Waterstone Financial, Inc. — Q1 2016 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015; balance-sheet comparisons are to December 31, 2015. Waterstone operates community banking, primarily in southeastern Wisconsin, and mortgage banking, originating residential loans mainly for sale. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior period |
|---|---|---|
| Net interest income | $10.0 million | $9.4 million, Q1 2015 |
| Net interest margin | 2.48% reported; 2.54% fully tax-equivalent | 2.31% reported; 2.37% fully tax-equivalent, Q1 2015 |
| Noninterest income | $21.4 million | $22.0 million, Q1 2015 |
| Noninterest expenses | $25.2 million | $26.4 million, Q1 2015 |
| Provision for loan losses | $0.2 million | $0.3 million, Q1 2015 |
| Net income | $3.9 million | $3.0 million, Q1 2015 |
| Basic and diluted EPS | $0.14 | $0.09, Q1 2015 |
| Annualized return on average assets / equity | 0.90% / 3.95% | 0.69% / 2.71%, Q1 2015 |
| Total assets | $1.74 billion | $1.76 billion, December 31, 2015 |
| Cash and cash equivalents | $122.7 million | $100.5 million, December 31, 2015 |
| Total loans receivable, net | $1.10 billion | $1.10 billion, December 31, 2015 |
| Total deposits | $918.3 million | $893.4 million, December 31, 2015 |
| Borrowings | $396.2 million | $441.2 million, December 31, 2015 |
| Shareholders’ equity | $393.4 million | $391.9 million, December 31, 2015 |
- Net cash provided by operating activities was $56.4 million, compared with $36.9 million used in Q1 2015. Cash and cash equivalents increased $22.2 million to $122.7 million. Operating cash flow reflects the mortgage-loan origination and sale cycle and should not be read as recurring earnings.
- Net cash used in investing activities was $2.8 million; net cash used in financing activities was $31.4 million. Financing included repayment of $50 million of long-term debt, deposit growth of $24.9 million, and $3.7 million of share repurchases.
- Net charge-offs were $0.6 million, or 0.21% of average loans annualized, versus $1.3 million, or 0.48%, in Q1 2015. The allowance for loan losses was $15.8 million, 1.42% of loans, versus $16.2 million and 1.45% at year-end 2015.
- Non-accrual loans declined to $15.5 million (1.39% of loans) from $17.6 million (1.58%). Total nonperforming assets were $23.8 million, or 1.37% of assets, versus $26.8 million, or 1.52%.
- Bank capital ratios were well above applicable thresholds: at March 31, the Bank reported total capital to risk-weighted assets of 31.62%, Tier 1 risk-based capital of 30.37%, common equity Tier 1 of 30.37%, and Tier 1 leverage of 20.92%. The Bank was classified as well-capitalized.
Material changes versus comparable periods
- Net income increased 28% year over year, supported by net interest income growth of 5.8%, a lower loan-loss provision, and noninterest expense reduction of 4.6%. Net interest margin improved from 2.31% to 2.48% on the reported basis.
- Noninterest income fell 2.7%, principally because mortgage banking income declined 2.0% to $20.6 million. Mortgage originations for sale declined 7.0% to $371.2 million, while management said stronger margins on purchase products partly offset lower volume. Mortgage banking segment revenue decreased 1.8%; segment net income was approximately $1.4 million, broadly unchanged.
- Deposits rose $24.9 million, while borrowings fell $45.0 million, including repayment of $50 million in fixed-rate FHLB advances funded through retail channels. Interest expense on deposits increased as average deposit balances and costs rose; borrowing expense declined.
- Assets declined $25.2 million from year-end, largely due to lower loans held for sale. The company purchased a $10 million bank-owned life insurance policy. Shareholders’ equity increased modestly after earnings and higher accumulated other comprehensive income, offset by dividends and repurchases.
Outlook, risks, contingencies, and unusual items
- The filing gives no numerical earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management cited improving asset-quality measures and stabilization in the local real estate market. Credit remains geographically concentrated in the Milwaukee metropolitan area; further property-value deterioration could require additional provisions or charge-offs.
- Interest-rate risk is a key exposure. The company’s simulation estimated a 0.33% increase in 12-month net interest income from a gradual 100-basis-point rate rise, and a 0.46% decline from a 100-basis-point decline. Management notes that actual prepayments may differ from assumptions.
- Risk factors include economic conditions, competition, interest rates, secondary mortgage and securities markets, regulatory changes, credit losses, and operational and market risks. The company identifies no changes to the risk factors in its 2015 Form 10-K.
- At March 31, $510.7 million of time deposits were scheduled to mature within one year. Management expects a significant portion to remain, but warns that outflows could require other funding, potentially at higher cost or with limited availability. Borrowings include callable FHLB advances and repurchase agreements.
- Off-balance-sheet credit commitments totaled $91.1 million. Management reported no probable losses on these commitments. A mortgage subsidiary faces a wage-and-hour lawsuit transferred to arbitration; management says it will vigorously defend the case and does not expect pending proceedings to materially affect the company.
- Two municipal securities previously impaired had $198,000 combined amortized cost and $117,000 of lifetime credit impairment. Management judged securities with long-standing unrealized losses not other-than-temporarily impaired, but warned that economic deterioration could lead to future impairment losses.
- A $857,000 deferred tax asset related to 2007 stock options may require additional tax expense if the options expire unexercised in January 2017.
- The board-approved repurchase program had authorization for 1,000,200 additional shares at quarter-end. The company declared a $0.05-per-share cash dividend during the quarter.
Important facts for investors to verify
- Whether mortgage origination volumes and gain margins can sustain mortgage banking income, which remains a major earnings contributor.
- Trends in deposits and renewal costs, especially the $510.7 million of time deposits maturing within one year, and the company’s dependence on callable borrowings.
- Whether improvements in non-accrual loans and nonperforming assets persist, and whether the allowance remains adequate against local real-estate exposure and impaired loans.
- The sensitivity of earnings and capital to interest-rate changes, prepayment assumptions, and changes in the value of mortgage servicing rights and securities.
- Developments in the mortgage subsidiary’s wage-and-hour arbitration and any material change in repurchase or representation-and-warranty claims on loans sold.