Business Context and Reporting Period
This Form 8-K, filed on December 19, 2013, by Waterstone Financial, Inc. (Waterstone-Federal), serves as a supplement to a proxy statement/prospectus regarding the mutual-to-stock conversion of Lamplighter Financial, MHC. The report provides unaudited operating results for the two-month period ended November 30, 2013, and compares them to the quarter ended September 30, 2013. The filing also notifies stockholders of an opportunity to adjust orders for the proposed new holding company, New Waterstone.
Key Financial Metrics
Waterstone Mortgage Corporation
- Pre-tax Loss (2 months ended Nov 30, 2013): $112,000
- Operating Loss (2 months ended Nov 30, 2013): $1.5 million
- Gain on Sale of Mortgage Servicing Rights: $1.4 million
- Loan Originations for Sale (2 months ended Nov 30, 2013): $210.4 million (Average: $105.2 million/month)
- Hedging Income (2 months ended Nov 30, 2013): $269,000 (Average: $134,000/month)
- New Branch Start-up Costs (2 months ended Nov 30, 2013): $579,000
Consolidated Waterstone Federal
- Pre-tax Net Income (2 months ended Nov 30, 2013): $1.5 million
- Source of Income: Attributed entirely to unconsolidated pre-tax net income of WaterStone Bank.
The filing does not provide specific data on total revenue, cash flow, debt levels, or liquidity ratios for the consolidated entity or the mortgage subsidiary beyond the items listed above.
Material Changes vs. Prior Period
- Loan Origination Volume: Originations for sale dropped to $210.4 million for the two months ended November 30, 2013, compared to $441.5 million for the three months ended September 30, 2013. Average monthly originations fell from $147.2 million to $105.2 million.
- Hedging Income: Pre-tax income from interest rate risk management activities decreased significantly to $269,000 for the two-month period, compared to $1.2 million for the prior quarter.
- Expense Structure: Mortgage banking expenses increased due to start-up costs for new branch offices ($579,000 for the two-month period vs. $325,000 for the prior quarter), partially offset by reduced loan commissions due to lower origination volumes.
Outlook, Risks, and Management Commentary
Management Commentary and Outlook
Management expects Waterstone Mortgage Corporation to incur an operating loss for December 2013 and potentially the first quarter of 2014. This outlook is driven by continued lower loan origination volumes and ongoing expansion costs. To mitigate these losses, the company intends to reduce expenses through non-loan originator staff reductions and the consolidation of operations.
Risks and Contingencies
- Interest Rate Environment: Rising market interest rates since spring 2013 have reduced demand for refinanced loans and decreased origination volumes.
- Government Shutdown: The federal government shutdown in October 2013 negatively affected loan originations and related gains on sale.
- Forward-Looking Uncertainties: Results may differ materially due to general economic conditions, competition, inflation, regulatory changes, and the ability to manage market and credit risks.
Investor Verification Checklist
- Verify the impact of rising interest rates on future refinance demand and origination volumes.
- Confirm the timeline and cost-benefit analysis of the new branch office expansion strategy.
- Monitor the effectiveness of planned staff reductions and operational consolidations in offsetting operating losses.
- Review the status of the mutual-to-stock conversion and the subscription order adjustment process for New Waterstone.
- Assess the sustainability of the $1.5 million consolidated pre-tax income, which relies entirely on WaterStone Bank's performance while the mortgage subsidiary operates at a loss.