10-Q: Waterstone Financial Reports Strong Q3 Earnings Growth

Waterstone Financial, Inc. announced a significant increase in net income and earnings per share for the third quarter and first nine months of 2025, driven by improved net interest income and reduced noninterest expenses.

Summary

• Net income for the three months ended September 30, 2025, increased by 67.6% to $7.9 million, up from $4.7 million in the same period of 2024.
• Basic and diluted earnings per share rose to $0.45 for the quarter, a 73.1% increase from $0.26 in the prior year's quarter.
• For the nine months ended September 30, 2025, net income grew by 38.7% to $18.7 million, compared to $13.5 million in the corresponding period of 2024.
• Basic and diluted earnings per share for the nine months increased to $1.04, up 44.4% from $0.72 in the prior year.
• Net interest income for the quarter increased by 28.0% to $14.7 million, and for the nine months, it increased by 23.1% to $41.0 million.
• Total noninterest expenses decreased by 3.8% to $27.5 million for the quarter and by 4.8% to $82.2 million for the nine months.
• The community banking segment's net income increased to $6.9 million for the quarter and $17.8 million for the nine months, up from $4.7 million and $11.7 million, respectively, in the prior year.
• The mortgage banking segment reported a net income of $948,000 for the quarter, a significant improvement from a net loss of $50,000 in the prior year's quarter, despite a 3.5% decrease in loan origination volume.
• Total assets increased by 2.7% to $2.27 billion at September 30, 2025, from $2.21 billion at December 31, 2024.
• Total deposits increased by 1.9% to $1.39 billion, and total borrowings increased by 5.0% to $469.1 million at September 30, 2025.

Sentiment

Score: 7

Explanation: The company reported strong net income and EPS growth, driven by robust net interest income and effective cost control. The community banking segment performed exceptionally well, and the mortgage banking segment returned to profitability in the quarter. While loan originations decreased in mortgage banking and non-accrual loans saw a slight increase, overall asset quality metrics improved with a significant reduction in total past due loans. The company remains well-capitalized, indicating a solid financial position.

Positives

• Net income for Q3 2025 significantly increased by 67.6% to $7.9 million compared to $4.7 million in Q3 2024.
• Basic and diluted EPS for Q3 2025 rose by 73.1% to $0.45 from $0.26 in Q3 2024.
• Net interest income for Q3 2025 increased by 28.0% to $14.7 million, driven by increased yields on loan and securities portfolios and decreased borrowing costs.
• Total noninterest expenses decreased by 3.8% for the quarter and 4.8% for the nine months, reflecting effective cost control measures.
• The community banking segment showed strong performance, with net income increasing by 46.8% for the quarter and 52.1% for the nine months.
• The mortgage banking segment returned to profitability in Q3 2025 with a net income of $948,000, compared to a net loss of $50,000 in Q3 2024, despite a decrease in loan production volume.
• Gross margin on loans originated and sold in the mortgage banking segment increased by 1.1% for the three months ended September 30, 2025.
• Cash and cash equivalents increased by 35.2% to $53.8 million at September 30, 2025.
• Securities available for sale increased by 8.6% to $226.4 million, partly due to an increase in fair value as longer-term interest rates decreased.
• Total loans past due decreased by 43.7% to $8.5 million at September 30, 2025, from $15.1 million at December 31, 2024.
• The Bank remains well-capitalized, exceeding all regulatory capital requirements.

Negatives

• Mortgage banking income decreased by 2.0% for the quarter and 10.6% for the nine months, primarily due to decreased loan origination volumes.
• Mortgage loan originations for sale decreased by 3.5% for the quarter and 9.7% for the nine months.
• Gross margin on loans originated and sold in the mortgage banking segment decreased by 1.6% for the nine months ended September 30, 2025, reflecting decreased industry demand and increased competition.
• Non-accrual loans increased by 5.8% to $6.0 million at September 30, 2025, from $5.7 million at December 31, 2024.
• Loans past due 90 days or more increased by 5.0% to $4.2 million at September 30, 2025, primarily in the multi-family loan category.

Risks

• General economic conditions, nationally or in the market area, including employment prospects, may differ from expectations.
• Competition among depository and other financial institutions could intensify.
• Inflation and changes in the interest rate environment may reduce margins, mortgage banking revenues, fair value of financial instruments, or origination levels, or increase defaults, losses, or prepayments.
• Adverse changes in the securities or secondary mortgage markets could impact financial performance.
• Changes in laws, government regulations, or policies affecting financial institutions, including regulatory fees and capital requirements, could have a negative impact.
• Changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, could affect operations.
• The ability to manage market risk, credit risk, and operational risk in current economic conditions is crucial.
• Decreased demand for products and services could impact revenue.
• Changes in liquidity, including the size and composition of the deposit portfolio and the percentage of uninsured deposits, pose a risk.
• Cyber attacks, computer viruses, and other technological risks could breach security or disable systems.
• Significant increases in loan losses could adversely affect financial results.
• Changes in the financial condition, results of operations, or future prospects of issuers of securities owned could lead to losses.
• Changes in liquidity needs and access to wholesale funding are important for operations.
• The ability to access low-cost funding is critical for profitability.
• Higher than anticipated rates of loan default would likely result in a need to increase provisions for credit losses in future years.
• There is no assurance that a significant portion of maturing certificates of deposit will be retained, potentially requiring the use of other funding sources like FHLB advances, which may not be available on attractive terms or at all, or requiring a reduction in liquid assets. The cost of such deposits may also be significantly higher.

Future Outlook

The company continues to evaluate the impact of the recently enacted 'One Big Beautiful Bill Act' tax reform legislation on its consolidated financial statements. Management monitors the economic environment for its CECL forecast and aims to manage interest rate risk to minimize exposure of earnings and capital to rate changes. The company expects to continue its stock repurchase program and anticipates seasonal increases in advance payments by borrowers for taxes until real estate tax obligations are paid in the fourth quarter.

Management Comments

• Management believes that any liability resulting from pending legal proceedings would not be expected to have a material adverse effect on the company's consolidated financial statements.
• Management believes that, subject to the Bank's funding needs, a significant portion of maturing certificates of deposit will remain with the company.
• Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review asset/liability policies and interest rate risk position.
• Management is responsible for the timely and periodic determination of the amount of the allowance for credit losses.
• To the best of management's knowledge, all probable losses have been provided for in the allowance for credit losses loans.

Industry Context

The mortgage banking segment faces a challenging rate environment and increased competition from mortgage originators, leading to decreased industry demand and impacting gross margins. The banking sector has experienced 'fed funds rate cuts over the past year,' which has contributed to decreased borrowing costs for the company. However, to attract new deposits, the company has increased rates on money market and savings accounts to remain competitive. Longer-term interest rates have decreased, positively impacting the fair value of the company's securities portfolio. The enactment of new Wisconsin tax law, resulting in no state income taxes in future years, provides a specific regional advantage.

Corporate Governance

Legal Proceedings

• The company is involved in various legal proceedings in the normal course of business, with management believing any resulting liability would not have a material adverse effect on consolidated financial statements.
• A settlement related to a previously disclosed legal matter was finalized during the nine months ended September 30, 2025, for which a $1.3 million accrual was maintained as of December 31, 2024.

Related Party Transactions

• Deposits from certain directors and executive officers, including their immediate families and companies in which they are principal owners, amounted to $12.1 million at September 30, 2025, and $11.3 million at December 31, 2024.

Stakeholder Impact

• Shareholders: Benefited from increased net income and EPS, ongoing stock repurchase program, and cash dividends paid ($0.45 per share for the nine months, $0.15 per share for the three months).
• Employees: Experienced decreased compensation and benefits in community banking due to lower health insurance claims, and in mortgage banking due to reduced headcount and loan origination volumes, offset by increases in annual bonus accrual and sign-on incentives.
• Customers: Continued access to a range of banking products and services, including loans and deposits, with the mortgage banking segment facing increased competition.
• Creditors: The company's stable financial condition and well-capitalized status provide assurance, while increased borrowings indicate continued operational funding needs.
• Regulatory Authorities: The Bank's compliance with all regulatory capital requirements and 'well-capitalized' status reflects sound financial management and adherence to regulations.

Next Steps

• Continue to evaluate the impact of the 'One Big Beautiful Bill Act' tax reform legislation.
• Monitor the economic environment for the CECL forecast.
• Continue the authorized stock repurchase program, with approximately 643,000 shares remaining.
• Make real estate tax obligation payments in the fourth quarter, which will reduce advance payments by borrowers for taxes.

Key Dates

Recommendation

Waterstone Financial's Q3 2025 results demonstrate strong financial performance with significant year-over-year growth in net income and EPS, driven by robust net interest income and effective cost management. The community banking segment is a key strength, showing substantial profit increases. While the mortgage banking segment faces industry headwinds, its return to profitability in the quarter is a positive sign. The company's healthy asset quality, with a notable reduction in total past due loans, and its well-capitalized status underscore its stability. The ongoing stock repurchase program further signals management's confidence and commitment to shareholder value. These factors suggest a positive outlook for the stock.

Keywords

Waterstone Financial, WSBF, Q3 2025 Earnings, Quarterly Report, SEC Filing, Community Banking, Mortgage Banking, Net Income, EPS, Net Interest Income, Loan Originations, Deposits, Borrowings, Asset Quality, Financial Performance, Banking Industry, Mortgage Market