Waterstone Financial, Inc. Announces Results of Operations for the Quarter and Year Ended December 31, 2020

Waterstone Financial, Inc. (NASDAQ: WSBF), holding company for WaterStone Bank, reported net income of $27.8 million, or $1.17 per diluted share for the quarter ended December 31, 2020 compared to $8.8 million, or $0.34 per diluted share for the quarter ended December 31, 2019. Net income per diluted share was $3.30 for the year ended December 31, 2020 compared to net income per diluted share of $1.37 for the year ended December 31, 2019.

“Our financial results continue to be outstanding, as we have just completed our third consecutive quarter of record profits,” said Douglas Gordon, Chief Executive Officer of Waterstone Financial, Inc. “The turbulent environment of 2020 demonstrated the synergies, and profitability, a community bank and its mortgage subsidiary can achieve working in harmony. Waterstone’s entire team navigated the rocky seas presented by a pandemic, achieving record results, and enhancing shareholders with dividends of $1.28 per share paid during the year.”

Highlights of the Quarter Ended December 31, 2020

Waterstone Financial, Inc. (Consolidated)

Consolidated net income of Waterstone Financial, Inc. totaled $27.8 million for the quarter ended December 31, 2020, compared to $8.8 million for the quarter ended December 31, 2019.
Consolidated return on average assets was 4.96% for the quarter ended December 31, 2020 compared to 1.75% for the quarter ended December 31, 2019.
Consolidated return on average equity was 27.11% for the quarter ended December 31, 2020 and 8.91% for the quarter ended December 31, 2019.
Dividends declared totaled $0.50 per share, which included a quarterly dividend of $0.20 per share and a special dividend of $0.30 per share. The quarterly dividend declared during the quarter represents an increase of $0.08, or 66.7%, compared to quarterly dividend rate paid in previous quarters during 2020.
We repurchased approximately 203,000 shares at a cost of $3.5 million during the quarter ended December 31, 2020.

Community Banking Segment

Pre-tax income totaled $8.7 million for the quarter ended December 31, 2020, which represents a 4.8% increase compared to $8.3 million for the quarter ended December 31, 2019.
Net interest income totaled $14.5 million for the quarter ended December 31, 2020, which represents an 8.0% increase compared to $13.5 million for the quarter ended December 31, 2019.
Average loans held for investment totaled $1.40 billion during the quarter ended December 31, 2020, which represents an increase of $21.6 million, or 1.6%, compared to $1.38 billion for the quarter ended December 31, 2019. The Paycheck Protection Program (PPP) loans originated during the year ended December 31, 2020, contributed to the growth. Average loans held for investment decreased $26.6 million, or 7.5% annualized, compared to $1.43 billion for the quarter ended September 30, 2020 as PPP loans started to pay off during the fourth quarter.
The PPP loans totaled $18.1 million as of December 31, 2020.
Net interest margin decreased six basis points to 2.73% for the quarter ended December 31, 2020 compared to 2.79% for the quarter ended December 31, 2019, which was a result of the decrease in yield of interest-earning assets as rates on loans, investments, and cash decreased. Net interest margin increased 10 basis points compared to 2.63% for the quarter ended September 30, 2020, driven by lower average rates on deposits.
The segment had no provision for loan losses for the quarter ended December 31, 2020 compared to a negative provision for loan losses of $200,000 for the quarter ended December 30, 2019. Net charge-offs totaled $51,000 for the quarter ended December 31, 2020, compared to net recoveries of $10,000 for the quarter ended December 31, 2019.
The efficiency ratio was 46.15% for the quarter ended December 31, 2020, compared to 46.23% for the quarter ended December 31, 2019.
Average deposits (excluding escrow accounts) totaled $1.19 billion during the quarter ended December 31, 2020, an increase of $137.9 million, or 13.1%, compared to $1.06 billion during the quarter ended December 31, 2019. Average deposits increased $13.0 million, or 4.4% annualized compared to the $1.18 billion for the quarter ended September 30, 2020.
Nonperforming assets as percentage of total assets was 0.27% at December 31, 2020, 0.31% at September 30, 2020, and 0.39% at December 31, 2019.
Past due loans as percentage of total loans was 0.57% at December 31, 2020, 0.39% at September 30, 2020, and 0.47% at December 31, 2019.
The Company held approximately $9.2 million in loans, representing 0.7% of the total loan portfolio as of December 31, 2020, which had been modified as either a deferment of principal or principal and interest since the beginning of the pandemic. Of the $9.2 million in loans, $1.2 million qualify as modifications under the CARES Act. The remaining $8.0 million represents three loans that are classified as troubled debt restructurings.

Mortgage Banking Segment

Pre-tax income totaled $28.3 million for the quarter ended December 31, 2020, compared to $3.4 million for the quarter ended December 31, 2019.
Loan originations increased $505.2 million, or 65.0%, to $1.28 billion during the quarter ended December 31, 2020, compared to $777.1 million during the quarter ended December 31, 2019. Origination volume relative to purchase activity accounted for 59.2% of originations for the quarter ended December 31, 2020 compared to 72.1% of total originations for the quarter ended December 31, 2019.
Mortgage banking income increased $36.1 million, or 111.2%, to $68.5 million for the quarter ended December 31, 2020, compared to $32.4 million for the quarter ended December 31, 2019.
Gross margin on loans sold increased to 5.40% for the quarter ended December 31, 2020, compared to 4.27% for the quarter ended December 31, 2019.

Recent Developments:

COVID-19 Pandemic and the CARES Act

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law at the end of March 2020, allowed for a temporary delay in the adoption of accounting guidance under Accounting Standards Codification Topic 326, “Financial Instruments – Credit Losses (“CECL”) until the earlier of December 31, 2020 or the end of the COVID-19 national emergency. During the quarter ended March 31, 2020, pursuant to the CARES Act and guidance from the Securities and Exchange Commission (“SEC”) and Financial Accounting Standards Board (“FASB”), we elected to delay adoption of CECL. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. Among other provisions, this Act extended the temporary delay on the adoption of CECL until the earlier of January 1, 2022 or the end of the COVID-19 national emergency. We have elected to delay adoption of CECL. As a result, our financial statements for the quarter and year ended December 31, 2020 include an allowance for loan losses that was prepared under the existing incurred loss methodology.

About Waterstone Financial, Inc.

Waterstone Financial, Inc. is the savings and loan holding company for WaterStone Bank. WaterStone Bank was established in 1921 and offers a full suite of personal and business banking products. The Bank has branches in Wauwatosa/State St, Brookfield, Fox Point/North Shore, Franklin/Hales Corners, Germantown/Menomonee Falls, Greenfield/Loomis Rd, Milwaukee/Oklahoma Ave, Oak Creek/27th St, Oak Creek/Howell Ave, Oconomowoc/Lake Country, Pewaukee, Waukesha, West Allis/Greenfield Ave, and West Allis/National Ave, Wisconsin. WaterStone Bank is the parent company to Waterstone Mortgage, which has the ability to lend in 48 states. For more information about WaterStone Bank, go to http://www.wsbonline.com.

Forward-Looking Statements

This press release contains statements or information that may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding expected financial and operating activities and results that are preceded by, followed by, or that include words such as “may,” “expects,” “anticipates,” “estimates” or “believes.” Any such statements are based upon current expectations that involve a number of risks and uncertainties and are subject to important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements. Factors that might cause such a difference include changes in interest rates; demand for products and services; the degree of competition by traditional and nontraditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economies, including significant disruption to financial market and other economic activity caused by the outbreak of COVID-19; and other factors, including risk factors referenced in Item 1A. Risk Factors in Waterstone’s most recent Annual Report on Form 10-K and as may be described from time to time in Waterstone’s subsequent SEC filings, which factors are incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect only Waterstone’s belief as of the date of this press release.

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For The Three Months Ended December 31,						For The Year Ended December 31,
		2020			2019			2020			2019
	(In Thousands, except per share amounts)
Interest income:
Loans	$	18,229		$	18,547		$	72,633		$	72,235
Mortgage-related securities		528			718			2,488			2,978
Debt securities, federal funds sold and short-term investments		870			1,013			3,363			4,528
Total interest income		19,627			20,278			78,484			79,741
Interest expense:
Deposits		2,605			4,465			14,365			17,278
Borrowings		2,706			2,687			10,619			10,266
Total interest expense		5,311			7,152			24,984			27,544
Net interest income		14,316			13,126			53,500			52,197
Provision for loan losses		30			(170	)		6,340			(900	)
Net interest income after provision for loan losses		14,286			13,296			47,160			53,097
Noninterest income:
Service charges on loans and deposits		1,078			1,091			4,462			2,363
Increase in cash surrender value of life insurance		318			356			1,905			1,935
Mortgage banking income		66,953			32,140			233,245			125,666
Other		1,537			222			4,405			786
Total noninterest income		69,886			33,809			244,017			130,750
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		38,351			26,491			139,046			101,718
Occupancy, office furniture, and equipment		2,479			2,521			10,223			10,606
Advertising		1,066			1,051			3,691			3,885
Data processing		918			989			3,941			3,630
Communications		335			320			1,329			1,359
Professional fees		471			1,167			8,118			3,605
Real estate owned		(63	)		(221	)		(8	)		(146	)
Loan processing expense		1,026			746			4,646			3,288
Other		2,580			2,273			12,075			8,328
Total noninterest expenses		47,163			35,337			183,061			136,273
Income before income taxes		37,009			11,768			108,116			47,574
Income tax expense		9,174			2,974			26,971			11,671
Net income	$	27,835		$	8,794		$	81,145		$	35,903
Income per share:
Basic	$	1.17		$	0.34		$	3.32		$	1.38
Diluted	$	1.17		$	0.34		$	3.30		$	1.37
Weighted average shares outstanding:
Basic		23,703			25,586			24,464			26,021
Diluted		23,877			25,852			24,607			26,247

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	December 31,			December 31,
		2020			2019
	(Unaudited)
Assets	(In Thousands, except per share amounts)
Cash	$	56,190		$	52,814
Federal funds sold		18,847			12,704
Interest-earning deposits in other financial institutions and other short term investments		19,730			8,782
Cash and cash equivalents		94,767			74,300
Securities available for sale (at fair value)		159,619			178,476
Loans held for sale (at fair value)		402,003			220,123
Loans receivable		1,375,137			1,388,031
Less: Allowance for loan losses		18,823			12,387
Loans receivable, net		1,356,314			1,375,644

Office properties and equipment, net		23,722			25,028
Federal Home Loan Bank stock (at cost)		26,720			21,150
Cash surrender value of life insurance		63,573			69,665
Real estate owned, net		322			748
Prepaid expenses and other assets		57,547			31,213
Total assets	$	2,184,587		$	1,996,347

Liabilities and Shareholders' Equity
Liabilities:
Demand deposits	$	188,225		$	130,063
Money market and savings deposits		295,317			197,942
Time deposits		701,328			739,771
Total deposits		1,184,870			1,067,776

Borrowings		508,074			483,562
Advance payments by borrowers for taxes		3,522			4,212
Other liabilities		75,003			47,111
Total liabilities		1,771,469			1,602,661

Shareholders' equity:
Preferred stock		-			-
Common stock		251			271
Additional paid-in capital		180,684			211,997
Retained earnings		245,287			197,393
Unearned ESOP shares		(15,430	)		(16,617	)
Accumulated other comprehensive income, net of taxes		2,326			642
Total shareholders' equity		413,118			393,686
Total liabilities and shareholders' equity	$	2,184,587		$	1,996,347

Share Information
Shares outstanding		25,088			27,148
Book value per share	$	16.47		$	14.50
Closing market price	$	18.82		$	19.03
Price to book ratio		114.27	%		131.24	%

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
SUMMARY OF KEY QUARTERLY FINANCIAL DATA
(Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
		2020			2020			2020			2020			2019
	(Dollars in Thousands, except per share amounts)
Condensed Results of Operations:
Net interest income	$	14,316		$	13,409		$	13,249		$	12,526		$	13,126
Provision for loan losses		30			1,025			4,500			785			(170	)
Total noninterest income		69,886			75,763			66,904			31,464			33,809
Total noninterest expense		47,163			53,001			47,689			35,208			35,337
Income before income taxes		37,009			35,146			27,964			7,997			11,768
Income tax expense		9,174			8,853			7,016			1,928			2,974
Net income	$	27,835		$	26,293		$	20,948		$	6,069		$	8,794
Income per share - basic	$	1.17		$	1.08		$	0.86		$	0.24		$	0.34
Income per share - diluted	$	1.17		$	1.08		$	0.85		$	0.24		$	0.34
Dividends declared per share	$	0.50		$	0.12		$	0.12		$	0.62		$	0.12

Performance Ratios (annualized):
Return on average assets - QTD		4.96	%		4.78	%		3.87	%		1.21	%		1.75	%
Return on average equity - QTD		27.11	%		26.30	%		22.39	%		6.24	%		8.91	%
Net interest margin - QTD		2.73	%		2.63	%		2.62	%		2.68	%		2.79	%

Return on average assets - YTD		3.77	%		3.35	%		2.59	%		1.21	%		1.82	%
Return on average equity - YTD		20.18	%		18.02	%		14.03	%		6.24	%		9.14	%
Net interest margin - YTD		2.67	%		2.64	%		2.65	%		2.68	%		2.83	%

Asset Quality Ratios:
Past due loans to total loans		0.57	%		0.39	%		0.45	%		0.78	%		0.47	%
Nonaccrual loans to total loans		0.40	%		0.42	%		0.39	%		0.48	%		0.51	%
Nonperforming assets to total assets		0.27	%		0.31	%		0.28	%		0.36	%		0.39	%
Allowance for loan losses to loans receivable		1.37	%		1.31	%		1.24	%		0.94	%		0.89	%

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
SUMMARY OF QUARTERLY AVERAGE BALANCES AND YIELD/COSTS
(Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
		2020			2020			2020			2020			2019
Average balances	(Dollars in Thousands)
Interest-earning assets
Loans receivable and held for sale	$	1,775,455		$	1,766,715		$	1,759,970		$	1,562,097		$	1,573,190
Mortgage related securities		91,199			96,529			105,727			112,089			110,426
Debt securities, federal funds sold and short term investments		217,356			166,160			164,306			206,485			183,447
Total interest-earning assets		2,084,010			2,029,404			2,030,003			1,880,671			1,867,063
Noninterest-earning assets		147,573			160,526			147,342			132,283			125,904
Total assets	$	2,231,583		$	2,189,930		$	2,177,345		$	2,012,954		$	1,992,967

Interest-bearing liabilities
Demand accounts	$	53,771		$	50,590		$	45,289		$	39,886		$	38,650
Money market, savings, and escrow accounts		304,467			282,349			252,500			218,942			215,332
Certificates of deposit		726,132			741,265			730,573			734,147			737,726
Total interest-bearing deposits		1,084,370			1,074,204			1,028,362			992,975			991,708
Borrowings		546,070			531,588			609,863			495,595			485,482
Total interest-bearing liabilities		1,630,440			1,605,792			1,638,225			1,488,570			1,477,190
Noninterest-bearing demand deposits		128,665			129,911			115,605			92,627			85,815
Noninterest-bearing liabilities		64,001			56,451			47,140			40,609			38,580
Total liabilities		1,823,106			1,792,154			1,800,970			1,621,806			1,601,585
Equity		408,477			397,776			376,375			391,148			391,382
Total liabilities and equity	$	2,231,583		$	2,189,930		$	2,177,345		$	2,012,954		$	1,992,967

Average Yield/Costs (annualized)
Loans receivable and held for sale		4.08	%		4.10	%		4.23	%		4.55	%		4.68	%
Mortgage related securities		2.30	%		2.42	%		2.55	%		2.52	%		2.58	%
Debt securities, federal funds sold and short term investments		1.59	%		1.75	%		1.71	%		2.07	%		2.19	%
Total interest-earning assets		3.75	%		3.83	%		3.93	%		4.16	%		4.31	%

Demand accounts		0.07	%		0.09	%		0.08	%		0.08	%		0.10	%
Money market and savings accounts		0.53	%		0.67	%		0.74	%		0.78	%		0.66	%
Certificates of deposit		1.20	%		1.62	%		1.91	%		2.13	%		2.20	%
Total interest-bearing deposits		0.96	%		1.29	%		1.54	%		1.75	%		1.79	%
Borrowings		1.97	%		1.98	%		1.76	%		2.12	%		2.20	%
Total interest-bearing liabilities		1.30	%		1.52	%		1.62	%		1.87	%		1.92	%

COMMUNITY BANKING SEGMENT
SUMMARY OF KEY QUARTERLY FINANCIAL DATA
(Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
		2020			2020			2020			2020			2019
	(Dollars in Thousands)
Condensed Results of Operations:
Net interest income	$	14,546		$	13,461		$	13,701		$	12,908		$	13,472
Provision for loan losses		-			1,000			4,325			750			(200	)
Total noninterest income		1,655			3,104			2,936			1,028			1,645
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		5,159			5,000			4,906			5,168			4,693
Occupancy, office furniture and equipment		934			874			866			1,014			894
Advertising		244			252			297			248			317
Data processing		511			490			678			605			583
Communications		110			113			91			97			93
Professional fees		5			266			226			198			162
Real estate owned		(63	)		11			33			11			(251	)
Loan processing expense		-			-			-			-			-
Other		577			818			532			580			498
Total noninterest expense		7,477			7,824			7,629			7,921			6,989
Income before income taxes		8,724			7,741			4,683			5,265			8,328
Income tax expense		1,926			1,565			574			1,154			2,033
Net income	$	6,798		$	6,176		$	4,109		$	4,111		$	6,295

Efficiency ratio - QTD		46.15	%		47.23	%		45.86	%		56.84	%		46.23	%
Efficiency ratio - YTD		48.71	%		49.59	%		50.86	%		56.84	%		47.74	%

MORTGAGE BANKING SEGMENT
SUMMARY OF KEY QUARTERLY FINANCIAL DATA
(Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
		2020			2020			2020			2020			2019
	(Dollars in Thousands)
Condensed Results of Operations:
Net interest income	$	(223	)	$	(58	)	$	(511	)	$	(379	)	$	(399	)
Provision for loan losses		30			25			175			35			30
Total noninterest income		68,500			73,143			64,218			30,798			32,440
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		33,347			34,559			32,139			19,387			21,975
Occupancy, office furniture and equipment		1,545			1,595			1,668			1,727			1,627
Advertising		822			609			567			652			734
Data processing		402			426			413			395			402
Communications		225			226			226			241			227
Professional fees		441			4,465			850			1,620			1,000
Real estate owned		-			-			-			-			30
Loan processing expense		1,026			1,336			1,208			1,076			746
Other		2,110			2,444			3,239			2,552			1,918
Total noninterest expense		39,918			45,660			40,310			27,650			28,659
Income before income taxes		28,329			27,400			23,222			2,734			3,352
Income tax expense		7,252			7,284			6,440			768			921
Net income	$	21,077		$	20,116		$	16,782		$	1,966		$	2,431

Efficiency ratio - QTD		58.46	%		62.48	%		63.27	%		90.90	%		89.44	%
Efficiency ratio - YTD		65.20	%		67.95	%		72.70	%		90.90	%		87.47	%

Loan originations	$	1,282,321		$	1,296,725		$	1,142,683		$	708,840		$	777,073
Purchase		59.2	%		64.1	%		55.5	%		68.3	%		72.1	%
Refinance		40.8	%		35.9	%		44.5	%		31.7	%		27.9	%
Gross margin on loans sold(1)		5.40	%		5.44	%		5.45	%		4.08	%		4.27	%
(1) - Gross margin on loans sold equals mortgage banking income (excluding the change in interest rate lock value) divided by total loan originations