Waterstone Financial Rises 22% in 6 Months: Should You Buy the Stock?

Core Viewpoint - Waterstone Financial, Inc. (WSBF) has significantly outperformed its industry peers, with a 21.5% increase in share price over the past six months, while the industry saw a decline of 1.8% [1] Company Overview - Waterstone Financial operates as a community-focused financial institution through WaterStone Bank and its mortgage subsidiary, providing traditional banking services and originating loans primarily for the secondary market [3] - The company's core lending includes residential and commercial real estate, construction, business, and consumer loans, funded through deposits and other sources [3] Financial Performance - The loan portfolio grew to $1.71 billion as of September 30, 2025, up from $1.68 billion at the end of 2024, driven by a focus on multi-family and commercial real estate lending [4] - Net interest income for Q3 2025 rose to $14.7 million, a $3.2 million increase from Q3 2024, attributed to a 19-basis-point improvement in loan yield and a favorable asset mix [5] - The net interest margin expanded from 2.14% in Q3 2024 to 2.76% in Q3 2025, supported by a $159.6 million reduction in average borrowings and lower rates on new funding sources [6] Capital Position - As of September 30, 2025, the total capital ratio was 20.46% and the Common Equity Tier 1 capital ratio was 19.45%, well above regulatory minimums, providing a cushion against market volatility [7] - The board declared a quarterly dividend of 15 cents per share in December 2025, reflecting the company's commitment to returning capital to shareholders [7] Operational Efficiency - The company has improved operational efficiency, particularly in the mortgage banking segment, with a $0.2 million reduction in compensation and benefits expenses in Q3 2025 compared to the previous year [8] - The community banking segment also saw savings from reduced health insurance claims [8] Challenges - The mortgage banking segment faced a decline in loan origination volume, down $19.3 million year over year, leading to lower mortgage banking income [9] - The company is managing elevated unrealized losses in its investment portfolio due to interest rate shifts, along with regulatory pressures and competitive deposit markets [9] Valuation - WSBF is trading at a price/earnings ratio of 12.63X, below the industry average of 12.99X and lower than Citizens Community Bancorp's 14.2X, but higher than Northpointe Bancshares' 9.51X [10] Conclusion - Strong capital ratios, expanding net interest margin, and disciplined cost controls highlight the company's strategic resilience, while growth in higher-yielding commercial real estate loans supports long-term earnings [11] - Despite headwinds such as lower mortgage volumes and unrealized investment losses, the company's fundamentals and undervaluation present a potential investment opportunity [13]