Waterstone Financial, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview 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, 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. - 40 - As described in the notes to consolidated financial statements, we have two reportable segments: community banking and mortgage banking. The community banking segment provides consumer and business banking products and services to customers. 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. 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, 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. Significant Items Earnings comparisons among the three years ended December 31, 2021 and 2020 were impacted by the Significant Items summarized below. There 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. 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 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, 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, 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 participated in assisting our customers with applications for resources through the program. PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity for loans made on or after June 5, 2020 (loans made prior to June 5, 2020 have a two-year term, however borrowers and lenders may mutually agree to extend the maturity for such loans to five years); and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP. 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. - 41 - Capital and liquidity 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. 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. 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. 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. 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: ● Obtaining updated real estate appraisals or performing updated discounted cash flow analysis; ● Confirming that the physical condition of the real estate has not significantly changed since the last valuation date; ● Comparing the estimated current book value to that of updated sales values experienced on similar real estate owned; ● Comparing the estimated current book value to that of updated values seen on more current appraisals of similar properties; and ● 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; the level of non-performing and classified assets; current economic conditions; volume, growth, and composition of the loan portfolio; adverse situations that may affect the borrower’s ability to repay; the estimated value of any underlying collateral; regulatory guidance; 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. 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. - 42 - 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. 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 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. 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 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. Recent Accounting Pronouncements. 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. - 43 - 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 audited. At or for the Year Ended December 31, 2021 2020 2019 2018 2017 (In Thousands, except per share amounts) Selected Financial Condition Data: Total assets $ $2,215,858 $ $2,184,587 $ $1,996,347 $ $1,915,381 $ $1,806,401 Cash and cash equivalents 376,722 94,767 74,300 86,101 48,607 Securities available for sale 179,016 159,619 178,476 185,720 199,707 Loans held for sale 312,738 402,003 220,123 141,616 149,896 Loans receivable 1,205,785 1,375,137 1,388,031 1,379,148 1,291,814 Allowance for loan losses 15,778 18,823 12,387 13,249 14,077 Loans receivable, net 1,190,007 1,356,314 1,375,644 1,365,899 1,277,737 Real estate owned, net 148 322 748 2,152 4,558 Deposits 1,233,386 1,184,870 1,067,776 1,038,495 967,380 Borrowings 477,127 508,074 483,562 435,046 386,285 Total shareholders' equity 432,773 413,118 393,686 399,679 412,104 Selected Operating Data: Interest income $ $69,883 $ $78,484 $ $79,741 $ $73,700 $ $67,095 Interest expense 14,368 24,984 27,544 19,523 16,362 Net interest income 55,515 53,500 52,197 54,177 50,733 Provision for loan losses (3,990 ) 6,340 (900 ) (1,060 ) (1,166 ) Net interest income after provision for loan losses 59,505 47,160 53,097 55,237 51,899 Noninterest income 203,195 244,017 130,750 118,199 124,413 Noninterest expense 170,594 183,061 136,273 133,156 131,879 Income before income taxes 92,106 108,116 47,574 40,280 44,433 Provision for income taxes 21,315 26,971 11,671 9,526 18,469 Net income $ $70,791 $ $81,145 $ $35,903 $ $30,754 $ $25,964 Per common share: Income per share - basic $ $2.98 $ $3.32 $ $1.38 $ $1.12 $ $0.95 Income per share - diluted $ $2.96 $ $3.30 $ $1.37 $ $1.11 $ $0.93 Book value $ $17.45 $ $16.47 $ $14.50 $ $14.04 $ $13.97 Dividends declared $ $1.80 $ $1.36 $ $0.98 $ $0.98 $ $0.98 - 44 - At or for the Year Ended December 31, 2021 2020 2019 2018 2017 Selected Financial Ratios and Other Data: Performance Ratios: Return on average assets 3.20 % 3.77 % 1.82 % 1.64 % 1.43 % Return on average equity 16.38 20.18 9.14 7.60 6.32 Interest rate spread (1) 2.47 2.34 2.44 2.75 2.69 Net interest margin (2) 2.68 2.67 2.83 3.09 3.00 Noninterest expense to average assets 7.71 8.50 6.91 7.12 7.29 Efficiency ratio (3) 65.94 61.53 74.49 77.25 75.30 Average interest-earning assets to average interest-bearing liabilities 130.76 126.07 126.40 130.14 131.86 Dividend payout ratio (4) 43.62 38.55 71.01 87.50 103.16 Capital Ratios: Waterstone Financial, Inc.: Equity to total assets at end of period 19.53 % 18.91 % 19.72 % 20.87 % 22.81 % Average equity to average assets 19.53 18.68 19.91 21.63 22.70 Total capital to risk-weighted assets 29.01 24.80 26.17 28.22 30.75 Tier 1 capital to risk-weighted assets 27.99 23.71 25.37 27.32 29.74 Common equity tier 1 capital to risk-weighted assets 27.99 23.71 25.37 27.32 29.74 Tier 1 capital to average assets 19.29 18.38 19.69 21.06 22.43 WaterStone Bank: Total capital to risk-weighted assets 25.52 22.52 22.85 26.95 28.93 Tier I capital to risk-weighted assets 24.50 21.44 22.05 26.05 27.92 Common equity tier 1 capital to risk-weighted assets 24.50 21.44 22.05 26.05 27.92 Tier I capital to average assets 16.88 16.61 17.11 20.08 21.10 Asset Quality Ratios: Allowance for loan losses as a percent of total loans 1.31 % 1.37 % 0.89 % 0.96 % 1.09 % Allowance for loan losses as a percent of non-performing loans 283.06 338.54 176.33 202.12 231.99 Net (recoveries) charge-offs to average outstanding loans during the period (0.07 ) (0.01 ) 0.00 (0.02 ) 0.06 Non-accrual or performing loans as a percent of total loans 0.46 0.40 0.51 0.48 0.47 Non-performing assets as a percent of total assets 0.26 0.27 0.39 0.45 0.59 Other Data: Number of full-service banking offices 14 14 13 11 11 Number of full-time equivalent employees 870 812 824 888 927 (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 31, 2020. 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. Cash 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, 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 for Sale . 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 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. - 45 - 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 attributable to decreases in each of the one- to four-family, multi-family, home equity, commercial, and consumer loan categories. Allowance for Loan Losses. 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. 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, 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. 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 $97.0 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. Borrowings. 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 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’ Equity. 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. Comparison of Community Banking Segment Operations for the Years Ended December 31, 2021 and 2020 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 $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 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. - 46 - 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 $4.23 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 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 share. We sell loans on both a servicing-released and a servicing-retained basis. Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing. Additionally, our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance). Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan. 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 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 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 31, 2020. 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. 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. Comparison of Consolidated Waterstone Financial, Inc. Results of Operations for the Years Ended December 31, 2021 and 2020 Years Ended December 31, 2021 2020 (Dollars in Thousands, except per share amounts) Net income $ 70,791 $ 81,145 Earnings per share - basic 2.98 3.32 Earnings per share - diluted 2.96 3.30 Return on average assets 3.20 % 3.77 % Return on average equity 16.38 % 20.18 % - 47 - 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. 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. Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable. Years Ended December 31, 2021 2020 2019 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable and held for sale (1) $ $1,600,115 64,366 4.02 % $ $1,716,341 72,633 4.23 % $ $1,546,249 72,235 4.67 % Mortgage related securities (2) 103,324 1,954 1.89 % 101,345 2,488 2.45 % 113,659 2,978 2.62 % Debt securities, federal funds sold and short-term investments (2)(3) 366,949 3,827 1.04 % 187,910 3,644 1.94 % 181,897 4,826 2.65 % Total interest-earning assets 2,070,388 70,147 3.39 % 2,005,596 78,765 3.93 % 1,841,805 80,039 4.35 % Noninterest-earning assets 142,040 147,697 131,168 Total assets $ $2,212,428 $ $2,153,293 $ $1,972,973 Interest-bearing liabilities: Demand accounts $ $64,653 50 0.08 % $ $47,410 38 0.08 % $ $36,926 33 0.09 % Money market, savings, and escrow accounts 363,930 904 0.25 % 264,722 1,768 0.67 % 198,027 1,247 0.63 % Time deposits 675,495 3,466 0.51 % 733,033 12,559 1.71 % 737,397 15,998 2.17 % Total interest-bearing deposits 1,104,078 4,420 0.40 % 1,045,165 14,365 1.37 % 972,350 17,278 1.78 % Borrowings 479,262 9,948 2.08 % 545,741 10,619 1.95 % 484,801 10,266 2.12 % Total interest-bearing liabilities 1,583,340 14,368 0.91 % 1,590,906 24,984 1.57 % 1,457,151 27,544 1.89 % Noninterest-bearing liabilities Non-interest bearing deposits 146,767 116,771 90,497 Other non-interest bearing liabilities 50,140 43,460 32,594 Total non-interest bearing liabilities 196,907 160,231 123,091 Total liabilities 1,780,247 1,751,137 1,580,242 Equity 432,181 402,156 392,731 Total liabilities and equity $ $2,212,428 $ $2,153,293 $ $1,972,973 Net interest income / Net interest rate spread (4) 55,779 2.48 % 53,781 2.36 % 52,495 2.46 % Less: taxable equivalent adjustment 264 0.01 % 281 0.02 % 298 0.02 % Net interest income / Net interest rate spread, as reported 55,515 2.47 % 53,500 2.34 % 52,197 2.44 % Net interest-earning assets (5) $ $487,048 $ $414,690 $ $384,654 Net interest margin (6) 2.68 % 2.67 % 2.83 % Tax equivalent effect 0.01 % 0.01 % 0.02 % Net interest margin on a fully tax equivalent basis 2.69 % 2.68 % 2.85 % Average interest-earning assets to average interest-bearing liabilities 130.76 % 126.07 % 126.40 % (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, 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. (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. - 48 - Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments for either of the years ending December 31, 2021 or 2020. Years Ended December 31, Years Ended December 31, 2021 versus 2020 2020 versus 2019 Increase (Decrease) due to Increase (Decrease) due to Volume Rate Net Volume Rate Net (In Thousands) Interest and dividend income: Loans receivable and held for sale (1) (2) $ ($(3,968) ) $ ($(4,299) ) $ ($(8,267) ) $ $7,543 $ ($(7,145) ) $ $398 Mortgage related securities (3) 47 (581 ) (534 ) (258 ) (232 ) (490 ) Other interest-earning assets (3) (4) 2,398 (2,215 ) 183 154 (1,336 ) (1,182 ) Total interest-earning assets (1,523 ) (7,095 ) (8,618 ) 7,439 (8,713 ) (1,274 ) Interest expense: Demand accounts 12 - 12 9 (4 ) 5 Money market, savings, and escrow accounts 1,285 (2,149 ) (864 ) 439 82 521 Time deposits (915 ) (8,178 ) (9,093 ) (94 ) (3,345 ) (3,439 ) Total interest-bearing deposits 382 (10,327 ) (9,945 ) 354 (3,267 ) (2,913 ) Borrowings (1,481 ) 810 (671 ) 975 (622 ) 353 Total interest-bearing liabilities (1,099 ) (9,517 ) (10,616 ) 1,329 (3,889 ) (2,560 ) Net change in net interest income $ ($(424) ) $ $2,422 $ $1,998 $ $6,110 $ ($(4,824) ) $ $1,286 (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) Non-accrual loans have been included in average loans receivable balance. (3) 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, 2021, 2020, and 2019. Net Interest Income 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. - 49 - • 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 permited under the CARES Act and subsequently under the Consolidated Appropriations Act. 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 full. 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 Years Ended December 31, 2021 2020 $ Change % Change (Dollars in Thousands) Service charges on loans and deposits $ 3,325 $ 4,462 $ (1,137 ) (25.5 %) Increase in cash surrender value of life insurance 1,615 1,905 (290 ) (15.2 %) Mortgage banking income 191,035 233,245 (42,210 ) (18.1 %) Other 7,220 4,405 2,815 63.9 % Total noninterest income $ 203,195 $ 244,017 $ (40,822 ) (16.7 %) 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. - 50 - Noninterest Expenses Years Ended December 31, 2021 2020 $ Change % Change (Dollars in Thousands) Compensation, payroll taxes, and other employee benefits $ 135,115 $ 139,046 $ (3,931 ) (2.8 %) Occupancy, office furniture and equipment 9,612 10,223 (611 ) (6.0 %) Advertising 3,528 3,691 (163 ) (4.4 %) Data processing 3,950 3,941 9 0.2 % Communications 1,309 1,329 (20 ) (1.5 %) Professional fees 1,275 8,118 (6,843 ) (84.3 %) Real estate owned 3 (8 ) 11 (137.5 %) Loan processing expense 4,610 4,646 (36 ) (0.8 %) Other 11,192 12,075 (883 ) (7.3 %) Total noninterest expenses $ 170,594 $ 183,061 $ (12,467 ) (6.8 %) 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. Other 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. - 51 - Income Taxes 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. Liquidity and Capital Resources 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. We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows and pay real estate taxes on mortgage loans. We also adjust liquidity as appropriate to meet asset and liability management objectives. The 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. 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, 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. 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, 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 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 $97.0 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. At December 31, 2021, we had $5.0 million in short term advances from the FHLB. 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 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 2022. As an additional source of funds, the mortgage banking segment has a repurchase agreement. At December 31, 2021, we had $2.1 million outstanding under the repurchase agreement with a total outstanding commitment of $75.0 million. - 52 - 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. Capital 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. 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. 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. 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. 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. Contractual Obligations More Than More Than One Year Three Years One Year or Through Through Five Over Five Total Less Three Years Years Years (In Thousands) Deposits without a stated maturity (1) $ $606,723 $ $606,723 $ $- $ $- $ $- Time deposit (1) 626,663 533,010 91,672 1,981 - Repurchase agreements (1) 2,127 2,127 - - - Federal Home Loan Bank advances (2) 475,000 5,000 - - 470,000 Operating leases (3) 8,819 2,894 3,559 1,470 896 Total Contractual Obligations $ $1,719,332 $ $1,149,754 $ $95,231 $ $3,451 $ $470,896 _______________ (1) Excludes interest. (2) Secured under a blanket security agreement on qualifying assets, principally, mortgage loans. Excludes interest that will accrue on the advances. See call provisions in Note 8 - Borrowings. (3) Represents non-cancellable operating leases for offices and equipment. - 53 - Other Commitments More than More than One Year Three through Years One Year Three Through Over Five Total or Less Years Five Years Years (In Thousands) Real estate loan commitments (1) $ $48,626 $ $48,626 $ $- $ $- $ $- Unused portion of home equity lines of credit (2) 11,990 11,990 - - - Unused portion of construction loans (3) 50,303 50,303 - - - Unused portion of business lines of credit 17,916 17,916 - - - Standby letters of credit 1,379 1,379 - - - _______________ (1) Commitments for loans are extended to customers for up to 90 days after which they expire. (2) Unused portions of home equity loans are available to the borrower for up to 10 years. (3) Unused portions of construction loans are available to the borrower for up to one year. 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 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. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation. Quarterly Financial Information The following table sets forth certain quarterly data for the periods indicated: Quarter Ended March 31 June 30 September 30 December 31 (In thousands, except per share data) 2021 Interest income $ $17,969 $ $17,824 $ $17,506 $ $16,584 Interest expense 4,017 3,547 3,392 3,412 Net interest income 13,952 14,277 14,114 13,172 Provision for loan losses (1,070 ) (750 ) (700 ) (1,470 ) Net interest income after provision for loan losses 15,022 15,027 14,814 14,642 Total noninterest income 56,199 52,044 52,936 42,016 Total noninterest expense 43,000 43,297 43,323 40,974 Income before income taxes 28,221 23,774 24,427 15,684 Income taxes 6,877 5,880 5,427 3,131 Net income $ $21,344 $ $17,894 $ $19,000 $ $12,553 Income per share – basic $ $0.90 $ $0.75 $ $0.80 $ $ 0.53 Income per share - diluted $ $0.89 $ $0.74 $ $0.79 $ $0.53 2020 Interest income $ $19,452 $ $19,861 $ $19,544 $ $19,627 Interest expense 6,926 6,612 6,135 5,311 Net interest income 12,526 13,249 13,409 14,316 Provision (credit) for loan losses 785 4,500 1,025 30 Net interest income after provision for loan losses 11,741 8,749 12,384 14,286 Total noninterest income 31,464 66,904 75,763 69,886 Total noninterest expense 35,208 47,689 53,001 47,163 Income before income taxes 7,997 27,964 35,146 37,009 Income taxes 1,928 7,016 8,853 9,174 Net income $ $6,069 $ $20,948 $ $26,293 $ $27,835 Income per share – basic $ $0.24 $ $0.86 $ $1.08 $ $1.17 Income per share - diluted $ $0.24 $ $0.85 $ $1.08 $ $1.17 - 54 -