What changed in this filing

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Item 1. Financial Statements

2023-05-02 compared with 2022-11-02 · 466 added, 1075 removed, 1627 unchanged (49% of the section changed)

3 unchanged sentences

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 30, 2022

March 31, 2023

December 31, 2022

4 unchanged sentences

10,683  

13,981  

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

19,703  

19,725  

Cash and cash equivalents

1 unchanged sentence

46,642  

Securities available for sale (at fair value)

Securities available for sale, at fair value (cost:

2023—$ 223,620 ;

2022—$ 222,665 )

200,440  

52 unchanged sentences

Shareholders’

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

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

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at March 31, 2023 and at December 31, 2022, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at March 31, 2023 and at December 31, 2022, Issued and Outstanding - 21,867,233 at March 31, 2023 and 22,174,225 at December 31, 2022

Additional paid-in capital

18 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands, except per share amounts)

29 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended September 30,

Nine months ended September 30,

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three months ended March 31,

(In Thousands)

1 unchanged sentence

$ 5,291  

$ 18,552  

$ 58,238  

Other comprehensive loss, net of tax:

Net unrealized holding loss on available for sale securities:

Net unrealized holding loss arising during the period, net of tax benefit of $ 1,779 , $ 262 , $ 6,667 and $ 783 , respectively

( 4,753 )  

( 696 )  

( 17,806 )  

Total other comprehensive loss

( 4,753 )  

( 696 )  

( 17,806 )  

Comprehensive income

$ 18,304  

Other comprehensive income (loss), net of tax:

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

Net unrealized holding gain (loss) arising during the period, net of tax (expense) benefit of $( 790 ) and $ 2,623 , respectively

Total other comprehensive gain (loss)

Comprehensive income (loss)

$ 4,262  

7 unchanged sentences

(In Thousands, except per share amounts)

For the nine months ended September 30, 2021

Balances at December 31, 2020

25,088  

$ 180,684  

$ 245,287  

$ ( 15,430 )  

$ 2,326  

$ 413,118  

Comprehensive income:

58,238  

Other comprehensive loss

( 2,093 )  

Total comprehensive income

56,145  

ESOP shares committed to be released to plan participants

Cash dividend, $ 1.10 per share

( 26,209 )  

Proceeds from stock option exercises

Stock compensation expense

Purchase of common stock returned to authorized but unissued

( 237 )  

( 4,659 )  

Balances at September 30, 2021

25,038  

$ 179,312  

$ 277,316  

$ ( 14,540 )  

$ 442,571  

(In Thousands, except per share amounts)

For the nine months ended September 30, 2022

For the three months ended March 31, 2022

Balances at December 31, 2021

5 unchanged sentences

$ 432,773  

Comprehensive income:

18,552  

Comprehensive loss:

Other comprehensive loss

( 7,002 )  

Total comprehensive income

Total comprehensive loss

Adoption of new accounting pronouncement (see Note 1)

8 unchanged sentences

( 13,748 )  

( 45,171 )  

Balances at September 30, 2022

22,318  

$ 130,731  

$ 277,514  

$ ( 13,353 )  

$ ( 18,941 )  

$ 376,174  

Comprehensive

Shareholders'

Income (Loss)

(In Thousands, except per share amounts)

For the three months ended September 30, 2021

Balances at June 30, 2021

25,213  

$ 182,346  

$ 263,048  

$ ( 14,837 )  

$ 431,738  

Comprehensive income:

19,000  

Other comprehensive loss

( 696 )  

Total comprehensive income

18,304  

ESOP shares committed to be released to Plan participants

Cash dividend, $ 0.20 per share

( 4,732 )  

Stock compensation activity, net of tax

Stock compensation expense

Purchase of common stock returned to authorized but unissued

( 178 )  

Balances at March 31, 2022

24,147  

Balances at September 30, 2021

$ 161,354  

4 unchanged sentences

(In Thousands, except per share amounts)

For the three months ended September 30, 2022

Balances at June 30, 2022

For the three months ended March 31, 2023

Balances at December 31, 2022

22,174  

5 unchanged sentences

Comprehensive income:

Other comprehensive loss

( 4,753 )  

Other comprehensive income

Total comprehensive income

2 unchanged sentences

( 4,133 )  

Stock compensation activity, net of tax

Proceeds from stock option exercises

Stock compensation expense

2 unchanged sentences

( 5,837 )  

Balances at September 30, 2022

Balances at March 31, 2023

21,867  

8 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

Operating activities:

$ 2,155  

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

4 unchanged sentences

Origination of mortgage servicing rights

( 302 )  

Proceeds on sales of mortgage servicing rights

Gain on sale of loans held for sale

( 14,915 )  

Loans originated for sale

( 415,742 )  

Proceeds on sales of loans originated for sale

400,520  

878,554  

Gain on death benefit on bank owned life insurance

(Increase) decrease in accrued interest receivable

Increase in accrued interest receivable

( 575 )  

Increase in cash surrender value of life insurance

(Increase) decrease in derivative assets

Decrease in accrued interest on deposits and borrowings

Decrease (increase) in prepaid tax expense

Legal settlement

Increase (decrease) in derivative liabilities

Net gain related to real estate owned

( 325 )  

Decrease (increase) in derivative assets

Increase (decrease) in accrued interest on deposits and borrowings

Increase in prepaid tax expense

( 194 )  

(Decrease) increase in derivative liabilities

( 4,311 )  

Gain on sale of mortgage servicing rights

( 601 )  

Change in other assets and other liabilities, net

Net cash provided by operating activities

( 6,189 )  

Net cash (used in) provided by operating activities

( 31,384 )  

142,604  

Investing activities:

Net (increase) decrease in loans receivable

Net increase in loans receivable

( 40,029 )  

Purchases of:

Debt securities

( 601 )  

Mortgage related securities

Bank Owned Life Insurance

( 5,705 )  

( 6,516 )  

Premises and equipment

( 52 )  

Proceeds from:

1 unchanged sentence

Maturities of debt securities

Sales of FHLB stock

Sales of real estate owned

Death benefit

Net cash (used in) provided by investing activities

Death benefit on bank owned life insurance

Net cash used in investing activities

( 46,541 )  

Financing activities:

Net (decrease) increase in deposits

Net decrease in deposits

( 16,128 )  

Net change in short-term borrowings

24,912  

Repayment of long-term debt

( 25,000 )  

Proceeds from long-term debt

115,000  

Net change in advance payments by borrowers for taxes

( 3,772 )  

Cash dividends on common stock

( 4,197 )  

Purchase of common stock returned to authorized but unissued

( 5,841 )  

Proceeds from stock option exercises

Net cash used in financing activities

(Decrease) increase in cash and cash equivalents

Net cash provided by (used in) financing activities

85,475  

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

46,642  

376,722  

Cash and cash equivalents at end of period

$ 54,192  

$ 278,530  

Supplemental information:

1 unchanged sentence

Income tax payments

$ 2,135  

Interest payments

12 unchanged sentences

WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances.

Our deposit offerings include:

The Company's deposit offerings include:

certificates of deposit, money market savings accounts, transaction deposit accounts, non-interest bearing demand accounts and individual retirement accounts.

Our investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations.

The investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations.

WaterStone Bank's mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation. 

7 unchanged sentences

December 31, 2022 Annual Report on Form 10 -K.

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

or for any other period.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 

2023   or for any other period.

The preparation of the unaudited consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.

3 unchanged sentences

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

There were no significant subsequent events for the three and nine months ended September 30, 2022 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

Impact of Recent Accounting Pronouncements

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

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

The authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses).

In addition, the credit losses relating to available-for-sale (AFS) debt securities should be recorded through an allowance for credit losses rather than a write-down.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.

It included an option for entities to delay the adoption of ASC Topic 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2021 .

Due to the uncertainty on the economy and unemployment from COVID- 19, the Company determined to delay its adoption of ASC Topic 326 and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASC Topic 326.

On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law.

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

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

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

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

There were no significant subsequent events for the three months ended March 31, 2023 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

Accounting Standards Adopted in 2023

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

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

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

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

Government for which credit risk is deemed minimal.

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

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

The Company adopted "Troubled Debt Restructurings and Vintage Disclosures" under ASC Topic 326 on January 1, 2023, and applied the standard’s provisions.

The impact going forward will depend on the credit quality of the loan portfolio as well as the economic conditions at future reporting periods.

See Note 3 - Loans Receivable for the new disclosures. Adoption of "Troubled Debt Restructurings and Vintage Disclosures" under ASC Topic 326 did not have a material impact on the Company's consolidated financial statements.

Note 2  

1 unchanged sentence

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

September 30, 2022

March 31, 2023

(In Thousands)

44 unchanged sentences

Private-label issued

( 935 )  

Mortgage related securities

7 unchanged sentences

( 1,193 )  

36,934  

Other debt securities

6 unchanged sentences

50,352  

$ 179,884  

Other securities

$ 222,665  

2 unchanged sentences

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

At September 30, 2022 , $ 282,000  of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At March 31, 2023 , $ 239,000  of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At December 31, 2022 , $ 259,000  of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2022 are shown below.

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2023 are shown below.

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

11 unchanged sentences

Due after ten years

13,150  

12,558  

Mortgage-related securities

5 unchanged sentences

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

September 30, 2022

March 31, 2023

Less than 12 months

6 unchanged sentences

$ 1,600  

$ 13,537  

Collateralized mortgage obligations:

6 unchanged sentences

Private-label issued

( 867 )  

Government sponsored enterprise bonds

( 258 )  

Municipal securities

1 unchanged sentence

15,942  

( 212 )  

26,081  

Other debt securities

23 unchanged sentences

124,765  

Government sponsored enterprise bonds

20,975  

Private-label issued

Government sponsored enterprise bonds

Municipal securities

18,648  

22,743  

Other debt securities

5 unchanged sentences

$ 180,894  

$ 26,509  

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

1 unchanged sentence

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

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

As of March 31, 2023 and December 31, 2022 , 

no  allowance for credit losses on securities was recognized.

1 unchanged sentence

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

During the three and 

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

During the 

three months ended March 31, 2023 and March 31, 2022 , there were no sales of securities.

Note 3 - Loans Receivable

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

September 30, 2022

Loans receivable at March 31, 2023 and December 31, 2022 are summarized as follows:

March 31, 2023

December 31, 2022

24 unchanged sentences

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

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

Qualifying loans receivable totaling $ 1.14  billion and $ 976.7  million at March 31, 2023 and December 31, 2022 , respectively, were pledged as collateral against $ 500.5 million and $ 385.7  million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at March 31, 2023 and December 31, 2022 .

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

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

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

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

As of September 30, 2022

Loans outstanding to such parties were approximately $ 3.1 million as of March 31, 2023  and $ 2.8  million as of December 31, 2022 . 

None of these loans were past due or considered impaired as of March 31, 2023 or December 31, 2022 .

An analysis of past due loans receivable as of March 31, 2023 and December 31, 2022 follows:

As of March 31, 2023

1-59 Days Past Due (1)  

63 unchanged sentences

$ 1,510,178  

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

 Includes $ 40,000  and $ -  at March 31, 2023 and December 31, 2022 , respectively, which are on non-accrual status.

( 2 )   

Includes $ -  and $ -  at 

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

March 31, 2023 and December 31, 2022 , respectively, which are on non-accrual status.

( 3 )   

Includes $ -  million and $ 624,000  at 

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

March 31, 2023 and December 31, 2022 , respectively, which are on non-accrual status.

The following tables present the activity in the allowance for credit losses by portfolio segment for the 

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

One- to Four-Family  

Multi-Family  

Home Equity  

Land and Construction  

Commercial Real Estate  

Consumer  

Commercial  

(In Thousands)  

Nine months ended September 30, 2022

Balance at beginning of period

$ 3,963  

$ 5,398  

$ 1,386  

$ 4,482  

$ 15,778  

Adoption of CECL

( 640 )  

( 69 )  

Provision (credit) for credit losses - loans

( 763 )  

( 417 )  

( 150 )  

( 254 )  

( 12 )  

Balance at end of period

$ 4,496  

$ 7,563  

$ 1,511  

$ 3,437  

$ 17,452  

Nine months ended September 30, 2021

Balance at beginning of period

$ 5,459  

$ 5,600  

$ 1,755  

$ 5,138  

$ 18,823  

Provision (credit) for loan losses

( 1,952 )  

( 105 )  

( 511 )  

( 446 )  

( 215 )  

( 105 )  

( 13 )  

( 10 )  

Balance at end of period

$ 3,924  

$ 6,336  

$ 1,283  

$ 4,685  

$ 16,790  

three months ended March 31, 2023 and the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2022 :

One- to Four-Family

Construction and Land

Land and Construction

Commercial Real Estate

(In Thousands)

Three months ended September 30, 2022

Three months ended March 31, 2023

Balance at beginning of period

7 unchanged sentences

( 495 )  

Balance at end of period

( 522 )  

( 21 )  

$ 1,511  

$ 3,437  

$ 17,452  

Three months ended September 30, 2021

Balance at beginning of period

Balance at end of period

$ 5,786  

2 unchanged sentences

$ 17,744  

Three months ended March 31, 2022

Balance at beginning of period

$ 3,963  

Provision for loan losses

$ 5,398  

2 unchanged sentences

$ 15,778  

Adoption of CECL

( 640 )  

( 69 )  

Provision (credit) for loan losses

( 442 )  

21 unchanged sentences

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

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

The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management.

Management attempts to quantify qualitative reserves whenever possible.

12 unchanged sentences

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

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

The historical loss rate was utilized as the base rate, and qualitative adjustments and future forecast adjustments were applied.

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

2 unchanged sentences

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

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

The allowance for unfunded commitments at March 31, 2023 and December 31, 2022  was $ 1.8  million and $ 1.3  million.

Provision for Credit Losses :

2 unchanged sentences

Three months ended

Nine months ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

(In Thousands)

Provision for credit losses on:

Provision (credit) for credit losses on:

$ ( 25 )  

Unfunded commitments

( 28 )  

( 396 )  

Investment securities

$ ( 700 )  

Collateral Dependent Loans :

1 unchanged sentence

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

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

The following tables present collateral dependent loans by portfolio segment and collateral type as of March 31, 2023  and 

December 31, 2022 :

One- to Four- Family

10 unchanged sentences

$ 17,744  

$ 17,452  

Collateral dependent loans

17 unchanged sentences

$ 1,550,219  

The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired.

Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.

Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value.

The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years.

In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal.

The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.

With respect to multi-family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions.

Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses.

These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.

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

One- to Four- Family  

2 unchanged sentences

(In Thousands)

Allowance related to loans individually evaluated for impairment

Allowance related to loans collectively evaluated for impairment

15,778  

Balance at end of period

Allowance related to collateral dependent loans

Allowance related to pooled loans

17,757  

Allowance at end of period

$ 4,743  

2 unchanged sentences

$ 3,199  

Loans individually evaluated for impairment

$ 17,757  

Collateral dependent loans

$ 2,584  

1 unchanged sentence

$ 8,079  

Loans collectively evaluated for impairment

466,983  

13 unchanged sentences

$ 1,510,178  

The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired.

Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value.

The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years.

In situations in which the Company is placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal.

The additional adjustment factor is based upon relevant sales data available for the Company's general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.

Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses.

These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.

Credit Quality Indicators

5 unchanged sentences

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

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

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of March 31, 2023 and December 31, 2022 :

One to Four-Family

2 unchanged sentences

(In Thousands)

At September 30, 2022

At March 31, 2023

$ 4,388  

35 unchanged sentences

$ 1,510,178  

$ 1,205,785  

The following tables present data on impaired loans at 

December 31, 2021 .

As of December 31, 2021

Credit Quality Information:

The following table presents total loans by risk categories and year of origination as of March 31, 2023 :

(In Thousands)

Total Impaired with Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired with no Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired

One- to four-family

Construction and land

Commercial real estate

$ 100,662  

$ 177,462  

The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss when the value of the collateral securing the loan is below the loan balance and management’s assessment that the full collection of the loan balance is not likely.

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

(In Thousands)  

Total Impaired with Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired with no Reserve

One- to four-family

Construction and land

Commercial real estate

Total Impaired

One- to four-family

$ 52,290  

$ 37,481  

$ 21,262  

$ 91,796  

$ 1,157  

$ 482,110  

105,045  

178,013  

53,557  

37,481  

21,544  

96,214  

493,011  

35,764  

248,793  

148,803  

137,749  

43,336  

88,598  

703,984  

35,764  

248,793  

148,803  

137,749  

43,336  

88,788  

704,174  

11,230  

11,463  

Construction and land

24,503  

36,688  

24,503  

38,894  

Commercial Real Estate

17,358  

Credit Quality Information:

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

(In Thousands)  

One- to four-family

84,789  

23 unchanged sentences

$ 1,550,219  

Gross charge-offs

The following table presents total loans by risk categories and year of origination as of December 31, 2022 :

(In Thousands)

One- to four-family

$ 246,437  

4 unchanged sentences

$ 76,568  

Construction and land

$ 1,332  

2 unchanged sentences

56,749  

Commercial Real Estate

37,957  

19 unchanged sentences

11,455  

Construction and land

49,092  

1 unchanged sentence

49,092  

The following presents data on troubled debt restructurings:

As of September 30, 2022

(Dollars in Thousands)

One- to four-family

62,494  

Commercial Real Estate

87,971  

1 unchanged sentence

39,015  

As of December 31, 2021

(Dollars in Thousands)

One- to four-family

24,795  

21,467  

Commercial real estate

24,595  

1 unchanged sentence

89,587  

After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status.

If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.

The following presents troubled debt restructurings by concession type:

As of September 30, 2022

53,788  

39,110  

27,021  

28,187  

24,595  

262,973  

22,850  

24,934  

$ 608,900  

$ 305,783  

$ 222,810  

$ 101,316  

$ 72,689  

$ 181,242  

$ 17,438  

$ 1,510,178  

The following presents data on restructurings of financing receivables whose borrowers are experiencing financial difficulty:

As of March 31, 2023

(Dollars in Thousands)

One- to four-family

The following presents data on troubled debt restructurings:

As of December 31, 2022

(Dollars in Thousands)

One- to four-family

The following presents restructurings of financing receivables whose borrowers are experiencing financial difficulty by concession type:

As of March 31, 2023

Performing in accordance with modified terms

1 unchanged sentence

Interest reduction and principal forbearance

Interest reduction

Principal forbearance

$ 1,282  

$ 1,623  

The following presents troubled debt restructurings by concession type:

As of December 31, 2022

4 unchanged sentences

Principal forbearance

$ 3,989  

There were 

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

There was 

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

There were 

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

There were 

two  loans modified as troubled debt restructurings with a total loan balance of $ 754,000  during the three months ended 

September 30, 2021 .

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

September 30, 2021 .

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

September 30, 2022

There were no  restructurings of financing receivables whose borrowers are experiencing financial difficulty during the 

three months ended March 31, 2023 .

 There were 

two loans modified as troubled debt restructurings with a total loan balance of $ 432,000 during the three months ended 

March 31, 2022 .

There were no restructurings of financing receivables whose borrowers are experiencing financial difficulty within the past twelve months of which there was a default during the three months ended March 31, 2023 . There were no troubled debt restructurings within the past twelve months of which there was a default during the three months ended March 31, 2022 .

The following table presents data on non-accrual loans as of March 31, 2023 and December 31, 2022 :

March 31, 2023

December 31, 2022

13 unchanged sentences

0.21 %  

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

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 467,000  and $ 795,000   at March 31, 2023  and 

December 31, 2022 , respectively.

2 unchanged sentences

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

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

Mortgage servicing rights at beginning of the period

$ 1,555  

$ 5,977  

( 437 )  

Mortgage servicing rights at end of the period

1 unchanged sentence

Mortgage servicing rights at end of the period, net

$ 3,155  

$ 1,161  

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

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

The unpaid principal balance of loans serviced for others was $ 378.7 million and $ 204.8  million at September 30, 2022 and December 31, 2021 , respectively.

During the three months ended March 31, 2023 , $ 415.7  million in residential loans were originated for sale on a consolidated basis generating mortgage banking income of $ 16.8  million.

During the same period in the prior year, sales of loans held for sale totaled $ 698.1  million, generating mortgage banking income of $ 28.3 million.

The unpaid principal balance of loans serviced for others was $ 116.6 million and $ 409.6  million at March 31, 2023 and December 31, 2022 , respectively.

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

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

The fair value of mortgage servicing rights were $ 1.2 million at March 31, 2023 and $ 5.0  million at 

December 31, 2022 .

During the 

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

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

three months ended March 31, 2023 , the Company sold mortgage servicing rights related to $ 318.4  million in loans receivable with a book value of $ 2.8  

million for $ 3.5  million resulting in a gain on sale of $ 601,000 .

During the three months ended 

March 31, 2022 , there were no sales of mortgage servicing rights.

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

(In Thousands)

Estimate for the annual period ended December 31:

$ 3,155  

Estimate for the annual period ending December 31:

Note 5  

At September 30, 2022 and December 31, 2021 , the aggregate balance of uninsured deposits of $250,000 or more was $ 318.4 million and $ 314.2 million, respectively.

At March 31, 2023 and December 31, 2022 , the aggregate balance of uninsured time deposits of $250,000 or more was $ 120.3 million and $ 115.5 million, respectively.

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

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

A summary of the contractual maturities of time deposits at March 31, 2023 is as follows:

(In Thousands)

Within one year

$ 498,311  

More than one to two years

88,460  

More than two to three years

1 unchanged sentence

More than four through five years

$ 593,681  

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

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

Such deposits amounted to $ 7.8 million and $ 9.2 million at March 31, 2023 and December 31, 2022 , respectively.

As of March 31, 2023 , overdrawn deposit accounts totaling $ 1.2  million were reclassified as loan balances.

Note 6  

Borrowings consist of the following:

September 30, 2022

March 31, 2023

December 31, 2022

1 unchanged sentence

Repurchase agreements

$ 19,951  

5.88 %  

$ 2,127  

Federal Home Loan Bank, Chicago advances

50,000  

2.53 %  

Federal Home Loan Bank, Chicago advances maturing:

50,000  

3.50 %  

50,000  

1.73 %  

50,000  

2.57 %  

255,000  

100,000  

1.87 %  

165,000  

$ 319,951  

2.57 %  

$ 477,127  

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

The short-term repurchase agreement represents the outstanding portion of a total $ 50.0  million commitment with one unrelated bank as of March 31, 2023 . 

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

1 unchanged sentence

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

The short-term repurchase agreement had a $ 20.0 million balance at September 30, 2022 and a $ 2.1 million balance at December 31, 2021 .

The short-term repurchase agreement had a $ 1.2 million balance at March 31, 2023 and a $ 1.1 million balance at December 31, 2022 .

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

6 unchanged sentences

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

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

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

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

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

The $ 100.0 million in advances due in 2029 consists of one $ 50.0 million advance with a fixed rate of 1.98 % with a FHLB quarterly call option currently available and 

one $ 50.0 million advance with a fixed rate of 1.75 % with a FHLB quarterly call option currently available.

The $ 210.5 million FHLB short-term advances consist of a $ 35.0 million advance with a fixed rate of 

4.76 % and a maturity date of 

April 3, 2023, 

a $ 25.0  million advance with a fixed rate of 

4.86 % and a maturity date of 

April 3, 2023, 

a $ 25.0  million advance with a fixed rate of 

4.79 % and a maturity date of 

April 17, 2023, 

a $ 37.0  million advance with a fixed rate of 

4.77 % and a maturity date of April 21, 2023, 

a $ 25.0  million advance with a fixed rate of 

4.88 % and a maturity date of May 

1, 2023,  a $ 38.5 million advance with a fixed rate of 

4.85 % and a maturity date of May 

8, 2023,  and a $ 25.0  million advance with a fixed rate of 

5.01 % and a maturity date of 

June 1, 2023.

The $ 125.0  million in advances due in 

2025  consists of 

one  $ 50.0  million advance with a fixed rate of 

3.50 % and a single call option in 

September 2023, 

one  $ 25.0  million advance with a fixed rate of 

4.09 % and a quarterly call option starting in 

November 2023, 

one  $ 25.0  million advance with a fixed rate of 

4.25 % and a quarterly call option starting in 

November 2023, 

one  $ 25.0  million advance with a fixed rate of 

3.82 % and a quarterly call option starting in 

The $ 50.0  million advance due in 

2027  has a fixed rate of 

1.73 % and has a contractual maturity date in 

December 2027.

The $ 115.0  million in advances due in 

2033  consists of 

one $ 20.0  million advance with a fixed rate of 2.38 % and a quarterly call option starting in 

April 2023, 

one  $ 20.0  million advance with a fixed rate of 

2.38 % and a monthly call option currently available, 

one  $ 25.0  million advance with a fixed rate of 

2.45 % and a monthly call option starting in 

April 2023, 

one  $ 25.0  million advance with a fixed rate of 

2.54 % and a monthly call option starting in 

April 2023, 

one  $ 25.0  million advance with a fixed rate of 

2.35 % and a quarterly call option starting in 

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

The Company’s borrowings from the FHLB are limited to 78 % of the carrying value of unencumbered one - to four -family mortgage loans, 73 % of the carrying value of multi-family loans and 63 % of the carrying value of home equity loans.

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

In addition, these advances were collateralized by FHLB stock of $ 23.9  million at March 31, 2023 and $ 17.4  million at 

December 31, 2022 , respectively.

23 unchanged sentences

The minimum capital conservation buffer is 2.5%.

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

As of March 31, 2023 , the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement.

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

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

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

September 30, 2022

The actual and required capital amounts and ratios for the Bank as of March 31, 2023 and December 31, 2022 are presented in the tables below:

March 31, 2023

For Capital Adequacy Purposes

4 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 411,947  

25.45 %  

$ 129,504  

8.00 %  

$ 169,974  

10.50 %  

Waterstone Bank

360,964  

22.30 %  

129,504  

8.00 %  

169,974  

10.50 %  

161,880  

Tier I Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

394,495  

24.37 %  

97,128  

6.00 %  

137,598  

8.50 %  

Waterstone Bank

343,512  

21.22 %  

97,128  

6.00 %  

137,598  

8.50 %  

129,504  

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

Consolidated Waterstone Financial, Inc.

394,495  

24.37 %  

72,846  

4.50 %  

113,316  

7.00 %  

Waterstone Bank

343,512  

21.22 %  

72,846  

4.50 %  

113,316  

7.00 %  

105,222  

Tier I Capital (to average assets)

Consolidated Waterstone Financial, Inc.

394,495  

20.32 %  

77,645  

4.00 %  

Waterstone Bank

343,512  

17.70 %  

77,645  

4.00 %  

97,057  

State of Wisconsin (to total assets)

Waterstone Bank

343,512  

17.45 %  

118,143  

6.00 %  

December 31, 2021  

December 31, 2022

For Capital Adequacy Purposes

4 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 448,818  

29.01 %  

$ 123,766  

8.00 %  

$ 162,443  

10.50 %  

Waterstone Bank

394,540  

25.52 %  

123,695  

8.00 %  

162,350  

10.50 %  

154,619  

Tier I capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

433,040  

27.99 %  

92,825  

6.00 %  

131,502  

8.50 %  

Waterstone Bank

378,762  

24.50 %  

92,771  

6.00 %  

131,426  

8.50 %  

123,695  

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

Consolidated Waterstone Financial, Inc.

433,040  

27.99 %  

69,619  

4.50 %  

108,296  

7.00 %  

Waterstone Bank

378,762  

24.50 %  

69,579  

4.50 %  

108,233  

7.00 %  

100,502  

Tier I Capital (to average assets)

Consolidated Waterstone Financial, Inc.

433,040  

19.29 %  

89,774  

4.00 %  

Waterstone Bank

378,762  

16.88 %  

89,774  

4.00 %  

112,218  

State of Wisconsin (to total assets)

Waterstone Bank

378,762  

17.14 %  

132,572  

6.00 %  

Note 8 –

4 unchanged sentences

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

September 30, 2022

March 31, 2023

December 31, 2022

6 unchanged sentences

10,841  

11,990  

Unused portion of construction loans (3)

18 unchanged sentences

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

December 31, 2021 . 

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

March 31, 2023  and 

December 31, 2022 . Please see Note 3 - Loans Receivable for discussion on the allowance for credit losses - unfunded commitments.  

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

6 unchanged sentences

historical experience has resulted in insignificant losses and repurchase activity.

The Company's reserve for losses related to these recourse provisions totaled $ 2.0  million and $ 2.1 million as of September 30, 2022 and December 31, 2021 , respectively.

The Company's reserve for losses related to these recourse provisions totaled $ 2.1  million and $ 2.0 million as of March 31, 2023 and December 31, 2022 , respectively.

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

31 unchanged sentences

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

September 30, 2022

March 31, 2023

Derivatives not designated as Hedging Instruments

5 unchanged sentences

$ 369.8  

$ 12.4  

Other liabilities

$ 10.9  

Interest rate locks

25 unchanged sentences

Interest Rate Swaps

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

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

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

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

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

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

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

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

As of March 31, 2023  and December 31, 2022 , 

no  back-to-back swaps were in default. 

1 unchanged sentence

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

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

No  right of offset existed with dealer counterparty swaps as of March 31, 2023 and December 31, 2022 . 

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

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

The Company pledged no cash at March 31, 2023 and at December 31, 2022 .

Note 10 –

5 unchanged sentences

161,000 and 

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

127,000 and 

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

87,000 antidilutive shares of common stock for the three months ended March 31, 2023 and 2022 , respectively. 

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands, except per share amounts)

$ 5,270  

$ 19,000  

$ 18,552  

$ 58,238  

Weighted average shares outstanding

21,342  

23,785  

22,193  

23,790  

Effect of dilutive potential common shares

Diluted weighted average shares outstanding

$ 21,454  

$ 23,960  

$ 22,323  

$ 23,987  

Basic earnings per share

$ 0.25  

$ 0.80  

$ 0.84  

$ 2.45  

Diluted earnings per share

$ 0.25  

$ 0.79  

$ 0.83  

$ 2.43  

Note 11 –

11 unchanged sentences

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents information about our assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2022 and December 31, 2021 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

The following table presents information about our assets recorded in the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2023 and December 31, 2022 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2022

March 31, 2023

(In Thousands)

20 unchanged sentences

Mortgage banking derivative assets

13,868  

Interest rate swap assets

2 unchanged sentences

Mortgage banking derivative liabilities

10,949  

Interest rate swap liabilities

20 unchanged sentences

11,162  

Other securities

Loans held for sale

3 unchanged sentences

Interest rate swap assets

14,226  

Mortgage banking derivative liabilities

Interest rate swap liabilities

The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:

14,226  

The following summarizes the valuation techniques for assets recorded in the consolidated statements of financial condition at their fair value on a recurring basis:

Available-for-sale securities –

29 unchanged sentences

2023 and 2022 .

Three months ended September 30,

Nine months ended September 30,

(In Thousands)

Three months ended March 31,

(In Thousands)

2 unchanged sentences

$ 4,369  

$ 5,917  

Mortgage derivative gain (loss), net

( 683 )  

( 1,450 )  

Mortgage derivative gain, net

Mortgage derivative, net balance at the end of the period

$ 5,573  

$ 6,806  

$ 2,919  

$ 6,806  

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

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of September 30, 2022 and December 31, 2021 , and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

The following tables present information about assets recorded in the consolidated statements of financial condition at their fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022 , and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2022

March 31, 2023

(In Thousands)

4 unchanged sentences

Real estate owned

Impaired mortgage servicing rights

Real estate owned –

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

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

Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value.

8 unchanged sentences

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

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

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2023  and 

December 31, 2022 , the significant unobservable inputs used in the fair value measurements were as follows:

1 unchanged sentence

Fair Value at  

September 30,

(Dollars in Thousands)  

Mortgage banking derivatives

$ 2,919  

Pricing models

18 unchanged sentences

34.8 %  

Mortgage servicing rights

Pricing models

Prepayment rate

43.4 %  

Discount rate

12.0 %  

Cost to service

$ 84.06  

$ 839.53  

108.37  

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

6 unchanged sentences

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

September 30, 2022

March 31, 2023

December 31, 2022

64 unchanged sentences

Fair values for the Company’s commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparty’s credit standing, and discounted cash flow analyses.

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

The fair value of the Company’s commitments to extend credit was not material at March 31, 2023 and December 31, 2022 .

Note 12 –

21 unchanged sentences

Presented below is the segment information:

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

As of or for the three months ended March 31, 2023

(In Thousands)

Net interest income (expense)

$ 15,507  

$ ( 155 )  

$ 15,398  

Provision for credit losses

Net interest income (expense) after provision for credit losses

15,273  

( 253 )  

15,066  

Noninterest income:

27,305  

( 1,017 )  

27,404  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

21,864  

( 114 )  

26,174  

Occupancy, office furniture and equipment

4 unchanged sentences

Loan processing expense

( 861 )  

Total noninterest expenses

28,822  

( 968 )  

35,694  

Income (loss) before income taxes (benefit)

( 1,770 )  

Income tax expense (benefit)

( 470 )  

Net income (loss)

$ 6,566  

$ ( 1,300 )  

$ 5,270  

$ 1,904,785  

$ 250,301  

$ ( 180,035 )  

$ 1,975,051  

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

(In Thousands)

Net interest income (expense)

$ 14,090  

$ ( 2 )  

$ 14,114  

Provision (credit) for loan losses

( 750 )  

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

14,840  

( 52 )  

14,814  

Noninterest income:

51,290  

( 80 )  

52,936  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

28,981  

( 112 )  

34,229  

Occupancy, office furniture and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

Total noninterest expenses

35,647  

( 32 )  

43,323  

Income (loss) before income taxes

15,591  

( 22 )  

24,427  

Income tax expense (benefit)

Net income (loss)

$ 6,766  

$ 12,250  

$ ( 16 )  

$ 19,000  

$ 2,184,200  

$ 381,177  

$ ( 331,266 )  

$ 2,234,111  

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

(In Thousands)

Net interest income

$ 40,869  

$ 41,343  

Provision for credit losses

Net interest income after provision for credit losses

40,816  

41,039  

Noninterest income:

86,035  

( 1,763 )  

88,460  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

14,232  

63,613  

( 343 )  

77,502  

Occupancy, office furniture and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

( 1,288 )  

Total noninterest expenses

23,071  

84,207  

( 1,600 )  

105,678  

Income (loss) before income taxes (benefit)

21,933  

( 87 )  

23,821  

Income tax expense (benefit)

( 24 )  

Net income (loss)

$ 17,125  

$ 1,490  

$ ( 63 )  

$ 18,552  

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

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

(In Thousands)

Net interest income (expense)

$ 42,854  

$ ( 603 )  

$ 42,343  

Provision (credit) for loan losses

( 2,600 )  

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

45,454  

( 683 )  

44,863  

Noninterest income:

156,881  

( 301 )  

161,179  

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

15,209  

87,413  

( 344 )  

102,278  

Occupancy, office furniture and equipment

3 unchanged sentences

Real estate owned

( 11 )  

Loan processing expense

Total noninterest expenses

22,401  

107,371  

( 152 )  

129,620  

Income (loss) before income taxes

27,652  

48,827  

( 57 )  

76,422  

Income tax expense (benefit)

12,198  

( 20 )  

18,184  

Net income (loss)

$ 21,646  

$ 36,629  

$ ( 37 )  

$ 58,238  

Management ’

19 unchanged sentences

general economic conditions, either nationally or in our market area, including employment prospects, that are different than expected;

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

competition among depository and other financial institutions;

10 unchanged sentences

changes in tax policies or assessment policies;

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

changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio;

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

4 unchanged sentences

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

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

the effects of any federal government shutdown;

12 unchanged sentences

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

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

The detailed discussion in the sections below focuses on the results of operations for the three months ended March 31, 2023 and 2022 and the financial condition as of March 31, 2023 compared to the financial condition as of December 31, 2022.

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

6 unchanged sentences

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

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

We have provided below a discussion of the material results of operations for each segment on a separate basis for the three months ended March 31, 2023 and 2022, which focuses on noninterest income and noninterest expenses.

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

Recent Industry Developments

During the first quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry-wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system.

Despite these negative industry developments, the Company’s liquidity position and balance sheet remains stable.

The Company’s total deposits decreased by 1.3% as compared to December 31, 2022, to $1.18 billion at March 31, 2023 as we experienced minimal deposit outflow in the first quarter.

The Company also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments.

Furthermore, the Company’s capital remains well capitalized with a Total Capital ratio of 23.27% as of March 31, 2023.

Significant Items

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

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

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

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

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

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

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

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

There were no significant items that impacted earnings for the three months ended March 31, 2023 and 2022. 

Comparison of Community Banking Segment Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net income totaled $4.8 million for the three months ended March 31, 2023 compared to $4.3 million for the three months ended March 31, 2022.

Net interest income increased $2.4 million to $14.0 million for the three months ended March 31, 2023 compared to $11.7 million for the three months ended March 31, 2022. 

There was a provision for credit losses of $388,000 for the three months ended March 31, 2023 compared to a $140,000 negative provision for credit losses for the three months ended March 31, 2022.

The provision for credit losses of $388,000 consisted of a $96,000 negative provision related to loans and a $484,000 of provision related to unfunded commitments for the three months ended March 31, 2023.

During the three months ended March 31, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

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

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

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

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

Total noninterest income decreased $445,000 to $987,000 during the three months ended March 31, 2023 due primarily to a decrease in prepayment penalties on loans and gain from death benefit received on one bank-owned life insurance policy during the three months ended March 31, 2022.

Compensation, payroll taxes, and other employee benefits expense decreased $44,000 to $5.2 million primarily due to a decrease in Employee Stock Ownership Plan expense as the average stock price decreased compared to the quarter ending March 31, 2022.

Other noninterest expense increased $296,000 to $896,000 as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans increased.

These fees are eliminated in the consolidated statements of income.

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

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

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

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

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net loss totaled $2.7 million for the three months ended March 31, 2023 compared to net income of $1.1 million for the three months ended March 31, 2022.

We originated $442.7 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended March 31, 2023, which represents a decrease of $265.8 million, or 37.5%, from the $708.5 million originated during the three months ended March 31, 2022.

The decrease in loan production volume was driven by a $145.3 million, or 90.4%, decrease in refinance products as mortgage rates have increased over the past year.

Mortgage purchase products decreased $120.4 million, or 22.0%, due to inventory constraints in the market, affordability, and interest rate increases.

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

The decrease in mortgage banking noninterest income was related to a 30.8% decrease in volume and a 18.5% decrease in gross margin on loans originated and sold for the three months ended September 30, 2022 compared to September 30, 2021. 

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

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. 

Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 94.2% of total originations during the three months ended September 30, 2022, compared to 73.8% of total originations during the three months ended September 30, 2021, respectively, as refinance demand decelerated due to an increase in interest rates over the past year. 

The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 33.3% and 66.7% of all loan originations, respectively, during the three months ended September 30, 2022, compared to 26.2% and 73.8% of all loan originations, respectively, during the three months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $7.1 million, or 24.6%, to $21.9 million for the three months ended September 30, 2022 compared to $29.0 million for the three months ended September 30, 2021. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased.

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

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

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

Consolidated Waterstone Financial, Inc.

Results of Operations

Three months ended September 30,

(Dollars In Thousands, except per share amounts)

Earnings per share - basic

Earnings per share - diluted

Annualized return on average assets

Annualized return on average equity

Net Interest Income

Average Balance Sheets, Interest and Yields/Costs

The following table sets forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated.

Non-accrual loans are included in the computation of the average balances of loans receivable and held for sale.

The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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

Three months ended September 30,

Average Balance

(Dollars in Thousands)

Interest-earning assets:

Loans receivable and held for sale (1)

Mortgage related securities (2)

Debt securities, federal funds sold and short-term investments(2) (3)

Total interest-earning assets

Noninterest-earning assets

Liabilities and equity

Interest-bearing liabilities:

Demand accounts

Money market and savings accounts

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Noninterest-bearing liabilities

Noninterest-bearing deposits

Other noninterest-bearing liabilities

Total noninterest-bearing liabilities

Total liabilities

Total liabilities and equity

Net interest income / Net interest rate spread (4)

taxable equivalent adjustment

Net interest income, as reported

Net interest-earning assets (5)

Net interest margin (6)

Tax equivalent effect

Net interest margin on a fully tax equivalent basis

Average interest-earning assets to average interest-bearing liabilities

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

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

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

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 2.41% and 0.88% for the three months ended September 30, 2022 and 2021, respectively.

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities and is presented on a fully tax equivalent basis.

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

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

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. 

The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). 

The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).

The net column represents the sum of the prior columns.

For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

Three months ended September 30,

2022 versus 2021

Increase (Decrease) due to

(In Thousands)

Interest income:

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

Mortgage related securities (3)

Other earning assets(3) (4)

Total interest-earning assets

Interest expense:

Demand accounts

Money market and savings accounts

Time deposits

Total interest-bearing deposits

Total interest-bearing liabilities

Net change in net interest income

______________

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

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

Includes available for sale securities.

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

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

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

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

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

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

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

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

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

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

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

Provision for Credit Losses

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

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

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

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

The provision is primarily a function of the Company's reserving methodology and assessments of certain quantitative and qualitative factors which are used to determine an appropriate allowance for credit losses for the period. 

See further discussion regarding the allowance for loan losses in the "Asset Quality" section for an analysis of charge-offs, nonperforming assets, specific reserves and additional provisions and the "Allowance for Credit Loss" section.

Noninterest Income

Three months ended September 30,

(Dollars In Thousands)

Service charges on loans and deposits

Increase in cash surrender value of life insurance

Mortgage banking income

Total noninterest income

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

The decrease resulted primarily from a decrease in mortgage banking noninterest income and other income.

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

Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $377.5 million, or 36.0%, to $671.2 million during the three months ended September 30, 2022 compared to $1.05 billion during the three months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.5% at the mortgage banking segment.

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

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

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

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

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

Three months ended September 30,

(Dollars In Thousands)

Compensation, payroll taxes, and other employee benefits

Occupancy, office furniture, and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

Total noninterest expenses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The effective rate as of 

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

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

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

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

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

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

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

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

During the nine months ended September 30, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.  

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

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

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

These fees are eliminated in the consolidated statements of income.

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

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

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

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

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

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

The decrease in mortgage banking noninterest income was related to a 31.5% decrease in volume and a 18.8% decrease in gross margin on loans originated and sold for the nine months ended September 30, 2022 compared to September 30, 2021. 

Total mortgage banking noninterest income decreased $10.7 million, or 37.2%, to $18.0 million during the three months ended March 31, 2023 compared to $28.6 million during the three months ended March 31, 2022. 

The decrease in mortgage banking noninterest income was related to a 37.5% decrease in volume and a 5.4% decrease in gross margin on loans originated and sold for the three months ended March 31, 2023 compared to March 31, 2022. 

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

5 unchanged sentences

Department of Agriculture loan. 

Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 87.5% of total originations during the nine months ended September 30, 2022, compared to 68.2% of total originations during the nine months ended September 30, 2021, respectively, as refinance demand decelerated due to an increase in interest rates over the past year. 

The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 27.8% and 72.2% of all loan originations, respectively, during the nine months ended September 30, 2022, compared to 23.1% and 76.9% of all loan originations, respectively, during the nine months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $23.8 million, or 27.2%, to $63.6 million for the nine months ended September 30, 2022 compared to $87.4 million for the nine months ended September 30, 2021. 

The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased. During the nine months ended September 30, 2022 the segment has added 11 branches and a total of 130 loan origination personnel.

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

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

Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 96.5% of total originations during the three months ended March 31, 2023, compared to 77.3% of total originations during the three months ended March 31, 2022, 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 35.2% and 64.8% of all loan originations, respectively, during the three months ended March 31, 2023, compared to 24.5% and 75.5% of all loan originations, respectively, during the three months ended March 31, 2022.

Total compensation, payroll taxes and other employee benefits decreased $5.3 million, or 26.1%, to $15.1 million for the three months ended March 31, 2023 compared to $20.4 million for the three months ended March 31, 2022. The decrease in compensation expense was primarily related to decreased commission expense and salaries driven by decreased loan origination volume and reduction in headcount.

Consolidated Waterstone Financial, Inc.

Results of Operations

Nine months ended September 30,

Three months ended March 31,

(Dollars In Thousands, except per share amounts)

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

Nine months ended September 30,

Three months ended March 31,

Average Balance

28 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities

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

Interest income includes net deferred loan fee amortization income of $151,000 and $195,000 for the three months ended March 31, 2023 and 2022, respectively.

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

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

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

Interest income from tax-exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended March 31, 2023 and 2022.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 3.71% and 0.72% for the three months ended March 31, 2023 and 2022, respectively.

7 unchanged sentences

Nine months ended September 30,

Three months ended March 31,

2023 versus 2022

14 unchanged sentences

______________

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

Interest income includes net deferred loan fee amortization income of $151,000 and $195,000 for the three months ended March 31, 2023 and 2022, respectively.

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

1 unchanged sentence

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

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

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

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

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

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

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

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

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

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

Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended March 31, 2023 and March 31, 2022.

Net interest income increased $1.9 million, or 16.3%, to $13.8 million during the three months ended March 31, 2023 compared to $11.9 million during the three months ended March 31, 2022.

Interest income on loans increased $6.4 million, or 47.3%, to $19.9 million due primarily to an 85 basis point increase in average yield on loans as interest rates continued to increase over the past year and an increase in average loan balance as loans held for investment increased. The increase in average loan balance was driven by an increase of a $326.6 million, or 27.1%, in the average balance of loans held for investment offset by a decrease of $33.5 million, or 213%, in average loans held for sale.

Interest expense on time deposits increased $2.5 million, or 453.0%, to $3.1 million primarily due to a 155 basis point increase in average cost of time deposits.

Additionally, the average balance of time deposits increased $37.9 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts increased $795,000, or 378.6%, to $1.0 million due primarily to a 105 basis point increase in average cost of money market, savings, and escrow accounts as the account mix shifted towards more savings accounts.

Partially offsetting the increase in average cost, the average balance decreased $82.2 million. 

Interest expense on borrowings increased $1.6 million, or 67.9%, to $4.0 million due to a 148 basis point increase in the cost of borrowings during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 as the federal funds rate increased over the past year.

Additionally, the average balance increased $1.5 million to $441.7 million during the three months ended March 31, 2023, compared to $440.3 million during the three months ended March 31, 2022.

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

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

During the nine months ended September 30, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors. 

There was a provision for credit losses of $460,000 for the three months ended March 31, 2023 compared to a $76,000 negative provision for credit losses for the three months ended March 31, 2022.

The $460,000 provision for credit losses consisted of a $25,000 negative provision related to loans and a $485,000 provision related to unfunded commitments for the three months ended March 31, 2023.

During the three months ended March 31, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

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

The increase on the unfunded commitments is due to the increase in unfunded commitments balance.  

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Noninterest Income

Nine months ended September 30,

Three months ended March 31,

(Dollars In Thousands)

3 unchanged sentences

Total noninterest income

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

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

Total noninterest income decreased $11.3 million, or 37.8%, to $18.6 million during the three months ended March 31, 2023 compared to $29.8 million during the three months ended March 31, 2022.

The decrease resulted primarily from decreases in mortgage banking noninterest income and other income.

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

Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $1.10 billion, or 34.1%, to $2.12 billion during the nine months ended September 30, 2022 compared to $3.21 billion during the nine months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.8% at the mortgage banking segment.

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

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

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

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

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

As of September 30, 2022 and September 30, 2021, the Company maintained servicing rights related to $378.7 million and $204.8 million, respectively, in loans previously sold to third parties.

Offsetting the decreases, there was a $340,000 increase in gain from death benefit received on one bank owned life insurance policy during the nine months ended September 30, 2022 compared to none during the nine months ended September 30, 2021.

Noninterest Expenses

Nine months ended September 30,

Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $282.4 million, or 40.4%, to $415.7 million during the three months ended March 31, 2023 compared to $698.1 million during the three months ended March 31, 2022. Gross margin on loans originated and sold decreased 5.4% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2023 and 2022" above for additional discussion of the decrease in mortgage banking income.

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

During the quarter ended March 31, 2023, the Company sold mortgage servicing rights related to $318.4 million in loans serviced for third parties.

The sale generated $3.5 million in net proceeds and a $601,000 gain.

There were no comparable sales during the quarter ended March 31, 2022. As of March 31, 2023 and March 31, 2022, the Company maintained servicing rights related to $116.6 million and $409.6 million, respectively, in loans previously sold to third parties.

Offsetting the increase from the gain on sale of mortgage servicing rights, gain from death benefit decreased as there was a gain recorded on one bank owned life insurance policy during the three months ended March 31, 2022 compared to none during the three months ended March 31, 2023.

Three months ended March 31,

(Dollars In Thousands)

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Total noninterest expenses

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

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

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

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

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

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

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

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

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

Data processing expense increased $559,000, or 19.5%, to $3.4 million during the nine months ended September 30, 2022.

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

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

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

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

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

These fees are eliminated in the consolidated statements of income.

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

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

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

Income tax expense was recognized on the statement of income during the nine months ended September 30, 2022 at an effective rate of 22.1% of pretax income compared to 23.8% during the nine months ended September 30, 2021.

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

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

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

Total noninterest expenses decreased $5.8 million, or 16.7%, to $29.1 million during the three months ended March 31, 2023 compared to $34.9 million during the three months ended March 31, 2022.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $5.3 million, or 26.1%, to $15.1 million during the three months ended March 31, 2023.

The decrease in compensation expense was primarily related to decreased commission expense and salary expense driven by decreased loan origination volume and a reduction in headcount.

Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $44,000, or 0.8%, to $5.2 million during the three months ended March 31, 2023.

The decrease was due primarily to a decrease in Employee Stock Ownership Plan expense as the average stock price decreased compared to the quarter ending March 31, 2022.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $19,000 to $1.2 million during the three months ended March 31, 2023, primarily resulting from decreased computer equipment expenses.

Occupancy, office furniture and equipment expense at the community banking segment increased $94,000 to $1.0 million during the three months ended March 31, 2023.

The increase was due primarily to increased snow removal and repairs expense.

Advertising expense decreased $16,000, or 1.8%, to $889,000 million during the three months ended March 31, 2023.

This was primarily due to advertising at the community banking segment decreasing as marketing campaigns started off slower compared to prior year.

Offsetting the decrease at the community banking segment, the mortgage banking segment increased marketing to attract customers as rates are higher than in the prior year.  

Data processing expense decreased $80,000, or 6.7%, to $1.1 million during the three months ended March 31, 2023. This was primarily due to decreases at the community banking and mortgage banking segments related to decreased spending to start the year.

Professional fees decreased $45,000 to $416,000 during the three months ended March 31, 2023.

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

Offsetting the decreases at the mortgage banking segment, the community banking segment had an increase in audit and tax expense.

Loan processing expense decreased $413,000 to $1.0 million during the three months ended March 31, 2023. 

The decrease was primarily due to a decrease in loan applications and fundings.  

Other noninterest expense increased $227,000, or 7.9%, to $3.1 million during the three months ended March 31, 2023. 

The increase at the mortgage banking segment related to an increase in provision of loan sale losses and provision for branch losses. 

Income tax expense totaled $627,000 for the three months ended March 31, 2023 compared to $1.5 million during the three months ended March 31, 2022.

Income tax expense was recognized on the statement of income during the three months ended March 31, 2023 and March 31, 2022 at an effective rate of 22.5% of pretax income. 

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total Assets –

Total assets decreased by $240.8 million, or 10.9%, to $1.98 billion at September 30, 2022 from $2.22 billion at December 31, 2021.

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

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

Total assets increased by $82.8 million, or 4.1%, to $2.11 billion at March 31, 2023 from $2.03 billion at December 31, 2022.

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

The increase in total assets reflects liability increases in borrowings.

Cash and Cash Equivalents –

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

Cash and cash equivalents increased $7.6 million, or 16.2%, to $54.2 million at March 31, 2023, compared to $46.6 million at December 31, 2022. The increase in cash and cash equivalents primarily reflects the increase of funding sources from borrowings and advance payments by borrowers for taxes.

Securities Available for Sale  –

Securities available for sale increased $18.3 million to $197.3 million at September 30, 2022.

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

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

Loans Held for Sale - Loans held for sale decreased $126.7 million to $186.0 million at September 30, 2022 due to the decrease of refinancing and purchase activity resulting from the increase in mortgage rates.

Loans Receivable - Loans receivable held for investment increased $148.7 million to $1.35 billion at September 30, 2022.

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

Securities available for sale increased $3.9 million to $200.4 million at March 31, 2023.

The increase was primarily due to the increase in fair value as longer term interest rates decreased during the year. 

Loans Held for Sale - Loans held for sale increased $30.1 million to $161.3 million at March 31, 2023 due to the increase of purchase activity resulting from the usual seasonal activity seen during the spring. 

Loans Receivable - Loans receivable held for investment increased $40.0 million to $1.55 billion at March 31, 2023.

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

The following table shows loan originations during the periods indicated.

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

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Total loans originated for investment

Allowance for Credit Losses - Loans - The allowance for credit losses increased $1.7 million to $17.5 million at September 30, 2022.

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

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

Additionally, net recoveries totaled $810,000 for the nine months ended September 30, 2022. With the adoption of CECL, estimated recoveries may be accounted for within the calculation and do not impact the provision for credit losses line item when cash is received. 

There was a provision for credit losses - loans of $700,000 for the nine months ended September 30, 2022.

Allowance for Credit Losses - Loans - The allowance for credit losses decreased $13,000 to $17.7 million at March 31, 2023.  There was a negative provision for credit losses - loans of $25,000 for the three months ended March 31, 2023.

During the three months ended March 31, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

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

Additionally, net recoveries totaled $12,000 for the three months ended March 31, 2023.

Prepaid expenses and other assets  –

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

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

Total prepaid expenses and other assets decreased $4.7 million to $55.0 million at March 31, 2023.

The decrease was primarily due to a decrease in the fair value mark on derivatives as long term interest rates decreased and mortgage servicing rights as the Company sold $2.7 million of mortgage servicing rights during the period ended March 31, 2023.  

Deposits –

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

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

Total deposits decreased $16.1 million to $1.18 billion at March 31, 2023. 

The decrease was driven by a decrease of $25.1 million in money market and savings deposits and $24.7 million in demand deposits offset by an increase of $33.6 million in time deposits.

Borrowings –

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

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

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

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $20.0 million to $24.1 million at September 30, 2022.

Total borrowings increased $114.9 million, or 29.7%, to $501.7 million at March 31, 2023.

The community banking segment paid off $25.0 million in long-term FHLB borrowings, borrowing $115.0 million of new long-term FHLB borrowings, and $24.8 million in new short-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment increased a total of $112,000 at March 31, 2023 from December 31, 2022.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $8.1 million to $13.4 million at March 31, 2023.

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

Other Liabilities - Other liabilities decreased $764,000 to $67.7 million at September 30, 2022. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. 

Other Liabilities - Other liabilities decreased $19.0 million to $50.7 million at March 31, 2023. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. 

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

1 unchanged sentence

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

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

Additionally, the fair value mark on derivative liabilities related to the loans held for sale and the back-to-back swaps decreased with the decrease in long term interest rates.  

Shareholders ’

Equity –

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

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

Shareholders' equity decreased $4.7 million to $365.8 million at March 31, 2023. 

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

ASSET QUALITY

NONPERFORMING ASSETS

At September 30,

At December 31,

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

At or for the Nine Months

Ended September 30,

At or for the Three Months

Ended March 31,

(In Thousands)

4 unchanged sentences

Balance at end of period

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

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

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

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

Of the $5.1 million in total non-accrual loans as of September 30, 2022, $3.3 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.

Total non-accrual loans increased by $170,000, or 3.9%, to $4.5 million as of March 31, 2023 compared to $4.3 million as of December 31, 2022. 

The ratio of non-accrual loans to total loans receivable was 0.29% at March 31, 2023 and at December 31, 2022. 

During the three months ended March 31, 2023, $951,000 in loans were placed on non-accrual status.

Offsetting this activity, $749,000 in loans returned to accrual status and $32,000 in principal payments were received during the three months ended March 31, 2023.

Of the $4.5 million in total non-accrual loans as of March 31, 2023, $2.1 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.

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

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

Partially charged-off loans measured for impairment based upon net realizable collateral value are maintained in a "non-performing" status and are disclosed as impaired loans. 

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

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

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

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

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

Based upon these specific reviews, no charge-offs have been recorded over the life of these loans and there were no specific reserves as of March 31, 2023.  The remaining $2.4 million of non-accrual loans were reviewed on an aggregate basis as of March 31, 2023.  

The outstanding principal balance of our five largest non-accrual loans as of March 31, 2023 totaled $2.7 million, which represents 59.5% of total non-accrual loans as of that date. 

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

Interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible.

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Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's sustained historical repayment performance and other relevant factors.

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

TROUBLED DEBT RESTRUCTURINGS

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

As of September 30, 2022

(In Thousands)

One- to four-family

As of December 31, 2021

(In Thousands)

One- to four-family

Commercial real estate

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

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

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

Our troubled debt restructurings are short-term modifications. 

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

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

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

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

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

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

As of March 31, 2023 and December 31, 2022, there were no loans 90 or more days past due and still accruing interest. 

LOAN DELINQUENCY

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

At September 30,

At December 31,

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Total loans past due to total loans receivable

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

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

Past due loans increased by $3.6 million, or 57.6%, to $9.9 million at March 31, 2023 from $6.3 million at December 31, 2022. 

Loans past due less than 90 days increased by $2.9 million, or 110.7%, primarily in the one- to four-family category.

Loans past due 90 days or more increased by $754,000, or 20.5%, primarily in the one- to four-family loan category, during the three months ended March 31, 2023.

ALLOWANCE FOR CREDIT LOSSES - LOANS

At or for the Nine Months

Ended September 30,

At or for the Three Months

Ended March 31,

(Dollars in Thousands)

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Net recoveries (annualized) to beginning of the year allowance

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

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

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

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

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

Additionally, net recoveries totaled $544,000 for the nine months ended September 30, 2022. With the adoption of CECL, estimated recoveries may be accounted for within the calculation and do not impact the provision for credit losses line item when cash is received. 

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

Of the $544,000 in net recoveries during the nine months ended September 30, 2022, the majority of the activity related to loans secured by multi-family loan categories.

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

The allowance for credit losses - loans decreased $13,000 to $17.7 million at March 31, 2023 from $17.8 million at December 31, 2022. 

During the three months ended March 31, 2023, there was a $25,000 negative provision for credit losses.

Additionally, net recoveries totaled $12,000 for the three months ended March 31, 2023. 

We had net recoveries of $12,000, or less than 0.00% of average loans annualized, for the three months ended March 31, 2023, compared to net recoveries of $616,000, or 0.21% of average loans annualized, for the three months ended March 31, 2022. 

Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral. 

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

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

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

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

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

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

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

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

$3.44 billion in proceeds from the sale of loans held for sale, $148.8 million for net loan receivables decrease, $61.7 million from an increase in deposits, $30.8 million in principal repayments on mortgage related securities, $6.4 million in maturities of debt securities, and $58.2 million in net income.

During the three months ended March 31, 2023, primary uses of cash and cash equivalents included:

$415.7 million in funding loans held for sale, $40.0 million to fund loans held for investment, $5.7 million for purchases of mortgage related securities, $6.5 million for FHLB stock, $25.0 million for payoffs of long-term borrowings, $4.2 million for cash dividends paid, $16.1 million for decrease in deposits, and $5.8 million for purchases of our common stock.

During the three months ended March 31, 2023, primary sources of cash and cash equivalents included:

$400.5 million in proceeds from the sale of loans held for sale, $115.0 million in long-term borrowings, $24.9 million in short-tern borrowings, $4.6 million in principal repayments on mortgage related securities, $1.3 million in maturities of debt securities, and $18.6 million in net income.

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

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

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

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

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. 

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

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

$37.2 million in cash held at the Federal Reserve Bank and other depository institutions and $35.7 million in federal funds sold and short-term investments. 

Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt and mortgage-related securities, increases in deposit accounts, 

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

At March 31, 2023 and 2022, respectively, $54.2 million and $278.5 million of our assets were invested in cash and cash equivalents. At March 31, 2023, cash and cash equivalents were comprised of the following:

$34.3 million in cash held at the Federal Reserve Bank and other depository institutions and $19.9 million in federal funds sold and short-term investments. 

Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt and mortgage-related securities, increases in deposit accounts, advances from the FHLB, and repurchase agreements from other institutions.

Liquidity management is both a daily and longer-term function of business management. 

If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds.

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

At March 31, 2023, we had $290.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, and 2033. 

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

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

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

There are two advances with contractual maturities in 2029.

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

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

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

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

The 2033 advance maturities have monthly and quarterly call options starting in 2023.

At March 31, 2023, we had outstanding commitments to originate loans receivable of $86.5 million. 

In addition, at March 31, 2023, we had unfunded commitments under construction loans of $67.7 million, unfunded commitments under business lines of credit of $17.1 million and unfunded commitments under home equity lines of credit and standby letters of credit of $11.8 million. 

At March 31, 2023, certificates of deposit scheduled to mature in one year or less totaled $498.3 million. 

Based on prior experience, management believes that, subject to the Bank’s funding needs, a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. 

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

At September 30, 2022, Waterstone Financial, Inc.

At March 31, 2023, Waterstone Financial, Inc.

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

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

Shareholders' equity decreased $4.7 million to $365.8 million at March 31, 2023. 

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

As of September 30, 2022, the Company has 925,000 shares remaining in the plan.  

As of March 31, 2023, the Company has 393,000 shares remaining in the plan.  

WaterStone Bank is subject to various regulatory capital requirements, including a risk-based capital measure.

The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. 

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

At March 31, 2023, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized”

under regulatory guidelines.

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

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

During the three months ended March 31, 2023, we repaid $25.0 million in FHLB long-term debt, borrowed $115.0 million of FHLB long-term debt, and borrowed $24.8 million of additional short-term debt. During the three months ended March 31, 2022, we repaid $155.0 million in FHLB long-term debt. 

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

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

Our most recent simulation uses projected repricing of assets and liabilities at September 30, 2022 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. 

Our most recent simulation uses projected repricing of assets and liabilities at March 31, 2023 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. 

Prepayment rate assumptions may have a significant impact on interest income simulation results. 

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Immediate Change in Rates

As of September 30, 2022

As of March 31, 2023

Dollar Change

Percentage Change

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

At March 31, 2023, a 100 basis point instantaneous increase in interest rates had the effect of decreasing forecast net interest income over the next 12 months by 2.37% while a 100 basis point decrease in rates had the effect of increasing net interest income by 0.52%.

Controls and Procedures

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The information required by this item is set forth in Part I, Item 1, Note 9 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities.

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors”

in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

What changed 10-Q

Item 1. Financial Statements