UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
For the quarterly period ended
OR
Commission File Number
WATERSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
(
(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 | ||
| | | The |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | | 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
The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was
10-Q INDEX
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| (Unaudited) | ||||||||
| June 30, 2023 | December 31, 2022 | |||||||
| (Dollars In Thousands, except share and per share data) | ||||||||
| Assets | ||||||||
| Cash | $ | $ | ||||||
| Federal funds sold | ||||||||
| Interest-earning deposits in other financial institutions and other short term investments | ||||||||
| Cash and cash equivalents | ||||||||
| Securities available for sale, at fair value (cost: 2023—$; 2022—$) | ||||||||
| Loans held for sale, at fair value | ||||||||
| Loans receivable | ||||||||
| Less: Allowance for credit losses ("ACL") - loans | ||||||||
| Loans receivable, net | ||||||||
| Office properties and equipment, net | ||||||||
| Federal Home Loan Bank stock, at cost | ||||||||
| Cash surrender value of life insurance | ||||||||
| Real estate owned, net | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Demand deposits | $ | $ | ||||||
| Money market and savings deposits | ||||||||
| Time deposits | ||||||||
| Total deposits | ||||||||
| Borrowings | ||||||||
| Advance payments by borrowers for taxes | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock (par value $ per share) Authorized - shares at June 30, 2023 and at December 31, 2022, shares issued | ||||||||
| Common stock (par value $ per share) Authorized - shares at June 30, 2023 and at December 31, 2022, Issued and Outstanding - at June 30, 2023 and at December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Unearned ESOP shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss, net of taxes | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||
| Interest income: | ||||||||||||||||
| Loans | $ | $ | $ | $ | ||||||||||||
| Mortgage-related securities | ||||||||||||||||
| Debt securities, federal funds sold and short-term investments | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision (credit) for credit losses | ( | ) | ||||||||||||||
| Net interest income after provision (credit) for credit losses | ||||||||||||||||
| Noninterest income: | ||||||||||||||||
| Service charges on loans and deposits | ||||||||||||||||
| Increase in cash surrender value of life insurance | ||||||||||||||||
| Mortgage banking income | ||||||||||||||||
| Other | ||||||||||||||||
| Total noninterest income | ||||||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation, payroll taxes, and other employee benefits | ||||||||||||||||
| Occupancy, office furniture, and equipment | ||||||||||||||||
| Advertising | ||||||||||||||||
| Data processing | ||||||||||||||||
| Communications | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Real estate owned | ||||||||||||||||
| Loan processing expense | ||||||||||||||||
| Other | ||||||||||||||||
| Total noninterest expenses | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive loss, net of tax: | ||||||||||||||||
| Net unrealized holding loss on available for sale securities: | ||||||||||||||||
| Net unrealized holding loss arising during the period, net of tax (expense) benefit of $, $, $, and $ respectively | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Unearned | Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | ESOP | Comprehensive | Shareholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Shares | Income (Loss) | Equity | ||||||||||||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||||||||||||||
| For the six months ended June 30, 2022 | ||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||||
| Adoption of new accounting pronouncement (see Note 1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| ESOP shares committed to be released to plan participants | - | |||||||||||||||||||||||||||
| Cash dividend, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Proceeds from stock option exercises | ||||||||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||||||
| Purchase of common stock returned to authorized but unissued | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||||||||||||||
| For the six months ended June 30, 2023 | ||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||||
| ESOP shares committed to be released to plan participants | - | |||||||||||||||||||||||||||
| Cash dividend, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock Compensation Activity, net of tax | ||||||||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||||||
| Purchase of common stock returned to authorized but unissued | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Unearned | Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | ESOP | Comprehensive | Shareholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Shares | Income (Loss) | Equity | ||||||||||||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||||||||||||||
| For the three months ended June 30, 2022 | ||||||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||||
| ESOP shares committed to be released to Plan participants | - | |||||||||||||||||||||||||||
| Cash dividend, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock compensation activity, net of tax | ||||||||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||||||
| Purchase of common stock returned to authorized but unissued | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||||||||||||||
| For the three months ended June 30, 2023 | ||||||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Total comprehensive income | - | |||||||||||||||||||||||||||
| ESOP shares committed to be released to Plan participants | - | |||||||||||||||||||||||||||
| Cash dividend, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock compensation activity, net of tax | ||||||||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||||||
| Purchase of common stock returned to authorized but unissued | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended June 30, |
||||||||
| 2023 |
2022 |
|||||||
| (In Thousands) |
||||||||
| Operating activities: |
||||||||
| Net income |
$ | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
| Provision (credit) for credit losses |
( |
) | ||||||
| Depreciation, amortization, accretion |
||||||||
| Deferred taxes |
( |
) | ( |
) | ||||
| Stock based compensation |
||||||||
| Origination of mortgage servicing rights |
( |
) | ( |
) | ||||
| Proceeds on sales of mortgage servicing rights |
||||||||
| Gain on sale of mortgage servicing rights |
( |
) | ||||||
| Gain on sale of loans held for sale |
( |
) | ( |
) | ||||
| Loans originated for sale |
( |
) | ( |
) | ||||
| Proceeds on sales of loans originated for sale |
||||||||
| Gain on death benefit on bank owned life insurance |
( |
) | ||||||
| Increase in accrued interest receivable |
( |
) | ( |
) | ||||
| Increase in cash surrender value of life insurance |
( |
) | ( |
) | ||||
| Decrease (increase) in derivative assets |
( |
) | ||||||
| Increase (decrease) in accrued interest on deposits and borrowings |
( |
) | ||||||
| Increase in accrued tax expense |
||||||||
| (Decrease) increase in derivative liabilities |
( |
) | ||||||
| Change in other assets and other liabilities, net |
( |
) | ( |
) | ||||
| Net cash (used in) provided by operating activities |
( |
) | ||||||
| Investing activities: |
||||||||
| Net increase in loans receivable |
( |
) | ( |
) | ||||
| Purchases of: |
||||||||
| Debt securities |
( |
) | ||||||
| Mortgage related securities |
( |
) | ( |
) | ||||
| Bank owned life insurance |
( |
) | ( |
) | ||||
| FHLB stock |
( |
) | ||||||
| Premises and equipment |
( |
) | ( |
) | ||||
| Proceeds from: |
||||||||
| Principal repayments on mortgage-related securities |
||||||||
| Maturities of debt securities |
||||||||
| Sales of FHLB Stock |
||||||||
| Death benefit on bank owned life insurance |
||||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities: |
||||||||
| Net decrease in deposits |
( |
) | ( |
) | ||||
| Net change in short-term borrowings |
( |
) | ||||||
| Repayment of long-term debt |
( |
) | ( |
) | ||||
| Proceeds from long-term debt |
||||||||
| Net change in advance payments by borrowers for taxes |
||||||||
| Cash dividends on common stock |
( |
) | ( |
) | ||||
| Purchase of common stock returned to authorized but unissued |
( |
) | ( |
) | ||||
| Proceeds from stock option exercises |
||||||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental information: |
||||||||
| Cash paid or credited during the period for: |
||||||||
| Income tax payments |
$ | $ | ||||||
| Interest payments |
||||||||
| Noncash activities: |
||||||||
| Dividends declared but not paid in other liabilities |
||||||||
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
WaterStone Bank's mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation. Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market. Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’ equity, and cash flows of the Company for the periods presented.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2022 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other period.
The 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.
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 and six months ended June 30, 2023 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.
Accounting Standards Adopted in 2023
The Company adopted "Troubled Debt Restructurings and Vintage Disclosures" under ASC Topic 326 on January 1, 2023, and applied the standard’s provisions. The impact going forward will depend on the credit quality of the loan portfolio as well as the economic conditions at future reporting periods. See Note 3 - Loans Receivable for the new disclosures. Adoption of "Troubled Debt Restructurings and Vintage Disclosures" under ASC Topic 326 did not have a material impact on the Company's consolidated financial statements.
Note 2 — Securities Available for Sale
The amortized cost and fair values of the Company’s investment in securities available for sale follow:
| June 30, 2023 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
| cost | gains | losses | Fair value | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| Government sponsored enterprise issued | ( | ) | ||||||||||||||
| Private-label issued | ( | ) | ||||||||||||||
| Mortgage-related securities | ( | ) | ||||||||||||||
| Government sponsored enterprise bonds | ( | ) | ||||||||||||||
| Municipal securities | ( | ) | ||||||||||||||
| Other debt securities | ( | ) | ||||||||||||||
| Debt securities | ( | ) | ||||||||||||||
| Other securities | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
| cost | gains | losses | Fair value | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Government sponsored enterprise issued | ( | ) | ||||||||||||||
| Private-label issued | ( | ) | ||||||||||||||
| Mortgage related securities | ( | ) | ||||||||||||||
| Government sponsored enterprise bonds | ( | ) | ||||||||||||||
| Municipal securities | ( | ) | ||||||||||||||
| Other debt securities | ( | ) | ||||||||||||||
| Debt securities | ( | ) | ||||||||||||||
| Other securities | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
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 June 30, 2023, $
The amortized cost and fair values of investment securities by contractual maturity at June 30, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (In Thousands) | ||||||||
| Debt and other securities | ||||||||
| Due within one year | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Mortgage-related securities | ||||||||
| Other securities | ||||||||
| Total | $ | $ | ||||||
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:
| June 30, 2023 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | loss | value | loss | value | loss | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||||||||||
| Government sponsored enterprise issued | ||||||||||||||||||||||||
| Private-label issued | ||||||||||||||||||||||||
| Government sponsored enterprise bonds | ||||||||||||||||||||||||
| Municipal securities | ||||||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | loss | value | loss | value | loss | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||||||||||
| Government sponsored enterprise issued | ||||||||||||||||||||||||
| Private-label issued | ||||||||||||||||||||||||
| Government sponsored enterprise bonds | ||||||||||||||||||||||||
| Municipal securities | ||||||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company reviews the investment securities portfolio on a quarterly basis to monitor securities in unrealized loss positions, which were comprised of
During the three and six months ended June 30, 2023 and June 30, 2022, there were
Note 3 - Loans Receivable
Loans receivable at June 30, 2023 and December 31, 2022 are summarized as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| (In Thousands) | ||||||||
| Mortgage loans: | ||||||||
| Residential real estate: | ||||||||
| One- to four-family | $ | $ | ||||||
| Multi-family | ||||||||
| Home equity | ||||||||
| Construction and land | ||||||||
| Commercial real estate | ||||||||
| Consumer | ||||||||
| Commercial loans | ||||||||
| Total | $ | $ | ||||||
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 $
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 $
An analysis of past due loans receivable as of June 30, 2023 and December 31, 2022 follows:
| As of June 30, 2023 | ||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
(1) Includes $
(2) Includes $ and $ at June 30, 2023 and December 31, 2022, respectively, which are on non-accrual status.
(3) Includes $ and $
The following tables present the activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2023 and the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2022:
| One- to Four-Family | Multi-Family | Home Equity | Land and Construction | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Six months ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision (credit) for credit losses - loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Adoption of CECL | ( | ) | ( | ) | $ | |||||||||||||||||||||||||||
| Provision (credit) for loan losses | ( | ) | ( | ) | ( | ) | $ | |||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Recoveries | $ | |||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| One to-Four- Family | Multi-Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Three months ended June 30, 2023 | ||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Adoption of CECL | ||||||||||||||||||||||||||||||||
| Provision (credit) for credit losses - loans | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The Company utilized the Vintage Loss Rate method in determining expected future credit losses. This technique considers losses over the full life cycle of loan pools. A vintage is a group of loans originated in the same annual time period. The loss rate method measures the amount of loan charge–offs, net of recoveries, (“loan losses”) recognized over the life of a pool by loan segment and vintage and compares those loan losses to the original loan balance of that pool as of a similar vintage.
To estimate a CECL loss rate for the pool, management first identifies the loan losses recognized between the pool date and the reporting date for the pool and determines which loan losses were related to loans outstanding at the pool date. The loss rate method then divides the loan losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date.
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look–back period includes January 2012 through the current period, on an annual basis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external models or data.
Additionally, the weighted average remaining maturity ("WARM") method is used for the Construction and Consumer loan pools. The WARM method considers an estimate of expected credit losses over the remaining life of the financial assets and uses average annual charge-off rates to estimate the allowance for credit losses. For amortizing assets, the remaining contractual life is adjusted by the expected scheduled payments and prepayments. The average annual charge-off rate is applied to the amortization-adjusted remaining life to determine the unadjusted lifetime historical charge-off rate.
Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration other analytics performed within the organization, such as enterprise and concentration management. Management attempts to quantify qualitative reserves whenever possible. The CECL methodology applied focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses.
The Company’s CECL estimate applies a forecast that incorporates macroeconomic trends and other environmental factors. Management utilized national, regional and local leading economic indexes, as well as management judgment, as the basis for the forecast period. The historical loss rate was utilized as the base rate, and qualitative adjustments and future forecast adjustments were applied.
The Company segments the loan portfolio into pools based on the following risk characteristics: collateral type, credit characteristics, loan origination balance, and outstanding loan balances.
Allowance for Credit Losses-Unfunded Commitments:
In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in other liabilities on the consolidated statements of financial condition. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The allowance for unfunded commitments at June 30, 2023 and December 31, 2022 was $
Provision for Credit Losses:
The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 2 - Securities Available for Sale for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Provision (credit) for credit losses on: | ||||||||||||||||
| Loans | $ | $ | $ | $ | ||||||||||||
| Unfunded commitments | ( | ) | ( | ) | ( | ) | ||||||||||
| Investment securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | ||||||||||
Collateral Dependent Loans:
A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following tables present collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.
The following tables present collateral dependent loans by portfolio segment and collateral type as of June 30, 2023 and December 31, 2022:
| One- to Four- Family | Multi-Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Allowance related to collateral dependent loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Allowance related to pooled loans | ||||||||||||||||||||||||||||||||
| Allowance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Pooled loans | ||||||||||||||||||||||||||||||||
| Total gross loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| One- to Four- Family | Multi-Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Allowance related to collateral dependent loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Allowance related to pooled loans | ||||||||||||||||||||||||||||||||
| Allowance at end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Pooled loans | ||||||||||||||||||||||||||||||||
| Total gross loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 the Company is placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for the Company's general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.
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.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $
Watch. Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and, additionally, the weakness or weaknesses to make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of June 30, 2023 and December 31, 2022:
| One to Four-Family | Multi-Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| At June 30, 2023 | ||||||||||||||||||||||||||||||||
| Substandard | $ | $ | $ | $ | $ | $ | - | $ | $ | |||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||||||||||||||
| Substandard | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Credit Quality Information:
The following table presents total loans by risk categories and year of origination as of June 30, 2023:
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| One- to four-family | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Pass | $ | |||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following table presents total loans by risk categories and year of origination as of December 31, 2022:
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| One- to four-family | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following presents data on restructurings of financing receivables whose borrowers are experiencing financial difficulty:
| As of June 30, 2023 | ||||||||||||||||||||||||
| Accruing | Non-accruing | Total | ||||||||||||||||||||||
| Amount | Number | Amount | Number | Amount | Number | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | |||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||
The following presents data on troubled debt restructurings:
| As of December 31, 2022 | ||||||||||||||||||||||||
| Accruing | Non-accruing | Total | ||||||||||||||||||||||
| Amount | Number | Amount | Number | Amount | Number | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | |||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||
The following presents restructurings of financing receivables whose borrowers are experiencing financial difficulty by concession type:
| As of June 30, 2023 | ||||||||||||||||||||||||
| Performing in accordance with modified terms | In Default | Total | ||||||||||||||||||||||
| Amount | Number | Amount | Number | Amount | Number | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Interest reduction and principal forbearance | $ | $ | $ | |||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||
The following presents troubled debt restructurings by concession type:
| As of December 31, 2022 | ||||||||||||||||||||||||
| Performing in accordance with modified terms | In Default | Total | ||||||||||||||||||||||
| Amount | Number | Amount | Number | Amount | Number | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Interest reduction and principal forbearance | $ | $ | $ | |||||||||||||||||||||
| Interest reduction | ||||||||||||||||||||||||
| Principal forbearance | ||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||
There were no restructurings of financing receivables whose borrowers are experiencing financial difficulty during the three or six months ended June 30, 2023. There were
There were
The following table presents data on non-accrual loans as of June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||
| (Dollars in Thousands) | ||||||||
| Non-accrual loans: | ||||||||
| Residential | ||||||||
| One- to four-family | $ | $ | ||||||
| Multi-family | ||||||||
| Home equity | ||||||||
| Construction and land | ||||||||
| Commercial real estate | ||||||||
| Commercial | ||||||||
| Consumer | ||||||||
| Total non-accrual loans | $ | $ | ||||||
| Total non-accrual loans to total loans receivable | % | % | ||||||
| Total non-accrual loans to total assets | % | % | ||||||
Residential one- to four-family mortgage loans that were in the process of foreclosure were $
Note 4 — Mortgage Servicing Rights
The following table presents the activity in the Company’s mortgage servicing rights:
| Six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (In Thousands) | ||||||||
| Mortgage servicing rights at beginning of the period | $ | $ | ||||||
| Additions | ||||||||
| Amortization | ( | ) | ( | ) | ||||
| Sales | ( | ) | ||||||
| Mortgage servicing rights at end of the period | ||||||||
| Valuation allowance recovered during the period | ||||||||
| Mortgage servicing rights at end of the period, net | $ | $ | ||||||
During the six months ended June 30, 2023, $
The fair value of mortgage servicing rights was $
During the six months ended June 30, 2023 the Company sold mortgage servicing rights related to $
The following table shows the estimated future amortization expense for mortgage servicing rights for the periods indicated:
| (In Thousands) | ||||
| Estimate for the annual period ending December 31: | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 5 — Deposits
At June 30, 2023 and December 31, 2022, the aggregate balance of uninsured time deposits of $250,000 or more was $
A summary of the contractual maturities of time deposits at June 30, 2023 is as follows:
| (In Thousands) | ||||
| Within one year | $ | |||
| More than one to two years | ||||
| More than two to three years | ||||
| More than three to four years | ||||
| More than four through five years | ||||
| $ | ||||
Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Bank. Such deposits amounted to $
Note 6 — Borrowings
Borrowings consist of the following:
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Balance | Rate | Balance | Rate | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Short term: | ||||||||||||||||
| Repurchase agreements | $ | % | $ | % | ||||||||||||
| Federal Home Loan Bank, Chicago advances | % | % | ||||||||||||||
| Long term: | ||||||||||||||||
| Federal Home Loan Bank, Chicago advances maturing: | ||||||||||||||||
| 2025 | % | % | ||||||||||||||
| 2027 | % | % | ||||||||||||||
| 2032 | % | % | ||||||||||||||
| 2033 | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
The short-term repurchase agreement represents the outstanding portion of a total $
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 $
The $
The $
The $
At June 30, 2023, the Company had approximately $
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
Note 7 – Regulatory Capital
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Company's and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
As required by applicable legislation, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement.
The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. The Community Bank Leverage Ratio is currently 9%. 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 capital conservation buffer. The minimum capital conservation buffer is 2.5%.
As of June 30, 2023, the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category.
The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and to regulatory notification requirements for dividends that do not require prior regulatory approval.
The actual and required capital amounts and ratios for the Bank as of June 30, 2023 and December 31, 2022 are presented in the tables below:
| June 30, 2023 | ||||||||||||||||||||||||||||||||
| 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. | $ | % | $ | 141,140 | % | $ | 185,240 | % | N/A | N/A | ||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Tier I Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | 21.31 | % | 105,860 | % | 149,970 | % | N/A | N/A | ||||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | % | 79,400 | % | 123,500 | % | N/A | N/A | |||||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Tier I Capital (to average assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | % | 86,480 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
| Waterstone Bank | % | % | N/A | N/A | % | |||||||||||||||||||||||||||
| State of Wisconsin (to total assets) | ||||||||||||||||||||||||||||||||
| Waterstone Bank | % | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| 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. | $ | % | $ | % | $ | % | N/A | N/A | ||||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Tier I capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | % | % | % | N/A | N/A | |||||||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | % | % | % | N/A | N/A | |||||||||||||||||||||||||||
| Waterstone Bank | % | % | % | % | ||||||||||||||||||||||||||||
| Tier I Capital (to average assets) | ||||||||||||||||||||||||||||||||
| Consolidated Waterstone Financial, Inc. | % | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||
| Waterstone Bank | % | % | N/A | N/A | % | |||||||||||||||||||||||||||
| State of Wisconsin (to total assets) | ||||||||||||||||||||||||||||||||
| Waterstone Bank | % | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||
Note 8 – Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. 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.
| June 30, 2023 | December 31, 2022 | |||||||
| (In Thousands) | ||||||||
| Financial instruments whose contract amounts represent potential credit risk: | ||||||||
| Commitments to extend credit under amortizing loans (1) | $ | $ | ||||||
| Commitments to extend credit under home equity lines of credit (2) | ||||||||
| Unused portion of construction loans (3) | ||||||||
| Unused portion of business lines of credit | ||||||||
| Standby letters of credit | ||||||||
| (1) | Commitments for loans are extended to customers for up to |
| (2) | Unused portions of home equity loans are available to the borrower for up to |
| (3) | Unused portions of construction loans are available to the borrower for up to 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
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 $
In the normal course of business, the Company, or its subsidiaries, are involved in various legal proceedings. In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements.
Note 9 – Derivative Financial Instruments
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being a hedge relationship. These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. The Company does not use derivatives for speculative purposes.
Derivative Loan Commitments
Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
Forward Loan Sale Commitments
The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).
The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.
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 following tables presents the outstanding notional balances and fair values of outstanding derivative instruments:
| June 30, 2023 | ||||||||||||||
| Assets | Liabilities | |||||||||||||
| Derivatives not designated as Hedging Instruments | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
| (In Millions) | ||||||||||||||
| Forward commitments | $ | Other assets | $ | Other liabilities | $ | |||||||||
| Interest rate locks | Other assets | Other liabilities | ||||||||||||
| Interest rate swaps | Other assets | Other liabilities | ||||||||||||
| December 31, 2022 | ||||||||||||||
| Assets | Liabilities | |||||||||||||
| Derivatives not designated as Hedging Instruments | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
| (In Millions) | ||||||||||||||
| Forward commitments | $ | Other assets | $ | Other liabilities | $ | |||||||||
| Interest rate locks | Other assets | Other liabilities | ||||||||||||
| Interest rate swaps | Other assets | Other liabilities | ||||||||||||
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 back-to-back swaps mature in December 2029 to June 2037. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of June 30, 2023 and December 31, 2022, no back-to-back swaps were in default. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank.
Note 10 – 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
Presented below are the calculations for basic and diluted earnings per share:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands, except per share amounts) | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Effect of dilutive potential common shares | ||||||||||||||||
| Diluted weighted average shares outstanding | $ | $ | $ | $ | ||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
Note 11 – Fair Value Measurements
ASC Topic 820, "Fair Value Measurements and Disclosures" defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. 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 the consolidated statements of financial condition at their fair value on a recurring basis as of June 30, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| Fair Value Measurements Using |
||||||||||||||||
| June 30, 2023 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In Thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Available for sale securities |
||||||||||||||||
| Mortgage-backed securities |
$ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations |
||||||||||||||||
| Government sponsored enterprise issued |
||||||||||||||||
| Private-label issued |
||||||||||||||||
| Government sponsored enterprise bonds |
||||||||||||||||
| Municipal securities |
||||||||||||||||
| Other debt securities |
||||||||||||||||
| Other securities |
||||||||||||||||
| Loans held for sale |
||||||||||||||||
| Mortgage banking derivative assets |
||||||||||||||||
| Interest rate swap assets |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Mortgage banking derivative liabilities |
||||||||||||||||
| Interest rate swap liabilities |
||||||||||||||||
| Fair Value Measurements Using |
||||||||||||||||
| December 31, 2022 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In Thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Available for sale securities |
||||||||||||||||
| Mortgage-backed securities |
$ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations |
||||||||||||||||
| Government sponsored enterprise issued |
||||||||||||||||
| Private-label issued |
||||||||||||||||
| Government sponsored enterprise bonds |
||||||||||||||||
| Municipal securities |
||||||||||||||||
| Other debt securities |
||||||||||||||||
| Other securities |
||||||||||||||||
| Loans held for sale |
||||||||||||||||
| Mortgage banking derivative assets |
||||||||||||||||
| Interest rate swap assets |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Mortgage banking derivative liabilities |
||||||||||||||||
| Interest rate swap liabilities |
||||||||||||||||
The following summarizes the valuation techniques for assets recorded in the consolidated statements of financial condition at their fair value on a recurring basis:
Available-for-sale securities – The Company’s investment securities classified as available for sale include: 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 2023 and 2022.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands) | (In Thousands) | |||||||||||||||
| Mortgage derivative, net balance at the beginning of the period | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage derivative gain (loss), net | ( | ) | ( | ) | ||||||||||||
| Mortgage derivative, net balance at the end of the period | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
There were
Assets Recorded at Fair Value on a Non-recurring Basis
The following tables present information about assets recorded in the consolidated statements of financial condition at their fair value on a non-recurring basis as of June 30, 2023 and December 31, 2022, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| Fair Value Measurements Using |
||||||||||||||||
| June 30, 2023 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In Thousands) |
||||||||||||||||
| Real estate owned |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measurements Using |
||||||||||||||||
| December 31, 2022 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In Thousands) |
||||||||||||||||
| Real estate owned |
$ | $ | $ | $ | ||||||||||||
Real estate owned – On a non-recurring basis, real estate owned is recorded in the consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques.
Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value.
For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
| Significant Unobservable Input Value |
|||||||||||||||||||
| Fair Value at | Significant |
||||||||||||||||||
| June 30, |
Valuation |
Unobservable |
Minimum |
Maximum |
Weighted |
||||||||||||||
| 2023 |
Technique |
Inputs |
Value |
Value |
Average |
||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| Mortgage banking derivatives |
$ | Pricing models |
Pull through rate |
% | % | % | |||||||||||||
| Real estate owned |
Market approach |
Discount rates applied to appraisals |
% | % | % | ||||||||||||||
| December 31, | |||||||||||||||||||
| 2022 | |||||||||||||||||||
| Mortgage banking derivatives |
$ | ( |
) | Pricing models |
Pull through rate |
% | % | % | |||||||||||
| Real estate owned |
Market approach |
Discount rates applied to appraisals |
% | % | % | ||||||||||||||
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:
| June 30, 2023 |
December 31, 2022 |
|||||||||||||||||||||||||||||||||||||||
| Carrying |
Fair Value |
Carrying |
Fair Value |
|||||||||||||||||||||||||||||||||||||
| amount |
Total |
Level 1 |
Level 2 |
Level 3 |
amount |
Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||||||||||||||||
| (In Thousands) |
||||||||||||||||||||||||||||||||||||||||
| Financial Assets |
||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Loans receivable |
||||||||||||||||||||||||||||||||||||||||
| FHLB stock |
||||||||||||||||||||||||||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||||||||||||||||||||||
| Mortgage servicing rights |
||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||
| Financial Liabilities |
||||||||||||||||||||||||||||||||||||||||
| Deposits |
||||||||||||||||||||||||||||||||||||||||
| Advance payments by borrowers for taxes |
||||||||||||||||||||||||||||||||||||||||
| Borrowings |
||||||||||||||||||||||||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||||||||||||||||||||||
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.
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 marketplace. 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 June 30, 2023 and December 31, 2022.
Note 12 – Segment Reporting
Selected financial and descriptive information is required to be provided about reportable operating segments, considering a "management approach" concept as the basis for identifying reportable segments. 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
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 29 states with the ability to lend in
Presented below is the segment information:
| As of or for the three months ended June 30, 2023 | ||||||||||||||||
| Holding | ||||||||||||||||
| Community | Mortgage | Company and | ||||||||||||||
| Banking | Banking | Other | Consolidated | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Net interest income (expense) | $ | $ | ( | ) | $ | $ | ||||||||||
| Provision for credit losses | ||||||||||||||||
| Net interest income (expense) after provision for credit losses | ( | ) | ||||||||||||||
| Noninterest income: | ( | ) | ||||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation, payroll taxes, and other employee benefits | ( | ) | ||||||||||||||
| Occupancy, office furniture and equipment | ||||||||||||||||
| Advertising | ||||||||||||||||
| Data processing | ||||||||||||||||
| Communications | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Real estate owned | ||||||||||||||||
| Loan processing expense | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total noninterest expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes (benefit) | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
| Total Assets | $ | $ | $ | ( | ) | $ | ||||||||||
| As of or for the three months ended June 30, 2022 | ||||||||||||||||
| Holding | ||||||||||||||||
| Community | Mortgage | Company and | ||||||||||||||
| Banking | Banking | Other | Consolidated | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Net interest income (expense) | $ | $ | $ | $ | ||||||||||||
| Provision (credit) for loan losses | ( | ) | ||||||||||||||
| Net interest income (expense) after provision (credit) for loan losses | ||||||||||||||||
| Noninterest income: | ( | ) | ||||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation, payroll taxes, and other employee benefits | ( | ) | ||||||||||||||
| Occupancy, office furniture and equipment | ||||||||||||||||
| Advertising | ||||||||||||||||
| Data processing | ||||||||||||||||
| Communications | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Real estate owned | ||||||||||||||||
| Loan processing expense | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total noninterest expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Total Assets | $ | $ | $ | ( | ) | $ | ||||||||||
| As of or for the six months ended June 30, 2023 | ||||||||||||||||
| Holding | ||||||||||||||||
| Community | Mortgage | Company and | ||||||||||||||
| Banking | Banking | Other | Consolidated | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Net interest income | $ | $ | ( | ) | $ | $ | ||||||||||
| Provision for credit losses | ||||||||||||||||
| Net interest income after provision for credit losses | ( | ) | ||||||||||||||
| Noninterest income: | ( | ) | ||||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation, payroll taxes, and other employee benefits | ( | ) | ||||||||||||||
| Occupancy, office furniture and equipment | ||||||||||||||||
| Advertising | ||||||||||||||||
| Data processing | ||||||||||||||||
| Communications | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Real estate owned | ||||||||||||||||
| Loan processing expense | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total noninterest expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes (benefit) | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
| As of or for the six months ended June 30, 2022 | ||||||||||||||||
| Holding | ||||||||||||||||
| Community | Mortgage | Company and | ||||||||||||||
| Banking | Banking | Other | Consolidated | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Net interest income (expense) | $ | $ | $ | $ | ||||||||||||
| Provision (credit) for loan losses | ( | ) | ( | ) | ||||||||||||
| Net interest income (expense) after provision (credit) for loan losses | ||||||||||||||||
| Noninterest income: | ( | ) | ||||||||||||||
| Noninterest expenses: | ||||||||||||||||
| Compensation, payroll taxes, and other employee benefits | ( | ) | ||||||||||||||
| Occupancy, office furniture and equipment | ||||||||||||||||
| Advertising | ||||||||||||||||
| Data processing | ||||||||||||||||
| Communications | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Real estate owned | ||||||||||||||||
| Loan processing expense | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total noninterest expenses | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
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; |
|
| ● |
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; |
|
| ● | changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio; | |
| ● |
changes in consumer demand, spending, borrowing and savings habits; |
|
| ● |
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 pandemic, including COVID-19, and related government actions; | |
| ● |
the effects of any federal government shutdown; |
|
| ● |
the effects of global or national war, conflict or acts of terrorism; |
|
| ● |
the ability of the U.S. Government to manage federal debt limits; |
|
| ● |
significant increases in our loan losses; and |
|
| ● |
changes in the financial condition, results of operations or future prospects of issuers of securities that we own. |
See also the factors referred to in reports filed by the Company with the Securities and Exchange Commission (particularly those under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
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 and six months ended June 30, 2023 and 2022 and the financial condition as of June 30, 2023 compared to the financial condition as of December 31, 2022.
As described in the notes to the unaudited consolidated financial statements, we have two reportable segments: 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 27 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.
Our community banking segment generates the significant majority of our consolidated net interest income and requires the significant majority of our provision for loan losses. Our mortgage banking segment generates the significant majority of our noninterest income and a majority of our noninterest expenses. We have provided below a discussion of the material results of operations for each segment on a separate basis for the three and six months ended June 30, 2023 and 2022, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.
Recent Industry Developments
During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry-wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains stable. The Company’s total deposits decreased by 1.0% as compared to December 31, 2022, to $1.19 billion at June 30, 2023 as we experienced minimal deposit outflow in the first half of the year. Deposits increased $4.1 million during the three months ended June 30, 2023. The Company also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments. Furthermore, the Company remains well capitalized for regulatory purposes with a Total Capital ratio of 22.43% as of June 30, 2023.
Significant Items
There were no significant items that impacted earnings for the three and six months ended June 30, 2023 and 2022.
Comparison of Community Banking Segment Results of Operations for the Three Months Ended June 30, 2023 and 2022
Net income totaled $5.2 million for the three months ended June 30, 2023 compared to $6.3 million for the three months ended June 30, 2022. Net interest income decreased $472,000 to $13.2 million for the three months ended June 30, 2023 compared to $13.7 million for the three months ended June 30, 2022. Interest expense on deposits and borrowings increased as replacement rates increased in the rising interest rate environment. Offsetting the increase in interest expense on deposit and borrowings, interest income on loans increased as replacement rates and average loans held for investment balances were higher than in the prior year and interest income on mortgage-related securities increased due to the increase in the average balance and replacement rates.
There was a provision for credit losses of $158,000 for the three months ended June 30, 2023 compared to a $41,000 negative provision for credit losses for the three months ended June 30, 2022. The provision for credit losses of $158,000 consisted of a $619,000 provision related to loans partially offset by a negative $462,000 provision related to unfunded commitments for the three months ended June 30, 2023. During the three months ended June 30, 2023, the increase related to loans was primarily due to an increase in originations and loan balance and the decrease in provision related to unfunded commitments was primarily due to a decrease in the loan pipeline. We made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors. The forecast factor remained unchanged as we monitor the economic environment going forward.
Total noninterest income decreased $100,000 to $1.5 million during the three months ended June 30, 2023 due primarily to a decrease in prepayment penalties on loans during the three months ended June 30, 2023.
Compensation, payroll taxes, and other employee benefits expense increased $87,000 to $4.7 million compared to the quarter ending June 30, 2022 primarily due to an increase in salaries due to annual raises that took place at the beginning of the year. Other noninterest expense increased $635,000 to $1.6 million as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans increased. These fees are eliminated in the consolidated statements of income.
Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended June 30, 2023 and 2022
Net loss totaled $1.2 million for the three months ended June 30, 2023 compared to net income of $1.7 million for the three months ended June 30, 2022. We originated $623.3 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended June 30, 2023, which represents a decrease of $155.4 million, or 20.0%, from the $778.8 million originated during the three months ended June 30, 2022. The decrease in loan production volume was driven by a $52.3 million, or 70.0%, decrease in refinance products as mortgage rates have increased over the past year. Mortgage purchase products decreased $103.1 million, or 14.6%, due to inventory constraints in the market, affordability, and interest rate increases. Total mortgage banking noninterest income decreased $7.1 million, or 23.5%, to $23.0 million during the three months ended June 30, 2023 compared to $30.1 million during the three months ended June 30, 2022. The decrease in mortgage banking noninterest income was related to a 20.0% decrease in volume and a 3.0% decrease in gross margin on loans originated and sold for the three months ended June 30, 2023 compared to June 30, 2022. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. The gross margin on loans originated and sold contraction reflects decreased industry demand due to the increased competition from mortgage originators. We sell loans on both a servicing-released and a servicing-retained basis. Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.
Additionally, our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance). Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan. Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 96.4% of total originations during the three months ended June 30, 2023, compared to 90.4% of total originations during the three months ended June 30, 2022, respectively, as refinance demand decelerated due to an increase in interest rates over the past year. The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 38.7% and 61.3% of all loan originations, respectively, during the three months ended June 30, 2023, compared to 25.7% and 74.3% of all loan originations, respectively, during the three months ended June 30, 2022.
Total compensation, payroll taxes and other employee benefits decreased $3.4 million, or 15.9%, to $17.9 million for the three months ended June 30, 2023 compared to $21.3 million for the three months ended June 30, 2022. The decrease in compensation expense was primarily related to decreased commission expense and salaries driven by decreased loan origination volume and reduction in headcount.
Consolidated Waterstone Financial, Inc. Results of Operations
| Three months ended June 30, |
||||||||
| 2023 |
2022 |
|||||||
| (Dollars In Thousands, except per share amounts) |
||||||||
| Net income |
$ | 4,007 | $ | 7,990 | ||||
| Earnings per share - basic |
0.20 | 0.36 | ||||||
| Earnings per share - diluted |
0.20 | 0.36 | ||||||
| Annualized return on average assets |
0.74 | % | 1.61 | % | ||||
| Annualized return on average equity |
4.41 | % | 7.93 | % | ||||
Net Interest Income
Average Balance Sheets, Interest and Yields/Costs
The following table sets forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. Non-accrual loans are included in the computation of the average balances of loans receivable and held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.
| Three months ended June 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield/Cost |
Average Balance |
Interest |
Yield/Cost |
|||||||||||||||||||
| (Dollars in Thousands) |
||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans receivable and held for sale(1) |
$ | 1,759,001 | $ | 22,150 | 5.05 | % | $ | 1,433,452 | $ | 14,546 | 4.07 | % | ||||||||||||
| Mortgage related securities(2) |
171,938 | 969 | 2.26 | % | 168,000 | 821 | 1.96 | % | ||||||||||||||||
| Debt securities, federal funds sold and short-term investments(2) (3) |
123,195 | 1,193 | 3.88 | % | 269,823 | 1,092 | 1.62 | % | ||||||||||||||||
| Total interest-earning assets |
2,054,134 | 24,312 | 4.75 | % | 1,871,275 | 16,459 | 3.53 | % | ||||||||||||||||
| Noninterest-earning assets |
108,320 | 117,248 | ||||||||||||||||||||||
| Total assets |
$ | 2,162,454 | $ | 1,988,523 | ||||||||||||||||||||
| Liabilities and equity |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand accounts |
$ | 69,147 | 16 | 0.09 | % | $ | 70,674 | 15 | 0.09 | % | ||||||||||||||
| Money market and savings accounts |
305,576 | 1,083 | 1.42 | % | 412,321 | 193 | 0.19 | % | ||||||||||||||||
| Time deposits |
695,310 | 4,856 | 2.80 | % | 584,244 | 543 | 0.37 | % | ||||||||||||||||
| Total interest-bearing deposits |
1,070,033 | 5,955 | 2.23 | % | 1,067,239 | 751 | 0.28 | % | ||||||||||||||||
| Borrowings |
551,545 | 5,617 | 4.08 | % | 326,068 | 1,584 | 1.95 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,621,578 | 11,572 | 2.86 | % | 1,393,307 | 2,335 | 0.67 | % | ||||||||||||||||
| Noninterest-bearing liabilities |
||||||||||||||||||||||||
| Noninterest-bearing deposits |
130,291 | 154,070 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
46,446 | 36,962 | ||||||||||||||||||||||
| Total noninterest-bearing liabilities |
176,737 | 191,032 | ||||||||||||||||||||||
| Total liabilities |
1,798,315 | 1,584,339 | ||||||||||||||||||||||
| Equity |
364,139 | 404,184 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 2,162,454 | $ | 1,988,523 | ||||||||||||||||||||
| Net interest income / Net interest rate spread (4) |
12,740 | 1.89 | % | 14,124 | 2.86 | % | ||||||||||||||||||
| Less: taxable equivalent adjustment |
65 | 0.02 | % | 43 | 0.01 | % | ||||||||||||||||||
| Net interest income, as reported |
$ | 12,675 | 1.87 | % | 14,081 | 2.85 | % | |||||||||||||||||
| Net interest-earning assets (5) |
$ | 432,556 | $ | 477,968 | ||||||||||||||||||||
| Net interest margin (6) |
2.47 | % | 3.02 | % | ||||||||||||||||||||
| Tax equivalent effect |
0.02 | % | 0.01 | % | ||||||||||||||||||||
| Net interest margin on a fully tax equivalent basis |
2.49 | % | 3.03 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
126.68 | % | 134.30 | % | ||||||||||||||||||||
__________
| (1) |
Interest income includes net deferred loan fee amortization income of $143,000 and $187,000 for the three months ended June 30, 2023 and 2022, 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 June 30, 2023 and 2022. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 3.67% and 1.56% for the three months ended June 30, 2023 and 2022, 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 June 30, |
||||||||||||
| 2023 versus 2022 |
||||||||||||
| Increase (Decrease) due to |
||||||||||||
| Volume |
Rate |
Net |
||||||||||
| (In Thousands) |
||||||||||||
| Interest income: |
||||||||||||
| Loans receivable and held for sale(1) (2) |
$ | 3,690 | $ | 3,914 | $ | 7,604 | ||||||
| Mortgage related securities(3) |
19 | 129 | 148 | |||||||||
| Other earning assets(3) (4) |
(794 | ) | 873 | 79 | ||||||||
| Total interest-earning assets |
2,915 | 4,916 | 7,831 | |||||||||
| Interest expense: |
||||||||||||
| Demand accounts |
- | 1 | 1 | |||||||||
| Money market and savings accounts |
(36 | ) | 926 | 890 | ||||||||
| Time deposits |
123 | 4,190 | 4,313 | |||||||||
| Total interest-bearing deposits |
87 | 5,117 | 5,204 | |||||||||
| Borrowings |
(941 | ) | 4,974 | 4,033 | ||||||||
| Total interest-bearing liabilities |
(854 | ) | 10,091 | 9,237 | ||||||||
| Net change in net interest income |
$ | 3,769 | $ | (5,175 | ) | $ | (1,406 | ) | ||||
______________
| (1) |
Interest income includes net deferred loan fee amortization income of $143,000 and $187,000 for the three months ended June 30, 2023 and 2022, 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 June 30, 2023 and June 30, 2022. |
Net interest income decreased $1.4 million, or 10.0%, to $12.7 million during the three months ended June 30, 2023 compared to $14.1 million during the three months ended June 30, 2022 primarily due to the increased cost of funds as a result of the rising interest rate environment.
| ● |
Interest income on loans increased $7.6 million, or 52.3%, to $22.2 million due primarily to a 98 basis point increase in average yield on loans as interest rates continued to increase over the past year and an increase in average loan balance as loans held for investment increased. The increase in average loan balance was driven by an increase of a $339.6 million, or 27.2%, in the average balance of loans held for investment offset by a decrease of $14.0 million, or 7.5%, in average loans held for sale. |
| ● |
Interest expense on time deposits increased $4.3 million, or 794.3%, to $4.9 million primarily due to a 243 basis point increase in average cost of time deposits. Additionally, the average balance of time deposits increased $111.1 million compared to the prior year period. |
| ● |
Interest expense on money market, savings, and escrow accounts increased $890,000, or 461.1%, to $1.1 million due primarily to a 123 basis point increase in average cost of money market, savings, and escrow accounts as the account mix shifted towards more savings accounts. Partially offsetting the increase in average cost, the average balance decreased $106.7 million. |
| ● |
Interest expense on borrowings increased $4.0 million, or 254.6%, to $5.6 million due to a 213 basis point increase in the cost of borrowings during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 as the federal funds rate increased over the past year. Additionally, the average balance increased $225.5 million to $551.5 million during the three months ended June 30, 2023, compared to $326.1 million during the three months ended June 30, 2022. |
Provision for Credit Losses
There was a provision for credit losses of $186,000 for the three months ended June 30, 2023 compared to a $48,000 negative provision for credit losses for the three months ended June 30, 2022. The $186,000 provision for credit losses consisted of a $648,000 provision related to loans and a negative $462,000 provision related to unfunded commitments for the three months ended June 30, 2023. During the three months ended June 30, 2023, the increase related to loans was primarily due to an increase in originations and loan balance and the decrease in provision related to unfunded commitments was primarily due to a dcrease in the loan pipeline. We made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors. The forecast factor remained unchanged as we monitor the economic environment going forward.
The provision is primarily a function of the Company's reserving methodology and assessments of certain quantitative and qualitative factors which are used to determine an appropriate allowance for credit losses for the period. See further discussion regarding the allowance for loan losses in the "Asset Quality" section for an analysis of charge-offs, nonperforming assets, specific reserves and additional provisions and the "Allowance for Credit Loss" section.
Noninterest Income
| Three months ended June 30, |
||||||||||||||||
| 2023 |
2022 |
$ Change |
% Change |
|||||||||||||
| (Dollars In Thousands) |
||||||||||||||||
| Service charges on loans and deposits |
$ | 611 | $ | 666 | $ | (55 | ) | (8.3 | )% | |||||||
| Increase in cash surrender value of life insurance |
714 | 724 | (10 | ) | (1.4 | )% | ||||||||||
| Mortgage banking income |
21,914 | 29,410 | (7,496 | ) | (25.5 | )% | ||||||||||
| Other |
286 | 438 | (152 | ) | (34.7 | )% | ||||||||||
| Total noninterest income |
$ | 23,525 | $ | 31,238 | $ | (7,713 | ) | (24.7 | )% | |||||||
Total noninterest income decreased $7.7 million, or 24.7%, to $23.5 million during the three months ended June 30, 2023 compared to $31.2 million during the three months ended June 30, 2022. The decrease resulted primarily from decreases in mortgage banking noninterest income and other income.
| ● | The decrease in mortgage banking income was primarily the result of a decrease in loan origination volume and gross margin on loans originated and sold. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $185.6 million, or 24.8%, to $562.1 million during the three months ended June 30, 2023 compared to $747.7 million during the three months ended June 30, 2022. Gross margin on loans originated and sold decreased 3.0% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended June 30, 2023 and 2022" above for additional discussion of the decrease in mortgage banking income. |
| ● | The decrease in other noninterest income was due primarily to a decrease in mortgage servicing fee income. During the quarter ended March 31, 2023, the Company sold mortgage servicing rights related to $318.4 million in loans serviced for third parties. As of June 30, 2023 and June 30, 2022, the Company maintained servicing rights related to $156.3 million and $345.8 million, respectively, in loans previously sold to third parties. |
| Three months ended June 30, |
||||||||||||||||
| 2023 |
2022 |
$ Change |
% Change |
|||||||||||||
| (Dollars In Thousands) |
||||||||||||||||
| Compensation, payroll taxes, and other employee benefits |
$ | 22,395 | $ | 25,793 | $ | (3,398 | ) | (13.2 | )% | |||||||
| Occupancy, office furniture, and equipment |
2,046 | 2,056 | (10 | ) | (0.5 | )% | ||||||||||
| Advertising |
944 | 962 | (18 | ) | (1.9 | )% | ||||||||||
| Data processing |
1,090 | 1,144 | (54 | ) | (4.7 | )% | ||||||||||
| Communications |
225 | 258 | (33 | ) | (12.8 | )% | ||||||||||
| Professional fees |
618 | 349 | 269 | 77.1 | % | |||||||||||
| Real estate owned |
1 | - | 1 | N/A | ||||||||||||
| Loan processing expense |
932 | 1,134 | (202 | ) | (17.8 | )% | ||||||||||
| Other |
2,671 | 3,354 | (683 | ) | (20.4 | )% | ||||||||||
| Total noninterest expenses |
$ | 30,922 | $ | 35,050 | $ | (4,128 | ) | (11.8 | )% | |||||||
Total noninterest expenses decreased $4.1 million, or 11.8%, to $30.9 million during the three months ended June 30, 2023 compared to $35.1 million during the three months ended June 30, 2022.
| ● |
Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $3.4 million, or 15.9%, to $17.9 million during the three months ended June 30, 2023. The decrease in compensation expense was primarily related to decreased commission expense and salary expense driven by decreased loan origination volume and a reduction in headcount. |
| ● | Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $87,000, or 1.9%, to $4.7 million during the three months ended June 30, 2023. The increase was due primarily to an increase in salaries from annual raises that took place at the beginning of the year. |
| ● | Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $7,000 to $1.2 million during the three months ended June 30, 2023, primarily resulting from decreased computer equipment expenses. |
| ● | Occupancy, office furniture and equipment expense at the community banking segment decreased $3,000 to $1.0 million during the three months ended June 30, 2023. The decrease was due primarily to decreased depreciation expenses. |
| ● | Advertising expense decreased $18,000, or 1.9%, to $944,000 million during the three months ended June 30, 2023. This was primarily due to advertising at the community banking segment decreasing as marketing campaigns started off slower compared to prior year. |
| ● | Data processing expense decreased $54,000, or 4.7%, to $1.1 million during the three months ended June 30, 2023. This was primarily due to a decrease at the mortgage banking segments related to decreased projects compared to prior year. Offsetting the decrease at the mortgage banking segment, the community banking segment increased due to additional investments in technology. |
| ● |
Professional fees increased $269,000 to $618,000 during the three months ended June 30, 2023. The increase related to an increase in legal and consulting fees at the mortgage banking segment. |
| ● | Loan processing expense decreased $202,000 to $932,000 during the three months ended June 30, 2023. The decrease was primarily due to a decrease in loan applications and fundings. |
| ● | Other noninterest expense decreased $683,000, or 20.4%, to $2.7 million during the three months ended June 30, 2023. The decrease at the mortgage banking segment primarily related to decreases in provision for loan sale losses and provision for branch losses. |
Income Taxes
Income tax expense totaled $1.1 million for the three months ended June 30, 2023 compared to $2.2 million during the three months ended June 30, 2022. Income tax expense was recognized on the statement of income during the three months ended June 30, 2023 at an effective rate of 21.3% of pretax income and during the three months ended June 30, 2022 at an effective rate of 21.8% of pretax income.
Comparison of Community Banking Segment Results of Operations for the Six Months Ended June 30, 2023 and 2022
Net income totaled $10.0 million for the six months ended June 30, 2023 compared to $10.6 million for the six months ended June 30, 2022. Net interest income increased $1.9 million to $27.2 million for the six months ended June 30, 2023 compared to $25.4 million for the six months ended June 30, 2022. Interest income on loans increased as replacement rates and average loans held for investment balances were higher than in the prior year and interest income on mortgage-related securities increased due to the increase in the average balance and replacement rates. Offsetting the increase in interest income on loans and mortgage-related securities, interest expense on deposits and borrowings increased as replacement rates increased.
There was a provision for credit losses of $546,000 for the six months ended June 30, 2023 compared to a $181,000 negative provision for credit losses for the six months ended June 30, 2022. The provision for credit losses of $546,000 consisted of a $523,000 provision related to loans and a $23,000 of provision related to unfunded commitments for the six months ended June 30, 2023. The provision for credit losses related to loans increased primarily due to loan growth. During the six months ended June 30, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors. The forecast factor remained unchanged as we monitor the economic environment going forward.
Total noninterest income decreased $545,000 to $2.5 million during the six months ended June 30, 2023 due primarily to a decrease in prepayment penalties on loans and gain from death benefit received on one bank-owned life insurance policy during the six months ended June 30, 2022.
Compensation, payroll taxes, and other employee benefits expense increased $43,000 to $9.9 million primarily due to an increase in salaries due to annual raises that took place at the beginning of the year. Other noninterest expense increased $931,000 to $2.5 million as certain loan fees paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans increased. These fees are eliminated in the consolidated statements of income.
Comparison of Mortgage Banking Segment Results of Operations for the Six Months Ended June 30, 2023 and 2022
Net loss totaled $4.0 million for the six months ended June 30, 2023 compared to net income of $2.8 million for the six months ended June 30, 2022. We originated $1.07 billion in mortgage loans held for sale (including sales to the community banking segment) during the six months ended June 30, 2023, which represents a decrease of $421.2 million, or 28.3%, from the $1.49 billion originated during the six months ended June 30, 2022. The decrease in loan production volume was driven by a $197.6 million, or 83.9%, decrease in refinance products as mortgage rates have increased over the past year. Mortgage purchase products decreased $223.5 million, or 17.9%, due to inventory constraints in the market, affordability, and interest rate increases. Total mortgage banking noninterest income decreased $17.7 million, or 30.2%, to $41.0 million during the six months ended June 30, 2023 compared to $58.7 million during the six months ended June 30, 2022. The decrease in mortgage banking noninterest income was related to a 30.2% decrease in volume and a 4.3% decrease in gross margin on loans originated and sold for the six months ended June 30, 2023 compared to June 30, 2022. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. The gross margin on loans originated and sold contraction reflects decreased industry demand due to the increased competition from mortgage originators. We sell loans on both a servicing-released and a servicing-retained basis. Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.
Additionally, our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance). Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan. Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised 96.5% of total originations during the six months ended June 30, 2023, compared to 84.1% of total originations during the six months ended June 30, 2022, respectively, as refinance demand decelerated due to an increase in interest rates over the past year. The mix of loan type trended towards more governmental loans and less conventional loans, with governmental loans and conventional loans comprising 37.2% and 62.8% of all loan originations, respectively, during the six months ended June 30, 2023, compared to 25.1% and 74.9% of all loan originations, respectively, during the six months ended June 30, 2022.
Total compensation, payroll taxes and other employee benefits decreased $8.7 million, or 20.9%, to $33.0 million for the six months ended June 30, 2023 compared to $41.7 million for the six months ended June 30, 2022. The decrease in compensation expense was primarily related to decreased commission expense and salaries driven by decreased loan origination volume and reduction in headcount.
Consolidated Waterstone Financial, Inc. Results of Operations
| Six months ended June 30, |
||||||||
| 2023 |
2022 |
|||||||
| (Dollars In Thousands, except per share amounts) |
||||||||
| Net income |
$ | 6,162 | $ | 13,282 | ||||
| Earnings per share - basic |
0.30 | 0.59 | ||||||
| Earnings per share - diluted |
0.30 | 0.58 | ||||||
| Annualized return on average assets |
0.59 | % | 1.30 | % | ||||
| Annualized return on average equity |
3.37 | % | 6.42 | % | ||||
Net Interest Income
Average Balance Sheets, Interest and Yields/Costs
The following table sets forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. Non-accrual loans are included in the computation of the average balances of loans receivable and held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.
| Six months ended June 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield/Cost |
Average Balance |
Interest |
Yield/Cost |
|||||||||||||||||||
| (Dollars in Thousands) |
||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans receivable and held for sale(1) |
$ | 1,707,259 | $ | 42,035 | 4.97 |
% | $ | 1,397,855 | 28,046 | 4.05 |
% | |||||||||||||
| Mortgage related securities(2) |
171,083 | 1,912 | 2.25 |
% | 153,512 | 1,423 | 1.87 |
% | ||||||||||||||||
| Debt securities, federal funds sold and short-term investments(2) (3) |
119,599 | 2,319 | 3.91 |
% | 393,781 | 2,080 | 1.07 |
% | ||||||||||||||||
| Total interest-earning assets |
1,997,941 | 46,266 | 4.67 |
% | 1,945,148 | 31,549 | 3.27 |
% | ||||||||||||||||
| Noninterest-earning assets |
107,668 | 122,986 | ||||||||||||||||||||||
| Total assets |
$ | 2,105,609 | $ | 2,068,134 | ||||||||||||||||||||
| Liabilities and equity |
||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand accounts |
$ | 68,857 | $ | 30 | 0.09 |
% | $ | 70,208 | $ | 29 | 0.08 |
% | ||||||||||||
| Money market and savings accounts |
313,852 | 2,088 | 1.34 |
% | 408,389 | 403 | 0.20 |
% | ||||||||||||||||
| Time deposits |
672,050 | 7,925 | 2.38 |
% | 597,390 | 1,098 | 0.37 |
% | ||||||||||||||||
| Total interest-bearing deposits |
1,054,759 | 10,043 | 1.92 |
% | 1,075,987 | 1,530 | 0.29 |
% | ||||||||||||||||
| Borrowings |
496,934 | 9,624 | 3.91 |
% | 382,845 | 3,971 | 2.09 |
% | ||||||||||||||||
| Total interest-bearing liabilities |
1,551,693 | 19,667 | 2.56 |
% | 1,458,832 | 5,501 | 0.76 |
% | ||||||||||||||||
| Noninterest-bearing liabilities |
||||||||||||||||||||||||
| Noninterest-bearing deposits |
136,758 | 153,488 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
48,673 | 38,426 | ||||||||||||||||||||||
| Total noninterest-bearing liabilities |
185,431 | 191,914 | ||||||||||||||||||||||
| Total liabilities |
1,737,124 | 1,650,746 | ||||||||||||||||||||||
| Equity |
368,485 | 417,388 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 2,105,609 | $ | 2,068,134 | ||||||||||||||||||||
| Net interest income / Net interest rate spread (4) |
26,599 | 2.11 | % | 26,048 | 2.51 | % | ||||||||||||||||||
| Less: taxable equivalent adjustment |
129 | 0.01 | % | 103 | 0.01 | % | ||||||||||||||||||
| Net interest income, as reported |
$ | 26,470 | 2.10 | % | 25,945 | 2.50 | % | |||||||||||||||||
| Net interest-earning assets (5) |
$ | 446,248 | $ | 486,316 | ||||||||||||||||||||
| Net interest margin (6) |
2.67 |
% | 2.69 |
% | ||||||||||||||||||||
| Tax equivalent effect |
0.01 |
% | 0.01 |
% | ||||||||||||||||||||
| Net interest margin on a fully tax equivalent basis |
2.68 |
% | 2.70 |
% | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
128.76 |
% | 133.34 |
% | ||||||||||||||||||||
__________
| (1) |
Interest income includes net deferred loan fee amortization income of $295,000 and $382,000 for the six months ended June 30, 2023 and 2022, 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 six months ended June 30, 2023 and 2022. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 3.69% and 1.01% for the six months ended June 30, 2023 and 2022, 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.
| Six months ended June 30, |
||||||||||||
| 2023 versus 2022 |
||||||||||||
| Increase (Decrease) due to |
||||||||||||
| Volume |
Rate |
Net |
||||||||||
| (In Thousands) |
||||||||||||
| Interest income: |
||||||||||||
| Loans receivable and held for sale(1) (2) |
$ | 6,904 | $ | 7,085 | $ | 13,989 | ||||||
| Mortgage related securities(3) |
175 | 314 | 489 | |||||||||
| Other earning assets(3) (4) |
(2,154 | ) | 2,367 | 213 | ||||||||
| Total interest-earning assets |
4,925 | 9,766 | 14,691 | |||||||||
| Interest expense: |
||||||||||||
| Demand accounts |
(1 | ) | 2 | 1 | ||||||||
| Money market and savings accounts |
(71 | ) | 1,756 | 1,685 | ||||||||
| Time deposits |
154 | 6,673 | 6,827 | |||||||||
| Total interest-bearing deposits |
82 | 8,431 | 8,513 | |||||||||
| Borrowings |
676 | 4,977 | 5,653 | |||||||||
| Total interest-bearing liabilities |
758 | 13,408 | 14,166 | |||||||||
| Net change in net interest income |
$ | 4,167 | $ | (3,642 | ) | $ | 525 | |||||
______________
| (1) |
Interest income includes net deferred loan fee amortization income of $295,000 and $382,000 for the six months ended June 30, 2023 and 2022, 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 six months ended June 30, 2023 and June 30, 2022. |
Net interest income increased $525,000, or 2.0%, to $26.5 million during the six months ended June 30, 2023 compared to $25.9 million during the six months ended June 30, 2022.
| ● |
Interest income on loans increased $14.0 million, or 49.9%, to $42.0 million due primarily to a 92 basis point increase in average yield on loans as interest rates continued to increase over the past year and an increase in average loan balance as loans held for investment increased. The increase in average loan balance was driven by an increase of a $333.1 million, or 27.2%, in the average balance of loans held for investment offset by a decrease of $23.7 million, or 13.8%, in average loans held for sale. |
| ● |
Interest expense on time deposits increased $6.8 million, or 621.8%, to $7.9 million primarily due to a 201 basis point increase in average cost of time deposits. Additionally, the average balance of time deposits increased $74.7 million compared to the prior year period. |
| ● |
Interest expense on money market, savings, and escrow accounts increased $1.7 million, or 418.1%, to $2.1 million due primarily to a 114 basis point increase in average cost of money market, savings, and escrow accounts as the account mix shifted towards more savings accounts. Partially offsetting the increase in average cost, the average balance decreased $94.5 million. |
| ● |
Interest expense on borrowings increased $5.7 million, or 142.4%, to $9.6 million due to a 182 basis point increase in the cost of borrowings during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 as the federal funds rate increased over the past year. Additionally, the average balance increased $114.1 million to $496.9 million during the six months ended June 30, 2023, compared to $382.8 million during the six months ended June 30, 2022. |
Provision for Credit Losses
There was a provision for credit losses of $646,000 for the six months ended June 30, 2023 compared to a $28,000 negative provision for credit losses for the six months ended June 30, 2022. The $646,000 provision for credit losses consisted of a $623,000 provision related to loans and a $23,000 provision related to unfunded commitments for the six months ended June 30, 2023. The provision for credit losses related to loans increased primarily due to loan growth. During the six months ended June 30, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors. The forecast factor remained unchanged as we monitor the economic environment going forward. The increase on the unfunded commitments is due to the increase in unfunded commitments balance.
The provision is primarily a function of the Company's reserving methodology and assessments of certain quantitative and qualitative factors which are used to determine an appropriate allowance for credit losses for the period. See further discussion regarding the allowance for loan losses in the "Asset Quality" section for an analysis of charge-offs, nonperforming assets, specific reserves and additional provisions and the "Allowance for Credit Loss" section.
Noninterest Income
| Six months ended June 30, |
||||||||||||||||
| 2023 |
2022 |
$ Change |
% Change |
|||||||||||||
| (Dollars In Thousands) |
||||||||||||||||
| Service charges on loans and deposits |
$ | 1,041 | $ | 1,176 | $ | (135 | ) | (11.5 | )% | |||||||
| Increase in cash surrender value of life insurance |
1,039 | 1,040 | (1 | ) | (0.1 | )% | ||||||||||
| Mortgage banking income |
38,684 | 57,685 | (19,001 | ) | (32.9 | )% | ||||||||||
| Other |
1,315 | 1,155 | 160 | 13.9 | % | |||||||||||
| Total noninterest income |
$ | 42,079 | $ | 61,056 | $ | (18,977 | ) | (31.1 | )% | |||||||
Total noninterest income decreased $19.0 million, or 31.1%, to $42.1 million during the six months ended June 30, 2023 compared to $61.1 million during the six months ended June 30, 2022. The decrease resulted primarily from decreases in mortgage banking noninterest income and service charges on loans and deposits.
| ● | The decrease in mortgage banking income was primarily the result of a decrease in loan origination volume and gross margin on loans originated and sold. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a consolidated basis decreased $468.0 million, or 32.4%, to $977.8 million during the six months ended June 30, 2023 compared to $1.45 billion during the six months ended June 30, 2022. Gross margin on loans originated and sold decreased 4.3% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Six Months Ended June 30, 2023 and 2022" above for additional discussion of the decrease in mortgage banking income. |
| ● | The increase in other noninterest income was due primarily to an increase in gain on sale of mortgage serving rights and in mortgage servicing fee income. During the six months ended June 30, 2023, the Company sold mortgage servicing rights related to $318.4 million in loans serviced for third parties. The sale generated $3.5 million in net proceeds and a $583,000 gain. There were no comparable sales during the six months ended June 30, 2022. As of June 30, 2023 and June 30, 2022, the Company maintained servicing rights related to $156.3 million and $345.8 million, respectively, in loans previously sold to third parties. Offsetting the increase from the gain on sale of mortgage servicing rights, gain from death benefit decreased as there was a gain recorded on one bank owned life insurance policy during the six months ended June 30, 2022 compared to none during the six months ended June 30, 2023. |
| Six months ended June 30, |
||||||||||||||||
| 2023 |
2022 |
$ Change |
% Change |
|||||||||||||
| (Dollars In Thousands) |
||||||||||||||||
| Compensation, payroll taxes, and other employee benefits |
$ | 42,447 | $ | 51,328 | $ | (8,881 | ) | (17.3 | )% | |||||||
| Occupancy, office furniture, and equipment |
4,309 | 4,244 | 65 | 1.5 | % | |||||||||||
| Advertising |
1,833 | 1,867 | (34 | ) | (1.8 | )% | ||||||||||
| Data processing |
2,212 | 2,346 | (134 | ) | (5.7 | )% | ||||||||||
| Communications |
476 | 598 | (122 | ) | (20.4 | )% | ||||||||||
| Professional fees |
1,034 | 810 | 224 | 27.7 | % | |||||||||||
| Real estate owned |
2 | 5 | (3 | ) | (60.0 | )% | ||||||||||
| Loan processing expense |
1,950 | 2,565 | (615 | ) | (24.0 | )% | ||||||||||
| Other |
5,766 | 6,221 | (455 | ) | (7.3 | )% | ||||||||||
| Total noninterest expenses |
$ | 60,029 | $ | 69,984 | $ | (9,955 | ) | (14.2 | )% | |||||||
Total noninterest expenses decreased $10.0 million, or 14.2%, to $60.0 million during the six months ended June 30, 2023 compared to $70.0 million during the six months ended June 30, 2022.
| ● |
Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $8.7 million, or 20.9%, to $33.0 million during the six months ended June 30, 2023. The decrease in compensation expense was primarily related to decreased commission expense and salary expense driven by decreased loan origination volume and a reduction in headcount. |
| ● | Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $43,000, or 0.4%, to $9.9 million during the six months ended June 30, 2023. The increase was due primarily to an increase in salaries from annual raises that took place at the beginning of the year. |
| ● | Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $26,000 to $2.4 million during the six months ended June 30, 2023, primarily resulting from decreased computer equipment expenses. |
| ● | Occupancy, office furniture and equipment expense at the community banking segment increased $91,000 to $1.9 million during the six months ended June 30, 2023. The increase was due primarily to increased snow removal and repairs expense. |
| ● | Advertising expense decreased $34,000, or 1.8%, to $1.8 million during the six months ended June 30, 2023. This decrease was primarily due to advertising at the community banking segment decreasing as marketing campaigns started off slower compared to prior year and a shift to other cost effective advertising channels. Offsetting the decrease at the community banking segment, the mortgage banking segment increased marketing to attract customers as rates are higher than in the prior year. |
| ● | Data processing expense decreased $134,000, or 5.7%, to $2.2 million during the six months ended June 30, 2023. This was primarily due to a decrease at the mortgage banking segment related to less investments in technology during the year. |
| ● |
Professional fees increased $224,000 to $1.0 million during the six months ended June 30, 2023. The increase related to an increase in legal fees at the mortgage banking segment. Additionally, the community banking segment had an increase in audit and tax expense. |
| ● | Loan processing expense decreased $615,000, or 24.0%, to $2.0 million during the six months ended June 30, 2023. The decrease was primarily due to a decrease in loan applications and fundings. |
| ● | Other noninterest expense decreased $455,000, or 7.3%, to $5.8 million during the six months ended June 30, 2023. The decrease at the mortgage banking segment related to a decrease in corporate meeting expenses and mortgage servicing rights amortization as the there was a bulk sale in the first quarter of 2023 and none during 2022. |
Income Taxes
Income tax expense decreased $2.1 million, or 54.5%, to $1.7 million during the six months ended June 30, 2023 compared to $3.8 million during the six months ended June 30, 2022. Income tax expense was recognized on the statement of income during the six months ended June 30, 2023 at an effective rate of 21.7% of pretax income compared to an effective rate of 22.1% of pretax income during the six months ended June 30, 2022.
Comparison of Financial Condition at June 30, 2023 and December 31, 2022
Total Assets – Total assets increased by $198.2 million, or 9.8%, to $2.23 billion at June 30, 2023 from $2.03 billion at December 31, 2022. The increase in total assets primarily reflects an increase in loans held for investment and loans held for sale. The increase in total assets reflects liability increases in borrowings.
Cash and Cash Equivalents – Cash and cash equivalents increased $14.5 million, or 31.2%, to $61.2 million at June 30, 2023, compared to $46.6 million at December 31, 2022. The increase in cash and cash equivalents primarily reflects the increase of funding sources from borrowings and advance payments by borrowers for taxes.
Securities Available for Sale – Securities available for sale decreased $1.6 million to $195.0 million at June 30, 2023. The decrease was primarily due to the decrease in fair value as longer term interest rates increased during the year.
Loans Held for Sale - Loans held for sale increased $72.1 million to $203.3 million at June 30, 2023 due to the increase of purchase activity resulting from the usual seasonal activity seen during the spring and summer seasons.
Loans Receivable - Loans receivable held for investment increased $104.5 million to $1.61 billion at June 30, 2023. The increase in total loans receivable was attributable to increases in each of the one- to four-family, multi-family, commercial real estate, and commercial loan categories.
The following table shows loan originations during the periods indicated.
| For the |
||||||||
| Six months ended June 30, |
||||||||
| 2023 |
2022 |
|||||||
| (In Thousands) |
||||||||
| Real estate loans originated for investment: |
||||||||
| Residential |
||||||||
| One- to four-family |
$ | 172,990 | $ | 66,720 | ||||
| Multi-family |
54,136 | 156,501 | ||||||
| Home equity |
388 | 174 | ||||||
| Construction and land |
11,393 | 1,729 | ||||||
| Commercial real estate |
44,277 | 59,182 | ||||||
| Total real estate loans originated for investment |
283,184 | 284,306 | ||||||
| Consumer loans originated for investment |
- | 46 | ||||||
| Commercial business loans originated for investment |
15,289 | 2,985 | ||||||
| Total loans originated for investment |
$ | 298,473 | $ | 287,337 | ||||
Allowance for Credit Losses - Loans - The allowance for credit losses increased $617,000 to $18.4 million at June 30, 2023. There was a $623,000 provision for credit losses - loans for the six months ended June 30, 2023. The provision for credit losses related to loans increased primarily due to loan growth. During the six months ended June 30, 2023, we made adjustments to our qualitative factors, primarily to account for the changes in internal metrics and external risk factors. See Note 3 - Loans Receivable of the notes to unaudited consolidated financial statements for further discussion on the allowance for credit losses. Additionally, net charge-offs totaled $6,000 for the six months ended June 30, 2023.
Prepaid expenses and other assets – Total prepaid expenses and other assets decreased $203,000 to $59.6 million at June 30, 2023. The decrease was primarily due to a decrease in mortgage servicing rights as the Company sold $2.7 million of mortgage servicing rights during the six months ended June 30, 2023. Offsetting the decrease, investor receivables increased as of June 30, 2023.
Deposits – Total deposits decreased $12.0 million to $1.19 billion at June 30, 2023. The decrease was driven by a decrease of $45.4 million in money market and savings deposits and $33.5 million in demand deposits offset by an increase of $66.8 million in time deposits.
Borrowings – Total borrowings increased $228.1 million, or 59.0%, to $614.9 million at June 30, 2023. The community banking segment paid off $120.0 million in long-term FHLB borrowings, borrowing $115.0 million of new long-term FHLB borrowings, and $214.8 million in new short-term FHLB borrowings. External short-term borrowings at the mortgage banking segment increased a total of $18.3 million at June 30, 2023 from December 31, 2022.
Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $15.3 million to $20.6 million at June 30, 2023. The increase was the result of payments received from borrowers for their real estate taxes and is seasonally normal, as balances increase during the course of the calendar year until real estate tax obligations are paid in the fourth quarter.
Other Liabilities - Other liabilities decreased $18.0 million to $51.6 million at June 30, 2023. Other liabilities decreased primarily due to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. The Company receives payments from borrowers for their real estate taxes during the course of the calendar year until real estate tax obligations are paid in the fourth quarter. At the time at which the disbursements are made, the outstanding checks are classified as other liabilities in the statements of financial condition, and these amounts remain classified as other liabilities until settled. Additionally, the fair value mark on derivative liabilities related to the loans held for sale decreased.
Shareholders’ Equity – Shareholders' equity decreased $14.7 million to $355.8 million at June 30, 2023. Shareholders' equity decreased primarily due to the declaration of dividends, the repurchase of stock, and decrease in the fair value of the securities portfolio. Partially offsetting the decreases, there were increases due to the net income, additional paid-in capital as stock options were exercised, equity awards vested, and unearned ESOP shares vesting.
ASSET QUALITY
NONPERFORMING ASSETS
| At June 30, |
At December 31, |
|||||||
| 2023 |
2022 |
|||||||
| (Dollars in Thousands) |
||||||||
| Non-accrual loans: |
||||||||
| Residential |
||||||||
| One- to four-family |
$ | 4,107 | $ | 4,209 | ||||
| Over four-family |
- | - | ||||||
| Home equity |
38 | 98 | ||||||
| Construction and land |
- | - | ||||||
| Commercial real estate |
- | - | ||||||
| Commercial |
2 | - | ||||||
| Consumer |
- | - | ||||||
| Total non-accrual loans |
4,147 | 4,307 | ||||||
| Real estate owned |
||||||||
| Construction and land |
145 | 145 | ||||||
| Total real estate owned |
145 | 145 | ||||||
| Total nonperforming assets |
$ | 4,292 | $ | 4,452 | ||||
| Total non-accrual loans to total loans, net |
0.26 | % | 0.29 | % | ||||
| Total non-accrual loans to total assets |
0.19 | % | 0.21 | % | ||||
| Total nonperforming assets to total assets |
0.19 | % | 0.22 | % | ||||
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.
A loan is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of loans and leases deemed collateral-dependent, the Company elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, the Company records a specific valuation allowance or a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral consists of various types of real estate including residential and commercial properties.
The following table sets forth activity in our non-accrual loans for the periods indicated.
| At or for the Six Months |
||||||||
| Ended June 30, |
||||||||
| 2023 |
2022 |
|||||||
| (In Thousands) |
||||||||
| Balance at beginning of period |
$ | 4,307 | $ | 5,574 | ||||
| Additions |
1,164 | 2,774 | ||||||
| Transfers to real estate owned |
- | - | ||||||
| Charge-offs |
- | - | ||||||
| Returned to accrual status |
(749 | ) | (20 | ) | ||||
| Principal paydowns and other |
(575 | ) | (835 | ) | ||||
| Balance at end of period |
$ | 4,147 | $ | 7,493 | ||||
Total non-accrual loans decreased by $160,000, or 3.7%, to $4.1 million as of June 30, 2023 compared to $4.3 million as of December 31, 2022. The ratio of non-accrual loans to total loans receivable was 0.26% at June 30, 2023 and 0.29% at December 31, 2022. During the six months ended June 30, 2023, $1.2 million in loans were placed on non-accrual status. Offsetting this activity, $749,000 in loans returned to accrual status and $575,000 in principal payments were received during the six months ended June 30, 2023.
Of the $4.1 million in total non-accrual loans as of June 30, 2023, $2.2 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary. A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan's original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset. Based upon these specific reviews, no charge-offs have been recorded over the life of these loans and there were no specific reserves as of June 30, 2023. The remaining $1.9 million of non-accrual loans were reviewed on an aggregate basis as of June 30, 2023.
.
The outstanding principal balance of our five largest non-accrual loans as of June 30, 2023 totaled $2.7 million, which represents 64.4% of total non-accrual loans as of that date. Three of the loans was reviewed on an aggregate basis along with the other loans held for investment at the mortgage segment.
Interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. 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 June 30, 2023 and December 31, 2022, there were no loans 90 or more days past due and still accruing interest.
LOAN DELINQUENCY
The following table summarizes loan delinquency in total dollars and as a percentage of the total loan portfolio:
| At June 30, |
At December 31, |
|||||||
| 2023 |
2022 |
|||||||
| (Dollars in Thousands) |
||||||||
| Loans past due less than 90 days |
$ | 3,914 | $ | 2,578 | ||||
| Loans past due 90 days or more |
4,115 | 3,683 | ||||||
| Total loans past due |
$ | 8,029 | $ | 6,261 | ||||
| Total loans past due to total loans receivable |
0.50 | % | 0.41 | % | ||||
Past due loans increased by $1.8 million, or 28.2%, to $8.0 million at June 30, 2023 from $6.3 million at December 31, 2022. Loans past due less than 90 days increased by $1.3 million, or 51.8%, primarily in the one- to four-family category. Loans past due 90 days or more increased by $432,000, or 11.7%, primarily in the one- to four-family loan category, during the six months ended June 30, 2023.
ALLOWANCE FOR CREDIT LOSSES - LOANS
| At or for the Six Months |
||||||||
| Ended June 30, |
||||||||
| 2023 |
2022(1) |
|||||||
| (Dollars in Thousands) |
||||||||
| Balance at beginning of period |
$ | 17,757 | $ | 15,778 | ||||
| Adoption of CECL (1) |
- | 430 | ||||||
| Provision (credit) for credit losses - loans |
623 | 340 | ||||||
| Charge-offs: |
||||||||
| Mortgage |
||||||||
| One- to four-family |
29 | 65 | ||||||
| Multi family |
- | - | ||||||
| Home Equity |
- | - | ||||||
| Commercial real estate |
- | - | ||||||
| Construction and land |
- | - | ||||||
| Consumer |
26 | 5 | ||||||
| Commercial |
- | - | ||||||
| Total charge-offs |
55 | 70 | ||||||
| Recoveries: |
||||||||
| Mortgage |
||||||||
| One- to four-family |
39 | 43 | ||||||
| Multi family |
3 | 726 | ||||||
| Home Equity |
4 | 10 | ||||||
| Commercial real estate |
2 | 2 | ||||||
| Construction and land |
1 | 12 | ||||||
| Consumer |
- | - | ||||||
| Commercial |
- | - | ||||||
| Total recoveries |
49 | 793 | ||||||
| Net charge-offs (recoveries) |
6 | (723 | ) | |||||
| Allowance for credit losses - loans at end of period |
$ | 18,374 | $ | 17,271 | ||||
| Ratios: |
||||||||
| Allowance for credit losses to non-accrual loans at end of period |
443.07 | % | 230.50 | % | ||||
| Allowance for credit losses to loans receivable at end of period |
1.14 | % | 1.35 | % | ||||
| Net charge-offs (recoveries) to average loans outstanding (annualized) |
0.00 | % | (0.12 | )% | ||||
| Current year provision (credit) for credit losses - loans to net recoveries |
(10,383.33 | %) | (47.03 | )% | ||||
| Net charge-offs (recoveries) (annualized) to beginning of the year allowance |
0.07 | % | (9.24 | )% | ||||
(1) The Company adopted ASU 2016-13 as of January 1, 2022.
The allowance for credit losses - loans increased $617,000 to $18.4 million at June 30, 2023 from $17.8 million at December 31, 2022. During the six months ended June 30, 2023, there was a $623,000 provision for credit losses. Additionally, net charge-offs totaled $6,000 for the six months ended June 30, 2023.
We had net charge-offs of $6,000, or less than 0.00% of average loans annualized, for the six months ended June 30, 2023, compared to net recoveries of $723,000, or 0.21% of average loans annualized, for the six months ended June 30, 2022.
Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral. Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.
The allowance for credit losses - loans has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors. To the best of management’s knowledge, all probable losses have been provided for in the allowance for credit losses - loans.
The establishment of the amount of the allowance for credit loss inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct. Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years.
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 six months ended June 30, 2023, primary uses of cash and cash equivalents included: $977.8 million in funding loans held for sale, $104.5 million to fund loans held for investment, $11.2 million for purchases of mortgage related securities, $9.4 million for FHLB stock, $120.0 million for payoffs of long-term borrowings, $8.3 million for cash dividends paid, $12.0 million for decrease in deposits, and $13.2 million for purchases of our common stock.
During the six months ended June 30, 2023, primary sources of cash and cash equivalents included: $941.5 million in proceeds from the sale of loans held for sale, $115.0 million in long-term borrowings, $233.1 million in short-tern borrowings, $10.3 million in principal repayments on mortgage related securities, $3.0 million in maturities of debt securities, $3.5 million in proceeds for mortgage servicing rights sale, and $6.2 million in net income.
During the six months ended June 30, 2022, primary uses of cash and cash equivalents included: $1.45 billion in funding loans held for sale, $70.0 million to fund loans held for investment, $68.2 million for purchases of mortgage related securities, $195.0 million for payoffs of long-term borrowings, $21.8 million for cash dividends paid, $20.2 million for decrease in deposits, and $37.9 million for purchases of our common stock.
During the six months ended June 30, 2022, primary sources of cash and cash equivalents included: $1.59 billion in proceeds from the sale of loans held for sale, $17.4 million in principal repayments on mortgage related securities, $11.4 million in maturities of debt securities, $8.1 million in sales of FHLB stock, and $13.3 million in net income.
A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At June 30, 2023 and 2022, respectively, $61.2 million and $122.2 million of our assets were invested in cash and cash equivalents. At June 30, 2023, cash and cash equivalents were comprised of the following: $53.4 million in cash held at the Federal Reserve Bank and other depository institutions and $7.8 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 June 30, 2023, we had $195.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, and 2033. The 2025 advance has a contractual maturity date in September 2025 with a single call option in 2023. The 2027 advance has a contractual maturity date in December 2027. The 2033 advance maturities have monthly and quarterly call options starting in 2023.
The Company had approximately $262.5 million of uninsured deposits for approximately 1,125 customers as of June 30, 2023. Uninsured deposit amounts are estimated based on the portions of customer account balances that exceed the FDIC insurance limits.
At June 30, 2023, we had outstanding commitments to originate loans receivable of $44.7 million. In addition, at June 30, 2023, we had unfunded commitments under construction loans of $61.3 million, unfunded commitments under business lines of credit of $8.7 million and unfunded commitments under home equity lines of credit and standby letters of credit of $10.8 million. At June 30, 2023, certificates of deposit scheduled to mature in one year or less totaled $603.9 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.
The Federal Reserve Bank (“FRB”) created a new borrowing facility called the Bank Term Funding Program. This program allows a bank to borrow against its investment portfolio, at par value, with no reduction for unrealized losses. The term is for one year and interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge are those the FRB can own. This would include all of the Company’s investment securities except municipal securities, private label bonds, and corporate bonds. At June 30, 2023, the Company had no advances under this program and had $164.8 million in unused borrowing capacity under this program. The program expires on March 11, 2024.
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 June 30, 2023, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totaling $41.7 million.
Capital
Shareholders' equity decreased $14.7 million to $355.8 million at June 30, 2023. Shareholders' equity decreased primarily due to the declaration of dividends, the repurchase of stock, and decrease in the fair value of the security portfolio. Partially offsetting the decreases, there were increases due to the net income, additional paid-in capital as stock options were exercised, and equity awards vested, and unearned ESOP shares vesting.
The Company's Board of Directors authorized a 2,000,000 share stock repurchase program in the second quarter of 2023. As of June 30, 2023, the Company has 1,881,000 shares remaining in the plan.
WaterStone Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. At June 30, 2023, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. See “Notes to Unaudited Consolidated Financial Statements - Note 7 - Regulatory Capital.”
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
During the three months ended June 30, 2023, we repaid $95.0 million in FHLB long-term debt and entered into $400.5 million of new short-term debt at the end of the period.
See Note 6 - Borrowings of the notes to unaudited consolidated financial statements for additional information about the remaining maturities of our FHLB long-term debt.
Our commitments, contingent liabilities, and off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022.
See Note 9 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information.
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 June 30, 2023 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions may have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn affect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our liabilities and therefore would most likely have a positive impact on net interest income and earnings.
The following interest rate scenario displays the percentage change in net interest income over a one-year time horizon assuming increases of 100, 200 and 300 basis points and a decreases of 100 basis points. The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a static no growth, balance sheet.
Analysis of Net Interest Income Sensitivity
| Immediate Change in Rates |
||||||||||||||||
| +300 |
+200 |
+100 |
-100 |
|||||||||||||
| As of June 30, 2023 |
||||||||||||||||
| Dollar Change |
$ | (9,878 | ) | $ | (6,859 | ) | $ | (3,428 | ) | $ | (1,160 | ) | ||||
| Percentage Change |
(22.93 | )% | (15.92 | )% | (7.96 | )% | (2.69 | )% | ||||||||
At June 30, 2023, a 100 basis point instantaneous increase in interest rates had the effect of decreasing forecast net interest income over the next 12 months by 2.37% while a 100 basis point decrease in rates had the effect of increasing net interest income by 0.52%.
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 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.
In July 2022, a complaint was filed by Mutual of Omaha Mortgage, Inc. asserting claims against Waterstone Mortgage Corporation relating to certain employees hired by Waterstone Mortgage Corporation who previously worked for Mutual. The Company intends to continue to vigorously defend its interests in this matter and pursue all possible defenses against the claims. Given the current stage of the litigation, the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter, nor is it able to estimate the range of any possible loss.
Other than as described in Quarterly Reports on Form 10-Q filed during the year ending December 31, 2023, 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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Following are the Company’s monthly common stock repurchases during the second quarter of 2023:
| 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) |
||||||||||||
| April 1, 2023 - April 30, 2023 |
220,500 | $ | 14.72 | 220,500 | 172,279 | |||||||||||
| May 1, 2023 - May 31, 2023 |
203,598 | 13.79 | 203,598 | 1,968,681 | ||||||||||||
| June 1, 2023 - June 30, 2023 |
87,259 | 14.52 | 87,259 | 1,881,422 | ||||||||||||
| Total |
511,357 | $ | 14.32 | 511,357 | 1,881,422 | |||||||||||
| (a) |
On May 24, 2023, the Board of Directors announced the termination 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.
During the three months ended June 30, 2023,
| Exhibit No. |
Description |
Filed Herewith |
|||
| 31.1 |
X | ||||
| 31.2 |
X | ||||
| 32.1 |
X | ||||
| 32.2 |
X | ||||
| 101 |
The following financial statements from Waterstone Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline Extensive Business Reporting Language (iXBRL): (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 | |||
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: August 2, 2023 |
|
| /s/ Douglas S. Gordon |
|
| Douglas S. Gordon |
|
| Chief Executive Officer Principal Executive Officer |
|
| Date: August 2, 2023 | |
| /s/ Mark R. Gerke |
|
| Mark R. Gerke |
|
| Chief Financial Officer Principal Financial Officer |