As filed with the Securities and Exchange Commission on July 30 , 2013 |
Registration No. 333-189160 |
Maryland | 6712 | To be Applied For |
(State or Other Jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer |
Incorporation or Organization) | Classification Code Number) | Identification Number) |
Large accelerated filer | o | Accelerated filer | x | |
Non-accelerated filer | o | Smaller reporting company | o | |
(Do not check if a smaller reporting company) |
Title of each class of securities to be registered | Amount to be registered | Proposed maximum offering price per share | Proposed maximum aggregate offering price | Amount of registration fee |
Common Stock, $0.01 par value per share | 34,406,086 shares | $ 10.00 | $ 344,060,860 (1) | $ 46,930 (2) |
Participation interests | 422,344 interests (3) | (3) |
(1) | Estimated solely for the purpose of calculating the registration fee. |
(2) | A fee of $41,597 was previously paid. |
(3) | The securities of Waterstone Financial, Inc. to be purchased by the WaterStone Bank SSB 401(k) Plan are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan. |
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LEGAL OPINION | 23 |
New Waterstone is offering participants in the WaterStone Bank SSB 401(k) Plan (the “Plan”) the opportunity to purchase participation interests in the common stock of New Waterstone. The ownership of common stock of New Waterstone in the Plan is referred to as a “participation interest” since the common stock will be titled in the name of the Plan and not directly in a participant’s name. Given the purchase price of $ 10.00 per share in the stock offering, the Plan may purchase (or acquire) up to 422,344 shares of New Waterstone common stock in the stock offering. Only employees of WaterStone Bank SSB may become participants in the Plan and only participants may purchase stock in the New Waterstone Stock Fund. Your investment in stock in connection with the stock offering through the New Waterstone Stock Fund is subject to the purchase priorities contained in the Plan of Conversion and Reorganization of Lamplighter Financial, MHC. Information with regard to the Plan is contained in this prospectus supplement and information with regard to the financial condition, results of operations and business of New Waterstone is contained in the accompanying prospectus. The address of the principal executive office of New Waterstone and WaterStone Bank SSB is 11200 West Plank Court, Wauwatosa, Wisconsin 53226. All questions about completing the Special Investment Election Form should be addressed to Ian Konrath, PHR, Human Resources Director, WaterStone Bank SSB, 11200 W. Plank Ct., Wauwatosa, WI 53226; telephone number (414) 459-4127; or e-mail Ian Konrath at IanKonrath@wsbonline.com. Questions about the common stock being offered or about the prospectus may be directed to the Stock Information Center at 1-______________. | |
In connection with the stock offering, you may elect to transfer all or part of your account balances in the Plan to the New Waterstone Stock Fund, to be used to purchase common stock of New Waterstone issued in the stock offering. The New Waterstone Stock Fund is a new fund in the Plan established to hold shares of common stock of New Waterstone. | |
Purchase Priorities | All Plan participants are eligible to direct a transfer of funds to the New Waterstone Stock Fund. However, such directions are subject to the purchase priorities in the Plan of Conversion and Reorganization of Lamplighter Financial, MHC, which provides for a subscription offering and a community offering. In the offering, the purchase priorities are as follows and apply in case more shares are ordered than are available for sale (an “oversubscription”): |
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Subscription Offering: | |||
(1) | Depositors of WaterStone Bank SSB with $50 or more on deposit at the close of business on December 31, 2011, get first priority. | ||
(2) | WaterStone Bank SSB’s tax-qualified plans, including the employee stock ownership plan, get second priority. | ||
(3) | Depositors of WaterStone Bank SSB with $50 or more on deposit at the close of business on __________, 2013 who are not eligible under priority #1 get third priority. | ||
(4) | Depositors of WaterStone Bank SSB as of the close of business on _________, 2013 who are not eligible under priority #1 or #3 get fourth priority. | ||
Community Offering: | |||
(5) | Natural persons (including trusts of natural persons) residing in the Wisconsin counties of Milwaukee, Washington and Waukesha get fifth priority. | ||
(6) | Waterstone-Federal’s public stockholders as of _________, 2013 get sixth priority. | ||
(7) | Other members of the general public get seventh priority. | ||
If you fall into subscription offering categories (1), (3) or (4), you have subscription rights to purchase shares of New Waterstone common stock in the subscription offering and you may use funds in the Plan to pay for the common stock. You may also be able to purchase shares of New Waterstone common stock in the subscription offering even though you are ineligible to purchase through subscription offering categories (1), (3) or (4) by purchasing stock in the Plan through subscription offering category (2), reserved for WaterStone Bank SSB’s tax-qualified employee plans. | |||
The trustee of the New Waterstone Stock Fund will purchase common stock of New Waterstone in the stock offering in accordance with your directions. Once you make your election, the amount that you elect to transfer from your existing investment options for the purchase of common stock in connection with the stock offering will be sold from your existing investment options and transferred to the New Waterstone Stock Fund and held in a money market account pending the formal closing of the stock offering, several weeks later. After the end of the stock offering period, we will determine whether all or any portion of your order will be filled (if the offering is oversubscribed you may not receive any or all of your order, depending on your purchase priority, as described above). The amount that can be used toward your order will be applied to the purchase of common stock of New Waterstone and will be denominated in stock in the Plan. |
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In the event the offering is oversubscribed,i.e., there are more orders for common stock of New Waterstone than shares available for sale in the offering, and the trustee is unable to use the full amount allocated by you to purchase interests in common stock of New Waterstone in the offering, the amount that cannot be invested in common stock of New Waterstone, and any interest earned on such amount, will be reinvested in the existing funds of the Plan, in accordance with your then existing investment election (in proportion to your investment direction for future contributions). The prospectus describes the allocation procedures in the event of an oversubscription. If you choose not to direct the investment of your account balances towards the purchase of any shares of common stock of New Waterstone through the New Waterstone Stock Fund in connection with the offering, your account balances will remain in the investment funds of the Plan as previously directed by you. | |||
As of March 31, 2013, the market value of the assets of the Plan was approximately $4,223,447. | |||
In connection with the stock offering, the Plan will permit you to direct the trustee to transfer all or part of the funds which represent your current beneficial interest in the assets of the Plan to the New Waterstone Stock Fund. The trustee of the Plan will subscribe for New Waterstone common stock offered for sale in connection with the stock offering, in accordance with each participant’s direction. In order to purchase stock representing an ownership interest in common stock of New Waterstone in the stock offering through the Plan, you must order at least 25 shares in the offering through the Plan. The prospectus describes maximum purchase limits for investors in the stock offering. The trustee will pay $ 10.00 per share of stock in the offering, which will be the same price paid by all other persons who purchase shares in the subscription and community offerings. |
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Enclosed is a Special Investment Election Form on which you can elect to purchase stock through the New Waterstone Stock Fund in connection with the stock offering. Please note the following stipulations concerning this election: | |||
● | You can direct all or a portion of your current account to the New Waterstone Stock Fund in increments of $ 10.00 . | ||
● | Your election is subject to a minimum purchase of 25 shares of common stock, which equals $200. | ||
● | Your election, plus any order you placed outside the Plan, are together subject to a maximum purchase of 375,000 shares, which equals $3,000,000.00. | ||
● | The election period closes at ___________, Central Time, on ____________, 2013. | ||
● | During the stock offering period, you will continue to have the ability to transfer amounts that are not directed to purchase stock in the New Waterstone Stock Fund among all other investment funds. However, you will not be permitted to change the investment amounts that you designated to be transferred to the New Waterstone Stock Fund on your Special Investment Election Form. | ||
● | The amount you elect to transfer to the New Waterstone Stock Fund will be held separately until the offering closes. Therefore, this money is not available for distributions, loans, or withdrawals until the transaction is completed, which is expected to be several weeks after the closing of the subscription offering period. | ||
If you wish to use all or part of your account balance in the Plan to purchase common stock of New Waterstone issued in the stock offering, you should indicate that decision on the Special Investment Election Form. If you do not wish to make an election, you should check Box E in Section D of the Special Investment Election Form and return the form to Jodi Stephens in the Human Resources Department at WaterStone Bank SSB, 11200 W. Plank Ct., Wauwatosa, WI 53226, to be received no later than __________, Central Time, on ____________, 2013. You may return your Special Investment Election Form by hand delivery, inter-office mail or by mailing it to Jodi Stephens at the above address in the enclosed self-addressed envelope, so long as it is received by the time specified. |
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You must return your Special Investment Election Form to Jodi Stephens, at WaterStone Bank SSB, to be received no later than ____________, Central Time, on _______________, 2013. | |
Once you make an election to transfer amounts to the New Waterstone Stock Fund in connection with the stock offering, you may not change your election. Your election is irrevocable. You will, however, continue to have the ability to transfer amounts not directed towards the purchase of stock among all of the other investment funds on a daily basis. | |
You will be able to purchase New Waterstone stock after the offering through your investment in the New Waterstone Stock Fund. You may direct that your future contributions or your account balance in the Plan be transferred to the New Waterstone Stock Fund. After the offering, to the extent that shares are available, the trustee of the Plan will acquire common stock of New Waterstone at your election in open market transactions at the prevailing price. You may change your investment allocation on a daily basis. Special restrictions may apply to transfers directed to and from the New Waterstone Stock Fund by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of New Waterstone. | |
The Plan provides that you may direct the trustee as to how to vote any shares of New Waterstone common stock held by the New Waterstone Stock Fund, and the interest in such shares that is credited to your account. If the trustee does not receive your voting instructions, the plan administrator will exercise these rights as it determines in its discretion and will direct the trustee accordingly. All voting instructions will be kept confidential. |
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● | Payment of post-secondary school education for the next 12 months for you, your spouse or dependents; |
● | Unreimbursed medical expenses which were previously incurred, or expenses which are necessary to obtain medical care for you, your spouse or dependents; |
● | Purchase of your principal residence (not including mortgage payments); |
● | Prevention of eviction from your principal residence or foreclosure on the mortgage of your principal residence; |
● | Payment of funeral expenses for your parent, spouse, child, or dependent; and |
● | Expenses for the repair of damage to your principal residence that would qualify for a casualty loss deduction under the Internal Revenue Code. |
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Average Annual Total Returns as of March 31, 2013 | ||||||||||||
Fund Name | Year to Date | 1 Year | 3 Year | 5 Year | 10 Year | Since Inception | ||||||
Principal Trust(SM) Income Fund I | 2.40% | 6.81% | 7.38% | -- | -- | 9.61% | ||||||
Principal Trust(SM) Target 2010 Fund I | 4.23% | 8.85% | 9.08% | -- | -- | 13.40% | ||||||
Principal Trust(SM) Target 2015 Fund I | 5.34% | 9.74% | 9.58% | -- | -- | 14.47% | ||||||
Principal Trust(SM) Target 2020 Fund I | 5.90% | 10.52% | 10.06% | -- | -- | 15.37% | ||||||
Principal Trust(SM) Target 2025 Fund I | 6.41% | 11.37% | 10.42% | -- | -- | 16.03% | ||||||
Principal Trust(SM) Target 2030 Fund I | 7.03% | 11.60% | 10.55% | -- | -- | 16.44% | ||||||
Principal Trust(SM) Target 2035 Fund I | 7.13% | 11.76% | 10.72% | -- | -- | 16.82% | ||||||
Principal Trust(SM) Target 2040 Fund I | 7.69% | 12.35% | 10.91% | -- | -- | 17.14% | ||||||
Principal Trust(SM) Target 2045 Fund I | 7.83% | 12.60% | 11.13% | -- | -- | 17.57% | ||||||
Principal Trust(SM) Target 2050 Fund I | 7.97% | 12.64% | 11.19% | -- | -- | 17.29% | ||||||
Principal Trust(SM) Target 2055 Fund I | 8.15% | 12.75% | 11.22% | -- | -- | 17.57% | ||||||
LargeCap S&P 500 Index Inst Fund | 10.53% | 13.81% | 12.47% | 5.61% | 8.32% | n/a | ||||||
MidCap Inst Fund | 12.17% | 19.99% | 18.66% | 11.00% | 13.06% | n/a | ||||||
MidCap S&P 400 Index Inst Fund | 13.33% | 17.52% | 14.86% | 9.58% | 12.20% | n/a | ||||||
SmallCap S&P 600 Index Inst Fund | 11.73% | 15.86% | 14.92% | 8.95% | 12.14% | n/a | ||||||
LargeCap Growth I Inst Fund | 9.12% | 7.63% | 13.11% | 9.12% | 8.90% | n/a | ||||||
Columbia Acorn A Fund | 9.78% | 11.85% | 12.88% | 7.87% | 12.62% | n/a | ||||||
Fidelity Capital Appreciation Fund | 10.35% | 15.15% | 12.72% | 7.59% | 10.41% | n/a | ||||||
Fidelity Contrafund | 9.18% | 10.41% | 12.68% | 6.27% | 10.89% | n/a | ||||||
Fidelity Leveraged Company Stock Fund | 12.35% | 23.61% | 14.41% | 5.08% | 16.11% | n/a | ||||||
Oppenheimer Developing Markets Y Fund | 0.17% | 5.73% | 7.29% | 6.05% | 21.33% | n/a | ||||||
First Eagle Gold A Fund | -15.13% | -17.09% | -0.45% | 1.41% | 12.31% | n/a | ||||||
American Beacon International Equity Fund | 2.41% | 11.17% | 5.15% | 0.02% | 10.31% | n/a | ||||||
Harbor International Inst Fund | 2.09% | 7.85% | 6.86% | 0.94% | 13.31% | n/a | ||||||
Oppenheimer Global Strategic Income Y Fund | 1.46% | 9.89% | 9.03% | 6.35% | 8.01% | n/a | ||||||
Oppenheimer International Growth Y Fund | 6.06% | 14.03% | 10.02% | 4.20% | 14.68% | n/a | ||||||
BlackRock Equity Dividend I Fund | 8.43% | 12.59% | 12.16% | 5.30% | 10.77% | n/a | ||||||
Goldman Sachs Small Cap Value Inst Fund | 12.62% | 17.75% | 15.22% | 10.18% | 12.40% | n/a | ||||||
JP Morgan Core Bond R5 Fund | 0.15% | 4.42% | 6.07% | 6.31% | 5.45% | n/a | ||||||
DWS RREEF Real Estate Sec S Fund | 5.84% | 13.08% | 17.11% | 6.32% | 12.45% | n/a | ||||||
BlackRock Global Allocation Institutional Fund | 4.29% | 6.37% | 6.36% | 3.88% | 11.03% | n/a | ||||||
John Hancock Disciplined Value Mid Cap I Fund | 12.41% | 17.64% | 15.14% | 11.62% | 13.90% | n/a | ||||||
Janus Triton T Fund | 9.66% | 13.27% | 17.33% | 12.26% | -- | 12.20% | ||||||
BlackRock High Yield Bond Institutional Fund | 3.24% | 13.82% | 11.32% | 11.25% | 10.12% | n/a | ||||||
Oppenheimer Equity Income Y Fund | 11.10% | 16.43% | 11.94% | 9.03% | 10.83% | n/a | ||||||
Ivy Science & Technology I Fund | 12.98% | 19.70% | 14.55% | 11.22% | 13.73% | n/a | ||||||
************* | ||||||||||||
Principal Fixed Income Guaranteed Option –See discussion under Description of the Investment Funds. |
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Crediting Rate History | ||||||||||||
06/13 -- 11/13 | 12/12 -- 05/13 | 06/12 -- 11/12 | 12/11 -- 05/12 | 06/11 -- 11/11 | 12/10 -- 05/11 | 06/10 -- 11/10 | 12/09 -- 05/10 | 06/09 -- 11/09 | 12/08 -- 05/09 | 06/08 -- 11/08 | 12/07 -- 05/08 | 03/07 -- 11/07 |
1.35% | 1.45% | 1.75% | 2.00% | 2.20% | 2.20% | 2.55% | 2.60% | 2.60% | 3.95% | 3.95% | 4.00% | 4.00% |
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund or stock investment, there is always a risk that you may lose money on your investment in any of the funds listed above. |
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Minimum | Midpoint | Maximum | ||||||||||
Number of shares | 18,700,000 | 22,000,000 | 25,300,000 | |||||||||
Gross offering proceeds | $ | 187 , 000 ,000 | $ | 220 ,000,000 | $ | 253 , 000 ,000 | ||||||
Estimated offering expenses, excluding selling agent and underwriters’ commissions | $ | 1,549,550 | $ | 1,549,550 | $ | 1,549,550 | ||||||
Selling agent and underwriters’ commissions (1) | $ | 5,270,650 | $ | 6,181,450 | $ | 7,092,250 | ||||||
Estimated net proceeds | $ | 1 80,179,800 | $ | 212,269,000 | $ | 2 44,358,200 | ||||||
Estimated net proceeds per share | $ | 9.64 | $ | 9.65 | $ | 9.66 |
(1) | The amounts shown assume that 50% of the shares are sold in the subscription and community offerings and the remaining 50% are sold in a syndicated or firm commitment underwritten offering. The amounts shown further assume that Sandler O’Neill & Partners, L.P. will receive fees and expenses in the amount of: (i) 1.0% of the aggregate amount of common stock sold in the subscription offering (net of insider purchases and shares purchased by our employee stock ownership plan); (ii) records management fees and expenses of $60,000; and (iii) other expenses of the offering of $115,000. The amounts shown also include fees of 5% of the aggregate amount of common stock sold in the syndicated or firm commitment underwritten offering, which will be paid to Sandler O’Neill & Partners, L.P. and any other broker-dealers included in the syndicated or firm commitment underwritten offering. See “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” for information regarding compensation to be received by Sandler O’Neill & Partners, L.P. in the subscription and community offerings and the compensation to be received by Sandler O’Neill & Partners, L.P. and the other broker-dealers that may participate in the syndicated or firm commitment underwritten offering. If all shares of common stock were sold in the syndicated or firm commitment underwritten offering, the selling agent and broker-dealers’ commissions would be approximately $ 9.4 million, $ 11.0 million and $ 12.7 million at the minimum, midpoint and maximum levels of the offering, respectively. |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
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● | Continued reduction of problem assets. Our non-performing assets have decreased to $96.8 million, or 5.94% of total assets at March 31, 2013, from $141.9 million, or 7.85% of total assets at December 31, 2010. Our non-performing assets at March 31, 2013 included $66.0 million of non-performing loans and $30.8 million of real estate owned. Of the $66.0 million of non-accrual loans, $33.7 million, or 51.1%, were troubled debt restructurings that were on non-accrual status either due to being past due greater than 90 days or because they had not yet performed under the modified terms for a required period of time. At March 31, 2013, total troubled debt restructurings totaled $55.8 million, of which $49.9 million, or 89.4%, were performing in accordance with their restructured terms. Reducing our level of non-performing assets will continue to be a key element of our business strategy. |
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● | Controlled loan growth with a focus on multi-family and commercial real estate lending. Our principal business activity historically has been the origination of residential mortgage loans, including multi-family residential real estate loans, for retention in our portfolio. In an effort to increase our commercial business and commercial real estate loan portfolios, we established a commercial loan department in 2007. We currently have four commercial business loan officers and four commercial real estate loan officers. Multi-family residential and commercial real estate loans comprised 66.9% of total loans originated for investment during the year ended December 31, 2012, while one- to four-family residential mortgage loans comprised 17.2% of total originations in 2012. We intend to continue our emphasis on multi-family residential and commercial real estate lending. However, we would purchase adjustable-rate mortgage loans from Waterstone Mortgage Corporation in the future in the event changes in interest rates or consumer preferences enable Waterstone Mortgage Corporation to originate such loans. |
● | Continued emphasis on mortgage banking operations. Waterstone Mortgage Corporation has become a significant originator of fixed-rate, one-to-four family mortgage loans, with total originations increasing to $1.75 billion during the year ended December 31, 2012 from $1.03 billion in 2011. Subject to market conditions and particularly changes in the interest rate environment, we intend to continue to grow our mortgage banking business, which has been a significant source of our net income in recent periods. Such growth may occur through geographic expansion, online direct consumer origination, or both. |
● | Enhance core earnings through improved core funding mix. We have made a concerted effort to improve our core funding profile by increasing lower-cost transaction deposit accounts and reducing time deposits. Our ratio of time deposits to total deposits has decreased from 87.1% at December 31, 2008 to 77.9% at March 31, 2013. We plan to continue to aggressively market our core transaction accounts and savings accounts, emphasizing our high quality service and competitive pricing of these products. In the past two years we have also introduced remote deposit capture, internet banking and mobile banking. |
● | Stockholder-focused management of capital. We recognize that a strong capital position is essential to achieving our long-term objective of building stockholder value. Following the offering, at the minimum of the offering range, our pro forma tier 1 leverage ratio is expected to be 15.25% and our pro forma total risk-based capital ratio is expected to be 18.75%. This capital position will support our future growth and expansion, and will give us flexibility to pursue other capital management strategies to enhance stockholder value. In particular, New Waterstone intends to commence payment of a regular quarterly dividend following completion of the conversion. See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. |
● | Disciplined expansion through organic growth coupled with opportunistic acquisitions. Since our initial public offering, we have opened three additional branches in the Milwaukee area. Given our current regulatory status, we have been unable to open any additional branches. However, subject to regulatory approval, we plan to open one office in 2013 and two additional offices in each of 2014 through 2016, all in our local market area, and we may also seek to open one or more loan production offices or full service branches in other markets. Waterstone Mortgage Corporation now has locations in 12 states and does business nationally. While organic growth has been our primary focus, we will also consider acquisition opportunities that we believe will enhance our franchise and yield financial benefits for our stockholders. |
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● | Eliminate the uncertainties associated with the mutual holding company structure under financial reform legislation. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, the Federal Reserve Board became the federal regulator of all savings and loan holding companies and mutual holding companies, which has resulted in changes in regulations applicable to Lamplighter Financial, MHC and Waterstone-Federal. Among other things, these changes have adversely affected our ability to pay cash dividends to our stockholders, including the ability of Lamplighter Financial, MHC to waive any dividends declared by Waterstone-Federal. The conversion will eliminate our mutual holding company structure and will enable us to pay dividends to our stockholders, subject to the customary legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.” It also will eliminate the risk that the Federal Reserve Board will amend existing regulations applicable to the conversion process in a manner disadvantageous to our public stockholders or depositors. |
● | Transition us to a more familiar and flexible organizational structure. The stock holding company structure is a more familiar form of organization, which we believe will make our common stock more appealing to investors, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings, although we have no current plans, agreements or understandings regarding any additional securities offerings. |
● | Enhance our regulatory capital position. A strong capital position is essential to achieving our long-term objective of building stockholder value. While WaterStone Bank significantly exceeds all regulatory capital requirements, including the minimum capital requirements required by the memorandum of understanding we have entered into with the WDFI and the Federal Deposit Insurance Corporation, the proceeds from the offering will greatly strengthen our capital position and enable us to support our planned growth and expansion. Minimum regulatory capital requirements will also increase in the future under recently adopted regulations, and compliance with these new requirements will be essential to the continued implementation of our business strategy. |
● | Improve the liquidity of our shares of common stock. The larger number of shares that will be outstanding after completion of the conversion and offering is expected to result in a more liquid and active market for Waterstone-Federal common stock. A more liquid and active market will make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies. |
● | Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit the acquisition of New Waterstone for three years following completion of the conversion. |
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Company Name | Ticker Symbol | Headquarters | Total Assets (1) | |||||
(In millions) | ||||||||
Bank Mutual Corporation | BKMU | Milwaukee, WI | $ | 2,394 | ||||
First Defiance Financial Corp. | FDEF | Defiance, OH | $ | 2,039 | ||||
Meta Financial Group, Inc. | CASH | Sioux Falls, SD | $ | 1,740 | ||||
Pulaski Financial Corporation | PULB | St. Louis, MO | $ | 1,351 | ||||
HF Financial Corp. | HFFC | Sioux Falls, SD | $ | 1,197 | ||||
NASB Financial, Inc. | NASB | Grandview, MO | $ | 1,179 | ||||
Fox Chase Bancorp, Inc. | FXCB | Hatboro, PA | $ | 1,085 | ||||
Franklin Financial Corporation | FRNK | Glen Allen, VA | $ | 1,052 | ||||
First Financial Northwest, Inc. | FFNW | Renton, WA | $ | 887 | ||||
Simplicity Bancorp, Inc. | SMPL | Covina, CA | $ | 882 |
(1) | Asset size for all companies is as of March 31, 2013. |
Price-to-arnings multiple (1) | Price-to-book value ratio | Price-to-tangible book value ratio | ||||||||||
New Waterstone (on a pro forma basis, assuming completion of the conversion) | ||||||||||||
Maximum | 16.83 | x | 81.23 | % | 81.38 | % | ||||||
Midpoint | 14.53 | x | 75.70 | % | 75.81 | % | ||||||
Minimum | 12.26 | x | 69.25 | % | 69.38 | % | ||||||
Valuation of peer group companies, all of which are fully converted (on an historical basis) | ||||||||||||
Averages | 26.67 | x | 106.18 | % | 111.04 | % | ||||||
Medians | 28.78 | x | 106.77 | % | 110.01 | % |
(1) | Price-to-earnings multiples calculated by RP Financial, LC. in the independent appraisal are based on an estimate of “core” or recurring earnings on a trailing twelve-month basis through June 30 , 2013 for New Waterstone and March 31, 2013 for the peer group . These ratios are different than those presented in “Pro Forma Data.” |
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Shares to be Sold in This Offering | Shares of New Waterstone to be Issued for Shares of Waterstone-Federal | Total Shares of Common Stock to be Issued in Exchange and Offering | Exchange Ratio | Equivalent Value of Shares Based Upon Offering Price (1) | Equivalent Pro Forma Tangible Book Value Per Exchanged Share (2) | Shares to be Received for 100 Existing Shares (3) | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||
Minimum | 18,700,000 | 73.5 | % | 6,730,586 | 26.5 | % | 25,430,586 | 0.8111 | $ | 8.11 | $ | 11. 62 | 8 1 | |||||||||||||||||||||||
Midpoint | 22,000,000 | 73.5 | 7,918,336 | 26.5 | 29,918,336 | 0.9542 | 9.54 | 12.51 | 95 | |||||||||||||||||||||||||||
Maximum | 25,300,000 | 73.5 | 9,106,086 | 26.5 | 34,406,086 | 1.0973 | 10.97 | 1 3.41 | 110 |
(1) | Represents the value of shares of New Waterstone common stock to be received in the conversion by a holder of one share of Waterstone-Federal, pursuant to the exchange ratio, based upon the $10 .00 per share purchase price. |
(2) | Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. |
(3) | Cash will be paid in lieu of fractional shares. |
8 |
(i) | To depositors with accounts at WaterStone Bank with aggregate balances of at least $50 at the close of business on December 31, 2011. |
(ii) | To our tax-qualified employee benefit plans (including WaterStone Bank’s employee stock ownership plan and WaterStone Bank’s 401(k) plan), which may subscribe for up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the stock offering. |
(iii) | To depositors with accounts at WaterStone Bank with aggregate balances of at least $50 at the close of business on June 30, 2013 . |
(iv) | To depositors of WaterStone Bank at the close of business on July 31, 2013 . |
9 |
● | your spouse or relatives of you or your spouse living in your house; |
● | most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or |
● | other persons who may be your associates or persons acting in concert with you. |
(i) | personal check, bank check or money order made payable directly to Waterstone Financial, Inc.; or |
(ii) | authorizing us to withdraw available funds from your WaterStone Bank deposit accounts. |
10 |
11 |
12 |
● | The plan of conversion and reorganization is approved by at leasta majority of votes eligible to be cast by members of Lamplighter Financial, MHC (depositors of WaterStone Bank) as of July 31, 2013 ; |
● | The plan of conversion and reorganization is approved by Waterstone-Federal stockholders holding at leasttwo-thirds of the outstanding shares of common stock of Waterstone-Federal as of July 31, 2013 , including shares held by Lamplighter Financial, MHC; |
● | The plan of conversion and reorganization is approved by Waterstone-Federal stockholders holding at leasta majority of the outstanding shares of common stock of Waterstone-Federal as of July 31, 2013 , excluding shares held by Lamplighter Financial, MHC; |
● | We sell at least the minimum number of shares of common stock offered in the offering; |
● | The WDFI approves New Waterstone’s acquisition of WaterStone Bank; and |
● | We receive the approval of the Federal Reserve Board to complete the conversion and offering. |
(i) | increase the purchase and ownership limitations; and/or |
(ii) | seek regulatory approval to extend the offering beyond November 1, 2013 , so long as we resolicit subscriptions that we have previously received in the offering; and/or |
(iii) | increase the shares purchased by the employee stock ownership plan. |
13 |
● | terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings); |
● | set a new offering range; or |
● | take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission. |
14 |
Number of Shares to be Granted or Purchased | Dilution Resulting From Issuance of Shares for Stock-Based Benefit Plans | Value of Grants (In Thousands) (1) | |||||||||||||||||||||||
At Minimum of Offering Range | At Maximum of Offering Range | As a Percentage of Common Stock to be Sold in the Offering | At Minimum of Offering Range | At Maximum of Offering Range | |||||||||||||||||||||
Employee stock ownership plan | 1,496,000 | 2,024,000 | 8.0 | % | N/A | (2) | $ | 14,960,000 | $ | 20,240,000 | |||||||||||||||
Restricted stock awards | 748,000 | 1,012,000 | 4.0 | 2.86 | % | 7,480,000 | 10,120,000 | ||||||||||||||||||
Stock options | 1,870,000 | 2,530,000 | 10.0 | 6.85 | % | 4,544,100 | 6,147,900 | ||||||||||||||||||
Total | 4,114,000 | 5,566,000 | 22.0 | % | 9.33 | % | $ | 26,984,100 | $ | 36,507,900 |
(1) | The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for stock awards is assumed to be the same as the offering price of $10 .00 per share. The fair value of stock options has been estimated at $ 2.43% per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10 .00; an expected option term of 10 years; a dividend yield of 2.0% ; a risk-free rate of return of 1.87%; and expected volatility of 24.34%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. |
(2) | No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the stock offering. |
15 |
Existing and New Stock Benefit Plans | Participants | Shares at Maximum of Offering Range | Estimated Value of Shares | Percentage of Shares Outstanding After the Conversion | ||||||||||
Employee Stock Ownership Plan: | Officers and Employees | |||||||||||||
Shares purchased in 2005 offering (1) | 835,610 | (2) | $ | 8,356,100 | 2.43 | % | ||||||||
Shares to be purchased in this offering | 2,024,000 | 20,240,000 | 5.88 | |||||||||||
Total employee stock ownership plan shares | 2,859,610 | $ | 28,596,100 | 8.31 | % | |||||||||
Restricted Stock Awards: | Directors, Officers and Employees | |||||||||||||
2006 Equity Incentive Plan (1) | 468,483 | (3) | $ | 4, 684,830 | (4) | 1.36 | % | |||||||
New shares of restricted stock | 1,012,000 | 10,120,000 | (4) | 2.94 | ||||||||||
Total shares of restricted stock | 1,480,483 | $ | 14,804,830 | 4.30 | % | |||||||||
Stock Options: | Directors, Officers and Employees | |||||||||||||
2006 Equity Incentive Plan (1) | 1, 111,016 | (5) | $ | 2,699,769 | 3.23 | % | ||||||||
New stock options | 2,530,000 | 6,147,900 | (6) | 7.35 | ||||||||||
Total stock options | 3,641,016 | $ | 8,847,669 | 10.58 | % | |||||||||
Total of stock benefit plans | 7,981,110 | $ | 52,248,599 | 23.19 | % |
(1) | The number of shares indicated has been adjusted for the 1.0973 exchange ratio at the maximum of the offering range. |
(2) | As of March 31, 2013, 668,488 of these shares, or 609, 212 shares prior to adjustment for the exchange, have been allocated. |
(3) | As of March 31, 2013, 382,628 of these shares, or 348,700 shares prior to adjustment for the exchange, have been awarded, and 293,747 of these shares, or 267,700 shares prior to adjustment for the exchange, have vested. |
(4) | The value of restricted stock awards is determined based on their fair value as of the date grants are made. For purposes of this table, the fair value of awards under the new stock-based benefit plan is assumed to be the same as the offering price of $10 .00 per share. |
(5) | As of March 31, 2013, options to purchase 1,111,016 of these shares, or 1,012,500 shares prior to adjustment for the exchange, have been awarded, and options to purchase 860,831 of these shares, or 784,500 shares prior to adjustment for the exchange, have vested. |
(6) | The weighted-average fair value of stock options to be granted has been estimated at $ 2.43% per option, using the Black-Scholes option pricing model with the following assumptions: exercise price, $10 .00; trading price on date of grant, $10 .00; dividend yield, 2.0% ; expected term, 10 years; expected volatility, 24.34%; and risk-free rate of return, 1.87%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. |
16 |
17 |
18 |
19 |
20 |
● | excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans); |
● | interest-only payments; |
● | negative-amortization; and |
● | terms of longer than 30 years. |
21 |
22 |
23 |
● | difficulty in estimating the value of the target company; |
● | payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term; |
● | potential exposure to unknown or contingent liabilities of the target company; |
24 |
● | exposure to potential asset quality problems of the target company; |
● | potential volatility in reported income associated with goodwill impairment losses; |
● | difficulty and expense of integrating the operations and personnel of the target company; |
● | inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits; |
● | potential disruption to our business; |
● | potential diversion of our management’s time and attention; |
● | the possible loss of key employees and customers of the target company; and |
● | potential changes in banking or tax laws or regulations that may affect the target company. |
25 |
26 |
27 |
28 |
At March 31, | At December 31, | |||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||||||||
Total assets | $ | 1,628,754 | $ | 1,661,076 | $ | 1,712,851 | $ | 1,808,966 | $ | 1,868,266 | $ | 1,885,432 | ||||||||||||
Securities available for sale | 220,471 | 205,017 | 206,519 | 203,166 | 205,415 | 179,887 | ||||||||||||||||||
Federal Home Loan Bank stock | 20,193 | 20,193 | 21,653 | 21,653 | 21,653 | 21,653 | ||||||||||||||||||
Loans receivable, net | 1,095,639 | 1,102,629 | 1,184,234 | 1,277,262 | 1,391,516 | 1,534,591 | ||||||||||||||||||
Cash and cash equivalents | 64,114 | 71,469 | 80,380 | 75,331 | 71,120 | 23,849 | ||||||||||||||||||
Deposits | 914,919 | 939,513 | 1,051,292 | 1,145,529 | 1,164,890 | 1,195,897 | ||||||||||||||||||
Borrowings | 479,324 | 479,888 | 461,138 | 456,959 | 507,900 | 487,000 | ||||||||||||||||||
Total shareholders’ equity | 207,105 | 202,634 | 166,372 | 172,220 | 168,592 | 171,267 | ||||||||||||||||||
Allowance for loan losses | 29,298 | 31,043 | 32,430 | 29,175 | 28,494 | 25,167 | ||||||||||||||||||
Real estate owned | 30,799 | 35,974 | 56,670 | 57,752 | 50,929 | 24,653 |
For the Three Months Ended March 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
(In Thousands, except per share amounts) | ||||||||||||||||||||||||||||
Selected Operating Data: | ||||||||||||||||||||||||||||
Interest income | $ | 16,186 | $ | 18,142 | $ | 69,846 | $ | 79,352 | $ | 89,933 | $ | 98,488 | $ | 104,078 | ||||||||||||||
Interest expense | 6,040 | 7,716 | 27,901 | 32,836 | 40,269 | 54,577 | 63,027 | |||||||||||||||||||||
Net interest income | 10,146 | 10,426 | 41,945 | 46,516 | 49,664 | 43,911 | 41,051 | |||||||||||||||||||||
Provision for loan losses | 1,760 | 3,675 | 8,300 | 22,077 | 25,832 | 26,687 | 37,629 | |||||||||||||||||||||
Net income after provision for loan losses | ||||||||||||||||||||||||||||
8,386 | 6,751 | 33,645 | 24,439 | 23,832 | 17,224 | 3,422 | ||||||||||||||||||||||
Noninterest income | 23,033 | 15,002 | 91,203 | 43,229 | 38,993 | 12,208 | 6,291 | |||||||||||||||||||||
Noninterest expense | 23,871 | 19,515 | 102,138 | 74,579 | 64,627 | 40,876 | 33,860 | |||||||||||||||||||||
Income (loss) before income taxes | 7,548 | 2,238 | 22,710 | (6,911 | ) | (1,802 | ) | (11,444 | ) | (24,147 | ) | |||||||||||||||||
Provision for income taxes (benefit) | 2,923 | 30 | (12,204 | ) | 562 | 52 | (1,306 | ) | 2,299 | |||||||||||||||||||
Net income (loss) | $ | 4,625 | $ | 2,208 | $ | 34,914 | $ | (7,473 | ) | $ | (1,854 | ) | $ | (10,138 | ) | $ | (26,446 | ) | ||||||||||
Income (loss) per share – basic | $ | 0.15 | $ | 0.07 | $ | 1.12 | $ | (0.24 | ) | $ | (0.06 | ) | $ | (0.33 | ) | $ | (0.87 | ) | ||||||||||
Income (loss) per share – diluted | $ | 0.15 | $ | 0.07 | $ | 1.12 | $ | (0.24 | ) | $ | (0.06 | ) | $ | (0.33 | ) | $ | (0.87 | ) |
29 |
At or for the Three Months Ended March 31, (1) | At or for the Year Ended December 31, | |||||||||||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Selected Financial Ratios and Other Data: | ||||||||||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||||||||||
Return (loss) on average assets | 1.14 | % | 0.52 | % | 2.07 | % | (0.43 | %) | (0.10 | %) | (0.53 | %) | (1.44 | %) | ||||||||||||||
Return (loss) on average equity | 9.14 | 5.24 | 18.89 | (4.47 | ) | (1.09 | ) | (6.12 | ) | (13.76 | ) | |||||||||||||||||
Interest rate spread (2) | 2.45 | 2.46 | 2.45 | 2.67 | 2.67 | 2.21 | 1.99 | |||||||||||||||||||||
Net interest margin (3) | 2.66 | 2.62 | 2.62 | 2.82 | 2.83 | 2.41 | 2.32 | |||||||||||||||||||||
Efficiency ratio (4) | 71.95 | 76.75 | 76.71 | 83.12 | 72.90 | 72.84 | 71.52 | |||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.82 | 108.07 | 109.84 | 107.67 | 107.11 | 106.68 | 10 9 . 17 | |||||||||||||||||||||
Capital Ratios: | ||||||||||||||||||||||||||||
Equity to total assets | 12.72 | % | 9.94 | % | 12.20 | % | 9.71 | % | 9.52 | % | 9.02 | % | 9.08 | % | ||||||||||||||
Average equity to average assets | 12.47 | 9.99 | 10.94 | 9.55 | 9.18 | 8.67 | 10.44 | |||||||||||||||||||||
Total capital to risk-weightedassets (5) | 18.75 | 14.69 | 17.34 | 14.58 | 14.13 | 13. 74 | 12.84 | |||||||||||||||||||||
Tier I capital to risk-weightedassets (5) | 17.49 | 13.42 | 16.07 | 13.31 | 12.87 | 12. 48 | 11.58 | |||||||||||||||||||||
Tier I capital to average assets (5) | 11.79 | 9.60 | 11.13 | 9.16 | 8.83 | 8.7 1 | 8.93 | |||||||||||||||||||||
Asset Quality Ratios: | ||||||||||||||||||||||||||||
Allowance for loan losses as a percent of total loans | 2.60 | % | 2.75 | % | 2.74 | % | 2.67 | % | 2.23 | % | 2.01 | % | 1.61 | % | ||||||||||||||
Allowance for loan losses as a percent of non-performing loans | 44.42 | 35.98 | 41.58 | 41.46 | 34.66 | 37.83 | 23.36 | |||||||||||||||||||||
Net charge-offs to average outstanding loans during the period | 1.14 | 0.96 | 0.76 | 1.43 | 1.75 | 1.54 | 1.67 | |||||||||||||||||||||
Non-performing loans as a percent of total loans | 5.86 | 7.65 | 6.59 | 6.43 | 6.44 | 5.30 | 6.91 | |||||||||||||||||||||
Non-performing assets as a percent of total assets | 5.94 | 8.70 | 6.66 | 7.88 | 7.85 | 6.76 | 7.02 | |||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||||
Number of full-service banking offices | 8 | 8 | 8 | 8 | 8 | 8 | 8 | |||||||||||||||||||||
Number of full-time equivalent employees | 750 | 613 | 726 | 574 | 595 | 518 | 320 |
(1) | Annualized where appropriate. |
(2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Represents net interest income as a percent of average interest-earning assets. |
(4) | Represents non-interest expense divided by the sum of net interest income and non-interest income. |
(5) | Ratios are for WaterStone Bank only. |
30 |
At June 30, 2013 | At December 31, 2012 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Selected Financial Condition Data: | ||||||||
Total assets | $ | 1,632,876 | $ | 1,661,076 | ||||
Securities available for sale | 216,253 | 205,017 | ||||||
Federal Home Loan Bank stock | 20,193 | 20,193 | ||||||
Loans receivable, net | 1,079,148 | 1,102,629 | ||||||
Cash and cash equivalents | 54,368 | 71,469 | ||||||
Deposits | 893,007 | 939,513 | ||||||
Borrowings | 490,046 | 479,888 | ||||||
Total shareholders’ equity | 209,345 | 202,634 | ||||||
Allowance for loan losses | 27,767 | 31,043 | ||||||
Total real estate owned | 29,983 | 35,974 |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In Thousands, except per share amounts) | ||||||||||||||||
Selected Operating Data: | ||||||||||||||||
Interest income | $ | 15,898 | $ | 17,788 | $ | 32,084 | $ | 35,931 | ||||||||
Interest expense | 5,977 | 7,160 | 12,017 | 14,876 | ||||||||||||
Net interest income | 9,921 | 10,628 | 20,067 | 21,055 | ||||||||||||
Provision for loan losses | 1,200 | 1,425 | 2,960 | 5,100 | ||||||||||||
Net income after provision for loan losses | 8,721 | 9,203 | 17,107 | 15,955 | ||||||||||||
Noninterest income | 26,707 | 23,252 | 49,740 | 38,253 | ||||||||||||
Noninterest expense | 27,447 | 26,236 | 51,318 | 45,751 | ||||||||||||
Income before income taxes | 7,981 | 6,219 | 15,529 | 8,457 | ||||||||||||
Provision for income taxes | 3,054 | 41 | 5,977 | 71 | ||||||||||||
Net income | $ | 4,927 | $ | 6,178 | $ | 9,552 | $ | 8,386 | ||||||||
Income per share – basic | $ | 0.16 | $ | 0.20 | $ | 0.31 | $ | 0.27 | ||||||||
Income per share – diluted | $ | 0.16 | $ | 0.20 | $ | 0.30 | $ | 0.27 |
31 |
At or for the Three Months Ended June 30, (1) | At or for the Six Months Ended June 30, (1) | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | ||||||||||||||||
Selected Financial Ratios and Other Data: | ||||||||||||||||
Performance Ratios: | ||||||||||||||||
Return on average assets | 1.21 | % | 1.45 | % | 1.18 | % | 0.99 | % | ||||||||
Return on average equity | 9.42 | 14.12 | 9.28 | 9.59 | ||||||||||||
Interest rate spread (2) | 2.40 | 2.49 | 2.43 | 2.46 | ||||||||||||
Net interest margin (3) | 2.60 | 2.65 | 2.64 | 2.63 | ||||||||||||
Efficiency ratio (4) | 74.93 | 77.44 | 73.51 | 77.14 | ||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.82 | 108.77 | 112.53 | 109.08 | ||||||||||||
Capital Ratios: | ||||||||||||||||
Equity to total assets | 12.82 | % | 10.46 | % | 12.82 | % | 10.46 | % | ||||||||
Average equity to average assets | 12.87 | 10.28 | 12.71 | 10.32 | ||||||||||||
Total capital to risk-weighted assets (5) | 18.87 | 15.11 | 18.87 | 15.11 | ||||||||||||
Tier I capital to risk-weighted assets (5) | 17.60 | 13.84 | 17.60 | 13.84 | ||||||||||||
Tier I capital to average assets (5) | 12.17 | 9.82 | 12.17 | 9.82 | ||||||||||||
Asset Quality Ratios: | ||||||||||||||||
Allowance for loan losses as a percent of total loans | 2.51 | % | 2.80 | % | 2.51 | % | 2.80 | % | ||||||||
Allowance for loan losses as a percent of non-performing loans | 52.14 | 38.53 | 52.14 | 38.53 | ||||||||||||
Net charge-offs to average outstanding loans during the period | 0.90 | 0.57 | 1.01 | 0.76 | ||||||||||||
Non-performing loans as a percent of total loans | 4.81 | 7.26 | 4.81 | 7.26 | ||||||||||||
Non-performing assets as a percent of total assets | 5.10 | 7.89 | 5.10 | 7.89 | ||||||||||||
Other Data: | ||||||||||||||||
Number of full-service banking offices | 8 | 8 | 8 | 8 | ||||||||||||
Number of full-time equivalent employees | 782 | 607 | 782 | 607 |
(1) | Annualized where appropriate. |
(2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Represents net interest income as a percent of average interest-earning assets. |
(4) | Represents non-interest expense divided by the sum of net interest income and non-interest income. |
(5) | Ratios are for WaterStone Bank only. |
32 |
At June 30, 2013 | At December 31, 2012 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed securities | $ | 107,683 | $ | 108,218 | $ | 116,813 | $ | 119,056 | ||||||||
Collateralized mortgage obligations: | ||||||||||||||||
Government sponsored enterprise issued | 22,465 | 22,794 | 29,207 | 29,579 | ||||||||||||
Government sponsored enterprise bonds | 14,517 | 14,345 | 8,000 | 8,017 | ||||||||||||
Municipal obligations | 61,173 | 59,568 | 35,493 | 37,371 | ||||||||||||
Other debt securities | 5,000 | 5,168 | 5,000 | 5,070 | ||||||||||||
Certificates of deposit | 6,125 | 6,160 | 5,880 | 5,924 | ||||||||||||
Total securities available for sale | $ | 216,963 | $ | 216,253 | $ | 200,393 | $ | 205,017 |
33 |
At June 30, 2013 | At December 31, 2012 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Mortgage loans: | ||||||||||||||||
Residential real estate: | ||||||||||||||||
One- to four-family | $ | 425,693 | 38.46 | % | $ | 460,821 | 40.65 | % | ||||||||
Multi-family | 518,745 | 46.86 | 514,363 | 45.37 | ||||||||||||
Home equity | 35,382 | 3.20 | 36,494 | 3.22 | ||||||||||||
Construction and land | 36,981 | 3.34 | 33,818 | 2.98 | ||||||||||||
Commercial real estate | 70,960 | 6.41 | 65,495 | 5.78 | ||||||||||||
Commercial loans | 19,020 | 1.72 | 22,549 | 1.99 | ||||||||||||
Consumer | 134 | 0.01 | 132 | 0.01 | ||||||||||||
Total loans | 1,106,915 | 100.00 | % | 1,133,672 | 100.00 | % | ||||||||||
Allowance for loan losses | (27,767 | ) | (31,043 | ) | ||||||||||||
Loans, net | $ | 1,079,148 | $ | 1,102,629 |
34 |
At June 30, 2013 | At December 31, 2012 | |||||||||||||||||||||||
Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Deposit type: | ||||||||||||||||||||||||
Demand deposits | $ | 44,646 | 5.00 | % | 0.00 | % | $ | 39,767 | 4.23 | % | 0.00 | % | ||||||||||||
NOW accounts | 46,849 | 5.24 | 0.03 | % | 44,373 | 4.72 | 0.03 | % | ||||||||||||||||
Regular savings | 59,191 | 6.63 | 0.05 | % | 54,837 | 5.84 | 0.10 | % | ||||||||||||||||
Money market and savings deposits | 60,430 | 6.77 | 0.16 | % | 63,616 | 6.77 | 0.15 | % | ||||||||||||||||
Total transaction accounts | 211,116 | 23.64 | 0.06 | % | 202,593 | 21.56 | 0.08 | % | ||||||||||||||||
Certificates of deposit | 681,891 | 76.36 | 0.73 | % | 736,920 | 78.44 | 0.83 | % | ||||||||||||||||
Total deposits | $ | 893,007 | 100.00 | % | 0.57 | % | $ | 939,513 | 100.00 | % | 0.67 | % |
Due in: | At June 30, 2013 | |||
(In Thousands) | ||||
Three months or less | $ | 35,605 | ||
Over three months through six months | 18,603 | |||
Over six months through 12 months | 68,459 | |||
Over 12 months | 55,142 | |||
Total | $ | 177,809 |
35 |
36 |
Three Months Ended June 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest | Average Yield/Rate (7) | Average Balance | Interest | Average Yield/Rate (7) | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable and held for sale | $ | 1,235,782 | $ | 14,862 | (1) | 4.82 | % | $ | 1,275,192 | $ | 16,319 | (1) | 5.13 | % | ||||||||||
Mortgage related securities (2) | 134,985 | 419 | 1.25 | 140,792 | 921 | 2.62 | ||||||||||||||||||
Debt securities, federal funds sold and short-term investments (2) (3) | 159,956 | 617 | 1.54 | 195,179 | 548 | 1.13 | ||||||||||||||||||
Total interest-earning assets | 1,530,723 | 15,898 | 4.17 | 1,611,163 | 17,788 | 4.43 | ||||||||||||||||||
Noninterest-earning assets | 98,244 | 96,858 | ||||||||||||||||||||||
Total assets | $ | 1,628,967 | $ | 1,708,021 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Demand accounts | $ | 45,705 | 3 | 0.03 | $ | 40,258 | 6 | 0.06 | ||||||||||||||||
Money market and savings accounts | 129,250 | 36 | 0.11 | 124,151 | 77 | 0.25 | ||||||||||||||||||
Certificates of deposit | 696,610 | 1,314 | 0.76 | 844,806 | 2,580 | 1.23 | ||||||||||||||||||
Total interest-bearing deposits | 871,565 | 1,353 | 0.62 | 1,009,215 | 2,663 | 1.06 | ||||||||||||||||||
Borrowings | 485,199 | 4,624 | 3.82 | 472,052 | 4,497 | 3.82 | ||||||||||||||||||
Total interest-bearing liabilities | 1,356,764 | 5,977 | 1.77 | 1,481,267 | 7,160 | 1.94 | ||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing deposits | 43,502 | 32,697 | ||||||||||||||||||||||
Other non-interest bearing liabilities | 19,002 | 18,520 | ||||||||||||||||||||||
Total non-interest bearing liabilities | 62,504 | 51,217 | ||||||||||||||||||||||
Total liabilities | 1,419,268 | 1,532,484 | ||||||||||||||||||||||
Equity | 209,699 | 175,537 | ||||||||||||||||||||||
Total liabilities and equity | $ | 1,628,967 | $ | 1,708,021 | ||||||||||||||||||||
Net interest income | $ | 9,921 | $ | 10,628 | ||||||||||||||||||||
Net interest rate spread (4) | 2.40 | % | 2.49 | % | ||||||||||||||||||||
Net interest-earning assets (5) | $ | 173,959 | $ | 129,896 | ||||||||||||||||||||
Net interest margin (6) | 2.60 | % | 2.65 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.82 | % | 108.77 | % |
37 |
Six Months Ended June 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest | Average Yield/Rate (7) | Average Balance | Interest | Average Yield/Rate (7) | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable and held for sale | $ | 1,239,390 | $ | 30,075 | (1) | 4.89 | % | $ | 1,284,612 | $ | 32,892 | (1) | 5.13 | % | ||||||||||
Mortgage related securities (2) | 139,283 | 856 | 1.24 | 121,915 | 1,784 | 2.93 | ||||||||||||||||||
Debt securities, federal funds sold and short-term investments (2) (3) | 156,906 | 1,153 | 1.48 | 196,728 | 1,255 | 1.28 | ||||||||||||||||||
Total interest-earning assets | 1,535,579 | 32,084 | 4.21 | 1,603,255 | 35,931 | 4.49 | ||||||||||||||||||
Noninterest-earning assets | 98,053 | 96,856 | ||||||||||||||||||||||
Total assets | $ | 1,633,632 | $ | 1,700,111 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Demand accounts | $ | 44,959 | 6 | 0.03 | $ | 30,445 | 13 | 0.09 | ||||||||||||||||
Money market and savings accounts | 124,436 | 73 | 0.12 | 117,419 | 163 | 0.28 | ||||||||||||||||||
Certificates of deposit | 709,969 | 2,740 | 0.78 | 857,086 | 5,690 | 1.33 | ||||||||||||||||||
Total interest-bearing deposits | 879,364 | 2,819 | 0.65 | 1,004,950 | 5,866 | 1.17 | ||||||||||||||||||
Borrowings | 485,229 | 9,198 | 3.82 | 464,855 | 9,010 | 3.89 | ||||||||||||||||||
Total interest-bearing liabilities | 1,364,593 | 12,017 | 1.78 | 1,469,805 | 14,876 | 2.03 | ||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest bearing deposits | 41,694 | 39,411 | ||||||||||||||||||||||
Other non-interest bearing liabilities | 19,772 | 15,447 | ||||||||||||||||||||||
Total non-interest bearing liabilities | 61,466 | 54,858 | ||||||||||||||||||||||
Total liabilities | 1,426,059 | 1,524,663 | ||||||||||||||||||||||
Equity | 207,573 | 175,448 | ||||||||||||||||||||||
Total liabilities and equity | $ | 1,633,632 | $ | 1,700,111 | ||||||||||||||||||||
Net interest income | $ | 20,067 | $ | 21,055 | ||||||||||||||||||||
Net interest rate spread (4) | 2.43 | % | 2.46 | % | ||||||||||||||||||||
Net interest-earning assets (5) | $ | 170,986 | $ | 133,450 | ||||||||||||||||||||
Net interest margin (6) | 2.64 | % | 2.63 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.53 | % | 109.08 | % |
(1) | Includes net deferred loan fee amortization income of $183,000, $146,000, $339,000 and $296,000 for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. |
(2) | Average balance of available for sale securities is based on amortized historical cost. |
(3) | Interest income from tax exempt securities is not significant to total interest income, therefore, interest and yield on interest earnings assets are not stated on a tax equivalent basis. The average balance of tax exempt securities totaled $51.0 million, $15.0 million, $43.8 million and $20.7 million for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. |
(4) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(5) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(6) | Net interest margin represents net interest income divided by average total interest-earning assets. |
(7) | Annualized. |
38 |
Three Months Ended June 30, 2013 vs. 2012 Increase (Decrease) due to | Six Months Ended June 30, 2013 vs. 2012 Increase (Decrease) due to | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans receivable and held for sale (1) | $ | (494 | ) | $ | (963 | ) | $ | (1,457 | ) | $ | (1,206 | ) | $ | (1,611 | ) | $ | (2,817 | ) | ||||||
Mortgage related securities | (36 | ) | (466 | ) | (502 | ) | 225 | (1,153 | ) | (928 | ) | |||||||||||||
Other interest-earning assets | (111 | ) | 180 | 69 | (280 | ) | 178 | (102 | ) | |||||||||||||||
Total interest-earning assets | (641 | ) | (1,249 | ) | (1,890 | ) | (1,261 | ) | (2,586 | ) | (3,847 | ) | ||||||||||||
Interest expense: | ||||||||||||||||||||||||
Demand accounts | 1 | (4 | ) | (3 | ) | 5 | (11 | ) | (6 | ) | ||||||||||||||
Money market and savings accounts | 3 | (44 | ) | (41 | ) | 9 | (99 | ) | (90 | ) | ||||||||||||||
Certificates of deposit | (398 | ) | (868 | ) | (1,266 | ) | (863 | ) | (2,088 | ) | (2,951 | ) | ||||||||||||
Total interest-bearing deposits | (394 | ) | (916 | ) | (1,310 | ) | (849 | ) | (2,198 | ) | (3,047 | ) | ||||||||||||
Borrowings | 126 | 1 | 127 | 353 | (165 | ) | 188 | |||||||||||||||||
Total interest-bearing liabilities | (268 | ) | (915 | ) | (1,183 | ) | (496 | ) | (2,363 | ) | (2,859 | ) | ||||||||||||
Net change in net interest income | $ | (373 | ) | $ | (334 | ) | $ | (707 | ) | $ | (765 | ) | $ | (223 | ) | $ | (988 | ) |
(1) | Includes net deferred loan fee amortization income of $183,000, $146,000, $339,000 and $296,000 for the three months ended June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012, respectively. |
39 |
At and For the Three Months Ended June 30, 2013 | ||||||||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||||||||
(In Thousands) | ||||||||||||||||
Net interest income | $ | 9,724 | $ | 73 | $ | 124 | $ | 9,921 | ||||||||
Provision for loan losses | 1,200 | — | — | 1,200 | ||||||||||||
Net income after provision for loan losses | 8,524 | 73 | 124 | 8,721 | ||||||||||||
Noninterest income | 811 | 25,974 | (78 | ) | 26,707 | |||||||||||
Noninterest expenses: | ||||||||||||||||
Compensation, payroll taxes and other employee benefits | 3,577 | 16,434 | (67 | ) | 19,944 | |||||||||||
Occupancy, office furniture and equipment | 765 | 1,163 | (66 | ) | 1,862 | |||||||||||
FDIC insurance premiums | 380 | — | — | 380 | ||||||||||||
Real estate owned | 12 | — | — | 12 | ||||||||||||
Other | 1,107 | 4,057 | 85 | 5,249 | ||||||||||||
Total noninterest expenses | 5,841 | 21,654 | (48 | ) | 27,447 | |||||||||||
Income before income taxes | 3,494 | 4,393 | 94 | 7,981 | ||||||||||||
Income tax expense | 1,245 | 1,759 | 50 | 3,054 | ||||||||||||
Net income | $ | 2,249 | $ | 2,634 | $ | 44 | $ | 4,927 | ||||||||
Total assets | $ | 1,545,771 | $ | 156,019 | $ | (68,914 | ) | $ | 1,632,876 |
At and For the Three Months Ended June 30, 2012 | ||||||||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||||||||
(In Thousands) | ||||||||||||||||
Net interest income | $ | 10,335 | $ | 168 | $ | 125 | $ | 10,628 | ||||||||
Provision for loan losses | 1,500 | (750 | ) | — | 1,425 | |||||||||||
Net income after provision for loan losses | 8,835 | 243 | 125 | 9,203 | ||||||||||||
Noninterest income | 670 | 22,582 | — | 23,252 | ||||||||||||
Noninterest expenses: | ||||||||||||||||
Compensation, payroll taxes and other employee benefits | 3,086 | 12,052 | (173 | ) | 14,965 | |||||||||||
Occupancy, office furniture and equipment | 758 | 930 | — | 1,688 | ||||||||||||
FDIC insurance premiums | 873 | — | — | 873 | ||||||||||||
Real estate owned | 2,838 | — | — | 2,838 | ||||||||||||
Other | 1,322 | 4,462 | 88 | 5,872 | ||||||||||||
Total noninterest expenses | 8,877 | 17,444 | (85 | ) | 26,236 | |||||||||||
Income before income taxes | 628 | 5,381 | 210 | 6,219 | ||||||||||||
Income tax expense | (2,313 | ) | 2,159 | 195 | 41 | |||||||||||
Net income | $ | 2,941 | $ | 3,222 | $ | 15 | $ | 6,178 | ||||||||
Total assets | $ | 1,611,757 | $ | 137,374 | $ | (67,950 | ) | $ | 1,681,181 |
40 |
At and For the Six Months Ended June 30, 2013 | ||||||||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||||||||
(In Thousands) | ||||||||||||||||
Net interest income | $ | 19,660 | $ | 159 | $ | 248 | $ | 17,107 | ||||||||
Provision for loan losses | 2,900 | 60 | — | 2,960 | ||||||||||||
Net income after provision for loan losses | 16,760 | 99 | 248 | 17,107 | ||||||||||||
Noninterest income | 1,450 | 48,380 | (90 | ) | 49,740 | |||||||||||
Noninterest expenses: | ||||||||||||||||
Compensation, payroll taxes and other employee benefits | 6,868 | 29,704 | (146 | ) | 36,426 | |||||||||||
Occupancy, office furniture and equipment | 1,598 | 2,246 | (66 | ) | 3,778 | |||||||||||
FDIC insurance premiums | 1,053 | — | — | 1,053 | ||||||||||||
Real estate owned | 153 | — | — | 153 | ||||||||||||
Other | 2,066 | 7,714 | 128 | 9,908 | ||||||||||||
Total noninterest expenses | 11,738 | 39,664 | (84 | ) | 51,318 | |||||||||||
Income before income taxes | 6,472 | 8,815 | 242 | 15,529 | ||||||||||||
Income tax expense | 2,361 | 3,541 | 75 | 5,977 | ||||||||||||
Net income | $ | 4,111 | $ | 5,274 | $ | 167 | $ | 9,552 | ||||||||
Total assets | $ | $ | $ | $ |
At and For the Six Months Ended June 30, 2012 | ||||||||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||||||||
(In Thousands) | ||||||||||||||||
Net interest income | $ | 20,582 | $ | 223 | $ | 250 | $ | 21,055 | ||||||||
Provision for loan losses | 5,100 | — | — | 5,100 | ||||||||||||
Net income after provision for loan losses | 15,482 | 223 | 250 | 15,955 | ||||||||||||
Noninterest income | 1,444 | 36,809 | — | 38,253 | ||||||||||||
Noninterest expenses: | ||||||||||||||||
Compensation, payroll taxes and other employee benefits | 6,213 | 19,779 | (390 | ) | 25,602 | |||||||||||
Occupancy, office furniture and equipment | 1,548 | 1,861 | — | 3,409 | ||||||||||||
FDIC insurance premiums | 1,814 | — | — | 1,814 | ||||||||||||
Real estate owned | 4,273 | — | — | 4,273 | ||||||||||||
Other | 2,540 | 7,959 | 154 | 10,653 | ||||||||||||
Total noninterest expenses | 16,388 | 29,599 | (236 | ) | 45,751 | |||||||||||
Income before income taxes | 538 | 7,433 | 486 | 8,457 | ||||||||||||
Income tax expense | (3,107 | ) | 2,893 | 195 | 71 | |||||||||||
Net income | $ | 3,645 | $ | 4,450 | $ | 291 | $ | 8,386 | ||||||||
Total assets | $ | $ | $ | $ |
41 |
42 |
43 |
44 |
45 |
46 |
47 |
48 |
Percentage Increase in Estimated Net Annual Interest Income Over 12 Months As of June 30, 2013 | ||
300 basis point gradual rise in rates | 3.16% | |
200 basis point gradual rise in rates | 2.26% | |
100 basis point gradual rise in rates | 1.47% | |
Unchanged rate scenario | 0.43% | |
100 basis point gradual decline in rates (1) | (1.02)% |
49 |
Percentage Increase (Decrease) in Estimated Net Annual Interest Income Over 12 Months As of December 31, 2012 | ||
300 basis point gradual rise in rates | 1.32% | |
200 basis point gradual rise in rates | 0.26% | |
100 basis point gradual rise in rates | (0.78%) | |
Unchanged rate scenario | (2.21%) | |
100 basis point gradual decline in rates (1) | (4.37%) |
(1) | Given the current low point in the interest rate cycle, scenarios in excess of 100 basis point declines are not meaningful. |
As of or for the Six Months Ended June 30, | |||||||||
2013 | 2012 | ||||||||
(In Thousands) | |||||||||
Total gross loans receivable and held for sale at beginning of period | $ | 1,267,285 | $ | 1,304,947 | |||||
Real estate loans originated for investment: | |||||||||
Residential : | |||||||||
One- to four-family | 9,187 | 10,352 | |||||||
Multi-family | 37,190 | 22,930 | |||||||
Home equity | 2,882 | 1,915 | |||||||
Construction and land | 2,372 | 238 | |||||||
Commercial real estate | 9,637 | 10,900 | |||||||
Total real estate loans originated for investment | 61,268 | 46,335 | |||||||
Consumer loans originated for investment | — | 35 | |||||||
Commercial loans originated for investment | 2,401 | 3,013 | |||||||
Total loans originated for investment | 63,669 | 49,383 | |||||||
Total real estate loans purchased for investment | — | — | |||||||
Principal repayments | (75,861 | ) | (82,992 | ) | |||||
Transfers to real estate owned | (8,404 | ) | (11,002 | ) | |||||
Loan principal charged-off, net of recoveries | (6,161 | ) | (4,872 | ) | |||||
Net activity in loans held for investment | (26,757 | ) | (49,483 | ) | |||||
Loans originated for sale | 978,327 | 767,092 | |||||||
Loans sold | (979,895 | ) | (732,886 | ) | |||||
Net activity in loans held for sale | (1,568 | ) | 34,206 | ||||||
Total gross loans receivable and held for sale at end of period | $ | 1,238,960 | $ | 1,289,670 |
50 |
At June 30, 2013 | At December 31, 2012 | ||||||||
(Dollars in Thousands) | |||||||||
Non-accrual loans: | |||||||||
Residential | |||||||||
One- to four-family | $ | 36,664 | $ | 46,467 | |||||
Multi-family | 9,259 | 23,205 | |||||||
Home equity | 1,328 | 1,578 | |||||||
Construction and land | 5,199 | 2,215 | |||||||
Commercial real estate | 272 | 668 | |||||||
Commercial | 511 | 511 | |||||||
Consumer | 20 | 24 | |||||||
Total non-accrual loans | 53,253 | 74,668 | |||||||
Real estate owned | |||||||||
One- to four-family | 15,458 | 17,353 | |||||||
Multi-family | 7,514 | 9,890 | |||||||
Construction and land | 5,200 | 7,029 | |||||||
Commercial real estate | 1,811 | 1,702 | |||||||
Total real estate owned | 29,983 | 35,974 | |||||||
Total non-performing assets | $ | 83,236 | $ | 110,642 | |||||
Total accruing troubled debt restructurings | $ | 26,177 | $ | 16,011 | |||||
Total non-accrual loans to total loans, net | 4.81 | % | 6.59 | % | |||||
Total non-accrual loans and accruing troubled debt restructurings to total loans receivable | 7.18 | % | 8.00 | % | |||||
Total non-accrual loans to total assets | 3.26 | % | 4.50 | % | |||||
Total non-performing assets to total assets | 5.10 | % | 6.66 | % |
At or for the Six Months Ended June 30, | |||||||||
2013 | 2012 | ||||||||
(In Thousands) | |||||||||
Balance at beginning of period | $ | 74,668 | $ | 78,218 | |||||
Additions | 17,608 | 31,340 | |||||||
Transfers to real estate owned | (8,404 | ) | (11,002 | ) | |||||
Charge-offs | (6,766 | ) | (3,443 | ) | |||||
Returned to accrual status | (20,000 | ) | (8,043 | ) | |||||
Principal paydowns and other | (4,853 | ) | (2,318 | ) | |||||
Balance at end of period | $ | 52,253 | $ | 84,752 |
51 |
At June 30, 2013 | At December 31, 2012 | ||||||||
(In Thousands) | |||||||||
Troubled debt restructurings | |||||||||
Substandard | $ | 24,853 | $ | 48,449 | |||||
Watch | 22,247 | 11,172 | |||||||
Total troubled debt restructurings | $ | 47,100 | $ | 59,621 |
52 |
At June 30, 2013 | At December 31, 2012 | ||||||||||||||||
Non-Accruing | Accruing | Non-Accruing | Accruing | ||||||||||||||
(In Thousands) | |||||||||||||||||
Troubled Debt Restructurings: | |||||||||||||||||
Residential | |||||||||||||||||
One- to four-family | $ | 12,842 | $ | 8,420 | $ | 21,847 | $ | 9,921 | |||||||||
Multi-family | 5,962 | 16,340 | 20,030 | 3,917 | |||||||||||||
Home equity | 1,007 | — | 986 | — | |||||||||||||
Construction and land | 840 | 1,408 | 79 | 2,173 | |||||||||||||
Commercial real estate | 272 | — | 668 | — | |||||||||||||
Commercial | — | 9 | — | — | |||||||||||||
Total | $ | 20,923 | $ | 26,177 | $ | 43,610 | $ | 16,011 |
At or for the Six Months Ended June 30, 2013 | |||||||||
Accrual | Non- Accrual | ||||||||
(In Thousands) | |||||||||
Balance at beginning of period | $ | 16,011 | $ | 43,609 | |||||
Additions | 98 | 620 | |||||||
Change in accrual status | 16,146 | (16,146 | ) | ||||||
Charge-offs | (63 | ) | (1,970 | ) | |||||
Returned to contractual/market terms | (5,721 | ) | (2,845 | ) | |||||
Transferred to real estate owned | — | (1,625 | ) | ||||||
Principal paydowns and other | (294 | ) | (720 | ) | |||||
Balance at end of period | $ | 26,177 | $ | 20,923 |
At June 30, 2013 | At December 31, 2012 | ||||||||
(Dollars in Thousands) | |||||||||
Loans past due less than 90 days | $ | 27,049 | $ | 23,092 | |||||
Loans past due 90 days or more | 33,557 | 51,358 | |||||||
Total loans past due | $ | 60,606 | $ | 74,450 | |||||
Total loans past due to total loans receivable | 5.48 | % | 6.57 | % |
53 |
At or for the Six Months Ended June 30, | |||||||||
2013 | 2012 | ||||||||
(Dollars in Thousands) | |||||||||
Balance at beginning of period | $ | 31,043 | $ | 32,430 | |||||
Provision for loan losses | 2,960 | 5,100 | |||||||
Charge-offs: | |||||||||
Mortgage loans | |||||||||
One- to four-family | 5,686 | 4,133 | |||||||
Multi-family | 732 | 612 | |||||||
Home equity | 524 | 158 | |||||||
Construction and land | 95 | 43 | |||||||
Commercial real estate | 134 | 192 | |||||||
Consumer | — | — | |||||||
Commercial | — | 59 | |||||||
Total charge-offs | 7,171 | 5,197 | |||||||
Recoveries: | |||||||||
Mortgage loans | |||||||||
One- to four-family | 608 | 252 | |||||||
Multi-family | 201 | 11 | |||||||
Home equity | 70 | 22 | |||||||
Construction and land | 51 | 15 | |||||||
Commercial real estate | — | — | |||||||
Consumer | 2 | — | |||||||
Commercial | 3 | 25 | |||||||
Total recoveries | 935 | 325 | |||||||
Net charge-offs | 6,236 | 4,872 | |||||||
Allowance at end of period | $ | 27,767 | $ | 32,658 | |||||
Ratios: | |||||||||
Allowance for loan losses to non-performing loans at end of period | 52.14 | % | 38.53 | % | |||||
Allowance for loan losses to net loans outstanding at end of period | 2.51 | % | 2.80 | % | |||||
Net charge-offs to average loans outstanding (annualized) | 1.01 | % | 0.76 | % | |||||
Current period provision for loan losses to net charge-offs | 47.47 | % | 104.68 | % | |||||
Net charge-offs to beginning of the period allowance (annualized) | 40.51 | % | 15.02 | % |
54 |
● | statements of our goals, intentions and expectations; |
● | statements regarding our business plans, prospects, growth and operating strategies; |
● | statements regarding the quality of our loan and investment portfolios; and |
● | estimates of our risks and future costs and benefits. |
● | general economic conditions, either nationally or in our market areas, that are worse than expected; |
● | competition among depository and other financial institutions; |
● | inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets; |
● | adverse changes in the securities markets; |
● | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
● | our ability to manage market risk, credit risk and operational risk in the current economic conditions; |
● | our ability to enter new markets successfully and capitalize on growth opportunities; |
● | our ability to successfully integrate acquired entities; |
55 |
● | changes in consumer spending, borrowing and savings habits; |
● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; |
● | our ability to retain key employees; |
● | significant increases in our loan losses; and |
● | changes in the financial condition, results of operations or future prospects of issuers of securities that we own. |
Based Upon the Sale at $10 .00 Per Share of | ||||||||||||||||||||||||
18,700,000 Shares | 22,000,000 Shares | 25,300,000 Shares | ||||||||||||||||||||||
Amount | Percent of Net Proceeds | Amount | Percent of Net Proceeds | Amount | Percent of Net Proceeds | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Offering proceeds | $ | 187,000 | $ | 220,000 | $ | 253,000 | ||||||||||||||||||
Less offering expenses | (6,820 | ) | (7,731 | ) | (8,642 | ) | ||||||||||||||||||
Net offering proceeds | $ | 180,180 | 100.0 | % | $ | 212,269 | 100.0 | % | $ | 244,358 | 100.0 | % | ||||||||||||
Distribution of net proceeds: | ||||||||||||||||||||||||
To WaterStone Bank | $ | 90,090 | 50.0 | % | $ | 106,135 | 50.0 | % | $ | 122,179 | 50.0 | % | ||||||||||||
To fund loan to employee stock ownership plan | $ | 14,960 | 8.3 | % | $ | 17,600 | 8.3 | % | $ | 20,240 | 8.3 | % | ||||||||||||
Retained by New Waterstone (1) | $ | 75,130 | 41.7 | % | $ | 88,535 | 41.7 | % | $ | 101,939 | 41.7 | % |
(1) | In the event the stock-based benefit plan providing for stock awards and stock options is approved by stockholders, and assuming shares are purchased for the stock awards at $10 .00 per share, an additional $ 7.5 million, $ 8.8 million and $ 10.1 million of net proceeds will be used by New Waterstone. In this case, the net proceeds retained by New Waterstone would be $ 67.7 million, $ 79.7 million and $ 91.8 million, respectively, at the minimum, midpoint and maximum of the offering range. |
● | to invest in securities; |
56 |
● | to pay cash dividends to stockholders, subject to the receipt of any required regulatory approvals; |
● | to repurchase shares of our common stock, subject to the receipt of any required regulatory approvals; |
● | to finance the acquisition of financial institutions, although we do not currently have any agreements or understandings regarding any specific acquisition transaction; and |
● | for other general corporate purposes. |
● | to fund new loans; |
● | to enhance existing products and services and to support the development of new products and services; |
● | to expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity; |
● | to invest in securities; and |
● | for other general corporate purposes. |
57 |
58 |
Price Per Share | |||||||||
High | Low | ||||||||
2013 | |||||||||
Third quarter (through July 31, 2013 ) | $ | $ | |||||||
Second quarter | $ | 10.16 | $ | 7.59 | |||||
First quarter | $ | 8.68 | $ | 6.66 | |||||
2012 | |||||||||
Fourth quarter | $ | 8.39 | $ | 5.16 | |||||
Third quarter | $ | 5.19 | $ | 3.33 | |||||
Second quarter | $ | 4.05 | $ | 3.01 | |||||
First quarter | $ | 3.18 | $ | 1.78 | |||||
2011 | |||||||||
Fourth quarter | $ | 2.69 | $ | 2.40 | |||||
Third quarter | $ | 2.83 | $ | 2.25 | |||||
Second quarter | $ | 3.22 | $ | 2.50 | |||||
First quarter | $ | 3.80 | $ | 1.80 |
59 |
WaterStone Bank Historical at March 31, 2013 | Pro Forma at March 31, 2013, Based Upon the Sale in the Offering of (1) | |||||||||||||||||||||||||||||||
18,700,000 Shares | 22,000,000 Shares | 25,300,000 Shares | ||||||||||||||||||||||||||||||
Amount | Percent of Assets (2) | Amount | Percent of Assets (2) | Amount | Percent of Assets (2) | Amount | Percent of Assets (2) | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Equity | $ | 199,610 | 12.30 | % | $ | 274,740 | 16.19 | % | $ | 288,145 | 16.84 | % | $ | 301,549 | 17.49 | % | ||||||||||||||||
Tier 1 leverage capital | $ | 191,736 | 11.79 | % | $ | 266,866 | 15.68 | % | $ | 280,271 | 16.34 | % | $ | 293,675 | 16.99 | % | ||||||||||||||||
Leverage requirement (3) | 81,326 | 5.00 | 85,083 | 5.00 | 85,753 | 5.00 | 86,423 | 5.00 | ||||||||||||||||||||||||
Excess | $ | 110,410 | 6.79 | % | $ | 181,783 | 10.68 | % | $ | 194,518 | 11.34 | % | $ | 207,252 | 11.99 | % | ||||||||||||||||
Tier 1 risk-basedcapital (4) | $ | 191,736 | 17.49 | % | $ | 266,866 | 24.01 | % | $ | 280,271 | 25.15 | % | $ | 293,675 | 26.29 | % | ||||||||||||||||
Risk-based requirement | 65,794 | 6.00 | 66,696 | 6.00 | 66,857 | 6.00 | 67,018 | 6.00 | ||||||||||||||||||||||||
Excess | $ | 125,942 | 11.49 | % | $ | 200,170 | 18.01 | % | $ | 213,414 | 19.15 | % | $ | 226,657 | 20.29 | % | ||||||||||||||||
Total risk-basedcapital (4) | $ | 205,635 | 18.75 | % | $ | 280,765 | 25.26 | % | $ | 294,170 | 26.40 | % | $ | 307,574 | 27.54 | % | ||||||||||||||||
Risk-basedrequirement (3) | 109,657 | 10.00 | 111,160 | 10.00 | 111,428 | 10.00 | 111,696 | 10.00 | ||||||||||||||||||||||||
Excess | $ | 95,978 | 8.75 | % | $ | 169,605 | 15.26 | % | $ | 182,742 | 16.40 | % | $ | 195,878 | 17.54 | % | ||||||||||||||||
Reconciliation of capital infused into WaterStone Bank: | ||||||||||||||||||||||||||||||||
Net proceeds | $ | 90,090 | $ | 106,135 | $ | 122,179 | ||||||||||||||||||||||||||
Less: Common stock acquired by employee stock ownership plan | (14,960 | ) | (17,600 | ) | (20,240 | ) | ||||||||||||||||||||||||||
Pro forma increase | $ | 75,130 | $ | 88,535 | $ | 101,939 |
(1) | Pro forma capital levels assume that the employee stock ownership plan purchases 8% of the shares of common stock sold in the stock offering with funds we lend. Pro forma generally accepted accounting principles (“GAAP”) capital and regulatory capital have been reduced by the amount required to fund this plan. See “Management” for a discussion of the employee stock ownership plan. |
(2) | Equity and Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. |
(3) | WaterStone Bank has entered into a memorandum of understanding with the WDFI and the Federal Deposit Insurance Corporation, which requires that WaterStone Bank maintain Tier 1 leverage capital of 8.0% of total average assets and minimum total risk-based capital of 12.0% of risk-weighted assets. |
(4) | Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting. |
60 |
Waterstone- Federal Historical at March 31, 2013 | Pro Forma at March 31, 2013 Based upon the Sale in the Offering at $10 .00 per Share of | |||||||||||||||
18,700,000 Shares | 22,000,000 Shares | 25,300,000 Shares | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Deposits (1) | $ | 914,919 | $ | 914,844 | $ | 914,844 | $ | 914,844 | ||||||||
Borrowed funds | 479,324 | 479,324 | 479,324 | 479,324 | ||||||||||||
Total deposits and borrowed funds | $ | 1,394,243 | $ | 1,394,168 | $ | 1,394,168 | $ | 1,394,168 | ||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized (post-conversion) (2) | — | — | — | — | ||||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized (post-conversion); shares to be issued as reflected (2) (3) | 341 | 254 | 299 | 344 | ||||||||||||
Additional paid-in capital (2) | 110,458 | 290,725 | 322,769 | 354,813 | ||||||||||||
MHC capital contribution | — | 55 | 55 | 55 | ||||||||||||
Retained earnings (4) | 141,112 | 95,851 | 95,851 | 95,851 | ||||||||||||
Accumulated other comprehensive income | 1,949 | 1,949 | 1,949 | 1,949 | ||||||||||||
Less: | ||||||||||||||||
Treasury stock | (45,261 | ) | — | — | — | |||||||||||
Common stock held by employee stock ownership plan (5) | (1,494 | ) | ( 16,454 | ) | ( 19,094 | ) | ( 21,734 | ) | ||||||||
Common stock to be acquired by stock-based benefit plan (6) | — | (7,480 | ) | (8,800 | ) | (10,120 | ) | |||||||||
Total stockholders’ equity | $ | 207,105 | $ | 364,900 | $ | 393,029 | $ | 421,158 | ||||||||
Pro Forma Shares Outstanding | ||||||||||||||||
Shares offered for sale | — | 18,700,000 | 22,000,000 | 25,300,000 | ||||||||||||
Exchange shares issued | — | 6,730,586 | 7,918,336 | 9,106,086 | ||||||||||||
Total shares outstanding | — | 25,430,586 | 29,918,336 | 34,406,086 | ||||||||||||
Total stockholders’ equity as a percentage of total assets (1) | 12.72 | % | 20.42 | % | 21.66 | % | 22.85 | % | ||||||||
Tangible equity as a percentage of total assets | 12.68 | % | 20.39 | % | 21.63 | % | 2 2.82 | % |
(1) | Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals. |
(2) | Waterstone-Federal currently has 20,000,000 authorized shares of preferred stock, par value $0.01 per share, and 200,000,000 authorized shares of common stock, par value $0.01 per share. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of New Waterstone common stock to be outstanding. |
(3) | No effect has been given to the issuance of additional shares of New Waterstone common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of New Waterstone common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.” |
(4) | The retained earnings of WaterStone Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.” |
61 |
(5) | Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from New Waterstone. The loan will be repaid principally from WaterStone Bank’s contributions to the employee stock ownership plan. Since New Waterstone will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on New Waterstone’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity. |
(6) | Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans. The funds to be used by the plan to purchase the shares will be provided by New Waterstone. The dollar amount of common stock to be purchased is based on the $10 .00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. New Waterstone will accrue compensation expense to reflect the vesting of shares pursuant to the plan and will credit capital in an amount equal to the charge to operations. Implementation of the plan will require stockholder approval. |
62 |
(i) | 50% of all shares of common stock will be sold in the subscription and community offerings and 50% will be sold in the syndicated or firm commitment underwritten offering; |
(ii) | our executive officers and directors, and their associates, will purchase 218,500 shares of common stock; |
(iii) | our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering with a loan from New Waterstone. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, calculated as of the date of the origination of the loan) over a period of 20 years. Interest income that we earn on the loan will offset the interest paid by WaterStone Bank; |
(iv) | we will pay Sandler O’Neill & Partners, L.P. a fee equal to 1.0% of the aggregate amount of common stock sold in the subscription and community offerings (net of insider purchases and shares purchased by our employee stock ownership plan); |
(v) | we will pay Sandler O’Neill & Partners, L.P. and any other broker-dealers participating in the syndicated or firm commitment underwritten offering an aggregate fee of 5% of the aggregate dollar amount of the common stock sold in the syndicated or firm commitment underwritten offering; |
(vi) | No fee will be paid with respect to shares of common stock purchased by our qualified and non-qualified employee stock benefit plans, or stock purchased by our officers, directors and employees, and their immediate families, and no fee will be paid with respect to exchange shares; and |
(vii) | total expenses of the offering, other than the fees and commissions to be paid to Sandler O’Neill & Partners, L.P. and other broker-dealers, will be $1.5 million. |
● | the yield on the U.S Treasury Note can be determined and/or estimated from third-party sources; and |
● | we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest. |
63 |
● | withdrawals from deposit accounts to purchase shares of common stock in the stock offering; |
● | our results of operations after the stock offering; or |
● | changes in the market price of the shares of common stock after the stock offering. |
64 |
At or for the Three Months Ended March 31, 2013 Based upon the Sale at $10 .00 Per Share of | ||||||||||||
18,700,000 Shares | 22,000,000 Shares | 25,300,000 Shares | ||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||
Gross proceeds of offering | $ | 187,000 | $ | 220,000 | $ | 253,000 | ||||||
Market value of shares issued in the exchange | 67,306 | 79,183 | 91,061 | |||||||||
Pro forma market capitalization | $ | 254,306 | $ | 299,183 | $ | 344,061 | ||||||
Gross proceeds of offering | $ | 187,000 | $ | 220,000 | $ | 253,000 | ||||||
Expenses | (6,820 | ) | (7,731 | ) | (8,642 | ) | ||||||
Estimated net proceeds | 180,235 | 212,324 | 244,413 | |||||||||
Assets received from mutual holding company | 55 | 55 | 55 | |||||||||
Common stock purchased by employee stock ownership plan | ( 14,960 | ) | ( 17,600 | ) | ( 20,240 | ) | ||||||
Common stock purchased by stock-based benefit plan | (7,480 | ) | (8,800 | ) | (10,120 | ) | ||||||
Estimated net proceeds, as adjusted | $ | 157,795 | $ | 185,924 | $ | 214,053 | ||||||
For the Three Months Ended March 31, 2013 | ||||||||||||
Consolidated net earnings: | ||||||||||||
Historical | $ | 4,625 | $ | 4,625 | $ | 4,625 | ||||||
Income on adjusted net proceeds | 182 | 215 | 247 | |||||||||
Employee stock ownership plan (1) | 3 | ( 17 | ) | ( 37 | ) | |||||||
Stock awards (2) | ( 225 | ) | ( 264 | ) | ( 304 | ) | ||||||
Stock options (3) | (205 | ) | (241 | ) | (277 | ) | ||||||
Pro forma net income | $ | 4,381 | $ | 4,319 | $ | 4,255 | ||||||
Earnings per share (4): | ||||||||||||
Historical | $ | 0.19 | $ | 0.16 | $ | 0.14 | ||||||
Income on adjusted net proceeds | 0.01 | 0.01 | �� | 0.01 | ||||||||
Employee stock ownership plan (1) | — | — | — | |||||||||
Stock awards (2) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
Stock options (3) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
Pro forma earnings per share (4) | $ | 0.18 | $ | 0.15 | $ | 0.13 | ||||||
Offering price to pro forma net earnings per share | 13.89 | x | 16.67 | x | 19.23 | x | ||||||
Number of shares used in earnings per share calculations | 23,953,286 | 28,180,336 | 32,407,386 | |||||||||
At March 31, 2013 | ||||||||||||
Stockholders’ equity: | ||||||||||||
Historical | $ | 207,105 | $ | 207,105 | $ | 207,105 | ||||||
Estimated net proceeds | 180,180 | 212,269 | 244,358 | |||||||||
Equity increase from the mutual holding company | 55 | 55 | 55 | |||||||||
Common stock acquired by employee stock ownership plan (1) | ( 14,960 | ) | ( 17,600 | ) | ( 20,240 | ) | ||||||
Common stock acquired by stock-based benefit plan (2) | (7,480 | ) | (8,800 | ) | (10,120 | ) | ||||||
Pro forma stockholders’ equity | $ | 364,900 | $ | 393,029 | $ | 421,158 | ||||||
Intangible assets | $ | (601 | ) | $ | (601 | ) | $ | (601 | ) | |||
Pro forma tangible stockholders’ equity (5) | $ | 364,299 | $ | 392,428 | $ | 420,557 | ||||||
Stockholders’ equity per share (6): | ||||||||||||
Historical | $ | 8.14 | $ | 6.92 | $ | 6.02 | ||||||
Estimated net proceeds | 7.09 | 7.09 | 7.10 | |||||||||
Equity increase from the mutual holding company | — | — | — | |||||||||
Common stock acquired by employee stock ownership plan (1) | ( 0.59 | ) | ( 0.59 | ) | ( 0.59 | ) | ||||||
Common stock acquired by stock-based benefit plan (2) | (0.29 | ) | (0.29 | ) | (0.29 | ) | ||||||
Pro forma stockholders’ equity per share (5) (6) | $ | 14.35 | $ | 13.13 | $ | 12.24 | ||||||
Intangible assets | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | |||
Pro forma tangible stockholders’ equity per share (5) (6) | $ | 14.33 | $ | 13.11 | $ | 12.22 | ||||||
Offering price as percentage of pro forma stockholders’ equity per share | 69.69 | % | 76.16 | % | 81.70 | % | ||||||
Offering price as percentage of pro forma tangible stockholders’ equity per share | 69.78 | % | 76.28 | % | 81.83 | % | ||||||
Number of shares outstanding for pro forma book value per share calculations | 25,430,586 | 29,918,336 | 34,406,086 |
65 |
(1) | Assumes that 8% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Waterstone, and the outstanding loan with respect to existing shares of Waterstone-Federal held by the employee stock ownership plan will be refinanced and consolidated with the new loan from New Waterstone. WaterStone Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. WaterStone Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. ASC 718-40 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by WaterStone Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 40.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 20,024 , 23,817 and 27,389 shares were committed to be released during the period at the minimum, midpoint and maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. |
(2) | Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from New Waterstone or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by New Waterstone. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10 .00 per share, (ii) 5% of the amount contributed to the plan is amortized as an expense during the three months ended March 31, 2013, and (iii) the plan expense reflects an effective combined federal and state tax rate of 40.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.9%. |
(3) | Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10 .00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $ 2.43% for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 40.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10 .00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 6.9%. |
66 |
(4) | Per share figures include publicly held shares of Waterstone-Federal common stock that will be exchanged for shares of New Waterstone common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the year. See note 1. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. Pro forma net income per share has been annualized to calculate the offering price to pro forma net earnings per share. |
(5) | The retained earnings of WaterStone Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.” |
(6) | Per share figures include publicly held shares of Waterstone-Federal common stock that will be exchanged for shares of New Waterstone common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.8111 , 0.9542 and 1.0973 at the minimum, midpoint and maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. |
67 |
At or for the Year Ended December 31, 2012 Based upon the Sale at $10 .00 Per Share of | ||||||||||||
18,700,000 Shares | 22,000,000 Shares | 25,300,000 Shares | ||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||
Gross proceeds of offering | $ | 187,000 | $ | 220,000 | $ | 253,000 | ||||||
Market value of shares issued in the exchange | 67,306 | 79,183 | 91,061 | |||||||||
Pro forma market capitalization | $ | 254,306 | $ | 299,183 | $ | 344,061 | ||||||
Gross proceeds of offering | $ | 187,000 | $ | 220,000 | $ | 253,000 | ||||||
Expenses | (6,820 | ) | (7,731 | ) | (8,642 | ) | ||||||
Estimated net proceeds | 180,235 | 212,324 | 244,413 | |||||||||
Assets received from mutual holding company | 55 | 55 | 55 | |||||||||
Common stock purchased by employee stock ownership plan | (1 4 , 9 60 | ) | (1 7 ,600 | ) | ( 20,24 0 | ) | ||||||
Common stock purchased by stock-based benefit plan | (7,480 | ) | (8,800 | ) | (10,120 | ) | ||||||
Estimated net proceeds, as adjusted | $ | 157,795 | $ | 185,924 | $ | 214,053 | ||||||
For the Year Ended December 31, 2012 | ||||||||||||
Consolidated net earnings: | ||||||||||||
Historical | $ | 34,914 | $ | 34,914 | $ | 34,914 | ||||||
Income on adjusted net proceeds | 682 | 803 | 925 | |||||||||
Employee stock ownership plan (1) | 12 | ( 67 | ) | ( 146 | ) | |||||||
Stock awards (2) | ( 898 | ) | ( 1,056 | ) | ( 1,214 | ) | ||||||
Stock options (3) | (818 | ) | (962 | ) | (1,107 | ) | ||||||
Pro forma net income | $ | 33,892 | $ | 33,632 | $ | 33,372 | ||||||
Earnings per share (4): | ||||||||||||
Historical | $ | 1.45 | $ | 1.24 | $ | 1.07 | ||||||
Income on adjusted net proceeds | 0.03 | 0.03 | 0.03 | |||||||||
Employee stock ownership plan (1) | — | — | — | |||||||||
Stock awards (2) | ( 0.04 | ) | ( 0.04 | ) | ( 0.04 | ) | ||||||
Stock options (3) | (0.03 | ) | (0.03 | ) | (0.03 | ) | ||||||
Pro forma earnings per share (4) | $ | 1.41 | $ | 1.20 | $ | 1.03 | ||||||
Offering price to pro forma net earnings per share | 7.09 | x | 8.33 | x | 9.71 | x | ||||||
Number of shares used in earnings per share calculations | 24,009,386 | 28,246,336 | 32,483,286 | |||||||||
At December 31, 2012 | ||||||||||||
Stockholders’ equity: | ||||||||||||
Historical | $ | 202,634 | $ | 202,634 | $ | 202,634 | ||||||
Estimated net proceeds | 180,180 | 212,269 | 244,358 | |||||||||
Equity increase from the mutual holding company | 55 | 55 | 55 | |||||||||
Common stock acquired by employee stock ownership plan (1) | ( 14,960 | ) | ( 17,600 | ) | ( 20,240 | ) | ||||||
Common stock acquired by stock-based benefit plan (2) | (7,480 | ) | (8,800 | ) | (10,120 | ) | ||||||
Pro forma stockholders’ equity | $ | 360,429 | $ | 388,558 | $ | 416,687 | ||||||
Intangible assets | $ | (601 | ) | $ | (601 | ) | $ | (601 | ) | |||
Pro forma tangible stockholders’ equity (5) | $ | 359,828 | $ | 387,957 | $ | 416,086 | ||||||
Stockholders’ equity per share (6): | ||||||||||||
Historical | $ | 7.97 | $ | 6.77 | $ | 5.89 | ||||||
Estimated net proceeds | 7.09 | 7.09 | 7.10 | |||||||||
Equity increase from the mutual holding company | — | — | — | |||||||||
Common stock acquired by employee stock ownership plan (1) | ( 0.59 | ) | ( 0.59 | ) | ( 0.59 | ) | ||||||
Common stock acquired by stock-based benefit plan (2) | (0.29 | ) | (0.29 | ) | (0.29 | ) | ||||||
Pro forma stockholders’ equity per share (5) (6) | $ | 14.18 | $ | 12.98 | $ | 12.11 | ||||||
Intangible assets | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | |||
Pro forma tangible stockholders’ equity per share (5) (6) | $ | 14.16 | $ | 12.96 | $ | 12.09 | ||||||
Offering price as percentage of pro forma stockholders’ equity per share | 70.52 | % | 77.04 | % | 82.58 | % | ||||||
Offering price as percentage of pro forma tangible stockholders’ equity per share | 70.62 | % | 77.16 | % | 82.71 | % | ||||||
Number of shares outstanding for pro forma book value per share calculations | 25,430,586 | 29,918,336 | 34,406,086 |
68 |
(1) | Assumes that 8% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Waterstone, and the outstanding loan with respect to existing shares of Waterstone-Federal held by the employee stock ownership plan will be refinanced and consolidated with the new loan from New Waterstone. WaterStone Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. WaterStone Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. ASC 718-40 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by WaterStone Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 40.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 80,977 , 95,266 and 109,556 shares were committed to be released during the year at the minimum, midpoint and maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. |
(2) | Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from New Waterstone or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by New Waterstone. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10 .00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2012, and (iii) the plan expense reflects an effective combined federal and state tax rate of 40.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.9%. |
(3) | Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10 .00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $ 2.43% for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 40.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10 .00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 6.9%. |
69 |
(4) | Per share figures include publicly held shares of Waterstone-Federal common stock that will be exchanged for shares of New Waterstone common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the year. See note 1. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. |
(5) | The retained earnings of WaterStone Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.” |
(6) | Per share figures include publicly held shares of Waterstone-Federal common stock that will be exchanged for shares of New Waterstone common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.8111 , 0.9542 and 1.0973 at the minimum, midpoint and maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. |
70 |
71 |
● | Continued reduction of problem assets. Our strategy with respect to non-performing loans is to work with borrowers to return loans to performing status when possible, including through temporary forbearance or troubled debt restructurings. If a loan cannot be returned to performing status, we foreclose on the loan, taking the collateral into real estate owned. In an effort to strengthen our oversight of problem assets and minimize overall costs and expenses as well as any loss on the sale of real estate owned, we have established an internal asset management group and an internal sales group to manage and market our real estate owned. These groups also enable our lenders to focus on loan originations instead of foreclosed asset management. Our non-performing assets have decreased to $96.8 million, or 5.94% of total assets at March 31, 2013, from $141.9 million, or 7.85% of total assets at December 31, 2010. Our non-performing assets at March 31, 2013 included $66.0 million of non-performing loans and $30.8 million of real estate owned. Of the $66.0 million of non-accrual loans, $33.7 million, or 51.1%, were troubled debt restructurings that were on non-accrual status either due to being past due greater than 90 days or because they had not yet performed under the modified terms for a required period of time. At March 31, 2013, total troubled debt restructurings totaled $55.8 million, of which $49.9 million, or 89.4%, were performing in accordance with their restructured terms. Reducing our level of non-performing assets will continue to be a key element of our business strategy. |
● | Controlled loan growth with a focus on multi-family and commercial real estate lending. Our principal business activity historically has been the origination of residential mortgage loans, including multi-family residential real estate loans, for retention in our portfolio. In an effort to increase our commercial business and commercial real estate loan portfolios, we established a commercial loan department in 2007 and we currently have four commercial business loan officers and four commercial real estate loan officers. During the past five years, our total loan portfolio has decreased substantially, from $1.56 billion at December 31, 2008 to $1.12 billion at March 31, 2013. This decrease reflects a decline in loan demand, a shift in consumer preference for fixed-rate, one- to four-family residential mortgage loans (which we generally do not retain in our portfolio), and our efforts to control overall growth to maintain strong capital ratios and comply with regulatory directives. There has also been a change in the mix of our portfolio, as one- to four-family residential mortgage loans have decreased from $788.2 million, or 50.5% of the portfolio at December 31, 2008, to $445.2 million, or 39.6% of the portfolio at March 31, 2013. During the same period, multi-family residential and commercial real estate loans have increased from $567.9 million, or 36.4% of the portfolio, to $591.3 million, or 52.6% of the portfolio. Multi-family and commercial real estate loans comprised 66.9% of total loans originated for investment during the year ended December 31, 2012, while one- to four-family residential mortgage loans comprised 17.2% of total originations in 2012. We intend to continue our emphasis on multi-family residential and commercial real estate lending. However, we would consider purchasing adjustable-rate mortgage loans from Waterstone Mortgage Corporation in the future in the event changes in interest rates or consumer preferences enable Waterstone Mortgage Corporation to originate such loans. |
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● | Continued emphasis on mortgage banking operations. Waterstone Mortgage Corporation has become a significant originator of fixed-rate, one-to-four family mortgage loans, with total originations increasing to $1.75 billion during the year ended December 31, 2012 from $1.03 billion in 2011. Waterstone Mortgage Corporation originates loans in the retail market, and sells most of its loan production to Wells Fargo, Freddie Mac, Chase and Fannie Mae. It has also been approved to sell loans to Ginnie Mae. Subject to market conditions and particularly changes in the interest rate environment, we intend to continue to grow our mortgage banking business, which has been a significant source of our net income in recent periods. Such growth may occur through geographic expansion, online direct consumer origination, or both. |
● | Enhance core earnings through improved core funding mix. We have made a concerted effort to improve our core funding profile by increasing lower-cost transaction deposit accounts and reducing time deposits. Our ratio of time deposits to total deposits has decreased from 87.1% at December 31, 2008 to 77.9% at March 31, 2013. We plan to continue to aggressively market our core transaction accounts and savings accounts, emphasizing our high quality service and competitive pricing of these products. In the past two years we have also introduced remote deposit capture, internet banking and mobile banking. |
● | Stockholder-focused management of capital. We recognize that a strong capital position is essential to achieving our long-term objective of building stockholder value. Following the offering, at the minimum of the offering range, our pro forma tier 1 leverage ratio is expected to be 15.25% and our pro forma total risk-based capital ratio is expected to be 18.75%, which are well in excess of the minimum ratios of 8.0% and 12.0%, respectively, required under the memorandum of understanding to which we are subject. This capital position will support our future growth and expansion, and will give us flexibility to pursue other capital management strategies to enhance stockholder value. In particular, New Waterstone intends to commence payment of a regular quarterly dividend following completion of the conversion. See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. |
● | Disciplined expansion through organic growth coupled with opportunistic acquisitions. Since we became a public company in 2005, we have successfully pursued a strategy of organic growth by continuing to leverage our existing community banking franchise and expanding our mortgage banking operations. Since our initial public offering, we have opened three additional branches in the Milwaukee area. Given our current regulatory status, we have been unable to open any additional branches. However, subject to regulatory approval, we plan to open one office in 2013 and two additional offices in each of 2014 through 2016, all in our local market area, and we may also seek to open one or more loan production offices or full service branches in other markets. Waterstone Mortgage Corporation now has locations in 12 states and does business nationally. While organic growth has been our primary focus, we will also consider acquisition opportunities that we believe would enhance our franchise and yield financial benefits for our stockholders. |
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● | Obtaining updated real estate appraisals or performing updated discounted cash flow analysis; |
● | Confirming that the physical condition of the real estate has not significantly changed since the last valuation date; |
● | Comparing the estimated current book value to that of updated sales values experienced on similar real estate owned; |
● | Comparing the estimated current book value to that of updated values seen on more current appraisals of similar properties; and |
● | Comparing the estimated current book value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by us). |
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Three Months Ended March 31, | ||||||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||||||
At March 31, 2013 | Average Balance | Interest | Average Yield/Rate (7) | AverageBalance | Interest | AverageYield/Rate (7) | ||||||||||||||||||||||
Yield/Rate | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||
Loans receivable and held for sale | 5.03 | % | $ | 1,248,893 | $ | 15,213 | (1) | 4.94 | % | $ | 1,294,031 | $ | 16,572 | (1) | 5.14 | % | ||||||||||||
Mortgage related securities (2) | 2.06 | 143,628 | 437 | 1.23 | 103,039 | 863 | 3.36 | |||||||||||||||||||||
Debt securities, federal funds sold and short-term investments (2) (3) | 1.91 | 155,973 | 536 | 1.40 | 198,266 | 707 | 1.43 | |||||||||||||||||||||
Total interest-earning assets | 4.43 | 1,548,494 | 16,186 | 4.24 | 1,595,336 | 18,142 | 4.56 | |||||||||||||||||||||
Noninterest-earning assets | 98,893 | 96,883 | ||||||||||||||||||||||||||
Total assets | $ | 1,647,387 | $ | 1,692,219 | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||
Demand accounts | 0.03 | $ | 44,206 | 3 | 0.03 | $ | 38,563 | 7 | 0.07 | |||||||||||||||||||
Money market and savings accounts | 0.12 | 119,569 | 37 | 0.13 | 110,686 | 86 | 0.31 | |||||||||||||||||||||
Certificates of deposit | 0.79 | 723,477 | 1,426 | 0.80 | 869,367 | 3,111 | 1.43 | |||||||||||||||||||||
Total interest-bearing deposits | 0.6 6 | 887,252 | 1,466 | 0.67 | 1,018,616 | 3,204 | 1.26 | |||||||||||||||||||||
Borrowings | 3.83 | 485,259 | 4,574 | 3.82 | 457,658 | 4,512 | 3.95 | |||||||||||||||||||||
Total interest-bearing liabilities | 1.78 | 1,372,511 | 6,040 | 1.79 | 1,476,274 | 7,716 | 2.10 | |||||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||
Non-interest bearing deposits | 39,866 | 28,194 | ||||||||||||||||||||||||||
Other non-interest bearing liabilities | 29,713 | 18,692 | ||||||||||||||||||||||||||
Total non-interest bearing liabilities | 69,579 | 46,886 | ||||||||||||||||||||||||||
Total liabilities | 1,442,090 | 1,523,160 | ||||||||||||||||||||||||||
Equity | 205,297 | 169,059 | ||||||||||||||||||||||||||
Total liabilities and equity | $ | 1,647,387 | $ | 1,692,219 | ||||||||||||||||||||||||
Net interest income | $ | 10,146 | $ | 10,426 | ||||||||||||||||||||||||
Net interest rate spread (4) | 2.45 | % | 2.46 | % | ||||||||||||||||||||||||
Net interest-earning assets (5) | $ | 175,983 | $ | 119,062 | ||||||||||||||||||||||||
Net interest margin (6) | 2.66 | % | 2.62 | % | ||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 112.82 | % | 108.07 | % |
81 |
Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Loans receivable and held for sale | $ | 1,276,271 | $ | 64,317 | (1) | 5.03 | % | $ | 1,314,068 | $ | 72,269 | (1) | 5.50 | % | $ | 1,440,417 | $ | 81,161 | (1) | 5.63 | % | |||||||||||||||
Mortgage related securities (2) | 138,133 | 3,278 | 2.37 | 94,099 | 3,822 | 4.06 | 107,406 | 5,360 | 4.99 | |||||||||||||||||||||||||||
Debt securities, federal funds sold and short-term investments (2) (3) | 180,117 | 2,251 | 1.25 | 239,400 | 3,261 | 1.36 | 206,066 | 3,412 | 1.66 | |||||||||||||||||||||||||||
Total interest-earning assets | 1,594,521 | 69,846 | 4.37 | 1,647,567 | 79,352 | 4.82 | 1,753,889 | 89,933 | 5.13 | |||||||||||||||||||||||||||
Noninterest-earning assets | 95,222 | 101,671 | 97,215 | |||||||||||||||||||||||||||||||||
Total assets | $ | 1,689,743 | $ | 1,749,238 | $ | 1,851,104 | ||||||||||||||||||||||||||||||
Interest-bearing liabilities: | �� | |||||||||||||||||||||||||||||||||||
Demand accounts | $ | 39,818 | 24 | 0.06 | $ | 38,328 | 30 | 0.08 | $ | 37,852 | 37 | 0.10 | ||||||||||||||||||||||||
Money market and savings accounts | 127,261 | 273 | 0.21 | 120,231 | 369 | 0.31 | 110,479 | 495 | 0.45 | |||||||||||||||||||||||||||
Certificates of deposit | 809,446 | 9,180 | 1.13 | 925,209 | 14,890 | 1.61 | 1,007,304 | 20,457 | 2.03 | |||||||||||||||||||||||||||
Total interest-bearing deposits | 976,525 | 9,477 | 0.97 | 1,083,768 | 15,289 | 1.41 | 1,155,635 | 20,989 | 1.82 | |||||||||||||||||||||||||||
Borrowings | 475,114 | 18,424 | 3.87 | 446,401 | 17,547 | 3.93 | 481,808 | 19,280 | 4.00 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,451,639 | 27,901 | 1.92 | 1,530,169 | 32,836 | 2.15 | 1,637,443 | 40,269 | 2.46 | |||||||||||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Non-interest bearing deposits | 33,500 | 28,917 | 26,940 | |||||||||||||||||||||||||||||||||
Other non-interest bearing liabilities | 19,817 | 23,099 | 16,789 | |||||||||||||||||||||||||||||||||
Total non-interest bearing liabilities | 53,317 | 52,016 | 43,729 | |||||||||||||||||||||||||||||||||
Total liabilities | 1,504,956 | 1,582,185 | 1,681,172 | |||||||||||||||||||||||||||||||||
Equity | 184,787 | 167,053 | 169,932 | |||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 1,689,743 | $ | 1,749,238 | $ | 1,851,104 | ||||||||||||||||||||||||||||||
Net interest income | $ | 41,945 | $ | 46,516 | $ | 49,664 | ||||||||||||||||||||||||||||||
Net interest rate spread (4) | 2.45 | % | 2.67 | % | 2.67 | % | ||||||||||||||||||||||||||||||
Net interest-earning assets (5) | $ | 142,882 | $ | 117,398 | $ | 116,446 | ||||||||||||||||||||||||||||||
Net interest margin (6) | 2.62 | % | 2.82 | % | 2.83 | % | ||||||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 109.84 | % | 107.67 | % | 107.11 | % |
(1) | Includes net deferred loan fee amortization income of $156,000, $150,000, $657,000, $636,000 and $739,000 for the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012, 2011 and 2010, respectively. |
(2) | Average balance of available for sale securities is based on amortized historical cost. |
(3) | Interest income from tax exempt securities is not significant to total interest income, therefore, interest and yield on interest earnings assets are not stated on a tax equivalent basis. The average balance of tax exempt securities totaled $36.5 million, $26.3 million, $19.1 million, $27.6 million and $24.0 million for the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012, 2011 and 2010, respectively. |
(4) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(5) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(6) | Net interest margin represents net interest income divided by average total interest-earning assets. |
(7) | Annualized. |
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Three Months Ended March 31, 2013 vs. 2012 Increase (Decrease) due to | Years Ended December 31, 2012 vs. 2011 Increase (Decrease) due to | Years Ended December 31, 2011 vs. 2010 Increase (Decrease) due to | ||||||||||||||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||||||
Loans receivable and held for sale (1) | $ | (648 | ) | $ | (711 | ) | $ | (1,359 | ) | $ | (1,990 | ) | $ | (5,962 | ) | $ | (7,952 | ) | $ | (6,985 | ) | $ | (1,907 | ) | $ | (8,892 | ) | |||||||||
Mortgage related securities | 257 | (683 | ) | (426 | ) | 1,399 | (1,943 | ) | (544 | ) | (615 | ) | (923 | ) | (1,538 | ) | ||||||||||||||||||||
Other interest-earning assets | (154 | ) | (17 | ) | (171 | ) | (752 | ) | (258 | ) | (1,010 | ) | 505 | (656 | ) | (151 | ) | |||||||||||||||||||
Total interest-earning assets | (545 | ) | (1,411 | ) | (1,956 | ) | (1,343 | ) | (8,163 | ) | (9,506 | ) | (7,095 | ) | (3,486 | ) | (10,581 | ) | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||||||
Demand accounts | 1 | (5 | ) | (4 | ) | 1 | (7 | ) | (6 | ) | — | (7 | ) | (7 | ) | |||||||||||||||||||||
Money market and savings accounts | 6 | (55 | ) | (49 | ) | 21 | (117 | ) | (96 | ) | 41 | (167 | ) | (126 | ) | |||||||||||||||||||||
Certificates of deposit | (463 | ) | (1,222 | ) | (1,685 | ) | (1,692 | ) | (4,018 | ) | (5,710 | ) | (1,570 | ) | (3,997 | ) | (5,567 | ) | ||||||||||||||||||
Total interest-bearing deposits | (456 | ) | (1,282 | ) | (1,738 | ) | (1,670 | ) | (4,142 | ) | (5,812 | ) | (1,529 | ) | (4,171 | ) | (5,700 | ) | ||||||||||||||||||
Borrowings | 234 | (172 | ) | 62 | 1,154 | (277 | ) | 877 | (1,384 | ) | (349 | ) | (1,733 | ) | ||||||||||||||||||||||
Total interest-bearing liabilities | (222 | ) | (1,454 | ) | (1,676 | ) | (516 | ) | (4,419 | ) | (4,935 | ) | (2,913 | ) | (4,520 | ) | (7,433 | ) | ||||||||||||||||||
Net change in net interest income | $ | (323 | ) | $ | 43 | $ | (280 | ) | $ | (827 | ) | $ | (3,744 | ) | $ | (4,571 | ) | $ | (4,182 | ) | $ | 1,034 | $ | (3,148 | ) |
(1) | Includes net deferred loan fee amortization income of $156,000, $150,000, $657,000, $636,000 and $739,000 for the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012, 2011 and 2010, respectively. |
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84 |
85 |
86 |
87 |
88 |
89 |
90 |
91 |
92 |
93 |
94 |
Percentage Increase in Estimated Net Annual Interest Income Over 12 Months As of March 31, 2013 | ||
300 basis point gradual rise in rates | 5.96% | |
200 basis point gradual rise in rates | 5.03% | |
100 basis point gradual rise in rates | 4.39% | |
Unchanged rate scenario | 3.51% | |
100 basis point gradual decline in rates (1) | 2.16% |
95 |
Percentage Increase (Decrease) in Estimated Net Annual Interest Income Over 12 Months As of December 31, 2012 | ||
300 basis point gradual rise in rates | 1.32% | |
200 basis point gradual rise in rates | 0.26% | |
100 basis point gradual rise in rates | (0.78%) | |
Unchanged rate scenario | (2.21%) | |
100 basis point gradual decline in rates (1) | (4.37%) |
(1) | Given the current low point in the interest rate cycle, scenarios in excess of 100 basis point declines are not meaningful. |
96 |
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Contractual Obligations | ||||||||||||||||||||
Total | One Year or Less | More Than One Year Through Three Years | More Than Three Years Through Five Years | Over Five Years | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Deposits without a stated maturity (1) | $ | 202,593 | $ | 202,593 | $ | — | $ | — | $ | — | ||||||||||
Certificates of deposit (1) | 736,920 | 454,561 | 251,822 | 30,517 | 20 | |||||||||||||||
Bank lines of credit (1) | 45,888 | 45,888 | — | — | — | |||||||||||||||
Federal Home Loan Bank advances (2) | 350,000 | — | — | 285,000 | 65,000 | |||||||||||||||
Repurchase agreements (1) (3) | 84,000 | — | — | 84,000 | — | |||||||||||||||
Operating leases (4) | 3,223 | 1,664 | 1,306 | 253 | — | |||||||||||||||
Salary continuation agreements | 765 | 170 | 340 | 255 | — | |||||||||||||||
Total Contractual Obligations | $ | 1,423,389 | $ | 704,876 | $ | 253,468 | $ | 400,025 | $ | 65,020 |
(1) | Excludes interest. |
(2) | Secured under a blanket security agreement on qualifying assets, principally, mortgage loans. Excludes interest that will accrue on the advances. All Federal Home Loan Bank advances are callable on a quarterly basis. |
(3) | The repurchase agreements are callable on a quarterly basis. |
(4) | Represents non-cancellable operating leases for offices and equipment. |
98 |
Other Commitments | ||||||||||||||||||||
Total | One Year or Less | More Than One Year Through Three Years | More Than Three Years Through Five Years | Over Five Years | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Real estate loan commitments (1) | $ | 20,836 | $ | 20,836 | $ | — | $ | — | $ | — | ||||||||||
Unused portion of home equity lines of credit (2) | 17,628 | 17,628 | — | — | — | |||||||||||||||
Unused portion of construction loans (3) | 5,502 | 5,502 | — | — | — | |||||||||||||||
Unused portion of business lines of credit | 10,967 | 10,967 | — | — | — | |||||||||||||||
Standby letters of credit | 736 | 736 | — | — | — | |||||||||||||||
Total Other Commitments | $ | 55,669 | $ | 55,669 | $ | — | $ | — | $ | — |
(1) | Commitments for loans are extended to customers for up to 180 days after which they expire. |
(2) | Unused portions of home equity loans are available to the borrower for up to 10 years. |
(3) | Unused portions of construction loans are available to the borrower for up to one year. |
99 |
100 |
101 |
102 |
103 |
At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
At March 31, 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
One- to four-family | $ | 445,243 | 39.58 | % | $ | 460,821 | 40.65 | % | $ | 496,736 | 40.83 | % | $ | 582,026 | 44.56 | % | $ | 679,657 | 47.86 | % | $ | 788,152 | 50.54 | % | ||||||||||||||||||||||||
Multi-family | 514,566 | 45.74 | 514,363 | 45.37 | 552,240 | 45.39 | 542,602 | 41.53 | 536,731 | 37.80 | 512,746 | 32.87 | ||||||||||||||||||||||||||||||||||||
Home equity | 35,949 | 3.20 | 36,494 | 3.22 | 38,599 | 3.17 | 46,149 | 3.53 | 57,589 | 4.06 | 59,281 | 3.80 | ||||||||||||||||||||||||||||||||||||
Construction and land | 33,249 | 2.96 | 33,818 | 2.98 | 39,528 | 3.25 | 53,961 | 4.13 | 61,953 | 4.36 | 111,599 | 7.15 | ||||||||||||||||||||||||||||||||||||
Commercial real estate | 76,759 | 6.82 | 65,495 | 5.78 | 65,434 | 5.38 | 51,733 | 3.96 | 48,948 | 3.45 | 55,193 | 3.54 | ||||||||||||||||||||||||||||||||||||
Commercial loans | 19,043 | 1.69 | 22,549 | 1.99 | 24,018 | 1.97 | 29,812 | 2.28 | 34,513 | 2.43 | 32,422 | 2.08 | ||||||||||||||||||||||||||||||||||||
Consumer | 128 | 0.01 | 132 | 0.01 | 109 | 0.01 | 154 | 0.01 | 619 | 0.04 | 365 | 0.02 | ||||||||||||||||||||||||||||||||||||
Total loans | 1,124,937 | 100.00 | % | 1,133,672 | 100.00 | % | 1,216,664 | 100.00 | % | 1,306,437 | 100.00 | % | 1,420,010 | 100.00 | % | 1,559,758 | 100.00 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses | (29,298 | ) | (31,043 | ) | (32,430 | ) | (29,175 | ) | (28,494 | ) | (25,167 | ) | ||||||||||||||||||||||||||||||||||||
Loans, net | $ | 1,095,639 | $ | 1,102,629 | $ | 1,184,234 | $ | 1,277,262 | $ | 1,391,516 | $ | 1,534,591 |
104 |
One- to four-family | Multi-family | Home Equity | Construction and Land | |||||||||||||||||||||||||||||
Due during the years ended December 31, | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
2013 | $ | 29,228 | 5.66 | % | $ | 45,816 | 5.84 | % | $ | 10,857 | 4.34 | % | $ | 16,102 | 5.25 | % | ||||||||||||||||
2014 | 33,138 | 5.79 | % | 42,475 | 5.70 | % | 5,776 | 4.01 | % | 2,519 | 4.80 | % | ||||||||||||||||||||
2015 | 5,244 | 5.10 | % | 22,679 | 5.06 | % | 8,397 | 4.07 | % | 3,898 | 4.54 | % | ||||||||||||||||||||
2016 and 2017 | 9,187 | 4.77 | % | 38,570 | 4.23 | % | 5,494 | 5.26 | % | 978 | 3.16 | % | ||||||||||||||||||||
2018 through 2022 | 75,887 | 5.48 | % | 291,260 | 5.04 | % | 5,914 | 4.65 | % | 8,318 | 4.43 | % | ||||||||||||||||||||
2023 through 2027 | 11,188 | 6.06 | % | 10,336 | 5.22 | % | — | — | 639 | 4.92 | % | |||||||||||||||||||||
2028 and thereafter | 296,949 | 5.09 | % | 63,227 | 5. 4 7 | % | 56 | 4.50 | % | 1,364 | 4.77 | % | ||||||||||||||||||||
Total | $ | 460,821 | 5.26 | % | $ | 514,363 | 5.16 | % | $ | 36,494 | 4.41 | % | $ | 33,818 | 4.85 | % |
Commercial Real Estate | Commercial Business | Consumer | Total | |||||||||||||||||||||||||||||
Due during the years ended December 31, | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
2013 | $ | 5,481 | 6.17 | % | $ | 12,385 | 3.46 | % | $ | 94 | 5.60 | % | $ | 119,963 | 5.36 | % | ||||||||||||||||
2014 | 6,556 | 5.77 | % | 1,514 | 6.11 | % | 14 | 6.03 | % | 91,992 | 5.61 | % | ||||||||||||||||||||
2015 | 9,513 | 5.85 | % | 3,173 | 5.28 | % | — | — | 52,904 | 5.02 | % | |||||||||||||||||||||
2016 and 2017 | 20,235 | 5.33 | % | 2,129 | 5.30 | % | 24 | 3.00 | % | 76,617 | 4.67 | % | ||||||||||||||||||||
2018 through 2022 | 18,112 | 5.50 | % | 2,888 | 4.80 | % | — | — | 402,379 | 5.12 | % | |||||||||||||||||||||
2023 through 2027 | 38 | 6.75 | % | — | — | — | — | 22,201 | 5.64 | % | ||||||||||||||||||||||
2028 and thereafter | 5,560 | 5.94 | % | 460 | 5.50 | % | — | — | 367,616 | 5.17 | % | |||||||||||||||||||||
Total | $ | 65,495 | 5.62 | % | $ | 22,549 | 4.28 | % | $ | 132 | 4.25 | % | $ | 1,133,672 | 5.18 | % |
105 |
Due After December 31, 2013 | |||||||||||||
Fixed | Adjustable | Total | |||||||||||
(In Thousands) | |||||||||||||
Mortgage loans | |||||||||||||
Real estate loans: | |||||||||||||
One- to four-family | $ | 28,504 | $ | 403,089 | $ | 431,593 | |||||||
Multi-family | 59,235 | 409,312 | 468,547 | ||||||||||
Home equity | 5,170 | 20,467 | 25,637 | ||||||||||
Construction and land | 2,416 | 15,300 | 17,716 | ||||||||||
Commercial | 33,215 | 26,799 | 60,014 | ||||||||||
Commercial | 8,415 | 1,749 | 10,164 | ||||||||||
Consumer | 38 | — | 38 | ||||||||||
Total loans | $ | 136,993 | $ | 876,716 | $ | 1,013,709 |
106 |
107 |
108 |
As of or for the Three Months Ended March 31, | As of or for the Year Ended December 31, | |||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Total gross loans receivable and held for sale at beginning of period | $ | 1,267,285 | $ | 1,304,947 | $ | 1,304,947 | $ | 1,443,824 | $ | 1,516,800 | ||||||||||
Real estate loans originated for investment: | ||||||||||||||||||||
Residential : | ||||||||||||||||||||
One- to four-family | 5,606 | 3,047 | 17,088 | 13,651 | 11,390 | |||||||||||||||
Multi-family | 19,526 | 10,959 | 51,816 | 60,367 | 69,602 | |||||||||||||||
Home equity | 924 | 981 | 3,112 | 4,328 | 5,528 | |||||||||||||||
Construction and land | 468 | 202 | 2,695 | 3,487 | 8,355 | |||||||||||||||
Commercial real estate | 9,292 | 4,950 | 14,572 | 25,398 | 5,813 | |||||||||||||||
Total real estate loans originated for investment | 35,816 | 20,139 | 89,283 | 107,231 | 100,688 | |||||||||||||||
Consumer loans originated for investment | — | — | 35 | — | 76 | |||||||||||||||
Commercial loans originated for investment | 1,460 | 1,294 | 9,857 | 9,366 | 11,204 | |||||||||||||||
Total loans originated for investment | 37,276 | 21,433 | 99,175 | 116,597 | 111,968 | |||||||||||||||
Real estate loans purchased for investment: | ||||||||||||||||||||
One- to four-family | — | — | 12,148 | — | — | |||||||||||||||
Home equity | — | — | 3,338 | — | — | |||||||||||||||
Total real estate loans purchased for investment | — | — | 15,486 | — | — | |||||||||||||||
Principal repayments | (39,772 | ) | (28,212 | ) | (165,683 | ) | (200,544 | ) | (169,093 | ) | ||||||||||
Transfers to real estate owned | (2,734 | ) | (6,349 | ) | (22,282 | ) | (28,259 | ) | (41,781 | ) | ||||||||||
Loan principal charged-off, net of recoveries | (3,505 | ) | (3,059 | ) | (9,687 | ) | (18,821 | ) | (25,151 | ) | ||||||||||
Net activity in loans held for investment | (8,735 | ) | (16,187 | ) | (82,991 | ) | (131,027 | ) | (124,057 | ) | ||||||||||
Loans originated for sale | 430,108 | 326,882 | 1,749,426 | 1,027,346 | 1,084,362 | |||||||||||||||
Loans sold | (459,553 | ) | (324,464 | ) | (1,704,097 | ) | (1,035,196 | ) | (1,033,281 | ) | ||||||||||
Net activity in loans held for sale | (29,445 | ) | 2,418 | 45,329 | (7,850 | ) | 51,081 | |||||||||||||
Total gross loans receivable and held for sale at end of period | $ | 1,229,105 | $ | 1,291,178 | $ | 1,267,285 | $ | 1,304,947 | $ | 1,443,824 |
109 |
● | A secured one- to four-family mortgage loan up to $500,000 for a borrower with total outstanding loans from us of less than $1,000,000 that is independently underwritten can be approved by select loan officers. |
● | A loan up to $500,000 for a borrower with total outstanding loans from us of less than $500,000 can be approved by select commercial loan officers. |
● | Any secured mortgage loan ranging from $500,001 to $2,999,999 or any new loan to a borrower with outstanding loans from us exceeding $1,000,000 must be approved by the Officer Loan Committee. |
● | Any loan for $3,000,000 or more must be approved by the Officer Loan Committee and the board of directors prior to closing. Any new loan to a borrower with outstanding loans from us exceeding $10,000,000 must be reviewed by the board of directors prior to closing. |
110 |
At | ||||||||||||||||||||||||
March 31, | At December 31, | |||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Non-accrual loans: | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
One- to four-family | $ | 41,98 5 | $ | 46,467 | $ | 55,609 | $ | 56,759 | $ | 45,988 | $ | 42,182 | ||||||||||||
Multi-family | 19,067 | 23,205 | 13,680 | 20,587 | 16,683 | 35,787 | ||||||||||||||||||
Home equity | 1,539 | 1,578 | 1,334 | 712 | 1,159 | 2,015 | ||||||||||||||||||
Construction and land | 2,175 | 2,215 | 6,946 | 3,013 | 6,269 | 18,271 | ||||||||||||||||||
Commercial real estate | 665 | 668 | 514 | 1,577 | 2,773 | 9,325 | ||||||||||||||||||
Commercial | 511 | 511 | 135 | 1,530 | 2,441 | 150 | ||||||||||||||||||
Consumer | 22 | 24 | — | — | — | — | ||||||||||||||||||
Total non-accrual loans | 65,964 | 74,668 | 78,218 | 84,178 | 75,313 | 107,730 | ||||||||||||||||||
Real estate owned | ||||||||||||||||||||||||
One- to four-family | 15,348 | 17,353 | 27,449 | 28,142 | 27,016 | 16,720 | ||||||||||||||||||
Multi-family | 7,849 | 9,890 | 16,231 | 14,903 | 8,824 | 6,057 | ||||||||||||||||||
Construction and land | 6,048 | 7,029 | 8,796 | 9,926 | 10,458 | 1,094 | ||||||||||||||||||
Commercial real estate | 1,554 | 1,702 | 4,194 | 4,781 | 4,631 | 782 | ||||||||||||||||||
Total real estate owned | 30,799 | 35,974 | 56,670 | 57,752 | 50,929 | 24,653 | ||||||||||||||||||
Total non-performing assets | $ | 96,763 | $ | 110,642 | $ | 134,888 | $ | 141,930 | $ | 126,242 | $ | 132,383 | ||||||||||||
Total accruing troubled debt restructurings | $ | 22,110 | $ | 16,011 | $ | 24,589 | $ | 33,592 | $ | 42,730 | $ | 2,409 | ||||||||||||
Total non-accrual loans to total loans, net | 5.86 | % | 6.59 | % | 6.43 | % | 6.44 | % | 5.30 | % | 6.91 | % | ||||||||||||
Total non-accrual loans and accruing troubled debt restructurings to total loans receivable | 7.83 | % | 8.00 | % | 8.45 | % | 9.01 | % | 8.31 | % | 7.06 | % | ||||||||||||
Total non-accrual loans to total assets | 4.05 | % | 4.50 | % | 4.57 | % | 4.65 | % | 4.03 | % | 5.71 | % | ||||||||||||
Total non-performing assets to total assets | 5.94 | % | 6.66 | % | 7.88 | % | 7.85 | % | 6.76 | % | 7.02 | % |
111 |
At or for the Three Months Ended March 31, | At or for the Year Ended December 31, | |||||||||||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||
Balance at beginning of period | $ | 74,668 | $ | 78,218 | $ | 78,218 | $ | 84,178 | $ | 75,313 | $ | 107,730 | $ | 80,350 | ||||||||||||||
Additions | 7,039 | 23,834 | 44,617 | 59,703 | 87,349 | 76,435 | 106,286 | |||||||||||||||||||||
Transfers to real estate owned | (2,734 | ) | (6,349 | ) | (22,282 | ) | (28,259 | ) | (41,781 | ) | (54,072 | ) | (32,946 | ) | ||||||||||||||
Charge-offs | (3,314 | ) | (2,265 | ) | (8,379 | ) | (14,138 | ) | (24,395 | ) | (23,541 | ) | (24,517 | ) | ||||||||||||||
Returned to accrual status | (8,391 | ) | (55 | ) | (8,194 | ) | (12,021 | ) | (7,936 | ) | (17,601 | ) | (13,600 | ) | ||||||||||||||
Principal paydowns and other | (1,304 | ) | (1,547 | ) | (9,312 | ) | (11,245 | ) | (4,372 | ) | (13,638 | ) | (7,843 | ) | ||||||||||||||
Balance at end of period | $ | 65,964 | $ | 91,836 | $ | 74,668 | $ | 78,218 | $ | 84,178 | $ | 75,313 | $ | 107,730 |
112 |
At March | At December 31, | |||||||||||||||||||||||
31, 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Troubled debt restructurings | ||||||||||||||||||||||||
Substandard | $ | 41,432 | $ | 48, 449 | $ | 47,220 | $ | 15,769 | $ | 18,003 | $ | 2,409 | ||||||||||||
Watch | 14,362 | 11,172 | 8,192 | 20,703 | 34,082 | — | ||||||||||||||||||
Total troubled debt restructurings | $ | 55,794 | $ | 59,621 | $ | 55,412 | $ | 36,472 | $ | 52,085 | $ | 2,409 |
At December 31, | ||||||||||||||||||||||||
At March 31, 2013 | 2012 | 2011 | ||||||||||||||||||||||
Non- Accruing | Accruing | Non- Accruing | Accruing | Non- Accruing | Accruing | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Troubled Debt Restructurings: | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
One- to four-family | $ | 15,942 | $ | 13,212 | $ | 21, 847 | $ | 9,921 | $ | 26,773 | $ | 8,293 | ||||||||||||
Multi-family | 16,024 | 6,727 | 20,030 | 3,917 | 2,453 | 14,845 | ||||||||||||||||||
Home equity | 975 | — | 986 | — | 1,024 | 43 | ||||||||||||||||||
Construction and land | 78 | 2,171 | 79 | 2,173 | 79 | 1,408 | ||||||||||||||||||
Commercial real estate | 665 | — | 668 | — | 452 | — | ||||||||||||||||||
Commercial | — | — | — | — | 42 | — | ||||||||||||||||||
Total | $ | 33,684 | $ | 22,110 | $ | 43,610 | $ | 16,011 | $ | 30,823 | $ | 24,589 |
113 |
At or for the Three Months Ended | At or for the Year Ended December 31, | |||||||||||||||||||||||
March 31, 2013 | 2012 | 2011 | ||||||||||||||||||||||
Accrual | Non- Accrual | Accrual | Non- Accrual | Accrual | Non- Accrual | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Balance at beginning of period | $ | 16,011 | $ | 43,610 | $ | 24,589 | $ | 30,823 | $ | 33,592 | $ | 2,879 | ||||||||||||
Additions | 98 | 245 | 3,651 | 24,049 | 15,066 | 24,614 | ||||||||||||||||||
Change in accrual status | 6,202 | (6,202 | ) | (2,060 | ) | 2,060 | (3,764 | ) | 3,764 | |||||||||||||||
Charge-offs | — | (1,416 | ) | (270 | ) | (1,795 | ) | (836 | ) | (191 | ) | |||||||||||||
Returned to contractual/market terms | — | (1,927 | ) | (8,773 | ) | (8,502 | ) | (18,758 | ) | (225 | ) | |||||||||||||
Transferred to real estate owned | — | (337 | ) | (125 | ) | (1,009 | ) | (359 | ) | — | ||||||||||||||
Principal paydowns and other | (201 | ) | (289 | ) | (1,001 | ) | (2,016 | ) | (352 | ) | (18 | ) | ||||||||||||
Balance at end of period | $ | 22,110 | $ | 33,684 | $ | 16,011 | $ | 43,610 | $ | 24,589 | $ | 30,823 |
At December 31, | ||||||||||||
At March 31, 2013 | 2012 | 2011 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Loans past due less than 90 days | $ | 19,372 | $ | 23,092 | $ | 36,798 | ||||||
Loans past due 90 days or more | 51,820 | 51,358 | 56,612 | |||||||||
Total loans past due | $ | 71,192 | $ | 74,450 | $ | 93,410 | ||||||
Total loans past due to total loans receivable | 6.33 | % | 6.57 | % | 7.68 | % |
114 |
● | Applying an updated adjustment factor (as described previously) to an existing appraisal; |
● | Confirming that the physical condition of the real estate has not significantly changed since the last valuation date; |
● | Comparing the estimated current value of the collateral to that of updated sales values experienced on similar collateral; |
● | Comparing the estimated current value of the collateral to that of updated values seen on current appraisals of similar collateral; and |
● | Comparing the estimated current value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by us). |
115 |
116 |
At or for the Three Months Ended March 31, | At or for the Year Ended December 31, | |||||||||||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||
Balance at beginning of period | $ | 31,043 | $ | 32,430 | $ | 32,430 | $ | 29,175 | $ | 28,494 | $ | 25,167 | $ | 12,839 | ||||||||||||||
Provision for loan losses | 1,760 | 3,675 | 8,300 | 22,077 | 25,832 | 26,687 | 37,629 | |||||||||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||
One- to four-family | 3,642 | 2,446 | 6,472 | 11,553 | 16,906 | 13,602 | 8,397 | |||||||||||||||||||||
Multi-family | 137 | 447 | 1,108 | 3,996 | 3,439 | 3,304 | 10,056 | |||||||||||||||||||||
Home equity | 78 | 150 | 485 | 634 | 619 | 861 | 394 | |||||||||||||||||||||
Construction and land | — | 35 | 1,668 | 1,745 | 2,319 | 3,957 | 5,088 | |||||||||||||||||||||
Commercial real estate | 7 | 120 | 1,182 | 734 | 575 | 910 | 1,838 | |||||||||||||||||||||
Consumer | — | — | 4 | 10 | 13 | 9 | 4 | |||||||||||||||||||||
Commercial | — | — | 59 | 619 | 1,470 | 1,000 | — | |||||||||||||||||||||
Total charge-offs | 3,864 | 3,198 | 10,978 | 19,291 | 25,341 | 23,643 | 25,777 | |||||||||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||
One- to four-family | 153 | 116 | 667 | 311 | 127 | 181 | 313 | |||||||||||||||||||||
Multi-family | 201 | 4 | 56 | 40 | 55 | 23 | 31 | |||||||||||||||||||||
Home equity | 2 | 7 | 25 | 7 | 3 | 1 | 1 | |||||||||||||||||||||
Construction and land | — | — | 250 | 69 | 2 | 77 | 125 | |||||||||||||||||||||
Commercial real estate | — | — | — | 6 | 1 | — | — | |||||||||||||||||||||
Consumer | 2 | — | — | 1 | 1 | 1 | 6 | |||||||||||||||||||||
Commercial | 1 | 13 | 293 | 35 | 1 | — | — | |||||||||||||||||||||
Total recoveries | 359 | 140 | 1,291 | 469 | 190 | 283 | 476 | |||||||||||||||||||||
Net charge-offs | 3,505 | 3,058 | 9,687 | 18,822 | 25,151 | 23,360 | 25,301 | |||||||||||||||||||||
Allowance at end of period | $ | 29,298 | $ | 33,047 | $ | 31,043 | $ | 32,430 | $ | 29,175 | $ | 28,494 | $ | 25,167 | ||||||||||||||
Ratios: | ||||||||||||||||||||||||||||
Allowance for loan losses to non-performing loans at end of period | 44.42 | % | 35.98 | % | 41.58 | % | 41.46 | % | 34.66 | % | 37.83 | % | 23.36 | % | ||||||||||||||
Allowance for loan losses to net loans outstanding at end of period | 2.60 | % | 2.75 | % | 2.74 | % | 2.67 | % | 2.23 | % | 2.01 | % | 1.61 | % | ||||||||||||||
Net charge-offs to average loans outstanding (annualized) | 1.14 | % | 0.96 | % | 0.76 | % | 1.43 | % | 1.75 | % | 1.54 | % | 1.67 | % | ||||||||||||||
Current period provision for loan losses to net charge-offs | 50.22 | % | 120.15 | % | 85.68 | % | 117.29 | % | 102.71 | % | 114.24 | % | 148.73 | % | ||||||||||||||
Net charge-offs to beginning of the period allowance (annualized) | 45.79 | % | 3 8 .25 | % | 29.87 | % | 64.51 | % | 88.27 | % | 92.82 | % | 197.06 | % |
117 |
At December 31, | ||||||||||||||||||||||||||||||||||||
At March 31, 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||||||||||
One- to four-family | $ | 16,385 | 39.58 | % | 55.93 | % | $ | 17,819 | 40.65 | % | 57.40 | % | $ | 17,475 | 40.83 | % | 53.89 | % | ||||||||||||||||||
Multi-family | 7,469 | 45.74 | 25.49 | 7,734 | 45.37 | 24.90 | 8,252 | 45.39 | 25.44 | |||||||||||||||||||||||||||
Home equity | 1,947 | 3.20 | 6.65 | 2,097 | 3.22 | 6.76 | 1,998 | 3.17 | 6.16 | |||||||||||||||||||||||||||
Construction and land | 1,355 | 2.96 | 4.62 | 1,323 | 2.98 | 4.26 | 2,922 | 3.25 | 9.01 | |||||||||||||||||||||||||||
Commercial real estate | 1,391 | 6.82 | 4.75 | 1,259 | 5.78 | 4.06 | 941 | 5.38 | 2.90 | |||||||||||||||||||||||||||
Commercial | 721 | 1.69 | 2.46 | 781 | 1.99 | 2.52 | 814 | 1.97 | 2.51 | |||||||||||||||||||||||||||
Consumer | 30 | 0.01 | 0.10 | 30 | 0.01 | 0.10 | 28 | 0.01 | 0.09 | |||||||||||||||||||||||||||
Total allowance for loan losses | $ | 29,298 | 100.00 | % | 100.00 | % | $ | 31,043 | 100.00 | % | 100.00 | % | $ | 32,430 | 100.00 | % | 100.00 | % |
At December 31, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | Allowance for Loan Losses | % of Loans in Category to Total Loans | % of Allowance in Category to Total Allowance | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||||||||||
One- to four-family | $ | 16,150 | 44.56 | % | 55.36 | % | $ | 17,875 | 47.86 | % | 62.73 | % | $ | 14,218 | 50.54 | % | 56.49 | % | ||||||||||||||||||
Multi-family | 6,877 | 41.53 | 23.57 | 5,208 | 37.80 | 18.28 | 6,844 | 32.87 | 27.20 | |||||||||||||||||||||||||||
Home equity | 1,196 | 3.53 | 4.10 | 1,642 | 4.06 | 5.76 | 1,027 | 3.80 | 4.08 | |||||||||||||||||||||||||||
Construction and land | 3,252 | 4.13 | 11.14 | 2,635 | 4.36 | 9.25 | 2,137 | 7.15 | 8.49 | |||||||||||||||||||||||||||
Commercial real estate | 671 | 3.96 | 2.30 | 720 | 3.45 | 2.53 | 445 | 3.54 | 1.77 | |||||||||||||||||||||||||||
Commercial | 1,001 | 2.28 | 3.43 | 371 | 2.43 | 1.30 | 457 | 2.08 | 1.82 | |||||||||||||||||||||||||||
Consumer | 28 | 0.01 | 0.10 | 43 | 0.04 | 0.15 | 39 | 0.02 | 0.15 | |||||||||||||||||||||||||||
Total allowance for loan losses | $ | 29,175 | 100.00 | % | 100.00 | % | $ | 28,494 | 100.00 | % | 100.00 | % | $ | 25,167 | 100.00 | % | 100.00 | % |
118 |
119 |
120 |
121 |
122 |
At December 31, | ||||||||||||||||||||||||||||||||
At March 31, 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 111,803 | $ | 114,076 | $ | 116,813 | $ | 119,056 | $ | 33,561 | $ | 35,417 | $ | 42,607 | $ | 44,330 | ||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
Government sponsored enterprise issued | 25,682 | 26,092 | 29,207 | 29,579 | 32,650 | 33,196 | 38,262 | 39,277 | ||||||||||||||||||||||||
Private label issued | — | — | — | — | 19,475 | 18,451 | 26,199 | 25,447 | ||||||||||||||||||||||||
Government sponsored enterprise bonds | 10,000 | 10,021 | 8,000 | 8,017 | 71,210 | 71,349 | 57,327 | 57,698 | ||||||||||||||||||||||||
Municipal obligations | 57,550 | 58,729 | 35,493 | 37,371 | 37,644 | 39,068 | 31,804 | 31,120 | ||||||||||||||||||||||||
Other debt securities | 5,000 | 5,136 | 5,000 | 5,070 | 5,000 | 5,118 | 5,000 | 5,294 | ||||||||||||||||||||||||
Certificates of deposit | 6,370 | 6,417 | 5,880 | 5,924 | 3,920 | 3,920 | — | — | ||||||||||||||||||||||||
Total securities available for sale | $ | 216,405 | $ | 220,471 | $ | 200,393 | $ | 205,017 | $ | 203,460 | $ | 206,519 | $ | 201,199 | $ | 203,166 |
123 |
At March 31, 2013 | ||||||||
Amortized Cost | Fair Value | |||||||
(In Thousands) | ||||||||
Mortgage-backed securities: | ||||||||
Fannie Mae | $ | 103,368 | $ | 105,144 | ||||
Freddie Mac | 40,292 | 41,088 |
124 |
One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total Securities | ||||||||||||||||||||||||||||||||||||
Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | — | — | $ | 109,407 | 1.9 6 | % | $ | 2,045 | 1.34 | % | $ | 2,624 | 3.40 | % | $ | 114,076 | 1.9 7 | % | |||||||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||||||||||||||||||
Government sponsored enterprise issued | 1,664 | 4.79 | % | 24,428 | 2.20 | — | — | — | — | 26,092 | 2.36 | |||||||||||||||||||||||||||||
Government sponsored enterprise bonds | — | — | 10,021 | 0.78 | — | — | — | — | 10,021 | 0.78 | ||||||||||||||||||||||||||||||
Municipal obligations | 792 | 1.83 | 11,738 | 4.56 | 19,680 | 2.96 | 26,519 | 4.56 | 58,729 | 3.97 | ||||||||||||||||||||||||||||||
Other debt securities | — | — | — | — | — | — | 5,136 | 10.00 | 5,136 | 10.00 | ||||||||||||||||||||||||||||||
Certificates of deposit | 1,964 | 0.69 | 4,209 | 1.06 | 244 | 1.00 | — | — | 6,417 | 0.94 | ||||||||||||||||||||||||||||||
Total securities available for sale | $ | 4,420 | 2.43 | % | $ | 159,803 | 2.08 | % | $ | 21,969 | 2.79 | % | $ | 34,279 | 5.28 | % | $ | 220,471 | 2.66 | % |
125 |
126 |
At March 31, 2013 | At December 31, 2012 | |||||||||||||||||||||||
Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Deposit type: | ||||||||||||||||||||||||
Demand deposits | $ | 41,979 | 4.59 | % | 0.00 | % | $ | 39,767 | 4.23 | % | 0.00 | % | ||||||||||||
NOW accounts | 44,969 | 4.92 | 0.03 | % | 44,373 | 4.72 | 0.03 | % | ||||||||||||||||
Regular savings | 58,315 | 6.37 | 0.10 | % | 54,837 | 5.84 | 0.10 | % | ||||||||||||||||
Money market and savings deposits | 57,263 | 6.26 | 0.16 | % | 63,616 | 6.77 | 0.15 | % | ||||||||||||||||
Total transaction accounts | 202,526 | 22.14 | 0.08 | % | 202,593 | 21.56 | 0.08 | % | ||||||||||||||||
Certificates of deposit | 712,393 | 77.86 | 0.79 | % | 736,920 | 78.44 | 0.83 | % | ||||||||||||||||
Total deposits | $ | 914,919 | 100.00 | % | 0.63 | % | $ | 939,513 | 100.00 | % | 0.67 | % |
At December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Deposit type: | ||||||||||||||||||||||||
Demand deposits | $ | 28,812 | 2.74 | % | 0.00 | % | $ | 30,030 | 2.62 | % | 0.00 | % | ||||||||||||
NOW accounts | 39,645 | 3.77 | 0.08 | % | 37,705 | 3.29 | 0.08 | % | ||||||||||||||||
Regular savings | 45,511 | 4.33 | 0.20 | % | 44,540 | 3.89 | 0.22 | % | ||||||||||||||||
Money market and savings deposits | 58,591 | 5.57 | 0.41 | % | 58,863 | 5.14 | 0.48 | % | ||||||||||||||||
Total transaction accounts | 172,559 | 16.41 | 0.21 | % | 171,138 | 14.94 | 0.24 | % | ||||||||||||||||
Certificates of deposit | 878,733 | 83.59 | 1.53 | % | 974,391 | 85.06 | 1.74 | % | ||||||||||||||||
Total deposits | $ | 1,051,292 | 100.00 | % | 1.31 | % | $ | 1,145,529 | 100.00 | % | 1.51 | % |
At December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Deposit type: | ||||||||||||||||||||||||
Demand deposits | $ | 24,255 | 2.08 | % | 0.00 | % | $ | 20,664 | 1.73 | % | 0.00 | % | ||||||||||||
NOW accounts | 37,165 | 3.19 | 0.08 | % | 32,770 | 2.74 | 0.13 | % | ||||||||||||||||
Regular savings | 45,219 | 3.88 | 0.48 | % | 27,029 | 2.26 | 0.47 | % | ||||||||||||||||
Money market and savings deposits | 46,809 | 4.02 | 0.46 | % | 73,901 | 6.18 | 0. 95 | % | ||||||||||||||||
Total transaction accounts | 153,448 | 13.17 | 0. 30 | % | 154,364 | 12.91 | 0. 57 | % | ||||||||||||||||
Certificates of deposit | 1,011,442 | 86.83 | 2.52 | % | 1,041,533 | 87.09 | 3.85 | % | ||||||||||||||||
Total deposits | $ | 1,164,890 | 100.00 | % | 2.2 2 | % | $ | 1,195,897 | 100.00 | % | 3. 42 | % |
127 |
Due in: | At March 31, 2013 | ||||
(In Thousands) | |||||
Three months or less | $ | 47,384 | |||
Over three months through six months | 36,891 | ||||
Over six months through 12 months | 33,098 | ||||
Over 12 months | 68,685 | ||||
Total | $ | 186,058 |
At March 31, | At December 31, | |||||||||||||||
2013 | 2012 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest Rate: | ||||||||||||||||
Less than 1% | $ | 557,422 | $ | 562,186 | $ | 177,225 | $ | 56,294 | ||||||||
1.00% to 1.99% | 143,614 | 162,541 | 588,989 | 771,822 | ||||||||||||
2.00% to 2.99% | 10,174 | 10,681 | 92,330 | 111,511 | ||||||||||||
3.00% to 3.99% | 1,183 | 1,512 | 4,929 | 8,840 | ||||||||||||
4.00% to 4.99% | — | — | 14,757 | 25,060 | ||||||||||||
5.00% to 5.99% | — | — | 503 | 864 | ||||||||||||
Total | $ | 712,393 | $ | 736,920 | $ | 878,733 | $ | 974,391 |
At March 31, 2013 | ||||||||||||||||||||||||
Period to Maturity | ||||||||||||||||||||||||
One Year or Less | Over One Year to Two Years | Over Two Years to Three Years | Over Three Years | Total | Percentage of Total Certificate Accounts | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest Rate: | ||||||||||||||||||||||||
Less than 1% | $ | 377,412 | $ | 177,670 | $ | 2,340 | $ | — | $ | 557,422 | 78.2 | % | ||||||||||||
1.00% to 1.99% | 72,463 | 33,192 | 4,574 | 33,385 | 143,614 | 20.2 | ||||||||||||||||||
2.00% to 2.99% | 1,293 | 3,224 | 5,657 | — | 10,174 | 1.4 | ||||||||||||||||||
3.00% to 3.99% | 1,183 | — | — | — | 1,183 | 0.2 | ||||||||||||||||||
Total | $ | 452,351 | $ | 214,086 | $ | 12,571 | $ | 33,385 | $ | 712,393 | 100.0 | % |
128 |
At or For the Three Months Ended March 31, | At or For the Year Ended December 31, | |||||||||||||||||||
2013 | 2012 | 2012 | 2011 | 2010 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Balance outstanding at end of period | $ | 479,3 2 4 | $ | 459,193 | $ | 479,888 | $ | 461,138 | $ | 456,959 | ||||||||||
Weighted average interest rate at the end of period | 3.83 | % | 3.89 | % | 3.82 | % | 3.93 | % | 3.94 | % | ||||||||||
Maximum amount of borrowings outstanding at any month end during the period | $ | 490,124 | $ | 461,610 | $ | 491,053 | $ | 465,290 | $ | 506,902 | ||||||||||
Average balance outstanding during the period | 485,259 | 457,658 | 475,114 | 446,401 | 481,808 | |||||||||||||||
Weighted average interest rate during the period | 3.82 | % | 3.95 | % | 3.87 | % | 3.93 | % | 4.03 | % |
129 |
130 |
131 |
● | for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral; |
132 |
● | for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory limit is 75%; |
● | for loans for the construction of commercial, multi-family or other non-residential property, the supervisory limit is 80%; |
● | for loans for the construction of one- to four-family properties, the supervisory limit is 85%; and |
● | for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), the limit is 85%. |
133 |
134 |
135 |
136 |
137 |
138 |
139 |
140 |
141 |
142 |
143 |
144 |
Name | Age | Position | ||
Douglas S. Gordon | 55 | President and Chief Executive Officer, New Waterstone and WaterStone Bank | ||
Richard C. Larson | 55 | Chief Financial Officer and Senior Vice President, New Waterstone and WaterStone Bank | ||
William F. Bruss | 43 | Chief Operating Officer (appointed June 2013), General Counsel and Secretary, New Waterstone and WaterStone Bank | ||
Rebecca M. Arndt | 45 | Vice President, Retail Banking, WaterStone Bank | ||
Eric J. Egenhoefer | 37 | President, Waterstone Mortgage Corporation |
145 |
Name, Age, Director Since, Term Expiration | Experience, Qualifications, Attributes, Skills | |
Douglas S. Gordon, 55, director since 2005, term expires 2015 | Chief Executive Officer and President of Waterstone-Federal and WaterStone Bank since January 2007; President and Chief Operating Officer of WaterStone Bank from 2005 to 2007; real estate investor. Mr. Gordon brings extensive prior banking experience as an executive officer at M&I Bank and at Security Savings Bank. He has extensive firsthand knowledge and experience with our lending markets and our customers. Mr. Gordon has a B.A. from the University of Wisconsin – Parkside and an M.B.A. from Marquette University. | |
Ellen S. Bartel, 58, director since 2013, term expires 2016 | President of Divine Savior Holy Angels (DSHA) High School (Milwaukee, Wisconsin) since 1998 where she achieved significant and measurable improvements in DSHA curriculum, facilities, financial infrastructure, image, and reputation. Ms. Bartel has balanced DSHA’s budget for 15 consecutive years, oversaw endowment growth from under $1 million to nearly $10 million, and developed recruitment strategies leading to an incoming class wait list for 14 consecutive years. Prior to her employment at DSHA, Bartel held several positions at Alverno College (Milwaukee, Wisconsin) (1986 to 1997) with the most recent being Vice President of Institutional Advancement from 1994 to 1997. Ms. Bartel’s experience overseeing a large corporate entity provides significant perspective on financial management and human resources. Ms. Bartel has a B.A. and an M.S.A. from the University of Notre Dame. | |
Thomas E. Dalum, 72, director since 1979, term expires 2016 | Former chairman and CEO of UELC, an equipment leasing company and of DUECO, an equipment manufacturer and distributor. Mr. Dalum brings a strong entrepreneurial background, an outstanding history of community involvement and public service plus more than 30 years of experience as a member of the Waterstone-Federal board of directors. Mr. Dalum has a B.A. from the University of Notre Dame and an M.B.A. from Northwestern University. | |
Michael L. Hansen, 61, director since 2003, term expires 2014 | Business investor; current significant ownership interest in Jacsten Holdings LLC, Eagle Metal Finishing LLC, Mid-States Contracting, Inc., and Midwest Metals LLC. In addition to extensive entrepreneurial experience, Mr. Hansen is a C.P.A. with 13 years of audit and tax experience at an international public accounting firm. Mr. Hansen brings this experience to the board of directors and to the audit committee in particular. Mr. Hansen has a B.B.A. from the University of Notre Dame. | |
Patrick S. Lawton, 56, director since 2000, term expires 2015 | Managing Director of Fixed Income Capital Markets for Robert W. Baird & Co., Incorporated. As an R.W. Baird Managing Director, Mr. Lawton brings his investment portfolio expertise to the board of directors. Mr. Lawton has a B.S.B.A. and an M.B.A. from Marquette University. | |
Kristine A. Rappé,56, director since 2013, term expires 2016 | Special advisor to the Wisconsin Energy Foundation (Milwaukee, Wisconsin) following a 30-year career with Wisconsin Energy Corporation. In her roles at Wisconsin Energy Corporation as Vice President of Customer Services (1994 to 2001), Vice President and Corporate Secretary (2001 to 2004) and Senior Vice President and Chief Administrative Officer (2004 to 2012), Ms. Rappé had responsibility for shared services including information technology, human resources, supply chain management, business continuity/corporate security, and the WEC Foundation. Ms. Rappé’s experience overseeing a large corporate entity provides significant perspective on financial management and human resources, and she has an outstanding history of community involvement and public service. Ms. Rappé has a B.A. from the University of Wisconsin – Oshkosh. | |
Stephen J. Schmidt, 51, director since 2002, term expires 2014 | President of Schmidt and Bartelt Funeral and Cremation Services. Mr. Schmidt has solid entrepreneurial experience and extensive community contact throughout the communities served by WaterStone Bank. Mr. Schmidt has an Associate’s Degree from the New England Institute and a B.A. from the University of Wisconsin – Stevens Point. |
146 |
147 |
Name | Largest Aggregate Balance 01/01/12 to 12/31/12 | Interest Rate | Non- employee Interest Rate | Principal Balance 12/31/12 | Principal Paid 01/01/12 to 12/31/12 | Interest Paid 01/01/12 to 12/31/12 | |||||||||||||||||||
Richard C. Larson | $ | 283,171 | 2.06 | % | 5.75 | % | $ | 272,457 | $ | 10,714 | $ | 5,779 | |||||||||||||
William F. Bruss | $ | 281,517 | 2.06 | % | 5.50 | % | $ | 271,866 | $ | 9,651 | $ | 5,754 |
Name | Largest Aggregate Balance 01/01/11 to 12/31/11 | Interest Rate | Non- employee Interest Rate | Principal Balance 12/31/11 | Principal Paid 01/01/11 to 12/31/11 | Interest Paid 01/01/11 to 12/31/11 | |||||||||||||||||||
Richard C. Larson | $ | 293,458 | 2.16 | % | 5.75 | % | $ | 283,171 | $ | 10,287 | $ | 6,498 | |||||||||||||
William F. Bruss | $ | 290,768 | 2.16 | % | 5.50 | % | $ | 281,517 | $ | 9,251 | $ | 6,448 |
Name | Largest Aggregate Balance 01/01/10 to 12/31/10 | Interest Rate | Non- employee Interest Rate | Principal Balance 12/31/10 | Principal Paid 01/01/10 to 12/31/10 | Interest Paid 01/01/10 to 12/31/10 | |||||||||||||||||||
Richard C. Larson | $ | 302,278 | 2.71 | % | 5.75 | % | $ | 293,458 | $ | 9,327 | $ | 8,521 | |||||||||||||
William F. Bruss | $ | 299,104 | 2.71 | % | 5.50 | % | $ | 290,768 | $ | 8,336 | $ | 8,428 |
148 |
DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2012 | |||||||||
Name | Fees earned or paid in cash ($)(1) | Total ($) | |||||||
Patrick S. Lawton Chairman of the Board; Compensation Committee Chairman | 108,000 | 108,000 | |||||||
Michael L. Hansen Audit Committee Chairman | 88,000 | 88,000 | |||||||
Stephen J. Schmidt Nominating Committee Chairman | 80,500 | 80,500 | |||||||
Thomas E. Dalum Director | 80,500 | 80,500 |
(1) | Includes annual retainer, committee and chairman fees. |
(2) | As of December 31, 2012, each of Messrs. Lawton, Hansen, Schmidt and Dalum had 50,000 vested but unexercised stock options, respectively, and no unvested stock options, respectively. |
149 |
150 |
151 |
SUMMARY COMPENSATION TABLE | ||||||||||||||||||||||||||||||||
Name and Principal Position | Year | Salary ($)(1) | Bonus ($) | Stock Awards ($)(2) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($)(3) | Total ($) | ||||||||||||||||||||||||
Douglas S. Gordon Chief Executive Officer of Waterstone-Federal and WaterStone Bank | 2012 2011 2010 | 780,000420,000420,000 | 350,000 — — | — — — | — — — | — — — | 16,552 16,263 7,320 | 1,146,552436,263427,320 | ||||||||||||||||||||||||
Richard C. Larson Chief Financial Officer of Waterstone-Federal and WaterStone Bank | 2012 2011 2010 | 240,000236,000233,400 | 30,000 — — | 47,250 — — | 37,500 — — | — — — | 23,857 21,458 19,762 | 378,607257,458253,162 | ||||||||||||||||||||||||
William F. Bruss Chief Operating Officer and General Counsel of Waterstone-Federal and WaterStone Bank | 2012 2011 2010 | 207,200204,200196,700 | 30,000 — — | 47,250 — — | 43,750 — — | — — — | 26,314 21,448 18,363 | 354,544225,648215,063 | ||||||||||||||||||||||||
Eric J. Egenhoefer President of Waterstone Mortgage Corporation | 2012 2011 2010 | 247,115200,000173,462 | — — — | — — — | — — 109,000 | 879,371 80,000 120,000 | 6,600 5,600 — | 1,133,086285,600402,462 | ||||||||||||||||||||||||
Rebecca M. Arndt Vice President, Retail Operations of WaterStone Bank | 2012 2011 2010 | 152,000148,000145,000 | 20,000 — — | 28,350 — — | 25,000 — — | — — — | 16,938 12,064 18,074 | 242,288160,064163,074 |
(1) | Salary includes amounts contributed by participants in the WaterStone Bank 401(k) Plan. Mr. Gordon’s salary includes 401(k) contributions of $22,500 in 2012, $19,314 in 2011 and $22,000 in 2010. Mr. Larson’s salary includes 401(k) contributions of $5,514 in 2012 and $4,085 in 2011. Mr. Bruss’ salary includes 401(k) contributions of $9,873 in 2012, $5,483 in 2011 and $6,506 in 2010. Ms. Arndt’s salary includes 401(k) contributions of $15,177 in 2012, $14,093 in 2011 and $14,509 in 2010. Mr. Egenhoefer contributed $16,500 to the Waterstone Mortgage Corp 401(k) Plan in 2010. |
(2) | Reflects the aggregate grant-date fair value of the stock and option awards granted during the years shown as calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. The fair value of stock awards is equal to the quoted market closing price of our common stock on the date of grant. The assumptions used in the valuation of stock options, as well as additional information related to these awards, are included in Note 10 to Waterstone-Federal’s audited financial statements for the year ended December 31, 2012 included in Waterstone-Federal’s Annual Report on Form 10-K for the year then ended, as filed with the Securities and Exchange Commission. |
(3) | All other 2012 compensation includes Employee Stock Ownership Plan shares valued at $4.02 per share allocated on December 31, 2012 and total $10,323 for Messrs. Gordon and Mr. Larson, $9,998 for Mr. Bruss and $7,248 for Ms. Arndt. Mr. Egenhoefer is not eligible to participate in the Employee Stock Ownership Plan. All other 2011 compensation includes Employee Stock Ownership Plan shares valued at $2.65 per share allocated on December 31, 2011 and total $7,517 for Mr. Gordon, $7,285 for Mr. Larson, $6,289 for Mr. Bruss and $4,537 for Ms. Arndt. All other 2010 compensation includes Employee Stock Ownership Plan shares valued at $3.48 per share allocated on December 31, 2010 and total $8,467 for Mr. Gordon, $8,227 for Mr. Larson, $6,922 for Mr. Bruss and $5,105 for Ms. Arndt. All other compensation also includes club membership dues. Mr. Gordon’s membership dues were expense of $1,498 for 2012, expense of $1,699 for 2011 and a refund of $7,770 for 2010; Mr. Larson’s membership dues were $5,280 for 2012, $5,615 for 2011 and $4,960 for 2010; Mr. Bruss’ membership dues were $6,884 for 2012, $6,621 for 2011 and $6,411 for 2010; Ms. Arndt’s dues were $925 for 2012, and $984 for 2011 and 2010. All other compensation includes personal use of company-owned vehicles. The value of such use amounted to $4,731 in 2012, $7,051 in 2011 and $6,623 in 2010 for Mr. Gordon; $8,253 in 2012, $8,558 in 2011 and $6,575 in 2010 for Mr. Larson; $9,462 in 2012, $8,538 in 2011 and $5,030 in 2010 for Mr. Bruss; $8,765 in 2012, $6,543 in 2011 and $11,985 in 2010 for Ms. Arndt. Mr. Egenhoefer was paid a car allowance of $6,600 in 2012 and $5,600 in 2011. |
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GRANTS OF PLAN-BASED AWARDS FOR THE YEAR ENDED DECEMBER 31, 2012 | |||||||||||||||||||||||||||||||
Estimated Future Payouts Under Non-Equity Incentive Plan Awards | All other stock awards: number of shares or units (#) | All other option awards: number of securities underlying options (#) | Exercise or base price of option awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) | |||||||||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | |||||||||||||||||||||||||||
Richard C. Larson | 1/4/12 | — | — | — | 25,000 | — | — | 47,250 | |||||||||||||||||||||||
1/4/12 | — | — | — | — | 30,000 | 1.89 | 37,500 | ||||||||||||||||||||||||
William E. Bruss | 1/4/12 | — | — | — | 25,000 | — | — | 47,250 | |||||||||||||||||||||||
1/4/12 | — | — | — | — | 35,000 | 1.89 | 43,750 | ||||||||||||||||||||||||
Eric J. Egenhoefer | (1) | (1 | ) | 63,000 | (1) | (1 | ) | — | — | — | — | ||||||||||||||||||||
Rebecca M. Arndt | 1/4/12 | — | — | — | 15,000 | — | — | 28,350 | |||||||||||||||||||||||
1/4/12 | — | — | — | — | 20,000 | 1.89 | 25,000 |
(1) | On an annual basis, Mr. Egenhoefer is entitled to earn a bonus under the criteria described under “—Compensation Discussion and Analysis—Bonus.” There is no minimum, target or maximum amount. Therefore, pursuant to Securities and Exchange Commission regulations, the target amount listed is based upon operating results for the year ended December 31, 2011. |
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2012 | |||||||||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#)(1) | Market Value of Shares or Units of Stock That Have Not Vested ($)(2) | |||||||||||||||||
Douglas S. Gordon | 250,000 | — | 17.67 | 1/5/2017 | — | — | |||||||||||||||||
Richard C. Larson | 50,000 | — | 17.67 | 1/5/2017 | 25,000 | 195,000 | |||||||||||||||||
— | 30,000 | (3) | 1.89 | 1/4/2022 | |||||||||||||||||||
William F. Bruss | 50,000 | — | 17.67 | 1/5/2017 | 25,000 | 195,000 | |||||||||||||||||
— | 35,000 | (3) | 1.89 | 1/4/2022 | |||||||||||||||||||
Rebecca M. Arndt | 25,000 | — | 17.67 | 1/5/2017 | 15,000 | 117,000 | |||||||||||||||||
— | 20,000 | (3) | 1.89 | 1/4/2022 | |||||||||||||||||||
Eric J. Egenhoefer | 20,000 | 30,000 | (3) | 3.80 | 10/20/2020 | — | — |
(1) | Consists of restricted shares awarded on January 4, 2012 under the 2006 Equity Incentive Plan. The restricted shares vest in five annual increments of 20% each beginning on the first anniversary of the initial award. |
(2) | Based on the $7.80 per share closing price of our common stock on December 31, 2012, the last trading day of the year. |
(3) | Options vest in five annual increments of 20% each beginning on the first anniversary of the grant date. |
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OPTION EXERCISES AND STOCK VESTED DURING THE YEAR ENDED DECEMBER 31, 2012 | ||||||||||||||||
Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting(#) | Value Realized on Vesting ($)(1) | ||||||||||||
Douglas S. Gordon | — | — | 20,000 | 37,800 | ||||||||||||
Richard C. Larson | — | — | 3,300 | 6,237 | ||||||||||||
William F. Bruss | — | — | 2,700 | 5,103 | ||||||||||||
Rebecca M. Arndt | — | — | 2,000 | 3,780 | ||||||||||||
Eric J. Egenhoefer | — | — | — | — |
(1) | Based on the $1.89 per share closing price of our common stock on January 4, 2012. |
154 |
155 |
● | non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plan; |
● | any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plan; |
● | any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plan; |
● | any tax-qualified employee stock benefit plans and restricted stock plan, in the aggregate, may not acquire more than 10% of the shares sold in the offering, unless WaterStone Bank has tangible capital of 10% or more, in which case tax-qualified employee stock benefit plans and restricted stock plans may acquire up to 12% of the shares sold in the offering; |
● | the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; |
● | accelerated vesting is not permitted except for death, disability or upon a change in control of WaterStone Bank or New Waterstone; and |
● | our executive officers or directors must exercise or forfeit their options in the event that WaterStone Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive. |
156 |
Share Price | 748,000 Shares Awarded at Minimum of Offering Range | 880 ,000 Shares Awarded at Midpoint of Offering Range | 1, 0 12, 00 0 Shares Awarded at Maximum of Offering Range | |||||||||||
(In thousands, except share price information) | ||||||||||||||
$ | 8.00 | $ | 5,984 | $ | 7,040 | $ | 8,096 | |||||||
10.00 | 7,480 | 8,800 | 10,120 | |||||||||||
12.00 | 8,976 | 10,560 | 12,144 | |||||||||||
14.00 | 10,472 | 12,320 | 14,168 |
Exercise Price | Grant-Date Fair Value Per Option | 1,870,000 Options at Minimum of Offering Range | 2, 200 , 0 00 Options at Midpoint of Offering Range | 2, 530 , 000 Options at Maximum of Offering Range | |||||||||||||
(In thousands, except exercise price and fair value information) | |||||||||||||||||
$ | 8.00 | $ | 1.94 | $ | 3,628 | $ | 4,268 | $ | 4,908 | ||||||||
10.00 | 2.43 | 4,544 | 5,346 | 6,148 | |||||||||||||
12.00 | 2.92 | 5,460 | 6,424 | 7,388 | |||||||||||||
14.00 | 3.40 | 6,358 | 7,480 | 8,602 |
157 |
Name of Beneficial Owner | Total Shares Beneficially Owned (1)(2) | Percent of All Common Stock Outstanding | |||||
Rebecca M. Arndt | * | ||||||
Ellen S. Bartel | * | ||||||
William F. Bruss | * | ||||||
Thomas E. Dalum | * | ||||||
Eric J. Egenho e fer | * | ||||||
Douglas S. Gordon | |||||||
Michael L. Hansen | * | ||||||
Richard C. Larson | * | ||||||
Patrick S. Lawton | * | ||||||
Kristine A. Rappé | * | ||||||
Stephen J. Schmidt | * | ||||||
All directors and executive officers as a group (11 persons) (3) | % | ||||||
Lamplighter Financial, MHC 11200 West Plank Court Wauwatosa, Wisconsin 53226 | 23,050,183 | 73.5% |
* | Less than 1%. |
(1) | Unless otherwise noted, the specified persons have sole voting and dispositive power as to the shares. Number of shares identified as indirect beneficial ownership with shared voting and dispositive power: Mr. Egenhoefer - _____________; Ms. Arndt – ____________; Mr. Bruss – ____________; Mr. Dalum – _____________; Mr. Gordon – _____________; Mr. Hansen – ___________; Mr. Larson – ____________; Mr. Lawton – ____________; group – _____________. |
(2) | Includes the following shares underlying options which are exercisable within 60 days of July 31, 2013 : Ms. Arndt – 25,000; Messrs. Bruss, Dalum, Hansen, Larsen, Lawton and Schmidt – 50,000 shares each; Mr. Gordon – 250,000; all directors and executive officers as a group – ______________. |
(3) | The total for the group (but not any individual) includes ____________ unallocated shares held in the employee stock ownership plan, as to which voting and dispositive power is shared. As administrator, WaterStone Bank (through its board) may vote, in its discretion, shares which have not yet been allocated to participants. Employees may vote the shares allocated to their accounts; the administrator will vote unvoted shares in its discretion. Allocated shares are included only if allocated to named executive officers, in which case they are included in those individuals’ (and the group’s) beneficial ownership. |
158 |
(i) | the number of exchange shares to be held upon completion of the conversion, based upon their beneficial ownership of Waterstone-Federal common stock as of July 31, 2013 ; |
(ii) | the proposed purchases of subscription shares, assuming sufficient shares of common stock are available to satisfy their subscriptions; and |
(iii) | the total shares of common stock to be held upon completion of the conversion. |
Number of Exchange Shares to BeHeld (2) | Proposed Purchases of Stock in the Offering (1) | Total Common Stock to be Held at Minimum of Offering Range (3) | ||||||||||||||||||
Name of Beneficial Owner | Number of Shares | Amount | Number of Shares | Percentage of Shares Outstanding | ||||||||||||||||
Rebecca M. Arndt | 2 0 ,000 | $ | 200,000 | * | ||||||||||||||||
Ellen S. Bartel | 5 , 00 0 | 50,000 | * | |||||||||||||||||
William F. Bruss | 1 2 , 500 | 125,000 | * | |||||||||||||||||
Thomas E. Dalum | 25 , 000 | 250,000 | * | |||||||||||||||||
Eric J. Egenho e fer | 1 0 , 0 00 | 100,000 | * | |||||||||||||||||
Douglas S. Gordon | 50 , 0 00 | 500,000 | ||||||||||||||||||
Michael L. Hansen | 25 , 00 0 | 250,000 | * | |||||||||||||||||
Richard C. Larson | 1, 00 0 | 10,000 | * | |||||||||||||||||
Patrick S. Lawton | 50 , 0 00 | 500,000 | * | |||||||||||||||||
Kristine A. Rappé | 1 0 , 0 00 | 100,000 | * | |||||||||||||||||
Stephen J. Schmidt | 10,000 | 100,000 | * | |||||||||||||||||
Total for Directors and Executive Officers | 218,500 | $ | 2,185,000 | % |
* | Less than 1%. |
(1) | Includes proposed subscriptions, if any, by associates. |
(2) | Based on information presented in “Beneficial Ownership of Common Stock,” and assuming an exchange ratio of 0.8111 at the minimum of the offering range. |
(3) | At the maximum of the offering range, directors and executive officers would own __________ shares, or _________% of our outstanding shares of common stock. |
159 |
(i) | Natural persons (including trusts of natural persons) residing in Milwaukee, Washington and Waukesha Counties, Wisconsin; and |
(ii) | Waterstone-Federal’s public stockholders as of July 31, 2013 . |
160 |
● | Eliminate the uncertainties associated with the mutual holding company structure under financial reform legislation. Under the Dodd-Frank Act, the Federal Reserve Board became the federal regulator of all savings and loan holding companies and mutual holding companies, which has resulted in changes in regulations applicable to Lamplighter Financial, MHC and Waterstone-Federal. Among other things, these changes have adversely affected our ability to pay cash dividends to our stockholders, including the ability of Lamplighter Financial, MHC to waive any dividends declared by Waterstone-Federal. The conversion will eliminate our mutual holding company structure and will enable us to pay dividends to our stockholders, subject to the customary legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.” It also will eliminate the risk that the Federal Reserve Board will amend existing regulations applicable to the conversion process in a manner disadvantageous to our public stockholders or depositors. |
● | Transition us to a more familiar and flexible organizational structure. The stock holding company structure is a more familiar form of organization, which we believe will make our common stock more appealing to investors, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings, although we have no current plans, agreements or understandings regarding any additional securities offerings. |
● | Enhance our regulatory capital position. A strong capital position is essential to achieving our long-term objective of building stockholder value. While WaterStone Bank significantly exceeds all regulatory capital requirements, including the minimum capital requirements required by the memorandum of understanding we have entered into with the WDFI and the Federal Deposit Insurance Corporation, the proceeds from the offering will greatly strengthen our capital position and enable us to support our planned growth and expansion. Minimum regulatory capital requirements will also increase in the future under recently adopted regulations, and compliance with these new requirements will be essential to continued implementation of our business strategy. |
161 |
● | Improve the liquidity of our shares of common stock. The larger number of shares that will be outstanding after completion of the conversion and offering is expected to result in a more liquid and active market than currently exists for Waterstone-Federal common stock. A more liquid and active market would make it easier for our stockholders to buy and sell our common stock and would give us greater flexibility in implementing capital management strategies. |
● | Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions as opportunities arise. The additional capital raised in the offering will also enable us to consider larger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions, although applicable regulations prohibit the acquisition of New Waterstone for three years following completion of the conversion. |
162 |
Shares to be Sold in This Offering | Shares of New Waterstone to be Issued for Shares of Waterstone-Federal | Total Shares of Common Stock to be Issued in Exchange and Offering | Exchange Ratio | Equivalent Value of Shares Based Upon Offering Price (1) | Equivalent Pro Forma Tangible Book Value Per Exchanged Share (2) | Shares to be Received for 100 Existing Shares (3) | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||
Minimum | 18,700,000 | 73.5 | % | 6,730,586 | 26.5 | % | 25,430,586 | 0.8111 | $ | 8.11 | $ | 11.62 | 81 | |||||||||||||||||||||||
Midpoint | 22,000,000 | 73.5 | 7,918,336 | 26.5 | 29,918,336 | 0.9542 | 9.54 | 12.51 | 95 | |||||||||||||||||||||||||||
Maximum | 25,300,000 | 73.5 | 9,106,086 | 26.5 | 34,406,086 | 1.0973 | 10.97 | 13.41 | 110 |
(1) | Represents the value of shares of New Waterstone common stock to be received in the conversion by a holder of one share of Waterstone-Federal, pursuant to the exchange ratio, based upon the $10 .00 per share offering price. |
(2) | Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. |
(3) | Cash will be paid in lieu of fractional shares. |
163 |
164 |
● | the present results and financial condition of Waterstone-Federal and the projected results and financial condition of New Waterstone; |
● | the economic and demographic conditions in Waterstone-Federal’s existing market area; |
● | certain historical, financial and other information relating to Waterstone-Federal; |
● | a comparative evaluation of the operating and financial characteristics of Waterstone-Federal with those of other publicly traded savings institutions; |
● | the effect of the conversion and offering on New Waterstone’s stockholders’ equity and earnings potential; |
● | the proposed dividend policy of New Waterstone; and |
● | the trading market for securities of comparable institutions and general conditions in the market for such securities. |
165 |
● | Waterstone-Federal’s financial condition and results of operations; |
● | a comparison of financial performance ratios of Waterstone-Federal to those of other financial institutions of similar size; |
● | market conditions generally and in particular for financial institutions; and |
● | the historical trading price of the publicly held shares of Waterstone-Federal common stock. |
166 |
Price-to-earnings multiple (1) | Price-to-book value ratio | Price-to-tangible book value ratio | ||||||||||
New Waterstone (on a pro forma basis, assuming completion of the conversion) | ||||||||||||
Maximum | 16.83 | x | 81.23 | % | 81.38 | % | ||||||
Midpoint | 14.53 | x | 75.70 | % | 75.81 | % | ||||||
Minimum | 12.26 | x | 69.25 | % | 69.38 | % | ||||||
Valuation of peer group companies, all of which are fully converted (on an historical basis) | ||||||||||||
Averages | 26.67 | x | 106.18 | % | 111.04 | % | ||||||
Medians | 28.78 | x | 106.77 | % | 110.01 | % |
(1) | Price-to-earnings multiples calculated by RP Financial, LC. in the independent appraisal are based on an estimate of “core,” or recurring, earnings on a trailing twelve-month basis through June 30 , 2013 for New Waterstone and March 31, 2013 for the peer group compannies . These ratios are different than those presented in “Pro Forma Data.” |
167 |
168 |
169 |
(i) | Natural persons (including trusts of natural persons) residing in Milwaukee, Washington and Waukesha Counties, Wisconsin; |
(ii) | Waterstone-Federal’s public stockholders as of July 31, 2013 ; and |
(iii) | Other members of the general public. |
170 |
(i) | No person may purchase fewer than 25 shares of common stock; |
(ii) | Tax qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering; |
(iii) | Except for the employee stock ownership plan and 401(k) plan, as described above, no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than $3.0 million ( 300,000 shares) of common stock in all categories of the offering combined; |
(iv) | Current stockholders of Waterstone-Federal are subject to an ownership limitation. As previously described, current stockholders of Waterstone-Federal will receive shares of New Waterstone common stock in exchange for their existing shares of Waterstone-Federal common stock. The number of shares of common stock that a stockholder may purchase in the offering, together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates will receive in exchange for existing Waterstone-Federal common stock, may not exceed 9.9% of the shares of common stock of New Waterstone to be issued and outstanding at the completion of the conversion; and |
171 |
(v) | The maximum number of shares of common stock that may be purchased in all categories of the offering by executive officers and directors of WaterStone Bank and their associates, in the aggregate, when combined with shares of common stock issued in exchange for existing shares, may not exceed 25% of the total shares issued in the conversion. |
(i) | any corporation or organization, other than Waterstone-Federal, WaterStone Bank or a majority-owned subsidiary of WaterStone Bank, of which the person is a senior officer, partner or 10% beneficial stockholder; |
(ii) | any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; provided, however, it does not include any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity; and |
(iii) | any blood or marriage relative of the person, who either has the same home as the person or who is a director or officer of Waterstone-Federal or WaterStone Bank. |
(i) | knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or |
(ii) | a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. |
172 |
(i) | consulting as to the financial and marketing implications of the plan of conversion and reorganization; |
(ii) | reviewing with our board of directors the financial effect of the offering on us, based on the independent appraiser’s appraisal of the shares of common stock; |
(iii) | reviewing all offering documents, including this prospectus and any prospectus related to a syndicated or firm commitment underwritten offering, stock order forms and related offering materials; |
(iv) | assisting in the design and implementation of a marketing strategy for the offering; |
(v) | assisting management in scheduling and preparing for meetings with potential investors and other broker-dealers in connection with the offering; and |
(vi) | providing such other general advice and assistance as may be reasonably necessary to promote the successful completion of the offerings. |
173 |
● | consolidation of deposit accounts and vote calculations; |
● | design and preparation of proxy and stock order forms; |
● | organization and supervision of the Stock Information Center; |
● | proxy solicitation and other services for our special meeting of members; and |
● | preparation and processing of other documents related to the stock offering. |
174 |
175 |
(i) | personal check, bank check or money order, made payable to Waterstone Financial, Inc.; or |
(ii) | authorization of withdrawal of available funds from your WaterStone Bank deposit accounts. |
176 |
(i) | a small number of persons otherwise eligible to subscribe for shares under the plan of conversion and reorganization reside in such state; |
(ii) | the issuance of subscription rights or the offer or sale of shares of common stock to such persons would require us, under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify our securities for sale in such state; or |
(iii) | such registration or qualification would be impracticable for reasons of cost or otherwise. |
177 |
178 |
179 |
1. | The merger of Lamplighter Financial, MHC with and into Waterstone-Federal will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. |
2. | The constructive exchange of Eligible Account Holders’ and Supplemental Eligible Account Holders’ liquidation interests in Lamplighter Financial, MHC for liquidation interests in Waterstone-Federal will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations. |
3. | None of Lamplighter Financial, MHC, Waterstone-Federal, Eligible Account Holders nor Supplemental Eligible Account Holders, will recognize any gain or loss on the transfer of the assets of Lamplighter Financial, MHC to Waterstone-Federal in constructive exchange for liquidation interests in Waterstone-Federal. |
4. | The basis of the assets of Lamplighter Financial, MHC and the holding period of such assets to be received by Waterstone-Federal will be the same as the basis and holding period of such assets in Lamplighter Financial, MHC immediately before the exchange. |
5. | The merger of Waterstone-Federal with and into New Waterstone will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code and, therefore, will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. Neither Waterstone-Federal nor New Waterstone will recognize gain or loss as a result of such merger. |
6. | The basis of the assets of Waterstone-Federal and the holding period of such assets to be received by New Waterstone will be the same as the basis and holding period of such assets in Waterstone-Federal immediately before the exchange. |
7. | Current stockholders of Waterstone-Federal will not recognize any gain or loss upon their exchange of Waterstone-Federal common stock for New Waterstone common stock. |
8. | Eligible Account Holders and Supplemental Eligible Account Holders will not recognize any gain or loss upon the constructive exchange of their liquidation interests in Waterstone-Federal for interests in the liquidation account in New Waterstone. |
9. | The exchange by the Eligible Account Holders and Supplemental Eligible Account Holders of the liquidation interests that they constructively received in Waterstone-Federal for interests in the liquidation account established in New Waterstone will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations. |
10. | Each stockholder’s aggregate basis in shares of New Waterstone common stock (including fractional share interests) received in the exchange will be the same as the aggregate basis of Waterstone-Federal common stock surrendered in the exchange. |
11. | Each stockholder’s holding period in his or her New Waterstone common stock received in the exchange will include the period during which the Waterstone-Federal common stock surrendered was held, provided that the Waterstone-Federal common stock surrendered is a capital asset in the hands of the stockholder on the date of the exchange. |
180 |
12. | Cash received by any current stockholder of Waterstone-Federal in lieu of a fractional share interest in shares of New Waterstone common stock will be treated as having been received as a distribution in full payment in exchange for a fractional share interest of New Waterstone common stock, which such stockholder would otherwise be entitled to receive. Accordingly, a stockholder will recognize gain or loss equal to the difference between the cash received and the basis of the fractional share. If the common stock is held by the stockholder as a capital asset, the gain or loss will be capital gain or loss. |
13. | It is more likely than not that the fair market value of the nontransferable subscription rights to purchase New Waterstone common stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members upon distribution to them of nontransferable subscription rights to purchase shares of New Waterstone common stock. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights. |
14. | It is more likely than not that the fair market value of the benefit provided by the liquidation account of WaterStone Bank supporting the payment of the New Waterstone liquidation account in the event New Waterstone lacks sufficient net assets is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders and Supplemental Eligible Account Holders upon the constructive distribution to them of such rights in the WaterStone Bank liquidation account as of the effective date of the merger of Waterstone-Federal with and into New Waterstone. |
15. | It is more likely than not that the basis of the shares of New Waterstone common stock purchased in the offering by the exercise of nontransferable subscription rights will be the purchase price. The holding period of the New Waterstone common stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date the right to acquire such stock was exercised. |
16. | No gain or loss will be recognized by New Waterstone on the receipt of money in exchange for New Waterstone common stock sold in the offering. |
181 |
182 |
WATERSTONE FINANCIAL, INC.
183 |
184 |
185 |
● | the plan of merger does not make an amendment to the articles of incorporation that would be required to be approved by the stockholders; |
● | each stockholder of the surviving corporation whose shares were outstanding immediately before the effective date of the merger will hold the same number of shares, with identical designations, preferences, limitations, and rights, immediately after; and |
● | the number of shares of any class or series of stock outstanding immediately after the effective time of the merger will not increase by more than 20% the total number of voting shares outstanding immediately before the merger. |
186 |
● | the economic effect, both immediate and long-term, upon New Waterstone’s stockholders, including stockholders, if any, who do not participate in the transaction; |
● | the social and economic effect on the present and future employees, creditors and customers of, and others dealing with, New Waterstone and its subsidiaries and on the communities in which New Waterstone and its subsidiaries operate or are located; |
● | whether the proposal is acceptable based on the historical, current or projected future operating results or financial condition of New Waterstone; |
● | whether a more favorable price could be obtained for New Waterstone’s stock or other securities in the future; |
● | the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would affect the employees of New Waterstone and its subsidiaries; |
● | the future value of the stock or any other securities of New Waterstone or the other entity to be involved in the proposed transaction; |
● | any antitrust or other legal and regulatory issues that are raised by the proposal; |
● | the business and historical, current or expected future financial condition or operating results of the other entity to be involved in the transaction, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed transaction; and |
● | the ability of New Waterstone to fulfill its objectives as a financial institution holding company and on the ability of its subsidiary financial institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations. |
187 |
(i) | The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock; |
(ii) | The division of the board of directors into three staggered classes; |
(iii) | The ability of the board of directors to fill vacancies on the board; |
(iv) | The requirement that directors may only be removed for cause and by the affirmative vote of at least a majority of the votes eligible to be cast by stockholders; |
(v) | The ability of the board of directors to amend and repeal the bylaws; |
(vi) | The ability of the board of directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire New Waterstone; |
(vii) | The authority of the board of directors to provide for the issuance of preferred stock; |
(viii) | The validity and effectiveness of any action lawfully authorized by the affirmative vote of the holders of a majority of the total number of outstanding shares of common stock; |
(ix) | The number of stockholders constituting a quorum or required for stockholder consent; |
(x) | The indemnification of current and former directors and officers, as well as employees and other agents, by New Waterstone; |
(xi) | The limitation of liability of officers and directors to New Waterstone for money damages; |
(xii) | The inability of stockholders to cumulate their votes in the election of directors; |
(xiii) | The advance notice requirements for stockholder proposals and nominations; and |
(xiv) | The provision of the articles of incorporation requiring approval of at least 80% of the outstanding voting stock to amend the provisions of the articles of incorporation provided in (i) through (xiii) of this list. |
188 |
189 |
190 |
191 |
192 |
193 |
194 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition at March 31, 2013 (Unaudited) and December 31, 2012 | F-2 |
Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 (Unaudited) | F-3 |
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (Unaudited) | F-4 |
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2013 and 2012 (Unaudited) | F-5 |
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (Unaudited) | F-6 |
Notes to Consolidated Financial Statements (Unaudited) | F-8 |
Reports of Independent Registered Public Accounting Firm | F-42 |
Consolidated Statements of Financial Condition at December 31, 2012 and 2011 | F-45 |
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 | F-46 |
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2012, 2011 and 2010 | F-47 |
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 2010 | F-48 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 | F-49 |
Notes to Consolidated Financial Statements | F-51 |
*** | |
All financial statement schedules have been omitted as the required information either is not applicable or is included in the financial statements or related notes. |
F-1
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited) | ||||||
March 31, | December 31, | |||||
2013 | 2012 | |||||
(In Thousands, except share data) | ||||||
Assets | ||||||
Cash | $ | 54,652 | 37,129 | |||
Federal funds sold | 9,209 | 28,576 | ||||
Interest-earning deposits in other financial institutions and other short term investments | 253 | 5,764 | ||||
Cash and cash equivalents | 64,114 | 71,469 | ||||
Securities available for sale (at fair value) | 220,471 | 205,017 | ||||
Loans held for sale (at fair value) | 104,168 | 133,613 | ||||
Loans receivable | 1,124,937 | 1,133,672 | ||||
Less: Allowance for loan losses | 29,298 | 31,043 | ||||
Loans receivable, net | 1,095,639 | 1,102,629 | ||||
Office properties and equipment, net | 26,844 | 26,935 | ||||
Federal Home Loan Bank stock (at cost) | 20,193 | 20,193 | ||||
Cash surrender value of life insurance | 38,201 | 38,061 | ||||
Real estate owned | 30,799 | 35,974 | ||||
Prepaid expenses and other assets | 28,325 | 27,185 | ||||
Total assets | $ | 1,628,754 | 1,661,076 | |||
Liabilities and Shareholders’ Equity | ||||||
Liabilities: | ||||||
Demand deposits | $ | 86,948 | 84,140 | |||
Money market and savings deposits | 115,578 | 118,453 | ||||
Time deposits | 712,393 | 736,920 | ||||
Total deposits | 914,919 | 939,513 | ||||
Short-term borrowings | 45,324 | 45,888 | ||||
Long-term borrowings | 434,000 | 434,000 | ||||
Advance payments by borrowers for taxes | 7,346 | 1,672 | ||||
Other liabilities | 20,060 | 37,369 | ||||
Total liabilities | 1,421,649 | 1,458,442 | ||||
Shareholders’ equity: | ||||||
Preferred stock (par value $.01 per share) Authorized - 20,000,000 shares, no shares issued | — | — | ||||
Common stock (par value $.01 per share) Authorized - 200,000,000 shares in 2013 and 2012 Issued - 34,072,909 in 2013 and 2012 Outstanding - 31,348,556 in 2013 and 2012 | 341 | 341 | ||||
Additional paid-in capital | 110,458 | 110,490 | ||||
Retained earnings | 141,112 | 136,487 | ||||
Unearned ESOP shares | (1,494 | ) | (1,708 | ) | ||
Accumulated other comprehensive income, net of taxes | 1,949 | 2,285 | ||||
Treasury shares (2,724,353 shares), at cost | (45,261 | ) | (45,261 | ) | ||
Total shareholders’ equity | 207,105 | 202,634 | ||||
Total liabilities and shareholders’ equity | $ | 1,628,754 | 1,661,076 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-2
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands, except per share amounts) | ||||||
Interest income: | ||||||
Loans | $ | 15,213 | 16,572 | |||
Mortgage-related securities | 437 | 863 | ||||
Debt securities, federal funds sold and short-term investments | 536 | 707 | ||||
Total interest income | 16,186 | 18,142 | ||||
Interest expense: | ||||||
Deposits | 1,466 | 3,204 | ||||
Borrowings | 4,574 | 4,512 | ||||
Total interest expense | 6,040 | 7,716 | ||||
Net interest income | 10,146 | 10,426 | ||||
Provision for loan losses | 1,760 | 3,675 | ||||
Net interest income after provision for loan losses | 8,386 | 6,751 | ||||
Noninterest income: | ||||||
Service charges on loans and deposits | 365 | 249 | ||||
Increase in cash surrender value of life insurance | 140 | 145 | ||||
Total other-than-temporary investment losses | — | (901 | ) | |||
Portion of loss recognized in other comprehensive income (before income taxes) | — | 897 | ||||
Net impairment losses recognized in earnings | — | (4 | ) | |||
Mortgage banking income | 21,988 | 14,201 | ||||
(Loss) gain on sale of available for sale securities | (9 | ) | 241 | |||
Other | 549 | 170 | ||||
Total noninterest income | 23,033 | 15,002 | ||||
Noninterest expenses: | ||||||
Compensation, payroll taxes, and other employee benefits | 16,482 | 10,637 | ||||
Occupancy, office furniture, and equipment | 1,916 | 1,721 | ||||
Advertising | 824 | 555 | ||||
Data processing | 477 | 392 | ||||
Communications | 408 | 296 | ||||
Professional fees | 405 | 426 | ||||
Real estate owned | 141 | 1,435 | ||||
FDIC insurance premiums | 673 | 941 | ||||
Other | 2,545 | 3,112 | ||||
Total noninterest expenses | 23,871 | 19,515 | ||||
Income before income taxes | 7,548 | 2,238 | ||||
Income tax expense | 2,923 | 30 | ||||
Net income | $ | 4,625 | 2,208 | |||
Income per share: | ||||||
Basic | $ | 0.15 | 0.07 | |||
Diluted | $ | 0.15 | 0.07 | |||
Weighted average shares outstanding: | ||||||
Basic | 31,123,857 | 31,024,139 | ||||
Diluted | 31,334,490 | 31,036,711 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-3
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Net income | $ | 4,625 | 2,208 | |||
Other comprehensive income, net of tax: | ||||||
Net unrealized holding (loss) gain on avaliable for sale securities: | ||||||
Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $225 and ($100) respectively | (341 | ) | 340 | |||
Reclassification adjustment for net loss (gain) included in net income during the period, net of tax (benefit) expense of $4 and ($96), respectively | 5 | (144 | ) | |||
Total other comprehensive (loss) income | (336 | ) | 196 | |||
Comprehensive income | $ | 4,289 | 2,404 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-4
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
Accumulated | ||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||
Common Stock | Paid-In | Retained | ESOP | Comprehensive | Treasury | Shareholders’ | ||||||||||||
Shares | Amount | Capital | Earnings | Shares | Income | Shares | Equity | |||||||||||
(In Thousands) | ||||||||||||||||||
Balances at December 31, 2011 | 31,250 | $ | 340 | 110,894 | 101,573 | (2,562 | ) | 1,388 | (45,261 | ) | 166,372 | |||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | 2,208 | — | — | — | 2,208 | ||||||||||
Other comprehensive income: | — | — | — | — | — | 196 | — | 196 | ||||||||||
Total comprehensive income | 2,404 | |||||||||||||||||
ESOP shares committed to be released to Plan participants | — | — | (170 | ) | — | 214 | — | — | 44 | |||||||||
Stock based compensation | 100 | — | 40 | — | — | — | — | 40 | ||||||||||
Balances at March 31, 2012 | 31,350 | $ | 340 | 110,764 | 103,781 | (2,348 | ) | 1,584 | (45,261 | ) | 168,860 | |||||||
Balances at December 31, 2012 | 31,348 | $ | 341 | 110,490 | 136,487 | (1,708 | ) | 2,285 | (45,261 | ) | 202,634 | |||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | 4,625 | — | — | — | 4,625 | ||||||||||
Other comprehensive loss: | — | — | — | — | — | (336 | ) | — | (336 | ) | ||||||||
Total comprehensive income | 4,289 | |||||||||||||||||
ESOP shares committed to be released to Plan participants | — | — | (64 | ) | — | 214 | — | — | 150 | |||||||||
Stock based compensation | — | — | 32 | — | — | — | — | 32 | ||||||||||
Balances at March 31, 2013 | 31,348 | $ | 341 | 110,458 | 141,112 | (1,494 | ) | 1,949 | (45,261 | ) | 207,105 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-5
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Operating activities: | ||||||
Net income | $ | 4,625 | 2,208 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Provision for loan losses | 1,760 | 3,675 | ||||
Provision for depreciation | 606 | 486 | ||||
Deferred income taxes | 1,671 | — | ||||
Stock based compensation | 32 | 40 | ||||
Net amortization of premium/discount on debt and mortgage related securities | 620 | 216 | ||||
Amortization of unearned ESOP shares | 150 | 44 | ||||
Gain on sale of loans held for sale | (19,996 | ) | (14,964 | ) | ||
Loans originated for sale | (430,108 | ) | (326,882 | ) | ||
Proceeds on sales of loans originated for sale | 479,549 | 339,428 | ||||
(Increase) decrease in accrued interest receivable | (500 | ) | 147 | |||
Increase in cash surrender value of life insurance | (140 | ) | (145 | ) | ||
Decrease in accrued interest on deposits and borrowings | (64 | ) | (117 | ) | ||
Increase in other liabilities | (4,947 | ) | (2,610 | ) | ||
Decrease in accrued tax payable | (557 | ) | (17 | ) | ||
(Loss) gain on sale of available for sale securities | 9 | (241 | ) | |||
Impairment of securities | — | 4 | ||||
Net realized and unrealized (gain) loss related to real estate owned | (352 | ) | 533 | |||
Other | (2,319 | ) | (1,232 | ) | ||
Net cash provided by operating activities | 30,039 | 573 | ||||
Investing activities: | ||||||
Net decrease in loans receivable | 2,496 | 6,779 | ||||
Purchases of: | ||||||
Debt securities | (26,316 | ) | (980 | ) | ||
Mortgage related securities | (3,096 | ) | (51,367 | ) | ||
Premises and equipment, net | (537 | ) | (396 | ) | ||
Proceeds from: | ||||||
Principal repayments on mortgage-related securities | 11,036 | 7,339 | ||||
Maturities of debt securities | 815 | 25,072 | ||||
Sales of debt securities | 921 | 11,908 | ||||
Calls of structured notes | — | 2,648 | ||||
Sales of real estate owned | 8,512 | 6,490 | ||||
Redemption of FHLB stock | — | 852 | ||||
Net cash (used in) provided by investing activities | (6,169 | ) | 8,345 | |||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-6
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Financing activities: | ||||||
Net decrease in deposits | (24,594 | ) | (7,538 | ) | ||
Net change in short-term borrowings | (564 | ) | (1,945 | ) | ||
Net change in advance payments by borrowers for taxes | (6,067 | ) | (4,208 | ) | ||
Net cash used in financing activities | (31,225 | ) | (13,691 | ) | ||
Decrease in cash and cash equivalents | (7,355 | ) | (4,773 | ) | ||
Cash and cash equivalents at beginning of period | 71,469 | 80,380 | ||||
Cash and cash equivalents at end of period | $ | 64,114 | 75,607 | |||
Supplemental information: | ||||||
Cash paid, credited or (received) during the period for: | ||||||
Income tax payments | 1,809 | 47 | ||||
Interest payments | 6,105 | 7,833 | ||||
Noncash investing activities: | ||||||
Loans receivable transferred to real estate owned | 2,734 | 6,349 | ||||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-7
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 — Basis of Presentation
The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc. (the “Company”) and the Company’s subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’ equity, and cash flows of the Company for the periods presented.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2012 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any other period.
The preparation of the unaudited consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the allowance for loan losses, deferred income taxes and real estate owned. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In January 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-01,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which amended disclosures by requiring improved information about financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. Reporting entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of international financial reporting standards (“IFRS”). Companies were required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those years. The adoption of this accounting standard did not have a material impact on the Company’s results of operation, financial position, or liquidity.
In February 2013, the FASB issued ASU No. 2013-02,Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated OCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated OCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to
F-8
other disclosures that provide additional details about those amounts. This standard does not change the current requirements for reporting net income or other comprehensive income in the financial statements and was effective for interim and annual periods beginning on or after December 15, 2012. The adoption of this accounting standard did not have a material impact on the Company’s results of operation, financial position, or liquidity.
Note 2— Securities Available for Sale
The amortized cost and fair values of the Company’s investment in securities available for sale follow:
March 31, 2013 | ||||||||||
Gross | Gross | |||||||||
Amortized | unrealized | unrealized | ||||||||
cost | gains | losses | Fair value | |||||||
(In Thousands) | ||||||||||
Mortgage-backed securities | $ | 111,803 | 2,381 | (108 | ) | 114,076 | ||||
Collateralized mortgage obligations: | ||||||||||
Government sponsored enterprise issued | 25,682 | 410 | — | 26,092 | ||||||
Mortgage-related securities | 137,485 | 2,791 | (108 | ) | 140,168 | |||||
Government sponsored enterprise bonds | 10,000 | 21 | — | 10,021 | ||||||
Municipal securities | 57,550 | 1,746 | (567 | ) | 58,729 | |||||
Other debt securities | 5,000 | 136 | — | 5,136 | ||||||
Debt securities | 72,550 | 1,903 | (567 | ) | 73,886 | |||||
Certificates of Deposit | 6,370 | 51 | (4 | ) | 6,417 | |||||
$ | 216,405 | 4,745 | (679 | ) | 220,471 |
December 31, 2012 | ||||||||||
Gross | Gross | |||||||||
Amortized | unrealized | unrealized | ||||||||
cost | gains | losses | Fair value | |||||||
(In Thousands) | ||||||||||
Mortgage-backed securities | $ | 116,813 | 2,349 | (106 | ) | 119,056 | ||||
Collateralized mortgage obligations: | ||||||||||
Government sponsored enterprise issued | 29,207 | 373 | (1 | ) | 29,579 | |||||
Mortgage-related securities | 146,020 | 2,722 | (107 | ) | 148,635 | |||||
Government sponsored enterprise bonds | 8,000 | 17 | — | 8,017 | ||||||
Municipal securities | 35,493 | 2,043 | (165 | ) | 37,371 | |||||
Other debt securities | 5,000 | 70 | — | 5,070 | ||||||
Debt securities | 48,493 | 2,130 | (165 | ) | 50,458 | |||||
Certificates of Deposit | 5,880 | 45 | (1 | ) | 5,924 | |||||
$ | 200,393 | 4,897 | (273 | ) | 205,017 |
F-9
The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At March 31, 2013, $6.1 million of the Company’s government sponsored enterprise bonds and $94.6 million of the Company’s mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.
The amortized cost and fair values of investment securities by contractual maturity at March 31, 2013 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized | Fair | |||||
Cost | Value | |||||
(In Thousands) | ||||||
Debt and other securities | ||||||
Due within one year | $ | 2,750 | 2,756 | |||
Due after one year through five years | 24,726 | 25,737 | ||||
Due after five years through ten years | 20,248 | 20,155 | ||||
Due after ten years | 31,196 | 31,655 | ||||
Mortgage-related securities | 137,485 | 140,168 | ||||
$ | 216,405 | 220,471 |
Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:
March 31, 2013 | ||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||
value | loss | value | loss | value | loss | |||||||||
(In Thousands) | ||||||||||||||
Mortgage-backed securities | $ | 8,012 | (108 | ) | — | — | 8,012 | (108 | ) | |||||
Municipal securities | 30,938 | (477 | ) | 384 | (90 | ) | 31,322 | (567 | ) | |||||
Certificates of Deposit | 1,221 | (4 | ) | — | — | 1,221 | (4 | ) | ||||||
$ | 40,171 | (589 | ) | 384 | (90 | ) | 40,555 | (679 | ) |
December 31, 2012 | ||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||
value | loss | value | loss | value | loss | |||||||||
(In Thousands) | ||||||||||||||
Mortgage-backed securities | $ | 19,382 | (106 | ) | — | — | 19,382 | (106 | ) | |||||
Collateralized mortgage obligations: | ||||||||||||||
Government sponsored enterprise issued | 1,419 | (1 | ) | — | — | 1,419 | (1 | ) | ||||||
Municipal securities | 9,009 | (94 | ) | 398 | (71 | ) | 9,407 | (165 | ) | |||||
Certificates of Deposit | 244 | (1 | ) | — | — | 244 | (1 | ) | ||||||
$ | 30,054 | (202 | ) | 398 | (71 | ) | 30,452 | (273 | ) |
F-10
The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain securities in unrealized loss positions, the Company prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
As of March 31, 2013, the Company identified two municipal securities that were deemed to be other-than-temporarily impaired. Both securities were issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the securities to operate as a going concern. During the year ended December 31, 2012, the Company’s analysis of these securities resulted in $100,000 in credit losses that were charged to earnings with respect to these two municipal securities. No additional credit loss was recognized during the three months ended March 31, 2013. As of March 31, 2013, these securities had a combined amortized cost of $215,000 and a combined estimated fair value of $237,000. As of March 31, 2013, the Company had one municipal security which had been in an unrealized loss position for twelve months or longer. This security was determined not to be other-than-temporarily impaired as of March 31, 2013. During the year ended December 31, 2012, two private-label collateralized mortgage obligations, that had been identified as other than temporarily impaired, were sold at a combined gain of $282,000. At the time of sale, these securities had a combined amortized cost of $18.0 million.
The following table presents the change in other-than-temporary credit related impairment charges on securities available for sale for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive loss.
(In Thousands) | ||||
Credit-related impairments on securities as of December 31, 2011 | $ | 2,096 | ||
Credit-related impairments related to securites for which an other-than-temporary impairment was not previously recognized | 100 | |||
Increase in credit-related impairments related to securities for which an other-than-temporary impairment was previously recognized | 113 | |||
Reduction for sales of securities for which other-than-temporary was previously recognized | (2,209 | ) | ||
Credit-related impairments on securities as of December 31, 2012 | 100 | |||
Credit-related impairments related to securites for which an other-than-temporary impairment was not previously recognized | — | |||
Increase in credit-related impairments related to securities for which an other-than-temporary impairment was previously recognized | — | |||
Credit-related impairments on securities as of March 31, 2013 | $ | 100 |
Exclusive of the aforementioned securities, the Company has determined that the decline in fair value of the remaining securities is not attributable to credit deterioration. Based on the foregoing evaluation criteria, and as the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired.
F-11
Continued deterioration of general economic market conditions could result in the recognition of future other-than-temporary impairment losses within the investment portfolio and such amounts could be material to our consolidated financial statements.
During the three months ended March 31, 2013, proceeds from the sale of securities totaled $921,000 and resulted in losses totaling $9,000. The $9,000 loss included in (loss) gain on sale of available for sale securities in the consolidated statements of income during the three months ended March 31, 2013 was reclassified from accumulated other comprehensive income. During the three months ended March 31, 2012, proceeds from the sale of securities totaled $11.9 million and resulted in gains totaling $241,000. The $241,000 gain included in (loss) gain on sale of available for sale securities in the consolidated statements of income during the three months ended March 31, 2012 was reclassified from accumulated other comprehensive income.
Note 3 - Loans Receivable
Loans receivable at March 31, 2013 and December 31, 2012 are summarized as follows:
March 31, | December 31, | |||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Mortgage loans: | ||||||
Residential real estate: | ||||||
One- to four-family | $ | 445,243 | 460,821 | |||
Over four-family | 514,566 | 514,363 | ||||
Home equity | 35,949 | 36,494 | ||||
Construction and land | 33,249 | 33,818 | ||||
Commercial real estate | 76,759 | 65,495 | ||||
Consumer | 128 | 132 | ||||
Commercial loans | 19,043 | 22,549 | ||||
$ | 1,124,937 | 1,133,672 |
The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While credit risks are geographically concentrated in the Company’s Milwaukee metropolitan area, and while 88.5% of the Company’s loan portfolio involves loans that are secured by residential real estate, there are no concentrations with individual or groups of related borrowers. While the real estate collateralizing these loans is residential in nature, it ranges from owner-occupied single family homes to large apartment complexes. In addition, real estate collateralizing $79.0 million, or 7.0% of total loans, is located outside of the state of Wisconsin.
During the three months ended March 31, 2013, $430.1 million in residential loans were originated for sale. During the same period, sales of loans held for sale totaled $459.6 million, generating mortgage banking income of $22.0 million. The unpaid principal balance of loans serviced for others was $787.6 million and $635.8 million at March 31, 2013 and December 31, 2012, respectively. These loans are not reflected in the consolidated statements of financial condition.
Qualifying loans receivable totaling $818.2 million and $801.6 million at March 31, 2013 and December 31, 2012, respectively, are pledged as collateral against $350.0 million in outstanding Federal Home Loan Bank of Chicago advances under a blanket security agreement.
F-12
An analysis of past due loans receivable as of March 31, 2013 and December 31, 2012 follows:
As of March 31, 2013 | ||||||||||||||
1-59 Days Past Due (1) | 60-89 Days Past Due (2) | Greater Than 90 Days | Total Past Due | Current (3) | Total Loans | |||||||||
(In Thousands) | ||||||||||||||
Mortgage loans: | ||||||||||||||
Residential real estate: | ||||||||||||||
One- to four-family | $ | 8,344 | 4,766 | 29,016 | 42,126 | 403,117 | 445,243 | |||||||
Over four-family | 1,819 | 1,562 | 19,040 | 22,421 | 492,145 | 514,566 | ||||||||
Home equity | 914 | 105 | 448 | 1,467 | 34,482 | 35,949 | ||||||||
Construction and land | — | 763 | 2,140 | 2,903 | 30,346 | 33,249 | ||||||||
Commercial real estate | 258 | — | 665 | 923 | 75,836 | 76,759 | ||||||||
Consumer | — | — | — | — | 128 | 128 | ||||||||
Commercial loans | — | 841 | 511 | 1,352 | 17,691 | 19,043 | ||||||||
Total | $ | 11,335 | 8,037 | 51,820 | 71,192 | 1,053,745 | 1,124,937 |
As of December 31, 2012 | ||||||||||||||
Mortgage loans: | ||||||||||||||
Residential real estate: | ||||||||||||||
One- to four-family | $ | 11,745 | 5,402 | 29,259 | 46,406 | 414,415 | 460,821 | |||||||
Over four-family | 3,543 | 1,498 | 18,336 | 23,377 | 490,986 | 514,363 | ||||||||
Home equity | 416 | 111 | 404 | 931 | 35,563 | 36,494 | ||||||||
Construction and land | 87 | — | 2,180 | 2,267 | 31,551 | 33,818 | ||||||||
Commercial real estate | 290 | — | 668 | 958 | 64,537 | 65,495 | ||||||||
Consumer | — | — | — | — | 132 | 132 | ||||||||
Commercial loans | — | — | 511 | 511 | 22,038 | 22,549 | ||||||||
Total | $ | 16,081 | 7,011 | 51,358 | 74,450 | 1,059,222 | 1,133,672 |
(1) Includes $4.9 million and $2.4 million for March 31, 2013 and December 31, 2012, respectively, which are on non-accrual status.
(2) Includes $2.2 million and $2.8 million for March 31, 2013 and December 31, 2012, respectively, which are on non-accrual status.
(3) Includes $7.1 million and $18.2 million for March 31, 2013 and December 31, 2012, respectively, which are on non-accrual status.
As of March 31, 2013 and December 31, 2012, there are no loans that are 90 or more days past due and still accruing interest.
F-13
A summary of the activity for the three months ended March 31, 2013 and 2012 in the allowance for loan losses follows:
One- to Four- Family | Over Four- Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Three months ended March 31, 2013 | ||||||||||||||||||
Balance at beginning of period | $ | 17,819 | 7,734 | 2,097 | 1,323 | 1,259 | 30 | 781 | 31,043 | |||||||||
Provision (credit) for loan losses | 2,055 | (329 | ) | (74 | ) | 39 | 132 | (2 | ) | (61 | ) | 1,760 | ||||||
Charge-offs | (3,642 | ) | (137 | ) | (78 | ) | (7 | ) | — | — | — | (3,864 | ) | |||||
Recoveries | 153 | 201 | 2 | — | — | 2 | 1 | 359 | ||||||||||
Balance at end of period | $ | 16,385 | 7,469 | 1,947 | 1,355 | 1,391 | 30 | 721 | 29,298 | |||||||||
Three months ended March 31, 2012 | ||||||||||||||||||
Balance at beginning of period | $ | 17,475 | 8,252 | 1,998 | 2,922 | 941 | 28 | 814 | 32,430 | |||||||||
Provision (credit) for loan losses | 2,245 | 762 | 448 | 264 | 14 | (1 | ) | (57 | ) | 3,675 | ||||||||
Charge-offs | (2,446 | ) | (447 | ) | (150 | ) | (120 | ) | (35 | ) | — | — | (3,198 | ) | ||||
Recoveries | 116 | 4 | 7 | — | — | — | 13 | 140 | ||||||||||
Balance at end of period | $ | 17,390 | 8,571 | 2,303 | 3,066 | 920 | 27 | 770 | 33,047 |
F-14
A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of March 31, 2013 follows:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Allowance related to loans individually evaluated for impairment | $ | 5,190 | 2,383 | 951 | 377 | 228 | — | 331 | 9,460 | |||||||||
Allowance related to loans collectively evaluated for impairment | 11,195 | 5,086 | 996 | 978 | 1,163 | 30 | 390 | 19,838 | ||||||||||
Balance at end of period | $ | 16,385 | 7,469 | 1,947 | 1,355 | 1,391 | 30 | 721 | 29,298 | |||||||||
Loans individually evaluated for impairment | $ | 56,498 | 25,794 | 2,221 | 4,429 | 665 | 22 | 1,352 | 90,981 | |||||||||
Loans collectively evaluated for impairment | 388,745 | 488,772 | 33,728 | 28,820 | 76,094 | 106 | 17,691 | 1,033,956 | ||||||||||
Total gross loans | $ | 445,243 | 514,566 | 35,949 | 33,249 | 76,759 | 128 | 19,043 | 1,124,937 |
F-15
A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of the year ended December 31, 2012 follows:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Allowance related to loans individually evaluated for impairment | $ | 7,058 | 3,268 | 1,033 | 377 | 341 | — | 331 | 12,408 | |||||||||
Allowance related to loans collectively evaluated for impairment | 10,761 | 4,466 | 1,064 | 946 | 918 | 30 | 450 | 18,635 | ||||||||||
Balance at end of period | $ | 17,819 | 7,734 | 2,097 | 1,323 | 1,259 | 30 | 781 | 31,043 | |||||||||
Loans individually evaluated for impairment | $ | 57,467 | 28,281 | 2,127 | 4,470 | 1,250 | 24 | 1,352 | 94,971 | |||||||||
Loans collectively evaluated for impairment | 403,354 | 486,082 | 34,367 | 29,348 | 64,245 | 108 | 21,197 | 1,038,701 | ||||||||||
Total gross loans | $ | 460,821 | 514,363 | 36,494 | 33,818 | 65,495 | 132 | 22,549 | 1,133,672 |
F-16
The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of March 31, 2013 and December 31, 2012:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
At March 31, 2013 | ||||||||||||||||||
Substandard | $ | 51,706 | 19,696 | 2,637 | 3,665 | 665 | 22 | 1,364 | 79,755 | |||||||||
Watch | 15,550 | 18,464 | 1,558 | 2,891 | 2,005 | — | 1,331 | 41,799 | ||||||||||
Pass | 377,987 | 476,406 | 31,754 | 26,693 | 74,089 | 106 | 16,348 | 1,003,383 | ||||||||||
$ | 445,243 | 514,566 | 35,949 | 33,249 | 76,759 | 128 | 19,043 | 1,124,937 | ||||||||||
At December 31, 2012 | ||||||||||||||||||
Substandard | $ | 53,242 | 24,767 | 2,913 | 3,705 | 1,251 | 23 | 1,365 | 87,266 | |||||||||
Watch | 17,082 | 14,157 | 606 | 2,803 | 1,234 | — | 964 | 36,846 | ||||||||||
Pass | 390,497 | 475,439 | 32,975 | 27,310 | 63,010 | 109 | 20,220 | 1,009,560 | ||||||||||
$ | 460,821 | 514,363 | 36,494 | 33,818 | 65,495 | 132 | 22,549 | 1,133,672 |
F-17
Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies. Our underwriting policies require an officers’ loan committee review and approve all loans in excess of $500,000. In addition, an independent loan review function exists for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, over four-family, construction and land, commercial real estate and commercial loans that individually, or as part of an overall borrower relationship, exceed $1.0 million in potential exposure. Loans meeting these criteria are reviewed on an annual basis, or more frequently if the loan renewal is less than one year. With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management’s attention and, if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.
The Company’s procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.
Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value. The adjustment factor is based upon the Company’s actual experience with respect to sales of real estate owned over the prior two years. An additional adjustment factor is applied by appraisal vintage to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.
With respect to over-four family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.
F-18
The following tables present data on impaired loans at March 31, 2013 and December 31, 2012.
As of or for the Three Months Ended March 31, 2013 | ||||||||||||||
Recorded Investment | Unpaid Principal | Reserve | Cumulative Charge-Offs | Average Recorded Investment | Interest Paid | |||||||||
(In Thousands) | ||||||||||||||
Total Impaired with Reserve | ||||||||||||||
One- to four-family | $ | 23,875 | 24,097 | 5,190 | 222 | 24,445 | 226 | |||||||
Over four-family | 16,030 | 16,275 | 2,383 | 245 | 16,732 | 214 | ||||||||
Home equity | 1,463 | 1,463 | 951 | — | 1,539 | 10 | ||||||||
Construction and land | 2,315 | 2,315 | 377 | — | 2,315 | 15 | ||||||||
Commercial real estate | 228 | 594 | 228 | 366 | 594 | — | ||||||||
Consumer | — | — | — | — | — | — | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 3 | ||||||||
45,263 | 46,096 | 9,460 | 833 | 46,977 | 468 | |||||||||
Total Impaired with no Reserve | ||||||||||||||
One- to four-family | 32,623 | 38,246 | — | 5,623 | 38,154 | 271 | ||||||||
Over four-family | 9,764 | 9,929 | — | 165 | 10,489 | 5 | ||||||||
Home equity | 758 | 924 | — | 166 | 934 | 3 | ||||||||
Construction and land | 2,114 | 3,579 | — | 1,465 | 3,579 | 1 | ||||||||
Commercial real estate | 437 | 461 | — | 24 | 472 | 2 | ||||||||
Consumer | 22 | 22 | — | — | 23 | — | ||||||||
Commercial | — | — | — | — | — | — | ||||||||
45,718 | 53,161 | — | 7,443 | 53,651 | 282 | |||||||||
Total Impaired | ||||||||||||||
One- to four-family | 56,498 | 62,343 | 5,190 | 5,845 | 62,599 | 497 | ||||||||
Over four-family | 25,794 | 26,204 | 2,383 | 410 | 27,221 | 219 | ||||||||
Home equity | 2,221 | 2,387 | 951 | 166 | 2,473 | 13 | ||||||||
Construction and land | 4,429 | 5,894 | 377 | 1,465 | 5,894 | 16 | ||||||||
Commercial real estate | 665 | 1,055 | 228 | 390 | 1,066 | 2 | ||||||||
Consumer | 22 | 22 | — | — | 23 | — | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 3 | ||||||||
$ | 90,981 | 99,257 | 9,460 | 8,276 | 100,628 | 750 |
F-19
As of or for the Year Ended December 31, 2012 | ||||||||||||||
Recorded Investment | Unpaid Principal | Reserve | Cumulative Charge-Offs | Average Recorded Investment | Interest Paid | |||||||||
(In Thousands) | ||||||||||||||
Total Impaired with Reserve | ||||||||||||||
One- to four-family | $ | 29,057 | 29,456 | 7,058 | 399 | 29,768 | 874 | |||||||
Over four-family | 17,397 | 17,642 | 3,268 | 245 | 18,073 | 722 | ||||||||
Home equity | 1,544 | 1,544 | 1,033 | — | 1,615 | 74 | ||||||||
Construction and land | 2,316 | 2,316 | 377 | — | 2,316 | 78 | ||||||||
Commercial real estate | 813 | 1,179 | 341 | 366 | 1,748 | 50 | ||||||||
Consumer | — | — | — | — | — | — | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 42 | ||||||||
52,479 | 53,489 | 12,408 | 1,010 | 54,872 | 1,840 | |||||||||
Total Impaired with no Reserve | ||||||||||||||
One- to four-family | 28,410 | 31,315 | — | 2,905 | 31,358 | 1,175 | ||||||||
Over four-family | 10,884 | 11,179 | — | 295 | 11,649 | 549 | ||||||||
Home equity | 583 | 749 | — | 166 | 755 | 14 | ||||||||
Construction and land | 2,154 | 3,655 | — | 1,501 | 3,656 | 5 | ||||||||
Commercial real estate | 437 | 461 | — | 24 | 473 | 12 | ||||||||
Consumer | 24 | 24 | — | — | 24 | 1 | ||||||||
Commercial | — | — | — | — | — | — | ||||||||
42,492 | 47,383 | — | 4,891 | 47,915 | 1,756 | |||||||||
Total Impaired | ||||||||||||||
One- to four-family | 57,467 | 60,771 | 7,058 | 3,304 | 61,126 | 2,049 | ||||||||
Over four-family | 28,281 | 28,821 | 3,268 | 540 | 29,722 | 1,271 | ||||||||
Home equity | 2,127 | 2,293 | 1,033 | 166 | 2,370 | 88 | ||||||||
Construction and land | 4,470 | 5,971 | 377 | 1,501 | 5,972 | 83 | ||||||||
Commercial real estate | 1,250 | 1,640 | 341 | 390 | 2,221 | 62 | ||||||||
Consumer | 24 | 24 | — | — | 24 | 1 | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 42 | ||||||||
$ | 94,971 | 100,872 | 12,408 | 5,901 | 102,787 | 3,596 |
The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan balance and management’s assessment that the full collection of the loan balance is not likely.
When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower’s financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors.
F-20
The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $45.7 million of impaired loans as of March 31, 2013 for which no allowance has been provided, $7.4 million in charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loan’s net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.
At March 31, 2013, total impaired loans includes $55.8 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months. At December 31, 2012, total impaired loans included $59.6 million of troubled debt restructurings.
The following presents data on troubled debt restructurings:
As of March 31, 2013 | ||||||||||||||||
Accruing | Non-accruing | Total | ||||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||||
(dollars in thousands) | ||||||||||||||||
One- to four-family | $ | 13,212 | 21 | $ | 15,942 | 85 | $ | 29,154 | 106 | |||||||
Over four-family | 6,727 | 5 | 16,024 | 8 | 22,751 | 13 | ||||||||||
Home equity | — | — | 975 | 3 | 975 | 3 | ||||||||||
Construction and land | 2,171 | 2 | 78 | 1 | 2,249 | 3 | ||||||||||
Commercial real estate | — | — | 665 | 2 | 665 | 2 | ||||||||||
$ | 22,110 | 28 | $ | 33,684 | 99 | $ | 55,794 | 127 |
As of December 31, 2012 | ||||||||||||||||
Accruing | Non-accruing | Total | ||||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||||
(dollars in thousands) | ||||||||||||||||
One- to four-family | $ | 9,921 | 17 | $ | 21,847 | 95 | $ | 31,768 | 112 | |||||||
Over four-family | 3,917 | 4 | 20,030 | 13 | 23,947 | 17 | ||||||||||
Home equity | — | — | 986 | 3 | 986 | 3 | ||||||||||
Construction and land | 2,173 | 2 | 79 | 1 | 2,252 | 3 | ||||||||||
Commercial real estate | — | — | 668 | 2 | 668 | 2 | ||||||||||
$ | 16,011 | 23 | $ | 43,610 | 114 | $ | 59,621 | 137 |
At March 31, 2013, $55.8 million in loans had been modified in troubled debt restructurings and $33.7 million of these loans were included in the non-accrual loan total. The remaining $22.1 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and thus, continued to be
F-21
included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.
All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, a $4.4 million valuation allowance has been established as of March 31, 2013 with respect to the $55.8 million in troubled debt restructurings. As of December 31, 2012, a $6.4 million valuation allowance had been established with respect to the $59.6 million in troubled debt restructurings.
After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.
The following presents troubled debt restructurings by concession type as of March 31, 2013 and December 31, 2012:
As of March 31, 2013 | ||||||||||||||
Performing in accordance with modified terms | In Default | Total | ||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||
(dollars in thousands) | ||||||||||||||
Interest reduction and principal forbearance | $ | 24,809 | 70 | 2,266 | 9 | 27,075 | 79 | |||||||
Principal forbearance | 17,374 | 11 | 347 | 1 | 17,721 | 12 | ||||||||
Interest reduction | 7,694 | 10 | 3,304 | 26 | 10,998 | 36 | ||||||||
$ | 49,877 | 91 | 5,917 | 36 | 55,794 | 127 |
As of December 31, 2012 | ||||||||||||||
Performing in accordance with modified terms | In Default | Total | ||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||
(dollars in thousands) | ||||||||||||||
Interest reduction and principal forbearance | $ | 26,051 | 77 | 2,770 | 11 | 28,821 | 88 | |||||||
Principal forbearance | 17,574 | 11 | 348 | 1 | 17,922 | 12 | ||||||||
Interest reduction | 11,984 | 35 | 894 | 2 | 12,878 | 37 | ||||||||
$ | 55,609 | 123 | 4,012 | 14 | 59,621 | 137 |
F-22
The following presents data on troubled debt restructurings as of March 31, 2013:
For the Three Months Ended March 31, 2013 | For the Three Months Ended March 31, 2012 | ||||||||||
Amount | Number | Amount | Number | ||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||
Loans modified as a troubled debt restructure | |||||||||||
One- to four-family | $ | 343 | 3 | $ | 2,971 | 7 | |||||
$ | 343 | 3 | $ | 2,971 | 7 | ||||||
Troubled debt restructuring modified within the past twelve months for which there was a default | |||||||||||
One- to four-family | $ | — | — | $ | 520 | 1 | |||||
$ | — | — | $ | 520 | 1 |
There have been no troubled debt restructurings modified within the past twelve months for which there was a default.
The following table presents data on non-accrual loans as of March 31, 2013 and December 31, 2012:
March 31, | December 31, | |||||
2013 | 2012 | |||||
(Dollars in Thousands) | ||||||
Non-accrual loans: | ||||||
Residential | ||||||
One- to four-family | $ | 41,985 | 46,467 | |||
Over four-family | 19,067 | 23,205 | ||||
Home equity | 1,539 | 1,578 | ||||
Construction and land | 2,175 | 2,215 | ||||
Commercial real estate | 665 | 668 | ||||
Consumer | 22 | 24 | ||||
Commercial | 511 | 511 | ||||
Total non-accrual loans | $ | 65,964 | 74,668 | |||
Total non-accrual loans to total loans receivable | 5.86 | % | 6.59 | % | ||
Total non-accrual loans and performing troubled debt restructurings to total loans receivable | 7.83 | % | 8.00 | % | ||
Total non-accrual loans to total assets | 4.05 | % | 4.50 | % |
F-23
Note 4— Real Estate Owned
Real estate owned is summarized as follows:
March 31, | December 31, | |||||
2013 | 2012 | |||||
(In Thousands) | ||||||
One- to four-family | $ | 15,348 | 17,353 | |||
Over four-family | 7,849 | 9,890 | ||||
Construction and land | 6,048 | 7,029 | ||||
Commercial real estate | 1,554 | 1,702 | ||||
$ | 30,799 | 35,974 |
The following table presents the activity in the Company’s real estate owned:
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Real estate owned at beginning of the period | $ | 35,974 | 56,670 | |||
Transferred from loans receivable | 2,734 | 6,349 | ||||
Sales | (7,680 | ) | (6,122 | ) | ||
Write downs | (480 | ) | (875 | ) | ||
Other | 251 | (12 | ) | |||
Real estate owned at the end of the period | $ | 30,799 | 56,010 |
Note 5— Mortgage Servicing Rights
The following table presents the activity in the Company’s mortgage servicing rights:
Three months ended March 31, | ||||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Mortgage servicing rights at beginning of the period | $ | 3,220 | 198 | |||
Additions | 958 | 439 | ||||
Amortization | (269 | ) | (22 | ) | ||
Mortgage servicing rights at end of the period | 3,909 | 615 | ||||
Valuation allowance at end of period | — | — | ||||
Mortgage servicing rights at the end of the period, net | $ | 3,909 | 615 |
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The following table shows the estimated future amortization expense for mortgage servicing rights for the periods indicated:
March 31, | ||||||
2013 | ||||||
(In Thousands) | ||||||
Estimate for the period ended December 31: | 2013 | $ | 862 | |||
2014 | 935 | |||||
2015 | 765 | |||||
2016 | 597 | |||||
2017 | 429 | |||||
Thereafter | 321 | |||||
Total | $ | 3,909 |
Note 6— Deposits
A summary of the contractual maturities of time deposits at March 31, 2013 is as follows:
(In Thousands) | ||||
Within one year | $ | 452,351 | ||
More than one to two years | 214,086 | |||
More than two to three years | 12,571 | |||
More than three to four years | 10,869 | |||
More than four through five years | 22,490 | |||
After five years | 26 | |||
$ | 712,393 |
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Note 7— Borrowings
Borrowings consist of the following:
March 31, 2013 | December 31, 2012 | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Balance | Rate | Balance | Rate | |||||||||
(Dollars in Thousands) | ||||||||||||
Short term: | ||||||||||||
Short-term repurchase agreements | $ | 45,324 | 3.22 | % | 45,888 | 3.09 | % | |||||
Long term: | ||||||||||||
Federal Home Loan Bank, Chicago advances maturing: | ||||||||||||
2016 | 220,000 | 4.34 | % | 220,000 | 4.34 | % | ||||||
2017 | 65,000 | 3.19 | % | 65,000 | 3.19 | % | ||||||
2018 | 65,000 | 2.97 | % | 65,000 | 2.97 | % | ||||||
Repurchase agreements maturing | 2017 | 84,000 | 3.96 | % | 84,000 | 3.96 | % | |||||
$ | 479,324 | 3.83 | % | 479,888 | 3.82 | % |
The short-term repurchase agreements represent the outstanding portion of a total $90.0 million commitment with two unrelated banks. The short-term repurchase agreements are utilized by Waterstone Mortgage Corporation to finance loans originated for sale. These agreements are secured by the underlying loans being financed. Related interest rates are based upon the note rate associated with the loans being financed. The first of the two short-term repurchase agreements has an outstanding balance of $29.8 million, a rate of 2.95% and a total commitment of $40.0 million at March 31, 2013. The second short-term repurchase agreement has an outstanding balance of $15.5 million, a rate of 3.75% and a total commitment of $50.0 million at March 31, 2013.
The $220.0 million in advances due in 2016 consist of eight advances with fixed rates ranging from 4.01% to 4.82% callable quarterly until maturity.
The $65.0 million in advances due in 2017 consist of three advances with fixed rates ranging from 3.09% to 3.46% callable quarterly until maturity.
The $65.0 million in advances due in 2018 consist of three advances with fixed rates ranging from 2.73% to 3.11% callable quarterly until maturity.
The $84.0 million in repurchase agreements have fixed rates ranging from 2.89% to 4.31% callable quarterly until their maturity in 2017. The repurchase agreements are collateralized by securities available for sale with an estimated fair value of $100.7 million at March 31, 2013 and $101.9 million at December 31, 2012.
The Company selects loans that meet underwriting criteria established by the Federal Home Loan Bank Chicago (FHLBC) as collateral for outstanding advances. The Company’s borrowings at the FHLBC are limited to 75% of the carrying value of unencumbered one- to four-family mortgage loans, 40% of the carrying value of home equity loans and 60% of the carrying value of over four-family loans. In addition, these advances are collateralized by FHLBC stock of $20.2 million at both March 31, 2013 and December 31, 2012. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.
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Note 8 — Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). As of March 31, 2013, the Bank meets all capital adequacy requirements to which it is subject.
On November 25, 2009, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, WaterStone Bank agreed to the issuance of a Consent Order jointly issued by the Federal Deposit Insurance Corporation and the WDFI, WaterStone Bank’s primary banking regulators. At the same time, pursuant to a Stipulation and Consent to Issuance of Order to Cease and Desist, Waterstone Financial, Inc. agreed to the issuance of an Order to Cease and Desist by the Office of Thrift Supervision, Waterstone Financial Inc.’s thrift holding company regulator at the time. The Order issued by the Office of Thrift Supervision requires, among other things, that WaterStone Bank maintain minimum Tier 1 capital of 8.5% of total average assets and minimum total risk-based capital of 12.0% of risk-weighted assets. Effective December 11, 2012, the WDFI and the Federal Deposit Insurance Corporation terminated the Order issued to WaterStone Bank. The terminated Order was replaced with a memorandum of understanding that requires, among other things, maintenance of a minimum Tier I capital of 8.0% and a minimum total risk based capital ratio of 12.0%, and also prohibits dividend payments without prior regulatory non-objection. Waterstone Financial, Inc. remains subject to its Order issued by the Office of Thrift Supervision, through enforcement by the Federal Reserve Board, as the successor holding company regulator to the Office of Thrift Supervision. At March 31, 2013, the Company is in compliance with all requirements of the memorandum of understanding and order to cease and desist.
As of March 31, 2013 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as quantitatively “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
As a state-chartered savings bank, the Bank is required to meet minimum capital levels established by the state of Wisconsin in addition to federal requirements. For the state of Wisconsin, regulatory capital consists of retained income, paid-in-capital, capital stock equity and other forms of capital considered to be qualifying capital by the Federal Deposit Insurance Corporation.
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The actual and required capital amounts and ratios for the Bank as of March 31, 2013 and December 31, 2012 are presented in the table below:
March 31, 2013 | ||||||||||||||
To Be Well-Capitalized | ||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
(Dollars In Thousands) | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 205,635 | 18.75 | % | 87,726 | 8.00 | % | 109,657 | 10.00 | % | ||||
Tier I capital (to risk-weighted assets) | 191,736 | 17.49 | % | 43,863 | 4.00 | % | 65,794 | 6.00 | % | |||||
Tier I capital (to average assets) | 191,736 | 11.79 | % | 65,061 | 4.00 | % | 81,326 | 5.00 | % | |||||
State of Wisconsin (to total assets) | 191,736 | 11.82 | % | 97,339 | 6.00 | % | N/A | N/A | ||||||
December 31, 2012 | ||||||||||||||
(Dollars In Thousands) | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 199,098 | 17.34 | % | 91,844 | 8.00 | % | 114,806 | 10.00 | % | ||||
Tier I capital (to risk-weighted assets) | 184,542 | 16.07 | % | 45,922 | 4.00 | % | 68,883 | 6.00 | % | |||||
Tier I capital (to average assets) | 184,542 | 11.13 | % | 66,312 | 4.00 | % | 82,890 | 5.00 | % | |||||
State of Wisconsin (to total assets) | 184,542 | 11.15 | % | 99,305 | 6.00 | % | N/A | N/A |
Note 9 — Income Taxes
Income tax expense increased from $30,000 during the three months ended March 31, 2012 to $2.9 million for the three months ended March 31, 2013. This increase was partially due to the increase in our income before income taxes, which increased from $2.2 million during the three months ended March 31, 2012 to $7.5 million during the three months ended March 31, 2013. During the third quarter of 2008, we established a valuation allowance against our net deferred tax assets. That valuation allowance effectively resulted in no income tax expense being recognized during the three months ended March 31, 2012 other than state income taxes for states in which separate company returns are filed. During the fourth quarter of 2012, we released the valuation allowance against our net deferred tax assets. Therefore, income tax expense is recognized on the statement of income during the three months ended March 31, 2013 at an effective rate of 38.7% of pretax book income.
As of March 31, 2013, net deferred tax assets totaled $15.3 million, which, in the judgment of management, will more-likely-than-not be fully realized. The largest components of the deferred tax asset are associated with the allowance for loan losses and basis adjustments on real estate owned. We are largely relying on earnings generated in the current year and forecasted earnings in future years in making the determination that we will more-likely-than-not realize our deferred tax asset.
Note 10 — Offsetting of Assets and Liabilities
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. In addition, the Company enters into agreements under which it sells loans held for sale subject to an obligation to repurchase the same loans. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of assets. The obligation to repurchase the assets is reflected as a liability in the Company’s consolidated statements of condition, while the securities and loans held for sale underlying the repurchase agreements remain in the respective investment securities and loans held for sale asset accounts. In other words, there is no offsetting or netting of the investment securities or loans held for sale assets with the repurchase agreement liabilities. One of the Company’s two short-term repurchase agreements and all of the Company’s long-term repurchase agreements are subject to master netting agreements, which sets
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forth the rights and obligations for repurchase and offset. Under the master netting agreement, the Company is entitled to set off the collateral placed with a single counterparty against obligations owed to that counterparty.
The following table presents the liabilities subject to an enforceable master netting agreement as of March 31, 2013 and December 31, 2012.
Gross Recognized Liabilities | Gross Amounts Offset | Net Amounts Presented | Gross Amounts Not Offset | Net Amount | ||||||||
(In Thousands) | ||||||||||||
March 31, 2013 | ||||||||||||
Repurchase Agreements | ||||||||||||
Short-term | $ | 29,847 | — | 29,847 | 29,847 | — | ||||||
Long-term | 84,000 | — | 84,000 | 84,000 | — | |||||||
$ | 113,847 | — | 113,847 | 113,847 | — | |||||||
December 31, 2012 | ||||||||||||
Repurchase Agreements | ||||||||||||
Short-term | $ | 38,090 | — | 38,090 | 38,090 | — | ||||||
Long-term | 84,000 | — | 84,000 | 84,000 | — | |||||||
$ | 122,090 | — | 122,090 | 122,090 | — |
Note 11— Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
March 31, | December 31, | |||||
2013 | 2012 | |||||
(In Thousands) | ||||||
Financial instruments whose contract amounts represent potential credit risk: | ||||||
Commitments to extend credit under amortizing loans (1) | $ | 23,101 | 20,836 | |||
Commitments to extend credit under home equity lines of credit | 16,814 | 17,628 | ||||
Unused portion of construction loans | 5,770 | 5,502 | ||||
Unused portion of business lines of credit | 10,988 | 10,967 | ||||
Standby letters of credit | 1,159 | 736 | ||||
(1) Excludes commitments to originate loans held for sale.
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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral obtained generally consists of mortgages on the underlying real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of March 31, 2013 and December 31, 2012.
Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. The Company has only been required to make insignificant repurchases as a result of its representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages and that historical experience shows negligible losses and insignificant repurchase activity, management believes that losses and repurchases under the limited recourse provisions will continue to be insignificant.
Note 12 — Derivative Financial Instruments
In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans to third party investors. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held for sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded as a component of mortgage banking income in the Company’s consolidated statements of operations. The Company does not use derivatives for speculative purposes.
Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. At March 31, 2013, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $295.0 million and interest rate lock commitments with an aggregate notional amount of approximately $184.0 million. The fair value of the mortgage derivatives at March 31, 2013 included a gain of $2.4 million on mortgage banking derivative assets and a $124,000 net loss on mortgage banking liabilities that are reported as a
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component of other asset and other liabilities, respectively on the Company’s consolidated statements of financial condition.
In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated by the loan arising from exercise of the loan commitment when sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market. The fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income.
Note 13 — Earnings per share
Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities have the right to receive dividends at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. Unvested restricted stock and stock options are considered outstanding for diluted earnings per share only. Unvested restricted stock totaling 81,000 and 105,000 shares are considered outstanding for dilutive earnings per share for the three months ended March 31, 2013 and March 31, 2012, respectively. Unvested stock options totaled 228,000 and 295,000 shares for the three months ended March 31, 2013 and March 31, 2012, respectively.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended | ||||||
March 31, | ||||||
2013 | 2012 | |||||
(In Thousands, except per share amounts) | ||||||
Net income | $ | 4,625 | 2,208 | |||
Net income available to unvested restricted shares | 12 | 7 | ||||
Net income available to common stockholders | $ | 4,613 | 2,201 | |||
Weighted average shares outstanding | 31,124 | 31,024 | ||||
Effect of dilutive potential common shares | 211 | 13 | ||||
Diluted weighted average shares outstanding | 31,335 | 31,037 | ||||
Basic earnings per share | $ | 0.15 | 0.07 | |||
Diluted earnings per share | $ | 0.15 | 0.07 |
Note 14 — Fair Value Measurements
The FASB issued an accounting standard (subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an
F-31
orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.
Level 1 inputs In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a recurring basis as of March 31, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
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Fair Value Measurements Using | ||||||||||
March 31, 2013 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Available for sale securities | ||||||||||
Mortgage-backed securities | $ | 114,076 | — | 114,076 | — | |||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 26,092 | — | 26,092 | — | ||||||
Government sponsored enterprise bonds | 10,021 | — | 10,021 | — | ||||||
Municipal securities | 58,729 | — | 58,729 | — | ||||||
Other debt securities | 5,136 | 5,136 | — | — | ||||||
Certificates of deposit | 6,417 | — | 6,417 | — | ||||||
Loans held for sale | 104,168 | — | 104,168 | — | ||||||
Mortgage banking derivative assets | 2,364 | — | — | 2,364 | ||||||
Mortgage banking derivative liabilities | 124 | — | — | 124 | ||||||
December 31, | Fair Value Measurements Using | |||||||||
2012 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Available for sale securities | ||||||||||
Mortgage-backed securities | $ | 119,056 | — | 119,056 | — | |||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 29,579 | — | 29,579 | — | ||||||
Government sponsored enterprise bonds | 8,017 | — | 8,017 | — | ||||||
Municipal securities | 37,371 | — | 37,371 | — | ||||||
Other debt securities | 5,070 | 5,070 | — | — | ||||||
Certificates of deposit | 5,924 | — | 5,924 | — | ||||||
Loans held for sale | 133,613 | — | 133,613 | — | ||||||
Mortgage banking derivative assets | 1,668 | — | — | 1,668 | ||||||
Mortgage banking derivative liabilities | 249 | — | — | 249 | ||||||
The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:
Available for sale securities — The Company’s investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 and Level 3 in the fair value hierarchy. The fair value of municipal securities is determined by a third party valuation source using observable market data utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. The fair value of other debt securities, which includes a trust preferred security issued by a financial institution, is determined through quoted prices in active markets and is classified as Level 1 in the fair value hierarchy.
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Loans held for sale — The Company carries loans held for sale at fair value under the fair value option model. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques.
Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy.
The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2013 and 2012.
Available for sale securities | Mortgage banking derivatives, net | |||||
(In Thousands) | ||||||
Balance at December 31, 2011 | $ | 18,451 | 527 | |||
Transfer into level 3 | — | — | ||||
Unrealized holding losses arising during the period: | ||||||
Included in other comprehensive income | 1,023 | — | ||||
Other than temporary impairment included in net loss | (113 | ) | — | |||
Principal repayments | (1,352 | ) | — | |||
Net accretion of discount/amortization of premium | — | — | ||||
Sales of available for sale securities | (18,009 | ) | ||||
Mortgage derivative gain, net | — | 892 | ||||
Balance at December 31, 2012 | — | 1,419 | ||||
Transfer into level 3 | — | — | ||||
Unrealized holding losses arising during the period: | ||||||
Included in other comprehensive income | — | — | ||||
Other than temporary impairment included in net loss | — | — | ||||
Principal repayments | — | — | ||||
Net accretion of discount/amortization of premium | — | — | ||||
Mortgage derivative gain, net | — | 821 | ||||
Balance at March 31, 2013 | $ | — | 2,240 |
There were no transfers in or out of Level 1 or Level 2 measurements during the periods.
Assets Recorded at Fair Value on a Non-recurring Basis
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a non-recurring basis as of March 31, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
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Fair Value Measurements Using | ||||||||||
March 31, 2013 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Impaired loans, net (1) | $ | 35,803 | — | — | 35,803 | |||||
Real estate owned | 30,799 | — | — | 30,799 | ||||||
December 31, | Fair Value Measurements Using | |||||||||
2012 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Impaired loans, net (1) | $ | 40,071 | — | — | 40,071 | |||||
Real estate owned | 35,974 | — | — | 35,974 | ||||||
(1) Represents collateral-dependent impaired loans, net, which are included in loans.
Loans — We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable value of the underlying collateral. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation techniques. At March 31, 2013, loans determined to be impaired with an outstanding balance of $45.3 million were carried net of specific reserves of $9.5 million for a fair value of $35.8 million. At December 31, 2012, loans determined to be impaired with an outstanding balance of $52.5 million were carried net of specific reserves of $12.4 million for a fair value of $40.1 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.
Real estate owned — On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. Changes in the value of real estate owned totaled $480,000 and $875,000 during the three months ended March 31, 2013 and 2012, respectively and are recorded in real estate owned expense. At March 31, 2013 and December 31, 2012, real estate owned totaled $30.8 million and $36.0 million, respectively.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:
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Significant | Significant Unobservable Input Value | |||||||||||
Fair Value at | Valuation | Unobservable | Minimum | Maximum | ||||||||
March 31, 2013 | Technique | Inputs | Value | Value | ||||||||
Mortgage banking derivatives | $ | 2,240 | Pricing models | Pull through rate | 68.7 | % | 100.0 | % | ||||
Impaired loans | 35,803 | Market approach | Disount rates applied to appraisals | 15.0 | % | 30.0 | % | |||||
Real estate owned | 30,799 | Market approach | Disount rates applied to appraisals | 5.0 | % | 89.4 | % | |||||
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage banking derivatives, including interest rate lock commitments is the loan pull through rate. This represents the percentage of loans currently in a lock position which the Company estimates will ultimately close. Generally, the fair value of an interest rate lock commitment will be positively (negatively) impacted when the prevailing interest rate is lower (higher) than the interest rate lock commitment. Generally, an increase in the pull through rate will result in the fair value of the interest rate lock increasing when in a gain position, or decreasing when in a loss position. The pull through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed using historical data and the ratio is periodically reviewed by the Company.
The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and real estate owned included in the above table primarily relate to discounting criteria applied to independent appraisals received with respect to the collateral. Discounts applied to the appraisals are dependent on the vintage of the appraisal as well as the marketability of the property. The discount factor is computed using actual realization rates on properties that have been foreclosed upon and liquidated in the open market.
Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
F-36
The carrying amounts and fair values of the Company’s financial instruments consist of the following at March 31, 2013 and December 31, 2012:
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||||||||
amount | Total | Level 1 | Level 2 | Level 3 | amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In Thousands) | ||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||
Cash and cash equivalents | $ | 64,114 | 64,114 | 64,114 | — | — | 71,649 | 71,469 | 71,469 | — | — | |||||||||||
Securities available-for-sale | 220,471 | 220,471 | 5,136 | 215,335 | — | 205,017 | 205,017 | 5,070 | 199,947 | — | ||||||||||||
Loans held for sale | 104,168 | 104,168 | — | 104,168 | — | 133,613 | 133,613 | — | 133,613 | — | ||||||||||||
Loans receivable | 1,124,937 | 1,139,665 | — | — | 1,139,665 | 1,133,672 | 1,148,107 | — | — | 1,148,107 | ||||||||||||
FHLB stock | 20,193 | 20,193 | — | 20,193 | — | 20,193 | 20,193 | 20,193 | — | — | ||||||||||||
Cash surrender value of life insurance | 38,201 | 38,201 | 38,201 | — | — | 38,061 | 38,061 | 38,061 | — | — | ||||||||||||
Real estate owned | 30,799 | 30,799 | — | — | 30,799 | 35,974 | 35,974 | — | — | 35,974 | ||||||||||||
Accrued interest receivable | 3,952 | 3,952 | 3,952 | — | — | 3,452 | 3,452 | 3,452 | — | — | ||||||||||||
Mortgage banking derivative assets | 2,364 | 2,364 | — | — | 2,364 | 1,668 | 1,668 | — | — | 1,668 | ||||||||||||
Financial Liabilities | ||||||||||||||||||||||
Deposits | 914,919 | 917,255 | 202,526 | 714,729 | — | 939,513 | 942,118 | 202,593 | 739,525 | — | ||||||||||||
Advance payments by borrowers for taxes | 7,346 | 7,346 | 7,346 | — | — | 1,672 | 1,672 | 1,672 | — | — | ||||||||||||
Borrowings | 479,324 | 531,868 | — | 531,868 | — | 479,888 | 537,299 | — | 537,299 | — | ||||||||||||
Accrued interest payable | 1,651 | 1,651 | 1,651 | — | — | 1,715 | 1,715 | 1,715 | — | — | ||||||||||||
Mortgage banking derivative liabilities | 124 | 124 | — | — | 124 | 249 | 249 | — | — | 249 | ||||||||||||
Other Financial Instruments | ||||||||||||||||||||||
Stand-by letters of credit | 8 | 8 | — | — | 8 | 5 | 5 | — | — | 5 | ||||||||||||
F-37
The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value.
Securities
Thefair value of securities is determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features.
Loans Held for Sale
Fair value is estimated using the prices of the Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.
Loans Receivable
Loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at fair value. Fair value isdetermined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. With respect to loans that are not considered to be impaired, fair value is estimated by discounting the future contractual cash flows using discount rates that reflect a current rate offered to borrowers of similar credit standing for the remaining term to maturity. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820-10 and generally produces a higher fair value.
FHLBC Stock
For FHLBC stock, the carrying amount is the amount at which shares can be redeemed with the FHLBC and is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
The carrying amounts reported in the consolidated statements of financial condition for the cash surrender value of life insurance approximate those assets’ fair values.
Deposits and Advance Payments by Borrowers for Taxes
The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date.
F-38
Borrowings
Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings.
Accrued Interest Payable and Accrued Interest Receivable
For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would be generally established at market rates at the time of the draw. Fair values for the Company’s commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparty’s credit standing, and discounted cash flow analyses. The fair value of the Company’s commitments to extend credit is not material at March 31, 2013 and December 31, 2012.
Mortgage Banking Derivative Assets and Liabilities
Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment, and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. On the Company’s Consolidated Statements of Condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities.
Note 15 — Segment Reporting
Selected financial and descriptive information is required to be provided about reportable operating segments, considering a “management approach” concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise’s internal organization, focusing on financial information that an enterprise’s chief operating decision-makers use to make decisions about the enterprise’s operating matters. The Company has determined that it has two reportable segments: community banking and mortgage banking. The Company’s operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company’s business segments are not necessarily comparable with similar information for other financial institutions.
Community Banking
The Community Banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. Consumer products include loan and deposit products: mortgage, home equity loans and lines, personal term loans, demand deposit accounts, interest
F-39
bearing transaction accounts and time deposits. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, demand deposit accounts, interest bearing transaction accounts and time deposits.
Mortgage Banking
The Mortgage Banking segment provides residential mortgage loans for the purpose of sale on the secondary market. Mortgage banking products and services are provided by offices in: Wisconsin, Arizona, Florida, Idaho, Illinois, Indiana, Iowa, Maryland, Minnesota, Ohio and Pennsylvania.
Three Months ended March 31, 2013 | ||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||
(In Thousands) | ||||||||||
Net interest income | $ | 9,936 | 86 | 124 | 10,146 | |||||
Provision for loan losses | 1,700 | 60 | — | 1,760 | ||||||
Net interest income after provision for loan losses | 8,236 | 26 | 124 | 8,386 | ||||||
Noninterest income: | 639 | 22,406 | (12 | ) | 23,033 | |||||
Noninterest expenses: | ||||||||||
Compensation, payroll taxes, and other employee benefits | 3,291 | 13,270 | (79 | ) | 16,482 | |||||
Occupancy, office furniture and equipment | 833 | 1,083 | — | 1,916 | ||||||
FDIC insurance premiums | 673 | — | — | 673 | ||||||
Real estate owned | 141 | — | — | 141 | ||||||
Other | 960 | 3,656 | 43 | 4,659 | ||||||
Total noninterest expenses | 5,898 | 18,009 | (36 | ) | 23,871 | |||||
Income before income taxes | 2,977 | 4,423 | 148 | 7,548 | ||||||
Income tax exense | 1,116 | 1,782 | 25 | 2,923 | ||||||
Net income | $ | 1,861 | 2,641 | 123 | 4,625 | |||||
Total Assets | $ | 1,558,139 | 119,725 | (49,110 | ) | 1,628,754 |
F-40
Three Months ended March 31, 2012 | ||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||
(In Thousands) | ||||||||||
Net interest income | $ | 10,247 | 54 | 125 | 10,426 | |||||
Provision for loan losses | 3,600 | 75 | — | 3,675 | ||||||
Net interest income after provision for loan losses | 6,647 | (21 | ) | 125 | 6,751 | |||||
Noninterest income: | 774 | 14,228 | — | 15,002 | ||||||
Noninterest expenses: | ||||||||||
Compensation, payroll taxes, and other employee benefits | 3,127 | 7,727 | (217 | ) | 10,637 | |||||
Occupancy, office furniture and equipment | 790 | 931 | — | 1,721 | ||||||
FDIC insurance premiums | 941 | — | — | 941 | ||||||
Real estate owned | 1,435 | — | — | 1,435 | ||||||
Other | 1,218 | 3,497 | 66 | 4,781 | ||||||
Total noninterest expenses | 7,511 | 12,155 | (151 | ) | 19,515 | |||||
Income (loss) before income taxes (benefit) | (90 | ) | 2,052 | 276 | 2,238 | |||||
Income tax expense (benefit) | (794 | ) | 824 | — | 30 | |||||
Net income | $ | 704 | 1,228 | 276 | 2,208 | |||||
Total Assets | $ | 1,654,117 | 101,578 | (56,793 | ) | 1,698,902 |
F-41
Report of Independent Registered Public Accounting Firm
Board of Directors
Waterstone Financial, Inc.:
We have audited the accompanying consolidated statements of financial condition of Waterstone Financial, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Waterstone Financial, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP | |
Milwaukee, Wisconsin | |
March 15, 2013, except for note 20, as to which the date is June 6, 2013 |
F-42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Waterstone Financial, Inc.:
We have audited Waterstone Financial, Inc’s internal control over financial reporting as of December 31, 2012, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Waterstone Financial, Inc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Waterstone Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established inInternal
F-43
Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Waterstone Financial, Inc and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012 and our report dated March 15, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP | |
Milwaukee, Wisconsin | |
March 15, 2013 |
F-44
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2012 and 2011
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands, except share data) | ||||||
Assets | ||||||
Cash | $ | 37,129 | 72,336 | |||
Federal funds sold | 28,576 | 8,044 | ||||
Interest-earning deposits in other financial institutions and other short term investments | 5,764 | — | ||||
Cash and cash equivalents | 71,469 | 80,380 | ||||
Securities available for sale (at fair value) | 205,017 | 206,519 | ||||
Securities held to maturity (at amortized cost) fair value of $2,542 in 2011 | — | 2,648 | ||||
Loans held for sale (at fair value) | 133,613 | 88,283 | ||||
Loans receivable | 1,133,672 | 1,216,664 | ||||
Less: Allowance for loan losses | 31,043 | 32,430 | ||||
Loans receivable, net | 1,102,629 | 1,184,234 | ||||
Office properties and equipment, net | 26,935 | 27,356 | ||||
Federal Home Loan Bank stock (at cost) | 20,193 | 21,653 | ||||
Cash surrender value of life insurance | 38,061 | 36,749 | ||||
Real estate owned | 35,974 | 56,670 | ||||
Prepaid expenses and other assets | 27,185 | 8,359 | ||||
Total assets | $ | 1,661,076 | 1,712,851 | |||
Liabilities and Shareholders’ Equity | ||||||
Liabilities: | ||||||
Demand deposits | $ | 84,140 | 68,457 | |||
Money market and savings deposits | 118,453 | 104,102 | ||||
Time deposits | 736,920 | 878,733 | ||||
Total deposits | 939,513 | 1,051,292 | ||||
Short-term borrowings | 45,888 | 27,138 | ||||
Long-term borrowings | 434,000 | 434,000 | ||||
Advance payments by borrowers for taxes | 1,672 | 942 | ||||
Other liabilities | 37,369 | 33,107 | ||||
Total liabilities | 1,458,442 | 1,546,479 | ||||
Shareholders’ equity: | ||||||
Preferred stock (par value $.01 per share) | ||||||
Authorized - 20,000,000 shares, no shares issued | — | — | ||||
Common stock (par value $.01 per share) | ||||||
Authorized - 200,000,000 shares in 2012 and 2011 | ||||||
Issued - 34,072,909 in 2012 and 33,974,450 in 2011 | ||||||
Outstanding - 31,348,556 in 2012 and 31,250,097 in 2011 | 341 | 340 | ||||
Additional paid-in capital | 110,490 | 110,894 | ||||
Retained earnings | 136,487 | 101,573 | ||||
Unearned ESOP shares | (1,708 | ) | (2,562 | ) | ||
Accumulated other comprehensive income, net of taxes | 2,285 | 1,388 | ||||
Treasury shares (2,724,353 shares), at cost | (45,261 | ) | (45,261 | ) | ||
Total shareholders’ equity | 202,634 | 166,372 | ||||
Total liabilities and shareholders’ equity | $ | 1,661,076 | 1,712,851 |
See accompanying notes to consolidated financial statements.
F-45
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2012, 2011 and 2010
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands, except per share amounts) | ||||||||
Interest income: | ||||||||
Loans | $ | 64,317 | 72,269 | 81,161 | ||||
Mortgage-related securities | 3,278 | 3,822 | 5,360 | |||||
Debt securities, federal funds sold and short-term investments | 2,251 | 3,261 | 3,412 | |||||
Total interest income | 69,846 | 79,352 | 89,933 | |||||
Interest expense: | ||||||||
Deposits | 9,477 | 15,289 | 20,989 | |||||
Borrowings | 18,424 | 17,547 | 19,280 | |||||
Total interest expense | 27,901 | 32,836 | 40,269 | |||||
Net interest income | 41,945 | 46,516 | 49,664 | |||||
Provision for loan losses | 8,300 | 22,077 | 25,832 | |||||
Net interest income after provision for loan losses | 33,645 | 24,439 | 23,832 | |||||
Noninterest income: | ||||||||
Service charges on loans and deposits | 1,331 | 1,078 | 1,093 | |||||
Increase in cash surrender value of life insurance | 1,071 | 1,124 | 1,138 | |||||
Total other-than-temporary investment losses | (190 | ) | (1,479 | ) | — | |||
Portion of (gain) loss recognized in other comprehensive income (before tax) | (23 | ) | 1,023 | — | ||||
Net impairment losses recognized in earnings | (213 | ) | (456 | ) | — | |||
Mortgage banking income | 87,375 | 39,845 | 35,465 | |||||
Gain on sale of available for sale securities | 522 | 53 | 55 | |||||
Other | 1,117 | 1,585 | 1,242 | |||||
Total noninterest income | 91,203 | 43,229 | 38,993 | |||||
Noninterest expenses: | ||||||||
Compensation, payroll taxes, and other employee benefits | 63,507 | 39,159 | 36,323 | |||||
Occupancy, office furniture, and equipment | 6,968 | 6,488 | 5,762 | |||||
Advertising | 2,647 | 1,568 | 1,259 | |||||
Data processing | 1,523 | 1,400 | 1,372 | |||||
Communications | 1,277 | 968 | 902 | |||||
Professional fees | 2,109 | 1,648 | 1,689 | |||||
Real estate owned | 8,746 | 12,140 | 6,583 | |||||
FDIC insurance premiums | 3,390 | 3,814 | 4,353 | |||||
Other | 11,971 | 7,394 | 6,384 | |||||
Total noninterest expenses | 102,138 | 74,579 | 64,627 | |||||
Income (loss) before income taxes | 22,710 | (6,911 | ) | (1,802 | ) | |||
Income tax expense (benefit) | (12,204 | ) | 562 | 52 | ||||
Net income (loss) | $ | 34,914 | (7,473 | ) | (1,854 | ) | ||
Income (loss) per share: | ||||||||
Basic | $ | 1.12 | (0.24 | ) | (0.06 | ) | ||
Diluted | $ | 1.12 | (0.24 | ) | (0.06 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic | 31,054,825 | 30,929,415 | 30,804,063 | |||||
Diluted | 31,161,922 | 30,929,415 | 30,804,063 |
See accompanying notes to consolidated financial statements.
F-46
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2012, 2011 and 2010
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Net income (loss) | $ | 34,914 | (7,473 | ) | (1,854 | ) | ||
Other comprehensive income (loss), net of tax: | ||||||||
Net unrealized holding gain (loss) on avaliable for sale securities arising during the period, net of tax (expense) benefit of ($791), ($1,240) and ($2,102) respectively | 1,082 | (201 | ) | 3,592 | ||||
Reclassification adjustment for net gain (loss) on available for sale securities realized during the period, net of tax expense (benefit) of $124, ($22) and $22, respectively | (185 | ) | 31 | (33 | ) | |||
Total other comprehensive income (loss) | 897 | (170 | ) | 3,559 | ||||
Comprehensive income (loss) | $ | 35,811 | (7,643 | ) | 1,705 |
See accompanying notes to consolidated financial statements.
F-47
Table of Contents
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2012, 2011 and 2010
Accumulated | |||||||||||||||||||
Additional | Unearned | Other | Total | ||||||||||||||||
Common Stock | Paid-In | Retained | ESOP | Comprehensive | Treasury | Shareholders’ | |||||||||||||
Shares | Amount | Capital | Earnings | Shares | Income (Loss) | Shares | Equity | ||||||||||||
(In Thousands) | |||||||||||||||||||
Balances at December 31, 2009 | 31,250 | 340 | 108,883 | 110,900 | (4,269 | ) | (2,001 | ) | (45,261 | ) | 168,592 | ||||||||
Comprehensive income (loss): | |||||||||||||||||||
Net loss | — | — | — | (1,854 | ) | — | — | — | (1,854 | ) | |||||||||
Other comprehensive income | — | — | — | — | — | 3,559 | — | 3,559 | |||||||||||
Total comprehensive loss | 1,705 | ||||||||||||||||||
ESOP shares committed to be released to Plan participants | — | — | (589 | ) | — | 853 | — | — | 264 | ||||||||||
Stock based compensation | — | — | 1,659 | — | — | — | — | 1,659 | |||||||||||
Balances at December 31, 2010 | 31,250 | $ | 340 | 109,953 | 109,046 | (3,416 | ) | 1,558 | (45,261 | ) | 172,220 | ||||||||
Comprehensive income (loss): | |||||||||||||||||||
Net loss | — | — | — | (7,473 | ) | — | — | — | (7,473 | ) | |||||||||
Other comprehensive loss: | — | — | — | — | — | (170 | ) | — | (170 | ) | |||||||||
Total comprehensive loss | (7,643 | ) | |||||||||||||||||
ESOP shares committed to be released to Plan participants | — | — | (652 | ) | — | 854 | — | — | 202 | ||||||||||
Stock based compensation | — | — | 1,593 | — | — | — | — | 1,593 | |||||||||||
Balances at December 31, 2011 | 31,250 | $ | 340 | 110,894 | 101,573 | (2,562 | ) | 1,388 | (45,261 | ) | 166,372 | ||||||||
Comprehensive income: | |||||||||||||||||||
Net income | — | — | — | 34,914 | — | — | — | 34,914 | |||||||||||
Other comprehensive income: | — | — | — | — | — | 897 | — | 897 | |||||||||||
Total comprehensive income | 35,811 | ||||||||||||||||||
ESOP shares committed to be released to Plan participants | — | — | (548 | ) | — | 854 | — | — | 306 | ||||||||||
Stock based compensation | 98 | 1 | 144 | — | — | — | — | 145 | |||||||||||
Balances at December 31, 2012 | 31,348 | $ | 341 | 110,490 | 136,487 | (1,708 | ) | 2,285 | (45,261 | ) | 202,634 |
See accompanying notes to consolidated financial statements.
F-48
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Operating activities: | ||||||||
Net income (loss) | $ | 34,914 | (7,473 | ) | (1,854 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Provision for loan losses | 8,300 | 22,077 | 25,832 | |||||
Provision for depreciation | 2,081 | 1,842 | 1,859 | |||||
Deferred income taxes | (16,895 | ) | (735 | ) | — | |||
Stock based compensation | 145 | 1,593 | 1,659 | |||||
Net amortization of premium/discount on debt and mortgage related securities | 1,647 | 635 | 70 | |||||
Amortization of unearned ESOP shares | 306 | 202 | 264 | |||||
Gain on sale of loans held for sale | (90,171 | ) | (37,667 | ) | (35,465 | ) | ||
Loans originated for sale | (1,749,426 | ) | (1,027,346 | ) | (1,084,362 | ) | ||
Proceeds on sales of loans originated for sale | 1,794,268 | 1,072,863 | 1,068,746 | |||||
Decrease in accrued interest receivable | 612 | 37 | 424 | |||||
Increase in cash surrender value of life insurance | (1,071 | ) | (1,124 | ) | (1,138 | ) | ||
Decrease in accrued interest on deposits and borrowings | (372 | ) | (239 | ) | (1,011 | ) | ||
Increase in other liabilities | 4,796 | 211 | 7,565 | |||||
Increase (decrease) in accrued tax payable | (161 | ) | 1,282 | 5,606 | ||||
Gain on sale of available for sale securities | (522 | ) | (53 | ) | (55 | ) | ||
Impairment of securities | 213 | 456 | — | |||||
Net realized and unrealized loss related to real estate owned | 6,162 | 6,052 | 675 | |||||
Other | (2,963 | ) | 2,477 | (1,943 | ) | |||
Net cash (used in) provided by operating activities | (8,137 | ) | 35,090 | (13,128 | ) | |||
Investing activities: | ||||||||
Net decrease in loans receivable | 51,023 | 42,692 | 46,642 | |||||
Purchases of: | ||||||||
Debt securities | (19,269 | ) | (85,802 | ) | (66,955 | ) | ||
Mortgage related securities | (115,660 | ) | (14,184 | ) | (34,700 | ) | ||
Premises and equipment, net | (1,674 | ) | (1,021 | ) | (925 | ) | ||
Bank owned life insurance | (240 | ) | (240 | ) | (306 | ) | ||
Proceeds from: | ||||||||
Principal repayments on mortgage-related securities | 35,504 | 31,433 | 40,624 | |||||
Maturities of debt securities | 71,065 | 62,115 | 47,202 | |||||
Sales of debt securities | 11,798 | — | 14,023 | |||||
Sales of mortgage-related securities | 18,291 | 3,230 | 6,710 | |||||
Calls of structured notes | 2,648 | — | — | |||||
Sales of foreclosed properties and other assets | 36,580 | 23,231 | 33,577 | |||||
Redemption of FHLB stock | 1,459 | — | — | |||||
Net cash provided by investing activities | 91,525 | 61,454 | 85,892 | |||||
See Accompanying notes to consolidated financial statements.
F-49
Waterstone Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Financing activities: | ||||||||
Net decrease in deposits | (111,779 | ) | (94,237 | ) | (19,361 | ) | ||
Net increase (decrease) in short-term borrowings | 18,750 | 4,179 | (50,941 | ) | ||||
Net increase (decrease) in advance payments by borrowers for taxes | 730 | (1,437 | ) | 1,749 | ||||
Net cash used by financing activities | (92,299 | ) | (91,495 | ) | (68,553 | ) | ||
(Decrease) increase in cash and cash equivalents | (8,911 | ) | 5,049 | 4,211 | ||||
Cash and cash equivalents at beginning of year | 80,380 | 75,331 | 71,120 | |||||
Cash and cash equivalents at end of year | $ | 71,469 | 80,380 | 75,331 | ||||
Supplemental information: | ||||||||
Cash paid, credited or (received) during the period for: | ||||||||
Income tax payments (refunds) | 4,852 | 69 | (5,554 | ) | ||||
Interest payments | 28,273 | 33,076 | 41,013 | |||||
Noncash investing activities: | ||||||||
Loans receivable transferred to other real estate | 22,282 | 28,259 | 41,781 | |||||
See Accompanying notes to consolidated financial statements.
F-50
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
1) Summary of Significant Accounting Policies
a) Organization
The board of directors of WaterStone Bank (the Bank) adopted the Plan of Reorganization and related Stock Issuance Plan on May 17, 2005, as amended on June 3, 2005, under which Waterstone Financial, Inc. (the Company) was formed to become the mid-tier holding company for the Bank. In addition, Lamplighter Financial, MHC, a Federally-chartered mutual holding company, was formed to become the majority owner of Waterstone Financial, Inc. The Company’s outstanding common shares are 73.5% owned by Lamplighter Financial, MHC at December 31, 2012.
b) Nature of Operations
The Company is a one-bank holding company with two operating segments — community banking and mortgage banking. The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits to originate real estate, business and consumer loans.
The Bank provides a full range of financial services to customers through branch locations in southeastern Wisconsin. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
The Bank owns a mortgage banking subsidiary that originates residential real estate loans held for sale at various branch offices across the country. Mortgage banking volume fluctuates widely given movements in interest rates. Mortgage banking income is reported as a single line item in the statements of operations while mortgage banking expense is distributed among the various noninterest expense lines. Compensation, payroll taxes and other employee benefits expense varies directly with mortgage banking income.
c) Principles of Consolidation
The consolidated financial statements include the accounts and operations of Waterstone Financial, Inc. and its wholly owned subsidiary, WaterStone Bank. The Bank has the following wholly owned subsidiaries: Wauwatosa Investments, Inc. and Waterstone Mortgage Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.
d) Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include: the allowance for loan losses, deferred income taxes, valuation of investments, evaluation of other than temporary impairment on investments and valuation of real estate owned. Actual results could differ from those estimates and the current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
e) Cash and Cash Equivalents
The Company considers federal funds sold and highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents.
F-51
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
f) Securities
Available for Sale Securities
At the time of purchase, investment securities are classified as available for sale, as management has the intent and ability to hold such securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell investment securities available for sale would be based on various factors, including, but not limited to asset/liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of deferred tax, reported as a separate component of equity, accumulated other comprehensive income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities and collateralized mortgage obligations, over the estimated life of the security. Such amortization is included in interest income from securities. Realized gains or losses on securities sales (using specific identification method) are included in other income. Declines in value judged to be other than temporary are included in net impairment losses recognized in earnings in the consolidated statements of operations.
Held to Maturity Securities
Debt securities that the Company has the intent and ability to hold to maturity have been designated as held to maturity. Such securities are stated at amortized cost.
Other Than Temporary Impairment
One of the significant estimates related to securities is the evaluation of investments for other than temporary impairment. The Company assesses investment securities with unrealized loss positions for other than temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either temporary or other than temporary. In evaluating other than temporary impairment, management considers the length of time and extent to which the fair value has been less than cost and the expected recovery period of the security, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of investment securities below amortized cost are deemed to be other than temporary when the Company cannot assert that it will recover its amortized cost basis, including whether the present value of cash flows expected to be collected is less than the amortized cost basis of the security. If it is more likely than not that the Company will be required to sell the security before recovery or if the Company has the intent to sell, an other than temporary impairment write down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If it is not more likely than not that the Company will be required to sell the security before recovery and if the Company does not intend to sell, the other than temporary impairment write down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to other factors, which is recognized as a separate component of equity. Following the recognition of an other than temporary impairment representing credit loss, the book value of an investment less the impairment loss realized becomes the new cost basis. Because the Company’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other than temporary impairment exists and, if so, the amount considered other than temporarily impaired, or not impaired, is subjective and, therefore, the timing and amount of other than temporary impairments constitute material estimates that are subjective to significant change.
F-52
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is carried at cost, which is the amount that the stock is redeemable by tendering to the FHLBC or the amount at which shares can be sold to other FHLBC members. FHLBC dividends are recognized as income on their ex-dividend date.
g) Loans Held for Sale
The origination of residential real estate loans is an integral component of the business of the Company. The Company generally sells its originations of long-term fixed interest rate mortgage loans in the secondary market. Gains and losses on the sales of these loans are determined using the specific identification method. The Company generally sells mortgage loans in the secondary market on a servicing released basis, however, servicing is retained when economic conditions so warrant. Mortgage loans originated for sale are generally sold within 45 days after closing.
The Company has elected to carry loans held for sale at fair value. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the market. The amount by which cost differs from market value is accounted for as a valuation adjustment to the carrying value of the loans. Changes in value are included in mortgage banking income in the consolidated statements of operations. The carrying value of loans held for sale included a market valuation adjustment of $6.0 million at December 31, 2012 and $3.2 million at December 31, 2011.
Costs to originate loans held for sale are expensed as incurred and are included on the appropriate noninterest expense lines of the statements of operations. Salaries, commissions and related payroll taxes are the primary costs to originate and comprise approximately 73% of total mortgage banking noninterest expense.
The value of mortgage loans held for sale and other residential mortgage loan commitments to customers are hedged by utilizing both best efforts and mandatory forward commitments to sell loans to investors in the secondary market. Such forward commitments are generally entered into at the time when applications are taken to protect the value of the mortgage loans from increases in market interest rates during the period held. The Corporation recognizes revenue associated with the expected future cash flows of servicing loans at the time a forward loan commitment is made, as required under Securities and Exchange Commission Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings.
h) Loans Receivable and Related Interest Income
Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. Loans are carried at the principal amount outstanding, net of any unearned income, charge-offs and unamortized deferred fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan yield. Amortization is based on a level-yield method over the contractual life of the related loans or until the loan is paid in full.
Loan interest income is recognized on the accrual basis. Accrual of interest is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal, or when a loan becomes contractually past due more than 90 days with respect to interest or principal. At that time, previously accrued and uncollected interest on such loans is reversed and additional income is recorded only to the extent that payments are received and the collection of principal is reasonably
F-53
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
assured. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
A loan is accounted for as a troubled debt restructuring if the Company, for economic reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring typically involves a modification of terms such as a reduction of the stated interest rate, a deferral of principal payments or a combination of both for a temporary period of time. If the borrower was performing in accordance with the original contractual terms at the time of the restructuring, the restructured loan is accounted for on an accruing basis as long as the borrower continues to comply with the modified terms. If the loan was not accounted for on an accrual basis at the time of restructuring, the restructured loan remains in non-accrual status until the loan returns to its original contractual terms and a positive payment history is established.
i) Allowance for Loan Losses
The allowance for loan losses is presented as a reserve against loans and represents the Bank’s assessment of probable loan losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Estimated loan losses are charged against the allowance when the loan balance is confirmed to be uncollectible directly or indirectly by the borrower or upon initiation of a foreclosure action by the Bank. Subsequent recoveries, if any, are credited to the allowance.
The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but have not been specifically identified. The Bank utilizes its own loss history to estimate inherent losses on loans. Although the Bank allocates portions of the allowance to specific loans and loan types, the entire allowance is available for any loan losses that occur.
The Bank evaluates the need for specific valuation allowances on loans that are considered impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Within the loan portfolio, all non-accrual loans and loans modified under troubled debt restructurings have been determined by the Bank to meet the definition of an impaired loan. In addition, other one- to four-family, over four-family, construction and land, commercial real estate and commercial loans may be considered impaired loans. A valuation allowance is established for an amount equal to the impairment when the carrying amount of the loan exceeds the present value of the expected future cash flows, discounted at the loan’s original effective interest rate or the fair value of the underlying collateral.
The Bank also establishes valuation allowances based on an evaluation of the various risk components that are inherent in the loan portfolio. The risk components that are evaluated include past loan loss experience; the level of non-performing and classified assets; current economic conditions; volume, growth, and composition of the loan portfolio; adverse situations that may affect the borrower’s ability to repay; the estimated value of any underlying collateral; regulatory guidance; and other relevant factors.
The appropriateness of the allowance for loan losses is approved quarterly by the Bank’s board of directors. The allowance reflects management’s best estimate of the amount needed to provide for the probable loss on impaired loans, as well as other credit risks of the Bank, and is based on a risk model developed and implemented by management and approved by the Bank’s board of directors.
F-54
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Actual results could differ from this estimate, and future additions to the allowance may be necessary based on unforeseen changes in economic conditions. In addition, federal regulators periodically review the Bank’s allowance for loan losses. Such regulators have the authority to require the Bank to recognize additions to the allowance at the time of their examination.
j) Real Estate Owned
Real estate owned consists of properties acquired through, or in lieu of, loan foreclosure. Real estate owned is transferred into the portfolio at the lower of estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer or the net carrying value of the loan. To the extent that the net carrying value of the loan exceeds the estimated fair value of the property at the date of transfer, the excess is charged to the allowance for loan losses. Subsequent write-downs to reflect current fair market value, as well as gains and losses upon disposition and revenue and expenses incurred in maintaining such properties, are treated as period costs and included in real estate owned in the consolidated statements of operations.
k) Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and, on a selective basis, retains the right to service the loans sold. Upon sale, a mortgage servicing rights asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. Mortgage servicing rights, when purchased, are initially recorded at fair value. Mortgage servicing rights are amortized over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets, net in the consolidated balance sheets.
l) Cash Surrender Value of Life Insurance
The Company purchased bank owned life insurance on the lives of certain employees. The Company is the beneficiary of the life insurance policies. The cash surrender value of life insurance is reported at the amount that would be received in cash if the polices were surrendered. Increases in the cash value of the policies and proceeds of death benefits received are recorded in non-interest income. The increase in cash surrender value of life insurance is not subject to income taxes, as long as the Company has the intent and ability to hold the policies until the death benefits are received.
m) Office Properties and Equipment
Office properties and equipment, including leasehold improvements and software, are stated at cost, net of depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lease term, if shorter than the estimated useful life. Maintenance and repairs are charged to expense as incurred, while additions or major improvements are capitalized and depreciated over their estimated useful lives. Estimated useful lives of the assets are 10 to 30 years for office properties, three to 10 years for equipment, and three years for software. Rent expense related to long-term operating leases is recorded on the accrual basis.
n) Income Taxes
The Company and its subsidiaries file consolidated federal and combined state income tax returns. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax returns. Deferred tax assets and liabilities are recognized for
F-55
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss carry fowards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Company evaluates the realizability of its deferred tax assets on a quarterly basis. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.
Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of uncertain tax positions are initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest and penalties on income tax uncertainties are classified within income tax expense in the income statement.
o) Earnings Per Share
Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Shares of the Employee Stock Ownership Plan committed to be released are considered outstanding for both common and diluted EPS. Incentive stock compensation awards granted can result in dilution.
p) Comprehensive Income
Comprehensive income is the total of reported net income and changes in unrealized gains or losses, net of tax, on securities available for sale.
q) Employee Stock Ownership Plan (ESOP)
Compensation expense under the ESOP is equal to the fair value of common shares released or committed to be released to participants in the ESOP in each respective period. Common stock purchased by the ESOP and not committed to be released to participants is included in the consolidated statements of financial condition at cost as a reduction of shareholders’ equity.
F-56
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
r) Impact of Recent Accounting Pronouncements
In June 2011, the FASB issued guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments were effective for interim and annual periods beginning after December 15, 2011 with retrospective application. Subsequently, in December 2011, the FASB decided that the requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. Therefore, those requirements will not be effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2011. The adoption of this accounting standard did not have a material impact on the Company’s results of operations, financial position, and liquidity. See the Consolidated Statement of Comprehensive Income (Loss) for required disclosures.
In May 2011, the FASB issued guidance on measuring fair value to create common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments also clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements. The amendments were effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard did not have a material impact on the Company’s results of operations, financial position, and liquidity. See Note 16 for required disclosures on fair value measurements.
F-57
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
2) Securities
Securities Available for Sale
The amortized cost and fair values of the Company’s investment in securities follow:
December 31, 2012 | ||||||||||
Gross | Gross | |||||||||
Amortized | unrealized | unrealized | ||||||||
cost | gains | losses | Fair value | |||||||
(In Thousands) | ||||||||||
Mortgage-backed securities | $ | 116,813 | 2,349 | (106 | ) | 119,056 | ||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 29,207 | 373 | (1 | ) | 29,579 | |||||
Mortgage related securities | 146,020 | 2,722 | (107 | ) | 148,635 | |||||
Government sponsored enterprise bonds | 8,000 | 17 | — | 8,017 | ||||||
Municipal securities | 35,493 | 2,043 | (165 | ) | 37,371 | |||||
Other debt securities | 5,000 | 70 | — | 5,070 | ||||||
Debt securities | 48,493 | 2,130 | (165 | ) | 50,458 | |||||
Certificates of Deposit | 5,880 | 45 | (1 | ) | 5,924 | |||||
$ | 200,393 | 4,897 | (273 | ) | 205,017 |
December 31, 2011 | ||||||||||
Gross | Gross | |||||||||
Amortized | unrealized | unrealized | ||||||||
cost | gains | losses | Fair value | |||||||
(In Thousands) | ||||||||||
Mortgage-backed securities | $ | 33,561 | 1,857 | (1 | ) | 35,417 | ||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 32,650 | 559 | (13 | ) | 33,196 | |||||
Private label issued | 19,475 | 16 | (1,040 | ) | 18,451 | |||||
Mortgage related securities | 85,686 | 2,432 | (1,054 | ) | 87,064 | |||||
Government sponsored enterprise bonds | 71,210 | 152 | (13 | ) | 71,349 | |||||
Municipal securities | 37,644 | 1,744 | (320 | ) | 39,068 | |||||
Other debt securities | 5,000 | 118 | — | 5,118 | ||||||
Debt securities | 113,854 | 2,014 | (333 | ) | 115,535 | |||||
Certificates of Deposit | 3,920 | 2 | (2 | ) | 3,920 | |||||
$ | 203,460 | 4,448 | (1,389 | ) | 206,519 |
The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by one of the following government sponsored enterprises: Fannie Mae, Freddie Mac or Ginnie Mae. At December 31, 2012, $6.1 million of the Company’s government sponsored enterprise bonds and $95.8 million of the Company’s mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the
F-58
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Company. As of December 31, 2012, $8.0 million of municipal securities were pledged as collateral to secure Federal Home Loan Bank advances.
The amortized cost and fair value of securities at December 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers or borrowers may have the right to prepay obligations with or without prepayment penalties.
December 31, 2012 | ||||||
Amortized | ||||||
cost | Fair value | |||||
(In Thousands) | ||||||
Debt securities: | ||||||
Due within one year | $ | 2,925 | 2,932 | |||
Due after one year through five years | 22,354 | 23,376 | ||||
Due after five years through ten years | 10,239 | 10,288 | ||||
Due after ten years | 18,855 | 19,786 | ||||
Mortgage-related securities | 146,020 | 148,635 | ||||
$ | 200,393 | 205,017 |
Total proceeds and gross gains and losses from sales of investment securities available for sale for each of periods listed below.
December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Gross gains | $ | 522 | 53 | 136 | ||||
Gross losses | — | — | (81 | ) | ||||
Gains on sale of investment securities, net | $ | 522 | 53 | 55 | ||||
Proceeds from sales of investment securities | $ | 30,089 | 3,230 | 20,733 |
F-59
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
December 31, 2012 | ||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||
value | loss | value | loss | value | loss | |||||||||
(In Thousands) | ||||||||||||||
Mortgage-backed securities | 19,382 | (106 | ) | — | — | 19,382 | (106 | ) | ||||||
Collateralized mortgage obligations | ||||||||||||||
Government sponsored enterprise issued | 1,419 | (1 | ) | — | — | 1,419 | (1 | ) | ||||||
Municipal securities | 9,009 | (94 | ) | 398 | (71 | ) | 9,407 | (165 | ) | |||||
Certificates of Deposit | 244 | (1 | ) | — | — | 244 | (1 | ) | ||||||
$ | 30,054 | (202 | ) | 398 | (71 | ) | 30,452 | (273 | ) | |||||
December 31, 2011 | ||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||
value | loss | value | loss | value | loss | |||||||||
(In Thousands) | ||||||||||||||
Mortgage-backed securities | 1,167 | (1 | ) | — | — | 1,167 | (1 | ) | ||||||
Collateralized mortgage obligations | ||||||||||||||
Government sponsored enterprise issued | 5,726 | (13 | ) | — | — | 5,726 | (13 | ) | ||||||
Private-label issue | — | — | 15,408 | (1,040 | ) | 15,408 | (1,040 | ) | ||||||
Government sponsored enterprise bonds | 12,487 | (13 | ) | — | — | 12,487 | (13 | ) | ||||||
Municipal securities | 228 | (87 | ) | 1,989 | (233 | ) | 2,217 | (320 | ) | |||||
Certificates of Deposit | 1,958 | (2 | ) | — | — | 1,958 | (2 | ) | ||||||
$ | 21,566 | (116 | ) | 17,397 | (1,273 | ) | 38,963 | (1,389 | ) | |||||
The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain securities in unrealized loss positions, the Company prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
During the year ended December 31, 2012, the Company identified two private-label collateralized mortgage obligation securities for which a cash flow analysis was performed to determine whether an other-than-temporary impairment was warranted. This evaluation indicated that the two private-label collateralized mortgage obligations were other-than-temporarily impaired. Estimates of discounted cash flows based on expected yield at time of original purchase, prepayment assumptions based on actual and anticipated prepayment speed, actual and anticipated default rates and estimated level of severity given the loan to value ratios, credit scores, geographic locations, vintage and levels of
F-60
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
subordination related to the security and its underlying collateral resulted in a projected credit loss on the collateralized mortgage obligations. During the year ended December 31, 2012, the Company’s analysis resulted in an additional $113,000 in credit losses that were charged to earnings with respect to one of these two collateralized mortgage obligations. The analysis with respect to the second collateralized mortgage obligation indicated no additional estimated credit loss for the year ended December 31, 2012. During the year ended December 31, 2012, the two aforementioned private-label collateralized mortgage obligations were sold at a combined gain of $282,000. At the time of sale, these securities had a combined amortized cost of $18.0 million.
In addition to the securities discussed above, during the year ended December 31, 2012, the Company identified two municipal securities that were deemed to be other-than-temporarily impaired. Both securities were issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the securities to operate as a going concern. During the year ended December 31, 2012, the Company’s analysis of these securities resulted in $100,000 in credit losses that were charged to earnings with respect to these two municipal securities. As of December 31, 2012, these securities had a combined amortized cost of $215,000 and a combined estimated fair value of $237,000. As of December 31, 2012, the Company had one municipal security which had been in an unrealized loss position for twelve months or longer. This security was determined not to be other-than-temporarily impaired as of December 31, 2012.
The following table presents the change in other-than-temporary credit related impairment charges on collateralized mortgage obligations and municipal securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive loss.
(in thousands) | ||||
Credit related impairments on securities as of December 31, 2010 | $ | 1,640 | ||
Credit related impairments related to a security for which other-than-temporary impairment was not previously recognized | — | |||
Increase in credit related impairments related to securities for which an other-than- temporary impairment was previously recognized | 456 | |||
Credit related impairments on securities as of December 31, 2011 | 2,096 | |||
Credit related impairments related to a security for which other-than-temporary impairment was not previously recognized | 100 | |||
Increase in credit related impairments related to securities for which an other-than- temporary impairment was previously recognized | 113 | |||
Reduction for sales of securities for which other-than-temporary impairment was previously recognized | (2,209 | ) | ||
Credit related impairments on securities as of December 31, 2012 | $ | 100 |
Exclusive of the two aforementioned municipal securities, the Company has determined that the decline in fair value of the remaining securities is not attributable to credit deterioration, and as the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired.
F-61
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Continued deterioration of general economic market conditions could result in the recognition of future other than temporary impairment losses within the investment portfolio and such amounts could be material to our consolidated financial statements.
Securities Held to Maturity
As of December 31, 2012, the Company does not hold any securities that are designated as held to maturity. During the year ended December 31, 2012, the one security held by the Company that had been designated as held to maturity was called by the issuer. This security had an amortized cost of $2.6 million at the time that it was called.
3) Loans Receivable
Loans receivable at December 31, 2012 and 2011 are summarized as follows:
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Mortgage loans: | ||||||
Residential real estate: | ||||||
One- to four-family | $ | 460,821 | 496,736 | |||
Over four-family | 514,363 | 552,240 | ||||
Home equity | 36,494 | 38,599 | ||||
Construction and land | 33,818 | 39,528 | ||||
Commercial real estate | 65,495 | 65,434 | ||||
Consumer | 132 | 109 | ||||
Commercial loans | 22,549 | 24,018 | ||||
Total loans receivable | $ | 1,133,672 | 1,216,664 |
The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While credit risks tend to be geographically concentrated in the Company’s Milwaukee metropolitan area and while 89.2% of the Company’s loan portfolio involves loans that are secured by residential real estate, there are no concentrations with individual or groups of related borrowers. While the real estate collateralizing these loans is primarily residential in nature, it ranges from owner-occupied single family homes to large apartment complexes. In addition, real estate collateralizing $81.1 million or 7.2% of total mortgage loans is located outside of the state of Wisconsin.
During the year ended December 31, 2012, $1.75 billion in residential loans were originated for sale. During the same period, sales of loans held for sale totaled $1.70 billion, generating mortgage banking income of $87.4 million. During the year ended December 31, 2011, the Company began selectively selling loans on a servicing retained basis. The unpaid principal balance of loans serviced for others was $635.8 million and $29.9 million at December 31, 2012 and December 31, 2011, respectively. These loans are not reflected in the consolidated statements of financial condition.
Qualifying loans receivable totaling $801.6 million and $715.7 million are pledged as collateral against $350.0 million in outstanding Federal Home Loan Bank of Chicago advances under a blanket security agreement at both December 31, 2012 and December 31, 2011.
F-62
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
An analysis of past due loans receivable as of December 31, 2012 and 2011 follows:
As of December 31, 2012 | ||||||||||||||
1-59 Days Past Due (1) | 60-89 Days Past Due (2) | Greater Than 90 Days | Total Past Due | Current (3) | Total Loans | |||||||||
(In Thousands) | ||||||||||||||
Mortgage loans: | ||||||||||||||
Residential real estate: | ||||||||||||||
One- to four-family | $ | 11,745 | 5,402 | 29,259 | 46,406 | 414,415 | 460,821 | |||||||
Over four-family | 3,543 | 1,498 | 18,336 | 23,377 | 490,986 | 514,363 | ||||||||
Home equity | 416 | 111 | 404 | 931 | 35,563 | 36,494 | ||||||||
Construction and land | 87 | — | 2,180 | 2,266 | 31,552 | 33,818 | ||||||||
Commercial real estate | 290 | — | 668 | 959 | 64,536 | 65,495 | ||||||||
Consumer | — | — | — | — | 132 | 132 | ||||||||
Commercial loans | — | — | 511 | 511 | 22,038 | 22,549 | ||||||||
Total | $ | 16,081 | 7,011 | 51,358 | 74,450 | 1,059,222 | 1,133,672 |
As of December 31, 2011 | ||||||||||||||
1-59 Days Past Due (1) | 60-89 Days Past Due (2) | Greater Than 90 Days | Total Past Due | Current (3) | Total Loans | |||||||||
(In Thousands) | ||||||||||||||
Mortgage loans: | ||||||||||||||
Residential real estate: | ||||||||||||||
One- to four-family | $ | 12,650 | 5,536 | 40,001 | 58,187 | 438,549 | 496,736 | |||||||
Over four-family | 13,044 | 2,630 | 8,946 | 24,620 | 527,620 | 552,240 | ||||||||
Home equity | 1,982 | 131 | 290 | 2,403 | 36,196 | 38,599 | ||||||||
Construction and land | 49 | 155 | 6,790 | 6,994 | 32,534 | 39,528 | ||||||||
Commercial real estate | 70 | — | 515 | 585 | 64,849 | 65,434 | ||||||||
Consumer | 8 | — | — | 8 | 101 | 109 | ||||||||
Commercial loans | 543 | — | 70 | 613 | 23,405 | 24,018 | ||||||||
Total | $ | 28,346 | 8,452 | 56,612 | 93,410 | 1,123,254 | 1,216,664 |
(1) Includes $2.4 million and $4.6 million for December 31, 2012 and 2011, respectively, which are on non-accrual status.
(2) Includes $2.8 million and $1.4 million for December 31, 2012 and 2011, respectively, which are on non-accrual status.
(3) Includes $18.2 million and $15.7 million for December 31, 2012 and 2011, respectively, which are on non-accrual status.
As of December 31, 2012 and 2011, there are no loans that are 90 or more days past due and still accruing interest.
F-63
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
A summary of the activity for the years ended December 31, 2012, 2011 and 2010 in the allowance for loan losses follows:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Year ended December 31, 2012 | ||||||||||||||||||
Balance at beginning of period | $ | 17,475 | 8,252 | 1,998 | 2,922 | 941 | 28 | 814 | 32,430 | |||||||||
Provision for loan losses | 6,149 | 534 | 559 | (181 | ) | 1,500 | 6 | (267 | ) | 8,300 | ||||||||
Charge-offs | (6,472 | ) | (1,108 | ) | (485 | ) | (1,668 | ) | (1,182 | ) | (4 | ) | (59 | ) | (10,978 | ) | ||
Recoveries | 667 | 56 | 25 | 250 | — | — | 293 | 1,291 | ||||||||||
Balance at end of period | $ | 17,819 | 7,734 | 2,097 | 1,323 | 1,259 | 30 | 781 | 31,043 | |||||||||
Year ended December 31, 2011 | ||||||||||||||||||
Balance at beginning of period | $ | 16,150 | 6,877 | 1,196 | 3,252 | 671 | 28 | 1,001 | 29,175 | |||||||||
Provision for loan losses | 12,567 | 5,331 | 1,429 | 1,346 | 998 | 9 | 397 | 22,077 | ||||||||||
Charge-offs | (11,553 | ) | (3,996 | ) | (634 | ) | (1,745 | ) | (734 | ) | (10 | ) | (619 | ) | (19,291 | ) | ||
Recoveries | 311 | 40 | 7 | 69 | 6 | 1 | 35 | 469 | ||||||||||
Balance at end of period | $ | 17,475 | 8,252 | 1,998 | 2,922 | 941 | 28 | 814 | 32,430 | |||||||||
Year ended December 31, 2010 | ||||||||||||||||||
Balance at beginning of period | $ | 17,875 | 5,208 | 1,642 | 2,635 | 720 | 43 | 371 | 28,494 | |||||||||
Provision for loan losses | 15,054 | 5,053 | 170 | 2,934 | 525 | (3 | ) | 2,099 | 25,832 | |||||||||
Charge-offs | (16,906 | ) | (3,439 | ) | (619 | ) | (2,319 | ) | (575 | ) | (13 | ) | (1,470 | ) | (25,341 | ) | ||
Recoveries | 127 | 55 | 3 | 2 | 1 | 1 | 1 | 190 | ||||||||||
Balance at end of period | $ | 16,150 | 6,877 | 1,196 | 3,252 | 671 | 28 | 1,001 | 29,175 |
F-64
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of the year ended December 31, 2012 follows:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Allowance related to loans individually evaluated for impairment | $ | 7,058 | 3,268 | 1,033 | 377 | 341 | — | 331 | 12,408 | |||||||||
Allowance related to loans collectively evaluated for impairment | 10,761 | 4,466 | 1,064 | 946 | 918 | 30 | 450 | 18,635 | ||||||||||
Balance at end of period | $ | 17,819 | 7,734 | 2,097 | 1,323 | 1,259 | 30 | 781 | 31,043 | |||||||||
Loans individually evaluated for impairment | $ | 57,467 | 28,281 | 2,127 | 4,470 | 1,250 | 24 | 1,352 | 94,971 | |||||||||
Loans collectively evaluated for impairment | 403,354 | 486,082 | 34,367 | 29,348 | 64,245 | 108 | 21,197 | 1,038,701 | ||||||||||
Total gross loans | $ | 460,821 | 514,363 | 36,494 | 33,818 | 65,495 | 132 | 22,549 | 1,133,672 |
F-65
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of the year ended December 31, 2011 follows:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
Allowance related to loans individually evaluated for impairment | $ | 5,707 | 3,719 | 803 | 2,077 | — | — | 269 | 12,575 | |||||||||
Allowance related to loans collectively evaluated for impairment | 11,768 | 4,533 | 1,195 | 845 | 941 | 28 | 545 | 19,855 | ||||||||||
Balance at end of period | $ | 17,475 | 8,252 | 1,998 | 2,922 | 941 | 28 | 814 | 32,430 | |||||||||
Loans individually evaluated for impairment | $ | 68,321 | 40,783 | 2,227 | 8,436 | 515 | — | 1,115 | 121,397 | |||||||||
Loans collectively evaluated for impairment | 428,415 | 511,457 | 36,372 | 31,092 | 64,919 | 109 | 22,903 | 1,095,267 | ||||||||||
Total gross loans | $ | 496,736 | 552,240 | 38,599 | 39,528 | 65,434 | 109 | 24,018 | 1,216,664 |
F-66
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The following table presents information relating to the Company’s internal risk ratings of its loans receivable as of December 31, 2012 and 2011:
One- to Four- Family | Over Four Family | Home Equity | Construction and Land | Commercial Real Estate | Consumer | Commercial | Total | |||||||||||
(In Thousands) | ||||||||||||||||||
At December 31, 2012 | ||||||||||||||||||
Substandard | $ | 53,242 | 24,767 | 2,913 | 3,705 | 1,251 | 23 | 1,365 | 87,266 | |||||||||
Watch | 17,082 | 14,157 | 606 | 2,803 | 1,234 | — | 964 | 36,846 | ||||||||||
Pass | 390,497 | 475,439 | 32,975 | 27,310 | 63,010 | 109 | 20,220 | 1,009,560 | ||||||||||
$ | 460,821 | 514,363 | 36,494 | 33,818 | 65,495 | 132 | 22,549 | 1,133,672 |
(In Thousands) | ||||||||||||||||||
At December 31, 2011 | ||||||||||||||||||
Substandard | $ | 68,566 | 37,502 | 3,188 | 8,436 | 1,114 | — | 1,116 | 119,922 | |||||||||
Watch | 14,341 | 16,993 | 721 | 6,199 | 1,549 | — | 1,108 | 40,911 | ||||||||||
Pass | 413,829 | 497,745 | 34,690 | 24,893 | 62,771 | 109 | 21,794 | 1,055,831 | ||||||||||
$ | 496,736 | 552,240 | 38,599 | 39,528 | 65,434 | 109 | 24,018 | 1,216,664 |
F-67
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies. Our underwriting policies require an officers’ loan committee review and approval of all loans in excess of $500,000. In addition, an independent loan review function exists for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, over four-family, construction and land, commercial real estate and commercial loans that individually, or as part of an overall borrower relationship exceed $1.0 million in potential exposure. Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year. With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management’s attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.
The Company’s procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.
Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value. The adjustment factor is based upon the Company’s actual experience with respect to sales of real estate owned over the prior two years. In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.
With respect to over-four family income producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted
F-68
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.
The following tables present data on impaired loans at December 31, 2012 and 2011.
As of or for the Year Ended December 31, 2012 | ||||||||||||||
Recorded Investment | Unpaid Principal | Reserve | Cumulative Charge-Offs | Average Recorded Investment | Int Paid YTD | |||||||||
Total Impaired with Reserve | ||||||||||||||
One- to four-family | $ | 29,057 | 29,456 | 7,058 | 399 | 29,768 | 874 | |||||||
Over four-family | 17,397 | 17,642 | 3,268 | 245 | 18,073 | 722 | ||||||||
Home equity | 1,544 | 1,544 | 1,033 | — | 1,615 | 74 | ||||||||
Construction and land | 2,316 | 2,316 | 377 | — | 2,316 | 78 | ||||||||
Commercial real estate | 813 | 1,179 | 341 | 366 | 1,748 | 50 | ||||||||
Consumer | — | — | — | — | — | — | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 42 | ||||||||
$ | 52,479 | 53,489 | 12,408 | 1,010 | 54,872 | 1,840 | ||||||||
Total Impaired with no Reserve | ||||||||||||||
One- to four-family | $ | 28,410 | 31,315 | — | 2,905 | 31,358 | 1,175 | |||||||
Over four-family | 10,884 | 11,179 | — | 295 | 11,649 | 549 | ||||||||
Home equity | 583 | 749 | — | 166 | 755 | 14 | ||||||||
Construction and land | 2,154 | 3,655 | — | 1,501 | 3,656 | 5 | ||||||||
Commercial real estate | 437 | 461 | — | 24 | 473 | 12 | ||||||||
Consumer | 24 | 24 | — | — | 24 | 1 | ||||||||
Commercial | — | — | — | — | — | — | ||||||||
$ | 42,492 | 47,383 | — | 4,891 | 47,915 | 1,756 | ||||||||
Total Impaired | ||||||||||||||
One- to four-family | $ | 57,467 | 60,771 | 7,058 | 3,304 | 61,126 | 2,049 | |||||||
Over four-family | 28,281 | 28,821 | 3,268 | 540 | 29,722 | 1,271 | ||||||||
Home equity | 2,127 | 2,293 | 1,033 | 166 | 2,370 | 88 | ||||||||
Construction and land | 4,470 | 5,971 | 377 | 1,501 | 5,972 | 83 | ||||||||
Commercial real estate | 1,250 | 1,640 | 341 | 390 | 2,221 | 62 | ||||||||
Consumer | 24 | 24 | — | — | 24 | 1 | ||||||||
Commercial | 1,352 | 1,352 | 331 | — | 1,352 | 42 | ||||||||
$ | 94,971 | 100,872 | 12,408 | 5,901 | 102,787 | 3,596 |
The difference between a loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss due to the value of the collateral securing the loan being below the loan balance and management’s assessment that the full collection of the loan balance is not likely.
When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower’s
F-69
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
financial condition and prospects for repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant factors.
As of or for the Year Ended December 31, 2011 | ||||||||||||||
Recorded Investment | Unpaid Principal | Reserve | Cumulative Charge-Offs | Average Recorded Investment | Int Paid YTD | |||||||||
Total Impaired with Reserve | ||||||||||||||
One- to four-family | $ | 25,735 | 25,913 | 5,707 | 178 | 26,093 | 579 | |||||||
Over four-family | 21,268 | 21,648 | 3,719 | 380 | 21,846 | 761 | ||||||||
Home equity | 1,428 | 1,428 | 803 | — | 1,448 | 2 | ||||||||
Construction and land | 6,543 | 6,543 | 2,077 | — | 6,543 | 113 | ||||||||
Commercial real estate | — | — | — | — | — | — | ||||||||
Commercial | 1,033 | 1,033 | 269 | — | 1,037 | 42 | ||||||||
$ | 56,007 | 56,565 | 12,575 | 558 | 56,967 | 1,497 | ||||||||
Total Impaired with no Reserve | ||||||||||||||
One- to four-family | $ | 42,586 | 48,482 | — | 5,896 | 48,552 | 1,448 | |||||||
Over four-family | 19,515 | 21,264 | — | 1,749 | 21,535 | 780 | ||||||||
Home equity | 799 | 799 | — | — | 833 | 3 | ||||||||
Construction and land | 1,893 | 3,413 | — | 1,520 | 3,413 | 60 | ||||||||
Commercial real estate | 515 | 539 | — | 24 | 538 | 17 | ||||||||
Commercial | 82 | 100 | — | 18 | 90 | — | ||||||||
$ | 65,390 | 74,597 | — | 9,207 | 74,961 | 2,308 | ||||||||
Total Impaired | ||||||||||||||
One- to four-family | $ | 68,321 | 74,395 | 5,707 | 6,074 | 74,645 | 2,027 | |||||||
Over four-family | 40,783 | 42,912 | 3,719 | 2,129 | 43,381 | 1,541 | ||||||||
Home equity | 2,227 | 2,227 | 803 | — | 2,281 | 5 | ||||||||
Construction and land | 8,436 | 9,956 | 2,077 | 1,520 | 9,956 | 173 | ||||||||
Commercial real estate | 515 | 539 | — | 24 | 538 | 17 | ||||||||
Commercial | 1,115 | 1,133 | 269 | 18 | 1,127 | 42 | ||||||||
$ | 121,397 | 131,162 | 12,575 | 9,765 | 131,928 | 3,805 |
F-70
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $42.5 million of impaired loans as of December 31, 2012 for which no allowance has been provided, $4.9 million in charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the loan’s net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.
The following presents data on troubled debt restructurings:
As of December 31, 2012 | ||||||||||||||||
Accruing | Non-accruing | Total | ||||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||||
(dollars in thousands) | ||||||||||||||||
One- to four-family | $ | 9,921 | 17 | $ | 21,847 | 95 | $ | 31,768 | 112 | |||||||
Over four-family | 3,917 | 4 | 20,030 | 13 | 23,947 | 17 | ||||||||||
Home equity | — | — | 986 | 3 | 986 | 3 | ||||||||||
Construction and land | 2,173 | 2 | 79 | 1 | 2,252 | 3 | ||||||||||
Commercial real estate | — | — | 668 | 2 | 668 | 2 | ||||||||||
$ | 16,011 | 23 | $ | 43,610 | 114 | $ | 59,621 | 137 |
As of December 31, 2011 | ||||||||||||||||
Accruing | Non-accruing | Total | ||||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||||
(dollars in thousands) | ||||||||||||||||
One- to four-family | $ | 8,293 | 26 | $ | 26,773 | 93 | $ | 35,066 | 119 | |||||||
Over four-family | 14,845 | 13 | 2,453 | 8 | 17,298 | 21 | ||||||||||
Home equity | 43 | 1 | 1,024 | 4 | 1,067 | 5 | ||||||||||
Construction and land | 1,408 | 1 | 79 | 1 | 1,487 | 2 | ||||||||||
Commercial real estate | — | — | 452 | 1 | 452 | 1 | ||||||||||
Commercial | — | — | 42 | 2 | 42 | 2 | ||||||||||
$ | 24,589 | 41 | $ | 30,823 | 109 | $ | 55,412 | 150 |
Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. Typical restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both. In no instances have the restructured terms included a reduction of outstanding principal balance. At December 31, 2012, $59.6 million in loans had been modified in troubled debt restructurings and $43.6 million of these loans were included in the non-accrual loan total. The remaining $16.0 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with
F-71
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
respect to payments under their original loan terms at the time of the restructuring and thus, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.
All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, a $6.4 million valuation allowance has been established as of December 31, 2012 with respect to the $59.6 million in troubled debt restructurings. As of December 31, 2011, $6.2 million in valuation allowance had been established with respect to the $55.4 million in troubled debt restructurings.
After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.
F-72
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The following presents troubled debt restructurings by concession type at December 31, 2012 and 2011:
As of December 31, 2012 | ||||||||||||||
Performing in accordance with modified terms | In Default | Total | ||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||
(dollars in thousands) | ||||||||||||||
Interest reduction and principal forebearance | $ | 26,051 | 77 | 2,770 | 11 | 28,821 | 88 | |||||||
Principal forebearance | 17,574 | 11 | 348 | 1 | 17,922 | 12 | ||||||||
Interest reduction | 11,984 | 35 | 894 | 2 | 12,878 | 37 | ||||||||
$ | 55,609 | 123 | 4,012 | 14 | 59,621 | 137 |
As of December 31, 2011 | ||||||||||||||
Performing in accordance with modified terms | In Default | Total | ||||||||||||
Amount | Number | Amount | Number | Amount | Number | |||||||||
(dollars in thousands) | ||||||||||||||
Interest reduction and principal forebearance | $ | 22,752 | 61 | 6,564 | 22 | 29,316 | 83 | |||||||
Principal forebearance | 3,894 | 29 | 1,771 | 9 | 5,665 | 38 | ||||||||
Interest reduction | 20,006 | 27 | 425 | 2 | 20,431 | 29 | ||||||||
$ | 46,652 | 117 | 8,760 | 33 | 55,412 | 150 |
The following presents data on troubled debt restructurings:
For the Year Ended | |||||||||||
December 31, 2012 | December 31, 2011 | ||||||||||
Amount | Number | Amount | Number | ||||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||
Loans modified as a troubled debt restructure | |||||||||||
One- to four-family | $ | 14,821 | 27 | $ | 23,049 | 86 | |||||
Over four-family | 18,520 | 8 | 10,340 | 12 | |||||||
Home equity | 12 | 1 | 1,062 | 3 | |||||||
Land and construction | 764 | 1 | — | — | |||||||
$ | 34,117 | 37 | $ | 34,451 | 101 | ||||||
Troubled debt restructuring modified within the past twelve months for which there was a default | |||||||||||
One- to four-family | — | — | $ | 702 | 6 | ||||||
$ | — | — | $ | 702 | 6 |
F-73
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The following table presents data on non-accrual loans:
As of December 31, | |||||||
2012 | 2011 | ||||||
(Dollars in Thousands) | |||||||
Residential | |||||||
One- to four-family | $ | 46,467 | $ | 55,609 | |||
Over four-family | 23,205 | 13,680 | |||||
Home equity | 1,578 | 1,334 | |||||
Construction and land | 2,215 | 6,946 | |||||
Commercial real estate | 668 | 514 | |||||
Commercial | 511 | 135 | |||||
Consumer | 24 | — | |||||
Total non-accrual loans | $ | 74,668 | $ | 78,218 | |||
Total non-accrual loans to total loans, net | 6.59 | % | 6.43 | % | |||
Total non-accrual loans and performing troubled debt restructurings to total loans receivable | 8.00 | % | 8.45 | % | |||
Total non-accrual loans to total assets | 4.50 | % | 4.57 | % |
F-74
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
4) Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Land | $ | 6,836 | 6,959 | |||
Office buildings and improvements | 29,652 | 29,583 | ||||
Furniture and equipment | 12,347 | 10,679 | ||||
48,835 | 47,221 | |||||
Less accumulated depreciation | (21,900 | ) | (19,865 | ) | ||
$ | 26,935 | 27,356 |
Depreciation of premises and equipment totaled $2.1 million, $1.8 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
The Company and certain subsidiaries are obligated under non-cancelable operating leases for other facilities and equipment. Rent and equipment lease expense totaled $2.8 million, $2.6 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The appropriate minimum annual commitments under all non-cancelable lease agreements as of December 31, 2012 are as follows:
Operating | ||||
leases | ||||
(In Thousands) | ||||
Within one year | $ | 1,664 | ||
One to two years | 916 | |||
Two to three years | 390 | |||
Three to four years | 230 | |||
Four through five years | 23 | |||
After five years | — | |||
Total | $ | 3,223 |
F-75
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
5) Real Estate Owned
Real estate owned is summarized as follows:
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
One- to four-family | $ | 17,353 | 27,449 | |||
Over four-family | 9,890 | 16,231 | ||||
Construction and land | 7,029 | 8,796 | ||||
Commercial real estate | 1,702 | 4,194 | ||||
$ | 35,974 | 56,670 |
The following table presents the activity in real estate owned:
Year Ended December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Real estate owned at beginning of period | $ | 56,670 | 57,752 | |||
Transferred in from loans receivable | 22,282 | 28,259 | ||||
Sales | (35,159 | ) | (22,432 | ) | ||
Write downs | (7,562 | ) | (6,825 | ) | ||
Other activity | (257 | ) | (84 | ) | ||
Real estate owned at end of period | $ | 35,974 | 56,670 |
6) Mortgage Servicing Rights
The following table presents the activity related to the Company’s mortgage servicing rights:
Year ended December 31, | |||||||
2012 | 2011 | ||||||
(In Thousands) | |||||||
Mortgage servicing rights at beginning of the period | $ | 198 | $ | 42 | |||
Additions | 3,411 | 169 | |||||
Amortization | (389 | ) | (13 | ) | |||
Mortgage servicing rights at end of the period | 3,220 | 198 | |||||
Valuation allowance at end of period | — | — | |||||
Mortgage servicing rights at the end of the period, net | $ | 3,220 | $ | 198 |
The following table shows the estimated future amortization expense for mortgage servicing rights at
F-76
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
December 31, 2012 for the periods indicated:
(In Thousands) | |||||
Estimate for the years ended December 31: | 2013 | 890 | |||
2014 | 747 | ||||
2015 | 603 | ||||
2016 | 459 | ||||
2017 | 316 | ||||
Thereafter | 205 | ||||
Total | 3,220 |
7) Deposits
At December 31, 2012 and 2011, time deposits with balances greater than $100,000 amounted to $193.6 million and $232.8 million, respectively.
A summary of interest expense on deposits is as follows:
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Interest-bearing demand deposits | $ | 23 | 30 | 37 | ||||
Money market and savings deposits | 272 | 369 | 493 | |||||
Time deposits | 9,182 | 14,890 | 20,459 | |||||
$ | 9,477 | 15,289 | 20,989 |
A summary of the contractual maturities of time deposits at December 31, 2012 is as follows:
(In Thousands) | ||||
Within one year | $ | 454,561 | ||
One to two years | 236,816 | |||
Two to three years | 15,006 | |||
Three to four years | 6,269 | |||
Four through five years | 24,248 | |||
After five years | 20 | |||
$ | 736,920 |
F-77
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
8) Borrowings
Borrowings consist of the following:
December 31, 2012 | December 31, 2011 | |||||||||
Weighted | Weighted | |||||||||
Average | Average | |||||||||
Balance | Rate | Balance | Rate | |||||||
(In Thousands) | ||||||||||
Short-term repurchase agreements | $ | 45,888 | 3.09 | % | 27,138 | 4.50 | % | |||
Federal Home Loan Bank advances maturing: | ||||||||||
2016 | 220,000 | 4.34 | % | 220,000 | 4.34 | % | ||||
2017 | 65,000 | 3.19 | % | 65,000 | 3.19 | % | ||||
2018 | 65,000 | 2.97 | % | 65,000 | 2.97 | % | ||||
Repurchase agreements maturing: | ||||||||||
2017 | 84,000 | 3.96 | % | 84,000 | 3.96 | % | ||||
$ | 479,888 | 3.82 | % | 461,138 | 3.93 | % |
The short-term repurchase agreements represent the outstanding portion of a total $90.0 million commitment with two unrelated banks. The short-term repurchase agreements are utilized by Waterstone Mortgage Corporation to finance loans originated for sale. These agreements are secured by the underlying loans being financed. Related interest rates are based upon the note rate associated with the loans being financed. The first of short-term repurchase agreements has an outstanding balance of $38.1 million, a rate of 2.96% and a total commitment of $40.0 million at December 31, 2012. The second short-term repurchase agreement has an outstanding balance of $7.8 million, a rate of 3.75% and a total commitment of $50.0 million at December 31, 2012.
The $220.0 million in advances due in 2016 consist of eight advances with fixed rates ranging from 4.01% to 4.82% callable quarterly until maturity.
The $65.0 million in advances due in 2017 consist of three advances with fixed rates ranging from 3.09% to 3.46% callable quarterly until maturity.
The $65.0 million in advances due in 2018 consist of three advances with fixed rates ranging from 2.73% to 3.11% callable quarterly until maturity.
The $84.0 million in repurchase agreements have fixed rates ranging from 2.89% to 4.31% callable quarterly until their maturity in 2017. The repurchase agreements are collateralized by securities available for sale with an estimated fair value of $101.9 million at December 31, 2012.
The Company selects loans that meet underwriting criteria established by the Federal Home Loan Bank Chicago (FHLBC) as collateral for outstanding advances. The Company’s borrowings at the FHLBC are limited to 75% of the carrying value of unencumbered one- to four-family mortgage loans, 40% of the carrying value of home equity loans and 60% of the carrying value of over four-family loans. In addition, these advances are collateralized by FHLBC stock of $20.2 million at December 31, 2012 and $21.7 million at December 31, 2011. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.
F-78
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
9) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2012, that the Bank meets all capital adequacy requirements to which it is subject.
On November 25, 2009, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, WaterStone Bank agreed to the issuance of a Consent Order jointly issued by the Federal Deposit Insurance Corporation and the WDFI, WaterStone Bank’s primary banking regulators. At the same time, pursuant to a Stipulation and Consent to Issuance of Order to Cease and Desist, Waterstone Financial, Inc. agreed to the issuance of an Order to Cease and Desist by the Office of Thrift Supervision, Waterstone Financial Inc.’s thrift holding company regulator at the time. The Order issued by the Office of Thrift Supervision requires, among other things, that WaterStone Bank maintain minimum Tier 1 capital of 8.5% of total average assets and minimum total risk-based capital of 12.0% of risk-weighted assets. Effective December 11, 2012, the WDFI and the Federal Deposit Insurance Corporation terminated the Order issued to WaterStone Bank. The terminated Order was replaced with a memorandum of understanding that requires, among other things, maintenance of a minimum Tier I capital of 8.0% and a minimum total risk based capital ratio of 12.0%, and also prohibits dividend payments without prior regulatory non-objection. Waterstone Financial, Inc. remains subject to its Order issued by the Office of Thrift Supervision, through enforcement by the Federal Reserve Board, as the successor holding company regulator to the Office of Thrift Supervision. At December 31, 2012, the Company is in compliance with all requirements of the memorandum of understanding and order to cease and desist.
As of December 31, 2012 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as quantitatively “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
As a state-chartered savings bank, the Bank is required to meet minimum capital levels established by the state of Wisconsin in addition to federal requirements. For the state of Wisconsin, regulatory capital consists of retained income, paid-in-capital, capital stock equity and other forms of capital considered to be qualifying capital by the Federal Deposit Insurance Corporation.
F-79
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The actual and required capital amounts and ratios for the Bank as of December 31, 2012 and 2011 are presented in the table below:
December 31, 2012 | ||||||||||||||
To Be Well-Capitalized | ||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
(Dollars In Thousands) | ||||||||||||||
WaterStone Bank | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 199,098 | 17.34 | % | 91,844 | 8.00 | % | 114,806 | 10.00 | % | ||||
Tier I capital (to risk-weighted assets) | 184,542 | 16.07 | % | 45,922 | 4.00 | % | 68,883 | 6.00 | % | |||||
Tier I capital (to average assets) | 184,542 | 11.13 | % | 66,312 | 4.00 | % | 82,890 | 5.00 | % | |||||
State of Wisconsin (to total assets) | 184,542 | 11.15 | % | 99,305 | 6.00 | % | N/A | N/A | ||||||
December 31, 2011 | ||||||||||||||
WaterStone Bank | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 174,144 | 14.58 | % | 95,579 | 8.00 | % | 119,474 | 10.00 | % | ||||
Tier I capital (to risk-weighted assets) | 158,994 | 13.31 | % | 47,790 | 4.00 | % | 71,684 | 6.00 | % | |||||
Tier I capital (to average assets) | 158,994 | 9.16 | % | 69,447 | 4.00 | % | 86,808 | 5.00 | % | |||||
State of Wisconsin (to total assets) | 158,994 | 9.31 | % | 102,463 | 6.00 | % | N/A | N/A | ||||||
F-80
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
10) Stock Based Compensation
Stock-Based Compensation Plan
In 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. All stock awards granted under this plan vest over a period of five years and are required to be settled in shares of the Company’s common stock. The exercise price for all stock options granted is equal to the quoted NASDAQ market close price on the date that the awards were granted and expire ten years after the grant date, if not exercised. All restricted stock grants are issued from previously unissued shares.
Accounting for Stock-Based Compensation Plan
The fair value of stock options granted is estimated on the grant date using a Black-Scholes pricing model. The fair value of restricted shares is equal to the quoted NASDAQ market close price on the date of grant. The fair value of stock grants is recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense is included in compensation, payroll taxes and other employee benefits in the consolidated statements of income.
Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represent the period of time that the options are expected to be outstanding and is based on the SEC simplified approach to calculating expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the actual volatility of Waterstone Financial, Inc. stock from the original date of issue, October 4, 2005. The following assumptions were used in estimating the fair value of options granted in the year ended December 31, 2012 and 2010. There were no options granted during the year ended December 31, 2011.
2012 | 2010 | ||||||
Dividend Yield | 0.00 | % | 0.00 | % | |||
Risk-free interest rate | 0.25 | % | 0.25 | % | |||
Expected volatility | 74.53 | % | 75.67 | % | |||
Weighted average expected life | 6.5 years | 6.5 years | |||||
Weighted average per share value of options | $ | 1.25 | $ | 2.54 | |||
The Company estimates potential forfeitures of stock grants and adjusts compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.
A summary of the Company’s stock option activity for the years ended December 31, 2012, 2011 and 2010 is presented below.
F-81
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Weighted Average | Aggregate | |||||||||
Weighted Average | Years Remaining in | Instrinsic Value | ||||||||
Stock Options | Shares | Exercise Price | Contractual Term | (000’s) | ||||||
Outstanding December 31, 2009 | 757,500 | 17.41 | 7.07 | — | ||||||
Options exercisable at December 31, 2009 | 298,000 | 17.60 | 7.03 | — | ||||||
Granted | 50,000 | $ | 3.80 | — | ||||||
Exercised | — | — | ||||||||
Forfeited | (5,000 | ) | 17.67 | — | ||||||
Outstanding December 31, 2010 | 802,500 | 16.44 | 6.34 | — | ||||||
Options exercisable at December 31, 2010 | 446,500 | 17.54 | 6.04 | — | ||||||
Granted | — | — | ||||||||
Exercised | — | — | ||||||||
Forfeited | (10,000 | ) | 17.16 | — | ||||||
Outstanding December 31, 2011 | 792,500 | 16.32 | 5.37 | — | ||||||
Options exercisable at December 31, 2011 | 599,000 | 17.28 | 5.12 | — | ||||||
Granted | 255,000 | $ | 2.03 | — | ||||||
Exercised | (3,000 | ) | 4.65 | 9 | ||||||
Forfeited | (24,000 | ) | 8.93 | (72 | ) | |||||
Outstanding December 31, 2012 | 1,020,500 | 13.11 | 5.69 | 1,622 | ||||||
Options exercisable at December 31, 2012 | 744,500 | 16.59 | 4.31 | 80 |
The following table summarizes information about the Company’s nonvested stock option activity for the years ended December 31, 2012 and 2011:
Weighted Average | ||||||
Stock Options | Shares | Grant Date Fair Value | ||||
Nonvested at December 31, 2010 | 356,000 | $ | 5.60 | |||
Granted | — | |||||
Vested | (160,500 | ) | 5.79 | |||
Forfeited | (2,000 | ) | 6.04 | |||
Nonvested at December 31, 2011 | 193,500 | 5.31 | ||||
Nonvested at December 31, 2011 | 193,500 | $ | 5.31 | |||
Granted | 255,000 | 1.33 | ||||
Vested | (158,500 | ) | 5.78 | |||
Forfeited | (14,000 | ) | 1.32 | |||
Nonvested at December 31, 2012 | 276,000 | 1.48 |
The Company amortizes the expense related to stock options as compensation expense over the vesting period. During the year ended December 31, 2012, 255,000 options were granted, 24,000 were forfeited, of which 10,000 were vested and 3,000 shares were exercised. During the year ended December 31, 2011, 10,000 were forfeited, of which 8,000 were vested. During the year ended December 31, 2010, 50,000 options were granted and 5,000 were forfeited, of which 2,000 were vested.
F-82
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Expense for the stock options granted of $94,000, $745,000 and $810,000 was recognized during the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, the Company had $305,000 in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over a weighted average period of 40 months.
The following table summarizes information about the Company’s restricted stock shares activity for the years ended December 31, 2012 and 2011:
Weighted Average | ||||||
Restricted Stock | Shares | Grant Date Fair Value | ||||
Nonvested at December 31, 2010 | 101,400 | $ | 16.91 | |||
Granted | — | — | ||||
Vested | (49,200 | ) | 17.24 | |||
Forfeited | — | — | ||||
Nonvested at December 31, 2011 | 52,200 | 16.61 | ||||
Nonvested at December 31, 2011 | 52,200 | 16.61 | ||||
Granted | 100,000 | 1.89 | ||||
Vested | (49,200 | ) | 17.24 | |||
Forfeited | (2,000 | ) | 4.65 | |||
Nonvested at December 31, 2012 | 101,000 | 1.96 | ||||
The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. During the year ended December 31, 2012, 100,000 shares of restricted stock were granted and 2,000 were forfeited. During the years ended December 31, 2011 and 2010, no shares of restricted stock were awarded and no shares were forfeited. Expense for the restricted stock awards of $51,000, $848,000 and $848,000 was recorded for the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, the Company had $158,000 of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period 40 months.
11) Employee Benefit Plans
The Company has two 401(k) profit sharing plans and trusts covering substantially all employees. WaterStone Bank employees over 18 years of age are immediately eligible to participate in the Bank’s Plan. Waterstone Mortgage employees over 21 years of age are eligible to participate in its Plan as of the first of the month following their date of employment. Participating employees may annually contribute pretax compensation in accordance with IRS limits. The Company made a contribution of $70,000 to one of the Plans during the year ended December 31, 2012. The Company made no contributions to the Plans during the years ended December 31, 2011 and 2010.
The Company has a nonqualified salary continuation plan for one former employee. This agreement provides for payments of specific amounts over a 10-year period subsequent to the employee’s retirement. The deferred compensation liability was accrued ratably to the employee’s respective normal retirement date. Payments made to the retired employee reduce the liability. As of December 31, 2012 and 2011, approximately $687,000 and $826,000 was accrued related to this plan. This agreement is funded by a life insurance policy with a death benefit of $6.4 million and a cash surrender value of $3.3 million and $2.9 million at December 31, 2012 and 2011, respectively. The former
F-83
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
employee has no interest in this policy. There was no expense for compensation under this agreement during the years ended December 31, 2012, 2011 and 2010.
12) Employee Stock Ownership Plan
All employees are eligible to participate in the WaterStone Bank Employee Stock Ownership Plan (the “Plan”) after they attain twenty-one years of age and complete twelve consecutive months of service in which they work at least 1,000 hours of service. During the year ended December 31, 2005, the Plan borrowed $8.5 million from the Company and purchased 761,515 shares of common stock of the Company in the open market. The Plan debt is secured by shares of the Company. The Company has committed to make annual contributions to the Plan necessary to repay the loan, including interest. The loan is scheduled to be repaid in ten annual installments through the year ended December 31, 2015. While the shares are not released and allocated to Plan participants until the loan payment is made, the shares are deemed to be earned and are therefore, committed to be released throughout the service period. As such, one-tenth of the shares are scheduled to be released annually as shares are earned over a period of ten years, beginning with the period ended December 31, 2005. As the debt is repaid, shares are released from collateral and allocated to active participant accounts. The shares pledged as collateral are reported as “Unearned ESOP shares” in the consolidated statement of financial condition. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average fair market price of the shares, and the shares become outstanding for earnings per share computations. Compensation expense attributed to the ESOP was $306,000, $202,000 and $264,000, respectively for the years ended December 31, 2012, 2011 and 2010.
The aggregate activity in the number of unearned ESOP shares, considering the allocation of those shares committed to be released as of December 31, is as follows:
2012 | 2011 | |||||
Beginning ESOP shares | 228,453 | 304,605 | ||||
Shares committed to be released | (76,151 | ) | (76,152 | ) | ||
Unreleased shares | 152,302 | 228,453 | ||||
Fair value of unreleased shares (in thousands) | $ | 1,188 | 432 | |||
F-84
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
13) Income Taxes
The provision (benefit) for income taxes for the year ended December 31, 2012, 2011 and 2010 consists of the following:
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Current: | ||||||||
Federal | $ | 4,256 | 1,216 | 30 | ||||
State | 435 | 81 | 22 | |||||
4,691 | 1,297 | 52 | ||||||
Deferred: | ||||||||
Federal | (12,664 | ) | (590 | ) | — | |||
State | (4,231 | ) | (145 | ) | — | |||
(16,895 | ) | (735 | ) | — | ||||
Total | $ | (12,204 | ) | 562 | 52 |
The income tax provisions differ from that computed at the Federal statutory corporate tax rate for the years ended December 31, 2012, 2011 and 2010 as follows:
Years ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(Dollars In Thousands) | ||||||||
Income (loss) before income taxes | $ | 22,710 | (6,911 | ) | (1,802 | ) | ||
Tax at Federal statutory rate (35%) | 7,949 | (2,419 | ) | (631 | ) | |||
Add (deduct) effect of: | ||||||||
State income taxes net of Federal income tax benefit (expense) | (2,467 | ) | (41 | ) | 14 | |||
Cash surrender value of life insurance | (375 | ) | (393 | ) | (398 | ) | ||
Non-deductible ESOP and stock option expense | 103 | 119 | 168 | |||||
Tax-exempt interest income | (185 | ) | (254 | ) | (294 | ) | ||
Reversal of federal valuation allowance on deferred taxes | (17,008 | ) | 2,921 | 1,281 | ||||
Intra-period tax allocation between other comprehensive income and loss from operations | — | (591 | ) | — | ||||
Increase in tax exposure reserve | (184 | ) | 1,216 | — | ||||
Other | (37 | ) | 4 | (88 | ) | |||
Income tax provision (benefit) | (12,204 | ) | 562 | 52 | ||||
Effective tax rate | (53.7 | )% | (8.1 | )% | (2.9 | )% | ||
Deferred tax asset valuation allowances originally established in 2008 were fully reversed at December 31, 2012. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The
F-85
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Examples of positive evidence may include the existence of taxes paid in available carry back years as well as the probability that taxable income will be generated in future periods, while examples of negative evidence may include the cumulative losses in the current year and prior two years and general business and economic trends. In addition, general uncertainty surrounding future economic and business conditions increased the potential volatility and uncertainty of projected earnings. At both December 31, 2011 and 2010, the Company determined a valuation allowance was necessary, largely based on the negative evidence represented by a cumulative loss in the most recent three-year period caused by the significant loan loss provisions recorded during the period. At December 31, 2012, pretax income in each of the four quarters in 2012 and for the year, the existence of taxes paid in 2012 and available for carry back in future years, applicable tax planning strategies and general economic conditions resulted in the conclusion that as of December 31, 2012, it is more likely than not that net deferred tax assets will be realized in future periods.
The income tax provision for 2011 includes a federal and state tax benefit of $736,000 due to an intra-period tax allocation between other comprehensive income and loss from continuing operations representing an out-of-period adjustment for an error that originated beginning in 2008 that was corrected during the quarter ended June 30, 2011. The correction of the error was not material to the year ended December 31, 2011. The impact of this error to all prior periods was not deemed to be material.
F-86
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The significant components of the Company’s net deferred tax assets (liabilities) included in prepaid expenses and other assets are as follows at December 31, 2012 and 2011:
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Gross deferred tax assets: | ||||||
Excess book depreciation | $ | 653 | 617 | |||
Compensation agreements | 277 | 335 | ||||
Restricted stock and stock options | 935 | 1,252 | ||||
Allowance for loan losses | 12,316 | 13,113 | ||||
Repurchase reserve for loans sold | 357 | — | ||||
Real estate owned write-downs | 4,005 | 4,826 | ||||
Interest recognized for tax but not books | 1,609 | 1,169 | ||||
Federal NOL carryforward | — | 915 | ||||
State NOL carryforward | 817 | 1,563 | ||||
Unrealized loss on impaired securities | — | 841 | ||||
Other | 426 | 213 | ||||
Total gross deferred tax assets | 21,395 | 24,844 | ||||
Valuation allowance | — | (21,270 | ) | |||
Deferred tax assets | 21,395 | 3,574 | ||||
Gross deferred tax liabilities: | ||||||
Unrealized gain on securities available for sale, net | (1,834 | ) | (1,228 | ) | ||
Mortgage servicing rights | (1,278 | ) | — | |||
FHLB stock dividends | (858 | ) | (931 | ) | ||
Deferred loan fees | (639 | ) | (859 | ) | ||
Deferred liabilities | (4,609 | ) | (3,018 | ) | ||
Net deferred tax assets | $ | 16,786 | 556 |
The Company had a Federal NOL carry forward of $3.0 million at December 31, 2011 which was fully utilized in 2012. The Company has a non-sharable Wisconsin NOL carry forward of $17.5 million at December 31, 2012 generated by the community banking segment which will begin to expire in 2028.
Under the Internal Revenue Code and Wisconsin Statutes, the Company was permitted to deduct, for tax years beginning before 1988, an annual addition to a reserve for bad debts. This amount differs from the provision for loan losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Company did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings at December 31, 2012 include approximately $16.7 million for which no deferred Federal or state income taxes were provided. Deferred income taxes have been provided on certain additions to the tax reserve for bad debts.
The Company and its subsidiaries file consolidated federal and state tax returns. One subsidiary also files separate state income tax returns in certain states. The Company is no longer subject to federal income tax examinations by tax authorities for years before 2010 and state income taxes for years before 2005.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
F-87
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
2012 | 2011 | |||||
(In Thousands) | ||||||
Balance at January 1 | $ | 2,004 | — | |||
Increases related to prior year tax positions | 13 | 1,526 | ||||
Increases related to current year tax positions | 2 | 478 | ||||
Decreases related to prior year tax positions | (1,948 | ) | — | |||
Balance at December 31 | $ | 71 | 2,004 |
The Internal Revenue Service (IRS) commenced an examination of the Company’s income tax returns for 2005 through 2009 in the first quarter of 2010. In the fourth quarter of 2011, the IRS proposed significant adjustments related to the Company’s deduction of expenses related to real estate owned and acquired through foreclosure, loan loss charge-offs and state tax deductions. All of these significant proposed adjustments are timing differences which resulted in current tax expense offset by deferred tax benefit to be realized in future periods. In the second quarter of 2012, a payment of $982,000 was made towards the proposed IRS adjustment. Final settlement of interest due is still pending.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2011, the Company recognized $241,000 in interest which was accrued for as of December 31, 2011. The Company recognized no interest or penalties during the years ended December 31, 2012 and 2010. The Company had an accrual for the payment of interest and penalties of $53,000 at December 31, 2012, $241,000 at December 31, 2011 and zero at December 31, 2010.
14) Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Financial instruments whose contract amounts represent potential credit risk: | ||||||
Commitments to extend credit under first mortgage loans | $ | 20,836 | 14,259 | |||
Commitments to extend credit under home equity lines of credit | 17,628 | 21,403 | ||||
Unused portion of construction loans | 5,502 | 5,684 | ||||
Unused portion of business lines of credit | 10,967 | 10,347 | ||||
Standby letters of credit | 736 | 970 | ||||
F-88
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of December 31, 2012 and 2011.
15) Derivative Financial Instruments
In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. These instruments are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. The Company does not use derivatives for speculative purposes.
Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. At December 31, 2012, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $138.1 million and interest rate lock commitments with an aggregate notional amount of $147.9 million. The fair value of the mortgage derivatives at December 31, 2012 included a gain of $1.7 million on mortgage banking derivative assets and a $249,000 net loss on mortgage banking liabilities that are reported as a component of other asset and other liabilities, respectively on the Company’s consolidated statements of financial condition.
In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated when the loan arising from exercise of the loan commitment is sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market. The fair value of these commitments is recorded on the consolidated
F-89
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
statements of financial condition with the changes in fair value recorded as a component of mortgage banking income.
16) Fair Values Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.
Level 1 inputs In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a recurring basis as of December 31, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
F-90
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
December 31, | Fair Value Measurements Using | |||||||||
2012 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Available for sale securities | ||||||||||
Mortgage-backed securities | $ | 119,056 | — | 119,056 | — | |||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 29,579 | — | 29,579 | — | ||||||
Government sponsored enterprise bonds | 8,017 | — | 8,017 | — | ||||||
Municipal securities | 37,371 | — | 37,371 | — | ||||||
Other debt securities | 5,070 | 5,070 | — | — | ||||||
Certificates of deposit | 5,924 | — | 5,924 | — | ||||||
Loans held for sale | 133,613 | — | 133,613 | — | ||||||
Mortgage banking derivative assets | 1,668 | — | — | 1,668 | ||||||
Mortgage banking derivative liabilities | 249 | — | — | 249 | ||||||
December 31, | Fair Value Measurements Using | |||||||||
2011 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Available for sale securities | ||||||||||
Mortgage-backed securities | $ | 35,417 | — | 35,417 | — | |||||
Collateralized mortgage obligations | ||||||||||
Government sponsored enterprise issued | 33,196 | — | 33,196 | — | ||||||
Private-label issued | 18,451 | — | — | 18,451 | ||||||
Government sponsored enterprise bonds | 71,349 | — | 71,349 | — | ||||||
Municipal securities | 39,068 | — | 39,068 | — | ||||||
Other debt securities | 5,118 | 5,118 | — | — | ||||||
Certificates of deposit | 3,920 | — | 3,920 | — | ||||||
Loans held for sale | 88,283 | — | 88,283 | — | ||||||
Mortgage banking derivative assets | 924 | — | — | 924 | ||||||
Mortgage banking derivative liabilities | 397 | — | — | 397 | ||||||
The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:
Available for sale securities — The Company’s investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 and Level 3 in the fair value hierarchy. The fair value of municipal securities is determined by a third party valuation source using observable market data
F-91
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. The fair value of other debt securities, which includes a trust preferred security issued by a financial institution, is determined through quoted prices in active markets and is classified as Level 1 in the fair value hierarchy.
Loans held for sale — The Company carries loans held for sale at fair value under the fair value option model. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques.
Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company utilizes a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also utilizes a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy.
The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2012 and 2011.
Available for sale securities | Mortgage banking derivatives, net | |||||
(In Thousands) | ||||||
Balance at December 31, 2010 | $ | 20,301 | 407 | |||
Transfer into level 3 | — | — | ||||
Unrealized holding losses arising during the period: | ||||||
Included in other comprehensive income | (142 | ) | — | |||
Other than temporary impairment included in net loss | (456 | ) | — | |||
Principal repayments | (1,252 | ) | — | |||
Net accretion of discount/amortization of premium | — | — | ||||
Mortgage derivative gain, net | — | 120 | ||||
Balance at December 31, 2011 | 18,451 | 527 | ||||
Transfer into level 3 | — | — | ||||
Unrealized holding losses arising during the period: | ||||||
Included in other comprehensive income | 1,023 | — | ||||
Other than temporary impairment included in net loss | (113 | ) | — | |||
Principal repayments | (1,352 | ) | — | |||
Net accretion of discount/amortization of premium | — | — | ||||
Sales of available for sale securities | (18,009 | ) | ||||
Mortgage derivative gain, net | — | 892 | ||||
Balance at December 31, 2012 | $ | — | 1,419 |
F-92
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Prior to December 31, 2012, level 3 available-for-sale securities included two corporate collateralized mortgage obligations. The market for these securities was not active as of December 31, 2011. As such, the Company valued these securities based on the present value of estimated future cash flows.
Assets Recorded at Fair Value on a Non-recurring Basis
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a non-recurring basis as of December 31, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
December 31, | Fair Value Measurements Using | |||||||||
2012 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Impaired loans, net (1) | $ | 40,071 | — | — | 40,071 | |||||
Real estate owned | 35,974 | — | — | 35,974 | ||||||
December 31, | Fair Value Measurements Using | |||||||||
2011 | Level 1 | Level 2 | Level 3 | |||||||
(In Thousands) | ||||||||||
Impaired loans, net (1) | $ | 43,432 | — | — | 43,432 | |||||
Real estate owned | 56,670 | — | — | 56,670 | ||||||
(1) Represents collateral-dependent impaired loans, net, which are included in loans.
Loans — We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable value of the underlying collateral. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation techniques. At December 31, 2012, loans determined to be impaired with an outstanding balance of $52.5 million were carried net of specific reserves of $12.4 million for a fair value of $40.1 million. At December 31, 2011, loans determined to be impaired with an outstanding balance of $56.0 million were carried net of specific reserves of $12.6 million for a fair value of $43.4 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.
Real estate owned — On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. Changes in
F-93
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
the fair value of real estate owned totaled $7.6 million and $6.8 million during the year ended December 31, 2012 and 2011, respectively and are recorded in real estate owned expense. At December 31, 2012 and December 31, 2011, real estate owned totaled $36.0 million and $56.7 million, respectively.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value at | Significant | Significant Unobservable Input Value | |||||||||
December 31, 2012 | Valuation Technique | Unobservable Inputs | Minimum Value | Maximum Value | |||||||
Mortgage banking derivatives | 1,419 | Pricing models | Pull through rate | 68.9 | % | 100.0 | % | ||||
Impaired loans | 40,071 | Market approach | Disount rates applied to appraisals | 15.0 | % | 30.0 | % | ||||
Real estate owned | 35,974 | Market approach | Disount rates applied to appraisals | 5.0 | % | 76.5 | % |
The significant unobservable input used in the fair value measurement of the Company’s mortgage banking derivatives, including interest rate lock commitments, is the loan pull through rate. This represents the percentage of loans currently in a lock position which the Company estimates will ultimately close. Generally, the fair value of an interest rate lock commitment will be positively (negatively) impacted when the prevailing interest rate is lower (higher) than the interest rate lock commitment. Generally, an increase in the pull through rate will result in the fair value of the interest rate lock increasing when in a gain position, or decreasing when in a loss position. The pull through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed using historical data and the ratio is periodically reviewed by the Company.
The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and real estate owned included in the above table primarily relate to discounting criteria applied to independent appraisals received with respect to the collateral. Discounts applied to the appraisals are dependent on the vintage of the appraisal as well as the marketability of the property. The discount factor is computed using actual realization rates on properties that have been foreclosed upon and liquidated in the open market.
Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
F-94
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
The carrying amounts and fair values of the Company’s financial instruments consist of the following at December 31, 2012 and December 31, 2011:
December 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying | Carrying | Fair | ||||||||||||||
amount | Fair Value | amount | value | |||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In Thousands) | ||||||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 71,649 | 71,469 | 71,469 | — | — | 80,380 | 80,380 | ||||||||
Securities available-for-sale | 205,017 | 205,017 | 5,070 | 199,947 | — | 206,519 | 206,519 | |||||||||
Securities held-to-maturity | — | — | — | — | — | 2,648 | 2,542 | |||||||||
Loans held for sale | 133,613 | 133,613 | — | 133,613 | — | 88,283 | 88,283 | |||||||||
Loans receivable | 1,133,672 | 1,148,107 | — | — | 1,148,107 | 1,216,664 | 1,225,141 | |||||||||
FHLB stock | 20,193 | 20,193 | — | 20,193 | — | 21,653 | 21,653 | |||||||||
Cash surrender value of life insurance | 38,061 | 38,061 | 38,061 | — | — | 36,749 | 36,749 | |||||||||
Real estate owned | 35,974 | 35,974 | — | — | 35,974 | 56,670 | 56,670 | |||||||||
Accrued interest receivable | 3,452 | 3,452 | 3,452 | — | — | 4,064 | 4,064 | |||||||||
Mortgage banking derivative assets | 1,668 | 1,668 | — | — | 1,668 | 924 | 924 | |||||||||
Financial Liabilities | ||||||||||||||||
Deposits | 939,513 | 942,118 | 202,593 | 739,525 | — | 1,051,292 | 1,052,663 | |||||||||
Advance payments by borrowers for taxes | 1,672 | 1,672 | 1,672 | — | — | 942 | 942 | |||||||||
Borrowings | 479,888 | 537,299 | — | 537,299 | — | 461,138 | 517,624 | |||||||||
Accrued interest payable | 1,715 | 1,715 | 1,715 | — | — | 2,087 | 2,087 | |||||||||
Mortgage banking derivative liabilities | 249 | 249 | — | — | 249 | 397 | 397 | |||||||||
Other Financial Instruments | ||||||||||||||||
Stand-by letters of credit | 5 | 5 | — | — | 5 | 6 | 6 | |||||||||
The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value for these short-term instruments.
Securities
Thefair value of securities is determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models
F-95
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features.
Loans Held for Sale
Fair value is estimated using the prices of the Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.
Loans Receivable
Loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at fair value. Fair value isdetermined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. With respect to loans that are not considered to be impaired, fair value is estimated by discounting the future contractual cash flows using discount rates that that reflect a current rate offered to borrowers of similar credit standing for the remaining term to maturity. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820-10 and generally produces a higher fair value.
FHLB Stock
For FHLB stock, the carrying amount is the amount at which shares can be redeemed with the FHLB and is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
The carrying amounts reported in the consolidated statements of financial condition for the cash surrender value of life insurance approximate those assets’ fair values.
Deposits and Advance Payments by Borrowers for Taxes
The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date.
Borrowings
Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings.
Accrued Interest Payable and Accrued Interest Receivable
For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value.
F-96
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would be generally established at market rates at the time of the draw. Fair values for the Company’s commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparty’s credit standing, and discounted cash flow analyses. The fair value of the Company’s commitments to extend credit is not material at December 31, 2012 and 2011.
Mortgage Banking Derivative Assets and Liabilities
Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company utilizes a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment, and then multiplying by quoted investor prices. The Company also utilizes a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. On the Company’s Consolidated Statements of Condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities.
17) Earnings (loss) per share
Earnings per share are computed using the two-class method. Basic earnings (loss) per share is computed by dividing net income (loss) allocated to common shares by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities have the right to receive dividends at the same rate as holders of the Company’s common stock. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. Unvested restricted stock and stock options are considered outstanding for diluted earnings per share only. Unvested restricted stock and stock options totaling 101,000 and 276,000 shares for the year ended December 31, 2012 and 52,200 and 193,500 shares for the year ended December 31, 2011 and 101,400 and 356,000 shares for the year ended December 31, 2010 are antidilutive and are excluded from the loss per share calculation. Presented below are the calculations for basic and diluted earnings loss per share.
F-97
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
For the year ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands, except per share amounts) | ||||||||
Net income (loss) | 34,914 | (7,473 | ) | (1,854 | ) | |||
Net income available to unvested restricted stockholders | 113 | — | — | |||||
Net income (loss) available to common stockholders | $ | 34,801 | (7,473 | ) | (1,854 | ) | ||
Weighted average shares outstanding | 31,055 | 30,929 | 30,804 | |||||
Effect of dilutive potential common shares | 107 | — | — | |||||
Diluted weighted average shares outstanding | 31,162 | 30,929 | 30,804 | |||||
Basic income (loss) per share | $ | 1.12 | (0.24 | ) | (0.06 | ) | ||
Diluted income (loss) per share | $ | 1.12 | (0.24 | ) | (0.06 | ) |
F-98
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
18) Condensed Parent Company Only Statements
Statements of Financial Condition
December 31, | ||||||
2012 | 2011 | |||||
(In Thousands) | ||||||
Assets | ||||||
Cash and cash equivalents | $ | 337 | 521 | |||
Securities available for sale (at fair value) | 5,070 | 5,118 | ||||
Investment in subsidiaries | 195,451 | 160,933 | ||||
Other assets | 1,926 | 21 | ||||
Total Assets | $ | 202,784 | 166,593 | |||
Liabilities and shareholders’ equity | ||||||
Liabilities: | ||||||
Other liabilities | 150 | 221 | ||||
Shareholders’ equity | ||||||
Preferred Stock (par value $.01 per share) Authorized - 20,000,000 shares, no shares issued | — | — | ||||
Common stock (par value $.01 per share) Authorized - 200,000,000 shares in 2012 and 2011 Issued - 34,072,909 in 2012 and 33,974,450 in 2011 Outstanding - 31,348,556 in 2012 and 31,250,097 in 2011 | 341 | 340 | ||||
Additional paid-in-capital | 110,490 | 110,894 | ||||
Retained earnings | 136,487 | 101,573 | ||||
Unearned ESOP shares | (1,708 | ) | (2,562 | ) | ||
Treasury stock (2,724,353 shares), at cost | (45,261 | ) | (45,261 | ) | ||
Accumulated other comprehensive income (net of taxes) | 2,285 | 1,388 | ||||
Total shareholders’ equity | 202,634 | 166,372 | ||||
Total liabilities and shareholders’ equity | $ | 202,784 | 166,593 |
F-99
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
Statements of Operations
For the year ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Interest income | $ | 644 | 669 | 715 | ||||
Equity in income (loss) of subsidiaries | 33,448 | (8,250 | ) | (2,790 | ) | |||
Total income (loss) | 34,092 | (7,581 | ) | (2,075 | ) | |||
Compensation | (523 | ) | (605 | ) | (541 | ) | ||
Professional fees | 3 | 57 | 40 | |||||
Other expense | 279 | 440 | 280 | |||||
Total expense | (241 | ) | (108 | ) | (221 | ) | ||
Income (loss) before income tax expense | 34,333 | (7,473 | ) | (1,854 | ) | |||
Income tax benefit | (581 | ) | — | — | ||||
Net income (loss) | $ | 34,914 | (7,473 | ) | (1,854 | ) |
Statements of Cash Flows
For the year ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
(In Thousands) | ||||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 34,914 | (7,473 | ) | (1,854 | ) | ||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
Amortization of unearned ESOP | 306 | 202 | 264 | |||||
Stock based compensation | 145 | 1,593 | 1,659 | |||||
Deferred income taxes | (954 | ) | (71 | ) | 319 | |||
Equity in (earnings) loss of subsidiaries | (33,448 | ) | 8,250 | 2,790 | ||||
Change in other assets and liabilities | (1,147 | ) | (1,537 | ) | (2,067 | ) | ||
Net cash (used in) provided by operating actitivies | (184 | ) | 964 | 1,111 | ||||
Cash flows used in investing activities: | ||||||||
Capital contributions to subsidiary | — | (1,000 | ) | (1,000 | ) | |||
Net cash used in investing activities | — | (1,000 | ) | (1,000 | ) | |||
Net cash provided by (used in) financing activities | — | — | — | |||||
Net increase (decrease) in cash | (184 | ) | (36 | ) | 111 | |||
Cash and cash equivalents at beginning of year | 521 | 557 | 446 | |||||
Cash and cash equivalents at end of year | $ | 337 | 521 | 557 |
F-100
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
19) Segments and Related Information
During the year ended December 31, 2011, the Company determined that it has two reportable segments: community banking and mortgage banking. During this period, the Company realigned its operations to allow for all mortgage banking activities to be managed exclusively within its mortgage banking subsidiary. Based upon this realignment, the Company determined that the mortgage banking subsidiary represents a segment that is distinct from the operations of the core community banking function. Prior to the year ended December 31, 2011, the Company’s operations were aligned such that it had one reportable segment. All segment data related to the year ended December 31, 2010 reflects the Company’s operations in the same manner as they were aligned during the years ended December 31, 2012 and 2011. The Company’s operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company’s business segments are not necessarily comparable with similar information for other financial institutions.
Community Banking
The Community Banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin. Consumer products include loan and deposit products: mortgage, home equity loans and lines, personal term loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, demand deposit accounts, interest bearing transaction accounts and time deposits.
Mortgage Banking
The Mortgage Banking segment provides residential mortgage loans for the purpose of sale on the secondary market. Mortgage banking products and services are provided by offices in: Wisconsin, Arizona, Florida, Idaho, Indiana, Illinois, Iowa, Maryland, Minnesota, Ohio and Pennsylvania.
F-101
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
As of or for the Year ended December 31, 2012 | ||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||
(in thousands) | ||||||||||
Net interest income | $ | 40,973 | 470 | 502 | 41,945 | |||||
Provision for loan losses | 8,250 | 50 | — | 8,300 | ||||||
Net interest income after provision for loan losses | 32,723 | 420 | 502 | 33,645 | ||||||
Noninterest income | 3,259 | 87,944 | — | 91,203 | ||||||
Noninterest expenses: | ||||||||||
Compensation, payroll taxes, and other employee benefits | 13,424 | 50,748 | (665 | ) | 63,507 | |||||
Occupancy, office furniture and equipment | 3,112 | 3,856 | — | 6,968 | ||||||
FDIC insurance premiums | 3,390 | — | — | 3,390 | ||||||
Real estate owned | 8,746 | — | — | 8,746 | ||||||
Other | 4,728 | 14,517 | 282 | 19,527 | ||||||
Total noninterest expenses | 33,400 | 69,121 | (383 | ) | 102,138 | |||||
Income before income taxes (benefit) | 2,582 | 19,243 | 885 | 22,710 | ||||||
Income taxes (benefit) | (19,347 | ) | 7,724 | (581 | ) | (12,204 | ) | |||
Net income | $ | 21,929 | 11,519 | 1,466 | 34,914 | |||||
Total Assets | $ | 1,589,314 | 147,699 | (75,937 | ) | 1,661,076 |
As of or for the Year ended December 31, 2011 | ||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||
(in thousands) | ||||||||||
Net interest income | $ | 45,611 | 406 | 499 | 46,516 | |||||
Provision for loan losses | 21,960 | 117 | — | 22,077 | ||||||
Net interest income after provision for loan losses | 23,651 | 289 | 499 | 24,439 | ||||||
Noninterest income | 2,431 | 40,798 | — | 43,229 | ||||||
Noninterest expenses: | ||||||||||
Compensation, payroll taxes, and other employee benefits | 13,006 | 26,929 | (776 | ) | 39,159 | |||||
Occupancy, office furniture and equipment | 3,262 | 3,226 | — | 6,488 | ||||||
FDIC insurance premiums | 3,814 | — | — | 3,814 | ||||||
Real estate owned | 12,140 | — | — | 12,140 | ||||||
Other | 4,598 | 7,883 | 497 | 12,978 | ||||||
Total noninterest expenses | 36,820 | 38,038 | (279 | ) | 74,579 | |||||
Income (loss) before income taxes (benefit) | (10,738 | ) | 3,049 | 778 | (6,911 | ) | ||||
Income taxes (benefit) | (833 | ) | 1,395 | — | 562 | |||||
Net income (loss) | $ | (9,905 | ) | 1,654 | 778 | (7,473 | ) | |||
Total Assets | $ | 1,669,231 | 100,177 | (56,557 | ) | 1,712,851 |
F-102
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
As of or for the Year ended December 31, 2010 | ||||||||||
Community Banking | Mortgage Banking | Holding Company and Other | Consolidated | |||||||
(in thousands) | ||||||||||
Net interest income | $ | 48,521 | 641 | 502 | 49,664 | |||||
Provision for loan losses | 25,553 | 279 | — | 25,832 | ||||||
Net interest income after provision for loan losses | 22,968 | 362 | 502 | 23,832 | ||||||
Noninterest income | 3,295 | 35,698 | — | 38,993 | ||||||
Noninterest expenses: | ||||||||||
Compensation, payroll taxes, and other employee benefits | 13,600 | 23,478 | (755 | ) | 36,323 | |||||
Occupancy, office furniture and equipment | 3,313 | 2,449 | — | 5,762 | ||||||
FDIC insurance premiums | 4,353 | — | — | 4,353 | ||||||
Real estate owned | 6,583 | — | — | 6,583 | ||||||
Other | 5,251 | 6,034 | 321 | 11,606 | ||||||
Total noninterest expenses | 33,100 | 31,961 | (434 | ) | 64,627 | |||||
Income (loss) before income taxes (benefit) | (6,837 | ) | 4,099 | 936 | (1,802 | ) | ||||
Income taxes (benefit) | (1,554 | ) | 1,606 | — | 52 | |||||
Net income (loss) | $ | (5,283 | ) | 2,493 | 936 | (1,854 | ) | |||
Total Assets | $ | 1,770,912 | 108,928 | (70,874 | ) | 1,808,966 |
20) Subsequent Events
On June 6, 2013, the Boards of Directors of Lamplighter Financial, MHC and the Company adopted a Plan of Conversion and Reorganization (the “Plan”). Pursuant to the Plan, Lamplighter Financial, MHC will convert from the mutual holding company form of organization to the fully public form. Lamplighter Financial, MHC will be merged into the Company, and Lamplighter Financial, MHC will no longer exist. The Company will then merge into a new Maryland corporation also named Waterstone Financial, Inc. As part of the conversion, Lamplighter Financial, MHC’s ownership interest of the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represent the remaining ownership interest in the Company, will be exchanged for new shares of common stock of the new Maryland corporation. The exchange ratio will ensure that immediately after the conversion and public offering, the public shareholders of the Company will own the same aggregate percentage of common stock of the new Maryland corporation that they owned immediately prior to the completion of the conversion and public offering (excluding shares purchased in the stock offering and cash received in lieu of fractional shares). When the conversion and public offering are completed, all of the capital stock of the Bank will be owned by the new Maryland corporation.
The Plan provides for the establishment, upon the completion of the conversion, of special “liquidation accounts” for the benefit of certain depositors of the Bank in an amount equal to the greater of Lamplighter Financial, MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the prospectus or the retained earnings of the Bank at the time it reorganized into Lamplighter Financial, MHC. Following the completion of the conversion, under the rules of the Board of Governors of the Federal Reserve System, the Bank will not be permitted to pay dividends on its capital stock to Waterstone Financial, Inc., its sole shareholder, if the Bank’s shareholder’s equity would be reduced below the amount of the liquidation accounts. The liquidation
F-103
Waterstone Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2012, 2011 and 2010
accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.
Direct costs of the conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public offering. No costs have been incurred as of December 31, 2012 related to the conversion.
F-104
1. | The approval of a plan of conversion and reorganization, whereby Lamplighter Financial, MHC and Waterstone Financial, Inc., a federal corporation, will convert and reorganize from the mutual holding company structure to the stock holding company structure, as more fully described in the attached proxy statement; |
2. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion and reorganization; |
3. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve certain amendments to New Waterstone’s articles of incorporation; |
4. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve stockholder-proposed amendments to New Waterstone’s bylaws; |
5. | Approval of a provision in New Waterstone’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of New Waterstone’s outstanding voting stock; and |
BY ORDER OF THE BOARD OF DIRECTORS | |
William F. Bruss | |
Corporate Secretary | |
Wauwatosa, Wisconsin | |
[document date] |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
A. | Waterstone Financial, Inc. stockholders as of July 31, 2013 are being asked to vote on the plan of conversion pursuant to which Lamplighter Financial, MHC will convert from the mutual to the stock form of organization. As part of the conversion, a newly formed Maryland corporation, New Waterstone, is offering its common stock to eligible depositors of WaterStone Bank, to WaterStone Bank’s tax qualified benefit plans, to stockholders of Waterstone Financial, Inc. as of July 31, 2013 and to the public. The shares offered represent Lamplighter Financial, MHC’s current ownership interest in Waterstone Financial, Inc. Voting for approval of the plan of conversion will also include approval of the exchange ratio and the articles of incorporation of New Waterstone (including the anti-takeover provisions and provisions limiting stockholder rights). Your vote is important. Without sufficient votes “FOR” its adoption, we cannot implement the plan of conversion and complete the stock offering. |
● | Approval of a provision requiring a super-majority vote to approve certain amendments to New Waterstone’s articles of incorporation; |
● | Approval of a provision requiring a super-majority vote of stockholders to approve stockholder-proposed amendments to New Waterstone’s bylaws; and |
● | Approval of a provision to limit the voting rights of shares beneficially owned in excess of 10% of New Waterstone’s outstanding voting stock. |
1 |
Q. | WHAT ARE THE REASONS FOR THE CONVERSION AND RELATED OFFERING? |
A. | The primary reasons for the conversion and offering are to: |
● | eliminate some of the uncertainties associated with the mutual holding company structure under financial reform legislation; |
● | transition us to a more familiar and flexible organizational structure; |
● | enhance our regulatory capital position; |
● | improve the liquidity of our shares of common stock; and |
● | facilitate future mergers and acquisitions. |
Q. | WHAT WILL STOCKHOLDERS RECEIVE FOR THEIR EXISTING WATERSTONE FINANCIAL, INC. SHARES? |
A. | As more fully described in “Proposal 1 — Approval of the Plan of Conversion and Reorganization — Share Exchange Ratio,” depending on the number of shares sold in the offering, each share of common stock that you own at the time of the completion of the conversion will be exchanged for between 0.8111 shares at the minimum and 1.0973 shares at the maximum of the offering range of New Waterstone common stock (cash will be paid in lieu of any fractional shares). For example, if you own 100 shares of Waterstone Financial, Inc. common stock, and the exchange ratio is 1.0973 (at the maximum of the offering range), after the conversion you will receive 109 shares of New Waterstone common stock and $ 7.30 in cash, the value of the fractional share based on the $10 .00 per share purchase price of stock in the offering. |
If you own shares of Waterstone Financial, Inc. common stock in a brokerage account in “street name,” your shares will be automatically exchanged within your account, and you do not need to take any action to exchange your shares of common stock or receive cash in lieu of fractional shares. If you own shares in the form of Waterstone Financial, Inc. stock certificates, after the completion of the conversion and stock offering, our exchange agent will mail to you a transmittal form with instructions to surrender your stock certificates. A statement reflecting your ownership of shares of common stock of New Waterstone and a check representing cash in lieu of fractional shares will be mailed to you within five business days after the transfer agent receives a properly executed transmittal form and your existing Waterstone Financial, Inc. stock certificate(s). New Waterstone will not issue stock certificates. You should not submit a stock certificate until you receive a transmittal form. |
2 |
Q. | WHY WILL THE SHARES THAT I RECEIVE BE BASED ON A PRICE OF $10 .00 PER SHARE RATHER THAN THE TRADING PRICE OF THE COMMON STOCK PRIOR TO COMPLETION OF THE CONVERSION? |
A. | The shares will be based on a price of $10 .00 per share because that is the price at which New Waterstone will sell shares in its stock offering. The amount of common stock New Waterstone will issue at $10 .00 per share in the offering and the exchange is based on an independent appraisal of the estimated market value of New Waterstone, assuming the conversion and offering are completed. RP Financial, LC., an appraisal firm experienced in the appraisal of financial institutions, has estimated that, as of July 19, 2013 , this market value was $ 299.2 million. Based on Board of Governors of the Federal Reserve System regulations, the market value forms the midpoint of a range with a minimum of $ 254.3 million and a maximum of $ 344.1 million. Based on this valuation and the valuation range, the number of shares of common stock of New Waterstone that existing public stockholders of Waterstone Financial, Inc. will receive in exchange for their shares of Waterstone Financial, Inc. common stock is expected to range from 6,730,586 to 9,106,086 with a midpoint of 7,918,336 (a value of approximately $ 67.3 million to $ 91.1 million, with a midpoint of $ 79.2 million, at $10 .00 per share). The number of shares received by the existing public stockholders of Waterstone Financial, Inc. is intended to maintain their existing ownership in our organization (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares). The independent appraisal is based in part on Waterstone Financial, Inc.’s financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of ten publicly traded savings bank and thrift holding companies that RP Financial, LC. considered comparable to Waterstone Financial, Inc. |
Q. | DOES THE EXCHANGE RATIO DEPEND ON THE TRADING PRICE OF WATERSTONE FINANCIAL, INC. COMMON STOCK? |
A. | No, the exchange ratio will not be based on the market price of Waterstone Financial, Inc. common stock. Instead, the exchange ratio will be based on the appraised value of New Waterstone. The purpose of the exchange ratio is to maintain the ownership percentage of existing public stockholders of Waterstone Financial, Inc. Therefore, changes in the price of Waterstone Financial, Inc. common stock between now and the completion of the conversion and offering will not affect the calculation of the exchange ratio. |
Q. | SHOULD I SUBMIT MY STOCK CERTIFICATES NOW? |
A. | No. If you hold stock certificate(s), instructions for exchanging the certificates will be sent to you by our exchange agentafter completion of the conversion. If your shares are held in “street name” (e.g., in a brokerage account) rather than in certificate form, the share exchange will be reflected automatically in your account upon completion of the conversion. |
Q. | HOW DO I VOTE? |
A. | Mark your vote, sign each proxy card enclosed and return the card(s) to us, in the enclosed proxy reply envelope. For information on submitting your proxy, please refer to instructions on the enclosed proxy card. YOUR VOTE IS IMPORTANT. PLEASE VOTE PROMPTLY. |
Q. | IF MY SHARES ARE HELD IN STREET NAME, WILL MY BROKER, BANK OR OTHER NOMINEE AUTOMATICALLY VOTE ON THE PLAN ON MY BEHALF? |
A. | No. Your broker, bank or other nominee will not be able to vote your shares without instructions from you. You should instruct your broker, bank or other nominee to vote your shares, using the directions that they provide to you. |
3 |
Q. | WHY SHOULD I VOTE? WHAT HAPPENS IF I DON’T VOTE? |
A. | Your vote is very important. We believe the conversion and offering are in the best interests of our stockholders. Not voting all the proxy card(s) you receive will have the same effect as voting“against” the plan of conversion.Without sufficient favorable votes“for” the plan of conversion, we cannot complete the conversion and offering. |
Q. | WHAT IF I DO NOT GIVE VOTING INSTRUCTIONS TO MY BROKER, BANK OR OTHER NOMINEE? |
A. | Your vote is important. If you do not instruct your broker, bank or other nominee to vote your shares, the unvoted proxy will have the same effect as a vote“against”the plan of conversion. |
Q. | MAY I PLACE AN ORDER TO PURCHASE SHARES IN THE COMMUNITY OFFERING, IN ADDITION TO THE SHARES THAT I WILL RECEIVE IN THE EXCHANGE? |
A. | Yes. If you would like to receive a prospectus and stock order form, you must call our Stock Information Center at [stock center number], Monday through Friday between 10:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center is closed weekends and bank holidays. |
Q. | WILL THE CONVERSION HAVE ANY EFFECT ON DEPOSIT AND LOAN ACCOUNTS AT WATERSTONE BANK? |
A. | No. The account number, amount, interest rate and withdrawal rights of deposit accounts will remain unchanged. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation up to the legal limit. Loans and rights of borrowers will not be affected. Depositors will no longer have voting rights in Lamplighter Financial, MHC as to matters currently requiring such vote. Lamplighter Financial, MHC will cease to exist after the conversion and offering. Only stockholders of New Waterstone will have voting rights after the conversion and offering. |
4 |
5 |
This summary highlights material information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the conversion and other proposals fully, you should read this entire document carefully, including the sections entitled “Risk Factors,” “Proposal 1 — Approval of The Plan of Conversion and Reorganization,” “Proposal 2 — Adjournment of the Special Meeting,” “Proposals 3 through 5 — Informational Proposals Related to the Articles of Incorporation of New Waterstone” and the consolidated financial statements and the notes to the consolidated financial statements. | ||||
The Special Meeting | ||||
Date, Time and Place. Waterstone Financial, Inc. will hold its special meeting of stockholders at 11200 West Plank Court, Wauwatosa, Wisconsin , on September 27, 2013 , at 11:00 a.m. , Central Time. | ||||
The Proposals. Stockholders will be voting on the following proposals at the special meeting: | ||||
1. | The approval of a plan of conversion and reorganization whereby: (a) Lamplighter Financial, MHC and Waterstone Financial, Inc., a federal corporation, will convert and reorganize from the mutual holding company structure to the stock holding company structure; (b) Waterstone Financial, Inc., a Maryland corporation (“New Waterstone”), will become the new stock holding company of WaterStone Bank; (c) the outstanding shares of Waterstone Financial, Inc., other than those held by Lamplighter Financial, MHC, will be converted into shares of common stock of New Waterstone; and (d) New Waterstone will offer shares of its common stock for sale in a subscription offering, a community offering and, if necessary, a syndicated offering; | |||
2. | The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the plan of conversion; and | |||
The following informational proposals: | ||||
3. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve certain amendments to New Waterstone’s articles of incorporation; | |||
4. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve stockholder-proposed amendments to New Waterstone’s bylaws; | |||
5. | Approval of a provision in New Waterstone’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of New Waterstone’s outstanding voting stock; and | |||
Such other business that may properly come before the meeting. | ||||
The provisions of New Waterstone’s articles of incorporation that are summarized as informational proposals 3 through 5 were approved as part of the process in which our board of directors approved the plan of conversion. These proposals are informational in nature only, because the Board of Governors of the Federal Reserve System’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if stockholders approve the plan of conversion, regardless of whether stockholders vote to approve any or all of the informational proposals. The provisions of New Waterstone’s articles of incorporation that are summarized as informational proposals may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of New Waterstone, if such attempts are not approved by the board of directors, or may make the removal of the board of directors or management, or the appointment of new directors, more difficult. | ||||
6 |
Vote Required for Approval of Proposals by the Stockholders of Waterstone Financial, Inc. | ||||
Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Waterstone Financial, Inc. stockholders, including shares held by Lamplighter Financial, MHC, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Waterstone Financial, Inc. stockholders other than Lamplighter Financial, MHC. | ||||
Proposal 1 must also be approved by the members of Lamplighter Financial, MHC (depositors of WaterStone Bank) at a special meeting of members called for that purpose. Members will receive separate informational materials from Lamplighter Financial, MHC regarding the conversion. | ||||
Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of at least a majority of the votes cast by Waterstone Financial, Inc. stockholders at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to approve the plan of conversion. | ||||
Informational Proposals 3 through 5. The provisions of New Waterstone’s articles of incorporation that are summarized as informational proposals were approved as part of the process in which the board of directors of Waterstone Financial, Inc. approved the plan of conversion. These proposals are informational in nature only, because the Board of Governors of the Federal Reserve System’s regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion. While we are asking you to vote with respect to each of the informational proposals listed above, the proposed provisions for which an informational vote is requested will become effective if stockholders approve the plan of conversion, regardless of whether stockholders vote to approve any or all of the informational proposals. The provisions of New Waterstone’s articles of incorporation that are summarized as informational proposals may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of New Waterstone, if such attempts are not approved by the board of directors, or may make the removal of the board of directors or management, or the appointment of new directors, more difficult. | ||||
Other Matters. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of common stock of Waterstone Financial, Inc. At this time, we know of no other matters that may be presented at the special meeting. | ||||
Revocability of Proxies | ||||
You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Waterstone Financial, Inc. in writing before your common stock has been voted at the special meeting, deliver a later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy. | ||||
Vote by Lamplighter Financial, MHC | ||||
Management anticipates that Lamplighter Financial, MHC, our majority stockholder, will vote all of its shares of common stock in favor of all the matters set forth above. If Lamplighter Financial, MHC votes all of its shares in favor of each proposal, the approval of the adjournment of the special meeting, if necessary, would be assured, and the approval of the plan of conversion and reorganization by stockholders holding at least two-thirds of the outstanding shares of common stock of Waterstone-Federal, including shares held by Lamplighter Financial, MHC, would also be assured. | ||||
As of July 31, 2013 the directors and executive officers of Waterstone Financial, Inc. beneficially owned _________________ shares, or approximately _____________% of the outstanding shares of Waterstone Financial, Inc. common stock, and Lamplighter Financial, MHC owned 23,050,183 shares, or approximately 73.5% of the outstanding shares of Waterstone Financial, Inc. common stock. | ||||
7 |
Vote Recommendations | ||
Your board of directors unanimously recommends that you vote “FOR” the plan of conversion, “FOR” the adjournment of the special meeting, if necessary, and “FOR” the Informational Proposals 3 through 5. | ||
Our Business | ||
[same as prospectus] | ||
Plan of Conversion and Reorganization | ||
The Boards of Directors of Waterstone Financial, Inc., Lamplighter Financial, MHC, WaterStone Bank and New Waterstone have adopted a plan of conversion pursuant to which WaterStone Bank will reorganize from a mutual holding company structure to a stock holding company structure. Public stockholders of Waterstone Financial, Inc. will receive shares in New Waterstone in exchange for their shares of Waterstone Financial, Inc. common stock based on an exchange ratio. See “—The Exchange of Existing Shares of Waterstone-Federal Common Stock.” This conversion to a stock holding company structure also includes the offering by New Waterstone of shares of its common stock to eligible depositors of WaterStone Bank and to the public, including Waterstone Financial, Inc. stockholders, in a subscription offering and, if necessary, in a community offering and/or in a separate public offering through a syndicate of broker-dealers, referred to in this proxy statement/prospectus as the syndicated offering. Following the conversion and offering, Lamplighter Financial, MHC and Waterstone Financial, Inc. will no longer exist, and New Waterstone will be the parent company of WaterStone Bank. | ||
The conversion and offering cannot be completed unless the stockholders of Waterstone Financial, Inc. approve the plan of conversion. Waterstone Financial, Inc.’s stockholders will vote on the plan of conversion at Waterstone Financial, Inc.’s special meeting. This document is the proxy statement used by Waterstone Financial, Inc.’s board of directors to solicit proxies for the special meeting. It is also the prospectus of New Waterstone regarding the shares of New Waterstone common stock to be issued to Waterstone Financial, Inc.’s stockholders in the share exchange. This document does not serve as the prospectus relating to the offering by New Waterstone of its shares of common stock in the subscription offering and any community offering or syndicated community offering, which will be made pursuant to a separate prospectus. | ||
Our Organizational Structure | ||
[same as prospectus] | ||
Business Strategy | ||
[same as prospectus] | ||
Reasons for the Conversion | ||
[same as prospectus] | ||
See “Proposal 1 — Approval of the Plan of Conversion and Reorganization” for a more complete discussion of our reasons for conducting the conversion and offering. |
8 |
Conditions to Completion of the Conversion | ||
[same as prospectus] | ||
The Exchange of Existing Shares of Waterstone-Federal Common Stock | ||
[same as prospectus] | ||
How We Determined the Offering Range, the Exchange Ratio and the $10 .00 Per Share Stock Price | ||
[same as prospectus] | ||
How We Intend to Use the Proceeds From the Offering | ||
[same as prospectus] | ||
Our Dividend Policy | ||
[same as prospectus] | ||
Purchases and Ownership by Officers and Directors | ||
[same as prospectus] | ||
Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion | ||
[same as prospectus] | ||
Market for Common Stock | ||
[same as prospectus] | ||
Tax Consequences | ||
[same as prospectus] | ||
Changes in Stockholders’ Rights for Existing Stockholders of Waterstone Financial, Inc. | ||
As a result of the conversion, existing stockholders of Waterstone Financial, Inc. will become stockholders of New Waterstone. Some rights of stockholders of New Waterstone will be reduced compared to the rights stockholders currently have in Waterstone Financial, Inc. The reduction in stockholder rights results from differences between the federal and Maryland charters and bylaws, and from distinctions between federal and Maryland law. Many of the differences in stockholder rights under the articles of incorporation and bylaws of New Waterstone are not mandated by Maryland law but have been chosen by management as being in the best interests of New Waterstone and all of its stockholders. The differences in stockholder rights in the articles of incorporation and bylaws of New Waterstone include the following: (i) greater lead time required for shareholders to submit proposals for certain provisions of new business or to nominate directors; (ii) approval by at least 80% of outstanding shares required to amend the bylaws and certain provisions of the articles of incorporation; and (iii) a limit on voting rights of shares beneficially owned in excess of 10% of New Waterstone’s outstanding voting stock. See “Comparison of Stockholders’ Rights For Existing Stockholders of Waterstone Financial, Inc.” for a discussion of these differences. | ||
9 |
Dissenters’ Rights | ||
Stockholders of Waterstone Financial, Inc. do not have dissenters’ rights in connection with the conversion and offering. | ||
Important Risks in Owning New Waterstone’s Common Stock | ||
Before you vote on the conversion, you should read the “Risk Factors” section beginning on page 11 of this proxy statement/prospectus. | ||
10 |
11 |
12 |
13 |
14 |
(i) | To depositors with accounts at WaterStone Bank with aggregate balances of at least $50 at the close of business on December 31, 2011. |
(ii) | To our tax-qualified employee benefit plans (including WaterStone Bank’s employee stock ownership plan and 401(k) plan), which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the stock offering, although we reserve the right to have the employee stock ownership plan purchase more than 8% of the shares sold in the offering to the extent necessary to complete the offering at the minimum of the offering range. |
15 |
(iii) | To depositors with accounts at WaterStone Bank with aggregate balances of at least $50 at the close of business on June 30, 2013 . |
(iv) | To depositors of WaterStone Bank at the close of business on July 31, 2013 . |
16 |
17 |
18 |
19 |
20 |
21 |
22 |
23 |
24 |
FOR | AGAINST | ABSTAIN | |||||
1. | The approval of a plan of conversion and reorganization pursuant to which: (a) Lamplighter Financial, MHC and Waterstone Financial, Inc., a federal corporation (“Waterstone-Federal”) will convert and reorganize from the mutual holding company structure to the stock holding company structure; (b) Waterstone Financial, Inc., a Maryland corporation (“New Waterstone”), will become the holding company for WaterStone Bank SSB; (c) the outstanding shares of Waterstone-Federal, other than those held by Lamplighter Financial, MHC, will be converted into shares of common stock of New Waterstone; and (d) New Waterstone will offer shares of its common stock for sale in a subscription offering, and, if necessary, a community offering and/or syndicated community offering; | o | o | o | |||
2. | The approval of the adjournment of the Special Meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the Special Meeting to approve the plan of conversion and reorganization; | o | o | o | |||
The following informational proposals. | |||||||
3. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve certain amendments to New Waterstone’s articles of incorporation; | o | o | o | |||
4. | Approval of a provision in New Waterstone’s articles of incorporation requiring a super-majority vote of stockholders to approve stockholder-proposed amendments to New Waterstone’s bylaws; | o | o | o |
5. | Approval of a provision in New Waterstone’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of New Waterstone’s outstanding voting stock; and | o | o | o |
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED FOR ONE OR MORE PROPOSALS, THIS PROXY, IF SIGNED, WILL BE VOTED FOR THE UNVOTED PROPOSALS. IF ANY OTHER BUSINESS IS PRESENTED AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THE MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING. |
Dated: _________________, 2013 | o Check Box if You Plan to Attend the Special Meeting |
PRINT NAME OF STOCKHOLDER
| PRINT NAME OF STOCKHOLDER | |||
SIGNATURE OF STOCKHOLDER | SIGNATURE OF STOCKHOLDER |
Please complete, sign and date this proxy card and return it promptly in the enclosed postage-prepaid envelope. |
PART II: | INFORMATION NOT REQUIRED IN PROSPECTUS |
Item 13. | Other Expenses of Issuance and Distribution |
Amount (1) | |||||
* | Registrant’s Legal Fees and Expenses | $ | 415,000 | ||
* | Registrant’s Accounting Fees and Expenses | 225,000 | |||
* | Registrant’s State Tax Advisory Fees | 15,000 | |||
* | Marketing Agent Fees (1) | 7,032,250 | |||
* | Records Management Fees and Expenses (1) | 60,000 | |||
* | Appraisal Fees and Expenses | 115,000 | |||
* | Printing, Postage, Mailing, EDGAR and XBRL Fees | 475,000 | |||
* | Filing Fees (Nasdaq, FINRA and SEC) | 97,000 | |||
* | Transfer Agent Fees and Expenses | 20,000 | |||
* | Business Plan Fees and Expenses | 32,500 | |||
* | Proxy Solicitor Fees and Expenses | 40,000 | |||
* | Other | 115,050 | |||
* | Total | $ 8,641,800 |
* | Estimated | |
(1) | Waterstone Financial, Inc. has retained Sandler O’Neill & Partners, L.P. to assist in the sale of common stock on a best efforts basis in the subscription, community and syndicated offerings. Fees are estimated at the maximum of the offering range, assuming 50% of the shares are sold in the subscription and community offerings and 50% of the shares are sold in the syndicated community offering. |
Item 14. | Indemnification of Directors and Officers |
II-1 |
II-2 |
Item 15. | Recent Sales of Unregistered Securities |
Not Applicable. |
Item 16. | Exhibits and Financial Statement Schedules: |
The exhibits and financial statement schedules filed as part of this registration statement are as follows: |
(a) | List of Exhibits |
1.1 | Engagement Letter between Lamplighter Financial, MHC, Waterstone Financial, Inc., WaterStone Bank and Sandler O’Neill & Partners, L.P.*** | |
1.2 | Form of Agency Agreement between Lamplighter Financial, MHC, Waterstone Financial, Inc., WaterStone Bank and Waterstone Financial, Inc., and Sandler O’Neill & Partners, L.P. *** | |
2 | Plan of Conversion and Reorganization | |
3.1 | Articles of Incorporation of Waterstone Financial, Inc.*** | |
3.2 | Bylaws of Waterstone Financial, Inc.*** | |
4 | Form of Common Stock Certificate of Waterstone Financial, Inc.*** | |
5 | Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered*** | |
8.1 | Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C. *** | |
8.2 | State Tax Opinion | |
10.1 | Wauwatosa Holdings, Inc. 2006 Equity Incentive Plan †(1) | |
10.2 | Employment Agreement By and Between Waterstone Mortgage Corporation and Eric J. Egenhoefer † *** | |
10.3 | Bonus Description for President of Waterstone Mortgage Corporation † *** | |
21 | Subsidiaries of Registrant (2) | |
23.1 | Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8.1) | |
23.2 | Consent of KPMG LLP | |
23.3 | Consent of RP Financial, LC. | |
23.4 | Consent of Baker Tilly Virchow Krause, LLP* (contained in Opinion included as Exhibit 8.2) | |
24 | Power of Attorney (set forth on signature page) | |
99.1 | Appraisal Agreement between WaterStone Bank and RP Financial, LC.*** | |
99.2 | Letter of RP Financial, LC. with respect to Subscription Rights*** | |
99.3 | Appraisal Report of RP Financial, LC.*** | |
99.3.1 | Updated Appraisal Report of RP Financial, LC. | |
99.4 | Marketing Materials *** | |
99.5 | Stock Order and Certification Form *** | |
99.6 | Letter of RP Financial, LC. with respect to Liquidation Account*** | |
101 | The following financial statements of Waterstone Financial, Inc. at March 31, 2013, December 31, 2012 and 2011, for the three months ended March 31, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 formatted in XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.** | |
† | Management contract or compensation plan or arrangement. | |
* | To be filed by amendment. | |
** | Furnished, not filed. | |
*** | Previously filed. | |
(1) | Incorporated by reference to Appendix A to the Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders filed by Wauwatosa Holdings, Inc. (the predecessor corporation to Waterstone Financial, Inc., a federal corporation) (Commission file no. 000-51507), filed with the U.S. Securities and Exchange Commission on March 27, 2006. | |
(2) | Incorporated by reference to Exhibit 21.1 of the Annual Report on Form 10-K of Waterstone Financial, Inc., a federal corporation, for the fiscal year ended December 31, 2012 (Commission file no. 000-51507), filed with the U.S. Securities and Exchange Commission on March 15, 2013. |
II-3 |
(b) | Financial Statement Schedules |
Item 17. | Undertakings |
II-4 |
II-5 |
WATERSTONE FINANCIAL, INC. | |||
By: | /s/ Douglas S. Gordon | ||
Douglas S. Gordon | |||
President and Chief Executive Officer | |||
(Duly Authorized Representative) |
Signatures | Title | Date | ||
/s/ Douglas S. Gordon | President and Chief Executive Officer (Principal Executive Officer) | July 29 , 2013 | ||
Douglas S. Gordon | ||||
/s/ Richard C. Larson | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | July 29 , 2013 | ||
Richard C. Larson | ||||
/s/ Patrick S. Lawton | Chairman and Director | July 29 , 2013 | ||
Patrick S. Lawton | ||||
/s/ Thomas E. Dalum | Director | July 29 , 2013 | ||
Thomas E. Dalum | ||||
/s/ Michael L. Hansen | Director | July 29 , 2013 | ||
Michael L. Hansen | ||||
/s/ Stephen J. Schmidt | Director | July 29 , 2013 | ||
Stephen J. Schmidt |
As filed with the Securities and Exchange Commission on July 30 , 2013 |
Registration No. 333-189160 |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
Waterstone Financial, Inc. |
WaterStone Bank SSB 401(k) Plan |
Wauwatosa, Wisconsin |
1.1 | Engagement Letters between Lamplighter Financial, MHC, Waterstone Financial, Inc., WaterStone Bank and Sandler O’Neill & Partners, L.P.*** | |
1.2 | Form of Agency Agreement between Lamplighter Financial, MHC, Waterstone Financial, Inc., WaterStone Bank and Waterstone Financial, Inc., and Sandler O’Neill & Partners, L.P. *** | |
2 | Plan of Conversion and Reorganization | |
3.1 | Articles of Incorporation of Waterstone Financial, Inc.*** | |
3.2 | Bylaws of Waterstone Financial, Inc.*** | |
4 | Form of Common Stock Certificate of Waterstone Financial, Inc.*** | |
5 | Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered*** | |
8.1 | Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C. *** | |
8.2 | State Tax Opinion | |
10.1 | Wauwatosa Holdings, Inc. 2006 Equity Incentive Plan †(1) | |
10.2 | Employment Agreement By and Between Waterstone Mortgage Corporation and Eric J. Egenhoefer † *** | |
10.3 | Bonus Description for President of Waterstone Mortgage Corporation † *** | |
21 | Subsidiaries of Registrant (2) | |
23.1 | Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8.1) | |
23.2 | Consent of KPMG LLP | |
23.3 | Consent of RP Financial, LC. | |
23.4 | Consent of Baker Tilly Virchow Krause, LLP (contained in Opinion included as Exhibit 8.2) | |
24 | Power of Attorney (set forth on signature page) | |
99.1 | Appraisal Agreement between WaterStone Bank and RP Financial, LC.*** | |
99.2 | Letter of RP Financial, LC. with respect to Subscription Rights*** | |
99.3 | Appraisal Report of RP Financial, LC.*** | |
99.3.1 | Updated Appraisal Report of RP Financial, LC. | |
99.4 | Marketing Materials *** | |
99.5 | Stock Order and Certification Form *** | |
99.6 | Letter of RP Financial, LC. with respect to Liquidation Account*** | |
101 | The following financial statements of Waterstone Financial, Inc. at March 31, 2013, December 31, 2012 and 2011, for the three months ended March 31, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 formatted in XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.** | |
† | Management contract or compensation plan or arrangement. | |
* | To be filed by amendment. | |
** | Furnished, not filed. | |
*** | Previously filed. | |
(1) | Incorporated by reference to Appendix A to the Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders filed by Wauwatosa Holdings, Inc. (the predecessor corporation to Waterstone Financial, Inc., a federal corporation) (Commission file no. 000-51507), filed with the U.S. Securities and Exchange Commission on March 27, 2006. | |
(2) | Incorporated by reference to Exhibit 21.1 of the Annual Report on Form 10-K of Waterstone Financial, Inc., a federal corporation, for the fiscal year ended December 31, 2012 (Commission file no. 000-51507), filed with the U.S. Securities and Exchange Commission on March 15, 2013. |