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.
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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.
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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:
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.
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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.
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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,
(In Thousands, except per share amounts)
Selected Financial Condition Data:
Selected Operating Data:
Per common share:
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At or for the Year Ended December 31,
Selected Financial Ratios and Other Data:
Performance Ratios:
Capital Ratios:
Waterstone Financial, Inc.:
WaterStone Bank:
Asset Quality Ratios:
Other Data:
Number of full-service banking offices 14 14 13 11 11
(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.
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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.
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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,
(Dollars in Thousands, except per share amounts)
Earnings per share - basic 2.98 3.32
Earnings per share - diluted 2.96 3.30
Return on average assets 3.20 % 3.77 %
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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. 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,
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
Interest-earning assets:
Interest-bearing liabilities:
Noninterest-bearing liabilities
Net interest margin on a fully tax equivalent basis 2.69 % 2.68 % 2.85 %
(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.
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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,
Increase (Decrease) due to Increase (Decrease) due to
Volume Rate Net Volume Rate Net
(In Thousands)
Interest and dividend income:
Interest expense:
(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.
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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,
(Dollars in Thousands)
Increase in cash surrender value of life insurance 1,615 1,905 (290 ) (15.2 %)
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.
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Noninterest Expenses
Years Ended December 31,
(Dollars in Thousands)
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.
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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.
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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 $533.0million. 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 $ $- $ $- $ $-
_______________
(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)
- 54 -
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Management of Market Risk
General.The majority of our assets and liabilities
are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a
principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, WaterStone Bank’s board of directors has established an Asset/Liability
Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance
objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our
asset/liability policies and interest rate risk position, which are evaluated quarterly.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest
rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real
estate balloon loans; (ii) reducing and shortening the expected average life of the investment portfolio; and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the FHLBC. These measures should reduce
the volatility of our net interest income in different interest rate environments.
Income Simulation. Simulation analysis is an estimate of our interest rate risk exposure at a particular point in time. At least quarterly we review the potential
effect changes in interest rates may have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities at December 31, 2021 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions may have a
significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage
related assets that may in turn affect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our
liabilities and therefore would most likely have a positive impact on net interest income and earnings.
The following interest rate scenario displays the percentage change in net interest income over a one-year time horizon assuming
increases of 100, 200 and 300 basis points and a decrease of 100 basis points. The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a
static (no growth balance sheet).
Analysis of Net Interest Income Sensitivity
Immediate Change in Rates
(Dollar Amounts in Thousands)
At December 31, 2021, a 100 basis point instantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 12.17% while a 100 basis
point decrease in rates had the effect of decreasing net interest income by 6.41%.
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Item 8.Financial Statements and Supplementary Data
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Waterstone Financial, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal executive and principal
financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on that assessment, we believe that, as of December 31,
2021, our internal control over financial reporting is effective based on those criteria.
CliftonLarsonAllen LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021,
as stated in their report dated Feruary 28, 2022.
/s/ Douglas S. Gordan /s/ Mark R. Gerke
Douglas S. Gordon Mark R. Gerke
Chief Executive Officer Chief Financial Officer
- 56 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Waterstone Financial, Inc.
Wauwatosa, Wisconsin
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial condition of Waterstone Financial, Inc. and Subsidiaries (the
Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the
financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control—Integrated Framework, issued by COSO in 2013.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
- 57 -
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
- 58 -
Allowance for Loan Losses
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses is a valuation
allowance for probable incurred losses in its loan portfolio to the extent they are reasonable to estimate. The allowance for loan losses was $15.8 million at December 31, 2021, which consists of two components (i) specific reserves based on probable
losses on specific loans (specific reserves), none in the current year, and (ii) a general allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company
(general reserves), representing $15.8 million. The general reserve component of the allowance for loan losses is based on a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss
experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area.
The qualitative adjustment for the general reserve includes management’s consideration of levels of and trends in delinquencies and impaired loans, trends in volume and terms of loans; effects of any changes in risk selection and underwriting
standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in
credit concentrations.
The qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. Management’s
identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. We identified the estimate of the qualitative adjustment of the general
reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which
required especially subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included performing substantive testing, including evaluating
management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, which consisted of the following:
/s/ CliftonLarsonAllen LLP
CliftonLarsonAllen LLP
We have served as the Company’s auditor since 2021.
Milwaukee, Wisconsin
February 28, 2022
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Waterstone Financial, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Waterstone Financial, Inc. and Subsidiaries (the Company) as of December
31, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Allowance for Loan Losses - Adjustments to historical loss ratios
As described in Notes 1 and 3 to the financial statements, the Company’s allowance for loan losses totaled $18,823,000, which consists of a reserve on
loans collectively evaluated for impairment (“general reserve”) of $18,800,000 and a reserve on loans individually evaluated for impairment (“specific reserve”) of $23,000 at December 31, 2020. Management’s estimate of the allowance for loan losses
is based on its assessment of probable loan losses inherent in the Company’s loan portfolio at December 31, 2020. The Company’s general reserve is estimated by applying historical loss ratios, adjusted for risk components not reflected in the
historical loss experience, to the balance of the non-impaired loan portfolio. Historical loss ratios are calculated for each loan category based on historical losses experienced by the Company. Adjustments to historical loss ratios are made for
differences in various risk components including changes in lending policies and personnel, economic conditions, portfolio origination activity, interest rates and past due and classified loan trends. The adjustments to historical loss ratios require
a significant amount of judgement by management and are highly sensitive to changes in significant assumptions.
We identified the adjustments to historical loss ratios in the general reserve component of the allowance for loan losses as a critical audit matter as
auditing the underlying adjustments required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and are highly sensitive to changes in significant assumptions.
Our audit procedures related to the adjustments to historical loss ratios in the general reserve component of the allowance for loan losses included the
following, among others:
/s/ RSM US LLP
We have served as the Company's auditor from 2014 through 2020
Chicago, Illinois
- 60 -
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2021 and 2020
December 31,
Assets (In Thousands, except share data)
Securities available for sale (at fair value) 179,016 159,619
Federal Home Loan Bank stock (at cost) 24,438 26,720
Cash surrender value of life insurance 65,368 63,573
Liabilities and Shareholders’ Equity
Liabilities:
Advance payments by borrowers for taxes 4,094 3,522
Commitments and contingencies (Note 14)
Shareholders’ equity:
Accumulated other comprehensive (loss) income, net of taxes (1,135 ) 2,326
See accompanying notes to consolidated financial statements
- 61 -
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 31, 2021, 2020 and 2019
Years ended December 31,
(In Thousands, except per share amounts)
Interest income:
Debt securities, federal funds sold and short-term investments 3,563 3,363 4,528
Interest expense:
Provision (credit) for loan losses (3,990 ) 6,340 (900 )
Noninterest income:
Increase in cash surrender value of life insurance 1,615 1,905 1,935
Noninterest expenses:
Real estate owned 3 (8 ) (146 )
Income per share:
Weighted average shares outstanding:
See accompanying notes to consolidated financial statements
- 62 -
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years ended December 31, 2021, 2020 and 2019
Years ended December 31,
(In Thousands)
Other comprehensive (loss) income, net of tax:
See accompanying notes to consolidated financial statements
- 63 -
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2021,
2020 and 2019
Common Stock
(In Thousands)
Comprehensive income:
Other comprehensive income: - - - - - 3,003 3,003
Total comprehensive income 38,906
Stock compensation activity 50 - 659 - - - 659
Stock based compensation expense - - 1,067 - - - 1,067
Comprehensive income:
Other comprehensive income: - - - - - 1,684 1,684
Total comprehensive income 82,829
Stock based compensation expense - - 716 - - - 716
Comprehensive income:
Other comprehensive loss: - - - - - (3,461 ) (3,461 )
Total comprehensive income 67,330
Stock based compensation expense - - 745 - - - 745
See accompanying notes to consolidated financial statements
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Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2021, 2020 and 2019
Years ended December 31,
(In Thousands)
Operating activities:
Provision (credit) for loan losses (3,990 ) 6,340 (900 )
Origination of mortgage servicing rights (5,778 ) (13,406 ) (354 )
Proceeds on sales of mortgage servicing rights 12,448 6,985 -
Gain on death benefit on bank owned life insurance - (1,456 ) -
Decrease (increase) in accrued interest receivable 944 387 (7 )
Increase in cash surrender value of life insurance (1,615 ) (1,905 ) (1,935 )
Decrease (increase) in derivative assets 6,688 (9,222 ) (179 )
(Increase) decrease in prepaid income tax (2,558 ) 113 330
(Decrease) increase in derivative liabilities (5,140 ) 5,140 (1,116 )
Net gain on real estate owned (12 ) (107 ) (304 )
Gain on sale of mortgage servicing rights (4,032 ) (600 ) -
Change in other assets and other liabilities, net (6,301 ) 7,353 282
Investing activities:
Purchases of:
Debt securities - (10,125 ) -
Bank owned life insurance (180 ) (180 ) (180 )
Proceeds from:
Death benefit from bank owned life insurance - 9,633 -
Financing activities:
Repayment of long term debt - - (125,000 )
Proceeds from long term debt - - 165,000