Waterstone Financial, Inc. 10-K

wsbf20220421_10k.htm     Table of Contents   SECURITIES AND EXCHANGE COMMISSION Washington, D.C.     20549   F O R M     10-K   ☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 001-36271   WATERSTONE FINANCIAL, INC. (Exact name of registrant as specified in its charter)   Maryland 90-1026709 (State or other jurisdiction of incorporation or organization) (I.R.S.  Employer Identification No.)     11200 W Plank Ct, Wauwatosa ,     Wisconsin 53226 (Address of principal executive offices) (Zip Code)   ( 414 ) 761-1000 Registrant's telephone number, including area code:   Securities registered pursuant to Section 12(b) of the Act:   Title of each class   Trading Symbol   Name of each exchange on which registered Common Stock, $0.01 Par Value   WSBF    The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the Act: NONE   Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the 1933 Act).    Yes     ☐            No      ☒   Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the 1934 Act.   Yes     ☐           No     ☒   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      ☒           No    ☐   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        Yes      ☒           No    ☐   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.   Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller Reporting Company ☐ Emerging growth company ☐               If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒   If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  ☐   Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).        Yes     ☐             No     ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act).     Yes     ☐            No     ☒   The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the price at which the common equity was last sold on June 30, 2022 as reported by the NASDAQ Global Select Market®, was approximately $ 387.4  million.   As of February 24, 2023, 22,058,568  shares of the Registrant’s Common Stock were issued and outstanding.   DOCUMENTS INCORPORATED BY REFERENCE     Part of Form 10-K Into Which Document   Portions of Document are Incorporated Proxy Statement for Annual Meeting of   Part III Shareholders on May 16, 2023         Table of Contents     WATERSTONE FINANCIAL, INC.   FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED December 31, 2022   TABLE OF CONTENTS         ITEM     PAGE         PART I               1. Business   1 -28 1A. Risk Factors   28 -36 1B. Unresolved Staff Comments   36 2. Properties   37 3. Legal Proceedings   37 4. Mine Safety Disclosures   37         PART II               5. Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities   38 -39 6. [Reserved]   39 7. Management's Discussion and Analysis of Financial Condition and Results of Operations   39 -53 7A. Quantitative and Qualitative Disclosures About Market Risk   54 8. Financial Statements and Supplementary Data   55 -101 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   102 9A. Controls and Procedures   102 9B. Other Information   102 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections   102         PART III               10. Directors, Executive Officers and Corporate Governance   103 11. Executive Compensation   103 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   103 13. Certain Relationships and Related Transactions, and Director Independence   104 14. Principal Accountant Fees and Services   104         PART IV               15. Exhibits and Financial Statement Schedules   104 16. Form 10-K Summary   104   Signatures   106     Table of Contents     PART 1   Item 1.    Business   Forward-Looking Statements   This Annual Report on Form 10-K may contain or incorporate by reference various forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions and verbs in the future tense. These forward-looking statements include, but are not limited to:     • Statements of our goals, intentions and expectations;   • Statements regarding our business plans, prospects, growth and operating strategies;   • Statements regarding the quality of our loan and investment portfolio;   • Estimates of our risks and future costs and benefits.   These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.   The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.     • general economic conditions, either nationally or in our market area, including employment prospects, that are different than expected;   • competition among depository and other financial institutions;   • inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses or prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;   • adverse changes in the securities or secondary mortgage markets;   • changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;   • changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;   • our ability to manage market risk, credit risk and operational risk in the current economic conditions;   • our ability to enter new markets successfully and capitalize on growth opportunities;   • our ability to successfully integrate acquired entities;   • decreased demand for our products and services;   • changes in tax policies or assessment policies;   • changes in consumer demand, spending, borrowing and savings habits;   • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;   • our ability to retain key employees;   • cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;   • technological changes that may be more difficult or expensive than expected;   • the ability of third-party providers to perform their obligations to us;   • the effect of any pandemic; including COVID-19;   • the effects of federal government shutdown;   • the effects of any national or international war, conflict, or act of terrorism;   • the ability of the U.S. Government to manage federal debt limits;   • significant increases in our loan losses; and   • changes in the financial condition, results of operations or future prospects of issuers of securities that we own.     - 1 - Table of Contents   See also the factors regarding future operations discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" below.   Waterstone Financial, Inc.   Waterstone Financial, Inc., a Maryland corporation (“New Waterstone”), was organized in 2013.  Upon completion of the mutual-to-stock conversion of Lamplighter Financial, MHC in 2014, New Waterstone became the holding company of WaterStone Bank SSB and succeeded to all of the business and operations of Waterstone Financial, Inc., a Federal corporation (“Waterstone-Federal”) and each of Waterstone-Federal and Lamplighter Financial, MHC ceased to exist.  In this report, we refer to WaterStone Bank SSB, our wholly owned subsidiary, both before and after the reorganization, as “WaterStone Bank” or the “Bank.”   Waterstone Financial, Inc. and its subsidiaries, including WaterStone Bank, are referred to herein as the “Company,” “Waterstone Financial,” or “we.”   The Company maintains a website at www.wsbonline.com . We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and proxy materials as soon as is reasonably practical after the Company electronically files those materials with, or furnishes them to, the Securities and Exchange Commission. You may access those reports by following the links under “Investor Relations” at the Company’s website. Information on this website is not and should not be considered a part of this document.   Waterstone Financial’s executive offices are located at 11200 West Plank Court, Wauwatosa, Wisconsin 53226, and its telephone number at this address is (414) 761-1000.   - 2 - Table of Contents   BUSINESS OF WATERSTONE BANK   General   WaterStone Bank is a community bank that has served the banking needs of its customers since 1921. WaterStone Bank also has an active mortgage banking subsidiary, Waterstone Mortgage Corporation, which had 78 offices in 26 states as of December 31, 2022.   WaterStone Bank conducts its community banking business from 14 banking offices located in Milwaukee, Washington and Waukesha counties, Wisconsin. WaterStone Bank’s principal lending activity is originating one- to four-family, multi-family residential, and commercial real estate loans for retention in its portfolio. At December 31, 2022, such loans comprised 31.09%, 44.90%, and 17.41%, respectively, of WaterStone Bank’s loan portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, commercial business loans, and consumer loans. WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances. Our deposit offerings include certificates of deposit, money market savings accounts, transaction deposit accounts, noninterest bearing demand accounts and individual retirement accounts. Our investment securities portfolio is comprised principally of mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise bonds, private-label enterprise bonds, municipal obligations, and other debt securities.   WaterStone Bank is subject to comprehensive regulation and examination by the Wisconsin Department of Financial Institutions (the "WDFI") and the Federal Deposit Insurance Corporation (the "FDIC").   WaterStone Bank’s executive offices are located at 11200 West Plank Court, Wauwatosa, Wisconsin 53226, and its telephone number is (414) 761-1000.  Its website address is www.wsbonline.com . Information on this website is not and should not be considered a part of this document.   WaterStone Bank’s mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation.  Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market.  Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed.  On a consolidated basis, Waterstone Mortgage Corporation originated $2.76 billion in mortgage loans held for sale during the year ended December 31, 2022, which excludes the loans originated from Waterstone Mortgage Corporation and purchased by WaterStone Bank.   Subsidiary Activities   Waterstone Financial currently has one wholly-owned subsidiary, WaterStone Bank, which in turn has three wholly-owned subsidiaries. Wauwatosa Investments, Inc., which holds and manages our investment portfolio, is located and incorporated in Nevada. Waterstone Mortgage Corporation is a mortgage banking business incorporated in Wisconsin. Main Street Real Estate Holdings, LLC is a Wisconsin limited liability corporation and previously owned WaterStone Bank office facilities and held WaterStone Bank office facility leases.   Wauwatosa Investments, Inc.   Established in 1998, Wauwatosa Investments, Inc. operates in Nevada as WaterStone Bank’s investment subsidiary.  This wholly-owned subsidiary owns and manages the majority of the consolidated investment portfolio.  It has its own board of directors currently comprised of its President, the WaterStone Bank Chief Financial Officer, Treasury Officer and the Chairman of Waterstone Financial’s board of directors.   Waterstone Mortgage Corporation.   Acquired in 2006, Waterstone Mortgage Corporation is a mortgage banking business with offices in 26 states.  It has its own board of directors currently comprised of its President, its Chief Financial Officer, its Chief Operating Officer, the WaterStone Bank Chief Executive Officer, President, Chief Financial Officer and Chief Credit Officer.   Main Street Real Estate Holdings, LLC.   Established in 2002, Main Street Real Estate Holdings, LLC was established to acquire and hold WaterStone Bank office and retail facilities, both owned and leased.  Main Street Real Estate Holdings, LLC currently conducts real estate broker activities limited to real estate owned.   Market Area   WaterStone Bank.   WaterStone Bank’s market area is broadly defined as the Milwaukee, Wisconsin metropolitan market, which is geographically located in the southeast corner of the state.  WaterStone Bank’s primary market area is Milwaukee and Waukesha counties and the five surrounding counties of Ozaukee, Washington, Jefferson, Walworth and Racine. We have nine branch offices in Milwaukee County, four branch offices in Waukesha County and one branch office in Washington County.  At June 30, 2022 (the latest date for which information was publicly available), 49.0% of deposits in the State of Wisconsin were located in the seven-county Milwaukee metropolitan market and 42.4% of deposits in the State of Wisconsin were located in the three counties in which the Bank has a branch office.   WaterStone Bank’s primary market area for deposits includes the communities in which we maintain our banking office locations. Our primary lending market area is broader than our primary deposit market area and includes all of the primary market area noted above but extends further west to the Madison, Wisconsin market and further north to the Appleton and Green Bay, Wisconsin markets.   Waterstone Mortgage Corporation.   As of December 31, 2022, Waterstone Mortgage Corporation had 13 offices in Florida, nine offices in New Mexico, seven offices in each of Virginia and Wisconsin, five offices in Texas, four offices in Maryland, three offices in each of Arizona, Illinois, Oklahoma, and Pennsylvania, two offices in each of Colorado, Michigan, New Hampshire, South Carolina, and Tennessee, and one office in each of Delaware, Idaho, Indiana, Iowa, Kansas, Kentucky, Minnesota, Missouri, New Jersey, North Dakota, and Rhode Island.   - 3 - Table of Contents   Competition   WaterStone Bank .   WaterStone Bank faces competition within our market area both in making real estate loans and attracting deposits. The Milwaukee-Waukesha metropolitan statistical area has a high concentration of financial institutions, including large commercial banks, community banks and credit unions. As of June 30, 2022, based on the FDIC annual Summary of Deposits Report, we had the 10th largest market share in our metropolitan statistical area out of 46 financial institutions, representing 1.4% of all deposits.   Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from money market funds, brokerage firms, and mutual funds. Some of our competitors offer products and services that we do not offer, such as trust services and private banking.   Our primary focus is to build and develop profitable consumer and commercial customer relationships while maintaining our role as a community bank.   Waterstone Mortgage Corporation.   Waterstone Mortgage Corporation faces competition for originating loans both directly within the markets in which it operates and from entities that provide services throughout the United States through internet services.  Waterstone Mortgage Corporation’s competition comes principally from other mortgage banking firms, as well as from commercial banks, savings institutions and credit unions.   Lending Activities   The scope of the discussion included under “Lending Activities” is limited to lending operations related to loans originated for investment.  A discussion of the lending activities related to loans originated for sale is included under “Mortgage Banking Activity.”   Historically, our principal lending activity has been originating mortgage loans for the purchase or refinancing of residential and commercial real estate. Generally, we retain the loans that we originate, which we refer to as loans originated for investment. One- to four-family residential mortgage loans represented $469.6 million, or 31.1%, of our total loan portfolio at December 31, 2022.  Multi-family residential mortgage loans represented $678.0 million, or 44.9%, of our total loan portfolio at December 31, 2022.  Commercial real estate loans represented $263.0 million, or 17.4%, of our total loan portfolio at December 31, 2022. We also offer construction and land loans, home equity lines of credit and commercial loans.  At December 31, 2022, commercial business loans, home equity loans, and construction and land loans totaled $24.9 million, $11.5 million and $62.5 million, respectively.   The largest exposure to one borrower or group of related borrowers was $43.8 million in the multi-family category.  The borrower represented a total of 2.9% of the total loan portfolio as of December 31, 2022.   Loan Portfolio Composition.   The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the total portfolio at the dates indicated.       At December 31,       2022     2021     2020       Amount     Percent     Amount     Percent     Amount     Percent       (Dollars in Thousands)   Mortgage loans:                                                 Residential real estate:                                                 One- to four-family   $ 469,567       31.09 %   $ 300,523       24.92 %   $ 426,792       31.04 % Multi-family     677,981       44.90 %     537,956       44.62 %     571,948       41.59 % Home equity     11,455       0.76 %     11,012       0.91 %     14,820       1.08 % Construction and land     62,494       4.14 %     82,588       6.85 %     77,080       5.61 % Commercial real estate     262,973       17.41 %     250,676       20.79 %     238,375       17.33 % Commercial loans     24,934       1.65 %     22,298       1.85 %     45,386       3.30 % Consumer     774       0.05 %     732       0.06 %     736       0.05 % Total     1,510,178       100.00 %     1,205,785       100.00 %     1,375,137       100.00 %                                                   Allowance for credit losses ("ACL") - loans (1)     (17,757 )             (15,778 )             (18,823 )                                                           Loans, net   $ 1,492,421             $ 1,190,007             $ 1,356,314             (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    - 4 - Table of Contents   Loan Portfolio Maturities and Yields.   The following table summarizes the final maturities of our loan portfolio at December 31, 2022. Maturities are based upon the final contractual payment dates and do not reflect the impact of prepayments and scheduled monthly payments that will occur.       On- to four-family     Multi family     Home Equity     Construction and Land               Weighted             Weighted             Weighted             Weighted   Maturity period as of           Average             Average             Average             Average   December 31, 2022   Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate       (Dollars in Thousands)   One year or less   $ 12,485       3.68 %   $ 17,242       4.36 %   $ 1,212       6.44 %   $ 568       5.99 % More than one year through five years     50,726       4.68 %     433,847       4.02 %     6,149       6.81 %     25,940       5.54 % More than five years through 15 years     66,478       4.97 %     225,422       4.89 %     4,055       4.69 %     35,986       3.90 % More than 15 years     339,878       4.75 %     1,470       4.01 %     39       5.13 %     -       0.00 % Total   $ 469,567       4.74 %   $ 677,981       4.32 %   $ 11,455       6.01 %   $ 62,494       4.60 %       Commercial Real Estate     Commercial Business     Consumer     Total               Weighted             Weighted             Weighted             Weighted   Maturity period as of           Average             Average             Average             Average   December 31, 2022   Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate       (Dollars in Thousands)   One year or less   $ 27,745       4.34 %   $ 4,926       6.94 %   $ 774       7.98 %   $ 64,952       4.51 % More than one year through five years     160,154       4.56 %     11,903       5.03 %     -       0.00 %     688,719       4.29 % More than five years through 15 years     75,074       4.30 %     8,105       5.91 %     -       0.00 %     415,120       4.73 % More than 15 years     -       -       -       -       -       0.00 %     341,387       4.74 % Total   $ 262,973       4.46 %   $ 24,934       5.70 %   $ 774       7.98 %   $ 1,510,178       4.52 %   The following table sets forth the scheduled repayments of fixed and adjustable rate loans at December 31, 2022 that are contractually due after December 31, 2023.       Due After December 31, 2023       Fixed     Adjustable     Total       (In Thousands)   Mortgage loans:                         Residential real estate:                         One- to four-family   $ 41,378     $ 415,704     $ 457,082   Multi-family     425,144       235,595       660,739   Home equity     1,369       8,874       10,243   Construction and land     41,347       20,579       61,926   Commercial real estate     167,676       67,552       235,228   Commercial loans     18,079       1,929       20,008   Consumer     -       -       -   Total loans   $ 694,993     $ 750,233     $ 1,445,226     One- to Four-Family Residential Mortgage Loans.   One- to four-family residential mortgage loans totaled $469.6 million, or 31.1% of total loans at December 31, 2022.  Our one- to four-family residential mortgage loans have fixed or adjustable rates.  Our single family adjustable-rate mortgage loans generally provide for maximum annual rate adjustments of 200 basis points, with a lifetime maximum adjustment of 600 basis points.  Our adjustable-rate mortgage loans typically amortize over terms of up to 30 years, and are indexed to either the 12-month SOFR rate or the 12-month LIBOR.  Single family adjustable rate mortgage loans are originated at both our community banking segment and our mortgage banking segment. We do not offer and have never offered residential mortgage loans specifically designed for borrowers with sub-prime credit scores, including Alt-A and negative amortization loans.   Adjustable rate mortgage loans can decrease the interest rate risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the loan payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate mortgage loans in decreasing the risk associated with changes in interest rates may be limited during periods of rapidly rising interest rates. Moreover, during periods of rapidly declining interest rates the interest income received from the adjustable rate loans can be significantly reduced, thereby adversely affecting interest income.   - 5 - Table of Contents   All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise transfers the real property subject to the mortgage and the loan is not repaid.  We also require homeowner’s insurance and where circumstances warrant, flood insurance, on properties securing real estate loans.  The average one- to four-family first mortgage loan balance was approximately $276,000 on December 31, 2022, and the largest outstanding balance on that date was $5.9 million, which is a consolidation loan that is collateralized by 86 single family properties.  A total of 37.1% of our one- to four-family loans are collateralized by properties in the state of Wisconsin.   Multi-family   Real Estate Loans.   Multi-family loans totaled $678.0 million, or 44.9% of total loans at December 31, 2022. These loans are generally secured by properties located in our primary market area. Our multi-family real estate underwriting policies generally provide that such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided the loan complies with our current loans-to-one borrower limit. Multi-family real estate loans are offered with interest rates that are fixed for periods of up to five years or are variable and either adjust based on a market index or at our discretion. Contractual maturities do not exceed 10 years while principal and interest payments are typically based on a 30-year amortization period. In reaching a decision whether to make a multi-family real estate loan, we consider gross revenues and the net operating income of the property, the borrower’s expertise and credit history, global cash flows, and the appraised value of the underlying property. We will also consider the terms and conditions of the leases and the credit quality of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before interest, income taxes, depreciation and amortization divided by interest expense and current maturities of long term debt) of at least 1.15 times. Generally, multi-family loans made to corporations, partnerships and other business entities require personal guarantees from the principals and by the owners of 20% or more of the borrower.   A multi-family borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower.  We generally require borrowers with aggregate outstanding balances exceeding $1.0 million to provide updated financial statements and federal tax returns annually.  These requirements also apply to most guarantors on these loans.  We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable.  The average outstanding multi-family mortgage loan balance was approximately $1.4 million on December 31, 2022, with the largest outstanding balance at $16.7 million.   Loans secured by multi-family real estate generally involve larger principal amounts than owner-occupied, one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties often depend on the successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.   Home Equity Loans and Lines of Credit . We also offer home equity loans and home equity lines of credit, both of which are secured by owner-occupied and non-owner occupied one- to four-family residences.  At December 31, 2022, outstanding home equity loans and equity lines of credit totaled $11.5 million, or 0.8% of total loans outstanding.  At December 31, 2022, the unadvanced portion of home equity lines of credit totaled $9.5 million.  The underwriting standards utilized for home equity loans and home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan, and the value of the collateral securing the loan.  Home equity loans are offered with adjustable rates of interest and with terms up to seven years.  The loan-to-value ratio for our home equity loans and our lines of credit is generally limited to 90% when combined with the first security lien, if applicable.  Our home equity lines of credit have ten-year terms and adjustable rates of interest, subject to a contractual floor, which are indexed to the prime rate, as reported in The Wall Street Journal .  Interest rates on home equity lines of credit are generally limited to a maximum rate of 18%.  The average outstanding home equity loan balance was approximately $47,000 at December 31, 2022, with the largest outstanding balance at that date of $334,000.   Construction and Land Loans.   We originate construction loans for the acquisition of land and the construction of single-family residences, multi-family residences, and commercial real estate buildings.  At December 31, 2022, construction and land loans totaled $62.5 million, or 4.1% of total loans.   A total of $48.5 million had yet to be advanced as of December 31, 2022.   Our construction mortgage loans generally provide for the payment of interest only during the construction phase, which is typically up to nine months for single-family residences although our policy is to consider construction periods as long as three years for multi-family residences and commercial buildings. At the end of the construction phase, the construction loan converts to a longer-term mortgage loan upon stabilization. Construction loans can be made with a maximum loan-to-value ratio of 90%, provided that the borrower obtains private mortgage insurance if the owner-occupied residential loan balance exceeds 80% of the lesser of the appraised value or acquisition cost of the secured property. The average outstanding construction loan balance totaled approximately $4.3 million on December 31, 2022, with the largest outstanding balance at $15.3 million.  The average outstanding land loan balance was approximately $169,000 on December 31, 2022, and the largest outstanding balance on that date was $604,000.   Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on either the percentage of completion method or the actual cost of the completed work.   Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is inaccurate, we may be confronted with a project, when completed, with a value that is insufficient to ensure full repayment of the loan.   - 6 - Table of Contents   Commercial Real Estate Loans.   Commercial real estate loans totaled $263.0 million at December 31, 2022, or 17.4% of total loans, and are made up of loans secured by office and retail buildings, industrial buildings, churches, restaurants, other retail properties and mixed use properties. These loans are generally secured by property located in our primary market area. Our commercial real estate underwriting policies provide that such real estate loans may be made in amounts of up to 80% of the appraised value of the property. Commercial real estate loans are offered with interest rates that are fixed up to five years or are variable and either adjust based on a market index or at our discretion. Contractual maturities do not exceed 10 years while principal and interest payments are typically based on a 20 to 25-year amortization period. In reaching a decision whether to make a commercial real estate loan, we consider gross revenues and the net operating income of the property, the borrower’s expertise and credit history, business and global cash flow, and the appraised value of the underlying property. In addition, we will also consider the terms and conditions of the leases and the credit quality of the tenants, if applicable. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before interest, income taxes, depreciation and amortization divided by interest expense and current maturities of long term debt) of at least 1.15 times. Environmental surveys are required for commercial real estate loans when environmental risks are identified. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals and by the owners of 20% or more of the borrower.   A commercial real estate borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower.  We generally require borrowers with aggregate outstanding balances exceeding $1.0 million to provide annual updated financial statements and federal tax returns.  These requirements also apply to all guarantors on these loans.  We also require borrowers to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable.  The average commercial real estate loan in our portfolio at December 31, 2022 was approximately $960,000, and the largest outstanding balance at that date was $16.1 million.   Commercial Loans.   Commercial loans totaled $24.9 million at December 31, 2022, or 1.7%% of total loans, and are made up of loans secured by accounts receivable, inventory, equipment and real estate.   Our commercial loans are generally made to borrowers that are located in our primary market area.  Working capital lines of credit are granted for the purpose of carrying inventory and accounts receivable or purchasing equipment.  These lines require that certain collateral levels must be maintained and are monitored on a monthly or quarterly basis.  Working capital lines of credit are short-term loans of 12 months or less with variable interest rates.  At December 31, 2022, the unadvanced portion of working capital lines of credit totaled $17.4 million.  Outstanding balances fluctuate up to the maximum commitment amount based on fluctuations in the balance of the underlying collateral.  Personal property loans secured by equipment are considered commercial business loans and are generally made for terms of up to 84 months and for up to 80% of the value of the underlying collateral.  Interest rates on equipment loans may be either fixed or variable.  Commercial business loans are generally variable rate loans with initial fixed rate periods of up to five years.   A commercial business borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, usually quarterly, payment history reviews and periodic face-to-face meetings with the borrower. The average outstanding commercial loan at December 31, 2022 was $367,000 and the largest outstanding balance on that date was $7.1 million.   Origination and Servicing of Loans.   All loans originated for investment are underwritten pursuant to internally developed policies and procedures.  While we generally underwrite owner-occupied residential mortgage loans to Freddie Mac and Fannie Mae standards, due to several unique characteristics, our loans originated prior to 2008 do not conform to the secondary market standards.  The unique features of these loans include interest payments in advance of the month in which they are earned and discretionary rate adjustments that are not tied to an independent index.   Exclusive of our mortgage banking operations, we retain in our portfolio all of the loans that we originate. At December 31, 2022, WaterStone Bank was not servicing any loan it originated and subsequently sold to unrelated third parties. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.   - 7 - Table of Contents   Loan Approval Procedures and Authority .   WaterStone Bank’s lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by WaterStone Bank’s board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan, if applicable. To assess the borrower’s ability to repay, we review the employment and credit history and information on the historical and projected income and expenses of borrowers. Loan officers, with concurrence from independent credit officers and underwriters, are authorized to approve and close any loan that qualifies under WaterStone Bank underwriting guidelines within the following lending limits:     ● Any secured mortgage loan up to $500,000 for a borrower with total outstanding loans from us of less than $1.0 million that is independently underwritten can be approved by the Chief Credit Officer or select lending personnel.     ● Any secured mortgage loan up to $1.0 million can be approved jointly the Chief Executive Officer.     ● Any secured mortgage loan ranging from $500,001 to $3.0 million or any new loan to a borrower with outstanding loans from us exceeding $1.0 million must be approved by the Officer Loan Committee.     ● Any non-real estate loan up to $250,000 for a borrower with total outstanding loans from us of less than $250,000 that is independently underwritten can be approved by select lending personnel.     ● Any non-real estate loan up to $500,000 for a borrower with total outstanding loans from us of less than $500,000 that is independently underwritten can be approved by the Chief Executive Officer or Business Banking Manager.     ● Any non-real estate loan ranging from $500,001 to $3.0 million or any new non-real estate loan to a borrower with outstanding loans exceeding $500,000 must be approved by the Officer Loan Committee.     ● Any new loan over $3.0 million must be approved by the Officer Loan Committee and the board of directors prior to closing. Any new loan to a borrower with outstanding loans from us exceeding $10.0 million must be reviewed by the board of directors.   Asset Quality   When a loan becomes more than 30 days delinquent, WaterStone Bank sends a letter advising the borrower of the delinquency.  The borrower is given a specific date by which delinquent payments must be made or by which they must contact WaterStone Bank to make arrangements to bring the loan current over a longer period of time.  If the borrower fails to bring the loan current within the specified time period or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are considered.   All loans are reviewed on a regular basis, and loans are placed on non-accrual status when they become 90 or more days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received when collection of the remaining principal balance is reasonably assured.   Non-Performing Assets.   Non-performing assets consist of non-accrual loans and other real estate owned.  Loans are generally placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments.  Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, management may place such loans on non-accrual status immediately, rather than waiting until the loan becomes 90 days past due. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest on such loans is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured.  Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.   - 8 - Table of Contents   The table below sets forth the amounts and categories of our non-accrual loans and real estate owned at the dates indicated.       At December 31,       2022     2021     2020       (Dollars in Thousands)   Non-accrual loans:                         Residential                         One- to four-family   $ 4,209     $ 5,420     $ 5,072   Multi family     -       128       341   Home equity     98       26       63   Construction and land     -       -       43   Commercial real estate     -       -       41   Commercial     -       -       -   Consumer     -       -       -   Total non-accrual loans     4,307       5,574       5,560                             Real estate owned                         One- to four-family     -       -       -   Multi family     -       -       -   Construction and land     145       148       322   Commercial real estate     -       -       -   Total real estate owned     145       148       322   Valuation allowance at end of period     -       -       -   Total real estate owned, net     145       148       322   Total nonperforming assets   $ 4,452     $ 5,722     $ 5,882                             Total non-accrual loans to total loans, net     0.29 %     0.46 %     0.40 % Total non-accrual loans to total assets     0.21 %     0.25 %     0.25 % Total nonperforming assets to total assets     0.22 %     0.26 %     0.27 %   All loans that meet or exceed 90 days with respect to past due principal and interest are recognized as non-accrual. Troubled debt restructurings which are still on non-accrual status either due to being past due 90 days or greater, or which have not yet performed under the modified terms for a reasonable period of time, are included in the table above. In addition, loans which are past due less than 90 days are evaluated to determine the likelihood of collectability given other credit risk factors such as early stage delinquency, the nature of the collateral or the results of a borrower fiscal review. When the collection of all contractual principal and interest is determined to be unlikely, the loan is moved to non-accrual status and an updated appraisal of the underlying collateral is ordered. This process generally takes place between 60 and 90 days past contractual due dates. 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, generally coinciding with the initiation of foreclosure action, the specific reserve is reviewed for adequacy, adjusted if necessary, and charged-off.   The following table sets forth activity in our non-accrual loans for the years indicated.       At and for the Year Ended December 31,       2022     2021     2020       (Dollars in Thousands)                             Balance at beginning of period   $ 5,574     $ 5,560     $ 7,025   Additions     3,306       3,374       3,356   Transfers to real estate owned     -       -       (637 ) Charge-offs     -       (12 )     (11 ) Returned to accrual status     (1,394 )     (1,792 )     (2,501 ) Principal paydowns and other     (3,179 )     (1,556 )     (1,672 ) Balance at end of period   $ 4,307     $ 5,574     $ 5,560     - 9 - Table of Contents   Total non-accrual loans decreased by $1.3 million to $4.3 million as of December 31, 2022 compared to $5.6 million as of December 31, 2021.  The ratio of non-accrual loans to total loans receivable was 0.29% at December 31, 2022 compared to 0.46% at December 31, 2021.  During the year ended December 31, 2022, no loans were transferred to real estate owned or were charged off, $3.2 million in principal payments were received and $1.4 million in loans were returned to accrual status. Offsetting this activity, $3.3 million in loans were placed on non-accrual status during the year ended December 31, 2022.   Of the $4.3 million in total non-accrual loans as of December 31, 2022, $2.6 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.  A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan’s original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset.  Based upon these specific reviews, a total of $30,000 in partial charge-offs have been recorded with respect to these loans as of December 31, 2022. Partially charged-off loans measured for impairment based upon net realizable collateral value are maintained in a “non-performing” status and are disclosed as impaired loans.  There were no specific reserve as of December 31, 2022.  The remaining $1.7 million of non-accrual loans were reviewed on an aggregate basis as of December 31, 2022.     The outstanding principal balance of our five largest non-accrual loans as of December 31, 2022 totaled $2.4 million, which represents 55.7% of total non-accrual loans as of that date.  These five loans did not have any charge-offs or require any specific valuation allowances as of December 31, 2022.   Interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's sustained historical repayment performance and other relevant factors.   There were no accruing loans past due 90 days or more during the years ended December 31, 2022 or  December 31, 2021.    Troubled Debt Restructurings.   The following table summarizes troubled debt restructurings by the Company’s internal risk rating.       December 31,       2022     2021     2020       (Dollars in Thousands)   Troubled debt restructurings                         Substandard   $ 936     $ 3,989     $ 9,249   Watch     -       -       2,320   Total troubled debt restructurings   $ 936     $ 3,989     $ 11,569     Troubled debt restructurings totaled $936,000 at December 31, 2022, compared to $4.0 million at December 31, 2021. At December 31, 2022, all of the troubled debt restructurings were performing in accordance with their restructured terms. All troubled debt restructurings are considered to be impaired and are risk rated as either substandard or watch and are included in the internal risk rating tables disclosed in the notes to the consolidated financial statements. Specific reserves have been established to the extent that the collateral-based impairment analyses indicate that a collateral shortfall exists or to the extent that a discounted cash flow analysis results in an impairment.   Our troubled debt restructurings are short-term modifications.  Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both.  Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court. Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.   - 10 - Table of Contents   Information with respect to the accrual status of our troubled debt restructurings is provided in the following table.       At December 31,       2022     2021       Accruing     Non-accruing     Accruing     Non-accruing       (In Thousands)                                     One- to four-family   $ -     $ 936     $ -     $ 1,670   Commercial real estate     -       -       1,222       -   Commercial     -       -       1,097       -       $ -     $ 936     $ 2,319     $ 1,670     Interest payments received on non-accrual troubled debt restructurings are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's sustained historical repayment performance and other relevant factors.   If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status.  After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification. The restructured loan will be classified as a troubled debt restructuring for at least the calendar year after the modification even after returning to a contractual/market rate and accrual status.   Loan Delinquency.   The following table summarizes loan delinquency in total dollars and as a percentage of the total loan portfolio:       At December 31,       2022     2021       (Dollars in Thousands)                     Loans past due less than 90 days   $ 2,578     $ 2,694   Loans past due 90 days or more     3,683       4,368   Total loans past due   $ 6,261     $ 7,062                     Total loans past due to total loans receivable     0.41 %     0.59 %   Past due loans decreased by $801,000, or 11.3%, to $6.3 million at December 31, 2022 from $7.1 million at December 31, 2021.  Loans past due less than 90 days decreased by $116,000 during the year ended December 31, 2022.  The decrease was primarily due to a decrease in one- to four-family loans during the year ended December 31, 2022. Loans past due 90 days or more decreased $685,000. The decrease in loans past due 90 days or more was primarily due to a decrease in the one-to four-family loans during the year ended December 31, 2022.   - 11 - Table of Contents   Potential Problem Loans.   We define potential problem loans as substandard loans which are still accruing interest.  We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management.  The aggregate principal amounts of potential problem loans as of December 31, 2022 and 2021 were $5.5 million and $7.9 million, respectively.  Management believes it has established an adequate allowance for probable loan losses as appropriate under generally accepted accounting principles.   Real Estate Owned.   Total real estate owned was $145,000 at December 31, 2022, and $148,000 at December 31, 2021.  During the year ended December 31, 2022 and December 31, 2021, there was no significant activity.   New appraisals received on real estate owned and collateral dependent impaired loans are based upon an "as is value" assumption.  During the period of time in which we are awaiting receipt of an updated appraisal, loans evaluated for impairment based upon collateral value are measured by the following:     ● Applying an updated adjustment factor to an existing appraisal;     ● Confirming that the physical condition of the real estate has not significantly changed since the last valuation date;     ● Comparing the estimated current value of the collateral to that of updated sales values experienced on similar collateral;     ● Comparing the estimated current value of the collateral to that of updated values seen on current appraisals of similar collateral; and     ● Comparing the estimated current value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by the Company).   We owned one property at December 31, 2022, December 31, 2021, and December 31, 2020.  Habitable real estate owned is managed with the intent of attracting a lessee to generate revenue. Foreclosed properties are transferred to real estate owned at estimated net realizable value, with charge-offs, if any, charged to the allowance for loan losses upon transfer to real estate owned.  The fair value is primarily based upon updated appraisals in addition to an analysis of current real estate market conditions.       - 12 - Table of Contents   Allowance for Credit Losses   The following table sets forth activity in our allowance for credit losses - loans for the years indicated.       At or for the Year Ended December 31,       2022     2021     2020       (Dollars in Thousands)                             Balance at beginning of period   $ 15,778     $ 18,823     $ 12,387   Adoption of CECL (1)     430       -       -   Provision (credit) for credit losses - loans     1,030       (3,990 )     6,340   Charge-offs:                         Mortgage                         One- to four-family     304       151       82   Multi family     -       -       5   Home Equity     -       -       13   Commercial real estate     -       13       8   Construction and land     -       10       -   Consumer     16       18       10   Commercial     -       -       -   Total charge-offs     320       192       118   Recoveries:                         Mortgage                         One- to four-family     78       949       148   Multi family     727       116       21   Home Equity     18       16       27   Commercial real estate     3       52       2   Construction and land     13       4       16   Consumer     -       -       -   Commercial     -       -       -   Total recoveries     839       1,137       214   Net recoveries     (519 )     (945 )     (96 ) Allowance at end of period   $ 17,757     $ 15,778     $ 18,823                             Ratios:                         Allowance for credit losses to non-accrual loans at end of period (1)     412.28 %     283.06 %     338.54 % Allowance for credit losses to loans receivable at end of period (1)     1.18 %     1.31 %     1.37 % Net (recoveries) charge-offs to average loans:                         Mortgage                         One- to four-family     0.06 %     (0.05 %)     (0.00 %) Multi family     (0.12 %)     (0.01 %)     (0.00 %) Home Equity     (0.16 %)     (0.03 %)     (0.02 %) Construction and land     (0.00 %)     (0.01 %)     0.00 % Commercial real estate     (0.01 %)     0.00 %     (0.00 %) Consumer     2.12 %     0.61 %     0.32 % Commercial     0.00 %     0.00 %     0.00 % Net (recoveries) charge-offs to average loans outstanding     (0.04 %)     (0.07 %)     (0.01 %)   (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    The allowance for credit losses - loans increased $2.0 million to $17.8 million at December 31, 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 along with a $1.0 million provision for credit losses - loans during the during year. Additionally, net recoveries totaled $519,000 for the year ended December 31, 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 $519,000, or 0.04% of average loans annualized, for the year ended December 31, 2022, compared to net recoveries of $945,000 or 0.07% of average loans annualized, for the year ended December 31, 2021. Of the $519,000 in net recoveries during the year ended December 31, 2022, the majority of the activity related to loans secured by multi-family loan categories.   Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral.  Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.   The allowance for credit losses - loans has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors.   - 13 - Table of Contents   Allocation of Allowance for Credit Losses - Loans.   The following table sets forth the allowance for credit losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.       At December 31,       2022     2021     2020       Allowance for Credit Losses - Loans (1)     % of Loans in Category to Total Loans     % of Allowance in Category to Total Allowance     Allowance for Loan Losses - Loans (1)     % of Loans in Category to Total Loans     % of Allowance in Category to Total Allowance     Allowance for Loan Losses - Loans (1)     % of Loans in Category to Total Loans     % of Allowance in Category to Total Allowance       (Dollars in Thousands)   Real estate:                                                                         Residential                                                                         One- to four-family   $ 4,743       31.09 %     26.71 %   $ 3,963       24.92 %     25.12 %   $ 5,459       31.04 %     29.00 % Multi family     7,975       44.90 %     44.91 %     5,398       44.62 %     34.21 %     5,600       41.59 %     29.75 % Home equity     174       0.76 %     0.98 %     89       0.91 %     0.56 %     194       1.08 %     1.03 % Construction and land     1,352       4.14 %     7.61 %     1,386       6.85 %     8.78 %     1,755       5.61 %     9.32 % Commercial real estate     3,199       17.41 %     18.02 %     4,482       20.79 %     28.41 %     5,138       17.33 %     27.30 % Commercial     267       1.65 %     1.50 %     427       1.85 %     2.71 %     642       3.30 %     3.41 % Consumer     47       0.05 %     0.26 %     33       0.06 %     0.21 %     35       0.05 %     0.19 % Total allowance for credit losses - loans (1)   $ 17,757       100.00 %     100.00 %   $ 15,778       100.00 %     100.00 %   $ 18,823       100.00 %     100.00 %   (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral.  Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.   The allowance for credit losses - loans has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors.    - 14 - Table of Contents   The establishment of the amount of the credit loss allowance inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct. Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years.   At December 31, 2022, the allowance for credit losses - loans was $17.8 million, compared to $15.8 million at December 31, 2021.  As of December 31, 2022, the allowance for credit losses to total loans receivable was 1.18% and  412.28% of non-performing loans, compared to 1.31%, and 283.06%, respectively at December 31, 2021.  The decrease in the allowance for credit losses during the year ended December 31, 2022 reflects an improvement in certain economic factors, decreasing the required allowance related to the loans collectively reviewed. The overall decrease was related to each of the one- to four-family, multi family, home equity, construction and land, commercial real estate, consumer, and commercial categories. See Note 3 of the notes to the consolidated financial statements for further discussion on the allowance for credit losses - loans.   Mortgage Banking Activity   In addition to the lending activities previously discussed, we also originate single-family residential mortgage loans for sale in the secondary market through Waterstone Mortgage Corporation.  Waterstone Mortgage Corporation originated, including loans sold to WaterStone Bank, $2.76 billion in mortgage loans held for sale during the year ended December 31, 2022, which was a volume decrease of $1.47 billion, or 34.6%, from the $4.23 billion originated during the year ended December 31, 2021.  The decrease in loan production volume was driven by a $986.3 million, or 76.6%, decrease in refinance products as mortgage rates increased from the prior year. Mortgage purchase products decreased $478.8 million, or 16.3%, due to an increase in mortgage rates year-over-year and the decline in affordable housing inventories. Total mortgage banking income decreased $93.5 million, or 47.3%, to $104.1 million during the year ended December 31, 2022 compared to $197.6 million during the year ended December 31, 2021. The decrease in mortgage banking noninterest income was related to a 34.6% decrease in volume and an 18.3% decrease in gross margin on loans originated and sold for the year ended December 31, 2022 compared to December 31, 2021.  Gross margin on those 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.  We sell loans on both a servicing-released and a servicing retained basis. Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.   Our gross margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance).  Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan.  Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 89.1% of total originations during the year ended December 31, 2022, compared to 69.5% of total originations during the year ended December 31, 2021.  The mix of loan type trended towards more governmental loans and less conventional loans comprising 29.3% and 70.7% of all loan originations, respectively, during the year ended December 31, 2022, compared to 23.4% and 76.6% of all loan originations, respectively, during the year ended December 31, 2021.   Investment Activities   Wauwatosa Investments, Inc. is WaterStone Bank’s investment subsidiary headquartered in the State of Nevada.  Wauwatosa Investments, Inc. manages the back office function for WaterStone Bank’s investment portfolio. Our Chief Financial Officer and Treasury Officer are responsible for executing purchases and sales in accordance with our investment policy and monitoring the investment activities of Wauwatosa Investments, Inc. The investment policy is reviewed annually by management and changes to the policy are recommended to and subject to the approval of WaterStone Bank's board of directors. Authority to make investments under the approved investment policy guidelines is delegated by the board to designated employees. While general investment strategies are developed and authorized by management, the execution of specific actions rests with the Chief Financial Officer and Treasury Officer who may act jointly in performing security trades. The Chief Financial Officer and Treasury Officer are responsible for ensuring that the guidelines and requirements included in the investment policy are followed and that all securities are considered prudent for investment. The Chief Financial Officer and the Treasury Officer are authorized to execute investment transactions (purchases and sales) without the prior approval of the board provided they are within the scope of the established investment policy.   Our investment policy requires that all securities transactions be conducted in a safe and sound manner. Investment decisions are based upon a thorough analysis of each security instrument to determine its quality, inherent risks, fit within our overall asset/liability management objectives, effect on our risk-based capital measurement and prospects for yield and/or appreciation.   Consistent with our overall business and asset/liability management strategy, which focuses on sustaining adequate levels of core earnings, our investment portfolio is comprised primarily of securities that are classified as available for sale.  During the years ended December 31, 2022, 2021, and 2020, no investment securities were sold.   - 15 - Table of Contents   Available for Sale Portfolio   Mortgage-backed Securities and Collateralized Mortgage Obligations.   We purchase mortgage-backed securities and collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.  We invest in mortgage-backed securities, collateralized mortgage obligations, and private-label mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk.  We regularly monitor the credit quality of this portfolio.   Mortgage-backed securities, collateralized mortgage obligations, and private-label mortgage-backed securities are created by the pooling of mortgages and the issuance of a security.  These securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage related securities backed by one- to four-family mortgages.  The issuers of such securities pool and resell the participation interests in the form of securities to investors such as WaterStone Bank, and in the case of government agency sponsored issues, guarantee the payment of principal and interest to investors.  Mortgage-backed securities, collateralized mortgage obligations, and private-label mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees, if any, and credit enhancements.  These fixed-rate securities are usually more liquid than individual mortgage loans.   At December 31, 2022, mortgage-backed securities totaled $13.3 million. The mortgage-backed securities portfolio had a weighted average yield of 2.48% and a weighted average remaining life of 9.7 years at December 31, 2022. The estimated fair value of our mortgage-backed securities portfolio at December 31, 2022 was $1.8 million less than the amortized cost of $15.1 million. Mortgage-backed securities valued at $259,000 were pledged as collateral for mortgage banking activities as of December 31, 2022. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the fair value of such securities may be adversely affected in a rising interest rate environment, particularly since all of our mortgage-backed securities have a fixed rate of interest.    At December 31, 2022, collateralized mortgage obligations totaled $124.8 million. At December 31, 2022, the collateralized mortgage obligations portfolio consisted entirely of securities backed by government sponsored enterprises or U.S. Government agencies.  The collateralized mortgage obligations portfolio had a weighted average yield of 2.06% and a weighted average remaining life of 6.0 years at December 31, 2022. The estimated fair value of our collateralized mortgage obligations portfolio at December 31, 2022 was $21.0 million less than the amortized cost of $145.7 million. Investments in collateralized mortgage obligations involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the fair value of such securities may be adversely affected in a rising interest rate environment, particularly since all of our collateralized mortgage obligations have a fixed rate of interest.    Private-Label Mortgage-backed Securities.   At December 31, 2022, private-label mortgage-backed securities totaled $8.1 million. These securities had a weighted average yield of 3.61% and a weighted average remaining life of 5.3 years at December 31, 2022. The estimated fair value of our private-label mortgage-backed securities portfolio at December 31, 2022 was $935,000 less than the amortized cost of $9.0 million. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the fair value of such securities may be adversely affected in a rising interest rate environment, particularly since all of our mortgage-backed securities have a fixed rate of interest.   Government Sponsored Enterprise Bonds.   At December 31, 2022, our Government sponsored enterprise bond portfolio totaled $2.3 million, all of which were issued by Federal National Mortgage Association ("Fannie Mae") and were classified as available for sale.  The weighted average yield on these securities was 0.60% and the weighted average remaining average life was 2.6 years at December 31, 2022.  While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes and prepayment protection.  The estimated fair value of our government sponsored enterprise bond portfolio at December 31, 2022 was $244,000 less than the amortized cost of $2.5 million.   Municipal Obligations.   These securities consist of obligations issued by school districts, counties and municipalities or their agencies and include general obligation bonds, industrial development revenue bonds and other revenue bonds.  Our investment policy requires that such municipal obligations be rated A+ or better by a nationally recognized rating agency at the date of purchase.  A security that is downgraded below investment grade will require additional analysis of creditworthiness and a determination will be made to hold or dispose of the investment.  We regularly monitor the credit quality of this portfolio.  At December 31, 2022, our municipal obligations portfolio totaled $36.9 million, all of which was classified as available for sale.  The weighted average yield on this portfolio was 3.94% at December 31, 2022, with a weighted average remaining life of 6.8 years.  The estimated fair value of our municipal obligations bond portfolio at December 31, 2022 was $765,000 less than the amortized cost of $37.7 million.       - 16 - Table of Contents   Other Debt Securities.   As of December 31, 2022, we held other debt securities in the portfolio that totaled $11.2 million.  Other debt securities consists of two corporate bonds. The weighted average yield on this portfolio was 3.43% at December 31, 2022, with a weighted average remaining life of 7.3 years.  We regularly monitor the credit quality of this portfolio. The unrealized losses for the other debt securities is due to the current slope of the yield curve. One security earns a floating rate that is indexed to the 10 year Treasury interest rate.   As of December 31, 2022, no allowance for credit losses on securities was recognized. The Company does not consider its securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.   Portfolio Maturities and Yields.   The composition and maturities of the debt securities portfolio at December 31, 2022 are summarized in the following table.  Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.  Municipal obligation yields have not been adjusted to a tax-equivalent basis.  Certain mortgage related securities have interest rates that are adjustable and will reprice annually within the various maturity ranges.  These repricing schedules are not reflected in the table below.       One Year or Less     More than One Year through Five Years     More than Five Years through Ten Years     More than Ten Years     Total Securities               Weighted             Weighted             Weighted             Weighted             Weighted       Amortized     Average     Amortized     Average     Amortized     Average     Amortized     Average     Amortized     Average       Cost     Yield     Cost     Yield     Cost     Yield     Cost     Yield     Cost     Yield       (Dollars in Thousands)   Debt securities available for sale:                                                                                 Mortgage-backed securities   $ 244       2.45 %   $ 5,420       2.71 %   $ 850       3.47 %   $ 8,620       2.24 %   $ 15,134       2.48 % Collateralized mortgage obligations:                                                                                 Government sponsored enterprise issued     3,088       5.26 %     37,358       3.07 %     103,640       1.62 %     1,654       1.01 %     145,740       2.06 % Private-label issued     890       6.79 %     3,639       3.92 %     4,512       2.72 %     -       -       9,041       3.61 % Government sponsored enterprise bonds     -       -       2,500       0.60 %     -       -       -       -       2,500       0.60 % Municipal obligations     3,706       2.69 %     15,717       3.79 %     5,622       5.13 %     12,654       3.97 %     37,699       3.94 % Other debt securities     -       -       -       -       12,500       3.43 %     -       -       12,500       3.43 % Total debt securities available for sale   $ 7,928       4.14 %   $ 64,634       3.17 %   $ 127,124       2.01 %   $ 22,928       3.11 %   $ 222,614       2.53 %   Sources of Funds   General.   Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on advances from the Federal Home Loan Bank of Chicago and borrowings from other commercial banks in the form of repurchase agreements collateralized by investment securities.  In addition to deposits and borrowings, we derive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets.  While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, economic conditions and competition from other financial institutions.   Deposits.   A majority of our depositors are persons or businesses who work, reside, or are located in Milwaukee and Waukesha Counties and, to a lesser extent, other southeastern Wisconsin communities. We offer a selection of deposit instruments, including checking, savings, money market deposit accounts, and fixed-term certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. As of December 31, 2022, certificates of deposit comprised 53.6% of total customer deposits, and had a weighted average cost of 1.52% on that date. Our reliance on certificates of deposit has resulted in a higher cost of funds than would otherwise be the case if demand deposits, savings and money market accounts made up a larger part of our deposit base. Development of our branch network and expansion of our commercial products and services and aggressively seeking lower cost savings, checking and money market accounts are expected to result in decreased reliance on higher-cost certificates of deposit.   Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis.  Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals.  To attract and retain deposits, we rely upon personalized customer service, long-standing relationships and competitive interest rates.  We also provide remote deposit capture, internet banking and mobile banking.   The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition.  The variety of deposit accounts that we offer allows us to be competitive in obtaining funds and responding to changes in consumer demand.  Based on historical experience, management believes our deposits are relatively stable.  The ability to attract and maintain money market accounts and certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.  At December 31, 2022 and December 31, 2021, $642.3 million and $626.7 million of our deposit accounts were certificates of deposit, of which $502.3 million and $533.0 million, respectively, had remaining maturities of one year or less.   Deposits decreased by $34.4 million, or 2.8%, from December 31, 2021 to December 31, 2022. The decrease in deposits was the result of a $50.0 million, or 8.2%, decrease in total transaction accounts offset by a $15.6 million, or 2.5% increase in time deposits.  The Company had no deposits obtained directly from brokers as of December 31, 2022 and December 31, 2021.   - 17 - Table of Contents   The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.       At December 31,       2022     2021     2020       Average Balance     Average Cost of Funds     Ending Weighted Average Yield     Average Balance     Average Cost of Funds     Ending Weighted Average Yield     Average Balance     Average Cost of Funds     Ending Weighted Average Yield       (Dollars in Thousands)   Deposit type:                                                                         Demand deposits   $ 159,495       0.00 %     0.00 %   $ 146,767       0.00 %     0.00 %   $ 116,771       0.00 %     0.00 % NOW accounts     72,751       0.08 %     0.08 %     64,653       0.08 %     0.08 %     47,410       0.08 %     0.07 % Regular savings     69,988       0.04 %     0.13 %     69,988       0.04 %     0.03 %     75,643       0.04 %     0.03 % Money market and savings deposits     321,182       0.37 %     1.41 %     293,942       0.30 %     0.27 %     189,079       0.64 %     0.59 % Total transaction accounts     623,416       0.20 %     0.66 %     575,350       0.17 %     0.15 %     428,903       0.30 %     0.29 %                                                                           Certificates of deposit     602,332       0.60 %     1.52 %     675,495       0.51 %     0.38 %     733,033       1.71 %     0.86 % Total deposits   $ 1,225,748       0.40 %     1.12 %   $ 1,250,845       0.35 %     0.27 %   $ 1,161,936       1.19 %     0.63 %   At December 31, 2022 and 2021, the aggregate balance of uninsured deposits of $250,000 or more was $313.3 million and $263.3 million, respectively. The Company does not have uninsured deposits less than $250,000 in aggregate balance. The following table sets forth the maturity of uninsured certificates of deposits at December 31, 2022 and 2021.       At December 31,       2022     2021       (In Thousands)   Due in:                 Three months or less   $ 26,246     $ 29,554   Over three months through six months     20,371       25,018   Over six months through 12 months     40,637       31,572   Over 12 months     23,681       16,419       $ 110,935     $ 102,563     Borrowings.   Our borrowings at December 31, 2022 consisted of $385.7 million in advances from the Federal Home Loan Bank of Chicago and $1.1 million outstanding balance in short-term repurchase agreements used to fund loans held for sale. The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the periods indicated.       At or For the Year Ended December 31,       2022     2021     2020       (Dollars in Thousands)   Borrowings:                         Balance outstanding at end of year   $ 386,784     $ 477,127     $ 508,074   Weighted average interest rate at the end of year     3.68 %     2.02 %     1.95 % Average balances outstanding during the year   $ 348,482     $ 479,262     $ 545,741   Weighted average interest rate during the year     2.42 %     2.08 %     1.95 %   - 18 - Table of Contents   Human Capital   As of December 31, 2022, we had 742 full-time equivalent employees.  A total of 172 are WaterStone Bank employees and 570 are employees of Waterstone Mortgage Corporation. We believe we are able to attract and retain top talent by creating a culture that challenges and engages our employees, offering them opportunities to learn, grow and achieve their career goals. Further, our commitment to a culture of inclusion is integral to our goal of attracting and retaining the best talent and ultimately driving our business performance. Our Diversity and Inclusion strategy includes regular training and development for all employees and partnerships with non-profit organizations that share in our inclusion mission. Our employees participate in a wide array of volunteer activities and we support their charitable giving by matching employee contributions to qualified nonprofit organizations.   We offer comprehensive compensation and benefits packages to our employees including a 401k Plan, Employee Stock Ownership Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off and certain family assistance programs, including paid family leave, flexible work arrangements, amongst others. We also offer stock-based compensation to certain management personnel as a way to attract and retain key talent. See Note 10 - Stock Based Compensation, Note 11 - Employee Benefit Plans, and Note 12 - Employee Stock Ownership Plan to the Consolidated Financial Statements included under Item 8 for further discussion of our stock-based compensation and benefit plans.   Supervision and Regulation   General   WaterStone Bank is a stock savings bank organized under the laws of the State of Wisconsin. The lending, investment, and other business operations of WaterStone Bank are governed by Wisconsin law and regulations, as well as applicable federal law and regulations, and WaterStone Bank is prohibited from engaging in any operations not authorized by such laws and regulations. WaterStone Bank is subject to extensive regulation, supervision and examination by the WDFI and by the Federal Deposit Insurance Corporation.  This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s Deposit Insurance Fund and depositors, and not for the protection of security holders.  WaterStone Bank also is regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters.  WaterStone Bank also is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the 11 regional banks in the Federal Home Loan Bank System.   Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as WaterStone Bank or its holding company, from obtaining necessary regulatory approvals to pay dividends, repurchase shares of common stock, acquire other financial institutions or establish new branches.   In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.   As a savings and loan holding company, Waterstone Financial is required to comply with the rules and regulations of the Federal Reserve Board.  It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board.  Waterstone Financial is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.   Any change in applicable laws or regulations, whether by the WDFI, the Federal Deposit Insurance Corporation, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of Waterstone Financial, WaterStone Bank and Waterstone Mortgage Corporation.   Set forth below is a brief description of material regulatory requirements that are or will be applicable to WaterStone Bank, Waterstone Mortgage Corporation and Waterstone Financial. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on WaterStone Bank, Waterstone Mortgage Corporation and Waterstone Financial.   - 19 - Table of Contents   Intrastate and Interstate Merger and Branching Activities   Wisconsin Law and Regulation. Any Wisconsin savings bank meeting certain requirements may, upon approval of the WDFI, establish one or more branch offices in the state of Wisconsin and the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, and Ohio.  In addition, upon WDFI approval, a Wisconsin savings bank may establish a branch office in any other state as the result of a merger or consolidation.   Federal Law and Regulation .  Federal law permits the federal banking agencies to, under certain circumstances, approve acquisition transactions between banks located in different states, regardless of whether an acquisition would be prohibited under state law. Federal law also authorizes de novo branching into another state at locations at which banks chartered by the host state could establish a branch.   Loans and Investments   Wisconsin Law and Regulations.   Under Wisconsin law and regulation, WaterStone Bank is authorized to make, invest in, sell, purchase, participate or otherwise deal in mortgage loans or interests in mortgage loans without geographic restriction, including loans made on the security of residential and commercial property. Wisconsin savings banks also may lend funds on a secured or unsecured basis for business, commercial or agricultural purposes, provided the total of all such loans does not exceed 20% of the savings bank’s total assets, unless the WDFI authorizes a greater amount. Loans are subject to certain other limitations, including percentage restrictions based on total assets.   Wisconsin savings banks may invest funds in certain types of debt and equity securities, including obligations of federal, state and local governments and agencies. Subject to prior approval of the WDFI, compliance with capital requirements and certain other restrictions, Wisconsin savings banks may invest in residential housing development projects. Wisconsin savings banks may also invest in service corporations or subsidiaries with the prior approval of the WDFI, subject to certain restrictions.  Similarly, the line of credit that WaterStone Bank provides to Waterstone Mortgage Corporation is subject to the approval of the WDFI.   Wisconsin savings banks may make loans and extensions of credit, both direct and indirect, to one borrower in amounts up to 20% of the savings bank’s capital plus an additional 5% for loans fully secured by readily marketable collateral. In addition, and notwithstanding the 20% of capital and additional 5% of capital limitations set forth above, Wisconsin savings banks may make loans to one borrower, or a related group of borrowers, for any purpose in an amount not to exceed $500,000, or to develop domestic residential housing units in an amount not to exceed the lesser of $30 million or 30% of the savings bank’s capital, subject to certain conditions.  At December 31, 2022, WaterStone Bank did not have any loans which exceeded the “loans-to-one borrower” limitations.   In addition, under Wisconsin law, WaterStone Bank must qualify for and maintain a level of qualified thrift investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. A Wisconsin savings bank that fails to meet this qualified thrift lender test becomes subject to certain operating restrictions otherwise applicable only to commercial banks. At December 31, 2022, WaterStone Bank maintained 84.2% of its assets in qualified thrift investments and therefore met the qualified thrift lender requirement.   Federal Law and Regulation . Federal Deposit Insurance Corporation regulations also govern the equity investments of WaterStone Bank and, notwithstanding Wisconsin law and regulations, Federal Deposit Insurance Corporation regulations prohibit WaterStone Bank from making certain equity investments and generally limit WaterStone Bank’s equity investments to those that are permissible for national banks and their subsidiaries.  Under Federal Deposit Insurance Corporation regulations, WaterStone Bank must obtain prior Federal Deposit Insurance Corporation approval before directly, or indirectly through a majority-owned subsidiary, engaging “as principal” in any activity that is not permissible for a national bank unless certain exceptions apply. The activity regulations provide that state banks that meet applicable minimum capital requirements would be permitted to engage in certain activities that are not permissible for national banks, including certain real estate and securities activities conducted through subsidiaries. The Federal Deposit Insurance Corporation will not approve an activity that it determines presents a significant risk to the Federal Deposit Insurance Corporation insurance fund. The current activities of WaterStone Bank and its subsidiaries are permissible under applicable federal regulations.   Loans to, and other transactions with, affiliates of WaterStone Bank, such as Waterstone Financial, are restricted by the Federal Reserve Act and regulations issued by the Federal Reserve Board thereunder. See “Transactions with Affiliates and Insiders” below.   Lending Standards   Wisconsin Law and Regulation.   Under Wisconsin law, WaterStone Bank is permitted to establish deposit accounts and accept deposits. WaterStone Bank’s board of directors, or its designee, determine the rate and amount of interest to be paid on or credited to deposit accounts.   Federal Law and Regulation . The federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under the joint regulations adopted by the federal banking agencies, all insured depository institutions, such as WaterStone Bank, must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and loan documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators.   - 20 - Table of Contents   The Interagency Guidelines, among other things, require a depository institution to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits:     ● for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral;   ● for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory limit is 75%;   ● for loans for the construction of commercial, over four-family or other non-residential property, the supervisory limit is 80%;   ● for loans for the construction of one- to four-family properties, the supervisory limit is 85%; and   ● for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), the limit is 85%.   Although no supervisory loan-to-value limit has been established for permanent mortgages on owner-occupied, one- to four-family and home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.   Deposits   Wisconsin Law and Regulation.   Under Wisconsin law, WaterStone Bank is permitted to establish deposit accounts and accept deposits. WaterStone Bank’s board of directors, or its designee, determines the rate and amount of interest to be paid on or credited to deposit accounts subject to Federal Deposit Insurance Corporation limitations.   Deposit Insurance   Wisconsin Law and Regulation.   Under Wisconsin law, WaterStone Bank is required to obtain and maintain insurance on its deposits from a deposit insurance corporation. The deposits of WaterStone Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation.   Federal Law and Regulation.   WaterStone Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.  The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000.   The Federal Deposit Insurance Corporation imposes an assessment against all insured depository institutions. An institution’s assessment rate depends upon the perceived risk of the institution to the Deposit Insurance Fund, with less risky institutions paying lower rates.  Currently, assessments for institutions of less than $10 billion of total assets are based on financial measures and supervisory ratings derived from statistical models estimating the probability of failure within three years. The Federal Deposit Insurance Corporation adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by two basis points beginning in the first quarterly assessment period of 2023. As a result, effective January 1, 2023, assessment rates for institutions of WaterStone Bank’s size range from 2.5 to 42 basis points of an institution’s total assets less tangible capital.  The Federal Deposit Insurance Corporation may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking.    The Federal Deposit Insurance Corporation has the authority to increase insurance assessments. A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of WaterStone Bank. We cannot predict what deposit insurance assessment rates will be in the future.   Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.   - 21 - Table of Contents   Capitalization   Wisconsin Law and Regulation . Wisconsin savings banks are required to maintain a minimum capital to total assets ratio of 6% and must maintain total capital necessary to ensure the continuation of insurance of deposit accounts by the Federal Deposit Insurance Corporation. If the WDFI determines that the financial condition, history, management or earning prospects of a savings bank are not adequate, the WDFI may require a higher minimum capital level for the savings bank. If a Wisconsin savings bank’s capital ratio falls below the required level, the WDFI may direct the savings bank to adhere to a specific written plan established by the WDFI to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the payment of dividends. At December 31, 2022, WaterStone Bank’s capital to assets ratio, as calculated under Wisconsin law, was 15.90%.   Federal Law and Regulation . Federal regulations require Federal Deposit Insurance Corporation insured depository institutions to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.   Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities).  WaterStone Bank exercised its AOCI opt-out election.  Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.   In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.    In assessing an institution’s capital adequacy, the Federal Deposit Insurance Corporation takes into consideration, not only these numeric factors, but qualitative factors as well, including the bank’s exposure to interest rate risk.  The Federal Deposit Insurance Corporation has the authority to establish higher capital requirements for individual institutions where deemed necessary due to a determination that an institution’s capital level is, or is likely to become, inadequate in light of particular circumstances.   Legislation enacted in May required the federal banking agencies, including the Federal Reserve Board, to establish a “community bank leverage ratio” of between 8 to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion.  Institutions with capital meeting the specified requirements and electing to follow the alternative framework are deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements.  A qualifying institution may opt in and out of the community bank leverage ratio on its quarterly call report.   The optional community bank leverage ratio has currently been established at 9%. WaterStone Bank has not opted into the community bank leverage ratio.   Safety and Soundness Standards   Each federal banking agency, including the Federal Deposit Insurance Corporation, has adopted guidelines establishing general standards relating to internal controls, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits, and information security. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.   Prompt Corrective Regulatory Action   Federal bank regulatory authorities are required to take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the regulations, a bank is deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 8.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and a common equity Tier 1 ratio of 6.5% or more, and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a Tier 1 leveraged capital ratio of 4.0% or more and a common equity Tier 1 ratio of 4.5% or more, and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 6.0%, a Tier 1 leverage capital ratio that is less than 4.0% or a common equity Tier 1 ratio of less than 4.5%; (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0% and a Tier 1 risk-based capital ratio that is less than 4.0% or a common equity Tier 1 ratio of less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.   - 22 - Table of Contents   Federal law and regulations also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an institution classified as less than well capitalized to comply with supervisory actions as if it were in the next lower category (except that the Federal Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as critically undercapitalized).   The Federal Deposit Insurance Corporation may order savings banks that have insufficient capital to take corrective actions. For example, a savings bank that is categorized as “undercapitalized” is subject to growth limitations and is required to submit a capital restoration plan, and a holding company that controls such a savings bank is required to guarantee that the savings bank complies with the restoration plan. A “significantly undercapitalized” savings bank may be subject to additional restrictions. Savings banks deemed by the Federal Deposit Insurance Corporation to be “critically undercapitalized” would be subject to the appointment of a receiver or conservator.   At December 31, 2022, WaterStone Bank was considered well-capitalized with a common equity Tier 1 ratio of 20.46%, Tier 1 leverage ratio of 17.08%, a Tier 1 risk-based ratio of 20.46% and a total risk based capital ratio of 21.52%.   A qualifying institution whose tier 1 capital equals or exceeds the specified community bank leverage ratio and opts into that framework will be considered well capitalized for prompt corrective action purposes.   Banking regulators addressed the regulatory capital treatment of credit loss allowance under Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (CECL) methodology by allowing banking organizations an option to phase in the day-one regulatory capital effects. See Note 1 for the section "Impact of Recent Accounting Pronouncements" for additional information regarding the adoption of this standard.   Dividends   Under Wisconsin law and applicable regulations, a Wisconsin savings bank that meets its regulatory capital requirements may declare dividends on capital stock based upon net profits, provided that its paid-in surplus equals its capital stock. In addition, prior WDFI approval is required before dividends exceeding 50% of net profits for any calendar year may be declared and before a stock dividend may be declared out of retained earnings.  Under WDFI regulations, a Wisconsin savings bank which has converted from mutual to stock form also is prohibited from paying a dividend on its capital stock if the payment causes the regulatory capital of the savings bank to fall below the amount required for its liquidation account.   The Federal Deposit Insurance Corporation has the authority to prohibit WaterStone Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of WaterStone Bank. Institutions may not pay dividends if they would be “undercapitalized” following payment of the dividend within the meaning of the prompt corrective action regulations.   Information with respect to regulation regarding dividends declared and paid by Waterstone Financial is disclosed under "Holding Company Dividends."   Liquidity and Reserves   Wisconsin Law and Regulation. Under WDFI regulations, all Wisconsin savings banks are required to maintain a certain amount of their assets as liquid assets, consisting of cash and certain types of investments. The exact amount of assets a savings bank is required to maintain as liquid assets is set by the WDFI, but generally ranges from 4% to 15% of the savings bank’s average daily balance of net withdrawable accounts plus short-term borrowings (the “Required Liquidity Ratio”). At December 31, 2022, WaterStone Bank’s Required Liquidity Ratio was 8.0%, and WaterStone Bank was in compliance with this requirement.  In addition, 50% of the liquid assets maintained by a Wisconsin savings bank must consist of “primary liquid assets,” which are defined to include securities issued by the United States Government, United States Government agencies, or the state of Wisconsin or a subdivision thereof, and cash.  At December 31, 2022, WaterStone Bank was in compliance with this requirement.   Federal Law and Regulation . Under federal law and regulations, WaterStone Bank is required to maintain sufficient liquidity to ensure safe and sound banking practices. Regulation D, promulgated by the Federal Reserve Board, imposes reserve requirements on all depository institutions, including WaterStone Bank, which maintain transaction accounts or non-personal time deposits. Checking accounts, NOW accounts, Super NOW checking accounts, and certain other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits (including certain money market deposit accounts) at a savings institution.  However, effective March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero, thereby effectively eliminating the requirements.  The Federal Reserve Board took that action due to a change in its approach to monetary policy; it has indicated that it has no plans to re-impose reserve requirements but could in the future if conditions warrant.   - 23 - Table of Contents   Transactions with Affiliates and Insiders   Wisconsin Law and Regulation . Under Wisconsin law, a savings bank may not make a loan to a person owning 10% or more of its stock, an affiliated person (including a director, officer, the spouse of either and a member of the immediate family of such person who is living in the same residence), agent, or attorney of the savings bank, either individually or as an agent or partner of another, except as under the rules of the WDFI and regulations of the Federal Deposit Insurance Corporation.  In addition, unless the prior approval of the WDFI is obtained, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an affiliated person, including a shareholder owning more than 10% of its capital stock, or from any firm, corporation, entity or family in which an affiliated person or 10% shareholder has a direct or indirect interest.   Federal Law and Regulation.   Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured savings bank, such as WaterStone Bank, and any of its affiliates, including Waterstone Financial. The Federal Reserve Board has adopted Regulation W, which comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal Reserve Board interpretations under Sections 23A and 23B.   An affiliate of a savings bank is any company or entity that controls, is controlled by or is under common control with the savings bank. A subsidiary of a savings bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the savings bank for the purposes of Sections 23A and 23B; however, the Federal Deposit Insurance Corporation has the discretion to treat subsidiaries of a savings bank as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which a savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such savings bank’s capital stock and surplus, and limit all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans and other extensions of credit by a savings bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amounts, depending on the type of collateral. In addition, any affiliate transaction by a savings bank must be on terms that are substantially the same, or at least as favorable, to the savings bank as those that would be provided to a non-affiliate, and be consistent with safe and sound banking practices.   A savings bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, (which is generally 15% of capital and surplus).  Aggregate loans by a savings bank to its insiders and insiders’ related interests in the aggregate may not exceed the savings bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s primary residence, may not exceed the greater of $25,000 or 2.5% of the savings bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the savings bank, with any interested director not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either $500,000 or the greater of $25,000 or 5% of the savings bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not present more than a normal risk of collectability.   An exception to the requirement is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the savings bank and that does not give any preference to insiders of the bank over other employees of the bank. Consistent with these requirements, the Bank offered employees special terms for home mortgage loans on their principal residences. Effective April 1, 2006, this program was discontinued for new loan originations. Under the terms of the discontinued program, the employee interest rate is based on the Bank’s cost of funds on December 31st of the immediately preceding year and is adjusted annually. At December 31, 2022, the rate of interest on an employee rate mortgage loan was 0.73%, compared to the weighted average rate of 4.81% on all single family mortgage loans. This rate will increase to 1.75% effective March 1, 2023. Employee rate mortgage loans totaled $495,000, or 0.1%, of our single family residential mortgage loan portfolio on December 31, 2022.   Transactions between Bank Customers and Affiliates   Wisconsin savings banks, such as WaterStone Bank, are subject to the prohibitions on certain tying arrangements. Subject to certain exceptions, a savings bank is prohibited from extending credit to or offering any other service to a customer, or fixing or varying the consideration for such extension of credit or service, on the condition that such customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution.   Examinations and Assessments   WaterStone Bank is required to file periodic reports with and is subject to periodic examinations by the WDFI and FDIC.  WaterStone Bank is required to pay examination fees and annual assessments to fund its supervision.  Federal regulations require annual on-site examinations for all depository institutions except certain well-capitalized and highly rated institutions with assets of less than $3 billion which are examined every 18 months.    - 24 - Table of Contents   Customer Privacy   Under Wisconsin and federal law and regulations, savings banks, such as WaterStone Bank, are required to develop and maintain privacy policies relating to information on its customers, restrict access to and establish procedures to protect customer data. Applicable privacy regulations further restrict the sharing of non-public customer data with non-affiliated parties if the customer requests.   Community Reinvestment Act   Under the Community Reinvestment Act, WaterStone Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Federal Deposit Insurance Corporation, in connection with its examination of WaterStone Bank, to assess WaterStone Bank’s record of meeting the credit needs of its community and to take that record into account in the Federal Deposit Insurance Corporation’s evaluation of certain applications by WaterStone Bank. For example, the regulations specify that a bank’s Community Reinvestment Act performance will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or conditioning the approval of an application. In May 2022, the Federal Deposit Insurance Corporation and other federal bank regulatory agencies released a notice of proposed rulemaking to strengthen and modernize the CRA regulations and framework.  As of the date of its most recent regulatory examination, WaterStone Bank was rated “satisfactory” with respect to its Community Reinvestment Act compliance.   Federal Home Loan Bank System   The Federal Home Loan Bank System, consisting of 11 Federal Home Loan Banks, is under the jurisdiction of the Federal Housing Finance Board. The designated duties of the Federal Housing Finance Board are to supervise the Federal Home Loan Banks; ensure that the Federal Home Loan Banks carry out their housing finance mission; ensure that the Federal Home Loan Banks remain adequately capitalized and able to raise funds in the capital markets; and ensure that the Federal Home Loan Banks operate in a safe and sound manner.   WaterStone Bank, as a member of the Federal Home Loan Bank of Chicago, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Chicago in specified amounts. WaterStone Bank is in compliance with this requirement with an investment in Federal Home Loan Bank of Chicago stock of $17.4 million at December 31, 2022.   Among other benefits, the Federal Home Loan Banks provide a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes advances to members in accordance with policies and procedures established by the Federal Housing Finance Board and the board of directors of the Federal Home Loan Bank of Chicago. At December 31, 2022, WaterStone Bank had $385.7 million in advances from the Federal Home Loan Bank of Chicago.   USA PATRIOT Act   The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also required the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.   Regulation of Waterstone Mortgage Corporation   Waterstone Mortgage Corporation is subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on its business.  These laws, regulations and judicial and administrative decisions to which Waterstone Mortgage Corporation is subject include those pertaining to: real estate settlement procedures; fair lending; fair credit reporting; truth in lending; compliance with net worth and financial statement delivery requirements; compliance with federal and state disclosure and licensing requirements; the establishment of maximum interest rates, finance charges and other charges; secured transactions; collection, foreclosure, repossession and claims-handling procedures; other trade practices and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers; and guidance on non-traditional mortgage loans issued by the federal financial regulatory agencies.  Waterstone Mortgage Corporation may also be required to comply with any additional requirements that its customers may be subject to by their regulatory authorities.   - 25 - Table of Contents   Holding Company Regulation   Waterstone Financial is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Waterstone Financial and its non-savings institution subsidiaries. Among other things, that authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to WaterStone Bank. In addition, any company that owns or controls, directly or indirectly, more than 25% of the voting securities of a state savings bank is subject to regulation as a savings bank holding company by the WDFI. Waterstone Financial is subject to regulation as a savings bank holding company under Wisconsin law. However, the WDFI has not issued specific regulations governing stock savings bank holding companies.   The business activities of savings and loan holding companies are generally limited to those activities permissible for  bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations, unless the holding company has elected “financial holding company” status.  A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity.  Waterstone Financial has not elected financial holding company status.  Federal law generally prohibits the acquisition of more than 5% of a class of voting stock of a company engaged in impermissible activities.   Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.   The Federal Reserve Board is required to impose upon bank and savings and loan holding companies consolidated regulatory capital requirements that are equally stringent as those applicable to the subsidiary depository institutions.  However, the “small holding company” exception for holding companies with less than $3 billion of consolidated assets, such as Waterstone Financial, generally results in such companies not being subject to the requirements unless otherwise advised by the Federal Reserve Board.   The Dodd-Frank Act extended the "source of strength" doctrine to savings and loan holding companies. The Federal Reserve Board promulgated regulations implementing the "source of strength" policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.   The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund a proposed dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition.  The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a company’s common stock dividend.  The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff, to provide opportunity for supervisory review and possible objection, prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Waterstone Financial to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.   - 26 - Table of Contents   Holding Company Dividends   Waterstone Financial is not permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by Waterstone Financial in connection with the conversion.  In addition, Waterstone Financial is subject to relevant state corporate law limitations and federal bank regulatory policy on the payment of dividends.  Maryland law, which is the state of Waterstone Financial’s incorporation, generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.   The dividend rate and continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions.   Federal Securities Laws Regulation   Securities Exchange Act.   Waterstone Financial common stock is registered with the Securities and Exchange Commission.  Waterstone Financial is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.   Shares of common stock purchased by persons who are not affiliates of Waterstone Financial may be resold without registration. Shares purchased by an affiliate of Waterstone Financial are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Waterstone Financial meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Waterstone Financial that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Waterstone Financial, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Waterstone Financial may permit affiliates to have their shares registered for sale under the Securities Act of 1933.   Sarbanes-Oxley Act of 2002.     The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.  We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.   Change in Control Regulations   Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as Waterstone Financial unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under the Change in Bank Control Act federal law, means ownership, control of or the power to vote 25% or more of any class of voting stock. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Waterstone Financial, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.   In addition, the Savings and Loan Holding Company Act provides that no company may acquire control of a savings and loan holding company (as “control” is defined for purposes of that statute) without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.  Effective September 30, 2020, the Federal Reserve Board adopted changes to its regulatory definition of “control” under the Savings and Loan Holding Company Act.   Relevant factors include a company’s voting and nonvoting equity interests in the savings and loan holding company, director, officer and employee overlaps and the scope of business relationships between the company and the savings and loan holding company or its subsidiary institution.   Federal and State Taxation   Federal Taxation   General.   Waterstone Financial and subsidiaries are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  Waterstone Financial and subsidiaries constitute an affiliated group of corporations and, therefore, are eligible to report their income on a consolidated basis.  The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Waterstone Financial or WaterStone Bank.  The Company is no longer subject to federal tax examinations for years before 2019.   - 27 - Table of Contents   Method of Accounting.   For federal income tax purposes, Waterstone Financial currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal income tax returns.   Bad Debt Reserves.   Prior to the Small Business Protection Act of 1996 (the "1996 Act"), WaterStone Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, WaterStone Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2022, WaterStone Bank had no reserves subject to recapture in excess of its base year.   Waterstone Financial is required to use the specific charge-off method to account for tax bad debt deductions.   Taxable Distributions and Recapture.   Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if WaterStone Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if WaterStone Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes. At December 31, 2022, our total federal pre-base year bad debt reserve was approximately $16.7 million.   Corporate Dividends-Received Deduction.   Waterstone Financial may exclude from its federal taxable income 100% of dividends received from WaterStone Bank as a wholly-owned subsidiary by filing consolidated tax returns.  The corporate dividends-received deduction is 65% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation.  The dividends-received deduction is 50% when the corporation receiving the dividend owns less than 20% of the distributing corporation.   Inflation Reduction Act of 2022.   The Inflation Reduction Act, which was signed into law on August 16, 2022, among other things, implements a new alternative minimum tax of 15% on corporations with profits in excess of $1 billion, a 1% excise tax on stock repurchases, and several tax incentives to promote clean energy and climate initiatives. These provisions are effective beginning January 1, 2023. Based on its analysis of the provisions, the Company does not expect this legislation to have a material impact on its consolidated financial statements.   State Taxation   The Company is subject to primarily the Wisconsin corporate franchise (income) tax and taxation in a number of states due primarily to the operations of the mortgage banking segment.  Under current law, the state of Wisconsin imposes a corporate franchise tax of 7.9% on the combined taxable incomes of the members of our consolidated income tax group.   The years open to examination by state and local government authorities varies by jurisdiction.   As a Maryland business corporation, Waterstone Financial is required to file an annual report and pay franchise taxes to the state of Maryland.     Item 1A.    Risk Factors   An investment in our securities is subject to risks inherent in our business and the industry in which we operate. Before making an investment decision, you should carefully consider the risks and uncertainties described below and all other information included in this report, as well as other reports we file with the SEC. The risks described below may adversely affect our business, financial condition and operating results. In addition to these risks and the other risks and uncertainties described in Item 1, “Business-Forward Looking Statements” and Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. The value or market price of our securities could decline due to any of these identified or other risks. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.   - 28 - Table of Contents   Risks Related to Regulatory Matters   We operate in a highly regulated environment and we are subject to supervision, examination and enforcement action by various bank regulatory agencies.   We are subject to extensive supervision, regulation, and examination by the WDFI, the Federal Deposit Insurance Corporation and the Federal Reserve Board.  As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities, and obtain financing.  This system of regulation is designed primarily for the protection of the Deposit Insurance Fund and our depositors, and not for the benefit of our stockholders.  Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees.   Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as WaterStone Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, paying dividends, acquiring other financial institutions or establishing new branches.   In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.   Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.   The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.  If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.  These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure to comply with these regulations could result in fines or sanctions.  During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations.  While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.   Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.   In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.   We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.   The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.   The Federal Reserve Board may require us to commit capital resources to support WaterStone Bank.   Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Thus, any borrowing or funds needed to raise capital required to make a capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.   - 29 - Table of Contents   Risks Related to Interest Rates   The reversal of the historically low interest rate environment may adversely affect our net interest income and profitability.     The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic.  The Federal Reserve Board has reversed its policy of near zero interest rates given its concerns over inflation.  Market interest rates have risen in response to the Federal Reserve Board’s recent rate increases. As discussed below, the increase in market interest rates is expected to have an adverse effect on our net interest income and profitability.   Changing interest rates may have a negative effect on our results of operations.   Our earnings and cash flows are dependent on our net interest income and income from our mortgage banking operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in market interest rates could have an adverse effect on our financial condition and results of operations.   Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowings costs.  Under these circumstances, we are subject to reinvestment risk to the extent we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities.   Changes in interest rates also affect the current fair value of our interest-earning investment securities portfolio.  Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2022, the fair value of our investment portfolio totaled $196.6 million. Net unrealized losses on these securities totaled $26.1 million at December 31, 2022.  During the year ended December 31, 2022, we incurred other comprehensive losses of $18.3 million, net of tax benefit, related to net changes in unrealized holding losses in the available-for-sale investment securities portfolio.   Increases in interest rates can also have an adverse impact on our results of operations.  A portion of our loans have adjustable interest rates.  While the higher payment amounts we would receive on these loans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, which may result in a higher rate of loan delinquencies and defaults, as well as lower loan originations, as borrowers who may qualify for a loan based on certain mortgage repayments, may not be able to afford repayments based on higher interest rates for the same loan amounts.  The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.  Furthermore, in a period of rising interest rates, the interest income earned on interest-earning assets may not increase as rapidly as the interest paid on interest-bearing liabilities, which would be expected to compress our interest rate spread and have a negative effect on our profitability.   Any increase in market interest rates may reduce our mortgage banking income. We generate revenues primarily from gains on the sale of mortgage loans to investors, and from the amortization of deferred mortgage servicing rights. We had mortgage banking income decrease $91.5 million during the year ended December 31, 2022. We also earn interest on loans held for sale while awaiting delivery to our investors. In a rising or higher interest rate environment, our mortgage loan originations may decrease, resulting in fewer loans that are available for sale. This would result in a decrease in interest income and a decrease in revenues from loan sales. In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment, data processing and other operating costs. During periods of reduced loan demand, our results of operations may continue to be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.   Although we have implemented asset and liability management strategies designed to reduce the effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rate could have a material adverse effect on our financial condition and results of operations. Also, our interest rate models and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.   See “Management’s Discussion and Analysis of Financial Condition" and "Quantitative and Qualitative Disclosures About Market Risk—Management of Market Risk.”   Risks Related to Economic Matters   Changes in economic conditions could adversely affect our earnings, as our borrowers ’ ability to repay loans and the value of the collateral securing our loans decline.   Economic conditions have an impact, to some extent, on our overall performance. Conditions such as an economic recession, rising unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Because a majority of our loans are secured by real estate, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. Consequently, declines in the economy in our market area could have a material adverse effect on our financial condition and results of operations.   Because most of our borrowers are located in the Milwaukee, Wisconsin metropolitan area, a prolonged downturn in the local economy, or a decline in local real estate values, could cause an increase in nonperforming loans or a decrease in loan demand, which would reduce our profits.   Substantially all of our loans are secured by real estate located in our primary market area. Weakness in our local economy and our local real estate markets could adversely affect the ability of our borrowers to repay their loans and the value of the collateral securing our loans, which could adversely affect our results of operations. Real estate values are affected by various factors, including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Weakness in economic conditions also could result in reduced loan demand and a decline in loan originations. In particular, a significant decline in real estate values would likely lead to a decrease in new loan originations and increased delinquencies and defaults by our borrowers, as well as increases in our allowance for loan losses.   - 30 - Table of Contents   Inflation can have an adverse impact on our business and on our customers.   Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money.  Over the past year, in response to a pronounced rise in inflation, the Federal Reserve Board has raised certain benchmark interest rates to combat inflation.  As inflation increases and market interest rates rise the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments.  In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expenses.  Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.  Sustained higher interest rates by the Federal Reserve Board to tame persistent inflationary price pressures could also push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.   Risks Related to Lending Matters   We intend to increase our commercial business lending, and we intend to continue our commercial real estate and multi-family residential real estate lending, which may expose us to increased lending risks and have a negative effect on our results of operations.   We continue to focus on originating commercial business, commercial real estate and multi-family residential real estate loans. These types of loans generally have a higher risk of loss compared to our one- to four-family residential real estate loans. Commercial business loans may expose us to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial business and commercial real estate loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate loans as repayment is generally dependent upon the successful operation of the borrower’s business. Also, the collateral underlying commercial business loans may fluctuate in value. Some of our commercial business loans are collateralized by equipment, inventory, accounts receivable or other business assets, and the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. Multi-family residential real estate and commercial real estate loans involve increased risk because repayment is dependent on income being generated in amounts sufficient to cover property maintenance and debt service. In addition, if loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and adversely affect our financial condition and results of operations.  In addition, if we foreclose on these loans, our holding period for the collateral may be longer than for a single -family residential property if there are fewer potential purchasers of the collateral.   Our allowance for credit losses may prove to be insufficient to absorb life-time losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.   Under the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. We estimate the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When we deem all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. We apply judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACL when received.   We measure expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, we use loss-rate methods to estimate expected credit losses. Our methodologies for estimating the ACL consider available relevant information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Our methodologies revert back to historical loss information on a straight-line basis over one year when it can no longer develop reasonable and supportable forecasts.   Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.   We are subject to environmental liability risk associated with lending activities.   A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or regulations, or more stringent interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental liability, and heightened pressure from investors and other stakeholders may require us to incur additional expenses with respect to environmental matters. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.   - 31 - Table of Contents   The foreclosure process may adversely impact our recoveries on non-performing loans   The judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines have been the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and our ability to minimize its losses.   Risks Related to Operational Matters   We rely heavily on certificates of deposit, which has increased our cost of funds and could continue to do so in the future.   Our reliance on certificates of deposit to fund our operations has resulted in a higher cost of funds than would otherwise be the case if we had a higher percentage of demand deposits, savings deposits and money market accounts. In addition, if our certificates of deposit do not remain with us, we may be required to access other sources of funds, including loan sales, other types of deposits, including replacement certificates of deposit, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank of Chicago and other borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on our certificates of deposit.   We may not be able to attract and retain skilled people.   Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.   Loss of key employees may disrupt relationships with certain customers.   Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While we believe our relationship with our key personnel is good, we cannot guarantee that all of our key personnel will remain with our organization. Loss of such key personnel, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers.   Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.   We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.   Risks associated with system failures, interruptions, or breaches of cybersecurity could negatively affect our earnings.   Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits and loans. We have established policies and procedures to prevent or limit the effect of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we take numerous protective measures and otherwise endeavor to protect and maintain the privacy and security of confidential data, these systems may be vulnerable to unauthorized access, computer viruses, other malicious code, cyber-attacks, cyber-theft and other events that could have a security impact. If one or more of such events were to occur, this potentially could jeopardize confidential and other information processed and stored in, and transmitted through, our systems or otherwise cause interruptions or malfunctions in our or our customers' operations.   In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.   The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, or expose us to litigation and possible financial liability. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully covered by our insurance. Any of these events could have a material adverse effect on our financial condition and results of operations.   Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.   Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.   - 32 - Table of Contents   Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.   Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes.  We have experienced losses due to apparent fraud and other financial crimes.  While we have policies and procedures designed to prevent such losses, losses may still occur.   Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.   We must maintain sufficient funds to respond to the needs of depositors and borrowers.  As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments.  As we continue to grow, we are likely to become more dependent on these sources, which may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit.  Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources.  Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.  If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.  In this case, our operating margins and profitability would be adversely affected.   Risks Related to Competitive Matters   Consumers may decide to use alternative options to complete financial transactions.   Technology is allowing parties to complete financial transactions through alternative methods that historically have involved banks. Consumers can now easily access historically banking needs through online banking accounts, brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete certain transactions without the assistance of banks.   The removal of banking with financial transactions could result in the loss of customer loans, customer deposits, and the related fee income generated from those loans and deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.   Strong competition within our market areas may limit our growth and profitability.   Competition in the banking and financial services industry is intense.  In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, money market funds, insurance companies, and brokerage firms operating locally and elsewhere.  Some of our competitors have greater name recognition and market presence and offer certain services that we do not or cannot provide, all of which benefit them in attracting business.  In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Competitive factors driven by consumer sentiment or otherwise can also reduce our ability to generate fee income, such as through overdraft fees.   Risks Related to Mortgage Banking Operations   Secondary mortgage market conditions could have a material impact on our financial condition and results of operations.   Our mortgage banking operations provide a significant portion of our non-interest income. In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for these loans.  These conditions may fluctuate or worsen in the future.  In light of current conditions, there is greater risk in retaining mortgage loans pending their sale to investors.  We believe our ability to retain fixed-rate residential mortgage loans is limited.  As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.   Changes in the programs offered by secondary market purchasers or our ability to qualify for their programs may reduce our mortgage banking revenues, which would negatively impact our non-interest income.   We generate mortgage revenues primarily from gains on the sale of single-family mortgage loans pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-GSE investors.  These entities account for a substantial portion of the secondary market in residential mortgage loans.  Any future changes in these programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations.   If we are required to repurchase mortgage loans that we have previously sold, it could negatively affect our earnings.   One of our primary business operations is our mortgage banking, which involves originating residential mortgage loans for sale in the secondary market under agreements that contain representations and warranties related to, among other things, the origination and characteristics of the mortgage loans.  We may be required to repurchase mortgage loans that we have sold in cases of borrower default or breaches of these representations and warranties. If we are required to repurchase mortgage loans or provide indemnification or other recourse, this could increase our costs and thereby affect our future earnings.   - 33 - Table of Contents   Risks Related to Environmental and Other Global Matters   Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.   Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes and other issues. The impact on our customers will likely vary depending on their specific attributes, including reliance on role in carbon intensive activities. among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of asset securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.   Our business, financial condition, and results of operations could be adversely affected by natural disasters, health epidemics, and other catastrophic events.   We could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a pandemic, natural disaster, war, act of terrorism, accident, or other reason. Any of these events could result in the temporary reduction of operations, employees, and customers, which could limit our ability to provide services. Additionally, many of our borrowers may suffer property damage, experience interruption of their businesses or lose their jobs after such events. Those borrowers might not be able to repay their loans, and the collateral for such loans may decline significantly in value.   Risks Related to the COVID-19 Pandemic   The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.   Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have continued to affect the macroeconomic environment, both nationally and in the Company’s existing geographic footprint. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be fully controlled and abated. The COVID-19 pandemic and the related adverse local and national economic consequences could result in a material, adverse effect on our business, financial condition, liquidity, and results of operations, and if these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways.    Risks Related to Accounting Matters   Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.   Our accounting policies are essential to understanding our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.   From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be hard to predict and could materially affect how we report our financial condition and results of operations. We could also be required to apply a new or revised standard retroactively, which may result in our restating our prior period financial statements.   The need to account for certain assets at estimated fair value may adversely affect our results of operations.   We report certain assets, such as loans held for sale, at estimated fair value.  Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize observable market inputs to estimate fair value.  Because we carry these assets on our books at their estimated fair value, we may incur losses even if the asset in question presents minimal credit risk.   - 34 - Table of Contents   Other Risks Related to Our Business   Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.   We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings.  Most of the proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry or we may not prevail in any proceeding or litigation.   Any litigation or regulatory proceeding could entail substantial costs and divert management’s attention away from our operations, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.   Changes in the valuation of our securities portfolio could adversely affect our profits.   Our securities portfolio may be impacted by fluctuations in fair value, potentially reducing accumulated other comprehensive income and/or earnings.  Fluctuations in fair value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.  Management evaluates securities for other-than-temporary impairment on a monthly basis, with more frequent evaluation for selected issues.  In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates.  In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame.  If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur.  Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates.  We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.  The declines in fair value could result in a material adverse effect on our capital levels. During the year ended December 31, 2022, we incurred other comprehensive losses of $18.3 million, net of tax benefit, related to net changes in unrealized holding losses in the available-for-sale investment securities portfolio.   New lines of business or new products and services may subject us to additional risks.   From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to make investments in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services.  External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.   Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.   Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.   - 35 - Table of Contents   Acquisitions may disrupt our business and dilute stockholder value.   We regularly evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.   Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:     • difficulty in estimating the value of the target company;     • payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;     • potential exposure to unknown or contingent tax or other liabilities of the target company;     • exposure to potential asset quality problems of the target company;     • potential volatility in reported income associated with goodwill impairment losses;     • difficulty and expense of integrating the operations and personnel of the target company;     • inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits;     • potential disruption to our business;     • potential diversion of our management’s time and attention;     • the possible loss of key employees and customers of the target company; and     • potential changes in banking or tax laws or regulations that may affect the target company.   Various factors may make takeover attempts more difficult to achieve.   Our articles of incorporation and bylaws, federal regulations, Maryland law, shares of restricted stock and stock options that we have granted or may grant to employees and directors and stock ownership by our management and directors, and various other factors may make it more difficult for companies or persons to acquire control of Waterstone Financial without the consent of our board of directors.  A shareholder may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then prevailing price of our common stock.   Item 1B.    Unresolved Staff Comments   None   - 36 - Table of Contents     Item 2.    Properties   We operate from our corporate center, our 14 full-service banking offices, our drive-through office and 14 automated teller machines, located in Milwaukee, Washington and Waukesha Counties, Wisconsin. The net book value of our premises, land, equipment and leasehold improvements was $21.1 million at December 31, 2022. The following table sets forth information with respect to our corporate center and our full-service banking offices as of December 31, 2022.     Corporate Center 11200 West Plank Court Wauwatosa, Wisconsin 53226 Wauwatosa 7500 West State Street Wauwatosa, Wisconsin 53213 Brookfield (1) 17495 W Capitol Dr. Brookfield, Wisconsin 53045       Franklin/Hales Corners 6555 South 108th Street Franklin, Wisconsin 53132 Germantown/Menomonee Falls W188N9820 Appleton Avenue Germantown, Wisconsin 53022 Oak Creek 6560 South 27th Street Oak Creek, Wisconsin 53154       Oconomowoc/Lake Country (1) 1233 Corporate Center Drive Oconomowoc, Wisconsin 53066 Pewaukee 1230 George Towne Drive Pewaukee, Wisconsin 53072 Waukesha/Brookfield 21505 East Moreland Blvd. Waukesha, Wisconsin 53186       West Allis/Greenfield Avenue 10101 West Greenfield Avenue West Allis, Wisconsin 53214 Fox Point/North Shore 8607 North Port Washington Road Fox Point, Wisconsin 53217 Greenfield/Loomis Road 5000 West Loomis Road Greenfield, Wisconsin  53220       West Allis/National Avenue 10296 West National Avenue West Allis, Wisconsin 53227 Oak Creek/Howell Avenue 8780 South Howell Avenue Oak Creek, Wisconsin 53154 Milwaukee/Oklahoma Avenue 6801 West Oklahoma Avenue Milwaukee, WI 53219   (1) Leased property   In addition to our banking offices, as of December 31, 2022, Waterstone Mortgage Corporation had 13 offices in Florida, nine offices in New Mexico, seven offices in each of Virginia and Wisconsin, five offices in Texas, four offices in Maryland, three offices in each of Arizona, Illinois, Oklahoma, and Pennsylvania, two offices in each of Colorado, Michigan, New Hampshire, South Carolina, and Tennessee, and one office in each of Delaware, Idaho, Indiana, Iowa, Kansas, Kentucky, Minnesota, Missouri, New Jersey, North Dakota, and Rhode Island.   Item 3.    Legal Proceedings   The information required by this item is set forth in Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements.   Item 4.    Mine Safety Disclosures   Not applicable.   - 37 - Table of Contents     Part II   Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities   Our shares of common stock are traded on the NASDAQ Global Select Market® under the symbol WSBF.  The approximate number of shareholders of record of Waterstone common stock as of February 25, 2022 was 1,400.  On that same date there were 24,230,968 shares of common stock issued and outstanding.   Following are the Company's monthly common stock repurchases during the fourth quarter of 2022.   Period     Total Number of Shares Purchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of Publicly Announced Plans     Maximum Number of Shares that May Yet Be Purchased Under the Plan (a)   October 1, 2022 - October 31, 2022     133,200     $ 16.56       133,200       792,018   November 1, 2022 - November 30, 2022     24,086       16.40       24,086       767,932   December 1, 2022 - December 31, 2022     1,960       16.52       1,960       765,972   Total     159,246     $ 16.53       159,246       765,972     (a) On December 10, 2021, the Board of Directors announced the termination of the then-existing stock repurchase plan and authorized the repurchase of 3,500,000 shares of common stock pursuant to a new share repurchase plan. This plan has no expiration date.     - 38 - Table of Contents   PERFORMANCE GRAPH   Set forth below is a line graph comparing the cumulative total shareholder return on Waterstone Financial common stock, based on the market price of the common stock and assuming reinvestment of cash dividends, with the cumulative total return of companies on the SNL Thrift NASDAQ Index and the Russell 2000. The graph assumes $100 was invested on December 31, 2017, in Waterstone Financial, Inc. common stock and each of those indices.   Waterstone Financial, Inc.     Index   12/31/17     12/31/18     12/31/19     12/31/20     12/31/21     12/31/22   Waterstone Financial, Inc.   100.00     104.01     125.22     134.29     166.41     140.19   S&P Composite 1500 Thrifts & Mortgage Finance Index   100.00     81.15     110.27     104.12     128.42     106.34   Russell 2000 Index   100.00     88.99     111.70     134.00     153.85     122.41     Item 6 .    [Reserved]     Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations   Overview   The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company's financial condition and results of operations. It is intended to complement the consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Annual Report on Form 10-K and should be read in conjunction therewith. The detailed discussion in the sections below focuses on the results of operations for the year ended December 31, 2022, compared to the year ended December 2021, and the financial condition as of December 31, 2022 compared to the financial condition as of December 31, 2021.   - 39 - Table of Contents   As described in the notes to consolidated financial statements, we have two reportable segments: community banking and mortgage banking. The community banking segment provides consumer and business banking products and services to customers. Consumer products include loan products, deposit products, and personal investment services. Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts.  The mortgage banking segment, which is conducted through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.   Our community banking segment generates the significant majority of our consolidated net interest income and requires the significant majority of our provision for credit losses.  Our mortgage banking segment generates the significant majority of our noninterest income and a majority of our noninterest expenses.  We have provided below a discussion of the material results of operations for each segment on a separate basis for the year ended December 31, 2022, compared the year ended December 31, 2021, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of Waterstone Financial, which includes the consolidated operations of WaterStone Bank and Waterstone Mortgage Corporation, for the same periods.   For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, see “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” Discussion of Results of Operations included in our 2021 Form 10-K, filed with the SEC on February 28, 2022.   Significant Items   There were no Significant Items for the years ended December 31, 2022 and 2021.      - 40 - Table of Contents       Critical Accounting Policies   Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.   Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.   See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements contains a further discussion of our significant accounting policies.   Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets.   Allowance for Credit Losses. The ACL represents management's estimate of current expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan portfolio and the amount of credit loss impairment on our AFS securities portfolio. Determining the amount of the ACL is considered a critical accounting estimate because of its complexity and because it requires extensive judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ACL include:     ● Our evaluation of current conditions;   ● Our assessment that the physical condition of the real estate has not significantly changed since the last valuation date;   ● Our determination of a reasonable and supportable economic forecast and selection of the reasonable and supportable forecast period;   ● Our evaluation of historical loss experience;   ● Our evaluation of changes in composition and characteristics of the loan portfolio, including internal risk ratings;   ● Our estimate of expected prepayments;   ● Our selection of models and modeling techniques may also have a material impact on the estimate;   ● The value of underlying collateral, which may impact loss severity and certain cash flow assumptions for collateral-dependent, criticized and classified loans;   ● Our selection and evaluation of qualitative factors; and   ● Our estimate of expected cash flows on AFS debt securities in unrealized loss positions.   The appropriateness of the allowance for credit losses is reviewed and approved quarterly by the WaterStone Bank Board of Directors. The allowance reflects management’s best estimate of the amount needed to provide for the future losses over the life of the loan portfolio, and is based on a loss model using a forecast and historical losses developed and implemented by management and approved by the WaterStone Bank Board of Directors.   Actual results could differ from this estimate, and future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.  More specifically, if our future charge-off experience increases substantially from our past experience, or if the value of underlying loan collateral, in our case mostly real estate, declines in value by a substantial amount, or if unemployment in our primary market area increases significantly, our allowance for credit losses may be inadequate and we will incur higher provisions for loan losses and lower net income in the future.   See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements describes the methodology used to determine the ACL.   - 41 - Table of Contents   In addition, state and federal regulators periodically review the WaterStone Bank allowance for credit losses. Such regulators have the authority to require WaterStone Bank to recognize additions to the allowance at the time of their examination.   Income Taxes.   The Company and its subsidiaries file consolidated federal, combined state income tax, and separate state income tax returns. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as for net operating loss carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.     Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized.  The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Examples of positive evidence may include the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods.  Examples of negative evidence may include cumulative losses in a current year and prior two years and general business and economic trends.   Positions taken in the Company’s tax returns are subject to challenge by the taxing authorities upon examination. The benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statements of operations.   Fair Value Measurements.   The Company determines the fair value of its assets and liabilities in accordance with ASC 820. ASC 820 establishes a standard framework for measuring and disclosing fair value under generally accepted accounting principles. A number of valuation techniques are used to determine the fair value of assets and liabilities in the Company’s financial statements. The valuation techniques include quoted market prices for investment securities, appraisals of real estate from independent licensed appraisers and other valuation techniques. Fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the valuation results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment are recognized in the consolidated statements of operations under the framework established by generally accepted accounting principles.   Recent Accounting Pronouncements.   Refer to Note 1- Summary of Significant Accounting Policies of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.   - 42 - Table of Contents   Selected Financial Data   The summary financial information presented below is derived in part from the Company’s audited financial statements, although the table itself is not audited.       At or for the Year Ended December 31,       2022     2021     2020       (In Thousands, except per share amounts)   Selected Financial Condition Data:                         Total assets   $ 2,031,672     $ 2,215,858     $ 2,184,587   Cash and cash equivalents     46,642       376,722       94,767   Securities available for sale     196,588       179,016       159,619   Loans held for sale     131,188       312,738       402,003   Loans receivable     1,510,178       1,205,785       1,375,137   Allowance for credit losses (1)     17,757       15,778       18,823   Loans receivable, net     1,492,421       1,190,007       1,356,314   Real estate owned, net     145       148       322   Deposits     1,199,012       1,233,386       1,184,870   Borrowings     386,784       477,127       508,074   Total shareholders' equity     370,486       432,773       413,118                             Selected Operating Data:                         Interest income   $ 70,245     $ 69,883     $ 78,484   Interest expense     13,291       14,368       24,984   Net interest income     56,954       55,515       53,500   Provision (credit) for credit losses (1)     968       (3,990 )     6,340   Net interest income after provision for credit losses (1)     55,986       59,505       47,160   Noninterest income     105,555       203,195       244,017   Noninterest expense     137,062       170,594       183,061   Income before income taxes     24,479       92,106       108,116   Provision for income taxes     4,992       21,315       26,971   Net income   $ 19,487     $ 70,791     $ 81,145                             Per common share:                         Income per share - basic   $ 0.89     $ 2.98     $ 3.32   Income per share - diluted   $ 0.89     $ 2.96     $ 3.30   Book value   $ 16.71     $ 17.45     $ 16.47   Dividends declared   $ 0.80     $ 1.80     $ 1.36     (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    - 43 - Table of Contents         At or for the Year Ended December 31,                       2022     2021     2020   Selected Financial Ratios and Other Data:                                                   Performance Ratios:                         Return on average assets     0.96 %     3.20 %     3.77 % Return on average equity     4.91       16.38       20.18   Interest rate spread (1)     2.76       2.47       2.34   Net interest margin (2)     3.00       2.68       2.67   Noninterest expense to average assets     6.79       7.71       8.50   Efficiency ratio (3)     84.34       65.94       61.53   Average interest-earing assets to average interest-bearing liabilities     134.23       130.76       126.07   Dividend payout ratio (4)     146.07       43.62       38.55                             Capital Ratios:                         Waterstone Financial, Inc.:                         Equity to total assets at end of period     18.24 %     19.53 %     18.91 % Average equity to average assets     19.66       19.53       18.68   Total capital to risk-weighted assets     24.36       29.01       24.80   Tier 1 capital to risk-weighted assets     23.29       27.99       23.71   Common equity tier 1 capital to risk-weighted assets     23.29       27.99       23.71   Tier 1 capital to average assets     19.45       19.29       18.38   WaterStone Bank:                         Total capital to risk-weighted assets     21.52       25.52       22.52   Tier 1 capital to risk-weighted assets     20.46       24.50       21.44   Common equity tier 1 capital to risk-weighted assets     20.46       24.50       21.44   Tier 1 capital to average assets     17.08       16.88       16.61                             Asset Quality Ratios:                         Allowance for credit losses - loans as a percent of total loans (5)     1.18 %     1.31 %     1.37 % Allowance for credit losses - loans as a percent of non-performing loans (5)     412.28       283.06       338.54   Net recoveries to average outstanding loans during the period     (0.04 )     (0.07 )     (0.01 ) Non-performing loans as a percent of total loans     0.29       0.46       0.40   Non-performing assets as a percent of total assets     0.22       0.26       0.27                             Other Data:                         Number of full-service banking offices     14       14       14   Number of full-time equivalent employees     742       870       812   (1)   Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. (2)   Represents net interest income as a percent of average interest-earning assets. (3)   Represents noninterest expense divided by the sum of net interest income and noninterest income. (4)   Represents dividends paid per share divided by basic earnings per share. (5) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.       Comparison of Consolidated Waterstone Financial, Inc. Financial Condition at December 31, 2022 and at December 31, 2021   Total Assets.   Total assets decreased by $184.2 million, or 8.3%, to $2.03 billion at December 31, 2022 from $2.22 billion at December 31, 2021.  The decrease in total assets primarily reflects a decrease in cash and cash equivalents and loans held for sale, partially offset by an increase in loans held for investment, securities available for sale and other assets. The total assets decrease reflects liability decreases in deposits and borrowings.   Cash and Cash Equivalents.   Cash and cash equivalents decreased $330.1 million to $46.6 million at December 31, 2022 from $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 by $17.6 million to $196.6 million at December 31, 2022 from $179.0 million at December 31, 2021. The increase was primarily due to purchases of mortgage-related securities to take advantage of the increase in interest rates. The purchases are exceeding security paydowns for the year and maturities of debt securities. Also offsetting the purchases, the decline in fair market value of the portfolio decreased due to rising interest rates.    Loans Held for Sale .   Loans held for sale decreased $181.6 million, or 58.1%, to $131.2 million at December 31, 2022 from $312.7 million at December 31, 2021 due to the decrease of refinancing activity resulting from the increase in mortgage rates.   - 44 - Table of Contents   Loans Receivable .   Loans receivable held for investment increased $304.4 million, or 25.2%, to $1.51 billion at December 31, 2022 from $1.21 billion at December 31, 2021. 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.   Allowance for Credit Losses.   The allowance for credit losses increased $2.0 million to $17.8 million at December 31, 2022 from $15.8 million at December 31, 2021.  The increase primarily resulted from the $1.0 million provision increase due to the increase in loans held in portfolio along with 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 $519,000 for the year ended December 31, 2022. During the  year ended December 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors. See Note 3 - Loans Receivable of the notes to consolidated financial statements for further discussion on the allowance for credit losses.   Prepaid Expenses and Other Assets.   Total prepaid expenses and other assets increased $14.6 million to $59.8 million at December 31, 2022 from $45.1 million at December 31, 2021. 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.   Deposits decreased by $34.4 million to $1.20 billion at December 31, 2022, from $1.23 billion at December 31, 2021. The decrease was driven by a decrease of $66.2 million in money market and savings deposits offset by an increase of $16.2 million in demand deposits and an increase of $15.6 in time deposits.   Borrowings.   Total borrowings decreased $90.3 million to $386.8 million at December 31, 2022, from $477.1 million at December 31, 2021. The community banking segment paid off $420.0 million in long-term FHLB borrowings and $5.0 million in short-term borrowings, borrowing $150.0 million of new long-term FHLB borrowings, and $187.5 million in new short-term FHLB borrowings. External short-term borrowings at the mortgage banking segment decreased a total of $1.0 million to $1.1 million at December 31, 2022 from $2.0 million at December 31, 2021.   Other Liabilities.   Other liabilities increased $1.6 million to $70.1 million at December 31, 2022 compared to $68.5 million at December 31, 2021. Other liabilities increased primarily due to increase of 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 offset by a decrease in dividends payable as a special dividend was declared in December 2021 and paid in February 2022.   Shareholders ’ Equity.   Shareholders’ equity decreased by $62.3 million, or 14.4%, to $370.5 million at December 31, 2022 from $432.8 million at December 31, 2021. 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.   Comparison of Community Banking Segment Operations for the Years Ended December 31, 2022 and 2021   Net income from our community banking segment for the year ended December 31, 2022 totaled $22.8 million compared to $28.3 million for the year ended December 31, 2021.  Net interest income increased $555,000 to $56.6 million for the year ended December 31, 2022 compared to $56.1 million for the year ended December 31, 2021. Net interest income increased primarily due to an increase in interest earned on mortgage-related securities and cash as the federal funds rates raises throughout the year along with a decrease on borrowing interest expense as less borrowings were needed to fund the mortgage banking segment line of credit.  Offsetting the those increases to net interest income, interest earned on loans decreased as the mortgage banking segment line decreased as volumes slowed and interest expense on deposits increased as funding rates matched the federal funds rate increases.     There was a provision for credit losses of $677,000 for the year ended December 31, 2022 compared to a negative provision for loan losses of $4.1 million for the year ended December 31, 2021. The provision for credit losses consisted of a $740,000 provision related to loans due to loan growth and a $62,000 of negative provision related to unfunded commitments as the balance decreased for the year ended December 31, 2022. During the year ended December 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.     Noninterest income decreased $837,000 for the year ended December 31, 2022 due primarily to a decrease in service fees on deposits and prepayment fees on loans during the year ended December 31, 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.   - 45 - Table of Contents   Compensation, payroll taxes, and other employee benefits expense decreased $1.3 million to $19.0 million during the year ended December 31, 2022 primarily due to a decrease in health insurance, variable compensation, ESOP expense compared to the year ended December 31, 2021. Other noninterest expense increased $3.6 million to $5.6 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 Operations for the Years Ended December 31, 2022 and 2021   Net loss totaled $3.4 million for the year ended December 31, 2022 compared to net income of $42.5 million for the year ended December 31, 2021. We originated $2.76 billion in mortgage loans held for sale (including sales to the community banking segment) during the year ended December 31, 2022, which represents a decrease of $1.47 billion, or 34.6%, from the $4.23 billion originated during the year ended December 31, 2021. The decrease in loan production volume was driven by a $986.3 million, or 76.6%, decrease in refinance products driven by an increase in fixed mortgage rates. Mortgage purchase products decreased $478.8 million, or 16.3% due to inventory constraints in the market, housing affordability, and as interest rates have increased. Total mortgage banking noninterest income decreased $93.5 million, or 47.3%, to $104.1 million during the year ended December 31, 2022 compared to $197.6 million during the year ended December 31, 2021. The decrease in mortgage banking noninterest income was related to a 34.6% decrease in volume and a 18.3% decrease in gross margin on loans originated and sold for the year ended December 31, 2022 compared to December 31, 2021.  Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. The gross margin on loans originated and sold contraction reflects decreased industry demand due to the increased competition from mortgage originators. We sell loans on both a servicing-released and a servicing-retained basis.  Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.    Additionally, our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance).  Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan. Our origination efforts continue to be focused on loans made for the purpose of residential purchases, as opposed to mortgage refinance. The percentage of origination volume related to purchase activity increased to 89.1% from 69.5% of total originations for the year ended December 31, 2022 and 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 29.3% and 70.7%, respectively of all loan originations, respectively, during the year ended December 31, 2022, compared to 23.4% and 76.6% of all originations, respectively, during the year ended December 31, 2021.   During the year ended December 31, 2022, there were no sales of mortgage servicing rights. During the year ended December 31, 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.   Total compensation, payroll taxes and other employee benefits decreased $34.3 million, or 29.7%, to $81.0 million for the year ended December 31, 2022 compared to $115.3 million for the year ended December 31, 2021. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased. During the year ended December 31, 2022, the segment has added 11 branches and a total of 130 loan origination personnel. Losses associated with these new branches totaled approximately $1.9 million during the year ended December 31, 2022. These branch losses are net of corporate revenue of approximately $1.2 million during the year ended December 31, 2022.   Waterstone Mortgage Corporation originates loans in various states. The states where we originate greater than 10% of total activity are Florida and New Mexico.   Comparison of Consolidated Waterstone Financial, Inc. Results of Operations for the Years Ended December 31, 2022 and 2021       Years Ended December 31,       2022     2021       (Dollars In Thousands, except per share amounts)                     Net income   $ 19,487     $ 70,791   Earnings per share - basic     0.89       2.98   Earnings per share - diluted     0.89       2.96   Return on average assets     0.96 %     3.20 % Return on average equity     4.91 %     16.38 %   - 46 - Table of Contents   Average Balance Sheets, Interest and Yields/Costs   The following table set forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated.  Non-accrual loans were included in the computation of the average balances of loans receivable and held for sale.  The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.  Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.       Years Ended December 31,       2022     2021     2020       Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate       (Dollars in Thousands)   Assets                                                                         Interest-earning assets:                                                                         Loans receivable and held for sale (1)   $ 1,467,306       62,935       4.29 %   $ 1,600,115       64,366       4.02 %   $ 1,716,341       72,633       4.23 % Mortgage related securities (2)     162,584       3,241       1.99 %     103,324       1,954       1.89 %     101,345       2,488       2.45 % Debt securities, federal funds sold and short-term investments (2)(3)     269,171       4,271       1.59 %     366,949       3,827       1.04 %     187,910       3,644       1.94 % Total interest-earning assets     1,899,061       70,447       3.71 %     2,070,388       70,147       3.39 %     2,005,596       78,765       3.93 % Noninterest-earning assets     120,744                       142,040                       147,697                   Total assets   $ 2,019,805                     $ 2,212,428                     $ 2,153,293                                                                                             Liabilities and equity                                                                         Interest-bearing liabilities:                                                                         Demand accounts   $ 72,751       61       0.08 %     64,653       50       0.08 %     47,410       38       0.08 % Money market and savings accounts     391,170       1,201       0.31 %     363,930       904       0.25 %     264,722       1,768       0.67 % Certificates of deposit     602,332       3,601       0.60 %     675,495       3,466       0.51 %     733,033       12,559       1.71 % Total interest-bearing deposits     1,066,253       4,863       0.46 %     1,104,078       4,420       0.40 %     1,045,165       14,365       1.37 % Borrowings     348,482       8,428       2.42 %     479,262       9,948       2.08 %     545,741       10,619       1.95 % Total interest-bearing liabilities     1,414,735       13,291       0.94 %     1,583,340       14,368       0.91 %     1,590,906       24,984       1.57 %                                                                           Noninterest-bearing liabilities                                                                         Non interest-bearing deposits     159,495                       146,767                       116,771                   Other noninterest-bearing liabilities     48,500                       50,140                       43,460                   Total noninterest-bearing liabilities     207,995                       196,907                       160,231                   Total liabilities     1,622,730                       1,780,247                       1,751,137                   Equity     397,075                       432,181                       402,156                   Total liabilities and equity   $ 2,019,805                     $ 2,212,428                     $ 2,153,293                   Net interest income / Net interest rate spread (4)             57,156       2.77 %             55,779       2.48 %             53,781       2.36 % Less: taxable equivalent adjustment             202       0.01 %             264       0.01 %             281       0.02 % Net interest income, as reported             56,954       2.76 %             55,515       2.47 %             53,500       2.34 % Net interest-earning assets (5)   $ 484,326                     $ 487,048                     $ 414,690                   Net interest margin (6)                     3.00 %                     2.68 %                     2.67 % Tax equivalent effect                     0.01 %                     0.01 %                     0.01 % Net interest margin on a fully tax equivalent basis                     3.01 %                     2.69 %                     2.68 % Average interest-earning assets to average interest-bearing liabilities     134.23 %                     130.76 %                     126.07 %                   (1)    Includes net deferred loan fee amortization income of $684,000, $2.1 million and $1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. (2)    Includes available for sale securities. (3)    Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended December 31, 2022, 2021, and 2020.  The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.51%, 0.97%, and 1.79% for the years ended December 31, 2022, 2021, and 2020, respectively. (4)    Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities and is presented on a fully tax equivalent basis. (5)    Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (6)    Net interest margin represents net interest income divided by average total interest-earning assets.   - 47 - Table of Contents   Rate/Volume Analysis   The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments for any of the years presented.       Years Ended December 31,     Years Ended December 31,       2022 versus 2021     2021 versus 2020       Increase (Decrease) due to     Increase (Decrease) due to       Volume     Rate     Net     Volume     Rate     Net       (In Thousands)   Interest and dividend income:                                                 Loans receivable and held for sale (1)(2)   $ (5,567 )   $ 4,136     $ (1,431 )   $ (3,968 )   $ (4,299 )   $ (8,267 ) Mortgage related securities (3)     1,190       97       1,287       47       (581 )     (534 ) Other interest-earning assets (3)(4)     (1,204 )     1,648       444       2,398       (2,215 )     183   Total interest-earning assets     (5,581 )     5,881       300       (1,523 )     (7,095 )     (8,618 )                                                   Interest expense:                                                 Demand accounts     11       -       11       12       -       12   Money market and savings accounts     71       226       297       1,285       (2,149 )     (864 ) Certificates of deposit     (214 )     349       135       (915 )     (8,178 )     (9,093 ) Total interest-bearing deposits     (132 )     575       443       382       (10,327 )     (9,945 ) Borrowings     (3,790 )     2,270       (1,520 )     (1,481 )     810       (671 ) Total interest-bearing liabilities     (3,922 )     2,845       (1,077 )     (1,099 )     (9,517 )     (10,616 ) Net change in net interest income   $ (1,659 )   $ 3,036     $ 1,377     $ (424 )   $ 2,422     $ 1,998     (1) Includes net deferred loan fee amortization income of $684,000, $2.1 million and $1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. (2) Non-accrual loans have been included in average loans receivable balance. (3) Includes available for sale securities. (4) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended December 31, 2022, 2021, and 2020.   Net Interest Income   Net interest income increased $1.4 million, or 2.6%, to $57.0 million during the year ended December 31, 2022 compared to $55.5 million during the year ended December 31, 2021.     • Interest income on loans decreased $1.4 million, or 2.2%, to $62.9 million during the year ended December 31, 2022 compared to $64.4 million during the year ended December 31, 2021 due primarily to a $144.9 million, or 45.6%, decrease in average loans as loans held for sale originations decreased as interest rates increased. This decrease was partially offset by a 27 basis point increase in average yield on loans as interest rates continue to increase over the past year and an increase in average loan balance of $12.1 million, or 0.9%, in the average balance of loans held in portfolio.   • Interest income from mortgage related securities increased $1.3 million, or 65.9%, primarily as the average balance increased $59.3 million.   • Interest expense on time deposits increased $135,000, or 3.9%, primarily due to a nine basis point increase in average cost of time deposits. Offsetting the average cost of time deposits increase, the average balance of time deposits decreased $73.2 million compared to the prior year.   - 48 - Table of Contents     • Interest expense on money market, savings, and escrow accounts increased $297,000, or 32.9%, due primarily to a six basis point increase in average cost of money market, savings, and escrow accounts and the average balance increased $27.2 million.   • Interest expense on borrowings decreased $1.5 million, or 15.3%, due to a $130.8 million decrease in the average balance of borrowings during the year ended December 31, 2022 compared to the year ended December 31, 2021 as $470.0 million in FHLB borrowings paid off and $385.7 million in new FHLB borrowings during the year ended December 31, 2022.  The FHLB borrowings decreased was primarily due to the decrease in loans held for sale.      Provision 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 provision for credit losses of $968,000 during the year ended December 31, 2022 compared to a $4.0 million negative provision for loan losses for the year ended December 31, 2021. The $968,000 provision for credit losses consisted of a $1.0 million provision related to loans and a $62,000 of negative provision related to unfunded commitments for the year ended December 31, 2022. During the year ended December 31, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.    The provision is primarily a function of the Company's reserving methodology and assessments of certain quantitative and qualitative factors which are used to determine an appropriate allowance for credit losses for the period.  See further discussion regarding the allowance for loan losses in the "Asset Quality" section for an analysis of charge-offs, nonperforming assets, specific reserves and additional provisions and the "Allowance for Credit Loss" section.   Noninterest Income       Years Ended December 31,       2022     2021     $ Change     % Change       (Dollars in Thousands)                                     Service charges on loans and deposits   $ 2,202     $ 3,325     $ (1,123 )     (33.8 %) Increase in cash surrender value of life insurance     1,738       1,615       123       7.6 % Mortgage banking income     99,560       191,035       (91,475 )     (47.9 %) Other     2,055       7,220       (5,165 )     (71.5 %) Total noninterest income   $ 105,555     $ 203,195     $ (97,640 )     (48.1 %)   Total noninterest income decreased $97.6 million, or 48.1%%, to $105.6 million during the year ended December 31, 2022 compared to $203.2 million during the year ended December 31, 2021. The decrease resulted primarily from a decrease in mortgage banking income along with decreases from no gain on sale of mortgage servicing rights.     • 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 $1.65 billion, or 39.3%, to $2.55 billion during the year ended December 31, 2022 compared to $4.20 billion during the year ended December 31, 2021.  Gross margin on loans originated and sold decreased 18.3% at the mortgage banking segment. 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. See "Comparison of Mortgage Banking Segment Results of Operations for the Year December 31, 2022 and 2021" above, for additional discussion of the increase in mortgage banking income.   • Service charges on loans and deposits decreased primarily due to a decrease in loan prepayment fees.   • The decrease in other noninterest income was due primarily to a gain on sale of mortgage servicing rights in 2021 and decreases in mortgage servicing fee income as a result of the servicing fees prior to the sale. During the year ended December 31, 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 December 31, 2022.  As of December 31, 2022 and December 31, 2021, the Company maintained servicing rights related to $409.6 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 year ended December 31, 2022 compared to none during the year ended December 31, 2021.    - 49 - Table of Contents   Noninterest Expenses       Years Ended December 31,       2022     2021     $ Change     % Change       (Dollars in Thousands)                                     Compensation, payroll taxes, and other employee benefits   $ 99,565     $ 135,115     $ (35,550 )     (26.3 %) Occupancy, office furniture, and equipment     8,706       9,612       (906 )     (9.4 %) Advertising     3,976       3,528       448       12.7 % Data processing     4,470       3,950       520       13.2 % Communications     1,189       1,309       (120 )     (9.2 %) Professional fees     1,815       1,275       540       42.4 % Real estate owned     19       3       16       533.3 % Loan processing expense     4,744       4,610       134       2.9 % Other     12,578       11,192       1,386       12.4 % Total noninterest expenses   $ 137,062     $ 170,594     $ (33,532 )     (19.7 %)   Total noninterest expenses decreased $33.5 million, or 19.7%, to $137.1 million during the year ended December 31, 2022 compared to $170.6 million during the year ended December 31, 2021.     • Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment decreased $34.3 million, or 29.7%, to $81.0 million for the year ended December 31, 2022. 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.   • Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $1.3 million, or 6.3%, to $19.0 million during the year ended December 31, 2022. The decrease was primarily due to a decrease in health insurance, variable compensation, and ESOP expense as the average stock price has decreased compared to the year ending December 31, 2021, offset by an increase in salaries due to annual raises.   • Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $770,000 to $5.1 million during the year ended December 31, 2022 primarily resulting from lower rent, computer, and depreciation expenses.   • Occupancy, office furniture and equipment expense at the community banking segment decreased $136,000 to $3.6 million during the year ended December 31, 2022 compared to the prior year. The decrease was due primarily to decreased depreciation expense and maintenance expense.   • Advertising expense increased $448,000, or 12.7%, to $4.0 million during the year ended December 31, 2022. This was primarily due to an increase at the mortgage banking segment in an effort to increase new customers.    • Data processing expense increased $520,000, or 13.2%, to $4.5 million during the year ended December 31, 2022. This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.   • Professional fees increased $540,000, or  42.4%, to $1.8 million during the year ended December 31, 2022. The increase was due to receiving a countersuit settlement related to a previously closed legal matter at the mortgage banking segment during the year ended December 31, 2021.   • Other noninterest expense increased $1.3 million, or 12.4%, to $12.6 million during the year ended December 31, 2022. Other noninterest expenses increased at the mortgage banking segment increased as the provision for loan sale losses and corporate meetings expenses increased during the year ended December 31, 2022. Offsetting the increases at the mortgage banking segment, the amortization expense on mortgage servicing rights decreased due to the bulk sale of mortgage servicing rights during the year ended December 31, 2021.   - 50 - Table of Contents   Income Taxes   Income tax expense decreased $16.3 million to $5.0 million during the year ended December 31, 2022, compared to $21.3 million during the year ended December 31, 2021 as pretax income decreased $67.6 million.  Income tax expense was recognized during the year ended December 31, 2022 at an effective rate of 20.4% compared to an effective rate of 23.1% during the year ended December 31, 2021. The decrease in the effective rate reflects an increase of permanent deductions relative to the amount of pretax income and additionally the 2022 rate reflects the lower state tax apportionment based on the final 2020 tax returns. During the year ended  December 31, 2021, the Company recorded a $949,000 return to provision income tax adjustment to reflect actual state tax apportionment based on the final 2021 tax returns. There was no return to provision adjustment during the year ended December 31, 2022.     Liquidity and Capital Resources   We maintain liquid assets at levels we consider adequate to meet our liquidity needs. The liquidity ratio is equal to average daily cash and cash equivalents for the period divided by average total assets. We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows and pay real estate taxes on mortgage loans. We also adjust liquidity as appropriate to meet asset and liability management objectives. The operational adequacy of our liquidity position at any point in time is dependent upon the judgment of the Chief Financial Officer as supported by the Asset/Liability Committee. Liquidity is monitored on a daily, weekly and monthly basis using a variety of measurement tools and indicators. Regulatory liquidity, as required by the WDFI, is based on current liquid assets as a percentage of the prior month’s average deposits and short-term borrowings. Minimum primary liquidity is equal to 4.0% of deposits and short-term borrowings and minimum total regulatory liquidity is equal to 8.0% of deposits and short-term borrowings. The Bank’s primary and total regulatory liquidity at December 31, 2022 were 4.49% and 19.46%, respectively.   Our primary sources of liquidity are deposits, amortization and repayment of loans, sales of loans held for sale, maturities of investment securities and other short-term investments, and earnings and funds provided from operations.  While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan repayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competitors.  We set the interest rates on our deposits to maintain a desired level of total deposits.  In addition, we invest excess funds in short-term, interest-earning assets, which provide liquidity to meet lending requirements.  Additional sources of liquidity used to manage long- and short-term cash flows include advances from the FHLB.   A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At December 31, 2022 and 2021, $46.6 million and $376.7 million, respectively, of our assets were invested in cash and cash equivalents. 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, Federal funds purchased and advances from the FHLB.   Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.   During the years ended December 31, 2022, and 2021, we originated on a consolidated basis $2.55 billion and $4.20 billion in loans for sale and sold loans on a consolidated basis of $2.81 billion and $4.48 billion.  During the year ended December 2022, loan originations net of loan repayments resulted in a negative cash flows of $303.9 million. During the year ended December 2021, loan repayments net of loan originations resulted in a positive cash flows of $170.3 million. Cash received from the principal repayments of debt and mortgage related securities and maturity and calls of debt securities totaled $50.7 million and $49.5 million for the years ended December 31, 2022 and 2021, respectively. We purchased $90.0 million and $73.7 million in debt securities and mortgage related securities classified as available for sale during the years ended December 31, 2022 and 2021, respectively. The net decrease in deposits was $34.4 million for the year ending December 31, 2022. The net increase in deposits was $48.5 million for the year ending December 31, 2021. We received a $1.2 million death benefit on a bank owned life insurance policy in 2022. There were net decreases in borrowings of $90.3 million and $30.9 million for the years ended December 31, 2022 and 2021.  During the years ended December 31, 2022 and 2021, we repurchased common stock of $47.8 million and $10.2 million, respectively.  During the years ended December 31, 2022 and 2021, we paid cash dividends on common stock of $30.3 million and $30.4 million, respectively.   Deposits decreased by $34.4 million from December 31, 2021 to December 31, 2022. The decrease was driven by a decrease of $66.2 million in money market and savings deposits offset by an increase of $16.2 million in demand deposits and $15.6 million in time deposits. Deposit flows are generally affected by the level of interest rates, market conditions and products offered by local competitors and other factors.   Liquidity management is both a daily and longer-term function of business management.  If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds.  At December 31, 2022, we had $185.7 million in short term advances from the FHLB. At December 31, 2022, we had $200.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, and 2032. There are four advances that have contractual maturities in 2025. The 2027 advance has a contractual maturity date in December 2027.  The 2032 advance has a quarterly call options which begins in March 2023. As an additional source of funds, the mortgage banking segment has a repurchase agreement. At December 31, 2022, we had $1.1 million outstanding under the repurchase agreement with a total outstanding commitment of $50.0 million.    - 51 - Table of Contents   At December 31, 2022, we had outstanding commitments to originate loans receivable of $61.2 million.  In addition, at December 31, 2022, we had unfunded commitments under construction loans of $48.5 million, unfunded commitments under business lines of credit of $17.4 million and unfunded commitments under home equity lines of credit and standby letters of credit of $11.1 million. At December 31, 2022, certificates of deposit scheduled to mature in less than one year totaled $502.3 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago advances, Federal Reserve Discount Window or brokered deposits to maintain our level of assets. However, such borrowings may not be available on attractive terms, or at all, if and when needed. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents and securities available for sale in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.   Capital   Shareholders’ equity decreased by $62.3 million, or 14.4%, to $370.5 million at December 31, 2022 from $432.8 million at December 31, 2021. 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.   The Company's Board of Directors authorized a stock repurchase program in the fourth quarter of 2021. As of December 31, 2022, the Company had repurchased 13.9 million shares at an average price of $15.27 under previously approved stock repurchase plans.   Waterstone Financial, Inc. and WaterStone Bank are 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 December 31, 2022, Waterstone Financial, Inc. and WaterStone Bank exceeded all regulatory capital requirements and are considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation—Capital Requirements” and Note 9 - Regulatory Capital of the notes to the consolidated financial statements.   Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements   During the year ended December 31, 2022, we repaid $5.0 million in FHLB short-term debt and $470.0 million in FHLB long-term debt and borrowed $200.0 million of FHLB long-term debt and $185.7 million of short-term debt.    See Note 8 - Borrowings of the notes to the consolidated financial statements for additional information about the remaining maturities of our FHLB long-term debt.   See Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to the consolidated financial statements for additional information.   WaterStone Bank has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following tables present information indicating various non-deposit contractual obligations and commitments of WaterStone Bank as of December 31, 2022 and the respective maturity dates.       - 52 - Table of Contents   Impact of Inflation and Changing Prices   The financial statements and accompanying notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.   Quarterly Financial Information   The following table sets forth certain quarterly data for the periods indicated:       Quarter Ended       March 31     June 30     September 30     December 31       (In Thousands, except per share data)   2022 (unaudited)                                 Interest income   $ 15,030     $ 16,416     $ 18,125     $ 20,674   Interest expense     3,166       2,335       2,727       5,063   Net interest income     11,864       14,081       15,398       15,611   Provision (credit) for credit losses (1)     (76 )     48       332       664   Net interest income after provision for credit losses (1)     11,940       14,033       15,066       14,947   Total noninterest income     29,818       31,238       27,404       17,095   Total noninterest expense     34,935       35,050       35,694       31,384   Income before income taxes     6,823       10,221       6,776       658   Income taxes     1,532       2,231       1,506       (277 ) Net income   $ 5,291     $ 7,990     $ 5,270     $ 935   Income per share - basic   $ 0.23     $ 0.36     $ 0.25     $ 0.04   Income per share - diluted   $ 0.23     $ 0.36     $ 0.25     $ 0.04                                     2021 (unaudited)                                 Interest income   $ 17,969     $ 17,824     $ 17,506     $ 16,584   Interest expense     4,017       3,547       3,392       3,412   Net interest income     13,952       14,277       14,114       13,172   Provision for loan losses (1)     (1,070 )     (750 )     (700 )     (1,470 ) Net interest income after provision for loan losses (1)     15,022       15,027       14,814       14,642   Total noninterest income     56,199       52,044       52,936       42,016   Total noninterest expense     43,000       43,297       43,323       40,974   Income before income taxes     28,221       23,774       24,427       15,684   Income taxes     6,877       5,880       5,427       3,131   Net income   $ 21,344     $ 17,894     $ 19,000     $ 12,553   Income per share - basic   $ 0.90     $ 0.75     $ 0.80     $ 0.53   Income per share - diluted   $ 0.89     $ 0.74     $ 0.79     $ 0.53     (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amount presented is calculated under the prior accounting standard.    - 53 - Table of Contents     Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   Management of Market Risk   General .   The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, WaterStone Bank’s board of directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.   We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real estate balloon loans; (ii) reducing and shortening the expected average life of the investment portfolio; and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the FHLBC. These measures should reduce the volatility of our net interest income in different interest rate environments.   Income Simulation .   Simulation analysis is an estimate of our interest rate risk exposure at a particular point in time.  At least quarterly we review the potential effect changes in interest rates may have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities.  Our most recent simulation uses projected repricing of assets and liabilities at December 31, 2022 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments.  Prepayment rate assumptions may have a significant impact on interest income simulation results.  Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn affect our interest rate sensitivity position.  When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our liabilities and therefore would most likely have a positive impact on net interest income and earnings.   The following interest rate scenario displays the percentage change in net interest income over a one-year time horizon assuming increases of 100, 200 and 300 basis points and a decrease of 100 basis points.  The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a static (no growth balance sheet).   Analysis of Net Interest Income Sensitivity       Immediate Change in Rates       +300     +200     +100       -100       (Dollar Amounts in Thousands)   As of December 31, 2022                                 Dollar Change   $ (5,632 )   $ (3,886 )   $ (2,053 )   $ (233 ) Percentage Change     (10.8 %)     (7.4 %)     (3.9 %)     (0.4 %)   At December 31, 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 3.92% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 0.44%.   - 54 - Table of Contents     Item 8.    Financial Statements and Supplementary Data   Management ’ s Annual Report on Internal Control Over Financial Reporting   The management of Waterstone Financial, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.   Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework.  Based on that assessment, we believe that, as of December 31, 2022, our internal control over financial reporting is effective based on those criteria.   CliftonLarsonAllen LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, as stated in their report dated February 28, 2023.     /s/ Douglas S. Gordan   /s/ Mark R. Gerke Douglas S. Gordon   Mark R. Gerke Chief Executive Officer   Chief Financial Officer   - 55 - Table of Contents       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Board of Directors and Shareholders Waterstone Financial, Inc. Wauwatosa, Wisconsin     Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of Waterstone Financial, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework , issued by COSO in 2013.   Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.   Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provides a reasonable basis for our opinions.   Definition and Limitations of Internal Control over Financial Reporting   A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.   - 56 - Table of Contents   Critical Audit Matter The critical audit matters communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.   Allowance for Credit Losses on Loans As described in Notes 1 and 3 to the consolidated financial statements, the Company’s estimate of the allowance for credit losses on loans was $17.8 million at December 31, 2022 on a loan portfolio of $1.51 billion. The allowance for credit losses (ACL) on loans is an estimate of lifetime expected credit losses. The ACL considers historical loss rates, which are adjusted for reasonable and supportable forecasts, and other qualitative adjustments. The Company segments the loan portfolio into loan pools based on loan type with similar origination years and similar credit risk elements. Loans that do not share credit risk elements are evaluated on an individual basis. For loan product types one-to-four family, multi family, commercial real estate, and commercial, an average historical loss rate is calculated by classifying net charge-offs by year of loan origin and dividing into total originations for that specific year. This methodology is referred to as vintage analysis. The average loss rate is then projected over the estimated remaining loan lives unique to each loan pool, to determine estimated lifetime losses. For loan product types construction and land and consumer, an average annual net loss rate is computed and extrapolated over the remaining life of the loans. This methodology is referred to as the weighted average remaining maturity method (WARM). For all loan pools the Company then considers the need for an additional allowance based upon qualitative factors as determined by pool. These qualitative factors are intended to adjust for changes not reflected in historical loss rates and otherwise unaccounted for in the quantitative process.   The principal considerations for our determination of the qualitative factors used in the allowance for credit losses for loans as a critical audit matter includes the subjectivity, complexity, and estimation uncertainty involved in determining significant model assumptions and adjusting model outputs to reflect economic and portfolio trends and conditions not captured within the models.   The primary procedures we performed to address this critical audit matter included the following:     • Obtained an understanding of the Company’s models and the process for establishing the allowance for credit losses for the loan portfolio.     • Tested the design and operating effectiveness of controls relating to management’s determination of the allowance for credit losses for loans, including controls over the allowance for credit losses models and the inputs and assumptions used to support the reserve calculations. Controls over the models include review of the model calculations and the macro-economic forecasts utilized in the models. Additionally, we tested controls over the approval of key policies and decisions during the implementation of the new accounting standard and validation of the models.     • Evaluated the reasonableness of management’s application of industry and qualitative factor adjustments to the allowance for credit losses, including the comparison of factors considered by management to third party or internal sources as well as evaluated the appropriateness and level of the qualitative factor adjustments.     • Assessed the overall trends in credit quality by comparing the Company’s quarterly changes in qualitative factors and the allowance for credit losses.     • Evaluated management’s determination of reasonable and supportable forecasts, including comparing key factors to independent sources.     • Evaluated subsequent events and transactions and considered whether they corroborated or contradicted the Company’s conclusion.     • Testing the calculations used by management to translate the assumptions and key factors into the allowance estimated amount.     /s/ CliftonLarsonAllen LLP   CliftonLarsonAllen LLP   We have served as the Company’s auditor since 2021.   Milwaukee, Wisconsin February 28, 2023   - 57 - Table of Contents   Report of Independent Registered Public Accounting Firm   Shareholders and the Board of Directors   Waterstone Financial, Inc.     Opinion on the Financial Statements We have audited the accompanying consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows of Waterstone Financial, Inc. and Subsidiaries (the Company) for the year ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.     /s/   RSM US LLP   We served as the Company's auditor from 2014 through 2020   Chicago, Illinois   March 1, 2021     - 58 - Table of Contents     Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Financial Condition December 31, 2022 and 2021     December 31,       2022     2021   Assets   (In Thousands, except share data)   Cash   $ 33,700     $ 343,016   Federal funds sold     10,683       13,981   Interest-earning deposits in other financial institutions and other short term investments     2,259       19,725   Cash and cash equivalents     46,642       376,722   Securities available for sale (at fair value)     196,588       179,016   Loans held for sale (at fair value)     131,188       312,738   Loans receivable     1,510,178       1,205,785   Less: Allowance for credit losses ("ACL") - loans (1)     17,757       15,778   Loans receivable, net     1,492,421       1,190,007                     Office properties and equipment, net     21,105       22,273   Federal Home Loan Bank stock (at cost)     17,357       24,438   Cash surrender value of life insurance     66,443       65,368   Real estate owned, net     145       148   Prepaid expenses and other assets     59,783       45,148   Total assets   $ 2,031,672     $ 2,215,858                     Liabilities and Shareholders' Equity                 Liabilities:                 Demand deposits   $ 230,596     $ 214,409   Money market and savings deposits     326,145       392,314   Time deposits     642,271       626,663   Total deposits     1,199,012       1,233,386                     Borrowings     386,784       477,127   Advance payments by borrowers for taxes     5,334       4,094   Other liabilities     70,056       68,478   Total liabilities     1,661,186       1,783,085   Commitments and contingencies (Note 14)                                       Shareholders' equity:                 Preferred stock (par value $ 0.01 per share) Authorized - 50,000,000 shares in 2022 and 2021, no shares issued     -       -   Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at December 31, 2022 and at December 31, 2021, Issued and Outstanding - 22,174,225 at December 31, 2022 and 24,795,124 at December 31, 2021     222       248   Additional paid-in capital     128,550       174,505   Retained earnings     274,246       273,398   Unearned ESOP shares     ( 13,056 )     ( 14,243 ) Accumulated other comprehensive loss, net of taxes     ( 19,476 )     ( 1,135 ) Total shareholders’ equity     370,486       432,773   Total liabilities and shareholders’ equity   $ 2,031,672     $ 2,215,858   (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    See accompanying notes to consolidated financial statements   - 59 - Table of Contents     Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Operations Years ended December 31, 2022, 2021 and 2020       Years ended December 31,       2022     2021     2020       (In Thousands, except per share amounts)   Interest income:                         Loans   $ 62,935     $ 64,366     $ 72,633   Mortgage-related securities     3,241       1,954       2,488   Debt securities, federal funds sold and short-term investments     4,069       3,563       3,363   Total interest income     70,245       69,883       78,484   Interest expense:                         Deposits     4,863       4,420       14,365   Borrowings     8,428       9,948       10,619   Total interest expense     13,291       14,368       24,984   Net interest income     56,954       55,515       53,500   Provision (credit) for credit losses (1)     968       ( 3,990 )     6,340   Net interest income after provision (credit) for credit losses (1)     55,986       59,505       47,160   Noninterest income:                         Service charges on loans and deposits     2,202       3,325       4,462   Increase in cash surrender value of life insurance     1,738       1,615       1,905   Mortgage banking income     99,560       191,035       233,245   Other     2,055       7,220       4,405   Total noninterest income     105,555       203,195       244,017   Noninterest expenses:                         Compensation, payroll taxes, and other employee benefits     99,565       135,115       139,046   Occupancy, office furniture, and equipment     8,706       9,612       10,223   Advertising     3,976       3,528       3,691   Data processing     4,470       3,950       3,941   Communications     1,189       1,309       1,329   Professional fees     1,815       1,275       8,118   Real estate owned     19       3       ( 8 ) Loan processing expense     4,744       4,610       4,646   Other     12,578       11,192       12,075   Total noninterest expenses     137,062       170,594       183,061   Income before income taxes     24,479       92,106       108,116   Income tax expense     4,992       21,315       26,971   Net income   $ 19,487     $ 70,791     $ 81,145   Income per share:                         Basic   $ 0.89     $ 2.98     $ 3.32   Diluted   $ 0.89     $ 2.96     $ 3.30   Weighted average shares outstanding:                         Basic     21,884       23,741       24,464   Diluted     22,010       23,931       24,607     (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    See accompanying notes to consolidated financial statements   - 60 - Table of Contents     Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Years ended December 31, 2022, 2021 and 2020       Years ended December 31,       2022     2021     2020       (In Thousands)   Net income   $ 19,487     $ 70,791     $ 81,145   Other comprehensive income (loss), net of tax:                         Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $ 6,868 , $ 1,294 , and ($630) , respectively     ( 18,341 )     ( 3,461 )     1,684   Total other comprehensive (loss) income     ( 18,341 )     ( 3,461 )     1,684   Comprehensive income   $ 1,146     $ 67,330     $ 82,829     See accompanying notes to consolidated financial statements   - 61 - Table of Contents     Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders ’ Equity Years Ended December 31, 2022, 2021 and 2020                                               Accumulated                               Additional             Unearned     Other     Total       Common Stock     Paid-In     Retained     ESOP     Comprehensive     Shareholders'       Shares     Amount     Capital     Earnings     Shares     Income (Loss)     Equity       (In Thousands)                                                             Balances at December 31, 2019     27,148     $ 271     $ 211,997     $ 197,393     $ ( 16,617 )   $ 642     $ 393,686                                                             Comprehensive income:                                                         Net income     -       -       -     $ 81,145       -       -     $ 81,145   Other comprehensive income:     -       -       -       -       -       1,684       1,684   Total comprehensive income                                           82,829   ESOP shares committed to be released to Plan participants     -       -       489       -       1,187       -       1,676   Cash dividend, $ 1.36 per share     -       -       -       ( 33,251 )     -       -       ( 33,251 ) Stock compensation activity, net of tax     293       3       3,701       -       -       -       3,704   Stock based compensation expense     -       -       716       -       -       -       716   Purchase of common stock returned to authorized but unissued     ( 2,353 )     ( 23 )     ( 36,219 )     -       -       -       ( 36,242 )                                                           Balances at December 31, 2020     25,088     $ 251     $ 180,684     $ 245,287     $ ( 15,430 )   $ 2,326     $ 413,118                                                             Comprehensive income:                                                         Net income     -     $ -     $ -     $ 70,791     $ -     $ -     $ 70,791   Other comprehensive loss:     -       -       -       -       -       ( 3,461 )     ( 3,461 ) Total comprehensive income                                           67,330   ESOP shares committed to be released to Plan participants     -       -       942       -       1,187       -       2,129   Cash dividend, $ 1.80 per share     -       -       -       ( 42,680 )     -       -       ( 42,680 ) Stock compensation activity, net of tax     208       2       2,305       -       -       -       2,307   Stock based compensation expense     -       -       745       -       -       -       745   Purchase of common stock returned to authorized but unissued     ( 501 )     ( 5 )     ( 10,171 )     -       -       -       ( 10,176 )                                                           Balances at December 31, 2021     24,795     $ 248     $ 174,505     $ 273,398     $ ( 14,243 )   $ ( 1,135 )   $ 432,773                                                             Comprehensive income:                                                         Net income     -     $ -     $ -     $ 19,487     $ -     $ -     $ 19,487   Other comprehensive loss:     -       -       -       -       -       ( 18,341 )     ( 18,341 ) Total comprehensive income     -       -       -       -       -       -       1,146   Adoption of new accounting pronouncement (See Note 1)     -       -       -       ( 1,392 )     -       -       ( 1,392 ) ESOP shares committed to be released to Plan participants     -       -       702       -       1,187       -       1,889   Cash dividend, $ 0.80 per share     -       -       -       ( 17,247 )     -       -       ( 17,247 ) Stock compensation activity, net of tax     62       1       563       -       -       -       564   Stock based compensation expense     -       -       583       -       -       -       583   Purchase of common stock returned to authorized but unissued     ( 2,683 )     ( 27 )     ( 47,803 )     -       -       -       ( 47,830 )                                                           Balances at December 31, 2022     22,174     $ 222     $ 128,550     $ 274,246     $ ( 13,056 )   $ ( 19,476 )   $ 370,486     See accompanying notes to consolidated financial statements   - 62 - Table of Contents     Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended December 31, 2022, 2021 and 2020       Years ended December 31,       2022     2021     2020       (In Thousands)   Operating activities:                         Net income   $ 19,487     $ 70,791     $ 81,145   Adjustments to reconcile net income to net cash provided by operating activities:                         Provision (credit) for credit losses (1)     968       ( 3,990 )     6,340   Depreciation, amortization, accretion     4,033       6,048       5,608   Deferred taxes     ( 484 )     1,378       ( 2,620 ) Stock based compensation     583       745       716   Origination of mortgage servicing rights     ( 2,462 )     ( 5,778 )     ( 13,406 ) Proceeds on sales of mortgage servicing rights     -       12,448       6,985   Gain on sale of loans held for sale     ( 76,156 )     ( 193,399 )     ( 245,358 ) Loans originated for sale     ( 2,549,935 )     ( 4,198,139 )     ( 4,332,028 ) Proceeds on sales of loans originated for sale     2,807,641       4,480,804       4,395,505   Gain on death benefit on bank owned life insurance     ( 340 )     -       ( 1,456 ) (Increase) decrease in accrued interest receivable     ( 1,712 )     944       387   Increase in cash surrender value of life insurance     ( 1,738 )     ( 1,615 )     ( 1,905 ) (Increase) decrease in derivative assets     ( 10,897 )     6,688       ( 9,222 ) Decrease in accrued interest on deposits and borrowings     399       ( 178 )     ( 422 ) Decrease (increase) in prepaid tax expense     1,068       ( 2,558 )     113   Legal settlement     -       ( 4,250 )     4,250   Increase (decrease) in derivative liabilities     16,260       ( 5,140 )     5,140   Net gain related to real estate owned     -       ( 12 )     ( 107 ) Gain on sale of mortgage servicing rights     -       ( 4,032 )     ( 600 ) Change in other assets and other liabilities, net     ( 50 )     ( 6,301 )     7,353   Net cash provided (used) by operating activities     206,665       154,454       ( 93,582 )                           Investing activities:                         Net (increase) decrease in loans receivable     ( 303,874 )     170,297       12,353   Purchases of:                         FHLB Stock     ( 5,005 )     -       ( 5,570 ) Debt securities     ( 9,732 )     -       ( 10,125 ) Mortgage related securities     ( 80,265 )     ( 73,687 )     ( 19,372 ) Bank owned life insurance     ( 180 )     ( 180 )     ( 180 ) Premises and equipment     ( 701 )     ( 778 )     ( 1,225 ) Proceeds from:                         Principal repayments on mortgage-related securities     33,191       40,445       45,254   Maturities of debt securities     17,555       9,055       5,290   Sales of FHLB stock     12,086       2,282       -   Sales of real estate owned     -       183       1,133   Death benefit from bank owned life insurance     1,183       -       9,633   Net cash provided (used) by investing activities     ( 335,742 )     147,617       37,191                             Financing activities:                         Net (decrease) increase in deposits     ( 34,374 )     48,516       117,094   Net change in short-term borrowings     179,657       ( 30,947 )     24,512   Repayment of long-term debt     ( 470,000 )     -       -   Proceeds from long-term debt     200,000       -       -   Net change in advance payments by borrowers for taxes     1,240       572       ( 690 ) Cash dividends on common stock     ( 30,260 )     ( 30,388 )     ( 31,520 ) Proceeds from stock option exercises     564       2,307       3,704   Purchase of common stock returned to authorized but unissued     ( 47,830 )     ( 10,176 )     ( 36,242 ) Net cash provided (used) by financing activities     ( 201,003 )     ( 20,116 )     76,858   (Decrease) increase in cash and cash equivalents     ( 330,080 )     281,955       20,467   Cash and cash equivalents at beginning of period     376,722       94,767       74,300   Cash and cash equivalents at end of period   $ 46,642     $ 376,722     $ 94,767                             Supplemental information:                         Cash paid during the period for:                         Income tax payments   $ 4,090     $ 22,663     $ 29,478   Interest payments     12,892       14,546       25,406   Noncash investing activities:                         Loans receivable transferred to other real estate     -       -       637   Dividends declared but not paid in other liabilities     4,511       17,525       5,232   (1) The Company adopted ASU 2016-13 as of January 1, 2022. The prior year amounts presented are calculated under the prior accounting standard.    See accompanying notes to consolidated financial statements - 63 - Table of Contents   Waterstone Financial, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years ended December 31, 2022, 2021 and 2020     1 ) Summary of Significant Accounting Policies   The following significant accounting and reporting policies of Waterstone Financial, Inc. and subsidiaries (collectively, the “Company”), conform to U.S. generally accepted accounting principles, or (“GAAP”), and are used in preparing and presenting these consolidated financial statements.   Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income.  The Company reclassed certain line items in the Consolidated Statements of Cash Flows.     a) Nature of Operations   The Company is a one -bank holding company with two operating segments – community banking and mortgage banking.  WaterStone Bank SSB (the "Bank" or "WaterStone Bank") is principally engaged in the business of attracting deposits from the general public and using such deposits to originate real estate, business and consumer loans.   The Bank provides a full range of financial services to customers through branch locations in southeastern Wisconsin. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.   The Bank owns a mortgage banking subsidiary that originates residential real estate loans held for sale at various branch offices across the country.  Mortgage banking volume fluctuates widely in connection with movements in interest rates.  Mortgage banking income is reported as a single line item in the statements of operations while mortgage banking expense is distributed among the various noninterest expense lines.  Compensation, payroll taxes and other employee benefits expense fluctuates in relation to fluctuations in mortgage banking income.     b) Principles of Consolidation   The consolidated financial statements include the accounts and operations of Waterstone Financial, Inc. and its wholly owned subsidiary, WaterStone Bank.  The Bank has the following wholly owned subsidiaries: Wauwatosa Investments, Inc., Waterstone Mortgage Corporation, and Main Street Real Estate Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.     c) Use of Estimates   The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include: the allowance for credit losses, income taxes, and fair value measurements.     d) Cash and Cash Equivalents   The Company considers federal funds sold and highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents.     e) Securities   Available for Sale Securities   At the time of purchase, investment debt securities are classified as available for sale, as management has the intent and ability to hold such securities for an indefinite period of time, but not necessarily to maturity.  Any decision to sell investment securities available for sale would be based on various factors, including, but not limited to asset/liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations.  Available for sale securities are carried at fair value, with the unrealized gains and losses, net of deferred tax, reported as a separate component of equity in accumulated other comprehensive income (loss). The amortized cost of securities available for sale is adjusted for accretion of discounts to maturity and amortization of premiums over the estimated life of each security or, in the case of callable securities, through the first call date, using the effective yield method. Such amortization and accretion is included in interest income. Interest income on securities is recognized using the interest method according to the terms of the security.  Realized gains or losses on securities sales (using specific identification method) are included in noninterest income.    - 64 - Table of Contents   Federal Home Loan Bank Stock   Federal Home Loan Bank ("FHLB") stock is carried at cost, which is the amount that the stock is redeemable by tendering to the FHLB or the amount at which shares can be sold to other FHLB members.     f) Loans Held for Sale   The origination of residential real estate loans is an integral component of the business of the Company. The Company generally sells its originations of long-term fixed interest rate mortgage loans in the secondary market, and on a selective basis, retains the rights to service the loans sold. Gains and losses on the sales of these loans are determined using the specific identification method. Mortgage loans originated for sale are generally sold within 45  days after closing.   The Company has elected to carry loans held for sale at fair value.  Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the market.  The amount by which cost differs from market value is accounted for as a valuation adjustment to the carrying value of the loans.  Changes in value are included in mortgage banking income in the consolidated statements of operations.    Costs to originate loans held for sale are expensed as incurred and are included on the appropriate noninterest expense lines of the statements of operations.  Salaries, commissions and related payroll taxes are the primary costs to originate and comprised approximately 74.7 % of total mortgage banking noninterest expense for 2022 .   The value of mortgage loans held for sale and other residential mortgage loan commitments to customers are hedged by utilizing both best efforts and mandatory forward commitments to sell loans to investors in the secondary market. Such forward commitments are generally entered into at the time when applications are taken to protect the value of the mortgage loans from increases in market interest rates during the period held. The Company recognizes revenue associated with the expected future cash flows of servicing loans at the time a forward loan commitment is made.     g) Loans Receivable and Related Interest Income   Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff.  Loans are carried at the principal amount outstanding, net of any unearned income, charge-offs and unamortized deferred fees and costs.  Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan yield. Amortization is based on a level-yield method over the contractual life of the related loans or until the loan is paid in full.   Loan interest income is recognized on the accrual basis.  Accrual of interest is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal, or when a loan becomes contractually past due  90 days or more with respect to interest or principal. At that time, previously accrued and uncollected interest on such loans is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured.  Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.   A loan is accounted for as a troubled debt restructuring if the Company, for economic reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider.  A troubled debt restructuring typically involves a modification of terms such as a reduction of the stated interest rate, a deferral of principal payments or a combination of both for a temporary period of time.  If the borrower was performing in accordance with the original contractual terms at the time of the restructuring, the restructured loan is accounted for on an accruing basis as long as the borrower continues to comply with the modified terms.  If the loan was not accounted for on an accrual basis at the time of restructuring, the restructured loan remains in non-accrual status until the loan completes a minimum of six consecutive contractual payments.   - 65 - Table of Contents     h) Allowance for Credit Losses AFS Debt Securities   The impairment model for available-for-sale (“AFS”) debt securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost.  Although ASC Topic   326 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model.  One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length of time fair value has been less than amortized cost.  For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.  The Company reviews its AFS debt securities for credit loss impairment at the individual security level on at least a quarterly basis. A security is impaired if its fair value is less than its amortized cost basis. A decline in fair value below amortized cost basis represents a credit loss impairment to the extent the Company does not expect to recover the amortized cost basis of the security. Impairment related to credit losses is recorded through the ACL to the extent fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through the ACL are recorded through other comprehensive income, net of applicable taxes. In assessing whether an impairment is credit loss related, the Company compares the present value of cash flows expected to be collected to the security's amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an ACL is recorded. The Company discounts expected cash flows at the effective interest rate implicit in the security at the purchase date, adjusted for expected prepayments. For floating rate securities, the Company uses the floating rate as it changes over the life of the security. In developing estimates about cash flows expected to be collected and determining whether a credit loss exists, the Company considers information about past events, current conditions and reasonable and supportable forecasts. Factors and information that the Company uses in making its assessments include, but are not necessarily limited to, the following: •The extent to which fair value is less than amortized cost; •Adverse conditions specifically related to the security, an industry or geographic area; •Changes in the financial condition of the issuer or underlying loan obligors; •The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization; •Failure of the issuer to make scheduled payments; •Changes in credit ratings; •Relevant market data; •Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.   The relative importance assigned to each of these factors varies depending on the facts and circumstances pertinent to the individual security being evaluated. Timely payment of principal and interest on securities issued by the U.S. Government, U.S. government agencies and U.S. government sponsored entities is explicitly or implicitly guaranteed by the U. S. government. Therefore, the Company expects to recover the amortized cost basis of these securities.   If the Company intends to sell a security in an unrealized loss position, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, any allowance for credit losses will be written off and the amortized cost basis will be written down to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings. AFS securities will be charged off to the extent that there is no reasonable expectation of recovery of amortized cost basis. AFS securities will be placed on non-accrual status if the Company does not reasonably expect to receive interest payments in the future and interest accrued will be reversed against interest income. Securities will be returned to accrual status only when collection of interest is reasonably assured.   Loans The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The ACL is adjusted through the provision for credit losses to the amount of amortized cost basis not expected to be collected at the balance sheet date. The measurement of expected credit losses encompasses information about historical events, current conditions and reasonable and supportable forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation of the ACL estimate in future periods, in light of changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods. Loans are charged off against the ACL in the period in which they are deemed uncollectible and recoveries are credited to the ACL when received. Expected recoveries on loans previously charged off and expected to be charged-off, not to exceed the aggregate of amounts previously charged-off and expected to be charged-off, are included in the ACL estimate. Once loans are downgraded to substandard, an assessment of collateral value is made; any outstanding loan balance in excess of fair value less cost to sell is charged off at no later than 180 days delinquency. Additionally, any outstanding balance in excess of fair value of collateral less cost to sell is charged off when the asset is taken back by the company. Commercial and other consumer loans are charged off when, in management's judgment, they are considered to be uncollectible. Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, geography, and internal risk ratings. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments. Expected prepayments are estimated using a model that incorporates company's prepayment data, calibrated to reflect the Company's experience. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. The ACL estimate incorporates a reasonable and supportable economic forecast through the use of externally developed macroeconomic scenarios applied in the model. The model include both current and forecasted unemployment rates. The length of the reasonable and supportable forecast period is evaluated at each reporting period and adjusted if deemed necessary. Currently, the Company uses a 1 -year reasonable and supportable forecast period in estimating the ACL. After the reasonable and supportable forecast periods, the models effectively revert to long-term mean loss on a straight-line basis over 12 months.   - 66 - Table of Contents   Collateral dependent loans Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral, adjusted for selling costs when repayment depends on sale of the collateral.  Troubled debt restructurings For TDRs or loans for which there is a reasonable expectation that a TDR will be executed that are not collateral dependent, the credit loss estimate is determined by comparing the net present value of expected cash flows, discounted at the loan’s original effective interest rate, to the amortized cost basis of the loan.   Unfunded commitments Expected credit losses related to off-balance sheet credit exposures are estimated over the contractual period for which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Expected credit losses are estimated using essentially the same methodologies employed to estimate expected credit losses on the amortized cost basis of loans, taking into consideration the likelihood and amount of additional amounts expected to be funded over the terms of the commitments. The liability for credit losses on off-balance sheet credit exposures is presented within other liabilities on the consolidated statements of financial condition, distinct from the ACL. Adjustments to the liability are included in the provision for credit losses.     i) Real Estate Owned   Real estate owned consists of properties acquired through, or in lieu of, loan foreclosure.  Real estate owned is transferred into the portfolio at estimated net realizable value.  To the extent that the net carrying value of the loan exceeds the estimated fair value of the property at the date of transfer, the excess is charged to the allowance for loan losses within 90 days of being transferred.  Subsequent write-downs to reflect current fair value, as well as gains and losses upon disposition and revenue and expenses incurred in maintaining such properties, are treated as period costs and included in real estate owned in the consolidated statements of operations.     j) Mortgage Servicing Rights   The Company sells residential mortgage loans in the secondary market and, on a selective basis, retains the right to service the loans sold.  Upon sale, a mortgage servicing rights asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities.  Mortgage servicing rights, when purchased, are initially recorded at fair value.  Mortgage servicing rights are amortized over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated statements of financial condition. To the extent that the Company sells mortgage servicing rights, a gain is recognized for the amount of which sale proceeds exceed the remaining unamortized cost of the servicing rights that were sold. Gains on sale of mortgage servicing rights are included in other noninterest income in the consolidated statements of operations.   - 67 - Table of Contents     k) Cash Surrender Value of Life Insurance   The Company purchases bank owned life insurance on the lives of certain employees.  The Company is the beneficiary of the life insurance policies.  The cash surrender value of life insurance is reported at the amount that would be received in cash if the polices were surrendered.  Increases in the cash value of the policies and proceeds of death benefits received are recorded in noninterest income.  The increase in cash surrender value of life insurance is not subject to income taxes, as long as the Company has the intent and ability to hold the policies until the death benefits are received.     l) Office Properties and Equipment   Office properties and equipment, including leasehold improvements and software, are stated at cost, net of depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lease term, if shorter than the estimated useful life. Maintenance and repairs are charged to expense as incurred, while additions or major improvements are capitalized and depreciated over their estimated useful lives. Estimated useful lives of the assets are 10 to 30 years for office properties, three years to 10 years for equipment, and three years for software.     m) Income Taxes   The Company and its subsidiaries file consolidated federal and combined state income tax returns. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax returns.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.     The Company evaluates the realizability of its deferred tax assets on a quarterly basis.  Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized.  The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.   Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination.  The benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.   Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statements of operations.     n) Earnings Per Share   Earnings per share (EPS) are computed using the two -class method.  Stock compensation awards that contain rights to receive nonforfeitable dividends prior to the awards being vested are considered participating securities and, as such, included in the common