Waterstone Financial, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are with the prior-year quarter or nine-month period, as applicable. Waterstone operates a Wisconsin community bank and a mortgage-banking business originating residential loans for sale. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $12.0 | $15.4 | $38.5 | $41.3 |
| Net interest margin | 2.26% | 3.34% | 2.53% | 2.90% |
| Noninterest income | $22.2 | $27.4 | $64.3 | $88.5 |
| Noninterest expense | $30.0 | $35.7 | $90.1 | $105.7 |
| Provision for credit losses | $0.45 | $0.33 | $1.09 | $0.30 |
| Net income | $3.3 | $5.3 | $9.4 | $18.6 |
| Diluted EPS | $0.16 | $0.25 | $0.46 | $0.83 |
| Annualized return on average assets | 0.58% | 1.08% | 0.59% | 1.22% |
| Annualized return on average equity | 3.63% | 5.38% | 3.46% | 6.09% |
Financial condition, funding and cash flow
- At September 30, total assets were $2.22 billion, up 9.3% from December 31, 2022. Loans receivable were $1.65 billion, up $140.9 million; loans held for sale were $157.4 million.
- Deposits were $1.21 billion, up $6.2 million from year-end. Time deposits rose $91.0 million while demand and money-market/savings balances declined. $663.4 million of time deposits were due within one year; estimated uninsured deposits were $287.1 million across about 1,218 customers.
- Borrowings increased $201.1 million, or 52%, to $587.9 million. Total borrowings carried a 4.79% weighted rate. The company reported $291.0 million of unused FHLB capacity and $62.7 million of unused Bank Term Funding Program capacity; that program was due to expire March 11, 2024.
- Cash and cash equivalents were $62.3 million, versus $46.6 million at year-end. For the first nine months, operating cash flow was negative $26.6 million, investing cash flow negative $144.8 million, and financing cash flow positive $187.0 million, producing a $15.7 million increase in cash.
- Shareholders’ equity was $346.3 million, down $24.2 million from year-end, reflecting dividends, share repurchases and securities valuation losses, partly offset by earnings. The securities portfolio had $31.4 million of gross unrealized losses; management attributed these to noncredit factors and stated it did not intend or expect to need to sell the securities before recovery.
- The Bank was reported well-capitalized: total risk-based capital ratio was 19.93%, against a 10.00% well-capitalized threshold. The allowance for loan credit losses was $18.6 million, or 1.12% of loans; net charge-offs were $33,000 for the nine-month period.
Changes and management commentary
- Q3 net interest income fell 22.1%; nine-month net interest income declined 7.0%. Higher loan yields and loan growth were more than offset by sharply higher deposit and borrowing costs. Q3 interest expense rose to $14.4 million from $2.7 million a year earlier; average funding costs rose substantially.
- Mortgage banking was the principal earnings headwind. Mortgage banking income fell 18.8% in Q3 and 28.5% year to date. Nine-month mortgage originations declined 25.0%, with higher rates, affordability and housing inventory constraints cited. The mortgage segment recorded a $5.4 million nine-month net loss, versus $1.5 million income a year earlier; lower volume and margins also led to reduced staffing and compensation expense.
- Credit indicators were mixed: nonaccrual loans declined to $4.1 million, or 0.25% of loans, from $4.3 million at year-end; however, total past-due loans increased to $8.7 million, or 0.53% of loans, from $6.3 million. The filing reports no loans 90 days or more past due and still accruing interest.
- Management described liquidity and the balance sheet as stable amid 2023 banking-industry volatility and said deposits increased 0.5% from year-end. It provided no specific earnings or operating guidance; results are not necessarily indicative of full-year performance.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point rate increase would reduce projected 12-month net interest income by 2.37%, while a 100-basis-point decrease would increase it by 0.52%. Larger modeled increases showed greater projected declines.
Risks, contingencies and unusual items
- Key stated risks include deposit competition and outflows, higher funding costs, interest-rate and market risk, credit deterioration, mortgage-market weakness, regulatory changes, cybersecurity and third-party technology risks.
- Most of the loan portfolio is real-estate-related and geographically concentrated in the Milwaukee area. Multi-family and commercial real-estate loans were $711.7 million and $278.4 million, respectively.
- Waterstone Mortgage faces litigation brought by Mutual of Omaha Mortgage concerning employees hired from Mutual. The company intends to defend the claims but said it cannot assess the likelihood of an unfavorable outcome or estimate a possible loss.
- A Wisconsin tax-law change may exempt qualifying business or agricultural loan income. The company said it could not yet estimate the impact; any benefit could reduce the 2023 effective tax rate and potentially trigger a one-time deferred-tax adjustment.
- The company reported no significant items affecting earnings and no significant subsequent events through issuance. It reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit balances and funding costs remain manageable as $663.4 million of time deposits mature within one year, and whether available borrowing capacity remains accessible on acceptable terms.
- Whether net interest margin stabilizes or continues to compress as deposit and borrowing repricing catches up with asset yields.
- Trends in mortgage originations, gain margins, operating costs and the mortgage segment’s path back to profitability.
- Credit performance, especially delinquencies and exposures in multi-family and commercial real estate, alongside allowance adequacy.
- The duration and potential financial impact of the Mutual of Omaha litigation, and the eventual quantified effect of Wisconsin tax-law changes.
- The effect of unrealized securities losses, planned share repurchases and dividends on capital and liquidity; the company had 1,365,195 shares remaining under its repurchase authorization at quarter-end.