10-Q: EWSB Bancorp Reports Q2 Loss, Faces Capital Compliance Issues

EWSB Bancorp, Inc. reported a net loss for the second quarter and first half of 2025, alongside significant deposit outflows and non-compliance with certain capital ratios and risk management policies.

Summary

• EWSB Bancorp, Inc. recorded a net loss of $278,660 for the three months ended June 30, 2025, an improvement from a net loss of $462,861 in the prior year period.
• The net loss for the six months ended June 30, 2025, was $847,301, slightly worse than the $840,356 net loss reported for the same period in 2024.
• Total assets increased by $11.7 million, or 4.3%, to $285.0 million at June 30, 2025, from $273.3 million at December 31, 2024.
• Loans, net, grew by $9.9 million, or 5.3%, reaching $196.2 million at June 30, 2025.
• Total deposits decreased by $9.4 million, or 4.0%, to $222.1 million at June 30, 2025, with a $9.4 million reduction in brokered non-maturity deposits.
• Borrowed funds increased by $20.1 million to $44.3 million at June 30, 2025, primarily to offset deposit declines and fund loan growth.
• Net interest income increased by $312,000 (38.2%) to $1.1 million for the three months ended June 30, 2025, and by $451,000 (27.5%) to $2.1 million for the six months ended June 30, 2025.
• The Bank's Tier 1 capital as a percentage of average total assets (6.3%) was not in compliance with the Board of Directors' designated minimum ratio of 8.0% at June 30, 2025.
• The Bank's net worth ratio of 5.54% was not in compliance with the State of Wisconsin's minimum requirement of 6.0% at June 30, 2025.
• The estimated change in Economic Value of Equity (EVE) for an instantaneous parallel 200 basis point increase or decrease in market interest rates was outside the limits set in the Bank's asset/liability management policy.
• A $25.0 million interest rate swap agreement was entered into on July 1, 2025, as part of asset liability management strategy.
• A former branch office property in Grand Chute, Wisconsin, was sold on July 16, 2025, for $405,000, with an estimated loss on sale of $22,000.

Sentiment

Score: 3

Explanation: The sentiment is negative due to persistent net losses, significant deposit outflows leading to increased reliance on higher-cost borrowings, and critical non-compliance with board-designated and state-mandated capital ratios. Furthermore, the Economic Value of Equity (EVE) sensitivity is outside policy limits, indicating elevated interest rate risk. While net interest income improved, these fundamental issues outweigh the operational gains.

Positives

• Net loss for the three months ended June 30, 2025, improved to $278,660 from $462,861 in the prior year.
• Net interest income significantly increased by 38.2% for the quarter and 27.5% for the six months, driven by higher loan yields and average loan balances.
• Loans, net, increased by $9.9 million (5.3%) to $196.2 million, indicating healthy loan production.
• The provision for credit losses on loans decreased significantly for the three months ended June 30, 2025, to $6,000 from $120,490 in the prior year.
• Accumulated other comprehensive loss decreased by $984,000 due to an increase in the market value of the investment portfolio, reflecting a decline in market interest rates.
• The Bank remains categorized as 'well capitalized' under federal regulatory capital regulations, meeting all federal minimum ratios.
• Loans past due 90+ days decreased to $0 at June 30, 2025, from $304,459 at December 31, 2024.

Negatives

• The net loss for the six months ended June 30, 2025, slightly worsened to $847,301 from $840,356 in the prior year.
• Total deposits decreased by $9.4 million (4.0%), with a significant reduction in non-interest bearing and interest-bearing non-CD deposits.
• Increased reliance on borrowed funds, which rose by $20.1 million to $44.3 million, to offset deposit outflows and fund loan growth.
• The Bank's Tier 1 capital to average total assets ratio of 6.3% was below the Board of Directors' designated minimum of 8.0%.
• The Bank's net worth ratio of 5.54% was below the State of Wisconsin's minimum requirement of 6.0%.
• The estimated change in Economic Value of Equity (EVE) for a +/200 basis point interest rate shift was outside the limits set in the Bank's asset/liability management policy, indicating elevated interest rate risk.
• Noninterest income declined by $66,000 (15.6%) for the quarter and $215,000 (20.7%) for the six months, primarily due to the absence of a non-recurring gain on an interest rate swap recognized in 2024.
• Noninterest expense increased by $114,000 (6.4%) for the quarter and $249,000 (6.9%) for the six months, driven by higher salaries and benefits, data processing, and professional fees.
• Nonaccrual loans increased to $60,748 at June 30, 2025, from $12,704 at December 31, 2024, for other consumer loans, and marine and recreational loans also had $18,561 in nonaccrual status.

Risks

• Vulnerability to interest rate changes, which could reduce margins, yields, mortgage banking revenues, fair value of financial instruments, or increase loan defaults and losses.
• General economic conditions, including inflation, potential recession, labor shortages, and supply chain disruptions, could negatively impact financial performance.
• Changes in the level and direction of loan delinquencies and write-offs, and the adequacy of the allowance for credit losses.
• Ability to comply with the confidential memorandum of understanding (MOU) with the Wisconsin Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC) regarding capital levels.
• Changes in liquidity, including the size and composition of the deposit portfolio and the percentage of uninsured deposits.
• Challenges in accessing cost-effective funding, especially given deposit outflows and increased reliance on FHLB borrowings.
• Fluctuations in real estate values and residential real estate market conditions.
• Ability to execute business strategies, including increasing loan originations, in a competitive environment.
• Technological changes that may be more difficult or expensive than expected, or failures/breaches of operational or security systems (cyberattacks).
• Changes in consumer spending, borrowing, and savings habits.
• Changes in accounting policies and practices, or regulatory changes affecting financial institutions.
• Ability to attract and retain key employees.
• Changes in the financial condition, results of operations, or future prospects of issuers of securities held by the company.

Future Outlook

Management is committed to maintaining a strong liquidity position and anticipates having sufficient funds to meet current funding commitments. They expect to gradually realize targeted improvements in interest rate risk management, constrained by the current balance sheet and capital structure. The net proceeds from the September 2024 stock offering have enhanced financial condition and net interest income, but return on equity may continue to be adversely affected for a period due to the increased equity.

Management Comments

• "Management has the ability and intent to hold the securities for the foreseeable future and no declines are deemed to be related to credit losses; therefore, no provision for expected credit losses or allowance is carried for the AFS portfolio."
• "It is management's opinion, as of June 30, 2025, that the Bank meets all applicable statutory capital adequacy requirements."
• "While the Bank has developed policies and procedures that it believes will help reduce its interest rate exposure, any targeted improvement is expected to be realized gradually given the constraints imposed by the Bank's current balance sheet composition and capital structure as well as regulatory requirements."
• "We anticipate that we will have sufficient funds to meet our current funding commitments."
• "Our financial condition and results of operations have been enhanced by the net proceeds from the offering, increasing our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, as well as other factors associated with the offering, our return on equity has been and may continue to be adversely affected for a period of time following the offering. This could negatively affect the trading price of our shares of common stock."

Industry Context

The company's performance reflects broader industry trends where financial institutions are navigating a dynamic interest rate environment. The increase in net interest income, despite rising interest expenses on deposits, suggests effective asset repricing. However, the shift of consumer deposits to higher-yielding term deposits and the need to replace brokered deposits with FHLB borrowings are common challenges faced by banks in a rising rate environment. The focus on managing interest rate risk and liquidity is critical for regional banks amidst market volatility.

Comparison to Industry Standards

• NA

Legal Proceedings

• The Company is subject to various legal actions arising in the normal course of business, which management believes are not expected to have a material adverse effect on financial condition or results of operations.

Related Party Transactions

• Loans to directors, executive officers, and their affiliates totaled $34,097 at June 30, 2025, down from $44,715 at December 31, 2024.
• Deposits from directors, executive officers, and their affiliates totaled $2,528,418 at June 30, 2025, up from $2,514,749 at December 31, 2024.

Stakeholder Impact

• Shareholders: Continued net losses and non-compliance with certain capital ratios could negatively impact shareholder value and the trading price of common stock. The adverse effect on return on equity from the recent offering is also noted.
• Customers (Depositors): Deposit outflows suggest some customers are seeking higher-yielding alternatives, potentially impacting customer loyalty or requiring the bank to offer more competitive rates.
• Customers (Borrowers): Loan growth indicates continued lending activity, benefiting borrowers in the primary market area.
• Employees: Salaries and related benefits increased, including ESOP expenses, indicating continued investment in the workforce.
• Regulators: The Bank's non-compliance with board-designated and state-mandated capital ratios, and operating under an MOU, indicates heightened scrutiny and potential for further regulatory actions if issues are not resolved.

Next Steps

• Continue to implement strategies to improve interest rate risk management, including maintaining capital levels, managing liquidity, originating shorter-term or adjustable-rate loans, increasing core deposits, and managing wholesale funding.
• Address non-compliance with the Board of Directors' designated Tier 1 capital to average total assets ratio and the State of Wisconsin's net worth ratio requirement.
• Monitor and manage the impact of the interest rate swap agreement on asset liability management.
• Continue to assess the available positive and negative evidence to estimate future taxable income and the realizability of deferred tax assets.

Key Dates

Recommendation

The company's persistent net losses, coupled with significant deposit outflows that necessitate increased reliance on higher-cost borrowed funds, are concerning. More critically, the Bank is not in compliance with its own Board-designated Tier 1 capital ratio and the State of Wisconsin's net worth ratio, and operates under a regulatory MOU. The Economic Value of Equity (EVE) sensitivity being outside policy limits further highlights unmanaged interest rate risk. While net interest income has improved, these fundamental weaknesses in capital adequacy, liquidity management, and risk exposure present substantial downside risk for investors, warranting a 'sell' recommendation.

Keywords

EWSB Bancorp, SEC Filing, 10-Q, Financial Results, Net Loss, Deposits, Loans, Capital Ratios, Interest Rate Risk, Banking, Financial Services, Wisconsin, Community Bank, Asset Liability Management, Regulatory Compliance