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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-02 · 490 added, 266 removed, 239 unchanged (76% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company's financial condition and results of operations.

The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company's financial

condition and results of operations.

It is intended to complement the consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Annual Report on Form 10-K and should be read in conjunction therewith.

The detailed discussion in the sections below focuses on the results of operations for the year ended December 31, 2020, compared to the year ended December 2019, and the financial condition as of December 31, 2020 compared to the financial condition as of December 31, 2019.

The detailed discussion in the sections below focuses on the results of operations for the year ended December 31, 2021, compared to the

year ended December 2020, and the financial condition as of December 31, 2021 compared to the financial condition as of December 31, 2020.

As described in the notes to consolidated financial statements, we have two reportable segments:

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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 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.

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 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 year ended December 31, 2020, compared the year ended December 31, 2019, which focuses on noninterest income and noninterest expenses.

We have also provided a discussion of the consolidated operations of Waterstone Financial, which includes the consolidated operations of WaterStone Bank and Waterstone Mortgage Corporation, for the same periods.

For a discussion of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, see “Part II, Item 7:

We have provided below a discussion of the material results of

operations for each segment on a separate basis for the year ended December 31, 2021, compared the year ended December 31, 2020, which focuses on noninterest income and noninterest expenses.

We have also provided a discussion of the consolidated operations of Waterstone

Financial, which includes the consolidated operations of WaterStone Bank and Waterstone Mortgage Corporation, for the same periods.

For a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, see

“Part II, Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations” Discussion of Results of Operations included in our 2020 Form 10-K, filed with the SEC on March 2, 2021.

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Earnings comparisons among the three years ended December 31, 2021 and 2020 were impacted by the Significant Items summarized below.

were no Significant Items during the year ended December 31, 2019.

COVID-19 and the CARES 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.

While some industries have been impacted more

severely than others, all businesses have been impacted to some degree.

This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout.

Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package.

The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.

The package also includes extensive emergency funding for hospitals and providers.

In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.

While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

The CARES Act allows 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 recently-enacted CARES Act and guidance from the Securities and Exchange Commission (“SEC”) and Financial Accounting Standards Board (“FASB”), we elected to delay adoption of CECL.

Most notably, the

Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package.

The goal of the CARES Act has been to prevent a severe economic downturn through various measures,

including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.

The package also included extensive emergency funding for hospitals and providers.

While it is not possible to know the full

universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

The CARES Act allows 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 recently-enacted 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 December 31, 2020 financial statements 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 December 31, 2019 and COVID-19 impacted loans which involved principal deferrals or principal and interest deferrals are considered current.

Among other provisions,

this Act extended the temporary delay on the adoption of CECL until January 1, 2022.

The December 31, 2021 and 2020 financial statements 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 December 31, 2019 and COVID-19 impacted loans which involved principal deferrals or

principal and interest deferrals are considered current.

A financial institution suspended the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”).

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 of December 31, 2020, the Company had modified three loans totaling $1.2 million consisting of principal deferrals or principal and interest deferrals.

In accordance with the CARES Act issued in April 2020 and the Consolidated Appropriations Act, 2021 signed in December 2020, these short-term deferrals are not considered troubled debt restructurings.

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program call the Paycheck Protection Program (“PPP”).

As of December 31,

2021 and 2020, the Company had modified three loans totaling $405,000 and $1.2 million, respectively, consisting of principal deferrals or principal and interest deferrals.

In accordance with the CARES Act issued in April 2020 and the

Consolidated Appropriations Act, 2021 signed in December 2020, these short-term deferrals are not considered troubled debt restructurings.

The CARES Act authorized the Small Business Administration (“SBA”) to 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 will 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);

The Company participated in assisting our customers with applications for resources through the program.

PPP loans have:

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.

During the year ended December 31, 2020, the Company originated a total of $30.1 million in PPP loans for customers and recognized $480,000 in fees received from the SBA.

As of December 31, 2020, we have PPP loans outstanding totaling $18.1 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 expected COVID-19 related economic crisis.

At this time, we are unable to project the materiality of such an impact, but recognize 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 the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

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.

During the year ended December 31, 2021, the Company recognized $1.2 million in fees received from the SBA.

During the year ended

December 31, 2020, the Company originated a total of $30.1 million in PPP loans for customers and recognized $480,000 in fees received from the SBA.

As of December 31, 2021 and 2020, we have PPP loans outstanding totaling $1.8 million and

$18.1 million, respectively.

Capital and liquidity

As of December 31, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements.

As of December 31, 2021, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory

requirements.

While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

We maintain access to multiple sources of liquidity.

Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile.

Wholesale funding markets have remained open to us, but rates for short term

funding have recently been volatile.

If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.

If an extended recession causes large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

There were no Significant Items during the year ended December 31, 2019 or 2018.

If an extended recession causes large numbers of our deposit customers to withdraw their

funds, we might become more reliant on volatile or more expensive sources of funding.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets.

Allowance for Loan Losses.

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a

material impact on our income or the carrying value of our assets.

Allowance for Loan

WaterStone Bank establishes valuation allowances on loans deemed to be impaired.

A loan is considered impaired when, based on current information and events, it is probable that WaterStone Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement.

A valuation allowance is established for an amount equal to the impairment when the carrying amount of the loan exceeds the present value of the expected future cash flows, discounted at the loan’s original effective interest rate or the fair value of the underlying collateral (specific component).

WaterStone Bank recognizes the change in present value of expected future cash flows on impaired loans attributable to the passage of time as bad debt expense.

A loan is considered impaired when, based on current information and events, it is probable that WaterStone Bank will not be able to collect all amounts

due according to the contractual terms of the loan agreement.

A valuation allowance is established for an amount equal to the impairment when the carrying amount of the loan exceeds the present value of the expected future cash flows, discounted at

the loan’s original effective interest rate or the fair value of the underlying collateral (specific component).

WaterStone Bank recognizes the change in present value of expected future cash flows on impaired loans attributable to the passage of

time as bad debt expense.

On an ongoing basis, at least quarterly for financial reporting purposes, the fair value of collateral dependent impaired loans and real estate owned is determined or reaffirmed by the following procedures:

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Comparing the estimated current book value to that of updated values seen on more current appraisals of similar properties;

Comparing the estimated current book value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by the Company).

WaterStone Bank also establishes valuation allowances based on an evaluation of the various risk components that are inherent in the credit portfolio (general component).

Comparing the estimated current book value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned

by the Company).

WaterStone Bank also establishes valuation allowances based on an evaluation of the various risk components that are inherent in the

credit portfolio (general component).

The risk components that are evaluated include past loan loss experience;

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and other relevant factors.

The allowance is increased by provisions charged to earnings and recoveries of previously charged-off loans and reduced by charge-offs.

The allowance is increased by provisions charged to earnings and recoveries of

previously charged-off loans and reduced by charge-offs.

Charge-offs approximate the amount by which the outstanding principal balance exceeds the estimated net realizable value of the underlying collateral.

The appropriateness of the allowance for loan losses is reviewed and approved quarterly by the WaterStone Bank Board of Directors.

The allowance reflects management’s best estimate of the amount needed to provide for the probable loss on impaired loans and other inherent losses in the loan portfolio, and is based on a risk model developed and implemented by management and approved by the WaterStone Bank Board of Directors.

Actual results could differ from this estimate, and future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.

More specifically, if our future charge-off experience increases substantially from our past experience, or if the value of underlying loan collateral, in our case mostly real estate, declines in value by a substantial amount, or if unemployment in our primary market area increases significantly, our allowance for loan losses may be inadequate and we will incur higher provisions for loan losses and lower net income in the future.

The appropriateness of the allowance for

loan losses is reviewed and approved quarterly by the WaterStone Bank Board of Directors.

The allowance reflects management’s best estimate of the amount needed to provide for the probable loss on impaired loans and other inherent losses in the loan

portfolio, and is based on a risk model developed and implemented by management and approved by the WaterStone Bank Board of Directors.

Actual results could differ from this estimate, and future additions to the allowance may be necessary based on unforeseen changes in

loan quality and economic conditions.

substantial amount, or if unemployment in our primary market area increases significantly, our allowance for loan losses may be inadequate and we will incur higher provisions for loan losses and lower net income in the future.

In addition, state and federal regulators periodically review the WaterStone Bank allowance for loan losses.

Such regulators have the authority to require WaterStone Bank to recognize additions to the allowance at the time of their examination.

Such regulators have the

authority to require WaterStone Bank to recognize additions to the allowance at the time of their examination.

Income Taxes.

The Company and its subsidiaries file consolidated federal, combined state income tax, and separate state income tax returns.

The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as for net operating loss carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported

on the income tax return.

bases as well as for net operating loss carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or

The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized.

The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.

Examples of positive evidence may include the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods.

Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that

a deferred tax asset will not be realized.

future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.

Examples of positive evidence may include the existence of taxes paid in available carry-back years as well as the probability

that taxable income will be generated in future periods.

Examples of negative evidence may include cumulative losses in a current year and prior two years and general business and economic trends.

Positions taken in the Company’s tax returns are subject to challenge by the taxing authorities upon examination.

The benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the tax authorities.

Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statements of operations.

Fair Value Measurements.

The benefit of

uncertain tax positions are initially recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the tax authorities.

Such tax positions are both initially and subsequently

measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

Interest and penalties on income tax

uncertainties are classified within income tax expense in the consolidated statements of operations.

Measurements.

The Company determines the fair value of its assets and liabilities in accordance with ASC 820.

ASC 820 establishes a standard framework for measuring and disclosing fair value under generally accepted accounting principles.

A number of valuation techniques are used to determine the fair value of assets and liabilities in the Company’s financial statements.

The valuation techniques include quoted market prices for investment securities, appraisals of real estate from independent licensed appraisers and other valuation techniques.

Fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors.

Therefore, the valuation results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment are recognized in the consolidated statements of operations under the framework established by generally accepted accounting principles.

number of valuation techniques are used to determine the fair value of assets and liabilities in the Company’s financial statements.

The valuation techniques include quoted market prices for investment securities, appraisals of real estate from

independent licensed appraisers and other valuation techniques.

Fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily upon estimates, and are often calculated based on the economic

and competitive environment, the characteristics of the asset or liability and other factors.

Therefore, the valuation results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or

future values.

accepted accounting principles.

Recent Accounting Pronouncements.

Refer to Note 1 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.

In June 2016, the FASB issued ASU 2016-13, Financial

Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments amended the incurred loss impairment methodology in current 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.

Based on our current analysis, we estimate that the impact of the

standard on the allowance for credit losses ("ACL") as of December 31, 2021, would have been within a range of no change to a 10% increase and is in the process of

finalizing the review of the most recent model run and the related underlying assumptions .

Within the ACL calculation, we generally expect the ACL to be lower for commercial loans as they are shorter duration loans compared to the longer

duration residential and real estate loans.

We expect the standard may potentially have a material impact on the financial statements and we expect more volatility in the

credit loss estimate over economic cycles.

The ACL related to AFS securities is immaterial as the portfolio consists entirely of municipal securities with low expected losses.

This estimate is subject to change based on continuing review

of the models, assumptions, methodologies and judgments.

Going forward, the quarterly evaluation of the allowance for loan losses will likely introduce additional volatility

to earnings from changes in economic conditions and forecasts, as well as changes in the underlying loan portfolio.

Refer to Note 1 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption

and effects on results of operations and financial condition.

Selected Financial Data

The summary financial information presented below is derived in part from the Company’s audited financial statements, although the table itself is not

At or for the Year Ended December 31,

(In Thousands, except per share amounts)

Selected Financial Condition Data:

Cash and cash equivalents

Securities available for sale

Loans held for sale

Loans receivable

Allowance for loan losses

Loans receivable, net

Real estate owned, net

Total shareholders' equity

Selected Operating Data:

Interest income

Interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Noninterest income

Noninterest expense

Income before income taxes

Provision for income taxes

Per common share:

Income per share - basic

Income per share - diluted

Dividends declared

At or for the Year Ended December 31,

Selected Financial Ratios and Other Data:

Performance Ratios:

Return on average assets

Return on average equity

Interest rate spread (1)

Net interest margin (2)

Noninterest expense to average assets

Efficiency ratio (3)

Average interest-earning assets to average interest-bearing liabilities

Dividend payout ratio (4)

Capital Ratios:

Waterstone Financial, Inc.:

Equity to total assets at end of period

Average equity to average assets

Total capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Common equity tier 1 capital to risk-weighted assets

Tier 1 capital to average assets

WaterStone Bank:

Total capital to risk-weighted assets

Tier I capital to risk-weighted assets

Common equity tier 1 capital to risk-weighted assets

Tier I capital to average assets

Asset Quality Ratios:

Allowance for loan losses as a percent of total loans

Allowance for loan losses as a percent of non-performing loans

Net (recoveries) charge-offs to average outstanding loans during the period

Non-accrual or performing loans as a percent of total loans

Non-performing assets as a percent of total assets

Number of full-service banking offices

Number of full-time equivalent employees

(1) Represents the difference between the weighted average yield on average interest-earning assets and the

weighted average cost of interest-bearing liabilities.

(2) Represents net interest income as a percent of average interest-earning assets.

(3) Represents noninterest expense divided by the sum of net interest income and noninterest income.

(4) Represents dividends paid per share divided by basic earnings per share.

Comparison of Consolidated Waterstone Financial, Inc.

Financial Condition at December 31, 2021 and at December 31, 2020

Total Assets.

Total assets increased by $31.3 million, or 1.4%, to $2.22 billion at December 31, 2021 from $2.18 billion at December

The increase in total assets primarily reflects an increase in loans held for sale, cash and cash equivalents, and prepaid expenses and other assets due to an increase in the fair market value of the loan rate lock commitments partially offset by a decrease in securities available for sale and loans receivable.

The total assets increase reflects liability increases in deposits, additional short-term debt, and other liabilities due to hedging liabilities.

Cash and Cash Equivalents.

The increase in total assets primarily reflects an increase in cash and cash equivalents and securities available for sale,

partially offset by a decrease in loans receivable and loans held for sale.

The total assets increase reflects liability increases in deposits and retained earnings, due to net income.

and Cash Equivalents.

Cash and cash equivalents increased $282.0 million to $376.7 million at December 31, 2021 from $94.8 million at December 31, 2020.

The increase in cash and cash equivalents primarily reflects the additional source of funds through an increase in deposits and short-term borrowings along with available for sale securities payments and loans held for investment payoffs.

Offsetting the increases, cash and cash equivalents decreased primarily due to the use of cash to fund loans held for sale, pay dividends, and repurchase shares since December 31, 2019.

Securities Available for Sale .

Securities available for sale decreased by $18.9 million to $159.6 million at December 31, 2020 from $178.5 million at December 31, 2019.

The decrease was due to paydowns in mortgage related securities and maturities of debt securities exceeding security purchases during the year.

The increase in cash and cash equivalents primarily reflects the additional source of funds through an increase in deposits, as well as paydowns of loans receivable and loans held for sale.

Offsetting the increases, cash and cash equivalents decreased primarily due to the use of cash to pay dividends and repurchase shares since December 31, 2020.

Securities Available

Securities available for sale increased by $19.4 million to $179.0 million at December 31, 2021 from $159.6 million at December 31, 2020.

The increase was primarily due to purchases of mortgage-related securities exceeding security paydowns for the year and maturities of debt securities.

Loans Held for Sale .

Loans held for sale increased $181.9 million, or 82.6%, to $402.0 million at December 31, 2020 from $220.1 million at December 31, 2019.

The increase was due primarily to the production increase of refinance products, which was driven by the reduction in mortgage rates compared to the end of last year.

Loans held for sale decreased $89.3 million, or 22.2%, to $312.7 million at December 31, 2021 from $402.0 million at December 31, 2020 due to the

decrease of refinancing activity resulting from the increase in mortgage rates.

Loans Receivable .

Loans receivable held for investment decreased $169.4 million, or 12.3%, to $1.21 billion at December 31, 2021 from $1.38 billion at December, 31, 2020.

The decrease in total loans receivable was primarily attributable to decreases in the one- to four-family, multi-family, home equity, and consumer categories.

Offsetting those decreases, the construction and land, commercial real estate, and commercial loan categories increased.

The growth in the commercial loan category was driven by $18.1 million of PPP loans originated and still outstanding during the year ended December 31, 2020.

Allowance for Loan Losses.

The allowance for loan losses increased $6.4 million to $18.8 million at December 31, 2020 from $12.4 million at December 31, 2019.

The increase resulted from a provision due to increased economic uncertainty increasing the required allowance related to the loans collectively reviewed.

The overall increase was primarily related to each of the one- to four-family, multi-family, construction and land, commercial real estate, consumer, and commercial categories.

The decrease in total loans receivable was

attributable to decreases in each of the one- to four-family, multi-family, home equity, commercial, and consumer loan categories.

Allowance for Loan

The allowance for loan losses decreased $3.0 million to $15.8 million at December 31, 2021 from $18.8 million at

December 31, 2020.

The overall decrease was primarily related to each of the one- to four-family, multi-family, home equity,

construction and land, commercial real estate, consumer, and commercial categories.

See Note 3 for further discussion on the allowance for loan losses.

Federal Home Loan Bank Stock.

Total Federal Home Loan Bank stock increased $5.6 million to $26.7 million at December 31, 2020 from $21.1 million at December 31, 2019.

The increase reflects the ownership requirements in conjunction with the additional FHLB borrowings.

Cash Surrender Value of Life Insurance.

Total cash surrender value of life insurance decreased $6.1 million, to $63.6 million at December 31, 2020 from $69.7 million.

The decrease is primarily related to the death benefit received on two policies during 2020 offset by continued earnings and annual premiums paid.

Real Estate Owned.

Total real estate owned decreased $174,000 to $148,000 at December 31, 2021, compared to $322,000 at December 31, 2020.

During the year ended December 31, 2020, $637,000 was transferred from loans to real estate owned upon completion of foreclosure.

During the same period, sales of real estate owned totaled $1.1 million.

There were no write-downs during the year ended December 31, 2020.

Prepaid Expenses and Other Assets.

Total prepaid expenses and other assets increased $26.3 million to $57.5 million at December 31, 2020 from $31.2 million at December 31, 2019.

The increase was primarily due to increases in loan rate lock commitments, funding receivables from investors, and receivables from back-to-back interest rate swaps.

During the year ended December 31, 2021,

no loans were transferred from loans receivable to real estate owned upon completion of foreclosure.

During the same period, sales of real estate owned totaled $172,000.

There was $2,000 in other activity applied to the balance and no writedowns during the year ended December 31, 2021.

Prepaid Expenses and

Other Assets.

Total prepaid expenses and other assets decreased $12.4 million to $45.1 million at December 31, 2021 from $57.5 million at December 31, 2020.

The decrease was primarily due to the sale of mortgage servicing rights along with

decreases in derivative assets and unrealized gain on loan swaps offset by an increase in funding receivable on loans sold.

Deposits increased by $48.5 million to $1.23 billion at December 31, 2021, from $1.18 billion at December 31, 2020.

The increase was driven by an increase of $97.4 million in money market and savings deposits and $58.2 million in demand deposits offset by a decrease of $38.4 million in time deposits.

Total borrowings increased $24.5 million to $508.1 million at December 31, 2020, from $483.6 million at December 31, 2019.

The community banking segment added $29.0 million in short-term FHLB borrowings.

External short-term borrowings at the mortgage banking segment decreased a total of $4.5 million to $9.0 million at December 31, 2020 from $13.6 million at December 31, 2019.

The increase was driven by an increase of $97.0 million in money market and savings deposits and $26.2 million in demand deposits offset by a

decrease of $74.7 million in time deposits.

Total borrowings decreased $30.9 million to $477.1 million at December 31, 2021, from $508.1 million at December 31, 2020.

The community banking segment paid off $24.0 million in short-term FHLB borrowings.

External short-term borrowings at the mortgage banking

segment decreased a total of $6.9 million to $2.1 million at December 31, 2021 from $9.0 million at December 31, 2020.

Other Liabilities.

Other liabilities increased $27.9 million to $75.0 million at December 31, 2020 compared to $47.1 million at December 31, 2019.

Other liabilities increased primarily due to liabilities resulting from payables due on back-to-back swaps, legal settlement, accrued compensation, dividends payable, and forward commitments to sell loans at the mortgage banking segment.

Shareholders’ Equity.

Shareholders’ equity increased by $19.4 million, or 4.9%, to $413.1 million at December 31, 2020 from $393.7 million at December 31, 2019.

Shareholders' equity increased primarily due to net income, additional paid-in capital as stock options were exercised and equity awards vested, an increase in fair value of the security portfolio, and unearned ESOP shares vesting.

Other liabilities decreased $6.5 million to $68.5 million at December 31, 2021 compared to $75.0 million at December 31, 2020.

Other liabilities decreased primarily due to liabilities resulting from payables due on back-to-back swaps, payment of a

legal settlement, accrued compensation, tax escrow checks clearing, and forward commitments to sell loans at the mortgage banking segment offset by an increase in dividends payable as a special dividend was declared in December 2021.

Shareholders’

Shareholders’ equity increased by $19.7 million, or 4.8%, to $432.8 million at December 31, 2021 from $413.1 million

at December 31, 2020.

Shareholders' equity increased primarily due to net income, and additional paid-in capital as stock options were

exercised and equity awards vested.

Partially offsetting the increases, there were decreases due to the declaration of regular and special dividends and the repurchase of stock.

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Net income from our community banking segment for the year ended December 31, 2021 totaled $28.3 million compared to $21.2 million for the year ended December 31, 2020.

Net interest income increased $597,000 to $54.6 million for the year ended December 31, 2020 compared to $54.0 million for the year ended December 31, 2019.

Net interest income increased $1.4 million to $56.1 million for the year ended December 31, 2021 compared to $54.6 million for the year ended December 31, 2020.

Net interest income increased primarily due to a decrease in interest expense as interest on time deposits decreased as replacement rates were lower.

Partially offsetting the decrease in interest expense, interest income decreased primarily due to decreases in loan interest, mortgage-related securities, and debt securities, federal funds sold and short-term investments interest.

The Company delayed adoption of ASC Topic 326 as permitted under the CARES Act.

The Company calculated the allowance using the incurred loss model.

Provision for loan losses was $6.1 million for the year ended December 31, 2020 compared to a negative provision of $1.1 million for the year ended December 31, 2019 as economic conditions significantly worsened during the year ended December 31, 2020.

Noninterest income increased $3.7 million for the year ended December 31, 2020 due primarily to increases in loan fees and a gain from death benefits on bank owned life insurance.

The loan fees increased primarily due to loan prepayment fees and fees earned on loan swaps.

Cash surrender value of life insurance decreased as the balance decreased due to death benefit proceeds received on two bank owned life insurance policies.

Other income increased primarily due to gain on death benefits, wealth management fees, and rental income.

Compensation, payroll taxes, and other employee benefits expense increased $2.0 million to $20.2 million due primarily to an increase in salaries expense, health insurance expense, and variable compensation.

Occupancy, office furniture and equipment decreased due primarily to computer supplies and snow plowing expense.

Data processing and advertising expense increased primarily due to the rollout of a new digital banking platform and promotions for deposit customers during the year ended December 31, 2020.

Communications expense, real estate owned, and other expenses increased while professional fees expense decreased.

offsetting the decrease in interest expense, interest income decreased primarily due to decreases in loan interest and mortgage-related securities interest as replacement rates were lower.

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act, as amended.

The Company calculated

the current year allowance using the incurred loss model.

There was a negative provision for loan losses of $4.1 million for the year ended December 31, 2021 compared to a $6.1 million provision for loan losses for the year ended December 31, 2020.

During the year ended December 31, 2021, we made adjustments to our qualitative factors, primarily to account for the improvement in certain economic factors along with a decrease in loan balance.

Additionally, we recorded net recoveries of $945,000

during the year ended December 31, 2021.

Noninterest income decreased $2.7 million for the year ended December 31, 2021 due primarily to a decrease in loan fees due to fees earned on loan swap originations in 2020.

Noninterest income also decreased as we recognized

gains from death benefit received on two bank owned life insurance policies during the year ended December 31, 2020.

Compensation, payroll taxes, and other employee benefits expense increased $61,000 to $20.3 million primarily due to an increase in employee stock ownership plan expenses offset by a decrease in salaries.

Data processing expense decreased $245,000 due to the implementation of

a new digital banking platform in 2020.

Other noninterest expense decreased $533,000 as certain loan-related expenses decreased offset by a decrease of credits received for FDIC premiums in 2020 but not in 2021.

Comparison of Mortgage Banking Segment Operations for the Years Ended December 31, 2021 and 2020

Net income totaled $42.5 million for the year ended December 31, 2021 compared to $59.9 million for the year ended December 31, 2020.

We originated $4.43 billion in mortgage loans held for sale (including sales to the community banking segment) during the year ended December 31, 2020, which represents an increase of $1.51 billion, or 51.6%, from the $2.92 billion originated during the year ended December 31, 2019.

The increase in loan production volume was driven by a $1.18 billion, or 216.2%, increase in refinance products driven by a decrease in fixed mortgage rates.

We originated $4.23 billion in mortgage loans held for sale (including sales to the community banking

segment) during the year ended December 31, 2021, which represents a decrease of $201.7 million, or 4.6%, from the $4.43 billion

originated during the year ended December 31, 2020.

The decrease in loan production volume was driven by a $433.6 million, or 25.2%,

decrease in refinance products driven by an increase in fixed mortgage rates.

Mortgage purchase products increased $231.9 million, or 8.6% due to an increased housing demand.

Total mortgage banking noninterest income increased $109.7 million, or 86.5%, to $236.7 million during the year ended December 31, 2020 compared to $126.9 million during the year ended December 31, 2019.

The increase in mortgage banking noninterest income was related to a 51.6% increase in volume and an 20.2% increase in gross margin on loans originated and sold for the year ended December 31, 2020 compared to December 31, 2019.

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 increase in gross margin on loans originated and sold reflects industry demand due to the low rate environment resulting in higher volume.

Total mortgage banking noninterest income decreased $39.1 million, or 16.5%, to $197.6 million during the year ended December 31, 2021 compared to $236.7 million during the year ended December 31, 2020.

The decrease in mortgage banking

noninterest income was related to an 11.6% decrease in gross margin on loans originated and by a 4.6% decrease in loan production volume for the year ended December 31, 2021 compared to the 2020 period.

Gross margin on loans originated is the

ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations.

The decrease in gross margin on loans originated and sold reflects pricing competition in the industry to gain market

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).

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.

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Our origination efforts continue to be focused on loans made for the purpose of residential purchases, as opposed to mortgage refinance.

The percentage of origination volume related to purchase activity decreased to 61.1% from 81.4% of total originations for the year ended December 31, 2020 and 2019, respectively, as refinance demand accelerated from the low rate environment.

The percentage of origination volume related to purchase activity increased to

69.5% from 61.1% of total originations for the year ended December 31, 2021 and 2020, respectively, as refinance demand decelerated due to an increase in interest rates

over the past year .

The mix of loan type trended towards more conventional loans and less governmental loans;

with conventional loans and governmental loans comprising 75.8% and 24.2%, respectively of all loan originations, respectively, during the year ended December 31, 2020, compared to 69.5% and 30.5% of all originations, respectively, during the year ended December 31, 2019.

During the year ended December 31, 2020, mortgage servicing rights related to $975.9 million in loans receivable with a book value of $6.4 million were sold at a gain of $600,000.

There were no sales of mortgage servicing rights during the year ended December 31, 2019.

Total compensation, payroll taxes and other employee benefits increased $35.2 million, or 41.8%, to $119.4 million for the year ended December 31, 2020 compared to $84.2 million for the year ended December 31, 2019.

The increase in compensation expense was primarily a result of the increase in commission expense as fundings increased, along with an increase in bonus and incentives due to a record level of originations.

In addition, branch manager pay increased as branches were more profitable due to increased volume and margin during the year.

Occupancy, office furniture, and equipment expense decreased due to lower rent expense as underperforming branches closed offset by an increase in computer expenses to accommodate remote work.

Advertising expense decreased as the low rate environment attracted customers.

Loan processing expenses increased as loan costs increased due to loan application volume.

Professional fees increased primarily due to a $4.25 million legal settlement in 2020 (see further discussion in Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information) along with ongoing litigation costs.

Other noninterest expense increased primarily due to increased provision for loan sale losses driven by an increase in sales volumes and increased uncertainty regarding selling loans to third party investors from COVID-19 pandemic challenges and the amortization of mortgage servicing rights as the value of the servicing portfolio has increased in 2020 compared to 2019.

with conventional loans and governmental loans comprising 76.6% and 23.4%, respectively of all loan originations, respectively,

during the year ended December 31, 2021, compared to 75.8% and 24.2% of all originations, respectively, during the year ended December

During the year ended December 31, 2021, the Company sold mortgage servicing rights related to $1.24 billion in loans serviced for third

The sale generated $12.4 million in net proceeds and a $4.0 million gain.

During the year ended December 31, 2020, mortgage servicing rights related to $975.9 million in loans receivable with a book value of $6.4 million were sold at a gain

Total compensation, payroll taxes and other employee

benefits decreased $4.2 million, or 3.5%, to $115.3 million for the year ended December 31, 2021 compared to $119.4 million for the year ended December 31, 2020 .

The decrease primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as

gross margins decreased .

Professional fees decreased primarily due to a $4.25 million legal settlement in 2020 (see further discussion in Note 14 - Commitments, Off-Balance

Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information) along with ongoing litigation costs related to the 2020 settlement.

Additionally, the Company received a legal settlement

in 2021 offsetting legal expenses.

Other noninterest expense decreased primarily due to decreased provision for loan sale losses as there was additional uncertainity in the prior year regarding selling loans to third party investors from COVID-19

pandemic challenges.

Offsetting the decreases, the amortization of mortgage servicing rights increased as the value of the servicing portfolio has increased in 2021 compared to 2020.

Waterstone Mortgage Corporation originates loans in various states.

The states where we originate greater than 10% of total activity are Florida and New Mexico.

The states where we originate

greater than 10% of total activity are Florida and New Mexico.

Comparison of Consolidated Waterstone Financial, Inc.

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Average Balance Sheets, Interest and Yields/Costs

The following table set forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated.

The following table set forth average balance sheets, annualized average yields and costs, and certain other information for the periods

Non-accrual loans were 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.

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.

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Average interest-earning assets to average interest-bearing liabilities

(1) Includes net deferred loan fee amortization income of $1.7 million, $672,000 and $622,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

(1) Includes net deferred loan fee amortization income of $2.1 million, $1.7 million and $672,000 for the years ended December 31, 2021, 2020, and 2019, respectively.

(2) Includes available for sale securities.

(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended December 31, 2020, 2019, and 2018.

(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended December

31, 2021, 2020, and 2019.

The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 0.97%,1.79%, and 2.49% for the years ended

December 31, 2021, 2020, and 2019, 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.

(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.

(6) Net interest margin represents net interest income

divided by average total interest-earning assets.

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 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.

The net column represents the sum of the prior

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.

There were no out-of-period items or adjustments for either of the years ending December 31, 2020 or 2019.

There were no out-of-period

items or adjustments for either of the years ending December 31, 2021 or 2020.

Years Ended December 31,

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Net change in net interest income

Includes net deferred loan fee amortization income of $1.7 million, $672,000 and $622,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

Includes net deferred loan fee amortization income of $2.1 million, $1.7 million and $672,000 for the years ended December 31, 2021, 2020, and 2019, respectively.

Non-accrual loans have been included in average loans receivable balance.

Includes available for sale securities.

(4) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended December 31, 2020, 2019, and 2018.

(4) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 21% for the years ended

December 31, 2021, 2020, and 2019.

Net Interest Income

Net interest income increased $1.3 million, or 2.5%, to $53.5 million during the year ended December 31, 2020 compared to $52.2 million during the year ended December 31, 2019.

Interest income on loans increased $398,000 due primarily to an increase of $170.1 million, or 11.0%, in average loans offset by a 44 basis point decrease in average yield on loans as LIBOR based loans repriced and U.S.

Treasury rates decreased new loan offering rates.

The increase in average loan balance was driven by a $33.0 million, or 2.4%, increase in the average balance of loans held in portfolio and by an increase of $137.1 million, or 81.9%, in the average balance of loans held for sale.

PPP loan fees increased interest income $480,000 for the year ended December 31, 2020.

Interest income from mortgage-related securities decreased $490,000 primarily because the average balance of mortgage related securities decreased $12.3 million.

Additionally, the average yield decreased 17 basis points.

Interest income from other interest-earning assets (comprised of debt securities, federal funds sold and short-term investments) decreased $1.2 million due to a 70 basis point decrease in the average yield.

The decrease in average yield was primarily driven by the decrease in federal funds rate earned on cash balances over the past year and matured higher yielding securities reinvested at lower rates.

Offsetting the decrease in yield, the average balance increased $6.0 million to $187.9 million due to increased FHLB stock with additional FHLB borrowings and higher short-term investments.

Offsetting those balance increases, the balance of municipal securities decreased as maturities occurred throughout the past 12 months and were not replaced at the same rate due to market conditions.

Net interest income increased $2.0 million, or 3.8%, to $55.5 million during the year ended December

31, 2021 compared to $53.5 million during the year ended December 31, 2020.

Interest income on loans decreased $8.3 million due primarily to a 21 basis point decrease in average yield

on loans as LIBOR and U.S.

Treasury rates continued to decrease and a $116.2 million, or 6.8%, decrease in average loans as payoffs continue to outpace originations.

The decrease in average loan balance was driven by a decrease of $129.2

million, or 9.2%, in the average balance of loans held in portfolio offset by a $13.0 million, or 4.3%, increase in the average balance of loans held for sale.

The yield on average loans decreased 21 basis points to 4.02% from 4.23%.

Interest income from mortgage related securities decreased $534,000 primarily as the yield decreased 56 basis points.

Partially offsetting the

decrease from yield, the average balance increased $2.0 million.

Interest income from other interest-earning assets (comprised of debt securities, federal funds sold and

short-term investments) increased $200,000 due to a $179.0 million increase in average balance of other interest-earning assets.

The increase in average cash balances resulted fron the growth in average deposits along with paydowns

decreasing average loans.

Offsetting the increase in average balance, the yield decreased 82 basis points as higher rate securities matured and were placed in cash .

Interest expense on time deposits decreased $9.1 million, or 72.4%, primarily due to a 120 basis point decrease in average cost of time deposits.

Additionally, the average balance of time deposits decreased $57.5 million compared to the prior year period.

Interest expense on money market, savings, and escrow accounts increased $521,000, or 41.8%, due primarily to an increase in average balance of $66.7 million along with a four basis point increase in average cost of money market, savings, and escrow accounts.

Money market accounts have been a focus over the year and the Company has actively marketed new customers through various new offerings and new branches that opened within the past 12 months.

Interest expense on borrowings increased $353,000, or 1.9%, due to an increase of $60.9 million to $545.7 million in average borrowing volume during the year ended December 31, 2020.

The increase was primarily due to the funding of the loans held for sale.

Offsetting the increase in volume, the average cost of borrowings decreased 17 basis points to 1.95% during the year ended December 31, 2020, compared to 2.12% during the year ended December 31, 2019.

The decrease in the cost of borrowings resulted from the new short-term fundings borrowed at a lower rate.

Interest expense on money market, savings, and escrow accounts decreased $864,000, or 48.9%, due primarily

to a 42 basis point decrease in average cost of money market, savings, and escrow accounts offset by an increase in average balance of $99.2 million.

Money market accounts have been a focus over the year and the Company has aggressively

marketed new customers through various new offerings and new branches that opened within the past 12 months.

Interest expense on borrowings decreased $671,000, or 6.3%, due to a decrease of $66.5 million to $479.3

million in average borrowing volume during the year ended December 31, 2021.

The decrease was primarily due to additional short-term funding needed in 2020.

Offsetting the decrease in volume, the average cost of borrowings increased 13

basis points to 2.08% during the year ended December 31, 2021, compared to 1.95% during the year ended December 31, 2020 as the lower rate short-term FHLB borrowings utilized during 2020 were not necessary during 2021 due to our excess

liquidity position .

Provision for Loan Losses

The Company delayed adoption of ASC Topic 326 as permitted under the CARES Act.

As a result, the Company calculated the current year allowance using the incurred loss model.

The provision for loan losses was $6.3 million for the year ended December 31, 2020 compared to a negative provision for loan losses of $900,000 for the year ended December 31, 2019 as economic conditions worsened due to the COVID-19 pandemic along with an increase of loan downgrades to our Watch category.

Additional qualitative risk factors were applied to each of the loan categories primarily to account for the significant increase in the unemployment rate and those downgrades.

We had a provision for loan losses of $6.1 million at the community banking segment and $265,000 for the mortgage banking segment.

Net recoveries were $96,000 for the year ended December 31, 2020.

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 loan 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 Loan Loss" section.

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act and subsequently under the Consolidated Appropriations

The Company calculated the current year allowance using the incurred loss model.

The negative provision for loan losses was $4.0 million for the year ended December 31, 2021 compared to a provision for loan losses of $6.3 million for the year

ended December 31, 2020.

During the year ended December 31, 2021, we made adjustments to our qualitative factors, primarily to account for the improvement in certain economic factors along with a decrease in loan balance.

We had a negative provision

for loan losses of $4.1 million at the community banking segment and $110,000 in provision for loan losses for the mortgage banking segment.

Net recoveries were $945,000 for the year ended December 31, 2021 as loans with prior charge-offs paid in

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 loan 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 Loan Loss" section.

Noninterest Income

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Total noninterest income

Total noninterest income increased $113.3 million, or 86.6%, to $244.0 million during the year ended December 31, 2020 compared to $130.8 million during the year ended December 31, 2019.

The increase resulted primarily from an increase in mortgage banking income along with increases in service charges on loans and deposit and other income categories.

The $107.6 million increase in mortgage banking income was primarily the result of an increase in loan origination volume.

Total loan origination volume on a consolidated basis increased $1.48 billion, or 51.8%, to $4.33 billion during the year ended December 31, 2020 compared to $2.85 billion during the year ended December 31, 2019.

Gross margin on loans originated and sold increased 20.2% at the mortgage banking segment.

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.

See "Comparison of Mortgage Banking Segment Results of Operations for the Year December 31, 2020 and 2019" above, for additional discussion of the increase in mortgage banking income.

The increase in service charges on loans and deposits was due to an increase of loan prepayment fees on existing loans and fees earned on loan swaps.

The decrease in cash surrender value of life insurance was due primarily to a lower average balance as death benefits were received on two policies during the year.

The increase in other noninterest income was due primarily to increases in gain from death benefit on bank owned life insurance, mortgage servicing fee income, gain on sale of mortgage servicing rights, wealth management revenue, and rental income.

Mortgage servicing fee income increased as loans sold with servicing rights retained increased due to market conditions.

During the year ended December 31, 2020, the Company sold mortgage servicing rights related to $975.9 million in loans receivable and with a book value of $6.4 million for $7.0 million resulting in a gain on sale of $600,000.

During the year ended December 31, 2019, the Company sold no mortgage servicing rights.

Total noninterest income decreased $40.8 million, or 16.7%, to $203.2 million during the year ended

December 31, 2021 compared to $244.0 million during the year ended December 31, 2020.

The decrease resulted primarily from a decrease in mortgage banking income along with decreases in service charges on loans and deposits and increase in cash

surrender value of life insurance.

The decrease in mortgage

banking income was primarily the result of a decrease in gross margin on loans originated and sold as well as a decrease in loan origination volume.

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 $133.9 million, or 3.1%, to $4.20 billion during the year ended December

31, 2021 compared to $4.33 billion during the year ended December 31, 2020.

Gross margin on loans originated and sold decreased 11.6% at the mortgage banking segment.

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.

See "Comparison of Mortgage Banking Segment Results of Operations for the Year December 31, 2021 and 2020" above, for additional

discussion of the increase in mortgage banking income.

Service charges on loans and deposits decreased primarily due to fees earned on loan swap originations in

2020 compared to none in 2021.

The decrease in cash surrender value of life insurance was due primarily to a lower average balance as death

benefits were received on two policies during the year ended December 31, 2020.

The increase in other noninterest income was due primarily to

increases in gain on sale of mortgage servicing rights.

During the year ended December 31, 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.

During the year ended December 31, 2020, mortgage servicing rights related to $975.9 million in loans receivable with a book value of $6.4 million were sold at a gain of $600,000.

Offsetting the

increases, other income decreased primarily from a decrease in gains from death benefits received on two bank owned life insurance policies that occured during the year ended December 31, 2020.

Noninterest Expenses

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Total noninterest expenses

Total noninterest expenses increased $46.8 million, or 34.3%, to $183.1 million during the year ended December 31, 2020 compared to $136.3 million during the year ended December 31, 2019.

Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment increased $35.2 million, or 41.8%, to $119.4 million for the year ended December 31, 2020.

The increase in compensation expense was primarily a result of an increase in commission expense as fundings increased and branch manager pay increased as branches were more profitable.

Compensation, payroll taxes and other employee benefits expense at the community banking segment increased $2.0 million, or 11.2%, to $20.2 million during the year ended December 31, 2020.

The increase was due primarily to an increase in salaries expense due to annual raises, health insurance expense as claims increased, and variable compensation as executives are eligible for an increased bonus.

Offsetting the increases, equity award expense decreased as a majority of awards granted in 2015 had a final vesting in 2019.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $319,000 to $6.5 million during the year ended December 31, 2020 compared to the prior year resulting from lower rent expense as a result of underperforming branches closing.

Offsetting the decreases, computer expenses increased to accommodate remote working.

Occupancy, office furniture and equipment expense at the community banking segment decreased $64,000 to $3.7 million during the year ended December 31, 2020 compared to the prior year.

The decrease was due primarily to lower computer, furniture and equipment, and snow plowing expense.

Advertising expense decreased $315,000 at the mortgage banking segment as lower rates generated customer activity.

Offsetting the decrease at the mortgage banking segment, advertising increased $121,000 at the community banking segment to promote the opening of a new branch, the release of the new digital banking platform, and additional promotions for deposit customers.

Data processing expense increased $311,000 to $3.9 million during the year ended December 31, 2020 compared to the prior year.

This was primarily due to the new digital banking platform rollout at the community banking segment and new contracts at the mortgage banking segment as technology investments continue to increase.

Professional fees expense increased $4.5 million to $8.1 million primarily as a result of an increase in legal fees at the mortgage banking segment for a $4.25 million legal settlement (see further discussion in Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information) and ongoing litigation costs.

Offsetting the increase at the mortgage banking segment, the community banking segment decreased primarily due to a decrease in consulting fees.

Loan processing expense increased $1.4 million to $4.6 million during the year ended December 31, 2020.

This was primarily due to an increase in loan costs associated with the application volumes as mortgage rates declined.

Other noninterest expense at the mortgage banking segment increased $3.6 million to $10.3 million for the year ended December 31, 2020.

The increase was primarily due to an increased provision for loan sale losses as there was additional uncertainty regarding selling loans to third party investors from COVID-19 pandemic challenges.

Additionally, amortization of mortgage servicing rights increased as the value of the servicing portfolio has increased in 2020 compared to 2019.

Other noninterest expenses at the community banking segment increased $302,000 to $2.5 million for the year ended December 31, 2020 due primarily to loan related costs along with an increase in FDIC insurance premiums as credits were used in 2019 but were fully utilized early in 2020.

Income tax expense increased $15.3 million to $27.0 million during the year ended December 31, 2020, compared to $11.7 million during the year ended December 31, 2019 as pretax income increased $60.5 million.

Income tax expense was recognized during the year ended December 31, 2020 at an effective rate of 24.9% compared to an effective rate of 24.5% during the year ended December 31, 2019.

Total noninterest expenses decreased $12.5 million, or 6.8%, to $170.6 million during the year ended

December 31, 2021 compared to $183.1 million during the year ended December 31, 2020.

Compensation, payroll taxes and

other employee benefit expense at our mortgage banking segment decreased $4.2 million, or 3.5%, to $115.3 million for the year ended December 31, 2021.

The decrease 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 increased

$61,000, or 0.3%, to $20.3 million during the year ended December 31, 2021.

The increase was primarily due to an increase in employee stock ownership plan

expenses offset by a decrease in salaries.

Occupancy, office furniture and equipment expense at the mortgage banking segment decreased $704,000 to $5.8

million during the year ended December 31, 2021 compared to the prior year resulting from lower rent and depreciation expense.

Occupancy, office furniture and equipment expense at the community banking segment increased $93,000 to $3.8

million during the year ended December 31, 2021 compared to the prior year.

The increase was due primarily to snow plowing and computer supplies expenses.

Advertising expense decreased $102,000 at the mortgage banking segment and $61,000 at the community banking

segment as both segments were less promotional in 2021.

Professional fees expense decreased $6.8 million to $1.3 million primarily as a result of a decrease in

legal fees at the mortgage banking segment primarily related to receiving a legal settlement in 2021 and lower litigation costs compared to the prior year as the Herrington settlement was resolved in 2020 (see further discussion in Note 14

- Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information) and ongoing litigation costs.

Other noninterest expense decreased $883,000 for the year ended December 31, 2021 due to decreases at the

mortgage banking and community banking segments.

The decrease at the mortgage banking segment was primarily due to decreased provision for loan sale losses as there was additional uncertainity in the prior year regarding selling loans to

third party investors from COVID-19 pandemic challenges.

Offsetting these decreases, amortization expense of mortgage servicing rights increased as the value of the servicing portfolio has increased in 2021 compared to 2020.

noninterest expenses decreased at the community banking segment due primarily to a decrease in certain loan-related expenses offset by a decrease of credits received for FDIC premiums in 2020 but not in 2021.

Income tax expense decreased $5.7 million to $21.3 million during the year ended December 31, 2021, compared to $27.0 million during the year ended December 31, 2020

as pretax income decreased $16.0 million.

Income tax expense was recognized during the year ended December 31, 2021 at an effective

rate of 23.1% compared to an effective rate of 24.9% during the year ended December 31, 2020.

During the year ended December 31, 2021, the Company recorded 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 year ended December 31, 2020.

The Company recognized a benefit of $354,000 related to the proceeds received on the bank owned life insurance death benefit during the year ended December 31, 2020.

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We maintain liquid assets at levels we consider adequate to meet our liquidity needs.

The liquidity ratio is equal to average daily cash and cash equivalents for the period divided by average total assets.

The liquidity ratio is equal to average daily cash

and cash equivalents for the period divided by average total assets.

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.

We also adjust liquidity as

appropriate to meet asset and liability management objectives.

The operational adequacy of our liquidity position at any point in time is dependent upon the judgment of the Chief Financial Officer 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.

Regulatory liquidity, as required by the WDFI, is based on current liquid assets as a percentage of the prior month’s average deposits and short-term borrowings.

Regulatory liquidity, as required by the WDFI, is based on current liquid assets as a percentage of the prior month’s average deposits

and short-term borrowings.

Minimum primary liquidity is equal to 4.0% of deposits and short-term borrowings and minimum total regulatory liquidity is equal to 8.0% of deposits and short-term borrowings.

The Bank’s primary and total regulatory liquidity at December 31, 2020 were 12.2% and 23.1%, respectively.

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.

The Bank’s primary and total regulatory

liquidity at December 31, 2021 were 33.1% and 46.5%, respectively.

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.

In addition, we invest excess funds in short-term,

interest-earning assets, which provide liquidity to meet lending requirements.

Additional sources of liquidity used to manage long- and short-term cash flows include advances from the FHLB.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities.

At December 31, 2020 and 2019, $94.8 million and $74.3 million, respectively, of our assets were invested in cash and cash equivalents.

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, Federal funds purchased and advances from the FHLB.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

During the years ended December 31, 2020, and 2019, we originated $4.33 billion and $2.85 billion in loans for sale and sold loans of $4.40 billion and $2.90 billion.

During the year ended December 31, 2020, loan repayments net of loan originations resulted in a positive cash flows of $12.4 million, respectively.

During the year ended December 31, 2019, loan originations net of loan repayments resulted in a negative cash flows of $9.9 million.

Cash received from the principal repayments of debt and mortgage related securities and maturity and calls of debt securities totaled $50.5 million and $40.0 million for the years ended December 31, 2020 and 2019, respectively.

We purchased $29.5 million and $28.9 million in debt securities and mortgage related securities classified as available for sale during the years ended December 31, 2020 and 2019, respectively.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing

At December 31, 2021 and 2020,

$376.7 million and $94.8 million, respectively, of our assets were invested in cash and cash equivalents.

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, Federal funds purchased and advances from the FHLB.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated

Statements of Cash Flows included in our Consolidated Financial Statements.

During the years ended December 31, 2021,

and 2020, we originated on a consolidated basis $4.20 billion and $4.33 billion in loans for sale and sold loans on a consolidated basis

of $4.48 billion and $4.40 billion.

During the year ended December 31, 2021, loan repayments net of loan originations resulted in a positive cash flows of $170.3 million and $12.4 million, respectively.

Cash received from the principal repayments of

debt and mortgage related securities and maturity and calls of debt securities totaled $49.5 million and $50.5 million for the years ended December 31, 2021

and 2020, respectively.

We purchased $73.7 million and $29.5 million in debt securities and mortgage related securities classified as

available for sale during the years ended December 31, 2021 and 2020, respectively.

The net increases in deposits were $48.5 million and $117.1 million for the years ending December 31, 2021 and 2020.

We received a $9.6 million death benefit on a bank owned life insurance policy in 2020.

There was a net increase in borrowings of $24.5 million and $48.5 million for the years ended December 31, 2020 and 2019.

During the years ended December 31, 2020 and 2019, we repurchased common stock of $36.2 million and $22.8 million, respectively.

During the years ended December 31, 2020 and 2019, we paid cash dividends on common stock of $31.5 million and $26.0 million, respectively.

We received a $9.6 million death

benefit on a bank owned life insurance policy in 2020.

There was a net decrease in borrowings of $30.9 million for the year ended December 31, 2021.

There was a net increase in borrowings of $24.5 million for the year ended December 31, 2020.

During the years ended December 31, 2021

and 2020, we repurchased common stock of $10.2 million and $36.2 million, respectively.

During the years ended December 31, 2021 and 2020, we paid cash dividends

on common stock of $30.4 million and $31.5 million, respectively.

Deposits increased by $48.5 million from December 31, 2020 to December 31, 2021.

The increase was driven by an increase of $97.4 million in money market and savings deposits and $58.2 million in demand deposits offset by a decrease of $38.4 million in time deposits.

Deposit flows are generally affected by the level of interest rates, market conditions and products offered by local competitors and other factors.

The increase was driven by an increase of $97.0 million in money market

and savings deposits and $26.2 million in demand deposits offset by a decrease of $74.7 million in time deposits.

Deposit flows are generally affected by the level of interest rates, market conditions and products offered by local competitors and

other factors.

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.

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 December 31, 2021, we had $5.0 million in short term advances from the FHLB.

At December 31, 2020, we had $470.0 million in long term advances from the FHLB with contractual maturity dates in 2027, 2028, and 2029.

At December 31, 2021, we had $470.0 million in long term

advances from the FHLB with contractual maturity dates in 2027, 2028, and 2029.

The 2027 advance has a contractual maturity date in December 2027.

There are two 2028 advances that have contractual maturities in 2028.

The remaining 2028 advance maturities have single call options in March 2021, and May 2021, along with two advances that have quarterly call options beginning in June 2020 and September 2020.

The 2029 advance maturities have quarterly call options currently available and the other options that began in November 2020, beginning in August 2021, and beginning in May 2022.

There are eight advances that have contractual maturities in 2028.

Two of the 2028 advance maturities

have quarterly call options which began in June 2020 and September 2020.

There are four advances with contractual maturities in 2029.

Three advances have quarterly call options currently available and the other advance has an option beginning in May

As an additional source of funds, the mortgage banking segment has a repurchase agreement.

At December 31, 2020, we had $9.1 million outstanding under the repurchase agreement with a total outstanding commitment of $55.0 million.

At December 31, 2020, we had outstanding commitments to originate loans receivable of $23.9 million.

In addition, at December 31, 2020, we had unfunded commitments under construction loans of $74.2 million, unfunded commitments under business lines of credit of $19.2 million and unfunded commitments under home equity lines of credit and standby letters of credit of $14.9 million.

At December 31, 2020, certificates of deposit scheduled to mature in less than one year totaled $576.9 million.

Based on prior experience, management believes that 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 are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago advances, Federal Reserve Discount Window or brokered deposits to maintain our level of assets.

At December 31, 2021, we had $2.1

million outstanding under the repurchase agreement with a total outstanding commitment of $75.0 million.

At December 31, 2021,

we had outstanding commitments to originate loans receivable of $48.6 million.

In addition, at December 31, 2021, we had unfunded commitments under construction loans of $50.3 million, unfunded commitments under business lines of credit of $17.9

million and unfunded commitments under home equity lines of credit and standby letters of credit of $13.4 million.

At December 31, 2021,

certificates of deposit scheduled to mature in less than one year totaled $533.0 million.

Based on prior experience, management believes that 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 are not retained by us, we will have to utilize other funding sources, such as

Federal Home Loan Bank of Chicago advances, Federal Reserve Discount Window or brokered deposits to maintain our level of assets.

However, such borrowings may not be available on attractive terms, or at all, if and when needed.

Alternatively, we would 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.

Alternatively, we

would 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.

Shareholders’ equity increased by $19.7 million, or 4.8%, to $432.8 million at December 31, 2021 from $413.1 million at December 31, 2020.

Partially offsetting the increases, there were decreases due to the declaration of regular and special dividends and the repurchase of stock.

The Company's Board of Directors authorized a stock repurchase program in the third quarter of 2020.

As of December 31, 2020, the Company had repurchased 10.7 million shares at an average price of $14.39 under previously approved stock repurchase plans.

Shareholders'

equity increased primarily due to net income, and additional paid-in capital as stock options were exercised and equity awards vested.

Partially offsetting the increases, there were decreases due to the declaration of regular and special dividends

and the repurchase of stock.

The Company's Board of Directors authorized a stock repurchase program in the fourth quarter of 2021.

As of December 31, 2021, the

Company had repurchased 11.2 million shares at an average price of $14.66 under previously approved stock repurchase plans.

Waterstone Financial, Inc.

and WaterStone Bank are subject to various regulatory capital requirements, including a risk-based capital measure.

and WaterStone Bank are subject to various regulatory capital requirements, including a risk-based capital

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 December 31, 2021, Waterstone Financial, Inc.

and WaterStone Bank exceeded all regulatory capital requirements and are considered “well capitalized” under regulatory guidelines.

and WaterStone Bank exceeded all regulatory capital requirements and are considered “well capitalized” under regulatory

See “Supervision and Regulation—Capital Requirements” and Note 9 - Regulatory Capital of the notes to the consolidated financial statements.

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

WaterStone Bank has various financial obligations, including contractual obligations and commitments that may require future cash payments.

WaterStone Bank has various financial obligations, including contractual obligations and commitments that may require future cash

The following tables present information indicating various non-deposit contractual obligations and commitments of WaterStone Bank as of December 31, 2021 and the respective maturity dates.

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(2) Secured under a blanket security agreement on qualifying assets, principally, mortgage loans.

Excludes interest that will accrue on the advances.

interest that will accrue on the advances.

See call provisions in Note 8 - Borrowings.

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

See Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information.

See Note 14 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for

additional information.

Impact of Inflation and Changing Prices

The financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation.

The impact of inflation is reflected in the increased cost of our operations.

The financial statements and accompanying notes have been prepared in accordance with GAAP.

GAAP generally requires the measurement of

financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation.

The impact of inflation is reflected in the increased cost of our

Unlike industrial companies, our assets and liabilities are primarily monetary in nature.

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Quarterly Financial Information

The following table sets forth certain unaudited quarterly data for the periods indicated:

The following table sets forth certain quarterly data for the periods indicated:

Quarter Ended

(In thousands, except per share data)

2020 (unaudited)

Interest income

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Income per share - diluted

2019 (unaudited)

Interest income

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis