What changed in this filing

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Item 1. Financial Statements

2024-05-08 compared with 2023-11-02 · 832 added, 1480 removed, 972 unchanged (70% of the section changed)

3 unchanged sentences

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 30, 2023

March 31, 2024

December 31, 2023

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

$ 55,796  

$ 33,700  

$ 41,325 $ 30,667

Federal funds sold

10,683  

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

Cash and cash equivalents

62,293  

46,642  

45,714 36,421

Securities available for sale, at fair value (cost:

2023—$ 225,857 ;

2022—$ 222,665 )

194,499  

196,588  

2024—$ 229,184 ;

2023—$ 227,716 )

204,701 204,907

Loans held for sale, at fair value

157,421  

131,188  

175,084 164,993

Loans receivable

1,651,093  

1,510,178  

1,664,817 1,664,215

Allowance for credit losses ("ACL") - loans

18,553  

17,757  

18,549 18,549

Loans receivable, net

1,632,540  

1,492,421  

1,646,268 1,645,666

Office properties and equipment, net

20,040  

21,105  

19,936 19,995

Federal Home Loan Bank stock, at cost

23,414  

17,357  

21,983 20,880

Cash surrender value of life insurance

67,522  

66,443  

68,207 67,859

Real estate owned, net

Prepaid expenses and other assets

63,257  

59,783  

$ 2,221,358  

$ 2,031,672  

Liabilities and Shareholders’

52,625 52,414

$ 2,234,724 $ 2,213,389

Liabilities and Shareholders’ Equity

Demand deposits

$ 189,954  

$ 230,596  

$ 182,093 $ 187,107

Money market and savings deposits

281,958  

326,145  

270,513 273,233

Time deposits

733,250  

642,271  

747,288 730,284

Total deposits

1,205,162  

1,199,012  

587,917  

386,784  

1,199,894 1,190,624

634,158 611,054

Advance payments by borrowers for taxes

28,238  

Other liabilities

53,715  

70,056  

48,618 61,048

Total liabilities

1,875,032  

1,661,186  

1,896,721 1,869,333

Commitments and contingencies (Note 8)

Shareholders’

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at September 30, 2023 and at December 31, 2022, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at September 30, 2023 and at December 31, 2022, Issued and Outstanding - 20,859,649 at September 30, 2023 and 22,174,225 at December 31, 2022

Shareholders’ equity:

Preferred stock (par value $ .01 per share) Authorized - 50,000,000 shares at March 31, 2024 and at December 31, 2023, no shares issued

Common stock (par value $ .01 per share) Authorized - 100,000,000 shares at March 31, 2024 and at December 31, 2023, Issued and Outstanding - 19,909,643 at March 31, 2024 and 20,314,786 at December 31, 2023

Additional paid-in capital

110,020  

128,550  

98,610 103,908

Retained earnings

272,535  

274,246  

269,827 269,606

Unearned ESOP shares

( 12,166 )  

( 11,572 ) ( 11,869 )

Accumulated other comprehensive loss, net of taxes

( 24,272 )  

Total shareholders’

346,326  

370,486  

Total liabilities and shareholders’

$ 2,221,358  

$ 2,031,672  

( 19,061 ) ( 17,792 )

Total shareholders’ equity

338,003 344,056

Total liabilities and shareholders’ equity

$ 2,234,724 $ 2,213,389

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands, except per share amounts)

30 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

$ 3,253  

$ 5,270  

$ 9,415  

$ 18,552  

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 $ 1,101 , $ 1,779 , $ 485 , and $ 6,667 respectively

( 3,444 )  

( 4,753 )  

( 4,796 )  

Total other comprehensive loss

( 3,444 )  

( 4,753 )  

( 4,796 )  

Comprehensive (loss) income

$ ( 191 )  

$ 4,619  

$ 3,038 $ 2,155

Other comprehensive income (loss), net of tax:

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

Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $ 405 and $( 790 ), respectively

( 1,269 ) 2,107

Total other comprehensive (loss) income

( 1,269 ) 2,107

Comprehensive income

$ 1,769 $ 4,262

See accompanying notes to unaudited consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS ’

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY

Comprehensive

2 unchanged sentences

(In Thousands, except per share amounts)

For the nine months ended September 30, 2022

For the three months ended March 31, 2023

Balances at December 31, 2022

24,795  

$ 174,505  

$ 273,398  

$ ( 14,243 )  

$ ( 1,135 )  

$ 432,773  

22,174 $ 222 $ 128,550 $ 274,246 $ ( 13,056 ) $ ( 19,476 ) $ 370,486

Comprehensive income:

18,552  

Other comprehensive loss

( 17,806 )  

- - - 2,155 - - 2,155

Other comprehensive income

- - - - - 2,107 2,107

Total comprehensive income

Adoption of new accounting pronouncement (see Note 1)

( 1,392 )  

ESOP shares committed to be released to plan participants

- - 129 - 297 - 426

Cash dividend, $ 0.20 per share

( 13,044 )  

- - - ( 4,133 ) - - ( 4,133 )

Proceeds from stock option exercises

66 1 500 - - - 501

Stock compensation expense

- - 106 - - - 106

Purchase of common stock returned to authorized but unissued

( 2,524 )  

( 25 )  

( 45,171 )  

Balances at September 30, 2022

22,318  

$ 130,731  

$ 277,514  

$ ( 13,353 )  

$ ( 18,941 )  

$ 376,174  

( 373 ) ( 4 ) ( 5,837 ) - - - ( 5,841 )

Balances at March 31, 2023

21,867 $ 219 $ 123,448 $ 272,268 $ ( 12,759 ) $ ( 17,369 ) $ 365,807

(In Thousands, except per share amounts)

For the nine months ended September 30, 2023

For the three months ended March 31, 2024

Balances at December 31, 2023

22,174  

$ 128,550  

$ 274,246  

$ ( 13,056 )  

$ ( 19,476 )  

$ 370,486  

Comprehensive income:

Other comprehensive loss

( 4,796 )  

Total comprehensive income

ESOP shares committed to be released to plan participants

Cash dividend, $ 0.55 per share

( 11,126 )  

Stock Compensation Activity, net of tax

Stock compensation expense

Purchase of common stock returned to authorized but unissued

( 1,400 )  

( 14 )  

( 19,829 )  

Balances at September 30, 2023

20,860  

$ 110,020  

$ 272,535  

$ ( 12,166 )  

$ ( 24,272 )  

$ 346,326  

Comprehensive

Shareholders'

Income (Loss)

(In Thousands, except per share amounts)

For the three months ended September 30, 2022

Balances at June 30, 2022

22,734  

$ 137,547  

$ 276,444  

$ ( 13,650 )  

$ ( 14,188 )  

$ 386,380  

20,315 $ 203 $ 103,908 $ 269,606 $ ( 11,869 ) $ ( 17,792 ) $ 344,056

Comprehensive income:

- - - 3,038 - - 3,038

Other comprehensive loss

( 4,753 )  

- - - - - ( 1,269 ) ( 1,269 )

Total comprehensive income

ESOP shares committed to be released to plan participants

Cash dividend, $ 0.20 per share

( 4,200 )  

Stock compensation activity, net of tax

Stock compensation expense

Purchase of common stock returned to authorized but unissued

( 425 )  

( 7,246 )  

Balances at September 30, 2022

22,318  

$ 130,731  

$ 277,514  

$ ( 13,353 )  

$ ( 18,941 )  

$ 376,174  

(In Thousands, except per share amounts)

For the three months ended September 30, 2023

Balances at June 30, 2023

21,376  

$ 116,611  

$ 272,229  

$ ( 12,463 )  

$ ( 20,828 )  

$ 355,763  

Comprehensive loss:

Other comprehensive loss

( 3,444 )  

Total comprehensive loss

ESOP shares committed to be released to Plan participants

- - 38 - 297 - 335

Cash dividend, $ 0.15 per share

( 2,947 )  

- - - ( 2,817 ) - - ( 2,817 )

Stock compensation Activity, net of tax

17 - - - - - -

Stock compensation expense

- - 6 - - - 6

Purchase of common stock returned to authorized but unissued

( 516 )  

( 6,675 )  

Balances at September 30, 2023

20,860  

$ 110,020  

$ 272,535  

$ ( 12,166 )  

$ ( 24,272 )  

$ 346,326  

( 422 ) ( 4 ) ( 5,342 ) - - - ( 5,346 )

Balances at March 31, 2024

19,910 $ 199 $ 98,610 $ 269,827 $ ( 11,572 ) $ ( 19,061 ) $ 338,003

See accompanying notes to unaudited consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30,

Three months ended March 31,

(In Thousands)

Operating activities:

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

Adjustments to reconcile net income to net cash used in operating activities:

Provision for credit losses

3 unchanged sentences

Origination of mortgage servicing rights

Gain on sale of mortgage servicing rights

Gain on sale of loans held for sale

1 unchanged sentence

Proceeds on sales of loans originated for sale

Gain on death benefit on bank owned life insurance

Decrease in accrued interest receivable

Decrease (increase) in accrued interest receivable

Increase in cash surrender value of life insurance

Increase in derivative assets

Increase (decrease) in accrued interest on deposits and borrowings

Increase in accrued tax expense

(Decrease) increase in derivative liabilities

(Increase) decrease in derivative assets

Increase in accrued interest on deposits and borrowings

Decrease (increase) in prepaid tax expense

Increase (decrease) in derivative liabilities

Gain on sale of mortgage servicing rights

Change in other assets and other liabilities, net

Net cash (used in) provided by operating activities

Net cash used in operating activities

Investing activities:

3 unchanged sentences

Mortgage related securities

Bank owned life insurance

Premises and equipment

2 unchanged sentences

Maturities of debt securities

Sales of FHLB Stock

Proceeds on sales of mortgage servicing rights

2 unchanged sentences

Financing activities:

Net decrease in deposits

Net increase (decrease) in deposits

Net change in short-term borrowings

5 unchanged sentences

Proceeds from stock option exercises

Net cash provided by (used in) financing activities

Increase (decrease) in cash and cash equivalents

Net cash provided by financing activities

Increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

7 unchanged sentences

See accompanying notes to unaudited consolidated financial statements.

Note 1 —

Basis of Presentation

Note 1 — Basis of Presentation

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

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

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

4 unchanged sentences

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

The Company's 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.

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. 

Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market. 

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.

Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market.

Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10 - 01 of Regulation S- X and the instructions to Form 10 -Q.

The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’

equity, and cash flows of the Company for the periods presented.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s 

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

Operating results for the three and nine months ended September 30, 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 accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2023 Annual Report on Form 10 -K.

Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or for any other period.

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

Significant items subject to such estimates and assumptions include the allowance for credit losses, income taxes, and fair value measurements.

Significant items subject to such estimates and assumptions include the allowance for credit losses, income taxes, and fair value measurements.

Actual results could differ from those estimates.

1 unchanged sentence

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, 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 "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  

Securities Available for Sale

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

September 30, 2023

There were no significant subsequent events for the three months ended March 31, 2024 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

In December 2023, the FASB issued ASU No.

2023 - 09, “Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures.” This update enhances the transparency and decision usefulness of income tax disclosures by providing better information regarding exposure to potential changes in jurisdictional tax legislation and related forecasting and cash flow opportunities.

This update is effective for fiscal years beginning after December 15, 2024.

The Corporation is assessing the impact of the standard.

Note 2 — Securities Available for Sale

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

March 31, 2024

(In Thousands)

Mortgage-backed securities

$ 13,009  

$ ( 2,096 )  

$ 10,913  

$ 12,295 $ 3 $ ( 1,672 ) $ 10,626

Collateralized mortgage obligations:

Government sponsored enterprise issued

151,866  

( 24,515 )  

127,351  

150,643 55 ( 20,392 ) 130,306

Private-label issued

( 1,025 )  

7,893 - ( 823 ) 7,070

Mortgage-related securities

173,200  

( 27,636 )  

145,564  

170,831 58 ( 22,887 ) 148,002

Government sponsored enterprise bonds

( 211 )  

2,500 - ( 147 ) 2,353

Municipal securities

37,556  

( 2,229 )  

35,413  

43,353 757 ( 955 ) 43,155

Other debt securities

12,500  

( 1,368 )  

11,132  

12,500 - ( 1,309 ) 11,191

Debt securities

52,556  

( 3,808 )  

48,834  

Other securities

$ 225,857  

$ ( 31,444 )  

$ 194,499  

58,353 757 ( 2,411 ) 56,699

$ 229,184 $ 815 $ ( 25,298 ) $ 204,701

December 31, 2023

1 unchanged sentence

Mortgage-backed securities

$ 15,134  

$ ( 1,824 )  

$ 13,314  

$ 12,651 $ 5 $ ( 1,475 ) $ 11,181

Collateralized mortgage obligations

Government sponsored enterprise issued

145,740  

( 20,975 )  

124,765  

152,700 212 ( 19,445 ) 133,467

Private-label issued

( 935 )  

8,061 - ( 801 ) 7,260

Mortgage related securities

169,915  

( 23,734 )  

146,185  

173,412 217 ( 21,721 ) 151,908

Government sponsored enterprise bonds

( 244 )  

2,500 - ( 152 ) 2,348

Municipal securities

37,699  

( 1,193 )  

36,934  

39,304 980 ( 796 ) 39,488

Other debt securities

12,500  

( 1,338 )  

11,162  

12,500 - ( 1,337 ) 11,163

Debt securities

52,699  

( 2,775 )  

50,352  

Other securities

$ 222,665  

$ ( 26,509 )  

$ 196,588  

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, 2023 , $ 94.7  million of the Company’s mortgage related securities were pledged as collateral to secure funding from the Federal Reserve Bank's new borrowing facility.

Additionally at September 30, 2023 , $ 198,000  of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

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, 2023 are shown below.

54,304 980 ( 2,285 ) 52,999

$ 227,716 $ 1,197 $ ( 24,006 ) $ 204,907

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

At March 31, 2024 , and December 31, 2023 , $ 123.3 million and $ 128.1 million of the Company’s mortgage related securities were pledged as collateral to secure funding from the Federal Reserve Bank's new borrowing facility.

Additionally at March 31, 2024 , $ 162,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

At December 31, 2023 , $ 183,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2024 are shown below.

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

2 unchanged sentences

Due within one year

$ 7,296  

$ 7,198  

$ 9,584 $ 9,524

Due after one year through five years

10,986  

10,751  

Due after five years through ten years

20,145  

18,467  

21,166 20,068

Due after ten years

14,129  

12,418  

19,122 18,658

Mortgage-related securities

173,200  

145,564  

Other securities

$ 225,857  

$ 194,499  

170,831 148,002

$ 229,184 $ 204,701

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, 2023

March 31, 2024

Less than 12 months

2 unchanged sentences

Mortgage-backed securities

$ 10,420  

$ 2,075  

$ 10,913  

$ 2,096  

$ 40 $ 1 $ 10,361 $ 1,671 $ 10,401 $ 1,672

Collateralized mortgage obligations:

Government sponsored enterprise issued

19,941  

107,410  

23,986  

127,351  

24,515  

15,677 106 108,416 20,286 124,093 20,392

Private-label issued

- - 6,070 823 6,070 823

Government sponsored enterprise bonds

- - 2,353 147 2,353 147

Municipal securities

24,407  

29,644  

2,975 25 11,318 930 14,293 955

Other debt securities

11,132  

$ 44,841  

$ 1,446  

$ 142,757  

$ 29,998  

$ 187,598  

$ 31,444  

- - 11,191 1,309 11,191 1,309

$ 18,692 $ 132 $ 149,709 $ 25,166 $ 168,401 $ 25,298

December 31, 2023

3 unchanged sentences

Mortgage-backed securities

$ 8,383  

$ 4,573  

$ 1,169  

$ 12,956  

$ 1,824  

$ 215 $ 1 $ 10,682 $ 1,474 $ 10,897 $ 1,475

Collateralized mortgage obligations:

Government sponsored enterprise issued

65,270  

59,495  

14,575  

124,765  

20,975  

2,442 42 110,271 19,403 112,713 19,445

Private-label issued

- - 6,250 801 6,250 801

Government sponsored enterprise bonds

- - 2,348 152 2,348 152

Municipal securities

18,648  

22,743  

7,597 36 5,808 760 13,405 796

Other debt securities

11,162  

$ 103,931  

$ 8,564  

$ 76,963  

$ 17,945  

$ 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 

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

- - 11,163 1,337 11,163 1,337

$ 10,254 $ 79 $ 146,522 $ 23,927 $ 156,776 $ 24,006

The Company reviews the investment securities portfolio on a quarterly basis to monitor securities in unrealized loss positions, which were comprised of 155 individual securities, to determine whether the impairment is due to credit-related factors or noncredit-related factors.

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

As of September 30, 2023 and December 31, 2022 , 

no  allowance for credit losses on securities was recognized.

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

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

During the 

three and nine months ended September 30, 2023  and September 30, 2022 , there were no sales of securities.

As of March 31, 2024 and December 31, 2023 , no allowance for credit losses on securities was recognized.

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

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

During the three months ended March 31, 2024 and March 31, 2023 , there were no sales of securities.

Note 3 - Loans Receivable

Loans receivable at September 30, 2023 and December 31, 2022 are summarized as follows:

September 30, 2023

Loans receivable at March 31, 2024 and December 31, 2023 are summarized as follows:

March 31, 2024

December 31, 2023

3 unchanged sentences

One- to four-family

$ 550,055  

$ 469,567  

711,660  

677,981  

11,719  

11,455  

$ 551,005 $ 551,190

702,487 707,566

13,664 13,228

Construction and land

62,409  

62,494  

64,431 53,371

Commercial real estate

278,441  

262,973  

297,341 300,892

Commercial loans

35,983  

24,934  

$ 1,651,093  

$ 1,510,178  

35,067 37,120

$ 1,664,817 $ 1,664,215

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

2 unchanged sentences

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

Qualifying loans receivable totaling $ 1.24  billion and $ 976.7  million at September 30, 2023 and December 31, 2022 , respectively, were pledged as collateral against $ 485.0 million and $ 385.7  million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 2023 and December 31, 2022 .

Qualifying loans receivable totaling $ 1.25 billion and $ 1.25 billion at March 31, 2024 and December 31, 2023 , respectively, were pledged as collateral against $ 488.5 million and $ 464.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at March 31, 2024 and December 31, 2023 .

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

Loans outstanding to such parties were approximately $ 3.2 million as of September 30, 2023  and $ 2.8  million as of December 31, 2022 . 

None of these loans were past due or considered impaired as of September 30, 2023 or December 31, 2022 .

An analysis of past due loans receivable as of September 30, 2023 and December 31, 2022 follows:

As of September 30, 2023

1-59 Days Past Due (1)  

60-89 Days Past Due (2)  

90 Days or Greater  

Total Past Due  

Total Loans  

These loans to related parties are summarized below:

Three months ended

March 31, 2024

March 31, 2023

(In Thousands)

Balance at beginning of year

$ 3,319 $ 2,847

( 29 ) ( 87 )

Balance at end of year

$ 3,290 $ 3,073

None of these loans were past due or considered impaired as of March 31, 2024 or December 31, 2023 .

An analysis of past due loans receivable as of March 31, 2024 and December 31, 2023 follows:

As of March 31, 2024

1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Total Past Due Current (3)

(In Thousands)

Mortgage loans:

1 unchanged sentence

One- to four-family

$ 3,620  

$ 3,926  

$ 7,687  

$ 542,368  

$ 550,055  

710,928  

711,660  

11,523  

11,719  

$ 5,022 $ 599 $ 3,695 $ 9,316 $ 541,689 $ 551,005

865 - - 865 701,622 702,487

200 - 32 232 13,432 13,664

Construction and land

62,409  

- - - - 64,431 64,431

Commercial real estate

278,312  

278,441  

145 - 129 274 297,067 297,341

- - - - 822 822

Commercial loans

35,983  

$ 4,511  

$ 3,963  

$ 8,744  

$ 1,642,349  

$ 1,651,093  

- - - - 35,067 35,067

$ 6,232 $ 599 $ 3,856 $ 10,687 $ 1,654,130 $ 1,664,817

As of December 31, 2023

1-59 Days Past Due (1)  

60-89 Days Past Due (2)  

90 Days or Greater  

Total Past Due  

Total Loans  

1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Total Past Due Current (3)

(In Thousands)

2 unchanged sentences

One- to four-family

$ 2,328  

$ 3,618  

$ 5,946  

$ 463,621  

$ 469,567  

677,981  

11,376  

11,455  

$ 5,265 $ 1,283 $ 4,270 $ 10,818 $ 540,372 $ 551,190

- 6 - 6 707,560 $ 707,566

209 - 34 243 12,985 $ 13,228

Construction and land

62,494  

- - - - 53,371 $ 53,371

Commercial real estate

262,740  

262,973  

54 - 129 183 300,709 $ 300,892

- - - - 848 $ 848

Commercial loans

24,931  

24,934  

$ 2,345  

$ 3,683  

$ 6,261  

$ 1,503,917  

$ 1,510,178  

 Includes $- and $- at September 30, 2023 and December 31, 2022 , respectively, which are on non-accrual status.

( 2 )   

Includes $- and $- at 

September 30, 2023 and December 31, 2022 , respectively, which are on non-accrual status.

( 3 )   

Includes $ 119,000  and $ 624,000  at 

September 30, 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, 2023 and the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2022 :

One- to Four-Family

Land and Construction

Commercial Real Estate

(In Thousands)

Nine months ended September 30, 2023

Balance at beginning of period

$ 4,743  

$ 7,975  

$ 1,352  

$ 3,199  

$ 17,757  

Provision (credit) for credit losses - loans

( 248 )  

( 189 )  

( 458 )  

( 63 )  

( 29 )  

Balance at end of period

$ 6,138  

$ 7,732  

$ 1,165  

$ 2,743  

$ 18,553  

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  

- - - - 37,120 $ 37,120

$ 5,528 $ 1,289 $ 4,433 $ 11,250 $ 1,652,965 $ 1,664,215

( 1 ) Includes $ 630,000 and $ 193,000 at March 31, 2024 and December 31, 2023 , respectively, which are on non-accrual status.

( 2 ) Includes $ - and $ 11,000 at March 31, 2024 and December 31, 2023 , respectively, which are on non-accrual status.

( 3 ) Includes $ 386,000 and $ 171,000 at March 31, 2024 and December 31, 2023 , respectively, which are on non-accrual status.

The following tables present the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2024 and the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2023 :

One to-Four- Family

2 unchanged sentences

(In Thousands)

Three months ended September 30, 2023

Three months ended March 31, 2024

Balance at beginning of period

$ 6,529  

$ 7,425  

$ 1,060  

$ 2,600  

$ 18,374  

$ 6,886 $ 7,318 $ 211 $ 983 $ 2,561 $ 56 $ 534 $ 18,549

Provision (credit) for credit losses - loans

( 364 )  

( 34 )  

( 284 ) 47 18 127 48 7 34 ( 3 )

( 3 ) - - - - ( 8 ) - ( 11 )

10 2 - 1 1 - - 14

Balance at end of period

$ 6,138  

$ 7,732  

$ 1,165  

$ 2,743  

$ 18,553  

Three months ended September 30, 2022

$ 6,609 $ 7,367 $ 229 $ 1,111 $ 2,610 $ 55 $ 568 $ 18,549

Three months ended March 31, 2023

Balance at beginning of period

$ 4,629  

$ 7,391  

$ 1,690  

$ 3,160  

$ 17,271  

$ 4,743 $ 7,975 $ 174 $ 1,352 $ 3,199 $ 47 $ 267 $ 17,757

Provision (credit) for credit losses - loans

( 179 )  

( 189 )  

1,016 ( 127 ) - ( 495 ) ( 522 ) 26 77 ( 25 )

( 3 ) - - - - ( 21 ) - ( 24 )

30 - 4 1 1 - - 36

Balance at end of period

$ 4,496  

$ 7,563  

$ 1,511  

$ 3,437  

$ 17,452  

$ 5,786 $ 7,848 $ 178 $ 858 $ 2,678 $ 52 $ 344 $ 17,744

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

1 unchanged sentence

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

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

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

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

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

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

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

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

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

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

3 unchanged sentences

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

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

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

2 unchanged sentences

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

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

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

6 unchanged sentences

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

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

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

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

The historical loss rate was utilized as the base rate, and qualitative adjustments 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.

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

The Company segments the loan portfolio into pools based on the following risk characteristics:

collateral type, credit characteristics, loan origination balance, and outstanding loan balances.

Allowance for Credit Losses-Unfunded Commitments :

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

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

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

The allowance for unfunded commitments at September 30, 2023 and December 31, 2022  was $ 1.6  million and $ 1.3  million.

The allowance for unfunded commitments at March 31, 2024 and December 31, 2023 was $ 1.1 million and $ 1.1 million.

Provision for Credit Losses :

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

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

See Note 2 - Securities Available for Sale for additional information regarding the ACL related to investment securities.

The following table presents the components of the provision for credit losses.

Three months ended

Nine months ended

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

March 31, 2024

March 31, 2023

(In Thousands)

Provision (credit) for credit losses on:

$ ( 3 ) $ ( 25 )

Unfunded commitments

( 28 )  

Investment securities

$ 1,091  

Collateral Dependent Loans :

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

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

The following tables present collateral dependent loans by portfolio segment and collateral type as of September 30, 2023  and 

December 31, 2022 :

The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.

The following tables present collateral dependent loans by portfolio segment and collateral type as of March 31, 2024 and December 31, 2023 :

One- to Four- Family

3 unchanged sentences

Allowance related to collateral dependent loans

$ - $ - $ - $ - $ - $ - $ - $ -

Allowance related to pooled loans

18,553  

6,609 7,367 229 1,111 2,610 55 568 18,549

Allowance at end of period

$ 6,138  

$ 7,732  

$ 1,165  

$ 2,743  

$ 18,553  

$ 6,609 $ 7,367 $ 229 $ 1,111 $ 2,610 $ 55 $ 568 $ 18,549

Collateral dependent loans

$ 1,527  

$ 5,368  

$ 1,421  

$ 8,353  

548,528  

711,660  

11,682  

62,409  

273,073  

34,562  

1,642,740  

$ 2,193 $ - $ 199 $ - $ 5,383 $ - $ 1,285 $ 9,060

548,812 702,487 13,465 64,431 291,958 822 33,782 1,655,757

Total gross loans

$ 550,055  

$ 711,660  

$ 11,719  

$ 62,409  

$ 278,441  

$ 35,983  

$ 1,651,093  

One- to Four- Family  

Construction and Land  

Commercial Real Estate  

$ 551,005 $ 702,487 $ 13,664 $ 64,431 $ 297,341 $ 822 $ 35,067 $ 1,664,817

One- to Four- Family Multi-Family

Construction and Land Commercial Real Estate Consumer

(In Thousands)

Allowance related to collateral dependent loans

$ - $ - $ - $ - $ - $ - $ - $ -

Allowance related to pooled loans

17,757  

6,886 7,318 211 983 2,561 56 534 18,549

Allowance at end of period

$ 4,743  

$ 7,975  

$ 1,352  

$ 3,199  

$ 17,757  

$ 6,886 $ 7,318 $ 211 $ 983 $ 2,561 $ 56 $ 534 $ 18,549

Collateral dependent loans

$ 2,584  

$ 5,455  

$ 8,079  

466,983  

677,981  

11,415  

62,494  

257,518  

24,934  

1,502,099  

$ 2,209 $ - $ 90 $ - $ 5,493 $ - $ 1,536 $ 9,328

548,981 707,566 13,138 53,371 295,399 848 35,584 1,654,887

Total gross loans

$ 469,567  

$ 677,981  

$ 11,455  

$ 62,494  

$ 262,973  

$ 24,934  

$ 1,510,178  

$ 551,190 $ 707,566 $ 13,228 $ 53,371 $ 300,892 $ 848 $ 37,120 $ 1,664,215

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.

3 unchanged sentences

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.

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.

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.

3 unchanged sentences

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

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

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

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

current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships.

For relationships over $1 million, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt.

Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis.

The Company uses the following definitions for risk ratings:

Loans classified as watch have a potential weakness that deserves management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and, additionally, the weakness or weaknesses to make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable.

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

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

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of September 30, 2023 and December 31, 2022 :

The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of March 31, 2024 and December 31, 2023 :

One to Four-Family

2 unchanged sentences

(In Thousands)

At September 30, 2023

$ 3,958  

$ 5,367  

$ 1,421  

$ 10,783  

10,277  

11,068  

535,820  

711,280  

11,540  

62,409  

272,805  

34,562  

1,629,242  

$ 550,055  

$ 711,660  

$ 11,719  

$ 62,409  

$ 278,441  

$ 35,983  

$ 1,651,093  

At March 31, 2024

$ 4,544 $ - $ 199 $ - $ 5,383 $ - $ 1,285 $ 11,411

8,747 185 708 145 417 - 75 10,277

537,714 702,302 12,757 64,286 291,541 822 33,707 1,643,129

$ 551,005 $ 702,487 $ 13,664 $ 64,431 $ 297,341 $ 822 $ 35,067 $ 1,664,817

At December 31, 2023

$ 4,209  

$ 5,454  

$ 9,822  

15,437  

459,662  

677,789  

11,261  

60,267  

252,316  

22,850  

1,484,919  

$ 469,567  

$ 677,981  

$ 11,455  

$ 62,494  

$ 262,973  

$ 24,934  

$ 1,510,178  

$ 4,503 $ - $ 90 $ - $ 5,492 $ - $ 1,536 $ 11,621

7,585 383 - - - - - 7,968

539,102 707,183 13,138 53,371 295,400 848 35,584 1,644,626

$ 551,190 $ 707,566 $ 13,228 $ 53,371 $ 300,892 $ 848 $ 37,120 $ 1,664,215

Credit Quality Information:

The following table presents total loans by risk categories and year of origination as of September 30, 2023 :

The following table presents total loans by risk categories and year of origination as of March 31, 2024 :

(In Thousands)

One- to four-family

$ 183,187  

$ 170,153  

$ 46,971  

$ 34,576  

$ 20,290  

$ 79,596  

$ 1,047  

$ 535,820  

10,277  

192,404  

170,687  

46,971  

34,576  

20,290  

84,080  

550,055  

102,253  

221,619  

141,033  

131,394  

39,533  

74,011  

$ 711,280  

102,445  

221,619  

141,033  

131,394  

39,533  

74,199  

711,660  

$ 11,540  

11,719  

$ 12,449 $ 193,887 $ 160,494 $ 44,322 $ 33,048 $ 92,399 $ 1,115 $ 537,714

6,214 - 465 - - 2,068 - 8,747

- 1,422 953 - - 2,169 - 4,544

18,663 195,309 161,912 44,322 33,048 96,636 1,115 551,005

8,271 123,507 209,783 134,109 116,823 108,954 855 $ 702,302

- - - - - 185 - 185

- - - - - - - -

8,271 123,507 209,783 134,109 116,823 109,139 855 702,487

351 1,075 232 158 96 404 10,441 $ 12,757

708 - - - - - - 708

- - 16 16 - - 167 199

1,059 1,075 248 174 96 404 10,608 13,664

Construction and land

24,833  

24,831  

$ 62,409  

24,833  

24,831  

62,409  

1,851 47,561 1,637 9,298 1,547 2,392 - $ 64,286

- - 145 - - - - 145

- - - - - - - -

1,851 47,561 1,782 9,298 1,547 2,392 - 64,431

Commercial Real Estate

57,221  

76,878  

48,433  

35,508  

19,810  

33,750  

$ 272,805  

62,500  

77,007  

48,433  

35,596  

19,950  

33,750  

278,441  

16,274  

$ 34,562  

16,274  

35,983  

$ 399,468  

$ 472,604  

$ 262,436  

$ 206,681  

$ 89,182  

$ 198,192  

$ 22,530  

$ 1,651,093  

6,807 69,799 70,252 61,543 32,892 49,447 801 $ 291,541

- - 417 - - - - 417

- 5,254 129 - - - - 5,383

6,807 75,053 70,798 61,543 32,892 49,447 801 297,341

- - - - - - 822 $ 822

- - - - - - - -

- - - - - - 822 822

130 17,234 1,526 821 2,536 5,483 5,977 $ 33,707

- - - - - - 75 75

- - 44 - - 6 1,235 1,285

130 17,234 1,570 821 2,536 5,489 7,287 35,067

$ 36,781 $ 459,739 $ 446,093 $ 250,267 $ 186,942 $ 263,507 $ 21,488 $ 1,664,817

Gross charge-offs

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

$ 3 $ - $ - $ - $ - $ - $ 8 $ 11

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

(In Thousands)

One- to four-family

$ 246,437  

$ 55,494  

$ 37,438  

$ 21,813  

$ 20,580  

$ 76,568  

$ 1,332  

$ 459,662  

251,478  

56,749  

37,957  

21,813  

20,580  

79,658  

469,567  

255,100  

144,731  

139,386  

44,221  

22,689  

70,905  

677,789  

255,100  

144,731  

139,386  

44,221  

22,689  

71,097  

677,981  

11,261  

11,455  

$ 196,255 $ 166,555 $ 46,378 $ 33,295 $ 19,966 $ 75,726 $ 927 $ 539,102

5,093 713 - - - 1,779 - 7,585

1,450 353 - - - 2,700 - 4,503

202,798 167,621 46,378 33,295 19,966 80,205 927 551,190

122,289 214,074 135,823 117,669 44,878 71,632 818 707,183

191 6 - - - 186 - 383

- - - - - - - -

122,480 214,080 135,823 117,669 44,878 71,818 818 707,566

1,084 255 161 98 87 342 11,111 13,138

- - - - - - - -

- 18 17 - - - 55 90

1,084 273 178 98 87 342 11,166 13,228

Construction and land

49,092  

60,267  

49,092  

62,494  

38,079 1,348 9,349 2,146 2,255 194 - 53,371

- - - - - - - -

38,079 1,348 9,349 2,146 2,255 194 - 53,371

Commercial Real Estate

87,971  

53,788  

39,015  

24,795  

21,467  

24,595  

252,316  

89,587  

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  

70,677 76,067 62,922 33,436 19,250 31,673 1,375 295,400

- - - - - - - -

5,277 129 - 86 - - - 5,492

75,954 76,196 62,922 33,522 19,250 31,673 1,375 300,892

- - - - - - 848 848

- - - - - - - -

- - - - - - 848 848

17,019 1,631 904 2,668 80 5,435 7,847 35,584

- - - - - - - -

- 48 - - 13 - 1,475 1,536

17,019 1,679 904 2,668 93 5,435 9,322 37,120

$ 457,414 $ 461,197 $ 255,554 $ 189,398 $ 86,529 $ 189,667 $ 24,456 $ 1,664,215

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

As of September 30, 2023

As of March 31, 2024

(Dollars in Thousands)

One- to four-family

$ - - $ 526 1 $ 526 1

The following presents data on troubled debt restructurings:

2 unchanged sentences

One- to four-family

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

As of September 30, 2023

$ - - $ 543 2 $ 543 2

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

As of March 31, 2024

Performing in accordance with modified terms

(Dollars in Thousands)

Interest reduction and principal forbearance

Principal forbearance

$ 526 1 $ - - $ 526 1

The following presents troubled debt restructurings by concession type:

2 unchanged sentences

(Dollars in Thousands)

Interest reduction and principal forbearance

Interest reduction

$ 15 1 $ - - $ 15 1

Principal forbearance

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

three or nine months ended September 30, 2023 .

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 balance of $ 424,000  during the 

nine  months ended September 30, 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 or nine months ended September 30, 2023  or 

September 30, 2022 .

The following table presents data on non-accrual loans as of September 30, 2023 and December 31, 2022 :

September 30, 2023

528 1 - - 528 1

$ 543 2 $ - - $ 543 2

There were no restructurings of financing receivables whose borrowers are experiencing financial difficulty during the three months ended March 31, 2024 .

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2023 .

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, 2024 or March 31, 2023 .

The following table presents data on non-accrual loans as of March 31, 2024 and December 31, 2023 :

March 31, 2024

December 31, 2023

2 unchanged sentences

One- to four-family

$ 3,958  

$ 4,209  

$ 4,544 $ 4,503

Construction and land

1 unchanged sentence

Total non-accrual loans

$ 4,083  

$ 4,307  

$ 4,872 $ 4,808

Total non-accrual loans to total loans receivable

0.25 %  

0.29 % 0.29 %

Total non-accrual loans to total assets

0.18 %  

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 651,000  and $ 795,000   at September 30, 2023  and 

December 31, 2022 , respectively.

Note 4  

Mortgage Servicing Rights

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

Nine months ended September 30,

0.22 % 0.22 %

Residential one - to four -family mortgage loans that were in the process of foreclosure were $ 235,000 and $ 250,000 at March 31, 2024 and December 31, 2023 , respectively.

Note 4 — Mortgage Servicing Rights

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

Three months ended March 31,

(In Thousands)

Mortgage servicing rights at beginning of the period

$ 3,445  

$ 1,555  

( 208 )  

( 2,767 )  

$ 1,811 $ 3,445

( 170 ) ( 71 )

Mortgage servicing rights at end of the period

1 unchanged sentence

Mortgage servicing rights at end of the period, net

$ 1,985  

$ 3,155  

During the nine months ended September 30, 2023 , $ 1.58  million in residential loans were originated for sale on a consolidated basis generating mortgage banking income of $ 59.9  million.

During the same period in the prior year, sales of loans held for sale totaled $ 2.12  billion, generating mortgage banking income of $ 83.7 million.

The unpaid principal balance of loans serviced for others was $ 220.0 million and $ 409.6  million at September 30, 2023 and December 31, 2022 , respectively.

$ 2,161 $ 909

During the three months ended March 31, 2024 , $ 477.8 million in residential loans were originated for sale on a consolidated basis generating mortgage banking income of $ 20.1 million.

During the same period in the prior year, sales of loans held for sale totaled $ 415.7 million, generating mortgage banking income of $ 16.8 million.

The unpaid principal balance of loans serviced for others was $ 257.1 million and $ 238.7 million at March 31, 2024 and December 31, 2023 , respectively.

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

The fair value of mortgage servicing rights was $ 2.5 million at September 30, 2023 and $ 5.0  million at 

December 31, 2022 , respectively.

During the 

nine months ended September 30, 2023  the Company sold mortgage servicing rights related to $ 318.4  million of loans serviced for others with a book value of $ 2.9  million for $ 3.5  million resulting in a gain on sale of $ 583,000 .

During the three months ended September 30, 2023, there were no sales of mortgage servicing rights.

During the three and nine  months ended 

September 30, 2022 , there were no sales of mortgage servicing rights.

The fair value of mortgage servicing rights was $ 2.5 million at March 31, 2024 and $ 2.2 million at December 31, 2023 , respectively.

During the three months ended March 31, 2024 , there were no sales of mortgage servicing rights.

During the three months ended March 31, 2023 , the Company sold mortgage servicing rights related to $ 318.4 million of loans serviced for others with a book value of $ 2.9 million for $ 3.5 million resulting in a gain on sale of $ 601,000 .

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

1 unchanged sentence

Estimate for the annual period ending December 31:

$ 1,985  

Note 5  

At September 30, 2023 and December 31, 2022 , the aggregate balance of uninsured time deposits of $250,000 or more was $ 122.8 million and $ 115.5 million, respectively.

Note 5 — Deposits

At March 31, 2024 and December 31, 2023 , the aggregate balance of uninsured time deposits of $250,000 or more was $ 161.5 million and $ 131.4 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, 2023 is as follows:

A summary of the contractual maturities of time deposits at March 31, 2024 is as follows:

(In Thousands)

5 unchanged sentences

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

Such deposits amounted to $ 7.9 million and $ 9.2 million at September 30, 2023 and December 31, 2022 , respectively.

Note 6  

Such deposits amounted to $ 9.9 million and $ 9.0 million at March 31, 2024 and December 31, 2023 , respectively.

Note 6 — Borrowings

Borrowings consist of the following:

September 30, 2023

March 31, 2024

Callable/Putable

1 unchanged sentence

FHLB advances

November 3, 2025

November 1, 2023

November 7, 2025

November 7, 2023

$ 50,000 December 14, 2027

December 14, 2017

July 24, 2028

November 24, 2023

July 27, 2028

November 27, 2023

10,000 August 8, 2028

December 7, 2023

August 8, 2023

December 8, 2023

Total FHLB long-term advances

10,000 October 10, 2028

2 unchanged sentences

October 10, 2023

October 12, 2023

October 16, 2023

October 18, 2023

October 27, 2023

10,000 November 6, 2028

November 6, 2023

15,000 November 14, 2028

November 14, 2023

10,000 March 5, 2029

March 5, 2024

10,000 March 5, 2029

Putable March 5, 2024 Monthly

10,000 March 26, 2029

Putable March 26, 2024 Monthly

Total FHLB long-term advances

135,000 2.80 %

10,000 April 3, 2024

23,500 December 27, 2024

18,000 April 9, 2024

20,000 January 29, 2025

13,000 April 29, 2024

20,500 April 8, 2024

20,000 May 22, 2024

30,000 June 12, 2024

33,000 April 15, 2024

22,500 April 22, 2024

23,000 April 29, 2024 5.36 % Fixed

120,000 April 1, 2024 5.43 % Fixed

Total FHLB short-term advances

353,500 5.26 %

Total FHLB advances

$ 488,500 4.58 %

Short-Term Borrowings

Federal reserve bank

July 18, 2024

Federal reserve bank

September 6, 2024

$ 145,000 January 16, 2025

Total federal reserve bank

$ 145,000 4.76 %

Repurchase agreements

$ 658 N/A 8.18 % Variable

Total short-term borrowings

$ 145,658 4.78 %

Total borrowings

$ 634,158 4.63 %

December 31, 2023

Callable/Putable

(Dollars in Millions)

(Dollars in Thousands)

FHLB advances

September 22, 2025

September 20, 2023

$ 50,000 December 14, 2027

December 14, 2019

November 3, 2025

November 1, 2023

November 7, 2025

10,000 August 7, 2028

December 7, 2023

10,000 August 8, 2028

December 8, 2023

10,000 October 10, 2028

November 10, 2023

10,000 October 10, 2028

November 10, 2023

10,000 November 3, 2028 3.46 % Fixed

Putable December 4, 2023 Quarterly

10,000 November 6, 2028 3.47 % Fixed

Putable December 6, 2023 Quarterly

15,000 November 14, 2028 3.39 % Fixed

Putable December 14, 2023 Quarterly

10,000 November 29, 2028 3.38 % Fixed

Putable December 29, 2023 Quarterly

10,000 November 29, 2028 3.43 % Fixed

Putable January 29, 2024 Quarterly

10,000 December 4, 2028

March 1, 2023

Total FHLB long-term advances

January 4, 2023

Total FHLB long-term advances

155,000 2.89 %

60,000 January 2, 2024

4 unchanged sentences

14,000 January 16, 2024

21,000 January 22, 2024 5.36 % Fixed

33,000 January 29, 2024 5.36 % Fixed

27,500 February 20, 2024 5.41 % Fixed

27,000 February 27, 2024 5.42 % Fixed

24,500 March 13, 2024 5.39 % Fixed

23,500 December 29, 2024

Total FHLB short-term advances

309,000 5.37 %

Total FHLB advances

464,000 4.54 %

Short-Term Borrowings

Federal reserve bank

$ 145,000 December 31, 2024 4.83 % Fixed

Total Federal reserve bank

$ 145,000 4.83 %

Repurchase agreements

$ 2,054 N/A 8.20 % Variable

Total short-term borrowings

$ 147,054 4.88 %

Total borrowings

The short-term repurchase agreement represents the outstanding portion of a total $ 50.0 million commitment with one unrelated bank as of September 30, 2023 . 

$ 611,054 4.62 %

The short-term repurchase agreement represents the outstanding portion of a total $ 30.0 million commitment with one unrelated bank as of March 31, 2024 .

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

This agreement is secured by the underlying loans being financed. 

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

The short-term repurchase agreement had a $ 2.9 million balance at September 30, 2023 and a $ 1.1 million balance at December 31, 2022 .

The short-term repurchase agreement had a $ 658,000 balance at March 31, 2024 and a $ 2.1 million balance at December 31, 2023 .

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 Federal Reserve Bank (“FRB”) created a new borrowing facility called the Bank Term Funding Program. 

This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. 

The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty. 

Allowable investments for pledge are those the FRB can own. 

This would include all of the Company’s investment securities except municipal securities, private label bonds, and corporate bonds. 

At September 30, 2023 , the Company had $ 62.7 million in unused borrowing capacity under this program. 

The program expires on March 11, 2024.

At September 30, 2023 , the Company had approximately $ 291.0 million in unused borrowing capacity at the FHLB.

The Federal Reserve Bank (“FRB”) created a new borrowing facility called the Bank Term Funding Program.

This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses.

The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty.

Allowable investments for pledge are those the FRB can own.

This would include all of the Company’s investment securities except municipal securities, private label bonds, and corporate bonds.

At March 31, 2024 , the Company had fully utilized its borrowing capacity under this program.

The program does not allow for additional funding capacity after March 11, 2024.

At March 31, 2024 , the Company had approximately $ 293.0 million in unused borrowing capacity at the FHLB.

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 62 % of the carrying value of home equity loans.

In addition, these advances were collateralized by FHLB stock of $ 23.4  million at September 30, 2023 and $ 17.4  million at 

December 31, 2022 , respectively.

The Company’s borrowings from the FHLB are limited to 76 % of the carrying value of unencumbered one - to four -family mortgage loans, 73 % of the carrying value of multi-family loans and 62 % of the carrying value of home equity loans.

In addition, these advances were collateralized by FHLB stock of $ 22.0 million at March 31, 2024 and $ 20.9 million at December 31, 2023 , respectively.

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

Note 7  

Regulatory Capital

Note 7 – Regulatory Capital

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices.

The Company's and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

A “qualifying community bank”

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

under Prompt Corrective Action statutes. 

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

The Company's and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

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

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

The Community Bank Leverage Ratio is currently 

The Community Bank Leverage Ratio is currently 9%.

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

7 unchanged sentences

The minimum capital conservation buffer is 2.5%.

As of September 30, 2023 , the Bank was considered well-capitalized, with all capital ratios exceeding the well-capitalized requirement.

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

As of March 31, 2024 , the Bank was considered 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, 2023 and December 31, 2022 are presented in the tables below:

September 30, 2023

The actual and required capital amounts and ratios for the Bank as of March 31, 2024 and December 31, 2023 are presented in the tables below:

March 31, 2024

For Capital Adequacy Purposes

4 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 375,349 21.15 % $ 141,960 8.00 % $ 186,320 10.50 % N/A N/A

Waterstone Bank

358,238 20.19 % 141,960 8.00 % 186,320 10.50 % 177,449 10.00 %

Tier I Capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

355,662 20.04 % 106,470 6.00 % 150,830 8.50 % N/A N/A

Waterstone Bank

338,551 19.08 % 106,470 6.00 % 150,830 8.50 % 141,959 8.00 %

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

Consolidated Waterstone Financial, Inc.

355,662 20.04 % 79,850 4.50 % 124,210 7.00 % N/A N/A

Waterstone Bank

338,551 19.08 % 79,850 4.50 % 124,210 7.00 % 115,342 6.50 %

Tier I Capital (to average assets)

Consolidated Waterstone Financial, Inc.

355,662 16.24 % 87,620 4.00 % N/A N/A N/A N/A

Waterstone Bank

338,551 15.46 % 87,620 4.00 % N/A N/A 109,526 5.00 %

State of Wisconsin (to total assets)

Waterstone Bank

338,551 15.17 % 133,920 6.00 % N/A N/A N/A N/A

December 31, 2023

5 unchanged sentences

Consolidated Waterstone Financial, Inc.

$ 380,351 21.50 % $ 141,538 8.00 % $ 185,769 10.50 % N/A N/A

Waterstone Bank

355,476 20.10 % 141,515 8.00 % 185,738 10.50 % 176,893 10.00 %

Tier I capital (to risk-weighted assets)

Consolidated Waterstone Financial, Inc.

360,734 20.39 % 106,154 6.00 % 150,385 8.50 % N/A N/A

Waterstone Bank

335,859 18.99 % 106,117 6.00 % 150,332 8.50 % 141,489 8.00 %

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

Consolidated Waterstone Financial, Inc.

360,734 20.39 % 79,615 4.50 % 123,846 7.00 % N/A N/A

Waterstone Bank

335,859 18.99 % 79,587 4.50 % 123,803 7.00 % 114,960 6.50 %

Tier I Capital (to average assets)

Consolidated Waterstone Financial, Inc.

360,734 16.77 % 86,043 4.00 % N/A N/A N/A N/A

Waterstone Bank

335,859 15.62 % 86,007 4.00 % N/A N/A 107,509 5.00 %

State of Wisconsin (to total assets)

Waterstone Bank

Note 8 –

Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

335,859 15.20 % 132,576 6.00 % N/A N/A N/A N/A

Note 8 – Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.

2 unchanged sentences

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

September 30, 2023

March 31, 2024

December 31, 2023

2 unchanged sentences

Commitments to extend credit under amortizing loans (1)

$ 31,047  

$ 61,223  

$ 15,079 $ 9,789

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

11,219  

12,230 11,722

Unused portion of construction loans (3)

91,291  

48,530  

78,466 76,660

Unused portion of business lines of credit

11,343  

17,356  

17,572 15,378

Standby letters of credit

11 unchanged sentences

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

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

September 30, 2023  and 

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

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of March 31, 2024 and December 31, 2023 .

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

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

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

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

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

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

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

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

historical experience has resulted in insignificant losses and repurchase activity.

The Company's reserve for losses related to these recourse provisions totaled $ 2.0  million as of September 30, 2023 and December 31, 2022 .

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

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

The Company's reserve for losses related to these recourse provisions totaled $ 1.9 million as of March 31, 2024 and $ 1.7 million as of December 31, 2023 .

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

In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements.

Note 9 –

Derivative Financial Instruments

Note 9 – Derivative Financial Instruments

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.   Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans.  It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale.  The Company’s mortgage banking derivatives have not been designated as being a hedge relationship.  These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC Topic 815.

  Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.  The Company does not use derivatives for speculative purposes.

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

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

It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale.

The Company’s mortgage banking derivatives have not been designated as being a hedge relationship.

These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC Topic 815.

Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

The Company does not use derivatives for speculative purposes.

Derivative Loan Commitments

6 unchanged sentences

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery”

and “best efforts”

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

With a “mandatory delivery”

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

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

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

With a “best efforts”

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

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

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

If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

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

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

3 unchanged sentences

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

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

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.

1 unchanged sentence

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

September 30, 2023

March 31, 2024

Derivatives not designated as Hedging Instruments

4 unchanged sentences

Forward commitments

$ 316.5  

$ 327.5 Other assets

$ - Other liabilities

Interest rate locks

233.9 Other assets

1.9 Other liabilities

Interest rate swaps

87.6 Other assets

13.3 Other liabilities

6 unchanged sentences

Forward commitments

$ 296.0  

$ 268.8 Other assets

$ - Other liabilities

Interest rate locks

170.9 Other assets

0.3 Other liabilities

Interest rate swaps

88.2 Other assets

12.0 Other liabilities

9 unchanged sentences

Interest Rate Swaps

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

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

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

As of September 30, 2023  and December 31, 2022 , 

no  back-to-back swaps were in default. 

As of March 31, 2024 and December 31, 2023 , no back-to-back swaps were in default.

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

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, 2023 and December 31, 2022 . 

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

No right of offset existed with dealer counterparty swaps as of March 31, 2024 and December 31, 2023 .

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

The Company pledged no cash at September 30, 2023 and at December 31, 2022 .

Note 10 –

Earnings Per Share

The Company pledged no cash at March 31, 2024 and at December 31, 2023 .

Note 10 – Earnings Per Share

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

1 unchanged sentence

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

There were 

199,000 and 

158,000 antidilutive shares of common stock for the three months ended September 30, 2023 and 2022 , respectively.

There were 

162,000  and 

127,000  antidilutive shares of common stock for the 

nine  months ended 

September 30, 2023 and 2022 , respectively. 

There were 508,000 and 161,000 antidilutive shares of common stock for the three months ended March 31, 2024 and 2023 , 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)

$ 3,038 $ 2,155

Weighted average shares outstanding

19,021 20,890

Effect of dilutive potential common shares

Diluted weighted average shares outstanding

$ 19,036 $ 20,980

Basic earnings per share

$ 0.16 $ 0.10

Diluted earnings per share

Note 11 –

Fair Value Measurements

$ 0.16 $ 0.10

Note 11 – Fair Value Measurements

ASC Topic 820, "Fair Value Measurements and Disclosures" defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

8 unchanged sentences

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

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

The following table presents information about our assets recorded in the consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2023 and December 31, 2022 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

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

The following table presents information about our assets recorded in the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2024 and December 31, 2023 , and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2023

March 31, 2024

(In Thousands)

1 unchanged sentence

Mortgage-backed securities

$ 10,913  

$ 10,626 $ - $ 10,626 $ -

Collateralized mortgage obligations

Government sponsored enterprise issued

127,351  

130,306 - 130,306 -

Private-label issued

7,070 - 7,070 -

Government sponsored enterprise bonds

2,353 - 2,353 -

Municipal securities

35,413  

43,155 - 43,155 -

Other debt securities

11,132  

Other securities

11,191 - 11,191 -

Loans held for sale

157,421  

175,084 - 175,084 -

Mortgage banking derivative assets

1,923 - - 1,923

Interest rate swap assets

16,000  

13,302 - 13,302 -

Mortgage banking derivative liabilities

Interest rate swap liabilities

16,000  

13,302 - 13,302 -

Fair Value Measurements Using

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Mortgage-backed securities

$ 13,314  

$ 11,181 $ - $ 11,181 $ -

Collateralized mortgage obligations

Government sponsored enterprise issued

124,765  

133,467 - 133,467 -

Private-label issued

7,260 - 7,260 -

Government sponsored enterprise bonds

2,348 - 2,348 -

Municipal securities

36,934  

39,488 - 39,488 -

Other debt securities

11,162  

Other securities

11,163 - 11,163 -

Loans held for sale

131,188  

164,993 - 164,993 -

Mortgage banking derivative assets

Interest rate swap assets

14,226  

12,044 - 12,044 -

Mortgage banking derivative liabilities

Interest rate swap liabilities

14,226  

12,044 - 12,044 -

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 –

The Company’s investment securities classified as available for sale include:

Available-for-sale securities – The Company’s investment securities classified as available for sale include:

mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities.

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

Loans held for sale –

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

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

Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments.

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

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

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

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

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

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

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

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

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

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

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

2023 and 2022 .

Three months ended September 30,

Nine months ended September 30,

(In Thousands)

The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) during 2024 and 2023 .

Three months ended March 31,

(In Thousands)

Mortgage derivative, net balance at the beginning of the period

$ 2,504  

$ ( 143 )  

$ ( 994 )  

$ 4,369  

Mortgage derivative gain (loss), net

$ ( 30 ) $ ( 994 )

Mortgage derivative gain, net

Mortgage derivative, net balance at the end of the period

$ 2,876  

$ 2,919  

$ 2,876  

$ 2,919  

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 assets recorded in the consolidated statements of financial condition at their fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022 , 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, 2024 and December 31, 2023 , and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2023

March 31, 2024

(In Thousands)

Real estate owned

$ 206 $ - $ - $ 206

Fair Value Measurements Using

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Real estate owned

Real estate owned –

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.

$ 254 $ - $ - $ 254

Impaired mortgage servicing rights

1,063 - - 1,063

Real estate owned – 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.

Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal.

Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. 

Mortgage servicing rights –

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

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

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

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

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

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

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

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2023  and 

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

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

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

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

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2024 and December 31, 2023 , the significant unobservable inputs used in the fair value measurements were as follows:

Significant Unobservable Input Value

Fair Value at  

September 30,

(Dollars in Thousands)  

Fair Value at Significant

(Dollars in Thousands)

Mortgage banking derivatives

$ 2,876  

$ 1,923 Pricing models

Pull through rate

30.8 %  

100.0 %  

0.5 % 99.8 % 85.3 %

Real estate owned

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Discount rates applied to appraisals

34.8 %  

81.8 %  

December 31,  

23.3 % 34.8 % 31.4 %

Mortgage banking derivatives

1 unchanged sentence

Pull through rate

20.6 %  

100.0 %  

20.5 % 99.9 % 69.8 %

Real estate owned

1 unchanged sentence

Discount rates applied to appraisals

34.8 %  

23.3 % 73.1 % 39.3 %

Mortgage servicing rights

1,063 Pricing models

Prepayment rate

6.7 % 23.9 % 14.6 %

Discount rate

10.0 % 15.5 % 11.2 %

Cost to service

$ 77 $ 471 $ 107

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.

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

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

September 30, 2023

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

March 31, 2024

December 31, 2023

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Cash and cash equivalents

$ 62,293  

$ 46,642  

$ 45,714 $ 45,714 $ 45,714 $ - $ - $ 36,421 $ 36,421 $ 36,421 $ - $ -

Loans receivable

1,651,093  

1,499,165  

1,510,178  

1,403,429  

23,414  

17,357  

1,664,817 1,563,649 - - 1,563,649 1,664,215 1,558,472 - - 1,558,472

21,983 21,983 21,983 - - 20,880 20,880 20,880 - -

Accrued interest receivable

7,571 7,571 7,571 - - 7,421 7,421 7,421 - -

Mortgage servicing rights

2,161 2,481 - - 2,481 1,811 2,207 - - 2,207

Financial Liabilities

1,205,162  

1,203,809  

471,912  

731,897  

1,199,012  

1,194,559  

556,741  

637,818  

1,199,894 1,198,955 452,606 746,349 - 1,190,624 1,189,274 460,340 728,934 -

Advance payments by borrowers for taxes

28,238  

587,917  

577,275  

386,784  

377,275  

14,051 14,051 14,051 - - 6,607 6,607 6,607 - -

634,158 623,686 - 623,686 - 611,054 602,948 - 602,948 -

Accrued interest payable

4,078 4,078 4,078 - - 2,613 2,613 2,613 - -

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

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Furthermore, interest rates on any amounts drawn under such commitments would be generally established at market rates at the time of the draw.

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

The fair value of the Company’s commitments to extend credit was not material at September 30, 2023 and December 31, 2022 .

Note 12 –

Segment Reporting

The fair value of the Company’s commitments to extend credit was not material at March 31, 2024 and December 31, 2023 .

Note 12 – Segment Reporting

Selected financial and descriptive information is required to be provided about reportable operating segments, considering a "management approach" concept as the basis for identifying reportable segments.

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Community Banking

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

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

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

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

( 1 ) lending solutions such as residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit;

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The mortgage banking segment provides residential mortgage loans for the primary purpose of sale on the secondary market.

Mortgage banking products and services are provided by offices in 26  states with the ability to lend in 48 states.

Mortgage banking products and services are provided by offices in 26 states with the ability to lend in 48 states.

Presented below is the segment information:

As of or for the three months ended September 30, 2023

(In Thousands)

Net interest income (expense)

Provision for credit losses

Net interest income (expense) after provision for credit losses

Noninterest income:

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

Occupancy, office furniture and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

Total noninterest expenses

Income (loss) before income tax expense (benefit)

Income tax expense (benefit)

Net income (loss)

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

As of or for the three months ended March 31, 2024

(In Thousands)

Net interest income (expense)

Provision for credit losses

Net interest income (expense) after provision for credit losses

$ 11,598 $ ( 541 ) $ 80 $ 11,137

Provision (credit) for credit losses

105 ( 38 ) - 67

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

11,493 ( 503 ) 80 11,070

Noninterest income:

990 20,328 ( 70 ) 21,248

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

5,360 14,756 ( 240 ) 19,876

Occupancy, office furniture and equipment

1,000 1,108 - 2,108

174 740 - 914

Data processing

693 508 5 1,206

Communications

Professional fees

208 520 15 743

Real estate owned

Loan processing expense

- 1,046 - 1,046

691 617 110 1,418

Total noninterest expenses

Income (loss) before income tax expense (benefit)

Income tax expense (benefit)

Net income (loss)

As of or for the nine months ended September 30, 2023

8,204 19,456 ( 110 ) 27,550

Income before income tax expense

4,279 369 120 4,768

Income tax expense

1,639 71 20 1,730

$ 2,640 $ 298 $ 100 $ 3,038

$ 2,197,708 $ 210,784 $ ( 173,768 ) $ 2,234,724

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

(In Thousands)

Net interest income (expense)

$ 14,008 $ ( 282 ) $ 69 $ 13,795

Provision for credit losses

Net interest income (expense) after provision for credit losses

Noninterest income:

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

Occupancy, office furniture and equipment

Data processing

Communications

Professional fees

Real estate owned

Loan processing expense

Total noninterest expenses

Income (loss) before income tax expense (benefit)

Income tax expense (benefit)

Net income (loss)

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

(In Thousands)

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

13,620 ( 354 ) 69 13,335

Noninterest income:

987 17,951 ( 384 ) 18,554

Noninterest expenses:

Compensation, payroll taxes, and other employee benefits

5,168 15,099 ( 215 ) 20,052

Occupancy, office furniture and equipment

1,031 1,232 - 2,263

184 705 - 889

Data processing

601 516 5 1,122

Communications

Professional fees

218 188 10 416

Real estate owned

Loan processing expense

- 1,018 - 1,018

896 2,403 ( 204 ) 3,095

Total noninterest expenses

8,177 21,334 ( 404 ) 29,107

Income (loss) before income tax expense (benefit)

6,430 ( 3,737 ) 89 2,782

Income tax expense (benefit)

1,600 ( 1,002 ) 29 627

Net income (loss)

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

$ 4,830 $ ( 2,735 ) $ 60 $ 2,155

$ 2,080,904 $ 207,572 $ ( 173,977 ) $ 2,114,499

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as “estimate,”

“project,”

“believe,”

“intend,”

“anticipate,”

“plan,”

“seek,”

“expect”

and similar expressions and verbs in the future tense.

This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions and verbs in the future tense.

These forward-looking statements include, but are not limited to:

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changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

See also the factors referred to in reports filed by the Company with the Securities and Exchange Commission (particularly those under the caption “Risk Factors”

in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

as supplemented by the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023).

changes in our liquidity needs and access to wholesale funding;

our ability to access low-cost funding.

See also the factors referred to in reports filed by the Company with the Securities and Exchange Commission (particularly those under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and as may be described from time to time in the Corporation’s subsequent SEC filings).

The risks included here are not exhaustive.

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

The following discussion and analysis is presented to assist the reader in understanding and evaluating the Company’s financial condition and results of operations.

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

The detailed discussion in the sections below focuses on the results of operations for the three and nine months ended September 30, 2023 and 2022 and the financial condition as of September 30, 2023 compared to the financial condition as of December 31, 2022.

The following discussion and analysis is presented to assist the reader in understanding and evaluating the Company’s financial condition and results of operations.

The detailed discussion in the sections below focuses on the results of operations for the three months ended March 31, 2024 and 2023 and the financial condition as of March 31, 2024 compared to the financial condition as of December 31, 2023.

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

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Consumer products include loan products, deposit products, and personal investment services.

Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts. 

The mortgage banking segment, which is conducted by offices in 26 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.

Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts.

The mortgage banking segment, which is conducted by offices in 26 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.

Our community banking segment generates the significant majority of our consolidated net interest income and requires the significant majority of our provision for loan losses.

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

We have provided below a discussion of the material results of operations for each segment on a separate basis for the three and nine months ended September 30, 2023 and 2022, 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, 2024 and 2023, 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 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 increased by 0.5% as compared to December 31, 2022, to $1.21 billion at September 30, 2023. Deposits increased $18.2 million, or 1.5%, during the three months ended September 30, 2023. 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 remains well capitalized for regulatory purposes with a Total Capital ratio of 21.72% as of September 30, 2023.

On July 1, 2023, Wisconsin’s Governor signed the State Budget, retroactive to January 1, 2023, which included language that provides financial institutions with an exemption from state taxable income for interest, fees, and penalties earned on business or agriculture purpose loans where the borrower resides, or is located, in the state of Wisconsin and that are $5 million or less.

The Company is not able to calculate a reasonable estimate of the impact of this law until further information regarding the criteria is published from the Wisconsin Department of Revenue.

If we are allowed to exclude current taxable income, we would expect to decrease our 2023 effective income tax rate and potentially reduce our deferred tax asset with a one-time charge to income tax expense to reflect the reduction in state income taxes. 

The Company will calculate an estimate once more details are provided. 

Significant Items

There were no significant items that impacted earnings for the three and nine months ended September 30, 2023 and 2022. 

Comparison of Community Banking Segment Results of Operations for the Three Months Ended September 30, 2023 and 2022

Net income totaled $4.5 million for the three months ended September 30, 2023 compared to $6.6 million for the three months ended September 30, 2022.

Net interest income decreased $3.1 million to $12.4 million for the three months ended September 30, 2023 compared to $15.5 million for the three months ended September 30, 2022. 

Interest expense on deposits and borrowings increased $11.7 million as replacement rates increased in the rising interest rate environment. Offsetting the increase in interest expense on deposit and borrowings, interest income on loans increased $8.0 million as replacement rates and average loans held for investment balances were higher than in the prior year and interest income on debt securities, federal funds sold and short-term investments increased due to the increase in the average balance and replacement rates.

There was a provision for credit losses of $445,000 for the three months ended September 30, 2023 compared to a provision for credit losses of $234,000 for the three months ended September 30, 2022.

The provision for credit losses of $445,000 consisted of a $206,000 provision related to loans and $239,000 provision related to unfunded commitments for the three months ended September 30, 2023.

During the three months ended September 30, 2023, the increase related to loans was primarily due to an increase in originations and loan balance and the increase in provision related to unfunded commitments was primarily due to an increase in the loan pipeline. 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.  

Compensation, payroll taxes, and other employee benefits expense increased $194,000 to $4.6 million compared to the quarter ending September 30, 2022 primarily due to an increase in salaries due to annual raises that took place at the beginning of the year.

Other noninterest expense decreased $774,000 to $703,000 as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans decreased.

There were no significant items that impacted earnings for the three months ended March 31, 2024 and 2023.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended March 31, 2024 and 2023

Net income totaled $2.6 million for the three months ended March 31, 2024 compared to $4.8 million for the three months ended March 31, 2023.

Net interest income decreased $2.4 million to $11.6 million for the three months ended March 31, 2024 compared to $14.0 million for the three months ended March 31, 2023.

Interest expense on deposits and borrowings increased $7.6 million as replacement rates increased in the rising interest rate environment.

Offsetting the increase in interest expense on deposit and borrowings, interest income on loans increased $4.8 million as replacement rates and average loans held for investment balances were higher than in the prior year and interest income on debt securities, federal funds sold and short-term investments increased due to the increase in the average balance and replacement rates.

There was a provision for credit losses of $105,000 for the three months ended March 31, 2024 compared to a provision for credit losses of $388,000 for the three months ended March 31, 2023.

The provision for credit losses of $105,000 consisted of a $35,000 provision related to loans and $70,000 provision related to unfunded commitments for the three months ended March 31, 2024.

During the three months ended March 31, 2024, the increase related to loans was primarily due to adjustments in the qualitative factors related to increases in treasury interest rates during the quarter offset by a decreases to historical loss rates and the increase in provision related to unfunded commitments was primarily due to an increase in the construction loans that are currently waiting to be funded compared to the prior quarter end.

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.

Compensation, payroll taxes, and other employee benefits expense increased $192,000 to $5.4 million compared to the quarter ending March 31, 2023 primarily due to an increase in salaries due to annual raises that took place at the beginning of the year and increase in health insurance expense as claims increased.

Other noninterest expense decreased $205,000 to $691,000 as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans decreased.

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, 2023 and 2022

Net loss totaled $1.4 million for the three months ended September 30, 2023 compared to net loss of $1.3 million for the three months ended September 30, 2022.

We originated $597.6 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended September 30, 2023, which represents a decrease of $132.3 million, or 18.1%, from the $729.9 million originated during the three months ended September 30, 2022.

The decrease in loan production volume was driven by a $117.5 million, or 19.0%, decrease in purchase products and a $14.8 million decrease in refinance products as mortgage rates have increased over the past year along with inventory constraints in the market and housing affordability.

Total mortgage banking noninterest income decreased $5.9 million, or 21.4%, to $21.5 million during the three months ended September 30, 2023 compared to $27.3 million during the three months ended September 30, 2022. 

The decrease in mortgage banking noninterest income was related to a 18.1% decrease in volume and a 2.3% decrease in gross margin on loans originated and sold for the three months ended September 30, 2023 compared to September 30, 2022. 

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2024 and 2023

Net income totaled $298,000 for the three months ended March 31, 2024 compared to net loss of $2.7 million for the three months ended March 31, 2023.

We originated $485.1 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended March 31, 2024, which represents an increase of $42.4 million, or 9.6%, from the $442.7 million originated during the three months ended March 31, 2023.

The increase in loan production volume was driven by a $23.9 million, or 5.6%, increase in purchase products and a $18.5 million increase in refinance products as mortgage rates decreased to start the year and average inventory levels have increased.

Total mortgage banking noninterest income increased $2.4 million, or 13.2%, to $20.3 million during the three months ended March 31, 2024 compared to $18.0 million during the three months ended March 31, 2023.

The increase in mortgage banking noninterest income was related to a 9.6% increase in volume and a 8.5% increase in gross margin on loans originated and sold for the three months ended March 31, 2024 compared to March 31, 2023.

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). 

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 95.4% of total originations during the three months ended September 30, 2023, compared to 94.2% of total originations during the three months ended September 30, 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 39.2% and 60.8% of all loan originations, respectively, during the three months ended September 30, 2023, compared to 33.3% and 66.7% of all loan originations, respectively, during the three months ended September 30, 2022.

Total compensation, payroll taxes and other employee benefits decreased $4.7 million, or 21.4%, to $17.2 million for the three months ended September 30, 2023 compared to $21.9 million for the three months ended September 30, 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.

Department of Agriculture loan.

Loans originated for the purchase of a residential property comprised 93.0% of total originations during the three months ended March 31, 2024, compared to 96.5% of total originations during the three months ended March 31, 2023, respectively.

The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 39.1% and 60.9% of all loan originations, respectively, during the three months ended March 31, 2024, compared to 35.2% and 64.8% of all loan originations, respectively, during the three months ended March 31, 2023.

Total compensation, payroll taxes and other employee benefits decreased $343,000, or 2.3%, to $14.8 million for the three months ended March 31, 2024 compared to $15.1 million for the three months ended March 31, 2023.

The decrease in compensation expense was primarily related to decreased salaries driven by a reduction in headcount and health insurance expense offset by branch manager pay as branch profitability increased.

Consolidated Waterstone Financial, Inc.

Results of Operations

Three months ended September 30,

Three months ended March 31,

(Dollars In Thousands, except per share amounts)

5 unchanged sentences

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.

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.

1 unchanged sentence

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

Three months ended September 30,

Three months ended March 31,

Average Balance

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Average interest-earning assets to average interest-bearing liabilities

Interest income includes net deferred loan fee amortization income of $179,000 and $113,000 for the three months ended September 30, 2023 and 2022, respectively.

Interest income includes net deferred loan fee amortization income of $152,000 and $151,000 for the three months ended March 31, 2024 and 2023, 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, 2023 and 2022.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 4.45% and 2.41% for the three months ended September 30, 2023 and 2022, 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, 2024 and 2023.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 4.82% and 3.71% for the three months ended March 31, 2024 and 2023, 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.

2 unchanged sentences

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 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).

1 unchanged sentence

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,

Three months ended March 31,

2024 versus 2023

14 unchanged sentences

______________

Interest income includes net deferred loan fee amortization income of $179,000 and $113,000 for the three months ended September 30, 2023 and 2022, respectively.

Interest income includes net deferred loan fee amortization income of $152,000 and $151,000 for the three months ended March 31, 2024 and 2023, respectively.

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

1 unchanged sentence

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

Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the three months ended September 30, 2023 and September 30, 2022.

Net interest income decreased $3.4 million, or 22.1%, to $12.0 million during the three months ended September 30, 2023 compared to $15.4 million during the three months ended September 30, 2022 primarily due to the increased cost of funds as a result of the rising interest rate environment.

Interest income on loans increased $7.6 million, or 46.8%, to $23.8 million due primarily to a 94 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 $316.3 million, or 24.1%, in the average balance of loans held for investment offset by a decrease of $11.5 million, or 6.3%, in average loans held for sale.

Interest expense on time deposits increased $5.5 million, or 722.5%, to $6.2 million primarily due to a 292 basis point increase in average cost of time deposits.

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, 2024 and March 31, 2023.

Net interest income decreased $2.7 million, or 19.3%, to $11.1 million during the three months ended March 31, 2024 compared to $13.8 million during the three months ended March 31, 2023 primarily due to the increased cost of funds as a result of the rising interest rate environment.

Interest income on loans increased $4.6 million, or 23.1%, to $24.5 million due primarily to a 59 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 $133.0 million, or 8.7%, in the average balance of loans held for investment and an increase of $17.1 million, or 13.9%, in average loans held for sale.

Interest expense on time deposits increased $4.6 million, or 150.8%, to $7.7 million primarily due to a 227 basis point increase in average cost of time deposits.

Additionally, the average balance of time deposits increased $91.0 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts increased $982,000, or 472.1%, to $1.2 million due primarily to a 133 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 $91.8 million. 

Interest expense on borrowings increased $5.2 million, or 297.8%, to $6.9 million due to a 237 basis point increase in the cost of borrowings during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 as the federal funds rate increased over the past year.

Additionally, the average balance increased $288.7 million to $584.8 million during the three months ended September 30, 2023, compared to $296.1 million during the three months ended September 30, 2022.

Interest expense on money market, savings, and escrow accounts increased $244,000, or 24.3%, to $1.2 million due primarily to a 53 basis point increase in average cost of money market, savings, and escrow accounts as rates increased to stay competitive in the market.

Partially offsetting the increase in average cost, the average balance decreased $41.0 million.

Interest expense on borrowings increased $2.8 million, or 69.7%, to $6.8 million due to a 86 basis point increase in the cost of borrowings during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 as we transitioned to more short-term fundings.

Additionally, the average balance increased $161.0 million to $602.7 million during the three months ended March 31, 2024, compared to $441.7 million during the three months ended March 31, 2023.

Provision for Credit Losses

There was a provision for credit losses of $445,000 for the three months ended September 30, 2023 compared to a $332,000 provision for credit losses for the three months ended September 30, 2022.

The $445,000 provision for credit losses consisted of a $206,000 provision related to loans and a provision related to unfunded commitments of $239,000 for the three months ended September 30, 2023.

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. 

There was a provision for credit losses of $67,000 for the three months ended March 31, 2024 compared to a $460,000 provision for credit losses for the three months ended March 31, 2023.

The $67,000 provision for credit losses consisted of a $3,000 negative provision related to loans and a provision related to unfunded commitments of $70,000 for the three months ended March 31, 2024.

During the three months ended March 31, 2024, the decrease related to loans was primarily due to a decrease in originations and historical losses used in the calculation and the increase in provision related to unfunded commitments was primarily due to an increase in the construction loans yet to be funded.

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.

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,

Three months ended March 31,

(Dollars In Thousands)

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Total noninterest income

Total noninterest income decreased $5.2 million, or 18.9%, to $22.2 million during the three months ended September 30, 2023 compared to $27.4 million during the three months ended September 30, 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 $73.1 million, or 73.1%, to $598.1 million during the three months ended September 30, 2023 compared to $671.2 million during the three months ended September 30, 2022. Gross margin on loans originated and sold decreased 2.3% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended September 30, 2023 and 2022" above for additional discussion of the decrease in mortgage banking income.

The decrease in other noninterest income was due primarily to a decrease in mortgage servicing fee income.

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

As of September 30, 2023 and September 30, 2022, the Company maintained servicing rights related to $220.0 million and $378.7 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 $5.7 million, or 15.9%, to $30.0 million during the three months ended September 30, 2023 compared to $35.7 million during the three months ended September 30, 2022.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $4.7 million, or 21.4%, to $17.2 million during the three months ended September 30, 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 increased $194,000, or 4.4%, to $4.6 million during the three months ended September 30, 2023.

The increase was due primarily to an increase in salaries from annual raises that took place at the beginning of the year.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $200,000 to $1.1 million during the three months ended September 30, 2023, primarily resulting from decreased computer equipment and rent expenses.

Occupancy, office furniture and equipment expense at the community banking segment decreased $103,000 to $852,000 during the three months ended September 30, 2023.

The decrease was due primarily to decreased computer expenses and maintenance costs. 

Advertising expense decreased $221,000, or 19.4%, to $916,000 during the three months ended September 30, 2023.

The decrease was primarily due to advertising expenses at the mortgage banking segment due to the decreased activity in the mortgage industry. 

Data processing expense increased $145,000, or 13.4%, to $1.2 million during the three months ended September 30, 2023. The increases at the mortgage banking and the community banking segments were due to additional investments in technology.  

Professional fees increased $352,000 to $745,000 during the three months ended September 30, 2023.

The increase related to an increase in legal fees at the mortgage banking segment.  In July 2022, a complaint was filed by Mutual of Omaha Mortgage, Inc.

asserting claims against Waterstone Mortgage Corporation relating to certain employees hired by Waterstone Mortgage Corporation who previously worked for Mutual. 

The Company intends to continue to vigorously defend its interests in this matter and pursue all possible defenses against the claims. 

Given the current stage of the litigation, the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter, nor is it able to estimate the range of any possible loss.

Loan processing expense decreased $398,000 to $722,000 during the three months ended September 30, 2023. 

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

Other noninterest expense decreased $603,000, or 18.9%, to $2.6 million during the three months ended September 30, 2023. 

The decrease at the mortgage banking segment primarily related to decreases in mortgage servicing rights amortization, travel, and meeting expenses. 

Income tax expense totaled $500,000 for the three months ended September 30, 2023 compared to $1.5 million during the three months ended September 30, 2022.

Income tax expense was recognized on the statement of income during the three months ended September 30, 2023 at an effective rate of 13.3% of pretax income and during the three months ended September 30, 2022 at an effective rate of 22.2% of pretax income.

The decrease in the effective rate was primarily due to the permanent deductions being a greater percentage of pretax income as pretax income continues to decrease compared to prior year. 

Comparison of Community Banking Segment Results of Operations for the Nine Months Ended September 30, 2023 and 2022

Net income totaled $14.6 million for the nine months ended September 30, 2023 compared to $17.1 million for the nine months ended September 30, 2022.

Net interest income decreased $1.2 million to $39.7 million for the nine months ended September 30, 2023 compared to $40.9 million for the nine months ended September 30, 2022. 

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 and debt securities, federal funds sold and short-term investments increased due to the increase in the average balance and replacement rates. Offsetting the increases in interest income, interest expense on deposits and borrowings increased as replacement rates and average balances increased.

There was a provision for credit losses of $991,000 for the nine months ended September 30, 2023 compared to a $53,000 provision for credit losses for the nine months ended September 30, 2022.

The provision for credit losses of $991,000 consisted of a $729,000 provision related to loans and a $262,000 of provision related to unfunded commitments for the nine months ended September 30, 2023.

The provision for credit losses related to loans increased primarily due to loan growth in the portfolio and the pipeline. 

During the nine months ended September 30, 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 $695,000 to $3.5 million during the nine months ended September 30, 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 nine months ended September 30, 2022.

Compensation, payroll taxes, and other employee benefits expense increased $237,000 to $14.5 million primarily due to an increase in salaries due to annual raises that took place at the beginning of the year.

Other noninterest expense increased $157,000 to $3.2 million as the FDIC insurance premiums increased starting in 2023.

Comparison of Mortgage Banking Segment Results of Operations for the Nine Months Ended September 30, 2023 and 2022

Net loss totaled $5.4 million for the nine months ended September 30, 2023 compared to net income of $1.5 million for the nine months ended September 30, 2022.

We originated $1.66 billion in mortgage loans held for sale (including sales to the community banking segment) during the nine months ended September 30, 2023, which represents a decrease of $553.5 million, or 25.0%, from the $2.22 billion originated during the nine months ended September 30, 2022.

The decrease in loan production volume was driven by a $212.5 million, or 76.5%, decrease in refinance products as mortgage rates have increased over the past year.

Mortgage purchase products decreased $341.0 million, or 17.6%, due to inventory constraints in the market, affordability, and interest rate increases.

Total mortgage banking noninterest income decreased $23.6 million, or 27.4%, to $62.4 million during the nine months ended September 30, 2023 compared to $86.0 million during the nine months ended September 30, 2022. 

The decrease in mortgage banking noninterest income was related to a 27.4% decrease in volume and a 3.7% decrease in gross margin on loans originated and sold for the nine months ended September 30, 2023 compared to September 30, 2022. 

Total noninterest income increased $2.7 million, or 14.5%, to $21.2 million during the three months ended March 31, 2024 compared to $18.6 million during the three months ended March 31, 2023.

The increase resulted primarily from increase in mortgage banking noninterest income offset by a decrease in other income.

The increase in mortgage banking income was primarily the result of a increase 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.

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). 

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 96.1% of total originations during the nine months ended September 30, 2023, compared to 87.5% of total originations during the nine months ended September 30, 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 37.9% and 62.1% of all loan originations, respectively, during the nine months ended September 30, 2023, compared to 27.8% and 72.2% of all loan originations, respectively, during the nine months ended September 30, 2022.

Total compensation, payroll taxes and other employee benefits decreased $13.4 million, or 21.1%, to $50.2 million for the nine months ended September 30, 2023 compared to $63.6 million for the nine months ended September 30, 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,

(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.

Nine 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 $474,000 and $495,000 for the nine months ended September 30, 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, 2023 and 2022.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 3.97% and 1.26% for the nine months ended September 30, 2023 and 2022, respectively.

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.

Nine months ended September 30,

2023 versus 2022

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 $474,000 and $495,000 for the nine months ended September 30, 2023 and 2022, 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 nine months ended September 30, 2023 and September 30, 2022.

Net interest income decreased $2.9 million, or 7.0%, to $38.5 million during the nine months ended September 30, 2023 compared to $41.3 million during the nine months ended September 30, 2022.

Interest income on loans increased $21.6 million, or 48.7%, to $65.9 million due primarily to a 93 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 $327.4 million, or 26.1%, in the average balance of loans held for investment offset by a decrease of $19.6 million, or 11.2%, in average loans held for sale.

Interest expense on time deposits increased $12.3 million, or 662.9%, to $14.2 million primarily due to a 233 basis point increase in average cost of time deposits.

Additionally, the average balance of time deposits increased $94.6 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts increased $2.7 million, or 436.5%, to $3.3 million due primarily to a 121 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 $93.6 million. 

Interest expense on borrowings increased $10.9 million, or 189.8%, to $16.6 million due to a 205 basis point increase in the cost of borrowings during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as the federal funds rate increased over the past year.

Additionally, the average balance increased $172.9 million to $526.5 million during the nine months ended September 30, 2023, compared to $353.6 million during the nine months ended September 30, 2022.

Provision for Credit Losses

There was a provision for credit losses of $1.1 million for the nine months ended September 30, 2023 compared to a provision for credit losses of $304,000 for the nine months ended September 30, 2022.

The $1.1 million provision for credit losses consisted of a $829,000 provision related to loans and a $262,000 provision related to unfunded commitments for the nine months ended September 30, 2023.

The provision for credit losses related to loans and unfunded commitments increased primarily due to loan growth in the portfolio and pipeline.

During the nine months ended September 30, 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.  

Noninterest Income

Nine 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 $24.2 million, or 27.3%, to $64.3 million during the nine months ended September 30, 2023 compared to $88.5 million during the nine months ended September 30, 2022.

The decrease resulted primarily from decreases in mortgage banking noninterest income and service charges on loans and deposits.

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 $541.0 million, or 25.6%, to $1.58 billion during the nine months ended September 30, 2023 compared to $2.12 billion during the nine months ended September 30, 2022. Gross margin on loans originated and sold decreased 3.7% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Nine Months Ended September 30, 2023 and 2022" above for additional discussion of the decrease in mortgage banking income.

The decrease in other noninterest income was due primarily to an decrease in mortgage servicing fee income and gain from death benefit decreased as there was a gain recorded 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, 2023. Offsetting the decreases, the Company sold mortgage servicing rights related to $318.4 million in loans serviced for third parties during the 

nine months ended September 30, 2023.

The sale generated $3.5 million in net proceeds and a $583,000 gain.

There were no comparable sales during the nine months ended September 30, 2022. As of September 30, 2023 and September 30, 2022, the Company maintained servicing rights related to $220.0 million and $378.7 million, respectively, in loans previously sold to third parties.

Nine months ended September 30,

Total loan origination volume on a consolidated basis increased $62.0 million, or 14.9%, to $477.8 million during the three months ended March 31, 2024 compared to $415.7 million during the three months ended March 31, 2023.

Gross margin on loans originated and sold increased 8.5% at the mortgage banking segment.

See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2024 and 2023" 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 servicing rights.

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 on a mortgage servicing rights book value of $2.9 million and resulted in a $583,000 gain during the three months ended March 31, 2023.

There were no comparable sales during the three months ended March 31, 2024.

As of March 31, 2024 and March 31, 2023, the Company maintained servicing rights related to $257.1 million and $116.1 million, respectively, in loans previously sold to third parties.

Three months ended March 31,

(Dollars In Thousands)

7 unchanged sentences

Total noninterest expenses

Total noninterest expenses decreased $15.6 million, or 14.8%, to $90.1 million during the nine months ended September 30, 2023 compared to $105.7 million during the nine months ended September 30, 2022.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $13.4 million, or 21.1%, to $50.2 million during the nine months ended September 30, 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 increased $237,000, or 1.7%, to $14.5 million during the nine months ended September 30, 2023.

The increase was due primarily to an increase in salaries from annual raises that took place at the beginning of the year.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $226,000 to $3.5 million during the nine months ended September 30, 2023, primarily resulting from decreased computer equipment expenses.

Occupancy, office furniture and equipment expense at the community banking segment increased $12,000 to $2.8 million during the nine months ended September 30, 2023.

The increase was due primarily to increased snow removal expense offset by a decrease in depreciation expense.

Advertising expense decreased $255,000, or 8.5%, to $2.7 million during the nine months ended September 30, 2023.

This decrease was primarily due to advertising at the community banking segment decreasing as marketing campaigns started off slower compared to prior year and a shift to other cost effective advertising channels.

Additionally, the mortgage banking segment decreased as the mortgage activity has decreased due to interest rates, housing affordability, and inventory constraints.  

Professional fees increased $576,000 to $1.8 million during the nine months ended September 30, 2023.

Total noninterest expenses decreased $1.6 million, or 5.3%, to $27.6 million during the three months ended March 31, 2024 compared to $29.1 million during the three months ended March 31, 2023.

Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $343,000, or 2.3%, to $14.8 million during the three months ended March 31, 2024.

Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $192,000, or 3.7%, to $5.4 million during the three months ended March 31, 2024.

The increase was primarily due to an increase in salaries due to annual raises that took place at the beginning of the year and increase in health insurance expense as claims increased.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $124,000 to $1.1 million during the three months ended March 31, 2024, primarily resulting from decreased rent expenses as underperforming branches were closed over the past year.

Occupancy, office furniture and equipment expense at the community banking segment decreased $31,000 to $1.0 million during the three months ended March 31, 2024.

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

Advertising expense increased $25,000, or 2.8%, to $914,000 during the three months ended March 31, 2024.

The increase was primarily due to advertising expenses at the mortgage banking segment due to the increased activity in the mortgage industry.

Data processing expense increased $84,000, or 7.5%, to $1.2 million during the three months ended March 31, 2024.

The increases at the community banking segments were due to additional investments in technology.

Professional fees increased $327,000 to $743,000 during the three months ended March 31, 2024.

The increase related to an increase in legal fees at the mortgage banking segment.

In July 2022, a complaint was filed by Mutual of Omaha Mortgage, Inc.

asserting claims against Waterstone Mortgage Corporation relating to certain employees hired by Waterstone Mortgage Corporation who previously worked for Mutual. 

The Company intends to continue to vigorously defend its interests in this matter and pursue all possible defenses against the claims. 

asserting claims against Waterstone Mortgage Corporation relating to certain employees hired by Waterstone Mortgage Corporation who previously worked for Mutual.

The Company intends to continue to vigorously defend its interests in this matter and pursue all possible defenses against the claims.

Additionally, the community banking segment had an increase in audit and tax expense.

Loan processing expense decreased $1.0 million, or 27.5%, to $2.7 million during the nine months ended September 30, 2023. 

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

Other noninterest expense decreased $1.1 million, or 11.2%, to $8.4 million during the nine months ended September 30, 2023. 

The decrease at the mortgage banking segment related to a decrease in corporate meeting expenses, travel expenses, meals expense, and mortgage servicing rights amortization as the there was a bulk sale in the first quarter of 2023 and none during 2022. 

Offsetting the decreases, other noninterest expenses increased at the community banking segment as FDIC premiums increased starting in 2023. 

Income tax expense decreased $3.1 million, or 58.0%, to $2.2 million during the nine months ended September 30, 2023 compared to $5.3 million during the nine months ended September 30, 2022.

Income tax expense was recognized on the statement of income during the nine months ended September 30, 2023 at an effective rate of 19.0% of pretax income compared to an effective rate of 22.1% of pretax income during the nine months ended September 30, 2022. The decrease in the effective rate was primarily due to the permanent deductions being a greater percentage of pretax income as pretax income continues to decrease compared to prior year.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets –

Total assets increased by $189.7 million, or 9.3%, to $2.22 billion at September 30, 2023 from $2.03 billion at December 31, 2022.

The increase in total assets primarily reflects an increase in loans held for investment, cash and cash equivalents, and loans held for sale.

The increase in total assets reflects liability increases in borrowings.

Cash and Cash Equivalents –

Cash and cash equivalents increased $15.7 million, or 33.6%, to $62.3 million at September 30, 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 decreased $2.1 million to $194.5 million at September 30, 2023.

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

Loans Held for Sale - Loans held for sale increased $26.2 million to $157.4 million at September 30, 2023 due to the increase of purchase activity resulting from the usual seasonal activity seen during the spring and summer seasons. 

Loans Receivable - Loans receivable held for investment increased $140.9 million to $1.65 billion at September 30, 2023.

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

Loan processing expense increased $28,000 to $1.0 million during the three months ended March 31, 2024.

The increase was primarily due to an increase in loan applications and fundings.

Other noninterest expense decreased $1.7 million, or 54.2%, to $1.4 million during the three months ended March 31, 2024.

The decrease primarily related to decreased provision for branch losses, branch overhead, provision for loan sale losses, and reversal of mortgage servicing rights impairment at the mortgage banking segment.

Income tax expense totaled $1.7 million for the three months ended March 31, 2024 compared to $627,000 during the three months ended March 31, 2023.

Income tax expense was recognized on the statement of income during the three months ended March 31, 2024 at an effective rate of 36.3% of pretax income and during the three months ended March 31, 2023 at an effective rate of 22.5% of pretax income.

On March 18, 2024, the State of Wisconsin Department of Revenue issued an emergency ruling with additional details of the law.

This publication enabled us to estimate the impact on our Wisconsin state income tax expense.

The impact moving forward should result in no Wisconsin state income taxes being expensed, resulting in a lower estimated effective tax rate.

The elimination of Wisconsin state income tax expense resulted in the establishment of a valuation allowance for Wisconsin state income deferred tax assets, resulting in a one-time $1.1 million charge to state income tax expense in the first quarter.

Partially offsetting the impact of the charge related to the valuation allowance we realized a one-time benefit of approximately $368,000 during the quarter to recognize a reduction in current state income tax provision.

The decrease in the effective rate was primarily due to the permanent deductions being a greater percentage of pretax income as pretax income continues to decrease compared to prior year.

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Total Assets – Total assets increased by $21.3 million, or 1.0%, to $2.23 billion at March 31, 2024 from $2.21 billion at December 31, 2023.

The increase in total assets primarily reflects an increase in cash and cash equivalents and loans held for sale.

The increase in total assets reflects liability increases in deposits and borrowings.

Cash and Cash Equivalents – Cash and cash equivalents increased $9.3 million, or 25.5%, to $45.7 million at March 31, 2024, compared to $36.4 million at December 31, 2023.

The increase in cash and cash equivalents primarily reflects the increase of funding sources from borrowings, deposits, and advance payments by borrowers for taxes.

Securities Available for Sale – Securities available for sale decreased $206,000 to $204.7 million at March 31, 2024.

The decrease was primarily due to the decrease in fair value as longer term interest rates increased at the end of the period.

Loans Held for Sale - Loans held for sale increased $10.1 million to $175.1 million at March 31, 2024 due to the increase of purchase and refinance activity resulting from a slight decrease in interest rates during the beginning of the period along with the usual seasonal activity increase seen during the spring season.

Loans Receivable - Loans receivable held for investment increased $602,000 to $1.66 billion at March 31, 2024.

The increase in total loans receivable was primarily attributable to increases in each of the construction loan category offset by decreases in the multi-family and commercial real estate 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 $796,000 to $18.6 million at September 30, 2023.  There was a $829,000 provision for credit losses - loans for the nine months ended September 30, 2023.

The provision for credit losses related to loans increased primarily due to loan growth.

During the nine months ended September 30, 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 charge-offs totaled $33,000 for the nine months ended September 30, 2023.  

Prepaid expenses and other assets  –

Total prepaid expenses and other assets increased $3.5 to $63.3 million at September 30, 2023.

The increase was primarily due to an increase in derivative assets due to the interest rate changes. 

Deposits –

Total deposits increased $6.2 million to $1.21 billion at September 30, 2023. 

The decrease was driven by an increase of $91.0 million in time deposits offset by a decrease of $44.2 million in money market and savings deposits and $40.6 million in demand deposits.

Borrowings –

Total borrowings increased $201.1 million, or 52.0%, to $587.9 million at September 30, 2023.

The community banking segment paid off $215.0 million in long-term FHLB borrowings, borrowing $174.0 million of new long-term FHLB borrowings, and $240.3 million in new short-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment increased a total of $1.8 million at September 30, 2023 from December 31, 2022.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $22.9 million to $28.2 million at September 30, 2023.

Allowance for Credit Losses - Loans - The allowance for credit losses remained at $18.5 million at March 31, 2024.

There was a $3,000 negative provision for credit losses - loans for the three months ended March 31, 2024.

The provision for credit losses related to loans decreased primarily due to a decrease in originations and historical losses used in the calculation offset by an increase in certain qualitative factors.

During the three months ended March 31, 2024, we made adjustments to our qualitative factors, primarily to account for the changes in interest rates, 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 $3,000 for the three months ended March 31, 2024.

Prepaid expenses and other assets – Total prepaid expenses and other assets increased $211,000 to $52.6 million at March 31, 2024.

The increase was primarily due to an increase in derivative assets due to the interest rate changes offset by a decrease in deferred tax assets due to the WI state tax rate decrease.

Deposits – Total deposits increased $9.3 million to $1.20 billion at March 31, 2024.

The increase was driven by an increase of $17.0 million in time deposits offset by a decrease of $2.7 million in money market and savings deposits and $5.0 million in demand deposits.

Borrowings – Total borrowings increased $23.1 million, or 3.8%, to $634.2 million at March 31, 2024.

The community banking segment paid off $50.0 million in long-term FHLB borrowings, borrowing $30.0 million of new long-term FHLB borrowings, and $24.5 million in new short-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment decreased a total of $1.4 million at March 31, 2024 from December 31, 2023.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $7.4 million to $14.1 million at March 31, 2024.

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 $16.0 million to $53.7 million at September 30, 2023. 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 $12.0 million to $48.6 million at March 31, 2024.

Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes.

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

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

Additionally, the fair value mark on derivative liabilities related to the loans held for sale, dividends payable, and lease liability decreased 

Shareholders ’

Equity –

Shareholders' equity decreased $24.2 million to $346.3 million at September 30, 2023. 

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

Shareholders ’ Equity – Shareholders' equity decreased $6.1 million to $338.0 million at March 31, 2024.

Shareholders' equity decreased primarily due to the declaration of dividends, the repurchase of stock, and decrease in the fair value of the securities portfolio.

Partially offsetting the decreases, there were increases due to the net income, equity awards granted, and unearned ESOP shares vesting.

ASSET QUALITY

NONPERFORMING ASSETS

At September 30,

At December 31,

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

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

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

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

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

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

A loan is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.

For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell.

In most cases, the Company records a specific valuation allowance or a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell.

Substantially all of the collateral consists of various types of real estate including residential and commercial properties.

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

At or for the Nine Months

Ended September 30,

At or for the Three Months

Ended March 31,

(In Thousands)

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Balance at end of period

Total non-accrual loans decreased by $224,000, or 5.2%, to $4.1 million as of September 30, 2023 compared to $4.3 million as of December 31, 2022. 

The ratio of non-accrual loans to total loans receivable was 0.25% at September 30, 2023 and 0.29% at December 31, 2022. 

During the nine months ended September 30, 2023, $2.0 million in loans were placed on non-accrual status.

Offsetting this activity, $227,000 in loans were transferred to real estate owned, $751,000 in loans returned to accrual status, and $575,000 in principal payments were received during the nine months ended September 30, 2023.

Of the $4.1 million in total non-accrual loans as of September 30, 2023, $1.7 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, no charge-offs have been recorded over the life of these loans and there were no specific reserves as of September 30, 2023.  The remaining $2.4 million of non-accrual loans were reviewed on an aggregate basis as of September 30, 2023.  

The outstanding principal balance of our five largest non-accrual loans as of September 30, 2023 totaled $2.6 million, which represents 63.1% of total non-accrual loans as of that date. 

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

Total non-accrual loans increased by $64,000, or 1.3%, to $4.9 million as of March 31, 2024 compared to $4.8 million as of December 31, 2023.

The ratio of non-accrual loans to total loans receivable was 0.29% at March 31, 2024 and 0.29% at December 31, 2023.

During the three months ended March 31, 2024, $745,000 in loans were placed on non-accrual status.

Offsetting this activity, $105,000 in loans returned to accrual status and $576,000 in principal payments were received during the three months ended March 31, 2024.

Of the $4.9 million in total non-accrual loans as of March 31, 2024, $2.5 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary.

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, 2024.

The remaining $2.4 million of non-accrual loans were reviewed on an aggregate basis as of March 31, 2024.

The outstanding principal balance of our five largest non-accrual loans as of March 31, 2024 totaled $2.7 million, which represents 54.5% of total non-accrual loans as of that date.

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

As of March 31, 2024 and December 31, 2023, 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 increased by $2.5 million, or 39.7%, to $8.7 million at September 30, 2023 from $6.3 million at December 31, 2022. 

Loans past due less than 90 days increased by $2.2 million, or 85.5%, primarily in the one- to four-family and multi-family categories.

Loans past due 90 days or more increased by $280,000, or 7.6%, primarily in the one- to four-family loan category, during the nine months ended September 30, 2023.

Past due loans decreased by $604,000, or 5.4%, to $10.6 million at March 31, 2024 from $11.3 million at December 31, 2023.

Loans past due less than 90 days increased by $26,000, or 0.4%.

Loans past due 90 days or more decreased by $578,000, or 13.0%, primarily in the one- to four-family loan category, during the three months ended March 31, 2024.

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)

Balance at beginning of period

Adoption of CECL (1)

Provision (credit) for credit losses - loans

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Allowance for credit losses to loans receivable at end of period

Net charge-offs (recoveries) to average loans outstanding (annualized)

Current year provision for credit losses - loans to net recoveries

Net charge-offs (recoveries) (annualized) to beginning of the year allowance

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

The allowance for credit losses - loans increased $796,000 to $18.6 million at September 30, 2023 from $17.8 million at December 31, 2022. 

During the nine months ended September 30, 2023, there was a $829,000 provision for credit losses.

Additionally, net charge-offs totaled $33,000 for the nine months ended September 30, 2023. 

We had net charge-offs of $33,000, or less than 0.01% of average loans annualized, for the nine months ended September 30, 2023, compared to net recoveries of $544,000, or 0.06% of average loans annualized, for the nine months ended September 30, 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. 

Net recoveries to average loans outstanding (annualized)

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

Net recoveries (annualized) to beginning of the year allowance

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

The allowance for credit losses - loans was $18.5 million at March 31, 2024 and $18.5 million at December 31, 2023.

During the three months ended March 31, 2024, there was a $3,000 negative provision for credit losses.

Additionally, net recoveries totaled $3,000 for the three months ended March 31, 2024.

We had net recoveries of $3,000, or less than 0.01% of average loans annualized, for the three months ended March 31, 2024, compared to net recoveries of $12,000, or less than 0.01% of average loans annualized, for the three months ended March 31, 2023.

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

Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.

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Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors.

To the best of management’s knowledge, all probable losses have been provided for in the allowance for credit losses - loans.

The establishment of the amount of the allowance for credit loss inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct.

To the best of management’s knowledge, all probable losses have been provided for in the allowance for credit losses - loans.

The establishment of the amount of the allowance for credit loss inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct.

Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years.

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We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows and pay real estate taxes on mortgage loans.

We also adjust liquidity as appropriate to meet asset and liability management objectives. 

The level of our liquidity position at any point in time is dependent upon the judgment of the senior management as supported by the Asset/Liability Committee. 

We also adjust liquidity as appropriate to meet asset and liability management objectives.

The level of our liquidity position at any point in time is dependent upon the judgment of the senior management as supported by the Asset/Liability Committee.

Liquidity is monitored on a daily, weekly and monthly basis using a variety of measurement tools and indicators.

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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, 2023, primary uses of cash and cash equivalents included:

$1.58 billion in funding loans held for sale, $140.9 million to fund loans held for investment, $18.9 million for purchases of mortgage related securities, $9.4 million for FHLB stock, $215.0 million for payoffs of long-term borrowings, $12.4 million for cash dividends paid, and $19.8 million for purchases of our common stock.

During the nine months ended September 30, 2023, primary sources of cash and cash equivalents included:

$1.60 billion in proceeds from the sale of loans held for sale, $174.0 million in long-term borrowings, $242.1 million in short-tern borrowings, $15.9 million in principal repayments on mortgage related securities, $6.2 million for increase in deposits, $3.6 million in maturities of debt securities, $3.5 million in proceeds for mortgage servicing rights sale, and $9.4 million in net income.

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.

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, 2023 and 2022, respectively, $62.3 million and $72.9 million of our assets were invested in cash and cash equivalents. At September 30, 2023, cash and cash equivalents were comprised of the following:

$55.8 million in cash held at the Federal Reserve Bank and other depository institutions and $6.5 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. 

During the three months ended March 31, 2024, primary uses of cash and cash equivalents included:

$477.8 million in funding loans held for sale, $600,000 to fund loans held for investment, $2.4 million for purchases of mortgage related securities, $1.1 million for FHLB stock, $50.0 million for payoffs of long-term borrowings, $2.9 million for cash dividends paid, and $5.3 million for purchases of our common stock.

During the three months ended March 31, 2024, primary sources of cash and cash equivalents included:

$487.0 million in proceeds from the sale of loans held for sale, $30.0 million in long-term borrowings, $43.1 million in short-tern borrowings, $5.0 million in principal repayments on mortgage related securities, $9.3 million for increase in deposits, $290,000 in maturities of debt securities, and $3.0 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 $2.2 million in net income.

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

At March 31, 2024 and 2023, respectively, $45.7 million and $54.2 million of our assets were invested in cash and cash equivalents.

At March 31, 2024, cash and cash equivalents were comprised of the following:

$33.2 million in cash held at the Federal Reserve Bank and other depository institutions and $12.5 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 the Federal Reserve, 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, 2023, we had $159.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, and 2028.  See Note 6 - Borrowings of the notes to unaudited consolidated financial statements for additional information about the remaining call option details of our FHLB long-term debt.

The Company had approximately $287.1 million of uninsured deposits for approximately 1,218 customers as of September 30, 2023.

At March 31, 2024, we had $135.0 million in long term advances from the FHLB with contractual maturity dates in 2027, and 2028.

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

The Company had approximately $293.5 million of uninsured deposits for approximately 1,243 customers as of March 31, 2024.

Uninsured deposit amounts are estimated based on the portions of customer account balances that exceed the FDIC insurance limits.

At September 30, 2023, we had outstanding commitments to originate loans receivable of $31.0 million. 

In addition, at September 30, 2023, we had unfunded commitments under construction loans of $91.3 million, unfunded commitments under business lines of credit of $11.3 million and unfunded commitments under home equity lines of credit and standby letters of credit of $11.9 million. 

At September 30, 2023, certificates of deposit scheduled to mature in one year or less totaled $663.4 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. 

At March 31, 2024, we had outstanding commitments to originate loans receivable of $15.1 million.

In addition, at March 31, 2024, we had unfunded commitments under construction loans of $78.5 million, unfunded commitments under business lines of credit of $17.6 million and unfunded commitments under home equity lines of credit and standby letters of credit of $12.7 million.

At March 31, 2024, certificates of deposit scheduled to mature in one year or less totaled $639.4 million.

In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as FHLB advances, in order to maintain our level of assets.

7 unchanged sentences

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

At September 30, 2023, Waterstone Financial, Inc.

At March 31, 2024, Waterstone Financial, Inc.

(on an unconsolidated basis) had liquid assets totaling $19.4 million.

Shareholders' equity decreased $24.2 million to $346.3 million at September 30, 2023. 

Shareholders' equity decreased primarily due to the declaration of dividends, the repurchase of stock, and decrease in the fair value of the security portfolio. 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 $6.1 million to $338.0 million at March 31, 2024.

Shareholders' equity decreased primarily due to the declaration of dividends, the repurchase of stock, and decrease in the fair value of the securities portfolio.

Partially offsetting the decreases, there were increases due to the net income, equity awards granted, and unearned ESOP shares vesting.

The Company's Board of Directors authorized a 2,000,000 share stock repurchase program in the second quarter of 2023.

As of September 30, 2023, the Company has 1,365,000 shares remaining in the plan.  

As of March 31, 2024, the Company has approximately 403,000 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, 2023, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized”

under regulatory guidelines.

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

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

At March 31, 2024, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized” under regulatory guidelines.

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

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

During the three months ended September 30, 2023, we repaid $95.0 million in FHLB long-term debt and entered into $400.5 million of new short-term debt at the end of the period. 

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

Our commitments, contingent liabilities, and off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

The majority of our assets and liabilities are monetary in nature.

Consequently, our most significant form of market risk is interest rate risk.

Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits.

As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates.

Accordingly, WaterStone Bank’s board of directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.

We have implemented the following strategies to manage our interest rate risk:

(i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real estate balloon loans;

(ii) reducing and shortening the expected average life of the investment portfolio;

and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the FHLB.

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

Income Simulation .

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

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

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

Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn affect our interest rate sensitivity position. 

When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our liabilities and therefore would most likely have a positive impact on net interest income and earnings.

The following interest rate scenario displays the percentage change in net interest income over a one-year time horizon assuming increases of 100, 200 and 300 basis points and a decreases of 100 basis points. 

The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a static no growth, balance sheet.

Analysis of Net Interest Income Sensitivity

Immediate Change in Rates

As of September 30, 2023

Dollar Change

Percentage Change

At September 30, 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

Disclosure Controls and Procedures :

Company management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.

Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

Internal Control Over Financial Reporting :

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

OTHER INFORMATION

Legal Proceedings

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

During the three months ended March 31, 2024, we repaid $50.0 million in FHLB long-term debt and entered into $30.0 million of new long-term debt and $43.1 million of new short-term debt at the end of the period.

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.

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

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