Business Overview

Waterstone Financial, Inc. (NASDAQ:WSBF) is a diversified financial services holding company that operates through two primary segments: community banking and mortgage banking. The company has a strong presence in the Southeastern Wisconsin region, providing a wide range of consumer and business banking products and services, as well as a robust mortgage banking operation that originates residential loans for sale in the secondary market.

The community banking segment of Waterstone Financial offers a comprehensive suite of lending solutions, including residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit. On the deposit side, the company provides checking, savings, money market, and time deposit accounts, as well as investment and trust services. The mortgage banking segment, operated through the company's Waterstone Mortgage Corporation subsidiary, originates residential mortgage loans primarily for sale in the secondary market, with a presence in 26 states.

Financials

For the full year 2023, Waterstone Financial reported annual net income of $9.375 million on total revenue of $181.919 million. The company's annual operating cash flow was -$69.617 million, while its annual free cash flow stood at -$70.497 million.

In the first quarter of 2024, the company generated net income of $3.038 million, a significant increase from the $2.155 million reported in the same period of the prior year. Total revenue for the quarter was $32.385 million, up from $32.349 million in the first quarter of 2023. The community banking segment contributed $12.588 million to total revenue, while the mortgage banking segment accounted for $20.328 million.

Net Interest Income and Margin

Net interest income for the first quarter of 2024 was $11.137 million, down from $13.795 million in the same period of the prior year. The decrease was primarily due to a rise in interest expense on deposits and borrowings, which increased by $7.673 million as replacement rates increased in the rising interest rate environment. This was partially offset by a $4.599 million increase in interest income on loans, driven by higher average yields and loan balances.

The company's net interest margin for the first quarter of 2024 was 2.15%, down from 2.88% in the same period of the prior year. The decrease in net interest margin was primarily attributable to the higher cost of funds, as the average cost of interest-bearing deposits and borrowings increased by 149 basis points and 86 basis points, respectively, compared to the first quarter of 2023.

Provision for Credit Losses

The provision for credit losses for the first quarter of 2024 was $67,000, down from $460,000 in the same period of the prior year. The decrease was primarily due to a $3,000 negative provision related to loans, as well as a $70,000 provision related to unfunded commitments. The company made adjustments to its qualitative factors to account for changes in internal metrics and external risk factors, while the forecast factor remained unchanged as management continues to monitor the economic environment.

Noninterest Income

Noninterest income for the first quarter of 2024 was $21.248 million, up from $18.554 million in the same period of the prior year. The increase was primarily driven by a $3.298 million, or 19.7%, rise in mortgage banking income, which was the result of a 14.9% increase in loan origination volume and an 8.5% improvement in gross margin on loans originated and sold.

Noninterest Expenses

Total noninterest expenses for the first quarter of 2024 were $27.550 million, down from $29.107 million in the same period of the prior year. The decrease was primarily due to a $343,000, or 2.3%, reduction in compensation, payroll taxes, and other employee benefits at the mortgage banking segment, as well as a $124,000 decrease in occupancy, office furniture, and equipment expenses at the same segment.

Liquidity

As of March 31, 2024, Waterstone Financial had $45.714 million in cash and cash equivalents, up from $36.421 million at the end of 2023. The company's total assets stood at $2.235 billion, compared to $2.213 billion at the end of the previous year.

Waterstone Bank, the company's banking subsidiary, is well-capitalized, with a total risk-based capital ratio of 20.19% and a Tier 1 leverage ratio of 15.46% as of March 31, 2024. These ratios exceed the regulatory requirements for a well-capitalized institution, providing the bank with a strong capital position to support its operations and growth initiatives.

Risks and Challenges

Waterstone Financial faces several risks and challenges that investors should be aware of. The company's performance is heavily influenced by interest rate movements, which can impact its net interest margin and profitability. Additionally, the mortgage banking segment is subject to fluctuations in loan origination volumes and competition in the industry, which can affect its financial results.

The company also faces regulatory risks, as changes in banking and financial services regulations could impact its operations and compliance requirements. Cybersecurity threats and the potential for data breaches are also ongoing concerns that the company must manage effectively.

Outlook

Waterstone Financial has not provided any specific financial guidance for the remainder of 2024. However, the company's management has indicated that they are closely monitoring the economic environment and adjusting their strategies accordingly to navigate the current market conditions.

The company's focus on diversifying its revenue streams, maintaining a strong capital position, and prudently managing risks should position Waterstone Financial to weather any potential challenges and capitalize on future growth opportunities.

Conclusion

Waterstone Financial, Inc. is a well-diversified financial institution with a strong presence in the Southeastern Wisconsin region. The company's community banking and mortgage banking segments have demonstrated resilience, with the mortgage banking segment in particular contributing significantly to the company's overall performance.

While the company faces some headwinds, such as the impact of rising interest rates and competition in the mortgage banking industry, Waterstone Financial's management team has shown a commitment to prudent risk management and strategic decision-making. With a solid capital position and a focus on diversifying its revenue streams, the company appears well-positioned to navigate the current market environment and capitalize on future growth opportunities.