Waterstone Financial, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing reports annual results; fourth-quarter figures are unaudited. New Waterstone became the holding company following the mutual-to-stock conversion completed in January 2014, so year-over-year balance-sheet comparisons are materially affected by the offering and return of excess subscription funds.
Business context and key financial metrics
The Company operates community banking through WaterStone Bank, primarily in southeastern Wisconsin, and mortgage banking through Waterstone Mortgage Corporation, which operates in 16 states. The Bank’s investment loan portfolio is heavily concentrated in residential real estate, particularly multifamily lending; the mortgage subsidiary originates residential loans for sale.
| Metric | FY 2014 / December 31, 2014 | Prior comparable period |
|---|---|---|
| Total assets | $1.783 billion | $1.947 billion at December 31, 2013 |
| Net income; diluted EPS | $12.7 million; $0.38 | $14.7 million; $0.43 |
| Net interest income; net interest margin | $41.3 million; 2.44% | $39.2 million; 2.56% |
| Noninterest income; noninterest expense | $84.6 million; $104.8 million | $87.8 million; $99.1 million |
| Loans held for investment, gross | $1.095 billion | $1.093 billion |
| Deposits; borrowings | $864.0 million; $434.0 million | $1.245 billion; $455.2 million |
| Cash and cash equivalents | $172.8 million | $429.2 million |
| Shareholders’ equity | $450.2 million | $214.5 million |
| Operating cash flow | $(2.2) million | $52.3 million |
Net income included $63.6 million of interest income and $22.3 million of interest expense. The loan-loss provision was $1.2 million. Return on average assets was 0.71% and return on average equity was 2.89%. The fourth quarter generated net income of $2.3 million and diluted EPS of $0.08, versus $1.9 million and $0.06 in fourth-quarter 2013.
Mortgage banking originated approximately $1.66 billion of loans for sale, down 5.1% from 2013; segment revenue was $81.7 million, down 3.7%, and pretax income was $4.1 million, down from $9.1 million. Community banking pretax income rose to $15.2 million from $13.8 million.
Material changes versus 2013
- Net income fell 13.4%, primarily as lower mortgage-banking pretax income and higher expenses more than offset improved community-bank results and a lower loan-loss provision.
- Net interest income increased 5.4%, but net interest margin narrowed 12 basis points. The filing attributes the income increase chiefly to higher average earning assets following the stock offering.
- The $380.8 million decline in deposits largely reflects the removal of offering-related subscription funds included in 2013 balances; deposits from the offering were used in the January 2014 conversion and excess funds returned. Time deposits increased $14.9 million.
- Equity rose by $235.8 million, principally from $248.3 million of net offering proceeds. Assets declined 8.4%, and cash declined $256.3 million, reflecting the offering-related cash movements and investment of funds.
- Credit indicators improved: nonaccrual loans declined to $38.0 million, or 3.47% of loans, from $51.0 million, or 4.66%. Net charge-offs fell to $6.7 million from $11.3 million. The allowance fell to $18.7 million, or 1.71% of loans, from $24.3 million, or 2.22%.
Liquidity, debt, outlook, and risks
Year-end borrowings comprised $350 million of Federal Home Loan Bank advances and $84 million of securities-backed repurchase agreements; no short-term loan-financing repurchase balance remained. The Bank reported regulatory liquidity ratios of 26.64% primary and 41.79% total, and was classified as well capitalized, with a 19.04% Tier 1 leverage ratio and 31.98% total risk-based capital ratio. Of $652.6 million in certificates of deposit, $417.5 million matured within one year. The Bank also had $18.9 million of loan commitments and $39.5 million of unfunded construction, credit-line and standby-letter commitments.
Cash flow was negative across operating, investing and financing activities: operating cash flow was $(2.2) million, investing cash flow $(75.2) million and financing cash flow $(178.9) million. Ending cash was $172.8 million. Liquidity was supported by cash, loan and securities proceeds, deposits and access to FHLB advances; management cautioned that deposit retention and access to alternative funding cannot be assured.
Management cited continued low interest rates, weaker mortgage refinance demand, local economic and property-market conditions, and ongoing problem assets as significant sensitivities. Risks include real-estate and borrower credit exposure, interest-rate and mortgage prepayment risk, mortgage loan repurchase claims, reliance on certificates of deposit and wholesale funding, regulation and compliance costs, and possible impairment of securities or collateral values. Two Wisconsin municipal securities had cumulative credit impairment of $117,000, including a $17,000 charge in 2014. Real-estate-owned write-downs were $1.5 million.
No specific earnings or operating guidance was provided. The filing states that Federal Reserve Board written approval is required before the holding company declares or pays dividends, increases debt, or redeems holding-company stock; this follows prior regulatory orders that were terminated. The Company declared $0.20 per share in dividends during 2014. Management’s interest-rate simulation estimated net interest income would rise 2.86% with a gradual 100-basis-point rate increase and fall 1.72% with a 100-basis-point decrease; actual outcomes may differ. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of the deposit and cash movement reflects the conversion and offering, versus recurring changes in customer funding and liquidity.
- Whether improving delinquency and nonaccrual trends persist, and whether the lower allowance remains adequate given the multifamily and commercial real-estate concentrations.
- Mortgage-banking production, margins, expenses and repurchase or indemnification exposure as refinance activity and secondary-market conditions change.
- The maturity, repricing, collateral and call terms of FHLB advances and repurchase agreements, plus the renewal and retention profile of large and near-term-maturing certificates of deposit.
- Any regulatory approvals or restrictions affecting future dividends, capital distributions, business-plan changes or deployment of offering proceeds.