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  • Waterstone Financial reported 2Q earnings.
  • In line with my expectations, the bank easily beat last quarter's earnings but that still isn't saying much.
  • Until the bank is freed from its heavy debt load, earnings will continue to look weak compared to the majority of its peers.

Waterstone Financial (NASDAQ:WSBF) reported sequential net income growth of 100%, but this was mostly due to a bad first quarter, and earnings were actually down 22.4% from the second quarter of last year. And, it could have been a down by a lot more considering that this quarter benefited from a much smaller provision expense, down $950 thousand YOY.

One of my major concerns has been the bank's level of nonperforming assets, and it is still high at 3.78% of all assets. Earnings were helped by a lower provision expense, but if you're looking at a comparable regional bank, you may start to question the decline, because the allowance account only covers 50% of past due loans and 32% of all nonperforming assets. Allowances have declined in each of the last 5-quarters.

If the bank can off-load some of its owned real estate, and kick-start bad loans, investors may eventually see margins improve. Expensive debt and a heavy reliance on non-interest income makes it almost impossible for the bank to grow by more than 5% a year. The majority of the bank's debt matures in 2016, a little too far out for me to want to get in now, but I will continue to monitor this one because interest expenses are the single largest contributor to the bank's weak performance, and they will not be around forever.

Source: Update: Waterstone Financial Earnings