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, 2020

☐ 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

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

Yes ☐ No ☒

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 25,161,736 at November 3, 2020.

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, 2020 (unaudited) and December 31, 2019	3
Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	6-7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9-40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41-65
Item 3. Quantitative and Qualitative Disclosures about Market Risk	66
Item 4. Controls and Procedures	67

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	67
Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information	67 67 67 67 67
Item 6. Exhibits	68
Signatures	68

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	September 30, 2020			December 31, 2019
Assets	(Dollars In Thousands, except share and per share data)
Cash	$	54,681		$	52,814
Federal funds sold		21,151			12,704
Interest-earning deposits in other financial institutions and other short term investments		10,730			8,782
Cash and cash equivalents		86,562			74,300
Securities available for sale (at fair value)		153,201			178,476
Loans held for sale (at fair value)		385,803			220,123
Loans receivable		1,434,132			1,388,031
Less: Allowance for loan losses		18,844			12,387
Loans receivable, net		1,415,288			1,375,644

Office properties and equipment, net		23,961			25,028
Federal Home Loan Bank stock (at cost)		26,720			21,150
Cash surrender value of life insurance		63,255			69,665
Real estate owned, net		772			748
Prepaid expenses and other assets		65,260			31,213
Total assets	$	2,220,822		$	1,996,347

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	169,218		$	130,063
Money market and savings deposits		271,283			197,942
Time deposits		744,150			739,771
Total deposits		1,184,651			1,067,776

Borrowings		552,126			483,562
Advance payments by borrowers for taxes		25,987			4,212
Other liabilities		58,629			47,111
Total liabilities		1,821,393			1,602,661

Shareholders’ equity:
Preferred stock (par value $0.01 per share)
Authorized - 50,000,000 shares at September 30, 2020 and at December 31, 2019, no shares issued		-			-
Common stock (par value $0.01 per share)
Authorized - 100,000,000 shares at September 30, 2020 and at December 31, 2019
Issued - 25,220,036 at September 30, 2020 and 27,148,411 at December 31, 2019
Outstanding - 25,220,036 at September 30, 2020 and 27,148,411 at December 31, 2019		252			271
Additional paid-in capital		182,960			211,997
Retained earnings		229,289			197,393
Unearned ESOP shares		(15,727	)		(16,617	)
Accumulated other comprehensive income, net of taxes		2,655			642
Total shareholders’ equity		399,429			393,686
Total liabilities and shareholders’ equity	$	2,220,822		$	1,996,347

See accompanying notes to unaudited consolidated financial statements.

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2020		2019			2020		2019
	(In Thousands, except per share amounts)

Interest income:
Loans	$	18,224	$	18,558		$	54,404	$	53,688
Mortgage-related securities		588		737			1,960		2,260
Debt securities, federal funds sold and short-term investments		732		1,083			2,493		3,515
Total interest income		19,544		20,378			58,857		59,463
Interest expense:
Deposits		3,495		4,479			11,760		12,813
Borrowings		2,640		2,745			7,913		7,579
Total interest expense		6,135		7,224			19,673		20,392
Net interest income		13,409		13,154			39,184		39,071
Provision (credit) for loan losses		1,025		(80	)		6,310		(730	)
Net interest income after provision for loan losses		12,384		13,234			32,874		39,801
Noninterest income:
Service charges on loans and deposits		672		503			3,384		1,272
Increase in cash surrender value of life insurance		714		728			1,587		1,579
Mortgage banking income		72,112		36,062			166,292		93,526
Other		2,265		201			2,868		564
Total noninterest income		75,763		37,494			174,131		96,941
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		39,405		27,514			100,695		75,227
Occupancy, office furniture, and equipment		2,469		2,629			7,744		8,085
Advertising		861		913			2,625		2,834
Data processing		922		1,003			3,023		2,641
Communications		339		358			994		1,039
Professional fees		4,738		954			7,647		2,438
Real estate owned		11		24			55		75
Loan processing expense		1,336		858			3,620		2,542
Other		2,920		1,979			9,495		6,055
Total noninterest expenses		53,001		36,232			135,898		100,936
Income before income taxes		35,146		14,496			71,107		35,806
Income tax expense		8,853		3,572			17,797		8,697
Net income	$	26,293	$	10,924		$	53,310	$	27,109
Income per share:
Basic	$	1.08	$	0.42		$	2.16	$	1.04
Diluted	$	1.08	$	0.42		$	2.15	$	1.03
Weighted average shares outstanding:
Basic		24,297		25,772			24,720		26,168
Diluted		24,380		25,962			24,842		26,372

See accompanying notes to unaudited consolidated financial statements.

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020		2019
	(In Thousands)
Net income	$	26,293		$	10,924		$	53,310	$	27,109

Other comprehensive (loss) income, net of tax:
Net unrealized holding (loss) gain on available for sale securities:
Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $41, $2, $(754), $(1,125), respectively		(104	)		(6	)		2,013		3,010
Total other comprehensive (loss) income		(104	)		(6	)		2,013		3,010
Comprehensive income	$	26,189		$	10,918		$	55,323	$	30,119

See accompanying notes to unaudited consolidated financial statements.

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock						Additional Paid-In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
	Shares			Amount
For the nine months ended Septeber 30, 2020	(In Thousands, except per share amounts)
Balances at January 1, 2020		27,148		$	271		$	211,997		$	197,393		$	(16,617	)	$	642		$	393,686

Comprehensive income:
Net income		-			-			-			53,310			-			-			53,310
Other comprehensive income		-			-			-			-			-			2,013			2,013
Total comprehensive income																				55,323

ESOP shares committed to be released to Plan participants		-			-			327			-			890			-			1,217
Cash dividend declared, $0.86 per share		-			-			-			(21,414	)		-			-			(21,414	)
Stock compensation activity, net of tax		222			3			2,783			-			-			-			2,786
Stock compensation expense		-			-			553			-			-			-			553
Purchase of common stock returned to authorized but unissued		(2,150	)		(22	)		(32,700	)		-			-			-			(32,722	)
Balances at September 30, 2020		25,220		$	252		$	182,960		$	229,289		$	(15,727	)	$	2,655		$	399,429

For the nine months ended September 30, 2019	(In Thousands, except per share amounts)
Balances at January 1, 2019		28,463		$	285		$	232,406		$	187,153		$	(17,804	)	$	(2,361	)	$	399,679

Comprehensive income:
Net income		-			-			-			27,109			-			-			27,109
Other comprehensive income		-			-			-			-			-			3,010			3,010
Total comprehensive income																				30,119

ESOP shares committed to be released to Plan participants		-			-			429			-			890			-			1,319
Cash dividend declared, $0.86 per share		-			-			-			(22,582	)		-			-			(22,582	)
Stock based compensation activity		47			-			603			-			-			-			603
Stock compensation expense		-			-			832			-			-			-			832
Purchase of common stock returned to authorized but unissued		(1,363	)		(14	)		(22,713	)		-			-			-			(22,727	)
Balances at September 30, 2019		27,147		$	271		$	211,557		$	191,680		$	(16,914	)	$	649		$	387,243

	Common Stock						Additional Paid-In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
	Shares			Amount
For the three months ended Septeber 30, 2020	(In Thousands, except per share amounts)
Balances at July 1, 2020		25,843		$	258		$	192,762		$	205,863		$	(16,023	)	$	2,759		$	385,619

Comprehensive income:
Net income		-			-			-			26,293			-			-			26,293
Other comprehensive loss		-			-			-			-			-			(104	)		(104	)
Total comprehensive income																				26,189

ESOP shares committed to be released to Plan participants		-			-			99			-			296			-			395
Cash dividend declared, $0.12 per share		-			-			-			(2,867	)		-			-			(2,867	)
Stock compensation activity, net of tax		177			2			2,253			-			-			-			2,255
Stock compensation expense		-			-			164			-			-			-			164
Purchase of common stock returned to authorized but unissued		(800	)		(8	)		(12,318	)		-			-			-			(12,326	)
Balances at September 30, 2020		25,220		$	252		$	182,960		$	229,289		$	(15,727	)	$	2,655		$	399,429

For the three months ended September 30, 2019	(In Thousands, except per share amounts)
Balances at July 1, 2019		27,626		$	276		$	219,262		$	183,820		$	(17,210	)	$	655		$	386,803

Comprehensive income:
Net income		-			-			-			10,924			-			-			10,924
Other comprehensive loss		-			-			-			-			-			(6	)		(6	)
Total comprehensive income																				10,918

ESOP shares committed to be released to Plan participants		-			-			148			-			296			-			444
Cash dividend declared, $0.12 per share		-			-			-			(3,064	)		-			-			(3,064	)
Stock based compensation activity		16			-			209			-			-			-			209
Stock compensation expense		-			-			234			-			-			-			234
Purchase of common stock returned to authorized but unissued		(495	)		(5	)		(8,296	)		-			-			-			(8,301	)
Balances at September 30, 2019		27,147		$	271		$	211,557		$	191,680		$	(16,914	)	$	649		$	387,243

See accompanying notes to unaudited consolidated financial statements.

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2020			2019
	(In Thousands)

Operating activities:
Net income	$	53,310		$	27,109
Adjustments to reconcile net income to used in operating activities:
Provision (credit) for loan losses		6,310			(730	)
Provision for depreciation		1,901			1,829
Deferred taxes		(2,445	)		1,303
Stock based compensation		553			832
Net amortization of premium/discount on debt and mortgage related securities		102			164
Amortization of unearned ESOP shares		1,217			1,319
Amortization and impairment of mortgage servicing rights		774			167
Gain on sale of loans held for sale		(171,374	)		(96,024	)
Loans originated for sale		(3,063,835	)		(2,092,948	)
Proceeds on sales of loans originated for sale		3,069,529			2,092,816
Gain on death benefit on bank owned life insurance		(1,456	)		-
Decrease (increase) in accrued interest receivable		181			(248	)
Increase in cash surrender value of life insurance		(1,587	)		(1,579	)
(Decrease) increase in accrued interest on deposits and borrowings		(245	)		92
Decrease in prepaid tax expense		2,794			1,812
Net gain related to real estate owned		(5	)		(20	)
Change in other assets and other liabilities		(12,074	)		(4,185	)
Net cash used in operating activities		(116,350	)		(68,291	)

Investing activities:
Net increase in loans receivable		(46,322	)		(7,102	)
Purchases of:
FHLB stock		(5,570	)		(2,700	)
Mortgage related securities		(4,455	)		(12,121	)
Debt securities		(5,000	)		-
Bank owned life insurance		(180	)		(180	)
Premises and equipment, net		(917	)		(2,247	)
Proceeds from:
Principal repayments on mortgage-related securities		33,635			21,920
Maturities of debt securities		3,760			1,835
Sales of real estate owned		353