Waterstone Mortgage’s mortgage volume declines in 2Q21

Even as its second quarter purchase mortgage share grew 20 percentage points over the previous year, Waterstone Mortgage reported lower segment net income.

The subsidiary of Wauwatosa, Wis.-based Waterstone Financial had a net income of $10.4 million in the second quarter, compared with $14 million in the first quarter and $16.8 million one year ago. Mortgage banking net income peaked at $21.1 million in the fourth quarter of 2020.

Mortgages account for the bulk of net income at the parent company. Waterstone Financial, which also operates a community bank, had total net income of $17.9 million for the second quarter, down from $21.3 million in the first quarter and $20.9 million in the second quarter of 2020.

The mortgage unit’s gross margins on loans sold for the second quarter was the lowest in the past five periods, at 481 basis points. This was down from 486 bps in the first quarter, and 545 bps for the second quarter of 2020.

But when it comes to shifting its production mix, Waterstone Mortgage appears to be ahead of the curve compared with its competition. Purchase mortgages made up 75.4% of its $1.07 billion of loans originated in the most recent period. In the first quarter, of the $1.12 billion total volume, 56.1% came from purchase loans. One year ago, purchases made up 55.5% of the $1.14 billion originated.

Fannie Mae’s most recent industry forecast estimated that across all lenders, 58% of second quarter originations were refinancings; in the first quarter, 72% were refis and one year ago, it was 68%.

Waterstone’s decline in overall mortgage volume also differs from the large banks like Wells Fargo, Bank of America and JPMorgan Chase, which recorded a quarter-to-quarter increase in mortgage production.

Waterstone Mortgage’s noninterest income declined to $50.5 million in the second quarter from $55 million in the first quarter and $64.2 million for the second quarter of 2020.

Meanwhile, noninterest expenses, which includes compensation costs, totaled $36.1 million for the most recent period, slightly higher than the first quarter’s $35.6 million but down from the year ago period’s $40.3 million.

The compensation line was flat compared with the first quarter. It was $29.17 million for the most recent period, versus $29.26 million for the prior quarter. In the second quarter of 2020, it was $32.1 million. The year-over-year change is a result of decreased commission expense and branch manager pay that resulted from lower loan origination volume, in addition to branch profitability slipping due to declining gross margins, Waterstone said.

Waterstone did not make a loan loss provision in the second quarter, compared with $30 million in the first quarter and a pandemic-driven $175 million a year ago. The decision to cut its provision “is driven by both a decrease in the number and volume of loans sold, as well as actual default activity resulting from COVID-19 pandemic was lower than expected,” the company said.

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