10-Q: EWSB Q3 loss on tax valuation hit

EWSB Bancorp posted a larger Q3 2025 net loss driven by a $3.2 million deferred tax asset valuation allowance, despite stronger net interest income and loan growth.

Summary

• Q3 2025 net loss: $3.34 million (vs. $0.33 million loss in Q3 2024), driven primarily by a $3.2 million valuation allowance recorded against deferred tax assets.
• YTD 2025 net loss: $4.19 million (vs. $1.17 million YTD 2024).
• Net interest income improved to $1.22 million in Q3 2025 (up 51.8% YoY); Q3 net interest margin rose to 1.81% (from 1.30%).
• Loans (net) grew 5.6% since year-end to $196.9 million; construction (+$8.8 million) and 1–4 family residential (+$2.2 million) led growth; equity lines increased (+$1.1 million).
• Deposits fell $12.38 million year-to-date to $219.1 million; brokered non-maturity deposits declined from $9.4 million at 12/31/24 to none at 9/30/25; certificates of deposit rose to $111.7 million.
• Borrowed funds increased $20.6 million year-to-date to $44.8 million, primarily FHLB advances used to fund loan growth and replace brokered deposits.
• Accumulated other comprehensive loss improved by $1.42 million year-to-date as market rates declined, lifting AFS/HTM valuations.
• Capital: Bank remains well capitalized under federal rules (CET1 10.4%, Total risk-based 11.1%, Tier 1 leverage 6.0%), but is below the Board’s internal Tier 1 leverage minimum (8.0%) and below Wisconsin’s 6.0% net worth ratio (reported 4.60%).
• Credit quality remained solid with very low nonaccrual balances ($25,548 at 9/30/25) and a modest ACL on loans of $1.15 million; allowance for unfunded commitments was $141,831.
• Q3 EPS: $(4.74); YTD EPS: $(5.95); shares outstanding: 752,538.

Sentiment

Score: 3

Explanation: Core margin trends improved and credit remains stable, but the quarter’s sizable loss, funding mix deterioration, and shortfalls versus internal/state capital targets create elevated risk.

Positives

• Net interest income rose to $1.22 million in Q3 (up 51.8% YoY), with net interest margin improving to 1.81% and spread to 1.72%.
• Loan portfolio expanded 5.6% YTD to $196.9 million, led by construction (+$8.8 million) and 1–4 family residential (+$2.2 million); equity lines grew to $6.95 million.
• Deposit mix improved with runoff of $9.4 million in brokered non-maturity deposits to zero by 9/30/25; CDs increased to $111.7 million.
• AOCI improved by $1.42 million YTD as lower market rates raised securities values; HTM fair value turned to a modest net gain versus a significant net loss at 12/31/24.
• Credit costs remained modest (Q3 provision for credit losses $16,580; YTD provision on loans $81,956) with low nonaccruals ($25,548).
• Liquidity sources remain available: $30.2 million unused FHLB capacity, $25 million Federal Reserve discount window line, and a $6 million correspondent fed funds line.

Negatives

• Q3 net loss of $3.34 million and YTD net loss of $4.19 million, primarily due to a $3.2 million valuation allowance on deferred tax assets.
• Total deposits declined $12.38 million YTD to $219.1 million, pressuring funding and requiring greater use of FHLB advances.
• Borrowed funds increased $20.6 million YTD to $44.8 million, elevating funding costs and interest rate exposure.
• Tier 1 leverage ratio of 6.0% is below the Board’s internal minimum of 8.0%; Wisconsin net worth ratio of 4.60% is below the 6.0% state minimum.
• Noninterest income decreased (Q3 down $78,000 YoY; YTD down $293,000), including a sharp decline in swap gains YTD.
• Noninterest expense edged higher YTD (+$264,000), including higher salaries/benefits and data processing costs.

Risks

• Ability to comply with the confidential MOU with the Wisconsin Department of Financial Institutions and the FDIC, including achieving required capital metrics and a 6.0% state net worth ratio.
• Sensitivity to interest rate changes that could impact margins, loan originations, deposit mix, and securities valuations.
• Liquidity risk from deposit outflows and the need to access cost‑effective wholesale funding.
• Potential increases in loan delinquencies and credit losses, and adequacy of the allowance for credit losses.
• Economic risks in core markets, including inflation, employment levels, and real estate values impacting demand and credit performance.
• Competition for loans and deposits that could pressure pricing and growth.
• Regulatory and policy changes affecting capital, fees, and insurance premiums.
• Operational, third‑party vendor, and cybersecurity risks.
• Ability to attract and retain key employees.
• Modeling shows EVE sensitivity outside policy limits under ±200 bps parallel rate shocks.

Future Outlook

Management intends to continue improving interest rate risk positioning by emphasizing shorter‑term and adjustable‑rate originations, selling most long‑term fixed residential mortgages, prudently managing FHLB borrowings and CD terms, and focusing on core deposit growth. Priorities include strengthening capital to meet the Board’s leverage target and Wisconsin’s 6.0% net worth ratio, maintaining robust liquidity, and containing operating costs. Sensitivity modeling shows EVE outside policy limits in ±200 bps shocks, so asset‑liability actions remain a key focus.

Management Comments

• The widened Q3 loss reflects recognition of a $3.2 million valuation allowance on deferred tax assets due to cumulative losses, despite improved core net interest income.
• Net interest income and margin improved on higher loan yields and balances, while deposit costs moderated and brokered non‑maturity deposits were eliminated.
• Borrowings were increased to support loan growth and manage the run‑off in deposits.
• The Bank remains well capitalized under federal rules but is working to meet the Board’s leverage ratio minimum and Wisconsin’s net worth requirement under the MOU.
• Asset‑liability strategies implemented in 2023 continue, including refining modeling assumptions, enhancing governance, and focusing on shorter‑duration assets and core funding.

Industry Context

Results reflect typical community bank dynamics in a high‑rate environment: deposit migration to higher‑yield CDs, reduced reliance on brokered balances, increased FHLB usage to bridge funding gaps, and gradual margin recovery as asset yields reprice. As rates eased during 2025, securities valuation marks improved, aiding AOCI, but capital and leverage constraints remain a focus across smaller thrifts.

Comparison to Industry Standards

• Profitability: A Q3 NIM of 1.81% and YTD NIM of 1.69% are below levels generally needed for durable profitability at community banks (>2%+), underscoring the need for further mix/pricing improvements.
• Capital: Federal ratios are well‑capitalized (CET1 10.4%, Total RBC 11.1%), but the 6.0% leverage ratio trails many boards’ typical 8%–9% internal thresholds and is below the Company’s own 8.0% target.
• Funding: Elevated FHLB reliance and declining deposits are consistent with peer trends, but sustained progress toward core deposit growth is key to align with better‑funded community peers.
• Interest Rate Risk: EVE sensitivity outside policy limits in ±200 bps shocks is more acute than desired versus best‑practice peers, reinforcing the need for continued balance sheet repositioning.

Legal Proceedings

• No material legal proceedings disclosed; routine matters not expected to be material.

Related Party Transactions

• Loans to directors, executive officers, and affiliates: $30,905 outstanding at September 30, 2025.
• Deposits from directors, executive officers, and affiliates: $2,729,166 at September 30, 2025.

Stakeholder Impact

• Shareholders: Book equity decreased to $12.88 million on the YTD net loss; AOCI improved with rate declines.
• Employees: ESOP expense of $18,863 YTD; 48,068 unallocated ESOP shares outstanding.
• Customers/Depositors: Deposit mix shifted toward higher‑yield CDs; $84.7 million of CDs mature within 12 months.
• Creditors: FHLB borrowings increased to $44.8 million; pledged collateral of ~$75.95 million in 1–4 family loans.
• Regulators: Shortfalls versus the Board’s leverage minimum and Wisconsin’s net worth requirement increase scrutiny under the MOU.

Next Steps

• Execute asset‑liability actions to bring EVE sensitivity within policy limits.
• Pursue capital enhancement to achieve the Board’s 8.0% leverage target and Wisconsin’s 6.0% net worth ratio.
• Focus on core deposit growth and retention as $84.7 million of CDs mature within 12 months.
• Optimize FHLB advance structure and costs while monitoring liquidity headroom.
• Maintain conservative credit posture and regularly reassess ACL adequacy.
• Continue selling most long‑term fixed‑rate residential mortgages and emphasizing shorter‑duration assets.

Key Dates

Recommendation

The quarter reflects a larger‑than‑expected loss from a $3.2 million tax valuation allowance, shrinking deposits, increased wholesale borrowings, and leverage and state net worth ratios below required/internal levels under an active MOU. While core NII and NIM improved and credit quality is sound, the capital and funding profile elevate execution and regulatory risk. Until tangible progress is demonstrated on capital ratios, core deposit growth, and interest rate risk metrics, a cautious stance is warranted.

Keywords

EWSB Bancorp, East Wisconsin Savings Bank, Q3 2025, net loss, deferred tax asset valuation allowance, net interest margin, FHLB advances, deposits, loans, Wisconsin net worth ratio, MOU, regulatory capital, AOCI, OTCQB, community bank