What changed in this filing

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Item 1. Financial Statements

2022-11-02 compared with 2022-08-03 · 632 added, 372 removed, 2070 unchanged (33% of the section changed)

3 unchanged sentences

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

June 30, 2022

September 30, 2022

December 31, 2021

66 unchanged sentences

Shareholders’

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at June 30, 2022 and at December 31, 2021, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at June 30, 2022 and at December 31, 2021, Issued - 22,733,766 at June 30, 2022 and 24,795,124 at December 31, 2021, Outstanding - 22,733,766 at June 30, 2022 and 24,795,124 at December 31, 2021

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at September 30, 2022 and at December 31, 2021, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at September 30, 2022 and at December 31, 2021, Issued and Outstanding - 22,318,471 at September 30, 2022 and 24,795,124 at December 31, 2021

Additional paid-in capital

18 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(In Thousands, except per share amounts)

7 unchanged sentences

Provision (credit) for credit losses

Net interest income after provision for loan losses

Net interest income after provision (credit) for credit losses

Noninterest income:

20 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(In Thousands)

16 unchanged sentences

$ 56,145  

$ 37,841  

See accompanying notes to unaudited consolidated financial statements.

6 unchanged sentences

(In Thousands, except per share amounts)

For the six months ended June 30, 2021

For the nine months ended September 30, 2021

Balances at December 31, 2020

20 unchanged sentences

( 4,659 )  

Balances at June 30, 2021

Balances at September 30, 2021

25,038  

4 unchanged sentences

(In Thousands, except per share amounts)

For the six months ended June 30, 2022

For the nine months ended September 30, 2022

Balances at December 31, 2021

22 unchanged sentences

( 45,171 )  

Balances at June 30, 2022

Balances at September 30, 2022

22,318  

6 unchanged sentences

Shareholders'

Income (Loss)

(In Thousands, except per share amounts)

For the three months ended June 30, 2021

Balances at March 31, 2021

25,230  

For the three months ended September 30, 2021

Balances at June 30, 2021

25,213  

18 unchanged sentences

( 3,504 )  

Balances at June 30, 2021

Balances at September 30, 2021

25,038  

4 unchanged sentences

(In Thousands, except per share amounts)

For the three months ended June 30, 2022

Balances at March 31, 2022

For the three months ended September 30, 2022

Balances at June 30, 2022

22,734  

16 unchanged sentences

( 7,246 )  

( 24,177 )  

Balances at June 30, 2022

Balances at September 30, 2022

22,318  

8 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30,

Nine months ended September 30,

(In Thousands)

6 unchanged sentences

Origination of mortgage servicing rights

Proceeds on sales of mortgage servicing rights

Gain on sale of loans held for sale

4 unchanged sentences

Increase in cash surrender value of life insurance

Decrease in derivative assets

(Increase) decrease in derivative assets

Decrease in accrued interest on deposits and borrowings

3 unchanged sentences

Net gain related to real estate owned

Gain on sale of mortgage servicing rights

Change in other assets and other liabilities, net

3 unchanged sentences

Purchases of:

Debt securities

Mortgage related securities

Bank Owned Life Insurance

Premises and equipment, net

Premises and equipment

Proceeds from:

9 unchanged sentences

Repayment of long-term debt

Proceeds from long-term debt

Net change in advance payments by borrowers for taxes

35 unchanged sentences

December 31, 2021 Annual Report on Form 10 -K.

Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 

Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 

or for any other period.

4 unchanged sentences

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 six months ended June 30, 2022 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

There were no significant subsequent events for the three and nine months ended September 30, 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

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates.

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in historical GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

20 unchanged sentences

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

June 30, 2022

September 30, 2022

(In Thousands)

28 unchanged sentences

46,846  

Other securities

$ 222,639  

35 unchanged sentences

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 June 30, 2022 , $ 317,000  of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At September 30, 2022 , $ 282,000  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 June 30, 2022 are shown below.

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

14 unchanged sentences

150,397  

Other securities

$ 222,639  

1 unchanged sentence

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:

June 30, 2022

September 30, 2022

Less than 12 months

20 unchanged sentences

25,578  

( 1,783 )  

( 212 )  

26,081  

Other debt securities

33 unchanged sentences

$ 89,342  

The Company reviews the investment securities portfolio on a quarterly basis to monitor securities in unrealized loss positions, which were comprised of  individual securities, to determine whether the impairment is due to credit-related factors or noncredit-related factors.

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

202  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 June 30, 2022 and December 31, 2021 , 

As of September 30, 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.

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 and 

six months ended June 30, 2022 and June 30, 2021 , there were no sales of securities.

nine months ended September 30, 2022 and September 30, 2021 , there were no sales of securities.

Note 3 - Loans Receivable

Loans receivable at June 30, 2022 and December 31, 2021 are summarized as follows:

June 30, 2022

Loans receivable at September 30, 2022 and December 31, 2021 are summarized as follows:

September 30, 2022

December 31, 2021

24 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 $ 776.4  million and $ 886.7  million at June 30, 2022 and December 31, 2021 , respectively, were pledged as collateral against $ 275.0 million and $ 475.0  million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at June 30, 2022 and December 31, 2021 .

Qualifying loans receivable totaling $ 893.6  million and $ 886.7  million at September 30, 2022 and December 31, 2021 , respectively, were pledged as collateral against $ 300.0 million and $ 475.0  million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 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 $ 2.7 million as of June 30, 2022  and $ 2.5  million as of December 31, 2021 . 

None of these loans were past due or considered impaired as of June 30, 2022 or December 31, 2021 , respectively.

An analysis of past due loans receivable as of June 30, 2022 and December 31, 2021 follows:

As of June 30, 2022

Loans outstanding to such parties were approximately $ 2.6 million as of September 30, 2022  and $ 2.5  million as of December 31, 2021 . 

None of these loans were past due or considered impaired as of September 30, 2022 or December 31, 2021 .

An analysis of past due loans receivable as of September 30, 2022 and December 31, 2021 follows:

As of September 30, 2022

1-59 Days Past Due (1)  

63 unchanged sentences

$ 1,205,785  

 Includes $ 49,000  and $ 43,000  at June 30, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

 Includes $ 74,000  and $ 43,000  at September 30, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

( 2 )   

Includes $ 8,000  and $ 347,000  at 

June 30, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

September 30, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

( 3 )   

Includes $ 1.4  million and $ 816,000  at 

June 30, 2022 and December 31, 2021 , respectively, which are on non-accrual status.

September 30, 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 and six months ended June 30, 2022 and the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 :

three and nine months ended September 30, 2022 and the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2021 :

One- to Four-Family  

6 unchanged sentences

(In Thousands)  

Six months ended June 30, 2022

Nine months ended September 30, 2022

Balance at beginning of period

4 unchanged sentences

$ 15,778  

Adoption of CECL

( 640 )  

5 unchanged sentences

( 254 )  

( 12 )  

Balance at end of period

4 unchanged sentences

$ 17,452  

Six months ended June 30, 2021

Nine months ended September 30, 2021

Balance at beginning of period

9 unchanged sentences

( 446 )  

( 215 )  

( 105 )  

( 13 )  

( 10 )  

Balance at end of period

8 unchanged sentences

(In Thousands)

Three months ended June 30, 2022

Three months ended September 30, 2022

Balance at beginning of period

7 unchanged sentences

( 189 )  

( 472 )  

( 44 )  

( 65 )  

Balance at end of period

4 unchanged sentences

$ 17,452  

Three months ended June 30, 2021

Three months ended September 30, 2021

Balance at beginning of period

9 unchanged sentences

( 490 )  

( 237 )  

( 66 )  

( 13 )  

( 10 )  

Balance at end of period

38 unchanged sentences

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 June 30, 2022 was $ 1.0 million.

The allowance for unfunded commitments at September 30, 2022 was $ 1.0 million.

Provision for Credit Losses :

2 unchanged sentences

Three months ended

Six months ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Nine months ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

(In Thousands)

6 unchanged sentences

$ ( 700 )  

$ ( 28 )  

Collateral Dependent Loans :

1 unchanged sentence

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 June 30, 2022 :

The following tables present collateral dependent loans by portfolio segment and collateral type as of September 30, 2022 :

One- to Four- Family

81 unchanged sentences

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 June 30, 2022 and December 31, 2021 :

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of September 30, 2022 and December 31, 2021 :

One to Four-Family

2 unchanged sentences

(In Thousands)

At June 30, 2022

At September 30, 2022

$ 5,018  

55 unchanged sentences

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 six months ended June 30, 2021.

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

(In Thousands)  

13 unchanged sentences

Credit Quality Information:

The following tables present total loans by risk categories and year of origination as of June 30, 2022 .

The following tables present total loans by risk categories and year of origination as of September 30, 2022 .

(In Thousands)  

One- to four-family

$ 124,694  

34 unchanged sentences

61,125  

14,307  

70,075  

Commercial Real Estate

24 unchanged sentences

The following presents data on troubled debt restructurings:

As of June 30, 2022

As of September 30, 2022

(Dollars in Thousands)

16 unchanged sentences

The following presents troubled debt restructurings by concession type:

As of June 30, 2022

As of September 30, 2022

Performing in accordance with modified terms

1 unchanged sentence

Interest reduction and principal forbearance

$ 1,000  

$ 1,345  

Interest reduction

11 unchanged sentences

There were 

one - to four -family loans modified as troubled debt restructurings with a total balance of $ 424,000  during the six months ended June 30, 2022 .

one - to four -family loans modified as troubled debt restructurings with a total balance of $ 424,000  during the nine months ended September 30, 2022 .

There was 

one - to four -family loan modified as a troubled debt restructuring with a balance of $ 575,000 during the six months ended June 30, 2021.

one - to four -family loan modified as a troubled debt restructuring with a balance of $ 1.3  million during the nine months ended September 30, 2021 .

There were 

no  loans modified as troubled debt restructurings during the three months ended June 30, 2022 and June 30, 2021, respectively. 

There were no troubled debt restructuring within the past twelve months for which there was a default during the three or six months ended June 30, 2022  and 

June 30, 2021 .

The following table presents data on non-accrual loans as of June 30, 2022 and December 31, 2021 :

June 30, 2022

no  loans modified as troubled debt restructurings during the three months ended September 30, 2022 . 

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 were no troubled debt restructuring within the past twelve months for which there was a default during the three or nine months ended September 30, 2022  and 

September 30, 2021 .

The following table presents data on non-accrual loans as of September 30, 2022 and December 31, 2021 :

September 30, 2022

December 31, 2021

13 unchanged sentences

0.26 %  

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 2.2 million and $ 1.4  million at June 30, 2022  and 

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 1.3 million and $ 1.4  million at September 30, 2022  and 

December 31, 2021 , respectively.

2 unchanged sentences

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

Six months ended June 30,

Nine months ended September 30,

(In Thousands)

8 unchanged sentences

$ 1,161  

During the six months ended June 30, 2022 , $ 1.45  billion in residential loans were originated for sale on a consolidated basis.

During the same period, sales of loans held for sale totaled $ 1.59  billion, generating mortgage banking income of $ 29.4  million.

The unpaid principal balance of loans serviced for others was $ 345.8 million and $ 204.8  million at June 30, 2022 and December 31, 2021 , respectively.

During the nine months ended September 30, 2022 , $ 2.12  billion in residential loans were originated for sale on a consolidated basis generating mortgage banking income of $ 83.7  million.

During the same period in the prior year, sales of loans held for sale totaled $ 2.31  billion, generating mortgage banking income of $ 150.6 million.

The unpaid principal balance of loans serviced for others was $ 378.7 million and $ 204.8  million at September 30, 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 $ 4.0 million at June 30, 2022 and $ 1.8  million at 

The fair value of mortgage servicing rights were $ 4.7 million at September 30, 2022 and $ 1.8  million at 

December 31, 2021 .

During the 

three and six months ended June 30, 2022  and 

June 30, 2021  the Company did not sell any mortgage servicing rights.

three and nine months ended September 30, 2022 , the Company did not sell any mortgage servicing rights.  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. 

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

3 unchanged sentences

Note 5  

At June 30, 2022 and December 31, 2021 , the aggregate balance of uninsured deposits of $250,000 or more was $ 332.4 million and $ 314.2 million, respectively.

At September 30, 2022 and December 31, 2021 , the aggregate balance of uninsured deposits of $250,000 or more was $ 318.4 million and $ 314.2 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 June 30, 2022 is as follows:

A summary of the contractual maturities of time deposits at September 30, 2022 is as follows:

(In Thousands)

8 unchanged sentences

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 $ 23.6 million and $ 27.4 million at June 30, 2022 and December 31, 2021 , respectively.

Such deposits amounted to $ 20.0 million and $ 27.4 million at September 30, 2022 and December 31, 2021 , respectively.

Note 6  

Borrowings consist of the following:

June 30, 2022

September 30, 2022

December 31, 2021

1 unchanged sentence

Repurchase agreements

$ 19,951  

5.88 %  

$ 2,127  

Federal Home Loan Bank, Chicago advances

50,000  

2.53 %  

Federal Home Loan Bank, Chicago advances maturing:

The short-term repurchase agreement represents the outstanding portion of a total $ 75.0  million commitment with one unrelated bank as of June 30, 2022 . 

50,000  

3.50 %  

50,000  

1.73 %  

50,000  

2.57 %  

255,000  

100,000  

1.87 %  

165,000  

$ 319,951  

2.57 %  

$ 477,127  

The short-term repurchase agreement represents the outstanding portion of a total $ 75.0  million commitment with one unrelated bank as of September 30, 2022 . 

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

1 unchanged sentence

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

The short-term repurchase agreement had a $ 6.1 million balance at June 30, 2022 and a $ 2.1 million balance at December 31, 2021 .

The short-term repurchase agreement had a $ 20.0 million balance at September 30, 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.

6 unchanged sentences

Under the master netting agreement, the Company is entitled to set off the collateral placed with a single counterparty against obligations owed to that counterparty.

The $ 50.0 million short term advance has a fixed rate of 2.53 % and has a contractual maturity date in October 2022.

The $ 50.0 million advance due in 2025  has a fixed rate of 3.50 % with a single call option in September 2024 and has a contractual maturity date in September 2025.

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

The $ 125.0 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 currently available, one $ 50.0 million advance with a fixed rate of 1.75 % with a FHLB quarterly call option currently available, and one $ 25.0 million advance with a fixed rate of 1.52 % with a FHLB quarterly call option currently available.

The $ 50.0 million advance due in 2028 has a fixed rate of 2.57 % with a FHLB quarterly call option currently available and has a contractual maturity date in September 2028.

The $ 100.0 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 currently available and 

one $ 50.0 million advance with a fixed rate of 1.75 % 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 $ 16.3  million at June 30, 2022 and $ 24.4  million at 

In addition, these advances were collateralized by FHLB stock of $ 15.8  million at September 30, 2022 and $ 24.4  million at 

December 31, 2021 , respectively.

23 unchanged sentences

The minimum capital conservation buffer is 2.5%.

As of June 30, 2022 , the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement.

As of September 30, 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 June 30, 2022 and December 31, 2021 are presented in the tables below:

June 30, 2022

The actual and required capital amounts and ratios for the Bank as of September 30, 2022 and December 31, 2021 are presented in the tables below:

September 30, 2022

For Capital Adequacy Purposes

4 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 411,947  

25.45 %  

$ 129,504  

8.00 %  

$ 169,974  

10.50 %  

Waterstone Bank

360,964  

22.30 %  

129,504  

8.00 %  

169,974  

10.50 %  

161,880  

Tier I Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

394,495  

24.37 %  

97,128  

6.00 %  

137,598  

8.50 %  

Waterstone Bank

343,512  

21.22 %  

97,128  

6.00 %  

137,598  

8.50 %  

129,504  

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

Consolidated Waterstone Financial, Inc.

394,495  

24.37 %  

72,846  

4.50 %  

113,316  

7.00 %  

Waterstone Bank

343,512  

21.22 %  

72,846  

4.50 %  

113,316  

7.00 %  

105,222  

Tier I Capital (to average assets)

Consolidated Waterstone Financial, Inc.

394,495  

20.32 %  

77,645  

4.00 %  

Waterstone Bank

343,512  

17.70 %  

77,645  

4.00 %  

97,057  

State of Wisconsin (to total assets)

Waterstone Bank

December 31, 2021

343,512  

17.45 %  

118,143  

6.00 %  

December 31, 2021  

For Capital Adequacy Purposes

4 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 448,818  

29.01 %  

$ 123,766  

8.00 %  

$ 162,443  

10.50 %  

Waterstone Bank

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

378,762  

24.50 %  

69,579  

4.50 %  

108,233  

7.00 %  

100,502  

Tier I Capital (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 8  

Income tax expense totaled $ 3.8 million for the six months ended June 30, 2022 compared to $ 12.8 million during the six months ended June 30, 2021 .

Income tax expense was recognized on the statement of income during the six months ended June 30, 2022 at an effective rate of 

22.1 % of pretax income compared to 

24.5 % during the six months ended June 30, 2021 . 

Note 9  

378,762  

17.14 %  

132,572  

6.00 %  

Note 8 –

Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

3 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

2 unchanged sentences

Commitments to extend credit under amortizing loans (1)

$ 57,800  

$ 48,686  

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

10,952  

11,990  

Unused portion of construction loans (3)

36,201  

50,303  

Unused portion of business lines of credit

17,318  

17,916  

Standby letters of credit

22 unchanged sentences

historical experience has resulted in insignificant losses and repurchase activity.

The Company's reserve for losses related to these recourse provisions totaled $ 1.8  million and $ 2.1 million as of June 30, 2022 and December 31, 2021 , respectively.

The Company's reserve for losses related to these recourse provisions totaled $ 2.0  million and $ 2.1 million as of September 30, 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 10  

Note 9 –

Derivative Financial Instruments

28 unchanged sentences

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

June 30, 2022

September 30, 2022

Derivatives not designated as Hedging Instruments

5 unchanged sentences

$ 497.0  

$ 12.4  

Other liabilities

$ 10.9  

Interest rate locks

32 unchanged sentences

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

As of June 30, 2022  and December 31, 2021 , 

As of September 30, 2022  and December 31, 2021 , 

no  back-to-back swaps were in default. 

1 unchanged sentence

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 June 30, 2022 and December 31, 2021 . 

No  right of offset existed with dealer counterparty swaps as of September 30, 2022 and December 31, 2021 . 

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

The Company pledged no cash at June 30, 2022 and $ 1.9  million in cash at December 31, 2021 .

Note 11  

The Company pledged no cash at September 30, 2022 and $ 1.9  million in cash at December 31, 2021 .

Note 10 –

Earnings Per Share

4 unchanged sentences

158,000 and 

36,100 antidilutive shares of common stock for the three months ended June 30, 2022 and 2021 , respectively. There were 

45,000 antidilutive shares of common stock for the three months ended September 30, 2022 and 2021 , respectively. There were 

127,000 and 

40,100 antidilutive shares of common stock for the six months ended 

June 30, 2021 and 2020, respectively.

50,000 antidilutive shares of common stock for the nine months ended September 30, 2022 and 2021 , respectively.

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(In Thousands, except per share amounts)

$ 5,270  

$ 19,000  

$ 18,552  

$ 58,238  

Weighted average shares outstanding

21,342  

23,785  

22,193  

23,790  

Effect of dilutive potential common shares

Diluted weighted average shares outstanding

$ 21,454  

$ 23,960  

$ 22,323  

$ 23,987  

Basic earnings per share

$ 0.25  

$ 0.80  

$ 0.84  

$ 2.45  

Diluted earnings per share

Note 12  

$ 0.25  

$ 0.79  

$ 0.83  

$ 2.43  

Note 11 –

Fair Value Measurements

10 unchanged sentences

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 June 30, 2022 and December 31, 2021 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

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, 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

June 30, 2022

September 30, 2022

(In Thousands)

1 unchanged sentence

Mortgage-backed securities

$ 13,917  

Collateralized mortgage obligations

Government sponsored enterprise issued

128,048  

Private-label issued

1 unchanged sentence

Municipal securities

33,458  

Other debt securities

11,146  

Other securities

Loans held for sale

186,049  

Mortgage banking derivative assets

13,868  

Interest rate swap assets

16,328  

Mortgage banking derivative liabilities

10,949  

Interest rate swap liabilities

16,328  

Fair Value Measurements Using

3 unchanged sentences

Mortgage-backed securities

$ 19,488  

Collateralized mortgage obligations

Government sponsored enterprise issued

99,302  

Private-label issued

1 unchanged sentence

Municipal securities

43,494  

Other debt securities

11,341  

Loans held for sale

312,738  

Mortgage banking derivative assets

32 unchanged sentences

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 2022  and 2021.

Three months ended June 30,

Six months ended June 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 September 30,

Nine months ended September 30,

(In Thousands)

5 unchanged sentences

$ 5,917  

Mortgage derivative (loss) gain, net

( 5,716 )  

Mortgage derivative gain (loss), net

( 683 )  

7 unchanged sentences

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 June 30, 2022 and December 31, 2021 , 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 September 30, 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

June 30, 2022

September 30, 2022

(In Thousands)

17 unchanged sentences

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 June 30, 2022 , the significant unobservable inputs used in the fair value measurements were as follows:

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2022  and 

December 31, 2021 , the significant unobservable inputs used in the fair value measurements were as follows:

Significant Unobservable Input Value

Fair Value at

(Dollars in Thousands)

Fair Value at  

September 30,

(Dollars in Thousands)  

Mortgage banking derivatives

$ 2,919  

Pricing models

Pull through rate

12.5 %  

99.7 %  

Real estate owned

1 unchanged sentence

Discount rates applied to appraisals

34.8 %  

December 31,  

Mortgage banking derivatives

1 unchanged sentence

Pull through rate

26.0 %  

99.8 %  

Real estate owned

1 unchanged sentence

Discount rates applied to appraisals

34.8 %  

Mortgage servicing rights

1 unchanged sentence

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.

6 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

2 unchanged sentences

Cash and cash equivalents

$ 72,941  

$ 376,722  

Loans receivable

1,354,465  

1,297,581  

1,205,785  

1,210,854  

15,750  

24,438  

Accrued interest receivable

1 unchanged sentence

Financial Liabilities

1,187,128  

1,185,598  

593,447  

592,151  

1,233,386  

1,233,478  

606,723  

626,755  

Advance payments by borrowers for taxes

24,084  

319,951  

307,758  

477,127  

499,120  

Accrued interest payable

3 unchanged sentences

Loans Receivable

The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the market place.

The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the marketplace.

Fair values are estimated for portfolios of loans with similar characteristics.

14 unchanged sentences

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 June 30, 2022 and December 31, 2021 .

Note 13  

The fair value of the Company’s commitments to extend credit was not material at September 30, 2022 and December 31, 2021 .

Note 12 –

Segment Reporting

20 unchanged sentences

Presented below is the segment information:

As of or for the three months ended June 30, 2022

As of or for the three months ended September 30, 2022

(In Thousands)

Net interest income

Net interest income (expense)

$ 15,507  

$ ( 155 )  

Provision (credit) for credit losses

$ 15,398  

Net interest income after provision for credit losses

Provision for credit losses

Net interest income (expense) after provision for credit losses

15,273  

( 253 )  

15,066  

Noninterest income:

20 unchanged sentences

( 1,770 )  

10,221  

Income tax expense (benefit)

Net income (loss)

( 470 )  

Net income (loss)

$ 6,566  

5 unchanged sentences

$ 1,975,051  

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

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

(In Thousands)

5 unchanged sentences

( 750 )  

Net interest income (expense) after provision for loan losses

Net interest income (expense) after provision (credit) for loan losses

14,840  

34 unchanged sentences

$ 2,234,111  

As of or for the six months ended June 30, 2022

As of or for the nine months ended September 30, 2022

(In Thousands)

Net interest income (expense)

$ 25,362  

Net interest income

$ 40,869  

Provision (credit) for credit losses

$ 41,343  

Net interest income (expense) after provision for credit losses

Provision for credit losses

Net interest income after provision for credit losses

40,816  

9 unchanged sentences

( 343 )  

77,502  

Occupancy, office furniture and equipment

21 unchanged sentences

$ 18,552  

As of or for the six months ended June 30, 2021

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

(In Thousands)

5 unchanged sentences

( 2,600 )  

Net interest income (expense) after provision for loan losses

Net interest income (expense) after provision (credit) for loan losses

45,454  

10 unchanged sentences

( 344 )  

102,278  

Occupancy, office furniture and equipment

2 unchanged sentences

Professional fees

( 163 )  

Real estate owned

14 unchanged sentences

( 20 )  

18,184  

Net income (loss)

58 unchanged sentences

It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction therewith.

The detailed discussion in the sections below focuses on the results of operations for the three and six months ended June 30, 2022 and 2021 and the financial condition as of June 30, 2022 compared to the financial condition as of December 31, 2021.

The detailed discussion in the sections below focuses on the results of operations for the three and nine months ended September 30, 2022 and 2021 and the financial condition as of September 30, 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:

6 unchanged sentences

Our mortgage banking segment generates the significant majority of our noninterest income and a majority of our noninterest expenses.

We have provided below a discussion of the material results of operations for each segment on a separate basis for the three and six months ended June 30, 2022 and 2021, which focuses on noninterest income and noninterest expenses.

We have provided below a discussion of the material results of operations for each segment on a separate basis for the three and nine months ended September 30, 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 and six months ended June 30, 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 June 30, 2022 and 2021

Net income totaled $6.3 million for the three months ended June 30, 2022 compared to $7.5 million for the three months ended June 30, 2021.

Net interest income decreased $807,000 to $13.7 million for the three months ended June 30, 2022 compared to $14.5 million for the three months ended June 30, 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 negative provision for credit losses of $41,000 for the three months ended June 30, 2022 compared to a $750,000 negative provision for loan losses for the three months ended June 30, 2021.

The negative provision for credit losses of $41,000 consisted of a $170,000 provision related to loans and a $211,000 of negative provision related to unfunded commitments for the three months ended June 30, 2022.

During the three months ended June 30, 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.  

Total noninterest income increased $10,000 to $1.6 million during the three months ended June 30, 2022 due primarily to an increase in bank owned life insurance offset as interest rates increased offset by a decrease in service fee on deposits. 

Compensation, payroll taxes, and other employee benefits expense decreased $278,000 to $4.6 million primarily due to a decrease in health insurance expense and Employee Stock Ownership Plan expense as the average stock price decreased compared to the quarter ending June 30, 2021.

Other noninterest expense increased $545,000 to $1.0 million as certain loan-related expenses increased.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended June 30, 2022 and 2021

Net income totaled $1.7 million for the three months ended June 30, 2022 compared to $10.4 million for the three months ended June 30, 2021.

We originated $778.8 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended June 30, 2022, which represents a decrease of $286.4 million, or 26.9%, from the $1.06 billion originated during the three months ended June 30, 2021.

The decrease in loan production volume was driven by a $187.3 million, or 71.5%, decrease in refinance products as mortgage rates have increased.

Mortgage purchase products decreased $99.1 million, or 12.3%, due to inventory constraints in the market and as interest rates have increased.

Total mortgage banking noninterest income decreased $20.4 million, or 40.4%, to $30.1 million during the three months ended June 30, 2022 compared to $50.6 million during the three months ended June 30, 2021. 

The decrease in mortgage banking noninterest income was related to a 26.9% decrease in volume and a 21.8% decrease in gross margin on loans originated and sold for the three months ended June 30, 2022 compared to June 30, 2021. 

There were no significant items that impacted earnings for the three and nine months ended September 30, 2022 and 2021. 

Comparison of Community Banking Segment Results of Operations for the Three Months Ended September 30, 2022 and 2021

Net income totaled $6.6 million for the three months ended September 30, 2022 compared to $6.8 million for the three months ended September 30, 2021.

Net interest income increased $1.4 million to $15.5 million for the three months ended September 30, 2022 compared to $14.1 million for the three months ended September 30, 2021. 

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

There was a provision for credit losses of $234,000 for the three months ended September 30, 2022 compared to a $750,000 negative provision for loan losses for the three months ended September 30, 2021.

The provision for credit losses of $234,000 consisted of a $262,000 provision related to loans and a $28,000 of negative provision related to unfunded commitments for the three months ended September 30, 2022.

During the three months ended September 30, 2022, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

The forecast factor remained unchanged as we monitor the economic environment going forward.  

Total noninterest income decreased $610,000 to $1.1 million during the three months ended September 30, 2022 due primarily to a decrease in prepayment penalties on loans. 

Compensation, payroll taxes, and other employee benefits expense decreased $936,000 to $4.4 million primarily due to a decrease in health insurance expense and variable compensation expense compared to the quarter ending September 30, 2021.

Other noninterest expense increased $1.1 million to $1.5 million as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans increased.

These fees are eliminated in the consolidated statements of income.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended September 30, 2022 and 2021

Net loss totaled $1.3 million for the three months ended September 30, 2022 compared to net income of $12.3 million for the three months ended September 30, 2021.

We originated $729.9 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended September 30, 2022, which represents a decrease of $325.6 million, or 30.8%, from the $1.06 billion originated during the three months ended September 30, 2021.

The decrease in loan production volume was driven by a $234.2 million, or 84.7%, decrease in refinance products as mortgage rates have increased.

Mortgage purchase products decreased $91.4 million, or 11.7%, due to inventory constraints in the market, affordability, and interest rate increases.

Total mortgage banking noninterest income decreased $24.0 million, or 46.8%, to $27.3 million during the three months ended September 30, 2022 compared to $51.3 million during the three months ended September 30, 2021. 

The decrease in mortgage banking noninterest income was related to a 30.8% decrease in volume and a 18.5% decrease in gross margin on loans originated and sold for the three months ended September 30, 2022 compared to September 30, 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.

5 unchanged sentences

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 90.4% of total originations during the three months ended June 30, 2022, compared to 75.4% of total originations during the three months ended June 30, 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 25.7% and 74.3% of all loan originations, respectively, during the three months ended June 30, 2022, compared to 24.7% and 75.3% of all loan originations, respectively, during the three months ended June 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $7.9 million, or 26.9%, to $21.3 million for the three months ended June 30, 2022 compared to $29.2 million for the three months ended June 30, 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.

Other noninterest expense increased $55,000 to $2.7 million during the quarter ended June 30, 2022. The increase related to an increase in provision of loan sale losses offset by a decrease in mortgage servicing rights amortization expense. During the quarter ended June 30, 2022, the segment opened five new branches. 

Direct start up expenses related to these branches totaled approximately $510,000 for the quarter ended June 30, 2022.

Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 94.2% of total originations during the three months ended September 30, 2022, compared to 73.8% of total originations during the three months ended September 30, 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 33.3% and 66.7% of all loan originations, respectively, during the three months ended September 30, 2022, compared to 26.2% and 73.8% of all loan originations, respectively, during the three months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $7.1 million, or 24.6%, to $21.9 million for the three months ended September 30, 2022 compared to $29.0 million for the three months ended September 30, 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.

Other noninterest expense increased $301,000 to $2.6 million during the quarter ended September 30, 2022. The increase related to an increase in provision of loan sale losses and provision for branch losses offset by a decrease in mortgage servicing rights amortization expense. During the nine months ended September 30, 2022 the segment has added 11 branches and a total of 130 loan origination personnel.

Losses associated with these new branches added in 2022 totaled approximately $683,000 for the three months ended September 30, 2022.

These new branch losses are net of corporate revenue of approximately $492,000 for the three months ended September 30, 2022.

Consolidated Waterstone Financial, Inc.

Results of Operations

Three months ended June 30,

Three months ended September 30,

(Dollars In Thousands, except per share amounts)

9 unchanged sentences

Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.

Three months ended June 30,

Three months ended September 30,

Average Balance

15 unchanged sentences

Noninterest-bearing liabilities

Non interest-bearing deposits

Noninterest-bearing deposits

Other noninterest-bearing liabilities

10 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities

Interest income includes net deferred loan fee amortization income of $187,000 and $494,000 for the three months ended June 30, 2022 and 2021, respectively.

Interest income includes net deferred loan fee amortization income of $113,000 and $644,000 for the three months ended September 30, 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 June 30, 2022 and 2021.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.56% and 1.12% for the three months ended June 30, 2022 and 2021, respectively.

Interest income from tax-exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended September 30, 2022 and 2021.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 2.41% and 0.88% for the three months ended September 30, 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.

7 unchanged sentences

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 June 30,

Three months ended September 30,

2022 versus 2021

14 unchanged sentences

______________

Interest income includes net deferred loan fee amortization income of $187,000 and $494,000 for the three months ended June 30, 2022 and 2021, respectively.

Interest income includes net deferred loan fee amortization income of $113,000 and $644,000 for the three months ended September 30, 2022 and 2021, respectively.

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

1 unchanged sentence

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 June 30, 2022 and June 30, 2021.

Net interest income decreased $196,000, or 1.4%, to $14.1 million during the three months ended June 30, 2022 compared to $14.3 million during the three months ended June 30, 2021.

Interest income on loans decreased $1.9 million, or 11.7%, to $14.5 million due primarily to a $221.6 million, or 13.4%, decrease in average loans as payoffs continued to outpace originations as interest rates are increasing.

This decrease was partially offset by an eight basis point increase in average yield on loans as interest rates continue to increase over the past year.

The decrease in average loan balance was driven by a decrease of $72.1 million, or 5.5%, in the average balance of loans held in portfolio along with a $149.6 million, or 44.5%, decrease in the average balance of loans held for sale.

Interest expense on time deposits decreased $318,000, or 36.9%, to $543,000 primarily due to a 13 basis point decrease in average cost of time deposits.

Additionally, the average balance of time deposits decreased $106.0 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts decreased $12,000, or 5.9%, to $193,000 due primarily to a four basis point decrease in average cost of money market, savings, and escrow accounts.

Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended September 30, 2022 and September 30, 2021.

Net interest income increased $1.3 million, or 9.1%, to $15.4 million during the three months ended September 30, 2022 compared to $14.1 million during the three months ended September 30, 2021.

Interest income on loans increased $104,000, or 0.6%, to $16.2 million due primarily to a 25 basis point increase in average yield on loans as interest rates continue to increase over the past year.

This increase was partially offset by an $80.7 million decrease in average loan balance as loans held for sale originations decreased as interest rates are increasing. The decrease in average loan balance was driven by a decrease of a $136.1 million, or 42.9%, decrease in the average balance of loans held for sale offset by an increase of $55.4 million, or 4.4%, in average loans held for investment.

Interest expense on time deposits increased $56,000, or 8.0%, to $757,000 primarily due to a nine basis point increase in average cost of time deposits.

Offsetting the increase, the average balance of time deposits decreased $77.3 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts decreased $25,000, or 10.7%, to $208,000 due primarily to a three basis point decrease in average cost of money market, savings, and escrow accounts as the account mix shifted towards more savings accounts.

Partially offsetting the decrease in average cost, the average balance increased $7.0 million. 

Interest expense on borrowings decreased $885,000, or 35.8%, to $1.6 million due to a $154.0 million decrease in the average balance of borrowings during the three months ended June 30, 2022 compared to the three months ended June 30, 2021 as $200.0 million in long-term FHLB borrowings were paid off since June 30, 2021.

Additionally, the cost of borrowings decreased 11 basis points to 1.95% during the three months ended June 30, 2022, compared to 2.06% during the three months ended June 30, 2021.

Interest expense on borrowings decreased $699,000, or 28.6%, to $1.7 million due to a $178.9 million decrease in the average balance of borrowings during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 as the FHLB borrowings balance decreased $175.0 million during 2022.

Offsetting the decrease in average balance, the cost of borrowings increased 30 basis points to 2.34% during the three months ended September 30, 2022, compared to 2.04% during the three months ended September 30, 2021.

Provision for Credit Losses

There was a provision for credit losses of $48,000 for the three months ended June 30, 2022 compared to a $750,000 negative provision for loan losses for the three months ended June 30, 2021.

The $48,000 provision for credit losses consisted of a $259,000 provision related to loans and a $211,000 of negative provision related to unfunded commitments for the three months ended June 30, 2022.

There was a provision for credit losses of $332,000 for the three months ended September 30, 2022 compared to a $700,000 negative provision for loan losses for the three months ended September 30, 2021.

The $332,000 provision for credit losses consisted of a $360,000 provision related to loans and a $28,000 of negative provision related to unfunded commitments for the three months ended September 30, 2022.

During the three months ended September 30, 2022, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

The forecast factor remained unchanged as we monitor the economic environment going forward.  

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. 

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Noninterest Income

Three months ended June 30,

Three months ended September 30,

(Dollars In Thousands)

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Total noninterest income

Total noninterest income decreased $20.8 million, or 40.0%, to $31.2 million during the three months ended June 30, 2022 compared to $52.0 million during the three months ended June 30, 2021.

Total noninterest income decreased $25.5 million, or 48.2%, to $27.4 million during the three months ended September 30, 2022 compared to $52.9 million during the three months ended September 30, 2021.

The decrease resulted primarily from a decrease in mortgage banking noninterest income and other 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 $307.5 million, or 29.1%, to $747.7 million during the three months ended June 30, 2022 compared to $1.06 billion during the three months ended June 30, 2021. Gross margin on loans originated and sold decreased 21.8% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended June 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

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 June 30, 2022 and June 30, 2021, the Company maintained servicing rights related to $340.5 million and $1.37 billion, respectively, in loans previously sold to third parties. 

Three months ended June 30,

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 $377.5 million, or 36.0%, to $671.2 million during the three months ended September 30, 2022 compared to $1.05 billion during the three months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.5% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended September 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

The decrease in other noninterest income was due primarily to a decrease in gain on sale of mortgage serving rights and in mortgage servicing fee income.

During the quarter ended September 30, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third parties.

The sale generated $12.4 million in net proceeds and a $4.0 million gain.

There were no comparable sales during the quarter ended September 30, 2022. As of September 30, 2022 and September 30, 2021, the Company maintained servicing rights related to $378.7 million and $160.8 million, respectively, in loans previously sold to third parties. 

Three months ended September 30,

(Dollars In Thousands)

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Total noninterest expenses

Total noninterest expenses decreased $8.2 million, or 19.0%, to $35.1 million during the three months ended June 30, 2022 compared to $43.3 million during the three months ended June 30, 2021.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $7.9 million, or 26.9%, to $21.3 million during the three months ended June 30, 2022.

Total noninterest expenses decreased $7.6 million, or 17.6%, to $35.7 million during the three months ended September 30, 2022 compared to $43.3 million during the three months ended September 30, 2021.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $7.1 million, or 24.6%, to $21.9 million during the three months ended September 30, 2022.

Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $278,000, or 5.7%, to $4.6 million during the three months ended June 30, 2022.

The decrease was due primarily to a decrease in health insurance expense and Employee Stock Ownership Plan expense as the average stock price decreased.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $226,000 to $1.2 million during the three months ended June 30, 2022, primarily resulting from lower rent and depreciation expense.

Occupancy, office furniture and equipment expense at the community banking segment decreased $11,000 to $876,000 during the three months ended June 30, 2022.

The increase was due primarily to decreased utilities expenses and computer equipment.

Advertising expense increased $51,000, or 5.6%, to $962,000 during the three months ended June 30, 2022.

Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $936,000, or 17.5%, to $4.4 million during the three months ended September 30, 2022.

The decrease was due primarily to a decrease in health insurance expense and variable compensation expense.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $238,000 to $1.3 million during the three months ended September 30, 2022, primarily resulting from lower rent and depreciation expense.

Occupancy, office furniture and equipment expense at the community banking segment increased $46,000 to $955,000 during the three months ended September 30, 2022.

The increase was due primarily to increased utilities expenses, maintenance, and computer equipment.

Advertising expense increased $302,000, or 36.2%, to $1.1 million during the three months ended September 30, 2022.

This was primarily due to marketing increases at the mortgage banking segment to attract customers as rates are higher than in the prior year.  Advertising at the community banking segment decreased as customer promotions slowed.

Data processing expense increased $230,000, or 25.2%, to $1.1 million during the three months ended June 30, 2022. This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.

Professional fees decreased $220,000 to $349,000 of income during the three months ended June 30, 2022.

The decrease related to a decrease in legal fees, consulting fees, and audit expenses.

Other noninterest expense increased $196,000, or 6.2%, to $3.4 million during the three months ended June 30, 2022. 

The increase at the mortgage banking segment related to an increase in provision of loan sale losses offset by a decrease in mortgage servicing rights amortization expense. The increase at the community banking segment was due to an increase in certain loan related expenses.

Income tax expense totaled $2.2 million for the three months ended June 30, 2022 compared to $5.9 million during the three months ended June 30, 2021.

Income tax expense was recognized on the statement of income during the three months ended June 30, 2022 at an effective rate of 21.8% of pretax income compared to 24.7% during the three months ended June 30, 2021.

Comparison of Community Banking Segment Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net income totaled $10.6 million for the six months ended June 30, 2022 compared to $14.9 million for the six months ended June 30, 2021.

Net interest income decreased $3.4 million to $25.4 million for the six months ended June 30, 2022 compared to $28.8 million for the six months ended June 30, 2021. 

There was a negative provision for credit losses of $181,000 for the six months ended June 30, 2022 compared to a $1.9 million negative provision for loan losses for the six months ended June 30, 2021.

The negative provision for credit losses of $181,000 consisted of a $187,000 provision related to loans and a $368,000 of negative provision related to unfunded commitments for the six months ended June 30, 2022.

During the six months ended June 30, 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.  

Total noninterest income increased $199,000, or 6.9%, to $3.1 million due primarily to an increase in a gain from death benefit received on one bank owned life insurance policy and an increase in bank owned life insurance as interest rates increased during the six months ended June 30, 2022,offset by a decrease in service fee on deposits.

Compensation, payroll taxes, and other employee benefits expense decreased $41,000 to $9.8 million primarily due to a decrease in ESOP expense compared to the six months ended June 30, 2021.

Other noninterest expense increased $705,000 to $1.6 million as certain loan-related expenses increased.

Comparison of Mortgage Banking Segment Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net income totaled $2.8 million for the six months ended June 30, 2022 compared to $24.4 million for the six months ended June 30, 2021.

We originated $1.49 billion in mortgage loans held for sale (including sales to the community banking segment) during the six months ended June 30, 2022, which represents a decrease of $693.0 million, or 31.8%, from the $2.18 billion originated during the six months ended June 30, 2021.

The decrease in loan production volume was driven by a $516.0 million, or 68.7%, decrease in refinance products as mortgage rates have increased.

Mortgage purchase products decreased $177.1 million, or 12.4%, due to inventory constraints in the market and as interest rates have increased.

Total mortgage banking noninterest income decreased $46.9 million, or 44.4%, to $58.7 million during the six months ended June 30, 2022 compared to $105.6 million during the six months ended June 30, 2021. 

The decrease in mortgage banking noninterest income was related to a 31.8% decrease in volume and a 19.8% decrease in gross margin on loans originated and sold for the six months ended June 30, 2022 compared to June 30, 2021. 

Data processing expense increased $98,000, or 9.9%, to $1.1 million during the three months ended September 30, 2022. This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.

Professional fees decreased $157,000 to $393,000 of income during the three months ended September 30, 2022.

The decrease related to a decrease in legal fees at the mortgage banking segment.

Other noninterest expense increased $419,000, or 15.1%, to $3.2 million during the three months ended September 30, 2022. 

The increase at the mortgage banking segment related to an increase in provision of loan sale losses and provision for branch losses offset by a decrease in mortgage servicing rights amortization expense. The increase at the community banking segment was due to placement fees.

Income tax expense totaled $1.5 million for the three months ended September 30, 2022 compared to $5.4 million during the three months ended September 30, 2021.

Income tax expense was recognized on the statement of income during the three months ended September 30, 2022 and September 30, 2021 at an effective rate of 22.2% of pretax income.

The effective rate as of 

September 30, 2022 reflects an increase of permanent deductions relative to the amount of pretax income. The effective rate as of September 30, 2021 reflects a $949,000 return to provision income tax adjustment to reflect actual state tax apportionment based on the final 2020 tax returns.

There was no return to provision adjustment during the three months ended September 30, 2022.

Comparison of Community Banking Segment Results of Operations for the Nine Months Ended September 30, 2022 and 2021

Net income totaled $17.1 million for the nine months ended September 30, 2022 compared to $21.6 million for the nine months ended September 30, 2021.

Net interest income decreased $2.0 million to $40.9 million for the nine months ended September 30, 2022 compared to $42.9 million for the nine months ended September 30, 2021. 

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

There was a provision for credit losses of $53,000 for the nine months ended September 30, 2022 compared to a $2.6 million negative provision for loan losses for the nine months ended September 30, 2021.

The provision for credit losses of $53,000 consisted of a $449,000 provision related to loans due to loan growth and a $396,000 of negative provision related to unfunded commitments as the balance decreased for the nine months ended September 30, 2022.

During the nine months ended September 30, 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.  

Total noninterest income decreased $411,000, or 8.9%, to $4.2 million due primarily to a decrease in service fees on deposits and prepayment fees on loans during the nine months ended September 30, 2022, offset by a gain from death benefit received on one bank owned life insurance policy and an increase in bank owned life insurance as interest rates increased.

Compensation, payroll taxes, and other employee benefits expense decreased $977,000 to $14.2 million primarily due to a decrease in health insurance and ESOP expense compared to the nine months ended September 30, 2021.

Other noninterest expense increased $1.8 million to $3.1 million as certain loan-related expenses paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans increased.

These fees are eliminated in the consolidated statements of income.

Comparison of Mortgage Banking Segment Results of Operations for the Nine Months Ended September 30, 2022 and 2021

Net income totaled $1.5 million for the nine months ended September 30, 2022 compared to $36.6 million for the nine months ended September 30, 2021.

We originated $2.22 billion in mortgage loans held for sale (including sales to the community banking segment) during the nine months ended September 30, 2022, which represents a decrease of $1.02 billion, or 31.5%, from the $3.24 billion originated during the nine months ended September 30, 2021.

The decrease in loan production volume was driven by a $750.2 million, or 73.0%, decrease in refinance products as mortgage rates have increased.

Mortgage purchase products decreased $268.5 million, or 12.2%, due to inventory constraints in the market, housing affordability, and as interest rates have increased.

Total mortgage banking noninterest income decreased $70.8 million, or 45.2%, to $86.0 million during the nine months ended September 30, 2022 compared to $156.9 million during the nine months ended September 30, 2021. 

The decrease in mortgage banking noninterest income was related to a 31.5% decrease in volume and a 18.8% decrease in gross margin on loans originated and sold for the nine months ended September 30, 2022 compared to September 30, 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.

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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 84.1% of total originations during the six months ended June 30, 2022, compared to 65.5% of total originations during the six months ended June 30, 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 25.1% and 74.9% of all loan originations, respectively, during the six months ended June 30, 2022, compared to 22.8% and 77.2% of all loan originations, respectively, during the six months ended June 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $16.7 million, or 28.6%, to $41.7 million for the six months ended June 30, 2022 compared to $58.4 million for the six months ended June 30, 2021. 

Other noninterest expense decreased $317,000 to $5.0 million during the six months ended June 30, 2022 compared to $5.4 million during the six months ended June 30, 2021.

The $317,000 decrease related to a decrease in the amortization expense on mortgage servicing rights due to the bulk sale of mortgage servicing rights during the third quarter of 2021. 

Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 87.5% of total originations during the nine months ended September 30, 2022, compared to 68.2% of total originations during the nine months ended September 30, 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 27.8% and 72.2% of all loan originations, respectively, during the nine months ended September 30, 2022, compared to 23.1% and 76.9% of all loan originations, respectively, during the nine months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $23.8 million, or 27.2%, to $63.6 million for the nine months ended September 30, 2022 compared to $87.4 million for the nine months ended September 30, 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. During the nine months ended September 30, 2022 the segment has added 11 branches and a total of 130 loan origination personnel.

Losses associated with these new branches totaled approximately $1.2 million for the nine months ended September 30, 2022.

These branch losses are net of corporate revenue of approximately $599,000 for the nine months ended September 30, 2022.

Consolidated Waterstone Financial, Inc.

Results of Operations

Six months ended June 30,

Nine months ended September 30,

(Dollars In Thousands, except per share amounts)

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Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.

Six months ended June 30,

Nine months ended September 30,

Average Balance

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Noninterest-bearing liabilities

Non interest-bearing deposits

Noninterest-bearing deposits

Other noninterest-bearing liabilities

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Average interest-earning assets to average interest-bearing liabilities

Interest income includes net deferred loan fee amortization income of $382,000 and $1.1 million for the six months ended June 30, 2022 and 2021, respectively.

Interest income includes net deferred loan fee amortization income of $495,000 and $1.7 million for the nine months ended September 30, 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 six months ended June 30, 2022 and 2021.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.01% and 1.20% for the six months ended June 30, 2022 and 2021, respectively.

Interest income from tax-exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the nine months ended September 30, 2022 and 2021.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.26% and 1.07% for the nine months ended September 30, 2022 and 2021, respectively.

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Six months ended June 30,

Nine months ended September 30,

2022 versus 2021

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______________

Interest income includes net deferred loan fee amortization income of $382,000 and $1.1 million for the six months ended June 30, 2022 and 2021, respectively.

Interest income includes net deferred loan fee amortization income of $495,000 and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively.

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

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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 six months ended June 30, 2022 and June 30, 2021.

Net interest income decreased $2.3 million, or 8.1%, to $25.9 million during the six months ended June 30, 2022 compared to $28.2 million during the six months ended June 30, 2021.

Interest income on loans decreased $5.0 million, or 15.2%, to $28.0 million during the six months ended June 30, 2022 compared to $33.1 million during the six months ended June 30, 2021 due primarily to a $258.7 million, or 15.6%, decrease in average loans as payoffs continue to outpace originations as interest rates are increasing.

This decrease was partially offset by an two basis point increase in average yield on loans as interest rates continue to increase over the past year.

The decrease in average loan balance was driven by an decrease of $107.3 million, or 8.0%, in the average balance of loans held in portfolio along with a $151.3 million, or 46.8%, decrease in the average balance of loans held for sale.

Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the nine months ended September 30, 2022 and September 30, 2021.

Net interest income decreased $1.0 million, or 2.4%, to $41.3 million during the nine months ended September 30, 2022 compared to $42.3 million during the nine months ended September 30, 2021.

Interest income on loans decreased $4.9 million, or 10.0%, to $44.3 million during the nine months ended September 30, 2022 compared to $49.2 million during the nine months ended September 30, 2021 due primarily to a $198.1 million, or 12.2%, decrease in average loans as loans held for sale originations decreased as interest rates are increasing.

This decrease was partially offset by a 10 basis point increase in average yield on loans as interest rates continue to increase over the past year.

The decrease in average loan balance was driven by a decrease of $51.8 million, or 4.0%, in the average balance of loans held in portfolio along with a $146.2 million, or 45.5%, decrease in the average balance of loans held for sale.

Interest expense on time deposits decreased $1.2 million, or 39.5%, to $1.9 million primarily due to a 18 basis point decrease in average cost of time deposits.

Additionally, the average balance of time deposits decreased $92.7 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts decreased $49,000, or 10.8%, to $403,000 due primarily to a seven basis point decrease in average cost of money market, savings, and escrow accounts.

Partially offsetting the decrease in average cost, the average balance increased $75.9 million. 

Interest expense on borrowings decreased $998,000, or 20.1%, to $4.0 million due to a $98.5 million decrease in the average balance of borrowings during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 as $200.0 million in long-term FHLB borrowings were paid off during the six months ended June 30, 2022. 

Interest expense on money market, savings, and escrow accounts increased $159,000, or 35.2%, to $611,000 due primarily to a three basis point increase in average cost of money market, savings, and escrow accounts and the average balance increased $52.7 million. 

Interest expense on borrowings decreased $1.7 million, or 22.9%, to $5.7 million due to a $124.7 million decrease in the average balance of borrowings during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as the FHLB borrowings balance decreased $175.0 million during the nine months ended September 30, 2022. 

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.

The Company adopted ASC Topic 326 as of 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 negative provision for credit losses of $28,000 for the six months ended June 30, 2022 compared to a $1.8 negative provision for loan losses for the six months ended June 30, 2021.

The $28,000 negative provision for credit losses consisted of a $340,000 provision related to loans and a $368,000 of negative provision related to unfunded commitments for the six months ended June 30, 2022.

During the six months ended June 30, 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 provision for credit losses of $304,000 for the nine months ended September 30, 2022 compared to a $2.5 million negative provision for loan losses for the nine months ended September 30, 2021.

The $304,000 provision for credit losses consisted of a $700,000 provision related to loans and a $396,000 of negative provision related to unfunded commitments for the nine months ended September 30, 2022.

During the nine months ended September 30, 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. 

1 unchanged sentence

Noninterest Income

Six months ended June 30,

Nine months ended September 30,

(Dollars In Thousands)

Service charges on loans and deposits

2 unchanged sentences

Total noninterest income

Total noninterest income decreased $47.2 million, or 43.6%, to $61.1 million during the six months ended June 30, 2022 compared to $108.2 million during the six months ended June 30, 2021.

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

Total noninterest income decreased $72.7 million, or 45.1%, to $88.5 million during the nine months ended September 30, 2022 compared to $161.2 million during the nine months ended September 30, 2021.

The decrease resulted primarily from a 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 $718.5 million, or 33.2%, to $1.45 billion during the six months ended June 30, 2022 compared to $2.16 billion during the six months ended June 30, 2021. Gross margin on loans originated and sold decreased 19.8% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Six Months Ended June 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

As of June 30, 2022 and June 30, 2021, the Company maintained servicing rights related to $340.5 million and $1.37 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 six months ended June 30, 2022 compared to none during the six months ended June 30, 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. Total loan origination volume on a consolidated basis decreased $1.10 billion, or 34.1%, to $2.12 billion during the nine months ended September 30, 2022 compared to $3.21 billion during the nine months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.8% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Nine Months Ended September 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

The decrease in other noninterest income was due primarily to a gain on sale of mortgage servicing rights in 2021, decreases in mortgage servicing fee income as a result of the servicing fees prior to the sale, and decreases to loan prepayment fees.

During the year ended September 30, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third parties.

The sale generated $12.4 million in net proceeds and a $4.0 million gain.

There was no comparable sale during the year ended September 30, 2022. 

As of September 30, 2022 and September 30, 2021, the Company maintained servicing rights related to $378.7 million and $204.8 million, 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 nine months ended September 30, 2022 compared to none during the nine months ended September 30, 2021.

Noninterest Expenses

Six months ended June 30,

Nine months ended September 30,

(Dollars In Thousands)

Compensation, payroll taxes, and other employee benefits

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Total noninterest expenses

Total noninterest expenses decreased $16.3 million, or 18.9%, to $70.0 million during the six months ended June 30, 2022 compared to $86.3 million during the six months ended June 30, 2021.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $16.7 million, or 28.6%, to $41.7 million during the six months ended June 30, 2022.

Total noninterest expenses decreased $23.9 million, or 18.5%, to $105.7 million during the nine months ended September 30, 2022 compared to $129.6 million during the nine months ended September 30, 2021.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $23.8 million, or 27.2%, to $63.6 million during the nine months ended September 30, 2022.

Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $41,000, or 0.4%, to $9.8 million during the six months ended June 30, 2022.

The increase was primarily due to a decrease in ESOP expense as the average stock average price has decreased compared to the quarter ending June 30, 2021, offset by an increase in health insurance expense and salaries due to annual raises.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $515,000, or 17.5%, to $2.4 million during the six months ended June 30, 2022, primarily resulting from lower rent and depreciation expense.

Occupancy, office furniture and equipment expense at the community banking segment decreased $99,000, or 5.2%, to $1.8 million during the six months ended June 30, 2022.

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

Advertising expense increased $132,000, or 7.6%, to $1.9 million during the six months ended June 30, 2022.

Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $977,000, or 6.4%, to $14.2 million during the nine months ended September 30, 2022.

The decrease was primarily due to a decrease in health insurance and ESOP expense as the average stock average price has decreased compared to the quarter ending September 30, 2021, offset by an increase in salaries due to annual raises.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $753,000, or 16.6%, to $3.8 million during the nine months ended September 30, 2022, primarily resulting from lower rent, computer, and depreciation expense.

Occupancy, office furniture and equipment expense at the community banking segment decreased $53,000, or 1.9%, to $2.8 million during the nine months ended September 30, 2022.

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

Advertising expense increased $434,000, or 16.9%, to $3.0 million during the nine months ended September 30, 2022.

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

Data processing expense increased $461,000, or 24.5%, to $2.3 million during the six months ended June 30, 2022.

Data processing expense increased $559,000, or 19.5%, to $3.4 million during the nine months ended September 30, 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 $556,000, 

218.9%, to $810,000 during the six months ended June 30, 2022.

The increase related to receiving a countersuit settlement at the mortgage banking segment during the six months ended June 30, 2021.

Other noninterest expense decreased $115,000, or 1.8%, to $6.2 million during the six months ended June 30, 2022.  

The decrease at the mortgage banking segment related to a decrease in the amortization expense on mortgage servicing rights due to the bulk sale of mortgage servicing rights during the third quarter of 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 six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Income tax expense decreased $9.0  million, or 70.5% , to $3.8 million for the six months ended June 30, 2022 compared to $12.8 million during the six months ended June 30, 2021.

Income tax expense was recognized on the statement of income during the six months ended June 30, 2022 at an effective rate of 22.1% of pretax income compared to 24.5% during the six months ended June 30, 2021.

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Professional fees increased $399,000, or  49.6%, to $1.2 million during the nine months ended September 30, 2022.

The increase related to receiving a countersuit settlement at the mortgage banking segment during the nine months ended September 30, 2021.

Other noninterest expense increased $304,000, or 3.3%, to $9.4 million during the nine months ended September 30, 2022.  

The increase at the community banking segment related to an increase in certain loan-related expenses paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

These fees are eliminated in the consolidated statements of income.

Additionally, there were increases in placement fees and correspondent bank fees.

 Offsetting the increase at the community banking segment, other noninterest expenses decreased at the mortgage banking segment as the amortization expense on mortgage servicing rights decreased due to the bulk sale of mortgage servicing rights during the third quarter of 2021.

Income tax expense decreased $12.9  million, or 71.0% , to $5.3 million for the nine months ended September 30, 2022 compared to $18.2 million during the nine months ended September 30, 2021.

Income tax expense was recognized on the statement of income during the nine months ended September 30, 2022 at an effective rate of 22.1% of pretax income compared to 23.8% during the nine months ended September 30, 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. The effective rate as of September 30, 2021 reflects a $949,000 return to provision income tax adjustment to reflect actual state tax apportionment based on the final 2020 tax returns.

There was no return to provision adjustment during the nine months ended September 30, 2022.

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets –

Total assets decreased by $274.8 million, or 12.4%, to $1.94 billion at June 30, 2022 from $2.22 billion at December 31, 2021.

Total assets decreased by $240.8 million, or 10.9%, to $1.98 billion at September 30, 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 loans held for investment, securities available for sale and other assets.

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Cash and Cash Equivalents –

Cash and cash equivalents decreased  $254.5 million, or 67.6%, to $122.2 million at June 30, 2022, compared to $376.7  million at December 31, 2021. 

The decrease in cash and cash equivalents primarily reflects the increases in loans held for investment, securities available for sale and decrease of funding sources from deposits and borrowings.

Cash and cash equivalents decreased $303.8 million, or 80.6%, to $72.9 million at September 30, 2022, compared to $376.7 million at December 31, 2021. The decrease in cash and cash equivalents primarily reflects the increases in loans held for investment, securities available for sale and decrease of funding sources from deposits and borrowings.

Securities Available for Sale  –

Securities available for sale increased $21.5 million to $200.5 million at June 30, 2022.

Securities available for sale increased $18.3 million to $197.3 million at September 30, 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 $106.0 million to $206.7 million at June 30, 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 $70.8 million to $1.28 billion at June 30, 2022.

Loans Held for Sale - Loans held for sale decreased $126.7 million to $186.0 million at September 30, 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 $148.7 million to $1.35 billion at September 30, 2022.

The increase in total loans receivable was attributable to increases in each of the one- to four-family, multi-family, and commercial real estate loan categories.

The following table shows loan originations during the periods indicated.

Six months ended June 30,

Nine months ended September 30,

(In Thousands)

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Total loans originated for investment

Allowance for Credit Losses - Loans - The allowance for loan losses increased $1.5 million to $17.3 million at June 30, 2022.

Allowance for Credit Losses - Loans - The allowance for credit losses increased $1.7 million to $17.5 million at September 30, 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 $723,000 for the six months ended June 30, 2022. 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 $340,000 for the six months ended June 30, 2022.

Additionally, net recoveries totaled $810,000 for the nine months ended September 30, 2022. 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 $700,000 for the nine months ended September 30, 2022.

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 $3.2 million to $48.4 million at June 30, 2022.

The increase was primarily due to an increase in funding receivable on loans sold at the mortgage banking segment and deferred taxes increased as unrealized losses on available for sale securities increased due to rising interest rates.  

Total prepaid expenses and other assets increased $33.1 million to $78.3 million at September 30, 2022.

The increase was primarily due to an increase in the fair value mark on derivatives as interest rates increased and deferred taxes increased as unrealized losses on available for sale securities increased due to rising interest rates.  

Deposits –

Total deposits decreased $20.2 million to $1.21 billion at June 30, 2022. 

The decrease was driven by a decrease of $38.7 million in time deposits offset by an increase of $15.6 million in demand deposits and $2.9 million in money market and savings deposits.

Total deposits decreased $46.3 million to $1.19 billion at September 30, 2022. 

The decrease was driven by a decrease of $33.0 million in time deposits and  $45.4 million in money market and savings deposits offset by an increase of $32.1 million in demand deposits.

Borrowings –

Total borrowings decreased $196.0 million, or 41.1%, to $281.1 million at June 30, 2022.

The community banking segment paid off $200.0 million in long-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment increased a total of $4.0 million at June 30, 2022 from December 31, 2021.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $13.2 million to $17.3 million at June 30, 2022.

Total borrowings decreased $157.2 million, or 32.9%, to $320.0 million at September 30, 2022.

The community banking segment paid off $270.0 million in long-term FHLB borrowings, borrowing $50.0 million of new long-term FHLB borrowings, and $50.0 million in new short-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment increased a total of $17.8 million at September 30, 2022 from December 31, 2021.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $20.0 million to $24.1 million at September 30, 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 $25.4 million to $43.1 million at June 30, 2022. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. 

Other Liabilities - Other liabilities decreased $764,000 to $67.7 million at September 30, 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.

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

Offsetting the decreases, the fair value mark on derivative liabilities related to the loans held for sale and the back-to-back swaps increased with the increase in interest rates.  

Shareholders ’

Equity –

Shareholders' equity decreased $46.4 million to $386.4 million at June 30, 2022. 

Shareholders' equity decreased $56.6 million to $376.2 million at September 30, 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.

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NONPERFORMING ASSETS

At September 30,

At December 31,

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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.

A loan is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.  For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell.  In most cases, the Company records a specific valuation allowance or a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell.  Substantially all of the collateral consists of various types of real estate including residential and commercial properties.

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

At or for the Six Months

Ended June 30,

At or for the Nine Months

Ended September 30,

(In Thousands)

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Balance at end of period

Total non-accrual loans increased by $1.9 million, or 34.4%, to $7.5 million as of June 30, 2022 compared to $5.6 million as of December 31, 2021. 

The ratio of non-accrual loans to total loans receivable was 0.59% at June 30, 2022 compared to 0.46% at December 31, 2021. 

During the six months ended June 30, 2022, $2.8 million in loans were placed on non-accrual status.

Offsetting this activity, $835,000 in principal payments were received during the six months ended June 30, 2022.

Of the $7.5 million in total non-accrual loans as of June 30, 2022, $5.9 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.

Total non-accrual loans decreased by $499,000, or 9.0%, to $5.1 million as of September 30, 2022 compared to $5.6 million as of December 31, 2021. 

The ratio of non-accrual loans to total loans receivable was 0.37% at September 30, 2022 compared to 0.46% at December 31, 2021. 

During the nine months ended September 30, 2022, $2.9 million in loans were placed on non-accrual status.

Offsetting this activity, $2.7 million in principal payments were received and $694,000 in loans returned to accrual status during the nine months ended September 30, 2022.

Of the $5.1 million in total non-accrual loans as of September 30, 2022, $3.3 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 June 30, 2022. 

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 September 30, 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 June 30, 2022. 

The remaining $1.6 million of non-accrual loans were reviewed on an aggregate basis as of June 30, 2022.  

The outstanding principal balance of our five largest non-accrual loans as of June 30, 2022 totaled $4.5 million, which represents 59.7% 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 June 30, 2022.

There were no specific reserves as of September 30, 2022. 

The remaining $1.7 million of non-accrual loans were reviewed on an aggregate basis as of September 30, 2022.  

The outstanding principal balance of our five largest non-accrual loans as of September 30, 2022 totaled $3.6 million, which represents 70.2% of total non-accrual loans as of that date. 

Four of the five loans have not had any cumulative life-to-date net charge-offs and no specific reserve was deemed necessary based on net realizable collateral value with respect to these four loans as of September 30, 2022. 

One of the loans was reviewed on an aggregate basis along with the other loans held for investment at the mortgage segment.  

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.

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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 June 30, 2022 and December 31, 2021, there were no loans 90 or more days past due and still accruing interest. 

As of September 30, 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 June 30, 2022

As of September 30, 2022

(In Thousands)

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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.

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

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

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

At September 30,

At December 31,

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Total loans past due to total loans receivable

Past due loans increased by $610,000, or 8.6%, to $7.7 million at June 30, 2022 from $7.1 million at December 31, 2021. 

Loans past due less than 90 days decreased by $1.3 million, or 46.6%, primarily in the one- to four-family loan category during the six months ended June 30, 2022.

Loans past due 90 days or more increased by $1.9 million, or 42.7%, primarily in the one- to four-family loan category.

Past due loans decreased by $535,000, or 7.6%, to $6.5 million at September 30, 2022 from $7.1 million at December 31, 2021. 

Loans past due 90 days or more decreased by $772,000, or 17.7%, primarily in the one- to four-family loan category during the nine months ended September 30, 2022 .Loans past due less than 90 days increased by $237,000, or 8.8%, primarily in the home equity and commercial loan categories.

ALLOWANCE FOR CREDIT LOSSES - LOANS

At or for the Six Months

Ended June 30,

At or for the Nine Months

Ended September 30,

(Dollars in Thousands)

Balance at beginning of period

Adoption of CECL (1)

Provision (credit) for credit losses - loans

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

The allowance for credit losses - loans increased $1.5 million to $17.3 million at June 30, 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 $723,000, or 0.12% of average loans annualized, for the six months ended June 30, 2022, compared to net recoveries of $407,000, or 0.06% of average loans annualized, for the six months ended June 30, 2021.

Of the $723,000 in net recoveries during the six months ended June 30, 2022, the majority of the activity related to loans secured by multi-family loan categories.

The allowance for credit losses - loans increased $1.7 million to $17.5 million at September 30, 2022 from $15.8 million at December 31, 2021.

The increase resulted from the CECL model adoption on January 1, 2022 along with loan growth throughout the year. 

The CECL calculation resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses and a $700,000 provision for credit losses.

Additionally, net recoveries totaled $544,000 for the nine months ended September 30, 2022. 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. 

We had net recoveries of $544,000, or 0.06% of average loans annualized, for the nine months ended September 30, 2022, compared to net recoveries of $487,000, or 0.05% of average loans annualized, for the nine months ended September 30, 2021.

Of the $544,000 in net recoveries during the nine months ended September 30, 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. 

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Additional sources of liquidity used for the purpose of managing long- and short-term cash flows include advances from the FHLB.

During the six months ended June 30, 2022, primary uses of cash and cash equivalents included:

$1.45 billion in funding loans held for sale, $70.0 to fund loans held for investment, $68.2 million for purchases of mortgage related securities, $195.0 million for payoffs of long-term borrowings, $21.8 million for cash dividends paid, $20.2 million for decrease in deposits, and $37.9 million for purchases of our common stock.

During the six months ended June 30, 2022, primary sources of cash and cash equivalents included:

During the nine months ended September 30, 2022, primary uses of cash and cash equivalents included:

$2.12 billion in funding loans held for sale, $148.1 million to fund loans held for investment, $77.4 million for purchases of mortgage related securities, $270.0 million for payoffs of long-term borrowings, $26.0 million for cash dividends paid, $46.3 million for decrease in deposits, and $45.2 million for purchases of our common stock.

During the nine months ended September 30, 2022, primary sources of cash and cash equivalents included:

$2.31 billion in proceeds from the sale of loans held for sale, $27.9 million in principal repayments on mortgage related securities, $14.9 million in maturities of debt securities, $8.7 million in sales of FHLB stock, and $18.6 million in net income.

During the six months ended June 30, 2021, primary uses of cash and cash equivalents included:

$2.16 billion in funding loans held for sale, $39.9 million for purchases of mortgage related securities, $33.1 million for short-term borrowings, $21.5 million for cash dividends paid, and $4.3 million to pay a legal settlement.

During the six months ended June 30, 2021, primary sources of cash and cash equivalents included: $2.32 billion in proceeds from the sale of loans held for sale, $79.1 million for net loan receivables decrease, $46.2 million from an increase in deposits, $21.1 million in principal repayments on mortgage related securities, $4.2 million in maturities of debt securities, and $39.2 million in net income.

During the nine months ended September 30, 2021, primary uses of cash and cash equivalents included:

$3.21 billion in funding loans held for sale, $55.3 million for purchases of mortgage related securities, $33.1 million for short-term borrowings, $26.3 million for cash dividends paid, $4.7 million for purchases of our common stock, and $4.3 million to pay a legal settlement.

During the nine months ended September 30, 2021, primary sources of cash and cash equivalents included:

$3.44 billion in proceeds from the sale of loans held for sale, $148.8 million for net loan receivables decrease, $61.7 million from an increase in deposits, $30.8 million in principal repayments on mortgage related securities, $6.4 million in maturities of debt securities, and $58.2 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 June 30, 2022 and 2021, respectively, $122.2 million and $228.7 million of our assets were invested in cash and cash equivalents. 

At June 30, 2022, cash and cash equivalents were comprised of the following:

$87.4 million in cash held at the Federal Reserve Bank and other depository institutions and $34.8 million in federal funds sold and short-term investments. 

At September 30, 2022 and 2021, respectively, $72.9 million and $358.6 million of our assets were invested in cash and cash equivalents. 

At September 30, 2022, cash and cash equivalents were comprised of the following:

$37.2 million in cash held at the Federal Reserve Bank and other depository institutions and $35.7 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, 

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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 June 30, 2022, we had $275.0 million in long term advances from the FHLB with contractual maturity dates in 2027, 2028, and 2029. 

At September 30, 2022, we had $250.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, 2028, and 2029. 

The 2025 advance has a contractual maturity date in September 2025 with a single call option in 2023.

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

There are two advances that have contractual maturities in 2028.There are three advances with contractual maturities in 2029.

There is one advance that has a contractual maturity in September 2028.

There are two advances with contractual maturities in 2029.

The 2028 and 2029 advance maturities have quarterly call options currently available.

At June 30, 2022, we had outstanding commitments to originate loans receivable of $66.8 million. 

In addition, at June 30, 2022, we had unfunded commitments under construction loans of $29.5 million, unfunded commitments under business lines of credit of $17.9 million and unfunded commitments under home equity lines of credit and standby letters of credit of $12.7 million. 

At June 30, 2022, certificates of deposit scheduled to mature in one year or less totaled $494.6 million. 

At September 30, 2022, we had outstanding commitments to originate loans receivable of $57.8 million. 

In addition, at September 30, 2022, we had unfunded commitments under construction loans of $36.2 million, unfunded commitments under business lines of credit of $17.3 million and unfunded commitments under home equity lines of credit and standby letters of credit of $12.6 million. 

At September 30, 2022, certificates of deposit scheduled to mature in one year or less totaled $498.3 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. 

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

At June 30, 2022, Waterstone Financial, Inc.

(on an unconsolidated basis) had liquid assets totaling $57.2 million.

Shareholders' equity decreased $46.4 million to $386.4 million at June 30, 2022. 

At September 30, 2022, Waterstone Financial, Inc.

(on an unconsolidated basis) had liquid assets totaling $52.1 million.

Shareholders' equity decreased $56.6 million to $376.2 million at September 30, 2022. 

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

As of June 30, 2022, the Company has 1.4 million shares remaining in the plan.  

As of September 30, 2022, the Company has 925,000 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 June 30, 2022, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized”

At September 30, 2022, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized”

under regulatory guidelines.

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

During the three months ended June 30, 2022, we repaid $45.0 million in FHLB long-term debt. During the six months ended June 30, 2022, we repaid $195.0 million in FHLB long-term debt. 

During the three months ended September 30, 2022, we repaid $75.0 million in FHLB long-term debt and borrowed $50.0 million of FHLB long-term debt and $50.0 million of short-term debt. During the nine months ended September 30, 2022, we repaid $270.0 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.

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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 June 30, 2022 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. 

Our most recent simulation uses projected repricing of assets and liabilities at September 30, 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. 

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Immediate Change in Rates

As of June 30, 2022

As of September 30, 2022

Dollar Change

Percentage Change

At June 30, 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%.

At September 30, 2022, a 100 basis point instantaneous increase in interest rates had the effect of decreasing forecast net interest income over the next 12 months by 2.37% while a 100 basis point decrease in rates had the effect of increasing net interest income by 0.52%.

Controls and Procedures

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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