Business Overview and History
Waterstone Financial Inc, a leading community bank holding company, has demonstrated its ability to navigate the evolving financial landscape by leveraging its dual-pronged business model. With a strong presence in both community banking and mortgage banking, Waterstone Financial has proven its resilience and adaptability in the face of changing market conditions.
Waterstone Financial, incorporated in 1921, has a rich history of serving the banking needs of its customers in Southeastern Wisconsin. The company operates through two primary segments: Community Banking and Mortgage Banking. The Community Banking segment provides a full suite of personal and business banking products, including loans, deposits, and investment services. The Mortgage Banking segment, conducted through the company’s wholly-owned subsidiary Waterstone Mortgage Corporation, originates and sells residential mortgage loans, primarily in the secondary market.
Waterstone Financial has grown to operate 14 banking offices in Milwaukee, Washington, and Waukesha Counties. The company added its mortgage banking segment through Waterstone Mortgage Corporation in 2001, which has become a significant contributor to the overall business. During the early 2000s, Waterstone Financial faced challenges related to the broader housing and mortgage market downturn. In response, the company worked to diversify its loan portfolio and strengthen its risk management practices, which allowed it to navigate the financial crisis of 2008-2009 relatively well compared to many of its peers.
In recent years, Waterstone Financial has had to adapt to a rapidly changing interest rate environment. The company has implemented measures to manage its interest rate risk, including emphasizing variable-rate loans, reducing the duration of its investment portfolio, and lengthening the term structure of its deposit base and borrowings. These actions have helped mitigate the volatility of the company’s net interest income.
Throughout its history, Waterstone Financial has maintained a focus on serving the financial needs of individuals and businesses in its local markets. The company has built a reputation for providing personalized service and developing deep relationships with its customers, which has been a key driver of its success over the past century.
Financial Performance and Resilience
Waterstone Financial’s financial performance highlights its ability to maintain a healthy balance sheet and generate consistent returns for its shareholders. As of the latest quarter ended September 30, 2024, the company reported net income of $13.48 million, or $0.72 per diluted share, for the nine-month period. This represents a significant increase compared to the $9.41 million, or $0.46 per diluted share, reported for the same period in the prior year.
The company’s annualized return on average assets and annualized return on average equity for the nine-month period ended September 30, 2024, were 0.81% and 5.30%, respectively, showcasing its ability to generate strong profitability. Additionally, Waterstone Financial’s balance sheet remains well-capitalized, with a total risk-based capital ratio of 20.74% as of September 30, 2024, well above the regulatory requirement for a “well-capitalized” institution.
For the most recent quarter, Waterstone Financial reported revenue of $29,191,000 and net income of $4,728,000. The company’s operating cash flow (OCF) for the quarter was $74,089,000, while free cash flow (FCF) reached $74,820,000. These figures demonstrate year-over-year growth, driven by higher loan volumes and improved margins in the mortgage banking segment.
Diversified Revenue Streams
Waterstone Financial’s diversified business model has been instrumental in its ability to withstand market fluctuations. The company’s Community Banking segment has consistently generated stable net interest income, which accounted for approximately 47% of the company’s total revenue for the nine months ended September 30, 2024. This segment’s focus on personal and business banking products has provided a reliable revenue stream, contributing to the overall financial resilience of the organization.
The Community Banking segment offers a variety of loan products, 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, it provides checking, savings, money market, and time deposit accounts, as well as individual retirement accounts. The segment also offers fixed and variable annuities, insurance, and trust and investment management services.
As of September 30, 2024, the Community Banking segment had $1.68 billion in total loans receivable, net of the allowance for credit losses of $18.20 million. This represented an increase of $31.10 million, or 1.9%, from the $1.65 billion in loans receivable as of December 31, 2023. The increase was primarily attributable to growth in the multi-family, construction, and commercial real estate loan categories, partially offset by a decrease in the one-to-four family loan portfolio.
The Mortgage Banking segment, on the other hand, has demonstrated its agility in adapting to changing market conditions. During periods of declining mortgage rates, this segment has capitalized on increased refinancing activity, contributing to the company’s noninterest income. Conversely, when mortgage rates rise, the segment has been able to shift its focus to purchase-money originations, further diversifying its revenue sources.
The Mortgage Banking segment operates in 26 states and has the ability to lend in 48 states. During the nine months ended September 30, 2024, this segment originated $1.68 billion in mortgage loans held for sale, representing an increase of $14.30 million, or 0.9%, compared to the $1.66 billion originated in the same period of the prior year. The increase in loan production volume was driven by a $75.20 million, or 12.0%, rise in refinance products, as mortgage rates decreased to start the year, which was partially offset by a $62.50 million, or 3.9%, decrease in purchase products.
This balanced approach to revenue generation has enabled Waterstone Financial to weather various economic cycles and market conditions, positioning the company for long-term success.
Prudent Risk Management and Regulatory Compliance
Waterstone Financial’s commitment to prudent risk management and regulatory compliance has been a hallmark of the company’s operations. The company has maintained strong asset quality metrics, with a nonperforming asset ratio of 0.25% as of September 30, 2024. This exemplary credit performance is a testament to the company’s rigorous underwriting standards and proactive risk management practices.
Furthermore, Waterstone Financial has consistently exceeded the regulatory requirements for a “well-capitalized” institution, underscoring its financial strength and stability. The company’s regulatory capital ratios, including a total risk-based capital ratio of 20.74% as of September 30, 2024, provide a solid foundation for weathering economic downturns and regulatory changes.
Strategic Initiatives and Future Outlook
Waterstone Financial continues to implement strategic initiatives aimed at strengthening its market position and driving long-term growth. The company has invested in digital banking capabilities to enhance the customer experience and improve operational efficiency. Additionally, Waterstone Financial has been actively managing its branch network, closing underperforming locations while strategically expanding its footprint in high-growth markets.
Looking ahead, the company remains cautiously optimistic about its future prospects, cognizant of the challenges posed by the current market environment. Waterstone Financial’s management team has expressed confidence in the company’s ability to navigate the evolving landscape, leveraging its diversified business model and prudent risk management approach to deliver sustainable value for its shareholders.
Conclusion
Waterstone Financial’s resilience and adaptability have been key differentiators in the dynamic financial services industry. By maintaining a balanced approach to revenue generation through its Community Banking and Mortgage Banking segments, the company has demonstrated its ability to weather various economic cycles and market conditions. With a strong focus on prudent risk management, regulatory compliance, and strategic initiatives, Waterstone Financial is well-positioned to continue its journey as a trusted community bank and mortgage lender, creating long-term value for its stakeholders.
Financials
Waterstone Financial’s financial performance has remained strong, as evidenced by its recent quarterly results. The company’s net income and earnings per share have shown significant improvement year-over-year, demonstrating its ability to generate consistent returns for shareholders. The company’s profitability metrics, including return on average assets and return on average equity, underscore its efficient operations and effective management of resources.
For the nine months ended September 30, 2024, the Community Banking segment generated $35.08 million in net interest income, which decreased by $4.60 million, or 11.6%, from the $39.68 million recorded in the same period of the prior year. This decrease was primarily driven by a $17.20 million increase in interest expense on deposits and borrowings, as replacement rates increased in the rising interest rate environment. Partially offsetting the increase in interest expense, interest income on loans increased by $11.80 million, reflecting higher replacement rates and increased average loan balances.
The Community Banking segment recorded a negative provision for credit losses of $476,000 for the nine months ended September 30, 2024, compared to a $991,000 provision for credit losses in the same period of the prior year. Noninterest income for this segment increased by $218,000, or 6.2%, to $3.71 million, while noninterest expenses decreased by $450,000, or 1.9%, to $24.27 million.
In the Mortgage Banking segment, noninterest income increased by $4.40 million, or 7.0%, to $66.80 million for the nine months ended September 30, 2024, compared to $62.40 million in the same period of 2023. Total compensation, payroll taxes, and other employee benefits expenses for this segment decreased by $2.60 million, or 5.3%, to $47.60 million. The Mortgage Banking segment reported net income of $1.60 million for the nine months ended September 30, 2024, compared to a net loss of $5.40 million in the same period of 2023.
Liquidity
Waterstone Financial maintains a robust liquidity position, which is crucial for meeting its operational needs and regulatory requirements. The company’s well-capitalized status, as reflected in its total risk-based capital ratio of 20.74%, provides a solid foundation for managing potential economic uncertainties and pursuing growth opportunities. This strong liquidity position also enhances the company’s ability to navigate market fluctuations and maintain financial flexibility.
As of the most recent quarter, Waterstone Financial reported a debt-to-equity ratio of 1.63, indicating a moderate level of leverage. The company had $41.41 million in cash and cash equivalents and $325.30 million in available credit, providing ample liquidity for operations and potential investments. The current ratio of 1.39 and quick ratio of 1.10 further underscore the company’s solid short-term liquidity position.
Waterstone Financial operates primarily in the United States, with no significant geographic diversification reported. The company’s focused regional approach allows it to maintain a deep understanding of its local markets and customer needs, which has been a key factor in its long-term success.
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