10-Q: 1895 Bancorp of Wisconsin Reports Mixed Results in Q2 2024 Amidst Interest Rate Challenges

1895 Bancorp of Wisconsin reported a net loss for the second quarter of 2024, impacted by increased interest expenses and a shift in deposit mix, despite growth in loan volume and interest income.

Summary

• 1895 Bancorp of Wisconsin reported a net loss of $516,000 for the three months ended June 30, 2024, and a net loss of $822,000 for the six months ended June 30, 2024.
• Total assets increased slightly to $561.5 million at June 30, 2024, from $557.6 million at December 31, 2023.
• The company experienced a $3.6 million increase in cash and cash equivalents and a $4.1 million increase in loans, offset by a $6.2 million decrease in available-for-sale securities.
• Interest and dividend income rose by 24.0% to $6.2 million for the quarter, driven by higher loan and securities yields.
• Interest expense increased by 57.9% to $3.0 million due to higher deposit rates and a shift towards higher-cost certificates of deposit.
• Net interest income increased slightly by 3.0% to $3.2 million for the quarter.
• Noninterest income decreased by $104,000, primarily due to a decrease in other noninterest income and unrealized gains on marketable equity securities.
• Noninterest expense decreased by $117,000, mainly due to lower salaries and benefits, partially offset by increased professional fees.
• Deposits decreased by $4.8 million to $398.9 million, with a shift from non-interest bearing accounts to certificates of deposit.
• The company repurchased 207,433 shares of its common stock for a total of $1.5 million under its stock repurchase program as of June 30, 2024.

Sentiment

Score: 4

Explanation: The sentiment is slightly negative due to the reported net loss and challenges with interest expenses and deposit mix. However, there are some positive aspects, such as loan growth and cost-cutting measures, which prevent a more negative score.

Positives

• Interest and dividend income increased significantly due to higher yields on loans and securities.
• The company saw an increase in loan volume, indicating growth in lending activities.
• Noninterest expenses decreased due to cost-saving initiatives, including a reduction in workforce.
• The company continues to maintain a strong capital position, exceeding all regulatory requirements.
• The company has a significant amount of additional borrowing capacity at the Federal Home Loan Bank of Chicago.

Negatives

• The company reported a net loss for both the quarter and the six-month period.
• Interest expense increased significantly due to higher deposit rates and a shift towards higher-cost certificates of deposit.
• Net interest margin decreased slightly, indicating pressure on profitability.
• Noninterest income decreased due to lower gains on marketable equity securities and other noninterest income.
• Deposits decreased, with a shift from lower-cost accounts to higher-cost certificates of deposit.

Risks

• The company faces interest rate risk, as changes in rates can impact net interest income and the value of assets and liabilities.
• The shift in deposit mix towards higher-cost certificates of deposit could continue to pressure margins.
• The company is exposed to credit risk, as changes in economic conditions could impact loan delinquencies and write-offs.
• The company's performance is subject to general economic conditions and competition from other financial institutions.
• The company's results are subject to changes in laws, regulations, and accounting standards.

Future Outlook

The company anticipates having sufficient funds to meet its current funding commitments based on its strategy to increase core deposits, along with the continued use of FHLB advances and brokered certificates of deposit as needed. The company expects a $1.5 million reduction in data processing expenses over the term of the renegotiated contract.

Management Comments

• Management believes that the critical accounting estimates include the allowance for credit losses, determination of fair value for financial instruments, and valuation of deferred income taxes.
• Management is not aware of any conditions or events since the most recent notification that would change our capital category.
• Management is committed to maintaining a strong liquidity position.

Industry Context

The company's performance is being impacted by broader industry trends, including rising interest rates, which are increasing funding costs and shifting deposit mixes. The company is also facing competition from other financial institutions for deposits and loans.

Comparison to Industry Standards

• The company's net interest margin of 2.44% for the quarter is below the average for many regional banks, which have been benefiting from higher interest rates on loans.
• The company's loan growth of 1.0% is moderate compared to some peers, which have seen more aggressive loan growth.
• The company's deposit decrease of 1.2% is in line with some banks that are experiencing a shift in deposits to higher-yielding products.
• The company's capital ratios are above regulatory requirements, which is a positive sign compared to some banks that are facing capital pressures.
• The company's cost-cutting measures, including a reduction in workforce, are similar to actions taken by other banks to improve efficiency.

Related Party Transactions

• Loans to directors, executive officers, and their affiliates totaled $874,000 at June 30, 2024.
• Deposits from directors, executive officers, and their affiliates totaled $681,000 at June 30, 2024.
• The company utilizes the services of law firms in which certain of the company's directors are partners, with fees paid being immaterial.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and the decrease in total stockholders' equity.
• Employees may be impacted by the cost-saving initiatives, including the reduction in workforce.
• Customers may be impacted by changes in deposit rates and loan terms.
• Creditors may be impacted by the company's liquidity and capital position.

Next Steps

• The company will continue to monitor its liquidity position and manage interest rate risk.
• The company will focus on increasing core deposits and managing funding costs.
• The company will continue to implement cost-saving initiatives to improve profitability.
• The company will continue to evaluate its loan portfolio and manage credit risk.

Key Dates

Keywords

financial results, net loss, interest income, interest expense, loans, deposits, securities, credit losses, capital, stock repurchase, FHLB advances, mortgage servicing rights