Waterstone Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Waterstone operates a community bank in southeastern Wisconsin and a mortgage banking business originating residential loans for sale.
Financial performance and condition
| Metric | Q1 2023 | Prior comparable period / change |
|---|---|---|
| Net interest income | $13.8 million | Up 16.3% from $11.9 million |
| Net interest margin | 2.88% | 2.38% in Q1 2022 |
| Noninterest income | $18.6 million | Down 37.8% from $29.8 million |
| Noninterest expenses | $29.1 million | Down 16.7% from $34.9 million |
| Net income / diluted EPS | $2.2 million / $0.10 | $5.3 million / $0.23 |
| Operating cash flow | $(31.4) million | $142.6 million provided in Q1 2022 |
- Profitability: Pretax income was $2.8 million and the reported effective tax rate was 22.5%. Annualized return on average assets was 0.43%, versus 1.00%; return on average equity was 2.35%, versus 5.00%.
- Balance sheet: Assets rose 4.1% to $2.11 billion. Loans held for investment increased $40.0 million to $1.55 billion; loans held for sale increased $30.1 million to $161.3 million. Shareholders’ equity fell $4.7 million to $365.8 million.
- Funding and liquidity: Deposits declined $16.1 million to $1.18 billion, while borrowings increased $114.9 million to $501.7 million. Cash and cash equivalents were $54.2 million, up $7.6 million. Q1 investing cash use was $46.5 million and financing cash provided was $85.5 million. Management said liquidity remained stable and deposit outflows were minimal despite industry volatility.
- Capital and credit: The Bank was well capitalized; its total risk-based capital ratio was 20.44%. The loan allowance was $17.7 million, or 1.14% of loans. Nonaccrual loans were $4.5 million (0.29% of loans); total past-due loans increased to $9.9 million, or 0.64% of loans, from $6.3 million, or 0.41%, at year-end.
- Other balance-sheet exposure: Available-for-sale securities had fair value of $200.4 million and gross unrealized losses of $23.8 million. Management attributed the losses to noncredit factors, reported no securities credit-loss allowance, and said it did not intend or expect to need to sell the securities before recovery.
Material changes and management commentary
- Mortgage banking was the main earnings headwind: segment revenue fell 37.2% to $18.0 million and the segment moved from $1.1 million of net income to a $2.7 million net loss. Originations declined 37.5%; management cited sharply lower refinancing, higher rates, purchase-market inventory and affordability constraints, and lower gross margins amid competition. Mortgage segment compensation declined with lower production and reduced headcount.
- Higher loan yields lifted interest income, but deposit and borrowing costs rose substantially. Net interest income increased as loan interest income rose, while deposit and borrowing interest expense also increased.
- The company sold servicing rights on $318.4 million of loans for $3.5 million, recognizing a $601,000 gain. Serviced loans for others declined to $116.6 million from $409.6 million at year-end. The filing reports no significant items impacting earnings overall.
- During Q1, the company repurchased 373,193 shares for approximately $5.8 million. It declared a $0.20-per-share cash dividend. The repurchase plan had 392,779 shares remaining at March 31.
Outlook, risks, and contingencies
- The filing gives no specific earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- Key risks include further deposit outflows or rising deposit costs, reliance on FHLB and other funding, interest-rate and securities-market movements, mortgage origination and margin weakness, and deterioration in loan credit quality. Management specifically noted industry-wide concerns after bank failures and the possibility of increased regulatory scrutiny and costs.
- About $538.4 million of time deposits were scheduled to mature within one year; management said a significant portion historically remains, but gave no assurance. Uninsured time deposits of $250,000 or more totaled $120.3 million.
- Off-balance-sheet commitments included $86.5 million of commitments to extend credit, $67.7 million of unused construction loans, $17.1 million of unused business lines, and $0.9 million of standby letters of credit. The company reported no probable losses on these commitments. Mortgage-loan sale representations and warranties can require repurchases; the related reserve was $2.1 million. Management did not expect pending legal proceedings to have a material adverse effect.
- Interest-rate sensitivity disclosures appear inconsistent: the table reports a 4.35% decline in projected net interest income for an immediate 100-basis-point increase and a 0.34% increase for a 100-basis-point decrease; accompanying narrative instead states a 2.37% decline and a 0.52% increase, respectively.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity table with the conflicting narrative and assess exposure to further rate changes.
- Monitor deposit retention, deposit pricing, uninsured funding, and the ability to refinance or replace short-term borrowings.
- Track mortgage production, gain-on-sale margins, servicing-rights sales, and the mortgage segment’s path back to profitability.
- Review rising delinquency and past-due balances, commercial real estate and multifamily concentrations, and allowance assumptions as economic conditions change.
- Assess the duration and potential liquidity implications of the securities portfolio’s unrealized losses and the company’s stated ability to hold securities until recovery.