UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





Form 10-Q





R
            
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934For
      the quarterly period ended March 31, 2009OR*
            
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934











Commission
File Number 000-51507





WATERSTONE
FINANCIAL, INC.





(Exact
name of registrant as specified in its charter)








Federal
            20-3598485(State
      or other jurisdiction of
              incorporation
      or organization)
            (IRS
      Employer Identification No.)








11200
W. Plank Ct.


Wauwatosa,
WI  53226


(414) 761-1000


(Address,
including Zip Code, and telephone number,


including
area code, of registrant’s principal executive offices)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.





Yes
            R
            
            No
            *





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer
            *
            
            Accelerated
      filer
            R
            
            Non-accelerated
      filer
            *
            
            Smaller
      Reporting Company
            *





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).





Yes
            *
            
            No
            R





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o





The
number of shares outstanding of the issuer’s common stock, $0.01 par value per
share, was 31,249,897 at April 30, 2009.











WATERSTONE FINANCIAL, INC.





10-Q
INDEX


























Page
      No.PARTI.FINANCIAL INFORMATIONItem l. Financial
      StatementsConsolidated
      Statements of Financial Condition as ofMarch
      31,
      2009(unaudited)
      and December 31, 2008
            3Consolidated
      Statements of Operations for the three months endedMarch
      31,
      2009and
      2008(unaudited)
            4Consolidated
      Statements of Changes in Shareholders’ Equity for thethreemonths
      endedMarch
      31,
      2009and
      2008(unaudited)
            5Consolidated
      Statements of Cash Flows for thethreemonths
      endedMarch
      31,
      2009and
      2008(unaudited)
            6-7Notes to Consolidated Financial
      Statements
            8-21Item 2. Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            22-37Item 3. Quantitative and Qualitative
      Disclosures about Market Risk
            38Item 4. Controls and
      Procedures
            39PART II. OTHER
      INFORMATION
            40Item 1. Legal
    Proceedings
            40Item 1A. Risk
      Factors
            40Item 6. Exhibits
            40Signatures
            40CertificationCertificationCertificationCertification






- 2
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 Table of Contents





PART I — FINANCIAL INFORMATION


Item 1. Financial
Statements





WATERSTONE FINANCIAL, INC AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION





(Unaudited)March
      31,
            
            
            December
      31,2009
            
            
            2008Assets
            
            (In
      Thousands, except share data)Cash
            
            $
            46,482
            
            
            
            14,847Federal
      funds sold
            
            
            20,196
            
            
            
            9,002Cash
      and cash equivalents
            
            
            66,678
            
            
            
            23,849Securities
      available for sale (at fair value)
            
            
            180,516
            
            
            
            179,887Securities
      held to maturity (at amortized cost)fair
      value of $8,016 in 2009 and $8,165 in 2008
            
            
            9,938
            
            
            
            9,938Loans
      held for sale
            
            
            28,250
            
            
            
            12,993Loans
      receivable
            
            
            1,535,382
            
            
            
            1,559,758Less:
      Allowance for loan losses
            
            
            28,839
            
            
            
            25,167Loans
      receivable, net
            
            
            1,506,543
            
            
            
            1,534,591Office
      properties and equipment, net
            
            
            30,047
            
            
            
            30,560Federal
      Home Loan Bank stock, at cost
            
            
            21,653
            
            
            
            21,653Cash
      surrender value of life insurance
            
            
            32,615
            
            
            
            32,399Real
      estate owned
            
            
            31,540
            
            
            
            24,653Prepaid
      expenses and other assets
            
            
            15,406
            
            
            
            14,909Total
      assets
            
            $
            1,923,186
            
            
            
            1,885,432Liabilities
      and Shareholders’ EquityLiabilities:Demand
      deposits
            
            $
            52,816
            
            
            
            53,434Money
      market and savings deposits
            
            
            99,105
            
            
            
            100,930Time
      deposits
            
            
            1,071,278
            
            
            
            1,041,533Total
      deposits
            
            
            1,223,199
            
            
            
            1,195,897Short
      term borrowings
            
            
            41,100
            
            
            
            4,100Long
      term borrowings
            
            
            470,900
            
            
            
            482,900Advance
      payments by borrowers for taxes
            
            
            7,505
            
            
            
            862Other
      liabilities
            
            
            10,504
            
            
            
            30,406Total
      liabilities
            
            
            1,753,208
            
            
            
            1,714,165Shareholders’
      equity:Preferred
      stock (par value $.01 per share)Authorized
      20,000,000 shares, no shares issued
            
            
            —
            
            
            
            —Common
      stock (par value $.01 per share)Authorized
      - 200,000,000 shares in 2008 and 2007Issued
      - 33,974,250 shares in 2009 and in 2008Outstanding
      - 31,249,897 shares in 2009 and in 2008
            
            
            340
            
            
            
            340Additional
      paid-in capital
            
            
            108,093
            
            
            
            107,839Accumulated
      other comprehensive loss net of taxes
            
            
            (5,720
            )
            
            
            (6,449
            )Retained
      earnings
            
            
            117,436
            
            
            
            119,921Unearned
      ESOP shares
            
            
            (4,910
            )
            
            
            (5,123
            )Treasury
      shares (2,724,353 shares), at cost
            
            
            (45,261
            )
            
            
            (45,261
            )Total
      shareholders’ equity
            
            
            169,978
            
            
            
            171,267Total
      liabilities and shareholders’ equity
            
            $
            1,923,186
            
            
            
            1,885,432








See
Accompanying Notes to Consolidated Financial Statements.




- 3
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 Table of Contents


WATERSTONE FINANCIAL, INC AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)








Three
      months ended
              March
      31,2009
            
            
            2008(In
      thousands, except per share data)Interest
      income:Loans
            
            $
            22,267
            
            
            $
            21,879Mortgage-related
      securities
            
            
            1,912
            
            
            
            1,821Debt
      securities, federal funds sold andshort-term
      investments
            
            
            812
            
            
            
            877Total
      interest income
            
            
            24,991
            
            
            
            24,577Interest
      expense:Deposits
            
            
            9,737
            
            
            
            11,064Borrowings
            
            
            4,972
            
            
            
            5,020Total
      interest expense
            
            
            14,709
            
            
            
            16,084Net
      interest income
            
            
            10,282
            
            
            
            8,493Provision
      for loan losses
            
            
            7,201
            
            
            
            2,699Net
      interest income after provision for loan losses
            
            
            3,081
            
            
            
            5,794Noninterest
      income:Service
      charges on loans and deposits
            
            
            293
            
            
            
            536Increase
      in cash surrender value of life insurance
            
            
            216
            
            
            
            236Mortgage
      banking income
            
            
            901
            
            
            
            750Total
      other-than-temporary impairment losses
            
            
            (9,419
            )
            
            
            -Portion
      of loss recognized in other comprehensive income (before
      taxes)
            
            
            8,512
            
            
            
            -Net
      impairment losses recognized in earnings
            
            
            (907
            )
            
            
            -Other
            
            
            217
            
            
            
            205Total
      noninterest income
            
            
            720
            
            
            
            1,727Noninterest
      expenses:Compensation,
      payroll taxes, and other employee benefits
            
            
            3,810
            
            
            
            3,825Occupancy,
      office furniture and equipment
            
            
            1,223
            
            
            
            1,253Advertising
            
            
            222
            
            
            
            164Data
      processing
            
            
            365
            
            
            
            368Communications
            
            
            193
            
            
            
            168Professional
      fees
            
            
            342
            
            
            
            217Real
      estate owned
            
            
            821
            
            
            
            383Other
            
            
            930
            
            
            
            624Total
      noninterest expenses
            
            
            7,906
            
            
            
            7,002Income
      (loss) before income taxes
            
            
            (4,105
            )
            
            
            519Income
      taxes (benefit)
            
            
            (503
            )
            
            
            (90
            )Net
      income (loss)
            
            
            (3,602
            )
            
            
            609Earnings
      (loss) per share:Basic
            
            
            (0.12
            )
            
            
            0.02Diluted
            
            
            (0.12
            )
            
            
            0.02Weighted
      average shares outstanding:Basic
            
            
            30,651,581
            
            
            
            30,641,728Diluted
            
            
            30,651,581
            
            
            
            30,641,728








See
Accompanying Notes to Consolidated Financial Statements.






- 4
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WATERSONE FINANCIAL, INC AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(Unaudited)





AccumulatedAdditional
            
            
            Other
            
            
            
            
            
            UnearnedCommon
      Stock
            
            
            Paid-In
            
            
            Comprehensive
            
            
            Retained
            
            
            ESOP
            
            
            Treasury
            
            
            Shareholders'Shares
            
            
            Amount
            
            
            Capital
            
            
            Income
      (Loss)
            
            
            Earnings
            
            
            Shares
            
            
            Shares
            
            
            Equity(In
      Thousands)Balances
      at December 31, 2007
            
            
            31,251
            
            
            $
            340
            
            
            
            106,306
            
            
            
            44
            
            
            
            146,367
            
            
            
            (5,977
            )
            
            
            (45,261
            )
            
            
            201,819Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            609
            
            
            
            —
            
            
            
            —
            
            
            
            609Other
      comprehensive income (loss):Net
      unrealized holding loss onavailable
      for sale securities arising during the period, net of taxes of
      $239
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (442
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (442
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            167ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            20
            
            
            
            —
            
            
            
            —
            
            
            
            213
            
            
            
            —
            
            
            
            233Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            437
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            437Balances
      at March 31, 2008
            
            
            31,251
            
            
            $
            340
            
            
            
            106,763
            
            
            
            (398
            )
            
            
            146,976
            
            
            
            (5,764
            )
            
            
            (45,261
            )
            
            
            202,656Balances
      at December 31, 2008
            
            
            31,250
            
            
            $
            340
            
            
            
            107,839
            
            
            
            (6,449
            )
            
            
            119,921
            
            
            
            (5,123
            )
            
            
            (45,261
            )
            
            
            171,267Cumulative
      effect adjustment related to a change in accountingprinciple
      related to available for sale securities, net of taxes of
    $448
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (669
            )
            
            
            1,117
            
            
            
            
            
            
            
            
            
            
            
            448Comprehensive
      loss:Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,602
            )
            
            
            —
            
            
            
            —
            
            
            
            (3,602
            )Other
      comprehensive income (loss):Net
      unrealized holding gain onavailable
      for sale securities arising during the period, net of tax benefit of
      $212
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            855
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            855Reclassification
      of adjustment for net losses onavailable
      for sale securities realized during the period, net of taxes of
      $364
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            543
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            543Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,204
            )ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            (165
            )
            
            
            —
            
            
            
            —
            
            
            
            213
            
            
            
            —
            
            
            
            48Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            419
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            419Balances
      at March 31, 2009
            
            
            31,250
            
            
            $
            340
            
            
            
            108,093
            
            
            
            (5,720
            )
            
            
            117,436
            
            
            
            (4,910
            )
            
            
            (45,261
            )
            
            
            169,978





See
Accompanying Notes to Consolidated Financial Statements.




- 5
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 Table of Contents


WATERSONE FINANCIAL, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)








Three
      months ended March 31,2009
            
            
            2008(In
      Thousands)Operating
      activities:Net
      income (loss)
            
            $
            (3,602
            )
            
            
            609Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:Provision
      for loan losses
            
            
            7,201
            
            
            
            2,699Depreciation
            
            
            514
            
            
            
            648Deferred
      income taxes
            
            
            (1,053
            )
            
            
            (553
            )Stock
      based compensation
            
            
            419
            
            
            
            437Net
      amortization of premium on debt and mortgage-related
      securities
            
            
            (54
            )
            
            
            (105
            )Amortization
      of unearned ESOP shares
            
            
            48
            
            
            
            233Gain
      on sale of loans held for sale
            
            
            (811
            )
            
            
            (469
            )Loans
      originated for sale
            
            
            (135,327
            )
            
            
            (137,269
            )Proceeds
      on sales of loans originated for sale
            
            
            120,881
            
            
            
            140,564(Increase)
      decrease in accrued interest receivable
            
            
            23
            
            
            
            (218
            )Increase
      in cash surrender value of bank owned life insurance
            
            
            (216
            )
            
            
            (236
            )Increase
      (decrease) in accrued interest on deposits and borrowings
            
            
            (1,172
            )
            
            
            1,605Decrease
      in other liabilities
            
            
            (1,841
            )
            
            
            (1,465
            )Loss
      on impairment of securities
            
            
            907
            
            
            
            —Loss
      (gain) on sale of real estate owned and other assets
            
            
            192
            
            
            
            (71
            )Other
            
            
            669
            
            
            
            67Net
      cash provided by operating activities
            
            
            (13,222
            )
            
            
            6,476Investing
      activities:Net
      decrease (increase) in loans receivable
            
            
            12,048
            
            
            
            (38,783
            )Purchases
      of:Mortgage-related
      securities
            
            
            (9,961
            )
            
            
            (15,049
            )Structured
      notes, held to maturity
            
            
            —
            
            
            
            (4,289
            )Premises
      and equipment, net
            
            
            (3,369
            )
            
            
            (486
            )Bank
      owned life insurance
            
            
            —
            
            
            
            (5,000
            )FHLB
      stock
            
            
            —
            
            
            
            (409
            )Proceeds
      from:Principal
      repayments on mortgage-related securities
            
            
            6,597
            
            
            
            4,514Maturities
      of debt securities
            
            
            3,497
            
            
            
            984Calls
      on structured notes
            
            
            0
            
            
            
            1,998Sales
      of real estate owned and other assets
            
            
            1,875
            
            
            
            2,646Net
      cash used in investing activities
            
            
            10,687
            
            
            
            (53,874
            )








See
Accompanying Notes to Consolidated Financial Statements.




- 6
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 Table of Contents


WATERSTONE
FINANCIAL, INC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)








Three
      months ended March 31,2009
            
            
            2008(In
      Thousands)Financing
      activities:Net
      increase in deposits
            
            
            27,302
            
            
            
            86,197Net
      change in short-term borrowings
            
            
            25,000
            
            
            
            (23,434
            )Proceeds
      from long-term borrowings
            
            
            —
            
            
            
            15,000Net
      decrease in advance payments by borrowers for taxes
            
            
            (6,938
            )
            
            
            (11,526
            )Net
      cash provided by financing activities
            
            
            45,364
            
            
            
            66,237Increase
      in cash and cash equivalents
            
            
            42,829
            
            
            
            18,839Cash
      and cash equivalents at beginning of period
            
            
            23,849
            
            
            
            17,884Cash
      and cash equivalents at end of period
            
            $
            66,678
            
            
            
            36,723Supplemental
      information:Cash
      paid or credited during the period for:Income
      tax payments
            
            
            —
            
            
            
            1,242Interest
      payments
            
            
            15,880
            
            
            
            14,479Noncash
      investing activities:Loans
      receivable transferred to foreclosed properties
            
            
            8,799
            
            
            
            4,672Noncash
      financing activities:Long-term
      FHLB advances reclassified to short-term
            
            
            37,000
            
            
            
            —

































































See
Accompanying Notes to Consolidated Financial Statements.




- 7
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WATERSTONE FINANCIAL, INC AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1 — Basis of Presentation





The
consolidated financial statements include the accounts of Waterstone Financial,
Inc. (the “Company”) and the Company’s subsidiaries.





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information, Rule 10-01 of Regulation S-X and the instructions to Form
10-Q. The financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position, results
of operations, changes in shareholders’ equity, and cash flows of the Company
for the periods presented.





The
accompanying unaudited consolidated financial statements and related notes
should be read in conjunction with the Company’s December 31, 2008 Annual Report
on Form 10-K. Operating results for the three months ended March 31, 2009, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.





The
preparation of the unaudited consolidated financial statements requires
management of the Company to make a number of estimates and assumptions relating
to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
period.  Significant items subject to such estimates and assumptions
include the allowance for loan losses and deferred income
taxes.  Actual results could differ from those estimates.








Note
2 — Reclassifications





Certain
items in the prior period consolidated financial statements have been
reclassified to conform with the March 31, 2009 presentation.






- 8
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 Table of Contents


Note
3 — Securities





Securities
Available for Sale





The
amortized cost and fair values of the Company’s investment in securities
available for sale follow:







March
      31, 2009(In
      Thousands)Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealizedcost
            
            
            gains
            
            
            losses
            
            
            Fair
      valueMortgage-backed
      securities
            
            $
            46,543
            
            
            
            1,519
            
            
            
            (10
            )
            
            
            48,052Collateralized
      mortgage obligations
            
            
            96,983
            
            
            
            1,546
            
            
            
            (9,694
            )
            
            
            88,835Mortgage-related
      securities
            
            
            143,526
            
            
            
            3,065
            
            
            
            (9,704
            )
            
            
            136,887Government
      sponsored entity bonds
            
            
            7,508
            
            
            
            239
            
            
            
            —
            
            
            
            7,747Municipal
      securities
            
            
            32,725
            
            
            
            316
            
            
            
            (2,082
            )
            
            
            30,959Corporate
      notes
            
            
            995
            
            
            
            —
            
            
            
            (22
            )
            
            
            973Other
      debt securities
            
            
            5,250
            
            
            
            —
            
            
            
            (1,300
            )
            
            
            3,950Debt
      securities
            
            
            46,478
            
            
            
            555
            
            
            
            (3,404
            )
            
            
            43,629$
            190,004
            
            
            
            3,620
            
            
            
            (13,108
            )
            
            
            180,516










December
      31, 2008(In
      Thousands)Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealizedcost
            
            
            gains
            
            
            losses
            
            
            Fair
      valueMortgage-backed
      securities
            
            $
            38,966
            
            
            
            1,133
            
            
            
            (14
            )
            
            
            40,085Collateralized
      mortgage obligations
            
            
            100,896
            
            
            
            1,068
            
            
            
            (10,507
            )
            
            
            91,457Mortgage-related
      securities
            
            
            139,862
            
            
            
            2,201
            
            
            
            (10,521
            )
            
            
            131,542Government
      sponsored entity bonds
            
            
            11,007
            
            
            
            335
            
            
            
            —
            
            
            
            11,342Municipal
      securities
            
            
            32,697
            
            
            
            291
            
            
            
            (1,626
            )
            
            
            31,362Corporate
      notes
            
            
            992
            
            
            
            —
            
            
            
            (51
            )
            
            
            941Other
      debt securities
            
            
            5,250
            
            
            
            —
            
            
            
            (550
            )
            
            
            4,700Debt
      securities
            
            
            49,946
            
            
            
            626
            
            
            
            (2,227
            )
            
            
            48,345$
            189,808
            
            
            
            2,827
            
            
            
            (12,748
            )
            
            
            179,887










At March
31, 2009, $6.7 million of the Company’s government sponsored entity bonds and
$98.2 million of the Company’s municipal securities and mortgage related
securities were pledged as collateral to secure repurchase agreement obligations
of the Company.






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The
amortized cost and fair values of investment securities by contractual maturity
at March 31, 2009, are shown below. Actual maturities may differ from
contractual maturities because issuers have the right to call or prepay
obligations with or without call or prepayment penalties.







Amortized
            
            
            FairCost
            
            
            Value(In
      Thousands)Debt
      securitiesDue
      within one year
            
            $
            5,499
            
            
            
            5,535Due
      after one year through five years
            
            
            5,852
            
            
            
            6,132Due
      after five years through ten years
            
            
            4,609
            
            
            
            4,740Due
      after ten years
            
            
            30,518
            
            
            
            27,222Mortgage-related
      securities
            
            
            143,526
            
            
            
            136,887$
            190,004
            
            
            
            180,516







Gross
unrealized losses on securities available for sale and the fair value of the
related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, were
as follows:








March
      31, 2009Less
      than 12 months
            
            
            12
      months or longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealizedvalue
            
            
            loss
            
            
            value
            
            
            loss
            
            
            value
            
            
            loss(In
      Thousands)Mortgage
      backed securites
            
            
            —
            
            
            
            —
            
            
            
            5,079
            
            
            
            (10
            )
            
            
            5,079
            
            
            
            (10
            )Collateralized
      mortgage obligations
            
            
            2,393
            
            
            
            (19
            )
            
            
            30,537
            
            
            
            (9,675
            )
            
            
            32,930
            
            
            
            (9,694
            )Municipal
      securities
            
            
            9,768
            
            
            
            (595
            )
            
            
            10,895
            
            
            
            (1,487
            )
            
            
            20,663
            
            
            
            (2,082
            )Corporate
      notes
            
            
            972
            
            
            
            (22
            )
            
            
            —
            
            
            
            —
            
            
            
            972
            
            
            
            (22
            )Other
      debt securities
            
            
            3,700
            
            
            
            (1,300
            )
            
            
            —
            
            
            
            —
            
            
            
            3,700
            
            
            
            (1,300
            )$
            16,833
            
            
            
            (1,936
            )
            
            
            46,511
            
            
            
            (11,172
            )
            
            
            63,344
            
            
            
            (13,108
            )





In the
first quarter, the Company elected to adopt Financial Accounting Standards Board
(FASB) Staff Position Nos. 115-2 and 124-2 Recognition and Presentation of
Other-Than-Temporary Impairments, 157-4 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly and 107-1 and
APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments.  In evaluating
whether a credit loss exists for a given debt security, management considers the
length of time and extent to which the fair value has been less than cost,
financial condition of the issuer and the underlying obligors, quality of credit
enhancements, volatility of the fair value of the security, the expected
recovery period of the security, payment structure of the security and ratings
agency evaluations.




At March
31, 2009, this evaluation indicated that two collateralized mortgage
obligations, three municipal securities and one trust preferred security may be
other-than-temporarily impaired.  Estimates of discounted cash flows
based on expected yield at time of original purchase, prepayment assumptions
based on actual and anticipated prepayment speed, actual and anticipated default
rates and estimated level of severity given the loan to value ratios, credit
scores, geographic locations, vintage and levels of subordination related to the
security and its underlying collateral resulted in a projected credit loss on
two collateralized mortgage obligations.  One of these two securities
had been deemed other-than-temporarily impaired in prior periods and a
cumulative-effect adjustment of $1.1 million was made to retained earnings as of
January 1, 2009 to reflect the difference between the credit loss estimated as
of that date and the amortized cost written-down to fair value as of September
30, 2008 when the other-than-temporary impairment was first
identified.  The estimated credit loss on the second collateralized
mortgage obligation of $907,000 was charged to earnings in the quarter ended
March 31, 2009.  These two securities had a fair value of $3.6 million
and $10.8 million and an amortized cost of $5.7 million and $17.1 million,
respectively as of March 31, 2009. As of March 31, 2009, unrealized losses
on collateralized mortgage obligations include other-than-temporary impairment
recognized in other comprehensive income (before taxes) of $8.5
million.






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The
following table presents the change in other-than-temporary credit related
impairment charges on collateralized mortgage obligations for which a portion of
the other-than-temporary impairments related to other factors was recognized in
other comprehensive loss:




(in
      thousands)Credit
      related impairments on securties as of December 31, 2008
            
            $
            755Credit
      related impairments not previously recognized
            
            
            907Credit
      related impairments on securities as of March 31, 2009
            
            $
            1,662







Exclusive
of the two aforementioned collateralized mortgage obligations, the Company has
determined that the decline in fair value of the remaining securities is not
attributable to credit deterioration, and as the Company does not intend to sell
nor is it more likely than not that it will be required to sell these securities
before recovery of the amortized cost basis, these securities are not considered
other-than-temporarily impaired.




Continued
deterioration of general economic market conditions could result in the
recognition of future other than temporary impairment losses within the
investment portfolio and such amounts could be material to our consolidated
financial statements.







Securities
Held to Maturity




As of
March 31, 2009, the Company held three securities that have been designated as
held to maturity.  The securities have a total amortized cost of $9.9
million and an estimated fair value of $8.0 million.  Each security is
callable quarterly beginning in the first quarter of 2009.  Two of the
securities have a final maturity in 2022 and the remaining security has a final
maturity in 2023.  A significant portion of the difference between
fair value and amortized cost with respect to this portfolio relates to one
structured note with an amortized cost of $2.6 million and a fair value of $1.1
million.  Due to the magnitude of the difference between fair value
and amortized cost and considering additional factors as previously described,
the Company assessed whether this security is other-than-temporarily
impaired.  Based primarily on the ongoing financial support of the
company that issued the security by the United States government, the Company
has determined that the security is not other-than-temporarily impaired at March
31, 2009.




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Note
4 — Loans Receivable





Loans
receivable are summarized as follows:






March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      Thousands)Mortgage
      loans:Residential
      real estate:One-
      to four-family
            
            $
            774,304
            
            
            
            790,486Over
      four-family residential
            
            
            508,886
            
            
            
            512,746Commercial
      real estate
            
            
            52,876
            
            
            
            55,193Construction
      and land
            
            
            124,684
            
            
            
            131,840Home
      equity
            
            
            88,659
            
            
            
            89,648Consumer
      loans
            
            
            471
            
            
            
            365Commercial
      business loans
            
            
            43,776
            
            
            
            43,006Gross
      loans receivable
            
            
            1,593,656
            
            
            
            1,623,284Less:Undisbursed
      loan proceeds
            
            
            56,118
            
            
            
            61,192Unearned
      loan fees
            
            
            2,156
            
            
            
            2,334Total
      loans receivable, net
            
            $
            1,535,382
            
            
            
            1,559,758







The
Company provides several types of loans to its customers, including residential,
construction, commercial and consumer loans.  The Company does not
have a concentration of loans in any specific industry.  Credit risks
tend to be geographically concentrated in that a majority of the Company’s
customer base lies in the Milwaukee metropolitan area.  Furthermore,
as of March 31, 2009, 87.2% of the Company’s loan portfolio involves loans that
are secured by real estate properties located primarily within the Milwaukee
metropolitan area.  Residential real estate collateralizing $160.0
million or 10.2% of total mortgage loans is located outside of the state of
Wisconsin.





The
unpaid principal balance of loans serviced for others was $4.8 million and $4.9
million at March 31, 2009 and December 31, 2008, respectively. These loans are
not reflected in the consolidated financial statements.




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A summary
of the activity in the allowance for loan loss is as follows:




For
      the Three Months EndedMarch
      31,2009
            
            
            2008(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            25,167
            
            
            
            12,839Provision
      for loan losses
            
            
            7,201
            
            
            
            2,699Charge-offs
            
            
            (3,591
            )
            
            
            (914
            )Recoveries
            
            
            62
            
            
            
            156Balance
      at end of period
            
            $
            28,839
            
            
            
            14,780Allowance
      for loan losses to loans receivable
            
            
            1.88
            %
            
            
            1.03
            %Net
      charge-offs to average loans outstanding (annualized)
            
            
            0.91
            %
            
            
            0.25
            %Allowance
      for loan losses to non-performing loans
            
            
            25.93
            %
            
            
            16.78
            %Non-performing
      loans to loans receivable
            
            
            7.24
            %
            
            
            6.13
            %








Non-accrual
loans totaled $111.2 million at March 31, 2009 and $107.7 million at December
31, 2008.





During
2007 and into 2008, the Company experienced significant deterioration in credit
quality, primarily in its residential and construction and land
portfolios.  These two segments represent a significant portion of the
overall loan portfolio.  The downturn in the residential real estate
market that has continued into 2009 has reduced demand and market prices for
vacant land, new construction and existing residential units.  The
economic downturn and the depressed real estate market have negatively impacted
many residential real estate customers and have resulted in the increase in
nonperforming loans.




The
following table presents data on impaired loans at March 31, 2009 and December
31, 2008.








March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      Thousands)Impaired
      loans for which an allowance has been provided
            
            $
            58,861
            
            
            
            41,970Impaired
      loans for which no allowance has been provided
            
            
            60,316
            
            
            
            56,382Total
      loans determined to be impaired
            
            $
            119,177
            
            
            
            98,352Allowance
      for loan losses related to all impaired loans
            
            $
            11,778
            
            
            
            9,832








Determination
as to whether an allowance is required with respect to impaired loans is based
upon an analysis of the value of the underlying collateral.  This
analysis is primarily based upon third party appraisals, or a discounted cash
flow analysis in the case of an income producing property.  In those
cases in which no allowance has been provided for an impaired loan, the Company
has determined that the estimated value of the underlying collateral exceeds the
remaining outstanding balance of the loan.  The valuation process is
subject to the use of significant estimates and actual results could differ from
estimates.




As of
March 31, 2009 and December 31, 2008, troubled debt restructurings totaled $10.6
million and $2.4 million, respectively.  All but three of these loans
totaling $1.6 million are performing in accordance with the terms of the
restructuring as of March 31, 2009.




The
Company serves the credit needs of its customers by offering a wide variety of
loan programs to customers, primarily in Wisconsin. The loan portfolio is widely
diversified by types of borrowers, property type, and market areas. Significant
loan concentrations are considered to exist for a financial institution when
there are amounts loaned to one borrower or to multiple borrowers engaged in
similar activities that would cause them to be similarly impacted by economic or
other conditions. At March 31, 2009 and 2008, no loans to one borrower or
industry concentrations existed in the Company’s loan portfolio in excess of 10%
of total loans.





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Note
5 — Deposits





A summary
of the contractual maturities of certificate accounts at March 31, 2009 is as
follows:






(In
      Thousands)Within
      one year
            
            $
            925,572One
      to two years
            
            
            116,268Two
      to three years
            
            
            12,190Three
      to four years
            
            
            13,688Four
      through five years
            
            
            3,560$
            1,071,278







Note
6 — Borrowings




Borrowings
consist of the following:









March
      31, 2009
            
            
            December
      31, 2008Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            AverageBalance
            
            
            Rate
            
            
            Balance
            
            
            Rate(Dollars
      in Thousands)Federal
      Home Loan Bank Chicago (FHLBC) advances maturing:2009
            
            $
            41,100
            
            
            
            2.64
            %
            
            
            4,100
            
            
            
            4.23
            %2010
            
            
            36,900
            
            
            
            4.76
            %
            
            
            48,900
            
            
            
            4.80
            %2016
            
            
            220,000
            
            
            
            4.34
            %
            
            
            220,000
            
            
            
            4.34
            %2017
            
            
            65,000
            
            
            
            3.19
            %
            
            
            65,000
            
            
            
            3.19
            %2018
            
            
            65,000
            
            
            
            2.97
            %
            
            
            65,000
            
            
            
            2.97
            %Repurchase
      agreements maturing
            2017
            
            
            84,000
            
            
            
            3.96
            %
            
            
            84,000
            
            
            
            3.96
            %$
            512,000
            
            
            
            3.85
            %
            
            
            487,000
            
            
            
            3.99
            %












The $220
million in advances due in 2016 consist of eight advances with rates ranging
from 4.01% to 4.82% callable quarterly until maturity.




The $65
million in advances due in 2017 consist of three advances with rates ranging
from 3.09% to 3.46% callable quarterly until maturity.




The $65
million in advances due in 2018 consist of three callable
advances.  The call features are as follows: two $25 million advances
at a weighted average rate of 3.04% callable beginning in May 2010 and quarterly
thereafter and a $15 million advance at a rate of 2.73% callable quarterly until
maturity.




The $84
million in repurchase agreements have rates ranging from 2.89% to 4.305%
callable quarterly until maturity.




The
Company selects loans that meet underwriting criteria established by the FHLBC
as collateral for outstanding advances.  The Company’s FHLBC
borrowings are limited to 60% of the carrying value of qualifying, unencumbered
one- to four-family mortgage loans, 25% of the carrying value of home equity
loans and 60% of the carrying value of over four-family loans.  In
addition, these advances are collateralized by FHLBC stock of $21.7 million at
March 31, 2009 and December 31, 2008.




- 14
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Note
7 – Income Taxes




We
recorded an income tax benefit of $503,000 in the first quarter of 2009,
resulting in an effective income tax rate of 12.3%.  During the first
quarter of 2008, we recorded an income tax benefit of $90,000, resulting in an
effective income tax rate of (17.3%).  The change in the effective tax rate
in the first quarter of 2009 as compared to that of the first quarter 2008 is
primarily due to the effect of the 2009 pre-tax loss partially offset by 2009
changes in the valuation allowance for deferred tax assets.




Under
generally accepted accounting principles, a valuation allowance is required to
be recognized if it is “more likely than not” that a deferred tax asset will not
be realized.  The determination of the realizability of the deferred
tax assets is highly subjective and dependent upon judgment concerning
management's evaluation of both positive and negative evidence, the forecasts of
future income, applicable tax planning strategies, and assessments of current
and future economic and business conditions. Positive evidence includes the
existence of taxes paid in available carryback years as well as the probability
that taxable income will be generated in future periods, while negative evidence
includes the cumulative losses in the current year and prior two years and
general business and economic trends.  At March 31, 2009 and December
31, 2008, the Company determined a valuation allowance was necessary, largely
based on the evidence represented by a cumulative loss in the most recent
three-year period caused by the significant loan loss provisions recorded during
2009 and 2008.  In addition, general uncertainty surrounding future
economic and business conditions have increased the potential volatility and
uncertainty of projected earnings.  Management is required to
re-evaluate the deferred tax asset and the related valuation allowance
quarterly.




A
Wisconsin state tax law change (retroactive to January 1, 2009) during the
quarter ended March 31, 2009 resulted in a state tax benefit related to the net
unrealized loss on securities available for sale owned by the Company’s Nevada
subsidiary.




- 15
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 Table of Contents




Note
8 – Financial Instruments with Off-Balance Sheet Risk





Off-balance
sheet financial instruments or obligations whose contract amounts represent
credit and/or interest rate risk are as follows:




March
      31,
            
            
            December
      31,2009
            
            
            2008(In
      Thousands)Financial
      instruments whose contract amounts representpotential
      credit risk:Commitments
      to extend credit under first mortgage loans
            
            $
            18,032
            
            
            
            15,340Unused
      portion of home equity lines of credit
            
            
            29,317
            
            
            
            30,368Unused
      portion of construction loans
            
            
            16,531
            
            
            
            20,241Unused
      portion of business lines of credit
            
            
            10,270
            
            
            
            10,584Standby
      letters of credit
            
            
            1,866
            
            
            
            1,866





In
connection with its mortgage banking activities, the Company enters into forward
loan sale commitments.  Forward commitments to sell mortgage loans
represent commitments obtained by the Company from a secondary market agency to
purchase mortgages from the Company at specified interest rates and within
specified periods of time.  Commitments to sell loans are made to
mitigate interest rate risk on commitments to originate loans and loans held for
sale.  As of March 31, 2009 and December 31, 2008, the Company had
$28.1 million and $13.0 million, respectively in forward loan sale
commitments.  A forward sale commitment is a derivative instrument
under Statement of Financial Accounting Standards No. 133 (“SFAS
No. 133”), “Accounting for Derivative Instruments and Hedging
Activities,”(as amended), which must be recognized at fair value on the
consolidated balance sheet in other assets and other liabilities with changes in
its value recorded in income from mortgage banking operations.  In
determining the fair value of its derivative loan commitments for economic
purposes, the Company considers the value that would be generated when the loan
arising from exercise of the loan commitment is sold in the secondary mortgage
market. That value includes the price that the loan is expected to be sold for
in the secondary mortgage market.


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 Table of Contents





Note
9 – Earnings (loss) per share





Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the
period.  Diluted earnings is computed by dividing net income (loss) by
the weighted average number of common shares outstanding adjusted for the
dilutive effect of all potential common shares.  Unvested restricted
stock is considered outstanding for dilutive earnings (loss) per share
only.  At March 31, 2009 and 2008 unvested restriced stock and stock
options totaling 611,900 and 827,200 shares, respectively are antidilutive and
are excluded from the earnings (loss) per share calculation.




Presented
below are the calculations for basic and diluted earnings (loss) per
share:







Three
      Months EndedMarch
      31,2009
            
            
            2008(In
      Thousands, except per share data)Net
      income (loss)
            
            $
            (3,602
            )
            
            
            609Weighted
      average shares outstanding
            
            
            30,652
            
            
            
            30,642Effect
      of dilutive potential common shares
            
            
            -
            
            
            
            -Diluted
      weighted average shares outstanding
            
            
            30,652
            
            
            
            30,642Basic
      earnings (loss) per share
            
            $
            (0.12
            )
            
            
            0.02Diluted
      earnings (loss) per share
            
            $
            (0.12
            )
            
            
            0.02








Note
10 – Fair Value Measurements





The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures.  Securities available
for sale and loans held for sale are recorded at fair value on a recurring
basis.  Additionally, from time to time, we may be required to record
at fair value other assets on a nonrecurring basis, such as portfolio loans and
real estate owned.  These nonrecurring fair value adjustments
typically result from the write-downs of individual assets.





Effective
January 1, 2009, under guidance set forth in FAS 159, The Fair Value Option for Financial
assets and Financial Liabilities (FAS 159), the Company elected to
measure loans held for sale at fair value prospectively for new loans held for
sale originations.  We believe that the election for loans held for
sale will reduce timing differences and better match changes in the value of
these assets with the changes in the value of forward commitments to sell
mortgage loans which are used as economic hedges for these assets.





Presented
below is information about assets recorded on our consolidated statement of
financial position at fair value on a recurring basis and assets recorded in our
consolidated statement of financial position on a nonrecurring
basis.





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 Table of Contents


Assets
and Liabilities Recorded at Fair Value on a Recurring Basis





The
following table presents information about our assets recorded in our
consolidated statement of financial position at their fair value on a recurring
basis as of March 31, 2009, and indicates the fair value hierarchy of the
valuation techniques utilized to determine such fair value.  In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that we have the ability to
access.  Fair values determined by Level 2 inputs use inputs other
than quoted prices included in Level 1 inputs that are observable for the asset
or liability, either directly or indirectly.  Level 2 inputs include
quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets where there are
few transactions and inputs other than quoted prices that are observable for the
asset or liability, such as interest rates and yield curves that are observable
at commonly quoted intervals.  Level 3 inputs are unobservable inputs
for the asset or liability and include situations where there is little, if any,
market activity for the asset or liability.





Assets
              Measured
      at
              Fair
      Value at
              March
      31, 2009
            
            
            Quoted
      Prices in
              Active
      Markets
              for
      Identical
              Assets
              (Level
      1)
            
            
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)(In
      Thousands)Available
      for sale securities
            
            $
            180,516
            
            
            
            -
            
            
            
            166,194
            
            
            
            14,322








The
following summarizes the valuation techniques for assets recorded in our
consolidated statements of financial condition at their fair value on a
recurring basis:





Available for sale securities –The fair value of available-for-sale securities is determined by a third
party valuation source using observable market data utilizing a matrix or
multi-dimensional relational pricing model.  Standard inputs to these
models include observable market data such as benchmark yields, reported trades,
broker quotes, issuer spreads, benchmark securities and bid/offer market
data.  For securities with an early redemption feature, an option
adjusted spread model is utilized to adjust the issuer
spread.  Prepayment models are used for mortgage related securities
with prepayment features.





The table
below presents a reconciliation for all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) during
2009.








Available-for-sale
      securties(In
      Thousands)Balance
      December 31, 2008
            
            $
            4,242Transfer
      into Level 3
            
            
            9,870Unrealized
      holding gains (losses) arising during the period:Included
      in other comprehensive loss
            
            
            58Other
      than temporary impairment included in net loss
            
            
            (907
            )Principal
      repayments
            
            
            (63
            )Net
      accretion of discount/amortization of premium
            
            
            5Cumulative-effect
      adjustment
            
            
            1,117Balance
      March 31, 2009
            
            $
            14,322








Level 3
available-for-sale securities include two corporate collateralized mortgage
obligations.  The market for this security was not active as of March
31, 2009.  As such, following the guidance set forth in FASB Staff
Position 157-3 Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, the Company valued this security based on the present value of
estimated future cash flows





Loans held for sale – Under
FAS 159, the Company elected to carry our loans held for sale at fair
value.  Fair value is generally determined by estimating a gross
premium or discount, which is derived from pricing currently observable in the
market.  At March 31, 2009, loans held-for-sale totaled $28.3
million.  Loans held-for-sale are considered to be Level 2 in the fair
value hierarchy of valuation techniques.




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Assets
Recorded at Fair Value on a Non-recurring Basis





Loans –On a non-recurring
basis, loans determined to be impaired are analyzed to determine whether a
collateral shortfall exists, and if such a shortfall exists, are recorded in our
consolidated statements of financial condition at fair value.  Fair
value is determined based on third party appraisals.  At March 31,
2009, loans determined to be impaired with an outstanding balance of $58.9
million were carried net of specific reserves of $11.8 million for a fair value
of $47.1 million.  Impaired loans are considered to be Level 2 in the
fair value hierarchy of valuation techniques.








Real estate owned –On a
non-recurring basis, real estate owned, is recorded in our consolidated
statements of financial condition at the lower of cost or fair
value.  Fair value is determined based on third party appraisals
obtained at the time the Company takes title to the property and, if less than
the carrying value of the loan, the carrying value of the loan is adjusted to
the fair value.At
March 31, 2009, real estate owned totaled $31.5 million.  Real estate
owned is considered to be Level 2 in the fair value hierarchy of valuation
techniques.





The
carrying amounts and fair values of the Company’s financial instruments consist
of the following at March 31, 2009 and December 31, 2008:









March
      31, 2009
            
            
            December
      31, 2008Carrying
            
            
            Fair
            
            
            Carrying
            
            
            Fairamount
            
            
            value
            
            
            amount
            
            
            value(In
      Thousands)Financial
      AssetsCash
      and cash equivalents
            
            $
            66,678
            
            
            
            66,678
            
            
            
            23,849
            
            
            
            23,849Securities
      available-for-sale
            
            
            180,516
            
            
            
            180,516
            
            
            
            179,887
            
            
            
            179,887Securities
      held-to-maturity
            
            
            9,938
            
            
            
            8,016
            
            
            
            9,938
            
            
            
            8,165Loans
      held for sale
            
            
            28,250
            
            
            
            28,250
            
            
            
            12,993
            
            
            
            12,993Loans
      receivable
            
            
            1,535,382
            
            
            
            1,532,528
            
            
            
            1,559,758
            
            
            
            1,553,577FHLB
      stock
            
            
            21,653
            
            
            
            21,653
            
            
            
            21,653
            
            
            
            21,653Cash
      surrender value of life insurance
            
            
            32,615
            
            
            
            32,615
            
            
            
            32,399
            
            
            
            32,399Accrued
      interest receivable
            
            
            4,300
            
            
            
            4,300
            
            
            
            4,323
            
            
            
            4,323Financial
      LiabilitiesDeposits
            
            
            1,223,199
            
            
            
            1,229,067
            
            
            
            1,195,897
            
            
            
            1,202,939Advance
      payments byborrowers
      for taxes
            
            
            7,505
            
            
            
            7,505
            
            
            
            862
            
            
            
            862Borrowings
            
            
            512,000
            
            
            
            510,044
            
            
            
            487,000
            
            
            
            501,858Accrued
      interest payable
            
            
            4,367
            
            
            
            4,367
            
            
            
            5,539
            
            
            
            5,539Obligations
      under capital leases
            
            
            -
            
            
            
            -
            
            
            
            3,308
            
            
            
            3,308Other
      Financial InstrumentsStand-by
      letters of credit
            
            
            8
            
            
            
            8
            
            
            
            12
            
            
            
            12







The
following methods and assumptions were used by the Company in determining its
fair value disclosures for financial instruments.




a)      Cash
      and Cash Equivalents




The
carrying amounts reported in the consolidated statements of financial condition
for cash and cash equivalents approximate those assets’ fair
values.




b)      Securities




Fair
values for securities are based on quoted market prices of these or comparable
instruments or valuation techniques previously discussed.




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c)      Loans
      Held for Sale




Fair
      value is estimated using the prices of the Company’s existing commitments
      to sell such loans and/or the quoted market price for commitments to sell
      similar loans.




d)      Loans
      Receivable




Fair
values for loans receivable are based upon third party appraisals or are
estimated using a discounted cash flow calculation that applies current interest
rates to estimated future cash flows of the loans receivable.




e)      FHLB
      Stock




For FHLB
stock, the carrying amount is the amount at which shares can be redeemed with
the FHLB and is a reasonable estimate of fair value.




f)      Cash
      Surrender Value of Life Insurance




The
carrying amounts reported in the consolidated statements of financial condition
for the cash surrender value of life insurance approximate those assets’ fair
values.




g)       Deposits
      and Advance Payments by Borrowers for
Taxes




The fair
values for interest-bearing and noninterest-bearing negotiable order of
withdrawal accounts, savings accounts, and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates of similar remaining maturities to
a schedule of aggregated expected monthly maturities of the outstanding
certificates of deposit. The advance payments by borrowers for taxes are equal
to their carrying amounts at the reporting date.




h)      Borrowings




Fair
values for borrowings are estimated using a discounted cash flow calculation
that applies current interest rates to estimated future cash flows of the
borrowings.




i)      Accrued
      Interest Payable and Accrued Interest
Receivable




For
accrued interest payable and accrued interest receivable, the carrying amount is
a reasonable estimate of fair value due to their short-term nature.




j)      Obligations
      under Capital Leases




The fair
value of obligations under capital leases is determined using a present value of
future minimum lease payments discounted at the current interest rate at the
time of lease inception.  The Company executed a purchase option on
its capital lease during the first quarter of 2009.




k)      Standby
      Letters of Credit




Commitments
to extend credit and standby letters of credit are generally not marketable.
Furthermore, interest rates on any amounts drawn under such commitments would be
generally established at market rates at the time of the draw. Fair values for
the Company’s commitments to extend credit and standby letters of credit are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the counterparty’s credit
standing, and discounted cash flow analyses. The fair value of the Company’s
commitments to extend credit is not material at March 31, 2009 and December 31,
2008.







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Note
11 – Recent Accounting Developments




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities. The statement allows an entity to elect to
measure certain financial assets and liabilities at fair value with changes in
fair value recognized in the income statement each period. The statement also
requires additional disclosures to identify the effects of an entity’s fair
value election on its earnings.  The Company adopted SFAS 159, when
required, on January 1, 2008 and the adoption did not have a material impact on
financial position, results of operation or liquidity.  On January 1,
2009 the Company elected to measure loans held for sale at fair value
prospectively for new loans held for sale originations.  This election
did not have a material impact on the Company’s financial position, results of
operation or liquidity.





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1 Determining Whether Instruments
Granted in Share-Based Payments Transactions Are Participating
Securities.The FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method described in FASB Statement No.
128, Earnings per
Share.  All prior period earnings per share data presented is
to be adjusted retrospectively to conform to the provisions of this
FSP.  The Company adopted EITF 03-6-1, when required, on January 1,
2009 and the adoption did not have a material impact.




In April
2009, the FASB issued FASB Staff Position FAS 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
157-4”). FSP 157-4 indicates that if an entity determines that either the volume
and/or level of activity for an asset or liability has significantly decreased
(from normal conditions for that asset or liability) or price quotations or
observable inputs are not associated with orderly transactions, increased
analysis and management judgment will be required to estimate fair value. FSP
157-4 is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted. FSP 157-4 must be applied prospectively.
The Company has elected to adopt FSP 157-4 in the first quarter of 2009. The
adoption of FSP 157-4 had no material impact on the Company’s financial
position, results of operation or liquidity.






In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”). FSP 107-1
relates to fair value disclosures in public entity financial statements for
financial instruments that are within the scope of Statement of Financial
Accounting Standards No. 107, “Disclosures about Fair Value of Financial
Instruments” (“SFAS 107”). This guidance increases the frequency of those
disclosures, requiring public entities to provide the disclosures on a quarterly
basis (rather than just annually). The quarterly disclosures are intended to
provide financial statement users with more timely information about the effects
of current market conditions on an entity’s financial instruments that are not
otherwise reported at fair value. FSP 107-1 is effective for interim and annual
periods ending after June 15, 2009. FSP 107-1 must be applied
prospectively. The Company has elected to adopt FSP 107-1 and APB 28-1 in the
first quarter of 2009.  The adoption of FSP 107-1 and APB
28-1 had no material impact on the Company’s financial position,
results of operation or liquidity.






In April
2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FSP
124-2”). FSP 115-2 and FSP 124-2 collectively establish a new method of
recognizing and reporting other-than-temporary impairments of debt securities.
FSP 115-2 and FSP 124-2 also contain additional disclosure requirements related
to debt and equity securities. FSP 115-2 and FSP 124-2 change existing
impairment guidance under Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”(“SFAS 115”). For debt
securities, the “ability and intent to hold” provision is eliminated, and
impairment is considered to be other-than-temporary if an entity (i) intends to
sell the security, (ii) more likely than not will be required to sell the
security before recovering its cost, or (iii) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). This new framework does not apply to equity securities (i.e., impaired
equity securities will continue to be evaluated under previously existing
guidance).The
“probability” standard relating to the collectability of cash flows is
eliminated, and impairment is now considered to be other-than-temporary if the
present value of cash flows expected to be collected from the debt security is
less than the amortized cost basis of the security. FSP 115-2 and FSP 124-2 also
provide that for debt securities which (i) an entity does not intend to sell and
(ii) it is not more likely than not that the entity will be required to sell
before the anticipated recovery of its remaining amortized cost basis, the
impairment is separated into the amount related to estimated credit losses and
the amount related to all other factors. The amount of the total impairment
related to all other factors is recorded in other comprehensive loss and the
amount related to estimated credit loss is recognized as a charge against
current period earnings. FSP 115-2 and FSP 124-2 are effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted. The
Company has elected to adopt FSP 115-2 and FSP 124-2 in the first quarter of
2009. See further discussion in Note 3 on the impact of adoption.





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Item 2.  Management’s Discussion and
Analysis of Financial Condition and Results of
Operations





Cautionary Statements
Regarding Forward-Looking Information





This
report contains or incorporates by reference various forward-looking statements
concerning the Company’s prospects that are based on the current expectations
and beliefs of management.  Forward-looking statements may also be
made by the Company from time to time in other reports and documents as well as
in oral presentations.  When used in written documents or oral
statements, the words “anticipate,” “believe,” “estimate,” “expect,” “objective”
and similar expressions and verbs in the future tense, are intended to identify
forward-looking statements.  The statements contained herein and such
future statements involve or may involve certain assumptions, risks and
uncertainties, many of which are beyond the Company’s control, that could cause
the Company’s actual results and performance to differ materially from what is
expected.  In addition to the assumptions and other factors referenced
specifically in connection with such statements, the following factors could
impact the business and financial prospects of the Company:





●
            adverse
      changes in the real estate markets;


●
            adverse
      changes in the securities markets;


●
            general
      economic conditions, either nationally or in our market areas, that are
      worse than expected;


●
            inflation
      and changes in the interest rate environment that reduce our margins or
      reduce the fair value of financial
instruments;


●
            legislative
      or regulatory changes that adversely affect our
  business;


●
            our
      ability to enter new markets successfully and take advantage of growth
      opportunities;


●
            significantly
      increased competition among depository and other financial
      institutions;


●
            changes
      in accounting policies and practices, as may be adopted by the bank
      regulatory agencies and the Financial Accounting Standards Board;
      and


●
            changes
      in consumer spending, borrowing and savings
  habits.





See also
the factors referred to in reports filed by the Company with the Securities and
Exchange Commission (particularly those under the caption “Risk Factors” in Item
1A of the Company’s 2008 Annual Report on Form 10-K).





Overview





Our
results of operations are highly dependent on our net interest income and the
provision for loan losses.  Net interest income is the difference
between the interest income we earn on loans receivable, investment securities
and cash and cash equivalents and the interest we pay on deposits and other
borrowings.  The Company’s banking subsidiary, WaterStone Bank SSB
(“WaterStone Bank”), formerly Wauwatosa Savings Bank, is primarily a mortgage
lender with such loans comprising 97.2% of total loans receivable on March 31,
2009.  Further, 80.5% of loans receivable are residential mortgage
loans with over four-family loans comprising 31.9% of all loans on March 31,
2009.  WaterStone Bank funds loan production primarily with retail
deposits and Federal Home Loan Bank advances.  On March 31, 2009,
deposits comprised 69.8% of total liabilities.  Time deposits, also
known as certificates of deposit, accounted for 87.6% of total deposits at March
31, 2009.  Federal Home Loan Bank advances outstanding on March 31,
2009 totaled $428.0 million, or 24.4% of total liabilities.




During
the three months ended March 31, 2009, our results of operations were adversely
affected by deterioration in asset quality resulting in increases in non-accrual
loans and real estate owned and a corresponding increase in both the provision
for loan losses and loan charge-offs.  We have sought to address the
impact of the deteriorating real estate market by increasing our
provisions for loan losses over the past two years.  The continued
downturn in the local real estate market prompted the Company to reevaluate the
assumptions used to determine the fair value of collateral related to loans
receivable to ensure that the allowance for loan losses continued to be an
accurate reflection of management’s best estimate of the amount needed to
provide for the probable loss on impaired loans and other inherent losses in the
loan portfolio.  As a result of that reevaluation, the Company
determined that a provision for loan losses of $7.2 million was necessary during
the quarter in order to bring the allowance for loan losses to an appropriate
level.  Additional information regarding loan quality and its impact
on our financial condition and results of operations can be found in the Asset
Quality discussion.  Our results of operations are also affected by
noninterest income and noninterest expense.  Noninterest income
consists primarily of service charges and mortgage banking fee income but was
negatively impacted in the quarter ended March 31, 2009 by a $907,000 impairment
charge of securities considered to be other than temporarily
impaired.  Noninterest expense consists primarily of compensation and
employee benefits, occupancy expenses and real estate owned
expense.  In 2009 our non-interest expense will be affected by higher
deposit insurance premium assessments from the FDIC.  Our results of
operations also may be affected significantly by general and local economic and
competitive conditions, governmental policies and actions of regulatory
authorities.




The
following discussion and analysis is presented to assist the reader in the
understanding and evaluation of the Company’s financial condition and results of
operations. It is intended to complement the unaudited consolidated financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith. The detailed
discussion focuses on the results of operations for the three month period ended
March 31, 2009 and 2008 and the financial condition as of March 31, 2009
compared to the financial condition as of December 31, 2008.




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Critical
Accounting Policies





Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets.




Allowance for
Loan Losses.WaterStone Bank
establishes valuation allowances on loans considered impaired. A loan is
considered impaired when, based on current information and events, it is
probable that WaterStone Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. A valuation allowance
is established for an amount equal to the impairment when the carrying amount of
the loan exceeds the net realizable value of the underlying
collateral.  WaterStone Bank also establishes valuation allowances
based on an evaluation of the various risk components that are inherent in the
credit portfolio. The risk components that are evaluated include past loan loss
experience; the level of nonperforming and classified assets; current economic
conditions; volume, growth, and composition of the loan portfolio; adverse
situations that may affect the borrower’s ability to repay; the estimated value
of any underlying collateral; regulatory guidance; and other relevant factors.
The allowance is increased by provisions charged to earnings and recoveries of
previously charged-off loans and reduced by charge-offs. The adequacy of the
allowance for loan losses is reviewed and approved at least quarterly by the
WaterStone Bank board of directors. The allowance reflects management’s best
estimate of the amount needed to provide for the probable loss on impaired loans
and other inherent losses in the loan portfolio, and is based on a risk model
developed and implemented by management and approved by the WaterStone Bank
board of directors.




Actual
results could differ from this estimate and future additions to the allowance
may be necessary based on unforeseen changes in loan quality and economic
conditions.  In addition, state and federal regulators periodically
review the WaterStone Bank allowance for loan losses. Such regulators have the
authority to require WaterStone Bank to recognize additions to the allowance at
the time of their examination.




Income
Taxes.The Company and its subsidiaries file a consolidated
federal income tax return. The provision for income taxes is based upon income
in the consolidated financial statements, rather than amounts reported on the
income tax return.  Consequently, our federal income tax returns do
not include the financial results of our mutual holding company
parent.  Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense in the period that
includes the enactment date.





Under
generally accepted accounting principles, a valuation allowance is required to
be recognized if it is “more likely than not” that a deferred tax asset will not
be realized.  The determination of the realizability of the deferred
tax assets is highly subjective and dependent upon judgment concerning
management's evaluation of both positive and negative evidence, the forecasts of
future income, applicable tax planning strategies, and assessments of current
and future economic and business conditions. Positive evidence includes the
existence of taxes paid in available carry-back years as well as the probability
that taxable income will be generated in future periods, while negative evidence
includes the cumulative losses in the current year and prior two years and
general business and economic trends.  At March 31, 2009, the Company
determined a valuation allowance was necessary, largely based on the cumulative
loss during the most recent three-year period caused by the significant loan
loss provisions recorded during 2009 and 2008.  In addition, general
uncertainty surrounding future economic and business conditions have increased
the potential volatility and uncertainty of projected
earnings.  Management is required to re-evaluate the deferred tax
asset and the related valuation allowance quarterly.




Positions
taken in the Company’s tax returns may be subject to challenge by the taxing
authorities upon examination.  The benefit of uncertain tax positions
are initially recognized in the financial statements only when it is more likely
than not the position will be sustained upon examination by the tax
authorities.  Such tax positions are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement with the tax authority, assuming full knowledge
of the position and all relevant facts.  Interest and penalties on
income tax uncertainties are classified within income tax expense in the income
statement.




Management
believes its tax policies and practices are critical because the determination
of the tax provision and current and deferred tax assets and liabilities have a
material impact on our net income and the carrying value of our
assets.  We have no plans to change the tax recognition methodology in
the future.  If our estimated valuation allowance is adjusted it will
affect our future results of operations.




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Comparison
of Operating Results for the Three Months Ended March 31, 2009 and
2008





General
- Net loss for the three months ended March 31, 2009 totaled $3.6 million, or
$0.12 for both basic and diluted loss per share compared to net income of
$609,000, or $0.02 for both basic and diluted earnings per share for the three
months ended March 31, 2008.  The three months ended March 31, 2009
generated an annualized loss on average assets of 0.76% and an annualized loss
on average equity of 8.68%, compared to a return on average assets of 0.14% and
a return on average equity of 1.22% for the comparable period in
2008.  The net loss reflects deteriorating asset quality resulting in
a $4.5 million increase in the provision for loan losses.  During the
first quarter, the Company received updated appraisals on a number of properties
that collateralize nonperforming loans.  The decline in value noted in
the appraisals, in addition to the continued downturn in the local real estate
market, contributed to the Company recording a provision for loan losses of $7.2
million during the first quarter.  The impact of the increase in
provision for loan losses was compounded by a decrease in noninterest income
which includes a $907,000 loss on impairment of securities and a $904,000
increase in noninterest expense which includes a $438,000 increase in real
estate owned expense.  These were partially offset by a $1.8 million
increase in net interest income and a $413,000 increase in income tax
benefit.  Loan charge-off activity and specific loan reserves are
discussed in additional detail in the Asset Quality section.  The net
interest margin for the nine months ended March 31, 2009 was 2.28% compared to
2.03% for the three months ended March 31, 2008.





Total
Interest Income - Total interest income increased $414,000, or 1.7%, to
$25.0 million during the three months ended March 31, 2009 compared to $24.6
million for the three months ended March 31, 2008.  Interest income on
loans increased $388,000, or 1.8%, to $22.3 million for the three months ended
March 31, 2009 compared to $21.9 million for the comparable period of
2008.  The increase resulted primarily from an increase of $135.6
million, or 9.4%, in the average loan balance to $1.57 billion during the
three-month period ended March 31, 2009 from $1.44 billion during the comparable
period in 2008.  The increase in average balance was partially offset
by a 36 basis point decrease in the average yield on loans to 5.75% for the
three-month period ended March 31, 2009 from 6.11% for the comparable period in
2008.  Unrecognized interest income on non-accrual loans totaled $1.7
million during the three months ended March 31, 2009.  This had the
effect of reducing the average yield on loans during the same period by 43 basis
points.  Unrecognized interest income on non-accrual loans totaled
$1.0 million during the three months ended March 31, 2008 effectively reducing
the average yield on loans for that period by 29 basis points.





Interest
income from mortgage-related securities increased $91,000, or 5.0%, to $1.9
million for the three months ended March 31, 2009 compared to $1.8 million for
the comparable quarter in 2008.  This was primarily due to a 32 basis
point increase in the average yield to 5.77% for the three months ended March
31, 2009 from 5.45% for the comparable period in 2008.  In addition to
the increase in average yield, the average balance of mortgage related
securities increased $319,000, or 0.2%, to $134.5 million for the three months
ended March 31, 2009 from $134.1 million during the comparable period in
2008.





Finally,
interest income from debt securities, federal funds sold and short-term
investments decreased $65,000, or 7.4%, to $812,000 for the three months ended
March 31, 2009 compared to $877,000 for the comparable period in
2008.  This was due to a 73 basis point decrease in the average yield
on other earning assets to 2.62% for the three months ended March 31, 2009 from
3.35% for the comparable period in 2008, partially offset by an increase of
$20.6 million, or 19.6%, in the average balance of other earning assets to
$125.8 million during the three months ended March 31, 2009 from $105.1 million
during the comparable period in 2008.  The average balance of debt
securities, federal funds sold and short-term investments includes FHLBC stock
of $21.7 million and $19.7 million for the three month-periods ended March 31,
2009 and March 31, 2008, respectively.  On October 10, 2007, the FHLBC
entered into a consensual cease and desist order with its regulator, the Federal
Housing Finance Board. Under the terms of the order, dividend declarations are
subject to the prior written approval of the Federal Housing Finance
Board.  The FHLBC has not declared a dividend since it entered into
the cease and desist order.  At the request of the FHLBC, on July 24,
2008, the Finance Board amended the cease and desist order to allow the FHLBC to
redeem incremental purchases of capital stock tied to increased levels of
borrowing through advances after repayment of those new advances.





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Total
Interest Expense-Total interest expense decreased by $1.4 million, or 8.5%, to $14.7
million during the three months ended March 31, 2009 from $16.1 million during
the three months ended March 31, 2008.  This decrease was the result
of a decrease of 76 basis points in the cost of funding to 3.45% for the three
months ended March 31, 2008 from 4.21% for the comparable period ended March 31,
2008, partially offset by an increase of $199.6 million, or 13.0%, in average
interest bearing deposits and borrowings outstanding to $1.73 billion for the
three months ended March 31, 2009 compared to an average balance of $1.53
billion for the three months ended March 31, 2008.





Interest
expense on deposits decreased $1.3 million, or 12.0%, to $9.7 million during the
three months ended March 31, 2009 from $11.1 million during the comparable
period in 2008.  This was due to a decrease in the cost of total
average deposits of 97 basis points to 3.26% for the three months ended March
31, 2009 compared to 4.23% for the comparable period during 2008.  The
decrease in interest expense attributable to the decrease in the cost of
deposits was partially offset by an increase of $162.0 million, or 15.4%, in the
average balance of other interest bearing deposits to $1.21 billion during the
three months ended March 31, 2009 from $1.05 billion during the comparable
period in 2008.  The decrease in the cost of deposits reflects the
lower shorter term interest rate environment resulting from the Federal
Reserve’s reduction of short term interest rates which are typically used by
financial institutions in determining the market rate for deposit
products.





Interest
expense on borrowings decreased $49,000, or 1.0%, to $4.97 million during the
three months ended March 31, 2009 from $5.02 million during the comparable
period in 2008.  The decrease resulted primarily from an increase in
average borrowings outstanding of $37.6 million, or 7.8%, to $520.0 million
during the three months ended March 31, 2009 from $482.4 million during the
comparable period in 2008.  The increase in average borrowings was
more than offset by a 28 basis point decrease in the average cost of borrowings
to 3.90% during the three months ended March 31, 2009 from 4.18% during the
comparable period in 2008.  The increased use of borrowings as a
source of funding during three months ended March 31, 2009 reflected our
assessment that such sources of funds provided favorable rates and terms
compared to alternate retail funding sources.  The reduction in short
term interest rates by the Federal Reserve allows banks such as WaterStone Bank
to borrow funds at lower rates, helping to reduce our cost of
borrowing.





Net
Interest Income - Net interest income increased by $1.8 million or 21.1%,
to $10.3 million during the three months ended March 31, 2009 as compared to
$8.5 million during the comparable period in 2008.  Net interest
income continues to be positively affected by a steeper yield curve in 2009, as
compared to 2008 and given that our interest bearing liabilities have repriced
faster than our interest earning assets.  The increase resulted
primarily from a 42 basis point increase in our interest rate spread to 2.08%
for the three month period ended March 31, 2009 from 1.67% for the comparable
period in 2008.  The 42 basis point increase in the interest rate
spread resulted from a 76 basis point decrease in the cost of interest bearing
liabilities, which was partially offset by a 35 basis point decrease in the
yield on interest earning assets.  The increase in net interest income
resulting from an increase in our net interest rate spread was partially offset
by a decrease in net average earning assets of $43.1 million, or 30.0%, to
$100.8 million for the three months ended March 31, 2009 from $143.9 million
from the comparable period in 2008.  The decrease in net average
earning assets was primarily attributable to an increase in loans transferred to
real estate owned and an increase in the allowance for loan
losses.  The average balance of real estate owned totaled $26.4
million for the three months ended March 31, 2009 compared to $9.7 million for
the three months ended March 31, 2008.  The average balance of the
allowance for loan losses totaled $24.8 million for the three months ended March
31, 2009 compared to $13.1 million for the three months ended March 31,
2008.





Provision
for Loan Losses - Provision for loan losses increased $4.5 million to
$7.2 million during the three months ended March 31, 2009, from $2.7 million
during the comparable period during 2008.  The increased provision for
the three months ended March 31, 2009 was primarily the result of $3.5 million
of net loan charge-offs combined with continued weakness in local real estate
markets.  The increase in charge-offs reflects management’s
reevaluation of assumptions used to determine the fair value of collateral
supporting nonperforming loans.  In addition, compared to prior
periods, the Company has observed an increased likelihood of the borrower being
unable to resolve the ongoing default in the terms of the loan prior to
completion of a sheriff’s sale.  As such, charge-offs are generally
being recognized earlier in the foreclosure process then they have been in prior
periods.  See the Asset Quality section for an analysis of
charge-offs, nonperforming assets, specific reserves and additional
provisions.





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 Table of Contents


Noninterest
Income - Total noninterest income decreased $1.0 million, to $720,000
during the three months ended March 31, 2009 from $1.7 million during the
comparable period in 2008.  The decrease primarily resulted from
$907,000 million in other than temporary impairment loss recognized on a
collateralized mortgage obligation.





Noninterest
Expense - Total noninterest expense increased $904,000, or 12.9%, to $7.9
million during the three months ended March 31, 2009 from $7.0 million during
the comparable period in 2008.  The increase was primarily the result
of the increase in real estate owned expense, reflecting higher levels of real
estate owned and to increased FDIC deposit insurance premiums.





Real
estate owned expense totaled $821,000 for the three months ended March 31, 2009
compared to $383,000 during the three months ended March 31,
2008.  Real estate owned expense includes the net gain or loss
recognized upon the sale of a foreclosed property, as well as the operating and
carrying costs related to the properties.  During the three months
ended March 31, 2009, operational expenses totaled $668,000 and net losses on
sales of real estate totaled $153,000.  The increase in expense
compared to the prior period results from an increase in the number of
foreclosed properties.  The average balance of real estate owned
totaled $26.4 million for the three months ended March 31, 2009 compared to $9.7
million for the three months ended March 31, 2008.





Compensation,
payroll taxes and other employee benefit expense decreased $15,000, or 0.4%, to
$3.8 million during the three months ended March 31, 2009.  This
decrease resulted primarily from a reduction in expense related to the ESOP,
partially offset by an increase in health insurance benefit
expense.  Expense related to the Company’s ESOP decreased $185,000, or
79.4%, to $48,000 during the three months ended March 31, 2009 compared to
$233,000 during the comparable period in 2008.  This decrease reflects
the decrease in the Company’s average share price during the three months ended
March 31, 2009 compared to the comparable period in 2008.  Expense
related to the Company’s self-insured employee health benefit plan increased
$122,000, or 49.8%, to $367,000 during the three months ended March 31, 2009
from $245,000 during the comparable period in 2008.





Other
noninterest expense increased $306,000, or 49.1%, to $930,000 during the three
months ended March 31, 2009 from $624,000 during the comparable period in
2008.  The increase resulted primarily from an increase in the FDIC
insurance assessment related to deposits.  FDIC insurance expense
increased $208,000 to $240,000 during the three months ended March 31, 2009 from
$32,000 during the comparable period ended March 31, 2008.





Income
Taxes– Income
tax benefit was $503,000, or 12.3% of the pretax loss of $4.1 million for the
three months ended March 31, 2009.  This compares to income tax
benefit of $90,000, or (17.3%) of the pretax income of $519,000 for the three
months ended March 31, 2008.




Net
Loss-As a
result of the foregoing factors, net loss for the three months ended March 31,
2009 was $3.6 million as compared to net income of $609,000 during the
comparable period in 2008.




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 Table of Contents





Comparison
of Financial Condition at March 31, 2009 and December 31, 2008





Total
Assets - Total assets increased by $37.8 million, or 2.0%, to $1.92
billion at March 31, 2009 from $1.89 billion at December 31, 2008. The increase
in total assets is reflected in increases in cash and cash equivalents of $42.8
million and loans held for sale of $15.3 million and an increase in real estate
owned of $6.9 million.  These increases were partially offset by a
decrease in loans receivable of $24.4 million and an increase in the allowance
for loan losses of $3.7 million.





Cash and
Cash Equivalents–Cash and cash equivalents increased by $42.8 million to $66.7 million at
March 31, 2009 from $23.8 million at December 31, 2008.  The increase
in cash and cash equivalents reflects the Company’s decision to maintain higher
than usual liquidity given the current economic environment and relatively low
rates of return available on loans and securities investments.





Securities
Available for Sale– Securities available for sale increased by $629,000,
or 0.3%, to $180.5 million at March 31, 2009 from $179.9 million at December 31,
2008.  This increase resulted from the increase in the market value of
securities net of an impairment loss recognized during the
quarter.  During
the three months ended March 31, 2009, the Company identified one previously
unimpaired available for sale security with a March 31, 2009 fair value of $10.8
million that was determined to be other-than-temporarily impaired.  As
a result of the Company’s analysis, a $7.3 million other-than-temporary
impairment loss has been recognized as of March 31, 2009, with respect to this
security.  Of the total other-than-temporary loss on this security,
$907,000 has been identified as a credit loss and has been charged to as a
current period expense.  The remaining $6.4 million impairment (before
taxes) is included in other comprehensive income.





Loans
Held for Sale–Loans held for sale increased by $15.3 million to $28.3 million at March
31, 2009, from $13.0 million at December 31, 2008.  The increase in
loans held for sale results primarily from an increase in origination activity
driven by historically low fixed mortgage rates.  Fluctuations in the
balance of loans held for sale also result from the timing of loan closings and
sales to third parties.





Loans
Receivable - Loans receivable decreased $24.4 million, or 1.6%, to $1.54
billion at March 31, 2009 from $1.56 billion at December 31,
2008.  The decrease in loans receivable is reflective of an overall
decline in loan demand combined with the Company’s more stringent loan
underwriting requirements given the current challenging economic
environment.  The 2009 total decrease in loans receivable was
primarily attributable to a $16.2 million decrease in one- to four-family loans
and a $7.2 million decrease in land and construction loans.  During
the three-month period ended March 31, 2009, $8.8 million in loans were
transferred to real estate owned.





The
following table shows loan origination, principal repayment activity, transfers
to real estate owned, charge offs and sales during the periods
indicated.







As
      of or for the
            
            
            As
      of or for theThree
      Months Ended March 31,
            
            
            Year
      Ended2009
            
            
            2008
            
            
            December
      31, 2008(In
      Thousands)Total
      gross loans receivable and held for sale atbeginning
      of period
            
            $
            1,636,277
            
            
            $
            1,495,970
            
            
            
            1,495,970Real
      estate loans originated for investment:ResidentialOne-
      to four-family
            
            
            8,543
            
            
            
            42,530
            
            
            
            205,526Over
      four-family
            
            
            9,732
            
            
            
            29,957
            
            
            
            122,113Construction
      and land
            
            
            512
            
            
            
            8,698
            
            
            
            51,367Commercial
      real estate
            
            
            4,080
            
            
            
            754
            
            
            
            14,876Home
      equity
            
            
            2,596
            
            
            
            3,914
            
            
            
            20,672Total
      real estate loans originated for investment
            
            
            25,463
            
            
            
            85,853
            
            
            
            414,554Consumer
      loans originated for investment
            
            
            122
            
            
            
            52
            
            
            
            280Commerical
      business loans originated for investment
            
            
            3,216
            
            
            
            2,879
            
            
            
            21,934Total
      loans originated for investment
            
            
            28,801
            
            
            
            88,784
            
            
            
            436,768Principal
      repayments
            
            
            (46,101
            )
            
            
            (48,308
            )
            
            
            (228,099
            )Transfers
      to real estate owned
            
            
            (8,799
            )
            
            
            (4,672
            )
            
            
            (32,946
            )Loan
      principal charged off
            
            
            (3,529
            )
            
            
            (1,785
            )
            
            
            (25,301
            )Net
      activity in loans held for investment
            
            
            (29,628
            )
            
            
            34,019
            
            
            
            150,422Loans
      originated for sale
            
            
            135,327
            
            
            
            137,269
            
            
            
            255,891Loans
      sold
            
            
            (120,070
            )
            
            
            (140,096
            )
            
            
            (266,006
            )Net
      activity in loans held for sale
            
            
            15,257
            
            
            
            (2,827
            )
            
            
            (10,115
            )Total
      gross loans receivable and held for sale at end of period
            
            $
            1,621,906
            
            
            $
            1,527,162
            
            
            
            1,636,277








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Real
Estate Owned– Total real estate owned increased $6.9 million, or 27.0%,
to $31.5 million at March 31, 2009 from $24.7 million at December 31,
2008.  The $6.9 million increase was primarily due to a $3.5 million
increase in over four-family real estate owned (with $2.1 million attributable
to one property) and a $3.3. million increase in commercial real estate owned
(with $2.2 million attributable to one property).





Deposits
– Total deposits increased $27.3 million, or 2.3%, to $1.22 billion at March 31,
2009 from $1.20 billion at December 31, 2008.  Total time deposits
increased $29.7 million, or 2.9%, to $1.1 billion from $1.0 billion at December
31, 2008.  The increase in time deposits reflected the Company’s
decision to offer competitive rates for time deposits in our local retail
market.  Time deposits originated through local retail outlets
increased $40.0 million, or 4.3%, to $977.4 million at March 31, 2009 from
$937.4 million at December 31, 2008.  The increase in time deposits
originated through local markets were partially offset by a decrease in time
deposits originated through the wholesale market.  Time deposits
originated through the wholesale market decreased $10.2 million, or 9.8%, to
$93.9 million at March 31, 2009 from $104.1 at December 31, 2008.  The
shift in the mix of deposits away from the wholesale market is intended to
decrease our reliance on this source of funding. Total money market and savings
deposits decreased $1.8 million, or 1.8%, to $99.1 million at March 31, 2009
from $100.9 million at December 31, 2008.  Total demand deposits
decreased $618,000, or 1.2%, to $52.8 million at March 31, 2009 from $53.4
million at December 31, 2008.





Borrowings
– Total borrowings increased $25.0 million, or 5.1%, to $512.0 million at March
31, 2009 from $487.0 million at December 31, 2008.  During the early
portion of the quarter ended March 31, 2009, a $25.0 million FHLBC advance was
entered into to fund the disbursement of advance payments by borrowers for
taxes.  The advance matures in January of 2010 and bears an interest
rate of 1.29%.





Advance
Payments by Borrowers for Taxes - Advance payments by borrowers for taxes
and insurance increased $6.6 million to $7.5 million at March 31, 2009 from
$862,000 at December 31, 2008.  The increase was the result of
payments received from borrowers for their real estate taxes and is seasonally
normal, as balances increase during the course of the calendar year until real
estate tax obligations are paid out in the fourth quarter.





Other
Liabilities - Other liabilities decreased $19.9 million, or 65.5%, to
$10.5 million at March 31, 2009 from $30.4 million at December 31,
2008.  The decrease resulted from a $12.6 million decrease in
outstanding escrow checks and a $3.3 million decrease in capital lease
obligation.  The decrease related to outstanding escrow checks is
seasonally normal.  The Company receives payments from borrowers for
their real estate taxes during the course of the calendar year until real estate
tax obligations are paid out in the fourth quarter.  These amounts
remain classified as other liabilities until paid.  The balance of
these outstanding checks was $226,000 at March 31, 2009 and $12.8 million at
December 31, 2008.  With respect to the elimination of the capital
lease obligation, the Company executed a purchase option of its capital lease on
a branch location during the three months ended March 31, 2009.





Shareholders’
Equity – Shareholders’ equity decreased $1.3 million, or 0.8%, to $170.0
million at March 31, 2009 from $171.3 million at December 31,
2008.  The decrease was primarily a result of a $2.5 million decrease
in retained earnings.  The decrease in retained earnings was the
result of the net loss of $3.6 million recognized during the three months ended
March 31, 2009, partially offset by a $1.1 million cumulative-effect adjustment
for a change in accounting principle.  The cumulative-effect
adjustment resulting from the adoption of FASB Staff Position Nos. 115-2 and
124-2 relates to a security that had been deemed other-than-temporarily impaired
during the year ended December 31, 2008.  In accordance with
accounting guidance the adjustment was made to reflect the difference between
the credit loss estimated as of that date and the amortized cost written-down to
fair value as of January 1, 2009, the effective date of the change in accounting
principal.






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 Table of Contents


Average
Balance Sheets, Interest and Yields/Costs




The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated.  No
tax-equivalent yield adjustments were made, as the effect thereof was not
material.  Non-accrual loans were included in the computation of
average balances.  The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.


Three
      Months Ended March 31,2009
              
              
              2008Average
      Balance
              
              
              Interest
      and Dividends
              
              
              
              
              
              Yield/Cost
              
              
              Average
      Balance
              
              
              Interest
      and Dividends
              
              
              
              
              
              Yield/Cost(Dollars
      in Thousands)Interest-earning
      assets:Loans
      receivable, net
              
              $
              1,571,690
              
              
              
              22,267
              
              
              
              (1
              )
              
              
              5.75
              %
              
              $
              1,436,140
              
              
              
              21,879
              
              
              
              (1
              )
              
              
              6.11
              %Mortgage
      related securities (2)
              
              
              134,453
              
              
              
              1,912
              
              
              
              
              
              
              
              5.77
              
              
              
              134,134
              
              
              
              1,821
              
              
              
              
              
              
              
              5.45Debt
      securities (2),federal funds sold and short-term investments
              
              
              125,764
              
              
              
              812
              
              
              
              
              
              
              
              2.62
              
              
              
              105,119
              
              
              
              877
              
              
              
              
              
              
              
              3.35Total
      interest-earning assets
              
              
              1,831,907
              
              
              
              24,991
              
              
              
              
              
              
              
              5.53
              
              
              
              1,675,393
              
              
              
              24,577
              
              
              
              
              
              
              
              5.88Noninterest-earning
      assets
              
              
              80,220
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              76,226Total
      assets
              
              $
              1,912,127
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,751,619Interest-bearing
      liabilities:Demand
      and money market accounts
              
              $
              125,607
              
              
              
              128
              
              
              
              
              
              
              
              0.41
              
              
              $
              143,642
              
              
              
              825
              
              
              
              
              
              
              
              2.30Savings
      accounts
              
              
              28,518
              
              
              
              27
              
              
              
              
              
              
              
              0.38
              
              
              
              22,559
              
              
              
              57
              
              
              
              
              
              
              
              1.01Certificates
      of deposit
              
              
              1,056,989
              
              
              
              9,580
              
              
              
              
              
              
              
              3.68
              
              
              
              882,879
              
              
              
              10,177
              
              
              
              
              
              
              
              4.62Total
      interest-bearing deposits
              
              
              1,211,114
              
              
              
              9,735
              
              
              
              
              
              
              
              3.26
              
              
              
              1,049,080
              
              
              
              11,059
              
              
              
              
              
              
              
              4.23Borrowings
              
              
              512,556
              
              
              
              4,933
              
              
              
              
              
              
              
              3.90
              
              
              
              471,297
              
              
              
              4,911
              
              
              
              
              
              
              
              4.18Other
      interest-bearing liabilities
              
              
              7,446
              
              
              
              41
              
              
              
              
              
              
              
              2.18
              
              
              
              11,128
              
              
              
              114
              
              
              
              
              
              
              
              4.11Total
      interest-bearing liabilities
              
              
              1,731,116
              
              
              
              14,709
              
              
              
              
              
              
              
              3.45
              
              
              
              1,531,505
              
              
              
              16,084
              
              
              
              
              
              
              
              4.21Noninterest-bearing
      liabilities
              
              
              12,788
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,803Total
      liabilities
              
              
              1,743,904
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,550,308Equity
              
              
              168,223
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              201,311Total
      liabilities and equity
              
              $
              1,912,127
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,751,619Net
      interest income
              
              
              
              
              
              
              10,282
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,493Net
      interest rate spread (3)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.08
              %
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1.67
              %Net
      interest-earning assets (4)
              
              $
              100,791
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              143,888Net
      interest margin (5)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.28
              %
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.03
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              105.82
              %
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              109.40
              %







(1)  Includes
      net deferred loan fee amortization income of $244,000 and $430,000 for the
      three months ended March 31, 2009 and 2008,
  respectively.


(2)  Average
      balance of mortgage related and debt securities is based on amortized
      historical cost.


(3)  Net
      interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost
of


average interest-bearing liabilities.


(4)  Net
      interest-earning assets represent total interest-earning assets less total
      interest-bearing liabilities.


(5)  Net
      interest margin represents net interest income divided by average total
      interest-earning assets.







- 29
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 Table of Contents


Rate/Volume
Analysis


The
following table sets forth the effects of changing rates and volumes on our net
interest income for the periods indicated.  The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume).  The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate).  The net
column represents the sum of the prior columns.  For purposes of this
table, changes attributable to changes in both rate and volume that cannot be
segregated have been allocated proportionately based on the changes due to rate
and the changes due to volume.




Three
      Months Ended March 31,2009
      versus 2008Increase
      (Decrease) due toVolume
              
              
              Rate
              
              
              Net(In
      Thousands)Interest
      and dividend income:Loans
      receivable (1)(2)
              
              $
              1,056
              
              
              
              (668
              )
              
              
              388Mortgage
      related securities
              
              
              4
              
              
              
              87
              
              
              
              91Other
      earning assets (3)
              
              
              598
              
              
              
              (663
              )
              
              
              (65
              )Total
      interest-earning assets
              
              
              1,658
              
              
              
              (1,244
              )
              
              
              414Interest
      expense:Demand
      and money market accounts
              
              
              (92
              )
              
              
              (605
              )
              
              
              (697
              )Savings
      accounts
              
              
              22
              
              
              
              (52
              )
              
              
              (30
              )Certificates
      of deposit
              
              
              15,138
              
              
              
              (15,735
              )
              
              
              (597
              )Total
      interest-bearing deposits
              
              
              15,068
              
              
              
              (16,392
              )
              
              
              (1,324
              )Borrowings
              
              
              91
              
              
              
              (69
              )
              
              
              22Other
      interest bearing liabilities
              
              
              (31
              )
              
              
              (42
              )
              
              
              (73
              )Total
      interest-bearing liabilities
              
              
              15,128
              
              
              
              (16,503
              )
              
              
              (1,375
              )Net
      change in net interest income
              
              
              (13,470
              )
              
              
              15,259
              
              
              
              1,789








(1)
            Includes
      net deferred loan fee amortization income of $244,000 and $430,000 for the
      three months ended March 31, 2009 and 2008,
  respectively.


(2)
            Non-accrual
      loans have been included in average loans receivable
    balance.


(3)
            Average
      balance of available for sale securities is based on amortized historical
      cost.







- 30
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 Table of Contents


ASSET
QUALITY





The
following table summarizes nonperforming loans and assets:




NONPERFORMING
ASSETS







At
      March 31,
            
            
            At
      December 31,2009
            
            
            2008(Dollars
      in Thousands)Non-accrual
      loans:ResidentialOne-
      to four-family
            
            $
            49,881
            
            
            
            42,182Over
      four-family
            
            
            37,259
            
            
            
            35,787Construction
      and land
            
            
            18,596
            
            
            
            18,271Commercial
      real estate
            
            
            3,290
            
            
            
            9,325Home
      equity
            
            
            2,209
            
            
            
            2,015Commercial
            
            
            -
            
            
            
            150Total
      non-accrual loans
            
            
            111,235
            
            
            
            107,730Real
      estate ownedOne-
      to four-family
            
            
            16,756
            
            
            
            16,720Over
      four-family
            
            
            9,537
            
            
            
            6,057Construction
      and land
            
            
            1,179
            
            
            
            1,094Commercial
      real estate
            
            
            4,067
            
            
            
            782Total
      real estate owned
            
            
            31,539
            
            
            
            24,653Total
      nonperforming assets
            
            $
            142,774
            
            
            
            132,383Total
      non-accrual loans to total loans receivable
            
            
            7.24
            %
            
            
            6.91
            %Total
      non-accrual loans to total assets
            
            
            5.78
            %
            
            
            5.71
            %Total
      nonperforming assets to total assets
            
            
            7.42
            %
            
            
            7.02
            %








Total
non-accrual loans increased by $3.5 million to $111.2 million as of March 31,
2009, compared to $107.7 million as of December 31, 2008.  The ratio
of non-accrual loans to total loans at March 31, 2009 was 7.24% compared to
6.91% at December 31, 2008.  The increase in non-accrual loans was
primarily attributable to the one- to four-family residential mortgage
loans.  The $7.7 million increase in the one- to four-family category
was primarily attributable to six individual borrowers.  The six loans
have aggregate outstanding balances of $9.4 million which range from $3.6
million down to $552,000 and are collateralized by single family residences
outside the state of Wisconsin.  During the quarter ended March 31,
2009, the Company determined that the value of the collateral was not sufficient
to allow for the recovery of the outstanding loan balances.  As a
result of the collateral shortfall, an aggregate of $933,000 has been
established as a specific reserve with respect to these six lending
relationships.





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Of the
$111.2 million in total non-accrual loans as of March 31, 2009, $63.6 million
related to six borrower relationships or types of relationships.  The
first is a $9.8 million relationship with a borrower who has 12 loans that are
secured by over four-family residential and mixed use commercial real estate
properties.  Based upon a review of the underlying collateral, the
Company has determined that the value of the properties is not sufficient to
allow for the recovery of the outstanding balance.  As a result, a
$1.6 million charge-off was recorded during the year ended December 31, 2008
with respect to this relationship.  The second is a relationship with
a borrower who has four loans totaling $4.5 million.  The Company
believes that the collateral, which consists of over four -family rental units,
is not sufficient to recover the outstanding principal balance of each of the
loans, should the borrower cease efforts to return the loan to a performing
status.  As a result, a $1.1 million charge-off was recorded during
the year ended December 31, 2008 with respect to this
relationship.  The third is a relationship with a borrower who has
eight loans totaling $4.4 million.  The Company believes that the
collateral, which consists of single family rental units, is not sufficient to
recover the outstanding principal balance of each of the loans, should the
borrower cease efforts to return the loan to a performing status.  As
a result, $1.6 million in specific reserves have been established as of March
31, 2009 with respect to this relationship.  In addition to the three
borrower relationships noted previously, a significant portion of total
non-accrual loans relates to a number of lending relationships with small real
estate investors, whose collateral consists of non-owner occupied one- to
four-family properties.  As of March 31, 2009, $18.4 million relates
to this general category.  Based upon a review of the underlying
collateral, the Company has determined that the value of the properties related
to these loans is not sufficient to allow for the recovery of the outstanding
balance.  As a result, $1.6 million in charge-offs and $2.7 in
specific reserves have been recorded with respect to this general category of
borrowers.  An additional $13.9 million relates to a number of lending
relationships with real estate developers.  Based upon a review of the
underlying collateral, the Company has determined that the value of the
properties related to these loans is not sufficient to allow for the recovery of
the outstanding balance.  As a result, $3.3 million in charge-offs
have been recorded with respect to this general category of
borrowers.  Finally, $12.5 million of the overall balance of
non-accrual loans relates to a number of borrowers with single family residences
located outside of the state of Wisconsin and include the group of six loans
previously described.  Based upon a review of the underlying
collateral, the Company has determined that the value of the properties related
to these loans is not sufficient to allow for the recovery of the outstanding
balance.  As a result, $2.0 million in specific reserves have been
recorded with respect to this general category of borrowers.




The
Company owned 136 properties at December 31, 2008.  During the quarter
ended March 31, 2009, 31 properties were added to real estate owned and 32
properties were disposed of.  Total real estate owned increased by
$6.9 million, to $31.5 million as of March 31, 2009, compared to $24.7 million
as of December 31, 2008.  Of this increase, $5.8 million relates to
three former lending relationships.  The first relationship was
collateralized by a commercial property with an estimated net realizable value
of $2.2 million.  The second significant relationship was
collateralized by a 52-unit residential property with an estimated net
realizable value of $2.1 million.  The third relationship was
collateralized by five residential and mixed used commercial real estate
properties.  These properties have a combined estimated net realizable
value of $1.5 million.  Foreclosed properties are recorded at the
lower of carrying value or fair value with charge-offs, if any, charged to the
allowance for loan losses upon transfer to real estate owned.  The
fair value is primarily based upon updated appraisals in addition to an analysis
of current real estate market conditions.




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A summary
of the allowance for loan losses is shown below:





ALLOWANCE
FOR LOAN LOSSES





At
      or for the Three MonthsEnded
      March 31,2009
            
            
            2008(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            25,167
            
            
            $
            12,839Provision
      for loan losses
            
            
            7,201
            
            
            
            2,699Charge-offs:MortgageOne-
      to four-family
            
            
            2,354
            
            
            
            547Over
      four-family
            
            
            380
            
            
            
            14Commercial
      real estate
            
            
            567
            
            
            
            -Construction
      and land
            
            
            290
            
            
            
            349Consumer
            
            
            -
            
            
            
            4Total
      charge-offs
            
            
            3,591
            
            
            
            914Recoveries:MortgageOne-
      to four-family
            
            
            62
            
            
            
            44Construction
      and land
            
            
            -
            
            
            
            106Consumer
            
            
            -
            
            
            
            6Total
      recoveries
            
            
            62
            
            
            
            156Net
      charge-offs
            
            
            3,529
            
            
            
            758Allowance
      at end of period
            
            $
            28,839
            
            
            $
            14,780Ratios:Allowance
      for loan losses to non-accrual loans at end of period
            
            
            25.93
            %
            
            
            16.78
            %Allowance
      for loan losses to loans receivable at end of period
            
            
            1.88
            %
            
            
            1.03
            %Net
      charge-offs to average loans outstanding (annualized)
            
            
            0.91
            %
            
            
            0.25
            %


_______________





Net
charge-offs totaled $3.5 million, or 0.91% of average loans for the three months
ended March 31, 2009 on an annualized basis, compared to $758,000, or 0.25% of
average loans for the comparable period in 2008.  The increase in
charge-offs is a direct result of the increase in non-accrual loans compared to
the comparable period in the prior year.  In addition, compared to
prior periods, the Company has observed an increased likelihood of the borrower
being unable to resolve the ongoing default prior to completion of a sheriff’s
sale.  As such, charge-offs are generally being recognized earlier in
the foreclosure process then they have been in prior periods.  Of the
$3.5 million in net charge-offs for the three months ended March 31, 2009, $2.4
million related to loans secured by one- to four-family loans.  The
majority of charge-offs in this category relate to two losses sustained on
owner-occupied properties the larger of which was based on a suspected
fraud.   An additional $567,000 in net charge-offs related to
commercial real estate loans.  Of this total, approximately $517,000
related to one relationship with a borrower with four mixed used commercial real
estate located in the City of Milwaukee and its surrounding suburban
areas.  The four properties are now held by the Company as real estate
owned.


The
allowance for loan loss totaled $28.8 million or 1.88% of loans outstanding as
of March 31, 2009 compared to $25.2 million or 1.61% of loans outstanding as of
December 31, 2008.  The majority of the $3.6 million increase in the
allowance for loan loss during the three months ended March 31, 2009 is
primarily attributable to the increase in non-accrual loans and an increase in
loss experience directly related to the weak real estate
market.  Weakness in the residential real estate market is well into
its second year and the risk of loss on loans secured by residential real estate
remains elevated.  Due to these unfavorable market conditions, the
Company expanded its loan review process to identify additional potential loan
collateral short falls.  The results of this expanded process are
reflected in the higher net charge-offs and allowance for loan losses as
compared to prior periods.





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The
allowance for loan losses has been determined in accordance with accounting
principles generally accepted in the United States (GAAP). We are responsible
for the timely and periodic determination of the amount of the allowance
required. Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and the underlying collateral, trends
in nonperforming loans, current economic conditions and other relevant factors.
To the best of management’s knowledge, all probable losses have been provided
for in the allowance for loan losses.





The
establishment of the amount of the loan loss allowance inherently involves
judgments by management as to the adequacy of the allowance, which ultimately
may or may not be correct. Higher than anticipated rates of loan default would
likely result in a need to increase provisions in future years. See “Significant
Accounting Policies” above for a discussion on the use of judgment in
determining the amount of the allowance for loan losses.






Impact
of Inflation and Changing Prices





The
financial statements and accompanying notes of the Company have been prepared in
accordance with GAAP. GAAP generally requires the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than do the effects of inflation.






Liquidity
and Capital Resources





We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs.  Our liquidity ratio averaged 2.5% and 2.3% for the three
months ended March 31, 2009 and 2008 respectively.  The liquidity
ratio is equal to average daily cash and cash equivalents for the period divided
by average total assets.  We adjust our liquidity levels to fund loan
commitments, repay our borrowings, fund deposit outflows and pay real estate
taxes on mortgage loans.  We also adjust liquidity as appropriate to
meet asset and liability management objectives.  The operational
adequacy of our liquidity position at any point in time is dependent upon the
judgment of the Chief Financial Officer as supported by the full Asset/Liability
Committee.  Liquidity is monitored on a daily, weekly and monthly
basis using a variety of measurement tools and indicators.




Our
primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and
earnings and funds provided from operations.  While scheduled
principal repayments on loans are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by market interest
rates, economic conditions, and rates offered by our competitors.  We
set the interest rates on our deposits to maintain a desired level of total
deposits.  In addition, we invest excess funds in short-term,
interest-earning assets, which provide liquidity to meet lending
requirements.  Additional sources of liquidity used for the purpose of
managing long- and short-term cash flows include advances from the FHLBC and
access to the Federal Reserve Bank discount window.




A portion
of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities.  At March 31, 2009
and 2008, respectively, $66.7 million and $36.7 million of our assets were
invested in cash and cash equivalents.  Our primary sources of cash
are principal repayments on loans, proceeds from the calls and maturities of
debt and mortgage-related securities, increases in deposit accounts, federal
funds purchased and advances from the FHLBC.




On
October 10, 2007, the FHLBC entered into a consensual cease and desist order
with its regulator, the Federal Housing Finance Board. Under the terms of the
order, capital stock repurchases and redemptions, including redemptions upon
membership withdrawal or other termination, are prohibited unless the FHLBC has
received approval of the Director of the Office of Supervision of the Federal
Housing Finance Board ("OS Director"). The order also provides that dividend
declarations are subject to the prior written approval of the OS Director.At the request of the
FHLBC, on July 24, 2008, the Finance Board amended the cease and desist order to
allow the FHLBC to redeem incremental purchases of capital stock tied to
increased levels of borrowing through advances after repayment of those new
advances.  We currently hold, at cost, $21.7 million of FHLBC stock,
all of which we believe we will ultimately be able to recover.  Based
upon correspondence we received from the FHLBC, there is currently no
expectation that this cease and desist order will impact the short- and
long-term funding options provided by the FHLBC.




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Our cash
flows are derived from operating activities, investing activities and financing
activities as reported in our Consolidated Statements of Cash Flows included in
our Consolidated Financial Statements.




During
the three months ended March 31, 2009, the collection of principal payment on
loans, net of loan originations provided cash flow of $12.0
million.  During the comparable period of the prior year, loan
originations, net of collected principal, resulted in the use of $38.8 million
in cash.  The decrease in loans receivable is reflective of the
general decline in loan demand combined with the Company’s tightened
underwriting standards given the current economic environment.  The
decrease in the loan portfolio during the three months ended March 31, 2009 was
primarily attributable to a $16.2 million decrease in one- to four-family loans
and a $7.2 million decrease in land and construction loans.




Deposit
flows are generally affected by the level of interest rates, the interest rates
and products offered by local competitors, and other
factors.  Deposits increased by $27.3 million for the three months
ended March 31, 2009 primarily as the result of competitive pricing offered on
time deposits in our local market.




Liquidity
management is both a daily and longer-term function of business
management.  If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the FHLBC, which provide an
additional source of funds.  At March 31, 2009, we had $428.0 million
in advances from the FHLBC, of which $29.1 million was due within 12
months.  As an additional source of funds, we also enter into
repurchase agreements.  At March 31, 2009, we had $84.0 million in
repurchase agreements.  The agreements mature at various times
beginning in 2017, however, all are callable quarterly until
maturity.




At March
31, 2009, we had outstanding commitments to originate loans of $18.0 million,
unfunded commitments under construction loans of $16.5 million, unfunded
commitments under business lines of credit of $10.3 million and unfunded
commitments under lines of credit and standby letters of credit of $31.2
million.  At March 31, 2009, certificates of deposit scheduled to
mature in one year or less totaled $925.6million.  Based
on prior experience, management believes that a significant portion of such
deposits will remain with us, although there can be no assurance that this will
be the case.  In the event a significant portion of our deposits is
not retained by us, we will have to utilize other funding sources, such as FHLBC
advances in order to maintain our level of assets.  However, we cannot
assure that such borrowings would be available on attractive terms, or at all,
if and when needed.  Alternatively, we would reduce our level of
liquid assets, such as our cash and cash equivalents and securities
available-for-sale in order to meet funding needs.  In addition, the
cost of such deposits may be significantly higher if market interest rates are
higher or there is an increased amount of competition for deposits in our market
area at the time of renewal.




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Regulatory
Capital







WaterStone
Bank is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items, as calculated under regulatory
accounting practices. The Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.




Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes that as of March 31, 2009, the Bank met all
capital adequacy requirements to which it is subject.  On November 18,
2008, WaterStone Bank entered into an informal agreement with its federal and
state bank regulators whereby it has agreed to maintain a minimum Tier I capital
ratio of 8.00% and a minimum total risk based capital ratio of
10.00%.  At March 31, 2009, these higher capital requirements were
satisfied.




As of
March 31, 2009 the most recent notification from the Federal Deposit Insurance
Corporation categorized WaterStone Bank as “well capitalized” under the
regulatory framework for prompt corrective action. To be categorized as “well
capitalized,” WaterStone Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios, as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed WaterStone Bank’ category.




As a
state-chartered savings bank, WaterStone Bank is required to meet minimum
capital levels established by the state of Wisconsin in addition to federal
requirements. For the state of Wisconsin, regulatory capital consists of
retained income, paid-in-capital, capital stock equity and other forms of
capital considered to be qualifying capital by the Federal Deposit Insurance
Corporation.




The
actual capital amounts and ratios for WaterStone Bank as of March 31, 2009 are
presented in the table below:






March
      31, 2009To
      Be Well-CapitalizedFor
      Capital
              
              
              Under
      Prompt CorrectiveActual
              
              
              Adequacy
      Purposes
              
              
              Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in Thousands)WaterStone
      BankTotal
      capital (to risk-weighted assets)
              
              $
              186,829
              
              
              
              12.37
              %
              
              $
              120,829
              
              
              
              8.00
              %
              
              $
              151,036
              
              
              
              10.00
              %Tier
      I capital (to risk-weighted assets)
              
              
              167,835
              
              
              
              11.11
              %
              
              
              60,414
              
              
              
              4.00
              %
              
              
              90,621
              
              
              
              6.00
              %Tier
      I capital (to average assets)
              
              
              167,835
              
              
              
              8.78
              %
              
              
              76,451
              
              
              
              4.00
              %
              
              
              95,564
              
              
              
              5.00
              %State
      of Wisconsin (to total assets)
              
              
              167,835
              
              
              
              8.75
              %
              
              
              115,032
              
              
              
              6.00
              %
              
              
              N/A
              
              
              
              N/A
 _____________




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Contractual
Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet
Arrangements




The
following tables present information indicating various contractual obligations
and commitments of the Company as of March 31, 2009 and the respective maturity
dates.









Contractual
      ObligationsMore
      than
            
            
            More
      thanOne
      Year
            
            
            Three
      Years
            
            
            OverOne
      Year
            
            
            Through
            
            
            Through
            
            
            FiveTotal
            
            
            or
      Less
            
            
            Three
      Years
            
            
            Five
      Years
            
            
            Years(In
      Thousands)Deposits
      without a stated maturity(5)
            
            $
            151,921
            
            
            
            151,921
            
            
            
            -
            
            
            
            -
            
            
            
            -Certificates
      of deposit (5)
            
            
            1,071,278
            
            
            
            925,572
            
            
            
            128,458
            
            
            
            17,248
            
            
            
            -Federal
      Home Loan Bank advances(1)
            
            
            428,000
            
            
            
            41,100
            
            
            
            36,900
            
            
            
            -
            
            
            
            350,000Repurchase
      agreements(2)(5)
            
            
            84,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            84,000Operating
      leases(3)
            
            
            78
            
            
            
            78
            
            
            
            -
            
            
            
            -
            
            
            
            -State
      income tax obligation (4)
            
            
            2,484
            
            
            
            2,484
            
            
            
            -
            
            
            
            -
            
            
            
            -Salary
      continuation agreements
            
            
            2,113
            
            
            
            576
            
            
            
            645
            
            
            
            340
            
            
            
            552$
            1,739,874
            
            
            
            1,121,731
            
            
            
            166,003
            
            
            
            17,588
            
            
            
            434,552




(1) 
Secured under a blanket security agreement on qualifying assets, principally,
mortgage loans.  Excludes interest which will accrue on the advances. 
All Federal Home Loan Bank


advances with maturities exceeding fice years are callable on quarterly basis
with the initial call at various times through March 2009.














The
following table details the amounts and expected maturities of significant
off-balance sheet commitments as of March 31, 2009.




Other
      CommitmentsMore
      than
              
              
              More
      thanOne
      Year
              
              
              Three
      Years
              
              
              OverOne
      Year
              
              
              Through
              
              
              Through
              
              
              FiveTotal
              
              
              or
      Less
              
              
              Three
      Years
              
              
              Five
      Years
              
              
              Years(In
      Thousands)Real
      estate loan commitments (1)
              
              $
              18,032
              
              
              
              18,032
              
              
              
              -
              
              
              
              -
              
              
              
              -Unused
      portion of home equity lines of credit (2)
              
              
              29,317
              
              
              
              29,317
              
              
              
              -
              
              
              
              -
              
              
              
              -Unused
      portion of business lines of credit
              
              
              10,270
              
              
              
              10,270
              
              
              
              -
              
              
              
              -
              
              
              
              -Unused
      portion of construction loans (3)
              
              
              16,531
              
              
              
              16,531
              
              
              
              -
              
              
              
              -
              
              
              
              -Standby
      letters of credit
              
              
              1,866
              
              
              
              1,629
              
              
              
              152
              
              
              
              85
              
              
              
              -Total
      Other Commitments
              
              $
              76,016
              
              
              
              75,779
              
              
              
              152
              
              
              
              85
              
              
              
              -


______________


General:  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract and generally have fixed
expiration dates or other termination clauses.


(1)  Commitments
for loans are extended to customers for up to 90 days after which they
expire.


(2)  Unused
portions of home equity loans are available to the borrower for up to 10
years.


(3)  Unused
portions of construction loans are available to the borrower for up to 1
year.






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Item 3. Quantitative and Qualitative
Disclosures about Market Risk





Management
of Market Risk





General.The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting primarily of
deposits and other borrowings.  As a result, a principal part of our
business strategy is to manage interest rate risk and reduce the exposure of our
net interest income to changes in market interest rates.  Accordingly,
the WaterStone Bank Board of Directors has established an Asset/Liability
Committee which is responsible for evaluating the interest rate risk inherent in
our assets and liabilities, for determining the level of risk that is
appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors.  Management
monitors the level of interest rate risk on a regular basis and the
Asset/Liability Committee meets at least weekly to review our asset/liability
policies and interest rate risk position, which are evaluated
quarterly.





Income
Simulation.  Simulation analysis is used to estimate our
interest rate risk exposure at a particular point in time.  At least
quarterly we review the potential effect changes in interest rates could have on
the repayment or repricing of rate sensitive assets and funding requirements of
rate sensitive liabilities.  Our most recent simulation used projected
repricing of assets and liabilities at March 31, 2009 on the basis of
contractual maturities, anticipated repayments and scheduled rate
adjustments.  Prepayment rate assumptions can have a significant
impact on interest income simulation results.  Because of the large
percentage of loans and mortgage-backed securities we hold, rising or falling
interest rates may have a significant impact on the actual prepayment speeds of
our mortgage-related assets that may in turn affect our interest rate
sensitivity position.  When interest rates rise, prepayment speeds
slow and the expected average lives of our assets tend to lengthen more than the
expected average lives of our liabilities and, therefore, negatively impact net
interest income and earnings.






Percentage
              Increase (Decrease) in
      Estimated
              Annual Net Interest Income
              Over 24 Months300
      basis point increase in rates
            
            
            0.10%200
      basis point increase in rates
            
            
            2.20100
      basis point increase in rates
            
            
            1.56100
      basis point decrease in rates
            
            
            (2.19)200
      basis point decrease in rates
            
            
            (2.98)300
      basis point decrease in rates
            
            
            (15.65)






WaterStone
Bank’s Asset/Liability policy limits projected changes in net average annual
interest income to a maximum variance of (10%) to (50%) for various levels of
interest rate changes measured over a 24-month period when compared to the flat
rate scenario.  In addition, projected changes in the capital ratio
are limited to (0.15%) to (1.00%) for various levels of changes in interest
rates when compared to the flat rate scenario.  These limits are
re-evaluated on a periodic basis and may be modified, as
appropriate.  Because our balance sheet is asset sensitive, income is
projected to increase proportionately with increases in interest
rates.  At March 31, 2009, a 100 basis point immediate and
instantaneous increase in interest rates had the effect of increasing estimated
net interest income by 1.56% while a 100 basis point decrease in rates had the
affect of decreasing net interest income by 2.19%.  At March 31, 2009,
a 100 basis point immediate and instantaneous increase in interest rates had the
effect of increasing the estimated return on assets by 0.04% while a 100 basis
point decrease in rates had the effect of decreasing the return on assets by
0.06%.  While we believe the assumptions used are reasonable, there
can be no assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.




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Item 4. Controls and
Procedures





Disclosure
Controls and Procedures:Company management, with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as
of the end of the period covered by this report. Based on such evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company’s disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.





Internal
Control Over Financial Reporting:There have not been any
changes in the Company’s internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.






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PART II. OTHER INFORMATION








Item 1. Legal
Proceedings





We are
not involved in any pending legal proceedings as a defendant other than routine
legal proceedings occurring in the ordinary course of business.  At
March 31, 2009, we believe that any liability arising from the resolution of any
pending legal proceedings will not be material to our financial condition or
results of operations.




Item 1A. Risk
Factors




See “Risk
Factors” in Item 1A of the Company’s annual report on Form 10-K for the year
ended December 31, 2008.












Item 6. Exhibits







(a) Exhibits:
See Exhibit Index, which follows the signature page hereof.


Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




















WATERSTONE FINANCIAL,
      INC.
              (Registrant)Date:
      May 8, 2009/s/Douglas
      S. GordonDouglas
      S. GordonChief
      Executive OfficerDate:
      May 8, 2009/s/
      Richard C. LarsonRichard
      C. LarsonChief
      Financial Officer





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EXHIBIT
INDEX





WATERSTONE
FINANCIAL, INC.




Form 10-Q
for Quarter Ended March 31, 2009











Exhibit
      No.
            Description
            Filed
      Herewith31.1
            Sarbanes-Oxley
      Act Section 302 Certification signed by the Chief Executive Officer
      of Waterstone Financial, Inc.
            X31.2
            Sarbanes-Oxley
      Act Section 302 Certification signed by the Chief Financial Officer
      of Waterstone Financial, Inc.
            X32.1
            Certification
      pursuant to 18 U.S. C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief
      Executive Officer of Waterstone Financial, Inc.
            X32.2
            Certification
      pursuant to 18 U.S. C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief
      Financial Officer of Waterstone Financial, Inc.
            X














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