Waterstone Financial, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 4, 2016. The company operates community banking through WaterStone Bank and mortgage banking through Waterstone Mortgage Corporation. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and condition
| Metric | FY 2015 / Dec. 31, 2015 | FY 2014 / Dec. 31, 2014 |
|---|---|---|
| Net income | $16.6 million | $12.7 million |
| Basic / diluted EPS | $0.57 / $0.56 | $0.38 / $0.38 |
| Interest income / expense | $62.0 million / $23.1 million | $63.6 million / $22.3 million |
| Net interest income | $38.8 million | $41.3 million |
| Provision for loan losses | $2.0 million | $1.2 million |
| Noninterest income / expense | $104.5 million / $115.5 million | $84.6 million / $104.8 million |
| Net interest margin; efficiency ratio | 2.36%; 80.61% | 2.44%; 83.27% |
| Total assets | $1,762.7 million | $1,783.4 million |
| Net loans held for investment | $1,098.7 million | $1,076.3 million |
| Deposits; borrowings | $893.4 million; $441.2 million | $864.0 million; $434.0 million |
| Cash and cash equivalents | $100.5 million | $172.8 million |
| Shareholders’ equity | $391.9 million | $450.2 million |
Return on average assets improved to 0.94% from 0.71%, and return on average equity to 3.99% from 2.89%. Mortgage banking segment revenue was $101.5 million, up 24.2%; segment net income rose to $8.3 million from $2.4 million. The community banking segment reported $8.3 million of net income, down from $10.0 million.
Cash flow was negative across operating, investing and financing activities: net cash used was $13.0 million, $16.1 million and $43.2 million, respectively. Cash and cash equivalents fell $72.3 million during the year. The company attributed much of the financing cash use and equity reduction to $72.7 million of share repurchases.
The bank’s primary and total regulatory liquidity ratios were 17.26% and 28.54%, respectively, against stated minimums of 4.0% and 8.0%. WaterStone Bank was well capitalized, reporting a 29.67% common equity Tier 1 ratio and 30.92% total risk-based capital ratio. These are bank regulatory measures, distinct from consolidated shareholders’ equity.
Material changes versus 2014
- Net income increased 30.1%, mainly as mortgage banking income grew with higher origination volume and margins. Mortgage loans originated for sale were approximately $2.0 billion, up 19.5%.
- Net interest income declined 6.0%; loan yields fell and funding costs increased. Net interest margin declined 8 basis points.
- Noninterest income rose 23.5%, while noninterest expense rose 10.2%. Higher mortgage commissions and $1.2 million of immediately vested restricted-stock compensation contributed to expense growth.
- Credit quality improved: non-accrual loans fell to $17.6 million from $38.0 million; nonperforming assets declined to $26.8 million from $56.7 million. Net charge-offs were $4.5 million, down from $6.7 million.
- Loans held for investment increased $19.9 million, with growth concentrated in multifamily and commercial real estate lending. Multifamily loans were 49.1% of the portfolio.
- Deposits increased $29.4 million, led by transaction accounts, but certificates of deposit remained 72.8% of deposits. Of $650.1 million in certificates, $508.4 million matured within one year.
- Quarterly unaudited net income ranged from $3.0 million to $5.3 million in 2015; fourth-quarter net income was $3.1 million versus $2.3 million in fourth-quarter 2014.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes plans to grow commercial, multifamily and commercial real estate lending, expand transaction accounts, and reduce reliance on higher-cost certificates over time.
- Key exposures include interest-rate and margin changes, mortgage-market demand and secondary-market liquidity, reliance on certificates of deposit and wholesale borrowings, and real estate and commercial credit concentration. Adjustable-rate loans may also raise borrower payment and default risk if rates increase.
- At year-end, $350.0 million of FHLB advances, $84.0 million of securities-backed repurchase agreements and $7.2 million of short-term repurchase agreements were outstanding. FHLB advances and repurchase agreements are callable quarterly. Contractual obligations include $508.4 million of certificates maturing within one year; management expects many deposits to renew but gives no assurance.
- Off-balance-sheet commitments included $10.3 million of real estate loan commitments and approximately $56.7 million of unused credit lines and construction commitments, plus $0.6 million of standby letters of credit. Management reported no probable losses on these commitments.
- Waterstone Mortgage is defending an employment lawsuit alleging Fair Labor Standards Act and contract violations, now in arbitration. Management believes pending legal matters will not materially affect consolidated results; the outcome cannot be predicted with certainty.
- Real estate owned write-downs totaled $2.2 million, as management lowered prices to sell older properties; sales of foreclosed properties were $23.4 million. The company also recorded $2.8 million in stock-based compensation expense and repurchased 5.6 million shares for $72.7 million.
- A $857,000 deferred tax asset related to 2007 stock options may require additional tax expense if the options expire unexercised in January 2017. A mortgage-related employment claim and loan-sale repurchase representations and warranties are additional matters to monitor; management reported historically insignificant repurchases.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether mortgage production, margins and profitability can be sustained, and how earnings respond to changing refinance and purchase demand.
- Trends in net interest margin and deposit pricing, especially the large near-term certificate maturities and callable borrowings.
- Multifamily and commercial real estate credit performance, collateral values, non-accruals, restructurings and the adequacy of the loan-loss allowance.
- Cash generation and liquidity after significant buybacks; reconcile the reported cash-flow use with operating needs and loan-sale funding.
- The outcome and potential cost of the mortgage subsidiary’s arbitration, and any future loan repurchase or indemnification claims.
- The remaining authorization for share repurchases, dividend sustainability, and the possible tax expense on the 2007 options.