What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-28 compared with 2024-03-06 · 95 added, 95 removed, 357 unchanged (35% of the section changed)

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For a discussion of our results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, see “Part II, Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations” Discussion of Results of Operations included in our 2022 Form 10-K, filed with the SEC on February 28, 2023.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” Discussion of Results of Operations included in our 2023 Form 10-K, filed with the SEC on March 6, 2024.

Significant Items

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Dividends declared

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

The prior year amounts presented are calculated under the prior accounting standard.

At or for the Year Ended December 31,

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Allowance for credit losses - loans as a percent of non-performing loans

Net chargeoffs (recoveries) to average outstanding loans during the period

Net (recoveries) charge-offs to average outstanding loans during the period

Non-performing loans as a percent of total loans

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(4) Represents dividends paid per share divided by basic earnings per share.

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

The 2021 amounts presented are calculated under the prior accounting standard.

Comparison of Consolidated Waterstone Financial, Inc.

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Total Assets.

Total assets increased by $181.7 million, or 8.9%, to $2.21 billion at December 31, 2023 from $2.03 billion at December 31, 2022.

The increase in total assets primarily reflects increases in loans held for investment and loans held for sale, partially offset by decreases cash and cash equivalents, office properties and equipment, and other assets.

The increase in total assets also reflects liability increases in borrowings.

Total assets decreased by $3.8 million, or 0.2%, to $2.21 billion at December 31, 2024 from $2.21 billion at December 31, 2023.

The decrease in total assets primarily reflects the decrease in loans held for sale, partially offset by increases in loans held for investment, cash surrender value of life insurance, and cash and cash equivalents.

Cash and Cash Equivalents.

Cash and cash equivalents decreased $10.2 million to $36.4 million at December 31, 2023 from $46.6 million at December 31, 2022.

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

Cash and cash equivalents increased $3.3 million to $39.8 million at December 31, 2024 from $36.4 million at December 31, 2023.

The increase in cash and cash equivalents primarily reflects the decrease in funding of loans held for sale and increase in deposit liabilities.

Securities Available for Sale .

Securities available for sale increased by $3.6 million to $208.5 million at December 31, 2024 from $204.9 million at December 31, 2023.

The increase was primarily due to purchases of mortgage-related securities to take advantage of the increase in interest rates.

The increase was also driven by a decrease in unrealized losses as the values of securities increased due to a decrease in long term interest rates.

The increase was primarily due to purchases of municipal bonds to take advantage of the increase in interest rates.

The increase was partially offset by an increase in unrealized losses on securities, as rising long-term rates put downward pressure on securities prices.

Purchases for the year exceeded the combination of security paydowns and maturities of debt securities.

Loans Held for Sale .

Loans held for sale increased $33.8 million, or 25.8%, to $165.0 million at December 31, 2023 from $131.2 million at December 31, 2022 due to a decrease in mortgage rates at the end of the year.

Loans held for sale decreased $29.1 million, or 17.6%, to $135.9 million at December 31, 2024 from $165.0 million at December 31, 2023 due to an increase in mortgage rates at the end of the year.

Loans Receivable .

Loans receivable held for investment increased $16.4 million, or 1.0%, to $1.68 billion at December 31, 2024 from $1.66 billion at December 31, 2023.

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

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

Allowance for Credit Losses.

The allowance for credit losses increased $792,000 to $18.5 million at December 31, 2023 from $17.8 million at December 31, 2022.

The increase primarily resulted from the increase in the total loan balances.

Net charge-offs totaled $135,000 for the year ended December 31, 2023.

The allowance for credit losses decreased $302,000 to $18.2 million at December 31, 2024 from $18.5 million at December 31, 2023.

The decrease primarily resulted from a decrease in historical loss rates and changed in qualitative factors.

Net recoveries totaled $40,000 for the year ended December 31, 2024.

During the year ended December 31, 2024, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

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Total prepaid expenses and other assets decreased $4.2 million to $48.3 million at December 31, 2024 from $52.4 million at December 31, 2023.

The decrease was primarily due to a decrease in the fair value mark on derivatives as interest rates decreased and deferred taxes decreased as unrealized losses on available for sale securities decreased due to falling long-term interest rates.

Deposits decreased by $8.4 million to $1.19 billion at December 31, 2023, from $1.20 billion at December 31, 2022.

The decrease was driven by a decrease of $52.9 million in money market and savings deposits and a decrease of $43.5 million in demand deposits.

The decrease was partially offset by an increase of $88.0 million in time deposits as customers sought higher rates in the current interest rate environment.

Total borrowings increased $224.3 million to $611.1 million at December 31, 2023, from $386.8 million at December 31, 2022.

The community banking segment increased its short-term FHLB borrowings by $123.3 million offset by a decrease of its long-term FHLB borrowings by $45.0 million.

In addition, we borrowed $145.0 million from the Federal Reserve Bank, all of which was incremental to 2022.

External short-term borrowings at the mortgage banking segment increased a total of $1.0 million to $2.1 million at December 31, 2023 from $1.1 million at December 31, 2022.

The increase in borrowings was used to fund the increase in loans held for investment.

The decrease was primarily due to a decrease in the mortgage servicing rights asset as well as decreases in receivables in the mortgage banking segment and a decrease in deferred tax assets due to a decrease in the Wisconsin state effective tax rate.

Deposits increased by $169.3 million to $1.36 billion at December 31, 2024, from $1.19 billion at December 31, 2023.

The increase was driven by $94.3 million in new brokered certificates of deposit, an increase of $81.0 million in non-brokered certificates of deposit, and an increase of $10.0 million in money market and savings deposits.

The increase as partially offset by a decrease of $16.0 million in demand deposits.

The increase in deposits was used to fund the increase in loans held for investment and replacing matured borrowings.

Total borrowings decreased $164.5 million to $446.5 million at December 31, 2024, from $611.1 million at December 31, 2023.

The community banking segment decreased its short-term FHLB borrowings by $15.4 million and its long-term FHLB borrowings by $5.0 million.

In addition, the $145.0 million short-term borrowing from the Federal Reserve Bank was paid down in the fourth quarter of 2024.

External short-term borrowings at the mortgage banking segment increased a total of $900,000 to $3.0 million at December 31, 2024 from $2.1 million at December 31, 2023.

The overall decrease in borrowings was primarily offset by the increase in deposits.

Other Liabilities.

Other liabilities decreased $2.6 million to $58.4 million at December 31, 2024 compared to $61.0 million at December 31, 2023.

Other liabilities decreased primarily due to a decrease of the fair value mark on derivative liabilities related to the loans held for sale and the back-to-back swaps decreased with the decrease in interest rates and a decrease in dividends payable as fourth-quarter dividends per share decreased to $0.15 in 2023 from $0.20 in 2022.

Other liabilities decreased primarily due to decreases in loan sale liability and amounts payable to investors in the mortgage banking segment.

Shareholders ’ Equity.

Shareholders’ equity decreased by $4.9 million, or 1.4%, to $339.1 million at December 31, 2024 from $344.1 million at December 31, 2023.

Shareholders' equity decreased primarily due to the declaration of dividends and the repurchase of stock.

Partially offsetting the decreases, there were increases due to the net income, additional paid-in capital as stock options were exercised and equity awards vested, increases in the values of securities available for sale, and unearned ESOP shares vesting.

Shareholders' equity decreased primarily due to the the ongoing repurchase of stock, dividends paid, 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 and equity awards vested, and unearned ESOP shares vesting.

Comparison of Community Banking Segment Operations for the Years Ended December 31, 2024 and 2023

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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 $441,000 for the year ended December 31, 2023 compared to a provision for credit losses of $677,000 for the year ended December 31, 2022.

The provision for credit losses consisted of a $712,000 provision related to loans due to loan growth and a $271,000 of negative provision related to unfunded commitments as the loan pipeline balance decreased for the year ended December 31, 2023.

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

There was a negative provision for credit losses of $145,000 for the year ended December 31, 2024 compared to a provision for credit losses of $441,000 for the year ended December 31, 2023.

The negative provision for credit losses consisted of a $319,000 negative provision related to adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors and a $174,000 of provision related to unfunded commitments as the loan pipeline balance decreased for the year ended December 31, 2024.

The negative provision for credit losses related to loans was primarily due to a decrease in historical loss rates and certain qualitative factors.

During the year ended December 31, 2024, 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.

Noninterest income decreased $834,000 for the year ended December 31, 2023 due primarily to a decrease in prepayment penalties on loans and gain from death benefit received on one bank-owned life insurance policy during 2022.

Compensation, payroll taxes, and other employee benefits expense increased $853,000 to $19.9 million during the year ended December 31, 2023 primarily due to an increase in salaries due to annual raises that took place at the beginning of the year and an increase in full-time equivalents due to fewer open positions.

Noninterest income increased $916,000 for the year ended December 31, 2024 due primarily to a $231,000 death benefit received in 2024, earnings on the bank owned life insurance, and loan swap fees.

Compensation, payroll taxes, and other employee benefits expense increased $819,000 to $20.7 million during the year ended December 31, 2024 primarily due to increased health insurance costs.

Other noninterest expense decreased $1.3 million to $2.5 million as certain loan-related expenses paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans decreased compared to the prior year.

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Comparison of Mortgage Banking Segment Operations for the Years Ended December 31, 2024 and 2023

Net loss totaled $9.6 million for the year ended December 31, 2023 compared to net loss of $3.4 million for the year ended December 31, 2022.

We originated $2.12 billion in mortgage loans held for sale (including sales to the community banking segment) during the year ended December 31, 2023, which represents a decrease of $641.8 million, or 23.2%, from the $2.76 billion originated during the year ended December 31, 2022.

The decrease in loan production volume was driven by a $424.9 million, or 17.3%, decrease in home purchase volume due to inventory constraints in the market, housing affordability, and as interest rates have increased.

Total mortgage banking noninterest income decreased $25.6 million, or 24.6%, to $78.5 million during the year ended December 31, 2023 compared to $104.1 million during the year ended December 31, 2022.

The decrease in mortgage banking noninterest income was related to a 23.2% decrease in volume and a 2.6% decrease in gross margin on loans originated and sold for the year ended December 31, 2023 compared to December 31, 2022.

Net income totaled $1.4 million for the year ended December 31, 2024 compared to net loss of $9.6 million for the year ended December 31, 2023.

We originated $2.15 billion in mortgage loans held for sale (including sales to the community banking segment) during the year ended December 31, 2024, which represents an increase of $26.6 million, or 1.3%, from the $2.12 billion originated during the year ended December 31, 2023.

The increase in loan production volume was driven by a $109.4 million, or 128.5%, increase in refinance products due to a decrease in mortgage rates at various points throughout the year.

Mortgage purchase products decreased $82.8 million, or 4.1% as housing inventory remained low and interest rates remained relatively high.

Total mortgage banking noninterest income increased $5.8 million, or 7.4%, to $84.3 million during the year ended December 31, 2024 compared to $78.5 million during the year ended December 31, 2023.

The increase in mortgage banking noninterest income was related to a 1.3% increase in volume and a 6.6% increase in gross margin on loans originated and sold for the year ended December 31, 2024 compared to December 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.

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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).

Our gross margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance).

Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S.

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Our origination efforts continue to be focused on loans made for the purpose of residential purchases, as opposed to mortgage refinance.

The percentage of origination volume related to purchase activity increased to 96.0% from 89.1% of total originations for the year ended December 31, 2023 and 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 41.0% and 59.0%, respectively of all loan originations, respectively, during the year ended December 31, 2023, compared to 29.3% and 70.7% of all originations, respectively, during the year ended December 31, 2022.

The percentage of origination volume related to purchase activity decreased to 88.9% from 96.0% of total originations for the year ended December 31, 2024 and 2023, respectively, as a year-over-year decrease in rates drove an increase in refinance activity, while low housing inventory and still relatively high interest rates suppressed purchase activity.

The mix of loan type trended towards more conventional loans and less government loans, with a mix of 63.8% and 36.2%, respectively of all loan originations, respectively, during the year ended December 31, 2024, compared to 59.0% and 41.0% of all originations, respectively, during the year ended December 31, 2023.

During the year ended December 31, 2024, the Company sold mortgage servicing rights related to $233.1 million in loans serviced for third parties.

The sale generated $2.1 million in net proceeds and a $152,000 gain.

During the year ended December 31, 2022, there were no sales of mortgage servicing rights.

During the year ended December 31, 2023, the Company sold mortgage servicing rights related to $318.4 million in loans services for third parties, which generated $3.5 million in net proceeds and a $583,000 gain.

Total compensation, payroll taxes and other employee benefits decreased $3.7 million, or 5.7%, to $61.4 million for the year ended December 31, 2024 compared to $65.1 million for the year ended December 31, 2023.

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

Additionally, salaries expense decreased due a reduction in headcount during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease primarily related to decreased salary expense and incentives expense driven by reduced employee headcount and a decrease in new branches added over the past year.

Comparison of Consolidated Waterstone Financial, Inc.

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Certificates of deposit

Certificates of deposit - brokered

Total interest-bearing deposits

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Average interest-earning assets to average interest-bearing liabilities

(1) Includes net deferred loan fee amortization income of $643,000, $684,000 and $2.1 million for the years ended December 31, 2023, 2022, and 2021, respectively.

(1) Includes net deferred loan fee amortization income of $663,000, $643,000 and $684,000 for the years ended December 31, 2024, 2023, and 2022, respectively.

(2) Includes available for sale securities.

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Money market and savings accounts

Certificates of deposit

Certificates of deposit - retail

Certificates of deposit - brokered

Total interest-bearing deposits

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Net change in net interest income

Includes net deferred loan fee amortization income of $643,000, $684,000 and $2.1 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Includes net deferred loan fee amortization income of $663,000, $643,000 and $684,000 for the years ended December 31, 2024, 2023, and 2022, respectively.

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

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Net interest income decreased $4.0 million, or 8.1%, to $46.2 million during the year ended December 31, 2024 compared to $50.2 million during the year ended December 31, 2023.

Interest income on loans increased $27.2 million, or 43.2%, to $90.1 million during the year ended December 31, 2023 compared to $62.9 million during the year ended December 31, 2022 due primarily to an 85 basis point increase in average yield on loans as interest rates continued to increase over the past year and an increase in average loan balance as loans held for investment increased.

The increase in average loan balance was driven by an increase of a $307.2 million, or 23.7%, in the average balance of loans held for investment offset by a decrease of $21.7 million, or 12.6%, in average loans held for sale.

Interest income from mortgage related securities increased $812,000, or 25.1%, primarily as the average balance increased $9.7 million and the yield increased by 36 basis points.

Interest income on loans increased $12.9 million, or 14.3%, to $103.1 million during the year ended December 31, 2024 compared to $90.1 million during the year ended December 31, 2023 due primarily to a 47 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 $93.6 million, or 5.9%, in the average balance of loans held for investment.

Interest income from mortgage related securities increased $443,000, or 10.9%, primarily as the yield increased by 28 basis points.

Interest income from debt securities increased $599,000, or 12.0%, to $5.6 million, due primarily to a 71 basis point increase in yield.

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Interest expense on time deposits increased $13.1 million, or 61.8%, primarily due to a 140 basis point increase in average cost of time deposits.

Additionally, the average balance of time deposits increased $97.7 million compared to the prior year period.

Additionally, the average balance of retail time deposits increased $73.6 million compared to the prior year period.

Including the new brokered time deposits, interest expense increased by $13.7 million.

The average balance of brokered time deposits was $15.0 million.

Interest expense on money market, savings, and escrow accounts increased $1.1 million, or 24.8%, due primarily to a 44 basis point increase in average cost of money market, savings, and escrow accounts as offering rates increased to match the Federal Funds Rate.

Partially offsetting the increase in average cost, the average balance decreased $12.8 million as more money moved to time deposits.

Interest expense on borrowings increased $14.8 million, or 175.9%, to $23.3 million due to a 195 basis point increase in the cost of borrowings during the year ended December 31, 2023 compared to the year ended December 31, 2022 as the federal funds rate increased over the past year.

Interest expense on borrowings increased $3.2 million, or 13.6%, to $26.4 million due to a 25 basis point increase in the cost of borrowings during the year ended December 31, 2024 compared to the year ended December 31, 2023 as we transitioned to more short-term fundings for a majority of the year.

Additionally, the average balance increased $40.2 million to $572.5 million during the year ended December 31, 2024, compared to $532.3 million during the year ended December 31, 2023.

Provision for Credit Losses

There was a provision for credit losses of $656,000 during the year ended December 31, 2023 compared to a $968,000 provision for loan losses for the year ended December 31, 2022.

The $656,000 provision for credit losses consisted of a $927,000 provision related to loans and $271,000 of negative provision related to unfunded commitments for the year ended December 31, 2023.

The increase in the loan portfolio provision is due to the increase in loan balance and the decrease on the unfunded commitments is due to the decrease in the loan pipeline.

There was a negative provision for credit losses of $168,000 during the year ended December 31, 2024 compared to a $656,000 provision for loan losses for the year ended December 31, 2023.

The $168,000 negative provision for credit losses consisted of a $342,000 negative provision related to loans and $174,000 of provision related to unfunded commitments for the year ended December 31, 2024.

The decrease in the loan portfolio provision is due to the decrease in historical loss factors and certain qualitative factors.

During the year ended December 31, 2024, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

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Total noninterest income

Total noninterest income decreased $24.4 million, or 23.1%, to $81.2 million during the year ended December 31, 2023 compared to $105.6 million during the year ended December 31, 2022.

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.

Total noninterest income increased $8.1 million, or 10.0%, to $89.3 million during the year ended December 31, 2024 compared to $81.2 million during the year ended December 31, 2023.

The increase in mortgage banking income was primarily the result of an increase in loan origination volume and a decrease in noninterest expenses.

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 $525.9 million, or 20.6%, to $2.02 billion during the year ended December 31, 2023 compared to $2.55 billion during the year ended December 31, 2022.

Gross margin on loans originated and sold decreased 2.6% at the mortgage banking segment.

Total loan origination volume on a consolidated basis increased $106.3 million, or 5.3%, to $2.13 billion during the year ended December 31, 2024 compared to $2.02 billion during the year ended December 31, 2023.

Gross margin on loans originated and sold increased 6.6% at the mortgage banking segment.

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

See "Comparison of Mortgage Banking Segment Results of Operations for the Year December 31, 2024 and 2023" above, for additional discussion of the increase in mortgage banking income.

Service charges on loans and deposits decreased primarily due to a decrease in loan prepayment fees and other loan fees.

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 year ended December 31, 2022 compared to none during the year ended December 31, 2023.

Offsetting the decreases, the Company sold mortgage servicing rights related to $318.4 million in loans serviced for third parties during the year ended December 31, 2023.

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.

There were no comparable sales during the year ended December 31, 2022.

As of December 31, 2023 and December 31, 2022, the Company maintained servicing rights related to $238.7 million and $409.6 million, respectively, in loans previously sold to third parties.

Service charges on loans and deposits increased primarily due to an increase in loan prepayment fees and other loan fees.

The decrease in other noninterest income was due primarily to an decrease in gain on sale of mortgage servicing rights.

The Company sold mortgage servicing rights related to $233.1 million in loans serviced for third parties.

The sale generated $2.1 million in net proceeds on a mortgage servicing rights book value of $2.0 million and resulted in a $152,000 gain during the year ended December 31, 2024.

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

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

Noninterest Expenses

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Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment decreased $3.7 million, or 5.7%, to $61.4 million for the year ended December 31, 2024.

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

Additionally, salaries expense decreased due a reduction in headcount during the year ended December 31, 2023 compared to the year ended December 31, 2022.

The decrease primarily related to decreased salary expense and incentives expense driven by reduced employee headcount and a decrease in new branches added over the past year.

Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $819,000 or 4.1%, to $20.7 million during the year ended December 31, 2024.

The increase was primarily due to an increase in variable compensation and overall salary expense due to annual raises and an increase in full-time equivalents due to open positions being filled.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $410,000 to $4.7 million during the year ended December 31, 2023 primarily resulting from lower equipment lease, maintenance, computer, and depreciation expenses.

The increase was primarily due to an increase in health insurance expense as claims increased.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $789,000 to $3.9 million during the year ended December 31, 2024 primarily resulting from decreased rent and depreciation expenses and underperforming branches were closed over the past year.

Occupancy, office furniture and equipment expense at the community banking segment increased $40,000 to $3.7 million during the year ended December 31, 2024 compared to the prior year.

The decrease was due primarily to increased building maintenance/repair costs.

The increase was due primarily to increases related to new equipment expenses.

Advertising expense decreased $225,000, or 6.0%, to $3.6 million during the year ended December 31, 2024.

This was primarily due to a decrease at the mortgage banking segment in an effort to control costs.

Data processing expense increased $183,000, or 4.1% to $4.7 million during the year ended December 31, 2023.

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

Data processing expense increased $325,000 or 7.0% to $5.0 million during the year ended December 31, 2024 This was primarily due to increases at the community banking segment for continued investments in technology, software, and security.

Professional fees increased $498,000, or 18.5%, to $3.2 million during the year ended December 31, 2024.

The increase was due to receiving a countersuit settlement related to a previously closed legal matter at the mortgage banking segment during the year ended December 31, 2022.

Additionally, legal costs increased at the mortgage banking segment due to ongoing legal matters.

Other noninterest expense decreased $823,000, or 6.5%, to $11.8 million during the year ended December 31, 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 $3.3 million to $1.7 million during the year ended December 31, 2023, compared to $5.0 million during the year ended December 31, 2022 as pretax income decreased $13.4 million.

The increase was due to legal costs at the mortgage banking segment.

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

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

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

In relation to this matter, we had an accrued legal liability balance of $1.3 million included within accrued liabilities on the consolidated balance sheets as of December 31, 2024.

Other noninterest expense decreased $4.5 million, or 38.5%, to $7.2 million during the year ended December 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 increased $3.7 million to $5.3 million during the year ended December 31, 2024, compared to $1.7 million during the year ended December 31, 2023 as pretax income decreased $13.4 million.

Income tax expense was recognized during the year ended December 31, 2024 at an effective rate of 22.1% compared to an effective rate of 15.0% during the year ended December 31, 2023.

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

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.

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 year to recognize a reduction in current state income tax provision.

Liquidity and Capital Resources

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We purchased $34.3 million and $29.5 million in debt securities and mortgage related securities classified as available for sale during the years ended December 31, 2024 and 2023, respectively.

The net decreases in deposits were $8.4 million and $34.4 for the year ending December 31, 2023 and 2022.

We received a $1.2 million death benefit on a bank owned life insurance policy in 2022.

There was an increase in net borrowings of $224.3 million for the year ended December 31, 2023 and a net decrease in borrowings of $90.3 million for the year ended December 31, 2022.

The net changes in deposits were a net increase of $169.3 million and a net decrease of $8.4 million for the year ending December 31, 2024 and 2023, respectively.

There was a decrease in net borrowings of $164.5 million for the year ended December 31, 2024 and a net increase in borrowings of $224.3 million for the year ended December 31, 2023.

During the years ended December 31, 2024 and 2023, we repurchased common stock of $14.9 million and $26.0 million, respectively.

During the years ended December 31, 2024 and 2023, we paid cash dividends on common stock of $11.3 million and $15.4 million, respectively.

Deposits decreased by $8.4 million from December 31, 2022 to December 31, 2023.

The decrease was driven by a $96.4 million decrease in total transaction accounts, offset by an $88.0 million increase in time deposits.

Deposits increased by $169.3 million from December 31, 2023 to December 31, 2024.

The increase was driven by a $175.2 million increase in time deposits and a $10.0 million increase in money market & savings account, offset by an $16.0 million decrease in demand deposits.

Of the increase in time deposits, $94.3 million was due to the addition of brokered certificates of deposit.

Deposit flows are generally affected by the level of interest rates, market conditions, products offered by local competitors, and other factors.

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Shareholders’ equity decreased by $4.9 million, or 1.4%, to $339.1 million at December 31, 2024 from $344.1 million at December 31, 2023.

Shareholders' equity decreased primarily due to the declaration of dividends and the repurchase of stock.

Shareholders' equity decreased primarily due to the the ongoing repurchase of stock, dividends declared, 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 and equity awards vested, 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 2024.

As of December 31, 2023, the Company had repurchased 15.9 million shares at an average price of $15.04 under previously approved stock repurchase plans.

As of December 31, 2024, the Company had approximately 1.7 million shares remaining in the plan.

Waterstone Financial, Inc.

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

During the year ended December 31, 2023, our FHLB short-term debt increased by $123.3 million and we repaid $304.0 million in FHLB long-term debt and borrowed $259.0 million of new FHLB long-term debt.

In addition, we borrowed $145.0 in short-term debt from the Federal Reserve Bank.

During the year ended December 31, 2024, our short-term debt decreased $159.5 million, of which $145.0 million was debt paid off from the Federal Reserve Bank through the borrowing facility called the Bank Term Funding Program.

In addition, we repaid $175.0 million in FHLB long-term debt and took on $170.0 million of new FHLB long-term debt.

See Note 8 - Borrowings of the notes to the consolidated financial statements for additional information about the remaining maturities of our FHLB long-term debt.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis