Waterstone Financial, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparison is primarily with 2019. The company operates community banking in southeastern Wisconsin and mortgage banking through Waterstone Mortgage Corporation. The mortgage business originates residential loans for sale, while the bank primarily retains loans in its portfolio.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $2.185 billion | $1.996 billion |
| Net income | $81.1 million | $35.9 million |
| Diluted earnings per share | $3.30 | $1.37 |
| Net interest income | $53.5 million | $52.2 million |
| Net interest margin | 2.67% | 2.83% |
| Provision for loan losses | $6.34 million | Credit of $0.90 million |
| Cash and cash equivalents, year-end | $94.8 million | $74.3 million |
| Deposits, year-end | $1.185 billion | $1.068 billion |
| Borrowings, year-end | $508.1 million | $483.6 million |
| Shareholders’ equity, year-end | $413.1 million | $393.7 million |
Mortgage banking drove the earnings increase: mortgage banking income was $233.2 million, up from $125.7 million, as mortgage originations rose with lower rates. The mortgage segment reported net income of $59.9 million versus $11.2 million; community banking net income declined to $21.2 million from $24.6 million. Consolidated noninterest income rose 86.6% to $244.0 million, while noninterest expense increased 34.3% to $183.1 million. The efficiency ratio improved to 61.53% from 74.49%; return on average assets was 3.77% versus 1.82%.
Net cash used in operating activities was $100.6 million, compared with $40.2 million used in 2019, largely reflecting the high-volume mortgage-loan origination and sale cycle. Investing activities provided $44.2 million and financing activities provided $76.9 million; cash increased $20.5 million. The bank reported primary and total regulatory liquidity ratios of 12.2% and 23.1%. WaterStone Bank remained well capitalized, with a 21.44% common equity Tier 1 ratio and 22.52% total risk-based capital ratio.
Material changes and notable items
- Mortgage originations increased 51.6% to $4.43 billion as refinance volume surged; purchase loans represented 61.1% of originations versus 81.4% in 2019. The filing also reports $4.332 billion of loans originated for sale in its cash-flow disclosures, reflecting differences in reported scope.
- Deposits grew 11.0%, driven by transaction accounts; time deposits declined 5.2%. Certificates of deposit remained 59.2% of customer deposits, with $576.9 million due within one year.
- The allowance for loan losses increased to $18.8 million, or 1.37% of loans, from $12.4 million, or 0.89%, reflecting COVID-19 uncertainty, unemployment assumptions, and loan downgrades. Net recoveries were $96,000.
- Non-accrual loans fell to $5.6 million from $7.0 million, but troubled debt restructurings increased to $11.6 million from $4.0 million. The company had $1.2 million of COVID-related payment deferrals not classified as TDRs.
- The company recorded a $4.25 million expense for a settlement of mortgage-company wage and compensation claims. The settlement was funded February 5, 2021, and the matters were closed.
- Cash dividends declared were $1.36 per share, up from $0.98. The company repurchased $36.2 million of stock during 2020.
Outlook, risks, and contingencies
The filing provides no quantified earnings or growth guidance. Management identified COVID-19 effects as uncertain, with potential impacts on borrower repayment, collateral values, loan demand, fees, funding, staffing, and operations. Other risks include interest-rate and margin sensitivity, reliance on certificates of deposit and FHLB funding, concentrated real-estate lending, mortgage secondary-market conditions, loan-sale repurchase exposure, cybersecurity and third-party risks, and the LIBOR transition. The company delayed CECL adoption under pandemic relief legislation and expected adoption by January 1, 2022, subject to the stated statutory timing. Unfunded commitments included $74.2 million of construction loans, $19.2 million of business lines, $13.7 million of home-equity lines, and $23.9 million of mortgage commitments. Auditors issued unqualified opinions on the financial statements and internal controls; the allowance for loan losses was identified as a critical audit matter.
Key facts for investors to verify
- How much of 2020’s exceptional mortgage income and earnings can persist if refinancing volumes and margins normalize.
- Whether the elevated allowance adequately reflects potential COVID-related deterioration, especially in commercial real estate, multifamily, and construction exposures.
- The performance of the $11.6 million TDR portfolio and the $1.2 million of pandemic-related deferrals.
- Deposit retention and refinancing needs, including near-term certificate maturities and FHLB advances with call options.
- Final effects of CECL adoption, mortgage-loan sale recourse reserves, and other remaining legal or regulatory matters.