Zacks Initiates Coverage of Waterstone Financial With Neutral Recommendation

Zacks Investment Research has recently initiated coverage of Waterstone Financial, Inc. WSBF with a Neutral recommendation, reflecting a balanced outlook for the Wisconsin-based bank and mortgage lender. While the company demonstrates capital strength, earnings stability and a steady dividend policy, several risk factors and operating inefficiencies limit near-term upside potential.

Waterstone’s financial foundation remains robust. As of March 2025, the company reported a Common Equity Tier 1 (CET1) capital ratio of 20.32% and a Total Capital Ratio of 21.40%, significantly exceeding regulatory minimums. This capital strength supports continued shareholder returns, including consistent dividends that currently yield 4.4%, above the industry average. The most recent quarterly dividend of 15 cents per share, declared in June and payable in August, extends the company’s track record of uninterrupted payouts. 

Meanwhile, improvements in net interest margin — from 2.15% in first-quarter 2024 to 2.47% in first-quarter 2025 — reflect effective asset-liability management, lower borrowing costs, and a more favorable asset mix. Interest-earning asset yields rose to 5.46%, while reliance on higher-cost Federal Home Loan Bank borrowings declined significantly, as highlighted in the research report.

Liquidity remains a bright spot, with $43.3 million in cash and $377 million in unused FHLB borrowing capacity as of March 31, 2025. Waterstone’s deposit base, led by time deposits, continues to expand, and its maturity profile provides flexibility in funding and pricing strategies. The Community Banking segment, anchored in southeastern Wisconsin, delivered net income of $4.6 million in the first quarter, up from $2.6 million a year ago, supported by higher interest income and a negative provision for credit losses that boosted results.

However, the company faces notable challenges, as outlined in the report. Waterstone’s Mortgage Banking segment incurred a $1.6 million loss in the first quarter, reversing a small profit in the same period last year. This was driven by a 20% decline in loan originations, particularly purchase loans, and narrower margins on loans sold. Further, the company carries $21.8 million in unrealized losses on its securities portfolio, primarily in government-sponsored mortgage-backed securities, which could weigh on book value if interest rates rise or liquidity pressures mount.

Credit quality trends are also worth watching. Substandard commercial real estate loans remained elevated at $11.9 million, and collateral-dependent loans rose sharply to $17.5 million. Nonaccrual loans increased to $7.4 million, signaling potential pressure in the CRE segment. Meanwhile, Waterstone’s regional concentration in Milwaukee and southeastern Wisconsin heightens exposure to localized economic conditions, limiting diversification benefits.

Waterstone’s share price has lagged behind peers and the broader market, reflecting tepid investor sentiment. While its trading multiples suggest the stock is not overvalued, they also do not indicate a compelling discount. Overall, the market appears to be pricing in a stable but limited growth trajectory, consistent with the company’s current fundamentals.

While the company demonstrates strong capital and liquidity positions, challenges such as mortgage segment weakness and geographic concentration warrant caution. Investors are encouraged to review the full Zacks Investment Research report for a comprehensive analysis of Waterstone Financial’s prospects.

Read the full Research Report on Waterstone Financial here>>>

Note: Our initiation of coverage on Waterstone Financial, which has a modest market capitalization of $251.6 million, aims to equip investors with the information needed to make informed decisions in this promising but inherently risky segment of the market.

This article originally published on Zacks Investment Research (zacks.com).

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