Waterstone Financial, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Waterstone operates a community bank serving southeastern Wisconsin and a mortgage banking business originating residential loans primarily for sale. Figures below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.9 | $14.0 in Q1 2021 |
| Noninterest income | $29.8 | $56.2 in Q1 2021 |
| Net income; diluted EPS | $5.3; $0.23 | $21.3; $0.89 in Q1 2021 |
| Net interest margin | 2.38% | 2.80% in Q1 2021 |
| Annualized return on average assets / equity | 1.00% / 5.00% | 3.99% / 20.49% in Q1 2021 |
| Cash provided by operating activities | $142.6 | $59.4 in Q1 2021 |
| Cash and cash equivalents | $278.5 | $376.7 at December 31, 2021 |
| Total assets | $2,004.6 | $2,215.9 at December 31, 2021 |
| Loans receivable, net | $1,190.5 | $1,190.0 at December 31, 2021 |
| Deposits / borrowings | $1,210.4 / $326.5 | $1,233.4 / $477.1 at December 31, 2021 |
| Shareholders’ equity | $412.3 | $432.8 at December 31, 2021 |
Investing activities used $33.7 million and financing activities used $207.1 million; cash declined $98.2 million during the quarter. The Bank was reported well-capitalized: total risk-based capital was 26.51%, Tier 1 leverage was 17.82%, and common equity Tier 1 was 25.39%.
Material changes versus comparable periods
- Net income fell about 75% year over year. Mortgage banking income declined 48.0% to $28.3 million, reflecting lower origination volume and a 17.6% decline in gross margin. Mortgage originations were down 36.5%, with refinance production down 67.1%; management cited higher mortgage rates and limited housing inventory.
- Net interest income declined 15.0%. Average loans and held-for-sale loans were lower, while the reported net interest margin contracted from 2.80% to 2.38%. Lower deposit costs partly offset reduced loan income.
- Noninterest expenses declined 18.8% to $34.9 million, primarily as mortgage commissions and other volume-related costs fell. Total noninterest income decreased 46.9% to $29.8 million.
- Assets fell 9.5%, chiefly due to lower cash and loans held for sale. Borrowings declined $150.6 million, including repayment of $155.0 million in long-term FHLB advances; deposits decreased $22.9 million.
- Equity fell $20.5 million, affected by dividends, $13.8 million of share repurchases, CECL adoption, and a $7.0 million after-tax unrealized loss on available-for-sale securities. The company paid $17.2 million in cash dividends during the quarter.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantified earnings or revenue guidance. Management states quarterly results are not necessarily indicative of full-year results.
- Waterstone adopted CECL on January 1, 2022. Adoption increased the loan allowance by $0.43 million and established a $1.4 million allowance for unfunded commitments, resulting in a $1.4 million after-tax reduction to opening retained earnings. The quarter’s total provision was a $0.08 million credit.
- Credit indicators warrant monitoring: nonaccrual loans rose to $6.6 million from $5.6 million at year-end, or 0.55% of loans versus 0.46%; nonperforming assets were $6.8 million. The allowance for loan losses was $16.9 million, or 1.40% of loans. Management reported $0.62 million of net recoveries, primarily from a significant multifamily loan recovery.
- Interest-rate, mortgage-market, credit, deposit-retention, operational, cybersecurity, regulatory, and broader economic risks are identified. Management noted pandemic conditions appeared to improve and operations remained fully functional.
- Liquidity considerations include $511.5 million of time deposits scheduled to mature within one year, $314.2 million of uninsured deposits of $250,000 or more, and substantial unfunded lending commitments. Management said a significant portion of maturing deposits had historically remained, but gave no assurance; alternative funding could be more costly or unavailable.
- Mortgage-loan sale agreements include limited representations, warranties, and recourse. The related reserve was $1.9 million. Management said any liability from pending legal proceedings was not expected to materially adversely affect the financial statements.
- The securities portfolio had $11.0 million of gross unrealized losses at quarter-end. Management attributed losses to interest rates and market conditions rather than credit deterioration, reported no securities credit-loss allowance, and stated it did not intend to sell the securities and expected to hold them until recovery.
- The filing’s interest-rate sensitivity disclosure appears inconsistent: its table reports a 1.57% estimated net interest income increase for a 100-basis-point rise and a 3.97% decrease for a 100-basis-point fall, while accompanying text reports an 8.08% increase and a 5.56% decrease, respectively.
Important facts for investors to verify
- Reconcile the conflicting interest-rate sensitivity figures and assess how rising rates may affect net interest income and mortgage production.
- Track mortgage origination volume, gross margins, refinance and purchase mix, and the impact of further volume declines on earnings.
- Review deposit retention and repricing as $511.5 million of time deposits mature within a year, alongside liquidity needs and borrowing capacity.
- Monitor nonaccrual loans, delinquencies, CECL assumptions, recoveries, and the allowance for funded and unfunded credit exposures.
- Assess the effect of securities’ unrealized losses on equity and capital, and confirm the scale of dividends and future share repurchases.