Waterstone Financial, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The company operates WaterStone Bank, a Wisconsin community bank, and Waterstone Mortgage Corporation, a nationwide mortgage originator. Comparisons below are primarily with 2021; amounts are in U.S. dollars.
Financial performance and condition
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total assets | $2.03 billion | $2.22 billion | Down 8.3% |
| Loans held for investment | $1.51 billion | $1.21 billion | Up 25.2% |
| Net interest income | $57.0 million | $55.5 million | Up 2.6% |
| Noninterest income | $105.6 million | $203.2 million | Down 48.1%, primarily lower mortgage banking income |
| Noninterest expense | $137.1 million | $170.6 million | Down 19.7% |
| Net income | $19.5 million | $70.8 million | Down 72.5%; diluted EPS was $0.89 versus $2.96 |
| Net interest margin | 3.00% | 2.68% | Improved 32 basis points |
| Efficiency ratio | 84.34% | 65.94% | Worsened as mortgage income fell |
| Cash and cash equivalents | $46.6 million | $376.7 million | Down $330.1 million |
| Deposits | $1.20 billion | $1.23 billion | Down $34.4 million, or 2.8% |
| Borrowings | $386.8 million | $477.1 million | Down $90.3 million; primarily FHLB advances |
| Shareholders’ equity | $370.5 million | $432.8 million | Down 14.4% |
Mortgage banking segment results shifted to a $3.4 million net loss from $42.5 million net income in 2021. Community banking segment net income was $22.8 million, down from $28.3 million.
Operating cash flow was $206.7 million; investing cash flow was negative $335.7 million and financing cash flow was negative $201.0 million. Cash declined as lending and securities investment used funds, deposits declined, and the company repurchased shares and paid dividends.
Material changes versus 2021
- Mortgage subsidiary originations of loans held for sale were $2.76 billion, down 34.6%; consolidated originations for sale reported in cash flows were $2.55 billion versus $4.20 billion. Mortgage banking income fell to $99.6 million from $191.0 million, reflecting lower volume and an 18.3% decline in gross margin.
- Higher mortgage rates sharply reduced refinancing activity: refinance production fell 76.6%. Purchase originations also declined, amid higher rates, limited housing inventory and affordability pressures.
- Portfolio loans grew, led by one- to four-family and multifamily lending. Multifamily loans were $678.0 million, or 44.9% of the loan portfolio; commercial real estate loans were $263.0 million, or 17.4%.
- Nonaccrual loans declined to $4.3 million from $5.6 million; nonperforming assets were 0.22% of assets versus 0.26%. The allowance for credit losses was $17.8 million, or 1.18% of loans, versus $15.8 million, or 1.31%.
- The company adopted CECL on January 1, 2022. The adoption reduced retained earnings by $1.4 million after tax, including an initial $430,000 increase in the loan allowance and a $1.4 million allowance for unfunded commitments.
- Available-for-sale securities ended the year at $196.6 million fair value, with $26.5 million of gross unrealized losses. Net other comprehensive loss from securities was $18.3 million after tax.
- Share repurchases totaled $47.8 million, versus $10.2 million in 2021. Dividends declared were $0.80 per share versus $1.80; cash dividends paid were $30.3 million.
Outlook, risks and notable items
- The filing provides no specific numerical earnings or revenue guidance. Management describes higher interest rates as a headwind to mortgage originations and mortgage banking income, while noting that rates can also affect funding costs, asset yields and credit quality.
- At year-end, the company reported regulatory liquidity ratios of 4.49% for primary liquidity and 19.46% for total regulatory liquidity, above its stated minimums. It also reported $185.7 million of short-term FHLB advances, largely maturing in January 2023, and $502.3 million of certificates of deposit due within one year.
- Certificates of deposit represented 53.6% of customer deposits. Deposits with balances of $250,000 or more totaled $313.3 million; uninsured certificate maturities were $87.3 million within 12 months. Deposit retention, repricing and alternative funding costs are important liquidity considerations.
- Management’s interest-rate simulation estimated that an immediate 100-basis-point increase would reduce projected one-year net interest income by 3.9%; a 300-basis-point increase would reduce it by 10.8%. An immediate 100-basis-point decrease was estimated to reduce it by 0.4%. These are model estimates and depend on assumptions, including prepayments.
- Principal risks include interest-rate and securities valuation exposure; dependence on mortgage banking and secondary-market conditions; concentrated real-estate lending, particularly multifamily and commercial real estate; deposit competition and funding; cybersecurity, third-party and operational risks; and regulatory and economic uncertainty.
- The company reported no significant items for 2022 and 2021. It said securities losses reflected market-rate and other noncredit factors, reported no securities credit-loss allowance, and did not intend or expect to need to sell the securities before recovery of cost.
- The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The allowance for credit losses was identified as a critical audit matter. Management stated pending legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether mortgage production, margins and staffing costs stabilize after the steep 2022 contraction, and whether new branches added during 2022 become profitable.
- Deposit retention and repricing, especially the large near-term certificate maturities and the level of uninsured deposits; confirm the availability and cost of contingent funding.
- The market value and liquidity implications of the $26.5 million gross unrealized securities losses, and the assumptions behind management’s expectation that securities need not be sold before recovery.
- Credit trends in the expanding loan portfolio, particularly multifamily and commercial real estate, and whether the CECL allowance remains adequate under changing economic conditions.
- Interest-rate sensitivity assumptions and actual net interest margin performance as asset yields and funding costs reprice.
- Capital allocation sustainability: 2022 dividends declared exceeded reported earnings (146.1% payout ratio), alongside $47.8 million of share repurchases.