Waterstone Financial, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Management’s Annual Report on Internal Control Over Financial Reporting The management of Waterstone Financial, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on that assessment, we believe that, as of December 31, 2021, our internal control over financial reporting is effective based on those criteria. CliftonLarsonAllen LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, as stated in their report dated Feruary 28, 2022. /s/ Douglas S. Gordan /s/ Mark R. Gerke Douglas S. Gordon Mark R. Gerke Chief Executive Officer Chief Financial Officer - 56 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Waterstone Financial, Inc. Wauwatosa, Wisconsin Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statement of financial condition of Waterstone Financial, Inc. and Subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework , issued by COSO in 2013. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. - 57 - Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. - 58 - Allowance for Loan Losses As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses is a valuation allowance for probable incurred losses in its loan portfolio to the extent they are reasonable to estimate. The allowance for loan losses was $15.8 million at December 31, 2021, which consists of two components (i) specific reserves based on probable losses on specific loans (specific reserves), none in the current year, and (ii) a general allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company (general reserves), representing $15.8 million. The general reserve component of the allowance for loan losses is based on a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. The qualitative adjustment for the general reserve includes management’s consideration of levels of and trends in delinquencies and impaired loans, trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. Management’s identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. We identified the estimate of the qualitative adjustment of the general reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which required especially subjective auditor judgment. The primary procedures we performed to address this critical audit matter included performing substantive testing, including evaluating management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, which consisted of the following: • Evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the information gathered. • Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data. • Assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period. • Analytically evaluating the qualitative adjustment in the current year compared to prior years for directional consistency and reasonableness. • Testing the calculations used by management to translate the assumptions and key factors into the allowance estimated amount. /s/ CliftonLarsonAllen LLP CliftonLarsonAllen LLP We have served as the Company’s auditor since 2021. Milwaukee, Wisconsin February 28, 2022 - 59 - Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Waterstone Financial, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Waterstone Financial, Inc. and Subsidiaries (the Company) as of December 31, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses - Adjustments to historical loss ratios As described in Notes 1 and 3 to the financial statements, the Company’s allowance for loan losses totaled $18,823,000, which consists of a reserve on loans collectively evaluated for impairment (“general reserve”) of $18,800,000 and a reserve on loans individually evaluated for impairment (“specific reserve”) of $23,000 at December 31, 2020. Management’s estimate of the allowance for loan losses is based on its assessment of probable loan losses inherent in the Company’s loan portfolio at December 31, 2020. The Company’s general reserve is estimated by applying historical loss ratios, adjusted for risk components not reflected in the historical loss experience, to the balance of the non-impaired loan portfolio. Historical loss ratios are calculated for each loan category based on historical losses experienced by the Company. Adjustments to historical loss ratios are made for differences in various risk components including changes in lending policies and personnel, economic conditions, portfolio origination activity, interest rates and past due and classified loan trends. The adjustments to historical loss ratios require a significant amount of judgement by management and are highly sensitive to changes in significant assumptions. We identified the adjustments to historical loss ratios in the general reserve component of the allowance for loan losses as a critical audit matter as auditing the underlying adjustments required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and are highly sensitive to changes in significant assumptions. Our audit procedures related to the adjustments to historical loss ratios in the general reserve component of the allowance for loan losses included the following, among others: • We obtained an understanding of the allowance for loan loss methodology and relevant controls related to the adjustments to historical loss ratios in the calculation of the allowance for loan losses and tested such controls for design and operating effectiveness, including the completeness and accuracy of information used in management’s assessment, and its challenge and review of the adjustments to historical loss ratios. • We tested the completeness and accuracy of data used by management in determining adjustments to historical loss ratios by agreeing this data to internal and external source data • We tested management’s conclusions regarding the appropriateness of the adjustments to historical loss ratios by challenging assumptions and rationale for the adjustments in total, both in magnitude and directional consistency, with underlying data used and for consistency with the Company’s policies. /s/ RSM US LLP We have served as the Company's auditor from 2014 through 2020 Chicago, Illinois March 1, 2021 - 60 - Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Financial Condition December 31, 2021 and 2020 December 31, 2021 2020 Assets (In Thousands, except share data) Cash $ 343,016 $ 56,190 Federal funds sold 13,981 18,847 Interest-earning deposits in other financial institutions and other short term investments 19,725 19,730 Cash and cash equivalents 376,722 94,767 Securities available for sale (at fair value) 179,016 159,619 Loans held for sale (at fair value) 312,738 402,003 Loans receivable 1,205,785 1,375,137 Less: Allowance for loan losses 15,778 18,823 Loans receivable, net 1,190,007 1,356,314 Office properties and equipment, net 22,273 23,722 Federal Home Loan Bank stock (at cost) 24,438 26,720 Cash surrender value of life insurance 65,368 63,573 Real estate owned, net 148 322 Prepaid expenses and other assets 45,148 57,547 Total assets $ 2,215,858 $ 2,184,587 Liabilities and Shareholders’ Equity Liabilities: Demand deposits $ 214,409 $ 188,225 Money market and savings deposits 392,314 295,317 Time deposits 626,663 701,328 Total deposits 1,233,386 1,184,870 Borrowings 477,127 508,074 Advance payments by borrowers for taxes 4,094 3,522 Other liabilities 68,478 75,003 Total liabilities 1,783,085 1,771,469 Commitments and contingencies (Note 14) Shareholders’ equity: Preferred stock (par value $ 0.01 per share) Authorized - 50,000,000 shares in 2021 and 2020 , no shares issued - - Common stock (par value $ 0.01 per share) Authorized - 100,000,000 shares in 2021 and 2020 Issued - 24,795,124 in 2021 and 25,087,976 in 2020 Outstanding - 24,795,124 in 2021 and 25,087,976 in 2020 248 251 Additional paid-in capital 174,505 180,684 Retained earnings 273,398 245,287 Unearned ESOP shares ( 14,243 ) ( 15,430 ) Accumulated other comprehensive (loss) income, net of taxes ( 1,135 ) 2,326 Total shareholders’ equity 432,773 413,118 Total liabilities and shareholders’ equity $ 2,215,858 $ 2,184,587 See accompanying notes to consolidated financial statements - 61 - Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Operations Years ended December 31, 2021, 2020 and 2019 Years ended December 31, 2021 2020 2019 (In Thousands, except per share amounts) Interest income: Loans $ 64,366 $ 72,633 $ 72,235 Mortgage-related securities 1,954 2,488 2,978 Debt securities, federal funds sold and short-term investments 3,563 3,363 4,528 Total interest income 69,883 78,484 79,741 Interest expense: Deposits 4,420 14,365 17,278 Borrowings 9,948 10,619 10,266 Total interest expense 14,368 24,984 27,544 Net interest income 55,515 53,500 52,197 Provision (credit) for loan losses ( 3,990 ) 6,340 ( 900 ) Net interest income after provision for loan losses 59,505 47,160 53,097 Noninterest income: Service charges on loans and deposits 3,325 4,462 2,363 Increase in cash surrender value of life insurance 1,615 1,905 1,935 Mortgage banking income 191,035 233,245 125,666 Other 7,220 4,405 786 Total noninterest income 203,195 244,017 130,750 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 135,115 139,046 101,718 Occupancy, office furniture, and equipment 9,612 10,223 10,606 Advertising 3,528 3,691 3,885 Data processing 3,950 3,941 3,630 Communications 1,309 1,329 1,359 Professional fees 1,275 8,118 3,605 Real estate owned 3 ( 8 ) ( 146 ) Loan processing expense 4,610 4,646 3,288 Other 11,192 12,075 8,328 Total noninterest expenses 170,594 183,061 136,273 Income before income taxes 92,106 108,116 47,574 Income tax expense 21,315 26,971 11,671 Net income $ 70,791 $ 81,145 $ 35,903 Income per share: Basic $ 2.98 $ 3.32 $ 1.38 Diluted $ 2.96 $ 3.30 $ 1.37 Weighted average shares outstanding: Basic 23,741 24,464 26,021 Diluted 23,931 24,607 26,247 See accompanying notes to consolidated financial statements - 62 - Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Years ended December 31, 2021, 2020 and 2019 Years ended December 31, 2021 2020 2019 (In Thousands) Net income $ 70,791 $ 81,145 $ 35,903 Other comprehensive (loss) income, net of tax: Net unrealized holding (loss) gain on available for sale securities arising during the period, net of tax benefit (expense) of $ 1,294 , ($ 630 ) and ($ 1,122 ) respectively ( 3,461 ) 1,684 3,003 Total other comprehensive (loss) income ( 3,461 ) 1,684 3,003 Comprehensive income $ 67,330 $ 82,829 $ 38,906 See accompanying notes to consolidated financial statements - 63 - Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2021, 2020 and 2019 Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity (In Thousands) Balances at December 31, 2018 28,463 $ 285 $ 232,406 $ 187,153 ( 17,804 ) $ ( 2,361 ) $ 399,679 Comprehensive income: Net income - - - 35,903 - - 35,903 Other comprehensive income: - - - - - 3,003 3,003 Total comprehensive income 38,906 ESOP shares committed to be released to Plan participants - - 618 - 1,187 - 1,805 Cash dividends, $ 0.98 per share - - - ( 25,663 ) - - ( 25,663 ) Stock compensation activity 50 - 659 - - - 659 Stock based compensation expense - - 1,067 - - - 1,067 Purchase of common stock returned to authorized but unissued ( 1,365 ) ( 14 ) ( 22,753 ) - - - ( 22,767 ) Balances at December 31, 2019 27,148 $ 271 $ 211,997 $ 197,393 ( 16,617 ) $ 642 $ 393,686 Comprehensive income: Net income - $ - - 81,145 - - 81,145 Other comprehensive income: - - - - - 1,684 1,684 Total comprehensive income 82,829 ESOP shares committed to be released to Plan participants - - 489 - 1,187 - 1,676 Cash dividends, $ 1.36 per share - - - ( 33,251 ) - - ( 33,251 ) Stock compensation activity 293 3 3,701 - - - 3,704 Stock based compensation expense - - 716 - - - 716 Purchase of common stock returned to authorized but unissued ( 2,353 ) ( 23 ) ( 36,219 ) - - - ( 36,242 ) Balances at December 31, 2020 25,088 $ 251 $ 180,684 $ 245,287 ( 15,430 ) $ 2,326 $ 413,118 Comprehensive income: Net income - $ - - 70,791 - - 70,791 Other comprehensive loss: - - - - - ( 3,461 ) ( 3,461 ) Total comprehensive income 67,330 ESOP shares committed to be released to Plan participants - - 942 - 1,187 - 2,129 Cash dividends, $ 1.80 per share - - - ( 42,680 ) - - ( 42,680 ) Stock compensation activity 208 2 2,305 - - - 2,307 Stock based compensation expense - - 745 - - - 745 Purchase of common stock returned to authorized but unissued ( 501 ) ( 5 ) ( 10,171 ) - - - ( 10,176 ) Balances at December 31, 2021 24,795 $ 248 $ 174,505 $ 273,398 ( 14,243 ) $ ( 1,135 ) $ 432,773 See accompanying notes to consolidated financial statements - 64 - Waterstone Financial, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years ended December 31, 2021, 2020 and 2019 Years ended December 31, 2021 2020 2019 (In Thousands) Operating activities: Net income $ 70,791 $ 81,145 $ 35,903 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision (credit) for loan losses ( 3,990 ) 6,340 ( 900 ) Depreciation, amortization, accretion 6,048 5,608 4,698 Deferred income taxes 1,378 ( 2,620 ) 639 Stock based compensation 745 716 1,067 Origination of mortgage servicing rights ( 5,778 ) ( 13,406 ) ( 354 ) Proceeds on sales of mortgage servicing rights 12,448 6,985 - Gain on sale of loans held for sale ( 193,399 ) ( 245,358 ) ( 128,928 ) Loans originated for sale ( 4,198,139 ) ( 4,332,028 ) ( 2,853,222 ) Proceeds on sales of loans originated for sale 4,480,804 4,395,505 2,903,643 Gain on death benefit on bank owned life insurance - ( 1,456 ) - Decrease (increase) in accrued interest receivable 944 387 ( 7 ) Increase in cash surrender value of life insurance ( 1,615 ) ( 1,905 ) ( 1,935 ) Decrease (increase) in derivative assets 6,688 ( 9,222 ) ( 179 ) (Decrease) increase in accrued interest on deposits and borrowings ( 178 ) ( 422 ) 164 (Increase) decrease in prepaid income tax ( 2,558 ) 113 330 Legal settlement ( 4,250 ) 4,250 - (Decrease) increase in derivative liabilities ( 5,140 ) 5,140 ( 1,116 ) Net gain on real estate owned ( 12 ) ( 107 ) ( 304 ) Gain on sale of mortgage servicing rights ( 4,032 ) ( 600 ) - Change in other assets and other liabilities, net ( 6,301 ) 7,353 282 Net cash provided by (used in) operating activities 154,454 ( 93,582 ) ( 40,219 ) I nvesting activities: Net decrease (increase) in loans receivable 170,297 12,353 ( 9,896 ) Purchases of: FHLB stock - ( 5,570 ) ( 8,100 ) Debt securities - ( 10,125 ) - Mortgage related securities ( 73,687 ) ( 19,372 ) ( 28,860 ) Premises and equipment, net ( 778 ) ( 1,225 ) ( 3,114 ) Bank owned life insurance ( 180 ) ( 180 ) ( 180 ) Proceeds from: Principal repayments on mortgage-related securities 40,445 45,254 31,944 Maturities of debt securities 9,055 5,290 8,080 Sales of FHLB stock 2,282 - 6,300 Death benefit from bank owned life insurance - 9,633 - Sales of real estate owned 183 1,133 2,674 Net cash provided by (used in) investing activities 147,617 37,191 ( 1,152 ) Financing activities: Net increase in deposits 48,516 117,094 29,281 Net change in short term borrowings ( 30,947 ) 24,512 8,516 Repayment of long term debt - - ( 125,000 ) Proceeds from long term debt - - 165,000 Increase (decrease) in advance payments by borrowers for taxes 572 ( 690 ) ( 159 ) Cash dividends on common stock ( 30,388 ) ( 31,520 ) ( 25,960 ) Proceeds from stock option exercises 2,307 3,704 659 Purchase of common stock returned to authorized but unissued ( 10,176 ) ( 36,242 ) ( 22,767 ) Net cash (used in) provided by financing activities ( 20,116 ) 76,858 29,570 Increase (decrease) in cash and cash equivalents 281,955 20,467 ( 11,801 ) Cash and cash equivalents at beginning of year 94,767 74,300 86,101 Cash and cash equivalents at end of year $ 376,722 $ 94,767 $ 74,300 Supplemental information: Cash paid or credited during the period for: Income tax payments $ 22,663 $ 29,478 $ 10,703 Interest payments 14,546 25,406 27,380 Noncash investing activities: Loans receivable transferred to other real estate - 637 1,052 Dividends declared but not paid in other liabilities 17,525 5,232 3,501 See accompanying notes to consolidated financial statements - 65 - Waterstone Financial, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years ended December 31, 2021, 2020 and 2019 1) Summary of Significant Accounting Policies The following significant accounting and reporting policies of Waterstone Financial, Inc. and subsidiaries (collectively, the “Company”), conform to U.S. generally accepted accounting principles, or (“GAAP”), and are used in preparing and presenting these consolidated financial statements. 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. a) Nature of Operations The Company is a one-bank holding company with two operating segments – community banking and mortgage banking. WaterStone Bank SSB (the "Bank" or "WaterStone Bank") is principally engaged in the business of attracting deposits from the general public and using such deposits to originate real estate, business and consumer loans. The Bank provides a full range of financial services to customers through branch locations in southeastern Wisconsin. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Bank owns a mortgage banking subsidiary that originates residential real estate loans held for sale at various branch offices across the country. Mortgage banking volume fluctuates widely in connection with movements in interest rates. Mortgage banking income is reported as a single line item in the statements of operations while mortgage banking expense is distributed among the various noninterest expense lines. Compensation, payroll taxes and other employee benefits expense fluctuates in relation to fluctuations in mortgage banking income. b) Principles of Consolidation The consolidated financial statements include the accounts and operations of Waterstone Financial, Inc. and its wholly owned subsidiary, WaterStone Bank. The Bank has the following wholly owned subsidiaries: Wauwatosa Investments, Inc., Waterstone Mortgage Corporation, and Main Street Real Estate Holdings, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. c) Use of Estimates The preparation of the 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. d) Cash and Cash Equivalents The Company considers federal funds sold and highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. e) Securities Available for Sale Securities At the time of purchase, investment debt securities are classified as available for sale, as management has the intent and ability to hold such securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell investment securities available for sale would be based on various factors, including, but not limited to asset/liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of deferred tax, reported as a separate component of equity in accumulated other comprehensive income (loss). The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities and collateralized mortgage obligations, over the estimated life of the security. Such amortization or accretion is included in interest income from securities. Realized gains or losses on securities sales (using specific identification method) are included in noninterest income. Declines in value judged to be other than temporary are included in net impairment losses recognized in earnings in the consolidated statements of operations. - 66 - Other-Than-Temporary Impairment One of the significant estimates related to securities is the evaluation of investments for other-than-temporary impairment. The Company assesses investment securities with unrealized loss positions for other than temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either temporary or other-than-temporary. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost and the expected recovery period of the security, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of investment securities below amortized cost are deemed to be other-than-temporary when the Company cannot assert that it will recover its amortized cost basis, including whether the present value of cash flows expected to be collected is less than the amortized cost basis of the security. If it is more likely than not that the Company will be required to sell the security before recovery or if the Company has the intent to sell, an other-than-temporary impairment write down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If it is not more likely than not that the Company will be required to sell the security before recovery and if the Company does not intend to sell, the other-than-temporary impairment write down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to other factors, which is recognized as a separate component of equity. Following the recognition of an other than temporary impairment representing credit loss, the book value of an investment less the impairment loss realized becomes the new cost basis. The determination as to whether an other than temporary impairment exists and, if so, the amount considered other-than-temporarily impaired, or not impaired, is subjective and, therefore, the timing and amount of other than temporary impairments constitute material estimates that are subject to significant change. Federal Home Loan Bank Stock Federal Home Loan Bank ("FHLB") stock is carried at cost, which is the amount that the stock is redeemable by tendering to the FHLB or the amount at which shares can be sold to other FHLB members. f) Loans Held for Sale The origination of residential real estate loans is an integral component of the business of the Company. The Company generally sells its originations of long-term fixed interest rate mortgage loans in the secondary market, and on a selective basis, retains the rights to service the loans sold. Gains and losses on the sales of these loans are determined using the specific identification method. Mortgage loans originated for sale are generally sold within 45 days after closing. The Company has elected to carry loans held for sale at fair value. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the market. The amount by which cost differs from market value is accounted for as a valuation adjustment to the carrying value of the loans. Changes in value are included in mortgage banking income in the consolidated statements of operations. Costs to originate loans held for sale are expensed as incurred and are included on the appropriate noninterest expense lines of the statements of operations. Salaries, commissions and related payroll taxes are the primary costs to originate and comprised approximately 79.2 % of total mortgage banking noninterest expense for 2021. The value of mortgage loans held for sale and other residential mortgage loan commitments to customers are hedged by utilizing both best efforts and mandatory forward commitments to sell loans to investors in the secondary market. Such forward commitments are generally entered into at the time when applications are taken to protect the value of the mortgage loans from increases in market interest rates during the period held. The Company recognizes revenue associated with the expected future cash flows of servicing loans at the time a forward loan commitment is made. g) Loans Receivable and Related Interest Income Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. Loans are carried at the principal amount outstanding, net of any unearned income, charge-offs and unamortized deferred fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan yield. Amortization is based on a level-yield method over the contractual life of the related loans or until the loan is paid in full. Loan interest income is recognized on the accrual basis. Accrual of interest is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal, or when a loan becomes contractually past due 90 days or more with respect to interest or principal. At that time, previously accrued and uncollected interest on such loans is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably assured. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. - 67 - A loan is accounted for as a troubled debt restructuring if the Company, for economic reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves a modification of terms such as a reduction of the stated interest rate, a deferral of principal payments or a combination of both for a temporary period of time. If the borrower was performing in accordance with the original contractual terms at the time of the restructuring, the restructured loan is accounted for on an accruing basis as long as the borrower continues to comply with the modified terms. If the loan was not accounted for on an accrual basis at the time of restructuring, the restructured loan remains in non-accrual status until the loan completes a minimum of six consecutive contractual payments. 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) December 31, 2020 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. In December 2020, the Consolidated Appropriations Act, 2021 was passed, which extended the TDR provisions of the CARES Act to January 1, 2022. The Company elected to adopt these provisions of the CARES Act. h) Allowance for Loan Losses The allowance for loan losses is presented as a reserve against loans and represents the Company’s assessment of probable loan losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Estimated loan losses are charged against the allowance when the loan balance is confirmed to be uncollectible directly or indirectly by the borrower or upon initiation of a foreclosure action by the Company. Subsequent recoveries, if any, are credited to the allowance. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but have not been specifically identified. The Company utilizes its own loss history to estimate inherent losses on loans. Although the Bank allocates portions of the allowance to specific loans and loan types, the entire allowance is available for any loan losses that occur. The Company evaluates the need for specific valuation allowances on loans that are considered impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Within the loan portfolio, all non-accrual loans and loans modified under troubled debt restructurings have been determined by the Company to meet the definition of an impaired loan. In addition, other loans may be considered impaired loans. A valuation allowance is established for an amount equal to the impairment when the carrying amount of the loan exceeds the present value of the expected future cash flows, discounted at the loan’s original effective interest rate or the fair value of the underlying collateral. The Company also establishes valuation allowances based on an evaluation of the various risk components that are inherent in the loan portfolio. The risk components that are evaluated include lending policies and personnel, economic conditions, portfolio origination activity, interest rates, and past due and classified loan trends. The appropriateness of the allowance for loan losses is approved quarterly by the Company’s board of directors. The allowance reflects management’s best estimate of the amount needed to provide for the probable loss on impaired loans, as well as other credit risks of the Company, and is based on a risk model developed and implemented by management and approved by the Company’s board of directors. Actual results could differ from this estimate, and future additions to the allowance may be necessary based on unforeseen changes in economic conditions. In addition, federal regulators periodically review the Company’s allowance for loan losses. Such regulators have the authority to require the Company to recognize additions to the allowance at the time of their examination. i) Real Estate Owned Real estate owned consists of properties acquired through, or in lieu of, loan foreclosure. Real estate owned is transferred into the portfolio at estimated net realizable value. To the extent that the net carrying value of the loan exceeds the estimated fair value of the property at the date of transfer, the excess is charged to the allowance for loan losses within 90 days of being transferred. Subsequent write-downs to reflect current fair value, as well as gains and losses upon disposition and revenue and expenses incurred in maintaining such properties, are treated as period costs and included in real estate owned in the consolidated statements of operations. j) Mortgage Servicing Rights The Company sells residential mortgage loans in the secondary market and, on a selective basis, retains the right to service the loans sold. Upon sale, a mortgage servicing rights asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. Mortgage servicing rights, when purchased, are initially recorded at fair value. Mortgage servicing rights are amortized over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated statements of financial condition. To the extent that the Company sells mortgage servicing rights, a gain is recognized for the amount of which sale proceeds exceed the remaining unamortized cost of the servicing rights that were sold. Gains on sale of mortgage servicing rights are included in other noninterest income in the consolidated statements of operations. - 68 - k) Cash Surrender Value of Life Insurance The Company purchases bank owned life insurance on the lives of certain employees. The Company is the beneficiary of the life insurance policies. The cash surrender value of life insurance is reported at the amount that would be received in cash if the polices were surrendered. Increases in the cash value of the policies and proceeds of death benefits received are recorded in noninterest income. The increase in cash surrender value of life insurance is not subject to income taxes, as long as the Company has the intent and ability to hold the policies until the death benefits are received. l) Office Properties and Equipment Office properties and equipment, including leasehold improvements and software, are stated at cost, net of depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lease term, if shorter than the estimated useful life. Maintenance and repairs are charged to expense as incurred, while additions or major improvements are capitalized and depreciated over their estimated useful lives. Estimated useful lives of the assets are 10 to 30 years for office properties, three years to 10 years for equipment, and three years for software. m) Income Taxes The Company and its subsidiaries file consolidated federal and combined state income tax returns. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax returns. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 % likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statements of operations. n) Earnings Per Share Earnings per share (EPS) are computed using the two-class method. Stock compensation awards that contain rights to receive nonforfeitable dividends prior to the awards being vested are considered participating securities and, as such, included in the common shares outstanding. Basic earnings per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. 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. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. Shares of the Employee Stock Ownership Plan committed to be released are considered outstanding for both common and diluted EPS. o) Comprehensive Income Comprehensive income is the total of reported net income and changes in unrealized gains or losses, net of tax, on securities available for sale. p) Employee Stock Ownership Plan (ESOP) Compensation expense under the ESOP is equal to the fair value of common shares released or committed to be released to participants in the ESOP in each respective period. Common stock purchased by the ESOP and not committed to be released to participants is included in the consolidated statements of financial condition at cost as a reduction of shareholders’ equity. - 69 - q) Share Repurchases The Company has a share repurchase program. Repurchases under the repurchase program may be made in the open market, through block trades and other negotiated transactions. The share repurchase program transactions take place primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended. Under Maryland law, shares repurchased are constituted as authorized but unissued. The Company reduced the common stock at par value and to the extent the cost acquired exceeds par value, it is recorded through additional paid-in capital on the consolidated statements of financial condition and consolidated statements of changes in shareholders’ equity. r) Revenue Recognition ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, loans held for sale, investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows: Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a stop payment). Payments for these activities are generally received at the time the performance obligations are satisfied. Wealth management fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management investment management and similar fiduciary activities. These fees are typically paid to us on a monthly basis and recognized as our performance obligation is satisfied each month. Other non-interest income includes items such as bank owned life insurance income, dividends on FHLB stock and other general operating income, none of which are subject to the requirements of ASC 606. Also included in other-non-interest income are interchange fees earned when our debit and credit card clients process transactions through card networks. Our performance obligations are generally complete when the transactions generating the fees are processed. s) 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. As of Decemeber 31, 2021, we completed a calculation of the allowance for credit losses under a CECL model. 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 as we finalize the review of the most recent model run and the related underlying assumptions. 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. - 70 - The Bank adopted 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. Based on our current calculation that is being finalized, the impact of the standard on the allowance for credit losses ("ACL") as of December 31, 2021, was within a range of no change to a 10 % increase. 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, 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. ASC Topic 848 "Reference Rate Reform." Authoritative accounting guidance under ASC Topic 848, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting" provides optional expedients and exceptions for certain contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform. The guidance is effective from the date of issuance until December 31, 2022. The guidance permits entities to not apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements. - 71 - 2) Securities Securities Available for Sale The amortized cost and fair value of the Company’s investment in securities follow: December 31, 2021 Amortized cost Gross unrealized gains Gross unrealized losses Fair value (In Thousands) Mortgage-backed securities $ 19,133 $ 542 $ ( 187 ) $ 19,488 Collateralized mortgage obligations Government sponsored enterprise issued 100,543 503 ( 1,744 ) 99,302 Private-label issued 2,913 30 - 2,943 Mortgage related securities 122,589 1,075 ( 1,931 ) 121,733 Government sponsored enterprise bonds 2,500 - ( 52 ) 2,448 Municipal securities 42,295 1,206 ( 7 ) 43,494 Other debt securities 12,500 41 ( 1,200 ) 11,341 Debt securities 57,295 1,247 ( 1,259 ) 57,283 $ 179,884 $ 2,322 $ ( 3,190 ) $ 179,016 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 sponsored 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 $ 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 one of the following government sponsored enterprises: Fannie Mae, Freddie Mac or Ginnie Mae. At December 31, 2021, $ 430,000 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 value of securities at December 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers or borrowers may have the right to prepay obligations with or without prepayment penalties. December 31, 2021 Amortized cost Fair value (In Thousands) Debt securities: Due within one year $ 10,515 $ 10,615 Due after one year through five years 27,460 28,289 Due after five years through ten years 14,210 13,229 Due after ten years 5,110 5,150 Mortgage-related securities 122,589 121,733 $ 179,884 $ 179,016 - 72 - 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: December 31, 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 $ 4,042 $ ( 101 ) $ 1,956 $ ( 86 ) $ 5,998 $ ( 187 ) Collateralized mortgage obligations Government sponsored enterprise issued 66,254 ( 1,589 ) 4,371 ( 155 ) 70,625 ( 1,744 ) Government sponsered enterprise bonds 2,448 ( 52 ) - - 2,448 ( 52 ) Municipal securities 1,471 ( 7 ) - - 1,471 ( 7 ) Other debt securities - - 8,800 ( 1,200 ) 8,800 ( 1,200 ) $ 74,215 $ ( 1,749 ) $ 15,127 $ ( 1,441 ) $ 89,342 $ ( 3,190 ) 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 ) $ 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, 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 December 31, 2021, the Company identified one municipal security that was 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 securities to operate as a going concern. During the year ended December 31, 2012, the Company’s analysis of the security in this municipality resulted in $ 77,000 in credit losses that were 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. As of December 31, 2021, the remaining impaired security had an amortized cost of $ 116,000 and a total life-to-date impairment of $ 94,000 . As of December 31, 2021, the Company had one corporate debt security, included in other debt securities, three mortgage-backed securities, 18 government sponsored enterprise issued securities, and three municipal securities, which had been in an unrealized loss position for twelve months or longer. These securities were determined not to be other-than-temporarily impaired as of December 31, 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. The unrealized losses for the other debt security with an unrealized loss greater than 12 months is due to the current slope of the yield curve. The security earns a floating rate that is indexed to the 10 year Treasury interest rate. - 73 - 3) Loans Receivable Loans receivable at December 31, 2021 and 2020 are summarized as follows: December 31, 2021 2020 Mortgage loans: (In Thousands) Residential real estate: One- to four-family $ 300,523 $ 426,792 Multi family 537,956 571,948 Home equity 11,012 14,820 Construction and land 82,588 77,080 Commercial real estate 250,676 238,375 Consumer 732 736 Commercial loans 22,298 45,386 Total loans receivable $ 1,205,785 $ 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 credit risks tend to be geographically concentrated in the Company’s Milwaukee metropolitan area and while 70.5 % of the Company’s loan portfolio involves loans that are secured by residential real estate, 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 $ 886.7 million were pledged as collateral against $ 475.0 million and $ 1.07 billion were pledged as collateral against $ 499.0 million in outstanding Federal Home Loan Bank of Chicago advances under a blanket security agreement at December 31, 2021 and December 31, 2020, respectively. Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. As of December 31, 2021 and December 31, 2020, loans aggregating approximately $ 2.5 million and $ 7.2 million, respectively, were outstanding to such parties. None of these loans were past due or considered impaired as of December 31, 2021 and December 31, 2020. An analysis of past due loans receivable as of December 31, 2021 and 2020 follows: As of December 31, 2021 1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Past Due Total Past Due Current (3) Total Loans Mortgage loans: (In Thousands) Residential real estate: One- to four-family $ 622 $ 2,028 $ 4,214 $ 6,864 $ 293,659 $ 300,523 Multi family - - 128 128 537,828 537,956 Home equity 14 23 26 63 10,949 11,012 Construction and land - - - - 82,588 82,588 Commercial real estate - - - - 250,676 250,676 Consumer - - - - 732 732 Commercial loans 7 - - 7 22,291 22,298 Total $ 643 $ 2,051 $ 4,368 $ 7,062 $ 1,198,723 $ 1,205,785 As of December 31, 2020 1-59 Days Past Due (1) 60-89 Days Past Due (2) 90 Days or Greater Past Due Total Past Due Current (3) Total Loans Mortgage loans: (In Thousands) 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 $ 43,000 and $ 611,000 for December 31, 2021 and 2020, respectively, which are on non-accrual status. (2) Includes $ 347,000 and $ - for December 31, 2021 and 2020, respectively, which are on non-accrual status. (3) Includes $ 816,000 and $ 1.6 million for December 31, 2021 and 2020, respectively, which are on non-accrual status. - 74 - We currently manage our loan portfolios and the respective exposure to credit losses (credit risk) by the following specific portfolio segments, which are levels at which we develop and document our systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are as follows: One- to four-family residential mortgage loans – This residential real estate subsegment contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios and collateral values. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral. Multi family residential real estate loans – Multi family real estate loans consist of multifamily rentals with a history of occupancy and cash flow. This segment includes both internally originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies, which can adversely impact cash flow. Home equity residential mortgage loans – This segment includes subsegment for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. Construction and land loans – Construction and land loans are intended to finance the construction of commercial and residential properties, including the construction of single-family dwellings, and also includes loans for the acquisition and development of land.Construction lending generally involves a greater degree of risk than other residential mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property within specified cost limits. The Bank of Greene County completes inspections during the construction phase prior to any disbursements. The Bank of Greene County limits its risk during the construction as disbursements are not made until the required work for each advance has been completed. Construction delays may further impair the borrower’s ability to repay the loan. Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties, such as investment properties for retail, and office with a history of occupancy and cash flow. This segment includes both internally originated loans. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of commercial real estate loans makes them more difficult for management to monitor and evaluate. Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans generally involve greater credit risk than residential mortgage loans because of the difference in the nature of the underlying collateral. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation in the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability. As such, these loans are subject to a higher risk of default than the typical consumer loan. Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs, as well as to finance owner-occupied real estate. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. This segment includes both internally originated and purchased participation loans. Credit risk arises from the successful operation of the business, which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy. As of December 31, 2021, no loans were 90 or more days past due and still accruing interest. As of December 31, 2020, there were $ 586,000 loans that were 90 or more days past due and still accruing interest. The bank received full payoff of the loan subsequent to December 31, 2020. A summary of the activity for the years ended December 31, 2021, 2020 and 2019 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) Year ended December 31, 2021 Balance at beginning of period $ 5,459 $ 5,600 $ 194 $ 1,755 $ 5,138 $ 35 $ 642 $ 18,823 Provision (credit) for loan losses ( 2,294 ) ( 318 ) ( 121 ) ( 408 ) ( 650 ) 16 ( 215 ) ( 3,990 ) Charge-offs ( 151 ) - - ( 13 ) ( 10 ) ( 18 ) - ( 192 ) Recoveries 949 116 16 52 4 - - 1,137 Balance at end of period $ 3,963 $ 5,398 $ 89 $ 1,386 $ 4,482 $ 33 $ 427 $ 15,778 Year ended December 31, 2020 Balance at beginning of period $ 4,907 $ 4,138 $ 201 $ 610 $ 2,145 $ 14 $ 372 $ 12,387 Provision (credit) for loan losses 486 1,446 ( 21 ) 1,151 2,977 31 270 6,340 Charge-offs ( 82 ) ( 5 ) ( 13 ) ( 8 ) - ( 10 ) - ( 118 ) Recoveries 148 21 27 2 16 - - 214 Balance at end of period $ 5,459 $ 5,600 $ 194 $ 1,755 $ 5,138 $ 35 $ 642 $ 18,823 Year ended December 31, 2019 Balance at beginning of period $ 5,742 $ 4,153 $ 325 $ 400 $ 2,126 $ 20 $ 483 $ 13,249 Provision (credit) for loan losses ( 845 ) ( 42 ) ( 107 ) 210 ( 4 ) ( 1 ) ( 111 ) ( 900 ) Charge-offs ( 125 ) ( 3 ) ( 44 ) - ( 2 ) ( 5 ) - ( 179 ) Recoveries 135 30 27 - 25 - - 217 Balance at end of period $ 4,907 $ 4,138 $ 201 $ 610 $ 2,145 $ 14 $ 372 $ 12,387 A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of the year ended December 31, 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 3,963 5,398 89 1,386 4,482 33 427 15,778 Balance at end of period $ 3,963 $ 5,398 $ 89 $ 1,386 $ 4,482 $ 33 $ 427 $ 15,778 Loans individually evaluated for impairment $ 5,420 $ 128 $ 26 $ - $ 1,222 $ - $ 1,097 $ 7,893 Loans collectively evaluated for impairment 295,103 537,828 10,986 82,588 249,454 732 21,201 1,197,892 Total gross loans $ 300,523 $ 537,956 $ 11,012 $ 82,588 $ 250,676 $ 732 $ 22,298 $ 1,205,785 - 75 - A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of the year ended 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 The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of December 31, 2021 and 2020: One- to Four- Family Multi Family Home Equity Construction and Land Commercial Real Estate Consumer Commercial Total At December 31, 2021 (In Thousands) Substandard $ 5,420 $ 128 $ 26 $ - $ 6,827 $ - $ 1,097 $ 13,498 Watch 7,937 - 37 4,212 5,870 - 3,194 21,250 Pass 287,166 537,828 10,949 78,376 237,979 732 18,007 1,171,037 $ 300,523 $ 537,956 $ 11,012 $ 82,588 $ 250,676 $ 732 $ 22,298 $ 1,205,785 At December 31, 2020 (In Thousands) 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 except for residential loans which has an approval limit in excess of $1.0 million. 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 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 Bank will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Bank 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. - 76 - 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. This estimated 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. The following tables present data on impaired loans as of and for the year ended December 31, 2021 and 2020. As of or for the Year Ended December 31, 2021 Recorded Investment Unpaid Principal Reserve Cumulative Charge-Offs Average Recorded Investment Interest Paid YTD (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 $ 5,420 $ 5,450 $ - $ 30 $ 5,465 $ 186 Multi family 128 128 - - 129 4 Home equity 26 26 - - 29 2 Construction and land - - - - - - Commercial real estate 1,222 1,222 - - 1,222 56 Consumer - - - - - - Commercial 1,097 1,097 - - 1,097 50 $ 7,893 $ 7,923 $ - $ 30 $ 7,942 $ 298 Total Impaired One- to four-family $ 5,420 $ 5,450 $ - $ 30 $ 5,465 $ 186 Multi family 128 128 - - 129 4 Home equity 26 26 - - 29 2 Construction and land - - - - - - Commercial real estate 1,222 1,222 - - 1,222 56 Consumer - - - - - - Commercial 1,097 1,097 - - 1,097 50 $ 7,893 $ 7,923 $ - $ 30 $ 7,942 $ 298 - 77 - As of or for the Year Ended December 31, 2020 Recorded Investment Unpaid Principal Reserve Cumulative Charge-Offs Average Recorded Investment Interest Paid YTD (In Thousands) Total Impaired with Reserve One- to four-family $ 208 $ 208 $ 23 $ - $ 213 $ 15 Multi family - - - - - - Home equity - - - - - - Construction and land - - - - - - Commercial real estate - - - - - - Consumer - - - - - - Commercial - - - - - - $ 208 $ 208 $ 23 $ - $ 213 $ 15 Total Impaired with no Reserve One- to four-family $ 7,597 $ 8,444 $ - $ 847 $ 7,770 $ 349 Multi family 341 352 - 11 353 17 Home equity 63 63 - - 67 4 Construction and land 43 51 - 8 51 1 Commercial real estate 7,248 7,248 - - 7,295 333 Consumer - - - - - - Commercial 1,097 1,097 - - 1,097 2 $ 16,389 $ 17,255 $ - $ 866 $ 16,633 $ 706 Total Impaired One- to four-family $ 7,805 $ 8,652 $ 23 $ 847 $ 7,983 $ 364 Multi family 341 352 - 11 353 17 Home equity 63 63 - - 67 4 Construction and land 43 51 - 8 51 1 Commercial real estate 7,248 7,248 - - 7,295 333 Consumer - - - - - - Commercial 1,097 1,097 - - 1,097 2 $ 16,597 $ 17,463 $ 23 $ 866 $ 16,846 $ 721 The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan balance and management’s assessment that the full collection of the loan balance is not likely. 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 $ 7.9 million of impaired loans as of December 31, 2021 for which no allowance has been provided, $ 30,000 in charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loan’s 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 resulting in additional provisions to the allowance for loans losses or charge-offs. - 78 - The following presents data on troubled debt restructurings: As of December 31, 2021 Accruing Non-accruing Total Amount Number Amount Number Amount Number (Dollars in Thousands) One- to four-family $ - - $ 1,670 5 $ 1,670 5 Commercial real estate 1,222 1 - - 1,222 1 Commercial 1,097 1 - - 1,097 1 $ 2,319 2 $ 1,670 5 $ 3,989 7 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 Comercial 1,097 1 - - 1,097 1 $ 11,037 6 $ 532 3 $ 11,569 9 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. Typical restructured terms include six months to twelve months of principal forbearance, a reduction in interest rate or both. In no instances have the restructured terms included a reduction of outstanding principal balance. At December 31, 2021, $ 4.0 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 $ 2.3 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 thus 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 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 has been deemed necessary as of December 31, 2021 with respect to the $ 4.0 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. If an updated credit department review indicates no other evidence of elevated credit risk and the borrower completes a minimum of six consecutive contractual payments, the loan is returned to accrual status at that time. The following presents troubled debt restructurings by concession type at December 31, 2021 and 2020: As of December 31, 2021 Performing in accordance with modified terms In Default Total Amount Number Amount Number Amount Number (Dollars in Thousands) Interest reduction and principal forbearance $ 388 2 $ - - $ 388 2 Interest reduction 24 1 - - 24 1 Principal forbearance 3,577 4 - - 3,577 4 $ 3,989 7 $ - - $ 3,989 7 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 - 79 - The following presents data on troubled debt restructurings: For the Year Ended December 31, 2021 December 31, 2020 Amount Number Amount Number (Dollars in Thousands) Loans modified as a troubled debt restructure One- to four-family $ 1,258 2 $ - - Commercial real estate - - 6,934 2 Commercial - - 1,097 1 $ 1,258 2 $ 8,031 3 There were no troubled debt restructurings within the past twelve months for which there was a default during the years ended December 31, 2021 and 2020. The provisions of the CARES Act and the 2021 Consolidated Appropriations 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 December 31, 2021, the Company had approximately $ 405,000 in outstanding loans subject to interest and principal and principal deferral agreements. The following table presents data on non-accrual loans: As of December 31, 2021 2020 (Dollars in Thousands) Residential One- to four-family $ 5,420 $ 5,072 Multi family 128 341 Home equity 26 63 Construction and land - 43 Commercial real estate - 41 Commercial - - Consumer - - Total non-accrual loans $ 5,574 $ 5,560 Total non-accrual loans to total loans 0.46 % 0.40 % Total non-accrual loans to total assets 0.25 % 0.25 % 4) Office Properties and Equipment Office properties and equipment are summarized as follows: December 31, 2021 2020 (In Thousands) Land $ 7,516 $ 7,516 Office buildings and improvements 34,273 34,923 Furniture and equipment 13,043 13,517 54,832 55,956 Less accumulated depreciation ( 32,559 ) ( 32,234 ) $ 22,273 $ 23,722 Depreciation of premises and equipment totaled $ 2.1 million, $ 2.5 million and $ 2.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. - 80 - 5) Real Estate Owned Real estate owned is summarized as follows: December 31, 2021 2020 (In Thousands) Construction and land $ 148 $ 322 Total $ 148 $ 322 The following table presents the activity in real estate owned: Year Ended December 31, 2021 2020 (In Thousands) Real estate owned at beginning of period $ 322 $ 748 Transferred in from loans receivable - 637 Sales ( 172 ) ( 1,063 ) Write downs - - Other activity ( 2 ) - Real estate owned at end of period $ 148 $ 322 Residential one- to four-family mortgage loans that were in the process of foreclosure were $ 1.4 million and $ 1.7 million at December 31, 2021 and December 31, 2020, respectively. 6) Mortgage Servicing Rights The following table presents the activity related to the Company’s mortgage servicing rights included in prepaid and other assets on the consolidated balance sheet: Year ended December 31, 2021 2020 (In Thousands) Mortgage servicing rights at beginning of the period $ 5,977 $ 282 Additions 5,788 13,406 Amortization ( 1,789 ) ( 1,326 ) Sales ( 8,444 ) ( 6,385 ) Mortgage servicing rights at end of the period 1,532 5,977 Valuation allowance recovered during the period 23 - Mortgage servicing rights at the end of the period, net $ 1,555 $ 5,977 During the year ended December 31, 2021, on a consolidated basis, $ 4.20 billion in residential loans were originated for sale, which excludes the loans originated from Waterstone Mortgage Corporation and purchased by WaterStone Bank. During the same period, sales of loans held for sale totaled $ 4.29 billion, generating mortgage banking income of $ 191.0 million. The unpaid principal balance of loans serviced for others was $ 204.8 million and $ 871.8 million at December 31, 2021 and December 31, 2020 respectively. Loans serviced for others are not reflected in the consolidated statements of financial condition. The fair value of mortgage servicing rights was $ 1.8 million at December 31, 2021 and $ 7.0 million at December 31, 2020. During the year ended December 31, 2021, the Company sold mortgage servicing rights related to $ 1.24 billion in loans receivable and with a book value of $ 8.4 million for $ 12.4 million resulting in a gain on sale of $ 4.0 million. During the year ended December 31, 2020, the Company sold mortgage servicing rights related to $ 975.9 million in loans receivable and with a book value of $ 6.4 million for $ 7.0 million resulting in a gain on sale of $ 600,000 . The following table shows the estimated future amortization expense for mortgage servicing rights at December 31, 2021 for the years ended December 31 periods indicated: (In Thousands) 2022 $ 282 2023 207 2024 195 2025 172 2026 150 Thereafter 549 Total $ 1,555 - 81 - 7) Deposits The aggregate amount of time deposit accounts with balances greater than $250,000 at December 31, 2021 and 2020 amounted to $ 102.6 million and $ 102.6 million, respectively. A summary of interest expense on deposits is as follows: Years ended December 31, 2021 2020 2019 (In Thousands) Interest-bearing demand deposits $ 50 $ 38 $ 33 Money market, savings, and escrow deposits 904 1,768 1,247 Time deposits 3,466 12,559 15,998 $ 4,420 $ 14,365 $ 17,278 A summary of the contractual maturities of time deposits at December 31, 2021 is as follows: (In Thousands) One year or less $ 533,010 Greater than one to two years 88,102 Greater than two to three years 3,570 Greater than three to four years 1,231 Greater than four through five years 750 $ 626,663 Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are depositors of the Corporation. Such deposits amounted to $ 27.4 million at December 31, 2021. 8) Borrowings Borrowings consist of the following: December 31, 2021 December 31, 2020 Balance Weighted Average Rate Balance Weighted Average Rate (Dollars in Thousands) Short term: Repurchase agreement $ 2,127 3.00 % $ 9,074 3.25 % Federal Home Loan Bank, Chicago 5,000 0.00 % 29,000 0.22 % Long term: Federal Home Loan Bank 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 % $ 477,127 2.02 % $ 508,074 1.95 % The short-term repurchase agreement represents the outstanding portion of a total $ 75.0 million commitment with one unrelated bank. The short-term repurchase agreement is utilized by Waterstone Mortgage Corporation to finance loans originated for sale. This agreement is secured by the underlying loans being financed. Related interest rates are based upon the note rate associated with the loans being financed. The short-term repurchase agreement had a $ 2.1 million balance at December 31, 2021 and a $ 9.1 million balance at December 31, 2020. 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. - 82 - 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. 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 %, two advances totaling $ 55.0 million with a fixed rate of 2.27 % both with a FHLB single call option in March 2021, 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 currently available, 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 Federal Home Loan Bank Chicago (FHLBC) as collateral for outstanding advances. The Company’s borrowings at the FHLBC are limited to 80 % of the carrying value of unencumbered one- to four-family mortgage loans, 64 % of the carrying value of home equity loans and 75 % of the carrying value of over four-family loans. In addition, these advances are collateralized by FHLBC stock of $ 24.4 million at December 31, 2021 and $ 26.7 million at December 31, 2020. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance. 9) 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 condition and results of operations. 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%. Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the Community Bank Leverage Ratio framework; and qualified community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement is re-established at greater than 9%. 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 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 capital conservation buffer. The minimum capital conservation buffer is 2.5%. As of December 31, 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. - 83 - The actual and required capital amounts and ratios as of December 31, 2021 and 2020 are presented in the table below: December 31, 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. $ 448,818 29.01 % $ 123,766 8.00 % $ 162,443 10.50 % $ N/A N/A WaterStone Bank 394,540 25.52 % 123,695 8.00 % 162,350 10.50 % 154,619 10.00 % Tier I capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 433,040 27.99 % 92,825 6.00 % 131,502 8.50 % N/A N/A WaterStone Bank 378,762 24.50 % 92,771 6.00 % 131,426 8.50 % 123,695 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets) Consolidated Waterstone Financial, Inc. 433,040 27.99 % 69,619 4.50 % 108,296 7.00 % N/A N/A WaterStone Bank 378,762 24.50 % 69,579 4.50 % 108,233 7.00 % 100,502 6.50 % Tier I capital (to average assets) Consolidated Waterstone Financial, Inc. 433,040 19.29 % 89,774 4.00 % N/A N/A N/A N/A WaterStone Bank 378,762 16.88 % 89,774 4.00 % N/A N/A 112,218 5.00 % State of Wisconsin (to total assets) WaterStone Bank 378,762 17.14 % 132,572 6.00 % N/A N/A N/A N/A December 31, 2020 (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 I 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 I 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 - 84 - 10) Stock Based Compensation Stock-Based Compensation Plan In 2020, the 2020 Omnibus Incentive Plan was approved. All stock awards granted under this plan are required to be settled in shares of the Company’s common stock. The exercise price for all stock options granted was equal to the quoted NASDAQ market closing price on the date that the awards were granted and the stock options expire ten years after the grant date, if not exercised. All restricted stock grants are issued from previously unissued shares. A total of 750,000 stock options and 500,000 restricted shares were approved for award. A total of 690,000 stock options and 471,278 restricted stock were available to be issued as of December 31, 2021. Accounting for Stock-Based Compensation Plan The fair value of stock options granted is estimated on the grant date using a Black-Scholes pricing model. The fair value of restricted shares is equal to the quoted NASDAQ market closing price on the date of grant. The fair value of stock grants is recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense is included in compensation, payroll taxes and other employee benefits in the consolidated statements of income. Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represents the period of time that the options are expected to be outstanding and is based on the historical results from the previous awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the actual volatility of Waterstone Financial, Inc. stock for the weighted average life time period prior to issuance date. The following assumptions were used in estimating the fair value of options granted in the years ended December 31, 2021 and 2020. 2021 2020 Minimum Maximum Minimum Maximum Dividend yield 3.64 % 4.37 % 2.59 % 3.76 % Risk-free interest rate 0.41 % 1.27 % 0.28 % 0.40 % Expected volatility 22.83 % 23.84 % 18.91 % 22.58 % Weighted average expected life 5.1 5.7 5.6 5.8 Weighted average per share value of options $ 1.92 $ 2.97 $ 1.11 $ 2.64 The Company's policy is to adjust compensation expense at the time of actual stock grant forfeiture. A summary of the Company’s stock option activity for the years ended December 31, 2021, 2020 and 2019 is presented below. Stock Options Shares Weighted Average Exercise Price Weighted Average Years Remaining in Contractual Term Aggregate Intrinsic Value (000's) Outstanding December 31, 2018 1,061,069 $ 13.21 6.47 $ 3,850 Options exercisable at December 31, 2018 421,068 12.78 6.23 $ 1,688 Granted 30,000 17.13 $ 56 Exercised ( 50,298 ) 13.10 298 Forfeited ( 15,000 ) 15.62 51 Outstanding December 31, 2019 1,025,771 13.29 5.56 $ 5,887 Options exercisable at December 31, 2019 546,770 12.93 5.31 $ 3,335 Granted 35,000 16.06 $ 97 Exercised ( 291,944 ) 12.66 1,799 Forfeited ( 17,000 ) 17.17 28 Outstanding December 31, 2020 751,827 13.57 4.82 $ 3,945 Options exercisable at December 31, 2020 433,827 13.31 4.45 $ 2,392 Granted 45,000 20.44 $ 39 Exercised ( 179,517 ) 12.85 1,496 Forfeited and expired ( 23,000 ) 16.50 108 Outstanding December 31, 2021 594,310 14.20 4.33 $ 4,158 Options exercisable at December 31, 2021 352,310 13.70 3.78 $ 2,636 - 85 - The following table summarizes information about the Company's stock options outstanding at December 31, 2021. Options Outstanding Weighted Average Exercise Price Remaining Life (Years) Options Exercisable Weighted Average Exercise Price Remaining Life (Years) Range of Exercise Prices $0.01 - $5.00 941 $ 1.73 0.01 941 $ 1.73 0.01 $5.01 - $10.00 452,369 12.87 3.40 290,369 12.89 3.31 $10.01 - $15.00 106,000 17.80 6.56 61,000 17.75 6.05 Over $15.01 35,000 20.82 9.69 - - - 594,310 $ 14.20 4.33 352,310 $ 13.70 3.78 The following table summarizes information about the Company’s nonvested stock option activity for the years ended December 31, 2021 and 2020: Stock Options Shares Weighted Average Grant Date Fair Value Nonvested at December 31, 2019 479,001 $ 3.24 Granted 35,000 2.06 Vested ( 179,001 ) 3.26 Forfeited ( 17,000 ) 2.21 Nonvested at December 31, 2020 318,000 3.16 Nonvested at December 31, 2020 318,000 3.16 Granted 45,000 2.48 Vested ( 103,000 ) 3.26 Forfeited ( 18,000 ) 2.23 Nonvested at December 31, 2021 242,000 3.06 The Company amortizes the expense related to stock options as compensation expense over the vesting period. Expense for the stock options granted of $ 329,000 , $ 398,000 and $ 582,000 was recognized during the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the Company had $ 485,000 in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over a weighted average period of 25 months. The following table summarizes information about the Company’s restricted stock shares activity for the years ended December 31, 2021 and 2020: Restricted Stock Shares Weighted Average Grant Date Fair Value Nonvested at December 31, 2019 73,000 $ 12.86 Granted - - Vested ( 27,000 ) 13.06 Forfeited - - Nonvested at December 31, 2020 46,000 12.75 Nonvested at December 31, 2020 46,000 12.75 Granted 28,722 20.09 Vested ( 23,000 ) 12.75 Forfeited - - Nonvested at December 31, 2021 51,722 16.82 The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. Expense for the restricted stock awards of $ 416,000 , $ 318,000 and $ 486,000 was recorded for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the Company had $ 427,000 of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of 25 months. - 86 - 11) Employee Benefit Plans The Company has two 401(k) profit sharing plans and trusts covering substantially all employees. WaterStone Bank employees over 18 years of age are immediately eligible to participate in the Bank’s plan. Waterstone Mortgage employees over 18 years of age are eligible to participate in its plan as of the first of the month following their date of employment. Participating employees may annually contribute pretax compensation in accordance with IRS limits. The Company made matching contributions of $ 1.6 million, $ 1.4 million and $ 1.0 million to the plans during the years ended December 31, 2021, 2020 and 2019, respectively. 12) Employee Stock Ownership Plan All WaterStone Bank employees are eligible to participate in the WaterStone Bank Employee Stock Ownership Plan (the “Plan”) after they attain 21 years of age and complete 12 consecutive months of service in which they work at least 1,000 hours of service. The Plan debt is secured by shares of the Company. The Company has committed to make annual contributions to the Plan necessary to repay the loan, including interest. During the year ended December 31, 2005, the Plan borrowed $ 8.5 million from the Company and purchased 835,610 shares of common stock of the Company in the open market. During the year ended December 31, 2014, the Plan borrowed an additional $ 23.8 million from the Company, refinanced the remaining 83,561 shares (related to the 2005 Plan purchase), and purchased an additional 2,024,000 shares of common stock of the Company in the open market. While the shares are not released and allocated to Plan participants until the loan payment is made, the shares are deemed to be earned and are therefore, committed to be released throughout the service period. As such, one-twentieth of the total 2,107,561 shares are scheduled to be released annually as shares are earned over a period of 20 years, beginning with the period ended December 31, 2014. As the debt is repaid, shares are released from collateral and allocated to active participant accounts. The shares pledged as collateral are reported as “Unearned ESOP shares” in the consolidated statement of financial condition. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average fair market price of the shares, and the shares become outstanding for earnings per share computations. Compensation expense attributed to the ESOP was $ 2.3 million, $ 1.8 million and $ 1.8 million, respectively, for the years ended December 31, 2021, 2020 and 2019. The aggregate activity in the number of unearned ESOP shares, considering the allocation of those shares committed to be released as of December 31, 2021 and 2020 is as follows: 2021 2020 Beginning ESOP shares 1,369,915 1,475,293 Shares committed to be released ( 105,378 ) ( 105,378 ) Unreleased shares 1,264,537 1,369,915 Fair value of unreleased shares (in millions) $ 29.9 $ 25.8 13) Income Taxes The provision for income taxes for the year ended December 31, 2021, 2020 and 2019 consists of the following: Years ended December 31, 2021 2020 2019 (In Thousands) Current: Federal $ 17,387 $ 22,272 $ 8,377 State 2,550 7,319 2,655 19,937 29,591 11,032 Deferred: Federal 900 ( 2,171 ) 619 State 478 ( 449 ) 20 1,378 ( 2,620 ) 639 Total $ 21,315 $ 26,971 $ 11,671 - 87 - The income tax provisions differ from that computed at the Federal statutory corporate tax rate for the years ended December 31, 2021, 2020 and 2019 as follows: Years ended December 31, 2021 2020 2019 (Dollars In Thousands) Income before income taxes $ 92,106 $ 108,116 $ 47,574 Tax at Federal statutory rate ( 21 % in 2021, 2020, and 2019) 19,342 22,704 9,991 Add (deduct) effect of: State income taxes net of Federal income tax benefit 2,392 5,428 2,113 Cash surrender value of life insurance ( 339 ) ( 400 ) ( 406 ) Non-deductible ESOP and stock option expense 216 133 186 Tax-exempt interest income ( 208 ) ( 222 ) ( 236 ) Non-deductible compensation 103 96 216 Death benefit on bank owned life insurance - ( 306 ) - Stock compensation ( 251 ) ( 387 ) ( 312 ) Other 60 ( 75 ) 119 Income tax provision $ 21,315 26,971 11,671 Effective tax rate 23.1 % 24.9 % 24.5 % The significant components of the Company’s net deferred tax assets (liabilities) included in prepaid expenses and other assets are as follows at December 31, 2021 and 2020: December 31, 2021 2020 Gross deferred tax assets: (In Thousands) Depreciation $ 886 832 Restricted stock and stock options 307 312 Allowance for loan losses 3,805 4,682 Repurchase reserve for loans sold 540 765 Non-accrual interest 185 208 Real estate owned 8 166 Litigation - 1,206 Unrealized loss on impaired securities 23 23 Lease liability 1,498 1,855 Unrealized loss on securities available for sale, net 236 - Other 109 49 Total gross deferred tax assets 7,597 10,098 Gross deferred tax liabilities: Unrealized gain on securities available for sale, net - ( 1,059 ) Mortgage servicing rights ( 390 ) ( 1,558 ) FHLB stock dividends ( 46 ) ( 52 ) Lease asset ( 1,469 ) ( 1,726 ) Deferred loan fees ( 372 ) ( 300 ) Deferred liabilities ( 2,277 ) ( 4,695 ) Net deferred tax assets $ 5,320 $ 5,403 The Company had a Wisconsin net operating loss carry forward of $ 19,000 at December 31, 2021 which will begin to expire in 2028 . The Company has no capital loss carryforwards as of December 31, 2021. Under the Internal Revenue Code and Wisconsin Statutes, the Company was permitted to deduct, for tax years beginning before 1988, an annual addition to a reserve for bad debts. This amount differs from the provision for loan losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Company did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings at December 31, 2021 include approximately $ 16.7 million for which no deferred Federal or state income taxes were provided. Deferred income taxes have been provided on certain additions to the tax reserve for bad debts. The Company and its subsidiaries file consolidated federal and combined state tax returns. One subsidiary also files separate state income tax returns in certain states. The Company is no longer subject to state income tax examinations by certain state tax authorities for years before 2017 or subject to federal tax examinations for the years before 2018. - 88 - 14) 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 balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. December 31, 2021 2020 (In Thousands) Financial instruments whose contract amounts represent potential credit risk: Commitments to extend credit under first mortgage loans (1) $ 48,626 $ 23,891 Commitments to extend credit under home equity lines of credit 11,990 13,653 Unused portion of construction loans 50,303 74,173 Unused portion of business lines of credit 17,916 19,207 Standby letters of credit 1,379 1,296 (1) Excludes commitments to originate loans held for sale, which are discussed in Footnote 15 - Derivative Financial Instruments. 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. 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 December 31, 2021 and 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 that is reported as a component of other liabilities on the Company's consolidated statement of financial condition totaled $ 2.1 million and $ 2.9 million as of December 31, 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. Herrington et al. v. Waterstone Mortgage Corporation Waterstone Mortgage Corporation was a defendant in a class action lawsuit that was filed in the United States District Court for the Western District of Wisconsin and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisions of the Fair Labor Standards Act (FLSA) and failed to pay loan officers consistent with their employment agreements. On July 5, 2017, the arbitrator issued a Final Award finding Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. On December 8, 2017, the District Court confirmed the award in large part, and entered a judgment against Waterstone in the amount of $ 7.3 million in damages to Claimants, $ 3.3 million in attorney fees and costs, and a $ 20,000 incentive fee to Plaintiff Herrington. - 89 - Subsequently, the Seventh Circuit Court of Appeals issued a ruling in October 2018 vacating the District Court’s order enforcing the arbitration award, and remanded the case to the District Court. On April 25, 2019, the District Court held that Plaintiff’s claims must be resolved through single-plaintiff arbitration. As a result, it vacated the July 5, 2017 arbitration award in its entirety, and issued a revised judgement in Waterstone’s favor. In May 2019, Herrington re-initiated her individual arbitration. The arbitrator issued a written award on February 18, 2020 in which he found Waterstone liable for damages, awarding Herrington $ 14,952 in damages on her claims. On May 6, 2020, the arbitrator issued an award that would allow Herrington to recover $ 1.1 million in attorney fees and costs. As a result of that award, the Company recorded a loss reserve with respect to this matter for $ 1.1 million during the three months ended March 31, 2020. Various Claimants v. Waterstone Mortgage Corporation Subsequent to the aforementioned decision by the United States District Court for the Western District of Wisconsin, which ruled that claims brought forth under the Herrington class action lawsuit must be resolved through single-plaintiff arbitration, 95 of the prior claimants in the aforementioned class action lawsuit filed new demands in arbitration asserting similar claims (“the Arbitrations”). Waterstone answered the arbitration demands and denied the allegations. Raeleen Johnson v. Waterstone Subsequent to the aforementioned decision by the United States District Court for the Western District of Wisconsin vacating the prior collective award, on May 3, 2019, Raeleen Johnson and 38 other Loan Originators who were prior Claimants in the Herrington Arbitration also filed a claim in the Eastern District of Wisconsin, in the United States District Court for the Eastern District of Wisconsin, Johnson et al. v. Waterstone Mortgage Corporation. The Johnson action claimed that Waterstone Mortgage Corporation violated the FLSA by failing to pay loan officers minimum and overtime wages. They also alleged that Waterstone breached its contractual agreement regarding their compensation. The Johnson action was pleaded as a class and collective action, brought on behalf of Johnson and other Waterstone loan originators. Johnson did not move for certification of her claims, and in August 2020, the Court issued an order finding that since no motion for certification had been filed, the case would not proceed as a class action. Ultimately, this case was limited to 30 plaintiffs. Resolution of Claims In September 2020, the parties reached a tentative agreement to resolve all of the above claims, including the Herrington individual arbitration and resulting $ 1.1 million award, the Arbitrations, and the Raeleen Johnson action. The proposed settlement payment was $ 4.25 million in total, which fully resolved all of the alleged claims and all attorney fees and costs. The parties finalized the terms of the settlement in November 2020. The global settlement was submitted to the arbitrator and approved in December 2020. As a result, the Company recorded a loss reserve with respect to this matter for $ 4.25 million during the year ended and as of December 31, 2020. The expense related to this reserve is reflected in Professional Fees in the Consolidated Statements of Operations. The Company funded the settlement on February 5, 2021 and these matters are now closed. 15) Derivative Financial Instruments Mortgage Banking Derivatives 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. 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 being a hedge relationship. 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 directly in earnings. The Company does not use derivatives for speculative purposes. Derivative Loan Commitments Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. Forward Loan Sale Commitments The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall. With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. 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 following tables presents the outstanding notional balances and fair values of outstanding derivative instruments: December 31, 2021 Assets Liabilities Derivatives not designated as Hedging Instruments Notional Amount Balance Sheet Location Fair Value Balance Sheet Location Fair Value (Dollars in millions) Forward commitments $ 571.5 Other assets $ 1.3 Other liabilities $ - Interest rate locks 345.2 Other assets 3.1 Other liabilities - Interest rate swaps 105.2 Other assets 1.6 Other liabilities 1.6 December 31, 2020 Assets Liabilities Derivatives not designated as Hedging Instruments Notional Amount Balance Sheet Location Fair Value Balance Sheet Location Fair Value (Dollars in millions) Forward commitments $ 779.9 Other assets $ - Other liabilities $ 5.1 Interest rate locks 486.2 Other assets 11.1 Other liabilities - Interest rate swaps 107.5 Other assets 3.9 Other liabilities 3.9 - 90 - In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated when the loan arising from exercise of the loan commitment is 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. The back-to-back 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. As of December 31, 2021 and December 31, 2020, no back-to-back swaps were in default. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank. No right of offset existed with dealer counterparty swaps as of December 31, 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 at December 31, 2021 and $ 7.2 million in cash at December 31, 2020. 16) 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. - 91 - 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. The following table presents information about our assets and liabilities recorded in our consolidated statement of financial position at their fair value on a recurring basis as of December 31, 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 December 31, 2021 Level 1 Level 2 Level 3 (In Thousands) Assets Available for sale securities Mortgage-backed securities $ 19,488 $ - $ 19,488 $ - Collateralized mortgage obligations Government sponsored enterprise issued 99,302 - 99,302 - Private-label issued 2,943 - 2,943 - Government sponsored enterprise bonds 2,448 - 2,448 - Municipal securities 43,494 - 43,494 - Other debt securities 11,341 - 11,341 - Loans held for sale 312,738 - 312,738 - Mortgage banking derivative assets 4,369 - - 4,369 Interest rate swap assets 1,578 - 1,578 - Liabilities Mortgage banking derivative liabilities - - - - Interest rate swap liabilities 1,578 - 1,578 - 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 enterprise issued 63,284 - 63,284 - Private-label issued 3,665 - 3,665 - Government sponsored enterprise bonds 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 and liabilities recorded in our consolidated statements of financial condition at their fair value on a recurring basis: - 92 - 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 values 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 values of municipal and other debt securities are 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. 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 operations. 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 operations, within mortgage banking 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. Mortgage banking derivatives, net (In Thousands) Balance at December 31, 2019 $ 1,835 Mortgage derivative gain, net 4,082 Balance at December 31, 2020 5,917 Mortgage derivative loss, net ( 1,548 ) Balance at December 31, 2021 $ 4,369 There were no transfers in or out of Level 1, 2 or 3 measurements during the periods. - 93 - Assets Recorded at Fair Value on a Non-recurring Basis The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a non-recurring basis as of December 31, 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 December 31, 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. 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 December 31, 2021, no reserve was needed on the loans that were impaired. 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 years ended December 31, 2021 and 2020, respectively. At December 31, 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. For the purpose of measuring impairment, mortgage servicing rights are stratified based upon predominant risk characteristics of the underlying loans. At December 31, 2021 and 2020, there was $ 6,000 and $ 77,000 of impairment on mortgage servicing rights, respectively. - 94 - For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis, the significant unobservable inputs used in the fair value measurements were as follows: Fair Value at Significant Significant Unobservable Input Value December 31, 2021 Valuation Technique Unobservable Inputs Minimum Value Maximum Value Weighted Average (Dollars in Thousands) Mortgage banking derivatives $ 4,369 Pricing models Pull through rate 26.0 % 99.8 % 88.2 % Real estate owned 148 Market approach Discount rates applied to appraisals 34.8 % 34.8 % 34.8 % Mortgage servicing rights - Pricing models Prepayment rate 9.8 % 43.4 % 11.8 % Discount rate 0.0 % 12.0 % 10.2 % Cost to service $ 84.06 $ 839.53 $ 108.37 December 31, 2020 Mortgage banking derivatives 5,917 Pricing models Pull through rate 5.0 % 99.8 % 88.2 % Impaired loans 185 Market approach Discount rates applied to appraisals 15.0 % 15.0 % 15.0 % Real estate owned 322 Market approach Discount rates applied to appraisals 34.8 % 51.0 % 44.6 % Mortgage servicing rights 7,075 Pricing models Prepayment rate 11.3 % 37.9 % 12.7 % Discount rate 9.5 % 14.0 % 10.6 % Cost to service $ 76.98 $ 475.26 $ 84.85 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. The carrying amounts and fair values of the Company’s financial instruments consist of the following at December 31, 2021 and December 31, 2020: December 31, 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 $ 376,722 $ 376,722 $ 376,722 $ - $ - $ 94,767 $ 94,767 $ 94,767 $ - $ - Securities available-for-sale 179,016 179,016 - 179,016 - 159,619 159,619 - 159,619 - Loans held for sale 312,738 312,738 - 312,738 - 402,003 402,003 - 402,003 - Loans receivable 1,205,785 1,210,854 - - 1,210,854 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 4,013 4,013 4,013 - - 4,957 4,957 4,957 - - Mortgage servicing rights 1,555 1,808 - - 1,808 5,977 7,075 - - 7,075 Mortgage banking derivative assets 4,369 4,369 - - 4,369 11,057 11,057 - - 11,057 Interest rate swap assets 1,578 1,578 - 1,578 - 3,892 3,892 - 3,892 - Financial Liabilities Deposits 1,233,386 1,233,478 606,723 626,755 - 1,184,870 1,186,062 483,542 702,520 - Advance payments by borrowers for taxes 4,094 4,094 4,094 - - 3,522 3,522 3,522 - - Borrowings 477,127 499,120 - 499,120 - 508,074 545,107 - 545,107 - Accrued interest payable 959 959 959 - - 1,137 1,137 1,137 - - Mortgage banking derivative liabilities - - - - - 5,140 5,140 - - 5,140 Interest rate swap liabilities 1,578 1,578 - 1,578 - 3,892 3,892 - 3,892 - - 95 - 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. The commercial paper instruments with a maturity of less than 90 days also approximates its fair value with its carrying value. Securities The fair value of securities is 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. 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 December 31, 2021 and December 31, 2020. - 96 - 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 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. 17) 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 70,000 , 125,000 , and 118,000 antidilutive shares of common stock for the years ended December 31, 2021 , 2020 , and 2019 , respectively. Presented below are the calculations for basic and diluted earnings per share: For the year ended December 31, 2021 2020 2019 (In Thousands, except per share amounts) Net income $ 70,791 $ 81,145 $ 35,903 Weighted average shares outstanding 23,741 24,464 26,021 Effect of dilutive potential common shares 190 143 226 Diluted weighted average shares outstanding $ 23,931 $ 24,607 $ 26,247 Basic income per share $ 2.98 $ 3.32 $ 1.38 Diluted income per share $ 2.96 $ 3.30 $ 1.37 - 97 - 18) Condensed Parent Company Only Statements Statements of Financial Condition December 31, 2021 2020 (In Thousands) Assets Cash and cash equivalents $ 71,158 $ 44,386 Investment in subsidiaries 378,247 373,665 Other assets 892 304 Total Assets $ 450,297 $ 418,355 Liabilities and shareholders' equity Liabilities: Other liabilities $ 17,524 $ 5,237 Shareholders' equity Preferred Stock (par value $ 0.01 per share), Authorized - 50,000,000 shares in 2021 and 2020 , no shares issued - - Common stock (par value $ 0.01 per share), Authorized - 100,000,000 shares in 2021 and in 2020 , Issued - 24,795,124 in 2021 and 25,087,976 in 2020 , Outstanding - 24,795,124 in 2021 and 25,087,976 in 2020 248 251 Additional paid-in-capital 174,505 180,684 Retained earnings 273,398 245,287 Unearned ESOP shares ( 14,243 ) ( 15,430 ) Accumulated other comprehensive (loss) gain (net of taxes) ( 1,135 ) 2,326 Total shareholders' equity 432,773 413,118 Total liabilities and shareholders' equity $ 450,297 $ 418,355 Statements of Operations For the year ended December 31, 2021 2020 2019 (In Thousands) Interest income $ 549 $ 688 $ 793 Equity in income of subsidiaries (distributed and undistributed) 70,862 81,122 35,784 Total income 71,411 81,810 36,577 Professional fees 38 47 58 Other expense 604 610 577 Total expense 642 657 635 Income before income tax expense 70,769 81,153 35,942 Income tax (benefit) expense ( 22 ) 8 39 Net income $ 70,791 $ 81,145 $ 35,903 - 98 - Statements of Cash Flows For the year ended December 31, 2021 2020 2019 (In Thousands) Cash flows from operating activities Net income $ 70,791 $ 81,145 $ 35,903 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of unearned ESOP 2,129 1,676 1,805 Stock based compensation 745 716 1,067 Deferred income taxes 1 - - Equity in earnings of subsidiaries ( 70,862 ) ( 81,122 ) ( 35,784 ) Change in other assets and liabilities ( 1,339 ) ( 853 ) 1,235 Net cash provided by operating activities 1,465 1,562 4,226 Net cash used in investing activities - - - Dividends received from subsidiary 63,564 52,152 78,456 Cash dividends on common stock ( 30,388 ) ( 31,520 ) ( 25,960 ) Proceeds from stock option exercises 2,307 3,704 659 Purchase of common stock returned to authorized but unissued ( 10,176 ) ( 36,242 ) ( 22,767 ) Net cash provided by (used in) financing activities 25,307 ( 11,906 ) 30,388 Net increase (decrease) in cash 26,772 ( 10,344 ) 34,614 Cash and cash equivalents at beginning of year 44,386 54,730 20,116 Cash and cash equivalents at end of year $ 71,158 $ 44,386 $ 54,730 19) 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 in the secondary market. Mortgage banking products and services are provided by offices in 23 states with the ability to lend in 48 states. - 99 - As of or for the Year ended December 31, 2021 Community Banking Mortgage Banking Holding Company and Other Consolidated (in thousands) Net interest income (loss) $ 56,051 $ ( 652 ) $ 116 $ 55,515 Provision (credit) for loan losses ( 4,100 ) 110 - ( 3,990 ) Net interest income (loss) after provision (credit) for loan losses 60,151 ( 762 ) 116 59,505 Noninterest income 6,058 197,573 ( 436 ) 203,195 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 20,294 115,279 ( 458 ) 135,115 Occupancy, office furniture, and equipment 3,781 5,831 - 9,612 Advertising 980 2,548 - 3,528 Data processing 2,039 1,889 22 3,950 Communications 427 882 - 1,309 Professional fees 673 564 38 1,275 Real estate owned 3 - - 3 Loan processing expense - 4,610 - 4,610 Other 1,974 9,074 144 11,192 Total noninterest expenses 30,171 140,677 ( 254 ) 170,594 Income before income taxes 36,038 56,134 ( 66 ) 92,106 Income taxes 7,696 13,641 ( 22 ) 21,315 Net income $ 28,342 $ 42,493 $ ( 44 ) $ 70,791 Total Assets $ 2,162,360 $ 365,590 $ ( 312,092 ) $ 2,215,858 As of or for the Year ended December 31, 2020 Community Banking Mortgage Banking Holding Company and Other Consolidated (in thousands) Net interest income (loss) $ 54,616 $ ( 1,171 ) $ 55 $ 53,500 Provision for loan losses 6,075 265 - 6,340 Net interest income (loss) after provision for loan losses 48,541 ( 1,436 ) 55 47,160 Noninterest income 8,723 236,659 ( 1,365 ) 244,017 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 20,233 119,432 ( 619 ) 139,046 Occupancy, office furniture and equipment 3,688 6,535 - 10,223 Advertising 1,041 2,650 - 3,691 Data processing 2,284 1,636 21 3,941 Communications 411 918 - 1,329 Professional fees 695 7,376 47 8,118 Real estate owned ( 8 ) - - ( 8 ) Loan processing expense - 4,646 - 4,646 Other 2,507 10,345 ( 777 ) 12,075 Total noninterest expenses 30,851 153,538 ( 1,328 ) 183,061 Income before income taxes 26,413 81,685 18 108,116 Income taxes 5,219 21,744 8 26,971 Net income $ 21,194 $ 59,941 $ 10 $ 81,145 Total Assets $ 2,116,560 $ 456,076 $ ( 388,049 ) $ 2,184,587 - 100 - As of or for the Year ended December 31, 2019 Community Banking Mortgage Banking Holding Company and Other Consolidated (in thousands) Net interest income (loss) $ 54,019 $ ( 1,910 ) $ 88 $ 52,197 Provision (credit) for loan losses ( 1,050 ) 150 - ( 900 ) Net interest income (loss) after provision (credit) for loan losses 55,069 ( 2,060 ) 88 53,097 Noninterest income 5,020 126,910 ( 1,180 ) 130,750 Noninterest expenses: Compensation, payroll taxes, and other employee benefits 18,195 84,230 ( 707 ) 101,718 Occupancy, office furniture and equipment 3,752 6,854 - 10,606 Advertising 920 2,965 - 3,885 Data processing 2,121 1,493 16 3,630 Communications 358 1,001 - 1,359 Professional fees 813 2,734 58 3,605 Real estate owned ( 176 ) 30 - ( 146 ) Loan processing expense - 3,288 - 3,288 Other 2,205 6,741 ( 618 ) 8,328 Total noninterest expenses 28,188 109,336 ( 1,251 ) 136,273 Income before income taxes 31,901 15,514 159 47,574 Income taxes 7,296 4,336 39 11,671 Net income $ 24,605 $ 11,178 $ 120 $ 35,903 Total Assets $ 1,955,999 $ 258,928 $ ( 218,580 ) $ 1,996,347 20) Leases The Company has entered into operating lease agreements for six 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 twelve months ended December 31, 2021. At December 31, 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 years ended December 31, 2021 and 2020: Year ended December 31, 2021 2020 (In Thousands) Operating lease cost $ 3,000 $ 3,158 Variable cost 494 487 Short-term lease cost 517 737 Total $ 4,011 $ 4,382 At December 31, 2021, the Company had leases that had not yet commenced, but will create approximately $ 449,000 of additional lease liabilities and right-of-use assets for the Company in the first quarter of 2022. - 101 - The table below summarizes other information related to our operating leases: Year ended December 31, 2021 2020 (Dollars in Millions) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3.3 3.5 Initial recognition of right-of-use asset 1.5 1.0 Initial recognition of lease liabilities 1.5 1.0 Weighted average remaining lease term - operating leases, in years 2.66 3.51 Weighted average discount rate - operating leases 5.1 % 5.5 % As of December 31, 2021, lease liability information for the Company is summarized in the following table. Maturity analysis Operating leases (In Thousands) One year or less $ 2,520 More than one year through two years 1,987 More than two years through three years 1,197 More than three years through four years 579 More than four years through five years 90 More than five years 711 Total lease payments 7,084 Present value discount ( 819 ) Lease Liability $ 6,265 - 102 - Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None