Waterstone Financial, Inc. Income Taxes Disclosure

12)	Income Taxes

 

The provision for income taxes for the year ended December 31, 2025, 2024 and 2023 consists of the following:

 

		Years ended December 31,
		2025				2024				2023
		(In Thousands)
Current:
Federal		$	5,478			$	3,866			$	2,274
State			851				(49	)			456
			6,329				3,817				2,730
Deferred:
Federal			737				215				(523	)
State			(23	)			765				(550	)
			714				980				(1,073	)
Valuation Allowance:
Available for sale securities, net			-				517				-
Total		$	7,043			$	5,314			$	1,657

 

The income tax provisions differ from that computed at the Federal statutory corporate tax rate for the years ended December 31, 2025, 2024 and 2023 as follows:

 

		Years ended December 31,
		2025								2024								2023
		(Dollars in Thousands)
		Balance				Rate				Balance				Rate				Balance				Rate
Income before income taxes		$	33,445							$	24,002							$	11,032
Tax at Federal statutory rate (21%)			7,023				21.0	%			5,040				21.0	%			2,317				21.0	%
Add (deduct) effect of:
State income taxes net of Federal income tax expense (benefit)(1)			654				2.0				1,083				4.5				(74	)			(0.7	)
Cash surrender value of life insurance			(538	)			(1.6	)			(413	)			(1.7	)			(359	)			(3.3	)
Non-deductible ESOP and stock option expense			85				0.3				65				0.3				73				0.7
Tax-exempt interest income			(281	)			(0.8	)			(245	)			(1.0	)			(205	)			(1.9	)
Non-deductible compensation			-				-				-				-				87				0.8
Death benefit on bank owned life insurance			-				-				(57	)			(0.2	)			(8	)			(0.1	)
Stock compensation			58				0.2				(32	)			(0.1	)			-				-
ESOP dividends			(126	)			(0.4	)			(126	)			(0.5	)			(168	)			(1.5	)
Other			168				0.5				(1	)			(0.0	)			(6	)			(0.1	)
Income tax provision/effective tax rate		$	7,043				21.1			$	5,314				22.1			$	1,657				15.0

⁽¹⁾ In 2025, state and local income taxes in New Mexico, Minnesota, Illinois, and Idaho comprised greater than 50% of the tax effect in this category. In 2024, state and local income taxes in New Mexico and Minnesota comprised greater than 50% of the tax effect in this category. In 2023, state and local income taxes in Wisconsin.

 

The significant components of the Company’s net deferred tax assets (liabilities) included in prepaid expenses and other assets are as follows at December 31, 2025 and 2024:

 

		December 31,
		2025				2024
		(In Thousands)
Gross deferred tax assets:
Depreciation		$	1,165			$	1,080
Restricted stock and stock options			55				137
Allowance for credit losses			4,381				4,480
Allowance for unfunded commitments			185				305
Repurchase reserve for loans sold			269				335
Interest recognized for tax but not books			32				98
State net operating loss			1,672				1,368
Real estate owned			-				11
Lease liability			933				955
Unrealized loss on securities available for sale, net			3,851				5,798
Valuation allowance - available for sale securities			(401	)			(517	)
Valuation allowance - other temporary differences			(2,043	)			(1,867	)
Other			76				384
Total gross deferred tax assets			10,175				12,567
Gross deferred tax liabilities:
Mortgage servicing rights			(271	)			(191	)
Lease Asset			(951	)			(968	)
Deferred loan fees			(556	)			(466	)
Deferred liabilities			(1,778	)			(1,625	)
Net deferred tax assets		$	8,397			$	10,942

 

The Company had a state net operating loss carry forward of $23.9 million at December 31, 2025. The Company has no capital loss carryforwards as of December 31, 2025. For the year ended December 31, 2025, income tax expense was impacted by a change in Wisconsin state income taxes. On March 18, 2024, the State of Wisconsin Department of Revenue issued an emergency ruling with additional details of the law. This publication enabled us to estimate the impact on our Wisconsin state income tax expense.  The impact moving forward should result in no Wisconsin state income taxes being expensed, resulting in a lower estimated effective tax rate.

 

A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized.  The Company had a deferred tax asset of $1.7 million and $1.4 million related to the state operating loss carry forward as of December 31, 2025 and 2024, and there were valuation allowances of $1.5 million and $1.3 million recorded against it. 

 

 

 

The income tax payments for the years ended December 31, 2025, 2024 and 2023 as follows:

 

		Years ended December 31,
		2025				2024				2023
		(Dollars in Thousands)
Income taxes paid:
U.S. federal			4,720				3,270				1,000
U.S. state and local
Wisconsin			20				(735	)			-
All other states			273				(146	)			169
Total income taxes paid			5,013				2,389				1,169

 

Under the Internal Revenue Code and Wisconsin Statutes, the Company was permitted to deduct, for tax years beginning before 1988, an annual addition to a reserve for bad debts. This amount differs from the provision for credit losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Company did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings at December 31, 2025 include approximately $16.7 million for which no deferred Federal or state income taxes were provided.  Deferred income taxes have been provided on certain additions to the tax reserve for bad debts.

 

The Company and its subsidiaries file consolidated federal and combined state tax returns. One subsidiary also files separate state income tax returns in certain states.  The Company is no longer subject to federal tax examinations for the years before 2022. The years open to examination by state and local government authorities varies by jurisdiction.