10-K: 1895 Bancorp of Wisconsin, Inc. Reports Full Year 2023 Results Amidst Strategic Shifts

1895 Bancorp of Wisconsin, Inc. reports a net loss for 2023, impacted by strategic balance sheet repositioning and changes in the interest rate environment.

Summary

• 1895 Bancorp of Wisconsin, Inc. reported a net loss of $6.8 million for the year ended December 31, 2023, a significant decrease compared to a net loss of $148,000 in 2022.
• The company experienced a $2.1 million decrease in net interest income, primarily due to a $6.5 million increase in interest expense, partially offset by a $4.5 million increase in interest and dividend income.
• Noninterest income decreased by $3.1 million, largely due to a $4.5 million loss on the sale of available-for-sale securities as part of a balance sheet repositioning strategy.
• Noninterest expense increased by $700,000, primarily due to a $1.4 million increase in the market value of mutual funds held in the deferred compensation plan, partially offset by cost-saving initiatives.
• The company's loan portfolio grew by $35.8 million, with a focus on commercial real estate and commercial loans.
• Deposits increased by $16.0 million, with a shift from lower-cost accounts to higher-rate certificates of deposit.
• The company adopted the Current Expected Credit Loss (CECL) accounting standard on January 1, 2023, resulting in an initial increase of $412,000 to the allowance for credit losses for loans and the establishment of a $665,000 allowance for credit losses for unfunded loan commitments.
• The company's net interest margin decreased by 45 basis points from 2.88% in 2022 to 2.43% in 2023.

Sentiment

Score: 3

Explanation: The document presents a negative financial picture with a significant net loss and declining profitability metrics. While there are some positive aspects like loan growth and cost-saving initiatives, the overall tone is concerning from an investment perspective.

Positives

• The company's loan portfolio grew by $35.8 million, indicating continued lending activity.
• The company implemented a balance sheet repositioning strategy to improve future earnings.
• The company's core deposits increased, providing a stable source of funding.
• The company's FHLB borrowing capacity remains strong at $100.9 million.
• The company implemented cost-saving initiatives, including a reduction in force and a review of open positions.

Negatives

• The company reported a significant net loss of $6.8 million for 2023.
• Net interest income decreased by $2.1 million due to rising interest expenses.
• Noninterest income declined by $3.1 million, primarily due to a $4.5 million loss on the sale of securities.
• The company's efficiency ratio was 155.8% (110.2%, excluding the loss on sale of securities) for 2023, indicating high operating costs relative to revenue.
• The company's net interest margin decreased by 45 basis points from 2.88% in 2022 to 2.43% in 2023.

Risks

• The company faces credit risks associated with its substantial amount of commercial real estate and commercial loans.
• Changes in laws and regulations and the cost of regulatory compliance may adversely affect operations.
• Fluctuations in interest rates could reduce profits and asset values.
• The company's reliance on deposits, including brokered certificates of deposit, as a source of funds could have an adverse effect on financial condition.
• The company faces significant operational risks due to its reliance on technology and potential cybersecurity breaches.
• A worsening of economic conditions in the company's market area could reduce demand for products and services and increase non-performing loans.
• Strong competition within the market area may limit growth and profitability.

Future Outlook

The company intends to continue its focus on growing its loan portfolio, particularly in commercial real estate and commercial lending, while also increasing core deposits and managing credit risk. The company will also consider acquisition opportunities that enhance the value of the franchise.

Management Comments

• Management believes there is a significant opportunity for a community-focused bank to provide a full range of financial services to commercial and retail customers in the market area.
• Management intends to continue its emphasis on originating commercial real estate and commercial loans.
• Management seeks core deposits to provide a stable source of funds to support loan growth at costs consistent with improving the net interest rate spread and margin.
• Management believes strong asset quality is a key to long-term financial success.

Industry Context

The company operates in a highly competitive market with numerous financial institutions, including large money center and regional banks, community banks, fintech companies, and credit unions. The company's performance is affected by the policies of the Federal Reserve Board, which regulates the money supply and credit conditions. The company's strategic shift towards commercial lending and balance sheet repositioning reflects a broader trend in the banking industry to adapt to changing economic conditions and interest rate environments.

Comparison to Industry Standards

• The company's efficiency ratio of 155.8% (110.2%, excluding the loss on sale of securities) is significantly higher than the industry average for community banks, which typically ranges between 50% and 70%.
• The company's net interest margin of 2.43% is below the industry average for community banks, which typically ranges between 3.0% and 3.5%.
• The company's loan growth of 9.9% is above the industry average for community banks, which typically ranges between 5% and 7%.
• The company's deposit growth of 4.1% is in line with the industry average for community banks, which typically ranges between 3% and 5%.
• The company's reliance on FHLB advances as a source of funding is higher than the industry average for community banks, which typically rely more on core deposits.
• The company's adoption of the CECL accounting standard is consistent with industry-wide requirements.
• The company's strategic shift towards commercial lending is a common strategy among community banks seeking to improve yields and diversify their loan portfolios. Comparible companies include First Business Financial Services, Inc. and Nicolet Bankshares, Inc.

Related Party Transactions

• Loans to directors, executive officers, and their affiliates totaled $995,000 as of December 31, 2023.
• Deposits from directors, executive officers, and their affiliates totaled $729,000 as of December 31, 2023.
• Fees paid to law firms in which certain directors are partners were $24,000 during the year ended December 31, 2023.

Stakeholder Impact

• Shareholders will be negatively impacted by the net loss and reduced profitability.
• Employees may be affected by cost-saving initiatives, including the reduction in force.
• Customers may experience changes in deposit rates and loan terms as the company adapts to the changing interest rate environment.
• Creditors may be concerned about the company's financial performance and ability to repay debts.

Next Steps

• The company will continue to focus on growing its loan portfolio, particularly in commercial real estate and commercial lending.
• The company will continue to increase core deposits, with an emphasis on low-cost demand deposits.
• The company will manage credit risk to maintain a low level of non-performing assets.
• The company will continue to grow organically while being aware of acquisition opportunities.

Key Dates

Keywords

financial results, net loss, loan portfolio, commercial real estate, interest income, interest expense, deposits, CECL, mortgage servicing rights, capital requirements, risk management, balance sheet, FHLB advances, operating expenses, cybersecurity