Zacks Initiates Coverage of Waterstone Financial With Neutral Recommendation

Core Viewpoint - Zacks Investment Research has initiated coverage of Waterstone Financial, Inc. (WSBF) with a Neutral recommendation, indicating a balanced outlook for the company despite its capital strength and earnings stability, due to several risk factors and operational inefficiencies limiting near-term upside potential [1] Financial Strength - Waterstone's financial foundation is robust, with a Common Equity Tier 1 (CET1) capital ratio of 20.32% and a Total Capital Ratio of 21.40% as of March 2025, significantly exceeding regulatory minimums [2] - The company offers a consistent dividend yield of 4.4%, above the industry average, with the most recent quarterly dividend of 15 cents per share declared in June [2] Performance Metrics - Improvements in net interest margin from 2.15% in Q1 2024 to 2.47% in Q1 2025 reflect effective asset-liability management and lower borrowing costs [3] - Interest-earning asset yields rose to 5.46%, while reliance on higher-cost Federal Home Loan Bank borrowings has significantly declined [3] Liquidity Position - As of March 31, 2025, Waterstone holds $43.3 million in cash and has $377 million in unused FHLB borrowing capacity, indicating a strong liquidity position [4] - The deposit base continues to expand, particularly in time deposits, providing flexibility in funding and pricing strategies [4] Challenges - The Mortgage Banking segment reported a $1.6 million loss in Q1, reversing a profit from the same period last year, driven by a 20% decline in loan originations [5] - The company has $21.8 million in unrealized losses on its securities portfolio, primarily in government-sponsored mortgage-backed securities, which could impact book value if interest rates rise [5] Credit Quality - Substandard commercial real estate loans are elevated at $11.9 million, with collateral-dependent loans rising sharply to $17.5 million, indicating potential pressure in the CRE segment [6] - Nonaccrual loans increased to $7.4 million, highlighting concerns regarding credit quality trends [6] Market Sentiment - Waterstone's share price has underperformed compared to peers and the broader market, reflecting tepid investor sentiment [7] - Trading multiples suggest the stock is not overvalued but do not indicate a compelling discount, with the market pricing in a stable but limited growth trajectory [7]