Waterstone Financial, Inc. — Q1 2024 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2024, compared with Q1 2023; balance-sheet comparisons are to December 31, 2023. Waterstone operates a Wisconsin community bank and a mortgage-banking business originating residential loans primarily for sale.
Financial performance and condition
- Profit: Net income was $3.0 million, or $0.16 per diluted share, versus $2.2 million, or $0.10, a year earlier. Pretax income rose to $4.8 million from $2.8 million.
- Revenue and margin: Net interest income fell 19.3% to $11.1 million as funding costs rose faster than asset yields. Net interest margin declined to 2.15% from 2.88%. Total noninterest income rose 14.5% to $21.2 million, mainly on higher mortgage-banking income ($20.1 million, up 19.7%).
- Costs and credit: Noninterest expense decreased 5.3% to $27.6 million. Provision for credit losses was $67,000, compared with $460,000. The loan allowance remained $18.5 million, or 1.11% of loans.
- Cash flow: Operating cash flow was negative $9.9 million (versus negative $34.9 million); investing cash flow was negative $0.1 million. Financing provided $19.4 million, and cash and equivalents increased $9.3 million to $45.7 million. Mortgage-loan originations for sale and subsequent sale proceeds were major operating cash-flow items.
- Balance sheet and liquidity: Assets totaled $2.23 billion, up 1.0% from year-end. Net portfolio loans were $1.65 billion; loans held for sale were $175.1 million. Deposits were $1.20 billion, up $9.3 million, while borrowings increased $23.1 million to $634.2 million. The company reported $293.5 million of uninsured deposits across about 1,243 customers; $639.4 million of time deposits mature within one year. Management reported approximately $293 million of unused FHLB borrowing capacity; the Bank Term Funding Program capacity was fully utilized.
- Capital and shareholder returns: Shareholders’ equity was $338.0 million, down $6.1 million. The Bank was considered well-capitalized; its total risk-based capital ratio was 20.19% and CET1 ratio 19.08%. The company paid a $0.15-per-share dividend and repurchased 422,440 shares for $5.3 million during the quarter.
Material changes versus the comparable period
- Interest expense increased $7.7 million, including higher deposit costs and greater reliance on borrowings; the average borrowing balance rose to $602.7 million from $441.7 million.
- Average loan yields rose, supporting a $4.6 million increase in loan interest income, but did not offset higher funding costs.
- Mortgage originations for sale increased: consolidated loans originated for sale were $477.8 million versus $415.7 million. Mortgage-banking segment net income improved to $0.3 million from a $2.7 million loss; community-banking segment net income decreased to $2.6 million from $4.8 million.
- The effective tax rate increased to 36.3% from 22.5%. A one-time $1.1 million valuation allowance charge related to Wisconsin state deferred tax assets was partly offset by an approximately $368,000 benefit; management said the Wisconsin tax change should lower future state income tax expense.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management highlighted sensitivity to interest rates, funding costs, deposit retention, wholesale-funding access, mortgage-market conditions, competition, credit quality, and economic conditions. Its simulation estimated that an immediate 100-basis-point rate increase would reduce forecast 12-month net interest income by 7.08%; a 100-basis-point decrease would increase it by 7.86%.
- Management described asset quality as stable: nonaccrual loans were $4.9 million, or 0.29% of loans, and nonperforming assets were $5.1 million, or 0.23% of assets. Past-due loans were 0.64% of loans. The loan portfolio is geographically concentrated in the Milwaukee metropolitan area and primarily real-estate-backed.
- Available-for-sale securities had $25.3 million of gross unrealized losses against $229.2 million amortized cost; the company attributed losses to noncredit factors and reported no securities credit-loss allowance. It stated it did not intend, and was not more likely than not required, to sell the securities before recovery.
- A lawsuit filed in 2022 by Mutual of Omaha Mortgage against Waterstone Mortgage remains unresolved. The company said it cannot yet assess the likelihood of an unfavorable outcome or estimate a possible loss. Management believes other pending legal proceedings are not expected to have a material adverse effect.
- The company reported no significant items affecting earnings overall, while separately disclosing the Wisconsin tax-related one-time charge and offsetting benefit. Disclosure controls were deemed effective; no material change in internal control was reported, and no material risk-factor changes were identified.
Important facts for investors to verify
- Whether deposit pricing and borrowing costs stabilize, and how short-term funding maturities and uninsured-deposit levels affect liquidity.
- Whether net interest margin can recover and mortgage-banking production and margins remain sufficient to support earnings.
- Whether asset quality, particularly real-estate exposures and the Milwaukee-area concentration, remains stable and the allowance remains adequate.
- The duration and valuation implications of unrealized securities losses, and the company’s ability to retain liquidity without selling securities.
- Developments in the Mutual of Omaha litigation and the realized effects of the Wisconsin tax change on subsequent tax expense.
- Capital and parent-company liquidity after dividends and repurchases; approximately 403,000 shares remained under the repurchase authorization at March 31, 2024.