Waterstone Financial, Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are to December 31, 2014. The company operates community banking and mortgage banking businesses, with WaterStone Bank primarily serving southeastern Wisconsin and mortgage operations across 17 states.
Financial performance and condition
| Metric | Q1 2015 / Mar. 31, 2015 | Comparable period / Dec. 31, 2014 |
|---|---|---|
| Net income | $3.016 million; $0.09 diluted EPS | $1.883 million; $0.05 diluted EPS |
| Net interest income | $9.436 million | $9.700 million in Q1 2014 |
| Net interest margin | 2.31% reported; 2.37% fully tax-equivalent | 2.31%; 2.35% fully tax-equivalent in Q1 2014 |
| Noninterest income | $22.033 million | $17.058 million in Q1 2014 |
| Noninterest expense | $26.428 million | $23.632 million in Q1 2014 |
| Cash and cash equivalents | $142.4 million | $172.8 million at Dec. 31, 2014 |
| Total assets / shareholders’ equity | $1.766 billion / $449.3 million | $1.783 billion / $450.2 million at Dec. 31, 2014 |
| Loans held for investment, net of allowance | $1.047 billion | $1.076 billion at Dec. 31, 2014 |
| Deposits / borrowings | $854.7 million / $434.0 million | $864.0 million / $434.0 million at Dec. 31, 2014 |
| Cash flows | Operating $(36.9) million; investing $28.1 million; financing $(21.6) million | Operating $(2.5) million; investing $(11.7) million; financing $(185.7) million in Q1 2014 |
- Net income increased 60%; pretax income rose to $4.706 million from $2.876 million. Mortgage banking income increased 45% to $21.039 million, primarily on higher origination volume. Loans originated for sale were $399.0 million, up 35% year over year.
- Net interest income declined 2.7%, mainly as the loan yield fell 17 basis points and deposit expense increased. Fully tax-equivalent net interest margin was broadly stable.
- Noninterest expense rose 11.8%. Compensation increased with mortgage production and 2015 equity awards; the company recorded $1.376 million of stock-based compensation expense.
- Mortgage banking segment net income was $1.375 million versus $30,000; community banking segment net income was $1.618 million versus $1.817 million.
- Operating cash use reflects the mortgage business’s loan-origination and sale cycle. Cash balances also fell with share repurchases and deposit outflows. Average liquidity ratio was 11.2%, versus 16.3% in Q1 2014.
- At quarter-end, total borrowings were $434.0 million, comprising $350 million of FHLB advances and $84 million of repurchase agreements; the balance sheet separately classifies $50 million as short-term and $384 million as long-term. Total deposits decreased $9.2 million during the quarter.
Asset quality, capital, and liquidity
- Nonperforming assets were $52.6 million, or 2.98% of assets, down from $56.7 million and 3.18% at year-end. Non-accrual loans declined to $33.0 million, or 3.10% of loans, from $38.0 million and 3.47%.
- The allowance for loan losses was $17.8 million, 1.67% of loans and 53.83% of non-accrual loans. Q1 net charge-offs were $1.274 million, compared with $1.123 million in Q1 2014. Troubled debt restructurings totaled $23.1 million; $12.3 million were non-accrual.
- Real estate owned increased to $19.6 million. Foreclosures transferred $6.9 million of loans to real estate owned; sales totaled $5.9 million and write-downs were $175,000.
- The bank reported capital ratios above regulatory minimums and was classified as well capitalized. At March 31, the bank’s total risk-based capital ratio was 32.29% and common equity Tier 1 ratio was 31.03%.
- Certificates of deposit totaling $464.6 million mature within one year. Management expected a significant portion to remain, but noted that deposit retention is not assured and replacement funding could cost more or be unavailable on attractive terms.
Outlook, risks, and notable items
- The filing provides no specific earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management cited improved loan-quality indicators and stabilization in the local real estate market, while noting that future loan-loss provisions depend on portfolio conditions, collateral values, and economic factors.
- Key stated risks include interest-rate changes, competition, economic conditions, mortgage and securities market conditions, regulation, credit losses, operational risk, and the ability to retain key employees.
- Interest-rate simulation estimated annual net interest income would rise 2.95% under a gradual 100-basis-point increase and fall 2.19% under a 100-basis-point decrease. These estimates depend on assumptions, including mortgage prepayment behavior.
- The company authorized repurchases of up to 1,721,170 shares and declared a $0.05-per-share dividend. Q1 repurchases reduced equity; the filing reports $5.35 million spent.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated pending routine legal proceedings were not expected to have a material effect.
Important facts for investors to verify
- Reconcile the filing’s repurchase figures: one table and the narrative report 381,000 shares, while a later Part II table reports 381,800; the balance sheet records 412,462 shares repurchased, and the filing separately notes 30,662 shares withheld for taxes.
- Assess how sustainable mortgage banking income is, given its reliance on origination volume and the increase in compensation and other costs.
- Monitor non-accrual loans, troubled debt restructurings, foreclosures, net charge-offs, and the adequacy of the allowance, particularly given collateral valuation uncertainty.
- Evaluate deposit retention and near-term certificate maturities alongside cash levels, funding commitments, and callable borrowings.
- Review interest-rate sensitivity assumptions and potential effects on net interest income, mortgage production, prepayments, and securities values.