Waterstone Financial, Inc. (WSBF) Earnings Call Transcript & Summary

Good morning, and welcome to the Annual Meeting of Shareholders of Waterstone Financial, Inc., which I will refer to as the Company. The Company's 2025 annual meeting is being conducted virtually by webcast and audio conference. The annual meeting will please come to order. My name is Bill Bruss, President, Chief Executive Officer and Secretary of the Company and WaterStone Bank, and Secretary of the annual meeting. Participating with me at the meeting is Mark Gerke, Chief Financial Officer and Executive Vice President of the Company and WaterStone Bank. I would like to welcome the directors of the company in attendance at the annual meeting: Patrick Lawton, Chairman; Ellen Bartel; Douglas Gordon; Michael Hansen; Kristine Rappe; Stephen Schmidt; and Derek Tyus. We have made available on the virtual meeting site the agenda and the rules of conduct of the meeting. If you would like to discuss a matter not on the agenda, I encourage you to contact an officer or director of the company after the meeting. We provided an opportunity to shareholders to submit questions in advance of the annual meeting, and any questions will be addressed by management prior to adjournment. Although we will take a vote on the matters to be considered at the annual meeting in a few moments, any registered shareholder wishing to vote their proxy may do so electronically during the meeting. If you have already voted your proxy or proxies, you need not vote again unless you wish to make a change. The Board of Directors has previously appointed Denise Mihaljevic to act as the Inspector at the annual meeting and any adjournments and to count and examine all voting. The Inspector's Report will be attached to the minutes of the annual meeting. A list of shareholders has been delivered to me as Secretary, entitled to vote at the annual meeting, arranged in alphabetical order and as of the close of business on March 26, 2025, the record date for voting. The records of the company show that there are 19,294,731 outstanding votes entitled to be cast at this annual meeting, of which 9,647,366 represent a majority. We have previously received confirmation that the notice regarding the availability of proxy materials for the shareholder meeting was mailed on or about April 10, 2025 to each shareholder of record as of the close of business on the record date. Copies of the affidavit of distribution with documents attached will be attached to the minutes of this annual meeting. The list of all shareholders and proxies which have been received were previously delivered to the Inspector. Substantially more than a majority of the total outstanding votes entitled to be cast at the annual meeting are present in person or by proxy. The Inspector is making an exact count and will submit a formal report on the number of shares present or represented during the course of the annual meeting. A quorum is declared present, subject to confirmation of that fact by the Inspector in her report. The business to be acted upon at the annual meeting, as stated in the notice of annual meeting, is as follows: one, the election of 1 director of the company; two, ratification of the company's selection of Forvis Mazars, LLP as its independent registered public accounting firm; and three, an advisory nonbinding resolution to ratify the approval of the executive compensation described in the company's proxy statement. In order to save time at this meeting, we have arranged the proceedings so that a vote will not be taken until all items have been moved and seconded. Again, registered shareholders who are attending the annual meeting by webcast do have the opportunity to vote their shares during the meeting. If you have already voted by proxy, you need not vote during the meeting. First item of business to be voted upon is the election of 1 director of the company. The director to be elected is to serve for a 3-year term and until her successor has been elected and qualified. The Board of Directors has nominated Ellen Bartel to serve as a director. Ms. Bartel is currently a Member of the Board of Directors and is prepared to serve if elected. The Chair will entertain a motion that the proposal to elect the director be adopted.

I so move.

I second the motion.

The second item to be acted on is the ratification of the company's selection of Forvis Mazars, LLP as its independent registered public accounting firm for 2025. The Chair will now entertain a motion to ratify Forvis Mazars, LLP as the company's registered independent public accounting firm.

I so move.

I second the motion.

The third item to be acted on is the ratification of our executive compensation as described in the proxy statement. The Chair will now entertain a motion to ratify our executive compensation.

I so move.

I second the motion.

The vote will now be taken on proposals 1, 2 and 3. Will anyone who wishes to vote electronically do so now? Again, if you've already voted your proxy or proxies, you do not need to vote now unless you wish to make a change. I will now pause for 2 minutes to allow an opportunity for electronic voting. [Voting]

Two minutes have passed, and I declare the voting closed on proposals 1 through 3. I would next like to introduce our Chief Financial Officer, Mark Gerke, who will report on our progress in 2024. Mark?

Thank you, Bill. Good morning, and thank you to each shareholder for joining us this morning. We want to take just a few minutes to walk through the results of operations for 2024 as well as discuss some of the macroeconomic forces that continue to impact WaterStone Bank, the overall banking industry and mortgage banking industry. Our first slide displays our consolidated earnings performance over the past 8 years. The red bars represent consolidated net income and the blue line represents consolidated earnings per share. During 2024, we generated $18.7 million in net income, which equated to a little over $1 per share in earnings. By either measure, we achieved a significant improvement compared to fiscal 2023. On our next slide, we'll look into income by segment. So peeling back a layer, we're showing the results of operations from our 2 operating segments. Community Banking segment is represented by the blue bars and Mortgage Banking segment is represented in red. Community Banking segment, which encompasses local consumer and commercial lending teams as well as retail deposit generation at our 14 Milwaukee area branches, generated just shy of $17 million in net income during 2024. You will note the segment's had a fairly steady earnings profile from 2018 to 2024. Fluctuation during that time period was primarily driven by provision for loan losses, either in expense or in times of -- better times of credit. So when we normalize for the loan loss provision, I'd note that segment has provided a fairly steady $24 million in net income from 2018 to 2022. That was the case until the impact of Federal Reserve rate increases took root in 2023. Segment net income dropped 18% during 2023, another 9% during 2024. This is consistent with the average bank in the State of Wisconsin, which experienced a 25% decline in profitability measured by return on assets over that same 2-year [ period ]. Mortgage Banking segment, again, represented by the red bar, is anything but consistent from an earnings perspective. Segment encompasses our residential mortgage origination teams that operate out of locations in 26 states. This is a transaction-based business in which we are earning fees on loans originated and sold to investors. After 2 extraordinary years in 2020 and 2021 fueled by low mortgage rates and strong consumer demand, we've remained in a period of low demand. As a result, the segment did incur losses in 2022 and 2023 as we worked to rightsize our operations to meet lower market volumes and margins. The improvement achieved during 2024 was driven by stronger margins and continued expense reductions as we rightsized to meet market conditions. Next, we'd like to provide a little more color on each segment, and we'll start on the Community Banking side. For a community bank, earnings are primarily driven by 3 factors: net interest margin, credit quality and expense management. We'll dive into net interest margin first. There are a number of levers we can control when it comes to growing net interest margin. Unfortunately, there's one very significant factor that we cannot control, and that's the Federal Reserve and its impact on interest rates and market liquidity. Any discussion of the banking industry would not be complete without mentioning the Federal Reserve monetary policy. Following a significant sustained increase in the rate of inflation in late 2021 and 2022, the Federal Reserve began taking action. During the 16-month period that began in March of '22, the Federal Reserve raised the Fed funds rate by a total of 525 basis points. That actually impacts both the income that we earn on assets as well as the cost of deposits and borrowings. The next slide displays our net interest margin from 2016 to 2025. On the front end of the rate-raising cycle, the impact was a net positive for Waterstone. So we'll see in '21 leading into '22, we quickly earned more assets -- earned more on our short-term and variable-rate assets. As a result, our net interest margin jumped from 2.68% to 3% during that time period. The next slide displays our loan and deposit rates. Our weighted average loan rates are displayed in red and average deposits in green. So as I mentioned, in early 2022, we instantaneously earned more interest on our cash or term investments in variable rate loans. While rates also rose on the deposit side, our rate-sensitive assets at that point exceeded our rate-sensitive liabilities. As such, we achieved growth in interest margin after 3 years of a low rate environment, although beginning in 2023 the pace of deposit repricing began to outpace the rate of repricing on the loan side. The real driver on that side is the deposit holders generally look for short durations in terms of certificates of deposits, while our loans tend to be 5 years in term. During the first quarter of 2025, we are starting to experience the benefit of recent rate reductions by the Federal Reserve. As you can see, our weighted average rate on deposits has -- which ended at 3.3% at the end of 2024, has declined 3.2% at March 31 of 2025. As a result of stable to increasing loan rates and decreasing deposit rates, our net interest margin grew from 2.17% during 2024 to 2.47% during the first quarter of 2025. The next slide displays loan and deposit growth over the past 5 years. Deposit flows are in orange and loan in blue. In a perfect world, with an upward-sloping yield curve, we would target even loan and deposit growth. However, given significant impact that the Federal Reserve can have on market rates and demands on liquidity, we are going to have periods in which it's advantageous to grow loans and deposits at different levels. As we entered late 2020 and 2021, the yield curve was flat and interest rates were low. In this environment, we made the strategic decision to grow low-cost deposits, but not chase low-interest loans. As you will note, in 2020 and 2021, we achieved deposit growth, but allowed for loan runoff. Reason being that in 2021, the typical loan was originated at a rate of about 3.6%, so rather than lock into 5-year term loans, what we did is ended up making investment security purchases as many banks did at this time, also holding on to a higher level of cash. 2022 saw loan growth of $300 million as rates began to approach and exceed 5%, and we achieved record loan growth during -- of $150 million. Over the long run, our loan-to-deposit growth must balance out, but as the majority of our loans have longer lives than our deposits, we need to be strategic in terms of growth. On the next slide, detailing out our deposit growth. So one of the keys to our continued success is our ability to grow core deposits. We define a core deposit as any checking, savings or money market account. This chart displays end-of-year checking balances in blue, money market and savings combined in orange over the past 11 years. We've achieved steady growth over this timeframe. Like all banks, we captured a lot of deposits during the pandemic and have experienced outflow over the past 2 years, as those noninterest or low-interest rate paying deposits that funds them have moved into CDs paying at higher rates. But even with recent runoff, there's a solid story of growth over the past decade. So second key area for us as a community bank is maintaining strong asset quality. So on the next slide, we display nonperforming assets to total assets as a bank in blue and whole Wisconsin-based banks in orange. This is one of the most common metrics relative to asset quality as we compare to our peers. Our continued focus on credit quality has allowed us to achieve metrics that are far better than the average Wisconsin bank. At December 31, we held just under $6 million in loans that were placed in nonaccrual status and just $500,000 in real estate that have been foreclosed from a prior nonperforming borrower. Both of these figures again are very low relative to a loan portfolio that exceeds $1.6 billion. The next slide displays our second-most common asset quality metric, which is net charge-offs to average loans. Again, we have performed better than the average Wisconsin bank over the past 5 years. I would note that we're one of the very few banks that have actually experienced a cumulative net recovery over that same time span. Both metrics are something that we take a great deal of pride in. The next slide, we get into our third area of focus as a community bank, an area of focus for all banking institutions. It's focus on expense management. The ratio of noninterest expense to average assets is one of the more effective measures to compare ourselves to our peer group. Our noninterest expense amounted to 1.42% of bank assets during 2024. This is well below our peers in the State of Wisconsin, and that's a positive. I would add that we need to outperform the group given our deposit mix. We do have a smaller branch network and rely more heavily on term deposits. So as rates increase, our expense will exceed our peers. So we must maintain a laser focus on expense. Our balance moving forward is to invest in the right areas to achieve growth at a rate that exceeds expense increases. Next, we'll dive into the Mortgage Banking segment. As highlighted on an earlier slide, the Mortgage Banking segment achieved significant improvement from a $9.6 million loss in 2023 to net income of $1.4 million during 2024. This improvement was driven by stronger margins and continued expense reductions as we rightsized to meet market conditions. While pleased with the improved results during 2024, the industry as a whole still faces significant challenges. We wanted to start a discussion with 2 of the more significant factors. On the next slide, we get into housing affordability, which is the first factor that has a large impact on volumes as well as margins. The chart details the federal funds rate in blue and the average 30-year mortgage rate in green. As inflation increased and the Federal Reserve began to disclose more information about the magnitude and pace of rate increases back in 2022, the longer end of the yield curve increased dramatically over the next 2 years. That increase resulted in the 30-year mortgage rate hitting 20-year highs, ultimately peaking at just under 8%. On the heels of 3 years in which mortgage rates were in the 3% to 4% range, the jump to 7% to 8% effectively eliminated consumer demand for refinance and cooled home purchase activity. The next slide, the next major impact for us is just the level of housing inventory. As it relates to the mortgage purchase market, which is our focus as a segment, the other headwind that we've been experiencing is just continued low levels of housing inventory. This chart shows the number of U.S. homes listed for sale. As you can see, beginning in 2020, we have seen a decline to the point now where we roughly have half the number of homes listed as we did in more typical years. Again, the big driver here is that so many homeowners refinanced at those low 3% to 4% rates and don't want to give up the rate to buy a new home at a much higher rate. So many are content to stay where they are and remodel. On the positive side, inventory did start to pick up during the second half of 2024 and has remained stable during 2025. That's a key to our continued improvement, is, not so much rates, but the level of housing inventory and demand for origination -- mortgage origination product, which is our strength. The next slide details the overall mortgage market. The impact of these factors, both rates and availability of homes, has been a significant impact on the market as well as our mortgage segment. Here are the origination volumes for the industry for the past 6 years. Huge years in 2020 and 2021. Origination volumes fell by 42% in '22 and another 29% in '23. The drop in demand drove the mortgage industry segment losses during those years. During the good times, the industry is quick to expand and add employees to catch up to consumer demand. But during the tough times, the industry is slow to contract. While that contraction occurs, there's fierce competition for shrinking volume, which leads to margin or price compression. During 2024, the industry saw a 10% increase in volumes, that's a bright spot. At the same time, through contraction, the industry as a whole, as well as our segment, is now closer to equilibrium between supply and demand for products. So as a result, the industry as well as our segment is in a healthier position than the prior 2 years. On the next slide, we detail the Mortgage Banking, specific for our segment, volumes as well as margins. In terms of volumes, our experience during 2024 was very similar to that of the industry. Total origination volumes were $2.2 billion, purchase origination volumes were down 1%, and refinance volumes were up 56%. While overall volumes were relatively flat, loan sale margins increased from 3.66% to 3.92%. And on $2 billion of originations, that improvement in margin resulted in a $6 million increase in revenue for our segment. The remainder of the improvement from the loss in '23 to net income in '24 were really driven by expense reductions. On the next slide, we detail our staffing levels. In blue, our level of admin staffing; in orange, our loan production staff. So in light of continued market challenges, we continue to respond to current level of consumer demand and assess our own capacity. As a result of that, during 2024, our non-originer staffing levels were reduced by 23%. Over the past 2 years, non-origination staffing levels are down 33%. On the flip side, the market has provided opportunities to attract talented loan officers from companies that were struggling. To that end, our goal is to retain high-producing loan officers, add to our sales force so that we're in a good position to take advantage as the market continues to improve. On the next slide, details out our mix of business. So we are in blue, the overall industry in green. And what we're demonstrating is that we have always been and will continue to be an operation that's focused on purchase business over refinance business. While we don't -- welcome both types of business, our laser focus is on purchase business. As we move forward, we look true to -- look to stay true to who we are and maintain that laser focus on purchase business as it is more stable, easier to plan for changes from an operational standpoint and, most importantly, more profitable than refinance. The light at the end of the mortgage tunnel rise when rates stabilize and the industry reaches that point of equilibrium. The next slide, we're looking at industry origination volumes forecast from the Mortgage Banking Association. And the MBA has forecasted origination volumes increasing by 9% in 2025 and another 15% in 2026. And that's where we need to be positioned to take advantage of that -- of the increased business as we move forward. The next slide looks to detail our history. Our origination volumes in blue, our level of profitability as measured by pretax income relative to origination volume. And it really is meant to display our opportunity for the segment. So while the past few years have been a story of highs and lows for the industry, we continue to believe that our operation is positioned to take advantage of an improved environment. From 2009 to 2019, net income amounted to 35 basis points of loan origination volumes. We believe we're built to scale to do about $2.5 billion to $3 billion in annual production. If we get back to that point where we're earning a net return of 35 basis points, that amounts to $10 million in net income on a segment basis. And that's what we look to achieve as the overall industry, again, cooperates in terms of interest rates, affordability and balancing supply and demand. Our next share -- slide details our total shareholder returns over the past 6 years. Since our second-step offering in 2024, we've been an overcapitalized institution. We've worked hard to leverage that capital through growth and continue to be committed to returning earnings and liquidity to shareholders through dividends and buybacks. Over the past 5 years, we've generated just shy of $200 million in net income and have returned $253 million to shareholders in the form of dividends and share repurchases. We continued that commitment during 2024 even in a year where earnings were not yet where we expect them to be long term. The next slide, we detail dividends by year since becoming a fully public company. We continue to maintain a very high dividend payout ratio. During 2024, the $0.60 per share dividend represented 59% of earnings per share. I would note, since our second-step offering in 2024, we have paid out $8.93 in dividends per share, which represents a cumulative 64% of earnings per share during that time period. Final slide is an area where we take great pride as well, and that's our commitment to the community. As a community bank, that is first and foremost for us, giving back to the communities in which we work, live and operate. In the past year, donated just shy of $800,000 to 240 local nonprofits and schools, and even more proud of the 850 employee volunteer hours that our team gave to local organizations and communities.

Thank you, Mark. No shareholder submitted questions. So we will now turn our attention to the results of the voting on our 3 items of business. The Inspector has completed her count and has certified and reported as follows. I hereby certify the following. One, Ellen Bartel, the nominee to serve on the Board of Directors of Waterstone Financial, Inc., has received a plurality of the votes cast at the annual meeting and is hereby elected as a Director to Waterstone Financial, Inc. Two, the appointment of Forvis Mazars, LLP as Waterstone Financial, Inc.'s independent registered accounting firm has been ratified by a majority of the votes cast at the annual meeting. Three, the nonbinding advisory vote regarding ratification of the company's executive compensation as set forth in the April 10, 2025 proxy statement received the majority of votes in favor of ratification. And four, that at all times during this meeting, more than a majority of the shares outstanding and entitled to vote at the annual meeting were represented in person or by proxy, and consequently, a quorum has been in attendance for the entirety of the annual meeting. Signed, Denise Mihaljevik, Inspector of Election. The report confirms that a quorum is and has been in attendance at the annual meeting for all purposes. The report also shows that, with respect to the first item of business, a plurality of the votes have been cast in favor of the election of Ellen Bartel as Director. With respect to the second item of business, in favor of the company's selection of Forvis Mazars, LLP as the company's registered independent public accounting firm. And with respect to the third item of business, in favor of the ratification of our executive compensation. The certificate and report of Inspector of Election has been accepted and approved and will be attached to the minutes of the annual meeting. There being no further business to come before the annual meeting, a motion to adjourn is in order.

I move that the annual meeting be adjourned.

I second the motion.

Those in favor, signify by saying aye. Aye.

Aye.

Aye.

Those opposed, say no. The motion is carried and the annual meeting is adjourned. As we conclude today, I want to thank Director Kristine Rappe who is retiring from the Board of Directors in conjunction with today's meeting, for her service on the Board of Directors and to Waterstone Financial, Inc. for the last 12 years. Thank you, Kris, for your service. Thank you.