Waterstone Financial, Inc. (WSBF Quick QuoteWSBF - Free Report) shares have climbed 43% in the past year compared with the industry’s 15.8% growth. The company has outperformed other industry players, including Great Southern Bancorp, Inc. (GSBC Quick QuoteGSBC - Free Report) and Heritage Financial Corporation (HFWA Quick QuoteHFWA - Free Report) . Shares of GSBC and HFWA have rallied 23.7% and 16.8%, respectively, in the same time frame. WSBF is benefiting from wider banking spreads, stronger mortgage activity, loan growth, stable credit quality, and robust capital and liquidity.

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A Key Look Into WSBF’s Business Operations

Waterstone Financial, Inc. is the holding company of WaterStone Bank SSB, a community bank serving customers since 1921. Based in Wauwatosa, WI, the Bank operates 14 offices across Milwaukee, WA, and Waukesha counties and primarily serves the broader Milwaukee metropolitan area. Its lending activities focus on one to four-family residential, multi-family and commercial real estate loans, while also offering construction and land loans, home equity products, commercial business loans and consumer loans. Loan production is funded mainly through retail and brokered deposits and Federal Home Loan Bank advances. The company also operates Waterstone Mortgage Corporation, which originates single-family residential mortgages for sale in the secondary market.

Waterstone Financial’s Key Tailwinds

Waterstone Financial is benefiting from a more favorable spread environment at its community banking business. For the first six months of 2026, net interest income rose 19.7% to $31.5 million as yields on loans and securities improved while funding costs eased. The average loan yield increased 17 basis points, while the average cost of retail time deposits fell 59 basis points. Borrowing costs also declined as the company shifted toward deposits and money market accounts and benefited from prior Federal Reserve rate cuts. These trends lifted the net interest margin to 3.00% from 2.54% a year earlier, strengthening the core earnings profile. 

Mortgage banking activity is another important tailwind, supported by stronger home-loan production and a sharp rebound in refinancing. Waterstone Mortgage originated $1.1 billion of loans held for sale in the first half of 2026, up 15.7% year over year. Purchase originations increased 5.4%, while refinance production more than doubled, rising 106.3%. The higher volume helped mortgage banking noninterest income increase 8.1% to $41.5 million, and the segment swung to net income of $1.2 million from a loss in the prior-year period. 

The loan portfolio also offers support as growth is broadening beyond traditional one-to-four-family mortgages. Loans held for investment increased to $1.7 billion at June 30, 2026, led by higher multi-family, construction and commercial balances. Multi-family loans rose to $781.9 million from $758.4 million at year-end, while construction and land loans climbed to $67.9 million from $56.3 million and commercial loans increased to $35.6 million from $33.4 million. Waterstone Financial also had $57.6 million of commitments to originate loans, along with unfunded construction and business credit lines, showing continued lending activity that can support future interest income and portfolio growth over time.

Credit quality remains relatively stable and gives Waterstone Financial room to pursue growth without a heavy drag from problem assets. Nonperforming assets were only 0.30% of total assets at June 30, 2026, while non-accrual loans represented 0.39% of total loans. The company recorded net recoveries during the first half, and its allowance for credit losses covered 273.62% of non-accrual loans. Total past-due loans also declined from year-end, while real estate owned decreased. 

A strong capital and liquidity position provides another tailwind by giving Waterstone flexibility to fund lending, absorb volatility and return capital to shareholders. Waterstone Bank remained well capitalized at June 30, 2026, with a total risk-based capital ratio of 19.68% and a Tier 1 risk-based ratio of 18.66%, both comfortably above regulatory thresholds. At the same time, the board maintained a quarterly dividend of 17 cents per share and authorized a new 2-million-share repurchase plan, reinforcing capital returns while preserving a strong regulatory position.

Challenges Persist for WSBF’s Business

Waterstone Financial faces pressure from weaker mortgage-banking profitability, as gross margins on loans originated and sold declined despite higher origination volumes. Credit costs also increased, with provisions rising due mainly to commercial real estate qualitative factors and a larger pipeline of business and commercial real estate loans. Higher compensation and employee-benefit expenses, including health insurance, ESOP, commission and incentive costs, could further weigh on operating leverage. Service-charge income has also been pressured by lower loan prepayment penalties.

Waterstone Financial’s Valuation

The company is cheaply priced compared with the industry average. Currently, WSBF is trading at 12.34X trailing 12-month price/earnings value, below the industry’s average of 13.65X. The metric remains lower than one of the company’s peers, Great Southern Bancorp (12.9X), but higher than that of Heritage Financial (12.28X).

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Conclusion

WSBF’s improving spread income, healthy loan growth and strong capital position support its long-term prospects, although mortgage margin pressure, higher credit costs and rising expenses warrant investor attention.

Strong fundamentals, coupled with the company’s undervaluation, present a lucrative opportunity for investors to add the stock to their portfolio.