Waterstone Financial, Inc. 10-Q

Item 1. Financial Statements WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) September 30, 2021 December 31, 2020 Assets (Dollars In Thousands, except share and per share data) Cash $ 327,288 $ 56,190 Federal funds sold 12,097 18,847 Interest-earning deposits in other financial institutions and other short term investments 19,229 19,730 Cash and cash equivalents 358,614 94,767 Securities available for sale (at fair value) 174,830 159,619 Loans held for sale (at fair value) 325,958 402,003 Loans receivable 1,226,834 1,375,137 Less: Allowance for loan losses 16,790 18,823 Loans receivable, net 1,210,044 1,356,314 Office properties and equipment, net 22,676 23,722 Federal Home Loan Bank stock (at cost) 24,438 26,720 Cash surrender value of life insurance 65,050 63,573 Real estate owned, net 148 322 Prepaid expenses and other assets 52,353 57,547 Total assets $ 2,234,111 $ 2,184,587 Liabilities and Shareholders’ Equity Liabilities: Demand deposits $ 217,078 $ 188,225 Money market and savings deposits 371,719 295,317 Time deposits 657,767 701,328 Total deposits 1,246,564 1,184,870 Borrowings 475,000 508,074 Advance payments by borrowers for taxes 25,298 3,522 Other liabilities 44,678 75,003 Total liabilities 1,791,540 1,771,469 Shareholders’ equity: Preferred stock (par value $ 0.01 per share) Authorized - 50,000,000 shares at September 30, 2021 and at December 31, 2020 , no shares issued - - Common stock (par value $ 0.01 per share) Authorized - 100,000,000 shares at September 30, 2021 and at December 31, 2020 Issued - 25,038,054 at September 30, 2021 and 25,087,976 at December 31, 2020 Outstanding - 25,038,054 at September 30, 2021 and 25,087,976 at December 31, 2020 250 251 Additional paid-in capital 179,312 180,684 Retained earnings 277,316 245,287 Unearned ESOP shares ( 14,540 ) ( 15,430 ) Accumulated other comprehensive income, net of taxes 233 2,326 Total shareholders’ equity 442,571 413,118 Total liabilities and shareholders’ equity $ 2,234,111 $ 2,184,587 See accompanying notes to unaudited consolidated financial statements. 3 WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (In Thousands, except per share amounts) Interest income: Loans $ 16,131 $ 18,224 $ 49,214 $ 54,404 Mortgage-related securities 471 588 1,448 1,960 Debt securities, federal funds sold and short-term investments 904 732 2,637 2,493 Total interest income 17,506 19,544 53,299 58,857 Interest expense: Deposits 947 3,495 3,542 11,760 Borrowings 2,445 2,640 7,414 7,913 Total interest expense 3,392 6,135 10,956 19,673 Net interest income 14,114 13,409 42,343 39,184 Provision (credit) for loan losses ( 700 ) 1,025 ( 2,520 ) 6,310 Net interest income after provision for loan losses 14,814 12,384 44,863 32,874 Noninterest income: Service charges on loans and deposits 1,136 672 2,483 3,384 Increase in cash surrender value of life insurance 312 714 1,297 1,587 Mortgage banking income 46,547 72,112 150,587 166,292 Other 4,941 2,265 6,812 2,868 Total noninterest income 52,936 75,763 161,179 174,131 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 34,229 39,405 102,278 100,695 Occupancy, office furniture, and equipment 2,488 2,469 7,346 7,744 Advertising 835 861 2,570 2,625 Data processing 986 922 2,871 3,023 Communications 331 339 988 994 Professional fees 550 4,738 804 7,647 Real estate owned 1 11 ( 11 ) 55 Loan processing expense 1,135 1,336 3,670 3,620 Other 2,768 2,920 9,104 9,495 Total noninterest expenses 43,323 53,001 129,620 135,898 Income before income taxes 24,427 35,146 76,422 71,107 Income tax expense 5,427 8,853 18,184 17,797 Net income $ 19,000 $ 26,293 $ 58,238 $ 53,310 Income per share: Basic $ 0.80 $ 1.08 $ 2.45 $ 2.16 Diluted $ 0.79 $ 1.08 $ 2.43 $ 2.15 Weighted average shares outstanding: Basic 23,785 24,297 23,790 24,720 Diluted 23,960 24,380 23,987 24,842 See accompanying notes to unaudited consolidated financial statements. 4 WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (In Thousands) Net income $ 19,000 $ 26,293 $ 58,238 $ 53,310 Other comprehensive (loss) income, net of tax: Net unrealized holding (loss) gain on available for sale securities: Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $ 262 , $ 41 , $ 783 , $( 754 ), respectively ( 696 ) ( 104 ) ( 2,093 ) 2,013 Total other comprehensive (loss) income ( 696 ) ( 104 ) ( 2,093 ) 2,013 Comprehensive income $ 18,304 $ 26,189 $ 56,145 $ 55,323 See accompanying notes to unaudited consolidated financial statements. 5 WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) Common Stock Additional Paid-In Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Shares Amount For the nine months ended September 30, 2020 (In Thousands, except per share amounts) Balances at December 31, 2019 27,148 $ 271 $ 211,997 $ 197,393 $ ( 16,617 ) $ 642 $ 393,686 Comprehensive income: Net income - - - 53,310 - - 53,310 Other comprehensive income - - - - - 2,013 2,013 Total comprehensive income 55,323 ESOP shares committed to be released to Plan participants - - 327 - 890 - 1,217 Cash dividend declared, $ 0.86 per share - - - ( 21,414 ) - - ( 21,414 ) Proceeds from stock option exercises 222 3 2,783 - - - 2,786 Stock compensation expense - - 553 - - - 553 Purchase of common stock returned to authorized but unissued ( 2,150 ) ( 22 ) ( 32,700 ) - - - ( 32,722 ) Balances at September 30, 2020 25,220 $ 252 $ 182,960 $ 229,289 $ ( 15,727 ) $ 2,655 $ 399,429 For the nine months ended September 30, 2021 (In Thousands, except per share amounts) Balances at December 31, 2020 25,088 $ 251 $ 180,684 $ 245,287 $ ( 15,430 ) $ 2,326 $ 413,118 Comprehensive income: Net income - - - 58,238 - - 58,238 Other comprehensive loss - - - - - ( 2,093 ) ( 2,093 ) Total comprehensive income 56,145 ESOP shares committed to be released to Plan participants - - 682 - 890 - 1,572 Cash dividend declared, $ 1.10 per share - - - ( 26,209 ) - - ( 26,209 ) Proceeds from stock option exercises 187 2 2,041 - - - 2,043 Stock compensation expense - - 564 - - - 564 Purchase of common stock returned to authorized but unissued ( 237 ) ( 3 ) ( 4,659 ) - - - ( 4,662 ) Balances at September 30, 2021 25,038 $ 250 $ 179,312 $ 277,316 $ ( 14,540 ) $ 233 $ 442,571 6 Common Stock Additional Paid-In Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Shares Amount For the three months ended September 30, 2020 (In Thousands, except per share amounts) Balances at June 30, 2020 25,843 $ 258 $ 192,762 $ 205,863 $ ( 16,023 ) $ 2,759 $ 385,619 Comprehensive income: Net income - - - 26,293 - - 26,293 Other comprehensive loss - - - - - ( 104 ) ( 104 ) Total comprehensive income 26,189 ESOP shares committed to be released to Plan participants - - 99 - 296 - 395 Cash dividend declared, $ 0.12 per share - - - ( 2,867 ) - - ( 2,867 ) Proceeds from stock option exercises 177 2 2,253 - - - 2,255 Stock compensation expense - - 164 - - - 164 Purchase of common stock returned to authorized but unissued ( 800 ) ( 8 ) ( 12,318 ) - - - ( 12,326 ) Balances at September 30, 2020 25,220 $ 252 $ 182,960 $ 229,289 $ ( 15,727 ) $ 2,655 $ 399,429 For the three months ended September 30, 2021 (In Thousands, except per share amounts) Balances at June 30, 2021 25,213 $ 252 $ 182,346 $ 263,048 $ ( 14,837 ) $ 929 $ 431,738 Comprehensive income: Net income - - - 19,000 - - 19,000 Other comprehensive loss - - - - - ( 696 ) ( 696 ) Total comprehensive income 18,304 ESOP shares committed to be released to Plan participants - - 227 - 297 - 524 Cash dividend declared, $ 0.20 per share - - - ( 4,732 ) - - ( 4,732 ) Proceeds from stock option exercises 3 - 49 - - - 49 Stock compensation expense - - 194 - - - 194 Purchase of common stock returned to authorized but unissued ( 178 ) ( 2 ) ( 3,504 ) - - - ( 3,506 ) Balances at September 30, 2021 25,038 $ 250 $ 179,312 $ 277,316 $ ( 14,540 ) $ 233 $ 442,571 See accompanying notes to unaudited consolidated financial statements 7 WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended September 30, 2021 2020 (In Thousands) Operating activities: Net income $ 58,238 $ 53,310 Adjustments to reconcile net income to cash provided by (used) in operating activities: Provision (credit) for loan losses ( 2,520 ) 6,310 Depreciation, amortization, accretion 4,924 4,016 Deferred taxes 345 ( 2,445 ) Stock based compensation 564 553 Origination of mortgage servicing rights ( 5,301 ) ( 8,936 ) Proceeds on sales of mortgage servicing rights 12,448 - Gain on sale of loans held for sale ( 153,612 ) ( 171,374 ) Loans originated for sale ( 3,212,967 ) ( 3,063,835 ) Proceeds on sales of loans originated for sale 3,442,624 3,069,529 Gain on death benefit on bank owned life insurance - ( 1,456 ) Decrease in accrued interest receivable 715 181 Increase in cash surrender value of life insurance ( 1,297 ) ( 1,587 ) Decrease (increase) in derivative assets 4,251 ( 10,765 ) Decrease in accrued interest on deposits and borrowings ( 200 ) ( 245 ) (Increase) decrease in prepaid tax expense ( 959 ) 2,794 Legal settlement ( 4,250 ) 4,250 (Decrease) increase in derivative liabilities ( 5,140 ) 445 Net gain related to real estate owned ( 12 ) ( 5 ) Gain on sale of mortgage servicing rights ( 4,032 ) - Change in other assets and other liabilities, net ( 10,147 ) 2,910 Net cash provided by (used in) operating activities 123,672 ( 116,350 ) Investing activities: Net decrease (increase) in loans receivable 148,790 ( 46,322 ) Purchases of: FHLB stock - ( 5,570 ) Mortgage related securities ( 55,256 ) ( 4,455 ) Debt securities - ( 5,000 ) Bank owned life insurance ( 180 ) ( 180 ) Premises and equipment, net ( 656 ) ( 917 ) Proceeds from: Principal repayments on mortgage-related securities 30,755 33,635 Maturities of debt securities 6,375 3,760 Sales of FHLB stock 2,282 - Sales of real estate owned 183 353 Proceeds from death benefit - 9,633 Net cash provided by (used in) investing activities 132,293 ( 15,063 ) Financing activities: Net increase in deposits 61,694 116,875 Net change in short term borrowings ( 33,074 ) 68,564 Cash paid for advance payments by borrowers for taxes 8,157 9,870 Cash dividends on common stock ( 26,276 ) ( 21,698 ) Purchase of common stock returned to authorized but unissued ( 4,662 ) ( 32,722 ) Proceeds from stock option exercises 2,043 2,786 Net cash provided by financing activities 7,882 143,675 Increase in cash and cash equivalents 263,847 12,262 Cash and cash equivalents at beginning of period 94,767 74,300 Cash and cash equivalents at end of period $ 358,614 $ 86,562 Supplemental information: Cash paid during the period for: Income tax payments $ 18,796 $ 17,448 Interest payments 10,756 19,918 Noncash activities: Loans receivable transferred to real estate owned - 369 Dividends declared but not paid in other liabilities 5,165 3,217 See accompanying notes to unaudited consolidated financial statements. 8 Note 1 — Basis of Presentation The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc. (the “Company”) and the Company’s subsidiaries. WaterStone Bank SSB (the "Bank") is a community bank that has served the banking needs of its customers since 1921. WaterStone Bank also has an active mortgage banking subsidiary, Waterstone Mortgage Corporation. WaterStone Bank conducts its community banking business from 14 banking offices located in Milwaukee, Washington and Waukesha Counties, Wisconsin. WaterStone Bank's principal lending activity is originating one- to four-family, multi-family residential real estate, and commercial real estate loans for retention in its portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, commercial business loans, and consumer loans. WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances. Our deposit offerings include: certificates of deposit, money market savings accounts, transaction deposit accounts, non-interest bearing demand accounts and individual retirement accounts. Our investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations. WaterStone Bank's mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation. Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market. Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’ equity, and cash flows of the Company for the periods presented. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2020 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any other period. The preparation of the unaudited consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the allowance for loan losses, income taxes, and fair value measurements. Actual results could differ from those estimates. Impacts of COVID-19 In March, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The pandemic and continuing spread of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. In 2021, restrictive measures related to the COVID-19 pandemic continued to ease as vaccination and other measures have increased. Most businesses have reopened at full capacity, which has improved commercial and consumer activity but still has not returned to pre-pandemic levels. While the overall outlook has improved based on the availability of the vaccine to all adults and older children, further government action in response to the COVID-19 pandemic, including any vaccination mandates, may affect our business and operations, including our workforce, human capital resources and infrastructure. the risk of further resurgence and possible reimplementation of restrictions remains. The Company has reopened all financial centers at normal business hours and all employees have returned to work during 2021. Subsequent Events The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. There were no significant subsequent events for the three and nine months ended September 30, 2021 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements . 9 Reclassifications Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income. The Company reclassed certain line items in the Consolidated Statements of Cash Flows. Impact of Recent Accounting Pronouncements ASC Topic 326 "Financial Instruments - Credit Losses." Authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" 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. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It included an option for entities to delay the adoption of ASC Topic 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. Due to the uncertainty on the economy and unemployment from COVID-19, the Company determined to delay its adoption of ASC Topic 326 and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASC Topic 326. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. The legislation extended the delay of the adoption of ASC Topic 326 allowed under the CARES Act until the earlier of the first day of the fiscal year that begins after the date when the COVID-19 national emergency is terminated or January 1, 2022. The Company has input the available historical Company data to build an internal model and is reviewing the assumptions to support the calculation under ASC Topic 326. Management’s methodology for estimating the allowance for credit losses under the current expected credit losses (CECL) model includes the use of relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience by vintage classified by loans with similar risk profiles provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, portfolio volume, delinquency rates, interest rates, or other relevant factors. The Company is currently finalizing controls, processes, policies and disclosures in preparation for final adoption. The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor. During the third quarter, we ran a parallel run including additional analytics, controls, and a parallel governance process. A set of controls, including management review controls, implementation controls, data, model, and forecasting controls has been established. Next steps include further testing and finalization of controls and developing disclosures. We will continue to evaluate and refine our loss estimates throughout 2021. Based on our most recent parallel run, we estimate that the impact of the standard on the allowance for credit losses ("ACL") as of September 30, 2021, would have been within a range of no change to a 10% increase. 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 that the ACL related to AFS securities will be 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. The impact of the ASU at adoption will be influenced by the portfolio composition and credit quality, macroeconomic conditions and forecasts at that time, as well as other management judgments. We expect more volatility in the credit loss estimate under CECL than under the current accounting requirements. The Bank will adopt this guidance beginning January 1, 2022. Transition to the new ASU will be through a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of January 1, 2022. Financial statement users should be aware that the allowance for credit loss is, by design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors. As we continue to evaluate the provisions of ASC Topic 326 as of and for the nine months ended September 30, 2021, we are considering the following in developing our forecast and its effect on our CECL calculations: • Duration, extent and severity of COVID-19; • Effect of government assistance; and • Unemployment and effect on economies and markets. The Company is evaluating the authoritative guidance related to credit losses relating to available-for-sale debt securities and is not expecting it to have a material impact on the Company's statements of operations or financial condition. 10 Note 2— Securities Available for Sale The amortized cost and fair values of the Company’s investment in securities available for sale follow: September 30, 2021 Amortized cost Gross unrealized gains Gross unrealized losses Fair value (In Thousands) Mortgage-backed securities $ 20,900 $ 718 $ ( 170 ) $ 21,448 Collateralized mortgage obligations: Government sponsored enterprise issued 89,963 902 ( 633 ) 90,232 Private -label issued 2,956 37 - 2,993 Mortgage-related securities 113,819 1,657 ( 803 ) 114,673 Government sponsored enterprise bonds 2,500 - ( 22 ) 2,478 Municipal securities 45,000 1,345 ( 14 ) 46,331 Other debt securities 12,500 48 ( 1,200 ) 11,348 Debt securities 60,000 1,393 ( 1,236 ) 60,157 Total $ 173,819 $ 3,050 $ ( 2,039 ) $ 174,830 December 31, 2020 Amortized cost Gross unrealized gains Gross unrealized losses Fair value (In Thousands) Mortgage-backed securities $ 24,005 $ 1,110 $ ( 15 ) $ 25,100 Collateralized mortgage obligations: Government sponsored enterprise issued 61,604 1,693 ( 13 ) 63,284 Private label issued 3,611 54 - 3,665 Mortgage-related securities 89,220 2,857 ( 28 ) 92,049 Government sponsered enterprise bonds 2,500 3 - 2,503 Municipal securities 51,512 2,102 - 53,614 Other debt securities 12,500 46 ( 1,093 ) 11,453 Debt securities 66,512 2,151 ( 1,093 ) 67,570 Total $ 155,732 $ 5,008 $ ( 1,121 ) $ 159,619 The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At September 30, 2021, $ 505,000 of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2020 , $ 785,000 of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities and $ 7.2 million were pledged as collateral to secure back-to-back swaps. The amortized cost and fair values of investment securities by contractual maturity at September 30, 2021 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value (In Thousands) Debt and other securities Due within one year $ 8,741 $ 8,808 Due after one year through five years 29,972 30,676 Due after five years through ten years 16,174 15,561 Due after ten years 5,113 5,112 Mortgage-related securities 113,819 114,673 Total $ 173,819 $ 174,830 11 Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows: September 30, 2021 Less than 12 months 12 months or longer Total Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss (In Thousands) Mortgage-backed securities $ 6,266 $ ( 170 ) $ - $ - $ 6,266 $ ( 170 ) Collateralized mortgage obligations: Government sponsored enterprise issued 42,337 ( 593 ) 2,720 ( 40 ) 45,057 ( 633 ) Government sponsored enterprise bonds 2,478 ( 22 ) - - 2,478 ( 22 ) Municipal securities 2,876 ( 14 ) - - 2,876 ( 14 ) Other debt securities - - 8,800 ( 1,200 ) 8,800 ( 1,200 ) Total $ 53,957 $ ( 799 ) $ 11,520 $ ( 1,240 ) $ 65,477 $ ( 2,039 ) December 31, 2020 Less than 12 months 12 months or longer Total Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss (In Thousands) Mortgage-backed securities $ 2,089 $ ( 15 ) $ - $ - $ 2,089 $ ( 15 ) Collateralized mortgage obligations: Government sponsored enterprise issued 4,880 ( 13 ) - - 4,880 ( 13 ) Municipal securities - - - - - - Other debt securities - - 8,907 ( 1,093 ) 8,907 ( 1,093 ) Total $ 6,969 $ ( 28 ) $ 8,907 $ ( 1,093 ) $ 15,876 $ ( 1,121 ) The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. As of September 30, 2021, the Company held one municipal security that had previously been deemed to be other-than-temporarily impaired. The security was issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of this security resulted in $ 77,000 in credit losses charged to earnings with respect to this municipal security. An additional $ 17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price. There have been no additional credit losses related to the security. As of September 30, 2021, this security had an amortized cost of $ 116,000 and total life-to-date impairment of $ 94,000 . As of September 30, 2021, the Company had one corporate debt security, included in other debt securities, and one government sponsored enterprise issued security which have been in an unrealized loss position for twelve months or longer. The securities were determined not to be other-than-temporarily impaired as of September 30, 2021. The Company has determined that the decline in fair value of these securities are not attributable to credit deterioration, and as the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired. During the three or nine months ended September 30, 2021 and September 30, 2020, there were no sales of securities. 12 Note 3 - Loans Receivable Loans receivable at September 30, 2021 and December 31, 2020 are summarized as follows: September 30, 2021 December 31, 2020 (In Thousands) Mortgage loans: Residential real estate: One- to four-family $ 331,570 $ 426,792 Multi-family 547,435 571,948 Home equity 12,024 14,820 Construction and land 69,076 77,080 Commercial real estate 241,929 238,375 Consumer 709 736 Commercial loans 24,091 45,386 Total $ 1,226,834 $ 1,375,137 The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers. While the real estate collateralizing these loans is primarily residential in nature, it ranges from owner-occupied single family homes to large apartment complexes. Qualifying loans receivable totaling $ 948.7 million and $ 1.07 billion at September 30, 2021 and December 31, 2020, respectively, were pledged as collateral against $ 475.0 million and $ 499.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLB") advances under a blanket security agreement at September 30, 2021 and December 31, 2020. Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. Loans outstanding to such parties were approximately $ 3.3 million as of September 30, 2021 and $ 7.2 million as of December 31, 2020. None of these loans were past due or considered impaired as of September 30, 2021 or December 31, 2020, respectively. As of September 30, 2021, there were no loans 90 or more days past due and still accruing interest. As of December 31, 2020, there was a $ 586,000 loan that was 90 or more days past due and still accruing interest. The Bank received full payoff of the loan subsequent to December 31, 2020. An analysis of past due loans receivable as of September 30, 2021 and December 31, 2020 follows: As of September 30, 2021 1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Total Past Due Current (3) Total Loans (In Thousands) Mortgage loans: Residential real estate: One- to four-family $ 1,152 $ 1,425 $ 3,221 $ 5,798 $ 325,772 $ 331,570 Multi-family 5,198 - 129 5,327 542,108 547,435 Home equity 79 - 28 107 11,917 12,024 Construction and land - - - - 69,076 69,076 Commercial real estate - - - - 241,929 241,929 Consumer - - - - 709 709 Commercial loans - - - - 24,091 24,091 Total $ 6,429 $ 1,425 $ 3,378 $ 11,232 $ 1,215,602 $ 1,226,834 13 As of December 31, 2020 1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Total Past Due Current (3) Total Loans (In Thousands) Mortgage loans: Residential real estate: One- to four-family $ 3,796 $ 142 $ 3,530 $ 7,468 $ 419,324 $ 426,792 Multi-family - - 314 314 571,634 571,948 Home equity - - 30 30 14,790 14,820 Construction and land - - 43 43 77,037 77,080 Commercial real estate - - 41 41 238,334 238,375 Consumer - - - - 736 736 Commercial loans - - - - 45,386 45,386 Total $ 3,796 $ 142 $ 3,958 $ 7,896 $ 1,367,241 $ 1,375,137 (1) Includes $ - and $ 611,000 at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status. (2) Includes $ - and $ - at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status. (3) Includes $ 594,000 and $ 1.6 million at September 30, 2021 and December 31, 2020 , respectively, which are on non-accrual status. A summary of the activity for the nine months ended September 30, 2021 and 2020 in the allowance for loan losses follows: One- to Four- Family Multi-Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total (In Thousands) Nine months ended September 30, 2021 Balance at beginning of period $ 5,459 $ 5,600 $ 194 $ 1,755 $ 5,138 $ 35 $ 642 $ 18,823 Provision (credit) for loan losses ( 1,952 ) 700 ( 105 ) ( 511 ) ( 446 ) 9 ( 215 ) ( 2,520 ) Charge-offs ( 105 ) - - ( 13 ) ( 10 ) ( 10 ) - ( 138 ) Recoveries 522 36 12 52 3 - - 625 Balance at end of period $ 3,924 $ 6,336 $ 101 $ 1,283 $ 4,685 $ 34 $ 427 $ 16,790 Nine months ended September 30, 2020 Balance at beginning of period $ 4,907 $ 4,138 $ 201 $ 610 $ 2,145 $ 14 $ 372 $ 12,387 Provision (credit) for loan losses 854 1,703 ( 6 ) 1,004 2,300 33 422 6,310 Charge-offs ( 9 ) ( 5 ) ( 13 ) - - ( 10 ) - ( 37 ) Recoveries 132 17 22 2 11 - - 184 Balance at end of period $ 5,884 $ 5,853 $ 204 $ 1,616 $ 4,456 $ 37 $ 794 $ 18,844 A summary of the activity for the three months ended September 30, 2021 and 2020 in the allowance for loan losses follows: One- to Four- Family Multi-Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total (In Thousands) Three months ended September 30, 2021 Balance at beginning of period $ 4,025 $ 6,028 $ 156 $ 1,319 $ 5,184 $ 34 $ 664 $ 17,410 Provision (credit) for loan losses ( 207 ) 307 ( 59 ) ( 24 ) ( 490 ) 10 ( 237 ) ( 700 ) Charge-offs ( 66 ) - - ( 13 ) ( 10 ) ( 10 ) - ( 99 ) Recoveries 172 1 4 1 1 - - 179 Balance at end of period $ 3,924 $ 6,336 $ 101 $ 1,283 $ 4,685 $ 34 $ 427 $ 16,790 Three months ended September 30, 2020 Balance at beginning of period $ 5,715 $ 5,870 $ 218 $ 1,153 $ 4,124 $ 38 $ 616 $ 17,734 Provision for loan losses 100 ( 25 ) ( 18 ) 462 328 - 178 1,025 Charge-offs ( 2 ) - - - - ( 1 ) - ( 3 ) Recoveries 71 8 4 1 4 - - 88 Balance at end of period $ 5,884 $ 5,853 $ 204 $ 1,616 $ 4,456 $ 37 $ 794 $ 18,844 14 A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of September 30, 2021 follows: One- to Four- Family Multi- Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total (In Thousands) Allowance related to loans individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Allowance related to loans collectively evaluated for impairment 3,924 6,336 101 1,283 4,685 34 427 16,790 Balance at end of period $ 3,924 $ 6,336 $ 101 $ 1,283 $ 4,685 $ 34 $ 427 $ 16,790 Loans individually evaluated for impairment $ 4,949 $ 129 $ 46 $ - $ 1,222 $ - $ 1,097 $ 7,443 Loans collectively evaluated for impairment 326,621 547,306 11,978 69,076 240,707 709 22,994 1,219,391 Total gross loans $ 331,570 $ 547,435 $ 12,024 $ 69,076 $ 241,929 $ 709 $ 24,091 $ 1,226,834 A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2020 follows: One- to Four-Family Multi- Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total (In Thousands) Allowance related to loans individually evaluated for impairment $ 23 $ - $ - $ - $ - $ - $ - $ 23 Allowance related to loans collectively evaluated for impairment 5,436 5,600 194 1,755 5,138 35 642 18,800 Balance at end of period $ 5,459 $ 5,600 $ 194 $ 1,755 $ 5,138 $ 35 $ 642 $ 18,823 Loans individually evaluated for impairment $ 7,805 $ 341 $ 63 $ 43 $ 7,248 $ - $ 1,097 $ 16,597 Loans collectively evaluated for impairment 418,987 571,607 14,757 77,037 231,127 736 44,289 1,358,540 Total gross loans $ 426,792 $ 571,948 $ 14,820 $ 77,080 $ 238,375 $ 736 $ 45,386 $ 1,375,137 15 The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of September 30, 2021 and December 31, 2020: One to Four- Family Multi-Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total (In Thousands) At September 30, 2021 Substandard $ 5,123 $ 129 $ 46 $ - $ 6,863 $ - $ 1,097 $ 13,258 Watch 9,550 266 15 4,231 5,937 - 3,254 23,253 Pass 316,897 547,040 11,963 64,845 229,129 709 19,740 1,190,323 $ 331,570 $ 547,435 $ 12,024 $ 69,076 $ 241,929 $ 709 $ 24,091 $ 1,226,834 At December 31, 2020 Substandard $ 7,804 $ 341 $ 248 $ 43 $ 6,026 $ - $ 710 $ 15,172 Watch 7,667 275 15 4,282 6,714 - 4,101 23,054 Pass 411,321 571,332 14,557 72,755 225,635 736 40,575 1,336,911 $ 426,792 $ 571,948 $ 14,820 $ 77,080 $ 238,375 $ 736 $ 45,386 $ 1,375,137 Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies. Our underwriting policies require an officers' loan committee review and approval of all loans in excess of $ 500,000 . A member of the credit department, independent of the loan originator, performs a loan review for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, and commercial real estate loans that individually, or as part of an overall borrower relationship exceed $ 1.0 million in potential exposure and review commercial loans that individually, or as part of an overall borrower relationship exceed $ 200,000 in potential exposure. Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year . With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan. The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property. Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value. The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years . In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition. With respect to multi-family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management. 16 The following tables present data on impaired loans at September 30, 2021 and December 31, 2020. As of September 30, 2021 Recorded Investment Unpaid Principal Reserve Cumulative Charge-Offs (In Thousands) Total Impaired with Reserve One- to four-family $ - $ - $ - $ - Multi-family - - - - Home equity - - - - Construction and land - - - - Commercial real estate - - - - Consumer - - - - Commercial - - - - - - - - Total Impaired with no Reserve One- to four-family 4,949 5,391 - 442 Multi-family 129 129 - - Home equity 46 46 - - Construction and land - - - - Commercial real estate 1,222 1,222 - - Consumer - - - - Commercial 1,097 1,097 - - 7,443 7,885 - 442 Total Impaired One- to four-family 4,949 5,391 - 442 Multi-family 129 129 - - Home equity 46 46 - - Construction and land - - - - Commercial real estate 1,222 1,222 - - Consumer - - - - Commercial 1,097 1,097 - - $ 7,443 $ 7,885 $ - $ 442 17 As of December 31, 2020 Recorded Investment Unpaid Principal Reserve Cumulative Charge-Offs (In Thousands) Total Impaired with Reserve One- to four-family $ 208 $ 208 $ 23 $ - Multi-family - - - - Home equity - - - - Construction and land - - - - Commercial real estate - - - - Consumer - - - - Commercial - - - - 208 208 23 - Total Impaired with no Reserve One- to four-family 7,597 8,444 - 847 Multi-family 341 352 - 11 Home equity 63 63 - - Construction and land 43 51 - 8 Commercial real estate 7,248 7,248 - - Consumer - - - - Commercial 1,097 1,097 - - 16,389 17,255 - 866 Total Impaired One- to four-family 7,805 8,652 23 847 Multi-family 341 352 - 11 Home equity 63 63 - - Construction and land 43 51 - 8 Commercial real estate 7,248 7,248 - - Consumer - - - - Commercial 1,097 1,097 - - $ 16,597 $ 17,463 $ 23 $ 866 The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss when the value of the collateral securing the loan is below the loan balance and management’s assessment that the full collection of the loan balance is not likely. 18 The following tables present data on impaired loans for the nine months ended September 30, 2021 and 2020. Nine months ended September 30, 2021 2020 Average Recorded Investment Interest Paid Average Recorded Investment Interest Paid (In Thousands) Total Impaired with Reserve One- to four-family $ - $ - $ 214 $ 12 Multi-family - - - - Home equity - - - - Construction and land - - - - Commercial real estate - - - - Consumer - - - - Commercial - - - - - - 214 12 Total Impaired with no Reserve One- to four-family 5,000 146 7,986 353 Multi-family 129 2 643 61 Home equity 49 2 78 3 Construction and land - - - - Commercial real estate 1,222 42 6,059 208 Consumer - - - - Commercial 1,097 38 - - 7,497 230 14,766 625 Total Impaired One- to four-family 5,000 146 8,200 365 Multi-family 129 2 643 61 Home equity 49 2 78 3 Construction and land - - - - Commercial real estate 1,222 42 6,059 208 Consumer - - - - Commercial 1,097 38 - - $ 7,497 $ 230 $ 14,980 $ 637 When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors. The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $ 7.4 million of impaired loans as of September 30, 2021 for which no allowance has been provided, $ 442,000 in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loans’ net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans which may result in additional provisions to the allowance for loans losses or charge-offs. 19 At September 30, 2021, total impaired loans included $ 5.2 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months . At December 31, 2020, total impaired loans included $ 11.6 million of troubled debt restructurings. The following presents data on troubled debt restructurings: As of September 30, 2021 Accruing Non-accruing Total Amount Number Amount Number Amount Number (Dollars in Thousands) One- to four-family $ 1,153 1 $ 1,695 5 $ 2,848 6 Commercial real estate 1,222 1 - - 1,222 1 Commercial 1,097 1 - - 1,097 1 $ 3,472 3 $ 1,695 5 $ 5,167 8 As of December 31, 2020 Accruing Non-accruing Total Amount Number Amount Number Amount Number (Dollars in Thousands) One- to four-family $ 2,733 2 $ 532 3 $ 3,265 5 Commercial real estate 7,207 3 - - 7,207 3 Commercial 1,097 1 - - 1,097 1 $ 11,037 6 $ 532 3 $ 11,569 9 At September 30, 2021, $ 5.2 million in loans had been modified in troubled debt restructurings and $ 1.7 million of these loans were included in the non-accrual loan total. The remaining $ 3.5 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis. All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, no valuation allowance was recorded as of September 30, 2021 with respect to the $ 5.2 million in troubled debt restructurings. As of December 31, 2020, no valuation allowance had been established with respect to the $ 11.6 million in troubled debt restructurings. After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time. 20 The following presents troubled debt restructurings by concession type: As of September 30, 2021 Performing in accordance with modified terms In Default Total Amount Number Amount Number Amount Number (Dollars in Thousands) Interest reduction and principal forbearance $ 1,541 3 $ - - $ 1,541 3 Interest reduction 25 1 - - 25 1 Principal forbearance 3,601 4 - - 3,601 4 $ 5,167 8 $ - - $ 5,167 8 As of December 31, 2020 Performing in accordance with modified terms In Default Total Amount Number Amount Number Amount Number (Dollars in Thousands) Interest reduction and principal forbearance $ 3,236 4 $ - - $ 3,236 4 Interest reduction 302 2 - - 302 2 Principal forebearance 8,031 3 - - 8,031 3 $ 11,569 9 $ - - $ 11,569 9 There were three one- to four-family loans modified as troubled debt restructurings with a total balance of $ 1.3 million during the nine months ended September 30, 2021. There were two loans modified as troubled debt restructurings with a total loan balance of $ 754,000 during the three months ended September 30, 2021. There was one loan modified as troubled debt restructurings with a total balance of $ 5.7 million during the three and nine months ended September 30, 2020. There were no troubled debt restructurings within the past twelve months for which there was a default during the three or nine months ended September 30, 2021 or September 30, 2020. The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. At September 30, 2021, the Company had approximately $ 559,000 in outstanding loans subject to principal deferral agreements which were not classified as troubled debt restructurings. The following table presents data on non-accrual loans as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (Dollars in Thousands) Non-accrual loans: Residential real estate: One- to four-family $ 3,797 $ 5,072 Multi-family 129 341 Home equity 46 63 Construction and land - 43 Commercial real estate - 41 Commercial - - Consumer - - Total non-accrual loans $ 3,972 $ 5,560 Total non-accrual loans to total loans receivable 0.32 % 0.40 % Total non-accrual loans to total assets 0.18 % 0.25 % 21 Note 4— Real Estate Owned Real estate owned is summarized as follows: September 30, 2021 December 31, 2020 (In Thousands) One- to four-family $ - $ - Multi-family - - Construction and land 148 322 Commercial real estate - - Total real estate owned $ 148 $ 322 The following table presents the activity in the Company’s real estate owned: Nine months ended September 30, 2021 2020 (In Thousands) Real estate owned at beginning of the period $ 322 $ 748 Transferred from loans receivable - 369 Sales (net of gains / losses) ( 172 ) ( 345 ) Write downs - - Other ( 2 ) - Real estate owned at the end of the period $ 148 $ 772 Residential one- to four-family mortgage loans that were in the process of foreclosure were $ 1.5 million at September 30, 2021 and $ 1.7 million at December 31, 2020. Note 5— Mortgage Servicing Rights The following table presents the activity in the Company’s mortgage servicing rights: Nine months ended September 30, 2021 2020 (In Thousands) Mortgage servicing rights at beginning of the period $ 5,977 $ 282 Additions 5,301 8,936 Amortization ( 1,701 ) ( 754 ) Sales (net of gains/losses) ( 8,416 ) - Mortgage servicing rights at end of the period 1,161 8,464 Valuation allowance during the period - ( 42 ) Mortgage servicing rights at end of the period, net $ 1,161 $ 8,422 During the nine months ended September 30, 2021, $ 3.21 billion in residential loans were originated for sale on a consolidated basis. During the same period, sales of loans held for sale totaled $ 3.44 billion, generating mortgage banking income of $ 150.6 million. The unpaid principal balance of loans serviced for others was $ 160.8 million and $ 871.8 million at September 30, 2021 and December 31, 2020, respectively. These loans are not reflected in the consolidated statements of financial condition. The fair value of mortgage servicing rights were $ 1.3 million at September 30, 2021 and $ 9.9 million at September 30, 2020. During the three and nine months ended September 30, 2021, the Company sold mortgage servicing rights related to $ 1.24 billion in loans receivable and with a book value of $ 9.3 million for $ 12.4 million resulting in a gain on sale of $ 4.0 million. During the three and nine months ended September 30, 2020, the Company did not sell any mortgage servicing rights. The following table shows the estimated future amortization expense for mortgage servicing rights for the periods indicated: (In Thousands) Estimate for the period ended December 31: 2021 $ 48 2022 202 2023 157 2024 146 2025 129 Thereafter 479 Total $ 1,161 22 Note 6— Deposits At September 30, 2021 and December 31, 2020, time deposits with aggregate balances greater than $250,000 amounted to $ 108.0 million and $ 102.6 million, respectively. A summary of the contractual maturities of time deposits at September 30, 2021 is as follows: (In Thousands) Within one year $ 576,578 More than one to two years 75,668 More than two to three years 3,570 More than three to four years 1,214 More than four through five years 737 $ 657,767 Note 7— Borrowings Borrowings consist of the following: September 30, 2021 December 31, 2020 Balance Weighted Average Rate Balance Weighted Average Rate (Dollars in Thousands) Short term: Repurchase agreement $ - 0.00 % $ 9,074 3.25 % Federal Home Loan Bank, Chicago 5,000 0.00 % 29,000 0.22 % Long term: Federal Home Loan Bank, Chicago advances maturing: 2027 50,000 1.73 % 50,000 1.73 % 2028 255,000 2.37 % 255,000 2.37 % 2029 165,000 1.61 % 165,000 1.61 % $ 475,000 2.01 % $ 508,074 1.95 % The short-term repurchase agreement is utilized by Waterstone Mortgage Corporation to finance loans originated for sale when necessary. Waterstone Mortgage Corporation has no commitments outstanding as of September 30, 2021. The short-term repurchase agreement had a $ 9.1 million balance at December 31, 2020. This agreement was secured by the underlying loans being financed. Related interest rates were based upon the note rate associated with the loans being financed. The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. In addition, the Company enters into agreements under which it sells loans held for sale subject to an obligation to repurchase the same loans. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of assets. The obligation to repurchase the assets is reflected as a liability in the Company's consolidated statements of financial condition, while the securities and loans held for sale underlying the repurchase agreements remain in the respective investment securities and loans held for sale asset accounts. In other words, there is no offsetting or netting of the investment securities or loans held for sale assets with the repurchase agreement liabilities. The Company's repurchase agreement is subject to master netting agreements, which sets forth the rights and obligations for repurchase and offset. Under the master netting agreement, the Company is entitled to set off the collateral placed with a single counterparty against obligations owed to that counterparty. The FHLB short-term advance consists of one $ 5.0 million advance with a fixed rate of 0.00 % and a maturity date of May 9, 2022 . The $ 50.0 million advance due in 2027 has a fixed rate of 1.73 % and has a contractual maturity date in December 2027. 23 The $ 255.0 million in advances due in 2028 consists of one $ 25.0 million advance with a fixed rate of 2.16 %, one $ 25.0 million advance with a fixed rate of 2.40 %, and two advances totaling $ 55.0 million with a fixed rate of 2.27 % with a maturity date in March 2028, two advances totaling $ 50.0 million with fixed rates of 2.34 % and 2.48 % both with a FHLB single call option in May 2021, one advance of $ 50.0 million with a fixed rate of 2.34 % and with a FHLB quarterly call option currently available, and one advance of $ 50.0 million with a fixed rate of 2.57 % and with a FHLB quarterly call option that currently available. The $ 165.0 million in advances due in 2029 consists of one $ 50.0 million advance with a fixed rate of 1.98 % with a FHLB quarterly call option in May 2022, one $ 50.0 million advance with a fixed rate of 1.75 % with a FHLB quarterly call option beginning in August 2021, one $ 25.0 million advance with a fixed rate of 1.52 % with a FHLB quarterly call option currently available, and one advance of $ 40.0 million with a fixed rate of 1.02 % and with a FHLB quarterly call option currently available. The Company selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances. The Company’s borrowings from the FHLB are limited to 80 % of the carrying value of unencumbered one- to four-family mortgage loans, 75 % of the carrying value of multi-family loans and 64 % of the carrying value of home equity loans. In addition, these advances were collateralized by FHLB stock of $ 24.4 million at September 30, 2021 and $ 26.7 million at December 31, 2020, respectively. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance. Note 8 – Regulatory Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Company's and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As required by applicable legislation, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. Pursuant to Section 4012 of the CARES Act and related interim final rules, the Community Bank Leverage Ratio will be 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. As a qualified community bank, we elected to opt-out of this definition during the second quarter of 2020. Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The minimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and as necessary. In accordance with the Regulatory Capital Plans, the Bank will not pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the captial conservation buffer. The minimum captial conservation buffer is 2.5%. As of September 30, 2021, the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action capitalization category. The Bank is subject to regulatory restrictions on the amount of dividends it may declare and pay to the Company without prior regulatory approval, and to regulatory notification requirements for dividends that do not require prior regulatory approval. 24 The actual and required capital amounts and ratios for the Bank as of September 30, 2021 and December 31, 2020 are presented in the table below: September 30, 2021 Actual For Capital Adequacy Purposes Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars In Thousands) Total Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. $ 458,509 28.90 % $ 126,935 8.00 % $ 166,603 10.50 % $ N/A N/A WaterStone Bank 412,808 26.02 % 126,935 8.00 % 166,603 10.50 % 158,669 10.00 % Tier 1 Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 441,719 27.84 % 95,201 6.00 % 134,869 8.50 % N/A N/A WaterStone Bank 396,018 24.96 % 95,201 6.00 % 134,869 8.50 % 126,935 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 441,719 27.84 % 71,401 4.50 % 111,068 7.00 % N/A N/A WaterStone Bank 396,018 24.96 % 71,401 4.50 % 111,068 7.00 % 103,135 6.50 % Tier 1 Capital (to average assets) Consolidated Waterstone Financial, Inc. 441,719 19.82 % 89,133 4.00 % N/A N/A N/A N/A WaterStone Bank 396,018 17.77 % 89,133 4.00 % N/A N/A 111,417 5.00 % State of Wisconsin (to total assets) WaterStone Bank 396,018 17.77 % 133,717 6.00 % N/A N/A N/A N/A 25 December 31, 2020 Actual For Capital Adequacy Purposes Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio (Dollars In Thousands) Total Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. $ 428,972 24.80 % $ 138,390 8.00 % $ 181,637 10.50 % $ N/A N/A WaterStone Bank 389,519 22.52 % 138,346 8.00 % 181,579 10.50 % 172,933 10.00 % Tier 1 Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 410,149 23.71 % 103,792 6.00 % 147,039 8.50 % N/A N/A WaterStone Bank 370,696 21.44 % 103,760 6.00 % 146,993 8.50 % 138,346 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 410,149 23.71 % 77,844 4.50 % 121,091 7.00 % N/A N/A WaterStone Bank 370,696 21.44 % 77,820 4.50 % 121,053 7.00 % 112,406 6.50 % Tier 1 Capital (to average assets) Consolidated Waterstone Financial, Inc. 410,149 18.38 % 89,238 4.00 % N/A N/A N/A N/A WaterStone Bank 370,696 16.61 % 89,263 4.00 % N/A N/A 111,579 5.00 % State of Wisconsin (to total assets) WaterStone Bank 370,696 16.62 % 133,856 6.00 % N/A N/A N/A N/A Note 9 – Income Taxes Income tax expense totaled $ 18.2 million for the nine months ended September 30, 2021 compared to $ 17.8 million during the nine months ended September 30, 2020. Income tax expense was recognized on the statement of income during the nine months ended September 30, 2021 at an effective rate of 23.8 % of pretax income compared to 25.0 % during the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company recorded a $ 949,000 return to provision income tax adjustment as state tax apportionment shifted states based on the final 2020 tax returns. 26 Note 10– Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. September 30, 2021 December 31, 2020 (In Thousands) Financial instruments whose contract amounts represent potential credit risk: Commitments to extend credit under amortizing loans (1) $ 44,643 $ 23,891 Commitments to extend credit under home equity lines of credit (2) 13,218 13,653 Unused portion of construction loans (3) 69,198 74,173 Unused portion of business lines of credit 19,864 19,207 Standby letters of credit 954 1,296 (1) Commitments for loans are extended to customers for up to 90 days after which they expire. Excludes commitments to originate loans held for sale, which are discussed in the following footnote. (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 . Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary. The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of September 30, 2021 and December 31, 2020. Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. The Company has only been required to make insignificant repurchases as a result of breaches of these representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages, historical experience has resulted in insignificant losses and repurchase activity. The Company's reserve for losses related to these recourse provisions totaled $ 2.8 million and $ 2.9 million as of September 30, 2021 and December 31, 2020, respectively. In the normal course of business, the Company, or its subsidiaries, are involved in various legal proceedings. In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements. 27 Note 11 – Derivative Financial Instruments Mortgage Banking Derviatives In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans to third party investors. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held for sale. The Company’s mortgage banking derivatives have not been designated as hedge relationships. These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded as a component of mortgage banking income in the Company’s consolidated statements of operations. The Company does not use derivatives for speculative purposes. Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. At September 30, 2021, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $ 724.0 million and interest rate lock commitments with an aggregate notional amount of approximately $ 482.0 million. The fair value of the forward commitments to sell mortgage loans at September 30, 2021 included a gain of $ 3.7 million that is reported as a component of other assets on the Company's consolidated statement of financial condition. The fair value of the interest rate locks at September 30, 2021 included a gain of $ 3.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition. At December 31, 2020, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $ 779.9 million and interest rate lock commitments with an aggregate notional amount of approximately $ 486.2 million. The fair value of the forward commitments to sell mortgage loans at December 31, 2020 included a loss of $ 5.1 million that is reported as a component of other liabilities on the Company's consolidated statement of financial condition. The fair value of the interest rate locks at December 31, 2020 included a gain of $ 11.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition. In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated by the loan arising from exercise of the loan commitment when sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market. The fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income. The significant unobservable input used in the fair value measurement of the Company's mortgage banking derivatives, including interest rate lock commitments, is the loan pull through rate. This represents the percentage of loans currently in a lock position which the Company estimates will ultimately close. Generally, the fair value of an interest rate lock commitment will be positively (negatively) impacted when the prevailing interest rate is lower (higher) than the interest rate lock commitment. Generally, an increase in the pull through rate will result in the fair value of the interest rate lock increasing when in a gain position, or decreasing when in a loss position. The pull through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed using historical data and the ratio is periodically reviewed by the Company. Interest Rate Swaps The Company may offer derivative contracts to its customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer through back-to-back swaps. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to current earnings during the period in which the changes occurred. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities on the Company's consolidated statement of financial condition, respectively, in equal amounts for these transactions. The aggregate amortizing notional value of back-to-back swaps with various commercial borrowers was $ 105.8 million at September 30, 2021 and $ 107.5 million at December 31, 2020. The Company receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These swaps mature in December 2029 to June 2037 . Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported as a component of other assets on the Company's consolidated statement of financial condition of $ 1.6 million as of September 30, 2021 and $ 3.9 million as of December 31, 2020. As of September 30, 2021 and December 31, 2020, no back-to-back swaps were in default. 28 The aggregate amortizing notional value of back-to-back swaps with dealer counterparties was $ 105.8 million as of September 30, 2021 and $ 107.5 million as of December 31, 2020. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. These swaps maturity dates range from December 2029 to June 2037 . Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported as a component of other liabilities on the Company's consolidated statement of financial condition of $ 1.6 million as of September 30, 2021 and $ 3.9 million as of December 31, 2020. No right of offset existed with dealer counterparty swaps as of September 30, 2021 and December 31, 2020. All changes in the fair value of these instruments are recorded in other non-interest income. The Company pledged $ 1.9 million in cash and cash equivalents to secure its obligation under these contracts at September 30, 2021 and $ 7.2 million in mortgage backed securities at December 31, 2020. Note 12 – Earnings Per Share Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. There were 45,000 and 124,000 antidilutive shares of common stock for the three months ended September 30, 2021 and 2020 , respectively. There were 50,000 and 123,000 antidilutive shares of common stock for the nine months ended September 30, 2021 and 2020, respectively. Presented below are the calculations for basic and diluted earnings per share: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (In Thousands, except per share amounts) Net income $ 19,000 $ 26,293 $ 58,238 $ 53,310 Weighted average shares outstanding 23,785 24,297 23,790 24,720 Effect of dilutive potential common shares 175 83 197 122 Diluted weighted average shares outstanding 23,960 24,380 23,987 24,842 Basic earnings per share $ 0.80 $ 1.08 $ 2.45 $ 2.16 Diluted earnings per share $ 0.79 $ 1.08 $ 2.43 $ 2.15 Note 13 – Fair Value Measurements ASC Topic 820, "Fair Value Measurements and Disclosures" defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels. Level 1 inputs - In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs - Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. 29 The following table presents information about our assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. Fair Value Measurements Using September 30, 2021 Level 1 Level 2 Level 3 (In Thousands) Assets Available-for-sale securities Mortgage-backed securities $ 21,448 $ - $ 21,448 $ - Collateralized mortgage obligations Government sponsored enterprise issued 90,232 - 90,232 - Private-label issued 2,993 - 2,993 - Government sponsored enterprise bonds 2,478 - 2,478 - Municipal securities 46,331 - 46,331 - Other debt securities 11,348 - 11,348 - Loans held for sale 325,958 - 325,958 - Mortgage banking derivative assets 6,806 - - 6,806 Interest rate swap assets 1,587 - 1,587 - Liabilities Mortgage banking derivative liabilities - - - - Interest rate swap liabilities 1,587 - 1,587 - Fair Value Measurements Using December 31, 2020 Level 1 Level 2 Level 3 (In Thousands) Assets Available-for-sale securities Mortgage-backed securities $ 25,100 $ - $ 25,100 $ - Collateralized mortgage obligations Government sponsored enterpris issued 63,284 - 63,284 - Private-label 3,665 - 3,665 - Government sponsored enterprise issued 2,503 - 2,503 - Municipal securities 53,614 - 53,614 - Other debt securities 11,453 - 11,453 - Loans held for sale 402,003 - 402,003 - Mortgage banking derivative assets 11,057 - - 11,057 Interest rate swap assets 3,892 - 3,892 - Liabilities Mortgage banking derivative liabilities 5,140 - - 5,140 Interest rate swap liabilities 3,892 - 3,892 - The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis: Available-for-sale securities – The Company’s investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The fair value of municipal and other debt securities is determined by a third party valuation source using observable market data utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of comprehensive income. 30 Loans held for sale – The Company carries loans held for sale at fair value under the fair value option model. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques. The change in fair value is recorded through an adjustment to the statement of income. Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company utilizes a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also utilizes a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of income. Interest rate swap assets/liabilities - The Company offers loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty. The fair values of derivatives are based on valuation models using observable market data as of the measurement date. Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Interest rate swap assets and liabilities are considered to be Level 2 in the fair value hierarchy of valuation techniques. The change in fair value is recorded through an adjustment to the statement of operations, within other income and other expense. The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2021 and 2020. Nine months ended September 30, 2021 2020 (In Thousands) Mortgage derivative, net balance at the beginning of the period $ 5,917 $ 1,835 Mortgage derivative gain, net 889 10,320 Mortgage derivative, net balance at the end of the period $ 6,806 $ 12,155 T here were no transfers in or out of Level 1, 2 or 3 measurements during the periods. Assets Recorded at Fair Value on a Non-recurring Basis The following tables present information about our assets recorded in our consolidated statements of financial condition at their fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. Fair Value Measurements Using September 30, 2021 Level 1 Level 2 Level 3 (In Thousands) Real estate owned $ 148 $ - $ - $ 148 Impaired mortgage servicing rights - - - - Fair Value Measurements Using December 31, 2020 Level 1 Level 2 Level 3 (In Thousands) Impaired loans, net (1) $ 185 $ - $ - $ 185 Real estate owned 322 - - 322 Impaired mortgage servicing rights 189 - - 189 (1) Represents collateral-dependent impaired loans, net, which are included in loans. 31 Loans – We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable value of the underlying collateral. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation techniques. At September 30, 2021, there were no impaired loans. At December 31, 2020, loans determined to be impaired with an outstanding balance of $ 208,000 were carried net of specific reserves of $ 23,000 for a fair value of $ 185,000 . Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves. Real estate owned – On a non-recurring basis, real estate owned is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. There were no writedowns during the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, real estate owned totaled $ 148,000 and $ 322,000 , respectively. Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value. At September 30, 2021 , there was no impairment on mortgage servicing rights at and December 31, 2020 , there was $ 77,000 of impairment on mortgage servicing rights. For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021, the significant unobservable inputs used in the fair value measurements were as follows: Significant Unobservable Input Value Fair Value at September 30, 2021 Valuation Technique Significant Unobservable Inputs Minimum Value Maximum Value Weighted Average Mortgage banking derivatives, net $ 6,806 Pricing models Pull through rate 20.7 % 99.8 % 89.2 % Real estate owned 148 Market approach Discount rates applied to appraisals 34.8 % 34.8 % 34.8 % A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 32 The carrying amounts and fair values of the Company’s financial instruments consist of the following: September 30, 2021 December 31, 2020 Carrying amount Fair Value Carrying amount Fair Value Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 (In Thousands) Financial Assets Cash and cash equivalents $ 358,614 $ 358,614 $ 358,614 $ - $ - $ 94,767 $ 94,767 $ 94,767 $ - $ - Securities available-for-sale 174,830 174,830 - 174,830 - 159,619 159,619 - 159,619 - Loans held for sale 325,958 325,958 - 325,958 - 402,003 402,003 - 402,003 - Loans receivable 1,226,834 1,229,881 - - 1,229,881 1,375,137 1,374,898 - - 1,374,898 FHLB stock 24,438 24,438 - 24,438 - 26,720 26,720 - 26,720 - Accrued interest receivable 4,242 4,242 4,242 - - 4,957 4,957 4,957 - - Mortgage servicing rights 1,161 1,338 - - 1,338 5,977 7,075 - - 7,075 Mortgage banking derivative assets 6,806 6,806 - - 6,806 11,057 11,057 - - 11,057 Interest rate swap asset 1,587 1,587 - 1,587 - 3,892 3,892 - 3,892 - Financial Liabilities Deposits 1,246,564 1,246,664 588,797 657,867 - 1,184,870 1,186,062 483,542 702,520 - Advance payments by borrowers for taxes 25,298 25,298 25,298 - - 3,522 3,522 3,522 - - Borrowings 475,000 491,696 - 491,696 - 508,074 545,107 - 545,107 - Accrued interest payable 937 937 937 - - 1,137 1,137 1,137 - - Mortgage banking derivative liabilities - - - - - 5,140 5,140 - - 5,140 Interest rate swap liability 1,587 1,587 - 1,587 - 3,892 3,892 - 3,892 - The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments. Cash and Cash Equivalents The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value. Securities The fair value of securities is generally determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features. 33 Loans Held for Sale Fair value is estimated using the prices of the Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans. Loans Receivable The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the market place. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as one- to four-family, multi-family, home equity, construction and land, commercial real estate, commercial, and other consumer. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. FHLB Stock For FHLB stock, the carrying amount is the amount at which shares can be redeemed with the FHLB and is a reasonable estimate of fair value. Deposits and Advance Payments by Borrowers for Taxes The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date. Borrowings Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings. Accrued Interest Payable and Accrued Interest Receivable For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value. Commitments to Extend Credit and Standby Letters of Credit Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would be generally established at market rates at the time of the draw. Fair values for the Company’s commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparty’s credit standing, and discounted cash flow analyses. The fair value of the Company’s commitments to extend credit was not material at September 30, 2021 and December 31, 2020. Mortgage Banking Derivative Assets and Liabilities Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment, and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. On the Company’s consolidated statements of financial condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities. Interest Rate Swap Assets and Liabilities The carrying value and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. 34 Note 14 – Segment Reporting Selected financial and descriptive information is required to be provided about reportable operating segments, considering a "management approach" concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization, focusing on financial information that an enterprise's chief operating decision-makers use to make decisions about the enterprise's operating matters. The Company has determined that it has two reportable segments: community banking and mortgage banking. The Company's operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company's business segments are not necessarily comparable with similar information for other financial institutions. Community Banking The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. Within this segment, the following products and services are provided: (1) lending solutions such as residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit; (2) deposit and transactional solutions such as checking, credit, debit and pre-paid cards, online banking and bill pay, and money transfer services; (3) investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, and (4) fixed and variable annuities, insurance as well as trust and investment management accounts. Consumer products include loan and deposit products: mortgage, home equity loans and lines, personal term loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Consumer products also include personal investment services. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Mortgage Banking The mortgage banking segment provides residential mortgage loans for the primary purpose of sale on the secondary market. Mortgage banking products and services are provided by offices in 21 states with the ability to lend in 48 states. 35 Presented below is the segment information: As of or for the three months ended September 30, 2021 Community Banking Mortgage Banking Holding Company and Other Consolidated (In Thousands) Net interest income (expense) $ 14,090 $ ( 2 ) $ 26 $ 14,114 Provision (credit) for loan losses ( 750 ) 50 - ( 700 ) Net interest income (expense) after provision for loan losses 14,840 ( 52 ) 26 14,814 Noninterest income 1,726 51,290 ( 80 ) 52,936 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 5,360 28,981 ( 112 ) 34,229 Occupancy, office furniture and equipment 909 1,579 - 2,488 Advertising 233 602 - 835 Data processing 531 450 5 986 Communications 122 209 - 331 Professional fees 130 421 ( 1 ) 550 Real estate owned 1 - - 1 Loan processing expense - 1,135 - 1,135 Other 422 2,270 76 2,768 Total noninterest expenses 7,708 35,647 ( 32 ) 43,323 Income before income taxes 8,858 15,591 ( 22 ) 24,427 Income tax expense 2,092 3,341 ( 6 ) 5,427 Net income $ 6,766 $ 12,250 $ ( 16 ) $ 19,000 Total assets $ 2,184,200 $ 381,177 $ ( 331,266 ) $ 2,234,111 As of or for the three months ended September 30, 2020 Community Banking Mortgage Banking Holding Company and Other Consolidated (In Thousands) Net interest income (expense) $ 13,461 $ ( 58 ) $ 6 $ 13,409 Provision for loan losses 1,000 25 - 1,025 Net interest income (expense) after provision for loan losses 12,461 ( 83 ) 6 12,384 Noninterest income 3,104 73,143 ( 484 ) 75,763 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 5,000 34,559 ( 154 ) 39,405 Occupancy, office furniture and equipment 874 1,595 - 2,469 Advertising 252 609 - 861 Data processing 490 426 6 922 Communications 113 226 - 339 Professional fees 266 4,465 7 4,738 Real estate owned 11 - - 11 Loan processing expense - 1,336 - 1,336 Other 818 2,444 ( 342 ) 2,920 Total noninterest expenses 7,824 45,660 ( 483 ) 53,001 Income before income taxes 7,741 27,400 5 35,146 Income tax expense 1,565 7,284 4 8,853 Net income $ 6,176 $ 20,116 $ 1 $ 26,293 Total assets $ 2,118,968 $ 458,526 $ ( 356,672 ) $ 2,220,822 36 As of or for the nine months ended September 30, 2021 Community Banking Mortgage Banking Holding Company and Other Consolidated (In Thousands) Net interest income (expense) $ 42,854 $ ( 603 ) $ 92 $ 42,343 Provision (credit) for loan losses ( 2,600 ) 80 - ( 2,520 ) Net interest income (expense) after provision for loan losses 45,454 ( 683 ) 92 44,863 Noninterest income 4,599 156,881 ( 301 ) 161,179 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 15,209 87,413 ( 344 ) 102,278 Occupancy, office furniture and equipment 2,821 4,525 - 7,346 Advertising 702 1,868 - 2,570 Data processing 1,508 1,347 16 2,871 Communications 327 661 - 988 Professional fees 522 258 24 804 Real estate owned ( 11 ) - - ( 11 ) Loan processing expense - 3,670 - 3,670 Other 1,323 7,629 152 9,104 Total noninterest expenses 22,401 107,371 ( 152 ) 129,620 Income before income taxes 27,652 48,827 ( 57 ) 76,422 Income tax expense 6,006 12,198 ( 20 ) 18,184 Net income $ 21,646 $ 36,629 $ ( 37 ) $ 58,238 As of or for the nine months ended September 30, 2020 Community Banking Mortgage Banking Holding Company and Other Consolidated (In Thousands) Net interest income (expense) $ 40,070 $ ( 948 ) $ 62 $ 39,184 Provision for loan losses 6,075 235 - 6,310 Net interest income (expense) after provision for loan losses 33,995 ( 1,183 ) 62 32,874 Noninterest income 7,068 168,159 ( 1,096 ) 174,131 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 15,074 86,085 ( 464 ) 100,695 Occupancy, office furniture and equipment 2,754 4,990 - 7,744 Advertising 797 1,828 - 2,625 Data processing 1,773 1,234 16 3,023 Communications 301 693 - 994 Professional fees 690 6,935 22 7,647 Real estate owned 55 - - 55 Loan processing expense - 3,620 - 3,620 Other 1,930 8,235 ( 670 ) 9,495 Total noninterest expenses 23,374 113,620 ( 1,096 ) 135,898 Income before income taxes 17,689 53,356 62 71,107 Income tax expense 3,293 14,492 12 17,797 Net income $ 14,396 $ 38,864 $ 50 $ 53,310 Note 15 – Leases The Company has entered into operating lease agreements for two of its community banking branch locations, all of its mortgage banking office locations, and some of its office equipment. The leases have fixed terms defined regarding the payments and length. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of financial condition. Some of the leases included options to extend the leases. These options are reviewed and factored into the length of the lease if the option is expected to be extended. Leases did not contain an implicit rate; therefore, the Company used the incremental borrowing rates for the discount rate. There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three or nine months ended September 30, 2021 and 2020. At September 30, 2021, the Company had lease liabilities totaling $ 6.3 million and right-of-use assets totaling $ 5.8 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively, on the consolidated statements of financial condition. The cost components of our operating leases were as follows for the three and nine months ended September 30, 2021 and 2020: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 (In Thousands) Operating lease cost $ 858 $ 786 $ 2,366 $ 2,380 Variable cost 172 134 399 374 Short-term lease cost 97 184 388 563 Total $ 1,127 $ 1,104 $ 3,153 $ 3,317 At September 30, 2021, the Company had leases that had not yet commenced, but will create approximately $ 31,000 of additional lease liabilities and right-of-use assets for the Company in the fourth quarter of 2021. The table below summarizes other information related to our operating leases: Nine months ended September 30, 2021 (Dollars in Thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,535 Initial recognition of right of use asset 979 Initial recognition of lease liabilities 979 Weighted average remaining lease term - operating leases, in years 2.9 Weighted average discount rate - operating leases 5.1 % As of September 30, 2021, lease liability information for the Company is summarized in the following table. Maturity analysis Operating leases (In Thousands) One year or less $ 2,423 More than one year through two years 1,900 More than two years through three years 1,253 More than three years through four years 591 More than four years through five years 202 More than five years 829 Total lease payments 7,198 Present value discount ( 942 ) Lease liability $ 6,256 37