Waterstone Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial-statement amounts are generally in thousands unless noted. Waterstone operates community banking in southeastern Wisconsin and mortgage banking across multiple states.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $15.4 million | $14.1 million | $41.3 million | $42.3 million |
| Noninterest income | $27.4 million | $52.9 million | $88.5 million | $161.2 million |
| Net income | $5.3 million | $19.0 million | $18.6 million | $58.2 million |
| Diluted EPS | $0.25 | $0.79 | $0.83 | $2.43 |
| Net interest margin | 3.34% | 2.68% | 2.90% | 2.75% |
- Profitability: Q3 pretax income was $6.8 million and income tax expense was $1.5 million. Annualized return on average assets/equity was 1.08%/5.38% for Q3 and 1.22%/6.09% for the nine-month period.
- Balance sheet at September 30: Total assets were $1.98 billion, down 10.9% from December 31, 2021. Net loans were $1.34 billion; loans held for sale were $186.0 million; available-for-sale securities were $197.3 million.
- Funding and capital: Deposits were $1.19 billion, down $46.3 million from year-end; borrowings were $320.0 million, down $157.2 million. Shareholders’ equity was $376.2 million, down $56.6 million. The Bank remained well capitalized; its actual total risk-based capital ratio was 22.30% and Tier 1 leverage ratio was 17.70%.
- Cash flow, nine months: Operating activities provided $135.2 million; investing activities used $175.8 million; financing activities used $263.2 million. Cash and cash equivalents declined $303.8 million to $72.9 million.
- Credit: Allowance for credit losses on loans was $17.5 million, or 1.29% of loans. Nonaccrual loans were $5.1 million (0.37% of loans); nonperforming assets were $5.2 million (0.26% of assets). Net recoveries were $544,000 for the nine months.
Changes versus comparable periods
- Net income fell 72% in Q3 and 68% for the nine months year over year. The principal pressure was weaker mortgage banking: Q3 mortgage banking income fell 44% to $26.1 million; nine-month income fell 44% to $83.7 million.
- Mortgage originations and margins contracted as higher rates sharply reduced refinancing and weighed on purchase activity. Nine-month mortgage production for sale was $2.12 billion, down 31.5%; management reported an 18.8% reduction in gross margin on loans originated and sold.
- Lower mortgage revenue was partly offset by reduced compensation and other operating expenses. Consolidated noninterest expenses declined 17.6% in Q3 and 18.5% for the nine months.
- Net interest income rose 9.1% in Q3 but declined 2.4% year to date. Q3 margin improved year over year, while lower average loan balances—particularly loans held for sale—reduced nine-month interest income.
- Loans held for investment grew $148.7 million from year-end, led by one- to four-family, multifamily and commercial real estate lending. The securities portfolio’s unrealized losses widened: gross unrealized losses were $25.4 million at September 30 versus $3.2 million at year-end; the filing attributes these primarily to market-rate and spread changes, not credit deterioration.
Outlook, commentary, risks and unusual items
- No quantified earnings or operating guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management cited elevated interest rates, lower refinancing demand, mortgage-market competition, housing inventory and affordability constraints. The mortgage segment added 11 branches and 130 loan origination personnel in the first nine months; related branch losses were about $1.2 million for the period.
- The filing’s rate simulation estimates that an immediate 100-basis-point rate increase would reduce next-12-month net interest income by 2.37%; a 100-basis-point decrease would increase it by 0.52%. Results depend on assumptions, including loan and securities prepayments.
- Liquidity considerations include $498.3 million of time deposits scheduled to mature within one year and $318.4 million of uninsured deposits of $250,000 or more. Management says it expects a significant portion of maturing deposits to remain, but provides no assurance; replacement funding may cost more or be unavailable on attractive terms.
- Waterstone adopted CECL on January 1, 2022, recording a $430,000 increase to the loan allowance and a $1.4 million allowance for unfunded commitments; the after-tax reduction to opening retained earnings was $1.4 million. The nine-month provision for credit losses was $304,000, compared with a $2.5 million credit in 2021.
- The company repurchased $45.2 million of stock in the first nine months and paid $26.0 million in cash dividends. At September 30, 925,218 shares remained under the repurchase authorization. A prior-year mortgage-servicing-rights sale generated a $4.0 million gain; no comparable sale occurred in 2022. Management reported no significant items impacting earnings and no significant subsequent events through issuance.
- Other disclosed risks include credit deterioration, deposit competition, interest-rate and market-value changes, operational and cyber risks, regulatory changes, and dependence on third-party providers. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material risk-factor changes were reported from the 2021 Form 10-K.
Important facts for investors to verify
- Whether mortgage originations and margins stabilize, and whether the newer branches can reach profitability.
- Deposit retention and funding costs as nearly $498 million of time deposits mature within one year; assess liquidity alongside the decline in cash.
- Changes in the securities portfolio’s unrealized losses and the potential effect of further rate moves on tangible equity and earnings.
- Loan quality, especially the largest nonaccrual exposures: the five largest totaled $3.6 million, or 70.2% of nonaccrual loans; review allowance assumptions and any changes in delinquencies.
- The sustainability of capital returns, including repurchases and dividends, given reduced earnings and lower shareholders’ equity.