Waterstone Financial, Inc. Announces Results of Operations for the Quarter and Six Months Ended June 30, 2021

Waterstone Financial, Inc. (NASDAQ: WSBF), holding company for WaterStone Bank, reported net income of $17.9 million, or $0.74 per diluted share for the quarter ended June 30, 2021 compared to $20.9 million, or $0.85 per diluted share for the quarter ended June 30, 2020. Net income per diluted share was $1.64 for the six months ended June 30, 2021 compared to net income per diluted share of $1.08 for the six months ended June 30, 2020.

“Our Company’s strong performance continued during the second quarter and we were excited to declare and pay a $0.50 special dividend during the quarter,” said Douglas Gordon, Chief Executive Officer of Waterstone Financial, Inc. “Our business model has allowed us to maximize the opportunity presented by the current market, return capital to our shareholders and continue to enhance our book value.”

Highlights of the Quarter Ended June 30, 2021

Waterstone Financial, Inc. (Consolidated)

Consolidated net income of Waterstone Financial, Inc. totaled $17.9 million for the quarter ended June 30, 2021, compared to $20.9 million for the quarter ended June 30, 2020.
Consolidated return on average assets was 3.25% for the quarter ended June 30, 2021 compared to 3.87% for the quarter ended June 30, 2020.
Consolidated return on average equity was 16.49% for the quarter ended June 30, 2021 and 22.39% for the quarter ended June 30, 2020.
Dividends declared during the quarter ended June 30, 2021 totaled $0.70 per common share, which included a quarterly dividend of $0.20 per share and a special dividend of $0.50 per share.
We repurchased approximately 59,000 shares at a cost of $1.1 million during the quarter ended June 30, 2021.

Community Banking Segment

Pre-tax income totaled $9.7 million for the quarter ended June 30, 2021, which represents a 106.4% increase compared to $4.7 million for the quarter ended June 30, 2020.
Net interest income totaled $14.5 million for the quarter ended June 30, 2021, which represents a 6.0% increase compared to $13.7 million for the quarter ended June 30, 2020.
Average loans held for investment totaled $1.32 billion during the quarter ended June 30, 2021, which represents a decrease of $101.6 million, or 7.2%, compared to $1.42 billion for the quarter ended June 30, 2020. Average loans held for investment decreased $27.7 million compared to $1.35 billion for the quarter ended March 31, 2021 as residential real estate loans continue to prepay at an accelerated rate.
Net interest margin increased 16 basis points to 2.78% for the quarter ended June 30, 2021 compared to 2.62% for the quarter ended June 30, 2020, which was a result of lower average rates on deposits, as certificate of deposits repriced at lower rates. Net interest margin decreased two basis points compared to 2.80% for the quarter ended March 31, 2021, driven by a decrease in PPP loan fees as the first round loan payoffs decreased.
The segment had a negative provision for loan losses of $750,000 for the quarter ended June 30, 2021 compared to a $4.3 million provision for loan losses for the quarter ended June 30, 2020. Net recoveries totaled $378,000 for the quarter ended June 30, 2021 as one significant loan recovery payment was made in the quarter, compared to net recoveries of $8,000 for the quarter ended June 30, 2020.
Noninterest income decreased $1.3 million for the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020, due primarily to decreases on service charges on loans from fees earned on swaps.
Noninterest expense decreased $397,000 for the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020. Compensation, payroll taxes and other employee benefits expense decreased $32,000 primarily due to a decrease in variable compensation offset by increases in health insurance and employee stock ownership plan expenses. Data processing expense decreased $212,000 due to the implementation of a new digital banking platform in 2020. Other noninterest expense decreased $71,000 as certain loan-related expenses decreased offset by a decrease of credits received for FDIC premiums in 2020 but not in 2021.
The efficiency ratio was 44.79% for the quarter ended June 30, 2021, compared to 45.86% for the quarter ended June 30, 2020.
Average deposits (excluding escrow accounts) totaled $1.23 billion during the quarter ended June 30, 2021, an increase of $103.4 million, or 9.2%, compared to $1.13 billion during the quarter ended June 30, 2020. Average deposits increased $24.8 million, or 8.2% annualized compared to the $1.21 billion for the quarter ended March 31, 2021.
Nonperforming assets as percentage of total assets was 0.20% at June 30, 2021, 0.20% at March 31, 2021, and 0.28% at June 30, 2020.
Past due loans as percentage of total loans was 0.53% at June 30, 2021, 0.52% at March 31, 2021, and 0.45% at June 30, 2020.
PPP loans totaled $16.9 million as of June 30, 2021. The average balance for the quarter ended June 30, 2021 was $19.5 million. For the quarter ended June 30, 2021, PPP loan interest income recognized was approximately $49,000 and the amortization of fee income was approximately $286,000. Net interest margin, excluding the impact of the PPP loans, was 2.74%. Net interest margin for the quarter ended June 30, 2021, including the impact of the PPP loans, was 2.78%.
The Company held approximately $3.5 million in loans, representing 0.3% of the total loan portfolio as of June 30, 2021, which had been modified as either a deferment of principal or principal and interest since the beginning of the pandemic. Of the $3.5 million in loans, $559,000 qualify as modifications under the Coronavirus Aid, Relief and Economic Security (“CARES Act”). The remaining $2.9 million is composed of three loan relationships that are classified as troubled debt restructurings.

Mortgage Banking Segment

Pre-tax income totaled $14.2 million for the quarter ended June 30, 2021, compared to $23.2 million for the quarter ended June 30, 2020.
Loan originations decreased $77.5 million, or 6.8%, to $1.07 billion during the quarter ended June 30, 2021, compared to $1.14 billion during the quarter ended June 30, 2020. Origination volume relative to purchase activity accounted for 75.4% of originations for the quarter ended June 30, 2021 compared to 55.5% of total originations for the quarter ended June 30, 2020.
Mortgage banking non-interest income decreased $13.7 million, or 21.3%, to $50.6 million for the quarter ended June 30, 2021, compared to $64.2 million for the quarter ended June 30, 2020.
Gross margin on loans sold decreased to 4.81% for the quarter ended June 30, 2021, compared to 5.45% for the quarter ended June 30, 2020.
Total compensation, payroll taxes and other employee benefits decreased $3.0 million, or 9.2%, to $29.2 million during the quarter ended June 30, 2021 compared to $32.1 million during the quarter ended June 30, 2020. The decrease primarily related to decreased commission expense and branch manager compensation driven by decreased loan origination volume and branch profitability as gross margins decreased.
Professional fees decreased $489,000 to $361,000 during the quarter ended June 30, 2021 compared to $850,000 of expense during the quarter ended June 30, 2020. The decrease related to a decrease in litigation costs compared to the prior year, as the Herrington settlement was resolved in 2020.
Other noninterest expense decreased $561,000 to $2.7 million during the quarter ended June 30, 2021 compared to $3.2 million during the quarter ended June 30, 2020. The decrease related to a decrease in the provision for losses on loans sold to the secondary market that results from both early payoff and early default provisions with investors. The decreased provision is driven by both an decrease in the number and volume of loans sold, as well as actual default activity resulting from COVID-19 pandemic was lower than expected.

Recent Developments:

COVID-19 Pandemic and the CARES Act

The 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 60th day after 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 January 1, 2022. We have elected to continue to delay adoption of CECL. As a result, our financial statements for the quarter and year ended June 30, 2021 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 StatementsThis 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 MonthsEnded June 30,					For The Six MonthsEnded June 30,
		2021			2020		2021			2020
	(In Thousands, except per share amounts)
Interest income:
Loans	$	16,480		$	18,493	$	33,083		$	36,180
Mortgage-related securities		486			670		977			1,372
Debt securities, federal funds sold and short-term investments		858			698		1,733			1,761
Total interest income		17,824			19,861		35,793			39,313
Interest expense:
Deposits		1,078			3,947		2,595			8,265
Borrowings		2,469			2,665		4,969			5,273
Total interest expense		3,547			6,612		7,564			13,538
Net interest income		14,277			13,249		28,229			25,775
Provision (credit) for loan losses		(750	)		4,500		(1,820	)		5,285
Net interest income after provision for loan losses		15,027			8,749		30,049			20,490
Noninterest income:
Service charges on loans and deposits		657			2,231		1,347			2,712
Increase in cash surrender value of life insurance		684			520		985			873
Mortgage banking income		49,649			63,774		104,040			94,180
Other		1,054			379		1,871			603
Total noninterest income		52,044			66,904		108,243			98,368
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		33,926			36,889		68,049			61,290
Occupancy, office furniture, and equipment		2,293			2,534		4,858			5,275
Advertising		911			864		1,735			1,764
Data processing		914			1,095		1,885			2,101
Communications		326			317		657			655
Professional fees		569			1,077		254			2,909
Real estate owned		-			33		(12	)		44
Loan processing expense		1,200			1,208		2,535			2,284
Other		3,158			3,672		6,336			6,575
Total noninterest expenses		43,297			47,689		86,297			82,897
Income before income taxes		23,774			27,964		51,995			35,961
Income tax expense		5,880			7,016		12,757			8,944
Net income	$	17,894		$	20,948	$	39,238		$	27,017
Income per share:
Basic	$	0.75		$	0.86	$	1.65		$	1.08
Diluted	$	0.74		$	0.85	$	1.64		$	1.08
Weighted average shares outstanding:
Basic		23,848			24,464		23,792			24,934
Diluted		24,029			24,513		23,996			25,071

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	June 30,			December 31,
		2021			2020
	(Unaudited)
Assets	(In Thousands, except per share amounts)
Cash	$	197,981		$	56,190
Federal funds sold		11,531			18,847
Interest-earning deposits in other financial institutions and other short term investments		19,227			19,730
Cash and cash equivalents		228,739			94,767
Securities available for sale (at fair value)		172,224			159,619
Loans held for sale (at fair value)		352,627			402,003
Loans receivable		1,296,441			1,375,137
Less: Allowance for loan losses		17,410			18,823
Loans receivable, net		1,279,031			1,356,314

Office properties and equipment, net		23,186			23,722
Federal Home Loan Bank stock (at cost)		26,538			26,720
Cash surrender value of life insurance		64,738			63,573
Real estate owned, net		150			322
Prepaid expenses and other assets		54,720			57,547
Total assets	$	2,201,953		$	2,184,587

Liabilities and Shareholders' Equity
Liabilities:
Demand deposits	$	208,523		$	188,225
Money market and savings deposits		351,394			295,317
Time deposits		671,143			701,328
Total deposits		1,231,060			1,184,870

Borrowings		475,000			508,074
Advance payments by borrowers for taxes		17,657			3,522
Other liabilities		46,498			75,003
Total liabilities		1,770,215			1,771,469

Shareholders' equity:
Preferred stock		-			-
Common stock		252			251
Additional paid-in capital		182,346			180,684
Retained earnings		263,048			245,287
Unearned ESOP shares		(14,837	)		(15,430	)
Accumulated other comprehensive income, net of taxes		929			2,326
Total shareholders' equity		431,738			413,118
Total liabilities and shareholders' equity	$	2,201,953		$	2,184,587

Share Information
Shares outstanding		25,213			25,088
Book value per share	$	17.12		$	16.47
Closing market price	$	19.66		$	18.82
Price to book ratio		114.84	%		114.27	%

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

	At or For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2021			2021			2020			2020			2020
	(Dollars in Thousands, except per share amounts)
Condensed Results of Operations:
Net interest income	$	14,277		$	13,952		$	14,316		$	13,409		$	13,249
Provision (credit) for loan losses		(750	)		(1,070	)		30			1,025			4,500
Total noninterest income		52,044			56,199			69,886			75,763			66,904
Total noninterest expense		43,297			43,000			47,163			53,001			47,689
Income before income taxes		23,774			28,221			37,009			35,146			27,964
Income tax expense		5,880			6,877			9,174			8,853			7,016
Net income	$	17,894		$	21,344		$	27,835		$	26,293		$	20,948
Income per share basic	$	0.75		$	0.90		$	1.17		$	1.08		$	0.86
Income per share diluted	$	0.74		$	0.89		$	1.17		$	1.08		$	0.85
Dividends declared per share	$	0.70		$	0.20		$	0.50		$	0.12		$	0.12

Performance Ratios (annualized):
Return on average assets - QTD		3.25	%		3.99	%		4.96	%		4.78	%		3.87	%
Return on average equity - QTD		16.49	%		20.49	%		27.11	%		26.30	%		22.39	%
Net interest margin - QTD		2.78	%		2.80	%		2.73	%		2.63	%		2.62	%

Return on average assets - YTD		3.62	%		3.99	%		3.77	%		3.35	%		2.59	%
Return on average equity - YTD		18.49	%		20.49	%		20.18	%		18.02	%		14.03	%
Net interest margin - YTD		2.79	%		2.80	%		2.67	%		2.64	%		2.65	%

Asset Quality Ratios:
Past due loans to total loans		0.53	%		0.52	%		0.57	%		0.39	%		0.45	%
Nonaccrual loans to total loans		0.34	%		0.31	%		0.40	%		0.42	%		0.39	%
Nonperforming assets to total assets		0.20	%		0.20	%		0.27	%		0.31	%		0.28	%
Allowance for loan losses to loans receivable		1.34	%		1.33	%		1.37	%		1.31	%		1.24	%

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

	At or For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2021			2021			2020			2020			2020
Average balances	(Dollars in Thousands)
Interest-earning assets
Loans receivable and held for sale	$	1,655,078		$	1,657,260		$	1,775,455		$	1,766,715		$	1,759,970
Mortgage related securities		100,056			90,457			91,199			96,529			105,727
Debt securities, federal funds sold and short term investments		308,105			273,929			217,356			166,160			164,306
Total interest-earning assets		2,063,239			2,021,646			2,084,010			2,029,404			2,030,003
Noninterest-earning assets		143,375			147,781			147,573			160,526			147,342
Total assets	$	2,206,614		$	2,169,427		$	2,231,583		$	2,189,930		$	2,177,345

Interest-bearing liabilities
Demand accounts	$	63,610		$	55,552		$	53,771		$	50,590		$	45,289
Money market, savings, and escrow accounts		350,270			314,418			304,467			282,349			252,500
Certificates of deposit		690,196			705,712			726,132			741,265			730,573
Total interest-bearing deposits		1,104,076			1,075,682			1,084,370			1,074,204			1,028,362
Borrowings		480,054			482,665			546,070			531,588			609,863
Total interest-bearing liabilities		1,584,130			1,558,347			1,630,440			1,605,792			1,638,225

Noninterest-bearing demand deposits		141,648			138,446			128,665			129,911			115,605
Noninterest-bearing liabilities		45,658			50,188			64,001			56,451			47,140
Total liabilities		1,771,436			1,746,981			1,823,106			1,792,154			1,800,970
Equity		435,178			422,446			408,477			397,776			376,375
Total liabilities and equity	$	2,206,614		$	2,169,427		$	2,231,583		$	2,189,930		$	2,177,345

Average Yield/Costs (annualized)
Loans receivable and held for sale		3.99	%		4.06	%		4.08	%		4.10	%		4.23	%
Mortgage related securities		1.95	%		2.20	%		2.30	%		2.42	%		2.55	%
Debt securities, federal funds sold and short term investments		1.12	%		1.30	%		1.59	%		1.75	%		1.71	%
Total interest-earning assets		3.47	%		3.60	%		3.75	%		3.83	%		3.93	%

Demand accounts		0.08	%		0.07	%		0.07	%		0.09	%		0.08	%
Money market and savings accounts		0.23	%		0.32	%		0.53	%		0.67	%		0.74	%
Certificates of deposit		0.50	%		0.72	%		1.20	%		1.62	%		1.91	%
Total interest-bearing deposits		0.39	%		0.57	%		0.96	%		1.29	%		1.54	%
Borrowings		2.06	%		2.10	%		1.97	%		1.98	%		1.76	%
Total interest-bearing liabilities		0.90	%		1.05	%		1.30	%		1.52	%		1.62	%

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

	At or For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2021			2021			2020			2020			2020
	(Dollars in Thousands)
Condensed Results of Operations:
Net interest income	$	14,517		$	14,247		$	14,546		$	13,461		$	13,701
Provision for loan losses		(750	)		(1,100	)		-			1,000			4,325
Total noninterest income		1,630			1,243			1,655			3,104			2,936
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,874			4,975			5,159			5,000			4,906
Occupancy, office furniture and equipment		887			1,025			934			874			866
Advertising		260			209			244			252			297
Data processing		466			511			511			490			678
Communications		86			119			110			113			91
Professional fees		198			194			5			266			226
Real estate owned		-			(12	)		(63	)		11			33
Loan processing expense		-			-			-			-			-
Other		461			440			577			818			532
Total noninterest expense		7,232			7,461			7,477			7,824			7,629
Income before income taxes		9,665			9,129			8,724			7,741			4,683
Income tax expense		2,128			1,786			1,926			1,565			574
Net income	$	7,537		$	7,343		$	6,798		$	6,176		$	4,109

Efficiency ratio - QTD		44.79	%		48.17	%		46.15	%		47.23	%		45.86	%
Efficiency ratio - YTD		46.44	%		48.17	%		48.71	%		49.59	%		50.86	%

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

	At or For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
		2021			2021			2020			2020			2020
	(Dollars in Thousands)
Condensed Results of Operations:
Net interest income	$	(251	)	$	(350	)	$	(223	)	$	(58	)	$	(511	)
Provision for loan losses		-			30			30			25			175
Total noninterest income		50,556			55,035			68,500			73,143			64,218
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		29,170			29,262			33,347			34,559			32,139
Occupancy, office furniture and equipment		1,406			1,540			1,545			1,595			1,668
Advertising		651			615			822			609			567
Data processing		443			454			402			426			413
Communications		240			212			225			226			226
Professional fees		361			(524	)		441			4,465			850
Real estate owned		-			-			-			-			-
Loan processing expense		1,200			1,335			1,026			1,336			1,208
Other		2,678			2,681			2,110			2,444			3,239
Total noninterest expense		36,149			35,575			39,918			45,660			40,310
Income before income taxes		14,156			19,080			28,329			27,400			23,222
Income tax expense		3,761			5,096			7,252			7,284			6,440
Net income	$	10,395		$	13,984		$	21,077		$	20,116		$	16,782

Efficiency ratio - QTD		71.86	%		65.05	%		58.46	%		62.48	%		63.27	%
Efficiency ratio - YTD		68.32	%		65.05	%		65.20	%		67.95	%		72.70	%

Loan originations	$	1,065,161		$	1,115,091		$	1,282,321		$	1,296,725		$	1,142,683
Purchase		75.4	%		56.1	%		59.2	%		64.1	%		55.5	%
Refinance		24.6	%		43.9	%		40.8	%		35.9	%		44.5	%
Gross margin on loans sold(1)		4.81	%		4.86	%		5.40	%		5.44	%		5.45	%
(1) - Gross margin on loans sold equals mortgage banking income (excluding the change in interest rate lock value) divided by total loan originations