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, 20162017

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's telephone number, including area code)

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

Yes      T            No      ☐

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

Yes      T            No      ☐

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

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

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

Yes      ☐            No      T

The number of shares outstanding of the issuer's common stock, $0.01 par value per share, was 29,385,90329,555,466 at OctoberJuly 28, 2016.2017.

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, 20162017 (unaudited) and December 31, 20152016
 3
Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
 4
Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
5 
Consolidated Statements of Changes in Shareholders' Equity for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
 6
Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (unaudited)
 7
Notes to Consolidated Financial Statements (unaudited)
 8 - 2934
  
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 3035 - 4653
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 4754
Item 4. Controls and Procedures
 4855
  
PART II. OTHER INFORMATION
 4855
  
Item 1. Legal Proceedings
 4855
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
 4855
4855
4956
4956
4956
Item 6. Exhibits
 4956
Signatures
 4956
  

 
 
 
- 2 -
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements


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

 (Unaudited)     (Unaudited)    
 September 30, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
Assets (Dollars In Thousands, except share and per share data)  (Dollars In Thousands, except share and per share data) 
Cash $22,388  $57,419  $84,013  $7,878 
Federal funds sold  21,914   20,297   29,382   26,828 
Interest-earning deposits in other financial institutions and other short term investments  10,018   22,755   16,165   12,511 
Cash and cash equivalents  54,320   100,471   129,560   47,217 
Securities available for sale (at fair value)  245,396   269,658   209,079   226,795 
Loans held for sale (at fair value)  227,765   166,516   196,644   225,248 
Loans receivable  1,151,696   1,114,934   1,225,762   1,177,884 
Less: Allowance for loan losses  15,633   16,185   14,612   16,029 
Loans receivable, net  1,136,063   1,098,749   1,211,150   1,161,855 
                
Office properties and equipment, net  24,044   25,328   23,170   23,655 
Federal Home Loan Bank stock (at cost)  12,600   19,500   18,675   13,275 
Cash surrender value of life insurance  61,188   49,562   64,978   61,509 
Real estate owned, net  7,454   9,190   4,784   6,118 
Prepaid expenses and other assets  26,205   23,755   28,270   24,947 
Total assets $1,795,035  $1,762,729  $1,886,310  $1,790,619 
                
Liabilities and Shareholders' Equity                
Liabilities:                
Demand deposits $110,872  $102,673  $119,585  $120,371 
Money market and savings deposits  157,472   140,631   153,743   162,456 
Time deposits  687,304   650,057   664,065   666,584 
Total deposits  955,648   893,361   937,393   949,411 
                
Borrowings  377,983   441,203   498,103   387,155 
Advance payments by borrowers for taxes  25,268   3,661   18,842   4,716 
Other liabilities  26,579   32,574   23,965   38,647 
Total liabilities  1,385,478   1,370,799   1,478,303   1,379,929 
                
Shareholders' equity:                
Preferred stock (par value $.01 per share)                
Authorized - 50,000,000 shares in 2016 and in 2015, no shares issued  -   - 
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 2016 and in 2015        
Issued - 29,385,903 in 2016 and 29,407,455 in 2015        
Outstanding - 29,385,903 in 2016 and 29,407,455 in 2015  294   294 
Authorized - 100,000,000 shares in 2017 and in 2016        
Issued - 29,554,466 in 2017 and 29,430,123 in 2016        
Outstanding - 29,554,466 in 2017 and 29,430,123 in 2016  296   294 
Additional paid-in capital  322,164   317,022   325,003   322,934 
Retained earnings  181,460   168,089   179,512   184,565 
Unearned ESOP shares  (20,475)  (21,365)  (19,584)  (20,178)
Accumulated other comprehensive income, net of taxes  2,661   582 
Cost of shares repurchased (5,908,150 shares at September 30, 2016 and 5,624,415 shares at December 31, 2015)  (76,547)  (72,692)
Accumulated other comprehensive income (loss), net of taxes  237   (378)
Cost of shares repurchased (5,957,833 shares at June 30, 2017 and 5,908,150 shares at December 31, 2016)  (77,457)  (76,547)
Total shareholders' equity  409,557   391,930   408,007   410,690 
Total liabilities and shareholders' equity $1,795,035  $1,762,729  $1,886,310  $1,790,619 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 3 -
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 Three months ended September 30,  Nine months ended September 30,  Three months ended June 30,  Six months ended June 30, 
 2016  2015  2016  2015  2017  2016  2017  2016 
 (In Thousands, except per share amounts)  (In Thousands, except per share amounts) 
                        
Interest income:                        
Loans $14,754  $14,117  $42,611  $41,495  $14,985  $14,073  $29,223  $27,857 
Mortgage-related securities  743   792   2,371   2,451   678   790   1,374   1,628 
Debt securities, federal funds sold and short-term investments  833   886   2,692   2,609   877   885   1,729   1,859 
Total interest income  16,330   15,795   47,674   46,555   16,540   15,748   32,326   31,344 
Interest expense:                                
Deposits  1,923   1,540   5,477   4,251   1,838   1,835   3,633   3,554 
Borrowings  3,082   4,345   10,724   12,898   2,221   3,748   4,317   7,642 
Total interest expense  5,005   5,885   16,201   17,149   4,059   5,583   7,950   11,196 
Net interest income  11,325   9,910   31,473   29,406   12,481   10,165   24,376   20,148 
Provision for loan losses  135   580   340   1,720   25   -   (1,186)  205 
Net interest income after provision for loan losses  11,190   9,330   31,133   27,686   12,456   10,165   25,562   19,943 
Noninterest income:                                
Service charges on loans and deposits  789   364   1,742   1,213   481   616   848   953 
Increase in cash surrender value of life insurance  734   636   1,446   1,195   470   471   788   712 
Loss on sale of securities  (107)  -   (107)  - 
Mortgage banking income  35,552   26,708   91,146   77,324   36,224   34,980   60,911   55,594 
Gain on sale of available for sale securities  -   -   -   44 
Other  337   843   874   1,848   173   284   738   537 
Total noninterest income  37,412   28,551   95,208   81,624   37,241   36,351   63,178   57,796 
Noninterest expenses:                                
Compensation, payroll taxes, and other employee benefits  27,573   21,234   70,968   62,584   27,584   25,709   47,579   43,395 
Occupancy, office furniture, and equipment  2,319   2,292   7,074   7,004   2,527   2,419   5,054   4,755 
Advertising  661   755   1,974   2,120   869   655   1,593   1,313 
Data processing  616   592   1,897   1,797   633   638   1,231   1,281 
Communications  374   332   1,088   1,053   397   372   776   714 
Professional fees  474   642   1,486   1,771   717   489   1,324   1,012 
Real estate owned  37   646   344   1,875   (133)  163   278   307 
FDIC insurance premiums  140   243   500   851   117   155   237   360 
Other  3,347   3,050   9,663   9,106   3,476   3,631   7,173   6,316 
Total noninterest expenses  35,541   29,786   94,994   88,161   36,187   34,231   65,245   59,453 
Income before income taxes  13,061   8,095   31,347   21,149   13,510   12,285   23,495   18,286 
Income tax expense  5,556   2,896   12,214   7,651   4,622   4,518   8,035   6,658 
Net income $7,505  $5,199  $19,133  $13,498  $8,888  $7,767  $15,460  $11,628 
Income per share:                                
Basic $0.28  $0.19  $0.71  $0.45  $0.32  $0.29  $0.56  $0.43 
Diluted $0.27  $0.19  $0.70  $0.45  $0.32  $0.29  $0.55  $0.43 
Weighted average shares outstanding:                                
Basic  27,043   27,490   26,976   29,882   27,487   26,919   27,406   26,942 
Diluted  27,429   27,795   27,283   30,145   27,955   27,204   27,913   27,243 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 4 -
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
  (In Thousands) 
Net income $7,505  $5,199  $19,133  $13,498 
                 
Other comprehensive (loss) income, net of tax:                
Net unrealized holding (loss) gain on available for sale securities:                
Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $385, ($718), ($1,341), ($4), respectively  (596)  1,114   2,079   8 
                 
Reclassification adjustment for net gain included in net income during the period, net of tax expense of $0, $0, $0, $17, respectively  -   -   -   (27)
                 
Total other comprehensive (loss) income  (596)  1,114   2,079   (19)
Comprehensive income $6,909  $6,313  $21,212  $13,479 
  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
  (In Thousands) 
Net income $8,888  $7,767  $15,460  $11,628 
                 
Other comprehensive income, net of tax:                
Net unrealized holding gain on available for sale securities:                
Net unrealized holding gain arising during the period, net of tax expense of ($204), ($528), ($356), ($1,728), respectively  316   815   550   2,675 
                 
Reclassification adjustment for net loss included in net income during the period, net of tax benefit of ($42), $0, ($42), $0, respectively  65   -   65   - 
                 
Total other comprehensive income  381   815   615   2,675 
Comprehensive income $9,269  $8,582  $16,075  $14,303 

See Accompanying Notes to Unaudited Consolidated Financial Statements.


 
 
 
 
 
 
 
 
- 5 -
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)


 Common Stock  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Unearned
ESOP
Shares
  
Accumulated
Other
Comprehensive Income
  
Cost of
Shares
Repurchased
  
Total
Shareholders'
Equity
  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         ��         
Balances at December 31, 2014  34,420  $$344  $313,894  $157,304  $(22,552) $1,247  $-  $450,237 
                                
Comprehensive income:                                
Net income  -   -   -   13,498   -   -   -   13,498 
Other comprehensive loss  -   -   -   -   -   (19)  -   (19)
Total comprehensive income                              13,479 
                                
ESOP shares committed to be released to Plan participants  -   -   136   -   891   -   -   1,027 
Cash dividend, $0.15 per share  -   -   -   (4,404)  -   -   -   (4,404)
Stock compensation activity, net of tax  599   6   96   -   -   -   -   102 
Stock compensation expense  -   -   2,334   -   -   -   -   2,334 
Repurchase of common stock returned to authorized but unissued  (5,582)  (56)  -   -   -   -   (72,125)  (72,181)
Balances at September 30, 2015  29,437  $$294  $316,460  $166,398  $(21,661) $1,228  $(72,125) $390,594 
                                 Shares  Amount                   
                                 (Dollars In Thousands, except per share amounts) 
Balances at December 31, 2015  29,407  $$294  $317,022  $168,089  $(21,365) $582  $(72,692) $391,930   29,407  $$294  $317,022  $168,089  $(21,365) $582  $(72,692) $391,930 
                                                                
Comprehensive income:                                                                
Net income  -   -   -   19,133   -   -   -   19,133   -   -   -   11,628   -   -   -   11,628 
Other comprehensive income  -   -   -   -   -   2,079   -   2,079   -   -   -   -   -   2,675   -   2,675 
Total comprehensive income                              21,212                               14,303 
                                                                
ESOP shares committed to be released to Plan participants  -   -   278   -   890   -   -   1,168   -   -   145   -   594   -   -   739 
Cash dividend, $0.21 per share  -   -   -   (5,762)  -   -   -   (5,762)
Cash dividend, $0.13 per share  -   -   -   (3,554)  -   -   -   (3,554)
Stock compensation activity, net of tax  40   -   78   -   -   -   -   78 
Stock compensation expense  -   -   942   -   -   -   -   942 
Repurchase of common stock returned to authorized but unissued  (284)  (2)  -   -   -   -   (3,855)  (3,857)
Balances at June 30, 2016  29,163  $$292  $318,187  $176,163  $(20,771) $3,257  $(76,547) $400,581 
                                
                                
Balances at December 31, 2016  29,430  $$294  $322,934  $184,565  $(20,178) $(378) $(76,547) $410,690 
                                
Comprehensive income:                                
Net income  -   -   -   15,460   -   -   -   15,460 
Other comprehensive income  -   -   -   -   -   615   -   615 
Total comprehensive income                              16,075 
                                
ESOP shares committed to be released to Plan participants  -   -   315   -   594   -   -   909 
Cash dividend, $0.74 per share  -   -   -   (20,513)  -   -   -   (20,513)
Stock based compensation activity  263   3   3,434   -   -   -   -   3,437   174   2   806   -   -   -   -   808 
Stock compensation expense  -   -   1,430   -   -   -   -   1,430   -   -   948   -   -   -   -   948 
Repurchase of common stock returned to authorized but unissued  (284)  (3)  -   -   -   -   (3,855)  (3,858)  (50)  -   -   -   -   -   (910)  (910)
Balances at September 30, 2016  29,386  $$294  $322,164  $181,460  $(20,475) $2,661  $(76,547) $409,557 
Balances at June 30, 2017  29,554  $$296  $325,003  $179,512  $(19,584) $237  $(77,457) $408,007 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 6 -
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  2017  2016 
 (In Thousands)  (In Thousands) 
            
Operating activities:            
Net income $19,133  $13,498  $15,460  $11,628 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Adjustments to reconcile net income to net cash provided by (used in)operating activities:        
Provision for loan losses  340   1,720   (1,186)  205 
Provision for depreciation  2,061   2,337   1,043   1,447 
Stock based compensation  1,430   2,334   948   942 
Net amortization of premium/discount on debt and mortgage related securities  749   1,011   365   510 
Amortization of unearned ESOP shares  1,168   1,027   909   739 
Amortization and impairment of mortgage servicing rights  513   422   49   389 
Gain on sale of loans held for sale  (93,481)  (75,935)  (60,277)  (54,929)
Loans originated for sale  (1,756,454)  (1,545,098)  (1,219,226)  (1,046,354)
Proceeds on sales of loans originated for sale  1,788,685   1,604,297   1,308,107   1,058,992 
Increase in accrued interest receivable  (204)  (218)  (153)  (21)
Increase in cash surrender value of life insurance  (1,446)  (1,195)  (788)  (712)
Decrease in accrued interest on deposits and borrowings  (615)  (34)
Increase in other liabilities  5,893   2,846 
(Increase) decrease in accrued tax receivable  (172)  2,591 
Gain on sale of available for sale securities  -   (44)
Net (gain) loss related to real estate owned  (123)  427 
Increase (decrease) in accrued interest on deposits and borrowings  70   (211)
(Decrease) increase in other liabilities  (560)  4,149 
Increase in accrued tax receivable  (1,132)  (367)
Loss on sale of securities  107   - 
Net loss related to real estate owned  102   3 
Gain on sale of mortgage servicing rights  -   (807)  (308)  - 
Other  (3,784)  (1,426)  (1,899)  (9,447)
Net cash (used in) provided by operating activities  (36,307)  7,753 
Net cash provided by (used in) operating activities  41,524   (33,037)
                
Investing activities:                
Net increase in loans receivable  (41,096)  (20,868)  (49,033)  (18,910)
Net change in FHLB stock  (5,400)  4,650 
Purchases of:                
Debt securities  (4,140)  (10,000)
Mortgage related securities  (5,236)  (15,933)  (4,976)  (5,236)
Premises and equipment, net  (925)  (2,042)  (695)  (689)
Bank owned life insurance  (10,180)  (180)  (2,680)  (10,180)
FHLB stock  (4,500)  (2,000)
Proceeds from:                
Principal repayments on mortgage-related securities  29,689   31,647   16,940   19,115 
Maturities of debt securities  6,620   8,160   5,845   5,945 
Sales of debt securities  -   1,034 
Sales of FHLB stock  11,400   - 
Sale of debt securities  448   - 
Sales of real estate owned  5,304   18,332   2,119   3,712 
Net cash (used in) provided by investing activities  (13,064)  8,150 
Net cash used in investing activities  (37,432)  (1,593)
                
Financing activities:                
Net increase in deposits  62,288   9,195 
Net (decrease) increase in deposits  (12,018)  49,348 
Net change in short term borrowings  56,780   -   34,948   (6,458)
Repayment of long term debt  (220,000)  -   (24,000)  (70,000)
Proceeds from long term debt  100,000   -   100,000   50,000 
Net change in advance payments by borrowers for taxes  9,405   9,070   (241)  175 
Cash dividends on common stock  (4,832)  (4,509)  (20,336)  (2,671)
Purchase of common stock returned to authorized but unissued  (3,858)  (72,181)  (910)  (3,857)
Proceeds from stock option exercises  3,437   102   808   78 
Net cash provided by (used in) financing activities  3,220   (58,323)
Decrease in cash and cash equivalents  (46,151)  (42,420)
Net cash provided by financing activities  78,251   16,615 
Increase (decrease) in cash and cash equivalents  82,343   (18,015)
Cash and cash equivalents at beginning of period  100,471   172,820   47,217   100,471 
Cash and cash equivalents at end of period $54,320  $130,400  $129,560  $82,456 
                
Supplemental information:                
Cash paid or credited during the period for:                
Income tax payments $11,009  $10,234  $9,332  $6,545 
Interest payments  16,816   17,183   7,880   11,407 
Noncash activities:                
Loans receivable transferred to real estate owned  3,442   11,719   923   3,123 
Dividends declared but not paid in other liabilities  2,322   1,516   3,514   2,304 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 7 -
Note 1 — Basis of Presentation

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

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

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

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

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

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company's December 31, 20152016 Annual Report on Form 10-K. Operating results for the ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 20162017 or for any other period.

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

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

Impact of Recent Accounting Pronouncements

ASU 2016-13 Accounting Standards Codification (ASC) Topic 606 "Revenue from Contracts with Customers."Financial Instruments - Credit Losses (Topic 326)New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a material impact on the Company's statements of operations or financial condition.

ASC Topic 825 "Financial Instruments." ("ASU 2016-13")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 utilizepresent 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 impairment model knownauthoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a material impact on the Company's statements of operations or financial condition.

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

- 8 -
ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718, "Compensation - Stock Compensation" amended prior guidance on several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For earnings per share, anticipated excess tax benefits will not be included in assumed proceeds when applying the treasury method for computing dilutive shares.  For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The Company adopted this standard on January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss ("CECL") model to estimate its lifetime "expectedestimates. The measurement of expected credit loss"losses is based on relevant information about past events, including historical experience, current conditions, and record an allowancereasonable and supportable forecasts that when deducted fromaffect 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 of the financial asset, presentsto be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are in the process of evaluating the impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures.condition.

ASU 2016-02 "Lease (Topic 842)" ("ASU 2016-02") requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures.

 
 
 
 
- 89 -
Note 2— Securities Available for Sale

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

 September 30, 2016  June 30, 2017 
 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 $78,582  $2,201  $(1) $80,782  $66,297  $612  $(163) $66,746 
Collateralized mortgage obligations:                                
Government sponsored enterprise issued  62,993   770   -   63,763   56,695   64   (319)  56,440 
Mortgage-related securities  141,575   2,971   (1)  144,545   122,992   676   (482)  123,186 
                                
Government sponsored enterprise bonds  3,750   15   -   3,765   2,500   1   (2)  2,499 
Municipal securities  75,750   2,721   (6)  78,465   63,747   1,590   (8)  65,329 
Other debt securities  17,399   216   (723)  16,892   17,397   52   (612)  16,837 
Debt securities  96,899   2,952   (729)  99,122   83,644   1,643   (622)  84,665 
Certificates of deposit  1,715   14   -   1,729   1,225   4   (1)  1,228 
 $240,189  $5,937  $(730) $245,396  $207,861  $2,323  $(1,105) $209,079 


 December 31, 2015  December 31, 2016 
 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 $95,911  $1,004  $(248) $96,667  $72,858  $798  $(243) $73,413 
Collateralized mortgage obligations:                                
Government sponsored enterprise issued  70,605   123   (300)  70,428   62,297   70   (365)  62,002 
Mortgage-related securities  166,516   1,127   (548)  167,095   135,155   868   (608)  135,415 
                                
Government sponsored enterprise bonds  3,750   -   (4)  3,746   2,500   4   (1)  2,503 
Municipal securities  77,509   1,730   (80)  79,159   70,311   685   (300)  70,696 
Other debt securities  17,401   209   (647)  16,963   17,399   154   (603)  16,950 
Debt securities  98,660   1,939   (731)  99,868   90,210   843   (904)  90,149 
Certificates of deposit  2,695   4   (4)  2,695   1,225   7   (1)  1,231 
 $267,871  $3,070  $(1,283) $269,658  $226,590  $1,718  $(1,513) $226,795 


The Company's mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At SeptemberJune 30, 2016, $91.72017, $63.9 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.  As of SeptemberJune 30, 2016, $2.02017, $2.9 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2015, $94.12016, $93.2 million of the Company's government sponsored enterprise bonds and $2.5$2.4 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities, respectively.

The amortized cost and fair values of investment securities by contractual maturity at SeptemberJune 30, 20162017 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 $13,145  $13,207  $9,486  $9,484 
Due after one year through five years  21,265   21,521   20,358   20,504 
Due after five years through ten years  41,448   43,262   38,150   39,470 
Due after ten years  22,756   22,861   16,875   16,435 
Mortgage-related securities  141,575   144,545   122,992   123,186 
 $240,189  $245,396  $207,861  $209,079 

- 910 -
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, 2016  June 30, 2017 
 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 $-  $-  $1,342  $(1) $1,342  $(1) $10,436  $(144) $1,054  $(19) $11,490  $(163)
Collateralized mortgage obligations:                                                
Government sponsored enterprise issued  -   -   -   -   -   -   37,476   (319)  -   -   37,476   (319)
Government sponsored enterprise bonds  1,998   (2)  -   -   1,998   (2)
Municipal securities  6,456   (5)  2,999   (1)  9,455   (6)  9,322   (8)  -   -   9,322   (8)
Other debt securities  -   -   9,277   (723)  9,277   (723)  -   -   9,388   (612)  9,388   (612)
Certificates of deposit  -   -   -   -   -   -   489   (1)  -   -   489   (1)
 $6,456  $(5) $13,618  $(725) $20,074  $(730) $59,721  $(474) $10,442  $(631) $70,163  $(1,105)


 December 31, 2015  December 31, 2016 
 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 $18,488  $(163) $5,577  $(85) $24,065  $(248) $23,433  $(222) $1,068  $(21) $24,501  $(243)
Collateralized mortgage obligations:                                                
Government sponsored enterprise issued  48,281   (300)  -   -   48,281   (300)  39,395   (365)  -   -   39,395   (365)
Government sponsored enterprise bonds  3,246   (4)  -   -   3,246   (4)  2,000   (1)  -   -   2,000   (1)
Municipal securities  9,409   (18)  5,555   (62)  14,964   (80)  32,141   (300)  -   -   32,141   (300)
Other debt securities  14,363   (647)  -   -   14,363   (647)  -   -   9,397   (603)  9,397   (603)
Certificates of deposit  976   (4)  -   -   976   (4)  489   (1)  -   -   489   (1)
 $94,763  $(1,136) $11,132  $(147) $105,895  $(1,283) $97,458  $(889) $10,465  $(624) $107,923  $(1,513)

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

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

As of SeptemberJune 30, 2016,2017, the Company held twoone municipal securitiessecurity that had previously been deemed to be other-than-temporarily impaired. Both securities wereThe 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 securitiessecurity to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of these securitiesthis security resulted in $100,000$77,000 in credit losses charged to earnings with respect to these twothis municipal securities. During the year ended December 31, 2014, there were sales in the market of municipal issuer bonds at a discounted price that resulted in the Company recording additional credit losses.security. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 for these municipal bonds.with respect to this security as a sale occurred at a discounted price. As of SeptemberJune 30, 2016, these securities2017, this security had a combined amortized cost of $198,000$116,000 and total life-to-date impairment of $117,000.$94,000.

As of SeptemberJune 30, 2016,2017, the Company had one mortgage-backed security, one municipal security and one other debt security which had been in an unrealized loss position for twelve months or longer. These securities were determined not to be other-than-temporarily impaired as of SeptemberJune 30, 2016.2017. The Company has determined that the decline in fair value of these securities is primarily attributable to an increase in market interest rates compared to the stated rates on these securities and is not attributable to credit deterioration. As the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired.

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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.

There were no sales of securities duringDuring the ninesix months ended SeptemberJune 30, 2016.  During the nine months ended September 30, 2015,2017, proceeds from the sale of securities totaled $1.0 million$448,000 and resulted in gainslosses totaling $44,000.$107,000. The $44,000$107,000 included in gainloss on sale of available for sale securities in the consolidated statements of income during the ninesix months ended SeptemberJune 30, 20152017 was reclassified from accumulated other comprehensive income. There were no sales of securities during the six months ended June 30, 2016.

- 10 -

Note 3 - Loans Receivable

Loans receivable at SeptemberJune 30, 20162017 and December 31, 20152016 are summarized as follows:

 September 30, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
 (In Thousands)  (In Thousands) 
Mortgage loans:            
Residential real estate:            
One- to four-family $389,267  $381,992  $412,139  $392,817 
Multi-family  551,487   547,250   574,468   558,592 
Home equity  22,394   24,326   21,046   21,778 
Construction and land  21,571   19,148   14,906   18,179 
Commercial real estate  137,298   118,820   176,934   159,401 
Consumer  339   361   291   319 
Commercial loans  29,340   23,037   25,978   26,798 
 $1,151,696  $1,114,934  $1,225,762  $1,177,884 

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

Qualifying loans receivable totaling $896.4$933.3 million and $872.8$911.9 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, are pledged as collateral against $280.0$415.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC) advances under a blanket security agreement.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank.  As of SeptemberJune 30, 20162017 and December 31, 2015,2016, loans aggregating approximately $4.6 million and $5.1 million, respectively, were outstanding to such parties.  None of these loans were considered impaired as of June 30, 2017 or December 31, 2016.

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

- 12 -
An analysis of past due loans receivable as of SeptemberJune 30, 20162017 and December 31, 20152016 follows:

As of September 30, 2016 As of June 30, 2017 
1-59 Days Past Due (1)
  
60-89 Days Past Due (2)
  90 Days or Greater  Total Past Due  
Current (3)
  Total Loans 
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 $1,546  $1,303  $4,999  $7,848  $381,419  $389,267  $1,924  $1,057  $4,317  $7,298  $404,841  $412,139 
Multi-family  130   -   404   534   550,953   551,487   129   -   763   892   573,576   574,468 
Home equity  37   35   58   130   22,264   22,394   155   -   56   211   20,835   21,046 
Construction and land  -   -   -   -   21,571   21,571   -   -   37   37   14,869   14,906 
Commercial real estate  10   -   207   217   137,081   137,298   164   212   186   562   176,372   176,934 
Consumer  -   -   -   -   339   339   -   -   -   -   291   291 
Commercial loans  -   1   26   27   29,313   29,340   -   -   26   26   25,952   25,978 
Total $1,723  $1,339  $5,694  $8,756  $1,142,940  $1,151,696  $2,372  $1,269  $5,385  $9,026  $1,216,736  $1,225,762 

As of December 31, 2015 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 
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 $851  $1,133  $6,503  $8,487  $373,505  $381,992  $2,403  $7  $4,623  $7,033  $385,784  $392,817 
Multi-family  -   207   1,858   2,065   545,185   547,250   376   -   401   777   557,815   558,592 
Home equity  255   96   110   461   23,865   24,326   82   -   35   117   21,661   21,778 
Construction and land  -   -   238   238   18,910   19,148   -   -   -   -   18,179   18,179 
Commercial real estate  57   -   223   280   118,540   118,820   -   -   203   203   159,198   159,401 
Consumer  -   -   -   -   361   361   -   -   -   -   319   319 
Commercial loans  -   -   -   -   23,037   23,037   42   -   27   69   26,729   26,798 
Total $1,163  $1,436  $8,932  $11,531  $1,103,403  $1,114,934  $2,903  $7  $5,289  $8,199  $1,169,685  $1,177,884 

(1)Includes $187,000$59,000 and $315,000$148,000 at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, which are on non-accrual status.
(2)Includes $48,000$1.3 million and $467,000$- at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, which are on non-accrual status.
(3)Includes $4.7$1.9 million and $7.9$4.4 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, which are on non-accrual status.

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A summary of the activity for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 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, 2016                      
Six months ended June 30, 2017Six months ended June 30, 2017                      
Balance at beginning of period $7,763  $5,000  $433  $904  $1,680  $9  $396  $16,185  $7,164  $4,809  $364  $1,016  $1,951  $12  $713  $16,029 
Provision (credit) for loan losses  141   23   (25)  (123)  33   3   288   340   (187)  (376)  1   (310)  (166)  (1)  (147)  (1,186)
Charge-offs  (801)  (488)  (62)  (3)  -   -   -   (1,354)  (392)  (44)  -   (14)  -   -   -   (450)
Recoveries  246   134   24   58   -   -   -   462   119   43   17   40   -   -   -   219 
Balance at end of period $7,349  $4,669  $370  $836  $1,713  $12  $684  $15,633  $6,704  $4,432  $382  $732  $1,785  $11  $566  $14,612 

Nine months ended September 30, 2015                      
Six months ended June 30, 2016Six months ended June 30, 2016                      
Balance at beginning of period $9,877  $5,358  $422  $687  $1,951  $8  $403  $18,706  $7,763  $5,000  $433  $904  $1,680  $9  $396  $16,185 
Provision (credit) for loan losses  1,032   615   (5)  157   (204)  (2)  127   1,720   (103)  (5)  (2)  (13)  52   1   275   205 
Charge-offs  (3,212)  (1,501)  (72)  (84)  (45)  -   -   (4,914)  (464)  (445)  (62)  (3)  -   -   -   (974)
Recoveries  436   789   101   45   40   5   -   1,416   178   59   19   33   -   -   -   289 
Balance at end of period $8,133  $5,261  $446  $805  $1,742  $11  $530  $16,928  $7,374  $4,609  $388  $921  $1,732  $10  $671  $15,705 

- 13 -
A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of SeptemberJune 30, 20162017 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 $532  $-  $73  $-  $77  $-  $1  $683  $986  $45  $85  $-  $58  $-  $-  $1,174 
Allowance related to loans collectively evaluated for impairment  6,817   4,669   297   836   1,636   12   683   14,950   5,718   4,387   297   732   1,727   11   566   13,438 
Balance at end of period $7,349  $4,669  $370  $836  $1,713  $12  $684  $15,633  $6,704  $4,432  $382  $732  $1,785  $11  $566  $14,612 
                                                                
Loans individually evaluated for impairment $12,021  $3,967  $373  $437  $726  $-  $44  $17,568  $10,024  $3,686  $273  $37  $691  $-  $26  $14,737 
Loans collectively evaluated for impairment  377,246   547,520   22,021   21,134   136,572   339   29,296   1,134,128   402,115   570,782   20,773   14,869   176,243   291   25,952   1,211,025 
Total gross loans $389,267  $551,487  $22,394  $21,571  $137,298  $339  $29,340  $1,151,696  $412,139  $574,468  $21,046  $14,906  $176,934  $291  $25,978  $1,225,762 

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 20152016 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 $1,114  $242  $108  $3  $106  $-  $3  $1,576  $499  $-  $79  $-  $83  $-  $1  $662 
Allowance related to loans collectively evaluated for impairment  6,649   4,758   325   901   1,574   9   393   14,609   6,665   4,809   285   1,016   1,868   12   712   15,367 
Balance at end of period $7,763  $5,000  $433  $904  $1,680  $9  $396  $16,185  $7,164  $4,809  $364  $1,016  $1,951  $12  $713  $16,029 
                                                                
Loans individually evaluated for impairment $18,385  $5,100  $472  $1,795  $1,766  $-  $27  $27,545  $10,920  $3,941  $442  $-  $718  $-  $41  $16,062 
Loans collectively evaluated for impairment  363,607   542,150   23,854   17,353   117,054   361   23,010   1,087,389   381,897   554,651   21,336   18,179   158,683   319   26,757   1,161,822 
Total gross loans $381,992  $547,250  $24,326  $19,148  $118,820  $361  $23,037  $1,114,934  $392,817  $558,592  $21,778  $18,179  $159,401  $319  $26,798  $1,177,884 

The following table presents information relating to the Company's internal risk ratings of its loans receivable as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

 
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, 2016                        
At June 30, 2017                        
Substandard $14,415  $1,445  $406  $—  $725  $-  $44  $17,035  $9,647  $1,198  $242  $37  $691  $-  $906  $12,721 
Watch  9,923   2,920   194   873   1,053   -   2,896   17,859   9,702   2,989   53   -   598   -   1,372   14,714 
Pass  364,929   547,122   21,794   20,698   135,520   339   26,400   1,116,802   392,790   570,281   20,751   14,869   175,645   291   23,700   1,198,327 
 $389,267  $551,487  $22,394  $21,571  $137,298  $339  $29,340  $1,151,696  $412,139  $574,468  $21,046  $14,906  $176,934  $291  $25,978  $1,225,762 
                                                                
At December 31, 2015                                
At December 31, 2016                                
Substandard $19,148  $2,553  $684  $1,794  $1,766  $-  $55  $26,000  $12,845  $1,427  $428  $-  $717  $-  $41  $15,458 
Watch  11,352   3,634   128   -   1,161   -   402   16,677   10,509   3,975   149   436   1,389   -   3,671   20,129 
Pass  351,492   541,063   23,514   17,354   115,893   361   22,580   1,072,257   369,463   553,190   21,201   17,743   157,295   319   23,086   1,142,297 
 $381,992  $547,250  $24,326  $19,148  $118,820  $361  $23,037  $1,114,934  $392,817  $558,592  $21,778  $18,179  $159,401  $319  $26,798  $1,177,884 

- 1214 -
Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies.  Our underwriting policies require an officers' loan committee review and approval of all loans in excess of $500,000.  In addition, we utilize an independent loan review function for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, commercial real estate and commercial loans that individually, or as part of an overall borrower relationship exceed $1.0 million  in potential exposure.  Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year.  With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  Finally, a loan is considered to be impaired when it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.

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

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

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

The following tables present data on impaired loans at SeptemberJune 30, 20162017 and December 31, 2015.2016.

 As of or for the Nine Months Ended September 30, 2016  As of or for the Six Months Ended June 30, 2017 
 
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
  
Average
Recorded
Investment
  
Interest
Paid
  
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
  
Average
Recorded
Investment
  
Interest
Paid
 
 (In Thousands)  (In Thousands) 
Total Impaired with Reserve                                    
One- to four-family $3,249  $3,289  $532  $40  $3,307  $113  $3,384  $3,384  $986  $-  $3,410  $65 
Multi-family  -   -   -   -   -   -   373   373   45   -   374   - 
Home equity  158   158   73   -   165   10   163   163   85   -   167   6 
Construction and land  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial real estate  286   695   77   409   299   11   255   664   58   409   263   5 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  1   1   1   -   2   -   -   -   -   -   -   - 
  3,694   4,143   683   449   3,773   134   4,175   4,584   1,174   409   4,214   76 
Total Impaired with no Reserve                                                
One- to four-family  8,772   10,087   -   1,315   8,944   262   6,640   7,612   -   972   6,778   144 
Multi-family  3,967   4,986   -   1,019   4,008   174   3,313   4,188   -   875   3,344   95 
Home equity  215   215   -   -   224   6   110   110   -   -   114   2 
Construction and land  437   437   -   -   615   15   37   51   -   14   49   - 
Commercial real estate  440   440   -   -   440   10   436   436   -   -   437   7 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  43   43   -   -   47   1   26   26   -   -   26   - 
  13,874   16,208   -   2,334   14,278   468   10,562   12,423   -   1,861   10,748   248 
Total Impaired                                                
One- to four-family  12,021   13,376   532   1,355   12,251   375   10,024   10,996   986   972   10,188   209 
Multi-family  3,967   4,986   -   1,019   4,008   174   3,686   4,561   45   875   3,718   95 
Home equity  373   373   73   -   389   16   273   273   85   -   281   8 
Construction and land  437   437   -   -   615   15   37   51   -   14   49   - 
Commercial real estate  726   1,135   77   409   739   21   691   1,100   58   409   700   12 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  44   44   1   -   49   1   26   26   -   -   26   - 
 $17,568  $20,351  $683  $2,783  $18,051  $602  $14,737  $17,007  $1,174  $2,270  $14,962  $324 

- 1315 -
 As of or for the Year Ended December 31, 2015  As of or for the Year Ended December 31, 2016 
 
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
  
Average
Recorded
Investment
  
Interest
Paid
  
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
  
Average
Recorded
Investment
  
Interest
Paid
 
 (In Thousands)  (In Thousands) 
Total Impaired with Reserve                                    
One- to four-family $7,903  $8,923  $1,114  $1,020  $8,113  $393  $3,007  $3,007  $499  $-  $3,063  $88 
Multi-family  1,055   1,055   242   -   1,044   42   -   -   -   -   -   - 
Home equity  169   169   108   -   174   10   188   188   79   -   198   15 
Construction and land  156   269   3   113   155   -   -   -   -   -   -   - 
Commercial real estate  314   723   106   409   367   23   280   689   83   409   295   15 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  3   3   3   -   5   1   1   1   1   -   2   - 
  9,600   11,142   1,576   1,542   9,858   469   3,476   3,885   662   409   3,558   118 
Total Impaired with no Reserve                                                
One- to four-family  10,482   11,991   -   1,509   10,676   500   7,913   9,245   -   1,332   8,150   401 
Multi-family  4,045   5,090   -   1,045   4,106   245   3,941   4,952   -   1,011   4,005   230 
Home equity  303   303   -   -   307   13   254   254   -   -   258   9 
Construction and land  1,639   1,639   -   -   1,827   62   -   -   -   -   -   - 
Commercial real estate  1,452   1,452   -   -   1,458   72   438   438   -   -   442   13 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  24   24   -   -   29   2   40   40   -   -   46   2 
  17,945   20,499   -   2,554   18,403   894   12,586   14,929   -   2,343   12,901   655 
Total Impaired                                                
One- to four-family  18,385   20,914   1,114   2,529   18,789   893   10,920   12,252   499   1,332   11,213   489 
Multi-family  5,100   6,145   242   1,045   5,150   287   3,941   4,952   -   1,011   4,005   230 
Home equity  472   472   108   -   481   23   442   442   79   -   456   24 
Construction and land  1,795   1,908   3   113   1,982   62   -   -   -   -   -   - 
Commercial real estate  1,766   2,175   106   409   1,825   95   718   1,127   83   409   737   28 
Consumer  -   -   -   -   -   -   -   -   -   -   -   - 
Commercial  27   27   3   -   34   3   41   41   1   -   48   2 
 $27,545  $31,641  $1,576  $4,096  $28,261  $1,363  $16,062  $18,814  $662  $2,752  $16,459  $773 

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

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

The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower's 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 $13.9$10.6 million of impaired loans as of SeptemberJune 30, 20162017 for which no allowance has been provided, $2.3$1.9 million in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loans' net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.

- 14 -
At SeptemberJune 30, 2016,2017, total impaired loans included $10.7$8.2 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, 2015,2016, total impaired loans included $17.5$10.1 million of troubled debt restructurings.

- 16 -
The following presents data on troubled debt restructurings:

 As of September 30, 2016  As of June 30, 2017 
 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 $3,298   3  $2,448   34  $5,746   37  $3,291   3  $1,224   7  $4,515   10 
Multi-family  2,522   1   1,445   5   3,967   6   2,489   1   825   3   3,314   4 
Home equity  54   1   98   1   152   2 
Construction and land  438   1   -   -   438   1 
Home Equity  48   1   -   -   48   1 
Commercial real estate  296   1   63   1   359   2   292   1   42   1   334   2 
 $6,608   7  $4,054   41  $10,662   48  $6,120   6  $2,091   11  $8,211   17 

 As of December 31, 2015  As of December 31, 2016 
 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 $3,900   4  $5,739   45  $9,639   49  $3,296   3  $2,399   34  $5,695   37 
Multi-family  2,546   1   2,317   7   4,863   8   2,514   1   1,427   5   3,941   6 
Home equity  -   -   98   1   98   1   49   1   97   1   146   2 
Construction and land  1,556   2   -   -   1,556   2 
Commercial real estate  1,306   1   77   1   1,383   2   295   1   60   1   355   2 
 $9,308   8  $8,231   54  $17,539   62  $6,154   6  $3,983   41  $10,137   47 


At SeptemberJune 30, 2016, $10.72017, $8.2 million in loans had been modified in troubled debt restructurings and $4.1$2.1 million of these loans were included in the non-accrual loan total. The remaining $6.6$6.1 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.

All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower's 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 $336,000$242,000 valuation allowance has been established as of SeptemberJune 30, 20162017 with respect to the $10.7$8.2 million in troubled debt restructurings. As of December 31, 2015,2016, a $996,000$293,000 valuation allowance had been established with respect to the $17.5$10.1 million in troubled debt restructurings.

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

The following presents troubled debt restructurings by concession type:

 As of September 30, 2016  As of June 30, 2017 
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 $1,114   22  $-   -  $1,114   22  $7,090   11  $714   2  $7,804   13 
Principal forbearance  54   1   -   -   54   1   48   1   -   -   48   1 
Interest reduction  8,710   23   784   2   9,494   25   359   3   -   -   359   3 
 $9,878   46  $784   2  $10,662   48  $7,497   15  $714   2  $8,211   17 

  As of December 31, 2015 
 
Performing in
accordance with
modified terms
  In Default  Total 
 Amount  Number  Amount  Number  Amount  Number 
 (dollars in thousands) 
Interest reduction and principal forbearance $13,971   30  $1,012   5  $14,983   35 
Principal forbearance  97   1   -   -   97   1 
Interest reduction  2,459   26   -   -   2,459   26 
  $16,527   57  $1,012   5  $17,539   62 

  As of December 31, 2016 
 
Performing in
accordance with
modified terms
  In Default  Total 
 Amount  Number  Amount  Number  Amount  Number 
 (dollars in thousands) 
Interest reduction and principal forbearance $8,221   22  $761   2  $8,982   24 
Principal forbearance  49   1   -   -   49   1 
Interest reduction  1,106   22   -   -   1,106   22 
  $9,376   45  $761   2  $10,137   47 

- 1517 -
There were no loans modified as troubled debt restructurings for the three months or six months ended June 30, 2017 and June 30, 2016.

There were no troubled debt restructurings within the past twelve months for which there was a default during the three or six months ended June 30, 2017 and June 30, 2016.

The following table presents data on non-accrual loans as of SeptemberJune 30, 20162017 and December 31, 2015:2016:

 September 30, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
 (Dollars in Thousands)  (Dollars in Thousands) 
Non-accrual loans:            
Residential            
One- to four-family $8,444  $13,888  $6,732  $7,623 
Multi-family  1,445   2,553   1,198   1,427 
Home equity  305   437   194   344 
Construction and land  -   239   37   - 
Commercial real estate  429   460   398   422 
Commercial  44   27   26   41 
Consumer  -   -   -   - 
Total non-accrual loans $10,667  $17,604  $8,585  $9,857 
Total non-accrual loans to total loans receivable  0.93%  1.58%  0.70%  0.84%
Total non-accrual loans to total assets  0.59%  1.00%  0.46%  0.55%

- 18 -
Note 4— Real Estate Owned

Real estate owned is summarized as follows:

 September 30, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
 (In Thousands)  (In Thousands) 
            
One- to four-family $2,735  $4,610  $1,386  $2,141 
Multi-family  315   209   -   - 
Construction and land  5,291   5,262   4,802   5,082 
Commercial real estate  300   300   300   300 
Total real estate owned  8,641   10,381   6,488   7,523 
Valuation allowance at end of period  (1,187)  (1,191)  (1,704)  (1,405)
Total real estate owned, net $7,454  $9,190  $4,784  $6,118 

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

 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  2017  2016 
 (In Thousands)  (In Thousands) 
Real estate owned at beginning of the period $9,190   18,706  $6,118   9,190 
Transferred from loans receivable  3,442   11,719   923   3,123 
Sales (net of gains / losses)  (4,762)  (17,265)  (1,792)  (3,325)
Write downs  (416)  (1,522)  (464)  (351)
Other  -   518   (1)  - 
Real estate owned at the end of the period $7,454   12,156  $4,784   8,637 

Residential one- to four-family mortgage loans that were in the process of foreclosure were $3.0$5.0 million and $5.1$3.1 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.

- 1619 -
Note 5— Mortgage Servicing Rights

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

 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  2017  2016 
 (In Thousands)  (In Thousands) 
Mortgage servicing rights at beginning of the period $1,422  $2,521  $2,260  $1,422 
Additions  1,486   3,149   568   972 
Amortization  (412)  (412)  (49)  (239)
Sales  -   (4,260)  (2,264)  - 
Mortgage servicing rights at end of the period  2,496   998   515   2,155 
Valuation allowance at end of period  (100)  (20)  -   (150)
Mortgage servicing rights at end of the period, net $2,396  $978  $515  $2,005 


During the ninesix months ended SeptemberJune 30, 2016, $1.82017, $1.22 billion in residential loans were originated for sale. During the same period, sales of loans held for sale totaled $1.8$1.31 billion, generating mortgage banking income of $91.1$60.9 million. The unpaid principal balance of loans serviced for others was $371.3$73.3 million and $176.4$318.6 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. These loans are not reflected in the consolidated statements of financial condition.

During the ninesix months ended SeptemberJune 30, 2017, the Company sold mortgage servicing rights related to $295.1 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.  During the six months ended June 30, 2016, the Company did not sell any mortgage servicing rights. During the nine months ended September 30, 2015, the Company sold mortgage servicing rights related to $552.4 million in loans receivable with a book value of $4.3 million for $5.1 million resulting in a gain on sale of $807,000.

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

Estimate for the period ended December 31: (In Thousands) 
2016 $115 
Estimate for the period ending December 31: (In Thousands) 
2017  414  $49 
2018  366   73 
2019  364   65 
2020  363   58 
2021  49 
Thereafter  774   221 
Total $2,396  $515 

Note 6— Deposits

At SeptemberJune 30, 20162017 and December 31, 2015,2016, time deposits with balances greater than $250,000 amounted to $46.3$40.4 million and $37.7$44.5 million, respectively.

A summary of the contractual maturities of time deposits at SeptemberJune 30, 20162017 is as follows:

 (In Thousands)  (In Thousands) 
      
Within one year $481,068  $557,711 
More than one to two years  194,598   90,268 
More than two to three years  6,304   13,027 
More than three to four years  4,037   1,637 
More than four through five years  1,297   1,422 
 $687,304  $664,065 

- 1720 -
Note 7— Borrowings

Borrowings consist of the following:

  September 30, 2016  December 31, 2015   June 30, 2017  December 31, 2016 
  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  $13,983   3.27% $7,203   3.19%  $23,103   3.98% $8,155   3.52%
Federal Home Loan Bank, Chicago advances   50,000   0.29%  -   0.00%   85,000   1.14%  65,000   0.61%
                                  
Long term:                                  
Federal Home Loan Bank, Chicago advances maturing:                                  
2016  -   0.00%  220,000   4.34%
2017 2017  65,000   3.19%  65,000   3.19% 2017  65,000   3.19%  65,000   3.19%
2018 2018  65,000   2.97%  65,000   2.97% 2018  65,000   2.97%  65,000   2.97%
2021 2021  100,000   0.78%  -   0.00% 2021  100,000   0.78%  100,000   0.78%
2027 2027  100,000   1.24%  -   0.00%
Repurchase agreements maturing2017  84,000   3.96%  84,000   3.96%2017  60,000   3.87%  84,000   3.96%
   $377,983   2.31% $441,203   3.88%   $498,103   2.05% $387,155   2.27%

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 $14.0$23.1 million balance at SeptemberJune 30, 20162017 and a $7.2$8.2 million balance at December 31, 2015.2016.

The $50.0$85.0 million in short-term advances consists of one $35.0 million short-term advance that has a maturity date of October 27, 2016. The short-term advance hasMarch 15, 2018 and a fixed rate of 0.29%1.28% and one $50.0 million short-term advance that has a maturity date of August 25, 2017 and a fixed rate of 1.05%.  .

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

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

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

The $84.0$100.0 million in advances due in 2027 consists of one $50.0 million advance with a fixed rate of 1.24% with a FHLB single call option in May 2019 and one $50.0 million advance with a fixed rate of 1.23% with a FHLB single call option in June 2019.

The $60.0 million in repurchase agreements have fixed rates ranging from 2.89% to 4.31% callable quarterly until their maturity in 2017. The repurchase agreements are collateralized by securities available for sale with an estimated fair value of $91.7$63.9 million at SeptemberJune 30, 20162017 and $94.1$93.2 million at December 31, 2015.2016.

The Company selects loans that meet underwriting criteria established by the FHLBC as collateral for outstanding advances. The Company's borrowings from the FHLBC are limited to 80%79% of the carrying value of unencumbered one- to four-family mortgage loans, 51%75% of the carrying value of home equity loans and 75%51% of the carrying value of multi-family loans. In addition, these advances arewere collateralized by FHLBC stock of $12.6$18.7 million at SeptemberJune 30, 20162017 and $19.5$13.3 million at December 31, 2015.2016. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.


- 1821 -
Note 8 – Regulatory Capital

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

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

The table below includes the new regulatory capital ratio requirements that became effective on January 1, 2015. Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent.2.5%. A banking organization with a conservation buffer of less than 2.5 percent2.5% (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time,June 30, 2017, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.

The actual and required capital amounts and ratios for the Bank as of SeptemberJune 30, 20162017 and December 31, 20152016 are presented in the table below:

  September 30, 2016 
  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. $421,928   32.25% $104,659   8.00% $112,836   8.625% $N/A   N/A 
WaterStone Bank  386,208   29.59%  104,409   8.00%  112,566   8.625%  130,511   10.00%
Tier 1 Capital (to risk-weighted assets)                                
Consolidated Waterstone Financial, Inc.  406,295   31.06%  78,495   6.00%  86,671   6.625%  N/A   N/A 
WaterStone Bank  370,575   28.39%  78,307   6.00%  86,464   6.625%  104,409   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                                
Consolidated Waterstone Financial, Inc.  406,295   31.06%  58,871   4.50%  67,047   5.125%  N/A   N/A 
WaterStone Bank  370,575   28.39%  58,730   4.50%  66,887   5.125%  84,832   6.50%
Tier 1 Capital (to average assets)                                
Consolidated Waterstone Financial, Inc.  406,295   22.66%  71,735   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  370,575   20.71%  71,561   4.00%  N/A   N/A   89,452   5.00%
State of Wisconsin (to total assets)                                
WaterStone Bank  370,575   20.69%  107,442   6.00%  N/A   N/A   N/A   N/A 

 June 30, 2017 
 Actual  
For Capital
Adequacy
Purposes
  
Minimum Capital
Adequacy with
Capital Buffer
  
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
 December 31, 2015  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 (Dollars In Thousands)  (Dollars In Thousands) 
Total Capital (to risk-weighted assets)                                                
Consolidated Waterstone Financial, Inc. $405,947   33.41% $97,207   8.00% $N/A   N/A  $N/A   N/A  $410,803   30.19% $108,841   8.00% $125,847   9.25% $N/A   N/A 
WaterStone Bank  374,435   30.92%  96,885   8.00%  N/A   N/A   121,106   10.00%  397,990   29.34%  108,513   8.00%  125,468   9.25%  135,642   10.00%
Tier 1 Capital (to risk-weighted assets)                                                                
Consolidated Waterstone Financial, Inc.  390,747   32.16%  72,905   6.00%  N/A   N/A   N/A   N/A   396,191   29.12%  81,630   6.00%  98,637   7.25%  N/A   N/A 
WaterStone Bank  359,284   29.67%  72,664   6.00%  N/A   N/A   96,885   8.00%  383,378   28.26%  81,385   6.00%  98,340   7.25%  108,513   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                                                                
Consolidated Waterstone Financial, Inc.  390,747   32.16%  54,679   4.50%  N/A   N/A   N/A   N/A   396,191   29.12%  61,223   4.50%  78,229   5.75%  N/A   N/A 
WaterStone Bank  359,284   29.67%  54,498   4.50%  N/A   N/A   78,719   6.50%  383,378   28.26%  61,039   4.50%  77,994   5.75%  88,167   6.50%
Tier 1 Capital (to average assets)                                                                
Consolidated Waterstone Financial, Inc.  390,747   22.20%  70,417   4.00%  N/A   N/A   N/A   N/A   396,191   22.14%  71,575   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  359,284   20.45%  70,286   4.00%  N/A   N/A   87,857   5.00%  383,378   21.47%  71,413   4.00%  N/A   N/A   89,266   5.00%
State of Wisconsin (to total assets)                                                                
WaterStone Bank  359,284   20.43%  105,493   6.00%  N/A   N/A   N/A   N/A   383,378   20.39%  112,838   6.00%  N/A   N/A   N/A   N/A 

- 1922 -
  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 

Note 9 – Income Taxes

Income tax expense increased from $7.7$6.7 million during the ninesix months ended SeptemberJune 30, 20152016 to $12.2$8.0 million for the ninesix months ended SeptemberJune 30, 2016.2017. This increase was primarily due to the increase in our income before income taxes, which increased from $21.1$18.3 million during the ninesix months ended SeptemberJune 30, 20152016 to $31.3$23.5 million during the ninesix months ended SeptemberJune 30, 2016.2017.  Income tax expense is recognized on the statement of income during the ninesix months ended SeptemberJune 30, 20162017 at an effective rate of 39.0%34.2% of pretax income compared to 36.2%36.4% during the ninesix months ended SeptemberJune 30, 2015.2016.

During the quartersix months ended SeptemberJune 30, 2016,2017, the Company incurredrecognized a chargebenefit of approximately $806,000 related to stock options awarded in 2007.  The deferred tax asset established forawards exercised during the year as a result of adopting the new 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.accounting standard.

The Company still has a deferred tax asset of $193,000 related to stock options awarded in 2007 that have not yet been exercised.  The stock options awarded in 2007 expire in January 2017.  If these awards are not exercised, the Company will have to recognize additional tax expense equal to the amount of the deferred tax asset upon expiration.  In the event that these options are exercised, the Company's tax deduction would be limited to the amount by which the fair market value of the stock, on the exercise date, exceeds the options strike price.  Per ASC 718, the determination of a need for a valuation allowance against stock-based compensation awards by a company should not consider the current fair market value of its stock.  Therefore, no valuation allowance has been recorded against these awards, even though these awards are currently out-of-the-money and may not be exercised.

- 23 -

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 SeptemberJune 30, 20162017 and December 31, 2015.2016.

 
Gross
Recognized
Liabilities
  
Gross
Amounts
Offset
  
Net
Amounts
Presented
  
Gross
Amounts Not
Offset
  
Net
Amount
  
Gross
Recognized
Liabilities
  
Gross
Amounts
Offset
  
Net
Amounts
Presented
  
Gross
Amounts Not
Offset
  
Net
Amount
 
 (In Thousands)  (In Thousands) 
September 30, 2016               
June 30, 2017               
Repurchase Agreements                              
Short-term $13,983  $-  $13,983  $13,983  $-  $23,103  $-  $23,103  $23,103  $- 
Long-term  84,000   -   84,000   84,000   -   60,000   -   60,000   60,000   - 
 $97,983  $-  $97,983  $97,983  $-  $83,103  $-  $83,103  $83,103  $- 
                                        
December 31, 2015                    
December 31, 2016                    
Repurchase Agreements                                        
Short-term $7,203  $-  $7,203  $7,203  $-  $8,155  $-  $8,155  $8,155  $- 
Long-term  84,000   -   84,000   84,000   -   84,000   -   84,000   84,000   - 
 $91,203  $-  $91,203  $91,203  $-  $92,155  $-  $92,155  $92,155  $- 

- 2024 -
Note 11– Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.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, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
 (In Thousands)  (In Thousands) 
Financial instruments whose contract amounts represent potential credit risk:            
Commitments to extend credit under amortizing loans (1) $35,463  $10,307  $33,719  $30,903 
Commitments to extend credit under home equity lines of credit (2)  13,969   14,173   14,467   14,367 
Unused portion of construction loans (3)  28,507   25,545   25,690   21,137 
Unused portion of business lines of credit  13,345   16,392   16,300   15,095 
Standby letters of credit  392   566   259   333 

(1) Commitments for loans are extended to customers for up to 90 days after which they expire. Excludes commitments to originate loans held for sale, which are discussed in the following footnote.
(2)  Unused portions of home equity loans are available to the borrower for up to 10 years.
(3)  Unused portions of construction loans are available to the borrower for up to one year.

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

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

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of SeptemberJune 30, 20162017 and December 31, 2015.2016.

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

Herrington et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit that was filed in the FederalUnited States District Court for the Western District of Wisconsin and has been transferredsubsequently compelled to arbitration allegingbefore 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 contracts.employment agreements. On July 5, 2017, the arbitrator issued a final award finding Waterstone Mortgage Corporation isliable 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.


 
 
- 2125 -
Note 12 – Derivative Financial Instruments

In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans to third party investors. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held for sale. The Company's mortgage banking derivatives have not been designated as hedge relationships. These instruments are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded as a component of mortgage banking income in the Company's 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, 2016,2017, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $454.6$417.2 million and interest rate lock commitments with an aggregate notional amount of approximately $262.0$266.9 million.  The fair value of the forward commitments to sell mortgage loans at SeptemberJune 30, 20162017 included a lossgain of $859,000$1.5 million that is reported as a component of other liabilitiesassets on the Company's consolidated statement of financial condition.  The fair value of the interest rate locks at SeptemberJune 30, 20162017 included a gain of $4.2$2.5 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 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 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.


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Note 13 – Earnings Per Share

Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted stock awards. Unvested restricted stock awards issued in 2012 are considered participating securities because holders of these securities have the right to receive dividends at the same rate as holders of the Company's common stock.period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares.

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

 Three months ended September 30,  Nine months ended September 30,  Three months ended June 30,  Six months ended June 30, 
 2016  2015  2016  2015  2017  2016  2017  2016 
 (In Thousands, except per share amounts)  (In Thousands, except per share amounts) 
                        
Net income $7,505  $5,199  $19,133  $13,498  $8,888  $7,767  $15,460  $11,628 
Net income available to unvested restricted shares  5   6   12   15   -   5   -   7 
Net income available to common stockholders $7,500  $5,193  $19,121  $13,483  $8,888  $7,762  $15,460  $11,621 
                                
Weighted average shares outstanding  27,043   27,490   26,976   29,882   27,487   26,919   27,406   26,942 
Effect of dilutive potential common shares  386   305   307   263   468   285   507   301 
Diluted weighted average shares outstanding  27,429   27,795   27,283   30,145   27,955   27,204   27,913   27,243 
                                
Basic earnings per share $0.28  $0.19  $0.71  $0.45  $0.32  $0.29  $0.56  $0.43 
Diluted earnings per share $0.27  $0.19  $0.70  $0.45  $0.32  $0.29  $0.55  $0.43 

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Note 14 – Fair Value Measurements

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

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

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

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

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

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's 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.

- 27 -
The following table presents information about our assets recorded in our consolidated statement of financial positioncondition at their fair value on a recurring basis as of SeptemberJune 30, 20162017 and December 31, 2015,2016, 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, 2016  Level 1  Level 2  Level 3  June 30, 2017  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
                        
Available for sale securities                        
Mortgage-backed securities $80,782  $-  $80,782  $-  $66,746  $-  $66,746  $- 
Collateralized mortgage obligations                                
Government sponsored enterprise issued  63,763   -   63,763   -   56,440   -   56,440   - 
Government sponsored enterprise bonds  3,765   -   3,765   -   2,499   -   2,499   - 
Municipal securities  78,465   -   78,465   -   65,329   -   65,329   - 
Other debt securities  16,892   2,516   14,376   -   16,837   2,412   14,425   - 
Certificates of deposit  1,729   -   1,729   -   1,228   -   1,228   - 
Loans held for sale  227,765   -   227,765   -   196,644   -   196,644   - 
Mortgage banking derivative assets  4,160   -   -   4,160   3,904   -   -   3,904 
Mortgage banking derivative liabilities  859   -   -   859 

    Fair Value Measurements Using     Fair Value Measurements Using 
 December 31, 2015  Level 1  Level 2  Level 3  December 31, 2016  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
                        
Available for sale securities                        
Mortgage-backed securities $96,667  $-  $96,667  $-  $73,413  $-  $73,413  $- 
Collateralized mortgage obligations                                
Government sponsored enterprise issued  70,428   -   70,428   -   62,002   -   62,002   - 
Government sponsored enterprise bonds  3,746   -   3,746   -   2,503   -   2,503   - 
Municipal securities  79,159   -   79,159   -   70,696   -   70,696   - 
Other debt securities  16,963   2,600   14,363   -   16,950   2,541   14,409   - 
Certificates of deposit  2,695   -   2,695   -   1,231   -   1,231   - 
Loans held for sale  166,516   -   166,516   -   225,248   -   225,248   - 
Mortgage banking derivative assets  2,313   -   -   2,313   3,403   -   -   3,403 
Mortgage banking derivative liabilities  125   -   -   125   69   -   -   69 

- 23 -
The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:

Available for sale securities – The Company's investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The fair value of municipal 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 fair value 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.

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.

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.

- 28 -
The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 20162017 and 2015.2016.

 
Mortgage banking
derivatives, net
  
Mortgage banking
derivatives, net
 
 (In Thousands)  (In Thousands) 
      
Balance at December 31, 2014 $999 
    
Mortgage derivative gain, net  1,189 
Balance at December 31, 2015 $2,188  $2,188 
        
Mortgage derivative gain, net  1,113   1,146 
Balance at September 30, 2016 $3,301 
Balance at December 31, 2016 $3,334 
    
Mortgage derivative gain, net  570 
Balance at June 30, 2017 $3,904 


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

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statement of financial positioncondition at their fair value on a non-recurring basis as of SeptemberJune 30, 20162017 and December 31, 2015,2016, 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, 2016  Level 1  Level 2  Level 3  June 30, 2017  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
Impaired loans, net (1) $3,011  $-  $-  $3,011  $3,001  $-  $-  $3,001 
Real estate owned  7,454   -   -   7,454   4,784   -   -   4,784 
Impaired mortgage servicing rights  1,149   -   -   1,149 

    Fair Value Measurements Using     Fair Value Measurements Using 
 December 31, 2015  Level 1  Level 2  Level 3  December 31, 2016  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
Impaired loans, net (1) $8,024  $-  $-  $8,024  $2,814  $-  $-  $2,814 
Real estate owned  9,190   -   -   9,190   6,118   -   -   6,118 

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

- 24 -
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, loans determined to be impaired with an outstanding balance of $4.2 million were carried net of specific reserves of $1.2 million for a fair value of $3.0 million. At December 31, 2016, loans determined to be impaired with an outstanding balance of $3.7$3.5 million were carried net of specific reserves of $683,000$662,000 for a fair value of $3.0 million. At December 31, 2015, loans determined to be impaired with an outstanding balance of $9.6 million were carried net of specific reserves of $1.6 million for a fair value of $8.0$2.8 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.

Real estate owned – On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. Changes in the value of real estate owned totaled $416,000$464,000 and $1.5 million$351,000 during the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively and are recorded in real estate owned expense. At SeptemberJune 30, 20162017 and December 31, 2015,2016, real estate owned totaled $7.5$4.8 million and $9.2$6.1 million, respectively.

Mortgage servicing rights -– The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights.  The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service.  Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy.  The Company records the mortgage servicing rights at the lower of amortized cost or fair value. At SeptemberJune 30, 2016, the Company determined that $1.1 million of mortgage servicing rights were temporarily impaired,2017 and as a result, recorded an impairment valuation allowance of $100,000.  At December 31, 20152016, there waswere no impairment identified for mortgage servicing rights.

- 29 -
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 2016,2017, 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, 2016
 
Valuation
Technique
Significant
Unobservable
Inputs
 
Minimum
Value
  
Maximum
Value
  
Fair Value at
June 30, 2017
 
Valuation
Technique
Significant
Unobservable
Inputs
 
Minimum
Value
  
Maximum
Value
 
                    
Mortgage banking derivatives $3,301 Pricing modelsPull through rate  52.2%  99.9% $3,904 Pricing modelsPull through rate  33.6%  99.8%
Impaired loans  3,011 Market approachDiscount rates applied to appraisals  15.0%  30.0%  3,001 Market approachDiscount rates applied to appraisals  15.0%  35.0%
Real estate owned  7,454 Market approachDiscount rates applied to appraisals  5.6%  85.7%  4,784 Market approachDiscount rates applied to appraisals  14.8%  85.7%
Impaired mortgage servicing rights  1,149 Pricing modelsPrepayment rate  7.0%  36.7%
        Discount rate  10.0%  12.0%
        Cost to service $75.93  $571.61 


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

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

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.

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

 September 30, 2016  December 31, 2015  June 30, 2017  December 31, 2016 
 
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 $54,320  $54,320  $44,570  $9,750  $-  $100,471  $100,471  $100,471  $-  $-  $129,560  $129,560  $113,660  $15,900  $-  $47,217  $47,217  $34,967  $12,250  $- 
Securities available-for-sale  245,396   245,396   2,516   242,880   -   269,658   269,658   2,600   267,058   -   209,079   209,079   2,412   206,667   -   226,795   226,795   2,541   224,254   - 
Loans held for sale  227,765   227,765   -   227,765   -   166,516   166,516   -   166,516   -   196,644   196,644   -   196,644   -   225,248   225,248   -   225,248   - 
Loans receivable  1,151,696   1,191,520   -   -   1,191,520   1,114,934   1,165,370   -   -   1,165,370   1,225,762   1,259,333   -   -   1,259,333   1,177,884   1,212,967   -   -   1,212,967 
FHLB stock  12,600   12,600   -   12,600   -   19,500   19,500   -   19,500   -   18,675   18,675   -   18,675   -   13,275   13,275   -   13,275   - 
Accrued interest receivable  4,312   4,312   4,312   -   -   4,108   4,108   4,108   -   -   4,434   4,434   4,434   -   -   4,281   4,281   4,281   -   - 
Mortgage servicing rights  2,396   2,414   -   -   2,414   1,422   1,658   -   -   1,658   515   655   -   -   655   2,260   3,232   -   -   3,232 
Mortgage banking derivative assets  4,160   4,160   -   -   4,160   2,313   2,313   -   -   2,313   3,904   3,904   -   -   3,904   3,403   3,403   -   -   3,403 
                                                                                
Financial Liabilities                                                                                
Deposits  955,648   956,041   268,344   687,697   -   893,361   894,015   243,304   650,711   -   937,393   937,064   273,328   663,736   -   949,411   949,825   282,827   666,998   - 
Advance payments by borrowers for taxes  25,268   25,268   25,268   -   -   3,661   3,661   3,661   -   -   18,842   18,842   18,842   -   -   4,716   4,716   4,716   -   - 
Borrowings  377,983   383,180   -   383,180   -   441,203   463,238   -   463,238   -   498,103   499,506   -   499,506   -   387,155   390,932   -   390,932   - 
Accrued interest payable  1,027   1,027   1,027   -   -   1,642   1,642   1,642   -   -   986   986   986   -   -   916   916   916   -   - 
Mortgage banking derivative liabilities  859   859   -   -   859   125   125   -   -   125   -   -   -   -   -   69   69   -   -   69 

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

- 30 -
Cash and Cash Equivalents

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

Securities

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

Loans Held for Sale

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

Loans Receivable

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 fair value. 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. With respect to loans that are not considered to be impaired, fair value is estimated by discounting the future contractual cash flows using discount rates that reflect a current rate offered to borrowers of similar 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.

- 26 -
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's commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparty's credit standing, and discounted cash flow analyses. The fair value of the Company's commitments to extend credit was not material at SeptemberJune 30, 20162017 and December 31, 2015.2016.

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 Statements of Condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities.

- 2731 -
Note 15 – Segment Reporting

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

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

Community Banking

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

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

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 2324 states.



 As of or for the three months ended September 30, 2016  As of or for the three months ended June 30, 2017 
 
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
 (In Thousands)  (In Thousands) 
                        
Net interest income $11,244  $10  $71  $11,325  $12,433  $24  $24  $12,481 
Provision for loan losses  100   35   -   135   -   25   -   25 
Net interest income after provision for loan losses  11,144   (25)  71   11,190 
Net interest income (loss) after provision for loan losses  12,433   (1)  24   12,456 
                                
Noninterest income  1,658   36,124   (370)  37,412   995   36,743   (497)  37,241 
                                
Noninterest expenses:                                
Compensation, payroll taxes, and other employee benefits  4,392   23,295   (114)  27,573   4,153   23,553   (122)  27,584 
Occupancy, office furniture and equipment  740   1,579   -   2,319   782   1,745   -   2,527 
FDIC insurance premiums  140   -   -   140   117   -   -   117 
Real estate owned  37   -   -   37   (133)  -   -   (133)
Other  1,252   4,453   (233)  5,472   1,628   4,782   (318)  6,092 
Total noninterest expenses  6,561   29,327   (347)  35,541   6,547   30,080   (440)  36,187 
Income before income taxes  6,241   6,772   48   13,061 
Income (loss) before income taxes  6,881   6,662   (33)  13,510 
Income tax expense  2,107   2,767   682   5,556   1,902   2,715   5   4,622 
Net income (loss) $4,134  $4,005  $(634) $7,505  $4,979  $3,947  $(38) $8,888 
                                
Total assets $1,777,014  $259,636  $(241,615) $1,795,035  $1,874,474  $225,119  $(213,283) $1,886,310 


- 2832 -
 As of or for the three months ended September 30, 2015  As of or for the three months ended June 30, 2016 
 
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
 (In Thousands)  (In Thousands) 
                        
Net interest income $9,566  $265  $79  $9,910  $9,962  $132  $71  $10,165 
Provision for loan losses  500   80   -   580   -   -   -   - 
Net interest income after provision for loan losses  9,066   185   79   9,330   9,962   132   71   10,165 
                                
Noninterest income  1,146   27,636   (231)  28,551   1,203   35,400   (252)  36,351 
                                
Noninterest expenses:                                
Compensation, payroll taxes, and other employee benefits  3,927   17,411   (104)  21,234   4,037   21,787   (115)  25,709 
Occupancy, office furniture and equipment  800   1,492   -   2,292   816   1,603   -   2,419 
FDIC insurance premiums  243   -   -   243   155   -   -   155 
Real estate owned  646   -   -   646   163   -   -   163 
Other  1,171   4,235   (35)  5,371   1,264   4,615   (94)  5,785 
Total noninterest expenses  6,787   23,138   (139)  29,786   6,435   28,005   (209)  34,231 
Income (loss) before income taxes  3,425   4,683   (13)  8,095 
Income before income taxes  4,730   7,527   28   12,285 
Income tax expense  962   1,917   17   2,896   1,421   3,087   10   4,518 
Net income (loss) $2,463  $2,766  $(30) $5,199 
Net income $3,309  $4,440  $18  $7,767 
                                
Total assets $1,724,714  $176,341  $(156,346) $1,744,709  $1,793,197  $246,295  $(240,226) $1,799,266 


  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 

  As of or for the nine months ended September 30, 2015 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
     (In Thousands)    
             
Net interest income $28,541  $615  $250  $29,406 
Provision for loan losses  1,450   270   -   1,720 
Net interest income after provision for loan losses  27,091   345   250   27,686 
                 
Noninterest income  2,824   79,193   (393)  81,624 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  12,462   50,438   (316)  62,584 
Occupancy, office furniture and equipment  2,447   4,557   -   7,004 
FDIC insurance premiums  851   -   -   851 
Real estate owned  1,860   15   -   1,875 
Other  3,275   12,434   138   15,847 
Total noninterest expenses  20,895   67,444   (178)  88,161 
Income before income taxes  9,020   12,094   35   21,149 
Income tax expense  2,544   5,018   89   7,651 
Net income (loss) $6,476  $7,076  $(54) $13,498 

  As of or for the six months ended June 30, 2017 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income $24,113  $125  $138  $24,376 
Provision for loan losses  (1,300)  114   -   (1,186)
Net interest income after provision for loan losses  25,413   11   138   25,562 
                 
Noninterest income  1,807   62,128   (757)  63,178 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  8,481   39,342   (244)  47,579 
Occupancy, office furniture and equipment  1,623   3,431   -   5,054 
FDIC insurance premiums  237   -   -   237 
Real estate owned  278   -   -   278 
Other  2,883   9,644   (430)  12,097 
Total noninterest expenses  13,502   52,417   (674)  65,245 
Income before income taxes  13,718   9,722   55   23,495 
Income tax expense  4,061   3,949   25   8,035 
Net income $9,657  $5,773  $30  $15,460 

- 2933 -
  As of or for the six months ended June 30, 2016 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
     (In Thousands)    
             
Net interest income $19,733  $277  $138  $20,148 
Provision for loan losses  100   105   -   205 
Net interest income after provision for loan losses  19,633   172   138   19,943 
                 
Noninterest income  1,925   56,333   (462)  57,796 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  8,392   35,231   (228)  43,395 
Occupancy, office furniture and equipment  1,648   3,107   -   4,755 
FDIC insurance premiums  360   -   -   360 
Real estate owned  307   -   -   307 
Other  2,453   8,337   (154)  10,636 
Total noninterest expenses  13,160   46,675   (382)  59,453 
Income before income taxes  8,398   9,830   58   18,286 
Income tax expense  2,604   4,030   24   6,658 
Net income $5,794  $5,800  $34  $11,628 


- 34 -
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" 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, that are worse than expected;
•● competition among depository and other financial institutions;
•● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or the origination levels in our lending business, or increase the level of defaults, losses or prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;
•● adverse changes in the securities or secondary mortgage markets;
•● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•● 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 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;
•● 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" in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2015)2016).


Overview

The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company's financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction therewith. The detailed discussion in the sections below focuses on the results of operations for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 and the financial condition as of SeptemberJune 30, 20162017 compared to the financial condition as of December 31, 2015.2016.
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.customers primarily within Southeastern Wisconsin along with a loan production office in Minneapolis, Minnesota. Consumer products include loan products, deposit products, and personal investment services. Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts.  The mortgage banking segment, which is conducted by offices in 24 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.

- 3035 -
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, 20162017 and 2015,2016, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of Waterstone Financial,the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended SeptemberJune 30, 20162017 and 20152016

Net income for the three months ended SeptemberJune 30, 20162017 totaled $4.1$5.0 million compared to net income of $2.5$3.3 million for the three months ended SeptemberJune 30, 2015.2016. Net interest income increased $1.7$2.5 million to $11.2$12.4 million for the three months ended SeptemberJune 30, 20162017 compared to $9.6$10.0 million for the three months ended SeptemberJune 30, 2015. The provision for loan losses decreased $400,000 compared to the prior year comparable period. Noninterest2016.  Net interest income increased $512,000due primarily to a decrease of $1.6 million in interest expense on borrowings as higher rate FHLB borrowings matured in 2016 along with an increase of $856,000 in interest income as the average loan prepayment feesbalance increased.

Compensation, payroll taxes, and other employee benefits expense increased $116,000 due primarily to increasesan increase in health insurance costs and ESOP expense partially offset by stock compensation expense. The Bank also reported an increase in other noninterest expense for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015.2016.  Occupancy, office furniture, and equipment expense, FDIC insurance premiums, and real estate owned expense decreased for the third quarter of 2016three months ended June 30, 2017 compared to the previous year period. FDIC insurance premiums and real estate owned expense decreased as a direct result of improved asset quality metrics.three months ended June 30, 2016.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended SeptemberJune 30, 20162017 and 20152016

Net income totaled $4.0$3.9 million for the three months ended SeptemberJune 30, 20162017 compared to net income of $2.8$4.4 million for the three months ended SeptemberJune 30, 2015.2016.  Mortgage banking segment revenue increased $8.5$1.3 million, or 30.7%3.8%, to $36.1$36.7 million for the three months ended SeptemberJune 30, 20162017 compared to $27.6$35.4 million for the three months ended SeptemberJune 30, 2015.2016.  The increase in revenue was attributable to ana $62.8 million, or 9.3%, increase in origination volume and an increasepartially offset by a decrease in margin. While mortgage segment revenue increased 30.7%,In addition to the decrease in margin, the value of the interest rate lock pipeline decreased $580,000 compared to the prior year period.

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 91.7% of total noninterest expenses increased $6.2 million, or 26.7%, to $29.3 million fororiginations during the three months ended SeptemberJune 30, 20162017, compared to $23.1 million for88.5% of total originations during the three months ended SeptemberJune 30, 2015.2016.  The increase in noninterest expenses resulted from an increase in commissions paid, which correlates tomix of loan type trended slightly towards more conventional loans and less governmental loans; with conventional loans and governmental loans comprising 64.8% and 35.2% of all loan originations, respectively, during the increase in origination volume, resulting in $5.9 million additionalthree months ended June 30, 2017, compared 61.0% and 39.0% of all loan originations, respectively, during the three months ended June 30, 2016.

Total compensation, payroll taxes and other employee benefits expense.

Loans originated by the mortgage banking segment for the purpose of sale in the secondary market increased $160.1$1.8 million, or 29.1%8.1%, to $710.1 million during the three months ended September 30, 2016, compared to $550.0$23.6 million for the three months ended SeptemberJune 30, 2015. The increase in originations was driven by an increase in the origination of loans made for the purpose of residential purchases, which yield a higher margin than refinance loans, along with an increase in the origination of mortgage refinance loans. Our origination efforts continue2017 compared 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 decreased slightly to 82% from 88% of total originations$21.8 million for the three months ended SeptemberJune 30, 20162016.  The increase in compensation expense was primarily a result of the increase in mortgage banking income, given our commission-based loan officer compensation model. Occupancy, office furniture, and 2015, respectively.  However, origination volume relatedequipment expense and other noninterest expense increased $309,000 to purchase activity still$6.5 million as the number of branches increased for the three months ended September 30, 2016 and 2015, respectively, as overall volumes increased.fundings increased, driving more volume-based expenses.



Consolidated Waterstone Financial, Inc. Results of Operations

 Three months ended September 30,  Three months ended June 30, 
 2016  2015  2017  2016 
 (Dollars in Thousands, except per share amounts)  (Dollars in Thousands, except per share amounts) 
            
Net income $7,505   5,199  $8,888   7,767 
Earnings per share - basic  0.28   0.19   0.32   0.29 
Earnings per share - diluted  0.27   0.19   0.32   0.29 
Annualized return on average assets  1.66%  1.18%  1.99%  1.78%
Annualized return on average equity  7.36%  5.21%  8.70%  7.86%
                


- 3136 -
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, 
 2016  2015  2017  2016 
 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) $1,333,666  $14,754   4.40% $1,243,879  $14,117   4.50% $1,346,784  $14,985   4.46% $1,261,199  $14,073   4.49%
Mortgage related securities (2)  150,790   743   1.96%  165,839   792   1.89%  128,207   678   2.12%  160,613   790   1.98%
Debt securities, federal funds sold and short-term investments (2)(3)  186,201   1,034   2.21%  234,102   1,115   1.89%  195,313   1,081   2.22%  212,545   1,110   2.10%
Total interest-earning assets  1,670,657   16,531   3.94%  1,643,820   16,024   3.87%  1,670,304   16,744   4.02%  1,634,357   15,973   3.93%
                                                
Noninterest-earning assets  123,318           98,224           119,663           119,033         
Total assets $1,793,975          $1,742,044          $1,789,967          $1,753,390         
                                                
Liabilities and equity                                                
Interest-bearing liabilities:                                                
Demand accounts $35,066   5   0.06% $31,980   5   0.06% $35,530   7   0.08% $33,681   5   0.06%
Money market and savings accounts  176,582   97   0.22%  152,346   59   0.15%  171,784   109   0.25%  163,219   106   0.26%
Time deposits  685,969   1,821   1.06%  641,064   1,476   0.91%  662,428   1,722   1.04%  675,306   1,724   1.03%
Total interest-bearing deposits  897,617   1,923   0.85%  825,390   1,540   0.74%  869,742   1,838   0.85%  872,206   1,835   0.85%
Borrowings  374,730   3,082   3.27%  434,943   4,345   3.96%  393,470   2,221   2.26%  388,933   3,748   3.88%
Total interest-bearing liabilities  1,272,347   5,005   1.56%  1,260,333   5,885   1.85%  1,263,212   4,059   1.29%  1,261,139   5,583   1.78%
                                                
Noninterest-bearing liabilities                                                
Noninterest-bearing deposits  80,407           65,016           90,037           70,273         
Other noninterest-bearing liabilities  35,331           21,099           27,118           24,358         
Total noninterest-bearing liabilities  115,738           86,115           117,155           94,631         
Total liabilities  1,388,085           1,346,448           1,380,367           1,355,770         
Equity  405,890           395,596           409,600           397,620         
Total liabilities and equity $1,793,975          $1,742,044          $1,789,967          $1,753,390         
                                                
Net interest income / Net interest rate spread (4)      11,526   2.38%      10,139   2.02%      12,685   2.73%      10,390   2.15%
Less: taxable equivalent adjustment      201   0.05%      229   0.06%      204   0.05%      225   0.06%
Net interest income / Net interest rate spread, as reported     $11,325   2.33%     $9,910   1.96%     $12,481   2.68%     $10,165   2.09%
Net interest-earning assets (5) $398,310          $383,487          $407,092          $373,218         
Net interest margin (6)
          2.70%          2.39%          3.00%          2.50%
Tax equivalent effect          0.04%          0.06%          0.05%          0.06%
Net interest margin on a fully tax equivalent basis (6)          2.74%          2.45%          3.05%          2.56%
Average interest-earning assets to average interest-bearing liabilities          131.31%          130.43%          132.23%          129.59%
__________
(1) Interest income includes net deferred loan fee amortization income of $229,000$244,000 and $139,000$190,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
(2) Average balance of mortgage related and debt securities are based on amortized historical cost.
(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.781.80% and 1.50%1.67% for the three months ended SeptemberJune 30, 20162017 and 2015,2016, 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.


- 3237 -

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, 
 2016 versus 2015  2017 versus 2016 
 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) $967  $(330) $637  $994  $(82) $912 
Mortgage related securities (3)  (75)  26   (49)  (174)  62   (112)
Other earning assets (3)(4)  (249)  168   (81)  (92)  63   (29)
Total interest-earning assets  643   (136)  507   728   43   771 
                        
Interest expense:                        
Demand accounts  -   -   -   -   2   2 
Money market and savings accounts  10   28   38   6   (3)  3 
Time deposits  107   238   345   (11)  9   (2)
Total interest-earning deposits  117   266   383   (5)  8   3 
Borrowings  (559)  (704)  (1,263)  44   (1,571)  (1,527)
Total interest-bearing liabilities  (442)  (438)  (880)  39   (1,563)  (1,524)
Net change in net interest income $1,085  $302  $1,387  $689  $1,606  $2,295 
______________
(1)
Interest income includes net deferred loan fee amortization income of $229,000$244,000 and $139,000$190,000 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
(2)   Non-accrual loans have been included in average loans receivable balance.
(3)   Includes available for sale securities. Average balance of available for sale securities is based on amortized historical cost.
(4)   Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.

Net interest income increased $1.4$2.3 million, or 14.3%22.8%, to $11.3$12.5 million during the three months ended SeptemberJune 30, 20162017 compared to $9.9$10.2 million during the three months ended SeptemberJune 30, 2015.2016.

·●Interest income on loans increased $637,000$912,000 due primarily to an increase of $89.8$85.6 million in average loans partially offset by a 10three basis point decrease in average yield on loans. The increase in average loan balance was driven by a $34.3$88.7 million increase in the average balance of loans held in portfolio along withpartially offset by a $55.5decrease of $3.1 million increase in the average balance of loans held for sale.
·●Interest income from mortgage-related securities decreased $49,000$112,000 year over year as the average balance decreased $15.0$32.4 million asdue to securities have paidpaying down in 20152016 and 2016into 2017 and less purchases have occurredoccurring to replace those securities due to current market conditions, whichconditions. This was partially offset by an increase in rate.
·●Interest income from other interest earning assets (comprised of debt securities, federal funds sold and short-term investments) decreased $53,000$8,000 due to a decrease of $47.9$17.2 million in average balance, as municipal securities matured and were not replaced due to market conditions. Also, liquid funds were utilized to fund loan growth and pay off maturing FHLB advances. The decrease in interest income due to anThis decrease in average balance was partially offset by 28a 13 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 2015,2016 and another 25 basis point increase in June 2017, as well as an increase in the cash dividend paid by the FHLB on its stock.
·●Interest expense on time deposits increased $345,000decreased $2,000 primarily due to a 15 basis point increase$12.9 million decrease in the average balance of time deposits compared to the prior year period.  Partially offsetting the decrease in average balance, the average cost of time deposits increased one basis point, as maturing time deposits have repriced or have been replaced at a slightly higher rate in the current competitive market. In addition, to an increase in rate, the average balance of time deposits increased compared to the prior year, which reflects the Company's decision to raise funds through its retail delivery channels to pay off FHLB advances that matured during the first nine months of 2016.
·●Interest expense on money market and savings accounts increased $38,000$3,000 due primarily to an increase in both rate and average balance. Increasesbalance of $8.6 million partially offset by a one basis point decrease in both rate andrate. The increase in average volume reflectreflects the Company's strategy to target this segment of retail funds for more aggressive growth.
·●Interest expense on borrowings decreased $1.3$1.5 million due to a decrease in the average cost of borrowings that resulted from the maturity of $220.0 millionand replacement of fixed rate borrowings that were paid offsince the beginning of the prior year.  The average cost of borrowings totaled 2.26% during the current year with lower rate long term fixed borrowings and funds raised through our retail delivery channels.  A total of $220.0 million FHLB borrowings at a weighted average rate of 4.34% maturedquarter ended June 30, 2017, compared to 3.88% during 2016. The Company borrowed $100.0 million of long-term FHLB borrowings replaced the maturities in 2016 at a weighted average rate of 0.78%.  In addition to the long-term borrowings, a total of $50.0 million in short-term FHLB were utilized throughout and at the end of the three monthsquarter ended SeptemberJune 30, 2016.




- 38 -
Provision for Loan Losses

Our provision for loan losses decreased $445,000increased $25,000 as a $135,000 provision was necessarythe mortgage banking segment had to reserve for additional loans during the three months ended SeptemberJune 30, 2016,2017, compared to $580,000no provision during the three months ended SeptemberJune 30, 2015, as asset2016. The community banking segment recorded no provision during the current quarter due to the continued improvement in loan quality metrics continued to improve.  The provision for loan losses for the three months ended September 30, 2016 was primarily driven by growth in the loan portfolio.including: non-accrual loans, loans rated substandard or watch, and loans past due.

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.

- 33 -
Noninterest Income
 Three months ended September 30,  Three months ended June 30, 
 2016  2015  $ Change  % Change  2017  2016  $ Change  % Change 
 (Dollars in Thousands)  (Dollars in Thousands) 
                        
Service charges on loans and deposits $789  $364  $425   116.8% $481  $616  $(135)  (21.9)%
Increase in cash surrender value of life insurance  734   636   98   15.4%  470   471   (1)  -0.2%
Loss on sale of securities  (107)  -   (107)  N/M
Mortgage banking income  35,552   26,708   8,844   33.1%  36,224   34,980   1,244   3.6%
Gain on sale of available for sale securities  -   -   -   N/M
Other  337   843   (506)  (60.0)%  173   284   (111)  (39.1)%
Total noninterest income $37,412  $28,551  $8,861   31.0% $37,241  $36,351  $890   2.4%
                                
N/M - Not meaningful                                
                                

Total noninterest income increased $8.9 million,$890,000, or 31.0%2.4%, to $37.4$37.2 million during the three months ended SeptemberJune 30, 20162017 compared to $28.6$36.4 million during the three months ended SeptemberJune 30, 2015.2016. The increase resulted primarily from an increase in mortgage banking income.income offset by decreases in the remaining other categories.

·●Service charges on loans and deposits increased primarily due to a $407,000 increase in loan prepayment fees. This increase was driven by one significant relationship that paid off during the quarter.
·The increase in cash surrender value of life insurance was due to the purchase of a $10.0 million policy in March 2016.
·The increase in mortgage banking income was the result of an increase in origination volumes.  The volume increased $160.1$62.8 million, or 29.1%9.3%, to $710.1$737.9 million during the three months ended SeptemberJune 30, 20162017 compared to $550.0a $675.1 million during the three months ended SeptemberJune 30, 2015. Along with2016.  See "Comparison of Mortgage Banking Segment Operations for the Three Months Ended June 30, 2017 and 2016" above, for additional discussion of the increase in origination volume, margin increased as higher margin purchase products performed well.mortgage banking income.
·●Service charges on loans and deposits decreased primarily due to a decrease in loan prepayment fees.
●The $506,000decrease in cash surrender value of life insurance was due to a decrease on one policy's annual dividend offset by a purchase of a $2.5 million policy in June 2017.
●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 $111,000 decrease in other noninterest income was due primarily to aan decrease in gainservicing fee revenue on loans sold at the mortgage servicing rights sold.  There wasbanking segment.  The decrease results from a bulk sale of mortgage servicing rights which occurred during the three months ended September 30, 2015 and no sales occurred during the three months ended September 30, 2016.  In addition, certain loan products were sold and treated as a gain on mortgage servicing rights sold and included in other noninterest income in the prior year has been treated as mortgage banking income in the current year.first quarter of 2017.




- 39 -
Noninterest Expenses
 Three months ended September 30,  Three months ended June 30, 
 2016  2015  $ Change  % Change  2017  2016  $ Change  % Change 
 (Dollars in Thousands)  (Dollars in Thousands) 
                        
Compensation, payroll taxes, and other employee benefits $27,573  $21,234  $6,339   29.9% $27,584  $25,709  $1,875   7.3%
Occupancy, office furniture and equipment  2,319   2,292   27   1.2%  2,527   2,419   108   4.5%
Advertising  661   755   (94)  (12.5)%  869   655   214   32.7%
Data processing  616   592   24   4.1%  633   638   (5)  (0.8)%
Communications  374   332   42   12.7%  397   372   25   6.7%
Professional fees  474   642   (168)  (26.2)%  717   489   228   46.6%
Real estate owned  37   646   (609)  (94.3)%  (133)  163   (296)  (181.6)%
FDIC insurance premiums  140   243   (103)  (42.4)%  117   155   (38)  (24.5)%
Other  3,347   3,050   297   9.7%  3,476   3,631   (155)  (4.3)%
Total noninterest expenses $35,541  $29,786  $5,755   19.3% $36,187  $34,231  $1,956   5.7%
                                
                                

Total noninterest expenses increased $5.8$2.0 million, or 19.3%5.7%, to $35.5$36.2 million during the three months ended SeptemberJune 30, 20162017 compared to $29.8$34.2 million during the three months ended SeptemberJune 30, 2015.2016.

·●Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment increased $1.8 million, or 8.1%, to $23.6 million during the three months ended June 30, 2017. The increase in compensation within our mortgage banking segment correlates to the increase in mortgage banking income due to the commission-based compensation structure in place for our mortgage banking loan officers.
●Compensation, payroll taxes and other employee benefit expense increased $465,000,$116,000, or 11.8%2.9%, at the community banking segment during the three months ended SeptemberJune 30, 2016.2017. This was primarily due to health insurance being higher in 2016 from an increase in health claimsinsurance expense and higher ESOP expense, increasing withwhich increased due to the increased average stock price of the vested shares in the thirdsecond quarter of 2016.2017.
·●Compensation, payroll taxes and other employee benefitAdvertising expense increased $5.9 million,$214,000, or 33.8%32.7%, at our mortgage banking segment. An increase in loan origination activity resulted in more commission-based compensation for the quarter. Total compensation, payroll taxes and other employee benefits also increased at our mortgage banking segment as branch managers earned more with increased profitability and new branches were added. In addition to those increases, health insurance expense increased as a reimbursement for a significant claim was paid$869,000 during the three months ended SeptemberJune 30, 2015.2017. This was primarily due to marketing increases at the mortgage banking segment in an effort to increase volumes.
·●Professional fees increased $228,000, or 46.6%, to $717,000 during the three months ended June 30, 2017. This was primarily due to an increase in legal fees at the mortgage banking segment related to ongoing litigation.
●Occupancy, office furniture and equipment expense increased, resulting from additional rent expense in the current year period compared to prior year period due to the addition of mortgage banking segment branches. Offsetting the rent increase, there was less depreciation expense at the mortgage banking segment in the quarter ended June 30, 2017 compared to the prior year period. The community banking segment had a slight decrease in expense year over year due to less depreciation and utilities expenses.
●Net real estate owned expense decreased $609,000,$296,000, resulting in $133,000 of income during the three months ended June 30, 2017, compared to $37,000$163,000 of expense during the three months ended SeptemberJune 30, 2016 compared to the three months ended September 30, 2015.2016. Property management expense (other than gains/losses) decreased $435,000$61,000 during the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016 due to a reduction in the number of properties under management during 2016.management. Net gains on sales of REO decreased $40,000increased $23,000 to $191,000$222,000 for the three months ended SeptemberJune 30, 20162017 compared to $231,000$199,000 for the three months ended SeptemberJune 30, 2015.2016. Real estate owned writedowns decreased $213,000$211,000 to $65,000$10,000 for the three months ended SeptemberJune 30, 20162017 compared to $278,000$221,000 for the three months ended SeptemberJune 30, 2015.2016.
·●FDIC insurance expense decreased during the three month periodmonths ended SeptemberJune 30, 2016. This was driven by a decrease in the FDIC assessment rate.2017 due to improved asset quality metrics.
·●Other noninterest expense increaseddecreased primarily due to increased expense at ourthe mortgage banking segment associated with the increasewhich resulted from lower amortization of loan origination activity.mortgage servicing rights and other various branch costs.


- 34 -
Income Taxes

Driven by an increase in pre-tax income, income tax expense increased $2.7 million,$104,000, or 91.9%2.3%, to $5.6$4.6 million during the three months ended SeptemberJune 30, 2016,2017, compared to $2.9$4.5 million during the three months ended SeptemberJune 30, 2015.2016. Income tax expense was recognized during the three months ended SeptemberJune 30, 20162017 at an effective rate of 42.5%34.2% compared to an effective rate of 35.8%36.8% during the three months ended SeptemberJune 30, 2015.  The increase in2016. During the effective rate was duequarter ended June 30, 2017, the Company recognized a benefit of approximately $456,000 related to both an increase in pretax income, which minimizesstock awards exercised within the impactcurrent period as a result of tax deductions and tax-exempt income andadopting the write off of a deferred tax asset.new stock compensation accounting standard.

- 40 -
Comparison of Community Banking Segment for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

Net income for the ninesix months ended SeptemberJune 30, 20162017 totaled $9.9$9.7 million compared to net income of $6.5$5.8 million for the ninesix months ended SeptemberJune 30, 2015.2016.  Net interest income increased $2.4$4.4 million to $31.0$24.1 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $28.5$19.7 million for the ninesix months ended SeptemberJune 30, 2015.2016.  Provision for loan losslosses decreased $1.3$1.4 million as asset quality metrics continued to improve. Noninterest income increased $759,000decreased $118,000 as loan prepayment fees increased.decreased and a $107,000 loss on sale of securities occurred in 2017 partially offset by an increase in the cash surrender value of life insurance.  Compensation, payroll taxes, and other employee benefits expense increased $322,000$89,000 primarily due to increases in salary expense along with an increase in ESOP expense, offset by a decrease in health insurance and additional salary expense due to the two additional branches added in late 2015, offset by reduction in stock compensation expense that immediately vested the grant of stock awards during 2015.cost. FDIC premiums and real estate owned expense decreased as asset quality improved and we experienced a reduction of foreclosuredforeclosed properties.  Those decreases were partially offset by an increase in other noninterest expense for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 2015.2016.

Comparison of Mortgage Banking Segment Operations for the NineSix Months Ended SeptemberJune 30, 20162017 and 20152016

Net income totaled $9.8decreased $27,000 to $5.8 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $7.1 million during the ninesix months ended SeptemberJune 30, 2015.2016.  Mortgage banking segment revenues increased $13.3$5.8 million, or 16.7%10.3%, to $92.5$62.1 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $79.2$56.3 million for the ninesix months ended SeptemberJune 30, 2015.2016.  The increase in revenue was attributable to a 13.7%16.5% increase in volume origination to $1.76$1.22 billion during the ninesix months ended SeptemberJune 30, 20162017 compared to $1.55$1.05 billion during the ninesix months ended SeptemberJune 30, 2015.2016 offset by a decrease in margin. While revenue increased 16.7%10.3%, noninterest expenses increased $8.6$5.7 million, or 12.7%12.3%, to $76.0$52.4 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $67.4$46.7 million for the ninesix months ended SeptemberJune 30, 2015.2016.

Loans originated by the mortgage banking segment for the purpose of sale in the secondary market increased $211.4$172.9 million, or 13.7%16.5%, to $1.76$1.22 billion during the ninesix months ended SeptemberJune 30, 2016,2017, compared to $1.55$1.05 billion for the ninesix months ended SeptemberJune 30, 2015.2016.  The increase in originations was driven by an increase in the origination of loans made for the purpose of residential purchases, which yield a higher margin than refinance loans, along with an increase in the origination of mortgage refinance products.  Our origination efforts continue to be focused on loans made for the purpose of residential purchases, as opposed to mortgage refinance.  The percentage of origination volume related to purchase activity increased slightly to 85%89.4% from 84%87.4% of total originations for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.

Consolidated Waterstone Financial, Inc. Results of Operations
 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  2017  2016 
 (Dollars in Thousands, except per share amounts)  (Dollars in Thousands, except per share amounts) 
            
Net income $19,133  $13,498  $15,460  $11,628 
Earnings per share - basic  0.71   0.45   0.56   0.43 
Earnings per share - diluted  0.70   0.45   0.55   0.43 
Annualized return on average assets  1.45%  1.03%  1.77%  1.34%
Annualized return on average equity  6.38%  4.26%  7.56%  5.89%
                



 
- 3541 -
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, 
 2016  2015  2017  2016 
 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) $1,274,369  $42,611   4.47% $1,223,971  $41,495   4.53% $1,326,577  $29,223   4.44% $1,244,431  $27,857   4.50%
Mortgage related securities (2)  158,854   2,371   1.99%  172,548   2,451   1.90%  130,391   1,374   2.12%  162,931   1,628   2.01%
Debt securities, federal funds sold and short-term investments (2)(3)  208,241   3,309   2.12%  255,284   3,306   1.73%  190,484   2,142   2.27%  219,633   2,318   2.12%
Total interest-earning assets  1,641,464   48,291   3.93%  1,651,803   47,252   3.82%  1,647,452   32,739   4.01%  1,626,995   31,803   3.93%
                                                
Noninterest-earning assets  116,863           102,558           114,945           113,314         
Total assets $1,758,327          $1,754,361          $1,762,397          $1,740,309         
                                                
Liabilities and equity                                                
Interest-bearing liabilities:                                                
Demand accounts $33,679   14   0.06% $30,804   15   0.07% $37,032   13   0.07% $32,979   9   0.05%
Money market and savings accounts  163,550   294   0.24%  137,016   116   0.11%  169,622   210   0.25%  156,962   197   0.25%
Time deposits  673,343   5,169   1.03%  639,049   4,120   0.86%  662,232   3,410   1.04%  666,960   3,348   1.01%
Total interest-bearing deposits  870,572   5,477   0.84%  806,869   4,251   0.70%  868,886   3,633   0.84%  856,901   3,554   0.83%
Borrowings  387,867   10,724   3.69%  438,767   12,898   3.93%  371,627   4,317   2.34%  394,508   7,642   3.90%
Total interest-bearing liabilities  1,258,439   16,201   1.72%  1,245,636   17,149   1.84%  1,240,513   7,950   1.29%  1,251,409   11,196   1.80%
                                                
Noninterest-bearing liabilities                                                
Noninterest-bearing deposits  73,828           64,945           86,798           70,502         
Other noninterest-bearing liabilities  25,537           20,532           22,742           21,400         
Total noninterest-bearing liabilities  99,365           85,477           109,540           91,902         
Total liabilities  1,357,804           1,331,113           1,350,053           1,343,311         
Equity  400,523           423,248           412,344           396,998         
Total liabilities and equity $1,758,327          $1,754,361          $1,762,397          $1,740,309         
                                                
Net interest income / Net interest rate spread (4)      32,090   2.21%      30,103   1.98%      24,789   2.72%      20,607   2.13%
Less: taxable equivalent adjustment      617   0.05%      697   0.05%      413   0.05%      459   0.06%
Net interest income / Net interest rate spread, as reported     $31,473   2.16%     $29,406   1.93%     $24,376   2.67%     $20,148   2.07%
Net interest-earning assets (5) $383,025          $406,167          $406,939          $375,586         
Net interest margin (6)
          2.56%          2.38%          2.98%          2.49%
Tax equivalent effect          0.05%          0.06%          0.05%          0.06%
Net interest margin on a fully tax equivalent basis (6)          2.61%          2.44%          3.03%          2.55%
Average interest-earning assets to average interest-bearing liabilities          130.44%          132.61%          132.80%          130.01%
__________
(1)  Interest income includes net deferred loan fee amortization income of $596,000386,000 and $420,000$367,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
(2) Average balance of mortgage related and debt securities are based on amortized historical cost.
(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.731.83% and 1.37%1.70% for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, 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.


- 3642 -

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, 
 2016 versus 2015  2017 versus 2016 
 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) $1,721  $(605) $1,116  $1,754  $(388) $1,366 
Mortgage related securities (3)  (199)  119   (80)  (343)  89   (254)
Other earning assets (3) (4)  (672)  675   3   (327)  151   (176)
Total interest-earning assets  850   189   1,039   1,084   (148)  936 
                        
Interest expense:                        
Demand accounts  1   (2)  (1)  1   3   4 
Money market and savings accounts  18   160   178   15   (2)  13 
Time deposits  232   817   1,049   (21)  83   62 
Total interest-earning deposits  251   975   1,226   (5)  84   79 
Borrowings  (1,430)  (744)  (2,174)  (477)  (2,848)  (3,325)
Total interest-bearing liabilities  (1,179)  231   (948)  (482)  (2,764)  (3,246)
Net change in net interest income $2,029  $(42) $1,987  $1,566  $2,616  $4,182 
______________
(1)
Interest income includes net deferred loan fee amortization income of  $596,000$386,000 and $420,000$376,000 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
(2)    Non-accrual loans have been included in average loans receivable balance.
(3)    Includes available for sale securities. Average balance of available for sale securities is based on amortized historical cost.
(4)    Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.


Net interest income increased $2.1$4.2 million, or 7.0%21.0%, to $31.5$24.4 million during the ninesix months ended SeptemberJune 30, 20162017 compared to $29.4$20.1 million during the ninesix months ended SeptemberJune 30, 2015.2016.

·●Interest income on loans increased $1.4 million due to an increase in average balance of $50.4$82.1 million partially offset by a six basis point decrease in average yield on loans.  The increase in average loan balance was driven by a $27.5an $81.3 million increase in the average balance of loans held in portfolio and the average balance of loans held for sale increased $22.9 million.$839,000.
·●Interest income from mortgage related securities decreased as securities have paid down, in 2015 and 2016, and less purchases have occurred to replace those securities due to current market conditions.
·●Interest income from other interest earning assets (comprised of debt securities, federal funds sold and short-term investments) increaseddecreased due to a 36$29.1 million decrease in average balance, as municipal securities matured and were not replaced due to market conditions. This decrease in average balance was partially offset by a 13 basis point increase in the average yield. The increase in average yield due towas driven by a 25 basis point increase in the Federal Funds rate in December 2016 and another 25 basis point increase in June 2017, as well as an increase in higher yielding corporate securities balance, a 25 basis points increase in the federal funds rate and an increase incash dividend paid by the FHLB stock dividend rate, offset by a $47.0 million decrease in the total other earning assets average balance.on its stock.
·●Interest expense on time deposits increased $1.0 million$62,000 primarily due to a 17three basis point increase in the average cost of funds, as maturing time deposits have repriced, or have been replaced at a higher rate in the current competitive market.  In addition to anPartially offsetting the increase in rate, the average balance of time deposits increaseddecreased $4.7 million compared to the prior year which reflects the Company's decision to raise funds through its retail delivery channels to pay off FHLB advances that matured during the first nine months of 2016.period.
·●Interest expense on money market and savings accounts increased $178,000$13,000 due to an increase in both rate and average balance.  Increasesbalance partially offset by a slight decrease in both rate andrate.  The increase in volume reflect the Company's strategy to aggressively grow this segment of retail funds.
·●Interest expense on borrowings decreased $2.2$3.3 million due to a decrease in the average cost of borrowings that resulted from the maturity of $220.0 millionand replacement of fixed rate borrowings.  The average cost of borrowings that were paid offtotaled 2.34% during the current year with lower rate long term fixed borrowings and funds raised through our retail delivery channels.
·A total of $220.0 million FHLB borrowings at a weighted average rate of 4.34% maturedsix months ended June 30, 2017, compared to 3.90% during the 2016 year. The Company borrowed $100.0 million of long-term FHLB borrowings replacing the maturities in 2016 at a weighted average rate of 0.78%.  In addition to the long-term borrowings, a total of $50.0 million in short-term FHLB were utilized throughout and at the threesix months ended SeptemberJune 30, 2016.


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Provision for Loan Losses

Our provision for loan losses decreased $1.4 million, or 80.2%, to $340,000 during the nine months ended September 30, 2016, from $1.7a negative provision of $1.2 million during the ninesix months ended SeptemberJune 30, 2015 as asset2017, from $205,000 during the six months ended June 30, 2016. The negative provision recorded during the current year period reflects the continued improvement in loan quality metrics continued to improve.including: non-accrual loans, loans rated substandard or watch, and loans past due.

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.

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Noninterest Income

 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  $ Change  % Change  2017  2016  $ Change  % Change 
 (Dollars in Thousands)  (Dollars in Thousands) 
                        
Service charges on loans and deposits $1,742  $1,213  $529   43.6% $848  $953  $(105)  (11.0)%
Increase in cash surrender value of life insurance  1,446   1,195   251   21.0%  788   712   76   10.7%
Loss on sale of securities  (107)  -   (107)  N/M
Mortgage banking income  91,146   77,324   13,822   17.9%  60,911   55,594   5,317   9.6%
Gain on sale of available for sale securities  -   44   (44)  N/M
Other  874   1,848   (974)  (52.7)%  738   537   201   37.4%
Total noninterest income $95,208  $81,624  $13,584   16.6% $63,178  $57,796  $5,382   9.3%
                                
N/M - Not meaningful                                
                                
Total noninterest income increased $13.6$5.4 million, or 16.6%9.3%, to $95.2$63.2 million during the ninesix months ended SeptemberJune 30, 20162017 compared to $81.6$57.8 million during the ninesix months ended SeptemberJune 30, 2015.2016. The increase resulted primarily from an increase in mortgage banking income and service charges on loans and deposits offset by a decrease in other noninterest income.

·●The $13.8$5.3 million increase in mortgage banking income was the result of an increase in origination volumes andbut partially offset by a decrease in margins.  The volume increased $211.4$172.9 million, or 13.7%16.5%, to $1.76$1.22 billion during the ninesix months ended SeptemberJune 30, 20162017 compared to $1.55$1.05 billion during the ninesix months ended SeptemberJune 30, 2015.2016.  See "Comparison of Mortgage Banking Segment Operations for the Six Months Ended June 30, 2017 and 2016" above, for additional discussion of the increase in mortgage banking income.
·●The increasedecrease in service charges on loans and deposits was related to an increasedecrease in loan prepayment fees.
·●The increase in cash surrender value of life insurance was primarily due to the purchase of a $10.0 million policy in March 2016.2016 and a $2.5 million policy in June 2017.
·●The Company sold one$107,000 loss on sale of securities was due to a sale of a municipal security at a gainbond in the prior period compared to noneJune 2017.  There were no sales of securities in the current year.2016.
·●The $974,000 decrease$201,000 increase in other noninterest income was primarily due to a decrease in gain on mortgage servicing rights as there were no sales of mortgage servicing rights during the nine months ended September 30, 2016 compared to a $807,000 gain on sales of mortgage servicing rights during the nine months ended September 30, 2015.   There was a bulk sale of mortgage servicing rights which occurredfor $308,000 during the ninesix months ended SeptemberJune 30, 2015 and2017.  The were no bulk sales occurredof mortgage servicing rights during the ninesix months ended SeptemberJune 30, 2016.   In addition, certain loan products were sold and treated as again, which was treated as aOffsetting the gain on sale and included in other noninterestof mortgage servicing rights, servicing fee income in the prior year has been treated as mortgage banking income in the current year. Also, other noninterest income decreased due to a decrease in the servicing fees earned on loans sold with mortgage servicing rights retained.decreased from the bulk sale.




Noninterest Expenses

 Nine months ended September 30,  Six months ended June 30, 
 2016  2015  $ Change  % Change  2017  2016  $ Change  % Change 
 (Dollars in Thousands)  (Dollars in Thousands) 
                        
Compensation, payroll taxes, and other employee benefits $70,968  $62,584  $8,384   13.4% $47,579  $43,395  $4,184   9.6%
Occupancy, office furniture and equipment  7,074   7,004   70   1.0%  5,054   4,755   299   6.3%
Advertising  1,974   2,120   (146)  (6.9)%  1,593   1,313   280   21.3%
Data processing  1,897   1,797   100   5.6%  1,231   1,281   (50)  (3.9)%
Communications  1,088   1,053   35   3.3%  776   714   62   8.7%
Professional fees  1,486   1,771   (285)  (16.1)%  1,324   1,012   312   30.8%
Real estate owned  344   1,875   (1,531)  (81.7)%  278   307   (29)  (9.4)%
FDIC insurance premiums  500   851   (351)  (41.2)%  237   360   (123)  (34.2)%
Other  9,663   9,106   557   6.1%  7,173   6,316   857   13.6%
Total noninterest expenses $94,994  $88,161  $6,833   7.8% $65,245  $59,453  $5,792   9.7%
                                
                                

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Total noninterest expenses increased $6.8$5.8 million, or 7.8%9.7%, to $95.0$65.2 million during the ninesix months ended SeptemberJune 30, 20162017 compared to $88.2$59.5 million during the ninesix months ended SeptemberJune 30, 2015.2016.

·●Compensation, payroll taxes and other employee benefit expense increased $8.4$4.1 million, primarily dueor 11.7%, to an $8.1$39.3 million increase in compensation, payroll taxes and other benefits withinat our mortgage banking segment. The increase in compensation within our mortgage banking segment correlatescorrelated to the increase in mortgage banking income due to the commission-based compensation structure in place for our mortgage banking loan officers.
·●Compensation, payroll taxes and other employee benefit expense increased $322,000$89,000 within the community banking segment primarily due to salary increasesexpenses and ESOP expenses offset by a decrease in health insurance. Salaries expense increased due primarily to adding two branches in the second half of 2015 and annual raises and healthhigher ESOP expense, which increased due to the increased average stock price of the shares in the first half of 2017. Health insurance costs, offset by reduction in stock compensation expense that immediately vested the grant of stock awards during 2015.decreased as claims have been lower to start 2017 compared to 2016.
·●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 during 2016.branches. Offsetting the rent increase, there was less depreciation expense at the mortgage banking segment in the ninesix months ended SeptemberJune 30, 20162017 compared to the same period during the prior year.  Additionally, the community banking segment had slightly lower expense year over year.year due to less depreciation expense.
·●Advertising expense decreasedincreased as a result of mortgage banking segment branchesincreased advertising less with mortgage demand remaining high.
·Data processing increased asefforts to generate more volume at the mortgage banking segment brought its hedging operations inhouse.branches.
·●Professional fees expense decreasedincreased as a result of a decreasean increase in legal fees at the mortgage banking segment.segment primarily related to ongoing litigation.
·●Net real estate owned expense decreased $1.5 million,$29,000, to $344,000 of expense$278,000 during the ninesix months ended SeptemberJune 30, 20162017 compared to $307,000 for the ninesix months ended SeptemberJune 30, 2015.2016. Property management expense (other than gains/losses) decreased $965,000$128,000 to $468,000$177,000 during the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016 due to a reduction in the number of properties under management during 2016.management. Net gains on sales of real estate owned decreased $556,000increased $14,000 to $539,000$362,000 for the ninesix months ended SeptemberJune 30, 20162017 compared to $1.1 million$348,000 for the ninesix months ended SeptemberJune 30, 2015.2016. Real estate owned writedowns decreased $1.1 millionincreased $113,000 to $461,000$464,000 for the ninesix months ended SeptemberJune 30, 20162017 compared to $1.5 million$351,000 for the ninesix months ended SeptemberJune 30, 2015.2016.
·●FDIC insurance expense decreased during the nine  month periodsix  months ended SeptemberJune 30, 2016.2017. This was driven by a decrease in the FDIC assessment rate.rate due to improved asset quality metrics.
·●Other noninterest expense increased primarily due to increased expense at both the community banking and mortgage banking segments.  The community banking increase was related to commissions paid relative to loans purchased from the mortgage banking segment.  The mortgage banking segment increase was associated with the increase of loan origination activity.


- 38 -

Income Taxes

Driven by an increase in pre-tax income, income tax expense increased $4.6$1.4 million, or 59.6%20.7%, to $12.2$8.0 million during the ninesix months ended SeptemberJune 30, 2016,2017, compared to $7.7$6.7 million during the ninesix months ended SeptemberJune 30, 2015.2016.  Income tax expense was recognized during the ninesix months ended SeptemberJune 30, 20162017 at an effective rate of 39.0%34.2% compared to 36.2%36.4% for the ninesix months ended SeptemberJune 30, 2015.  The increase in2016.  During the effective rate was duesix months ended June 30, 2017, the Company recognized a benefit of approximately $806,000 related to an increase in pretax income, which minimizesstock awards exercised within the impactfirst two quarters of tax deductions and tax-exempt income, and2017 as a result of adopting the write off of a deferred tax asset.


new stock compensation accounting standard.

Comparison of Financial Condition at SeptemberJune 30, 20162017 and December 31, 20152016

Total Assets - Total-Total assets increased by $32.3$95.7 million, or 1.8%5.3%, to $1.80$1.89 billion at SeptemberJune 30, 20162017 from $1.76$1.79 billion at December 31, 2015.2016. The increase in total assets primarily reflects an increase in cash and cash equivalents and loans andreceivable, partially offset by a decrease in loans held for sale offset by a reduction in cash and cash equivalents.sale. Funding needed for the loans receivable increased through additional short-term and loans held for sale was provided by a reduction of cash and cash equivalents.long-term FHLB debt in 2017.

Cash and Cash Equivalents – Cash and cash equivalents decreased $46.2increased $82.3 million, or 45.9%174.4%, to $54.3$129.6 million at SeptemberJune 30, 2016,2017, compared to $100.5$47.2 million at December 31, 2015.2016.  The decreaseincrease in cash and cash equivalents primarily reflects the increase in loans receivableshort-term and loans held for sale. In addition, cash was usedlong-term FHLB borrowings to pay down borrowings and other liabilities, purchase bank owned life insurance, and repurchase shares since December 31, 2015.  Offsetting those uses, cash was raised through deposit growth and income from operations.take advantage of the low interest rate environment in advance of wholesale borrowing maturities in the second half of 2017.

Securities Available for Sale– Securities available for sale decreased $24.3$17.7 million at SeptemberJune 30, 20162017 compared to December 31, 2015.2016. The decrease was due to paydowns in mortgage related securities and maturities of debt securities exceeding security purchases for the year.

Loans Held for Sale - Loans held for sale increaseddecreased at SeptemberJune 30, 20162017 due to increased funding volumes in the third quartertiming of 2016 at our mortgage subsidiary comparedloans sold to the fourth quarter of 2015.  The total fundings were $710.1 million for the third quarter of 2016 compared to $441.0 for the fourth quarter of 2015.investors.

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Loans Receivable - Loans receivable held for investment increased $36.8$47.9 million to $1.15$1.23 billion at SeptemberJune 30, 20162017 from $1.11$1.18 billion at December 31, 2015.2016.  The increase in total loans receivable was primarily attributable to increases in the one- to four-family, multi-family, construction and land, commercial real estate and commercial loan categories. Offsetting those increases, the home equity, land and construction, consumer, and commercial loan categories decreased.

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

 As of or for the  As of or for the  As of or for the  As of or for the 
 Nine months ended September 30,  Year Ended  Six months ended June 30,  Year Ended 
 2016  2015  December 31, 2015  2017  2016  December 31, 2016 
 (In Thousands)  (In Thousands) 
Total gross loans receivable and held for sale at beginning of period $1,281,450  $1,220,063  $1,220,063  $1,403,132  $1,281,450  $1,281,450 
Real estate loans originated for investment:                        
Residential                        
One- to four-family  57,080   32,286   41,835   57,651   34,757   78,045 
Multi-family  93,724   76,695   117,657   61,429   55,763   118,072 
Home equity  3,305   5,441   7,265   2,409   2,086   5,037 
Construction and land  5,648   11,085   11,085   655   4,915   5,878 
Commercial real estate  21,822   35,365   43,138   28,499   11,420   35,443 
Total real estate loans originated for investment  181,579   160,872   220,980   150,643   108,941   242,475 
Consumer loans originated for investment  -   688   688   -   -   - 
Commercial business loans originated for investment  6,920   14,662   23,467   4,073   5,530   11,692 
Total loans originated for investment  188,499   176,222   245,135   154,716   114,471   254,167 
                        
Principal repayments  (146,941)  (153,938)  (203,271)  (105,465)  (95,272)  (185,020)
Transfers to real estate owned  (3,442)  (11,719)  (15,580)  (923)  (3,123)  (4,590)
Loan principal charged-off  (1,354)  (4,914)  (6,340)  (450)  (974)  (1,607)
Net activity in loans held for investment  36,762   5,651   19,944   47,878   15,102   62,950 
                        
Loans originated for sale  1,756,454   1,545,098   1,986,147   1,219,226   1,046,354   2,378,926 
Loans sold  (1,695,205)  (1,528,363)  (1,944,704)  (1,247,830)  (1,004,063)  (2,320,194)
Net activity in loans held for sale  61,249   16,735   41,443   (28,604)  42,291   58,732 
Total gross loans receivable and held for sale at end of period $1,379,461  $1,242,449  $1,281,450  $1,422,406  $1,338,843  $1,403,132 


Allowance for Loan Losses - The allowance for loan losses decreased at September$1.4 million June 30, 20162017 from December 31, 2015.2016. The decrease resulted from the charge-off of specific reserves andnegative provision due to improvement of key loan quality metrics decreasing the allowance related to the loans collectively and specifically reviewed. The overall decrease was primarily related to the one- to four-family, multi-family, construction and multi-familyland, commercial real estate, consumer, and commercial categories.  Offsetting those decreases, amounts for the commercial loanThe home equity category increased as more commercial loans enteredcompared to the watch risk rating.  The other remaining categories were relatively consistent with the amountsbalance at December 31, 2015.2016.

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Cash surrender value of life insurance– Total cash surrender value of life insurance increased $11.6$3.5 million from December 31, 2015.2016.  During the ninesix months ended SeptemberJune 30, 2016, the Company purchased a $10 million bank owned life insurance policy.  Continued earnings aided in increasing2017, the policy values.value increased due to continued earnings 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 decreased $6.9increased $5.4 million from December 31, 2015.2016.  During the ninesix months ended SeptemberJune 30, 2016, $11.42017, $8.3 million of stock was purchased when entering into a total of $161.0 million of new short-term and long-term FHLB borrowings.  A total of $2.9 million of stock was sold as $220.0$65.0 million of Federal Home Loan Bankshort-term FHLB borrowings matured. A total of $4.5 million of stock was purchased when $100.0 million of new long-term borrowings were entered into with the Federal Home Loan Bank.

Real Estate Owned– Total real estate owned decreased $1.7$1.3 million from December 31, 2015.2016.  During the ninesix months ended SeptemberJune 30, 2016, $3.4 million2017, $923,000 was transferred from loans receivable to real estate owned upon completion of foreclosure.  During the same period, sales of real estate owned totaled $4.8$1.8 million and writedowns were $416,000.$464,000 in an effort to sell various aged properties.

Deposits – Total deposits increased $62.3decreased $12.0 million to $955.6$937.4 million at SeptemberJune 30, 20162017 from December 31, 2015.2016.  The increasedecrease was driven by an increasea decrease of $8.7 million in more cost effective transaction accounts along with an increasemoney market and savings deposits, $2.5 million in time deposits to help fund loan and loans held for sale growth and reduce our reliance on wholesale funding.$786,000 in demand deposits.

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Borrowings – Total borrowings decreased $63.2increased $110.9 million to $378.0$498.1 million at SeptemberJune 30, 20162017 from December 31, 2015.2016. A total of $220.0$75.0 million of fixed rateshort-term FHLB borrowings matured and were paid off during the current year.period.  These were replaced with $85.0 million of new fixed rate short-term and $100.0 million of new fixed rate long-term borrowings with the Federal Home Loan BankFHLB borrowings. A total of $24.0 million in repurchase agreements matured and with funds raised through our retail delivery channels.  Shortwere not replaced. External short term borrowings at the mortgage banking segment increased a total of $56.8$14.9 million at SeptemberJune 30, 20162017 from December 31, 2015 for both the community banking and mortgage banking segment2016 to fund loans held for sale .sale.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $21.6$14.1 million.  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 out in the fourth quarter.

Other Liabilities - Other liabilities decreased $6.0$14.7 million at SeptemberJune 30, 20162017 compared to December 31, 2015. A total2016. The decrease of $12.2 millionwas primarily 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 out in the fourth quarter.  At the time at which the disbursements are made, the outstanding checks are classified as other liabilities.  These amounts remain classified as other liabilities until settled.  Offsetting the decrease, the accrued expenses, accrued compensation, dividend payable, and hedging liability increased .

Shareholders' Equity – Shareholders' equity increaseddecreased by $17.6$2.7 million to $409.6$408.0 million at SeptemberJune 30, 20162017 from December 31, 2015.2016.  The increasedecrease in shareholders' equity was primarily due to the regular dividends and special dividend declared and the repurchase of stock.  Partially offsetting these decreases, shareholders' equity increased primarily due to net income, additional paid in capital as stock options were exercised, along with accumulated other comprehensive income increasing as the fair value of the security portfolio increased. These increases were offset by the repurchase of stockincreased, and dividends declared.unearned ESOP shares as they continue to vest.


ASSET QUALITY

NONPERFORMING ASSETS


 At September 30,  At December 31,  At June 30,  At December 31, 
 2016  2015  2017  2016 
 (Dollars in Thousands)  (Dollars in Thousands) 
Non-accrual loans:            
Residential            
One- to four-family $8,444  $13,888  $6,732  $7,623 
Multi-family  1,445   2,553   1,198   1,427 
Home equity  305   437   194   344 
Construction and land  -   239   37   - 
Commercial real estate  429   460   398   422 
Commercial  44   27   26   41 
Consumer  -   -   -   - 
Total non-accrual loans  10,667   17,604   8,585   9,857 
                
Real estate owned                
One- to four-family  2,735   4,610   1,386   2,141 
Multi-family  315   209   -   - 
Construction and land  5,291   5,262   4,802   5,082 
Commercial real estate  300   300   300   300 
Total real estate owned  8,641   10,381   6,488   7,523 
Valuation allowance at end of period  (1,187)  (1,191)  (1,704)  (1,405)
Total real estate owned, net  7,454   9,190   4,784   6,118 
Total nonperforming assets $18,121  $26,794  $13,369  $15,975 
                
Total non-accrual loans to total loans, net  0.93%  1.58%  0.70%  0.84%
Total non-accrual loans to total assets  0.59%  1.00%  0.46%  0.55%
Total nonperforming assets to total assets  1.01%  1.52%  0.71%  0.89%

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

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

 At or for the Nine Months  As of or for the Six Months Ended 
 Ended September 30,  June 30, 
 2016  2015  2017  2016 
 (In Thousands)  (In Thousands) 
            
Balance at beginning of period $17,604   38,011  $9,857   17,604 
Additions  1,990   8,710   2,340   1,927 
Transfers to real estate owned  (3,442)  (11,719)  (923)  (3,123)
Charge-offs  (662)  (3,161)  (109)  (662)
Returned to accrual status  (3,661)  (5,242)  (2,084)  (3,559)
Principal paydowns and other  (1,162)  (4,748)  (496)  (808)
Balance at end of period $10,667   21,851  $8,585   11,379 

Total non-accrual loans decreased by $6.9$1.3 million, or 39.4%12.9%, to $10.7$8.6 million as of SeptemberJune 30, 20162017 compared to $17.6$9.9 million as of December 31, 2015.2016.  The ratio of non-accrual loans to total loans receivable was 0.93%0.70% at SeptemberJune 30, 20162017 compared to 1.58%0.84% at December 31, 2015.2016.  During the ninesix months ended SeptemberJune 30, 2016, $3.4 million2017, $923,000 in non-accrual loans were transferred to real estate owned, $662,000$109,000 in loan principal was charged off, $3.7$2.1 million in loans were returned to accrual status and approximately $1.2 million$496,000 in principal payments were received.  Offsetting this activity, $2.0$2.3 million in loans were placed on non-accrual status during the ninesix months ended SeptemberJune 30, 2016.2017.

Of the $10.7$8.6 million in total non-accrual loans as of SeptemberJune 30, 2016, $10.02017, $8.2 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$1.6 million in cumulative partial net charge-offs have been recorded over the life of these loans as of SeptemberJune 30, 2016.2017.  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 $505,000$1.0 million have been recorded as of SeptemberJune 30, 2016.2017.  The remaining $658,000$370,000 of non-accrual loans were reviewed on an aggregate basis and $132,000$74,000 in general valuation allowance was deemed necessary related to those loans as of SeptemberJune 30, 2016.2017.   The $132,000$74,000 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, 20162017 totaled $2.7$2.8 million, which represents 25.3%32.4% of total non-accrual loans as of that date.  These five loans are carried net of cumulative life-to-date net charge-offs of $17,000.$15,000.  Aggregate specific valuation allowances with respect to these five loans total $130,000$680,000 as of SeptemberJune 30, 2016.2017.

For the ninesix months ended SeptemberJune 30, 2016,2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $554,000.$302,000.  We received $398,000$205,000 of interest payments on such loans during the ninesix months ended SeptemberJune 30, 2016.2017.   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, 20162017 or December 31, 2015.2016.


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TROUBLED DEBT RESTRUCTURINGS

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


 As of September 30, 2016  As of June 30, 2017 
 Accruing  Non-accruing  Total  Accruing  Non-accruing  Total 
 (In Thousands)  (In Thousands) 
                  
One- to four-family $3,298  $2,448   5,746  $3,291  $1,224   4,515 
Multi-family  2,522   1,445   3,967   2,489   825   3,314 
Home equity  54   98   152   48   -   48 
Construction and land  438   -   438 
Commercial real estate  296   63   359   292   42   334 
 $6,608  $4,054   10,662  $6,120  $2,091   8,211 
                        
 As of December 31, 2015  As of December 31, 2016 
 Accruing  Non-accruing  Total  Accruing  Non-accruing  Total 
      
                        
One- to four-family $3,900  $5,739   9,639  $3,296  $2,399   5,695 
Multi-family  2,546   2,317   4,863   2,514   1,427   3,941 
Home equity  -   98   98   49   97   146 
Construction and land  1,556   -   1,556 
Commercial real estate  1,306   77   1,383   295   60   355 
 $9,308  $8,231   17,539  $6,154  $3,983   10,137 

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

We do not participate in government-sponsored troubled debt restructuring programs.  Our troubled debt restructurings are short-term modifications.  Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both.  Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court. Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.
If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status. After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification.


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, 
 2016  2015  2017  2016 
 (Dollars in Thousands)  (Dollars in Thousands) 
            
Loans past due less than 90 days $3,062  $2,599  $3,641  $2,910 
Loans past due 90 days or more  5,694   8,932   5,385   5,289 
Total loans past due $8,756  $11,531  $9,026  $8,199 
                
Total loans past due to total loans receivable  0.76%  1.03%  0.74%  0.70%


Past due loans decreasedincreased by $2.8 million,$827,000, or 24.1%10.1%, to $8.8$9.0 million at SeptemberJune 30, 20162017 from $11.5$8.2 million at December 31, 2015.  Loans past due 90 days or more decreased by $3.2 million, or 36.3%, during the nine months ended September 30, 2016.  Loans past due less than 90 days increased by $463,000,$731,000, or 17.8%25.1%.  The $3.2 million decrease in loansLoans past due 90 days or more was primarily due to $3.4 million in loans transferred to real estate owned along with charge-offsincreased by $96,000, or 1.8%, during the ninesix months ended SeptemberJune 30, 2016 offset by additional loans which were included in the less than 90 day group in the previous period.2017.   The $463,000$731,000 increase in loans past due less than 90 days or more was primarily attributabledue to an increaseone relationship in loans entering the 1-59 day past dueone-to four-family loan category.


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REAL ESTATE OWNED

Total real estate owned decreased by $1.7$1.3 million, or 18.9%21.8%, to $7.5$4.8 million at SeptemberJune 30, 2016,2017, compared to $9.2$6.1 million at December 31, 2015.2016.  During the ninesix months ended SeptemberJune 30, 2016, $3.4 million2017, $923,000 was transferred from loans to real estate owned upon completion of foreclosure.  During the same period, sales of real estate owned totaled $4.8$1.8 million.  A total of $416,000$464,000 in write downs occurred during the ninesix months ended SeptemberJune 30, 2016.2017. New appraisals received on real estate owned and collateral dependent impaired loans are based upon an "as is 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.  The fair value is primarily based upon updated appraisals in addition to an analysis of current real estate market conditions.




ALLOWANCE FOR LOAN LOSSES



 At or for the Nine Months  As of or for the Six Months Ended 
 Ended September 30,  June 30, 
 2016  2015  2017  2016 
 (Dollars in Thousands)  (Dollars in Thousands) 
            
Balance at beginning of period $16,185  $18,706  $16,029  $16,185 
Provision for loan losses  340   1,720   (1,186)  205 
Charge-offs:                
Mortgage                
One- to four-family  801   3,212   392   464 
Multi-family  488   1,501   44   445 
Home equity  62   72   -   62 
Commercial real estate  -   45   -   - 
Construction and land  3   84   14   3 
Consumer  -   -   -   - 
Commercial  -   -   -   - 
Total charge-offs  1,354   4,914   450   974 
Recoveries:                
Mortgage                
One- to four-family  246   436   119   178 
Multi-family  134   789   43   59 
Home equity  24   101   17   19 
Commercial real estate  -   40   -   - 
Construction and land  58   45   40   33 
Consumer  -   5   -   - 
Commercial  -   -   -   - 
Total recoveries  462   1,416   219   289 
Net charge-offs  892   3,498   231   685 
Allowance at end of period $15,633  $16,928  $14,612  $15,705 
                
Ratios:                
Allowance for loan losses to non-accrual loans at end of period  146.55%  77.47%  170.20%  138.02%
Allowance for loan losses to loans receivable at end of period  1.36%  1.54%  1.19%  1.39%
Net charge-offs to average loans outstanding (annualized)  0.11%  0.43%  0.04%  0.12%
Current period provision for loan losses to net charge-offs  38.12%  49.17%  (513.42)%  29.93%
Net charge-offs (annualized) to beginning of the period allowance  7.36%  25.00%  2.91%  8.51%



- 4350 -
At SeptemberJune 30, 2016,2017, the allowance for loan losses was $15.6decreased $1.4 million to $14.6 million compared to $16.2$16.0 million at December 31, 2015.2016.  The decrease in allowance for loan losses reflects improvement in both the quality of the loan portfolio as well as stabilization in the overall local real estate marketnegative provision. The negative provision recorded during the nine months ended September 30, 2016.  The Company has experiencedcurrent quarter reflects the continued improvement in a number of key loan-related loan quality metrics compared to December 31, 2015, including impaired loans, substandardincluding: non-accrual loans, loans contractuallyrated substandard or watch, and loans past due and non-accrual loans.due.

Net charge-offs totaled $892,000,$231,000, or an annualized 0.11%0.04% of average loans for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $3.5 million,$685,000, or an annualized 0.43%0.12% of average loans for the ninesix months ended SeptemberJune 30, 2015.2016. Of the $892,000$231,000 in charge-offs during the ninesix months ended SeptemberJune 30, 2016,2017, a majority of the activity related to loans secured by multi-family and single-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'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, 2017 primary uses of cash and cash equivalents included: $1.22 billion funding loans held for sale, $49.0 million increase in loans receivable, $24.0 decrease in repurchase agreements, $12.0 million decrease in deposits, $20.3 million for cash dividends paid, $5.4 million in purchases of FHLB stock, and $5.0 million in purchases of mortgage related securities.

During the six months ended June 30, 2017, primary sources of cash and cash equivalents included: $1.31 billion in proceeds from the sale of loans held for sale, $100.0 million in proceeds from long-term FHLB debt, $34.9 million in proceeds from additional short-term borrowings, $16.9 million in principal repayments on mortgage related securities, $15.5 million in net income, and $5.8 million from maturities of debt securities.

During the six months ended June 30, 2016 primary uses of cash and cash equivalents included: $1.76$1.05 billion funding loans held for sale, $220.0$70.0 million in the payment of long term debt, $41.1$18.9 million increase in loans receivable, purchase of $10.0 million in bank owned life insurance, $3.9 million for the repurchase of common stock, $5.2 million in purchases of mortgage related securities, $4.5$6.5 million in purchases of FHLB stock, $4.1 million in purchases of debt securities,short term borrowings, and $4.8$2.7 million in dividends paid.

During the ninesix months ended SeptemberJune 30, 2016, primary sources of cash and cash equivalents included: $1.79$1.06 billion in proceeds from the sale of loans held for sale, $62.3$49.3 million increase in deposits, $100.0$50.0 million from long term borrowings, $56.8 million from short term borrowings, $29.7$19.1 million in principal repayments on mortgage related securities, $6.6$5.9 from maturities of debt securities, $19.1$11.6 million in net income, $11.4 from sales of FHLB stock, and $5.3 million from real estate owned sales.

During the nine months ended September 30, 2015 primary uses of cash and cash equivalents included: $1.55 billion funding loans held for sale, $72.2 million for the repurchase of common stock, $15.9 million in purchases of mortgage related securities, $20.9 million increase in net fundings of loans receivable (irrespective of loans transferred to real estate owned), $10.0 million in purchases of debt securities, and $4.5 million in dividends paid.

During the nine months ended September 30, 2015, primary sources of cash and cash equivalents included: $1.60 billion in proceeds from the sale of loans held for sale, $31.6 million in principal repayments on mortgage related securities, $8.2 million from maturities and calls of debt securities, $9.2 million increase in deposits, $9.1 million in advanced payments by borrowers for taxes, and $18.3$3.7 million from real estate owned sales.

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, 2017 and 2016, and 2015, respectively, $54.3$129.6 million and $130.4$82.5 million of our assets were invested in cash and cash equivalents.  At SeptemberJune 30, 2016,2017, cash and cash equivalents are comprised of the following: $22.4$29.4 million in cash held at the Federal Reserve Bank and other depository institutions and $31.9$100.2 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.

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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 FHLBC which provide an additional source of funds.  At SeptemberJune 30, 2016,2017, we had $50.0$85.0 million in short-term advances from the FHLBC withFHLBC. Of the $85.0 million, a total of $35.0 million has a contractual maturity date of October 27, 2016.March 15, 2018 and a total of $50.0 million has a contractual maturity date of August 25, 2017. At SeptemberJune 30, 2016,2017, we had $230.0$390.0 million in long term advances from the FHLBC with contractual maturity dates in 2017, 2018, 2021, and 2021.2027.  The advances with maturity dates in 2017 and 2018 are callable quarterly until maturity.  The 2021 advance maturities hashave quarterly call options beginning in June 2018 and September 2018.  The 2027 advance maturities have a single call option in May 2019 and June 2019.  As an additional source of funds, we also enter into repurchase agreements.  At SeptemberJune 30, 2016,2017, we had $84.0$60.0 million in repurchase agreements.  The repurchase agreements mature at various times in 2017, however, all are callable quarterly until maturity.

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At SeptemberJune 30, 2016,2017, we had outstanding commitments to originate loans receivable of 35.5$33.7 million.  In addition, at SeptemberJune 30, 2016,2017, we had unfunded commitments under construction loans of $28.5$25.7 million, unfunded commitments under business lines of credit of $13.3$16.3 million and unfunded commitments under home equity lines of credit and standby letters of credit of $14.4 million$14.7 million.  At SeptemberJune 30, 2016,2017, certificates of deposit scheduled to mature in one year or less totaled $481.1$557.7 million.  Based on prior experience, management believes that, subject to the Bank's funding needs, a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case.  In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as FHLBC 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 restrcitions.restrictions. At SeptemberJune 30, 2016,2017, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totalling $29.8totaling $22.5 million.

Capital

Shareholders' equity increaseddecreased by $17.6$2.7 million to $409.6$408.0 million at SeptemberJune 30, 20162017 from December 31, 2015.2016.  The increasedecrease in shareholders' equity was primarily due to the regular dividends and special dividend declared and the repurchase of stock.  Partially offsetting these decreases, shareholders' equity increased primarily due to net income, additional paid in capital as stock options were exercised, along with accumulated other comprehensive income increasing as the fair value of the security portfolio increased. These increases were offset by the repurchase of stockincreased, and dividends declared.unearned ESOP shares as they continue to vest.

The Company's Board of Directors authorized a stock repurchase program in the first quarter of 2015.  The Company authorized two stock repurchase programs in the second quarter of 2015.  TheThese first three programs have been either fulfilled or cancelled. 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.

As of SeptemberJune 30, 2016,2017, the Company had repurchased 5,847,153 shares at an average price of $12.96 under previously approved stock repurchase plans. As of SeptemberJune 30, 2016,2017, the Company is authorized to purchase up to 989,500 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, 2016,2017, WaterStone Bank exceeded all regulatory capital requirements and is considered "well capitalized" under regulatory guidelines. See "Notes to Consolidated Financial Statements - Note 8 Regulatory Capital."

The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds from the stock offering, our return on equity will continue to be adversely affected following the stock offering.

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, 20162017 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) $110,872  $110,872  $-  $-  $-  $119,585  $119,585  $-  $-  $- 
Money market and savings deposits (4)  157,472   157,472   -   -   -   153,743   153,743   -   -   - 
Time deposit (4)  687,304   481,068   200,902   5,334   -   664,065   557,711   103,295   3,059   - 
Bank lines of credit (4)  13,983   13,983   -   -   -   23,103   23,103   -   -   - 
Federal Home Loan Bank advances (1)  280,000   50,000   130,000   100,000   -   415,000   215,000   -   100,000   100,000 
Repurchase agreements (2)(4)  84,000   69,000   15,000   -   -   60,000   60,000   -   -   - 
Operating leases (3)  10,160   2,766   3,797   1,794   1,803   8,840   2,818   3,396   1,430   1,196 
Salary continuation agreements  128   128   -   -   - 
 $1,343,919  $885,289  $349,699  $107,128  $1,803  $1,444,336  $1,131,960  $106,691  $104,489  $101,196 

(1)  Secured under a blanket security agreement on qualifying assets, principally, mortgage loans.  Excludes interest which will accrue on the advances.
     All Federal Home Loan Bank advances with maturities exceeding one year are callable on a quarterly basis.
(2)  The repurchase agreements are callable on a quarterly basis until maturity.
(3)  Represents non-cancelable operating leases for offices and equipment.
(4)  Excludes interest.


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Herrington et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit that was filed in the FederalUnited States District Court for the Western District of Wisconsin and has been transferredsubsequently compelled to arbitration allegingbefore 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 contracts.employment agreements. On July 5, 2017, the arbitrator issued a final award finding Waterstone Mortgage Corporation isliable 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.




Off-Balance Sheet Commitments

The following table details the amounts and expected maturities of significant off-balance sheet commitments as of SeptemberJune 30, 2016.2017.

       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) $35,463  $35,463  $-  $-  $-  $33,719  $33,719  $-  $-  $- 
Unused portion of home equity lines of credit (2)  13,969   13,969   -   -   -   14,467   14,467   -   -   - 
Unused portion of construction loans (3)  28,507   28,507   -   -   -   25,690   25,690   -   -   - 
Unused portion of business lines of credit  13,345   13,345   -   -   -   16,300   16,300   -   -   - 
Standby letters of credit  392   392   -   -   -   259   259   -   -   - 
Total Other Commitments $91,676  $91,676  $-  $-  $-  $90,435  $90,435  $-  $-  $- 


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, theWaterStone Bank's board of directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three-three to five-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.base and our borrowings from the FHLBC. 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, 20162017 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 fixed-rate 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.


Percentage Increase
(Decrease) in Estimated
Annual Net Interest Income
Over 12 Months
400 basis point gradual rise in rates5.36%
300 basis point gradual rise in rates4.14%
200 basis point gradual rise in rates2.79%
100 basis point gradual rise in rates1.45%
Unchanged rate scenario0.00%
100 basis point gradual decline in rates (1)(1.42%)


____________
(1) Given the current low point in theThe following interest rate cycle, rate decline scenariosscenario displays the percentage change in excessnet interest income over a one-year time horizon assuming increases of 100, 200 and 300 basis points and a decreases of 100 basis points are not meaningful.points.  The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a static (no growth balance sheet).
WaterStone Bank's Asset/Liability policy limits projected changes in net average annual interest income to a maximum decline
Analysis of 25% for various levels of interest rate changes measured over a 12-month period when compared to the flat rate scenario. In addition, projected changes in the economic value of equity are limited to a maximum decline of 30% for interest rate movements of up to 400 basis points when compared to the flat rate scenario. These limits are re-evaluated on a periodic basis and may be modified, as appropriate.  Net Interest Income Sensitivity

  Immediate Change in Rates 
   +300   +200   +100   -100 
  (Dollar Amounts in Thousands) 
As of March 31, 2017                
          Dollar Change $3,804   2,573   1,299   (1,495)
          Percentage Change  7.35%  4.97   2.51   (2.89)

At SeptemberJune 30, 2016,2017, a 100 basis point gradualinstantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 1.45%2.51% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 1.42%2.89%.  At September 30, 2016, a 100 basis point gradual increase in interest rates had the effect of decreasing the economic value of equity by 1.54% while a 100 basis point decrease in rates had the effect of increasing the economic value of equity by 1.12%. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.



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Item 4. Controls and Procedures

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

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


PART II. OTHER INFORMATION


Item 1. Legal Proceedings

Other than as disclosed below, the Company is not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business.  At SeptemberJune 30, 2016,2017, 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 et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit that was filed in the FederalUnited States District Court for the Western District of Wisconsin and has been transferredsubsequently compelled to arbitration allegingbefore 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 contracts.employment agreements. On July 5, 2017, the arbitrator issued a final award finding Waterstone Mortgage Corporation isliable 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.

Item 1A. Risk Factors
There have been no changes in risk factors applicable to the Company from those disclosed in "Risk Factors" in Item 1A of the Company's annual reportAnnual Report on Form 10-K for the year ended December 31, 2015.2016.

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

Following are the Company's monthly common stock purchases during the thirdsecond quarter of 2016:2017:

Period
Total Number of Shares Purchased(b)
Average Price Paid per ShareTotal 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, 2016 - July 31, 2016-$--989,500
August 1, 2016 - August 31, 2016---989,500
September 1, 2016 - September 30, 2016---989,500
Total-$--989,500
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)
 
April 1, 2017 - April 30, 2017  19,484  $18.41   -   989,500 
May 1, 2017 - May 31, 2017  -   -   -   989,500 
June 1, 2017 - June 30, 2017  1,467   18.45   -   989,500 
Total  20,951  $18.41   -   989,500 

(a)On September 4, 2015, the Board of Directors terminated the then existing plan and authorized the repurchase of 1,500,000 shares of common stock.
(b)During the second quarter of 2016,2017, the Company repurchased 1,51820,951 shares for minimum tax withholding settlements on equity compensation. These purchases are included in the monthly common stock purchases table above but do not count against the maximum number of shares that may yet be purchased under the Board of Directors' authorization.



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Item 3. Defaults Upon Senior Securities


Not applicable.


Item 4. Mine Safety Disclosures


Not applicable.


Item 5. Other Information


Not applicable.


Item 6. Exhibits

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

Signatures

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



 
WATERSTONE FINANCIAL, INC.
(Registrant)
   
Date:  OctoberJuly 31, 20162017    
 
 
//s/ Douglas S. Gordon
   
 Douglas S. Gordon   
 
Chief Executive Officer
Principal Executive Officer
   
Date:  OctoberJuly 31, 20162017    
 
 
/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 SeptemberJune 30, 20162017



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, 2016,2017, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in shareholders' equity, (v) consolidated statements of cash flows and (vi) the notes to consolidated financial statements.
 X 




 
 
 
 
 
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