Waterstone Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results include WaterStone Bank and Waterstone Mortgage Corporation. Dollar amounts are in millions unless otherwise noted.
Business context and key financial metrics
The company operates community banking, primarily in southeastern Wisconsin, and mortgage banking, originating residential mortgages mainly for sale in the secondary market.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $14.1 | $13.4 | $42.3 | $39.2 |
| Net interest margin | 2.68% | 2.63% | 2.75% | 2.64% |
| Mortgage banking income | $46.5 | $72.1 | $150.6 | $166.3 |
| Provision (credit) for loan losses | $(0.7) | $1.0 | $(2.5) | $6.3 |
| Net income | $19.0 | $26.3 | $58.2 | $53.3 |
| Diluted EPS | $0.79 | $1.08 | $2.43 | $2.15 |
- Q3 annualized return on average assets was 3.38%, versus 4.78%; return on average equity was 17.25%, versus 26.30%. For the nine-month periods, those returns were 3.54% versus 3.35% and 18.08% versus 18.02%, respectively.
- At September 30, total assets were $2.234 billion, deposits $1.247 billion, borrowings $475.0 million, shareholders’ equity $442.6 million, and cash and cash equivalents $358.6 million.
- Gross loans held in portfolio were $1.227 billion; loans held for sale were $326.0 million. The allowance for loan losses was $16.8 million, or 1.37% of gross loans.
- Nine-month cash from operating activities was $123.7 million, compared with cash used of $116.4 million in 2020. Cash increased $263.8 million during the period, ending at $358.6 million.
- The Bank reported regulatory capital ratios above applicable requirements and was classified as well-capitalized. Its total risk-based capital ratio was 26.02% and Tier 1 leverage ratio was 17.77%.
Material changes versus comparable periods
- Q3 net income fell 27.7% year over year, principally as mortgage banking income declined with lower originations and narrower margins. Mortgage segment net income was $12.3 million, down from $20.1 million; community banking net income rose to $6.8 million from $6.2 million.
- Q3 mortgage originations at the mortgage segment fell 18.6% to $1.06 billion. Management attributed lower refinance volume to rising mortgage rates and lower purchase volume to housing inventory constraints; competition also compressed gross margins.
- For the first nine months, net income increased 9.2%. Community banking net income rose to $21.6 million from $14.4 million, while mortgage banking net income declined to $36.6 million from $38.9 million. Mortgage originations increased 2.8% to $3.24 billion, as increased purchase activity more than offset lower refinancing.
- Net interest income and margin improved year over year in both comparison periods, mainly reflecting lower deposit costs. This more than offset lower interest income from loans and securities.
- Assets rose 2.3% from December 31, 2020. Cash increased substantially, while loans held for sale fell $76.0 million and portfolio loans fell $148.3 million. Deposits increased $61.7 million and borrowings decreased $33.1 million.
- Nonperforming assets declined to $4.1 million from $5.9 million at year-end; non-accrual loans were 0.32% of loans, versus 0.40%. Past-due loans nonetheless increased to $11.2 million from $7.9 million.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or revenue guidance. Management said operating results for the reported interim periods are not necessarily indicative of full-year results.
- Management expected adoption of CECL on January 1, 2022. A Q3 parallel-run estimate indicated an allowance impact from no change to a 10% increase; the MD&A separately states the change, including unfunded-commitment reserves, was expected not to exceed 110% of the September 2021 allowance. Management cautioned that estimates could change with model validation, portfolio composition, economic conditions, and forecasts. Adoption was expected to be recorded as an adjustment to opening retained earnings.
- COVID-19 effects and possible renewed restrictions, economic conditions, interest-rate and funding-cost changes, mortgage-market competition, credit losses, deposit retention, and cybersecurity and operational risks remain relevant. Management noted that higher funding costs or significant deposit outflows could pressure liquidity and net interest margin.
- Q3 included a $4.0 million gain from selling mortgage servicing rights tied to $1.24 billion of serviced loans; the sale generated $12.4 million in proceeds. Servicing rights fell to $1.2 million from $6.0 million at year-end, and serviced loans for others fell to $160.8 million from $871.8 million.
- For the nine months, the company recorded a $2.5 million provision credit and $487,000 of net recoveries. It used the incurred-loss methodology, having deferred CECL adoption under pandemic-related legislation.
- Off-balance-sheet commitments totaled $147.9 million, including $69.2 million of unused construction loans and $44.6 million of loan commitments. Management reported no probable losses on these commitments. Mortgage-loan sale agreements include limited representations, warranties, and recourse; the reserve for related losses was $2.8 million.
- Management said pending legal proceedings were not expected to have a material adverse effect. Legal settlement activity affected reported expenses and liabilities; investors should confirm its timing and accounting treatment in the detailed disclosures.
- Interest-rate sensitivity disclosures are inconsistent: the table shows a 9.86% increase in projected net interest income for an immediate 100-basis-point rate increase, while the narrative states 8.08%. The table and narrative also differ slightly on the 100-basis-point decrease. This value should be verified against the original filing.
Important facts for investors to verify
- Reconcile the CECL impact estimates and confirm the final opening allowance adjustment at adoption.
- Verify the interest-rate sensitivity figures, especially the stated effect of a 100-basis-point increase.
- Track mortgage origination volumes, gain margins, and earnings dependence on mortgage banking as refinance activity changes.
- Monitor deposit retention and the $576.6 million of time deposits scheduled to mature within one year, along with available liquidity and funding costs.
- Review loan delinquency, non-accrual and TDR trends, and collateral exposure; past-due balances rose even as nonperforming assets declined.
- Confirm the settlement-related cash-flow and expense disclosures and the continuing exposure under mortgage-loan sale recourse provisions.