Waterstone Financial, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Waterstone operates community banking, primarily in southeastern Wisconsin, and mortgage banking, originating residential loans for sale in 22 states. The quarter included completion of its second-step conversion to a fully public company on January 22, 2014.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total interest income | $15.1 million | $16.2 million | Down 7.0% |
| Net interest income | $9.7 million | $10.1 million | Down 4.6% |
| Provision for loan losses | $0.25 million | $1.76 million | Down 85.8% |
| Noninterest income | $17.1 million | $23.0 million | Down 25.9% |
| Noninterest expense | $23.6 million | $23.9 million | Down 1.0% |
| Net income | $1.9 million | $4.6 million | Down 59.3% |
| Basic / diluted EPS | $0.05 / $0.05 | $0.14 / $0.13 | Lower |
| Annualized return on average assets / equity | 0.42% / 1.87% | 1.14% / 9.14% | Lower |
The net interest margin was 2.35%, versus 2.69% a year earlier. The average interest-rate spread was reported as 1.99% in the average-balance table; MD&A gives a different figure (1.95%).
Mortgage banking income fell 34.0% to $14.5 million, with originations for sale down 31.4% to $295.3 million. Management attributed the decline to weaker refinance demand and lower sales margins. A $1.8 million gain from selling mortgage servicing rights partly offset the reduction. Community banking net income was $1.8 million, compared with $1.9 million; mortgage banking net income was $30,000, compared with $2.6 million.
Financial position, cash flow and capital
- Total assets were $1.765 billion, down 9.4% from year-end, primarily reflecting the return of excess stock-offering subscriptions. Cash and cash equivalents were $229.3 million, down from $429.2 million.
- Loans held for investment totaled $1.103 billion, up 0.9%; net loans were $1.079 billion after a $23.4 million allowance. Loans held for sale were $106.8 million. Securities available for sale totaled $215.6 million.
- Deposits were $829.4 million, down $415.3 million, largely because subscription funds held in savings accounts were used for the offering or returned. Borrowings totaled $444.1 million: $350.0 million of FHLB advances, $84.0 million of long-term repurchase agreements and $10.1 million of short-term repurchase agreements.
- Shareholders’ equity rose to $466.5 million from $214.5 million, primarily due to $248.3 million of net offering proceeds. The Bank reported regulatory capital ratios of 33.70% total risk-based capital and 18.52% Tier I leverage capital and was classified as well capitalized.
- Operating cash flow was negative $2.5 million, versus positive $30.0 million in Q1 2013; investing cash flow was negative $11.7 million and financing cash flow negative $185.7 million. Cash declined by $199.9 million during the quarter, reflecting offering-related refunds and other funding movements.
Asset quality and material changes
- Non-accrual loans declined to $47.3 million from $51.0 million; non-accrual loans were 4.29% of loans, versus 4.66% at year-end. Total nonperforming assets were $69.9 million, or 3.96% of assets, compared with $73.6 million, or 3.78%.
- Past-due loans totaled $42.4 million, or 3.85% of loans, compared with $44.0 million, or 4.03%. Loans 90 or more days past due and still accruing were zero.
- The allowance was 2.12% of loans and 49.43% of non-accrual loans. Net charge-offs were $1.1 million, versus $3.5 million a year earlier. Management cited improving portfolio quality and local real estate conditions as reasons for the lower provision.
- Troubled debt restructurings totaled $30.0 million, of which $19.8 million was non-accrual; $8.5 million of TDRs were reported in default under modified terms.
- Real estate owned was $22.5 million. The quarter included $3.5 million of transfers from loans, $3.5 million of sales net of gains/losses, and $163,000 of write-downs.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said offering proceeds would support general corporate purposes, including loan funding, and could be redeployed from cash into securities and loans. It cautioned that the higher equity base would continue to weigh on return on equity. Management identified economic conditions, competition, interest-rate movements, mortgage-market conditions, credit losses, regulation, operational risk and deposit retention as significant risks.
At March 31, 2014, $460.6 million of time deposits were scheduled to mature within one year. Off-balance-sheet credit commitments totaled $61.7 million; management reported no probable losses on these commitments or standby letters of credit. Mortgage-loan sale agreements include limited representations, warranties and recourse provisions; management expected repurchases and losses to remain insignificant based on historical experience. No material pending legal proceedings were disclosed.
Interest-rate simulation estimated a 3.54% increase in annual net interest income from a gradual 100-basis-point rate rise and a 2.07% decrease from a 100-basis-point decline. Management cautioned that actual prepayment speeds may differ from assumptions. The Bank reported compliance with regulatory capital requirements. Management judged its $12.8 million net deferred tax asset more likely than not to be realized, relying substantially on current and forecast earnings.
Key facts for investors to verify
- Reconcile the differing net interest spread figures (1.99% in the table versus 1.95% in MD&A) and the effective tax-rate disclosures (34.5% in Note 9 versus 38.0% in MD&A).
- Assess whether the sharp decline in mortgage originations and margins persists, and whether the one-time $1.8 million servicing-rights sale gain is repeatable.
- Track non-accrual loans, TDR defaults, collateral values, charge-offs and the adequacy of the allowance, particularly given the residential-real-estate concentration.
- Monitor retention and repricing of the $460.6 million of time deposits maturing within one year, and the availability and cost of alternative funding.
- Evaluate how the company deploys conversion proceeds and the resulting effects on net interest income, liquidity and return on equity.
- Note that the filing’s MD&A contains apparent date inconsistencies about the conversion; the financial-statement note and offering disclosures identify completion on January 22, 2014.