What changed in this filing

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Item 1. Financial Statements

2022-05-06 compared with 2021-11-09 · 1661 added, 558 removed, 600 unchanged (79% of the section changed)

3 unchanged sentences

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 30, 2021

March 31, 2022

December 31, 2021

(Dollars In Thousands, except share and per share data)

$ 247,857  

$ 343,016  

Federal funds sold

10,954  

13,981  

Interest-earning deposits in other financial institutions and other short term investments

19,719  

19,725  

Cash and cash equivalents

278,530  

376,722  

Securities available for sale (at fair value)

201,953  

179,016  

Loans held for sale (at fair value)

154,440  

312,738  

Loans receivable

Allowance for loan losses

1,207,416  

1,205,785  

Allowance for credit losses ("ACL") - loans

16,905  

15,778  

Loans receivable, net

1,190,511  

1,190,007  

Office properties and equipment, net

21,932  

22,273  

Federal Home Loan Bank stock (at cost)

24,438  

Cash surrender value of life insurance

65,315  

65,368  

Real estate owned, net

Prepaid expenses and other assets

Liabilities and Shareholders’ Equity

67,347  

45,148  

$ 2,004,614  

$ 2,215,858  

Liabilities and Shareholders’

Demand deposits

$ 218,119  

$ 214,409  

Money market and savings deposits

400,710  

392,314  

Time deposits

591,619  

626,663  

Total deposits

1,210,448  

1,233,386  

326,478  

477,127  

Advance payments by borrowers for taxes

10,759  

Other liabilities

44,677  

68,478  

Total liabilities

Shareholders’ equity:

Preferred stock (par value $ 0.01 per share)

Authorized - 50,000,000 shares at September 30, 2021 and at December 31, 2020 , no shares issued

Common stock (par value $ 0.01 per share)

Authorized - 100,000,000 shares at September 30, 2021 and at December 31, 2020

Issued - 25,038,054 at September 30, 2021 and 25,087,976 at December 31, 2020

Outstanding - 25,038,054 at September 30, 2021 and 25,087,976 at December 31, 2020

1,592,362  

1,783,085  

Commitments and contingencies (Note 9)

Shareholders’

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at March 31, 2022 and at December 31, 2021, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at March 31, 2022 and at December 31, 2021, Issued - 24,146,920 at March 31, 2022 and 24,795,124 at December 31, 2021, Outstanding - 24,146,920 at March 31, 2022 and 24,795,124 at December 31, 2021

Additional paid-in capital

161,354  

174,505  

Retained earnings

272,740  

273,398  

Unearned ESOP shares

Accumulated other comprehensive income, net of taxes

Total shareholders’ equity

Total liabilities and shareholders’ equity

( 13,946 )  

Accumulated other comprehensive loss, net of taxes

( 8,137 )  

Total shareholders’

412,252  

432,773  

Total liabilities and shareholders’

$ 2,004,614  

$ 2,215,858  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands, except per share amounts)

6 unchanged sentences

Net interest income

Provision (credit) for loan losses

Provision (credit) for credit losses

Net interest income after provision for loan losses

21 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

Other comprehensive (loss) income, net of tax:

Net unrealized holding (loss) gain on available for sale securities:

Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $ 262 , $ 41 , $ 783 , $( 754 ), respectively

Total other comprehensive (loss) income

Comprehensive income

$ 5,291  

$ 21,344  

Other comprehensive loss, net of tax:

Net unrealized holding loss on available for sale securities:

Net unrealized holding loss arising during the period, net of tax benefit of $ 2,623 and $ 432 , respectively

( 7,002 )  

Total other comprehensive loss

( 7,002 )  

Comprehensive (loss) income

$ ( 1,711 )  

$ 20,188  

See accompanying notes to unaudited consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Comprehensive Income (Loss)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS ’

Comprehensive

Shareholders'

For the nine months ended September 30, 2020

(In Thousands, except per share amounts)

Balances at December 31, 2019

Comprehensive income:

Other comprehensive income

Total comprehensive income

ESOP shares committed to be released to Plan participants

Cash dividend declared, $ 0.86 per share

Proceeds from stock option exercises

Stock compensation expense

Purchase of common stock returned to authorized but unissued

Balances at September 30, 2020

For the nine months ended September 30, 2021

Income (Loss)

(In Thousands, except per share amounts)

For the three months ended March 31, 2021

Balances at December 31, 2020

Comprehensive income:

Other comprehensive loss

Total comprehensive income

ESOP shares committed to be released to Plan participants

Cash dividend declared, $ 1.10 per share

Proceeds from stock option exercises

Stock compensation expense

Purchase of common stock returned to authorized but unissued

Balances at September 30, 2021

Comprehensive Income (Loss)

Shareholders'

For the three months ended September 30, 2020

(In Thousands, except per share amounts)

Balances at June 30, 2020

25,088  

$ 180,684  

$ 245,287  

$ ( 15,430 )  

$ 2,326  

$ 413,118  

Comprehensive income:

21,344  

Other comprehensive loss

( 1,156 )  

Total comprehensive income

20,188  

ESOP shares committed to be released to plan participants

Cash dividend declared, $ 0.12 per share

Cash dividend, $ 0.20 per share

( 4,772 )  

Proceeds from stock option exercises

1 unchanged sentence

Purchase of common stock returned to authorized but unissued

Balances at September 30, 2020

For the three months ended September 30, 2021

Balances at March 31, 2021

25,230  

$ 182,533  

$ 261,859  

$ ( 15,133 )  

$ 1,170  

$ 430,681  

(In Thousands, except per share amounts)

Balances at June 30, 2021

Comprehensive income:

For the three months ended March 31, 2022

Balances at December 31, 2021

24,795  

$ 174,505  

$ 273,398  

$ ( 14,243 )  

$ ( 1,135 )  

$ 432,773  

Comprehensive loss:

Other comprehensive loss

Total comprehensive income

( 7,002 )  

Total comprehensive loss

Adoption of new accounting pronouncement (see Note 1)

( 1,392 )  

ESOP shares committed to be released to plan participants

Cash dividend declared, $ 0.20 per share

Cash dividend, $ 0.20 per share

( 4,557 )  

Proceeds from stock option exercises

1 unchanged sentence

Purchase of common stock returned to authorized but unissued

Balances at September 30, 2021

( 681 )  

( 13,748 )  

Balances at March 31, 2022

24,147  

$ 161,354  

$ 272,740  

$ ( 13,946 )  

$ ( 8,137 )  

$ 412,252  

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

Operating activities:

Adjustments to reconcile net income to cash provided by (used) in operating activities:

Provision (credit) for loan losses

Adjustments to reconcile net income to net cash provided by operating activities:

Provision (credit) for credit losses

Depreciation, amortization, accretion

2 unchanged sentences

Origination of mortgage servicing rights

Proceeds on sales of mortgage servicing rights

Gain on sale of loans held for sale

2 unchanged sentences

Gain on death benefit on bank owned life insurance

Decrease in accrued interest receivable

(Increase) decrease in accrued interest receivable

Increase in cash surrender value of life insurance

Decrease (increase) in derivative assets

Increase in derivative assets

Decrease in accrued interest on deposits and borrowings

(Increase) decrease in prepaid tax expense

Increase in prepaid tax expense

Legal settlement

(Decrease) increase in derivative liabilities

Net gain related to real estate owned

Gain on sale of mortgage servicing rights

Increase (decrease) in derivative liabilities

Net gain loss related to real estate owned

Change in other assets and other liabilities, net

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Investing activities:

Net decrease (increase) in loans receivable

Net (increase) decrease in loans receivable

Purchases of:

Mortgage related securities

Debt securities

Bank owned life insurance

Premises and equipment, net

2 unchanged sentences

Maturities of debt securities

Sales of FHLB stock

Sales of real estate owned

Proceeds from death benefit

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Financing activities:

Net increase in deposits

Net (decrease) increase in deposits

Net change in short-term borrowings

Cash paid for advance payments by borrowers for taxes

Repayment of long-term debt

Net change in advance payments by borrowers for taxes

Cash dividends on common stock

1 unchanged sentence

Proceeds from stock option exercises

Net cash provided by financing activities

Increase in cash and cash equivalents

Net cash (used in) provided by financing activities

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

1 unchanged sentence

Supplemental information:

Cash paid during the period for:

Cash paid or credited during the period for:

Income tax payments

1 unchanged sentence

Noncash activities:

Loans receivable transferred to real estate owned

Dividends declared but not paid in other liabilities

See accompanying notes to unaudited consolidated financial statements.

Note 1 — Basis of Presentation

Note 1 —

Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc.

(the “Company”) and the Company’s subsidiaries.

WaterStone Bank SSB (the "Bank") is a community bank that has served the banking needs of its customers since 1921.

7 unchanged sentences

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 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 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, 2020 Annual Report on Form 10-K.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any other period.

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, 2021 Annual Report on Form 10 -K.

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 

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.

1 unchanged sentence

Actual results could differ from those estimates.

Impacts of COVID-19

In March, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world.

The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

The pandemic and continuing spread of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company.

In 2021, restrictive measures related to the COVID-19 pandemic continued to ease as vaccination and other measures have increased.

Most businesses have reopened at full capacity, which has improved commercial and consumer activity but still has not returned to pre-pandemic levels.

While the overall outlook has improved based on the availability of the vaccine to all adults and older children, further government action in response to the COVID-19 pandemic, including any vaccination mandates, may affect our business and operations, including our workforce, human capital resources and infrastructure.

the risk of further resurgence and possible reimplementation of restrictions remains.

The Company has reopened all financial centers at normal business hours and all employees have returned to work during 2021.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10 -Q were issued.

There were no significant subsequent events for the three and nine months ended September 30, 2021 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements .

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

These reclassifications did not result in any changes to previously reported net income.

The Company reclassed certain line items in the Consolidated Statements of Cash Flows.

There were no significant subsequent events for the three months ended March 31, 2022 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

Impact of Recent Accounting Pronouncements

8 unchanged sentences

The legislation extended the delay of the adoption of ASC Topic 326 allowed under the CARES Act until the earlier of the first day of the fiscal year that begins after the date when the COVID- 19 national emergency is terminated or January 1, 2022.

The Company has input the available historical Company data to build an internal model and is reviewing the assumptions to support the calculation under ASC Topic 326.

Management’s methodology for estimating the allowance for credit losses under the current expected credit losses (CECL) model includes the use of relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience by vintage classified by loans with similar risk profiles provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, portfolio volume, delinquency rates, interest rates, or other relevant factors.

The Company is currently finalizing controls, processes, policies and disclosures in preparation for final adoption.

The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

During the third quarter, we ran a parallel run including additional analytics, controls, and a parallel governance process.

A set of controls, including management review controls, implementation controls, data, model, and forecasting controls has been established.

Next steps include further testing and finalization of controls and developing disclosures.

We will continue to evaluate and refine our loss estimates throughout 2021.

Based on our most recent parallel run, we estimate that the impact of the standard on the allowance for credit losses ("ACL") as of September 30, 2021, would have been within a range of no change to a 10% increase.

Within the ACL calculation, we generally expect the ACL to be lower for commercial loans as they are shorter duration loans compared to the longer duration residential and real estate loans.

We expect that the ACL related to AFS securities will be immaterial as the portfolio consists entirely of municipal securities with low expected losses.

This estimate is subject to change based on continuing review of the models, assumptions, methodologies and judgments.

The impact of the ASU at adoption will be influenced by the portfolio composition and credit quality, macroeconomic conditions and forecasts at that time, as well as other management judgments.

We expect more volatility in the credit loss estimate under CECL than under the current accounting requirements.

The Bank will adopt this guidance beginning January 1, 2022.

Transition to the new ASU will be through a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of January 1, 2022.

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

As we continue to evaluate the provisions of ASC Topic 326 as of and for the nine months ended September 30, 2021, we are considering the following in developing our forecast and its effect on our CECL calculations:

Duration, extent and severity of COVID-19;

Effect of government assistance;

Unemployment and effect on economies and markets.

The Company is evaluating the authoritative guidance related to credit losses relating to available-for-sale debt securities and is not expecting it to have a material impact on the Company's statements of operations or 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:

September 30, 2021

Amortized cost

Gross unrealized gains

Gross unrealized losses

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Troubled Debt Restructurings and Vintage Disclosures" eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The accounting guidance also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination.

The updated guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company is evaluating the impact of this ASU on its consolidated financial statements.

Accounting Standards Adopted in 2022

The Company adopted ASC Topic 326 on January 1, 2022, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings, as of January 1, 2022 ( i.e., modified retrospective approach).

Upon adoption of the standard, the Company recorded a $ 430,000  increase to the allowance for credit losses and $ 1.4 million increase to the allowance for unfunded commitments which resulted in a $ 1.4 million after-tax decrease to retained earnings as of January 1, 2022.

The tax effect resulted in a $ 439,000  increase to deferred tax assets. 

The Company did not record an allowance for AFS securities on January 1, 2022 as the investment portfolio consists primarily of debt securities explicitly or implicitly backed by the U.S.

Government for which credit risk is deemed minimal.

The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods.

See Note 2 - Securities Available for Sale and Note 3 - Loans Receivable for more information.

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, 2022

(In Thousands)

Mortgage-backed securities

$ 17,545  

$ ( 688 )  

$ 16,911  

Collateralized mortgage obligations:

Government sponsored enterprise issued

133,599  

( 8,009 )  

125,600  

Private-label issued

10,397  

( 173 )  

10,236  

Mortgage-related securities

Government sponsored enterprise bonds

161,541  

( 8,870 )  

152,747  

Government sponsered enterprise bonds

( 156 )  

Municipal securities

35,905  

( 751 )  

35,623  

Other debt securities

12,500  

( 1,261 )  

11,239  

Debt securities

50,905  

( 2,168 )  

49,206  

$ 212,446  

$ ( 11,038 )  

$ 201,953  

December 31, 2021

Amortized cost

Gross unrealized gains

Gross unrealized losses

(In Thousands)

Mortgage-backed securities

$ 19,133  

$ ( 187 )  

$ 19,488  

Collateralized mortgage obligations

Government sponsored enterprise issued

100,543  

( 1,744 )  

99,302  

Private-label issued

Mortgage related securities

122,589  

( 1,931 )  

121,733  

Government sponsered enterprise bonds

( 52 )  

Municipal securities

42,295  

43,494  

Other debt securities

12,500  

( 1,200 )  

11,341  

Debt securities

The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

At September 30, 2021, $ 505,000 of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At December 31, 2020 , $ 785,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities and $ 7.2 million were pledged as collateral to secure back-to-back swaps.

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2021 are shown below.

57,295  

( 1,259 )  

57,283  

$ 179,884  

$ 2,322  

$ ( 3,190 )  

$ 179,016  

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, 2022 , $ 352,000  of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At December 31, 2021 , $ 430,000  of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2022 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.

2 unchanged sentences

Due within one year

$ 11,188  

$ 11,223  

Due after one year through five years

21,412  

21,601  

Due after five years through ten years

13,199  

12,024  

Due after ten years

Mortgage-related securities

161,541  

152,747  

$ 212,446  

$ 201,953  

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

September 30, 2021

March 31, 2022

Less than 12 months

12 months or longer

Unrealized loss

(In Thousands)

Mortgage-backed securities

$ 10,416  

$ ( 314 )  

$ 3,479  

$ ( 374 )  

$ 13,895  

Collateralized mortgage obligations:

Government sponsored enterprise issued

Government sponsored enterprise bonds

103,876  

( 6,323 )  

13,953  

( 1,686 )  

117,829  

Private-label issued

( 173 )  

Government sponsered enterprise bonds

( 156 )  

Municipal securities

( 751 )  

Other debt securities

( 61 )  

( 1,200 )  

11,239  

$ 131,334  

$ ( 7,778 )  

$ 26,232  

$ ( 3,260 )  

$ 157,566  

December 31, 2021

1 unchanged sentence

12 months or longer

Unrealized loss

(In Thousands)

Mortgage-backed securities

$ 4,042  

$ ( 101 )  

$ 1,956  

$ ( 86 )  

$ 5,998  

Collateralized mortgage obligations:

Government sponsored enterprise issued

66,254  

( 1,589 )  

( 155 )  

70,625  

Government sponsered enterprise bonds

( 52 )  

Municipal securities

Other debt securities

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

In evaluating whether a security’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations.

In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral.

As of September 30, 2021, the Company held one municipal security that had previously been deemed to be other-than-temporarily impaired.

The security was issued by a tax incremental district in a municipality located in Wisconsin.

During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern.

During the year ended December 31, 2012, the Company's analysis of this security resulted in $ 77,000 in credit losses charged to earnings with respect to this municipal security.

An additional $ 17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price.

There have been no additional credit losses related to the security.

As of September 30, 2021, this security had an amortized cost of $ 116,000 and total life-to-date impairment of $ 94,000 .

As of September 30, 2021, the Company had one corporate debt security, included in other debt securities, and one government sponsored enterprise issued security which have been in an unrealized loss position for twelve months or longer.

The securities were determined not to be other-than-temporarily impaired as of September 30, 2021.

The Company has determined that the decline in fair value of these securities are not attributable to credit deterioration, and 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.

During the three or nine months ended September 30, 2021 and September 30, 2020, there were no sales of securities.

( 1,200 )  

$ 74,215  

$ ( 1,749 )  

$ 15,127  

$ ( 1,441 )  

$ 89,342  

The Company reviews the investment securities portfolio on a quarterly basis to monitor securities in unrealized loss positions, which were comprised of 

131  individual securities, to determine whether the impairment is due to credit-related factors or noncredit-related factors.

In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

As of March 31, 2022 and December 31, 2021 , 

no  allowance for credit losses on securities was recognized.

The Company does not consider its securities 

with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.

Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

During the 

three months ended March 31, 2022 and March 31, 2021 , there were no sales of securities.

Note 3 - Loans Receivable

Loans receivable at September 30, 2021 and December 31, 2020 are summarized as follows:

September 30, 2021

Loans receivable at March 31, 2022 and December 31, 2021 are summarized as follows:

March 31, 2022

December 31, 2021

3 unchanged sentences

One- to four-family

$ 294,249  

$ 300,523  

545,047  

537,956  

10,649  

11,012  

Construction and land

70,102  

82,588  

Commercial real estate

266,481  

250,676  

Commercial loans

20,178  

22,298  

$ 1,207,416  

$ 1,205,785  

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans.

2 unchanged sentences

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

Qualifying loans receivable totaling $ 948.7 million and $ 1.07 billion at September 30, 2021 and December 31, 2020, respectively, were pledged as collateral against $ 475.0 million and $ 499.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 2021 and December 31, 2020.

Qualifying loans receivable totaling $ 845.9  million and $ 886.7  million at March 31, 2022 and December 31, 2021 , respectively, were pledged as collateral against $ 320.0 million and $ 475.0  million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at March 31, 2022 and December 31, 2021 .

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank.

Loans outstanding to such parties were approximately $ 3.3 million as of September 30, 2021 and $ 7.2 million as of December 31, 2020.

None of these loans were past due or considered impaired as of September 30, 2021 or December 31, 2020, respectively.

As of September 30, 2021, there were no loans 90 or more days past due and still accruing interest.

As of December 31, 2020, there was a $ 586,000 loan that was 90 or more days past due and still accruing interest.

The Bank received full payoff of the loan subsequent to December 31, 2020.

An analysis of past due loans receivable as of September 30, 2021 and December 31, 2020 follows:

As of September 30, 2021

1-59 Days Past Due (1)

60-89 Days Past Due (2)

90 Days or Greater

Total Past Due

Loans outstanding to such parties were approximately $ 2.3 million as of March 31, 2022  and $ 2.5  million as of December 31, 2021 . 

None of these loans were past due or considered impaired as of March 31, 2022 or December 31, 2021 , respectively.

An analysis of past due loans receivable as of March 31, 2022 and December 31, 2021 follows:

As of March 31, 2022

1-59 Days Past Due (1)  

60-89 Days Past Due (2)  

90 Days or Greater  

Total Past Due  

Total Loans  

(In Thousands)

2 unchanged sentences

One- to four-family

$ 5,332  

$ 6,067  

$ 288,182  

$ 294,249  

545,047  

10,483  

10,649  

Construction and land

70,102  

Commercial real estate

266,481  

Commercial loans

20,028  

20,178  

$ 1,003  

$ 5,380  

$ 6,383  

$ 1,201,033  

$ 1,207,416  

As of December 31, 2021

1-59 Days Past Due (1)

60-89 Days Past Due (2)

90 Days or Greater

Total Past Due

1-59 Days Past Due (1)  

60-89 Days Past Due (2)  

90 Days or Greater  

Total Past Due  

Total Loans  

(In Thousands)

2 unchanged sentences

One- to four-family

$ 2,028  

$ 4,214  

$ 6,864  

$ 293,659  

$ 300,523  

537,828  

537,956  

10,949  

11,012  

Construction and land

82,588  

Commercial real estate

250,676  

Commercial loans

(1) Includes $ - and $ 611,000 at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status.

(2) Includes $ - and $ - at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status.

(3) Includes $ 594,000 and $ 1.6 million at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status.

A summary of the activity for the nine months ended September 30, 2021 and 2020 in the allowance for loan losses follows:

Construction and Land

Commercial Real Estate

(In Thousands)

Nine months ended September 30, 2021

Balance at beginning of period

Provision (credit) for loan losses

22,291  

22,298  

$ 2,051  

$ 4,368  

$ 7,062  

$ 1,198,723  

$ 1,205,785  

 Includes $ 600,000  and $ 43,000  at March 31, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

( 2 )   

Includes $ - and $ 347,000  at 

March 31, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

( 3 )   

Includes $ 666,000  and $ 816,000  at 

March 31, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

The following tables present the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2022 and the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021:

Three months ended March 31, 2022

One- to Four-Family  

Multi-Family  

Home Equity  

Land and Construction  

Commercial Real Estate  

Consumer  

Commercial  

(In Thousands)  

Beginning Balance

$ 3,963  

$ 5,398  

$ 1,386  

$ 4,482  

$ 15,778  

( 640 )  

( 69 )  

( 442 )  

( 222 )  

( 118 )  

Balance at end of period

Nine months ended September 30, 2020

$ 4,415  

$ 6,562  

$ 1,831  

$ 3,631  

$ 16,905  

Three months ended March 31, 2021

Balance at beginning of period

$ 5,459  

$ 5,600  

$ 1,755  

$ 5,138  

$ 18,823  

Provision (credit) for loan losses

( 862 )  

( 15 )  

( 505 )  

( 123 )  

( 14 )  

Balance at end of period

A summary of the activity for the three months ended September 30, 2021 and 2020 in the allowance for loan losses follows:

$ 4,594  

$ 6,044  

$ 1,251  

$ 5,017  

$ 17,780  

The Company utilized the Vintage Loss Rate method in determining expected future credit losses.

This technique considers losses over the full life cycle of loan pools.

A vintage is a group of loans originated in the same annual time period.

The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool by loan segment and vintage and compares those loan losses to the original loan balance of that pool as of a similar vintage.

To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date.

The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.

The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data.

The Company's historical look–back period includes January 2012 through the current period, on an annual basis.

When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.

Additionally, the weighted average remaining maturity ("WARM") method is used for the Construction and Consumer loan pools.

The WARM method considers an estimate of expected credit losses over the remaining life of the financial assets and uses average annual charge-off rates to estimate the allowance for credit losses.

For amortizing assets, the remaining contractual life is adjusted by the expected scheduled payments and prepayments.

The average annual charge-off rate is applied to the amortization-adjusted remaining life to determine the unadjusted lifetime historical charge-off rate.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience.

The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management, along with other credit–related analytics as deemed appropriate.

Management attempts to quantify qualitative reserves whenever possible.

The CECL methodology applied focuses on evaluation of qualitative and environmental factors, including but not limited to:

(i) evaluation of facts and issues related to specific loans;

(ii) management’s ongoing review and grading of the loan portfolio;

(iii) consideration of historical loan loss and delinquency experience on each portfolio segment;

(iv) trends in past due and nonperforming loans;

(v) the risk characteristics of the various loan segments;

(vi) changes in the size and character of the loan portfolio;

(vii) concentrations of loans to specific borrowers or industries;

(viii) existing economic conditions;

(ix) the fair value of underlying collateral;

and ( x ) other qualitative and quantitative factors which could affect expected credit losses.

The Company’s CECL estimate applies a forecast that incorporates macroeconomic trends and other environmental factors.

Management utilized national, regional and local leading economic indexes, as well as management judgment, as the basis for the forecast period.

The historical loss rate was utilized as the base rate, and qualitative adjustments were utilized to reflect the forecast and other relevant factors.

The Company segments the loan portfolio into pools based on the following risk characteristics: collateral type, credit characteristics, loan origination balance, and outstanding loan balances.

Allowance for Credit Losses-Unfunded Commitments :

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in other liabilities on the consolidated statements of financial condition.

This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans.

The allowance for unfunded commitments at March 31, 2022 was $ 1.2 million.

Provision for Credit Losses :

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments.

See Note 2 - Securities Available for Sale for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.

Three months ended

March 31, 2022

March 31, 2021

Provision for credit losses on:

(In Thousands)  

Unfunded commitments

( 157 )  

Investment securities

$ ( 76 )  

Collateral Dependent Loans :

A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.

The following tables present collateral dependent loans by portfolio segment and collateral type as of March 31, 2022 :

One- to Four- Family

Construction and Land

1 unchanged sentence

(In Thousands)

Three months ended September 30, 2021

Balance at beginning of period

Provision (credit) for loan losses

Balance at end of period

Three months ended September 30, 2020

Balance at beginning of period

Provision for loan losses

Balance at end of period

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of September 30, 2021 follows:

(In Thousands)

Allowance related to loans individually evaluated for impairment

Allowance related to loans collectively evaluated for impairment

Balance at end of period

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Total gross loans

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2020 follows:

(In Thousands)

Allowance related to loans individually evaluated for impairment

Allowance related to loans collectively evaluated for impairment

Balance at end of period

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Allowance related to collateral dependent loans

Allowance related to pooled loans

16,905  

Allowance at end of period

$ 4,415  

$ 6,562  

$ 1,831  

$ 3,631  

$ 16,905  

Collateral dependent loans

$ 5,617  

$ 6,782  

$ 12,424  

288,632  

545,047  

10,624  

70,102  

259,699  

20,178  

1,194,992  

Total gross loans

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of September 30, 2021 and December 31, 2020:

to Four- Family

(In Thousands)

At September 30, 2021

At December 31, 2020

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 .

A member of the credit department, independent of the loan originator, performs a loan review for all loans.

Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans.

To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, and commercial real estate loans that individually, or as part of an overall borrower relationship exceed $ 1.0 million in potential exposure and review commercial loans that individually, or as part of an overall borrower relationship exceed $ 200,000 in potential exposure.

Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year .

With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage.

Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit.

Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged.

These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Finally, a loan is considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.

Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.

$ 294,249  

$ 545,047  

$ 10,649  

$ 70,102  

$ 266,481  

$ 20,178  

$ 1,207,416  

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.

7 unchanged sentences

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 September 30, 2021 and December 31, 2020.

As of September 30, 2021

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2021 follows:

One- to Four- Family  

Construction and Land  

Commercial Real Estate  

(In Thousands)

Total Impaired with Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired with no Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired

Allowance related to loans individually evaluated for impairment

Allowance related to loans collectively evaluated for impairment

15,778  

Balance at end of period

$ 3,963  

$ 5,398  

$ 1,386  

$ 4,482  

$ 15,778  

Loans individually evaluated for impairment

$ 5,420  

$ 1,222  

$ 1,097  

$ 7,893  

Loans collectively evaluated for impairment

295,103  

537,828  

10,986  

82,588  

249,454  

21,201  

1,197,892  

Total gross loans

$ 300,523  

$ 537,956  

$ 11,012  

$ 82,588  

$ 250,676  

$ 22,298  

$ 1,205,785  

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:

current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships.  For relationships over $ 1  million, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt.  Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis.  The Company uses the following definitions for risk ratings:

 Loans classified as watch have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.  Watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

 Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and, additionally, the weakness or weaknesses to make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable.

Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of March 31, 2022 and December 31, 2021 :

One to Four-Family

1 unchanged sentence

Commercial Real Estate

(In Thousands)

At March 31, 2022

$ 6,675  

$ 6,782  

$ 13,505  

18,890  

279,448  

545,047  

10,601  

67,813  

253,900  

17,502  

1,175,021  

$ 294,249  

$ 545,047  

$ 10,649  

$ 70,102  

$ 266,481  

$ 20,178  

$ 1,207,416  

At December 31, 2021

$ 5,420  

$ 6,827  

$ 1,097  

$ 13,498  

21,250  

287,166  

537,828  

10,949  

78,376  

237,979  

18,007  

1,171,037  

$ 300,523  

$ 537,956  

$ 11,012  

$ 82,588  

$ 250,676  

$ 22,298  

$ 1,205,785  

The following tables present data on December 31, 2021 .

As of December 31, 2021

12 unchanged sentences

Commercial real estate

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.

The following tables present data on impaired loans for the nine months ended September 30, 2021 and 2020.

Nine months ended September 30,

(In Thousands)

$ 7,893  

$ 7,923  

The following tables present data on impaired loans for the three months ended for the three months ended March 31, 2021.

(In Thousands)  

Total Impaired with Reserve

6 unchanged sentences

Commercial real estate

14,775  

Total Impaired

2 unchanged sentences

Commercial real estate

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 $ 7.4 million of impaired loans as of September 30, 2021 for which no allowance has been provided, $ 442,000 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 which may result in additional provisions to the allowance for loans losses or charge-offs.

At September 30, 2021, total impaired loans included $ 5.2 million of troubled debt restructurings.

Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure.

The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate.

The restructured terms are typically in place for six to twelve months .

At December 31, 2020, total impaired loans included $ 11.6 million of troubled debt restructurings.

$ 14,982  

Credit Quality Information:

The following tables present total loans by risk categories and year of origination as of March 31, 2022 .

(In Thousands)  

$ 19,191  

$ 45,359  

$ 53,486  

$ 29,754  

$ 29,475  

$ 99,873  

$ 2,310  

$ 279,448  

27,117  

47,568  

54,176  

31,686  

29,475  

101,917  

294,249  

65,633  

154,087  

151,679  

53,945  

27,648  

89,167  

545,047  

65,633  

154,087  

151,679  

53,945  

27,648  

89,167  

545,047  

10,601  

10,649  

Construction and land

43,007  

18,981  

67,813  

43,007  

18,981  

70,102  

Commercial Real Estate

29,184  

56,828  

40,832  

45,613  

28,783  

51,035  

253,900  

30,451  

57,025  

40,832  

47,915  

35,661  

52,972  

266,481  

17,502  

20,178  

$ 125,566  

$ 304,679  

$ 270,336  

$ 141,504  

$ 94,280  

$ 250,419  

$ 20,632  

$ 1,207,416  

The following presents data on troubled debt restructurings:

As of September 30, 2021

As of March 31, 2022

(Dollars in Thousands)

One- to four-family

Commercial real estate

$ 2,077  

As of December 31, 2021

1 unchanged sentence

One- to four-family

$ 1,670  

Commercial real estate

At September 30, 2021, $ 5.2 million in loans had been modified in troubled debt restructurings and $ 1.7 million of these loans were included in the non-accrual loan total.

The remaining $ 3.5 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans.

Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.

All loans that have been modified in a troubled debt restructuring are considered to be impaired.

As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve.

When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate.

When there is doubt as to the borrower’s 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, no valuation allowance was recorded as of September 30, 2021 with respect to the $ 5.2 million in troubled debt restructurings.

As of December 31, 2020, no valuation allowance had been established with respect to the $ 11.6 million in troubled debt restructurings.

$ 2,319  

$ 1,670  

$ 3,989  

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.

1 unchanged sentence

The following presents troubled debt restructurings by concession type:

As of September 30, 2021

Performing in

accordance with

modified terms

As of March 31, 2022

Performing in accordance with modified terms

(Dollars in Thousands)

Interest reduction and principal forbearance

$ 1,023  

$ 1,364  

Interest reduction

Principal forbearance

Principal forebearance

$ 1,736  

$ 2,077  

As of December 31, 2021

Performing in

accordance with

modified terms

Performing in accordance with modified terms

(Dollars in Thousands)

2 unchanged sentences

Principal forebearance

There were three one- to four-family loans modified as troubled debt restructurings with a total balance of $ 1.3 million during the nine months ended September 30, 2021.

There were two loans modified as troubled debt restructurings with a total loan balance of $ 754,000 during the three months ended September 30, 2021.

There was one loan modified as troubled debt restructurings with a total balance of $ 5.7 million during the three and nine months ended September 30, 2020.

There were no troubled debt restructurings within the past twelve months for which there was a default during the three or nine months ended September 30, 2021 or September 30, 2020.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency.

The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019.

The Company elected to adopt these provisions of the CARES Act.

At September 30, 2021, the Company had approximately $ 559,000 in outstanding loans subject to principal deferral agreements which were not classified as troubled debt restructurings.

The following table presents data on non-accrual loans as of September 30, 2021 and December 31, 2020:

September 30, 2021

$ 3,989  

There were 

one - to four -family loans modified as troubled debt restructurings with a total balance of $ 432,000  during the three months ended March 31, 2022 . There was one  loan modified as troubled debt restructurings with a total balance of $ 583,000  during the three months ended March 31, 2021 .

There were 

no  troubled debt restructuring within the past twelve months for which there was a default during the three months ended March 31, 2022  and 

March 31, 2021 .

The following table presents data on non-accrual loans as of March 31, 2022 and December 31, 2021 :

March 31, 2022

December 31, 2021

1 unchanged sentence

Non-accrual loans:

Residential real estate:

One- to four-family

$ 6,598  

$ 5,420  

Construction and land

1 unchanged sentence

Total non-accrual loans

$ 6,646  

$ 5,574  

Total non-accrual loans to total loans receivable

0.55 %  

Total non-accrual loans to total assets

Note 4— Real Estate Owned

Real estate owned is summarized as follows:

September 30, 2021

December 31, 2020

(In Thousands)

One- to four-family

Construction and land

Commercial real estate

Total real estate owned

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

Nine months ended September 30,

(In Thousands)

Real estate owned at beginning of the period

Transferred from loans receivable

Sales (net of gains / losses)

Real estate owned at the end of the period

Residential one- to four-family mortgage loans that were in the process of foreclosure were $ 1.5 million at September 30, 2021 and $ 1.7 million at December 31, 2020.

Note 5— Mortgage Servicing Rights

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

Nine months ended September 30,

0.33 %  

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 2.2 million and $ 1.4  million at March 31, 2022  and 

December 31, 2021 , respectively.

Note 4  

Mortgage Servicing Rights

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

Three months ended March 31,

(In Thousands)

Mortgage servicing rights at beginning of the period

Sales (net of gains/losses)

$ 1,555  

$ 5,977  

( 105 )  

Mortgage servicing rights at end of the period

Valuation allowance during the period

Valuation allowance recovered during the period

Mortgage servicing rights at end of the period, net

During the nine months ended September 30, 2021, $ 3.21 billion in residential loans were originated for sale on a consolidated basis.

During the same period, sales of loans held for sale totaled $ 3.44 billion, generating mortgage banking income of $ 150.6 million.

The unpaid principal balance of loans serviced for others was $ 160.8 million and $ 871.8 million at September 30, 2021 and December 31, 2020, respectively.

$ 2,458  

$ 8,830  

During the three months ended March 31, 2022 , $ 698.1  million in residential loans were originated for sale on a consolidated basis.

During the same period, sales of loans held for sale totaled $ 878.6  million, generating mortgage banking income of $ 28.3  million.

The unpaid principal balance of loans serviced for others was $ 317.1 million and $ 204.8  million at March 31, 2022 and December 31, 2021 , respectively.

These loans are not reflected in the consolidated statements of financial condition.

The fair value of mortgage servicing rights were $ 1.3 million at September 30, 2021 and $ 9.9 million at September 30, 2020.

During the three and nine months ended September 30, 2021, the Company sold mortgage servicing rights related to $ 1.24 billion in loans receivable and with a book value of $ 9.3 million for $ 12.4 million resulting in a gain on sale of $ 4.0 million.

During the three and nine months ended September 30, 2020, the Company did not sell any mortgage servicing rights.

The fair value of mortgage servicing rights were $ 3.4 million at March 31, 2022 and $ 1.8  million at 

December 31, 2021

 During the 

three months ended March 31, 2022  and 

March 31, 2021  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:

(In Thousands)

Estimate for the period ended December 31:

Note 6— Deposits

At September 30, 2021 and December 31, 2020, time deposits with aggregate balances greater than $250,000 amounted to $ 108.0 million and $ 102.6 million, respectively.

A summary of the contractual maturities of time deposits at September 30, 2021 is as follows:

Estimate for the annual period ended December 31:

$ 2,458  

Note 5  

At March 31, 2022 and December 31, 2021 , the aggregate balance of uninsured deposits of $250,000 or more was $ 314.2 million and $ 318.0 million, respectively.

The Company does not have uninsured deposits less than $250,000 in aggregate balance.

A summary of the contractual maturities of time deposits at March 31, 2022 is as follows:

(In Thousands)

Within one year

$ 511,518  

More than one to two years

73,935  

More than two to three years

1 unchanged sentence

More than four through five years

Note 7— Borrowings

$ 591,619  

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation.

Such deposits amounted to $ 26.6 million and $ 27.4 million at March 31, 2022 and 

December 31, 2021, respectively.

Note 6  

Borrowings consist of the following:

September 30, 2021

March 31, 2022

December 31, 2021

Weighted Average Rate

(Dollars in Thousands)

Repurchase agreement

Federal Home Loan Bank, Chicago

Repurchase agreements

$ 6,478  

4.10 %  

$ 2,127  

Federal Home Loan Bank, Chicago advances

0.00 %  

Federal Home Loan Bank, Chicago advances maturing:

The short-term repurchase agreement is utilized by Waterstone Mortgage Corporation to finance loans originated for sale when necessary.

Waterstone Mortgage Corporation has no commitments outstanding as of September 30, 2021.

The short-term repurchase agreement had a $ 9.1 million balance at December 31, 2020.

This agreement was secured by the underlying loans being financed.

Related interest rates were based upon the note rate associated with the loans being financed.

50,000  

1.73 %  

50,000  

100,000  

2.46 %  

255,000  

165,000  

1.61 %  

165,000  

$ 326,478  

1.91 %  

$ 477,127  

The short-term repurchase agreement represents the outstanding portion of a total $ 75.0  million commitment with one unrelated bank as of March 31, 2022 . 

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 $ 6.5 million balance at March 31, 2022 and a $ 2.1 million balance at December 31, 2021 .

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.

8 unchanged sentences

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

The $ 255.0 million in advances due in 2028 consists of one $ 25.0 million advance with a fixed rate of 2.16 %, one $ 25.0 million advance with a fixed rate of 2.40 %, and two advances totaling $ 55.0 million with a fixed rate of 2.27 % with a maturity date in March 2028, two advances totaling $ 50.0 million with fixed rates of 2.34 % and 2.48 % both with a FHLB single call option in May 2021, one advance of $ 50.0 million with a fixed rate of 2.34 % and with a FHLB quarterly call option currently available, and one advance of $ 50.0 million with a fixed rate of 2.57 % and with a FHLB quarterly call option that currently available.

The $ 165.0 million in advances due in 2029 consists of one $ 50.0 million advance with a fixed rate of 1.98 % with a FHLB quarterly call option in May 2022, one $ 50.0 million advance with a fixed rate of 1.75 % with a FHLB quarterly call option beginning in August 2021, one $ 25.0 million advance with a fixed rate of 1.52 % with a FHLB quarterly call option currently available, and one advance of $ 40.0 million with a fixed rate of 1.02 % and with a FHLB quarterly call option currently available.

The $ 100.0 million in advances due in 2028 consists of 

one $ 50.0 million advance with a fixed rate of 2.34 % and a FHLB quarterly call option currently avavilable and one $ 50.0 million advance with a fixed rate of 2.57 % and a FHLB quarterly call option currently available.

The $ 165.0 million in advances due in 2029 consists of one $ 50.0 million advance with a fixed rate of 1.98 % with a FHLB quarterly call option in May 2022, one $ 50.0 million advance with a fixed rate of 1.75 % with a FHLB quarterly call option currently available, one $ 25.0 million advance with a fixed rate of 1.52 % with a FHLB quarterly call option currently available, and one advance of $ 40.0 million with a fixed rate of 1.02 % and with a FHLB quarterly call option currently available.

The Company selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances.

The Company’s borrowings from the FHLB are limited to 80 % of the carrying value of unencumbered one- to four-family mortgage loans, 75 % of the carrying value of multi-family loans and 64 % of the carrying value of home equity loans.

In addition, these advances were collateralized by FHLB stock of $ 24.4 million at September 30, 2021 and $ 26.7 million at December 31, 2020, respectively.

The Company’s borrowings from the FHLB are limited to 80 % of the carrying value of unencumbered one - to four -family mortgage loans, 75 % of the carrying value of multi-family loans and 64 % of the carrying value of home equity loans.

In addition, these advances were collateralized by FHLB stock of $ 24.4  million at March 31, 2022 and 

December 31, 2021 , respectively.

In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

Note 8 – Regulatory Capital

Note 7  

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.

As required by applicable legislation, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.

A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.

The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement.

The 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.

As required by applicable legislation, the federal banking agencies were required to develop a “Community Bank Leverage Ratio”

(the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. 

A “qualifying community bank”

that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized”

under Prompt Corrective Action statutes. 

The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement.

The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%.

Pursuant to Section 4012 of the CARES Act and related interim final rules, the Community Bank Leverage Ratio will be 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

The Community Bank Leverage Ratio is currently 

A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time.

7 unchanged sentences

The minimum captial conservation buffer is 2.5%.

As of September 30, 2021, the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement.

There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.

As of March 31, 2022 , the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement.

There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.

The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and to regulatory notification requirements for dividends that do not require prior regulatory approval.

The actual and required capital amounts and ratios for the Bank as of September 30, 2021 and December 31, 2020 are presented in the table below:

September 30, 2021

Minimum Capital

Adequacy with

Capital Buffer

Capitalized Under

Prompt Corrective

Action Provisions

The actual and required capital amounts and ratios for the Bank as of March 31, 2022 and December 31, 2021 are presented in the tables below:

March 31, 2022

For Capital Adequacy Purposes

Minimum Capital Adequacy with Capital Buffer

To Be Well-Capitalized Under Prompt Corrective Action Provisions

(Dollars In Thousands)

1 unchanged sentence

Consolidated Waterstone Financial, Inc.

436,674  

28.96 %  

120,635  

8.00 %  

158,333  

10.50 %  

Waterstone Bank

Tier 1 Capital (to risk-weighted assets)

399,776  

26.51 %  

120,627  

8.00 %  

158,322  

10.50 %  

150,783  

Tier I Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

419,769  

27.84 %  

90,476  

6.00 %  

128,174  

8.50 %  

Waterstone Bank

382,871  

25.39 %  

90,470  

6.00 %  

128,166  

8.50 %  

120,627  

Common Equity Tier 1 Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

419,769  

27.84 %  

67,857  

4.50 %  

105,555  

7.00 %  

Waterstone Bank

Tier 1 Capital (to average assets)

382,871  

25.39 %  

67,852  

4.50 %  

105,548  

7.00 %  

98,009  

Tier I Captial (to average assets)

Consolidated Waterstone Financial, Inc.

419,769  

19.54 %  

85,920  

4.00 %  

Waterstone Bank

382,871  

17.82 %  

85,920  

4.00 %  

107,401  

State of Wisconsin (to total assets)

Waterstone Bank

December 31, 2020

Minimum Capital

Adequacy with

Capital Buffer

Capitalized Under

Prompt Corrective

Action Provisions

382,871  

19.17 %  

119,838  

6.00 %  

December 31, 2021  

For Capital Adequacy Purposes

Minimum Capital Adequacy with Capital Buffer

To Be Well-Capitalized Under Prompt Corrective Action Provisions

(Dollars In Thousands)

1 unchanged sentence

Consolidated Waterstone Financial, Inc.

$ 448,818  

29.01 %  

$ 123,766  

8.00 %  

$ 162,443  

10.50 %  

Waterstone Bank

Tier 1 Capital (to risk-weighted assets)

394,540  

25.52 %  

123,695  

8.00 %  

162,350  

10.50 %  

154,619  

Tier I capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

433,040  

27.99 %  

92,825  

6.00 %  

131,502  

8.50 %  

Waterstone Bank

378,762  

24.50 %  

92,771  

6.00 %  

131,426  

8.50 %  

123,695  

Common Equity Tier 1 Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

433,040  

27.99 %  

69,619  

4.50 %  

108,296  

7.00 %  

Waterstone Bank

Tier 1 Capital (to average assets)

378,762  

24.50 %  

69,579  

4.50 %  

108,233  

7.00 %  

100,502  

Tier I Captial (to average assets)

Consolidated Waterstone Financial, Inc.

433,040  

19.29 %  

89,774  

4.00 %  

Waterstone Bank

378,762  

16.88 %  

89,774  

4.00 %  

112,218  

State of Wisconsin (to total assets)

Waterstone Bank

Note 9 – Income Taxes

Income tax expense totaled $ 18.2 million for the nine months ended September 30, 2021 compared to $ 17.8 million during the nine months ended September 30, 2020.

Income tax expense was recognized on the statement of income during the nine months ended September 30, 2021 at an effective rate of 23.8 % of pretax income compared to 25.0 % during the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, the Company recorded a $ 949,000 return to provision income tax adjustment as state tax apportionment shifted states based on the final 2020 tax returns.

Note 10– Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

378,762  

17.14 %  

132,572  

6.00 %  

Note 8  

Income tax expense totaled $ 1.5 million for the three months ended March 31, 2022 compared to $ 6.9 million during the three months ended March 31, 2021 .

Income tax expense was recognized on the statement of income during the three months ended March 31, 2022 at an effective rate of 

22.5 % of pretax income compared to 

24.4 % during the three months ended March 31, 2021 . 

Note 9  

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.

2 unchanged sentences

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

September 30, 2021

March 31, 2022

December 31, 2021

2 unchanged sentences

Commitments to extend credit under amortizing loans (1)

$ 61,559  

$ 48,686  

Commitments to extend credit under home equity lines of credit (2)

11,347  

11,990  

Unused portion of construction loans (3)

43,419  

50,303  

Unused portion of business lines of credit

18,047  

17,916  

Standby letters of credit

11 unchanged sentences

The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of September 30, 2021 and December 31, 2020.

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of 

December 31, 2021 . 

Please see Note 3 - Loans Receivable for discussion on the allowance for credit losses - unfunded commitments.  

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages.

The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected.

The Company has only been required to make insignificant repurchases as a result of breaches of these representations and warranties.

The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions.

The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met.

With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period.

Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages, historical experience has resulted in insignificant losses and repurchase activity.

The Company's reserve for losses related to these recourse provisions totaled $ 2.8 million and $ 2.9 million as of September 30, 2021 and December 31, 2020, respectively.

In the normal course of business, the Company, or its subsidiaries, are involved in various legal proceedings.

Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages, 

historical experience has resulted in insignificant losses and repurchase activity.

The Company's reserve for losses related to these recourse provisions totaled $ 1.9  million and $ 2.1 million as of March 31, 2022 and December 31, 2021 , respectively.

In the normal course of business, the Company, or its 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.

Note 11 – Derivative Financial Instruments

Note 10  

Derivative Financial Instruments

Mortgage Banking Derviatives

In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.

Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans to third party investors.

It is the Company’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 September 30, 2021, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $ 724.0 million and interest rate lock commitments with an aggregate notional amount of approximately $ 482.0 million.

The fair value of the forward commitments to sell mortgage loans at September 30, 2021 included a gain of $ 3.7 million that is reported as a component of other assets on the Company's consolidated statement of financial condition.

The fair value of the interest rate locks at September 30, 2021 included a gain of $ 3.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition.

At December 31, 2020, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $ 779.9 million and interest rate lock commitments with an aggregate notional amount of approximately $ 486.2 million.

The fair value of the forward commitments to sell mortgage loans at December 31, 2020 included a loss of $ 5.1 million that is reported as a component of other liabilities on the Company's consolidated statement of financial condition.

The fair value of the interest rate locks at December 31, 2020 included a gain of $ 11.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition.

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.  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 being a hedge relationship.  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 directly in earnings.  The Company does not use derivatives for speculative purposes.

Derivative Loan Commitments

Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding.

The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market.

A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates.

If interest rates increase, the value of these loan commitments decreases.

Conversely, if interest rates decrease, the value of these loan commitments increases.

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery”

and “best efforts”

forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery”

contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date.

If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off”

fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts”

contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes.

Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

Interest Rate Swaps

The Company may offer derivative contracts to its customers in connection with their risk management needs.

The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third -party dealer through back-to-back swaps.

These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. 

Consequently, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to current earnings during the period in which the changes occurred.

The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities on the Company's consolidated statement of financial condition, respectively, in equal amounts for these transactions.

The following tables presents the outstanding notional balances and fair values of outstanding derivative instruments:

March 31, 2022

Derivatives not designated as Hedging Instruments

Notional Amount

Balance Sheet Location

(In Millions)

Forward commitments

$ 502.7  

Other liabilities

Interest rate locks

Other liabilities

Interest rate swaps

Other liabilities

December 31, 2021

Derivatives not designated as Hedging Instruments

Notional Amount

Balance Sheet Location

(In Millions)

Forward commitments

$ 571.5  

Other liabilities

Interest rate locks

Other liabilities

Interest rate swaps

Other liabilities

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.

10 unchanged sentences

The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third -party dealer through back-to-back swaps.

These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment.

The aggregate amortizing notional value of back-to-back swaps with various commercial borrowers was $ 105.8 million at September 30, 2021 and $ 107.5 million at December 31, 2020.

The Company receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers.

These swaps mature in December 2029 to June 2037 .

The back-to-back swaps mature in December 2029 to June 2037.

Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements.

These commercial borrower swaps were reported as a component of other assets on the Company's consolidated statement of financial condition of $ 1.6 million as of September 30, 2021 and $ 3.9 million as of December 31, 2020.

As of September 30, 2021 and December 31, 2020, no back-to-back swaps were in default.

The aggregate amortizing notional value of back-to-back swaps with dealer counterparties was $ 105.8 million as of September 30, 2021 and $ 107.5 million as of December 31, 2020.

As of March 31, 2022  and December 31, 2021 , 

no  back-to-back swaps were in default. 

The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties.

These swaps maturity dates range from December 2029 to June 2037 .

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported as a component of other liabilities on the Company's consolidated statement of financial condition of $ 1.6 million as of September 30, 2021 and $ 3.9 million as of December 31, 2020.

No right of offset existed with dealer counterparty swaps as of September 30, 2021 and December 31, 2020.

Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank. 

No  right of offset existed with dealer counterparty swaps as of March 31, 2022 and December 31, 2021 . 

All changes in the fair value of these instruments are recorded in other non-interest income.

The Company pledged $ 1.9 million in cash and cash equivalents to secure its obligation under these contracts at September 30, 2021 and $ 7.2 million in mortgage backed securities at December 31, 2020.

Note 12 – Earnings Per Share

The Company pledged no cash at March 31, 2022 and $ 1.9  million in cash at December 31, 2021 .

Note 11  

Earnings Per Share

Earnings per share are computed using the two -class method.

1 unchanged sentence

Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares.

There were 45,000 and 124,000 antidilutive shares of common stock for the three months ended September 30, 2021 and 2020 , respectively.

There were 50,000 and 123,000 antidilutive shares of common stock for the nine months ended September 30, 2021 and 2020, respectively.

There were 

87,000 and 

35,000 antidilutive shares of common stock for the three months ended March 31, 2022 and 2021 , respectively. 

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands, except per share amounts)

$ 5,291  

$ 21,344  

Weighted average shares outstanding

23,132  

23,735  

Effect of dilutive potential common shares

Diluted weighted average shares outstanding

$ 23,311  

$ 23,950  

Basic earnings per share

$ 0.23  

$ 0.90  

Diluted earnings per share

Note 13 – Fair Value Measurements

$ 0.23  

$ 0.89  

Note 12  

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.

8 unchanged sentences

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 statements of financial condition at their fair value on a recurring basis as of September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

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 statements of financial condition at their fair value on a recurring basis as of March 31, 2022 and December 31, 2021 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2021

March 31, 2022

(In Thousands)

1 unchanged sentence

Mortgage-backed securities

$ 16,911  

Collateralized mortgage obligations

Government sponsored enterprise issued

125,600  

Private-label issued

10,236  

Government sponsored enterprise bonds

Municipal securities

35,623  

Other debt securities

11,239  

Loans held for sale

154,440  

Mortgage banking derivative assets

7 unchanged sentences

Mortgage-backed securities

$ 19,488  

Collateralized mortgage obligations

Government sponsored enterpris issued

Private-label

Government sponsored enterprise issued

99,302  

Private-label issued

Government sponsored enterprise bonds

Municipal securities

43,494  

Other debt securities

11,341  

Loans held for sale

312,738  

Mortgage banking derivative assets

3 unchanged sentences

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:

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.

7 unchanged sentences

The change in fair value is recorded through an adjustment to the statement of comprehensive income.

Loans held for sale – The Company carries loans held for sale at fair value under the fair value option model.

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.

7 unchanged sentences

Interest rate swap assets/liabilities - The Company offers loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty.

The fair values of derivatives are based on valuation models using observable market data as of the measurement date.

Our derivatives are traded in an over-the-counter market where quoted market prices are not always available.

Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs.

The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position.

The fair values of derivatives are based on valuation models using observable market data as of the measurement date. 

Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. 

Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. 

The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services.

1 unchanged sentence

The change in fair value is recorded through an adjustment to the statement of operations, within other income and other expense.

The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2021 and 2020.

Nine months ended September 30,

The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during 2022  and 2021.

Three months ended March 31,

(In Thousands)

Mortgage derivative, net balance at the beginning of the period

$ 4,369  

$ 5,917  

Mortgage derivative gain, net

Mortgage derivative, net balance at the end of the period

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

$ 5,573  

$ 11,601  

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

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021 , and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2021

March 31, 2022

(In Thousands)

Real estate owned

Impaired mortgage servicing rights

Fair Value Measurements Using

1 unchanged sentence

(In Thousands)

Impaired loans, net (1)

Real estate owned

Impaired mortgage servicing rights

(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 September 30, 2021, there were no impaired loans.

At December 31, 2020, loans determined to be impaired with an outstanding balance of $ 208,000 were carried net of specific reserves of $ 23,000 for a fair value of $ 185,000 .

Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.

Real estate owned – On a non-recurring basis, real estate owned is recorded in our consolidated statements of financial condition at the lower of cost or fair value.

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.

There were no writedowns during the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, real estate owned totaled $ 148,000 and $ 322,000 , respectively.

Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights.

Mortgage servicing rights –

The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. 

The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights.

The model considers characteristics specific to the underlying mortgage portfolio, such as:

contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service.

Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy.

The Company records the mortgage servicing rights at the lower of amortized cost or fair value.

At September 30, 2021 , there was no impairment on mortgage servicing rights at and December 31, 2020 , there was $ 77,000 of impairment on mortgage servicing rights.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

Significant Unobservable

Fair Value at

September 30, 2021

Weighted Average

Mortgage banking derivatives, net

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. 

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2022 , the significant unobservable inputs used in the fair value measurements were as follows:

Significant Unobservable Input Value

Fair Value at  

(Dollars in Thousands)  

Mortgage banking derivatives

$ 5,573  

Pricing models

Pull through rate

17.9 %  

99.9 %  

Real estate owned

Market approach

Disount rates applied to appraisals

34.8 %  

December 31,  

Mortgage banking derivatives

Pricing models

Pull through rate

26.0 %  

99.8 %  

Real estate owned

Market approach

Discount rates applied to appraisals

34.8 %  

Mortgage servicing rights

Pricing models

Prepayment rate

43.4 %  

Discount rate

12.0 %  

Cost to service

$ 84.06  

$ 839.53  

108.37  

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

5 unchanged sentences

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

September 30, 2021

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

March 31, 2022

December 31, 2021

2 unchanged sentences

Cash and cash equivalents

Securities available-for-sale

Loans held for sale

$ 278,530  

$ 376,722  

Loans receivable

1,207,416  

1,221,756  

1,205,785  

1,210,854  

24,438  

Accrued interest receivable

Mortgage servicing rights

Mortgage banking derivative assets

Interest rate swap asset

Financial Liabilities

1,210,448  

1,210,412  

618,829  

591,583  

1,233,386  

1,233,478  

606,723  

626,755  

Advance payments by borrowers for taxes

10,759  

326,478  

314,575  

477,127  

499,120  

Accrued interest payable

Mortgage banking derivative liabilities

Interest rate swap liability

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

1 unchanged sentence

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

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

15 unchanged sentences

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 September 30, 2021 and December 31, 2020.

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

Interest Rate Swap Assets and Liabilities

The carrying value and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract.

This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

Note 14 – Segment Reporting

The fair value of the Company’s commitments to extend credit was not material at March 31, 2022 and December 31, 2021 .

Note 13  

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.

6 unchanged sentences

Community Banking

The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin.

Within this segment, the following products and services are provided:

The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. 

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;

7 unchanged sentences

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 21 states with the ability to lend in 48 states.

Mortgage banking products and services are provided by offices in 23  states with the ability to lend in 48 states.

Presented below is the segment information:

As of or for the three months ended September 30, 2021

Holding Company and

(In Thousands)

Net interest income (expense)

Provision (credit) for loan losses

Net interest income (expense) after provision for loan losses

Noninterest income

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

Occupancy, office furniture and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

Total noninterest expenses

Income before income taxes

Income tax expense

As of or for the three months ended September 30, 2020

Holding Company and

As of or for the three months ended March 31, 2022

(In Thousands)

Net interest income (expense)

Provision for loan losses

Net interest income (expense) after provision for loan losses

Net interest income

$ 11,652  

$ 11,864  

Provision (credit) for credit losses

( 140 )  

Net interest income after provision for credit losses

11,792  

11,940  

Noninterest income:

28,604  

( 218 )  

29,818  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

20,438  

( 115 )  

25,535  

Occupancy, office furniture and equipment

4 unchanged sentences

Loan processing expense

( 41 )  

Total noninterest expenses

Income before income taxes

Income tax expense

As of or for the nine months ended September 30, 2021

Holding Company and

27,279  

( 141 )  

34,935  

Income (loss) before income taxes (benefit)

( 48 )  

Income tax expense (benefit)

( 12 )  

Net income (loss)

$ 4,260  

$ 1,067  

$ ( 36 )  

$ 5,291  

$ 1,950,664  

$ 227,550  

$ ( 173,600 )  

$ 2,004,614  

As of or for the three months ended March 31, 2021

(In Thousands)

Net interest income (expense)

$ 14,247  

$ ( 350 )  

$ 13,952  

Provision (credit) for loan losses

( 1,100 )  

Net interest income (expense) after provision for loan losses

15,347  

( 380 )  

15,022  

Noninterest income:

55,035  

( 79 )  

56,199  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

29,262  

( 114 )  

34,123  

Occupancy, office furniture and equipment

2 unchanged sentences

Professional fees

( 524 )  

Real estate owned

( 12 )  

Loan processing expense

Total noninterest expenses

35,575  

( 36 )  

43,000  

Income before income taxes

Income tax expense

As of or for the nine months ended September 30, 2020

Holding Company and

19,080  

28,221  

Income tax expense (benefit)

$ 7,343  

$ 13,984  

$ 21,344  

$ 2,123,366  

$ 411,750  

$ ( 346,105 )  

$ 2,189,011  

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, including employment prospects, that are different than expected;

the effects of any pandemic, including COVID-19, and related government actions;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or the origination levels in our lending business, or increase the level of defaults, losses or prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

adverse changes in the securities or secondary mortgage markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

changes in monetary or fiscal policies of the U.S.

Government, including policies of the U.S.

Treasury and the Federal Reserve Board;

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

our ability to enter new markets successfully and capitalize on growth opportunities;

our ability to successfully integrate acquired entities;

decreased demand for our products and services;

changes in tax policies or assessment policies;

the inability of third-party providers to perform their obligations to us;

changes in consumer demand, spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

our ability to retain key employees;

cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;

technological changes that may be more difficult or expensive than expected;

the ability of third-party providers to perform their obligations to us;

the effects of any federal government shutdown;

the effects of gobal or national war, conflict or acts of terrorism;

the ability of the U.S.

Government to manage federal debt limits;

significant increases in our loan losses;

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, 2021).

The risks included here are not exhaustive.

Other sections of this report may include additional factors which could adversely affect our business and financial performance.

New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements.

Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

The following discussion and analysis is presented to assist the reader in understanding and evaluating 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, 2022 and 2021 and the financial condition as of March 31, 2022 compared to the financial condition as of December 31, 2021.

As described in the notes to the unaudited consolidated financial statements, we have two reportable segments:

community banking and mortgage banking.

The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin.

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, 2022 and 2021, which focuses on noninterest income and noninterest expenses.

We have also provided a discussion of the consolidated operations of the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.

Significant Items

There were no significant items that impacted earnings for the three months ended March 31, 2022 and 2021. 

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale.

While some industries have been impacted more severely than others, all businesses have been impacted to some degree.

Conditions have appeared to improve and our businesses remain fully operational.

We continue to monitor the degree and severity of the pandemic and will react to future changes in current environment.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended March 31, 2022 and 2021

Net income totaled $4.3 million for the three months ended March 31, 2022 compared to $7.3 million for the three months ended March 31, 2021.

Net interest income decreased $2.6 million to $11.7 million for the three months ended March 31, 2022 compared to $14.2 million for the three months ended March 31, 2021. 

Interest income on loans decreased as replacement rates and average balances were lower than in the prior year. Offsetting the decrease in interest income on loans, interest expense on deposits decreased as replacement rates decreased and interest income on mortgage-related securities increased due to the increase in the average balance.

There was a provision for credit losses - loans of $16,000 for the three months ended March 31, 2022 compared to a $1.1 million negative provision for loan losses for the three months ended March 31, 2021.

During the three months ended March 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.  There was a negative provision for credit losses - unfunded commitments of $157,000 for the three months ended March 31, 2022

Total noninterest income increased $189,000 due primarily to an increase in a gain from death benefit received on one bank owned life insurance policy during the three months ended March 31, 2022

Compensation, payroll taxes, and other employee benefits expense increased $237,000 to $5.2 million primarily due to an increase in health insurance expense and Employee Stock Ownership Plan expense as the average stock price increased compared to the quarter ending March 31, 2021.

Other noninterest expense decreased $160,000 as certain loan-related expenses decreased.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2022 and 2021

Net income totaled $1.1 million for the three months ended March 31, 2022 compared to $14.0 million for the three months ended March 31, 2021.

We originated $708.5 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended March 31, 2022, which represents a decrease of $406.6 million, or 36.5%, from the $1.12 billion originated during the three months ended March 31, 2021.

The decrease in loan production volume was driven by a $328.7 million, or 67.1%, decrease in refinance products as mortgage rates have increased.

Mortgage purchase products decreased $77.9 million, or 12.5%, due to inventory constraints in the market.

Total mortgage banking noninterest income decreased $26.4 million, or 48.0%, to $28.6 million during the three months ended March 31, 2022 compared to $55.0 million during the three months ended March 31, 2021. 

The decrease in mortgage banking noninterest income was related to a 36.5% decrease in volume and a 17.6% decrease in gross margin on loans originated and sold for the three months ended March 31, 2022 compared to March 31, 2021. 

Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations.

The gross margin on loans originated and sold contraction reflects decreased industry demand due to the increased competition from mortgage orginators.

We sell loans on both a servicing-released and a servicing-retained basis. 

Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing. 

Additionally, our overall margin can be affected by 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 77.3% of total originations during the three months ended March 31, 2022, compared to 56.1% of total originations during the three months ended March 31, 2021, respectively, as refinance demand decelerated due to an increase in interest rates over the past year. 

The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 24.5% and 75.5% of all loan originations, respectively, during the three months ended March 31, 2022, compared to 21.0% and 79.0% of all loan originations, respectively, during the three months ended March 31, 2021.

Total compensation, payroll taxes and other employee benefits decreased $8.8 million, or 30.2%, to $20.4 million for the three months ended March 31, 2022 compared to $29.3 million for the three months ended March 31, 2021. 

The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased.

Professional fees increased $862,000 to $338,000 during the quarter ended March 31, 2022 compared to $524,000 of income during the quarter ended March 31, 2021.

The increase related to a countersuit settlement received during the quarter ended March 31, 2021.

Other noninterest expense decreased $372,000 to $2.3 million during the quarter ended March 31, 2022 compared to $2.7 million during the quarter ended March 31, 2021.

The decrease related to a decrease in the amortization expense on mortgage servicing rights due to the bulk sale of mortgage servicing rights during 2021. 

Consolidated Waterstone Financial, Inc.

Results of Operations

Three months ended March 31,

(Dollars In Thousands, except per share amounts)

Earnings per share - basic

Earnings per share - diluted

Annualized return on average assets

Annualized return on average equity

Net Interest Income

Average Balance Sheets, Interest and Yields/Costs

The following table sets 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,

Average Balance

(Dollars in Thousands)

Interest-earning assets:

Loans receivable and held for sale (1)

Mortgage related securities (2)

Debt securities, federal funds sold and short-term investments (2)

Total interest-earning assets

Noninterest-earning assets

Liabilities and equity

Interest-bearing liabilities:

Demand accounts

Money market and savings accounts

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Noninterest-bearing liabilities

Non interest-bearing deposits

Other noninterest-bearing liabilities

Total noninterest-bearing liabilities

Total liabilities

Total liabilities and equity

Net interest income / Net interest rate spread (3)

taxable equivalent adjustment

Net interest income, as reported

Net interest-earning assets (4)

Net interest margin (5)

Tax equivalent effect

Net interest margin on a fully tax equivalent basis

Average interest-earning assets to average interest-bearing liabilities

Interest income includes net deferred loan fee amortization income of $195,000 and $604,000 for the three months ended March 31, 2022 and 2021, respectively.

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

Interest income from tax-exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended March 31, 2022 and 2021.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 0.72% and 1.30% for the three months ended March 31, 2022 and 2021, respectively.

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.

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

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

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,

2022 versus 2021

Increase (Decrease) due to

(In Thousands)

Net interest income (expense)

Provision for loan losses

Net interest income (expense) after provision for loan losses

Interest income:

Loans receivable and held for sale(1) (2)

Mortgage related securities (3)

Other earning assets (3)

Total interest-earning assets

Interest expense:

Demand accounts

Money market and savings accounts

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Net change in net interest income

______________

Interest income includes net deferred loan fee amortization income of $195,000 and $604,000 for the three months ended March 31, 2022 and 2021, respectively.

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

Includes available for sale securities.

Average balance of available for sale securities is based on amortized historical cost.

Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended March 31, 2022 and March 31, 2021.

Net interest income decreased $2.1 million, or 15.0%, to $11.9 million during the three months ended March 31, 2022 compared to $14.0 million during the three months ended March 31, 2021.

Interest income on loans decreased $3.1 million due primarily to a $295.4 million, or 17.8%, decrease in average loans as payoffs continue to outpace originations as interest rates are increasing and a four basis point decrease in average yield on loans as higher rate loans continued to refinance over the past year.

The decrease in average loan balance was driven by an decrease of $142.2 million, or 10.6%, in the average balance of loans held in portfolio along with a $153.2 million, or 49.4%, decrease in the average balance of loans held for sale.

Interest expense on time deposits decreased $705,000, or 56.0%, primarily due to a 35 basis point decrease in average cost of time deposits.

Additionally, the average balance of time deposits decreased $95.0 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts decreased $37,000, or 15.0%, due primarily to a 11 basis point decrease in average cost of money market, savings, and escrow accounts.

Partially offsetting the decrease in average cost, the average balance increased $90.0 million. 

Interest expense on borrowings decreased $113,000, or 4.5%, due to a $42.4 million decrease in the average balance of borrowings during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 as $155.0 million in long-term FHLB borrowings were paid off during the three months ended March 31, 2022.

Offsetting the decrease in average balance, the cost of borrowings increased 10 basis points to 2.20% during the three months ended March 31, 2022, compared to 2.10% during the three months ended March 31, 2021 as the short-term repurchase rates increased with the federal funds rate hike.  

Provision for Credit Losses

The Company adopted ASC Topic 326 as of January 1, 2022.

The Company calculated the current quarter allowance using the CECL model on January 1, 2022, which resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses.

Additionally, there was a $1.4 million opening balance adjustment to record an allowance for credit losses on unfunded loan commitments, which is presented in Other Liabilities on the Consolidated Statements of Financial Condition.

Net of tax impact, the adoption of the CECL model resulted in a $1.4 million reduction to retained earnings.

There was a provision for credit losses - loans of $81,000 for the three months ended March 31, 2022 compared to a $1.1 million negative provision for loan losses for the three months ended March 31, 2021.

During the three months ended March 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.There was a negative provision for credit losses - unfunded commitments of $157,000 for the three months ended March 31, 2022

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 credit 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 Credit Loss" section.

Noninterest Income

Three months ended March 31,

(Dollars In Thousands)

Service charges on loans and deposits

Increase in cash surrender value of life insurance

Mortgage banking income

Total noninterest income

Total noninterest income decreased $26.4 million, or 46.9%, to $29.8 million during the three months ended March 31, 2022 compared to $56.2 million during the three months ended March 31, 2021.

The decrease resulted primarily from an decrease in mortgage banking noninterest income.

The decrease in mortgage banking income was primarily the result of a decrease in loan origination volume and gross margin on loans originated and sold.

Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $411.0 million, or 37.1%, to $698.1 million during the three months ended March 31, 2022 compared to $1.11 billion during the three months ended March 31, 2021. Gross margin on loans originated and sold decreased 17.6% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

Service charges on loans and deposits decreased primarily due to a decrease in loan prepayment fees and an increase net fraud losses.

The decrease in other noninterest income was due primarily to a decrease in mortgage servicing fee income as the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third parties during third quarter 2021.

As of March 31, 2022 and March 31, 2021, the Company maintained servicing rights related to $301.3 million and $1.25 billion, respectively, in loans previously sold to third parties.

Offsetting the decreases, there was a $340,000 increase in gain from death benefit received on one bank owned life insurance policy during the three months ended March 31, 2022 compared to none during the three months ended March 31, 2021

Noninterest Expenses

Three months ended March 31,

(Dollars In Thousands)

Compensation, payroll taxes, and other employee benefits

6 unchanged sentences

Total noninterest expenses

Income before income taxes

Income tax expense

Note 15 – Leases

The Company has entered into operating lease agreements for two of its community banking branch locations, all of its mortgage banking office locations, and some of its office equipment.

The leases have fixed terms defined regarding the payments and length.

The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of financial condition.

Some of the leases included options to extend the leases.

These options are reviewed and factored into the length of the lease if the option is expected to be extended.

Leases did not contain an implicit rate;

therefore, the Company used the incremental borrowing rates for the discount rate.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three or nine months ended September 30, 2021 and 2020.

At September 30, 2021, the Company had lease liabilities totaling $ 6.3 million and right-of-use assets totaling $ 5.8 million related to these leases.

Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively, on the consolidated statements of financial condition.

The cost components of our operating leases were as follows for the three and nine months ended September 30, 2021 and 2020:

Three months ended September 30,

Nine months ended September 30,

Total noninterest expenses decreased $8.1 million, or 18.8%, to $34.9 million during the three months ended March 31, 2022 compared to $43.0 million during the three months ended March 31, 2021.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $8.8 million, or 30.2%, to $20.4 million during the three months ended March 31, 2022.

Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $237,000, or 4.8%, to $5.2 million during the three months ended March 31, 2022.

The increase was primarily due to increases in health insurance expense and Employee Stock Ownership Plan expense as the average stock price increased compared to the quarter ending March 31, 2021.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $289,000 to $1.3 million during the three months ended March 31, 2022, primarily resulting from lower rent expense.

Occupancy, office furniture and equipment expense at the community banking segment decreased $88,000 to $937,000 during the three months ended March 31, 2022.

The decrease was due primarily to decreased snow removal expense and repairs expense.

Advertising expense increased $81,000, or 9.8%, to $905,000 during the three months ended March 31, 2022.

This was primarily due to an increase at the mortgage banking segment in an effort to increase new customers. 

Data processing expense increased $231,000, or 23.8%, to $1.2 million during the three months ended March 31, 2022.

This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.

Professional fees increased $776,000 to $461,000 during the three months ended March 31, 2022.

The increase related to receiving a countersuit settlement at the mortgage banking segment during the quarter ended March 31, 2021.

Other noninterest expense decreased $310,000, or 9.8%, to $2.9 million during the three months ended March 31, 2022.  

The decrease related to a decrease in the amortization expense on mortgage servicing rights due to the bulk sale of mortgage servicing rights during 2021. Offsetting the decrease at the mortgage banking segment, other noninterest expenses increased at the community banking segment as certain loan expenses increased during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Income tax expense totaled $1.5 million for the three months ended March 31, 2022 compared to $6.9 million during the three months ended March 31, 2021.

Income tax expense was recognized on the statement of income during the three months ended March 31, 2022 at an effective rate of 22.5% of pretax income compared to 24.4% during the three months ended March 31, 2021.

The decrease in the effective rate reflects an increase of permanent deductions relative to the amount of pretax income and additionally the 2022 rate reflects the lower state tax apportionment based on the final 2020 tax returns. 

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total Assets –

Total assets decreased by $211.2 million, or 9.5%, to $2.00 billion at March 31, 2022 from $2.22 billion at December 31, 2021.

The decrease in total assets primarily reflects a decrease in cash and cash equivalents and loans held for sale, partially offset by an increase in securities available for sale and other assets.

The total assets decrease reflects liability decreases in deposits and borrowings.

Cash and Cash Equivalents –

Cash and cash equivalents decreased $98.2 million, or 26.1%, to $278.5 million at March 31, 2022, compared to $376.7 million at December 31, 2021. 

The decrease in cash and cash equivalents primarily reflects the decrease of funding sources from deposits and borrowings.

Securities Available for Sale  –

Securities available for sale increased $22.9 million to $202.0 million at March 31, 2022.

The increase was primarily due to purchases of mortgage-related securities as the interest rates continue to rise.

The purchases are exceeding security paydowns for the year and maturities of debt securities.

Loans Held for Sale - Loans held for sale decreased $158.3 million to $154.4 million at March 31, 2022 due to the decrease of refinancing and purchase activity resulting from the increase in mortgage rates.

Loans Receivable - Loans receivable held for investment increased $1.6 million to $1.21 billion at March 31, 2022 The increase in total loans receivable was attributable to increases in each of the multi-family and commercial real estate loan categories.

The following table shows loan originations during the periods indicated.

Three months ended March 31,

(In Thousands)

Operating lease cost

Variable cost

Short-term lease cost

At September 30, 2021, the Company had leases that had not yet commenced, but will create approximately $ 31,000 of additional lease liabilities and right-of-use assets for the Company in the fourth quarter of 2021.

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

Nine months ended September 30, 2021

Real estate loans originated for investment:

One- to four-family

Construction and land

Commercial real estate

Total real estate loans originated for investment

Consumer loans originated for investment

Commerical business loans originated for investment

Total loans originated for investment

Allowance for Credit Losses - Loans - The allowance for loan losses increased $1.2 million to $16.9 million at March 31, 2022.

The increase primarily resulted from the CECL model adoption on January 1, 2022. 

The CECL calculation resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses.

Additionally, net recoveries totaled $616,000 for the quarter ended March 31, 2022, as one significant loan recovery payment was received during the quarter. With the adoption of CECL, estimated recoveries may be accounted for within the calculation and do not impact the provision for credit losses line item when cash is received. 

There was a provision for credit losses - loans of $81,000 for the three months ended March 31, 2022  During the three months ended March 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

See Note 3 - Loans Receivable of the notes to unaudited consolidated financial statements for further discussion on the allowance for credit losses.

Prepaid expenses and other assets  –

Total prepaid expenses and other assets increased $22.2 million to $67.3 million at March 31, 2022.

The increase was primarily due to an increase in funding receivable on loans sold at the mortgage banking segment and derivatives. 

Addtionally, deferred taxes increased as unrealized losses on available for sale securities increased due to rising interest rates.  

Deposits –

Total deposits decreased $22.9 million to $1.21 billion at March 31, 2022. 

The decrease was driven by a decrease of $35.0 million in time deposits offset by an increase of $8.4 million in money market and savings deposits and $3.7 million in demand deposits.

Borrowings –

Total borrowings decreased $150.6 million, or 31.6%, to $326.5 million at March 31, 2022.

The community banking segment paid off $155.0 million in long-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment increased a total of $4.4 million at March 31, 2022 from December 31, 2021.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $6.7 million to $10.8 million at March 31, 2022.

The increase was the result of payments received from borrowers for their real estate taxes and is seasonally normal, as balances increase during the course of the calendar year until real estate tax obligations are paid in the fourth quarter.

Other Liabilities - Other liabilities decreased $23.8 million to $44.7 million at March 31, 2022. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. 

The Company receives payments from borrowers for their real estate taxes during the course of the calendar year until real estate tax obligations are paid in the fourth quarter.

At the time at which the disbursements are made, the outstanding checks are classified as other liabilities in the statements of financial condition.

These amounts remain classified as other liabilities until settled.

Additionally, other liabilities decreased due to the payment of the special dividend in the first quarter.

Shareholders ’

Equity –

Shareholders' equity decreased $20.5 million to $412.3 million at March 31, 2022. 

Shareholders' equity decreased primarily due to the declaration of dividends, a decrease in the fair value of the security portfolio, the repurchase of stock and the adoption of CECL. Partially offsetting the decreases, there were increases due to the net income, additional paid-in capital as stock options were exercised and equity awards vested, and unearned ESOP shares vesting.

ASSET QUALITY

NONPERFORMING ASSETS

At December 31,

(Dollars in Thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

Initial recognition of right of use asset

Initial recognition of lease liabilities

Weighted average remaining lease term - operating leases, in years

Weighted average discount rate - operating leases

As of September 30, 2021, lease liability information for the Company is summarized in the following table.

Maturity analysis

Operating leases

Non-accrual loans:

One- to four-family

Over four-family

Construction and land

Commercial real estate

Total non-accrual loans

Real estate owned

Construction and land

Total real estate owned

Total nonperforming assets

Total non-accrual loans to total loans, net

Total non-accrual loans to total assets

Total nonperforming assets to total assets

All loans that are 90 days or more past due with respect to principal and interest are recognized as non-accrual.

Troubled debt restructurings that are non-accrual, either due to being past due greater than 90 days or which have not yet performed under the modified terms for a reasonable period of time, are included in the table above.

In addition, loans that are past due less than 90 days are evaluated to determine the likelihood of collectability given other credit risk factors such as early stage delinquency, the nature of the collateral or the results of a borrower review.

When the collection of all contractual principal and interest is determined to be unlikely, the loan is moved to non-accrual status and an updated appraisal of the underlying collateral is ordered. 

This process generally takes place when a loan is contractually past due between 60 and 89 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,

(In Thousands)

One year or less

More than one year through two years

More than two years through three years

More than three years through four years

More than four years through five years

More than five years

Total lease payments

Present value discount

Lease liability

Balance at beginning of period

Transfers to real estate owned

Returned to accrual status

Pricipal paydowns and other

Balance at end of period

Total non-accrual loans increased by $1.1 million, or 19.2%, to $6.6 million as of March 31, 2022 compared to $5.6 million as of December 31, 2021. 

The ratio of non-accrual loans to total loans receivable was 0.55% at March 31, 2022 compared to 0.46% at December 31, 2021. 

During the three months ended March 31, 2022, $1.8 million in loans were placed on non-accrual status.

Offsetting this activity, $766,000 in principal payments were received during the three months ended March 31, 2022.

Of the $6.6 million in total non-accrual loans as of March 31, 2022, $5.6 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.

A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan's original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset. 

Based upon these specific reviews, a total of $30,000 in cumulative partial net charge-offs have been recorded over the life of these loans as of March 31, 2022. 

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. 

There were no specific reserves as of March 31, 2022. 

The remaining $1.1 million of non-accrual loans were reviewed on an aggregate basis as of March 31, 2022.  

The outstanding principal balance of our five largest non-accrual loans as of March 31, 2022 totaled $4.5 million, which represents 68.1% of total non-accrual loans as of that date. 

These five loans have not had any cumulative life-to-date net charge-offs and no specific specific reserve was deemed necessary based on net realizable collateral value with respect to these five loans as of March 31, 2022.

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.

As of March 31, 2022 and December 31, 2021, there were no loans 90 or more days past due and still accruing interest. 

TROUBLED DEBT RESTRUCTURINGS

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

As of March 31, 2022

(In Thousands)

One- to four-family

As of December 31, 2021

(In Thousands)

One- to four-family

Commercial real estate

All troubled debt restructurings are considered to be impaired, are risk rated as either substandard or watch and are included in the internal risk rating tables disclosed in the notes to the unaudited consolidated financial statements.

Specific reserves have been established to the extent that collateral-based impairment analyses indicate that a collateral shortfall exists.

We do not participate in government-sponsored troubled debt restructuring programs. 

Our troubled debt restructurings are short-term modifications. 

Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both. 

Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court.

Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.

If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status. 

After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification.

The restructured loan will be classified as a troubled debt restructuring for at least the calendar year after the modification even after returning to a contractual/market rate and accrual status

LOAN DELINQUENCY

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

At December 31,

(Dollars in Thousands)

Loans past due less than 90 days

Loans past due 90 days or more

Total loans past due

Total loans past due to total loans receivable

Past due loans decreased by $679,000, or 9.6%, to $6.4 million at March 31, 2022 from $7.1 million at December 31, 2021. 

Loans past due less than 90 days decreased by $1.7 million, or 62.8%, primarily in the one- to four-family loan category during the three months ended March 31, 2022.

Loans past due 90 days or more increased by $1.0 million, or 23.2%, primarily in the one- to four-family loan category.

ALLOWANCE FOR CREDIT LOSSES - LOANS

At or for the Three Months

Ended March 31,

(Dollars in Thousands)

Balance at beginning of period

Provision (credit) for credit losses - loans

One- to four-family

Commercial real estate

Construction and land

Total charge-offs

One- to four-family

Commercial real estate

Construction and land

Total recoveries

Net recoveries

Allowance at end of period

Allowance for credit losses to non-accrual loans at end of period

Allowance for credit losses to loans receivable at end of period

Net recoveries to average loans outstanding (annualized)

Current year provision (credit) for credit losses - loans to net recoveries

Net recoveries (annualized) to beginning of the year allowance

(1) The Company adopted ASU 2016-13 as of January 1, 2022.

The 2021 amount presented is calculated under the prior accounting standard. 

The allowance for credit losses - loans increased $1.2 million to $16.9 million at March 31, 2022 from $15.8 million at December 31, 2021.

The increase primarily resulted from the CECL model adoption on January 1, 2022. 

The CECL calculation resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses.

We had net recoveries of $616,000, or 0.21% of average loans annualized, for the three months ended March 31, 2022, compared to net recoveries of $27,000, or 0.01% of average loans annualized, for the three months ended March 31, 2021.

Of the $616,000 in recoveries during the three months ended March 31, 2022, the majority of the activity related to loans secured by multi-family loan categories.

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 credit losses - loans 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 credit losses - loans.

The establishment of the amount of the allowance for credit loss 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, 2022, primary uses of cash and cash equivalents included:

$698.1 million in funding loans held for sale, $47.9 million for purchases of mortgage related securities, $155.0 million for payoffs of long-term borrowings, $17.2 million for cash dividends paid, $22.9 million for decrease in deposits, and $13.8 million for purchases of our common stock.

During the three months ended March 31, 2022, primary sources of cash and cash equivalents included:

$878.6 million in proceeds from the sale of loans held for sale, $9.0 million in principal repayments on mortgage related securities, $6.4 million in maturies of debt securities, and $5.3 million in net income.

During the three months ended March 31, 2021, primary uses of cash and cash equivalents included:

$1.11 billion in funding loans held for sale, $17.6 for short-term borrowings, $16.2 million for purchases of mortgage related securities, $4.8 million for cash dividends paid, $5.0 million for advance payments by borrowers for taxes, and $4.3 million to pay a legal settlement.

During the three months ended March 31, 2021, primary sources of cash and cash equivalents included:

$1.22 billion in proceeds from the sale of loans held for sale, $39.7 for net loan receivables decrease, $34.8 million from an increase in deposits, $11.0 million in principal repayments on mortgage related securities, and $21.3 million in net income.

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, 2022 and 2021, respectively, $278.5 million and $198.4 million of our assets were invested in cash and cash equivalents. 

At March 31, 2022, cash and cash equivalents were comprised of the following:

$247.9 million in cash held at the Federal Reserve Bank and other depository institutions and $30.7 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, 

advances from the FHLB, and repurchase agreements from other institutions.

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 FHLB which provide an additional source of funds.

At March 31, 2022, we had $320.0 million in long term advances from the FHLB with contractual maturity dates in 2027, 2028, and 2029. 

The 2027 advance has a contractual maturity date in December 2027.

There are two advances that have contractual maturities in 2028.

Two of the 2028 advance maturities have quarterly call options which began in June 2020 and September 2020.

There are four advances with contractual maturities in 2029.

Three advances have quarterly call options currently available and the other advance has an option beginning in May 2022.

At March 31, 2022, we had outstanding commitments to originate loans receivable of $61.6 million. 

In addition, at March 31, 2022, we had unfunded commitments under construction loans of $43.4 million, unfunded commitments under business lines of credit of $18.0 million and unfunded commitments under home equity lines of credit and standby letters of credit of $12.7 million. 

At March 31, 2022, certificates of deposit scheduled to mature in one year or less totaled $511.5 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 FHLB advances, in order to maintain our level of assets.

However, we cannot assure that such borrowings would be available on attractive terms, or at all, if and when needed.

Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents and securities available-for-sale in order to meet funding needs.

In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

Waterstone Financial, Inc.

is a separate legal entity from WaterStone Bank and must provide for its own liquidity to pay dividends to its shareholders, repurchase shares of its common stock, and for other corporate purposes.

The primary source of liquidity for Waterstone Financial, Inc.

is dividend payments from WaterStone Bank.

The ability of WaterStone Bank to pay dividends is subject to regulatory restrictions.

At March 31, 2022, Waterstone Financial, Inc.

(on an unconsolidated basis) had liquid assets totaling $40.0 million.

Shareholders' equity decreased $20.5 million to $412.3 million at March 31, 2022. 

The Company's Board of Directors authorized a stock repurchase program in the fourth quarter of 2021.

As of March 31, 2022, the Company has 2.8 million shares remaining in the plan.  

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, 2022, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized”

under regulatory guidelines.

See “Notes to Unaudited Consolidated Financial Statements - Note 7 - Regulatory Capital.”

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

During the three months ended March 31, 2022, we repaid $155.0 million in FHLB long-term debt. 

See Note 6 - Borrowings of the notes to unaudited consolidated financial statements for additional information about the remaining maturities of our FHLB long-term debt.

Our commitments, contingent liabilities, and off-balance sheet a rrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

See Note 9 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information.

Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

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 FHLB.

These measures should reduce the volatility of our net interest income in different interest rate environments.

Income Simulation .

Simulation analysis is an estimate of our interest rate risk exposure at a particular point in time. 

At least quarterly we review the potential effect changes in interest rates may have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. 

Our most recent simulation uses projected repricing of assets and liabilities at March 31, 2022 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

As of March 31, 2022

Dollar Change

Percentage Change

At March 31, 2022, a 100 basis point instantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 8.08% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 5.56%.

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 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.

OTHER INFORMATION

Legal Proceedings

The information required by this item is set forth in Part I, Item 1, Note 10 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities.

There have been no material 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, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements