Waterstone Financial, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with fiscal 2022. This is an annual filing, not a standalone fourth-quarter report.
Business context
Waterstone Financial is a bank holding company with two reportable segments: community banking through WaterStone Bank, based mainly in southeastern Wisconsin, and mortgage banking through Waterstone Mortgage Corporation, which operated in 26 states. The bank focuses on residential, multifamily and commercial real estate lending; the mortgage subsidiary originates residential loans primarily for sale.
Key financial results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $2.213 billion | $2.032 billion | +8.9% |
| Loans held for investment | $1.664 billion | $1.510 billion | +10.2% |
| Net interest income | $50.2 million | $57.0 million | -11.8% |
| Net interest margin | 2.46% | 3.00% | -54 basis points |
| Noninterest income | $81.2 million | $105.6 million | -23.1% |
| Noninterest expense | $119.7 million | $137.1 million | -12.7% |
| Income before taxes | $11.0 million | $24.5 million | -54.9% |
| Net income | $9.4 million | $19.5 million | -51.9% |
| Diluted EPS | $0.46 | $0.89 | -48.3% |
| Return on average assets / equity | 0.44% / 2.62% | 0.96% / 4.91% | Both declined |
| Efficiency ratio | 91.11% | 84.34% | Worsened |
Interest income rose to $99.2 million from $70.2 million, but interest expense increased faster, to $49.0 million from $13.3 million. Deposit costs rose amid higher market rates and a shift toward certificates of deposit; borrowing costs and average borrowings also increased. Mortgage banking income reported in consolidated results fell to $75.7 million from $99.6 million.
Net cash used in operating activities was $27.6 million, compared with $206.7 million provided in 2022; investing activities used $159.2 million, and financing activities provided $176.6 million. Cash and cash equivalents ended the year at $36.4 million, down from $46.6 million.
Balance sheet, funding and asset quality
- Deposits were $1.191 billion, down $8.4 million year over year. Transaction accounts declined $96.4 million, partly offset by an $88.0 million increase in time deposits. Certificates of deposit represented 61.3% of customer deposits; $622.4 million were scheduled to mature within one year.
- Total borrowings increased $224.3 million to $611.1 million: $464.0 million in FHLB advances, $145.0 million from the Federal Reserve, and $2.1 million in repurchase agreements. The year-end weighted average borrowing rate was 4.62%, versus 3.68% in 2022.
- Uninsured deposits were approximately $287.9 million. Management said it expects a significant portion of maturing certificates to remain, but noted replacement funding may be more expensive or unavailable on attractive terms.
- Shareholders’ equity fell 7.1% to $344.1 million, primarily reflecting dividends and $26.0 million of stock repurchases, partly offset by net income and improved unrealized securities values. The available-for-sale securities portfolio had $24.0 million of gross unrealized losses at year-end; accumulated other comprehensive loss was $17.8 million, net of tax.
- The loan portfolio was concentrated in multifamily ($707.6 million, 42.5%), one- to four-family residential ($551.2 million, 33.1%), and commercial real estate ($300.9 million, 18.1%). Loans grew 10.2% during the year.
- Nonaccrual loans were $4.8 million, or 0.29% of loans, broadly unchanged as a ratio. Total past-due loans increased 79.7% to $11.3 million, or 0.68% of loans. Potential problem loans rose to $6.8 million from $5.5 million.
- The loan-loss allowance increased to $18.5 million, or 1.11% of loans, from $17.8 million, or 1.18%. Net charge-offs were $135,000; there were no loan charge-offs reported for nonaccrual loans during 2023.
- WaterStone Bank was reported well-capitalized: common equity Tier 1 ratio 18.99%, total risk-based capital ratio 20.10%, and Tier 1 leverage ratio 15.62%.
Material changes, outlook and risks
- Mortgage loan originations held for sale were $2.12 billion, down 23.2%. Management attributed the decline to higher mortgage rates, limited affordable housing inventory and lower refinancing demand. Mortgage banking segment net loss widened to $9.6 million from $3.4 million.
- Community banking segment net income declined to $18.6 million from $22.8 million. Higher loan yields were outweighed by sharply higher deposit and borrowing costs, contributing to margin compression.
- Management provided no specific earnings or balance-sheet guidance. It said the economic forecast factor in its credit-loss estimate was unchanged, while qualitative allowance factors were adjusted for internal and external risk developments.
- Interest-rate sensitivity modeling estimated that an instantaneous 100-basis-point rate increase would reduce forecast one-year net interest income by 9.3%; a 100-basis-point decrease would increase it by 10.6%. Management cautioned that model assumptions, including prepayment behavior, may not capture actual outcomes.
- The Bank had fully used its capacity under the Federal Reserve Bank Term Funding Program at year-end; the program was scheduled to expire March 11, 2024. A key near-term funding issue is refinancing or replacing large certificate-of-deposit maturities and short-term borrowings.
- Other principal risks include rate and funding-cost pressure, local economic and real estate weakness, multifamily/commercial real estate credit exposure, mortgage-market volatility, securities valuation changes, cybersecurity and third-party technology risks, and regulatory constraints.
- The company declared $0.70 per share in dividends for 2023; the reported dividend payout ratio was 148.94% of basic earnings. It repurchased $26.0 million of stock during the year. The filing reports no significant items for 2023 or 2022.
- CEO Douglas S. Gordon retired January 5, 2024; William F. Bruss became CEO of the company and the Bank on that date. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How the company plans to fund near-term certificate maturities and replace the $145 million Federal Reserve borrowing, including the effect of the Term Funding Program’s expiration.
- Whether deposit retention, deposit pricing and wholesale funding costs stabilize, and how those trends affect net interest margin and earnings.
- Whether rising past-due and potential problem loans develop into higher nonaccrual balances, charge-offs or additional allowance needs, especially in real estate lending.
- Mortgage originations, gain margins and segment profitability as interest rates and housing affordability change.
- The sustainability of dividends and share repurchases given 2023 earnings, the payout ratio above 100%, and lower year-end equity.
- Reconciliation of figures where segment and consolidated mortgage banking income differ; the filing presents segment-level and consolidated measures on different bases.