WATERSTONE FINANCIAL, INC. Forward-Looking Information
This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions and verbs in the future tense. These forward-looking statements include, but are not limited to:
? Statements of our goals, intentions and expectations;
? Statements regarding our business plans, prospects, growth and
operating strategies;
? Statements regarding the quality of our loan and investment portfolio;
and
? Estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
? general economic conditions, either nationally or in our market area,
including employment prospects, that are different than expected;
? the effect of any pandemic; including COVID-19;
? competition among depository and other financial institutions;
? inflation and changes in the interest rate environment that reduce our
margins and yields, our mortgage banking revenues, the fair value of
financial instruments or the origination levels in our lending
business, or increase the level of defaults, losses or prepayments on
loans we have made and make whether held in portfolio or sold in the
secondary markets;
? adverse changes in the securities or secondary mortgage markets;
? changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
? changes in monetary or fiscal policies of the U.S. Government ,
including policies of the U.S. Treasury and the Federal Reserve Board ;
? our ability to manage market risk, credit risk and operational risk in
the current economic conditions;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
? our ability to successfully integrate acquired entities;
? decreased demand for our products and services;
? changes in tax policies or assessment policies;
? the inability of third-party providers to perform their obligations to
us;
? changes in consumer demand, spending, borrowing and savings habits;
? changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Financial Accounting Standards Board ,
the Securities and Exchange Commission or the Public Company
Accounting Oversight Board ;
? our ability to retain key employees;
? cyber attacks, computer viruses and other technological risks that may
breach the security of our websites or other systems to obtain
unauthorized access to confidential information and destroy data or
disable our systems;
? technological changes that may be more difficult or expensive than
expected;
? the ability of third-party providers to perform their obligations to
us;
? the effects of any federal government shutdown;
? the ability of the U.S. Government to manage federal debt limits;
? significant increases in our loan losses; and
? changes in the financial condition, results of operations or future
prospects of issuers of securities that we own.
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See also the factors referred to in reports filed by the Company with the
The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect our business and financial performance. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Overview
The following discussion and analysis is presented to assist the reader in
understanding and evaluating the Company's financial condition and results of
operations. It is intended to complement the unaudited consolidated financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Quarterly Report on Form 10-Q and should be read in conjunction therewith.
The detailed discussion in the sections below focuses on the results of
operations for the three and six months ended
Our community banking segment generates the significant majority of our
consolidated net interest income and requires the significant majority of our
provision for loan losses. Our mortgage banking segment generates the
significant majority of our noninterest income and a majority of our noninterest
expenses. We have provided below a discussion of the material results of
operations for each segment on a separate basis for the three and six months
ended
Earnings comparisons for the three and six months ended
COVID-19, the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act
The COVID-19 pandemic has caused economic and social disruption on an
unprecedented scale. While some industries have been impacted more severely than
others, all businesses have been impacted to some degree. This disruption
resulted in the shuttering of businesses across the country, significant job
loss, and aggressive measures by the federal government.
In
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• The CARES Act allowed for a temporary delay in the adoption of accounting
guidance under Accounting Standards Codification Topic 326, "Financial
Instruments - Credit Losses ("CECL") until the earlier of December 31, 2020 or
after the end of the COVID-19 national emergency. During the quarter ended
March 31, 2020 , pursuant to the CARES Act and guidance from the Securities and
Exchange Commission ("SEC") and Financial Accounting Standards Board ("FASB"),
we elected to delay adoption of CECL. On December 27, 2020 , the Consolidated
Appropriations Act, 2021 was signed into law. Among other provisions, this Act
extended the temporary delay on the adoption of CECL until January 1, 2022 . The
financial statements included in this Quarterly Report on Form 10-Q include an
allowance for loan losses that was prepared under the existing incurred loss
methodology.
• Under the CARES Act, loans less than 30 days past due as of
and COVID-19 modifications are considered current. A financial institution suspended the requirements under accounting principles generally accepted inthe United States (US GAAP) for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring ("TDR"). This includes a suspension of the requirement to determine impairment of these modifications for accounting purposes. In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company has executed a payment deferral program for our lending clients that are adversely affected by the pandemic. As ofJune 30, 2021 , the Company had three modified loans totaling$559,000 consisting of principal deferrals or principal and interest deferrals. These short-term deferrals are not considered troubled debt restructurings.
• The CARES Act authorized the
temporarily guarantee loans under a new loan program call the Paycheck
Protection Program ("PPP"). As a qualified SBA lender, we were automatically
authorized to originate PPP loans. The Company is actively participating in
assisting our customers with applications for resources through the program.
PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to
maturity for loans made on or after June 5, 2020 (loans made prior to June 5,
2020 have a two-year term, however borrowers and lenders may mutually agree to
extend the maturity for such loans to five years); and (c) principal and
interest payments deferred for six months from the date of disbursement. The
SBA will guarantee 100% of the PPP loans made to eligible borrowers. The
entire principal amount of the borrower's PPP loan, including any accrued
interest, is eligible to be reduced by the loan forgiveness amount under the
PPP. As of June 30, 2021 , we have funded 449 loans totaling $44.6 million .
During the six months ended June 30, 2021 , the Company originated a total of
$14.5 million in PPP loans for customers and recognized $640,000 in fees
received from the SBA. As of June 30, 2021 , we have PPP loans outstanding
totaling $16.9 million .
Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the COVID-19 emergency. At this time, we are unable to project the materiality of such an impact, but recognize that the breadth of the economic impact is likely to impact our fee income in future periods. Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize that the breadth of the economic impact may affect our borrowers' ability to repay in future periods.
Capital and liquidity
As of
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Comparison of Community Banking Segment Results of Operations for the Three
Months Ended
Net income totaled
The Company delayed adoption of ASC Topic 326 as permited under the CARES Act,
as amended. The Company calculated the current quarter allowance using the
incurred loss model. There was a negative provision for loan losses of
Total noninterest income decreased
Compensation, payroll taxes, and other employee benefits expense decreased
Comparison of Mortgage Banking Segment Results of Operations for the Three
Months Ended
Net income totaled
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
Total compensation, payroll taxes and other employee benefits decreased
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