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

Form 10-Q

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

For the quarterly period ended September 30, 2020

OR

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

Commission File Number 001-36271

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

Maryland
90-1026709
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
   
11200 W. Plank Court Wauwatosa, Wisconsin
53226
(Address of principal executive offices)
(Zip Code)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                No      

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes                  No      

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                  No      
The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 25,161,736 at November 3, 2020.











WATERSTONE FINANCIAL, INC.

10-Q INDEX

 
Page No.
   
PART I. FINANCIAL INFORMATION
 
   
Item l. Financial Statements
 
3
4
5
8
   
   
PART II. OTHER INFORMATION
 
   
   

2





PART I — FINANCIAL INFORMATION

Item 1. Financial Statements


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

 
(Unaudited)
       
   
September 30, 2020
   
December 31, 2019
 
Assets
 
(Dollars In Thousands, except share and per share data)
 
Cash
 
$
54,681
   
$
52,814
 
Federal funds sold
   
21,151
     
12,704
 
Interest-earning deposits in other financial institutions and other short term investments
   
10,730
     
8,782
 
Cash and cash equivalents
   
86,562
     
74,300
 
Securities available for sale (at fair value)
   
153,201
     
178,476
 
Loans held for sale (at fair value)
   
385,803
     
220,123
 
Loans receivable
   
1,434,132
     
1,388,031
 
Less: Allowance for loan losses
   
18,844
     
12,387
 
Loans receivable, net
   
1,415,288
     
1,375,644
 
                 
Office properties and equipment, net
   
23,961
     
25,028
 
Federal Home Loan Bank stock (at cost)
   
26,720
     
21,150
 
Cash surrender value of life insurance
   
63,255
     
69,665
 
Real estate owned, net
   
772
     
748
 
Prepaid expenses and other assets
   
65,260
     
31,213
 
Total assets
 
$
2,220,822
   
$
1,996,347
 
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Demand deposits
 
$
169,218
   
$
130,063
 
Money market and savings deposits
   
271,283
     
197,942
 
Time deposits
   
744,150
     
739,771
 
Total deposits
   
1,184,651
     
1,067,776
 
                 
Borrowings
   
552,126
     
483,562
 
Advance payments by borrowers for taxes
   
25,987
     
4,212
 
Other liabilities
   
58,629
     
47,111
 
Total liabilities
   
1,821,393
     
1,602,661
 
                 
Shareholders’ equity:
               
Preferred stock (par value $0.01 per share)
               
Authorized -  50,000,000 shares at September 30, 2020 and at December 31, 2019, no shares issued
   
-
     
-
 
Common stock (par value $0.01 per share)
               
Authorized - 100,000,000 shares at September 30, 2020 and at December 31, 2019
               
Issued - 25,220,036 at September 30, 2020 and 27,148,411 at December 31, 2019
               
Outstanding - 25,220,036 at September 30, 2020 and 27,148,411 at December 31, 2019
   
252
     
271
 
Additional paid-in capital
   
182,960
     
211,997
 
Retained earnings
   
229,289
     
197,393
 
Unearned ESOP shares
   
(15,727
)
   
(16,617
)
Accumulated other comprehensive income, net of taxes
   
2,655
     
642
 
Total shareholders’ equity
   
399,429
     
393,686
 
Total liabilities and shareholders’ equity
 
$
2,220,822
   
$
1,996,347
 

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,
 
   
2020
   
2019
   
2020
   
2019
 
   
(In Thousands, except per share amounts)
 
                         
Interest income:
                       
Loans
 
$
18,224
   
$
18,558
   
$
54,404
   
$
53,688
 
Mortgage-related securities
   
588
     
737
     
1,960
     
2,260
 
Debt securities, federal funds sold and short-term investments
   
732
     
1,083
     
2,493
     
3,515
 
Total interest income
   
19,544
     
20,378
     
58,857
     
59,463
 
Interest expense:
                               
Deposits
   
3,495
     
4,479
     
11,760
     
12,813
 
Borrowings
   
2,640
     
2,745
     
7,913
     
7,579
 
Total interest expense
   
6,135
     
7,224
     
19,673
     
20,392
 
Net interest income
   
13,409
     
13,154
     
39,184
     
39,071
 
Provision (credit) for loan losses
   
1,025
     
(80
)
   
6,310
     
(730
)
Net interest income after provision for loan losses
   
12,384
     
13,234
     
32,874
     
39,801
 
Noninterest income:
                               
Service charges on loans and deposits
   
672
     
503
     
3,384
     
1,272
 
Increase in cash surrender value of life insurance
   
714
     
728
     
1,587
     
1,579
 
Mortgage banking income
   
72,112
     
36,062
     
166,292
     
93,526
 
Other
   
2,265
     
201
     
2,868
     
564
 
Total noninterest income
   
75,763
     
37,494
     
174,131
     
96,941
 
Noninterest expenses:
                               
Compensation, payroll taxes, and other employee benefits
   
39,405
     
27,514
     
100,695
     
75,227
 
Occupancy, office furniture, and equipment
   
2,469
     
2,629
     
7,744
     
8,085
 
Advertising
   
861
     
913
     
2,625
     
2,834
 
Data processing
   
922
     
1,003
     
3,023
     
2,641
 
Communications
   
339
     
358
     
994
     
1,039
 
Professional fees
   
4,738
     
954
     
7,647
     
2,438
 
Real estate owned
   
11
     
24
     
55
     
75
 
Loan processing expense
   
1,336
     
858
     
3,620
     
2,542
 
Other
   
2,920
     
1,979
     
9,495
     
6,055
 
Total noninterest expenses
   
53,001
     
36,232
     
135,898
     
100,936
 
Income before income taxes
   
35,146
     
14,496
     
71,107
     
35,806
 
Income tax expense
   
8,853
     
3,572
     
17,797
     
8,697
 
Net income
 
$
26,293
   
$
10,924
   
$
53,310
   
$
27,109
 
Income per share:
                               
Basic
 
$
1.08
   
$
0.42
   
$
2.16
   
$
1.04
 
Diluted
 
$
1.08
   
$
0.42
   
$
2.15
   
$
1.03
 
Weighted average shares outstanding:
                               
Basic
   
24,297
     
25,772
     
24,720
     
26,168
 
Diluted
   
24,380
     
25,962
     
24,842
     
26,372
 

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,
 
   
2020
   
2019
   
2020
   
2019
 
   
(In Thousands)
 
Net income
 
$
26,293
   
$
10,924
   
$
53,310
   
$
27,109
 
                                 
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 $41, $2, $(754), $(1,125), respectively
   
(104
)
   
(6
)
   
2,013
     
3,010
 
Total other comprehensive (loss) income
   
(104
)
   
(6
)
   
2,013
     
3,010
 
Comprehensive income
 
$
26,189
   
$
10,918
   
$
55,323
   
$
30,119
 

See accompanying notes to unaudited consolidated financial statements.
5






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


 
Common Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Accumulated
Other
Comprehensive Income (Loss)
   
Total
Shareholders'
Equity
 
   
Shares
   
Amount
                               
For the nine months ended Septeber 30, 2020
 
(In Thousands, except per share amounts)
 
Balances at January 1, 2020
   
27,148
   
$
271
   
$
211,997
   
$
197,393
   
$
(16,617
)
 
$
642
   
$
393,686
 
                                                         
Comprehensive income:
                                                       
Net income
   
-
     
-
     
-
     
53,310
     
-
     
-
     
53,310
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
2,013
     
2,013
 
Total comprehensive income
                                                   
55,323
 
                                                         
ESOP shares committed to be released to Plan participants
   
-
     
-
     
327
     
-
     
890
     
-
     
1,217
 
Cash dividend declared, $0.86 per share
   
-
     
-
     
-
     
(21,414
)
   
-
     
-
     
(21,414
)
Stock compensation activity, net of tax
   
222
     
3
     
2,783
     
-
     
-
     
-
     
2,786
 
Stock compensation expense
   
-
     
-
     
553
     
-
     
-
     
-
     
553
 
Purchase of common stock returned to authorized but unissued
   
(2,150
)
   
(22
)
   
(32,700
)
   
-
     
-
     
-
     
(32,722
)
Balances at September 30, 2020
   
25,220
   
$
252
   
$
182,960
   
$
229,289
   
$
(15,727
)
 
$
2,655
   
$
399,429
 
                                                         
For the nine months ended September 30, 2019
 
(In Thousands, except per share amounts)
 
Balances at January 1, 2019
   
28,463
   
$
285
   
$
232,406
   
$
187,153
   
$
(17,804
)
 
$
(2,361
)
 
$
399,679
 
                                                         
Comprehensive income:
                                                       
Net income
   
-
     
-
     
-
     
27,109
     
-
     
-
     
27,109
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
3,010
     
3,010
 
Total comprehensive income
                                                   
30,119
 
                                                         
ESOP shares committed to be released to Plan participants
   
-
     
-
     
429
     
-
     
890
     
-
     
1,319
 
Cash dividend declared, $0.86 per share
   
-
     
-
     
-
     
(22,582
)
   
-
     
-
     
(22,582
)
Stock based compensation activity
   
47
     
-
     
603
     
-
     
-
     
-
     
603
 
Stock compensation expense
   
-
     
-
     
832
     
-
     
-
     
-
     
832
 
Purchase of common stock returned to authorized but unissued
   
(1,363
)
   
(14
)
   
(22,713
)
   
-
     
-
     
-
     
(22,727
)
Balances at September 30, 2019
   
27,147
   
$
271
   
$
211,557
   
$
191,680
   
$
(16,914
)
 
$
649
   
$
387,243
 
6



 
Common Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Accumulated
Other
Comprehensive Income (Loss)
   
Total
Shareholders'
Equity
 
   
Shares
   
Amount
                               
For the three months ended Septeber 30, 2020
 
(In Thousands, except per share amounts)
 
Balances at July 1, 2020
   
25,843
   
$
258
   
$
192,762
   
$
205,863
   
$
(16,023
)
 
$
2,759
   
$
385,619
 
                                                         
Comprehensive income:
                                                       
Net income
   
-
     
-
     
-
     
26,293
     
-
     
-
     
26,293
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(104
)
   
(104
)
Total comprehensive income
                                                   
26,189
 
                                                         
ESOP shares committed to be released to Plan participants
   
-
     
-
     
99
     
-
     
296
     
-
     
395
 
Cash dividend declared, $0.12 per share
   
-
     
-
     
-
     
(2,867
)
   
-
     
-
     
(2,867
)
Stock compensation activity, net of tax
   
177
     
2
     
2,253
     
-
     
-
     
-
     
2,255
 
Stock compensation expense
   
-
     
-
     
164
     
-
     
-
     
-
     
164
 
Purchase of common stock returned to authorized but unissued
   
(800
)
   
(8
)
   
(12,318
)
   
-
     
-
     
-
     
(12,326
)
Balances at September 30, 2020
   
25,220
   
$
252
   
$
182,960
   
$
229,289
   
$
(15,727
)
 
$
2,655
   
$
399,429
 
                                                         
For the three months ended September 30, 2019
 
(In Thousands, except per share amounts)
 
Balances at July 1, 2019
   
27,626
   
$
276
   
$
219,262
   
$
183,820
   
$
(17,210
)
 
$
655
   
$
386,803
 
                                                         
Comprehensive income:
                                                       
Net income
   
-
     
-
     
-
     
10,924
     
-
     
-
     
10,924
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(6
)
   
(6
)
Total comprehensive income
                                                   
10,918
 
                                                         
ESOP shares committed to be released to Plan participants
   
-
     
-
     
148
     
-
     
296
     
-
     
444
 
Cash dividend declared, $0.12 per share
   
-
     
-
     
-
     
(3,064
)
   
-
     
-
     
(3,064
)
Stock based compensation activity
   
16
     
-
     
209
     
-
     
-
     
-
     
209
 
Stock compensation expense
   
-
     
-
     
234
     
-
     
-
     
-
     
234
 
Purchase of common stock returned to authorized but unissued
   
(495
)
   
(5
)
   
(8,296
)
   
-
     
-
     
-
     
(8,301
)
Balances at September 30, 2019
   
27,147
   
$
271
   
$
211,557
   
$
191,680
   
$
(16,914
)
 
$
649
   
$
387,243
 

See accompanying notes to unaudited consolidated financial statements.
7





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

 
Nine months ended September 30,
 
   
2020
   
2019
 
   
(In Thousands)
 
             
Operating activities:
           
Net income
 
$
53,310
   
$
27,109
 
Adjustments to reconcile net income to used in operating activities:
               
Provision (credit) for loan losses
   
6,310
     
(730
)
Provision for depreciation
   
1,901
     
1,829
 
Deferred taxes
   
(2,445
)
   
1,303
 
Stock based compensation
   
553
     
832
 
Net amortization of premium/discount on debt and mortgage related securities
   
102
     
164
 
Amortization of unearned ESOP shares
   
1,217
     
1,319
 
Amortization and impairment of mortgage servicing rights
   
774
     
167
 
Gain on sale of loans held for sale
   
(171,374
)
   
(96,024
)
Loans originated for sale
   
(3,063,835
)
   
(2,092,948
)
Proceeds on sales of loans originated for sale
   
3,069,529
     
2,092,816
 
Gain on death benefit on bank owned life insurance
   
(1,456
)
   
-
 
Decrease (increase) in accrued interest receivable
   
181
     
(248
)
Increase in cash surrender value of life insurance
   
(1,587
)
   
(1,579
)
(Decrease) increase in accrued interest on deposits and borrowings
   
(245
)
   
92
 
Decrease in prepaid tax expense
   
2,794
     
1,812
 
Net gain related to real estate owned
   
(5
)
   
(20
)
Change in other assets and other liabilities
   
(12,074
)
   
(4,185
)
Net cash used in operating activities
   
(116,350
)
   
(68,291
)
                 
Investing activities:
               
Net increase in loans receivable
   
(46,322
)
   
(7,102
)
Purchases of:
               
FHLB stock
   
(5,570
)
   
(2,700
)
Mortgage related securities
   
(4,455
)
   
(12,121
)
Debt securities
   
(5,000
)
   
-
 
Bank owned life insurance
   
(180
)
   
(180
)
Premises and equipment, net
   
(917
)
   
(2,247
)
Proceeds from:
               
Principal repayments on mortgage-related securities
   
33,635
     
21,920
 
Maturities of debt securities
   
3,760
     
1,835
 
Sales of real estate owned
   
353
     
1,204
 
Proceeds from death benefit on bank owned life insurance
   
9,633
     
-
 
Net cash (used in) provided by investing activities
   
(15,063
)
   
609
 
                 
Financing activities:
               
Net increase in deposits
   
116,875
     
1,074
 
Net change in short term borrowings
   
68,564
     
40,749
 
Repayment of long term debt
   
-
     
(125,000
)
Proceeds from long term debt
   
-
     
165,000
 
Cash paid for advance payments by borrowers for taxes
   
9,870
     
10,961
 
Cash dividends on common stock
   
(21,698
)
   
(22,889
)
Purchase of common stock returned to authorized but unissued
   
(32,722
)
   
(22,727
)
Proceeds from stock option exercises
   
2,786
     
603
 
Net cash provided by financing activities
   
143,675
     
47,771
 
Increase (decrease) in cash and cash equivalents
   
12,262
     
(19,911
)
Cash and cash equivalents at beginning of period
   
74,300
     
86,101
 
Cash and cash equivalents at end of period
 
$
86,562
   
$
66,190
 
                 
Supplemental information:
               
Cash paid or credited during the period for:
               
Income tax payments
 
$
17,448
   
$
6,709
 
Interest payments
   
19,918
     
20,300
 
Noncash activities:
               
Loans receivable transferred to real estate owned
   
369
     
946
 
Dividends declared but not paid in other liabilities
   
3,217
     
3,492
 

See accompanying notes to unaudited consolidated financial statements.
8





Note 1 — Basis of Presentation

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

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

WaterStone Bank conducts its community banking business from 13 banking offices located in Milwaukee, Washington and Waukesha Counties, Wisconsin, as well as a loan production office in Minneapolis, Minnesota. WaterStone Bank's principal lending activity is originating one- to four-family, multi-family residential real estate, and commercial real estate loans for retention in its portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, 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, 2019 Annual Report on Form 10-K. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, income taxes, and fair value measurements. Actual results could differ from those estimates.

Impacts of COVID-19

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

Subsequent Events

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

9



Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income.  The Company reclassified the Cost of Shares Repurchased line item presented in prior periods to the Additional Paid in Capital line item in the Consolidated Statements of Financial Condition.  The Cost of Shares Repurchased column was reclassified to the Additional Paid in Capital line in the Consolidated Statements of Changes in Shareholders’ Equity.

Impact of Recent Accounting Pronouncements

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down.

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

The Company has input the available historical Company data to build an internal model and is reviewing the assumptions to support the calculation under ASC Topic 326. Management’s methodology for estimating the allowance for credit losses under the current expected credit losses (CECL) model includes the use of relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience by vintage classified by loans with similar risk profiles provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, portfolio volume, delinquency rates, interest rates, or other relevant factors. Management will continue to review and adjust these and other factors. Ongoing evaluations have been performed by vintage adjusted for prepayments. For two portfolio segments, management expects to use a weighted average remaining maturity methodology, which contemplates loss expectations on a pool basis, relying on historic loss rates.

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

Financial statement users should be aware that the allowance for credit loss is, by design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors.

As we continue to evaluate the provisions of ASC Topic 326 as of and for the nine months ended September 30, 2020, we are considering the following in developing our forecast and its effect on our CECL calculations:

Duration, extent and severity of COVID-19;
Effect of government assistance; and
Unemployment and effect on economies and markets.



10

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, 2020
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
24,872
   
$
1,228
   
$
-
   
$
26,100
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
57,424
     
2,095
     
-
     
59,519
 
Private-label issued
   
3,595
     
55
     
-
     
3,650
 
Mortgage-related securities
   
85,891
     
3,378
     
-
     
89,269
 
                                 
Government sponsered enterprise bonds
   
2,500
     
-
     
(1
)
   
2,499
 
Municipal securities
   
47,970
     
2,192
     
-
     
50,162
 
Other debt securities
   
12,500
     
-
     
(1,229
)
   
11,271
 
Debt securities
   
62,970
     
2,192
     
(1,230
)
   
63,932
 
   
$
148,861
   
$
5,570
   
$
(1,230
)
 
$
153,201
 


 
December 31, 2019
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
33,773
   
$
422
   
$
(45
)
 
$
34,150
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
81,232
     
776
     
(254
)
   
81,754
 
Mortgage-related securities
   
115,005
     
1,198
     
(299
)
   
115,904
 
                                 
Municipal securities
   
51,898
     
1,795
     
(1
)
   
53,692
 
Other debt securities
   
10,000
     
-
     
(1,120
)
   
8,880
 
Debt securities
   
61,898
     
1,795
     
(1,121
)
   
62,572
 
   
$
176,903
   
$
2,993
   
$
(1,420
)
 
$
178,476
 

The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At September 30, 2020, $897,000 of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities and $7.8 million were pledged as collateral to secure back-to-back swaps. At December 31, 2019, $1.2 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2020 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
Debt and other securities
           
Due within one year
 
$
5,512
   
$
5,556
 
Due after one year through five years
   
36,877
     
37,925
 
Due after five years through ten years
   
20,581
     
20,451
 
Due after ten years
   
-
     
-
 
Mortgage-related securities
   
85,891
     
89,269
 
   
$
148,861
   
$
153,201
 

11


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

 
September 30, 2020
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Collateralized mortgage obligations:
                                               
  Government sponsored enterprise issued
   
-
     
-
     
-
     
-
     
-
     
-
 
  Private label issued
   
-
     
-
     
-
     
-
     
-
     
-
 
Government sponsored enterprise bonds
   
2,499
     
(1
)
   
-
     
-
     
2,499
     
(1
)
Municipal securities
   
-
     
-
     
-
     
-
     
-
     
-
 
Other debt securities
   
2,476
     
(24
)
   
8,795
     
(1,205
)
   
11,271
     
(1,229
)
   
$
4,975
   
$
(25
)
 
$
8,795
   
$
(1,205
)
 
$
13,770
   
$
(1,230
)


 
December 31, 2019
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
2,929
   
$
(20
)
 
$
2,849
   
$
(25
)
 
$
5,778
   
$
(45
)
Collateralized mortgage obligations:
                                               
Government sponsored enterprise issued
   
21,723
     
(136
)
   
7,180
     
(118
)
   
28,903
     
(254
)
Municipal securities
   
100
     
(1
)
   
-
     
-
     
100
     
(1
)
Other debt securities
   
-
     
-
     
8,880
     
(1,120
)
   
8,880
     
(1,120
)
   
$
24,752
   
$
(157
)
 
$
18,909
   
$
(1,263
)
 
$
43,661
   
$
(1,420
)

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’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.

As of September 30, 2020, the Company held one municipal security that had previously been deemed to be other-than-temporarily impaired. The security was issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of this security resulted in $77,000 in credit losses charged to earnings with respect to this municipal security. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price.  There have been no additional credit losses related to the security.  As of September 30, 2020, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of September 30, 2020, the Company had one corporate debt security which had been in an unrealized loss position for twelve months or longer and this security represents a loss of 12.1% of its aggregate amortized cost. The security was determined not to be other-than-temporarily impaired as of September 30, 2020. The Company has determined that the decline in fair value of the security is primarily attributable to an increase in market interest rates compared to the stated rates on this security and is not attributable to credit deterioration. As the Company does not intend to sell nor is it more likely than not that it will be required to sell the security before recovery of the amortized cost basis, it is not considered other-than-temporarily impaired. The unrealized losses for the corporate debt security with an unrealized loss greater than 12 months is due to the current slope of the yield curve.  The security currently earns a floating rate that is indexed to the 10 year Treasury interest rate that is reset on a quarterly basis.

Deterioration of general economic market conditions could result in the recognition of future other than temporary impairment losses within the investment portfolio and such amounts could be material to our consolidated financial statements.

During the nine months ended September 30, 2020 and September 30, 2019, there were no sales of securities.
12




Note 3 - Loans Receivable

Loans receivable at September 30, 2020 and December 31, 2019 are summarized as follows:

 
September 30, 2020
   
December 31, 2019
 
   
(In Thousands)
 
Mortgage loans:
           
Residential real estate:
           
One- to four-family
 
$
452,491
   
$
480,280
 
Multi-family
   
599,637
     
584,859
 
Home equity
   
15,410
     
18,071
 
Construction and land
   
66,726
     
37,033
 
Commercial real estate
   
241,248
     
236,703
 
Consumer
   
783
     
832
 
Commercial loans
   
57,837
     
30,253
 
   
$
1,434,132
   
$
1,388,031
 

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers. While the real estate collateralizing these loans is primarily residential in nature, it ranges from owner-occupied single family homes to large apartment complexes.

Qualifying loans receivable totaling $1.32 billion and $1.07 billion at September 30, 2020 and December 31, 2019, respectively, were pledged as collateral against $504.0 million and $470.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 2020 and December 31, 2019.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. Loans outstanding to such parties were approximately $6.5 million as of September 30, 2020 and $6.3 million as of December 31, 2019.  None of these loans were past due or considered impaired as of September 30, 2020 or December 31, 2019.

As of September 30, 2020 and December 31, 2019, there were no loans 90 or more days past due and still accruing interest.

An analysis of past due loans receivable as of September 30, 2020 and December 31, 2019 follows:

As of September 30, 2020
 
 
1-59 Days Past Due (1)
   
60-89 Days Past Due (2)
   
90 Days or Greater
   
Total Past Due
   
Current (3)
   
Total Loans
 
 
(In Thousands)
 
Mortgage loans:
                                 
Residential real estate:
                                 
One- to four-family
 
$
1,608
   
$
-
   
$
2,647
   
$
4,255
   
$
448,236
   
$
452,491
 
Multi-family
   
-
     
-
     
314
     
314
     
599,323
     
599,637
 
Home equity
   
50
     
-
     
40
     
90
     
15,320
     
15,410
 
Construction and land
   
-
     
51
     
-
     
51
     
66,675
     
66,726
 
Commercial real estate
   
699
     
-
     
51
     
750
     
240,498
     
241,248
 
Consumer
   
-
     
-
     
-
     
-
     
783
     
783
 
Commercial loans
   
95
     
-
     
-
     
95
     
57,742
     
57,837
 
Total
 
$
2,452
   
$
51
   
$
3,052
   
$
5,555
   
$
1,428,577
   
$
1,434,132
 

As of December 31, 2019
 
 
1-59 Days Past Due (1)
   
60-89 Days Past Due (2)
   
90 Days or Greater
   
Total Past Due
   
Current (3)
   
Total Loans
 
 
(In Thousands)
 
Mortgage loans:
                                 
Residential real estate:
                                 
One- to four-family
 
$
1,179
   
$
638
   
$
3,969
   
$
5,786
   
$
474,494
   
$
480,280
 
Multi-family
   
-
     
-
     
360
     
360
     
584,499
     
584,859
 
Home equity
   
-
     
10
     
-
     
10
     
18,061
     
18,071
 
Construction and land
   
-
     
-
     
-
     
-
     
37,033
     
37,033
 
Commercial real estate
   
-
     
-
     
303
     
303
     
236,400
     
236,703
 
Consumer
   
-
     
-
     
-
     
-
     
832
     
832
 
Commercial loans
   
6
     
-
     
-
     
6
     
30,247
     
30,253
 
Total
 
$
1,185
   
$
648
   
$
4,632
   
$
6,465
   
$
1,381,566
   
$
1,388,031
 


(1)   Includes $407,000 and $53,000 at September 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

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

(3)   Includes $2.6 million and $2.0 million at September 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

13


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

 
One- to
Four- Family
   
Multi-Family
   
Home Equity
   
Construction and Land
   
Commercial Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Nine months ended September 30, 2020
                               
Balance at beginning of period
 
$
4,907
   
$
4,138
   
$
201
   
$
610
   
$
2,145
   
$
14
   
$
372
   
$
12,387
 
Provision (credit) for loan losses
   
854
     
1,703
     
(6
)
   
1,004
     
2,300
     
33
     
422
     
6,310
 
Charge-offs
   
(9
)
   
(5
)
   
(13
)
   
-
     
-
     
(10
)
   
-
     
(37
)
Recoveries
   
132
     
17
     
22
     
2
     
11
     
-
     
-
     
184
 
Balance at end of period
 
$
5,884
   
$