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WSBF Waterstone Financial

Filed: 5 May 21, 3:16pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

            Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021

OR

      Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-36271

WATERSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Maryland90-1026709
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
  
11200 W. Plank Court Wauwatosa, Wisconsin53226
(Address of principal executive offices)(Zip Code)

(414) 761-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class 
Trading
Symbol
 Name of each exchange on which registered
Common Stock, $0.01 Par Value WSBF The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                No      

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes                  No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                  No      
The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 25,232,284 at May 4, 2021.












WATERSTONE FINANCIAL, INC.

10-Q INDEX

 Page No.
  
PART I. FINANCIAL INFORMATION 
  
Item l. Financial Statements 
  
  
PART II. OTHER INFORMATION 
  
  





PART I — FINANCIAL INFORMATION

Item 1. Financial Statements


WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 (Unaudited)    
  March 31, 2021  December 31, 2020 
Assets (Dollars In Thousands, except share and per share data) 
Cash $160,144  $56,190 
Federal funds sold  19,029   18,847 
Interest-earning deposits in other financial institutions and other short term investments  19,228   19,730 
Cash and cash equivalents  198,401   94,767 
Securities available for sale (at fair value)  162,263   159,619 
Loans held for sale (at fair value)  341,293   402,003 
Loans receivable  1,335,423   1,375,137 
Less: Allowance for loan losses  17,780   18,823 
Loans receivable, net  1,317,643   1,356,314 
         
Office properties and equipment, net  23,402   23,722 
Federal Home Loan Bank stock (at cost)  26,720   26,720 
Cash surrender value of life insurance  63,874   63,573 
Real estate owned, net  150   322 
Prepaid expenses and other assets  64,265   57,547 
Total assets $2,198,011  $2,184,587 
         
Liabilities and Shareholders’ Equity        
Liabilities:        
Demand deposits $194,978  $188,225 
Money market and savings deposits  318,959   295,317 
Time deposits  705,754   701,328 
Total deposits  1,219,691   1,184,870 
         
Borrowings  490,505   508,074 
Advance payments by borrowers for taxes  12,048   3,522 
Other liabilities  45,086   75,003 
Total liabilities  1,767,330   1,771,469 
         
Shareholders’ equity:        
Preferred stock (par value $0.01 per share)        
Authorized -  50,000,000 shares at March 31, 2021 and at December 31, 2020, 0 shares issued  0   0 
Common stock (par value $0.01 per share)        
Authorized - 100,000,000 shares at March 31, 2021 and at December 31, 2020        
Issued - 25,230,284 at March 31, 2021 and 25,087,976 at December 31, 2020        
Outstanding - 25,230,284 at March 31, 2021 and 25,087,976 at December 31, 2020  252   251 
Additional paid-in capital  182,533   180,684 
Retained earnings  261,859   245,287 
Unearned ESOP shares  (15,133)  (15,430)
Accumulated other comprehensive income, net of taxes  1,170   2,326 
Total shareholders’ equity  430,681   413,118 
Total liabilities and shareholders’ equity $2,198,011  $2,184,587 

See accompanying notes to unaudited consolidated financial statements.



WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

  Three months ended March 31, 
  2021  2020 
  (In Thousands, except per share amounts) 
       
Interest income:      
Loans $16,603  $17,687 
Mortgage-related securities  491   702 
Debt securities, federal funds sold and short-term investments  875   1,063 
Total interest income  17,969   19,452 
Interest expense:        
Deposits  1,517   4,318 
Borrowings  2,500   2,608 
Total interest expense  4,017   6,926 
Net interest income  13,952   12,526 
Provision (credit) for loan losses  (1,070)  785 
Net interest income after provision (credit) for loan losses  15,022   11,741 
Noninterest income:        
Service charges on loans and deposits  690   481 
Increase in cash surrender value of life insurance  301   353 
Mortgage banking income  54,391   30,406 
Other  817   224 
Total noninterest income  56,199   31,464 
Noninterest expenses:        
Compensation, payroll taxes, and other employee benefits  34,123   24,401 
Occupancy, office furniture, and equipment  2,565   2,741 
Advertising  824   900 
Data processing  971   1,006 
Communications  331   338 
Professional fees  (315)  1,832 
Real estate owned  (12)  11 
Loan processing expense  1,335   1,076 
Other  3,178   2,903 
Total noninterest expenses  43,000   35,208 
Income before income taxes  28,221   7,997 
Income tax expense  6,877   1,928 
Net income $21,344  $6,069 
Income per share:        
Basic $0.90  $0.24 
Diluted $0.89  $0.24 
Weighted average shares outstanding:        
Basic  23,735   25,405 
Diluted  23,950   25,612 

See accompanying notes to unaudited consolidated financial statements.



WATERSONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

  Three months ended March 31, 
  2021  2020 
  (In Thousands) 
Net income $21,344  $6,069 
         
Other comprehensive (loss) income, net of tax:        
Net unrealized holding (loss) gains on available for sale securities:        
Net unrealized holding (loss) gains arising during the period, net of tax benefit (expense) of $432 and $(319), respectively  (1,156)  850 
Total other comprehensive (loss) income  (1,156)  850 
Comprehensive income $20,188  $6,919 

See accompanying notes to unaudited consolidated financial statements.




WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)


 Common Stock  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Unearned
ESOP
Shares
  
Accumulated
Other
Comprehensive Income (Loss)
  
Total
Shareholders'
Equity
 
  Shares  Amount                
For the three months ended March 31, 2020 (In Thousands, except per share amounts) 
Balances at December 31, 2019  27,148  $271  $211,997  $197,393  $(16,617) $642  $393,686 
                             
Comprehensive income:                            
Net income  -   0   0   6,069   0   0   6,069 
Other comprehensive income  -   0   0   0   0   850   850 
Total comprehensive income                          6,919 
                             
ESOP shares committed to be released to Plan participants  -   0   152   0   297   0   449 
Cash dividend declared, $0.62 per share  -   0   0   (15,650)  0   0   (15,650)
Proceeds from stock option exercises  39   1   452   0   0   0   453 
Stock compensation expense  -   0   214   0   0   0   214 
Purchase of common stock returned to authorized but unissued  (912)  (9)  (14,236)  0   0   0   (14,245)
Balances at March 31, 2020  26,275  $263  $198,579  $187,812  $(16,320) $1,492  $371,826 
                             
For the three months ended March 31, 2021 (In Thousands, except per share amounts) 
Balances at December 31, 2020  25,088  $251  $180,684  $245,287  $(15,430) $2,326  $413,118 
                             
Comprehensive income:                            
Net income  -   0   0   21,344   0   0   21,344 
Other comprehensive loss  -   0   0   0   0   (1,156)  (1,156)
Total comprehensive income                          20,188 
                             
ESOP shares committed to be released to Plan participants  -   0   223   0   297   0   520 
Cash dividend declared, $0.20 per share  -   0   0   (4,772)  0   0   (4,772)
Proceeds from stock option exercises  142   1   1,458   0   0   0   1,459 
Stock compensation expense  -   0   175   0   0   0   175 
Purchase of common stock returned to authorized but unissued  0   0   (7)  0   0   0   (7)
Balances at March 31, 2021  25,230  $252  $182,533  $261,859  $(15,133) $1,170  $430,681 

See accompanying notes to unaudited consolidated financial statements






WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 Three months ended March 31, 
  2021  2020 
  (In Thousands) 
       
Operating activities:      
Net income $21,344  $6,069 
Adjustments to reconcile net income to cash provided by (used) in operating activities:        
Provision (credit) for loan losses  (1,070)  785 
Depreciation, amortization, accretion  1,749   1,257 
Deferred taxes  2,059   40 
Stock based compensation  175   214 
Origination of mortgage servicing rights  (3,516)  (58)
Gain on sale of loans held for sale  (53,708)  (31,837)
Loans originated for sale  (1,109,074)  (687,694)
Proceeds on sales of loans originated for sale  1,223,492   676,918 
Decrease (increase) in accrued interest receivable  33   (147)
Increase in cash surrender value of life insurance  (301)  (353)
Increase in derviative assets  (544)  (6,571)
Decrease in accrued interest on deposits and borrowings  (102)  (38)
(Increase) decrease in prepaid tax expense  (463)  96 
Legal settlement  (4,250)  0 
(Decrease) increase in derviative liabilities  (5,140)  9,465 
Net gain related to real estate owned  (11)  (5)
Change in other assets and other liabilities, net  (11,282)  (5,804)
Net cash provided by (used in) operating activities  59,391   (37,663)
         
Investing activities:        
Net decrease (increase) in loans receivable  39,742   (21,293)
Purchases of:        
FHLB stock  0   (1,800)
Mortgage related securities  (16,153)  (686)
Debt securities  0   (2,500)
Premises and equipment, net  (268)  (241)
Proceeds from:        
Principal repayments on mortgage-related securities  11,022   9,729 
Maturities of debt securities  885   1,555 
Sales of real estate owned  183   59 
Net cash provided by (used in) investing activities  35,411   (15,177)
         
Financing activities:        
Net increase in deposits  34,821   18,292 
Net change in short term borrowings  (17,569)  38,618 
Cash paid for advance payments by borrowers for taxes  (5,025)  (3,040)
Cash dividends on common stock  (4,847)  (2,414)
Purchase of common stock returned to authorized but unissued  (7)  (14,245)
Proceeds from stock option exercises  1,459   453 
Net cash provided by financing activities  8,832   37,664 
Increase (decrease) in cash and cash equivalents  103,634   (15,176)
Cash and cash equivalents at beginning of period  94,767   74,300 
Cash and cash equivalents at end of period $198,401  $59,124 
         
Supplemental information:        
Cash paid or credited during the period for:        
Income tax payments $5,281  $1,791 
Interest payments  4,119   6,964 
Noncash activities:        
Dividends declared but not paid in other liabilities  5,157   16,737 

See accompanying notes to unaudited consolidated financial statements.






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. WaterStone Bank also has an active mortgage banking subsidiary, Waterstone Mortgage Corporation.

WaterStone Bank conducts its community banking business from 14 banking offices located in Milwaukee, Washington and Waukesha Counties, Wisconsin. WaterStone Bank's principal lending activity is originating one- to four-family, multi-family residential real estate, and commercial real estate loans for retention in its portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, commercial business loans, and consumer loans. WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances. Our deposit offerings include: certificates of deposit, money market savings accounts, transaction deposit accounts, non-interest bearing demand accounts and individual retirement accounts. Our investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations.

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, 2020 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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 loan losses, income taxes, and fair value measurements. Actual results could differ from those estimates.

Impacts of COVID-19

In March, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak and continuing spread of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which may negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impacts are unknown at this time.

Subsequent Events

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 months ended March 31, 2021 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.



Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income. The Company reclassed certain line items in the Consolidated Statements of Cash Flows.

Impact of Recent Accounting Pronouncements

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It included an option for entities to delay the adoption of ASC Topic 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. Due to the uncertainty on the economy and unemployment from COVID-19, the Company determined to delay its adoption of ASC Topic 326 and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASC Topic 326. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. The legislation extended the delay of the adoption of ASC Topic 326 allowed under the CARES Act until the earlier of the termination date of the national emergency declaration by the President or January 1, 2022.

The Company has input the available historical Company data to build an internal model and is reviewing the assumptions to support the calculation under ASC Topic 326. Management’s methodology for estimating the allowance for credit losses under the current expected credit losses (CECL) model includes the use of relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience by vintage classified by loans with similar risk profiles provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, portfolio volume, delinquency rates, interest rates, or other relevant factors. Management will continue to review and adjust these and other factors. Ongoing evaluations have been performed by vintage adjusted for prepayments. For two portfolio segments, management expects to use a weighted average remaining maturity methodology, which contemplates loss expectations on a pool basis, relying on historic loss rates.

Financial statement users should be aware that the allowance for credit loss is, by design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors.

As we continue to evaluate the provisions of ASC Topic 326 as of and for the three months ended March 31, 2021, we are considering the following in developing our forecast and its effect on our CECL calculations:

Duration, extent and severity of COVID-19;
Effect of government assistance; and
Unemployment and effect on economies and markets.





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, 2021 
  Amortized cost  Gross unrealized gains  Gross unrealized losses  Fair value 
  (In Thousands) 
Mortgage-backed securities $23,862  $868  $(152) $24,578 
Collateralized mortgage obligations:                
Government sponsored enterprise issued  67,447   1,428   (460)  68,415 
Private -label issued  3,081   49   0   3,130 
Mortgage-related securities  94,390   2,345   (612)  96,123 
                 
Government sponsored enterprise bonds  2,500   0   (32)  2,468 
Municipal securities  50,574   1,683   (16)  52,241 
Other debt securities  12,500   24   (1,093)  11,431 
Debt securities  65,574   1,707   (1,141)  66,140 
  $159,964  $4,052  $(1,753) $162,263 

 December 31, 2020 
  Amortized cost  Gross unrealized gains  Gross unrealized losses  Fair value 
  (In Thousands) 
Mortgage-backed securities $24,005  $1,110  $(15) $25,100 
Collateralized mortgage obligations:                
Government sponsored enterprise issued  61,604   1,693   (13)  63,284 
Private label issued  3,611   54   0   3,665 
Mortgage-related securities  89,220   2,857   (28)  92,049 
                 
Government sponsered enterprise bonds  2,500   3   0   2,503 
Municipal securities  51,512   2,102   0   53,614 
Other debt securities  12,500   46   (1,093)  11,453 
Debt securities  66,512   2,151   (1,093)  67,570 
  $155,732  $5,008  $(1,121) $159,619 

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, 2021, $687,000 of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2020, $785,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities and $7.2 million were pledged as collateral to secure back-to-back swaps.

The amortized cost and fair values of investment securities by contractual maturity at March 31, 2021 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.

 
Amortized
Cost
  
Fair
Value
 
  (In Thousands) 
Debt and other securities      
Due within one year $9,390  $9,456 
Due after one year through five years  33,922   34,913 
Due after five years through ten years  17,143   16,649 
Due after ten years  5,119   5,122 
Mortgage-related securities  94,390   96,123 
  $159,964  $162,263 



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:

 March 31, 2021 
  Less than 12 months  12 months or longer  Total 
  Fair value  Unrealized loss  Fair value  Unrealized loss  Fair value  Unrealized loss 
  (In Thousands) 
Mortgage-backed securities $4,308  $(152) $0  $0  $4,308  $(152)
Collateralized mortgage obligations:                        
Government sponsored enterprise issued  19,956   (460)  0   0   19,956   (460)
Government sponsored enterprise bonds  2,468   (32)  0   0   2,468   (32)
Municipal securities  3,171   (16)  0   0   3,171   (16)
Other debt securities  0   0   8,907   (1,093)  8,907   (1,093)
  $29,903  $(660) $8,907  $(1,093) $38,810  $(1,753)


 December 31, 2020 
  Less than 12 months  12 months or longer  Total 
  Fair value  Unrealized loss  Fair value  Unrealized loss  Fair value  Unrealized loss 
  (In Thousands) 
Mortgage-backed securities $2,089  $(15) $0  $0  $2,089  $(15)
Collateralized mortgage obligations:                        
Government sponsored enterprise issued  4,880   (13)  0   0   4,880   (13)
Municipal securities  0   0   0   0   0   0 
Other debt securities  
0
   
0
   
8,907
   
(1,093
)
  
8,907
   
(1,093
)
  $6,969  $(28) $8,907  $(1,093) $15,876  $(1,121)

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral.

As of March 31, 2021, the Company held 1 municipal security that had previously been deemed to be other-than-temporarily impaired. The security was issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of this security resulted in $77,000 in credit losses charged to earnings with respect to this municipal security. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price.  There have been no additional credit losses related to the security.  As of March 31, 2021, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of March 31, 2021, the Company had 1 corporate debt security, included in other debt securities, which had been in an unrealized loss position for twelve months or longer. The security was determined not to be other-than-temporarily impaired as of March 31, 2021. The Company has determined that the decline in fair value of these securities is not attributable to credit deterioration, and as the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, this security is not considered other-than-temporarily impaired.

During the three months ended March 31, 2021 and March 31, 2020, there were 0 sales of securities.





Note 3 - Loans Receivable

Loans receivable at March 31, 2021 and December 31, 2020 are summarized as follows:

 March 31, 2021  December 31, 2020 
  (In Thousands) 
Mortgage loans:      
Residential real estate:      
One- to four-family $401,170  $426,792 
Multi-family  572,165   571,948 
Home equity  14,673   14,820 
Construction and land  57,123   77,080 
Commercial real estate  241,790   238,375 
Consumer  698   736 
Commercial loans  47,804   45,386 
  $1,335,423  $1,375,137 

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers. 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 $1.01 billion and $1.07 billion at March 31, 2021 and December 31, 2020, respectively, were pledged as collateral against $474.0 million and $499.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at March 31, 2021 and December 31, 2020.

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 $7.0 million as of March 31, 2021 and $7.2 million as of December 31, 2020.  NaN of these loans were past due or considered impaired as of March 31, 2021 or December 31, 2020.

As of March 31, 2021, there were 0 loans 90 or more days past due and still accruing interest.  As of December 31, 2020, there was a $586,000 loan that was 90 or more days past due and still accruing interest.  The Bank received full payoff of the loan subsequent to December 31, 2020.

An analysis of past due loans receivable as of March 31, 2021 and December 31, 2020 follows:

As of March 31, 2021 
 
1-59 Days Past Due (1)
  
60-89 Days Past Due (2)
  90 Days or Greater  Total Past Due  
Current (3)
  Total Loans 
 (In Thousands) 
Mortgage loans:                 
Residential real estate:                 
One- to four-family $4,170  $0  $2,159  $6,329  $394,841  $401,170 
Multi-family  0   0   314   314   571,851   572,165 
Home equity  36   0   30   66   14,607   14,673 
Construction and land  0   0   43   43   57,080   57,123 
Commercial real estate  0   0   30   30   241,760   241,790 
Consumer  0   0   0   0   698   698 
Commercial loans  140   0   0   140   47,664   47,804 
Total $4,346  $0  $2,576  $6,922  $1,328,501  $1,335,423 



As of December 31, 2020 
 
1-59 Days Past Due (1)
  
60-89 Days Past Due (2)
  90 Days or Greater  Total Past Due  
Current (3)
  Total Loans 
 (In Thousands) 
Mortgage loans:                 
Residential real estate:                 
One- to four-family $3,796  $142  $3,530  $7,468  $419,324  $426,792 
Multi-family  0   0   314   314   571,634   571,948 
Home equity  0   0   30   30   14,790   14,820 
Construction and land  0   0   43   43   77,037   77,080 
Commercial real estate  0   0   41   41   238,334   238,375 
Consumer  0   0   0   0   736   736 
Commercial loans  0   0   0   0   45,386   45,386 
Total $3,796  $142  $3,958  $7,896  $1,367,241  $1,375,137 


(1)   Includes $394,000 and $611,000 at March 31, 2021 and December 31, 2020, respectively, which are on non-accrual status.

(2)   Includes $0 and $0 at March 31, 2021 and December 31, 2020, respectively, which are on non-accrual status.

(3)   Includes $1.2 million and $1.6 million at March 31, 2021 and December 31, 2020, respectively, which are on non-accrual status.

A summary of the activity for the three months ended March 31, 2021 and 2020 in the allowance for loan losses follows:

 
One- to
Four- Family
  Multi-Family  Home Equity  Construction and Land  Commercial Real Estate  Consumer  Commercial  Total 
  (In Thousands) 
Three months ended March 31, 2021                
Balance at beginning of period $5,459  $5,600  $194  $1,755  $5,138  $35  $642  $18,823 
Provision (credit) for loan losses  (862)  421   (15)  (505)  (123)  (2)  16   (1,070)
Charge-offs  (14)  0   0   0   0   0   0   (14)
Recoveries  11   23   4   1   2   0   0   41 
Balance at end of period $4,594  $6,044  $183  $1,251  $5,017  $33  $658  $17,780 

Three months ended March 31, 2020                   
Balance at beginning of period $4,907  $4,138  $201  $610  $2,145  $14  $372  $12,387 
Provision (credit) for loan losses  (234)  160   32   76   654   10   87   785 
Charge-offs  (6)  0   0   0   0   (1)  0   (7)
Recoveries  47   3   6   1   4   0   0   61 
Balance at end of period $4,714  $4,301  $239  $687  $2,803  $23  $459  $13,226 



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

 
One- to
Four- Family
  
Multi-
Family
  
Home
Equity
  
Construction
and Land
  
Commercial
Real Estate
  Consumer  Commercial  Total 
  (In Thousands) 
Allowance related to loans individually evaluated for impairment $21  $0  $0  $0  $0  $0  $0  $21 
Allowance related to loans collectively evaluated for impairment  4,573   6,044   183   1,251   5,017   33   658   17,759 
Balance at end of period $4,594  $6,044  $183  $1,251  $5,017  $33  $658  $17,780 
                                 
Loans individually evaluated for impairment $6,462  $314  $59  $43  $6,964  $0  $1,097  $14,939 
Loans collectively evaluated for impairment  394,708   571,851   14,614   57,080   234,826   698   46,707   1,320,484 
Total gross loans $401,170  $572,165  $14,673  $57,123  $241,790  $698  $47,804  $1,335,423 

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2020 follows:

 
One- to
Four-Family
  
Multi-
Family
  
Home
Equity
  
Construction
and Land
  
Commercial
Real Estate
  Consumer  Commercial  Total 
  (In Thousands) 
Allowance related to loans individually evaluated for impairment $23  $0  $0  $0  $0  $0  $0  $23 
Allowance related to loans collectively evaluated for impairment  5,436   5,600   194   1,755   5,138   35   642   18,800 
Balance at end of period $5,459  $5,600  $194  $1,755  $5,138  $35  $642  $18,823 
                                 
Loans individually evaluated for impairment $7,805  $341  $63  $43  $7,248  $0  $1,097  $16,597 
Loans collectively evaluated for impairment  418,987   571,607   14,757   77,037   231,127   736   44,289   1,358,540 
Total gross loans $426,792  $571,948  $14,820  $77,080  $238,375  $736  $45,386  $1,375,137 



The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of March 31, 2021 and December 31, 2020:

 
One
to Four- Family
  Multi-Family  
Home
Equity
  
Construction
and Land
  
Commercial
Real Estate
  Consumer  Commercial  Total 
  (In Thousands) 
At March 31, 2021                        
Substandard $6,462  $314  $242  $43  $6,964  $0  $1,796  $15,821 
Watch  6,164   272   83   4,269   5,585   0   3,127   19,500 
Pass  388,544   571,579   14,348   52,811   229,241   698   42,881   1,300,102 
  $401,170  $572,165  $14,673  $57,123  $241,790  $698  $47,804  $1,335,423 
                                 
At December 31, 2020                                
Substandard $7,804  $341  $248  $43  $6,026  $0  $710  $15,172 
Watch  7,667   275   15   4,282   6,714   0   4,101   23,054 
Pass  411,321   571,332   14,557   72,755   225,635   736   40,575   1,336,911 
  $426,792  $571,948  $14,820  $77,080  $238,375  $736  $45,386  $1,375,137 

Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies.  Our underwriting policies require an officers' loan committee review and approval of all loans in excess of $500,000.  A member of the credit department, independent of the loan originator, performs a loan review for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, and commercial real estate loans that individually, or as part of an overall borrower relationship exceed $1.0 million in potential exposure and review commercial loans that individually, or as part of an overall borrower relationship exceed $200,000 in potential exposure.  Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year.  With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Finally, a loan is considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.

The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.

Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value.  The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years.  In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.

With respect to multi-family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.



The following tables present data on impaired loans at March 31, 2021 and December 31, 2020.

 As of March 31, 2021 
  
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
 
  (In Thousands) 
Total Impaired with Reserve            
One- to four-family $206  $206  $21  $0 
Multi-family  0   0   0   0 
Home equity  0   0   0   0 
Construction and land  0   0   0   0 
Commercial real estate  0   0   0   0 
Consumer  0   0   0   0 
Commercial  0   0   0   0 
   206   206   21   0 
Total Impaired with no Reserve                
One- to four-family  6,256   7,019   0   763 
Multi-family  314   314   0   0 
Home equity  59   59   0   0 
Construction and land  43   51   0   8 
Commercial real estate  6,964   6,964   0   0 
Consumer  0   0   0   0 
Commercial  1,097   1,097   0   0 
   14,733   15,504   0   771 
Total Impaired                
One- to four-family  6,462   7,225   21   763 
Multi-family  314   314   0   0 
Home equity  59   59   0   0 
Construction and land  43   51   0   8 
Commercial real estate  6,964   6,964   0   0 
Consumer  0   0   0   0 
Commercial  1,097   1,097   0   0 
  $14,939  $15,710  $21  $771 



 As of December 31, 2020 
  
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
 
  (In Thousands) 
Total Impaired with Reserve            
One- to four-family $208  $208  $23  $0 
Multi-family  0   0   0   0 
Home equity  0   0   0   0 
Construction and land  0   0   0   0 
Commercial real estate  0   0   0   0 
Consumer  0   0   0   0 
Commercial  0   0   0   0 
   208   208   23   0 
Total Impaired with no Reserve                
One- to four-family  7,597   8,444   0   847 
Multi-family  341   352   0   11 
Home equity  63   63   0   0 
Construction and land  43   51   0   8 
Commercial real estate  7,248   7,248   0   0 
Consumer  0   0   0   0 
Commercial  1,097   1,097   0   0 
   16,389   17,255   0   866 
Total Impaired                
One- to four-family  7,805   8,652   23   847 
Multi-family  341   352   0   11 
Home equity  63   63   0   0 
Construction and land  43   51   0   8 
Commercial real estate  7,248   7,248   0   0 
Consumer  0   0   0   0 
Commercial  1,097   1,097   0   0 
  $16,597  $17,463  $23  $866 

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



The following tables present data on impaired loans for the three months ended March 31, 2021 and 2020.

 Three months ended March 31, 
  2021  2020 
  
Average
Recorded
Investment
  
Interest
Paid
  
Average
Recorded
Investment
  
Interest
Paid
 
  (In Thousands) 
Total Impaired with Reserve            
One- to four-family $207  $4  $216  $4 
Multi-family  0   0   0   0 
Home equity  0   0   0   0 
Construction and land  0   0   0   0 
Commercial real estate  0   0   5   10 
Consumer  0   0   0   0 
Commercial  0   0   0   0 
   207   4   221   14 
Total Impaired with no Reserve                
One- to four-family  6,294   79   8,265   98 
Multi-family  314   0   656   17 
Home equity  60   1   388   4 
Construction and land  43   0   0   0 
Commercial real estate  6,967   78   349   4 
Consumer  0   0   0   0 
Commercial  1,097   12   0   0 
   14,775   170   9,658   123 
Total Impaired                
One- to four-family  6,501   83   8,481   102 
Multi-family  314   0   656   17 
Home equity  60   1   388   4 
Construction and land  43   0   0   0 
Commercial real estate  6,967   78   354   14 
Consumer  0   0   0   0 
Commercial  1,097   12   0   0 
  $14,982  $174  $9,879  $137 

When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors.

The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $14.7 million of impaired loans as of March 31, 2021 for which no allowance has been provided, $771,000 in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loans’ net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans which may result in additional provisions to the allowance for loans losses or charge-offs.



At March 31, 2021, total impaired loans included $11.8 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months. At December 31, 2020, total impaired loans included $11.6 million of troubled debt restructurings.

The following presents data on troubled debt restructurings:

 As of March 31, 2021 
  Accruing Non-accruing Total 
  Amount  Number Amount  Number Amount  Number 
 (Dollars in Thousands) 
                
One- to four-family $2,728   2  $1,088   4  $3,816   6 
Commercial real estate  6,934   2   0   0   6,934   2 
Commercial  1,097   1   0   0   1,097   1 
  $10,759   5  $1,088   4  $11,847   9 

 As of December 31, 2020 
  Accruing Non-accruing Total 
  Amount  Number Amount  Number Amount  Number 
 (Dollars in Thousands) 
                
One- to four-family $2,733   2  $532   3  $3,265   5 
Commercial real estate  7,207   3   0   0   7,207   3 
Commercial  1,097   1   0   0   1,097   1 
  $11,037   6  $532   3  $11,569   9 

At March 31, 2021, $11.8 million in loans had been modified in troubled debt restructurings and $1.1 million of these loans were included in the non-accrual loan total. The remaining $10.8 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.

All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, 0 valuation allowance was recorded as of March 31, 2021 with respect to the $11.8 million in troubled debt restructurings. As of December 31, 2020, 0 valuation allowance had been established with respect to the $11.6 million in troubled debt restructurings.

After a troubled debt restructuring reverts to market terms, a minimum of 6 consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.



The following presents troubled debt restructurings by concession type:

 As of March 31, 2021 
 
Performing in
accordance with
modified terms
  In Default  Total 
 Amount  Number  Amount  Number  Amount  Number 
 (Dollars in Thousands) 
Interest reduction and principal forbearance $3,206   4  $0   0  $3,206   4 
Interest reduction  27   1   0   0   27   1 
Principal forbearance  8,614   4   0   0   8,614   4 
  $11,847   9  $0   0  $11,847   9 

 As of December 31, 2020 
 
Performing in
accordance with
modified terms
  In Default  Total 
 Amount  Number  Amount  Number  Amount  Number 
 (Dollars in Thousands) 
Interest reduction and principal forbearance $3,236   4  $0   0  $3,236   4 
Interest reduction  302   2   0   0   302   2 
Principal forebearance  8,031   3   0   0   8,031   3 
  $11,569   9  $0   0  $11,569   9 

There was 1 one- to four-family loan modified as troubled debt restructurings with a balance of $583,000 during the three months ended March 31, 2021. There were 0 loans modified as troubled debt restructurings during the three months ended March 31, 2020.

There were 0 troubled debt restructurings within the past twelve months for which there was a default during the three months ended March 31, 2021 or March 31, 2020.

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act.  At March 31, 2021, the Company had approximately $910,000 in outstanding loans subject to principal deferral agreements.

The following table presents data on non-accrual loans as of March 31, 2021 and December 31, 2020:

 March 31, 2021  December 31, 2020 
  (Dollars in Thousands) 
Non-accrual loans:      
Residential real estate:      
One- to four-family $3,734  $5,072 
Multi-family  314   341 
Home equity  59   63 
Construction and land  43   43 
Commercial real estate  30   41 
Commercial  0   0 
Consumer  0   0 
Total non-accrual loans $4,180  $5,560 
Total non-accrual loans to total loans receivable  0.31%  0.40%
Total non-accrual loans to total assets  0.19%  0.25%





Note 4— Real Estate Owned

Real estate owned is summarized as follows:

 March 31, 2021  December 31, 2020 
  (In Thousands) 
       
One- to four-family $0  $0 
Multi-family  0   0 
Construction and land  150   322 
Commercial real estate  0   0 
    Total real estate owned  150   322 

The following table presents the activity in the Company’s real estate owned:

 Three months ended March 31, 
  2021  2020 
  (In Thousands) 
Real estate owned at beginning of the period $322  $748 
Transferred from loans receivable  0   0 
Sales (net of gains / losses)  (172)  (46)
Write downs  0   0 
Other  0   0 
    Real estate owned at the end of the period $150  $702 

Residential one- to four-family mortgage loans that were in the process of foreclosure were $2.3 million at March 31, 2021 and $1.7 million at December 31, 2020.


Note 5— Mortgage Servicing Rights

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

 Three months ended March 31, 
  2021  2020 
  (In Thousands) 
Mortgage servicing rights at beginning of the period $5,977  $282 
Additions  3,516   58 
Amortization  (663)  (51)
Sales  0   0 
Mortgage servicing rights at end of the period  8,830   289 
Valuation allowance during the period  0   (53)
Mortgage servicing rights at end of the period, net $8,830  $236 

During the three months ended March 31, 2021, $1.11 billion in residential loans were originated for sale on a consolidated basis. During the same period, sales of loans held for sale totaled $1.22 billion, generating mortgage banking income of $54.4 million. The unpaid principal balance of loans serviced for others was $1.26 billion and $871.8 million at March 31, 2021 and December 31, 2020, respectively. These loans are not reflected in the consolidated statements of financial condition.

The fair value of mortgage servicing rights were $13.0 million at March 31, 2021 and $236,000 at March 31, 2020. During the three months ended March 31, 2021 and March 31, 2020, the Company did not sell any mortgage servicing rights.

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

 (In Thousands) 
Estimate for the period ended December 31:   
2021 $1,132 
2022  1,400 
2023  1,216 
2024  1,108 
Thereafter  3,974 
Total  8,830 




Note 6— Deposits

At March 31, 2021 and December 31, 2020, time deposits with aggregate balances greater than $250,000 amounted to $114.4 million and $102.6 million, respectively.

A summary of the contractual maturities of time deposits at March 31, 2021 is as follows:

 (In Thousands) 
    
Within one year $594,237 
More than one to two years  99,840 
More than two to three years  9,718 
More than three to four years  886 
More than four through five years  1,073 
  $705,754 



Note 7— Borrowings

Borrowings consist of the following:

 March 31, 2021  December 31, 2020 
  Balance  Weighted Average Rate  Balance  Weighted Average Rate 
  (Dollars in Thousands) 
Short term:            
Repurchase agreement $16,505   3.25% $9,074   3.25%
Federal Home Loan Bank, Chicago  4,000   0.00%  29,000   0.22%
                 
Long term:                
  Federal Home Loan Bank, Chicago advances maturing:                
2027  50,000   1.73%  50,000   1.73%
2028  255,000   2.37%  255,000   2.37%
2029  165,000   1.61%  165,000   1.61%
  $490,505   2.06% $508,074   1.95%

The short-term repurchase agreement represents the outstanding portion of a total $35.0 million commitment with one unrelated bank.  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 $16.5 million balance at March 31, 2021 and a $9.1 million balance at December 31, 2020.

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. In addition, the Company enters into agreements under which it sells loans held for sale subject to an obligation to repurchase the same loans. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of assets. The obligation to repurchase the assets is reflected as a liability in the Company's consolidated statements of financial condition, while the securities and loans held for sale underlying the repurchase agreements remain in the respective investment securities and loans held for sale asset accounts. In other words, there is no offsetting or netting of the investment securities or loans held for sale assets with the repurchase agreement liabilities. The Company's repurchase agreement is subject to master netting agreements, which sets forth the rights and obligations for repurchase and offset. 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 FHLB short-term advance consists of 1 $4.0 million advance with a fixed rate of 0.00% and a maturity date of May 1, 2021.

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




The $255.0 million in advances due in 2028 consists of 1 $25.0 million advance with a fixed rate of 2.16%, 1 $25.0 million advance with a fixed rate of 2.40%, and 2 advances totaling $55.0 million with a fixed rate of 2.27% with a maturity date in March 2028, 2 advances totaling $50.0 million with fixed rates of 2.34% and 2.48% both with a FHLB single call option in May 2021, 1 advance of $50.0 million with a fixed rate of 2.34% and with a FHLB quarterly call option currently available, and 1 advance of $50.0 million with a fixed rate of 2.57% and with a FHLB quarterly call option that currently available.

The $165.0 million in advances due in 2029 consists of 1 $50.0 million advance with a fixed rate of 1.98% with a FHLB quarterly call option in May 2022, 1 $50.0 million advance with a fixed rate of 1.75% with a FHLB quarterly call option beginning in August 2021, 1 $25.0 million advance with a fixed rate of 1.52% with a FHLB quarterly call option currently available, and 1 advance of $40.0 million with a fixed rate of 1.02% and with a FHLB quarterly call option currently available.

The Company selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances. The Company’s borrowings from the FHLB are limited to 80% of the carrying value of unencumbered one- to four-family mortgage loans, 75% of the carrying value of multi-family loans and 64% of the carrying value of home equity loans. In addition, these advances were collateralized by FHLB stock of $26.7 million at March 31, 2021 and at December 31, 2020, respectively. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.


Note 8 – 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 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%. Pursuant to Section 4012 of the CARES Act and related interim final rules, the Community Bank Leverage Ratio will be 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9%  thereafter.  A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. As a qualified community bank, we elected to opt-out of this definition during the second quarter of 2020.

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Plans, the Bank will not pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the captial conservation buffer. The minimum captial conservation buffer is 2.5%.

As of March 31, 2021, the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.

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



The actual and required capital amounts and ratios for the Bank as of March 31, 2021 and December 31, 2020 are presented in the table below:

 March 31, 2021 
  Actual  
For Capital
Adequacy
Purposes
  
Minimum Capital
Adequacy with
Capital Buffer
  
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars In Thousands) 
Total Capital (to risk-weighted assets)                   
Consolidated Waterstone Financial, Inc. $446,657   27.07% $131,977   8.00% $173,220   10.50% $N/A   N/A 
WaterStone Bank  396,096   24.01%  131,977   8.00%  173,220   10.50%  164,971   10.00%
Tier 1 Capital (to risk-weighted assets)                         
Consolidated Waterstone Financial, Inc.  428,877   26.00%  98,983   6.00%  140,226   8.50%  N/A   N/A 
WaterStone Bank  378,316   22.93%  98,983   6.00%  140,226   8.50%  131,977   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                     
Consolidated Waterstone Financial, Inc.  428,877   26.00%  74,237   4.50%  115,480   7.00%  N/A   N/A 
WaterStone Bank  378,316   22.93%  74,237   4.50%  115,480   7.00%  107,231   6.50%
Tier 1 Capital (to average assets)                         
Consolidated Waterstone Financial, Inc.  428,877   19.77%  86,752   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  378,316   17.44%  86,752   4.00%  N/A   N/A   108,440   5.00%
State of Wisconsin (to total assets)                         
WaterStone Bank  378,316   17.24%  131,644   6.00%  N/A   N/A   N/A   N/A 



 December 31, 2020 
  Actual  
For Capital
Adequacy
Purposes
  
Minimum Capital
Adequacy with
Capital Buffer
  
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars In Thousands) 
Total Capital (to risk-weighted assets)                   
Consolidated Waterstone Financial, Inc. $428,972   24.80% $138,390   8.00% $181,637   10.50% $N/A   N/A 
WaterStone Bank  389,519   22.52%  138,346   8.00%  181,579   10.50%  172,933   10.00%
Tier 1 Capital (to risk-weighted assets)                         
Consolidated Waterstone Financial, Inc.  410,149   23.71%  103,792   6.00%  147,039   8.50%  N/A   N/A 
WaterStone Bank  370,696   21.44%  103,760   6.00%  146,993   8.50%  138,346   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                 
Consolidated Waterstone Financial, Inc.  410,149   23.71%  77,844   4.50%  121,091   7.00%  N/A   N/A 
WaterStone Bank  370,696   21.44%  77,820   4.50%  121,053   7.00%  112,406   6.50%
Tier 1 Capital (to average assets)                         
Consolidated Waterstone Financial, Inc.  410,149   18.38%  89,238   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  370,696   16.61%  89,263   4.00%  N/A   N/A   111,579   5.00%
State of Wisconsin (to total assets)                         
WaterStone Bank  370,696   16.62%  133,856   6.00%  N/A   N/A   N/A   N/A 


Note 9 – Income Taxes

Income tax expense totaled $6.9 million for the three months ended March 31, 2021 compared to $1.9 million during the three months ended March 31, 2020. Income tax expense was recognized on the statement of income during the three months ended March 31, 2021 at an effective rate of 24.4% of pretax income compared to 24.1% during the three months ended March 31, 2020.





Note 10– 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. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 March 31, 2021  December 31, 2020 
  (In Thousands) 
Financial instruments whose contract amounts represent potential credit risk:      
Commitments to extend credit under amortizing loans (1) $20,302  $23,891 
Commitments to extend credit under home equity lines of credit (2)  12,767   13,653 
Unused portion of construction loans (3)  65,790   74,173 
Unused portion of business lines of credit  18,221   19,207 
Standby letters of credit  1,246   1,296 


(1) Commitments for loans are extended to customers for up to 90 days after which they expire. Excludes commitments to originate loans held for sale, which are discussed in the following footnote.
(2)  Unused portions of home equity loans are available to the borrower for up to 10 years.
(3)  Unused portions of construction loans are available to the borrower for up to one year.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 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 0 probable losses related to commitments to extend credit or the standby letters of credit as of March 31, 2021 and December 31, 2020.

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 $2.5 million and $2.9 million as of March 31, 2021 and December 31, 2020, respectively.

In the normal course of business, the Company, or its subsidiaries, are involved in various legal proceedings.  In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements.




Note 11 – Derivative Financial Instruments

Mortgage Banking Derviatives

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 to third party investors. 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 hedge relationships. 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 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded as a component of mortgage banking income in the Company’s consolidated statements of operations. The Company does not use derivatives for speculative purposes.

Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. At March 31, 2021, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $754.0 million and interest rate lock commitments with an aggregate notional amount of approximately $518.1 million.  The fair value of the forward commitments to sell mortgage loans at March 31, 2021 included a gain of $6.6 million that is reported as a component of other assets on the Company's consolidated statement of financial condition.  The fair value of the interest rate locks at March 31, 2021 included a gain of $5.0 million that is reported as a component of other assets on the Company's consolidated statements of financial condition. At December 31, 2020, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $779.9 million and interest rate lock commitments with an aggregate notional amount of approximately $486.2 million.  The fair value of the forward commitments to sell mortgage loans at December 31, 2020 included a loss of $5.1 million that is reported as a component of other liabilities on the Company's consolidated statement of financial condition.  The fair value of the interest rate locks at December 31, 2020 included a gain of $11.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition.

In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated by the loan arising from exercise of the loan commitment when sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market. The fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income.

The significant unobservable input used in the fair value measurement of the Company's mortgage banking derivatives, including interest rate lock commitments, is the loan pull through rate. This represents the percentage of loans currently in a lock position which the Company estimates will ultimately close. Generally, the fair value of an interest rate lock commitment will be positively (negatively) impacted when the prevailing interest rate is lower (higher) than the interest rate lock commitment. Generally, an increase in the pull through rate will result in the fair value of the interest rate lock increasing when in a gain position, or decreasing when in a loss position. The pull through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed using historical data and the ratio is periodically reviewed by the Company.

Interest Rate Swaps

The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer through back-to-back swaps. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment.  Consequently, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to current earnings during the period in which the changes occurred. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities on the Company's consolidated statement of financial condition, respectively, in equal amounts for these transactions.

The aggregate amortizing notional value of back-to-back swaps with various commercial borrowers was $106.9 million at March 31, 2021 and $107.5 million at December 31, 2020. The Company receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These 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. These commercial borrower swaps were reported as a component of other assets on the Company's consolidated statement of financial condition of $2.8 million as of March 31, 2021 and $3.9 million as of December 31, 2020. As of March 31, 2021 and December 31, 2020, 0 back-to-back swaps were in default.




The aggregate amortizing notional value of back-to-back swaps with dealer counterparties was $106.9 million as of March 31, 2021 and $107.5 million as of December 31, 2020. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. These swaps maturity dates range from December 2029 to June 2037. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported as a component of other liabilities on the Company's consolidated statement of financial condition of $2.8 million as of March 31, 2021 and $3.9 million as of December 31, 2020. No right of offset existed with dealer counterparty swaps as of March 31, 2021 and December 31, 2020.

All changes in the fair value of these instruments are recorded in other non-interest income. The Company pledged 0 mortgage backed securities to secure its obligation under these contracts at March 31, 2021 and $7.2 million in mortgage backed securities at December 31, 2020.


Note 12 – Earnings Per Share

Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period. 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 35,000 and 113,000 antidilutive shares of common stock for the three months ended March 31, 2021 and 2020.

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

  Three months ended March 31, 
  2021  2020 
       
       
Net income $21,344   6,069 
         
Weighted average shares outstanding  23,735   25,405 
Effect of dilutive potential common shares  215   207 
Diluted weighted average shares outstanding  23,950   25,612 
         
Basic earnings per share $0.90   0.24 
Diluted earnings per share $0.89   0.24 

Note 13 – 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. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.

Level 1 inputs - In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs - Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

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 our consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

    Fair Value Measurements Using 
  March 31, 2021  Level 1  Level 2  Level 3 
  (In Thousands) 
             
Assets            
Available-for-sale securities            
Mortgage-backed securities $24,578  $0  $24,578  $0 
Collateralized mortgage obligations                
Government sponsored enterprise issued  68,415   0   68,415   0 
Private-label issued  3,130   0   3,130   0 
Government sponsored enterprise bonds  2,468   0   2,468   0 
Municipal securities  52,241   0   52,241   0 
Other debt securities  11,431   0   11,431   0 
Loans held for sale  341,293   0   341,293   0 
Mortgage banking derivative assets  11,601   0   0   11,601 
Interest rate swap assets  2,816   0   2,816   0 
Liabilities                
Mortgage banking derivative liabilities  0   0   0   0 
Interest rate swap liabilities  2,816   0   2,816   0 

    Fair Value Measurements Using 
  December 31, 2020  Level 1  Level 2  Level 3 
  (In Thousands) 
             
Assets            
Available-for-sale securities            
Mortgage-backed securities $25,100  $0  $25,100  $0 
Collateralized mortgage obligations                
Government sponsored enterpris issued  63,284   0   63,284   0 
Private-label  3,665   0   3,665   0 
Government sponsored enterprise issued  2,503   0   2,503   0 
Municipal securities  53,614   0   53,614   0 
Other debt securities  11,453   0   11,453   0 
Loans held for sale  402,003   0   402,003   0 
Mortgage banking derivative assets  11,057   0   0   11,057 
Interest rate swap assets  3,892   0   3,892   0 
Liabilities                
Mortgage banking derivative liabilities  5,140   0   0   5,140 
Interest rate swap liabilities  3,892   0   3,892   0 

The following summarizes the valuation techniques for assets recorded in our 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: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The fair value of municipal and other debt securities is determined by a third party valuation source using observable market data utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. 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. 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. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques. The change in fair value is recorded through an adjustment to the statement of income.

Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company utilizes a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also utilizes a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of income.

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 majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Interest rate swap assets and liabilities are considered to be Level 2 in the fair value hierarchy of valuation techniques. 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 2021 and 2020.

 Three months ended March 31, 
  2021  2020 
  (In Thousands) 
       
Mortgage derivative, net balance at the beginning of the period $5,917  $1835 
Mortgage derivative gain, net  5,684   (3,282)
Mortgage derivative, net balance at the end of the period $11,601  $(1,447)
There were no transfers in or out of Level 1, 2 or 3 measurements during the periods.

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

    Fair Value Measurements Using 
  March 31, 2021  Level 1  Level 2  Level 3 
  (In Thousands) 
Impaired loans, net (1) $185  $0  $0  $185 
Real estate owned  150   0   0   150 
Impaired mortgage servicing rights  189   0   0   189 

    Fair Value Measurements Using 
  December 31, 2020  Level 1  Level 2  Level 3 
  (In Thousands) 
Impaired loans, net (1) $185  $0  $0  $185 
Real estate owned  322   0   0   322 
Impaired mortgage servicing rights  189   0   0   189 

(1) Represents collateral-dependent impaired loans, net, which are included in loans.



Loans – We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable value of the underlying collateral. Fair value is determined based on third party appraisals. 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 impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation techniques. At March 31, 2021, loans determined to be impaired with an outstanding balance of $206,000 were carried net of specific reserves of $21,000 for a fair value of $185,000. At December 31, 2020, loans determined to be impaired with an outstanding balance of $208,000 were carried net of specific reserves of $23,000 for a fair value of $185,000. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.

Real estate owned – On a non-recurring basis, real estate owned is recorded in our consolidated statements of financial condition at the lower of cost or fair value. 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. There were 0 writedowns during the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and December 31, 2020, real estate owned totaled $150,000 and $322,000, respectively.

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. At March 31, 2021 and December 31, 2020, there were $77,000, respectively, of impairment on mortgage servicing rights.

For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

 
      
Significant Unobservable
Input Value
 
  
Fair Value at
March 31, 2021
 
Valuation
Technique
Significant
Unobservable
Inputs
 
Minimum
Value
  
Maximum
Value
  Weighted Average 
               
Mortgage banking derivatives, net $11,601 Pricing modelsPull through rate  18.0%  99.8%  91.4%
Impaired loans  206 Market approachDiscount rates applied to appraisals  15.0%  15.0%  15.0%
Real estate owned  150 Market approachDiscount rates applied to appraisals  34.8%  34.8%  34.8%
Mortgage servicing rights  12,972 Pricing modelsPrepayment rate  8.1%  33.7%  9.2%
         Discount rate  8.1%  12.0%  9.6%
         Cost to service $77.01  $839.34  $82.92 

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.

Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. 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:

 March 31, 2021  December 31, 2020 
  
Carrying
amount
  Fair Value  
Carrying
amount
  Fair Value 
  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
  (In Thousands) 
Financial Assets                              
Cash and cash equivalents $198,401  $198,401  $198,401  $0  $0  $94,767  $94,767  $94,767  $0  $0 
Securities available-for-sale  162,263   162,263   0   162,263   0   159,619   159,619   0   159,619   0 
Loans held for sale  341,293   341,293   0   341,293   0   402,003   402,003   0   402,003   0 
Loans receivable  1,335,423   1,334,335   0   0   1,334,335   1,375,137   1,374,898   0   0   1,374,898 
FHLB stock  26,720   26,720   0   26,720   0   26,720   26,720   0   26,720   0 
Accrued interest receivable  4,924   4,924   4,924   0   0   4,957   4,957   4,957   0   0 
Mortgage servicing rights  8,830   12,972   0   0   12,972   5,977   7,075   0   0   7,075 
Mortgage banking derivative assets  11,601   11,601   0   0   11,601   11,057   11,057   0   0   11,057 
Interest rate swap asset  2,816   2,816   0   2,816   0   3,892   3,892   0   3,892   0 
                                         
Financial Liabilities                                        
Deposits  1,219,691   1,220,776   513,937   706,839   0   1,184,870   1,186,062   483,542   702,520   0 
Advance payments by borrowers for taxes  12,048   12,048   12,048   0   0   3,522   3,522   3,522   0   0 
Borrowings  490,505   514,121   0   514,121   0   508,074   545,107   0   545,107   0 
Accrued interest payable  1,035   1,035   1,035   0   0   1,137   1,137   1,137   0   0 
Mortgage banking derivative liabilities  0   0   0   0   0   5,140   5,140   0   0   5,140 
Interest rate swap liability  2,816   2,816   0   2,816   0   3,892   3,892   0   3,892   0 

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

Cash and Cash Equivalents

The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value.

Securities

The fair value of securities is generally determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features.



Loans Held for Sale

Fair value is estimated using the prices of the Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.

Loans Receivable

The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the market place. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as one- to four-family, multi-family, home equity, construction and land, commercial real estate, commercial, and other consumer. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate.

FHLB Stock

For FHLB stock, the carrying amount is the amount at which shares can be redeemed with the FHLB and is a reasonable estimate of fair value.

Deposits and Advance Payments by Borrowers for Taxes

The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date.

Borrowings

Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings.

Accrued Interest Payable and Accrued Interest Receivable

For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally not marketable. 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 March 31, 2021 and December 31, 2020.

Mortgage Banking Derivative Assets and Liabilities

Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment, and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. On the Company’s consolidated statements of financial condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities.

Interest Rate Swap Assets and Liabilities

The carrying value and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.




Note 14 – 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. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization, focusing on financial information that an enterprise's chief operating decision-makers use to make decisions about the enterprise's operating matters.

The Company has determined that it has 2 reportable segments: community banking and mortgage banking. The Company's operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company's business segments are not necessarily comparable with similar information for other financial institutions.

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:  (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; (2) deposit and transactional solutions such as checking, credit, debit and pre-paid cards, online banking and bill pay, and money transfer services; (3) investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, and (4) fixed and variable annuities, insurance as well as trust and investment management accounts.

Consumer products include loan and deposit products: mortgage, home equity loans and lines, personal term loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Consumer products also include personal investment services. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, demand deposit accounts, interest bearing transaction accounts and time deposits.

Mortgage Banking

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 21 states with the ability to lend in 48 states.

Presented below is the segment information:

  As of or for the three months ended March 31, 2021 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income $14,247   (350)  55   13,952 
Provision (credit) for loan losses  (1,100)  30   0   (1,070)
Net interest income after provision (credit) for loan losses  15,347   (380)  55   15,022 
                 
Noninterest income  1,243   55,035   (79)  56,199 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  4,975   29,262   (114)  34,123 
Occupancy, office furniture and equipment  1,025   1,540   0   2,565 
Advertising  209   615   0   824 
Data processing  511   454   6   971 
Communications  119   212   0   331 
Professional fees  194   (524)  15   (315)
Real estate owned  (12)  0   0   (12)
Loan processing expense  0   1,335   0   1,335 
Other  440   2,681   57   3,178 
Total noninterest expenses  7,461   35,575   (36)  43,000 
Income  before income taxes  9,129   19,080   12   28,221 
Income tax expense (benefit)  1,786   5,096   (5)  6,877 
Net income $7,343   13,984   17   21,344 
                 
Total assets $2,132,366   411,750   (346,105)  2,198,011 



  As of or for the three months ended March 31, 2020 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income $12,908   (379)  (3)  12,526 
Provision for loan losses  750   35   0   785 
Net interest income after provision for loan losses  12,158   (414)  (3)  11,741 
                 
Noninterest income  1,028   30,798   (362)  31,464 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  5,168   19,387   (154)  24,401 
Occupancy, office furniture and equipment  1,014   1,727   0   2,741 
Advertising  248   652   0   900 
Data processing  605   395   6   1,006 
Communications  97   241   0   338 
Professional fees  198   1,620   14   1,832 
Real estate owned  11   0   0   11 
Loan processing expense  0   1,076   0   1,076 
Other  580   2,552   (229)  2,903 
Total noninterest expenses  7,921   27,650   (363)  35,208 
Income (loss) before income taxes  5,265   2,734   (2)  7,997 
Income tax expense  1,154   768   6   1,928 
Net income (loss) $4,111   1,966   (8)  6,069 
                 
Total assets $2,018,092   311,570   (272,986)  2,056,676 

Note 15 – Leases

The Company has entered into operating lease agreements for 2 of its community banking branch locations, all of its mortgage banking office locations, and some of its office equipment.  The leases have fixed terms defined regarding the payments and length.  The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of financial condition. Some of the leases included options to extend the leases.  These options are reviewed and factored into the length of the lease if the option is expected to be extended.  Leases did not contain an implicit rate; therefore, the Company used the incremental borrowing rates for the discount rate.  There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2021 and March 31, 2020.

At March 31, 2021, the Company had lease liabilities totaling $7.5 million and right-of-use assets totaling $7.1 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively, on the consolidated statements of financial condition.

The cost components of our operating leases were as follows for the three months ended March 31, 2021 and March 31, 2020:

 Three months ended March 31, 2021  Three months ended March 31, 2020 
  (In Thousands) 
Operating lease cost $770  $824 
Variable cost  117   109 
Short-term lease cost  151   193 
Total $1,038  $1,126 

At March 31, 2021, the Company had leases that had not yet commenced, but will create approximately $13,000 of additional lease liabilities and right-of-use assets for the Company in the second quarter of 2021.




The table below summarizes other information related to our operating leases:

 Three months ended March 31, 2021 
  (Dollars in Thousands) 
Cash paid for amounts included in the measurement of lease liabilities   
Operating cash flows from operating leases $859 
Initial recognition of right of use asset  602 
Initial recognition of lease liabilities  602 
Weighted average remaining lease term - operating leases, in years  3.4 
Weighted average discount rate - operating leases  5.2%

As of March 31, 2021, lease liability information for the Company is summarized in the following table.

Maturity analysis Operating leases 
  (In Thousands) 
One year or less $2,742 
More than one year through two years  2,128 
More than two years through three years  1,484 
More than three years through four years  804 
More than four years through five years  452 
More than five years  874 
Total lease payments  8,484 
Present value discount  (952)
Lease liability $7,532 







Item 2.  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. These forward-looking statements include, but are not limited to:


 Statements of our goals, intentions and expectations;
 Statements regarding our business plans, prospects, growth and operating strategies;
 Statements regarding the quality of our loan and investment portfolio; and
 Estimates of our risks and future costs and benefits.


These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:


 general economic conditions, either nationally or in our market area, including employment prospects, that are different than expected;
 the effect of any pandemic; including COVID-19;
 competition among depository and other financial institutions;
 inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or the origination levels in our lending business, or increase the level of defaults, losses or prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;
 adverse changes in the securities or secondary mortgage markets;
 changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
 changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
 our ability to manage market risk, credit risk and operational risk in the current economic conditions;
 our ability to enter new markets successfully and capitalize on growth opportunities;
 our ability to successfully integrate acquired entities;
 decreased demand for our products and services;
 changes in tax policies or assessment policies;
 the inability of third-party providers to perform their obligations to us;
 changes in consumer demand, spending, borrowing and savings habits;
 changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
 our ability to retain key employees;
 
 cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;
 technological changes that may be more difficult or expensive than expected;
 the ability of third-party providers to perform their obligations to us;
 the effects of any federal government shutdown;
 the ability of the U.S. Government to manage federal debt limits;
 significant increases in our loan losses; and
 changes in the financial condition, results of operations or future prospects of issuers of securities that we own.



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, 2020).


The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect our business and financial performance. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


Overview

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 months ended March 31, 2021 and 2020 and the financial condition as of March 31, 2021 compared to the financial condition as of December 31, 2020.
As described in the notes to the unaudited consolidated financial statements, we have two reportable segments: community banking and mortgage banking. The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. 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 21 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 months ended March 31, 2021 and 2020, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.
Significant Items

Earnings comparisons for the three months ended March 31, 2021 and 2020 were impacted by the significant items summarized below.

COVID-19 and the CARES Act

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.
In March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In March 2021, the American Rescue Plan Act of 2021 (the American Rescue Plan Act) was signed into law which provides approximately $1.9 trillion in spending to address the continued impact of COVID-19. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.




The CARES Act allowed for a temporary delay in the adoption of accounting guidance under Accounting Standards Codification Topic 326, “Financial Instruments – Credit Losses (“CECL”) until the earlier of December 31, 2020 or after the end of the COVID-19 national emergency.  During the quarter ended March 31, 2020, pursuant to the CARES Act and guidance from the Securities and Exchange Commission (“SEC”) and Financial Accounting Standards Board (“FASB”), we elected to delay adoption of CECL. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. Among other provisions, this Act extended the temporary delay on the adoption of CECL until January 1, 2022. The financial statements included in this Quarterly Report on Form 10-Q include an allowance for loan losses that was prepared under the existing incurred loss methodology.
Under the CARES Act, loans less than 30 days past due as of December 31, 2019 and COVID-19 modifications are considered current. A financial institution suspended the requirements under accounting principles generally accepted in the United States (US GAAP) for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”).  This includes a suspension of the requirement to determine impairment of these modifications for accounting purposes.  In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company has executed a payment deferral program for our lending clients that are adversely affected by the pandemic.  As of March 31, 2021, the Company had two modified loans totaling $910,000 consisting of principal deferrals or principal and interest deferrals.  These short-term deferrals are not considered troubled debt restructurings.
The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program call the Paycheck Protection Program (“PPP”).  As a qualified SBA lender, we were automatically authorized to originate PPP loans.  The Company is actively participating in assisting our customers with applications for resources through the program.  PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity for loans made on or after June 5, 2020 (loans made prior to June 5, 2020 have a two-year term, however borrowers and lenders may mutually agree to extend the maturity for such loans to five years); and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.  As of March 31, 2021, we have funded 419 loans totaling $43.2 million.  During the three months ended March 31, 2021, the Company originated a total of $13.1 million in PPP loans for customers and recognized $354,000 in fees received from the SBA. As of March 31, 2021, we have PPP loans outstanding totaling $19.4 million.

Our fee income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.
Our interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and liquidity

As of March 31, 2021, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements.  While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.  
We maintain access to multiple sources of liquidity.  Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.





Comparison of Community Banking Segment Results of Operations for the Three Months Ended March 31, 2021 and 2020

Net income totaled $7.3 million for the three months ended March 31, 2021 compared to $4.1 million for the three months ended March 31, 2020. Net interest income increased $1.3 million to $14.2 million for the three months ended March 31, 2021 compared to $12.9 million for the three months ended March 31, 2020.  Interest expense decreased as funding rates decreased.  Offsetting the decrease in interest expense, interest income on loans, mortgage-related securities, and other interest-earning asset categories decreased as replacement rates were lower than in the prior year.

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act. The Company calculated the current quarter allowance using the incurred loss model. There was a negative provision for loan losses of $1.1 million for the three months ended March 31, 2021 compared to a $750,000 provision for loan losses for the three months ended March 31, 2020. During the three months ended March 31, 2021, we made adjustments to our qualitative factors, primarily to account for the improvement in certain economic factors along with a decrease in loan balance.

Total noninterest income increased $215,000 due primarily to loan fees primarily due to loan prepayment fees. Cash surrender value of life insurance decreased as the balance decreased year over year as a result of the death benefits in the prior year leading to a lower insurance balance. Other income increased primarily due to wealth management revenue.

Compensation, payroll taxes, and other employee benefits expense decreased $193,000 to $5.0 million due primarily to an decrease in health insurance expense. Occupancy, office furniture and equipment increased slighty due primarily to increased snow removal expense. Advertising expense decreased primarily due to promotions for the new branch opening during the three months ended March 31, 2020. Data processing expense decreased $94,000 due to the implementation of a new digital banking platform in 2020. Other noninterest expense decreased $140,000 as certain loan expenses decreased offset by a decrease of credits received for FDIC premiums in 2020 but not in 2021.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2021 and 2020

Net income totaled $14.0 million for the three months ended March 31, 2021 compared to $2.0 million for the three months ended March 31, 2020. We originated $1.12 billion in mortgage loans held for sale (including sales to the community banking segment) during the three months ended March 31, 2021, which represents an increase of $406.3 million, or 57.3%, from the $708.8 million originated during the three months ended March 31, 2020. The increase in loan production volume was driven by a $264.8 million, or 117.9%, increase in refinance products as mortgage rates decreased. Mortgage purchase products increased $141.4 million, or 29.2% due to the high demand for single family homes and fixed-rate mortgages. Total mortgage banking noninterest income increased $24.2 million, or 78.7%, to $55.0 million during the three months ended March 31, 2021 compared to $30.8 million during the three months ended March 31, 2020.  The increase in mortgage banking noninterest income was related to a 57.3% increase in volume and a 19.2% increase in gross margin on loans originated and sold for the three months ended March 31, 2021 compared to March 31, 2020.  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 expansion reflects increased industry demand due to the current low rate environment.  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 56.1% of total originations during the three months ended March 31, 2021, compared to 68.3% of total originations during the three months ended March 31, 2020, respectively, as refinance demand accelerated from the low rate environment.  The mix of loan type trended towards more conventional loans and less governmental loans; with conventional loans and governmental loans comprising 79.0% and 21.0% of all loan originations, respectively, during the three months ended March 31, 2021, compared to 71.3% and 28.7% of all loan originations, respectively, during the three months ended March 31, 2020.

Total compensation, payroll taxes and other employee benefits increased $9.9 million, or 50.9%, to $29.3 million for the three months ended March 31, 2021 compared to $19.4 million for the three months ended March 31, 2020.  The increase in compensation expense was primarily a result of the increase in commission expense, bonus, and incentives due to record originations. In addition, branch manager pay increased as branches were more profitable. Professional fees decreased $2.1 million to $524,000 of income during the quarter ended March 31, 2021 compared to $1.6 million of expense during the quarter ended March 31, 2020.  The decrease related to receiving a legal settlement and lower litigation costs compared to the prior year as the Herrington settlement was resolved. Occupancy, office furniture, and equipment decreased due to lower rent and depreciation expenses. Loan processing expenses increased due primarily to increased application and funding volumes as interest rates remain low. Other noninterest expense increased primarily due to amortization of mortgage servicing rights as the size of the servicing portfolio has increased in 2021 compared to 2020.




Consolidated Waterstone Financial, Inc. Results of Operations

 Three months ended March 31, 
  2021  2020 
  (Dollars in Thousands, except per share amounts) 
       
Net income $21,344   6,069 
Earnings per share - basic  0.90   0.24 
Earnings per share - diluted  0.89   0.24 
Annualized return on average assets  3.99%  1.21%
Annualized return on average equity  20.49%  6.24%
         




Net Interest Income

Average Balance Sheets, Interest and Yields/Costs
The following tables set forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. Non-accrual loans are included in the computation of the average balances of loans receivable and held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.
 Three months ended March 31, 
  2021  2020 
  Average Balance  Interest  Yield/Cost  Average Balance  Interest  Yield/Cost 
  (Dollars in Thousands) 
Assets                  
Interest-earning assets:                  
Loans receivable and held for sale (1) $$1,657,260  $$16,603   4.06% $$1,562,097  $$17,687   4.55%
Mortgage related securities (2)  90,457   491   2.20%  112,089   702   2.52%
Debt securities, federal funds sold and short-term investments (2)(3)  273,929   948   1.40%  206,485   1,134   2.21%
Total interest-earning assets  2,021,646   18,042   3.62%  1,880,671   19,523   4.18%
                         
Noninterest-earning assets  147,781           132,283         
Total assets $$2,169,427          $$2,012,954         
                         
Liabilities and equity                        
Interest-bearing liabilities:                        
Demand accounts $$55,552   10   0.07% $$39,886   8   0.08%
Money market, savings, and escrow accounts  314,418   247   0.32%  218,942   427   0.78%
Time deposits  705,712   1,260   0.72%  734,147   3,883   2.13%
Total interest-bearing deposits ��1,075,682   1,517   0.57%  992,975   4,318   1.75%
Borrowings  482,665   2,500   2.10%  495,595   2,608   2.12%
Total interest-bearing liabilities  1,558,347   4,017   1.05%  1,488,570   6,926   1.87%
                         
Noninterest-bearing liabilities                        
Noninterest-bearing deposits  138,446           92,627         
Other noninterest-bearing liabilities  50,188           40,609         
Total noninterest-bearing liabilities  188,634           133,236         
Total liabilities  1,746,981           1,621,806         
Equity  422,446           391,148         
Total liabilities and equity $$2,169,427          $$2,012,954         
                         
Net interest income / Net interest rate spread (4)      14,025   2.57%      12,597   2.31%
Less: taxable equivalent adjustment      73   0.02%      71   0.02%
Net interest income / Net interest rate spread, as reported     $$13,952   2.55%     $$12,526   2.29%
Net interest-earning assets (5) $$463,299          $$392,101         
Net interest margin (6)
          
2.80
%
          2.68%
Tax equivalent effect          0.01%          0.01%
Net interest margin on a fully tax equivalent basis (6)          2.81%          2.69%
Average interest-earning assets to average interest-bearing liabilities          129.73%          126.34%
__________
(1) Interest income includes net deferred loan fee amortization income of $604,000 and $171,000 for the three months ended March 31, 2021 and 2020, respectively.
(2) Average balance of mortgage related and debt securities are based on amortized historical cost.
(3) 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, 2021 and 2020. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.30% and 2.07% for the three months ended March 31, 2021 and 2020, respectively.
(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities and is presented on a fully tax equivalent basis.
(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total interest-earning assets.




Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 Three months ended March 31, 
  2021 versus 2020 
  Increase (Decrease) due to 
  Volume  Rate  Net 
  (In Thousands) 
Interest income:         
Loans receivable and held for sale (1)(2) $1,412  $(2,496) $(1,084)
Mortgage related securities (3)  (127)  (84)  (211)
Debt securities, federal funds sold and short-term investments (3)(4)  1,523   (1,709)  (186)
Total interest-earning assets  2,808   (4,289)  (1,481)
             
Interest expense:            
Demand accounts  3   (1)  2 
Money market, savings, and escrow accounts  511   (691)  (180)
Time deposits  (145)  (2,478)  (2,623)
Total interest-earning deposits  369   (3,170)  (2,801)
Borrowings  (79)  (29)  (108)
Total interest-bearing liabilities  290   (3,199)  (2,909)
Net change in net interest income $2,518  $(1,090) $1,428 
______________
(1)   Interest income includes net deferred loan fee amortization income of $604,000 and $171,000 for the three months ended March 31, 2021 and 2020, respectively.
(2)   Non-accrual loans have been included in average loans receivable balance.
(3)   Includes available for sale securities. Average balance of available for sale securities is based on amortized historical cost.
(4)   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, 2021 and March 31, 2020.


Net interest income increased $1.4 million, or 11.4%, to $14.0 million during the three months ended March 31, 2021 compared to $12.5 million during the three months ended March 31, 2020.

 Interest income on loans decreased $1.1 million due primarily to a 49 basis point decrease in average yield on loans as London Interbank Offered Rate (LIBOR) and U.S. Treasury rates continued to decrease, partially offset by an increase of $95.2 million, or 6.1%, in average loans. The increase in average loan balance was driven by an increase of $141.6 million, or 84.0%, in the average balance of loans held for sale partially offset by a $46.5 million, or 3.3%, decrease in the average balance of loans held in portfolio.
 Interest income from mortgage-related securities decreased $211,000 as the yield decreased 32 basis points and the average balance decreased $21.6 million.
 Interest income from other interest-earning assets (comprised of debt securities, federal funds sold and short-term investments) decreased $188,000 due to a 77 basis point decrease in the average yield. The decrease in average yield was primarily due to higher yielding securities maturing.  The average balance increased $67.4 million to $273.9 million due to higher cash balances offset by lower municipal securities balances.  The increase in average cash balances resulted fron the growth in deposits outpacing loan growth.
 Interest expense on time deposits decreased $2.6 million, or 67.6%, primarily due to a 141 basis point decrease in average cost of time deposits. Additionally, the average balance of time deposits decreased $28.4 million compared to the prior year period.
 Interest expense on money market, savings, and escrow accounts decreased $180,000, or 42.2%, due primarily to a 46 basis point decrease in average cost of money market, savings, and escrow accounts. Partially offsetting the decrease in average cost, the average balance increased $95.5 million. Money market accounts continue to be a focus and the Company agressively marketed new and existing customers through various new offerings.
 Interest expense on borrowings decreased $108,000, or 4.1%, due to a decrease in the average cost of borrowings of two basis points to 2.10% during the three months ended March 31, 2021 compared to 2.12% during the three months ended March 31, 2020. Additionally, the average borrowing volume decreased $12.9 million to $482.7 million during the three months ended March 31, 2021, compared to $495.6 million during the three months ended March 31, 2020. The decrease was primarily due to the increase in average deposits.





Provision for Loan Losses

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act and subsequently under the Consolidated Appropriations Act. The Company calculated the current quarter allowance using the incurred loss model. The negative provision for loan losses was $1.1 million for the three months ended March 31, 2021 compared to $750,000 of provision for loan losses for the three months ended March 31, 2020. During the three months ended March 31, 2021, we made adjustments to our qualitative factors, primarily to account for the improvement in certain economic factors along with a decrease in loan balance.  We had a negative provision for loan losses of $1.1 million at the community banking segment and a provision for loan losses of $30,000 for the mortgage banking segment. Net recoveries were $27,000 for the three months ended March 31, 2021.

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

Noninterest Income
 Three months ended March 31, 
  2021  2020  $ Change  % Change 
  (Dollars in Thousands) 
             
Service charges on loans and deposits $690  $481  $209   43.5%
Increase in cash surrender value of life insurance  301   353   (52)  (14.7)%
Mortgage banking income  54,391   30,406   23,985   78.9%
Other  817   224   593   264.7%
    Total noninterest income $56,199  $31,464  $24,735   78.6%

Total noninterest income increased $24.7 million, or 78.6%, to $56.2 million during the three months ended March 31, 2021 compared to $31.5 million during the three months ended March 31, 2020. The increase resulted primarily from an increase in mortgage banking income, service charges on loan and deposits, and other noninterest income.

 The increase in mortgage banking income was primarily the result of an 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. Total loan origination volume on a consolidated basis increased $421.4 million, or 61.3%, to $1.11 billion during the three months ended March 31, 2021 compared to $687.7 million during the three months ended March 31, 2020. Gross margin on loans originated and sold increased 19.2% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended March 31, 2021 and 2020" above for additional discussion of the increase in mortgage banking income.
 Service charges on loans and deposits increased primarily due to loan prepayment fees.
 The decrease in cash surrender value of life insurance was due primarily to a decrease in balance as death benefit proceeds were received on two policies in the prior year.
 The increase in other noninterest income was due primarily to increases in mortgage servicing fee income and wealth management revenue. Mortgage servicing fee income increased as loans sold with servicing rights retained increased due to market conditions.




Noninterest Expenses
 Three months ended March 31, 
  2021  2020  $ Change  % Change 
  (Dollars in Thousands) 
             
Compensation, payroll taxes, and other employee benefits $34,123  $24,401  $9,722   39.8%
Occupancy, office furniture and equipment  2,565   2,741   (176)  (6.4)%
Advertising  824   900   (76)  (8.4)%
Data processing  971   1,006   (35)  (3.5)%
Communications  331   338   (7)  (2.1)%
Professional fees  (315)  1,832   (2,147)  (117.2)%
Real estate owned  (12)  11   (23)  (209.1)%
Loan processing expense  1,335   1,076   259   24.1%
Other  3,178   2,903   275   9.5%
     Total noninterest expenses $43,000  $35,208  $7,792   22.1%

Total noninterest expenses increased $7.8 million, or 22.1%, to $43.0 million during the three months ended March 31, 2021 compared to $35.2 million during the three months ended March 31, 2020.

 Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment increased $9.9 million, or 50.9%, to $29.3 million during the three months ended March 31, 2021. The increase in compensation expense was primarily a result of an increase in commission expense as fundings increased and branch manager pay increased as branches were more profitable.
 Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $193,000, or 3.7%, to $5.0 million during the three months ended March 31, 2021. The decrease was due primarily to  health insurance expense as claims decreased.
 Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $187,000 to $1.5 million during the three months ended March 31, 2021, primarily resulting from lower rent and depreciation expense.
 Occupancy, office furniture and equipment expense at the community banking segment increased $11,000 to $1.0 million during the three months ended March 31, 2021. The increase was due primarily to increased snow removal expense.
 Advertising expense decreased $76,000, or 8.4%, to $824,000 during the three months ended March 31, 2021. This was primarily due to marketing decreases at the community banking segment due to lower customer promotions.  Advertising at the mortgage banking segment decreased as a low rate environment drove demand.
 Data processing expense decreased $35,000, or 3.5%, to $971,000 during the three months ended March 31, 2021. This was primarily due to increased conversion expenses for the new ditigal banking platform rollout at the community banking segment during the three months ended March 31, 2020.
 Professional fees decreased $2.1 million to $315,000 of income during the three months ended March 31, 2021. The decrease is primarily related to receiving a legal settlement and lower litigation costs compared to the prior year as the Herrington settlement was resolved.
 Loan processing expense increased $259,000, or 24.1%, to $1.3 million during the three months ended March 31, 2021. This was primarily due to an increase in loan costs associated with the increased application volumes as mortgage rates remain low.
 Other noninterest expense increased $275,000, or 9.5%, to $3.2 million during the three months ended March 31, 2021. The increase at the mortgage banking segment was primarily due to amortization of mortgage servicing rights as the size of the servicing portfolio has increased in 2021 compared to 2020. Additionally, other noninterest expenses increased at the community banking segment as certain loan expenses decreased offset by a decrease of credits received for FDIC premiums in 2020 but not in 2021.




Income Taxes

Income tax expense totaled $6.9 million for the three months ended March 31, 2021 compared to $1.9 million during the three months ended March 31, 2020. Income tax expense was recognized on the statement of income during the three months ended March 31, 2021 at an effective rate of 24.4% of pretax income compared to 24.1% during the three months ended March 31, 2020. The increase in rate is primarily due to higher pretax income, relative to permanent deductions.



Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Total AssetsTotal assets increased by $13.4 million, or 0.6%, to $2.20 billion at March 31, 2021 from $2.18 billion at December 31, 2020. The increase in total assets primarily reflects an increase in cash and cash equivalents, and prepaid expenses and other assets due to an increase in various receivables at the mortgage banking segment, partially offset by a decrease in loans receivable and loans held for sale. The total assets increase reflects liability increases in deposits and advance payments by borrowers for taxes.

Cash and Cash EquivalentsCash and cash equivalents increased $103.6 million, or 109.4%, to $198.4 million at March 31, 2021, compared to $94.8 million at December 31, 2020.  The increase in cash and cash equivalents primarily reflects the additional source of funds through an increase in deposits and advance payments by borrowers for taxes.

Securities Available for Sale – Securities available for sale increased $2.6 million to $162.3 million at March 31, 2021. The increase was primarily due to purchases of mortgage-related securities exceeding security paydowns for the year and maturities of debt securities.

Loans Held for Sale - Loans held for sale decreased $60.7 million to $341.3 million at March 31, 2021 due to the decrease of refinancing activity resulting from the increase in mortgage rates.

Loans Receivable - Loans receivable held for investment decreased $39.7 million to $1.34 billion at March 31, 2021.  The decrease in total loans receivable was attributable to decreases in one- to four-family, construction and land, home equity, and consumer loan categories. Partially offsetting those decreases, multi-family, commercial real estate, and commercial loan categories increased.

The following table shows loan originations during the periods indicated.

 For the 
  Three months ended March 31, 
  2021  2020 
       
Real estate loans originated for investment:      
Residential      
One- to four-family $13,256  $30,515 
Multi-family  29,212   26,979 
Home equity  2,652   1,850 
Construction and land  9,733   11,710 
Commercial real estate  1,554   15,137 
Total real estate loans originated for investment  56,407   86,191 
Consumer loans originated for investment  23   275 
Commercial business loans originated for investment  9,733   4,390 
Total loans originated for investment $66,163  $90,856 
         




Allowance for Loan Losses - The allowance for loan losses decreased $1.0 million to $17.8 million at March 31, 2021. The decrease resulted from a negative provision due to improvement in certain economic factors, decreasing the required allowance related to the loans collectively reviewed. The overall decrease was primarily related to each of the one- to four-family, multi-family, home equity, construction and land, commercial real estate, consumer, and commercial categories. See Note 3 for further discussion on the allowance for loan losses.

Real Estate Owned – Total real estate owned decreased $172,000 to $150,000 at March 31, 2021.  During the three months ended March 31, 2021, no loans were transferred from loans receivable to real estate owned upon completion of foreclosure.  During the same period, sales of real estate owned totaled $172,000. There were no writedowns during the three months ended March 31, 2021.

Prepaid expenses and other assets – Total prepaid expenses and other assets increased $6.7 million to $64.3 million at March 31, 2021. The increase was primarily due to increases in funding receivables from investors and hedging receivables.

Deposits – Total deposits increased $34.8 million to $1.22 billion at March 31, 2021.  The increase was driven by an increase of $23.6 million in money market and savings deposits, $6.8 million in demand deposits, and $4.4 million in time deposits.

Borrowings – Total borrowings decreased $17.6 million, or 3.5%, to $490.5 million at March 31, 2021. The community banking segmen paid off $25.0 million in short-term FHLB borrowings. External short-term borrowings at the mortgage banking segment increased a total of $7.4 million at March 31, 2021 from December 31, 2020.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $8.5 million to $12.0 million at March 31, 2021. 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 $29.9 million to $45.1 million at March 31, 2021 compared to December 31, 2020. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes.  The Company receives payments from borrowers for their real estate taxes during the course of the calendar year until real estate tax obligations are paid in the fourth quarter.  At the time at which the disbursements are made, the outstanding checks are classified as other liabilities in the statements of financial condition. These amounts remain classified as other liabilities until settled. Additionally, other liabilities decreased due to the payment of the legal settlement and lower forward commitments to sell loans at the mortgage banking segment.

Shareholders’ Equity – Shareholders' equity increased $17.6 million to $430.7 million at March 31, 2021 from December 31, 2020.  Shareholders' equity increased primarily due to net income, additional paid-in capital as stock options were exercised and equity awards vested, and unearned ESOP shares vesting.  Partially offsetting the increases, there were decreases due to the declaration of dividends, a decrease in the fair value of the security portfolio, and the repurchase of stock.




ASSET QUALITY

NONPERFORMING ASSETS

 At March 31,  At December 31, 
  2021  2020 
  (Dollars in Thousands) 
Non-accrual loans:      
Residential      
One- to four-family $3,734  $5,072 
Multi-family  314   341 
Home equity  59   63 
Construction and land  43   43 
Commercial real estate  30   41 
Commercial  -   - 
Consumer  -   - 
Total non-accrual loans  4,180   5,560 
         
Real estate owned        
One- to four-family  -   - 
Multi-family  -   - 
Construction and land  150   322 
Commercial real estate  -   - 
Total real estate owned  150   322 
Total nonperforming assets $4,330  $5,882 
         
Total non-accrual loans to total loans  0.31%  0.40%
Total non-accrual loans to total assets  0.19%  0.25%
Total nonperforming assets to total assets  0.20%  0.27%

All loans that are 90 days or more past due with respect to principal and interest are recognized as non-accrual. Troubled debt restructurings that are non-accrual either due to being past due greater than 90 days or which have not yet performed under the modified terms for a reasonable period of time, are included in the table above. In addition, loans 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.  Upon determining the updated estimated value of the collateral, a loan loss provision is recorded to establish a specific reserve to the extent that the outstanding principal balance exceeds the updated estimated net realizable value of the collateral.  When a loan is determined to be uncollectible, typically coinciding with the initiation of foreclosure action, the specific reserve is reviewed for adequacy, adjusted if necessary, and charged-off.



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

 At or for the Three Months 
  Ended March 31, 
  2021  2020 
  (In Thousands) 
       
Balance at beginning of period $5,560  $7,025 
Additions  171   1,206 
Transfers to real estate owned  -   - 
Charge-offs  -   - 
Returned to accrual status  (902)  (821)
Principal paydowns and other  (649)  (608)
Balance at end of period $4,180  $6,802 

Total non-accrual loans decreased by $1.4 million, or 24.8%, to $4.2 million as of March 31, 2021 compared to $5.6 million as of December 31, 2020.  The ratio of non-accrual loans to total loans receivable was 0.31% at March 31, 2021 compared to 0.40% at December 31, 2020.  During the three months ended March 31, 2021, $171,000 in loans were placed on non-accrual status. Offsetting this activity, $902,000 returned to accrual status and $649,000 in principal payments were received during the three months ended March 31, 2021.

Of the $4.2 million in total non-accrual loans as of March 31, 2021, $3.0 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary. A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan's original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset.  Based upon these specific reviews, a total of $118,000 in cumulative partial net charge-offs have been recorded over the life of these loans as of March 31, 2021.  Partially charged-off loans measured for impairment based upon net realizable collateral value are maintained in a "non-performing" status and are disclosed as impaired loans.  In addition, specific reserves totaling $21,000 have been recorded as of March 31, 2021.  The remaining $1.2 million of non-accrual loans were reviewed on an aggregate basis and $233,000 in general valuation allowance was deemed appropriate related to those loans as of March 31, 2021.   The $233,000 in valuation allowance is based upon a migration analysis performed with respect to similar non-accrual loans in prior periods.

The outstanding principal balance of our five largest non-accrual loans as of March 31, 2021 totaled $1.7 million, which represents 41.7% of total non-accrual loans as of that date.  These five loans have not had any cumulative life-to-date net charge-offs and $21,000 in specific valuation allowance was deemed necessary based on net realizable collateral value with respect to these five loans as of March 31, 2021.

Interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's sustained historical repayment performance and other relevant factors.

As of March 31, 2021, there were no loans 90 or more days past due and still accruing interest. As of December 31, 2020, there was a $586,000 loan that was 90 or more days past due and still accruing interest.  The bank received full payoff of the loan subsequent to December 31, 2020.






TROUBLED DEBT RESTRUCTURINGS

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


 As of March 31, 2021 
  Accruing  Non-accruing  Total 
  (In Thousands) 
          
One- to four-family $2,728  $1,088  $3,816 
Commercial real estate  6,934   -   6,934 
Commercial  1,097   -   1,097 
  $10,759  $1,088  $11,847 
             
  As of December 31, 2020 
  Accruing  Non-accruing  Total 
  (In Thousands) 
             
One- to four-family $2,733  $532  $3,265 
Commercial real estate  7,207   -   7,207 
Commercial  1,097   -   1,097 
  $11,037  $532  $11,569 

All troubled debt restructurings are considered to be impaired, are risk rated as either substandard or watch and are included in the internal risk rating tables disclosed in the notes to the unaudited consolidated financial statements. Specific reserves have been established to the extent that collateral-based impairment analyses indicate that a collateral shortfall exists.

We do not participate in government-sponsored troubled debt restructuring programs.  Our troubled debt restructurings are short-term modifications.  Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both.  Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court. Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.
If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status. After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification.
We modified loans for borrowers that were not considered troubled debt restructings under the CARES Act.  Loans less than 30 days past due as of December 31, 2019 were allowed for modifications if the borrower experienced a COVID-19 hardship. As of March 31, 2021, the Company had $910,000 of one-to four-family loans consisting of the deferral of principal and interest. In accordance with the CARES Act, these short term deferrals are not considered troubled debt restructurings.





LOAN DELINQUENCY

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


 At March 31,  At December 31, 
  2021  2020 
  (Dollars in Thousands) 
       
Loans past due less than 90 days $4,346  $3,938 
Loans past due 90 days or more  2,576   3,958 
Total loans past due $6,922  $7,896 
         
Total loans past due to total loans receivable  0.52%  0.57%


Past due loans decreased by $974,000, or 12.3%, to $6.9 million at March 31, 2021 from $7.9 million at December 31, 2020.  Loans past due 90 days or more decreased by $1.4 million, or 34.9%, primarily in the one- to four-family and commercial loan categories during the three months ended March 31, 2021. Loans past due less than 90 days increased by $408,000, or 10.4%, primarily in the one- to four-family loan category.


REAL ESTATE OWNED

Total real estate owned decreased by $172,000 to $150,000 at March 31, 2021, compared to $322,000 at December 31, 2020.  During the three months ended March 31, 2021, no loans were transferred to real estate owned upon completion of foreclosure.  During the same period, sales of real estate owned totaled $172,000.  There were no write downs during the three months ended March 31, 2021. New appraisals received on real estate owned and collateral dependent impaired loans are based upon an “as is value” assumption. During the period of time in which we are awaiting receipt of an updated appraisal, loans evaluated for impairment based upon collateral value are measured by the following:

 Applying an updated adjustment factor (as described previously) to an existing appraisal;
 Confirming that the physical condition of the real estate has not significantly changed since the last valuation date;
 Comparing the estimated current value of the collateral to that of updated sales values experienced on similar collateral;
 Comparing the estimated current value of the collateral to that of updated values seen on current appraisals of similar collateral; and
 Comparing the estimated current value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by the Company).

Virtually all habitable real estate owned (both residential and commercial properties) is managed with the intent of attracting a lessee to generate revenue.  Foreclosed properties are recorded at the lower of carrying value or fair value, less costs to sell, with charge-offs, if any, charged to the allowance for loan losses upon transfer to real estate owned within 90 days of being transferred.  Subsequent write-downs to reflect current fair market value, as well as gains and losses upon disposition and revenue and expenses incurred in maintaining such properties, are treated as period costs and included in real estate owned in the consolidated statements of income. The fair value is primarily based upon updated appraisals in addition to an analysis of current real estate market conditions.





ALLOWANCE FOR LOAN LOSSES

 At or for the Three Months 
  Ended March 31, 
  2021  2020 
  (Dollars in Thousands) 
       
Balance at beginning of period $18,823  $12,387 
Provision (credit) for loan losses  (1,070)  785 
Charge-offs:        
Mortgage        
One- to four-family  14   6 
Multi-family  -   - 
Home equity  -   - 
Commercial real estate  -   - 
Construction and land  -   - 
Consumer  -   1 
Commercial  -   - 
Total charge-offs  14   7 
Recoveries:        
Mortgage        
One- to four-family  11   47 
Multi-family  23   3 
Home equity  4   6 
Commercial real estate  2   4 
Construction and land  1   1 
Consumer  -   - 
Commercial  -   - 
Total recoveries  41   61 
Net recoveries  (27)  (54)
Allowance at end of period $17,780  $13,226 
         
Ratios:        
Allowance for loan losses to non-accrual loans at end of period  425.36%  194.44%
Allowance for loan losses to loans receivable at end of period  1.33%  0.94%
Net recoveries to average loans outstanding (annualized)  (0.01)%  (0.02)%
(Provision) credit for loan losses to net recoveries  3,962.96%  (1,453.70)%
Net recoveries to beginning of the period allowance (annualized)  (0.58)%  (1.75)%

The allowance for loan losses decreased $1.0 million to $17.8 million at March 31, 2021, compared to $18.8 million at December 31, 2020.  The decrease in allowance for loan losses reflects the $1.1 million negative provision for loan losses. The negative provision recorded during the current year reflects adjustments to our qualitative factors, primarily to account for the slight improvement in certain economic factors along with a decrease in loan balance.

We had net recoveries of $27,000, or 0.01% of average loans annualized, for the three months ended March 31, 2021, compared to net recoveries of $54,000, or less than 0.02% of average loans annualized, for the three months ended March 31, 2020. Of the $27,000 in recoveries during the three months ended March 31, 2021, the majority of the activity related to loans secured by one- to four-family residential and multi-family loans.

Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral.  Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.

The allowance for loan losses has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors. To the best of management’s knowledge, all probable losses have been provided for in the allowance for loan losses.

Management is validating the CECL model and methodologies; however we expect the change in the allowance for credit loss, including reserves for unfunded commitments, not to exceed 110% of the March 31, 2021 allowance based on a parallel computation.  When finalized, this one-time increase as a result of the adoption of CECL will be recorded, net of tax, as an adjustment to retained earnings effective on the earlier of the termination date of the national emergency declaration by the President or January 1, 2022. This estimate is subject to change based on continuing refinement and validation of the model and methodologies.




The establishment of the amount of the loan loss allowance inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct. Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years.


Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet our liquidity needs. 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.  Liquidity is monitored on a daily, weekly and monthly basis using a variety of measurement tools and indicators.

Our primary sources of liquidity are deposits, amortization and repayment of loans, sales of loans held for sale, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan repayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term, interest-earning assets, which provide liquidity to meet lending requirements. Additional sources of liquidity used for the purpose of managing long- and short-term cash flows include advances from the FHLB.

During the three months ended March 31, 2021, primary uses of cash and cash equivalents included: $1.11 billion in funding loans held for sale, $17.6 for short-term borrowings, $16.2 million for purchases of mortgage related securities, $4.8 million for cash dividends paid, $5.0 million for advance payments by borrowers for taxes, and $4.3 million to pay a legal settlement.

During the three months ended March 31, 2021, primary sources of cash and cash equivalents included: $1.22 billion in proceeds from the sale of loans held for sale, $39.7 for net loan receivables decrease, $34.8 million from an increase in deposits, $11.0 million in principal repayments on mortgage related securities, and $21.3 million in net income.

During the three months ended March 31, 2020, primary uses of cash and cash equivalents included: $687.7 million in funding loans held for sale, $21.3 million for funding of loans receivable, $14.2 million in purchases of our common stock, $2.4 million for cash dividends paid, $2.5 million for purchases of debt securities, a $3.0 million decrease in advance payments by borrowers for taxes, $1.4 million in repayment of short-term debt, and $686,000 for purchases of mortgage related securities.

During the three months ended March 31, 2020, primary sources of cash and cash equivalents included: $676.9 million in proceeds from the sale of loans held for sale, $40.0 million in additional proceeds from short-term FHLB borrowings, $18.3 million from an increase in deposits, $9.7 million in principal repayments on mortgage related securities, and $6.1 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, 2021 and 2020, respectively, $198.4 million and $59.1 million of our assets were invested in cash and cash equivalents.  At March 31, 2021, cash and cash equivalents were comprised of the following: $160.1 million in cash held at the Federal Reserve Bank and other depository institutions and $38.3 million in federal funds sold and short-term investments.  Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt and mortgage-related securities, increases in deposit accounts,  advances from the FHLB, and repurchase agreements from other institutions.

Liquidity management is both a daily and longer-term function of business management.  If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds. At March 31, 2021, we had $470.0 million in long term advances from the FHLB with contractual maturity dates in 2027, 2028, and 2029.  The 2027 advance has a contractual maturity date in December 2027. There are four 2028 advances that have contractual maturities in 2028. The remaining 2028 advance maturities have single call options in May 2021, along with two advances that have quarterly call options beginning in June 2020 and September 2020. The 2029 advance maturities have quarterly call options currently available and the other options that began in November 2020, beginning in August 2021, and beginning in May 2022.  As an additional source of funds, the mortgage banking segment has a repurchase agreement. At March 31, 2021, we had $16.5 million outstanding under the repurchase agreement with a total outstanding commitment of $35.0 million.



At March 31, 2021, we had outstanding commitments to originate loans receivable of $20.3 million.  In addition, at March 31, 2021, we had unfunded commitments under construction loans of $65.8 million, unfunded commitments under business lines of credit of $18.2 million and unfunded commitments under home equity lines of credit and standby letters of credit of $14.0 million.  At March 31, 2021, certificates of deposit scheduled to mature in one year or less totaled $594.2 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.  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. However, we cannot assure that such borrowings would be available on attractive terms, or at all, if and when needed. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents and securities available-for-sale in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

Waterstone Financial, Inc. is a separate legal entity from WaterStone Bank and must provide for its own liquidity to pay dividends to its shareholders, repurchase shares of its common stock, and for other corporate purposes.  The primary source of liquidity for Waterstone Financial, Inc. is dividend payments from WaterStone Bank.  The ability of WaterStone Bank to pay dividends is subject to regulatory restrictions. At March 31, 2021, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totaling $54.5 million.
Capital

Shareholders' equity increased $17.6 million to $430.7 million at March 31, 2021 from December 31, 2020.  Shareholders' equity increased primarily due to net income, additional paid-in capital as stock options were exercised and equity awards vested, and unearned ESOP shares vesting.  Partially offsetting the increases, there were decreases due to the declaration of dividends, a decrease in the fair value of the security portfolio, and the repurchase of stock.

The Company's Board of Directors authorized a stock repurchase program in the third quarter of 2020. As of March 31, 2021, the Company had repurchased 10.7 million shares at an average price of $14.39 under previously approved stock repurchase plans.

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 March 31, 2021, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. See “Notes to Unaudited Consolidated Financial Statements - Note 8 - Regulatory Capital.”





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

The following tables present information indicating various contractual obligations and commitments of the Company as of March 31, 2021 and the respective maturity dates.
       More than  More than    
        One Year  Three Years  Over 
     One Year  Through  Through  Five 
  Total  or Less  Three Years  Five Years  Years 
  (In Thousands) 
Demand deposits (3) $194,978  $$194,978  $-  $-  $- 
Money market and savings deposits (3)  318,959   318,959   -   -   - 
Time deposit (3)  705,754   594,237   109,558   1,959   - 
Repurchase agreements (3)  16,505   16,505   -   -   - 
Federal Home Loan Bank advances (1)  474,000   4,000   -   -   470,000 
Operating leases (2)  8,572   2,822   3,620   1,256   874 
  $1,718,768  $$1,131,501  $$113,178  $$3,215  $$470,874 

(1)  Secured under a blanket security agreement on qualifying assets, principally, mortgage loans.  Excludes interest which will accrue on the advances. See call provisions in Note 7 - Borrowings.
(2)  Represents non-cancelable operating leases for offices and equipment.
(3)  Excludes interest.

See Note 10 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information.


Off-Balance Sheet Commitments

The following table details the amounts and expected maturities of significant off-balance sheet commitments as of March 31, 2021.

       More than  More than    
        One Year  Three Years  Over 
     One Year  Through  Through  Five 
  Total  or Less  Three Years  Five Years  Years 
  (In Thousands) 
Real estate loan commitments (1) $20,302  $20,302  $-  $-  $- 
Unused portion of home equity lines of credit (2)  12,767   12,767   -   -   - 
Unused portion of construction loans (3)  65,790   65,790   -   -   - 
Unused portion of business lines of credit  18,221   18,221   -   -   - 
Standby letters of credit  1,246   1,246   -   -   - 
Total Other Commitments $118,326  $118,326  $-  $-  $- 


General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.
(1)  Commitments for loans are extended to customers for up to 90 days after which they expire.
(2)  Unused portions of home equity loans are available to the borrower for up to 10 years.
(3)  Unused portions of construction loans are available to the borrower for up to one year.






Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

General.  The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, WaterStone Bank’s board of directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real estate balloon loans; (ii) reducing and shortening the expected average life of the investment portfolio; and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the 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 March 31, 2021 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 
   +300   +200   +100   -100 
  (Dollar Amounts in Thousands) 
As of March 31, 2021                
          Dollar Change $$8,118   6,380   3,272   (2,427)
          Percentage Change  14.75%  11.59   5.95   (4.41)

At March 31, 2021, a 100 basis point instantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 5.95% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 4.41%.




Item 4. 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 material 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is set forth in Part I, Item 1, Note 10 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities.
Item 1A. Risk Factors
There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Following are the Company’s monthly common stock repurchases during the first quarter of 2021:

Period Total Number of Shares Purchased  Average Price Paid per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans  
Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plan(a)
 
January 1, 2021 - January 31, 2021  400  $$18.03   400   996,363 
February 1, 2021 - February 28, 2021  -   -   -   996,363 
March 1, 2021 - March 31, 2021  -   -   -   996,363 
Total  400  $$18.03   400   996,363 

(a)On July 21, 2020, the Board of Directors announced the completion of the then-existing stock repurchase plan and authorized the repurchase of 2,000,000 shares of common stock pursuant to a new share repurchase plan. This plan has no expiration date.



Item 3. Defaults Upon Senior Securities


Not applicable.


Item 4. Mine Safety Disclosures


Not applicable.





Item 5. Other Information


Not applicable.


Item 6. Exhibits
Exhibit No. Description Filed Herewith 
  Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Waterstone Financial, Inc.   X
  Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Waterstone Financial, Inc.   X
  Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Waterstone Financial, Inc.   X
  Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Waterstone Financial, Inc.   X
 101 
The following financial statements from Waterstone Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline Extensive Business Reporting Language (XBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in shareholders' equity, (v) consolidated statements of cash flows and (vi) the notes to consolidated financial statements.
   X
 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)   X

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 
WATERSTONE FINANCIAL, INC.
(Registrant)
   
Date:  May 5, 2021    
 
 
/s/ Douglas S. Gordon
   
 Douglas S. Gordon   
 
Chief Executive Officer
Principal Executive Officer
   
Date:  May 5, 2021    
 
 
/s/  Mark R. Gerke
   
 Mark R. Gerke   
 
Chief Financial Officer
Principal Financial Officer