Waterstone Financial, Inc. - Quarter Report: 2022 September (Form 10-Q)

wsbf20220930_10q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2022

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

Commission File Number 001-36271

WATERSTONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	90-1026709
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

11200 W. Plank Court Wauwatosa, Wisconsin	53226
(Address of principal executive offices)	(Zip Code)

(414) 761-1000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol

Name of each exchange on which registered

Common Stock, $0.01 Par Value

WSBF

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 22,190,271 at November 1, 2022.

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WATERSTONE FINANCIAL, INC.

10-Q INDEX

	Page No.

PART I. FINANCIAL INFORMATION

Item l. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2022 (unaudited) and December 31, 2021	3
Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9 -39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 -60
Item 3. Quantitative and Qualitative Disclosures about Market Risk	61
Item 4. Controls and Procedures	62

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	62
Item 1A. Risk Factors	62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3. Defaults Upon Senior Securities	62
Item 4. Mine Safety Disclosures	62
Item 5. Other Information	63
Item 6. Exhibits	63
Signatures	63

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	*September 30, 2022*			*December 31, 2021*
	(Dollars In Thousands, except share and per share data)
Assets
Cash	$	37,231		$	343,016
Federal funds sold		16,007			13,981
Interest-earning deposits in other financial institutions and other short term investments		19,703			19,725
Cash and cash equivalents		72,941			376,722
Securities available for sale (at fair value)		197,298			179,016
Loans held for sale (at fair value)		186,049			312,738
Loans receivable		1,354,465			1,205,785
Less: Allowance for credit losses ("ACL") - loans		17,452			15,778
Loans receivable, net		1,337,013			1,190,007

Office properties and equipment, net		21,491			22,273
Federal Home Loan Bank stock (at cost)		15,750			24,438
Cash surrender value of life insurance		66,099			65,368
Real estate owned, net		148			148
Prepaid expenses and other assets		78,262			45,148
Total assets	$	1,975,051		$	2,215,858

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	246,487		$	214,409
Money market and savings deposits		346,960			392,314
Time deposits		593,681			626,663
Total deposits		1,187,128			1,233,386

Borrowings		319,951			477,127
Advance payments by borrowers for taxes		24,084			4,094
Other liabilities		67,714			68,478
Total liabilities		1,598,877			1,783,085
Commitments and contingencies (Note 9)

Shareholders’ equity:
Preferred stock (par value $.01 per share) Authorized - 50,000,000 shares at September 30, 2022 and at December 31, 2021, no shares issued		-			-
Common stock (par value $.01 per share) Authorized - 100,000,000 shares at September 30, 2022 and at December 31, 2021, Issued and Outstanding - 22,318,471 at September 30, 2022 and 24,795,124 at December 31, 2021		223			248
Additional paid-in capital		130,731			174,505
Retained earnings		277,514			273,398
Unearned ESOP shares		(13,353	)		(14,243	)
Accumulated other comprehensive loss, net of taxes		(18,941	)		(1,135	)
Total shareholders’ equity		376,174			432,773
Total liabilities and shareholders’ equity	$	1,975,051		$	2,215,858

See accompanying notes to unaudited consolidated financial statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	*Three months ended September 30,*					*Nine months ended September 30,*
	*2022*		*2021*			*2022*		*2021*
	(In Thousands, except per share amounts)

Interest income:
Loans	$	16,235	$	16,131		$	44,281	$	49,214
Mortgage-related securities		903		471			2,326		1,448
Debt securities, federal funds sold and short-term investments		987		904			2,964		2,637
Total interest income		18,125		17,506			49,571		53,299
Interest expense:
Deposits		981		947			2,511		3,542
Borrowings		1,746		2,445			5,717		7,414
Total interest expense		2,727		3,392			8,228		10,956
Net interest income		15,398		14,114			41,343		42,343
Provision (credit) for credit losses		332		(700	)		304		(2,520	)
Net interest income after provision (credit) for credit losses		15,066		14,814			41,039		44,863
Noninterest income:
Service charges on loans and deposits		529		1,136			1,705		2,483
Increase in cash surrender value of life insurance		354		312			1,394		1,297
Mortgage banking income		26,064		46,547			83,749		150,587
Other		457		4,941			1,612		6,812
Total noninterest income		27,404		52,936			88,460		161,179
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		26,174		34,229			77,502		102,278
Occupancy, office furniture, and equipment		2,296		2,488			6,540		7,346
Advertising		1,137		835			3,004		2,570
Data processing		1,084		986			3,430		2,871
Communications		302		331			900		988
Professional fees		393		550			1,203		804
Real estate owned		1		1			6		(11	)
Loan processing expense		1,120		1,135			3,685		3,670
Other		3,187		2,768			9,408		9,104
Total noninterest expenses		35,694		43,323			105,678		129,620
Income before income taxes		6,776		24,427			23,821		76,422
Income tax expense		1,506		5,427			5,269		18,184
Net income	$	5,270	$	19,000		$	18,552	$	58,238
Income per share:
Basic	$	0.25	$	0.80		$	0.84	$	2.45
Diluted	$	0.25	$	0.79		$	0.83	$	2.43
Weighted average shares outstanding:
Basic		21,342		23,785			22,193		23,790
Diluted		21,454		23,960			22,323		23,987

See accompanying notes to unaudited consolidated financial statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	*Three months ended September 30,*						*Nine months ended September 30,*
	*2022*			*2021*			*2022*			*2021*
	(In Thousands)
Net income	$	5,270		$	19,000		$	18,552		$	58,238

Other comprehensive loss, net of tax:
Net unrealized holding loss on available for sale securities:
Net unrealized holding loss arising during the period, net of tax benefit of $1,779, $262, $6,667 and $783, respectively		(4,753	)		(696	)		(17,806	)		(2,093	)
Total other comprehensive loss		(4,753	)		(696	)		(17,806	)		(2,093	)
Comprehensive income	$	517		$	18,304		$	746		$	56,145

See accompanying notes to unaudited consolidated financial statements.

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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 nine months ended September 30, 2021
Balances at December 31, 2020		25,088		$	251		$	180,684		$	245,287		$	(15,430	)	$	2,326		$	413,118

Comprehensive income:
Net income		-			-			-			58,238			-			-			58,238
Other comprehensive loss		-			-			-			-			-			(2,093	)		(2,093	)
Total comprehensive income																				56,145

ESOP shares committed to be released to plan participants		-			-			682			-			890			-			1,572
Cash dividend, $1.10 per share		-			-			-			(26,209	)		-			-			(26,209	)
Proceeds from stock option exercises		187			2			2,041			-			-			-			2,043
Stock compensation expense		-			-			564			-			-			-			564
Purchase of common stock returned to authorized but unissued		(237	)		(3	)		(4,659	)		-			-			-			(4,662	)
Balances at September 30, 2021		25,038		$	250		$	179,312		$	277,316		$	(14,540	)	$	233		$	442,571

	(In Thousands, except per share amounts)
For the nine months ended September 30, 2022
Balances at December 31, 2021		24,795		$	248		$	174,505		$	273,398		$	(14,243	)	$	(1,135	)	$	432,773

Comprehensive income:
Net income		-			-			-			18,552			-			-			18,552
Other comprehensive loss		-			-			-			-			-			(17,806	)		(17,806	)
Total comprehensive income																				746

Adoption of new accounting pronouncement (see Note 1)		-			-			-			(1,392	)		-			-			(1,392	)
ESOP shares committed to be released to plan participants		-			-			557			-			890			-			1,447
Cash dividend, $0.60 per share		-			-			-			(13,044	)		-			-			(13,044	)
Proceeds from stock option exercises		47			-			372			-			-			-			372
Stock compensation expense		-			-			468			-			-			-			468
Purchase of common stock returned to authorized but unissued		(2,524	)		(25	)		(45,171	)		-			-			-			(45,196	)
Balances at September 30, 2022		22,318		$	223		$	130,731		$	277,514		$	(13,353	)	$	(18,941	)	$	376,174

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																*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 September 30, 2021
Balances at June 30, 2021		25,213		$	252		$	182,346		$	263,048		$	(14,837	)	$	929		$	431,738

Comprehensive income:
Net income		-			-			-			19,000			-			-			19,000
Other comprehensive loss		-			-			-			-			-			(696	)		(696	)
Total comprehensive income																				18,304

ESOP shares committed to be released to Plan participants		-			-			227			-			297			-			524
Cash dividend, $0.20 per share		-			-			-			(4,732	)		-			-			(4,732	)
Stock compensation activity, net of tax		3			-			49			-			-			-			49
Stock compensation expense		-			-			194			-			-			-			194
Purchase of common stock returned to authorized but unissued		(178	)		(2	)		(3,504	)		-			-			-			(3,506	)
Balances at September 30, 2021		25,038		$	250		$	179,312		$	277,316		$	(14,540	)	$	233		$	442,571

	(In Thousands, except per share amounts)
For the three months ended September 30, 2022
Balances at June 30, 2022		22,734		$	227		$	137,547		$	276,444		$	(13,650	)	$	(14,188	)	$	386,380
Comprehensive income:
Net income		-			-			-			5,270			-			-			5,270
Other comprehensive loss		-			-			-			-			-			(4,753	)		(4,753	)
Total comprehensive income																				517

ESOP shares committed to be released to Plan participants		-			-			166			-			297			-			463
Cash dividend, $0.20 per share		-			-			-			(4,200	)		-			-			(4,200	)
Stock compensation activity, net of tax		9			-			126			-			-			-			126
Stock compensation expense		-			-			138			-			-			-			138
Purchase of common stock returned to authorized but unissued		(425	)		(4	)		(7,246	)		-			-			-			(7,250	)
Balances at September 30, 2022		22,318		$	223		$	130,731		$	277,514		$	(13,353	)	$	(18,941	)	$	376,174

See accompanying notes to unaudited consolidated financial statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	*Nine months ended September 30,*
	*2022*			*2021*
	(In Thousands)

Operating activities:
Net income	$	18,552		$	58,238
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for credit losses		304			(2,520	)
Depreciation, amortization, accretion		3,094			4,924
Deferred taxes		(361	)		345
Stock based compensation		468			564
Origination of mortgage servicing rights		(2,030	)		(5,301	)
Proceeds on sales of mortgage servicing rights		-			12,448
Gain on sale of loans held for sale		(65,670	)		(153,612	)
Loans originated for sale		(2,117,010	)		(3,212,967	)
Proceeds on sales of loans originated for sale		2,309,369			3,442,624
Gain on death benefit on bank owned life insurance		(340	)		-
(Increase) decrease in accrued interest receivable		(907	)		715
Increase in cash surrender value of life insurance		(1,394	)		(1,297	)
(Increase) decrease in derivative assets		(24,248	)		4,251
Decrease in accrued interest on deposits and borrowings		(118	)		(200	)
Decrease (increase) in prepaid tax expense		1,090			(959	)
Legal settlement		-			(4,250	)
Increase (decrease) in derivative liabilities		25,699			(5,140	)
Net gain related to real estate owned		-			(12	)
Gain on sale of mortgage servicing rights		-			(4,032	)
Change in other assets and other liabilities, net		(11,301	)		(10,147	)
Net cash provided by operating activities		135,197			123,672

Investing activities:
Net (increase) decrease in loans receivable		(148,136	)		148,790
Purchases of:
Debt securities		(2,080	)		-
Mortgage related securities		(77,388	)		(55,256	)
Bank Owned Life Insurance		(180	)		(180	)
Premises and equipment		(641	)		(656	)
Proceeds from:
Principal repayments on mortgage-related securities		27,925			30,755
Maturities of debt securities		14,860			6,375
Sales of FHLB stock		8,688			2,282
Sales of real estate owned		-			183
Death benefit		1,183			-
Net cash (used in) provided by investing activities		(175,769	)		132,293

Financing activities:
Net (decrease) increase in deposits		(46,258	)		61,694
Net change in short-term borrowings		62,824			(33,074	)
Repayment of long-term debt		(270,000	)		-
Proceeds from long-term debt		50,000			-
Net change in advance payments by borrowers for taxes		11,097			8,157
Cash dividends on common stock		(26,048	)		(26,276	)
Purchase of common stock returned to authorized but unissued		(45,196	)		(4,662	)
Proceeds from stock option exercises		372			2,043
Net cash used in financing activities		(263,209	)		7,882
(Decrease) increase in cash and cash equivalents		(303,781	)		263,847
Cash and cash equivalents at beginning of period		376,722			94,767
Cash and cash equivalents at end of period	$	72,941		$	358,614

Supplemental information:
Cash paid or credited during the period for:
Income tax payments	$	4,286		$	18,796
Interest payments		8,110			10,756
Noncash activities:
Dividends declared but not paid in other liabilities		4,520			5,165

See accompanying notes to unaudited consolidated financial statements.

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Note 1 — Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc. (the “Company”) and the Company’s subsidiaries.

WaterStone Bank SSB (the "Bank") is a community bank that has served the banking needs of its customers since 1921. WaterStone Bank also has an active mortgage banking subsidiary, Waterstone Mortgage Corporation.

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

WaterStone Bank's mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation. Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market. Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’ equity, and cash flows of the Company for the periods presented.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2021 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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 nine months ended September 30, 2022 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

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Impact of Recent Accounting Pronouncements

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

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

ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Troubled Debt Restructurings and Vintage Disclosures" eliminates the accounting guidance for troubled debt restructurings (“TDRs”), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The accounting guidance also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of this ASU on its consolidated financial statements.

Accounting Standards Adopted in 2022

The Company adopted ASC Topic 326 on January 1, 2022, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings, as of January 1, 2022 (i.e., modified retrospective approach). Upon adoption of the standard, the Company recorded a $430,000 increase to the allowance for credit losses and $1.4 million increase to the allowance for unfunded commitments, which resulted in a $1.4 million after-tax decrease to retained earnings as of January 1, 2022. The tax effect resulted in a $439,000 increase to deferred tax assets.

The Company did not record an allowance for AFS securities on January 1, 2022 as the investment portfolio consists primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed minimal. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios as well as the economic conditions at future reporting periods. See Note 2 - Securities Available for Sale and Note 3 - Loans Receivable for more information.

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Note 2 — Securities Available for Sale

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

	*September 30, 2022*
			*Gross*		*Gross*
	*Amortized*		*unrealized*		*unrealized*
	*cost*		*gains*		*losses*			*Fair value*
	(In Thousands)
Mortgage-backed securities	$	15,735	$	3	$	(1,821	)	$	13,917
Collateralized mortgage obligations:
Government sponsored enterprise issued		147,192		-		(19,144	)		128,048
Private-label issued		9,299		-		(867	)		8,432
Mortgage-related securities		172,226		3		(21,832	)		150,397

Government sponsored enterprise bonds		2,500		-		(258	)		2,242
Municipal securities		35,358		95		(1,995	)		33,458
Other debt securities		12,500		-		(1,354	)		11,146
Debt securities		50,358		95		(3,607	)		46,846
Other securities		55		-		-			55
Total	$	222,639	$	98	$	(25,439	)	$	197,298

	*December 31, 2021*
			*Gross*		*Gross*
	*Amortized*		*unrealized*		*unrealized*
	*cost*		*gains*		*losses*			*Fair value*
	(In Thousands)
Mortgage-backed securities	$	19,133	$	542	$	(187	)	$	19,488
Collateralized mortgage obligations
Government sponsored enterprise issued		100,543		503		(1,744	)		99,302
Private-label issued		2,913		30		-			2,943
Mortgage related securities		122,589		1,075		(1,931	)		121,733

Government sponsored enterprise bonds		2,500		-		(52	)		2,448
Municipal securities		42,295		1,206		(7	)		43,494
Other debt securities		12,500		41		(1,200	)		11,341
Debt securities		57,295		1,247		(1,259	)		57,283
Total	$	179,884	$	2,322	$	(3,190	)	$	179,016

The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At September 30, 2022, $282,000 of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2021, $430,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2022 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	$	5,310	$	5,288
Due after one year through five years		19,301		18,934
Due after five years through ten years		18,622		16,971
Due after ten years		7,125		5,653
Mortgage-related securities		172,226		150,397
Other securities		55		55
Total	$	222,639	$	197,298

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Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

	*September 30, 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	$	8,903	$	(672	)	$	4,634	$	(1,149	)	$	13,537	$	(1,821	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		81,831		(8,188	)		46,217		(10,956	)		128,048		(19,144	)
Private-label issued		7,288		(867	)		-		-			7,288		(867	)
Government sponsored enterprise bonds		2,242		(258	)		-		-			2,242		(258	)
Municipal securities		25,578		(1,783	)		503		(212	)		26,081		(1,995	)
Other debt securities		2,346		(154	)		8,800		(1,200	)		11,146		(1,354	)
Total	$	128,188	$	(11,922	)	$	60,154	$	(13,517	)	$	188,342	$	(25,439	)

	*December 31, 2021*
	*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	$	4,042	$	(101	)	$	1,956	$	(86	)	$	5,998	$	(187	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		66,254		(1,589	)		4,371		(155	)		70,625		(1,744	)
Government sponsored enterprise bonds		2,448		(52	)		-		-			2,448		(52	)
Municipal securities		1,471		(7	)		-		-			1,471		(7	)
Other debt securities		-		-			8,800		(1,200	)		8,800		(1,200	)
Total	$	74,215	$	(1,749	)	$	15,127	$	(1,441	)	$	89,342	$	(3,190	)

The Company reviews the investment securities portfolio on a quarterly basis to monitor securities in unrealized loss positions, which were comprised of 202 individual securities, to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2022 and December 31, 2021, no allowance for credit losses on securities was recognized. The Company does not consider its securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

During the three and nine months ended September 30, 2022 and September 30, 2021, there were no sales of securities.

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Note 3 - Loans Receivable

Loans receivable at September 30, 2022 and December 31, 2021 are summarized as follows:

	*September 30, 2022*		*December 31, 2021*
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	361,943	$	300,523
Multi-family		621,560		537,956
Home equity		11,020		11,012
Construction and land		61,125		82,588
Commercial real estate		278,864		250,676
Consumer		757		732
Commercial loans		19,196		22,298
Total	$	1,354,465	$	1,205,785

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 $893.6 million and $886.7 million at September 30, 2022 and December 31, 2021, respectively, were pledged as collateral against $300.0 million and $475.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 2022 and December 31, 2021.

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 $2.6 million as of September 30, 2022 and $2.5 million as of December 31, 2021. None of these loans were past due or considered impaired as of September 30, 2022 or December 31, 2021.

An analysis of past due loans receivable as of September 30, 2022 and December 31, 2021 follows:

	*As of September 30, 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	$	2,035	$	245	$	3,573	$	5,853	$	356,090	$	361,943
Multi-family		-		-		-		-		621,560		621,560
Home equity		180		18		23		221		10,799		11,020
Construction and land		-		-		-		-		61,125		61,125
Commercial real estate		-		96		-		96		278,768		278,864
Consumer		-		-		-		-		757		757
Commercial loans		357		-		-		357		18,839		19,196
Total	$	2,572	$	359	$	3,596	$	6,527	$	1,347,938	$	1,354,465

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	*As of December 31, 2021*
	*1-59 Days Past Due (1)*		*60-89 Days Past Due (2)*		*90 Days or Greater*		*Total Past Due*		*Current (3)*		*Total Loans*
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	622	$	2,028	$	4,214	$	6,864	$	293,659	$	300,523
Multi-family		-		-		128		128		537,828		537,956
Home equity		14		23		26		63		10,949		11,012
Construction and land		-		-		-		-		82,588		82,588
Commercial real estate		-		-		-		-		250,676		250,676
Consumer		-		-		-		-		732		732
Commercial loans		7		-		-		7		22,291		22,298
Total	$	643	$	2,051	$	4,368	$	7,062	$	1,198,723	$	1,205,785

⁽¹⁾ Includes $74,000 and $43,000 at September 30, 2022 and December 31, 2021, respectively, which are on non-accrual status.

⁽²⁾ Includes $8,000 and $347,000 at September 30, 2022 and December 31, 2021, respectively, which are on non-accrual status.

⁽³⁾ Includes $ 1.4 million and $816,000 at September 30, 2022 and December 31, 2021, respectively, which are on non-accrual status.

The following tables present the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2022 and the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2021:

	*One- to Four-Family*			*Multi-Family*		*Home Equity*			*Land and Construction*			*Commercial Real Estate*			*Consumer*			*Commercial*			*Total*
	(In Thousands)
*Nine months ended September 30, 2022*
Balance at beginning of period	$	3,963		$	5,398	$	89		$	1,386		$	4,482		$	33		$	427		$	15,778
Adoption of CECL		88			100		58			886			(640	)		7			(69	)		430
Provision (credit) for credit losses - loans		644			1,338		29			(763	)		(417	)		19			(150	)		700
Charge-offs		(254	)		-		-			-			-			(12	)		-			(266	)
Recoveries		55			727		14			2			12			-			-			810
Balance at end of period	$	4,496		$	7,563	$	190		$	1,511		$	3,437		$	47		$	208		$	17,452

*Nine months ended September 30, 2021*
Balance at beginning of period	$	5,459		$	5,600	$	194		$	1,755		$	5,138		$	35		$	642		$	18,823
Provision (credit) for loan losses		(1,952	)		700		(105	)		(511	)		(446	)		9			(215	)		(2,520	)
Charge-offs		(105	)		-		-			(13	)		(10	)		(10	)		-			(138	)
Recoveries		522			36		12			52			3			-			-			625
Balance at end of period	$	3,924		$	6,336	$	101		$	1,283		$	4,685		$	34		$	427		$	16,790

	*One to-Four- Family*			*Multi-Family*		*Home Equity*			*Construction and Land*			*Commercial Real Estate*			*Consumer*			*Commercial*			*Total*
	(In Thousands)
Three months ended September 30, 2022
Balance at beginning of period	$	4,629		$	7,391	$	163		$	1,690		$	3,160		$	42		$	196		$	17,271
Provision (credit) for credit losses - loans		44			171		23			(179	)		277			12			12			360
Charge-offs		(189	)		-		-			-			-			(7	)		-			(196	)
Recoveries		12			1		4			-			-			-			-			17
Balance at end of period	$	4,496		$	7,563	$	190		$	1,511		$	3,437		$	47		$	208		$	17,452

Three months ended September 30, 2021
Balance at beginning of period	$	4,025		$	6,028	$	156		$	1,319		$	5,184		$	34		$	664		$	17,410
Provision for loan losses		(207	)		307		(59	)		(24	)		(490	)		10			(237	)		(700	)
Charge-offs		(66	)		-		-			(13	)		(10	)		(10	)		-			(99	)
Recoveries		172			1		4			1			1			-			-			179
Balance at end of period	$	3,924		$	6,336	$	101		$	1,283		$	4,685		$	34		$	427		$	16,790

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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, along with other credit–related analytics as deemed appropriate. 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.

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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 were utilized to reflect the forecast and other relevant factors.

The Company segments the loan portfolio into pools based on the following risk characteristics: collateral type, credit characteristics, loan origination balance, and outstanding loan balances.

Allowance for Credit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded commitments, classified in other liabilities on the consolidated statements of financial condition. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. The allowance for unfunded commitments at September 30, 2022 was $1.0 million.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management's judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 2 - Securities Available for Sale for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.

	*Three months ended*						*Nine months ended*
	*September 30, 2022*			*September 30, 2021*			*September 30, 2022*			*September 30, 2021*
	(In Thousands)
Provision for credit losses on:
Loans	$	360		$	(700	)	$	700		$	(2,520	)
Unfunded commitments		(28	)		-			(396	)		-
Investment securities		-			-			-			-
Total	$	332		$	(700	)	$	304		$	(2,520	)

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.

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The following tables present collateral dependent loans by portfolio segment and collateral type as of September 30, 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		4,496		7,563		190		1,511		3,437		47		208		17,452
Allowance at end of period	$	4,496	$	7,563	$	190	$	1,511	$	3,437	$	47	$	208	$	17,452

Collateral dependent loans	$	3,297	$	-	$	23	$	-	$	5,493	$	-	$	-	$	8,813
Pooled loans		358,646		621,560		10,997		61,125		273,371		757		19,196		1,345,652
Total gross loans	$	361,943	$	621,560	$	11,020	$	61,125	$	278,864	$	757	$	19,196	$	1,354,465

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

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

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

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

	*One- to Four- Family*		*Multi-Family*		*Home Equity*		*Construction and Land*		*Commercial Real Estate*		*Consumer*		*Commercial*		*Total*
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Allowance related to loans collectively evaluated for impairment		3,963		5,398		89		1,386		4,482		33		427		15,778
Balance at end of period	$	3,963	$	5,398	$	89	$	1,386	$	4,482	$	33	$	427	$	15,778

Loans individually evaluated for impairment	$	5,420	$	128	$	26	$	-	$	1,222	$	-	$	1,097	$	7,893
Loans collectively evaluated for impairment		295,103		537,828		10,986		82,588		249,454		732		21,201		1,197,892
Total gross loans	$	300,523	$	537,956	$	11,012	$	82,588	$	250,676	$	732	$	22,298	$	1,205,785

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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 $1 million, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

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 September 30, 2022 and December 31, 2021:

	*One to Four-Family*		*Multi-Family*		*Home Equity*		*Construction and Land*		*Commercial Real Estate*		*Consumer*		*Commercial*		*Total*
	(In Thousands)
At September 30, 2022
Substandard	$	5,018	$	-	$	57	$	-	$	5,493	$	-	$	-	$	10,568
Watch		5,056		193		121		2,248		5,128		-		3,918		16,664
Pass		351,869		621,367		10,842		58,877		268,243		757		15,278		1,327,233
	$	361,943	$	621,560	$	11,020	$	61,125	$	278,864	$	757	$	19,196	$	1,354,465

At December 31, 2021
Substandard	$	5,420	$	128	$	26	$	-	$	6,827	$	-	$	1,097	$	13,498
Watch		7,937		-		37		4,212		5,870		-		3,194		21,250
Pass		287,166		537,828		10,949		78,376		237,979		732		18,007		1,171,037
	$	300,523	$	537,956	$	11,012	$	82,588	$	250,676	$	732	$	22,298	$	1,205,785

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

	*As of December 31, 2021*
	*Recorded*		*Unpaid*				*Cumulative*
	*Investment*		*Principal*		*Reserve*		*Charge-Offs*
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	-	$	-	$	-	$	-
Multi-family		-		-		-		-
Home equity		-		-		-		-
Construction and land		-		-		-		-
Commercial real estate		-		-		-		-
Consumer		-		-		-		-
Commercial		-		-		-		-
		-		-		-		-
Total Impaired with no Reserve
One- to four-family		5,420		5,450		-		30
Multi-family		128		128		-		-
Home equity		26		26		-		-
Construction and land		-		-		-		-
Commercial real estate		1,222		1,222		-		-
Consumer		-		-		-		-
Commercial		1,097		1,097		-		-
		7,893		7,923		-		30
Total Impaired
One- to four-family		5,420		5,450		-		30
Multi-family		128		128		-		-
Home equity		26		26		-		-
Construction and land		-		-		-		-
Commercial real estate		1,222		1,222		-		-
Consumer		-		-		-		-
Commercial		1,097		1,097		-		-
	$	7,893	$	7,923	$	-	$	30

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

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The following tables present data on impaired loans for the nine months ended September 30, 2021.

	*2021*
	*Average*
	*Recorded*		*Interest*
	*Investment*		*Paid*
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	-	$	-
Multi-family		-		-
Home equity		-		-
Construction and land		-		-
Commercial real estate		-		-
Consumer		-		-
Commercial		-		-
		-		-
Total Impaired with no Reserve
One- to four-family		5,109		105
Multi-family		315		1
Home equity		79		2
Construction and land		43		-
Commercial real estate		1,251		28
Consumer		-		-
Commercial		1,097		25
		7,894		161
Total Impaired
One- to four-family		5,109		105
Multi-family		315		1
Home equity		79		2
Construction and land		43		-
Commercial real estate		1,251		28
Consumer		-		-
Commercial		1,097		25
	$	7,894	$	161

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Credit Quality Information:

The following tables present total loans by risk categories and year of origination as of September 30, 2022.

	*2022*		*2021*		*2020*		*2019*		*2018*		*Prior*		*Revolving*		*Total*
		(In Thousands)
One- to four-family
Pass	$	124,694	$	40,914	$	47,329	$	26,812	$	25,062	$	85,574	$	1,484	$	351,869
Watch		4,172		-		-		-		-		884		-		5,056
Substandard		759		1,428		-		529		-		2,302		-		5,018
Total		129,625		42,342		47,329		27,341		25,062		88,760		1,484		361,943

Multi-family
Pass		189,817		146,650		141,230		45,809		22,850		74,214		797		621,367
Watch		-		-		-		-		-		193		-		193
Substandard		-		-		-		-		-		-		-		-
Total		189,817		146,650		141,230		45,809		22,850		74,407		797		621,560

Home equity
Pass		254		82		848		122		176		170		9,190		10,842
Watch		-		121		-		-		-		-		-		121
Substandard		57		-		-		-		-		-		-		57
Total		311		203		848		122		176		170		9,190		11,020

Construction and land
Pass		3,174		47,877		2,350		5,249		124		103		-		58,877
Watch		-		-		-		2,248		-		-		-		2,248
Substandard		-		-		-		-		-		-		-		-
Total		3,174		47,877		2,350		7,497		124		103		-		61,125

Commercial Real Estate
Pass		75,939		54,920		50,697		37,469		22,075		26,484		659		268,243
Watch		1,498		-		96		2,252		1,282		-		-		5,128
Substandard		-		-		-		-		5,493		-		-		5,493
Total		77,437		54,920		50,793		39,721		28,850		26,484		659		278,864

Consumer
Pass		38		-		-		-		-		-		719		757
Watch		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total		38		-		-		-		-		-		719		757

Commercial
Pass		2,176		1,357		1,332		281		965		5,745		3,422		15,278
Watch		1,840		-		1,979		-		-		99		-		3,918
Substandard		-		-		-		-		-		-		-		-
Total		4,016		1,357		3,311		281		965		5,844		3,422		19,196

Total Loans	$	404,418	$	293,349	$	245,861	$	120,771	$	78,027	$	195,768	$	16,271	$	1,354,465

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The following presents data on troubled debt restructurings:

	*As of September 30, 2022*
	*Accruing*				*Non-accruing*				*Total*
	*Amount*		*Number*		*Amount*		*Number*		*Amount*		*Number*
	(Dollars in Thousands)

One- to four-family	$	-		-	$	1,623		5	$	1,623		5
	$	-		-	$	1,623		5	$	1,623		5

	*As of December 31, 2021*
	*Accruing*				*Non-accruing*				*Total*
	*Amount*		*Number*		*Amount*		*Number*		*Amount*		*Number*
	(Dollars in Thousands)

One- to four-family	$	-		-	$	1,670		5	$	1,670		5
Commercial real estate		1,222		1		-		-		1,222		1
Commercial		1,097		1		-		-		1,097		1
	$	2,319		2	$	1,670		5	$	3,989		7

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

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The following presents troubled debt restructurings by concession type:

	*As of September 30, 2022*
	*Performing in accordance with modified terms*				*In Default*				*Total*
	*Amount*		*Number*		*Amount*		*Number*		*Amount*		*Number*
	(Dollars in Thousands)
Interest reduction and principal forbearance	$	64		1	$	341		1	$	405		2
Interest reduction		20		1		-		-		20		1
Principal forbearance		1,198		2		-		-		1,198		2
	$	1,282		4	$	341		1	$	1,623		5

	*As of December 31, 2021*
	*Performing in accordance with modified terms*				*In Default*				*Total*
	*Amount*		*Number*		*Amount*		*Number*		*Amount*		*Number*
	(Dollars in Thousands)
Interest reduction and principal forbearance	$	388		2	$	-		-	$	388		2
Interest reduction		24		1		-		-		24		1
Principal forbearance		3,577		4		-		-		3,577		4
	$	3,989		7	$	-		-	$	3,989		7

There were two one- to four-family loans modified as troubled debt restructurings with a total balance of $424,000 during the nine months ended September 30, 2022. There was three one- to four-family loan modified as a troubled debt restructuring with a balance of $1.3 million during the nine months ended September 30, 2021. There were no loans modified as troubled debt restructurings during the three months ended September 30, 2022. There were two loans modified as troubled debt restructurings with a total loan balance of $754,000 during the three months ended September 30, 2021.

There were no troubled debt restructuring within the past twelve months for which there was a default during the three or nine months ended September 30, 2022 and September 30, 2021.

The following table presents data on non-accrual loans as of September 30, 2022 and December 31, 2021:

	*September 30, 2022*			*December 31, 2021*
	(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	5,018		$	5,420
Multi-family		-			128
Home equity		57			26
Construction and land		-			-
Commercial real estate		-			-
Commercial		-			-
Consumer		-			-
Total non-accrual loans	$	5,075		$	5,574
Total non-accrual loans to total loans receivable		0.37	%		0.46	%
Total non-accrual loans to total assets		0.26	%		0.25	%

Residential one- to four-family mortgage loans that were in the process of foreclosure were $1.3 million and $1.4 million at September 30, 2022 and December 31, 2021, respectively.

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Note 4 — Mortgage Servicing Rights

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

	*Nine months ended September 30,*
	*2022*			*2021*
	(In Thousands)
Mortgage servicing rights at beginning of the period	$	1,555		$	5,977
Additions		2,030			5,301
Amortization		(437	)		(1,701	)
Sales		-			(8,416	)
Mortgage servicing rights at end of the period		3,148			1,161
Valuation allowance recovered during the period		7			-
Mortgage servicing rights at end of the period, net	$	3,155		$	1,161

During the nine months ended September 30, 2022, $2.12 billion in residential loans were originated for sale on a consolidated basis generating mortgage banking income of $83.7 million. During the same period in the prior year, sales of loans held for sale totaled $2.31 billion, generating mortgage banking income of $150.6 million. The unpaid principal balance of loans serviced for others was $378.7 million and $204.8 million at September 30, 2022 and December 31, 2021, respectively. These loans are not reflected in the consolidated statements of financial condition.

The fair value of mortgage servicing rights were $4.7 million at September 30, 2022 and $1.8 million at December 31, 2021.

During the three and nine months ended September 30, 2022, the Company did not sell any mortgage servicing rights. During the three and nine months ended September 30, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans receivable and with a book value of $9.3 million for $12.4 million resulting in a gain on sale of $4.0 million.

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

	(In Thousands)
Estimate for the annual period ended December 31:
2022	$	132
2023		550
2024		426
2025		397
2026		350
Thereafter		1,300
Total	$	3,155

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Note 5 — Deposits

At September 30, 2022 and December 31, 2021, the aggregate balance of uninsured deposits of $250,000 or more was $318.4 million and $314.2 million, respectively. The Company does not have uninsured deposits less than $250,000 in aggregate balance.

A summary of the contractual maturities of time deposits at September 30, 2022 is as follows:

	(In Thousands)

Within one year	$	498,311
More than one to two years		88,460
More than two to three years		4,999
More than three to four years		793
More than four through five years		1,118
	$	593,681

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation. Such deposits amounted to $20.0 million and $27.4 million at September 30, 2022 and December 31, 2021, respectively.

Note 6 — Borrowings

Borrowings consist of the following:

	*September 30, 2022*					*December 31, 2021*
			*Weighted*					*Weighted*
			*Average*					*Average*
	*Balance*		*Rate*			*Balance*		*Rate*
	(Dollars in Thousands)
Short term:
Repurchase agreements	$	19,951		5.88	%	$	2,127		3.00	%
Federal Home Loan Bank, Chicago advances		50,000		2.53	%		5,000		0.00	%

Long term:
Federal Home Loan Bank, Chicago advances maturing:
2025		50,000		3.50	%		-		0.00	%
2027		50,000		1.73	%		50,000		1.73	%
2028		50,000		2.57	%		255,000		2.37	%
2029		100,000		1.87	%		165,000		1.61	%
	$	319,951		2.57	%	$	477,127		2.02	%

The short-term repurchase agreement represents the outstanding portion of a total $75.0 million commitment with one unrelated bank as of September 30, 2022. The short-term repurchase agreement is utilized by Waterstone Mortgage Corporation to finance loans originated for sale. This agreement is secured by the underlying loans being financed. Related interest rates are based upon the note rate associated with the loans being financed. The short-term repurchase agreement had a $20.0 million balance at September 30, 2022 and a $2.1 million balance at December 31, 2021.

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 $50.0 million short term advance has a fixed rate of 2.53% and has a contractual maturity date in October 2022.

The $50.0 million advance due in 2025 has a fixed rate of 3.50% with a single call option in September 2024 and has a contractual maturity date in September 2025.

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

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The $50.0 million advance due in 2028 has a fixed rate of 2.57% with a FHLB quarterly call option currently available and has a contractual maturity date in September 2028.

The $100.0 million in advances due in 2029 consists of one $50.0 million advance with a fixed rate of 1.98% with a FHLB quarterly call option currently available and one $50.0 million advance with a fixed rate of 1.75% with a FHLB quarterly call option currently available.

The Company selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances. The Company’s borrowings from the FHLB are limited to 80% of the carrying value of unencumbered one- to four-family mortgage loans, 75% of the carrying value of multi-family loans and 64% of the carrying value of home equity loans. In addition, these advances were collateralized by FHLB stock of $15.8 million at September 30, 2022 and $24.4 million at December 31, 2021, respectively. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

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 September 30, 2022, 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.

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The actual and required capital amounts and ratios for the Bank as of September 30, 2022 and December 31, 2021 are presented in the tables below:

	*September 30, 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.	$	411,947		25.45	%	$	129,504		8.00	%	$	169,974		10.50	%		N/A		N/A
Waterstone Bank		360,964		22.30	%		129,504		8.00	%		169,974		10.50	%		161,880		10.00	%
Tier I Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		394,495		24.37	%		97,128		6.00	%		137,598		8.50	%		N/A		N/A
Waterstone Bank		343,512		21.22	%		97,128		6.00	%		137,598		8.50	%		129,504		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		394,495		24.37	%		72,846		4.50	%		113,316		7.00	%		N/A		N/A
Waterstone Bank		343,512		21.22	%		72,846		4.50	%		113,316		7.00	%		105,222		6.50	%
Tier I Capital (to average assets)
Consolidated Waterstone Financial, Inc.		394,495		20.32	%		77,645		4.00	%		N/A		N/A			N/A		N/A
Waterstone Bank		343,512		17.70	%		77,645		4.00	%		N/A		N/A			97,057		5.00	%
State of Wisconsin (to total assets)
Waterstone Bank		343,512		17.45	%		118,143		6.00	%		N/A		N/A			N/A		N/A

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	*December 31, 2021*
	*Actual*					*For Capital Adequacy Purposes*					*Minimum Capital Adequacy with Capital Buffer*					*To Be Well-Capitalized Under Prompt Corrective Action Provisions*
	*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*			*Amount*		*Ratio*
	(Dollars In Thousands)
Total capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.	$	448,818		29.01	%	$	123,766		8.00	%	$	162,443		10.50	%		N/A		N/A
Waterstone Bank		394,540		25.52	%		123,695		8.00	%		162,350		10.50	%		154,619		10.00	%
Tier I capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		433,040		27.99	%		92,825		6.00	%		131,502		8.50	%		N/A		N/A
Waterstone Bank		378,762		24.50	%		92,771		6.00	%		131,426		8.50	%		123,695		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		433,040		27.99	%		69,619		4.50	%		108,296		7.00	%		N/A		N/A
Waterstone Bank		378,762		24.50	%		69,579		4.50	%		108,233		7.00	%		100,502		6.50	%
Tier I Capital (to average assets)
Consolidated Waterstone Financial, Inc.		433,040		19.29	%		89,774		4.00	%		N/A		N/A			N/A		N/A
Waterstone Bank		378,762		16.88	%		89,774		4.00	%		N/A		N/A			112,218		5.00	%
State of Wisconsin (to total assets)
Waterstone Bank		378,762		17.14	%		132,572		6.00	%		N/A		N/A			N/A		N/A

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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.

	*September 30, 2022*		*December 31, 2021*
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit under amortizing loans ⁽¹⁾	$	57,800	$	48,686
Commitments to extend credit under home equity lines of credit ⁽²⁾		10,952		11,990
Unused portion of construction loans ⁽³⁾		36,201		50,303
Unused portion of business lines of credit		17,318		17,916
Standby letters of credit		1,691		1,379

⁽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 December 31, 2021. Please see Note 3 - Loans Receivable for discussion on the allowance for credit losses - unfunded commitments.

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. The Company has only been required to make insignificant repurchases as a result of breaches of these representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages, historical experience has resulted in insignificant losses and repurchase activity. The Company's reserve for losses related to these recourse provisions totaled $2.0 million and $2.1 million as of September 30, 2022 and December 31, 2021, 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.

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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 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.

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

September 30, 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

497.0

Other assets

12.4

Other liabilities

10.9

Interest rate locks

379.4

Other assets

1.5

Other liabilities

Interest rate swaps

103.4

Other assets

16.3

Other liabilities

16.3

December 31, 2021

Assets

Liabilities

Derivatives not designated as Hedging Instruments

Notional Amount

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(In Millions)

Forward commitments

571.5

Other assets

1.3

Other liabilities

Interest rate locks

345.2

Other assets

3.1

Other liabilities

Interest rate swaps

105.2

Other assets

1.6

Other liabilities

1.6

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 September 30, 2022 and December 31, 2021, no back-to-back swaps were in default. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank. No right of offset existed with dealer counterparty swaps as of September 30, 2022 and December 31, 2021. All changes in the fair value of these instruments are recorded in other non-interest income. The Company pledged no cash at September 30, 2022 and $1.9 million in cash at December 31, 2021.

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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 158,000 and 45,000 antidilutive shares of common stock for the three months ended September 30, 2022 and 2021, respectively. There were 127,000 and 50,000 antidilutive shares of common stock for the nine months ended September 30, 2022 and 2021, respectively.

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

	*Three months ended September 30,*				*Nine months ended September 30,*
	*2022*		*2021*		*2022*		*2021*
	(In Thousands, except per share amounts)

Net income	$	5,270	$	19,000	$	18,552	$	58,238

Weighted average shares outstanding		21,342		23,785		22,193		23,790
Effect of dilutive potential common shares		112		175		130		197
Diluted weighted average shares outstanding	$	21,454	$	23,960	$	22,323	$	23,987

Basic earnings per share	$	0.25	$	0.80	$	0.84	$	2.45
Diluted earnings per share	$	0.25	$	0.79	$	0.83	$	2.43

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.

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The following table presents information about our assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

			*Fair Value Measurements Using*

	*September 30, 2022*		*Level 1*		*Level 2*		*Level 3*
	(In Thousands)
Assets
Available for sale securities
Mortgage-backed securities	$	13,917	$	-	$	13,917	$	-
Collateralized mortgage obligations
Government sponsored enterprise issued		128,048		-		128,048		-
Private-label issued		8,432		-		8,432		-
Government sponsored enterprise bonds		2,242		-		2,242		-
Municipal securities		33,458		-		33,458		-
Other debt securities		11,146		-		11,146		-
Other securities		55		-		55		-
Loans held for sale		186,049		-		186,049		-
Mortgage banking derivative assets		13,868		-		-		13,868
Interest rate swap assets		16,328		-		16,328		-
Liabilities
Mortgage banking derivative liabilities		10,949		-		-		10,949
Interest rate swap liabilities		16,328		-		16,328		-

			*Fair Value Measurements Using*

	*December 31, 2021*		*Level 1*		*Level 2*		*Level 3*
	(In Thousands)
Assets
Available for sale securities
Mortgage-backed securities	$	19,488	$	-	$	19,488	$	-
Collateralized mortgage obligations
Government sponsored enterprise issued		99,302		-		99,302		-
Private-label issued		2,943		-		2,943		-
Government sponsored enterprise bonds		2,448		-		2,448		-
Municipal securities		43,494		-		43,494		-
Other debt securities		11,341		-		11,341		-
Loans held for sale		312,738		-		312,738		-
Mortgage banking derivative assets		4,369		-		-		4,369
Interest rate swap assets		1,578		-		1,578		-
Liabilities
Mortgage banking derivative liabilities		-		-		-		-
Interest rate swap liabilities		1,578		-		1,578		-

The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:

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

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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 2022 and 2021.

	*Three months ended September 30,*						*Nine months ended September 30,*
	*2022*			*2021*			*2022*			*2021*
	(In Thousands)						(In Thousands)

Mortgage derivative, net balance at the beginning of the period	$	(143	)	$	7,489		$	4,369		$	5,917
Mortgage derivative gain (loss), net		3,062			(683	)		(1,450	)		889
Mortgage derivative, net balance at the end of the period	$	2,919		$	6,806		$	2,919		$	6,806

There were no transfers in or out of Level 1, 2 or 3 measurements during the periods.

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of September 30, 2022 and December 31, 2021, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

Fair Value Measurements Using

September 30, 2022

Level 1

Level 2

Level 3

(In Thousands)

Real estate owned

148

			*Fair Value Measurements Using*
	*December 31, 2021*		*Level 1*		*Level 2*		*Level 3*
	(In Thousands)
Real estate owned		148		-		-		148
Impaired mortgage servicing rights		-		-		-		-

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Real estate owned – On a non-recurring basis, real estate owned is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques.

Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

					*Significant Unobservable Input Value*
	*Fair Value at*			*Significant*
	*September 30,*		*Valuation*	*Unobservable*	*Minimum*			*Maximum*			*Weighted*
	*2022*		*Technique*	*Inputs*	*Value*			*Value*			*Average*
		(Dollars in Thousands)
Mortgage banking derivatives	$	2,919	Pricing models	Pull through rate		12.5	%		99.7	%		90.0	%
Real estate owned		148	Market approach	Discount rates applied to appraisals		34.8	%		34.8	%		34.8	%

		*December 31,*
		*2021*
Mortgage banking derivatives		4,369	Pricing models	Pull through rate		26.0	%		99.8	%		88.2	%
Real estate owned		148	Market approach	Discount rates applied to appraisals		34.8	%		34.8	%		34.8	%
Mortgage servicing rights		-	Pricing models	Prepayment rate		9.8	%		43.4	%		11.8	%
				Discount rate		0.0	%		12.0	%		10.2	%
				Cost to service	$	84.06		$	839.53			108.37

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.

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

	*September 30, 2022*										*December 31, 2021*
	*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	$	72,941	$	72,941	$	72,941	$	-	$	-	$	376,722	$	376,722	$	376,722	$	-	$	-
Loans receivable		1,354,465		1,297,581		-		-		1,297,581		1,205,785		1,210,854		-		-		1,210,854
FHLB stock		15,750		15,750		-		15,750		-		24,438		24,438		-		24,438		-
Accrued interest receivable		4,920		4,920		4,920		-		-		4,013		4,013		4,013		-		-
Mortgage servicing rights		3,155		4,724		-		-		4,724		1,555		1,808		-		-		1,808

Financial Liabilities
Deposits		1,187,128		1,185,598		593,447		592,151		-		1,233,386		1,233,478		606,723		626,755		-
Advance payments by borrowers for taxes		24,084		24,084		24,084		-		-		4,094		4,094		4,094		-		-
Borrowings		319,951		307,758		-		307,758		-		477,127		499,120		-		499,120		-
Accrued interest payable		841		841		841		-		-		959		959		959		-		-

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 September 30, 2022 and December 31, 2021.

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

Community Banking

The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. Within this segment, the following products and services are provided: (1) lending solutions such as residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit; (2) deposit and transactional solutions such as checking, credit, debit and pre-paid cards, online banking and bill pay, and money transfer services; (3) investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, and (4) fixed and variable annuities, insurance as well as trust and investment management accounts.

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

Mortgage Banking

The mortgage banking segment provides residential mortgage loans for the primary purpose of sale on the secondary market. Mortgage banking products and services are provided by offices in 27 states with the ability to lend in 48 states.

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Presented below is the segment information:

	*As of or for the three months ended September 30, 2022*
						*Holding*
	*Community*		*Mortgage*			*Company and*
	*Banking*		*Banking*			*Other*			*Consolidated*
	(In Thousands)

Net interest income (expense)	$	15,507	$	(155	)	$	46		$	15,398
Provision for credit losses		234		98			-			332
Net interest income (expense) after provision for credit losses		15,273		(253	)		46			15,066

Noninterest income:		1,116		27,305			(1,017	)		27,404

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,424		21,864			(114	)		26,174
Occupancy, office furniture and equipment		955		1,341			-			2,296
Advertising		213		924			-			1,137
Data processing		539		543			2			1,084
Communications		108		194			-			302
Professional fees		123		265			5			393
Real estate owned		1		-			-			1
Loan processing expense		-		1,120			-			1,120
Other		1,477		2,571			(861	)		3,187
Total noninterest expenses		7,840		28,822			(968	)		35,694
Income (loss) before income taxes (benefit)		8,549		(1,770	)		(3	)		6,776
Income tax expense (benefit)		1,983		(470	)		(7	)		1,506
Net income (loss)	$	6,566	$	(1,300	)	$	4		$	5,270

Total Assets	$	1,904,785	$	250,301		$	(180,035	)	$	1,975,051

	*As of or for the three months ended September 30, 2021*
							*Holding*
	*Community*			*Mortgage*			*Company and*
	*Banking*			*Banking*			*Other*			*Consolidated*
	(In Thousands)

Net interest income (expense)	$	14,090		$	(2	)	$	26		$	14,114
Provision (credit) for loan losses		(750	)		50			-			(700	)
Net interest income (expense) after provision (credit) for loan losses		14,840			(52	)		26			14,814

Noninterest income:		1,726			51,290			(80	)		52,936

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		5,360			28,981			(112	)		34,229
Occupancy, office furniture and equipment		909			1,579			-			2,488
Advertising		233			602			-			835
Data processing		531			450			5			986
Communications		122			209			-			331
Professional fees		130			421			(1	)		550
Real estate owned		1			-			-			1
Loan processing expense		-			1,135			-			1,135
Other		422			2,270			76			2,768
Total noninterest expenses		7,708			35,647			(32	)		43,323
Income (loss) before income taxes		8,858			15,591			(22	)		24,427
Income tax expense (benefit)		2,092			3,341			(6	)		5,427
Net income (loss)	$	6,766		$	12,250		$	(16	)	$	19,000

Total Assets	$	2,184,200		$	381,177		$	(331,266	)	$	2,234,111

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	*As of or for the nine months ended September 30, 2022*
					*Holding*
	*Community*		*Mortgage*		*Company and*
	*Banking*		*Banking*		*Other*			*Consolidated*
	(In Thousands)

Net interest income	$	40,869	$	398	$	76		$	41,343
Provision for credit losses		53		251		-			304
Net interest income after provision for credit losses		40,816		147		76			41,039

Noninterest income:		4,188		86,035		(1,763	)		88,460

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		14,232		63,613		(343	)		77,502
Occupancy, office furniture and equipment		2,768		3,772		-			6,540
Advertising		684		2,320		-			3,004
Data processing		1,678		1,744		8			3,430
Communications		265		635		-			900
Professional fees		355		825		23			1,203
Real estate owned		6		-		-			6
Loan processing expense		-		3,685		-			3,685
Other		3,083		7,613		(1,288	)		9,408
Total noninterest expenses		23,071		84,207		(1,600	)		105,678
Income (loss) before income taxes (benefit)		21,933		1,975		(87	)		23,821
Income tax expense (benefit)		4,808		485		(24	)		5,269
Net income (loss)	$	17,125	$	1,490	$	(63	)	$	18,552

	*As of or for the nine months ended September 30, 2021*
							*Holding*
	*Community*			*Mortgage*			*Company and*
	*Banking*			*Banking*			*Other*			*Consolidated*
	(In Thousands)

Net interest income (expense)	$	42,854		$	(603	)	$	92		$	42,343
Provision (credit) for loan losses		(2,600	)		80			-			(2,520	)
Net interest income (expense) after provision (credit) for loan losses		45,454			(683	)		92			44,863

Noninterest income:		4,599			156,881			(301	)		161,179

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		15,209			87,413			(344	)		102,278
Occupancy, office furniture and equipment		2,821			4,525			-			7,346
Advertising		702			1,868			-			2,570
Data processing		1,508			1,347			16			2,871
Communications		327			661			-			988
Professional fees		522			258			24			804
Real estate owned		(11	)		-			-			(11	)
Loan processing expense		-			3,670			-			3,670
Other		1,323			7,629			152			9,104
Total noninterest expenses		22,401			107,371			(152	)		129,620
Income (loss) before income taxes		27,652			48,827			(57	)		76,422
Income tax expense (benefit)		6,006			12,198			(20	)		18,184
Net income (loss)	$	21,646		$	36,629		$	(37	)	$	58,238

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions and verbs in the future tense. These forward-looking statements include, but are not limited to:

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

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

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

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

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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, 2021).

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 nine months ended September 30, 2022 and 2021 and the financial condition as of September 30, 2022 compared to the financial condition as of December 31, 2021.

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 nine months ended September 30, 2022 and 2021, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.

Significant Items

There were no significant items that impacted earnings for the three and nine months ended September 30, 2022 and 2021.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended September 30, 2022 and 2021

Net income totaled $6.6 million for the three months ended September 30, 2022 compared to $6.8 million for the three months ended September 30, 2021. Net interest income increased $1.4 million to $15.5 million for the three months ended September 30, 2022 compared to $14.1 million for the three months ended September 30, 2021. 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 increased as replacement rates increased.

There was a provision for credit losses of $234,000 for the three months ended September 30, 2022 compared to a $750,000 negative provision for loan losses for the three months ended September 30, 2021. The provision for credit losses of $234,000 consisted of a $262,000 provision related to loans and a $28,000 of negative provision related to unfunded commitments for the three months ended September 30, 2022. During the three months ended September 30, 2022, 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 $610,000 to $1.1 million during the three months ended September 30, 2022 due primarily to a decrease in prepayment penalties on loans.

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Compensation, payroll taxes, and other employee benefits expense decreased $936,000 to $4.4 million primarily due to a decrease in health insurance expense and variable compensation expense compared to the quarter ending September 30, 2021. Other noninterest expense increased $1.1 million to $1.5 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 Three Months Ended September 30, 2022 and 2021

Net loss totaled $1.3 million for the three months ended September 30, 2022 compared to net income of $12.3 million for the three months ended September 30, 2021. We originated $729.9 million in mortgage loans held for sale (including sales to the community banking segment) during the three months ended September 30, 2022, which represents a decrease of $325.6 million, or 30.8%, from the $1.06 billion originated during the three months ended September 30, 2021. The decrease in loan production volume was driven by a $234.2 million, or 84.7%, decrease in refinance products as mortgage rates have increased. Mortgage purchase products decreased $91.4 million, or 11.7%, due to inventory constraints in the market, affordability, and interest rate increases. Total mortgage banking noninterest income decreased $24.0 million, or 46.8%, to $27.3 million during the three months ended September 30, 2022 compared to $51.3 million during the three months ended September 30, 2021. The decrease in mortgage banking noninterest income was related to a 30.8% decrease in volume and a 18.5% decrease in gross margin on loans originated and sold for the three months ended September 30, 2022 compared to September 30, 2021. 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 94.2% of total originations during the three months ended September 30, 2022, compared to 73.8% of total originations during the three months ended September 30, 2021, 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 33.3% and 66.7% of all loan originations, respectively, during the three months ended September 30, 2022, compared to 26.2% and 73.8% of all loan originations, respectively, during the three months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $7.1 million, or 24.6%, to $21.9 million for the three months ended September 30, 2022 compared to $29.0 million for the three months ended September 30, 2021. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased. Other noninterest expense increased $301,000 to $2.6 million during the quarter ended September 30, 2022. The increase related to an increase in provision of loan sale losses and provision for branch losses offset by a decrease in mortgage servicing rights amortization expense. During the nine months ended September 30, 2022 the segment has added 11 branches and a total of 130 loan origination personnel. Losses associated with these new branches added in 2022 totaled approximately $683,000 for the three months ended September 30, 2022. These new branch losses are net of corporate revenue of approximately $492,000 for the three months ended September 30, 2022.

Consolidated Waterstone Financial, Inc. Results of Operations

	Three months ended September 30,
	2022			2021
	(Dollars In Thousands, except per share amounts)

Net income	$	5,270		$	19,000
Earnings per share - basic		0.25			0.80
Earnings per share - diluted		0.25			0.79
Annualized return on average assets		1.08	%		3.38	%
Annualized return on average equity		5.38	%		17.25	%

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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 September 30,
	2022							2021
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
	(Dollars in Thousands)
Assets
Interest-earning assets:
Loans receivable and held for sale⁽¹⁾	$	1,492,462	$	16,235		4.32	%	$	1,573,194		16,131		4.07	%
Mortgage related securities⁽²⁾		172,807		903		2.07	%		108,743		471		1.72	%
Debt securities, federal funds sold and short-term investments(2) (3)		162,211		1,027		2.51	%		409,559		967		0.94	%
Total interest-earning assets		1,827,480		18,165		3.94	%		2,091,496		17,569		3.33	%

Noninterest-earning assets		114,274							137,454
Total assets	$	1,941,754						$	2,228,950

Liabilities and equity
Interest-bearing liabilities:
Demand accounts	$	75,058		16		0.08	%	$	68,478		13		0.08	%
Money market and savings accounts		398,643		208		0.21	%		391,599		233		0.24	%
Time deposits		586,012		757		0.51	%		663,343		701		0.42	%
Total interest-bearing deposits		1,059,713		981		0.37	%		1,123,420		947		0.33	%
Borrowings		296,111		1,746		2.34	%		475,000		2,445		2.04	%
Total interest-bearing liabilities		1,355,824		2,727		0.80	%		1,598,420		3,392		0.84	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		153,591							153,436
Other noninterest-bearing liabilities		43,683							40,148
Total noninterest-bearing liabilities		197,274							193,584
Total liabilities		1,553,098							1,792,004
Equity		388,656							436,946
Total liabilities and equity	$	1,941,754						$	2,228,950

Net interest income / Net interest rate spread ⁽⁴⁾				15,438		3.14	%				14,177		2.49	%
Less: taxable equivalent adjustment				40		0.01	%				63		0.01	%
Net interest income, as reported			$	15,398		3.13	%				14,114		2.48	%
Net interest-earning assets ⁽⁵⁾	$	471,656						$	493,076
Net interest margin ⁽⁶⁾						3.34	%						2.68	%
Tax equivalent effect						0.01	%						0.01	%
Net interest margin on a fully tax equivalent basis						3.35	%						2.69	%
Average interest-earning assets to average interest-bearing liabilities						134.79	%						130.85	%

__________

⁽¹⁾	Interest income includes net deferred loan fee amortization income of $113,000 and $644,000 for the three months ended September 30, 2022 and 2021, 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 September 30, 2022 and 2021. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 2.41% and 0.88% for the three months ended September 30, 2022 and 2021, 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.

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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 September 30,
	2022 versus 2021
	Increase (Decrease) due to
	Volume			Rate			Net
	(In Thousands)
Interest income:
Loans receivable and held for sale(1) (2)	$	(847	)	$	951		$	104
Mortgage related securities⁽³⁾		370			62			432
Other earning assets(3) (4)		(838	)		898			60
Total interest-earning assets		(1,315	)		1,911			596

Interest expense:
Demand accounts		3			-			3
Money market and savings accounts		4			(29	)		(25	)
Time deposits		(67	)		123			56
Total interest-bearing deposits		(60	)		94			34
Borrowings		(1,147	)		448			(699	)
Total interest-bearing liabilities		(1,207	)		542			(665	)
Net change in net interest income	$	(108	)	$	1,369		$	1,261

______________

(1)	Interest income includes net deferred loan fee amortization income of $113,000 and $644,000 for the three months ended September 30, 2022 and 2021, 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 September 30, 2022 and September 30, 2021.

Net interest income increased $1.3 million, or 9.1%, to $15.4 million during the three months ended September 30, 2022 compared to $14.1 million during the three months ended September 30, 2021.

●	Interest income on loans increased $104,000, or 0.6%, to $16.2 million due primarily to a 25 basis point increase in average yield on loans as interest rates continue to increase over the past year. This increase was partially offset by an $80.7 million decrease in average loan balance as loans held for sale originations decreased as interest rates are increasing. The decrease in average loan balance was driven by a decrease of a $136.1 million, or 42.9%, decrease in the average balance of loans held for sale offset by an increase of $55.4 million, or 4.4%, in average loans held for investment.
●	Interest expense on time deposits increased $56,000, or 8.0%, to $757,000 primarily due to a nine basis point increase in average cost of time deposits. Offsetting the increase, the average balance of time deposits decreased $77.3 million compared to the prior year period.
●	Interest expense on money market, savings, and escrow accounts decreased $25,000, or 10.7%, to $208,000 due primarily to a three basis point decrease in average cost of money market, savings, and escrow accounts as the account mix shifted towards more savings accounts. Partially offsetting the decrease in average cost, the average balance increased $7.0 million.
●	Interest expense on borrowings decreased $699,000, or 28.6%, to $1.7 million due to a $178.9 million decrease in the average balance of borrowings during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 as the FHLB borrowings balance decreased $175.0 million during 2022. Offsetting the decrease in average balance, the cost of borrowings increased 30 basis points to 2.34% during the three months ended September 30, 2022, compared to 2.04% during the three months ended September 30, 2021.

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Provision for Credit Losses

There was a provision for credit losses of $332,000 for the three months ended September 30, 2022 compared to a $700,000 negative provision for loan losses for the three months ended September 30, 2021. The $332,000 provision for credit losses consisted of a $360,000 provision related to loans and a $28,000 of negative provision related to unfunded commitments for the three months ended September 30, 2022. During the three months ended September 30, 2022, 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 September 30,
	2022		2021		$ Change			% Change
	(Dollars In Thousands)
Service charges on loans and deposits	$	529	$	1,136	$	(607	)		(53.4	)%
Increase in cash surrender value of life insurance		354		312		42			13.5	%
Mortgage banking income		26,064		46,547		(20,483	)		(44.0	)%
Other		457		4,941		(4,484	)		(90.8	)%
Total noninterest income	$	27,404	$	52,936	$	(25,532	)		(48.2	)%

Total noninterest income decreased $25.5 million, or 48.2%, to $27.4 million during the three months ended September 30, 2022 compared to $52.9 million during the three months ended September 30, 2021. The decrease resulted primarily from a decrease 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 $377.5 million, or 36.0%, to $671.2 million during the three months ended September 30, 2022 compared to $1.05 billion during the three months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.5% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended September 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

●

The decrease in other noninterest income was due primarily to a decrease in gain on sale of mortgage serving rights and in mortgage servicing fee income. During the quarter ended September 30, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third parties. The sale generated $12.4 million in net proceeds and a $4.0 million gain. There were no comparable sales during the quarter ended September 30, 2022. As of September 30, 2022 and September 30, 2021, the Company maintained servicing rights related to $378.7 million and $160.8 million, respectively, in loans previously sold to third parties.

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	Three months ended September 30,
	2022		2021		$ Change			% Change
	(Dollars In Thousands)
Compensation, payroll taxes, and other employee benefits	$	26,174	$	34,229	$	(8,055	)		(23.5	)%
Occupancy, office furniture, and equipment		2,296		2,488		(192	)		(7.7	)%
Advertising		1,137		835		302			36.2	%
Data processing		1,084		986		98			9.9	%
Communications		302		331		(29	)		(8.8	)%
Professional fees		393		550		(157	)		(28.5	)%
Real estate owned		1		1		-			N/A
Loan processing expense		1,120		1,135		(15	)		(1.3	)%
Other		3,187		2,768		419			15.1	%
Total noninterest expenses	$	35,694	$	43,323	$	(7,629	)		(17.6	)%

Total noninterest expenses decreased $7.6 million, or 17.6%, to $35.7 million during the three months ended September 30, 2022 compared to $43.3 million during the three months ended September 30, 2021.

●	Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $7.1 million, or 24.6%, to $21.9 million during the three months ended September 30, 2022. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased.
●	Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $936,000, or 17.5%, to $4.4 million during the three months ended September 30, 2022. The decrease was due primarily to a decrease in health insurance expense and variable compensation expense.
●	Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $238,000 to $1.3 million during the three months ended September 30, 2022, primarily resulting from lower rent and depreciation expense.
●	Occupancy, office furniture and equipment expense at the community banking segment increased $46,000 to $955,000 during the three months ended September 30, 2022. The increase was due primarily to increased utilities expenses, maintenance, and computer equipment.
●	Advertising expense increased $302,000, or 36.2%, to $1.1 million during the three months ended September 30, 2022. This was primarily due to marketing increases at the mortgage banking segment to attract customers as rates are higher than in the prior year. Advertising at the community banking segment decreased as customer promotions slowed.
●	Data processing expense increased $98,000, or 9.9%, to $1.1 million during the three months ended September 30, 2022. This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.
●	Professional fees decreased $157,000 to $393,000 of income during the three months ended September 30, 2022. The decrease related to a decrease in legal fees at the mortgage banking segment.
●	Other noninterest expense increased $419,000, or 15.1%, to $3.2 million during the three months ended September 30, 2022. The increase at the mortgage banking segment related to an increase in provision of loan sale losses and provision for branch losses offset by a decrease in mortgage servicing rights amortization expense. The increase at the community banking segment was due to placement fees.

Income Taxes

Income tax expense totaled $1.5 million for the three months ended September 30, 2022 compared to $5.4 million during the three months ended September 30, 2021. Income tax expense was recognized on the statement of income during the three months ended September 30, 2022 and September 30, 2021 at an effective rate of 22.2% of pretax income. The effective rate as of September 30, 2022 reflects an increase of permanent deductions relative to the amount of pretax income. The effective rate as of September 30, 2021 reflects a $949,000 return to provision income tax adjustment to reflect actual state tax apportionment based on the final 2020 tax returns. There was no return to provision adjustment during the three months ended September 30, 2022.

Comparison of Community Banking Segment Results of Operations for the Nine Months Ended September 30, 2022 and 2021

Net income totaled $17.1 million for the nine months ended September 30, 2022 compared to $21.6 million for the nine months ended September 30, 2021. Net interest income decreased $2.0 million to $40.9 million for the nine months ended September 30, 2022 compared to $42.9 million for the nine months ended September 30, 2021. Interest income on loans decreased as average balances were lower than in the prior year. Offsetting the decrease in interest income on loans, interest income on mortgage-related securities increased due to an increase in average balance and yield and interest expense on deposits decreased as replacement rates decreased.

There was a provision for credit losses of $53,000 for the nine months ended September 30, 2022 compared to a $2.6 million negative provision for loan losses for the nine months ended September 30, 2021. The provision for credit losses of $53,000 consisted of a $449,000 provision related to loans due to loan growth and a $396,000 of negative provision related to unfunded commitments as the balance decreased for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

Total noninterest income decreased $411,000, or 8.9%, to $4.2 million due primarily to a decrease in service fees on deposits and prepayment fees on loans during the nine months ended September 30, 2022, offset by a gain from death benefit received on one bank owned life insurance policy and an increase in bank owned life insurance as interest rates increased.

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Compensation, payroll taxes, and other employee benefits expense decreased $977,000 to $14.2 million primarily due to a decrease in health insurance and ESOP expense compared to the nine months ended September 30, 2021. Other noninterest expense increased $1.8 million to $3.1 million as certain loan-related expenses 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 Nine Months Ended September 30, 2022 and 2021

Net income totaled $1.5 million for the nine months ended September 30, 2022 compared to $36.6 million for the nine months ended September 30, 2021. We originated $2.22 billion in mortgage loans held for sale (including sales to the community banking segment) during the nine months ended September 30, 2022, which represents a decrease of $1.02 billion, or 31.5%, from the $3.24 billion originated during the nine months ended September 30, 2021. The decrease in loan production volume was driven by a $750.2 million, or 73.0%, decrease in refinance products as mortgage rates have increased. Mortgage purchase products decreased $268.5 million, or 12.2%, due to inventory constraints in the market, housing affordability, and as interest rates have increased. Total mortgage banking noninterest income decreased $70.8 million, or 45.2%, to $86.0 million during the nine months ended September 30, 2022 compared to $156.9 million during the nine months ended September 30, 2021. The decrease in mortgage banking noninterest income was related to a 31.5% decrease in volume and a 18.8% decrease in gross margin on loans originated and sold for the nine months ended September 30, 2022 compared to September 30, 2021. 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 87.5% of total originations during the nine months ended September 30, 2022, compared to 68.2% of total originations during the nine months ended September 30, 2021, 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 27.8% and 72.2% of all loan originations, respectively, during the nine months ended September 30, 2022, compared to 23.1% and 76.9% of all loan originations, respectively, during the nine months ended September 30, 2021.

Total compensation, payroll taxes and other employee benefits decreased $23.8 million, or 27.2%, to $63.6 million for the nine months ended September 30, 2022 compared to $87.4 million for the nine months ended September 30, 2021. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased. During the nine months ended September 30, 2022 the segment has added 11 branches and a total of 130 loan origination personnel. Losses associated with these new branches totaled approximately $1.2 million for the nine months ended September 30, 2022. These branch losses are net of corporate revenue of approximately $599,000 for the nine months ended September 30, 2022.

Consolidated Waterstone Financial, Inc. Results of Operations

	Nine months ended September 30,
	2022			2021
	(Dollars In Thousands, except per share amounts)

Net income	$	18,552		$	58,238
Earnings per share - basic		0.84			2.45
Earnings per share - diluted		0.83			2.43
Annualized return on average assets		1.22	%		3.54	%
Annualized return on average equity		6.09	%		18.08	%

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Net Interest Income

Average Balance Sheets, Interest and Yields/Costs

	Nine months ended September 30,
	2022							2021
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
	(Dollars in Thousands)
Assets
Interest-earning assets:
Loans receivable and held for sale⁽¹⁾	$	1,429,736	$	44,281		4.14	%	$	1,627,793		49,214		4.04	%
Mortgage related securities⁽²⁾		160,014		2,326		1.94	%		99,819		1,448		1.94	%
Debt securities, federal funds sold and short-term investments(2) (3)		315,743		3,107		1.32	%		331,028		2,840		1.15	%
Total interest-earning assets		1,905,493		49,714		3.49	%		2,058,640		53,502		3.47	%

Noninterest-earning assets		120,050							142,822
Total assets	$	2,025,543						$	2,201,462

Liabilities and equity
Interest-bearing liabilities:
Demand accounts	$	71,842		45		0.08	%	$	62,594		22		0.05	%
Money market and savings accounts		405,105		611		0.20	%		352,378		452		0.17	%
Time deposits		593,556		1,855		0.42	%		686,262		3,068		0.60	%
Total interest-bearing deposits		1,070,503		2,511		0.31	%		1,101,234		3,542		0.43	%
Borrowings		353,616		5,717		2.16	%		478,349		7,414		2.07	%
Total interest-bearing liabilities		1,424,119		8,228		0.77	%		1,579,583		10,956		0.93	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		153,523							144,565
Other noninterest-bearing liabilities		40,685							46,657
Total noninterest-bearing liabilities		194,208							191,222
Total liabilities		1,618,327							1,770,805
Equity		407,216							430,657
Total liabilities and equity	$	2,025,543						$	2,201,462

Net interest income / Net interest rate spread ⁽⁴⁾				41,486		2.72	%				42,546		2.54	%
Less: taxable equivalent adjustment				143		0.01	%				203		0.01	%
Net interest income, as reported			$	41,343		2.71	%				42,343		2.53	%
Net interest-earning assets ⁽⁵⁾	$	481,374						$	479,057
Net interest margin ⁽⁶⁾						2.90	%						2.75	%
Tax equivalent effect						0.01	%						0.01	%
Net interest margin on a fully tax equivalent basis						2.91	%						2.76	%
Average interest-earning assets to average interest-bearing liabilities						133.80	%						130.33	%

__________

⁽¹⁾	Interest income includes net deferred loan fee amortization income of $495,000 and $1.7 million for the nine months ended September 30, 2022 and 2021, 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 nine months ended September 30, 2022 and 2021. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.26% and 1.07% for the nine months ended September 30, 2022 and 2021, 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.

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Rate/Volume Analysis

	Nine months ended September 30,
	2022 versus 2021
	Increase (Decrease) due to
	Volume			Rate			Net
	(In Thousands)
Interest income:
Loans receivable and held for sale(1) (2)	$	(6,128	)	$	1,195		$	(4,933	)
Mortgage related securities⁽³⁾		878			-			878
Other earning assets(3) (4)		(137	)		404			267
Total interest-earning assets		(5,387	)		1,599			(3,788	)

Interest expense:
Demand accounts		4			19			23
Money market and savings accounts		73			86			159
Time deposits		(377	)		(836	)		(1,213	)
Total interest-bearing deposits		(300	)		(731	)		(1,031	)
Borrowings		(2,037	)		340			(1,697	)
Total interest-bearing liabilities		(2,337	)		(391	)		(2,728	)
Net change in net interest income	$	(3,050	)	$	1,990		$	(1,060	)

______________

(1)	Interest income includes net deferred loan fee amortization income of $495,000 and $1.7 million for the nine months ended September 30, 2022 and 2021, 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 nine months ended September 30, 2022 and September 30, 2021.

Net interest income decreased $1.0 million, or 2.4%, to $41.3 million during the nine months ended September 30, 2022 compared to $42.3 million during the nine months ended September 30, 2021.

	●	Interest income on loans decreased $4.9 million, or 10.0%, to $44.3 million during the nine months ended September 30, 2022 compared to $49.2 million during the nine months ended September 30, 2021 due primarily to a $198.1 million, or 12.2%, decrease in average loans as loans held for sale originations decreased as interest rates are increasing. This decrease was partially offset by a 10 basis point increase in average yield on loans as interest rates continue to increase over the past year. The decrease in average loan balance was driven by a decrease of $51.8 million, or 4.0%, in the average balance of loans held in portfolio along with a $146.2 million, or 45.5%, decrease in the average balance of loans held for sale.
	●	Interest expense on time deposits decreased $1.2 million, or 39.5%, to $1.9 million primarily due to a 18 basis point decrease in average cost of time deposits. Additionally, the average balance of time deposits decreased $92.7 million compared to the prior year period.
	●	Interest expense on money market, savings, and escrow accounts increased $159,000, or 35.2%, to $611,000 due primarily to a three basis point increase in average cost of money market, savings, and escrow accounts and the average balance increased $52.7 million.
	●	Interest expense on borrowings decreased $1.7 million, or 22.9%, to $5.7 million due to a $124.7 million decrease in the average balance of borrowings during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as the FHLB borrowings balance decreased $175.0 million during the nine months ended September 30, 2022.

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Provision for Credit Losses

The Company adopted ASC Topic 326 as of January 1, 2022, which resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses. Additionally, there was a $1.4 million opening balance adjustment to record an allowance for credit losses on unfunded loan commitments, which is presented in Other Liabilities on the Consolidated Statements of Financial Condition. Net of tax impact, the adoption of the CECL model resulted in a $1.4 million reduction to retained earnings.

There was a provision for credit losses of $304,000 for the nine months ended September 30, 2022 compared to a $2.5 million negative provision for loan losses for the nine months ended September 30, 2021. The $304,000 provision for credit losses consisted of a $700,000 provision related to loans and a $396,000 of negative provision related to unfunded commitments for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and qualitative factors, primarily to account for the changes in internal metrics and external risk factors.

Noninterest Income

	Nine months ended September 30,
	2022		2021		$ Change			% Change
	(Dollars In Thousands)
Service charges on loans and deposits	$	1,705	$	2,483	$	(778	)		(31.3	)%
Increase in cash surrender value of life insurance		1,394		1,297		97			7.5	%
Mortgage banking income		83,749		150,587		(66,838	)		(44.4	)%
Other		1,612		6,812		(5,200	)		(76.3	)%
Total noninterest income	$	88,460	$	161,179	$	(72,719	)		(45.1	)%

Total noninterest income decreased $72.7 million, or 45.1%, to $88.5 million during the nine months ended September 30, 2022 compared to $161.2 million during the nine months ended September 30, 2021. The decrease resulted primarily from a decrease in mortgage banking noninterest 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 $1.10 billion, or 34.1%, to $2.12 billion during the nine months ended September 30, 2022 compared to $3.21 billion during the nine months ended September 30, 2021. Gross margin on loans originated and sold decreased 18.8% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Nine Months Ended September 30, 2022 and 2021" above for additional discussion of the decrease in mortgage banking income.

●

The decrease in other noninterest income was due primarily to a gain on sale of mortgage servicing rights in 2021, decreases in mortgage servicing fee income as a result of the servicing fees prior to the sale, and decreases to loan prepayment fees. During the year ended September 30, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third parties. The sale generated $12.4 million in net proceeds and a $4.0 million gain. There was no comparable sale during the year ended September 30, 2022. As of September 30, 2022 and September 30, 2021, the Company maintained servicing rights related to $378.7 million and $204.8 million, respectively, in loans previously sold to third parties. Offsetting the decreases, there was a $340,000 increase in gain from death benefit received on one bank owned life insurance policy during the nine months ended September 30, 2022 compared to none during the nine months ended September 30, 2021.

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Noninterest Expenses

	Nine months ended September 30,
	2022		2021			$ Change			% Change
	(Dollars In Thousands)
Compensation, payroll taxes, and other employee benefits	$	77,502	$	102,278		$	(24,776	)		(24.2	)%
Occupancy, office furniture, and equipment		6,540		7,346			(806	)		(11.0	)%
Advertising		3,004		2,570			434			16.9	%
Data processing		3,430		2,871			559			19.5	%
Communications		900		988			(88	)		(8.9	)%
Professional fees		1,203		804			399			49.6	%
Real estate owned		6		(11	)		17			(154.5	)%
Loan processing expense		3,685		3,670			15			0.4	%
Other		9,408		9,104			304			3.3	%
Total noninterest expenses	$	105,678	$	129,620		$	(23,942	)		(18.5	)%

Total noninterest expenses decreased $23.9 million, or 18.5%, to $105.7 million during the nine months ended September 30, 2022 compared to $129.6 million during the nine months ended September 30, 2021.

	●	Compensation, payroll taxes and other employee benefits expense at our mortgage banking segment decreased $23.8 million, or 27.2%, to $63.6 million during the nine months ended September 30, 2022. The decrease in compensation expense was primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased.
	●	Compensation, payroll taxes and other employee benefits expense at the community banking segment decreased $977,000, or 6.4%, to $14.2 million during the nine months ended September 30, 2022. The decrease was primarily due to a decrease in health insurance and ESOP expense as the average stock average price has decreased compared to the quarter ending September 30, 2021, offset by an increase in salaries due to annual raises.
	●	Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $753,000, or 16.6%, to $3.8 million during the nine months ended September 30, 2022, primarily resulting from lower rent, computer, and depreciation expense.
	●	Occupancy, office furniture and equipment expense at the community banking segment decreased $53,000, or 1.9%, to $2.8 million during the nine months ended September 30, 2022. The decrease was due primarily to decreased snow removal expense and maintenance expense.
	●	Advertising expense increased $434,000, or 16.9%, to $3.0 million during the nine months ended September 30, 2022. This was primarily due to an increase at the mortgage banking segment in an effort to increase new customers.
	●	Data processing expense increased $559,000, or 19.5%, to $3.4 million during the nine months ended September 30, 2022. This was primarily due to increases at the community banking and mortgage banking segments for continued investments in technology and security.
	●	Professional fees increased $399,000, or 49.6%, to $1.2 million during the nine months ended September 30, 2022. The increase related to receiving a countersuit settlement at the mortgage banking segment during the nine months ended September 30, 2021.
	●	Other noninterest expense increased $304,000, or 3.3%, to $9.4 million during the nine months ended September 30, 2022. The increase at the community banking segment related to an increase in certain loan-related expenses paid to the mortgage banking segment for the purchase of single-family adjustable rate mortgage loans during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. These fees are eliminated in the consolidated statements of income. Additionally, there were increases in placement fees and correspondent bank fees. Offsetting the increase at the community banking segment, other noninterest expenses decreased at the mortgage banking segment as the amortization expense on mortgage servicing rights decreased due to the bulk sale of mortgage servicing rights during the third quarter of 2021.

Income Taxes

Income tax expense decreased $12.9 million, or 71.0% , to $5.3 million for the nine months ended September 30, 2022 compared to $18.2 million during the nine months ended September 30, 2021. Income tax expense was recognized on the statement of income during the nine months ended September 30, 2022 at an effective rate of 22.1% of pretax income compared to 23.8% during the nine months ended September 30, 2021. The decrease in the effective rate reflects an increase of permanent deductions relative to the amount of pretax income and additionally the 2022 rate reflects the lower state tax apportionment based on the final 2020 tax returns. The effective rate as of September 30, 2021 reflects a $949,000 return to provision income tax adjustment to reflect actual state tax apportionment based on the final 2020 tax returns. There was no return to provision adjustment during the nine months ended September 30, 2022.

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Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets – Total assets decreased by $240.8 million, or 10.9%, to $1.98 billion at September 30, 2022 from $2.22 billion at December 31, 2021. The decrease in total assets primarily reflects a decrease in cash and cash equivalents and loans held for sale, partially offset by an increase in loans held for investment, securities available for sale and other assets. The total assets decrease reflects liability decreases in deposits and borrowings.

Cash and Cash Equivalents – Cash and cash equivalents decreased $303.8 million, or 80.6%, to $72.9 million at September 30, 2022, compared to $376.7 million at December 31, 2021. The decrease in cash and cash equivalents primarily reflects the increases in loans held for investment, securities available for sale and decrease of funding sources from deposits and borrowings.

Securities Available for Sale – Securities available for sale increased $18.3 million to $197.3 million at September 30, 2022. The increase was primarily due to purchases of mortgage-related securities as the interest rates continue to rise. The purchases are exceeding security paydowns for the year and maturities of debt securities.

Loans Held for Sale - Loans held for sale decreased $126.7 million to $186.0 million at September 30, 2022 due to the decrease of refinancing and purchase activity resulting from the increase in mortgage rates.

Loans Receivable - Loans receivable held for investment increased $148.7 million to $1.35 billion at September 30, 2022. The increase in total loans receivable was attributable to increases in each of the one- to four-family, multi-family, and commercial real estate loan categories.

The following table shows loan originations during the periods indicated.

	For the
	Nine months ended September 30,
	2022		2021
	(In Thousands)
Real estate loans originated for investment:
Residential
One- to four-family	$	129,625		43,137
Multi-family		189,817		81,722
Home equity		311		4,736
Construction and land		3,174		23,358
Commercial real estate		77,437		33,552
Total real estate loans originated for investment		400,364		186,505
Consumer loans originated for investment		38		23
Commercial business loans originated for investment		4,016		19,922
Total loans originated for investment	$	404,418		206,450

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Allowance for Credit Losses - Loans - The allowance for credit losses increased $1.7 million to $17.5 million at September 30, 2022. The increase primarily resulted from the CECL model adoption on January 1, 2022. The CECL calculation resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses. Additionally, net recoveries totaled $810,000 for the nine months ended September 30, 2022. With the adoption of CECL, estimated recoveries may be accounted for within the calculation and do not impact the provision for credit losses line item when cash is received.

There was a provision for credit losses - loans of $700,000 for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, we made adjustments to our forecast factor to reflect the current economic forecast, and 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.

Prepaid expenses and other assets – Total prepaid expenses and other assets increased $33.1 million to $78.3 million at September 30, 2022. The increase was primarily due to an increase in the fair value mark on derivatives as interest rates increased and deferred taxes increased as unrealized losses on available for sale securities increased due to rising interest rates.

Deposits – Total deposits decreased $46.3 million to $1.19 billion at September 30, 2022. The decrease was driven by a decrease of $33.0 million in time deposits and $45.4 million in money market and savings deposits offset by an increase of $32.1 million in demand deposits.

Borrowings – Total borrowings decreased $157.2 million, or 32.9%, to $320.0 million at September 30, 2022. The community banking segment paid off $270.0 million in long-term FHLB borrowings, borrowing $50.0 million of new long-term FHLB borrowings, and $50.0 million in new short-term FHLB borrowings. External short-term borrowings at the mortgage banking segment increased a total of $17.8 million at September 30, 2022 from December 31, 2021.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $20.0 million to $24.1 million at September 30, 2022. 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 $764,000 to $67.7 million at September 30, 2022. 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, other liabilities decreased due to the payment of the special dividend in the first quarter. Offsetting the decreases, the fair value mark on derivative liabilities related to the loans held for sale and the back-to-back swaps increased with the increase in interest rates.

Shareholders’ Equity – Shareholders' equity decreased $56.6 million to $376.2 million at September 30, 2022. Shareholders' equity decreased primarily due to the declaration of dividends, a decrease in the fair value of the security portfolio, the repurchase of stock and the adoption of CECL. 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.

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ASSET QUALITY

NONPERFORMING ASSETS

	At September 30,			At December 31,
	2022			2021
	(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	5,018		$	5,420
Over four-family		-			128
Home equity		57			26
Construction and land		-			-
Commercial real estate		-			-
Commercial		-			-
Consumer		-			-
Total non-accrual loans		5,075			5,574

Real estate owned
Construction and land		148			148
Total real estate owned		148			148
Total nonperforming assets	$	5,223		$	5,722

Total non-accrual loans to total loans, net		0.37	%		0.46	%
Total non-accrual loans to total assets		0.26	%		0.25	%
Total nonperforming assets to total assets		0.26	%		0.26	%

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.

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

	At or for the Nine Months
	Ended September 30,
	2022			2021
	(In Thousands)

Balance at beginning of period	$	5,574		$	5,560
Additions		2,908			1,320
Transfers to real estate owned		-			-
Charge-offs		-			(12	)
Returned to accrual status		(694	)		(1,544	)
Principal paydowns and other		(2,713	)		(1,352	)
Balance at end of period	$	5,075		$	3,972

Total non-accrual loans decreased by $499,000, or 9.0%, to $5.1 million as of September 30, 2022 compared to $5.6 million as of December 31, 2021. The ratio of non-accrual loans to total loans receivable was 0.37% at September 30, 2022 compared to 0.46% at December 31, 2021. During the nine months ended September 30, 2022, $2.9 million in loans were placed on non-accrual status. Offsetting this activity, $2.7 million in principal payments were received and $694,000 in loans returned to accrual status during the nine months ended September 30, 2022.

Of the $5.1 million in total non-accrual loans as of September 30, 2022, $3.3 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary. A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan's original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset. Based upon these specific reviews, a total of $30,000 in cumulative partial net charge-offs have been recorded over the life of these loans as of September 30, 2022. Partially charged-off loans measured for impairment based upon net realizable collateral value are maintained in a "non-performing" status and are disclosed as impaired loans. There were no specific reserves as of September 30, 2022. The remaining $1.7 million of non-accrual loans were reviewed on an aggregate basis as of September 30, 2022.
.

The outstanding principal balance of our five largest non-accrual loans as of September 30, 2022 totaled $3.6 million, which represents 70.2% of total non-accrual loans as of that date. Four of the five loans have not had any cumulative life-to-date net charge-offs and no specific reserve was deemed necessary based on net realizable collateral value with respect to these four loans as of September 30, 2022. One 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 September 30, 2022 and December 31, 2021, there were no loans 90 or more days past due and still accruing interest.

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TROUBLED DEBT RESTRUCTURINGS

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

	As of September 30, 2022
	Accruing		Non-accruing		Total
	(In Thousands)

One- to four-family	$	-	$	1,623	$	1,623
	$	-	$	1,623	$	1,623

	As of December 31, 2021
	Accruing		Non-accruing		Total
	(In Thousands)

One- to four-family	$	-	$	1,670	$	1,670
Commercial real estate		1,222		-		1,222
Commercial		1,097		-		1,097
	$	2,319	$	1,670	$	3,989

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

We do not participate in government-sponsored troubled debt restructuring programs. Our troubled debt restructurings are short-term modifications. Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both. Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court. Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.

If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status. After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification. The restructured loan will be classified as a troubled debt restructuring for at least the calendar year after the modification even after returning to a contractual/market rate and accrual status

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LOAN DELINQUENCY

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

	At September 30,			At December 31,
	2022			2021
	(Dollars in Thousands)

Loans past due less than 90 days	$	2,931		$	2,694
Loans past due 90 days or more		3,596			4,368
Total loans past due	$	6,527		$	7,062

Total loans past due to total loans receivable		0.48	%		0.59	%

Past due loans decreased by $535,000, or 7.6%, to $6.5 million at September 30, 2022 from $7.1 million at December 31, 2021. Loans past due 90 days or more decreased by $772,000, or 17.7%, primarily in the one- to four-family loan category during the nine months ended September 30, 2022 .Loans past due less than 90 days increased by $237,000, or 8.8%, primarily in the home equity and commercial loan categories.

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ALLOWANCE FOR CREDIT LOSSES - LOANS

	At or for the Nine Months
	Ended September 30,
	2022			2021(1)
	(Dollars in Thousands)

Balance at beginning of period	$	15,778		$	18,823
Adoption of CECL (1)		430			-
Provision (credit) for credit losses - loans		700			(2,520	)
Charge-offs:
Mortgage
One- to four-family		254			105
Multi family		-			-
Home Equity		-			-
Commercial real estate		-			10
Construction and land		-			13
Consumer		12			10
Commercial		-			-
Total charge-offs		266			138
Recoveries:
Mortgage
One- to four-family		55			522
Multi family		727			36
Home Equity		14			12
Commercial real estate		2			3
Construction and land		12			52
Consumer		-			-
Commercial		-			-
Total recoveries		810			625
Net recoveries		(544	)		(487	)
Allowance at end of period	$	17,452		$	16,790

Ratios:
Allowance for credit losses to non-accrual loans at end of period		343.88	%		422.71	%
Allowance for credit losses to loans receivable at end of period		1.29	%		1.37	%
Net recoveries to average loans outstanding (annualized)		(0.06	)%		(0.05	)%
Current year provision (credit) for credit losses - loans to net recoveries		(128.68	)%		517.45	%
Net recoveries (annualized) to beginning of the year allowance		(4.61	)%		(3.46	)%

⁽¹⁾ The Company adopted ASU 2016-13 as of January 1, 2022. The 2021 amount presented is calculated under the prior accounting standard.

The allowance for credit losses - loans increased $1.7 million to $17.5 million at September 30, 2022 from $15.8 million at December 31, 2021. The increase resulted from the CECL model adoption on January 1, 2022 along with loan growth throughout the year. The CECL calculation resulted in an opening balance adjustment of $430,000 to increase the allowance for credit losses and a $700,000 provision for credit losses. Additionally, net recoveries totaled $544,000 for the nine months ended September 30, 2022. With the adoption of CECL, estimated recoveries may be accounted for within the calculation and do not impact the provision for credit losses line item when cash is received.

We had net recoveries of $544,000, or 0.06% of average loans annualized, for the nine months ended September 30, 2022, compared to net recoveries of $487,000, or 0.05% of average loans annualized, for the nine months ended September 30, 2021. Of the $544,000 in net recoveries during the nine months ended September 30, 2022, the majority of the activity related to loans secured by multi-family loan categories.

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.

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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 nine months ended September 30, 2022, primary uses of cash and cash equivalents included: $2.12 billion in funding loans held for sale, $148.1 million to fund loans held for investment, $77.4 million for purchases of mortgage related securities, $270.0 million for payoffs of long-term borrowings, $26.0 million for cash dividends paid, $46.3 million for decrease in deposits, and $45.2 million for purchases of our common stock.

During the nine months ended September 30, 2022, primary sources of cash and cash equivalents included: $2.31 billion in proceeds from the sale of loans held for sale, $27.9 million in principal repayments on mortgage related securities, $14.9 million in maturities of debt securities, $8.7 million in sales of FHLB stock, and $18.6 million in net income.

During the nine months ended September 30, 2021, primary uses of cash and cash equivalents included: $3.21 billion in funding loans held for sale, $55.3 million for purchases of mortgage related securities, $33.1 million for short-term borrowings, $26.3 million for cash dividends paid, $4.7 million for purchases of our common stock, and $4.3 million to pay a legal settlement.

During the nine months ended September 30, 2021, primary sources of cash and cash equivalents included: $3.44 billion in proceeds from the sale of loans held for sale, $148.8 million for net loan receivables decrease, $61.7 million from an increase in deposits, $30.8 million in principal repayments on mortgage related securities, $6.4 million in maturities of debt securities, and $58.2 million in net income.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At September 30, 2022 and 2021, respectively, $72.9 million and $358.6 million of our assets were invested in cash and cash equivalents. At September 30, 2022, cash and cash equivalents were comprised of the following: $37.2 million in cash held at the Federal Reserve Bank and other depository institutions and $35.7 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 September 30, 2022, we had $250.0 million in long term advances from the FHLB with contractual maturity dates in 2025, 2027, 2028, and 2029. 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. There is one advance that has a contractual maturity in September 2028. There are two advances with contractual maturities in 2029. The 2028 and 2029 advance maturities have quarterly call options currently available.

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At September 30, 2022, we had outstanding commitments to originate loans receivable of $57.8 million. In addition, at September 30, 2022, we had unfunded commitments under construction loans of $36.2 million, unfunded commitments under business lines of credit of $17.3 million and unfunded commitments under home equity lines of credit and standby letters of credit of $12.6 million. At September 30, 2022, certificates of deposit scheduled to mature in one year or less totaled $498.3 million. Based on prior experience, management believes that, subject to the Bank’s funding needs, a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as FHLB advances, in order to maintain our level of assets. However, we cannot assure that such borrowings would be available on attractive terms, or at all, if and when needed. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents and securities available-for-sale in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

Waterstone Financial, Inc. is a separate legal entity from WaterStone Bank and must provide for its own liquidity to pay dividends to its shareholders, repurchase shares of its common stock, and for other corporate purposes. The primary source of liquidity for Waterstone Financial, Inc. is dividend payments from WaterStone Bank. The ability of WaterStone Bank to pay dividends is subject to regulatory restrictions. At September 30, 2022, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totaling $52.1 million.

Capital

Shareholders' equity decreased $56.6 million to $376.2 million at September 30, 2022. Shareholders' equity decreased primarily due to the declaration of dividends, a decrease in the fair value of the security portfolio, the repurchase of stock and the adoption of CECL. 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 stock repurchase program in the fourth quarter of 2021. As of September 30, 2022, the Company has 925,000 shares remaining in the plan.

WaterStone Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. At September 30, 2022, WaterStone Bank exceeded all regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. See “Notes to Unaudited Consolidated Financial Statements - Note 7 - Regulatory Capital.”

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

During the three months ended September 30, 2022, we repaid $75.0 million in FHLB long-term debt and borrowed $50.0 million of FHLB long-term debt and $50.0 million of short-term debt. During the nine months ended September 30, 2022, we repaid $270.0 million in FHLB long-term debt.

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, 2021.

See Note 9 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information.

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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 September 30, 2022 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 September 30, 2022
Dollar Change	$	(4,249	)		(2,750	)		(1,379	)		305
Percentage Change		(7.29	)%		(4.72	)		(2.37	)		0.52

At September 30, 2022, 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%.

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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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is set forth in Part I, Item 1, Note 9 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities.

Item 1A. Risk Factors

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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 2022:

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)
July 1, 2022 - July 31, 2022	118,600	$17.16	118,600	1,231,913
August 1, 2022 - August 31, 2022	33,450	17.42	33,450	1,198,463
September 1, 2022 - September 30, 2022	273,245	16.96	273,245	925,218
Total	425,295	$17.05	425,295	925,218

(a)	On December 10, 2021, the Board of Directors announced the termination of the then-existing stock repurchase plan and authorized the repurchase of 3,500,000 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.

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Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit No.		Description	Filed Herewith
	31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
	31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
	32.1	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
	32.2	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
	101	The following financial statements from Waterstone Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, 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

Signatures

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

	WATERSTONE FINANCIAL, INC. (Registrant)
Date: November 2, 2022
	/s/ Douglas S. Gordon
	Douglas S. Gordon
	Chief Executive Officer Principal Executive Officer
Date: November 2, 2022
	/s/ Mark R. Gerke
	Mark R. Gerke
	Chief Financial Officer Principal Financial Officer