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Waterstone Financial, Inc.: Navigating Mixed Performance in a Challenging Market

Victor HaleTuesday, Apr 22, 2025 5:47 pm ET
17min read

Waterstone Financial, Inc. (NASDAQ: WSBF) recently reported its Q1 2025 earnings, showcasing a resilient yet uneven performance across its core segments. While the Community Banking division demonstrated strength with improved margins and loan growth, the Mortgage Banking segment faced headwinds from declining originations and elevated legal costs. This article dissects the quarterly results, evaluates key risks and opportunities, and weighs the stock’s investment potential.

Ask Aime: What are the key risks and opportunities for Waterstone Financial's Community Banking division?

Core Financial Highlights

Waterstone reported net income of $3.0 million ($0.17 per diluted share) for Q1 2025, matching its Q1 2024 results. The EPS rose by $0.01 year-over-year, driven by better performance in Community Banking. Key metrics include:
- Net interest margin (Community Banking): Expanded to 2.47%, up 32 basis points from Q1 2024, reflecting lower borrowing costs.
- Efficiency ratio (Community Banking): Improved to 59.66%, a significant drop from 65.17% in the prior year, signaling cost discipline.
- Mortgage Banking pre-tax loss: $2.2 million, driven by a 20% decline in loan originations and a 164% surge in legal expenses tied to a resolved lawsuit.

WSBF Trend

Segment Analysis

Community Banking: A Bright Spot

The division’s net interest income rose 6.9% to $12.4 million, fueled by higher loan yields and disciplined cost management. Average loans grew modestly by 0.6% to $1.67 billion, with strong demand in commercial real estate and multi-family mortgages. The improved efficiency ratio highlights operational excellence, a critical factor in a high-interest-rate environment.

Ask Aime: How does Waterstone Financial's Q1 2025 performance compare to industry peers?

However, deposits grew 7.4% year-over-year, primarily in certificates of deposit (CDs), which could pressure margins if rates remain elevated.

Mortgage Banking: Challenges Ahead

The Mortgage segment’s struggles are emblematic of broader industry trends. Originations fell to $387.7 million, down 20% year-over-year, as purchase loans (87.5% of originations) faced affordability headwinds. Gross margins narrowed to 3.98%, reflecting pricing pressures. While legal costs spiked in Q1, the resolution of the lawsuit removes a near-term overhang.

WSBF Diluted EPS YoY, Diluted EPS

Capital Management and Dividends

Waterstone maintained its $0.15 per share dividend, a positive signal for income investors. The company also repurchased 237,000 shares in Q1 2025, boosting book value per share to $17.70. This capital return strategy aligns with management’s focus on shareholder value, though the stock’s current valuation—12x trailing P/E—remains reasonable for a regional bank.

Risks and Considerations

  1. Mortgage Sector Uncertainty: Declining originations may persist as housing demand remains soft. WaterStone’s mortgage division could face further margin compression if the Federal Reserve keeps rates high.
  2. Insider and Institutional Activity: Over the past six months, executives sold over 200,000 shares, including notable sales by CFO Kristine Rappe and CEO William Bruss’s deputy, Stephen Schmidt. While not definitive, this could hint at near-term caution.
  3. Regulatory and Interest Rate Risks: Rising deposit costs and regulatory compliance expenses could squeeze margins further.

Conclusion: A Hold with Upside Potential

Waterstone’s Q1 results reflect a company navigating mixed winds. The Community Banking division’s resilience and prudent capital management provide a solid foundation, while the Mortgage segment’s recovery hinges on macroeconomic stability.

Investors should monitor:
- Loan growth trends in commercial real estate and multi-family sectors.
- Mortgage originations for signs of stabilization in Q2 2025.
- Interest rate policy from the Federal Reserve.

With a book value per share of $17.70 and a dividend yield of 1.1%, WSBF offers modest income and value exposure. However, the stock’s 12% downside to book value and risks tied to mortgage headwinds suggest a Hold rating for now. A rebound in housing demand or a Fed pivot to rate cuts could unlock upside potential.

In summary, Waterstone Financial’s Q1 results underscore its dual identity: a steady performer in core banking and a volatile participant in mortgage lending. Investors seeking stability may find merit in the stock, but caution is warranted until mortgage pressures ease.

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Inevitable-Candy-628
04/22
$WSBF is my small cap play. Holding for the long haul, letting dividends roll in.
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Argothaught
04/22
Rate cuts could save WSBF's bacon.
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shakenbake6874
04/22
Mortgage banking is a ticking time bomb. Rates need to drop for WSBF to shine. 🚀
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shrinkshooter
04/22
Fed's rate game is the wildcard. Mortgage origination volume could swing hard.
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waterlimes
04/22
Community banking is a hidden gem.
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Wonderful_Touch5652
04/22
Regional banks like $WSBF offer safety with some juice. Not bad for a portfolio hedge.
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dypeverdier
04/22
Mortgage banking segment is a ticking time bomb with those legal expenses. Watch out below!
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JC-YNWA
04/22
Dividend and buybacks are sweet. Long WSBF for the income and value play.
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Argothaught
04/22
Mortgage margins tight; hope for a Fed pivot. WSBF could surprise investors. 🤔
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11thestate
04/22
Efficiency ratio is chef's kiss. WSBF managing costs like a pro.
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lies_are_comforting
04/23
@11thestate True, WSBF's cost control is solid.
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ABCXYZ12345679
04/22
Legal costs hit hard, but one-time deal. Watch for next quarter's mortgage rebound.
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EmergencyWitness7
04/22
Community banking is rock solid, but mortgage banking needs a Hail Mary to turn it around.
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AP9384629344432
04/22
Mortgage banking is a ticking time bomb.
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nrthrnbr
04/22
CD growth is a mixed bag. Could pressure margins if rates stay high.
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WatchDog2001
04/22
Community banking is rock solid. WSBF could be a sleeper hit if mortgage turns around.
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grailly
04/22
@WatchDog2001 What if mortgage takes long to recover?
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Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.
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