Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

6 Months Ended

Jun. 30, 2020

Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities [Abstract]

Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

Note 10– Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

	June 30, 2020		December 31, 2019
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit under amortizing loans (1)	$	16,775	$	13,389
Commitments to extend credit under home equity lines of credit (2)		13,570		13,776
Unused portion of construction loans (3)		76,156		90,439
Unused portion of business lines of credit		22,803		14,623
Standby letters of credit		874		885

⁽¹⁾ Commitments for loans are extended to customers for up to 90 days after which they expire. Excludes commitments to originate loans held for sale, which are discussed in the following footnote.

⁽²⁾  Unused portions of home equity loans are available to the borrower for up to 10 years.

⁽³⁾  Unused portions of construction loans are available to the borrower for up to one year.

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of June 30, 2020 and December 31, 2019.

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. The Company has only been required to make insignificant repurchases as a result of breaches of these representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages,  historical experience has resulted in insignificant losses and repurchase activity. The Company's reserve for losses related to these recourse provisions totaled $2.9 million and $921,000 as of June 30, 2020 and December 31, 2019, respectively.

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

Herrington et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation was a defendant in a class action lawsuit that was filed in the United States District Court for the Western District of Wisconsin and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisions of the Fair Labor Standards Act (FLSA) and failed to pay loan officers consistent with their employment agreements. On July 5, 2017, the arbitrator issued a Final Award finding Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. On December 8, 2017, the District Court confirmed the award in large part, and entered a judgment against Waterstone in the amount of $7.3 milllion in damages to Claimants, $3.3 million in attorney fees and costs, and a $20,000 incentive fee to Plaintiff Herrington.

Subsequently, the Seventh Circuit Court of Appeals issued a ruling in October 2018 vacating the District Court’s order enforcing the arbitration award, and remanded the case to the District Court.   On April 25, 2019, the District Court held that Plaintiff’s claims must be resolved through single-plaintiff arbitration. As a result, it vacated the July 5, 2017 arbitration award in its entirety, and issued a revised judgement in Waterstone’s favor.

In May 2019, Herrington re-initiated her individual arbitration. The arbitrator issued a written award on February 18, 2020 and in which he found Waterstone liable for damages, based on an assumed workweek of 50 hours and $100 in unreimbursed expenses per workweek, awarding Herrington $14,952 in damages on her claims.  Herrington has since sought $4.9 million in fees and costs on her award, which includes fees dating back to 2011 and the vacated proceeding. On May 6, 2020, the arbitrator issued an award that would allow Herrington to recover $1.1 million in attorney fees and costs.

Herrington has moved to confirm the award and Waterstone has subsequently moved to vacate the award in court.  If the award is confirmed, Waterstone retains its appellate rights to challenge the award before the Seventh Circuit. Waterstone believes that it has meaningful avenues to vacate the award.  However, given the details of these recent developments, Waterstone does believe that it has met the criteria with respect to recognizing a loss contingency under relevant accounting principles. As such, the Company recorded a loss reserve with respect to this matter for approximately $1.1 million during the three months ended March 31, 2020.

Waterstone is actively pursuing claims against its former attorneys related to their prior representation of Waterstone in the Herrington v. Waterstone arbitration and related matters.

Various Claimants v. Waterstone Mortgage Corporation

Subsequent to the aforementioned decision by the United States District Court for the Western District of Wisconsin, which ruled that claims brought forth under the Herrington class action lawsuit must be resolved through single-plaintiff arbitration, in May 2019, approximately 89 of the prior claimants in the aforementioned class action lawsuit filed new demands in arbitration asserting similar claims (“the Arbitrations”). Currently, the total amount of arbitrations is approximately 100, as some other individuals who filed in court have been compelled to arbitration. Waterstone has answered the arbitration demands and denies the allegations, and Waterstone will continue to vigorously defend its interests in these matters. The first hearings are scheduled for the latter half of 2020.  Waterstone does not believe a loss is probable at this time, as that term is used in assessing loss contingencies. Accordingly, in accordance with the authoritative guidance in the evaluation of contingencies, the Company has not recorded an accrual related to these matters. However, an unfavorable outcome is reasonably possible with respect to these individual matters and Waterstone would not characterize the chance of any loss as “remote.” Given the early stage of the individual proceedings, Waterstone cannot yet offer an opinion on the estimated range of any possible loss, in the event of an unfavorable opinion in any of the proceedings.