Waterstone Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - Waterstone Financial, Inc.	exhibit322.htm
EX-32.1 - Waterstone Financial, Inc.	exhibit321.htm
EX-31.2 - Waterstone Financial, Inc.	exhibit312.htm
EX-31.1 - Waterstone Financial, Inc.	exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2017

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

Commission File Number 001-36271

WATERSTONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	90-1026709
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

11200 W. Plank Court Wauwatosa, Wisconsin	53226
(Address of principal executive offices)	(Zip Code)

(414) 761-1000

(Registrant's telephone number, including area code)

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

Yes T No ☐

Indicate by check mark whether the registrant has submitted electronically 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 "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 29,459,369 at April 28, 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 March 31, 2017 (unaudited) and December 31, 2016	3
Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (unaudited)	4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 (unaudited)	5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2017 and 2016 (unaudited)	6
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8 - 32

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	33 - 49
Item 3. Quantitative and Qualitative Disclosures about Market Risk	50
Item 4. Controls and Procedures	50

PART II. OTHER INFORMATION	52

Item 1. Legal Proceedings	51
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	51 51 51 52 52
Item 6. Exhibits	52
Signatures	52

- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	March 31, 2017			December 31, 2016
Assets	(Dollars In Thousands, except share and per share data)
Cash	$	24,829		$	7,878
Federal funds sold		38,687			26,828
Interest-earning deposits in other financial institutions and other short term investments		11,112			12,511
Cash and cash equivalents		74,628			47,217
Securities available for sale (at fair value)		222,125			226,795
Loans held for sale (at fair value)		119,726			225,248
Loans receivable		1,194,848			1,177,884
Less: Allowance for loan losses		14,730			16,029
Loans receivable, net		1,180,118			1,161,855

Office properties and equipment, net		23,581			23,655
Federal Home Loan Bank stock (at cost)		11,925			13,275
Cash surrender value of life insurance		61,827			61,509
Real estate owned, net		5,070			6,118
Prepaid expenses and other assets		28,173			24,947
Total assets	$	1,727,173		$	1,790,619

Liabilities and Shareholders' Equity
Liabilities:
Demand deposits	$	124,384		$	120,371
Money market and savings deposits		159,946			162,456
Time deposits		661,711			666,584
Total deposits		946,041			949,411

Borrowings		334,764			387,155
Advance payments by borrowers for taxes		10,792			4,716
Other liabilities		20,514			38,647
Total liabilities		1,312,111			1,379,929

Shareholders' equity:
Preferred stock (par value $.01 per share)
Authorized - 50,000,000 shares in 2017 and in 2016, no shares issued		-			-
Common stock (par value $.01 per share)
Authorized - 100,000,000 shares in 2017 and in 2016
Issued - 29,450,655 in 2017 and 29,430,123 in 2016
Outstanding - 29,450,655 in 2017 and 29,430,123 in 2016		295			294
Additional paid-in capital		324,046			322,934
Retained earnings		187,817			184,565
Unearned ESOP shares		(19,881	)		(20,178	)
Accumulated other comprehensive loss, net of taxes		(144	)		(378	)
Cost of shares repurchased (5,936,882 shares at March 31, 2017 and 5,908,150 shares at December 31, 2016)		(77,071	)		(76,547	)
Total shareholders' equity		415,062			410,690
Total liabilities and shareholders' equity	$	1,727,173		$	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 March 31,
	2017			2016
	(In Thousands, except per share amounts)

Interest income:
Loans	$	14,238		$	13,784
Mortgage-related securities		696			838
Debt securities, federal funds sold and short-term investments		852			974
Total interest income		15,786			15,596
Interest expense:
Deposits		1,795			1,719
Borrowings		2,096			3,894
Total interest expense		3,891			5,613
Net interest income		11,895			9,983
Provision for loan losses		(1,211	)		205
Net interest income after provision for loan losses		13,106			9,778
Noninterest income:
Service charges on loans and deposits		367			337
Increase in cash surrender value of life insurance		318			241
Mortgage banking income		24,687			20,614
Other		565			253
Total noninterest income		25,937			21,445
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		19,995			17,686
Occupancy, office furniture, and equipment		2,527			2,336
Advertising		724			658
Data processing		598			643
Communications		379			342
Professional fees		607			523
Real estate owned		411			144
FDIC insurance premiums		120			205
Other		3,697			2,685
Total noninterest expenses		29,058			25,222
Income before income taxes		9,985			6,001
Income tax expense		3,413			2,140
Net income	$	6,572		$	3,861
Income per share:
Basic	$	0.24		$	0.14
Diluted	$	0.24		$	0.14
Weighted average shares outstanding:
Basic		27,323			26,966
Diluted		27,867			27,279

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 4 -

WATERSONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended March 31,
	2017		2016
	(In Thousands)
Net income	$	6,572	$	3,861

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 $(153)and $(1,200) respectively		234		1,860

Reclassification adjustment for net gain included in net income during the period, net of tax expense of $0 and $0, respectively		-		-

Total other comprehensive income		234		1,860
Comprehensive income	$	6,806	$	5,721

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 5 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	Common Stock						Additional Paid-In Capital		Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Cost of Shares Repurchased			Total Shareholders' Equity
	Shares			Amount
Balances at December 31, 2015		29,407		$	$294		$	317,022	$	168,089		$	(21,365	)	$	582		$	(72,692	)	$	391,930

Comprehensive income:
Net income		-			-			-		3,861			-			-			-			3,861
Other comprehensive income		-			-			-		-			-			1,860			-			1,860
Total comprehensive income																						5,721

ESOP shares committed to be released to Plan participants		-			-			65		-			297			-			-			362
Cash dividend, $0.05 per share		-			-			-		(1,364	)		-			-			-			(1,364	)
Stock compensation activity, net of tax		13			-			65		-			-			-			-			65
Stock compensation expense		-			-			400		-			-			-			-			400
Repurchase of common stock returned to authorized but unissued		(272	)		(2	)		-		-			-			-			(3,686	)		(3,688	)
Balances at March 31, 2016		29,148		$	$292		$	317,552	$	170,586		$	(21,068	)	$	2,442		$	(76,378	)	$	393,426


Balances at December 31, 2016		29,430		$	$294		$	322,934	$	184,565		$	(20,178	)	$	(378	)	$	(76,547	)	$	410,690

Comprehensive income:
Net income		-			-			-		6,572			-			-			-			6,572
Other comprehensive income		-			-			-		-			-			234			-			234
Total comprehensive income																						6,806

ESOP shares committed to be released to Plan participants		-			-			185		-			297			-			-			482
Cash dividend, $0.12 per share		-			-			-		(3,320	)		-			-			-			(3,320	)
Stock based compensation activity		50			1			453		-			-			-			-			454
Stock compensation expense		-			-			474		-			-			-			-			474
Repurchase of common stock returned to authorized but unissued		(29	)		-			-		-			-			-			(524	)		(524	)
Balances at March 31, 2017		29,451		$	$295		$	324,046	$	187,817		$	(19,881	)	$	(144	)	$	(77,071	)	$	415,062

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 6 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2017			2016
	(In Thousands)

Operating activities:
Net income	$	6,572		$	3,861
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(1,211	)		205
Provision for depreciation		520			702
Stock based compensation		474			400
Net amortization of premium/discount on debt and mortgage related securities		190			252
Amortization of unearned ESOP shares		482			362
Amortization and impairment of mortgage servicing rights		19			164
Gain on sale of loans held for sale		(21,647	)		(20,196	)
Loans originated for sale		(481,313	)		(371,222	)
Proceeds on sales of loans originated for sale		608,482			450,547
Increase in accrued interest receivable		(319	)		(326	)
Increase in cash surrender value of life insurance		(318	)		(241	)
Decrease in accrued interest on deposits and borrowings		(70	)		(156	)
Decrease in other liabilities		(3,877	)		(51	)
Increase in accrued tax receivable		(1,089	)		(887	)
Net loss (gain) related to real estate owned		315			(19	)
Gain on sale of mortgage servicing rights		(308	)		-
Other		(1,606	)		(6,957	)
Net cash provided by operating activities		105,296			56,438

Investing activities:
Net (increase) decrease in loans receivable		(17,469	)		1,017
Net change in FHLB stock		1,350			-
Purchases of:
Mortgage related securities		(4,976	)		(5,236	)
Premises and equipment, net		(505	)		(484	)
Bank owned life insurance		-			(10,000	)
Proceeds from:
Principal repayments on mortgage-related securities		8,357			8,990
Maturities of debt securities		1,485			980
Sales of real estate owned		1,134			1,964
Net cash used in investing activities		(10,624	)		(2,769	)

Financing activities:
Net (decrease) increase in deposits		(3,370	)		24,935
Net change in short term borrowings		(28,391	)		5,019
Repayment of long term debt		(24,000	)		(50,000	)
Net change in advance payments by borrowers for taxes		(8,156	)		(6,381	)
Cash dividends on common stock		(3,274	)		(1,376	)
Purchase of common stock returned to authorized but unissued		(524	)		(3,688	)
Proceeds from stock option exercises		454			65
Net cash used in financing activities		(67,261	)		(31,426	)
Increase in cash and cash equivalents		27,411			22,243
Cash and cash equivalents at beginning of period		47,217			100,471
Cash and cash equivalents at end of period	$	74,628		$	122,714

Supplemental information:
Cash paid or credited during the period for:
Income tax payments	$	5,042		$	2,505
Interest payments		3,961			5,769
Noncash activities:
Loans receivable transferred to real estate owned		416			1,094
Dividends declared but not paid in other liabilities		3,722			1,525

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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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 (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, multi-family residential real estate, and commercial real estate loans for retention in its portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, and commercial business loans, and consumer loans. WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances. Our deposit offerings include: certificates of deposit, money market savings accounts, transaction deposit accounts, non-interest bearing demand accounts and individual retirement accounts. Our investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations.

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

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

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company's December 31, 2016 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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

ASC Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company 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." New authoritative accounting guidance under ASC Topic 825 "Financial Instruments" amended prior guidance to require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new authoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a material impact on the Company's statements of operations or financial condition.

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 estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

Note 2— Securities Available for Sale

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

	March 31, 2017
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)
Mortgage-backed securities	$	68,227	$	650	$	(164	)	$	68,713
Collateralized mortgage obligations:
Government sponsored enterprise issued		63,442		67		(385	)		63,124
Mortgage-related securities		131,669		717		(549	)		131,837

Government sponsored enterprise bonds		2,500		2		(1	)		2,501
Municipal securities		68,741		1,023		(125	)		69,639
Other debt securities		17,398		220		(700	)		16,918
Debt securities		88,639		1,245		(826	)		89,058
Certificates of deposit		1,225		6		(1	)		1,230
	$	221,533	$	1,968	$	(1,376	)	$	222,125

	December 31, 2016
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)
Mortgage-backed securities	$	72,858	$	798	$	(243	)	$	73,413
Collateralized mortgage obligations:
Government sponsored enterprise issued		62,297		70		(365	)		62,002
Mortgage-related securities		135,155		868		(608	)		135,415

Government sponsored enterprise bonds		2,500		4		(1	)		2,503
Municipal securities		70,311		685		(300	)		70,696
Other debt securities		17,399		154		(603	)		16,950
Debt securities		90,210		843		(904	)		90,149
Certificates of deposit		1,225		7		(1	)		1,231
	$	226,590	$	1,718	$	(1,513	)	$	226,795

- 9 -

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 March 31, 2017, $80.7 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company. As of March 31, 2017, $2.3 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2016, $93.2 million of the Company's government sponsored enterprise bonds and $2.4 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities, respectively.

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2017 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	$	11,469	$	11,470
Due after one year through five years		19,436		19,523
Due after five years through ten years		39,904		40,651
Due after ten years		19,055		18,644
Mortgage-related securities		131,669		131,837
	$	221,533	$	222,125

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:

	March 31, 2017
	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(In Thousands)
Mortgage-backed securities	$	11,162	$	(145	)	$	1,060	$	(19	)	$	12,222	$	(164	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		40,932		(385	)		-		-			40,932		(385	)
Government sponsored enterprise bonds		1,999		(1	)		-		-			1,999		(1	)
Municipal securities		17,195		(125	)		-		-			17,195		(125	)
Other debt securities		-		-			9,300		(700	)		9,300		(700	)
Certificates of deposit		489		(1	)		-		-			489		(1	)
	$	71,777	$	(657	)	$	10,360	$	(719	)	$	82,137	$	(1,376	)

	December 31, 2016
	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	$	23,433	$	(222	)	$	1,068	$	(21	)	$	24,501	$	(243	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		39,395		(365	)		-		-			39,395		(365	)
Government sponsored enterprise bonds		2,000		(1	)		-		-			2,000		(1	)
Municipal securities		32,141		(300	)		-		-			32,141		(300	)
Other debt securities		-		-			9,397		(603	)		9,397		(603	)
Certificates of deposit		489		(1	)		-		-			489		(1	)
	$	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.

- 10 -

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 March 31, 2017	$	94

As of March 31, 2017, the Company held one municipal security that had previously been deemed to be other-than-temporarily impaired. The security was issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of this security resulted in $77,000 in credit losses charged to earnings with respect to this municipal security. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price. As of March 31, 2017, this security had a combined amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of March 31, 2017, the Company had one mortgage-backed 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 March 31, 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.

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

There were no sales of securities during the three months ended March 31, 2017 and March 31, 2016.

Note 3 - Loans Receivable

Loans receivable at March 31, 2017 and December 31, 2016 are summarized as follows:

	March 31, 2017		December 31, 2016
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	396,187	$	392,817
Multi-family		566,027		558,592
Home equity		21,803		21,778
Construction and land		20,900		18,179
Commercial real estate		162,870		159,401
Consumer		257		319
Commercial loans		26,804		26,798
	$	1,194,848	$	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 $921.5 million and $911.9 million at March 31, 2017 and December 31, 2016, respectively, are pledged as collateral against $265.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC) advances under a blanket security agreement.

- 11 -

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

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

An analysis of past due loans receivable as of March 31, 2017 and December 31, 2016 follows:

	As of March 31, 2017
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	2,421	$	-	$	4,511	$	6,932	$	389,255	$	396,187
Multi-family			335		-		772		1,107		564,920		566,027
Home equity			106		58		35		199		21,604		21,803
Construction and land			-		-		51		51		20,849		20,900
Commercial real estate			8		-		189		197		162,673		162,870
Consumer			-		-		-		-		257		257
Commercial loans			25		-		26		51		26,753		26,804
Total		$	2,895	$	58	$	5,584	$	8,537	$	1,186,311	$	1,194,848

	As of December 31, 2016
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	2,403	$	7	$	4,623	$	7,033	$	385,784	$	392,817
Multi-family			376		-		401		777		557,815		558,592
Home equity			82		-		35		117		21,661		21,778
Construction and land			-		-		-		-		18,179		18,179
Commercial real estate			-		-		203		203		159,198		159,401
Consumer			-		-		-		-		319		319
Commercial loans			42		-		27		69		26,729		26,798
Total		$	2,903	$	7	$	5,289	$	8,199	$	1,169,685	$	1,177,884

⁽¹⁾	Includes $196,000 and $148,000 at March 31, 2017 and December 31, 2016, respectively, which are on non-accrual status.

⁽²⁾	Includes $58,000 and $- at March 31, 2017 and December 31, 2016, respectively, which are on non-accrual status.

⁽³⁾	Includes $2.2 million and $4.4 million at March 31, 2017 and December 31, 2016, respectively, which are on non-accrual status.

A summary of the activity for the three months ended March 31, 2017 and 2016 in the allowance for loan losses follows:

	One- to Four- Family			Multi-Family			Home Equity		Construction and Land			Commercial Real Estate			Consumer			Commercial			Total
	(In Thousands)
Three months ended March 31, 2017
Balance at beginning of period	$	7,164		$	4,809		$	364	$	1,016		$	1,951		$	12		$	713		$	16,029
Provision (credit) for loan losses		(328	)		(470	)		13		(10	)		(306	)		(1	)		(109	)		(1,211	)
Charge-offs		(213	)		(5	)		-		-			-			-			-			(218	)
Recoveries		88			22			7		13			-			-			-			130
Balance at end of period	$	6,711		$	4,356		$	384	$	1,019		$	1,645		$	11		$	604		$	14,730

Three months ended March 31, 2016
Balance at beginning of period	$	7,763		$	5,000		$	433	$	904		$	1,680		$	9	$	396	$	16,185
Provision (credit) for loan losses		298			98			74		(299	)		(59	)		1		92		205
Charge-offs		(205	)		(432	)		-		-			-			-		-		(637	)
Recoveries		15			18			6		13			-			-		-		52
Balance at end of period	$	7,871		$	4,684		$	513	$	618		$	1,621		$	10	$	488	$	15,805

- 12 -

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

	One- to Four- Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	423	$	46	$	73	$	-	$	63	$	-	$	-	$	605
Allowance related to loans collectively evaluated for impairment		6,288		4,310		311		1,019		1,582		11		604		14,125
Balance at end of period	$	6,711	$	4,356	$	384	$	1,019	$	1,645	$	11	$	604	$	14,730

Loans individually evaluated for impairment	$	9,481	$	3,721	$	299	$	51	$	696	$	-	$	26	$	14,274
Loans collectively evaluated for impairment		386,706		562,306		21,504		20,849		162,174		257		26,778		1,180,574
Total gross loans	$	396,187	$	566,027	$	21,803	$	20,900	$	162,870	$	257	$	26,804	$	1,194,848

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2016 follows:

	One- to Four-Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	499	$	-	$	79	$	-	$	83	$	-	$	1	$	662
Allowance related to loans collectively evaluated for impairment		6,665		4,809		285		1,016		1,868		12		712		15,367
Balance at end of period	$	7,164	$	4,809	$	364	$	1,016	$	1,951	$	12	$	713	$	16,029

Loans individually evaluated for impairment	$	10,920	$	3,941	$	442	$	-	$	718	$	-	$	41	$	16,062
Loans collectively evaluated for impairment		381,897		554,651		21,336		18,179		158,683		319		26,757		1,161,822
Total gross loans	$	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 March 31, 2017 and December 31, 2016:

	One to Four- Family		Multi-Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
At March 31, 2017
Substandard	$	9,103	$	1,217	$	285	$	51	$	696	$	-	$	917	$	12,269
Watch		11,930		2,895		54		-		343		-		1,668		16,890
Pass		375,154		561,915		21,464		20,849		161,831		257		24,219		1,165,689
	$	396,187	$	566,027	$	21,803	$	20,900	$	162,870	$	257	$	26,804	$	1,194,848

At December 31, 2016
Substandard	$	12,845	$	1,427	$	428	$	-	$	717	$	-	$	41	$	15,458
Watch		10,509		3,975		149		436		1,389		-		3,671		20,129
Pass		369,463		553,190		21,201		17,743		157,295		319		23,086		1,142,297
	$	392,817	$	558,592	$	21,778	$	18,179	$	159,401	$	319	$	26,798	$	1,177,884

- 13 -

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 March 31, 2017 and December 31, 2016.

	As of or for the Three Months Ended March 31, 2017
	Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs		Average Recorded Investment		Interest Paid
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	2,971	$	2,971	$	423	$	-	$	2,985	$	22
Multi-family		374		374		46		-		375		-
Home equity		150		150		73		-		151		3
Construction and land		-		-		-		-		-		-
Commercial real estate		259		668		63		409		270		4
Consumer		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
		3,754		4,163		605		409		3,781		29
Total Impaired with no Reserve
One- to four-family		6,510		7,473		-		963		6,548		70
Multi-family		3,347		4,231		-		884		3,359		45
Home equity		149		149		-		-		150		1
Construction and land		51		51		-		-		51		-
Commercial real estate		437		437		-		-		438		4
Consumer		-		-		-		-		-		-
Commercial		26		26		-		-		27		-
		10,520		12,367		-		1,847		10,573		120
Total Impaired
One- to four-family		9,481		10,444		423		963		9,533		92
Multi-family		3,721		4,605		46		884		3,734		45
Home equity		299		299		73		-		301		4
Construction and land		51		51		-		-		51		-
Commercial real estate		696		1,105		63		409		708		8
Consumer		-		-		-		-		-		-
Commercial		26		26		-		-		27		-
	$	14,274	$	16,530	$	605	$	2,256	$	14,354	$	149

- 14 -

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

The difference between a loan'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 $10.5 million of impaired loans as of March 31, 2017 for which no allowance has been provided, $1.8 million in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loans' 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.

- 15 -

At March 31, 2017, total impaired loans included $8.3 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months. At December 31, 2016, total impaired loans included $10.1 million of troubled debt restructurings.

The following presents data on troubled debt restructurings:

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

One- to four-family		$	3,342		4		$	1,252		7		$	4,594		11
Multi-family			2,503		1			843		3			3,346		4
Home Equity			-		-			45		1			45		1
Commercial real estate			294		1			-		-			294		1
		$	6,139		6		$	2,140		11		$	8,279		17

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

One- to four-family		$	3,296		3		$	2,399		34		$	5,695		37
Multi-family			2,514		1			1,427		5			3,941		6
Home equity			49		1			97		1			146		2
Commercial real estate			295		1			60		1			355		2
		$	6,154		6		$	3,983		41		$	10,137		47

At March 31, 2017, $8.3 million in loans had been modified in troubled debt restructurings and $2.1 million of these loans were included in the non-accrual loan total. The remaining $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 $258,000 valuation allowance has been established as of March 31, 2017 with respect to the $8.3 million in troubled debt restructurings. As of December 31, 2016, a $293,000 valuation allowance had been established with respect to the $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.

- 16 -

The following presents troubled debt restructurings by concession type:

		As of March 31, 2017
	Performing in accordance with modified terms					In Default				Total
	Amount			Number		Amount		Number		Amount		Number
	(dollars in thousands)
Interest reduction and principal forbearance		$	7,141		11	$	727		2	$	7,868		13
Principal forbearance			48		1		-		-		48		1
Interest reduction			363		3		-		-		363		3
		$	7,552		15	$	727		2	$	8,279		17

		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

There were no loans modified as troubled debt restructurings for the three months ended March 31, 2017 and March 31, 2016.

There were no troubled debt restructurings within the past twelve months for which there was a default during the three months ended March 31, 2017 and March 31, 2016.

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

	March 31, 2017			December 31, 2016
	(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	6,113		$	7,623
Multi-family		1,217			1,427
Home equity		236			344
Construction and land		51			0
Commercial real estate		402			422
Commercial		26			41
Consumer		-			-
Total non-accrual loans	$	8,045		$	9,857
Total non-accrual loans to total loans receivable		0.67	%		0.84	%
Total non-accrual loans to total assets		0.47	%		0.55	%

- 17 -

Note 4— Real Estate Owned

Real estate owned is summarized as follows:

	March 31, 2017			December 31, 2016
	(In Thousands)

One- to four-family	$	1,672		$	2,141
Multi-family		-			-
Construction and land		4,802			5,082
Commercial real estate		300			300
Total real estate owned		6,774			7,523
Valuation allowance at end of period		(1,704	)		(1,405	)
Total real estate owned, net	$	5,070		$	6,118

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

	Three months ended March 31,
	2017			2016
	(In Thousands)
Real estate owned at beginning of the period	$	6,118			9,190
Transferred from loans receivable		416			1,094
Sales (net of gains / losses)		(1,009	)		(1,850	)
Write downs		(455	)		(130	)
Other		-			-
Real estate owned at the end of the period	$	5,070			8,304

Residential one- to four-family mortgage loans that were in the process of foreclosure were $3.1 million and $3.1 million at March 31, 2017 and December 31, 2016, respectively.

- 18 -

Note 5— Mortgage Servicing Rights

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

	Three months ended March 31,
	2017			2016
	(In Thousands)
Mortgage servicing rights at beginning of the period	$	2,260		$	1,422
Additions		314			421
Amortization		(19	)		(89	)
Sales		(2,264	)		-
Mortgage servicing rights at end of the period		291			1,754
Valuation allowance at end of period		-			(75	)
Mortgage servicing rights at end of the period, net	$	291		$	1,679

During the three months ended March 31, 2017, $481.3 million in residential loans were originated for sale. During the same period, sales of loans held for sale totaled $608.5 million, generating mortgage banking income of $24.7 million. The unpaid principal balance of loans serviced for others was $40.2 million and $318.6 million at March 31, 2017 and December 31, 2016, respectively. These loans are not reflected in the consolidated statements of financial condition.

During the three months ended March 31, 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 three months ended March 31, 2016, the Company did not sell any mortgage servicing rights.

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

Estimate for the period ending December 31:	(In Thousands)
2017	$	31
2018		36
2019		33
2020		30
2021		27
Thereafter		134
Total	$	291

- 19 -

Note 6— Deposits

At March 31, 2017 and December 31, 2016, time deposits with balances greater than $250,000 amounted to $40.4 million and $44.5 million, respectively.

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

	(In Thousands)

Within one year	$	510,692
More than one to two years		134,771
More than two to three years		12,292
More than three to four years		2,782
More than four through five years		1,174
	$	661,711

Note 7— Borrowings

Borrowings consist of the following:

		March 31, 2017					December 31, 2016
		Balance		Weighted Average Rate			Balance		Weighted Average Rate
		(Dollars in Thousands)
Short term:
Repurchase agreement		$	9,764		3.73	%	$	8,155		3.52	%
Federal Home Loan Bank, Chicago advances			35,000		1.28	%		65,000		0.61	%

Long term:
Federal Home Loan Bank, Chicago advances maturing:
2017			65,000		3.19	%		65,000		3.19	%
2018			65,000		2.97	%		65,000		2.97	%
2021			100,000		0.78	%		100,000		0.78	%
Repurchase agreements maturing	2017		60,000		3.87	%		84,000		3.96	%
		$	334,764		2.36	%	$	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 $9.8 balance at March 31, 2017 and a $8.2 million balance at December 31, 2016.

The $35.0 million short-term advance has a maturity date of March 15, 2018. The short-term advance has a fixed rate of 1.28%.

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 $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 $80.7 million at March 31, 2017 and $93.2 million at December 31, 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 79% of the carrying value of unencumbered one- to four-family mortgage loans, 75% of the carrying value of home equity loans and 51% of the carrying value of multi-family loans. In addition, these advances were collateralized by FHLBC stock of $11.9 million at March 31, 2017 and $13.3 million at December 31, 2016. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

- 20 -

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 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. A banking organization with a conservation buffer of less than 2.5 percent (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 March 31, 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 March 31, 2017 and December 31, 2016 are presented in the table below:

	March 31, 2017
	Actual					For Capital Adequacy Purposes					Minimum Capital Adequacy with Capital Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
Total Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.	$	429,335		33.35	%	$	102,974		8.00	%	$	119,063		9.25	%	$	N/A		N/A
WaterStone Bank		392,026		30.48	%		102,902		8.00	%		118,980		9.25	%		128,628		10.00	%
Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		414,605		32.21	%		77,230		6.00	%		93,320		7.25	%		N/A		N/A
WaterStone Bank		377,296		29.33	%		77,177		6.00	%		93,255		7.25	%		102,902		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		414,605		32.21	%		57,923		4.50	%		74,012		5.75	%		N/A		N/A
WaterStone Bank		377,296		29.33	%		57,882		4.50	%		73,961		5.75	%		83,608		6.50	%
Tier 1 Capital (to average assets)
Consolidated Waterstone Financial, Inc.		414,605		23.91	%		69,358		4.00	%		N/A		N/A			N/A		N/A
WaterStone Bank		377,296		21.80	%		69,233		4.00	%		N/A		N/A			86,542		5.00	%
State of Wisconsin (to total assets)
WaterStone Bank		377,296		21.90	%		103,358		6.00	%		N/A		N/A			N/A		N/A

- 21 -

	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 $2.1 million during the three months ended March 31, 2016 to $3.4 million for the three months ended March 31, 2017. This increase was primarily due to the increase in our income before income taxes, which increased from $6.0 million during the three months ended March 31, 2016 to $10.0 million during the three months ended March 31, 2017. Income tax expense is recognized on the statement of income during the three months ended March 31, 2017 at an effective rate of 34.2% of pretax income compared to 35.7% during the three months ended March 31, 2016.

During the quarter ended March 31, 2017, the Company recognized a benefit of approximately $350,000 related to stock awards exercised within the current period as a result of adopting the new stock compensation accounting standard.

- 22 -

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 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 March 31, 2017 and December 31, 2016.

	Gross Recognized Liabilities		Gross Amounts Offset		Net Amounts Presented		Gross Amounts Not Offset		Net Amount
	(In Thousands)
March 31, 2017
Repurchase Agreements
Short-term	$	9,764	$	-	$	9,764	$	9,764	$	-
Long-term		60,000		-		60,000		60,000		-
	$	69,764	$	-	$	69,764	$	69,764	$	-

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

- 23 -

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. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

	March 31, 2017		December 31, 2016
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit under amortizing loans (1)	$	30,239	$	30,903
Commitments to extend credit under home equity lines of credit (2)		13,853		14,367
Unused portion of construction loans (3)		20,581		21,137
Unused portion of business lines of credit		15,250		15,095
Standby letters of credit		333		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 March 31, 2017 and December 31, 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 v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit filed in the United States District Court for the Western District of Wisconsin and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisions of the Fair Labor Standards Act (FLSA) and failed to pay loan officers consistent with their various employment agreements. On April 13, 2017, the arbitrator issued a partial award regarding liability, in which the arbitrator found Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. While an award regarding damages has not yet been issued, the Company has estimated that the award, which includes plaintiff attorney fees and costs, could be as high as $10.0 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. In accordance with the authoritative guidance in evaluating contingencies, the Company has not recorded an accrual related to this matter.

- 24 -

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 March 31, 2017, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $261.1 million and interest rate lock commitments with an aggregate notional amount of approximately $296.8 million. The fair value of the forward commitments to sell mortgage loans at March 31, 2017 included a loss of $1.1 million that is reported as a component of other liabilities on the Company's consolidated statement of financial condition. The fair value of the interest rate locks at March 31, 2017 included a gain of $4.6 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.

Note 13 – Earnings Per Share

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

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

	Three months ended March 31,
	2017		2016


Net income	$	6,572		3,861
Net income available to unvested restricted shares		-		2
Net income available to common stockholders	$	6,572		3,859

Weighted average shares outstanding		27,323		26,966
Effect of dilutive potential common shares	$	544		313
Diluted weighted average shares outstanding	$	27,867		27,279

Basic earnings per share	$	0.24		0.14
Diluted earnings per share	$	0.24		0.14

- 25 -

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.

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

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

Available for sale securities
Mortgage-backed securities	$	68,713	$	-	$	68,713	$	-
Collateralized mortgage obligations
Government sponsored enterprise issued		63,124		-		63,124		-
Government sponsored enterprise bonds		2,501		-		2,501		-
Municipal securities		69,639		-		69,639		-
Other debt securities		16,918		2,568		14,350		-
Certificates of deposit		1,230		-		1,230		-
Loans held for sale		119,726		-		119,726		-
Mortgage banking derivative assets		4,584		-		-		4,584
Mortgage banking derivative liabilities		1,117		-		-		1,117

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

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

- 26 -

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.

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

	Mortgage banking derivatives, net
	(In Thousands)

Balance at December 31, 2015	$	2,188

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

Mortgage derivative gain, net		133
Balance at March 31, 2017	$	3,467

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

- 27 -

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 position at their fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

			Fair Value Measurements Using
	March 31, 2017		Level 1		Level 2		Level 3
	(In Thousands)
Impaired loans, net (1)	$	3,149	$	-	$	-	$	3,149
Real estate owned		5,070		-		-		5,070

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

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

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 March 31, 2017, loans determined to be impaired with an outstanding balance of $3.8 million were carried net of specific reserves of $605,000 for a fair value of $3.1 million. At December 31, 2016, loans determined to be impaired with an outstanding balance of $3.5 million were carried net of specific reserves of $662,000 for a fair value of $2.8 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.

Real estate owned – On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. Changes in the value of real estate owned totaled $455,000 and $130,000 during the three months ended March 31, 2017 and 2016, respectively and are recorded in real estate owned expense. At March 31, 2017 and December 31, 2016, real estate owned totaled $5.1 million and $6.1 million, respectively.

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

- 28 -

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

					Significant Unobservable Input Value
	Fair Value at March 31, 2017		Valuation Technique	Significant Unobservable Inputs	Minimum Value			Maximum Value

Mortgage banking derivatives	$	3,467	Pricing models	Pull through rate		21.2	%		99.8	%
Impaired loans		3,149	Market approach	Discount rates applied to appraisals		15.0	%		35.0	%
Real estate owned		5,070	Market approach	Discount rates applied to appraisals		9.5	%		85.7	%

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.

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:

	March 31, 2017										December 31, 2016
	Carrying amount		Fair Value								Carrying amount		Fair Value
	Carrying amount		Total		Level 1		Level 2		Level 3		Carrying amount		Total		Level 1		Level 2		Level 3
	(In Thousands)
Financial Assets
Cash and cash equivalents	$	74,628	$	74,628	$	63,778	$	10,850	$	-	$	47,217	$	47,217	$	34,967	$	12,250	$	-
Securities available-for-sale		222,125		222,125		2,568		219,557		-		226,795		226,795		2,541		224,254		-
Loans held for sale		119,726		119,726		-		119,726		-		225,248		225,248		-		225,248		-
Loans receivable		1,194,848		1,210,484		-		-		1,210,484		1,177,884		1,212,967		-		-		1,212,967
FHLB stock		11,925		11,925		-		11,925		-		13,275		13,275		-		13,275		-
Accrued interest receivable		4,600		4,600		4,600		-		-		4,281		4,281		4,281		-		-
Mortgage servicing rights		291		400		-		-		400		2,260		3,232		-		-		3,232
Mortgage banking derivative assets		4,584		4,584		-		-		4,584		3,403		3,403		-		-		3,403

Financial Liabilities
Deposits		946,041		945,804		284,330		661,474		-		949,411		949,825		282,827		666,998		-
Advance payments by borrowers for taxes		10,792		10,792		10,792		-		-		4,716		4,716		4,716		-		-
Borrowings		334,764		337,332		-		337,332		-		387,155		390,932		-		390,932		-
Accrued interest payable		846		846		846		-		-		916		916		916		-		-
Mortgage banking derivative liabilities		1,117		1,117		-		-		1,117		69		69		-		-		69

- 29 -

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

Cash and Cash Equivalents

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

Securities

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

Loans Held for Sale

Fair value is estimated using the prices of the Company's 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.

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 March 31, 2017 and December 31, 2016.

- 30 -

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.

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 23 states.

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

Net interest income	$	11,680			100		115			11,895
Provision for loan losses		(1,300	)		89		-			(1,211	)
Net interest income after provision for loan losses		12,980			11		115			13,106

Noninterest income		812			25,385		(260	)		25,937

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,328			15,789		(122	)		19,995
Occupancy, office furniture and equipment		841			1,686		-			2,527
FDIC insurance premiums		120			-		-			120
Real estate owned		411			-		-			411
Other		1,257			4,861		(113	)		6,005
Total noninterest expenses		6,957			22,336		(235	)		29,058
Income before income taxes		6,835			3,060		90			9,985
Income tax expense		2,159			1,234		20			3,413
Net income	$	4,676			1,826		70			6,572

Total assets	$	1,735,619			154,984		(163,430	)		1,727,173

- 31 -

	As of or for the three months ended March 31, 2016
	Community Banking		Mortgage Banking		Holding Company and Other			Consolidated
	(In Thousands)

Net interest income	$	9,771		144		68			9,983
Provision for loan losses		100		105		-			205
Net interest income after provision for loan losses		9,671		39		68			9,778

Noninterest income		722		20,933		(210	)		21,445

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,355		13,444		(113	)		17,686
Occupancy, office furniture and equipment		832		1,504		-			2,336
FDIC insurance premiums		205		-		-			205
Real estate owned		144		-		-			144
Other		1,191		3,721		(61	)		4,851
Total noninterest expenses		6,727		18,669		(174	)		25,222
Income before income taxes		3,666		2,303		32			6,001
Income tax expense		1,183		943		14			2,140
Net income	$	2,483		1,360		18			3,861

Total assets	$	1,705,185		139,296		(106,903	)		1,737,578

- 32 -

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;
●		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 provider 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, 2016).

- 33 -

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 months ended March 31, 2017 and 2016 and the financial condition as of March 31, 2017 compared to the financial condition as of December 31, 2016.

As described in the notes to the consolidated financial statements, we have two reportable segments: community banking and mortgage banking. The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin along with a loan production office in Minneapolis, Minnesota. Consumer products include loan products, deposit products, and personal investment services. Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts. The mortgage banking segment, which is conducted by offices in 23 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.

Our community banking segment generates the significant majority of our consolidated net interest income and requires the significant majority of our provision for loan losses. Our mortgage banking segment generates the significant majority of our noninterest income and a majority of our noninterest expenses. We have provided below a discussion of the material results of operations for each segment on a separate basis for the three months ended March 31, 2017 and 2016, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of Waterstone Financial, 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 March 31, 2017 and 2016

Net income for the three months ended March 31, 2017 totaled $4.7 million compared to net income of $2.5 million for the three months ended March 31, 2016. Net interest income increased $1.9 million to $11.7 million for the three months ended March 31, 2017 compared to $9.8 million for the three months ended March 31, 2016. Net interest income increased due primarily to a decrease of $1.8 million in interest expense on borrowings as higher rate FHLB borrowings matured in 2016. The provision for loan losses decreased $1.4 million compared to the prior year comparable period as asset quality continued to improve.

Compensation, payroll taxes, and other employee benefits expense decreased $27,000 due primarily to a decrease in health insurance expense partially offset by higher ESOP expense. The Bank also reported a decrease in FDIC premiums for the first quarter of 2017 compared to the previous year period. Occupancy, office furniture, and equipment expense, real estate owned expense, and other noninterest expense increased for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2017 and 2016

Net income totaled $1.8 million for the three months ended March 31, 2017 compared to $1.4 million for the three months ended March 31, 2016. Mortgage banking segment revenue increased $4.5 million, or 21.3%, to $25.4 million for the three months ended March 31, 2017 compared to $20.9 million for the three months ended March 31, 2016. The increase in revenue was attributable to a $110.1 million, or 29.7%, increase in origination volume partially offset by a decrease in margin. In addition, mortgage banking revenue included a $308,000 gain on bulk sale of mortgage servicing rights in the current period compared to the prior period. We sell loans on both a servicing-released and a servicing retained basis. Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.

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 85.9% of total originations during the three months ended March 31, 2017, compared to 84.9% of total originations during the three months ended March 31, 2016. The mix of loan type trended slightly towards less conventional loans and more governmental loans; with conventional loans and governmental loans comprising 61.4% and 38.6% of all loan originations, respectively, during the three months ended March 31, 2017, compared 64.7% and 35.3% of all loan originations, respectively, during the three months ended March 31, 2016.

- 34 -

Total compensation, payroll taxes and other employee benefits increased $2.3 million, or 17.4%, to $15.8 million for the three months ended March 31, 2017 compared to $13.4 million for the three months ended March 31, 2016. 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 equipment expense and other noninterest expense increased $1.3 million to $6.5 million as the number of branches increased and as fundings increased, driving more volume-based expenses.

Consolidated Waterstone Financial, Inc. Results of Operations

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

Net income	$	6,572			3,861
Earnings per share - basic		0.24			0.14
Earnings per share - diluted		0.24			0.14
Annualized return on average assets		1.54	%		0.90	%
Annualized return on average equity		6.44	%		3.95	%

- 35 -

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 March 31,
	2017							2016
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
	(Dollars in Thousands)
Assets
Interest-earning assets:
Loans receivable and held for sale (1)	$	1,306,145	$	14,238		4.42	%	$	1,227,663	$	13,784		4.52	%
Mortgage related securities (2)		132,600		696		2.13	%		165,249		838		2.04	%
Debt securities, federal funds sold and short-term investments (2)(3)		185,601		1,062		2.32	%		226,471		1,208		2.15	%
Total interest-earning assets		1,624,346		15,996		3.99	%		1,619,383		15,830		3.93	%

Noninterest-earning assets		110,212							107,846
Total assets	$	1,734,558						$	1,727,229

Liabilities and equity
Interest-bearing liabilities:
Demand accounts	$	38,552		6		0.06	%	$	32,277		5		0.06	%
Money market and savings accounts		167,436		102		0.25	%		150,704		91		0.24	%
Time deposits		662,033		1,687		1.03	%		658,615		1,623		0.99	%
Total interest-bearing deposits		868,021		1,795		0.84	%		841,596		1,719		0.82	%
Borrowings		349,542		2,096		2.43	%		400,083		3,894		3.91	%
Total interest-bearing liabilities		1,217,563		3,891		1.30	%		1,241,679		5,613		1.82	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		83,524							70,732
Other noninterest-bearing liabilities		19,474							21,360
Total noninterest-bearing liabilities		102,998							92,092
Total liabilities		1,320,561							1,333,771
Equity		413,997							393,458
Total liabilities and equity	$	1,734,558						$	1,727,229

Net interest income / Net interest rate spread (4)				12,105		2.69	%				10,217		2.11	%
Less: taxable equivalent adjustment				210		0.05	%				234		0.05	%
Net interest income / Net interest rate spread, as reported			$	11,895		2.64	%			$	9,983		2.06	%
Net interest-earning assets (5)	$	406,783						$	377,704
Net interest margin(6)						2.97	%						2.48	%
Tax equivalent effect						0.05	%						0.06	%
Net interest margin on a fully tax equivalent basis (6)						3.02	%						2.54	%
Average interest-earning assets to average interest-bearing liabilities						133.41	%						130.42	%

__________

(1) Interest income includes net deferred loan fee amortization income of $142,000 and $177,000 for the three months ended March 31, 2017 and 2016, respectively.

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

(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.86% and 1.73% for the three months ended March 31, 2017 and 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.

- 36 -

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 March 31,
	2017 versus 2016
	Increase (Decrease) due to
	Volume			Rate			Net
	(In Thousands)
Interest income:
Loans receivable and held for sale (1)(2)	$	2,161		$	(1,707	)	$	454
Mortgage related securities (3)		(359	)		217			(142	)
Other earning assets (3)(4)		(637	)		491			(146	)
Total interest-earning assets		1,165			(999	)		166

Interest expense:
Demand accounts		1			-			1
Money market and savings accounts		8			3			11
Time deposits		7			57			64
Total interest-earning deposits		16			60			76
Borrowings		(450	)		(1,348	)		(1,798	)
Total interest-bearing liabilities		(434	)		(1,288	)		(1,722	)
Net change in net interest income	$	1,599		$	289		$	1,888

______________

(1)	Interest income includes net deferred loan fee amortization income of $142,000 and $177,000 for the three months ended March 31, 2017 and 2016, respectively.

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

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

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

Net interest income increased $1.9 million, or 19.2%, to $11.9 million during the three months ended March 31, 2017 compared to $10.0 million during the three months ended March 31, 2016.

Interest income on loans increased $454,000 due primarily to an increase of $78.5 million in average loans partially offset by a 10 basis point decrease in average yield on loans. The increase in average loan balance was driven by a $73.8 million increase in the average balance of loans held in portfolio along with a $4.6 million increase in the average balance of loans held for sale.

Interest income from mortgage-related securities decreased $142,000 year over year as the average balance decreased $32.6 million as securities have paid down in 2016 and into 2017 and less purchases have occurred to replace those securities due to current market conditions, which was 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 $122,000 due to a decrease of $40.8 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 a decrease in average balance was partially offset by 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 2016, as well as an increase in the cash dividend paid by the FHLB on its stock.

Interest expense on time deposits increased $64,000 primarily due to a four basis point increase in the average cost of time deposits, as maturing time deposits have repriced or have been replaced at a higher rate in the current competitive market. In addition, due to an increase in rate, the average balance of time deposits increased $3.4 million compared to the prior year.

Interest expense on money market and savings accounts increased $11,000 due primarily to an increase in average balance of $16.7 million along with a one basis point increase in rate. The increase in volume reflects the Company's strategy to target this segment of retail funds for more aggressive growth.

Interest expense on borrowings decreased $1.8 million due to the maturity of $220.0 million of fixed rate borrowings in 2016 that were paid off 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% matured during 2016. The Company borrowed $100.0 million of long-term FHLB borrowings during 2016 at a weighted average rate of 0.78%. In addition to the long-term borrowings, short-term FHLB advances were utilized to help fund originations at the mortgage banking segment throughout 2016 and into 2017.

- 37 -

Provision for Loan Losses

Our provision for loan losses decreased $1.4 million as we established a $1.2 million negative provision during the three months ended March 31, 2017, compared to a $205,000 provision during the three months ended March 31, 2016. The negative provision recorded during the current quarter reflects the continued improvement in loan quality metrics 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.

Noninterest Income

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

Service charges on loans and deposits	$	367	$	337	$	30		8.9	%
Increase in cash surrender value of life insurance		318		241		77		32.0	%
Mortgage banking income		24,687		20,614		4,073		19.8	%
Gain on sale of available for sale securities		-		-		-		N/	M
Other		565		253		312		123.3	%
Total noninterest income	$	25,937	$	21,445	$	4,492		20.9	%

N/M - Not meaningful

Total noninterest income increased $4.5 million, or 20.9%, to $25.9 million during the three months ended March 31, 2017 compared to $21.4 million during the three months ended March 31, 2016. The increase resulted primarily from an increase in mortgage banking income.

The increase in mortgage banking income was the result of an increase in origination volumes. The volume increased $110.1 million, or 29.7%, to $481.3 million during the three months ended March 31, 2017 compared to a $371.2 million during the three months ended March 31, 2016. See "Comparison of Mortgage Banking Segment Operations for the Three Months Ended March 31, 2017 and 2016" above, for additional discussion of the increase in mortgage banking income.

·	Service charges on loans and deposits increased due to an increase in various loan and deposit fees.

·	The increase in cash surrender value of life insurance was due to the purchase of a $10.0 million policy in March 2016.

The $312,000 increase in other noninterest income was due primarily to an increase in gain on mortgage servicing rights sold. There was a bulk sale of mortgage servicing rights for $308,000 which occurred during the three months ended March 31, 2017 and no sales occurred during the three months ended March 31, 2016.

- 38 -

Noninterest Expenses

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

Compensation, payroll taxes, and other employee benefits	$	19,995	$	17,686	$	2,309			13.1	%
Occupancy, office furniture and equipment		2,527		2,336		191			8.2	%
Advertising		724		658		66			10.0	%
Data processing		598		643		(45	)		(7.0	)%
Communications		379		342		37			10.8	%
Professional fees		607		523		84			16.1	%
Real estate owned		411		144		267			185.4	%
FDIC insurance premiums		120		205		(85	)		(41.5	)%
Other		3,697		2,685		1,012			37.7	%
Total noninterest expenses	$	29,058	$	25,222	$	3,836			15.2	%

Total noninterest expenses increased $3.8 million, or 15.2%, to $29.1 million during the three months ended March 31, 2017 compared to $25.2 million during the three months ended March 31, 2016.

Compensation, payroll taxes and other employee benefit expense increased $2.3 million, or 17.4%, to $15.8 million at our mortgage banking segment. 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 decreased $27,000, or 0.6%, at the community banking segment during the three months ended March 31, 2017. This was primarily due to a decrease in health insurance expense offset by higher ESOP expense, which increased due to the increased stock price of the vested shares in the first quarter of 2017.

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. Offsetting the rent increase, there was less depreciation expense at the mortgage banking segment in the year ended December 31, 2016 compared to the prior year. The community banking segment had relatively flat expense year over year.

Net real estate owned expense increased $267,000, to $411,000 during the three months ended March 31, 2017 compared to the three months ended March 31, 2016. Property management expense (other than gains/losses) decreased $67,000 during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 due to a reduction in the number of properties under management during 2016 and into 2017. Net gains on sales of REO decreased $9,000 to $140,000 for the three months ended March 31, 2017 compared to $149,000 for the three months ended March 31, 2016. Real estate owned writedowns increased $325,000 to $455,000 for the three months ended March 31, 2017 compared to $130,000 for the three months ended March 31, 2016. The writedowns recorded during the current quarter reflects management's plan to facilitate the liquidation of certain aged properties.

·	FDIC insurance expense decreased during the three month period ended March 31, 2017 due to improved asset quality metrics.

·	Other noninterest expense increased primarily at the mortgage banking segment which correlated with the increased origination and funding volumes.

Income Taxes

Driven by an increase in pre-tax income, income tax expense increased $1.3 million, or 59.5%, to $3.4 million during the three months ended March 31, 2017, compared to $2.1 million during the three months ended March 31, 2016. Income tax expense was recognized during the three months ended March 31, 2017 at an effective rate of 34.2% compared to an effective rate of 35.7% during the three months ended March 31, 2016. During the quarter ended March 31, 2017, the Company recognized a benefit of approximately $350,000 related to stock awards exercised within the current period as a result of adopting the new stock compensation accounting standard.

- 39 -

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Total Assets - Total assets decreased by $63.4 million, or 3.5%, to $1.73 billion at March 31, 2017 from $1.79 billion at December 31, 2016. The decrease in total assets primarily reflects a decrease in loans held for sale. Funding needed for the loans held for sale decreased and the cash was used to pay down short-term FHLB debt in the beginning of 2017.

Cash and Cash Equivalents – Cash and cash equivalents increased $27.4 million, or 58.1%, to $74.6 million at March 31, 2017, compared to $47.2 million at December 31, 2016. The increase in cash and cash equivalents primarily reflects the decrease in loans held for sale. Some excess cash was used to pay down short-term FHLB borrowings and other liabilities and fund loans held for investment since December 31, 2016.

Securities Available for Sale – Securities available for sale decreased $4.7 million at March 31, 2017 compared to December 31, 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 decreased at March 31, 2017 due to decreased funding volumes at our mortgage subsidiary compared to the fourth quarter of 2016. The total fundings were $481.3 million for the first quarter of 2017 compared to $622.5 million for the fourth quarter of 2016.

Loans Receivable - Loans receivable held for investment increased $17.0 million to $1.19 billion at March 31, 2017 from $1.18 billion at December 31, 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, home equity, and commercial loan categories. Offsetting those increases, the consumer category 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
	Three months ended March 31,						Year Ended
	2017			2016			December 31, 2016
	(In Thousands)
Total gross loans receivable and held for sale at beginning of period	$	1,403,132		$	1,281,450		$	1,281,450
Real estate loans originated for investment:
Residential
One- to four-family		22,361			13,714			78,045
Multi-family		20,864			16,164			118,072
Home equity		896			960			5,037
Construction and land		120			3,400			5,878
Commercial real estate		7,470			2,284			35,443
Total real estate loans originated for investment		51,711			36,522			242,475
Consumer loans originated for investment		-			-			-
Commercial business loans originated for investment		1,532			3,593			11,692
Total loans originated for investment		53,243			40,115			254,167

Principal repayments		(35,645	)		(41,080	)		(185,020	)
Transfers to real estate owned		(416	)		(1,095	)		(4,590	)
Loan principal charged-off		(218	)		(637	)		(1,607	)
Net activity in loans held for investment		16,964			(2,697	)		62,950

Loans originated for sale		481,313			371,222			2,378,926
Loans sold		(586,835	)		(430,351	)		(2,320,194	)
Net activity in loans held for sale		(105,522	)		(59,129	)		58,732
Total gross loans receivable and held for sale at end of period	$	1,314,574		$	1,219,624		$	1,403,132

- 40 -

Allowance for Loan Losses - The allowance for loan losses decreased at March 31, 2017 from December 31, 2016. The decrease resulted from the negative 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, commercial real estate, and commercial categories. The other remaining categories were relatively consistent with the amounts at December 31, 2016.

Cash surrender value of life insurance – Total cash surrender value of life insurance increased $318,000 from December 31, 2016. During the three months ended March 31, 2017, continued earnings increased the policy values.

Federal Home Loan Bank stock – Total Federal Home Loan Bank stock decreased $1.4 million from December 31, 2016. During the three months ended March 31, 2017, $2.9 million of stock was sold as $65.0 million of short-term FHLB borrowings matured. A total of $1.6 million of stock was purchased when $35.0 million of new short-term FHLB borrowings were entered into with the Federal Home Loan Bank.

Real Estate Owned – Total real estate owned decreased $1.0 million from December 31, 2016. During the three months ended March 31, 2017, $416,000 was transferred from loans receivable to real estate owned upon completion of foreclosure. During the same period, sales of real estate owned totaled $1.0 million and writedowns were $455,000 in an effort to sell various aged properties.

Deposits – Total deposits decreased $3.4 million to $946.0 million at March 31, 2017 from December 31, 2016. The decrease was driven by a decrease in time deposits and money market and savings deposits. Demand deposits have increased since the end of the year.

Borrowings – Total borrowings decreased $52.4 million to $334.8 million at March 31, 2017 from December 31, 2016. A total of $65.0 million of short-term FHLB borrowings matured and were paid off during the current period. These were replaced with $35.0 million of new fixed rate short-term FHLB borrowings. A total of $24.0 million in repurchase agreements matured and were not replaced. External short term borrowings at the mortgage banking segment increased a total of $1.6 million at March 31, 2017 from December 31, 2016 to fund loans held for sale.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $6.1 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 $18.1 million at March 31, 2017 compared to December 31, 2016. The decrease was 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.

Shareholders' Equity – Shareholders' equity increased by $4.3 million to $415.1 million at March 31, 2017 from December 31, 2016. The increase in shareholders' equity was primarily due to net income, additional paid in capital as stock options were exercised, accumulated other comprehensive income increasing as the fair value of the security portfolio increased, and unearned ESOP shares as they continue to vest. These increases were offset by the repurchase of stock and dividends declared.

- 41 -

ASSET QUALITY

NONPERFORMING ASSETS

	At March 31,			At December 31,
	2017			2016
	(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	6,113		$	7,623
Multi-family		1,217			1,427
Home equity		236			344
Construction and land		51			-
Commercial real estate		402			422
Commercial		26			41
Consumer		-			-
Total non-accrual loans		8,045			9,857

Real estate owned
One- to four-family		1,672			2,141
Multi-family		-			-
Construction and land		4,802			5,082
Commercial real estate		300			300
Total real estate owned		6,774			7,523
Valuation allowance at end of period		(1,704	)		(1,405	)
Total real estate owned, net		5,070			6,118
Total nonperforming assets	$	13,115		$	15,975

Total non-accrual loans to total loans, net		0.67	%		0.84	%
Total non-accrual loans to total assets		0.47	%		0.55	%
Total nonperforming assets to total assets		0.76	%		0.89	%

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.

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

	At or for the Three Months
	Ended March 31,
	2017			2016
	(In Thousands)

Balance at beginning of period	$	9,857			17,604
Additions		933			1,260
Transfers to real estate owned		(416	)		(1,094	)
Charge-offs		(109	)		(413	)
Returned to accrual status		(2,027	)		(1,131	)
Principal paydowns and other		(194	)		(758	)
Balance at end of period	$	8,045			15,468

- 42 -

Total non-accrual loans decreased by $1.8 million, or 18.4%, to $8.0 million as of March 31, 2017 compared to $9.9 million as of December 31, 2016. The ratio of non-accrual loans to total loans receivable was 0.67% at March 31, 2017 compared to 0.84% at December 31, 2016. During the three months ended March 31, 2017, $416,000 in non-accrual loans were transferred to real estate owned, $109,000 in loan principal was charged off, $2.0 million in loans were returned to accrual status and approximately $194,000 in principal payments were received. Offsetting this activity, $933,000 in loans were placed on non-accrual status during the three months ended March 31, 2017.

Of the $8.0 million in total non-accrual loans as of March 31, 2017, $7.4 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 $1.6 million in cumulative partial charge-offs have been recorded over the life of these loans as of March 31, 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 $443,000 have been recorded as of March 31, 2017. The remaining $676,000 of non-accrual loans were reviewed on an aggregate basis and $135,000 in general valuation allowance was deemed necessary related to those loans as of March 31, 2017. The $135,000 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 March 31, 2017 totaled $2.0 million, which represents 25.2% of total non-accrual loans as of that date. These five loans are carried net of cumulative life-to-date charge-offs of $15,000. Aggregate specific valuation allowances with respect to these five loans total $88,000 as of March 31, 2017.

For the three months ended March 31, 2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $144,000. We received $86,000 of interest payments on such loans during the three months ended March 31, 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 March 31, 2017 or December 31, 2016.

TROUBLED DEBT RESTRUCTURINGS

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

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

One- to four-family	$	3,342	$	1,252		4,594
Multi-family		2,503		843		3,346
Home equity		-		45		45
Commercial real estate		294		-		294
	$	6,139	$	2,140		8,279

	As of December 31, 2016
	Accruing		Non-accruing		Total


One- to four-family	$	3,296	$	2,399		5,695
Multi-family		2,514		1,427		3,941
Home equity		49		97		146
Commercial real estate		295		60		355
	$	6,154	$	3,983		10,137

- 43 -

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 March 31,			At December 31,
	2017			2016
	(Dollars in Thousands)

Loans past due less than 90 days	$	2,953		$	2,910
Loans past due 90 days or more		5,584			5,289
Total loans past due	$	8,537		$	8,199

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

Past due loans increased by $338,000, or 4.1%, to $8.5 million at March 31, 2017 from $8.2 million at December 31, 2016. Loans past due 90 days or more increased by $295,000, or 5.6%, during the three months ended March 31, 2017. Loans past due less than 90 days increased by $43,000, or 1.5%. The $295,000 increase in loans past due 90 days or more was primarily due to multi-family loans offset by one- to four-family loans transferred to real estate owned along with charge-offs during the three months ended March 31, 2017.

- 44 -

REAL ESTATE OWNED

Total real estate owned decreased by $1.0 million, or 17.1%, to $5.1 million at March 31, 2017, compared to $6.1 million at December 31, 2016. During the three months ended March 31, 2017, $416,000 was transferred from loans to real estate owned upon completion of foreclosure. During the same period, sales of real estate owned totaled $1.0 million. A total of $455,000 in write downs occurred during the three months ended March 31, 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 Three Months
	Ended March 31,
	2017			2016
	(Dollars in Thousands)

Balance at beginning of period	$	16,029		$	16,185
Provision for loan losses		(1,211	)		205
Charge-offs:
Mortgage
One- to four-family		213			205
Multi-family		5			432
Home equity		-			-
Commercial real estate		-			-
Construction and land		-			-
Consumer		-			-
Commercial		-			-
Total charge-offs		218			637
Recoveries:
Mortgage
One- to four-family		88			15
Multi-family		22			18
Home equity		7			6
Commercial real estate		-			-
Construction and land		13			13
Consumer		-			-
Commercial		-			-
Total recoveries		130			52
Net charge-offs		88			585
Allowance at end of period	$	14,730		$	15,805

Ratios:
Allowance for loan losses to non-accrual loans at end of period		183.10	%		102.18	%
Allowance for loan losses to loans receivable at end of period		1.23	%		1.42	%
Net charge-offs to average loans outstanding (annualized)		0.03	%		0.21	%
Current period provision for loan losses to net charge-offs		(1,376.14	%)		35.04	%
Net charge-offs (annualized) to beginning of the period allowance		2.23	%		14.54	%

- 45 -

At March 31, 2017, the allowance for loan losses decreased $1.3 million to $14.7 million compared to $16.0 million at December 31, 2016. The decrease in allowance for loan losses reflects the negative provision. The negative provision recorded during the current quarter reflects the continued improvement in loan quality metrics including: non-accrual loans, loans rated substandard or watch, and loans past due.

Net charge-offs totaled $88,000, or an annualized 0.03% of average loans for the three months ended March 31, 2017, compared to $585,000, or an annualized 0.21% of average loans for the three months ended March 31, 2016. Of the $88,000 in charge-offs during the three months ended March 31, 2017, a majority of the activity related to loans secured by 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 three months ended March 31, 2017 primary uses of cash and cash equivalents included: $481.3 million funding loans held for sale, $28.4 million in net decrease in short-term borrowings, $24.0 decrease in repurchase agreements, $17.5 million increase in loans receivable, $3.4 million decrease in deposits, $3.3 million for cash dividends paid, and $5.0 million in purchases of mortgage related securities.

During the three months ended March 31, 2017, primary sources of cash and cash equivalents included: $608.5 million in proceeds from the sale of loans held for sale, $8.4 million in principal repayments on mortgage related securities, and $6.6 million in net income.

During the three months ended March 31, 2016 primary uses of cash and cash equivalents included: $371.2 million funding loans held for sale, $50.0 million in the payment of long term debt, purchase of $10.0 million in bank owned life insurance, $3.7 million for the repurchase of common stock, $5.2 million in purchases of mortgage related securities, $6.4 million in advanced payments by borrowers for taxes, and $1.4 million in dividends paid.

During the three months ended March 31, 2016, primary sources of cash and cash equivalents included: $450.5 million in proceeds from the sale of loans held for sale, $24.9 million increase in deposits, $9.0 million in principal repayments on mortgage related securities, $5.0 million from short term borrowings, $3.9 million in net income, and $2.0 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 March 31, 2017 and 2016, respectively, $74.6 million and $122.7 million of our assets were invested in cash and cash equivalents. At March 31, 2017, cash and cash equivalents are comprised of the following: $24.8 million in cash held at the Federal Reserve Bank and other depository institutions and $49.8 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 March 31, 2017, we had $35.0 million in short-term advances from the FHLBC with a contractual maturity date of March 18, 2018. At March 31, 2017, we had $230.0 million in long term advances from the FHLBC with contractual maturity dates in 2017, 2018, and 2021. The advances with maturity dates in 2017 and 2018 are callable quarterly until maturity. The 2021 advance maturities has quarterly call options beginning in June 2018 and September 2018. As an additional source of funds, we also enter into repurchase agreements. At March 31, 2017, we had $60.0 million in repurchase agreements. The repurchase agreements mature at various times in 2017, however, all are callable quarterly until maturity.

At March 31, 2017, we had outstanding commitments to originate loans receivable of $30.2 million. In addition, at March 31, 2017, we had unfunded commitments under construction loans of $20.6 million, unfunded commitments under business lines of credit of $15.3 million and unfunded commitments under home equity lines of credit and standby letters of credit of $14.2 million. At March 31, 2017, certificates of deposit scheduled to mature in one year or less totaled $510.7 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. At March 31, 2017, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totalling $37.6 million.

Capital

Shareholders' equity increased by $4.3 million to $415.1 million at March 31, 2017 from December 31, 2016. The increase in shareholders' equity was primarily due to net income, additional paid in capital as stock options were exercised, accumulated other comprehensive income increasing as the fair value of the security portfolio increased, and unearned ESOP shares as they continue to vest. These increases were offset by the repurchase of stock and dividends declared.

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. These 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 March 31, 2017, the Company had repurchased 5,847,153 shares at an average price of $12.96 under previously approved stock repurchase plans. As of March 31, 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 March 31, 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.

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

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

					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Demand deposits (4)	$	124,384	$	124,384	$	-	$	-	$	-
Money market and savings deposits (4)		159,946		159,946		-		-		-
Time deposit (4)		661,711		510,692		147,063		3,956		-
Bank lines of credit (4)		9,764		9,764		-		-		-
Federal Home Loan Bank advances (1)		265,000		115,000		50,000		100,000		-
Repurchase agreements (2)(4)		60,000		60,000		-		-		-
Operating leases (3)		8,828		2,555		3,321		1,465		1,487
Salary continuation agreements		43		43		-		-		-
	$	1,289,676	$	982,384	$	200,384	$	105,421	$	1,487

⁽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.

Herrington v. Waterstone Mortgage Corporation

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Off-Balance Sheet Commitments

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

					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Real estate loan commitments (1)	$	30,239	$	30,239	$	-	$	-	$	-
Unused portion of home equity lines of credit (2)		13,853		13,853		-		-		-
Unused portion of construction loans (3)		20,581		20,581		-		-		-
Unused portion of business lines of credit		15,250		15,250		-		-		-
Standby letters of credit		333		333		-		-		-
Total Other Commitments	$	80,256	$	80,256	$	-	$	-	$	-

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

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

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real estate balloon loans; (ii) reducing and shortening the expected average life of the investment portfolio; and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the FHLBC. 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 March 31, 2017 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions may have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn affect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our liabilities and therefore would most likely have a positive impact on net interest income and earnings.

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

Analysis of Net Interest Income Sensitivity

	Immediate Change in Rates
		+300		+200	+100	-100
	(Dollar Amounts in Thousands)
As of March 31, 2017
Dollar Change	$	2,344		1,677	839	(2,038	)
Percentage Change		4.79	%	3.43	1.72	(4.17	)

At March 31, 2017, a 100 basis point instantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 1.72% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 4.17%.

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.

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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 March 31, 2017, the Company believes that any liability arising from the resolution of any pending legal proceedings will not be material to its financial condition or results of operations.

Herrington v. Waterstone Mortgage Corporation

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 Report on Form 10-K for the year ended December 31, 2016.

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

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

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)
January 1, 2017 - January 31, 2017		6,361	$	18.70		-		989,500
February 1, 2017 - February 28, 2017		-		-		-		989,500
March 1, 2017 - March 31, 2017		22,371		18.15		-		989,500
Total		28,732	$	18.27		-		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 first quarter of 2017, the Company repurchased 28,732 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: May 1, 2017
	/s/ Douglas S. Gordon
	Douglas S. Gordon
	Chief Executive Officer Principal Executive Officer
Date: May 1, 2017
	/s/ Mark R. Gerke
	Mark R. Gerke
	Chief Financial Officer Principal Financial Officer

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EXHIBIT INDEX

WATERSTONE FINANCIAL, INC.

Form 10-Q for Quarter Ended March 31, 2017

Exhibit No.	Description	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
32.1	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
32.2	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
101	The following financial statements from Waterstone Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 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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Attached files

Waterstone Financial, Inc. Reports

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