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 June 30, 2008OR*
            
            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





The number of shares outstanding of the
issuer’s common stock, $0.01 par value per share, was 31,250,897 at July 31,
2008.







WATERSTONE FINANCIAL, INC.





10-Q INDEX


























Page
      No.PARTI.FINANCIAL INFORMATIONItem l.
      Financial StatementsConsolidated Statements of Financial Condition as
      ofJune 30, 2008 (unaudited) and December 31,
      2007
            3Consolidated
      Statements of Operations for the threeand sixmonths endedJune 30, 2008
      and 2007 (unaudited)
            4Consolidated
      Statements of Changes inShareholders’Equity for thesixmonths
      endedJune30, 2008 and
      2007 (unaudited)
            5Consolidated
      Statements of Cash Flows for thesixmonths
      endedJune30,
      2008 and 2007 (unaudited)
            6-7Notes to
      Consolidated Financial Statements
            8-18Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
            19-36Item 3. Quantitative and Qualitative
      Disclosures about Market Risk
            37Item 4. Controls and
      Procedures
            37PART II.
      OTHER INFORMATION
            38Item 1.
      Legal Proceedings
            38Item 1A. Risk
      Factors
            38Item 4.  Submission of Matters to a
      Vote of Security Holders
            38Item 6.
      Exhibits
            39Signatures
            39CertificationCertificationCertificationCertification





- 2
-
 Table of Contents


PART
I — FINANCIAL INFORMATION


Item 1. Financial
Statements





WATERSTONE
FINANCIAL, INC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION





(Unaudited)June
      30,
            
            
            December
      31,2008
            
            
            2007Assets
            
            (In
      Thousands, except share data)Cash
            
            $
            5,448
            
            
            
            5,492Federal
      funds sold
            
            
            11,148
            
            
            
            11,833Interest-earning
      deposits in other financial institutionsand
      other short term investments
            
            
            —
            
            
            
            559Cash
      and cash equivalents
            
            
            16,596
            
            
            
            17,884Securities
      available for sale (at fair value)
            
            
            186,781
            
            
            
            172,137Securities
      held to maturity (at amortized cost)fair
      value of $9,336 in 2008 and $7,174 in 2007
            
            
            9,937
            
            
            
            7,646Loans
      held for sale
            
            
            12,265
            
            
            
            23,108Loans
      receivable
            
            
            1,522,239
            
            
            
            1,402,048Less:
      Allowance for loan losses
            
            
            19,611
            
            
            
            12,839Loans
      receivable, net
            
            
            1,502,628
            
            
            
            1,389,209Office
      properties and equipment, net
            
            
            31,253
            
            
            
            32,018Federal
      Home Loan Bank stock, at cost
            
            
            21,653
            
            
            
            19,289Cash
      surrender value of life insurance
            
            
            31,412
            
            
            
            25,649Real
      estate owned
            
            
            16,557
            
            
            
            8,543Prepaid
      expenses and other assets
            
            
            19,346
            
            
            
            14,719Total
      assets
            
            $
            1,848,428
            
            
            
            1,710,202Liabilities
      and Shareholders’ EquityLiabilities:Demand
      deposits
            
            $
            51,776
            
            
            
            53,210Money
      market and savings deposits
            
            
            120,803
            
            
            
            115,135Time
      deposits
            
            
            920,277
            
            
            
            826,190Total
      deposits
            
            
            1,092,856
            
            
            
            994,535Short
      term borrowings
            
            
            32,296
            
            
            
            53,484Long
      term borrowings
            
            
            487,000
            
            
            
            422,000Advance
      payments by borrowers for taxes
            
            
            16,188
            
            
            
            607Other
      liabilities
            
            
            21,176
            
            
            
            37,757Total
      liabilities
            
            
            1,649,516
            
            
            
            1,508,383Shareholders’
      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
      - 33,975,250 shares in 2008 and in 2007Outstanding
      - 31,250,897 shares in 2008 and in 2007
            
            
            340
            
            
            
            340Additional
      paid-in capital
            
            
            107,222
            
            
            
            106,306Accumulated
      other comprehensive income (loss) net of taxes
            
            
            (2,278
            )
            
            
            44Retained
      earnings, substantially restricted
            
            
            144,440
            
            
            
            146,367Unearned
      ESOP shares
            
            
            (5,551
            )
            
            
            (5,977
            )Treasury
      shares (2,724,353 shares), at cost
            
            
            (45,261
            )
            
            
            (45,261
            )Total
      shareholders’ equity
            
            
            198,912
            
            
            
            201,819Total
      liabilities and shareholders’ equity
            
            $
            1,848,428
            
            
            
            1,710,202





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)








Six
      months ended June 30,
            
            
            Three
      months ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands, except per share data)Interest
      income:Loans
            
            $
            44,418
            
            
            
            43,308
            
            
            $
            22,539
            
            
            
            21,985Mortgage-related
      securities
            
            
            3,740
            
            
            
            2,542
            
            
            
            1,919
            
            
            
            1,278Debt
      securities, federal funds sold andshort-term
      investments
            
            
            1,667
            
            
            
            2,060
            
            
            
            790
            
            
            
            1,072Total
      interest income
            
            
            49,825
            
            
            
            47,910
            
            
            
            25,248
            
            
            
            24,335Interest
      expense:Deposits
            
            
            21,420
            
            
            
            22,166
            
            
            
            10,356
            
            
            
            11,141Borrowings
            
            
            10,162
            
            
            
            7,989
            
            
            
            5,142
            
            
            
            4,204Total
      interest expense
            
            
            31,582
            
            
            
            30,155
            
            
            
            15,498
            
            
            
            15,345Net
      interest income
            
            
            18,243
            
            
            
            17,755
            
            
            
            9,750
            
            
            
            8,990Provision
      for loan losses
            
            
            11,276
            
            
            
            6,026
            
            
            
            8,577
            
            
            
            5,676Net
      interest income after provision for loan losses
            
            
            6,967
            
            
            
            11,729
            
            
            
            1,173
            
            
            
            3,314Noninterest
      income:Service
      charges on loans and deposits
            
            
            975
            
            
            
            1,053
            
            
            
            439
            
            
            
            536Increase
      in cash surrender value of life insurance
            
            
            583
            
            
            
            448
            
            
            
            347
            
            
            
            267Mortgage
      banking income
            
            
            1,979
            
            
            
            1,393
            
            
            
            1,229
            
            
            
            824Other
            
            
            442
            
            
            
            421
            
            
            
            237
            
            
            
            84Total
      noninterest income
            
            
            3,979
            
            
            
            3,315
            
            
            
            2,252
            
            
            
            1,711Noninterest
      expenses:Compensation,
      payroll taxes, and other employee benefits
            
            
            8,294
            
            
            
            7,919
            
            
            
            4,469
            
            
            
            3,919Occupancy,
      office furniture and equipment
            
            
            2,419
            
            
            
            2,494
            
            
            
            1,166
            
            
            
            1,270Advertising
            
            
            532
            
            
            
            555
            
            
            
            368
            
            
            
            282Data
      processing
            
            
            697
            
            
            
            654
            
            
            
            329
            
            
            
            415Communications
            
            
            344
            
            
            
            383
            
            
            
            176
            
            
            
            167Professional
      fees
            
            
            513
            
            
            
            638
            
            
            
            296
            
            
            
            368Real
      estate owned
            
            
            1,240
            
            
            
            7
            
            
            
            857
            
            
            
            6Other
            
            
            1,616
            
            
            
            1,146
            
            
            
            992
            
            
            
            561Total
      noninterest expenses
            
            
            15,655
            
            
            
            13,796
            
            
            
            8,653
            
            
            
            6,988Income
      (loss) before income taxes
            
            
            (4,709
            )
            
            
            1,248
            
            
            
            (5,228
            )
            
            
            (1,963
            )Income
      taxes (benefit)
            
            
            (2,782
            )
            
            
            418
            
            
            
            (2,692
            )
            
            
            (694
            )Net
      income (loss)
            
            
            (1,927
            )
            
            
            830
            
            
            
            (2,536
            )
            
            
            (1,269
            )Earnings
      (loss) per share:Basic
            
            
            (0.06
            )
            
            
            0.03
            
            
            
            (0.08
            )
            
            
            (0.04
            )Diluted
            
            
            (0.06
            )
            
            
            0.03
            
            
            
            (0.08
            )
            
            
            (0.04
            )Weighted
      average shares outstanding:Basic
            
            
            30,535,674
            
            
            
            32,478,758
            
            
            
            30,545,141
            
            
            
            32,041,622Diluted
            
            
            30,535,674
            
            
            
            32,487,551
            
            
            
            30,545,141
            
            
            
            32,053,131








See
Accompanying Notes to Consolidated Financial Statements.





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 Table of Contents


WATERSONE
FINANCIAL, INC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY


(Unaudited)





AccumulatedAdditional
            
            
            Other
            
            
            
            
            
            UnearnedCommon
      Stock
            
            
            Paid-In
            
            
            Comprehensive
            
            
            Retained
            
            
            ESOP
            
            
            TreasuryShares
            
            
            Amount
            
            
            Capital
            
            
            Income
      (Loss)
            
            
            Earnings
            
            
            Shares
            
            
            Shares
            
            
            Equity(In
      Thousands)Balances
      at December 31, 2006
            
            
            33,724
            
            
            $
            337
            
            
            
            104,182
            
            
            
            (1,225
            )
            
            
            144,809
            
            
            
            (6,831
            )
            
            
            —
            
            
            
            241,272Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            830
            
            
            
            —
            
            
            
            —
            
            
            
            830Other
      comprehensive income (loss):Net
      unrealized holding gains onavailable
      for sale securities arising during the period, net of taxes of
      $551
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,024
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,024
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (194
            )ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            236
            
            
            
            —
            
            
            
            —
            
            
            
            427
            
            
            
            —
            
            
            
            663Stock
      based compensation
            
            
            252
            
            
            
            3
            
            
            
            863
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            866Purchase
      of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (25,778
            )
            
            
            (25,778
            )Balances
      at June 30, 2007
            
            
            33,976
            
            
            $
            340
            
            
            
            105,281
            
            
            
            (2,249
            )
            
            
            145,639
            
            
            
            (6,404
            )
            
            
            (25,778
            )
            
            
            216,829Balances
      at December 31, 2007
            
            
            31,251
            
            
            $
            340
            
            
            
            106,306
            
            
            
            44
            
            
            
            146,367
            
            
            
            (5,977
            )
            
            
            (45,261
            )
            
            
            201,819Comprehensive
      loss:Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,927
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,927
            )Other
      comprehensive income (loss):Net
      unrealized holding loss onavailable
      for sale securities arising during the period, net of taxes of
      $1,250
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,322
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,322
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,249
            )ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            42
            
            
            
            —
            
            
            
            —
            
            
            
            426
            
            
            
            —
            
            
            
            468Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            874
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            874Balances
      at June 30, 2008
            
            
            31,251
            
            
            $
            340
            
            
            
            107,222
            
            
            
            (2,278
            )
            
            
            144,440
            
            
            
            (5,551
            )
            
            
            (45,261
            )
            
            
            198,912





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)





Six
      months ended June 30,2008
            
            
            2007(In
      Thousands)Operating
      activities:Net
      income
            
            $
            (1,927
            )
            
            
            830Adjustments
      to reconcile net income to netcash
      provided by operating activities:Provision
      for loan losses
            
            
            11,276
            
            
            
            6,026Depreciation
            
            
            1,260
            
            
            
            1,313Deferred
      income taxes
            
            
            (2,210
            )
            
            
            (858
            )Stock
      based compensation
            
            
            874
            
            
            
            866Net
      amortization of premium on debt and mortgage-related
      securities
            
            
            (181
            )
            
            
            (65
            )Amortization
      of unearned ESOP shares
            
            
            468
            
            
            
            663Gain
      on sale of loans held for sale
            
            
            (1,237
            )
            
            
            (766
            )Loans
      originated for sale
            
            
            (165,464
            )
            
            
            (108,856
            )Proceeds
      on sales of loans originated for sale
            
            
            177,544
            
            
            
            106,281Increase
      in accrued interest receivable
            
            
            (654
            )
            
            
            (543
            )Increase
      in cash surrender value of bank owned life insurance
            
            
            (583
            )
            
            
            (448
            )Increase
      (decrease) in accrued interest on deposits and borrowings
            
            
            1,669
            
            
            
            (249
            )Increase
      (decrease) in other liabilities
            
            
            (651
            )
            
            
            1,202Loss
      (gain) loss on sale of real estate owned and other assets
            
            
            376
            
            
            
            (42
            )Other
            
            
            (265
            )
            
            
            (62
            )Net
      cash provided by operating activities
            
            
            20,295
            
            
            
            5,292Investing
      activities:Net
      increase in loans receivable
            
            
            (139,213
            )
            
            
            (8,754
            )Purchases
      of:Debt
      securities
            
            
            (5,000
            )
            
            
            (28,660
            )Mortgage-related
      securities
            
            
            (24,529
            )
            
            
            (12,952
            )Structured
      notes, held to maturity
            
            
            (4,289
            )
            
            
            (7,646
            )Premises
      and equipment, net
            
            
            (774
            )
            
            
            (1,134
            )Bank
      owned life insurance
            
            
            (5,180
            )
            
            
            (180
            )FHLB
      stock
            
            
            (2,364
            )
            
            
            (337
            )Proceeds
      from:Principal
      repayments on mortgage-related securities
            
            
            10,458
            
            
            
            8,543Maturities
      of debt securities
            
            
            984
            
            
            
            3,001Calls
      on structured notes
            
            
            1,998
            
            
            
            -Sales
      of real estate owned and other assets
            
            
            6,193
            
            
            
            1,196Net
      cash used in investing activities
            
            
            (161,716
            )
            
            
            (46,923
            )





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)








Six
      months ended June 30,2008
            
            
            2007(In
      Thousands)Financing
      activities:Net
      increase (decrease) in deposits
            
            
            98,322
            
            
            
            (17,305
            )Net
      change in short-term borrowings
            
            
            (21,188
            )
            
            
            (7,000
            )Proceeds
      from long-term borrowings
            
            
            65,000
            
            
            
            47,900Net
      increase in advance payments by borrowers for taxes
            
            
            (2,001
            )
            
            
            (1,551
            )Purchase
      of treasury stock
            
            
            —
            
            
            
            (25,778
            )Net
      cash provided by (used in) financing activities
            
            
            140,133
            
            
            
            (3,734
            )Decrease
      in cash and cash equivalents
            
            
            (1,288
            )
            
            
            (45,365
            )Cash
      and cash equivalents at beginning of period
            
            
            17,884
            
            
            
            73,807Cash
      and cash equivalents at end of period
            
            $
            16,596
            
            
            
            28,442Supplemental
      information:Cash
      paid or credited during the period for:Income
      tax payments
            
            
            1,283
            
            
            
            2,542Interest
      payments
            
            
            29,913
            
            
            
            30,128Noncash
      investing activities:Loans
      receivable transferred to foreclosed properties
            
            
            14,517
            
            
            
            1,472Noncash
      financing activities:Long-term
      FHLB advances reclassified to short-term
            
            
            —
            
            
            
            17,729



























































See
Accompanying Notes to Consolidated Financial Statements.


- 7
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 Table of Contents


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.  At a special
meeting of shareholders held on July 18, 2008, the shareholders of Wauwatosa
Holdings, Inc. approved an amendment to the Company’s charter changing its name
to Waterstone Financial, Inc. The charter amendment is effective August 1,
2008.





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, 2007 Annual Report
on Form 10-K. Operating results for the six months ended June 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.





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 June 30, 2008 presentation.


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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:







June
      30, 2008(In
      Thousands)Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealizedcost
            
            
            gains
            
            
            losses
            
            
            Fair
      valueMortgage-backed
      securities
            
            $
            41,513
            
            
            
            133
            
            
            
            (353
            )
            
            
            41,293Collateralized
      mortgage obligations
            
            
            103,185
            
            
            
            462
            
            
            
            (2,731
            )
            
            
            100,916Mortgage-related
      securities
            
            
            144,698
            
            
            
            595
            
            
            
            (3,084
            )
            
            
            142,209Government
      sponsored entity bonds
            
            
            13,003
            
            
            
            228
            
            
            
            —
            
            
            
            13,231Municipal
      securities
            
            
            27,334
            
            
            
            121
            
            
            
            (1,364
            )
            
            
            26,091Other
      debt securities
            
            
            5,250
            
            
            
            —
            
            
            
            —
            
            
            
            5,250Debt
      securities
            
            
            45,587
            
            
            
            349
            
            
            
            (1,364
            )
            
            
            44,572$
            190,285
            
            
            
            944
            
            
            
            (4,448
            )
            
            
            186,781















December
      31, 2007(In
      Thousands)Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealizedcost
            
            
            gains
            
            
            losses
            
            
            Fair
      valueMortgage-backed
      securities
            
            $
            20,128
            
            
            
            154
            
            
            
            (68
            )
            
            
            20,214Collateralized
      mortgage obligations
            
            
            110,419
            
            
            
            1,050
            
            
            
            (1,073
            )
            
            
            110,396Mortgage-related
      securities
            
            
            130,547
            
            
            
            1,204
            
            
            
            (1,141
            )
            
            
            130,610Government
      sponsored entity bonds
            
            
            13,996
            
            
            
            187
            
            
            
            (1
            )
            
            
            14,182Municipal
      securities
            
            
            27,277
            
            
            
            209
            
            
            
            (391
            )
            
            
            27,095Other
      debt securities
            
            
            250
            
            
            
            —
            
            
            
            —
            
            
            
            250Debt
      securities
            
            
            41,523
            
            
            
            396
            
            
            
            (392
            )
            
            
            41,527$
            172,070
            
            
            
            1,600
            
            
            
            (1,533
            )
            
            
            172,137







At June
30, 2008, $13.2 million of the Company’s government sponsored entity bonds and
$79.8 million of the Company’s 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 June 30, 2008, 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
            
            $
            6,986
            
            
            
            7,042Due
      after one year through five years
            
            
            6,797
            
            
            
            6,982Due
      after five years through ten years
            
            
            1,354
            
            
            
            1,344Due
      after ten years
            
            
            30,451
            
            
            
            29,205Mortgage-related
      securities
            
            
            144,698
            
            
            
            142,209$
            190,286
            
            
            
            186,782








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:








June
      30, 2008Less
      than 12 months
            
            
            12
      months or longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealizedvalue
            
            
            loss
            
            
            value
            
            
            loss
            
            
            value
            
            
            loss(In
      Thousands)Mortgage
      backed securites
            
            $
            27,864
            
            
            
            (329
            )
            
            
            2,477
            
            
            
            (24
            )
            
            
            30,341
            
            
            
            (353
            )Collateralized
      mortgage obligations
            
            
            42,468
            
            
            
            (1,953
            )
            
            
            18,387
            
            
            
            (778
            )
            
            
            60,855
            
            
            
            (2,731
            )Municipal
      securities
            
            
            12,590
            
            
            
            (419
            )
            
            
            9,777
            
            
            
            (945
            )
            
            
            22,367
            
            
            
            (1,364
            )$
            82,922
            
            
            
            (2,701
            )
            
            
            30,641
            
            
            
            (1,747
            )
            
            
            113,563
            
            
            
            (4,448
            )





There are
two mortgage backed securities, eight collateralized mortgage obligation
securities and thirteen municipal securities at June 30, 2008 which have been in
an unrealized loss position for twelve months or longer.  Because the
decline in fair value of all aforementioned securities is not attributable to
credit deterioration, and because the Company has the ability and intent to hold
these securities until a market price recovery or maturity, these investments
are not considered other-than-temporarily impaired.




Securities
Held to Maturity




As of
June 30, 2008, 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 $9.3 million.  Each security is
callable quarterly, all of which are callable beginning in the first quarter of
2009 and two of which have a final maturity in 2022.  The remaining
security has a final maturity in 2023.




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 Table of Contents


Note
4 — Loans Receivable





Loans
receivable are summarized as follows:









June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      Thousands)Mortgage
      loans:Residential
      real estate:One-
      to four-family
            
            $
            757,009
            
            
            
            672,362Over
      four-family residential
            
            
            495,579
            
            
            
            477,766Commercial
      real estate
            
            
            57,156
            
            
            
            51,983Construction
      and land
            
            
            160,910
            
            
            
            156,289Home
      equity
            
            
            86,818
            
            
            
            85,954Consumer
      loans
            
            
            356
            
            
            
            286Commercial
      business loans
            
            
            35,013
            
            
            
            28,222Gross
      loans receivable
            
            
            1,592,841
            
            
            
            1,472,862Less:Undisbursed
      loan proceeds
            
            
            67,813
            
            
            
            67,549Unearned
      loan fees
            
            
            2,789
            
            
            
            3,265Total
      loans receivable, net
            
            $
            1,522,239
            
            
            
            1,402,048










Real
estate collateralizing the Company’s first mortgage loans is primarily located
in the Company’s general lending area of metropolitan
Milwaukee.  Residential real estate collateralizing $138.9 million or
9% of total mortgage loans is located outside of Wisconsin.





Non-accrual
loans totaled $91.8 million at June 30, 2008 and $80.4 million at December 31,
2007.





The
following table presents data on impaired loans at June 30, 2008 and December
31, 2007.








June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      Thousands)Impaired
      loans for which an allowance has been provided
            
            $
            57,140
            
            
            
            27,896Impaired
      loans for which no allowance has been provided
            
            
            39,348
            
            
            
            54,632Total
      loans determined to be impaired
            
            $
            96,488
            
            
            
            82,528Allowance
      for loan losses related to impaired loans
            
            $
            11,989
            
            
            
            5,783





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








For
      the Six Months EndedJune
      30,2008
            
            
            2007(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            12,839
            
            
            
            7,195Provision
      for loan losses
            
            
            11,276
            
            
            
            6,026Charge-offs
            
            
            (4,709
            )
            
            
            (3,655
            )Recoveries
            
            
            205
            
            
            
            4Balance
      at end of period
            
            $
            19,611
            
            
            
            9,570Allowance
      for loan losses to loans receivable
            
            
            1.29
            %
            
            
            0.70
            %Net
      charge-offs to average loans outstanding (annualized)
            
            
            0.62
            %
            
            
            0.53
            %Allowance
      for loan losses to non-performing loans
            
            
            21.37
            %
            
            
            19.25
            %Non-performing
      loans to loans receivable
            
            
            6.03
            %
            
            
            3.61
            %

















Note
5 — Deposits





A summary of the contractual maturities of
certificate accounts at June 30, 2008 is as follows:









(In
      Thousands)Within
      one year
            
            $
            757,146One
      to two years
            
            
            112,737Two
      to three years
            
            
            28,481Three
      to four years
            
            
            12,738Four
      through five years
            
            
            9,132After
      five years
            
            
            43$
            920,277







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Note
6 — Borrowings




Borrowings
consist of the following:









June
      30, 2008
            
            
            December
      31, 2007Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            AverageBalance
            
            
            Rate
            
            
            Balance
            
            
            Rate(Dollars
      in Thousands)Federal
      funds maturing2008
            
            $
            2,246
            
            
            
            2.50
            %
            
            
            5,705
            
            
            
            4.75
            %Federal
      Home Loan Bank Chicago (FHLBC) advances maturing:2008
            
            
            30,050
            
            
            
            4.55
            %
            
            
            47,779
            
            
            
            4.24
            %2009
            
            
            4,100
            
            
            
            4.23
            %
            
            
            4,100
            
            
            
            4.23
            %2010
            
            
            48,900
            
            
            
            4.80
            %
            
            
            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
            %
            
            
            —
            
            
            
            —Repurchase
      agreements maturing:2017
            
            
            84,000
            
            
            
            3.97
            %
            
            
            84,000
            
            
            
            3.97
            %$
            519,296
            
            
            
            4.01
            %
            
            
            475,484
            
            
            
            4.16
            %







The $220
million in advances due in 2016 consist of eight callable
advances.  The call features are as follows: $70 million at a weighted
average rate of 4.44% callable quarterly until maturity, two $25 million
advances at a weighted average rate of 4.64% callable in July 2008 and in August
2008 and quarterly thereafter, and two $50 million advances at a weighted
average rate of 4.13% callable in January 2009 and in March 2009 and quarterly
thereafter.




The $65
million in advances due in 2017 consist of three callable
advances.  The call features are as follows: two $25 million advances
at a weighted average rate of 3.12% callable quarterly until maturity and a $15
million advance at a rate of 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 include quarterly call options beginning in
2009.  The repurchase agreements are collateralized by securities
available for sale with an estimated fair value of $93.1 million at June 30,
2008.




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 75% of the carrying value of qualifying, unencumbered
one- to four-family mortgage loans.  In addition, these advances are
collateralized by FHLBC stock of $21.7 million at June 30, 2008 and $19.3
million at December 31, 2007.




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Note
7 – Income Taxes





The
income tax provisions differ from that computed at the Federal statutory
corporate tax rate for the three month periods ended June 30, 2008 and 2007 as
follows:









Six
      Months Ended June 30,2008
            
            
            2007(Dollars
      in thousands)Income
      (loss) before income taxes
            
            $
            (4,709
            )
            
            
            1,248Tax
      at federal statutory rate
            
            $
            (1,648
            )
            
            
            437Effect
      of:State
      income taxes, net of Federal income tax benefit
            
            
            (747
            )
            
            
            16Cash
      surrender value of life insurance
            
            
            (204
            )
            
            
            (156
            )Non-deductible
      ESOP and stock options expense
            
            
            77
            
            
            
            119Tax-exempt
      interest income
            
            
            (186
            )
            
            
            (77
            )Other
            
            
            (74
            )
            
            
            79Income
      tax provision (benefit)
            
            $
            (2,782
            )
            
            
            418Effective
      tax rate
            
            
            59.1
            %
            
            
            33.5
            %












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:









June
      30,
            
            
            December
      31,2008
            
            
            2007(In
      Thousands)Financial
      instruments whose contract amounts representpotential
      credit risk:Commitments
      to extend credit under first mortgage loans
            
            $
            40,632
            
            
            
            16,674Unused
      portion of home equity lines of credit
            
            
            31,554
            
            
            
            31,492Unused
      portion of construction loans
            
            
            27,968
            
            
            
            27,336Unused
      portion of business lines of credit
            
            
            8,291
            
            
            
            8,721Standby
      letters of credit
            
            
            2,170
            
            
            
            2,337







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 June 30, 2008 and December 31, 2007, the Company had
$12.3 million and $23.1 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.





- 14
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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.  Nonvested restricted
stock is considered outstanding for dilutive earnings (loss) per share
only.  Nonvested restriced stock and stock options at June 30, 2008
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:







Six
      Months Ended June 30,
            
            
            Three
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      Thousands, except per share data)Net
      income (loss)
            
            $
            (1,927
            )
            
            
            830
            
            
            
            (2,536
            )
            
            
            (1,269
            )Weighted
      average shares outstanding
            
            
            30,536
            
            
            
            32,479
            
            
            
            30,545
            
            
            
            32,042Effect
      of dilutive potential common shares
            
            
            -
            
            
            
            9
            
            
            
            -
            
            
            
            11Diluted
      weighted average shares outstanding
            
            
            30,536
            
            
            
            32,488
            
            
            
            30,545
            
            
            
            32,053Basic
      earnings (loss) per share
            
            $
            (0.06
            )
            
            
            0.03
            
            
            $
            (0.08
            )
            
            
            (0.04
            )Diluted
      earnings (loss) per share
            
            $
            (0.06
            )
            
            
            0.03
            
            
            $
            (0.08
            )
            
            
            (0.04
            )





- 15
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Note
10 – Fair Value Measurements





Effective
January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements (SFAS 157).SFAS No. 157 establishes a single authoritative definition of value, sets
out a framework for measuring fair value, and provides a hierarchical disclosure
framework for assets and liabilities measured at fair value.  The
adoption of SFAS 157 did not have any impact on our financial position or
results of operations.  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.





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 June 30, 2008, 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
              June
      30, 2008
            
            
            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
            
            $
            186,781
            
            
            
            -
            
            
            
            180,237
            
            
            
            6,544








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
2008.


- 16
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Available-for-sale
      securties(In
      Thousands)Balance
      December 31, 2007
            
            $
            7,073Unrealized
      holding losses arising during the period:Included
      in other comprehensive income
            
            
            (141
            )Principal
      repayments
            
            
            (670
            )Balance
      June 30, 2008
            
            $
            6,544








Level 3
available-for-sale securities includes a single corporate collateralized
mortgage obligation.  At June 30, 2008, this security was valued by
obtaining indicative market pricing quotes from active brokers.





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 June 30,
2008, loans determined to be impaired with an outstanding balance of $57.1
million were carried net of specific reserves of $12.0 million for a fair value
of $45.1 million.  Impaired loans are considered to be Level 2 in the
fair value hierarchy of valuation techniques.





Loans held for sale - On a
non-recurring basis, loans held-for-sale are recorded in our consolidated
statements of financial condition at the lower of cost or fair
value.  Fair value is generally determined by estimating a gross
premium or discount, which is derived from pricing currently observable in the
market.  Loans held-for-sale 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.Real estate owned is
considered to be Level 2 in the fair value hierarchy of valuation
techniques.








- 17
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Note
11 – Recent Accounting Developments




In
December 2007, the FASB issued SFAS No. 141 (revised December 2007),
Business Combinations,
which replaces FASB Statement No. 141, “Business Combinations.” This
statement requires an acquirer to recognize identifiable assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their full fair values at that date, with limited
exceptions. Assets and liabilities assumed that arise from contractual
contingencies as of the acquisition date must also be measured at their
acquisition-date full fair values. SFAS 141R requires the acquirer to
recognize goodwill as of the acquisition date, and in the case of a bargain
purchase business combination, the acquirer shall recognize a gain.
Acquisition-related costs are to be expensed in the periods in which the costs
are incurred and the
services are received. Additional presentation and disclosure requirements have
also been established to enable financial statement users to evaluate and
understand the nature and financial effects of business combinations.
SFAS 141R is to be applied prospectively for acquisition dates on or after
the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company will adopt SFAS 141R when required in
2009 and is in the process of assessing the impact on its results of operations,
financial position, and liquidity.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 requires noncontrolling
interests to be treated as a separate component of equity, rather than a
liability or other item outside of equity. This statement also requires the
amount of consolidated net income attributable to the parent and the
noncontrolling interest to be clearly identified and presented on the face of
the income statement. Changes in a parent’s ownership interest, as long as the
parent retains a controlling financial interest, must be accounted for as equity
transactions, and should a parent cease to have a controlling financial
interest, SFAS 160 requires the parent to recognize a gain or loss in net
income. Expanded disclosures in the consolidated financial statements are
required by this statement and must clearly identify and distinguish between the
interest of the parent’s owners and the interests of the noncontrolling owners
of a subsidiary. SFAS 160 is to be applied prospectively for fiscal years
beginning on or after December 15, 2008, with the exception of presentation
and disclosure requirements, which shall be applied retrospectively for all
periods presented. The Company will adopt SFAS 160 when required in 2009
and is in the process of assessing the impact on its results of operations,
financial position, and liquidity.





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133.SFAS 161 applies to all derivative instruments and related hedged items
accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 161 requires entities to provide
greater transparency about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, results of operations and cash flows. To meet those objectives, SFAS
161 requires (1) qualitative disclosures about objectives for using
derivatives by primary underlying risk exposure (e.g., interest rate, credit or
foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow
hedge, net investment hedge, and non-hedges), (2) information about the
volume of derivative activity in a flexible format that the preparer believes is
the most relevant and practicable, (3) tabular disclosures about balance
sheet location and gross fair value amounts of derivative instruments, income
statement and other comprehensive income location of gain and loss amounts on
derivative instruments by type of contract, and (4) disclosures about
credit-risk related contingent features in derivative agreements. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company will adopt SFAS 160
when required in 2009 and is in the process of assessing the impact on its
results of operations, financial position, and liquidity.


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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:





·
            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;


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


·
            significantly
      increased competition among depository and other financial
      institutions;


·
            adverse
      changes in the securities markets;


·
            adverse
      changes in the real estate markets;


·
            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 2007 Annual Report on Form 10-K).





Overview





On August
1, 2008, the Company changed its name to Waterstone Financial,
Inc.  Generally, our results of operations depend on our net interest
income.  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 97.8% of total loans receivable on June 30,
2008.  Further, 78.6% of loans receivable are residential mortgage
loans with over four-family loans comprising 31.1% of all loans on June 30,
2008.  WaterStone Bank funds loan production primarily with retail
deposits and Federal Home Loan Bank advances.  On June 30, 2008,
deposits comprised 66.2% of total liabilities.  Time deposits, also
known as certificates of deposit,
accounted for 84.2% of total deposits at June 30, 2008.  Federal Home
Loan Bank advances outstanding on June 30, 2008 totaled $433.1 million, or 26.2%
of total liabilities.




During
the six months ended June 30, 2008, our results of operation were adversely
affected by deterioration in our asset quality resulting in increases in our
non-accrual loans and real estate owned and a corresponding increase in loan
charge-offs.  Consequently, our results of operations have been
significantly affected by historically high provisions for loan losses over the
past five quarters due to weak real estate markets.  As discussed
below, during the six months ended June 30, 2008, the Company significantly
increased its provision for loan losses to $11.3 million from $6.0 million for
the six months ended June 30, 2007.  Additional information regarding
loan quality and its impact on our financial condition and results of operations
can be found in the Asset Quality discussion beginning on page
30.  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.  Noninterest expense
consists primarily of compensation and employee benefits, occupancy expenses and
real estate owned expense.  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 six and three month
periods ended June 30, 2008 and 2007 and the financial condition as of June 30,
2008 compared to the financial condition as of December 31, 2007.




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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.





Positions
taken in the Company’s tax returns may be subject to challenge by the taxing
authorities upon examination.  Uncertain tax positions are initially
recognized in the financial statements 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 more likely than
not to be 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 as 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.  Net deferred tax assets totaled $13.2 million and $9.7
million on June 30, 2008 and December 31, 2007, respectively.  As of
June 30, 2008 and December 31, 2007 there were valuation allowances of $594,000,
net of $221,000 of federal income tax benefit and $244,000, net of federal
income tax benefit of $131,000, respectively.  If our estimated
current and deferred tax assets and liabilities and any related estimated
valuation allowance is too high or too low, it will affect our future net income
in the year that the new information enabling us to better evaluate our
estimates of income tax assets and liabilities becomes available.




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Comparison
of Operating Results for the Six Months Ended June 30, 2008 and
2007





General
- Net loss for the six months ended June 30, 2008 totaled $1.9 million, or $0.06
for both basic and diluted earnings per share compared to net income of
$830,000, or $0.03 for both basic and diluted earnings per share for the six
months ended June 30, 2007.  The six months ended June 30, 2008
generated an annualized loss on average assets of 0.22% and an annualized loss
on average equity of 1.92%, compared to a return on average assets of 0.10% and
a return on average equity of 0.72% for the comparable period in
2007.  The net loss was due to a $5.3 million increase in provisions
for loan losses, and a $1.9 million increase in noninterest expense, partially
offset by a $488,000 increase in net interest income, a $644,000 increase in
noninterest income and a $3.2 million decrease in income taxes.  The
increase in the provision for loan losses reflected management’s decision to
maintain its allowance for loan losses following an increase in loan charge-offs
and an increase in specific loan losses attributable to impaired
loans.  Loan charge-off activity and specific loan reserves are
discussed in additional detail in the Asset Quality section beginning on page
30.  The net interest margin for the six months ended June 30, 2008
was 2.15% compared to 2.27% for the six months ended June 30, 2007.





Total
Interest Income - Total interest income increased $1.9 million, or 4.0%,
to $49.8 million during the six months ended June 30, 2008 compared to $47.9
million for the six months ended June 30, 2007.  Interest income on
loans increased $1.1 million, or 2.6%, to $44.4 million for the six months ended
June 30, 2008 compared to $43.3 million for the comparable period of
2007.  The increase resulted primarily from an increase of $76.8
million, or 5.5%, in the average loan balance to $1.46 billion during the
six-month period ended June 30, 2008 from $1.39 billion during the comparable
period in 2007.  The increase in average balance was partially offset
by a 21 basis point decrease in the average yield on loans to 6.09% for the
six-month period ended June 30, 2008 from 6.30% for the comparable period in
2007.  Unrecognized interest income on non-accrual loans increased by
$669,000 during the six months ended June 30, 2008.  This had the
effect of reducing the average yield on loans during the same period by 9 basis
points.  Unrecognized interest income on non-accrual loans increased
by $873,000 during the six months ended June 30, 2007 effectively reducing the
average yield on loans for that period by 13 basis points.





Interest
income from mortgage-related securities increased $1.2 million, or 47.1%, to
$3.7 million for the six months ended June 30, 2008 compared to $2.5 million for
the comparable quarter in 2007.  This was primarily due to the
increase of $40.0 million, or 40.9%, in the average balance to $138.0 million
for the six months ended June 30, 2008 from $98.0 million during the comparable
period in 2007.  The increase in interest income reflects an increase
in the average balance of mortgage-related securities as well as a 21 basis
point increase in the average yield on mortgage-related securities to 5.44% for
the six months ended June 30, 2008 from 5.23% for the comparable period in
2007.  Finally, interest income from debt securities, federal funds
sold and short-term investments decreased $393,000, or 19.1%, to $1.7 million
for the six months ended June 30, 2008 compared to $2.1 million for the
comparable period in 2007.  This was due to a 124 basis point decrease
in the average yield on other earning assets to 3.30% for the six months ended
June 30, 2008 from 4.54% for the comparable period in 2007, partially offset by
an increase of $9.9 million, or 10.8%, in the average balance of other earning
assets to $101.3 million during the six months ended June 30, 2008 from $91.4
million during the comparable period in 2007.  The decrease in average
yield on other earning assets resulted primarily from a drop in the federal
funds rate of 325 basis points between June 30, 2007 and June 30, 2008 and from
a decline in dividends received on the Company’s FHLBC stock.  The
FHLBC stock yielded a return of 2.90% during the six months ended June 30, 2007,
however, no dividend was received during the six months ended June 30,
2008.  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 increased by $1.4 million, or 4.7%, to $31.6
million during the six months ended June 30, 2008 from $30.2 million during the
six months ended June 30, 2007.  This increase was the result of an
increase of $169.0 million, or 12.1%, in average interest bearing deposits and
borrowings outstanding partially offset by a 31 basis point drop in the cost of
funding to 4.06% for the six months ended June 30, 2008 from 4.37% for the
comparable period ended June 30, 2007.





Interest
expense on deposits decreased $746,000, or 3.4%, to $21.4 million during the six
months ended June 30, 2008 from $22.2 million during the comparable period in
2007.  This was due to a decrease in the cost of total average
deposits of 34 basis points to 4.03% for the six months ended June 30, 2008
compared to 4.37% for the comparable period during 2007.  The decrease
in interest expense attributable to the decrease in the cost of deposits was
partially offset by an increase of $44.2 million, or 4.3%, in the average
balance of other interest bearing deposits to $1.07 billion during the six
months ended June 30, 2008 from $1.02 billion during the comparable period in
2007.  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 the basis for determining the market rate of
deposit interest.





Interest
expense on borrowings increased $2.2 million, or 27.2%, to $10.2 million during
the six months ended June 30, 2008 from $8.0 million during the comparable
period in 2007.  The increase resulted primarily from an increase in
average borrowings outstanding of $124.9 million, or 35.1%, to $480.7 million
during the six months ended June 30, 2008 from $355.8 million during the
comparable period in 2007.  The increase in average borrowings was
partially offset by a 26 basis point decrease in the average cost of borrowings
to 4.15% during the six months ended June 30, 2008 from 4.41% during the
comparable period in 2007.  The increased use of borrowings as a
source of funding during six months ended June 30, 2008 was due to favorable
rates and terms compared to alternate retail funding sources.





Net
Interest Income - Net interest income increased by $488,000 or 2.7%,
during the six months ended June 30, 2008 as compared to the same period in
2007.  The increase resulted primarily from a 5 basis point increase
in our net interest rate spread to 1.82% for the six month period ended June 30,
2008 from 1.77% for the comparable period in 2007.  The 5 basis point
increase in the net interest rate spread resulted from a 32 basis point decrease
in the cost of interest bearing liabilities, which was partially offset by a 27
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
$42.2 million, or 23.2%, to $139.6 million for the six months ended June 30,
2008 from $181.9 million from the comparable period in 2007.  The
decrease in net average earning assets was primarily attributable to the
repurchase of $19.5 million of Company common stock between June 30, 2007 and
June 30, 2008 in addition to an increase in loans transferred to real estate
owned.





Provision
for Loan Losses - Provision for loan losses increased $5.3 million, or
87.1%, to $11.3 million during the six months ended June 30, 2008, from $6.0
million during the comparable period during 2008.  The increased
provision for the six months ended June 30, 2007 was the result of $4.5 million
of net loan charge-offs, specific loss provisions, a continued increase in
non-performing assets and growth of the overall loan portfolio.  See
Asset Quality section beginning on page 30 for an analysis of charge-offs,
non-performing assets specific reserves and additional
provisions.


Noninterest
Income - Total noninterest income increased $664,000, or 20.0%, to $4.0
million during the six months ended June 30, 2008 from $3.3 million during the
comparable period in 2007. The increase resulted primarily from an increase in
mortgage banking income generated by our Waterstone Mortgage Corporation
subsidiary.





Noninterest
Expense - Total noninterest expense increased $1.9 million, or 13.5%, to
$15.7 million during the six months ended June 30, 2008 from $13.8 million
during the comparable period in 2007.  The increase was primarily the
result of increase in compensation, payroll taxes and other employee benefits,
real estate owned expense and other noninterest expense.





Compensation,
payroll taxes and other employee benefit expense increased $375,000, or 4.7%, to
$8.3 million during the six months ended June 30, 2008 from $7.9 million during
the comparable period in 2007.  This increase resulted primarily from
an increase in salaries, partially offset by a reduction in expense related to
the ESOP plan.  Salary expense increased $657,000, or 12.5%, to $5.9
million during the six months ended June 30, 2008 compared to $5.3 million
during the comparable period in 2007 primarily as a result of an increase in
commissions related to loan originations.  Expense related to the
Company’s ESOP plan decreased $194,000, or 29.3%, to $468,000 during the six
months ended June 30, 2008 compared to $663,000 during the comparable period in
2007.  This decrease is directly related to the decrease in the
Company’s average share price during the six months ended June 30, 2008 compared
to the comparable period in 2007.





Real
estate owned expense totaled $1.2 million for the six months ended June 30, 2008
compared to $7,000 during the six months ended June 30, 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 six months ended June 30, 2008, operational
expenses totaled $1.1 million and net losses on sales totaled
$151,000.  The increase in expense compared to the comparable prior
period results from an increase in the number and total cost basis of foreclosed
properties.  Real estate owned totaled $16.6 million at June 30, 2008
and $819,000 at June 30, 2007.




Other
noninterest expense increased $470,000, or 41.0%, to $1.6 million during the six
months ended June 30, 2008 from $1.1 million during the comparable period in
2007.  This increase resulted primarily from a $238,000 expense
related to the early retirement of fixed assets related to building signage in
connection with the Bank’s name change.




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Income
Taxes - The effective tax rate for the six months ended June 30, 2008
provided a 59.1% benefit as compared to a 33.5% expense for the comparable
period during 2007.  The 2008 benefit of 59.1% is comprised of a 34.7%
federal benefit and a 24.4% state benefit.  The state tax benefit is
the result of pre-tax losses generated by high loan loss provisions for the
Wisconsin banking subsidiary.  It is anticipated that these benefits
will be realized in future periods.




Net
Income-As a
result of the foregoing factors, net loss for the six months ended June 30, 2008
was $1.9 million as compared to net income of $830,000 during the comparable
period in 2007.







Comparison
of Operating Results for the Three Months Ended June 30, 2008 and
2007





General
- Net loss for the three months ended June 30, 2008 totaled $2.5 million, or
$0.08 for both basic and diluted earnings per share compared to net loss of $1.3
million, or $0.04 for both basic and diluted earnings per share for the three
months ended June 30, 2007.  The quarter ended June 30, 2008 generated
an annualized loss on average assets of 0.56% and an annualized loss on average
equity of 4.99%, compared to annualized losses of 0.31% and 2.24%, respectively,
for the comparable period in 2007.  The increase in net loss was due
to a $1.7 million increase in noninterest expense and a $2.9 million increase in
provisions for loan losses, partially offset by a $760,000 increase in net
interest income, $541,000 increase in noninterest expense and a $2.0 million
decrease in income taxes.  The increase in the provision for loan
losses was the direct result of an increase in loan charge-offs and an increase
in specific loan losses attributable to impaired loans.  Loan
charge-off activity and specific loan reserves are discussed in additional
detail in the Asset Quality section beginning on page 30.  The net
interest margin for the three months ended June 30, 2008 was 2.24% compared to
2.28% for the three months ended June 30, 2007.





Total
Interest Income - Total interest income increased $913,000, or 3.8%, to
$25.2 million during the three months ended June 30, 2008 compared to $24.3
million for the three months ended June 30, 2007.  Interest income on
loans increased $554,000, or 2.5%, to $22.5 million for the three months ended
June 30, 2008 compared to $22.0 million for the comparable period of
2007.  The increase resulted primarily from an increase of $100.8
million, or 7.3%, in the average loan balance to $1.49 billion during the
three-month period ended June 30, 2008 from $1.39 billion during the comparable
period in 2007.  The increase in average balance was partially offset
by a 34 basis point decrease in the average yield on loans to 6.01% for the
three-month period ended June 30, 2008 from 6.35% for the comparable period in
2007.





In
addition, interest income from mortgage-related securities increased $641,000,
or 50.2%, to $1.9 million for the quarter ended June 30, 2008 compared to $1.3
million for the comparable quarter in 2007.  This was primarily due to
an increase of $44.0 million, or 45.0%, in the average balance to $141.8 million
for the three months ended June 30, 2008 from $97.8 million during the
comparable period in 2007.  The increase in interest income reflects a
13 basis point increase in the average yield on mortgage-related securities to
5.37% for the quarter ended June 30, 2008 from 5.24% for the comparable period
in 2007.  Finally, interest income from debt securities, federal funds
sold and short-term investments decreased $282,000, or 26.3%, to $790,000 for
the three months ended June 30, 2008 compared to $1.1 million for the comparable
period in 2007.  This was due to a 124 basis point decrease in the
average yield on other earning assets to 3.21% for the three-month period ended
June 30, 2008 from 4.45% for the comparable period in 2007, partially offset by
an increase of $841,000, or 0.9%, in the average balance of other earning assets
to $97.5 million during the three-month period ended June 30, 2008 from $96.7
million during the comparable period in 2007.  The decrease in average
yield on other earning assets results primarily from a drop in the federal funds
rate of 325 basis points between June 30, 2007 and June 30, 2008 and from a
decline in dividends received on the Company’s FHLBC stock.  The FHLBC
stock yielded a return of 2.70% during the three months ended June 30, 2007,
however, no dividend was received during the three months ended June 30,
2008.  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.





Total
Interest Expense-Total interest expense increased by $153,000, or 1.0%, to $15.5 million
during the three months ended June 30, 2008 from $15.3 million during the three
months ended June 30, 2007.





Interest
expense on deposits decreased $785,000, or 7.0%, to $10.4 million during the
three months ended June 30, 2008 from $11.1 million during the comparable period
in 2007.  This was due to a decrease in the cost of total average
deposits of 60 basis points to 3.79% for the three months ended June 30, 2008
compared to 4.39% for the comparable period during 2007.  The decrease
in interest expense attributable to the decrease in the cost of deposits was
partially offset by an increase of $65.3 million, or 6.4%, in the average
balance of other interest bearing deposits to $1.08 billion during the three
months ended June 30, 2008 from $1.02 billion during the comparable period in
2007.  The decrease in the cost of deposits reflects the lower
interest rate environment occasioned by the Federal Reserve’s reduction of short
term interest rates which are the basis for determining the market rate for
deposit interest rates.





Interest
expense on borrowings increased $938,000, or 22.3%, to $5.1 million during the
three months ended June 30, 2008 from $4.2 million during the comparable period
in 2007.  The increase resulted primarily from an increase in average
borrowings outstanding of $119.9 million, or 32.4%, to $490.1 million during the
three-month period ended June 30, 2008 from $370.2 million during the comparable
period in 2007.  The increase in average borrowings was partially
offset by a 35 basis point decrease in the average cost of borrowings to 4.08%
during the three-month period ended June 30, 2008 from 4.43% during the three
months ended June 30, 2008 due to favorable rates and terms compared to
alternate retail funding sources.





Net
Interest Income - Net interest income increased by $760,000 or 8.5%,
during the three months ended June 30, 2008 as compared to the same period in
2007.  The increase resulted primarily from a 14 basis point increase
in our net interest rate spread to 1.93% for the three month period ended June
30, 2008 from 1.79% for the comparable period in 2007. The 14 basis point
increase in the net interest rate spread resulted from a 51 basis point decrease
in the cost of interest bearing liabilities, which was partially offset by a 37
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
$39.3 million, or 22.4%, to $136.3 million for the three-month period ended June
30, 2008 from $175.6 million from the comparable period in 2007.  The
decrease in net average earning assets was primarily attributable to the
repurchase of $19.5 million of Company common stock between June 30, 2007 and
June 30, 2008 in addition to an increase in loans transferred to real estate
owned.





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Provision
for Loan Losses - Provision for loan losses increased $2.9 million, or
51.1%, to $8.6 million during the three months ended June 30, 2008, from $5.7
million during the comparable period during 2007.  The increased
provision for the three months ended June 30, 2008 was the result of $3.7
million of net loan charge-offs, specific loss provisions and a continued
increase in non-performing assets.  See Asset Quality section
beginning on page 30 for an analysis of charge-offs, non-performing assets
specific reserves and additional provisions.





Noninterest
Income - Total noninterest income increased $541,000, or 31.6%, to $2.3
million during the three months ended June 30, 2008 from $1.7 million during the
comparable period in 2007. The increase resulted primarily from an increase in
mortgage banking income generated by our Waterstone Mortgage Corporation
subsidiary.





Noninterest
Expense - Total noninterest expense increased $1.7 million, or 23.8%, to
$8.7 million during the three months ended June 30, 2008 from $7.0 million
during the comparable period in 2007.  The increase was primarily the
result of increase in compensation, payroll taxes and other employee benefits,
real estate owned expense and other noninterest expenses, partially offset by
decrease in data processing expense.





Compensation,
payroll taxes and other employee benefit expense increased $550,000, or 14.0%,
to $4.5 million during the three months ended June 30, 2008 from $3.9 million
during the comparable period in 2007.  This increase resulted
primarily from an increase in salaries, partially offset by a reduction in
expense related to the ESOP plan.  Salary expense increased $737,000,
or 28.3%, to $3.3 during the three months ended June 30, 2008 compared to $2.6
million during the comparable period in 2007 primarily as a result of an
increase in commissions related to loan originations.  Expense related
to the Company’s ESOP plan decreased $91,000, or 27.9%, to $235,000 during the
three months ended June 30, 2008 compared to $326,000 during the comparable
period in 2007.  This decrease is directly related to the decrease in
the Company’s average share price during the three months ended June 30, 2008
compared to the comparable period in 2007.





Real
estate owned expense totaled $857,000 for the three months ended June 30, 2008
compared to $6,000 during the comparable period in 2007.  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 quarter ended June 30, 2008, operational
expenses totaled $635,000 and net losses on sales totaled
$222,000.  The increase in expense compared to the comparable prior
period results from an increase in the number and total cost basis of foreclosed
properties.  Real estate owned totaled $16.6 million at June 30, 2008
and $819,000 at June 30, 2007.





Other
noninterest expense increased $431,000, or 76.8%, to $922,000 during the three
months ended June 30, 2008 from $561,000 during the comparable period in
2007.  This increase resulted primarily from a $238,000 expense
related to the early retirement of fixed assets related to building signage in
connection with the Bank’s name change.







- 24
-
 Table of Contents


Income
Taxes - The effective tax rate for the three months ended June 30, 2008
provided a 51.5% benefit as compared to a 35.4% benefit for the comparable
period during 2007.  The estimated 2008 annual effective tax benefit
is 59.1% and is comprised of a 34.7% federal benefit and a 24.4% state
benefit.  The state tax benefit is the result of pre-tax losses
generated by high loan loss provisions for the Wisconsin banking
subsidiary.  It is anticipated that these benefits will be realized in
future periods.  Tax expense for the quarter ended June 30, 2008
includes the effect of a change in the estimated effective annual benefit from
17.3% at March 31, 2008 to 59.1% at June 30, 2008.




Net
Income-As a
result of the foregoing factors, net loss for the three months ended June 30,
2008 was $2.5 million compared to a loss of $1.3 million during the comparable
period in 2007.







Comparison
of Financial Condition at June 30, 2008 and December 31, 2007





Total
Assets - Total assets increased by $138.2 million, or 8.1%, to $1.85
billion at June 30, 2008 from $1.71 billion at December 31, 2007. The increase
in total assets is reflected in increases in securities available for sale and
held to maturity of $16.9 million and an increase in loans receivable of $120.2
million.





Cash and
Cash Equivalents–Cash and cash equivalents decreased by $1.3 million, or 7.2%, to $16.6
million at June 30, 2008 from $17.9 million at December 31, 2007.





Securities
Available for Sale – Securities available for sale increased by $14.6
million, or 8.5%, to $186.8 million at June 30, 2008 from $172.1 million at
December 31, 2007.  The Company invested an additional $10.0 million
in its Nevada investment subsidiary during the six months ended June 30,
2008.  The investment subsidiary used the proceeds of the capital
infusion to purchase additional mortgage-related securities.  In
addition, the Company purchased a $5 million trust preferred security during the
current year.





Securities
Held to Maturity – Securities held to maturity increased by $2.3 million,
or 30.0%, to $9.9 million at June 30, 2008 from $7.6 million at December 31,
2007.  A portion of the Company’s proceeds of the capital infusion in
its Nevada investment subsidiary were used to increase the subsidiary’s
held-to-maturity portfolio.  These higher yield structured notes
accrue interest based on the range of a constant maturity treasury yield spread
and therefore have a higher potential for market value volatility.  As
the Company has the intent and ability to hold these securities until maturity,
they have been classified as held-to-maturity rather than as
available-for-sale.





Loans
Held for Sale–Loans held for sale decreased by $10.8 million, or 46.9%, to $12.3
million at June 30, 2008, from $23.1 million at December 31,
2007.  Fluctuations in the balance of loans held for sale result
primarily from the timing of loan closings and sales to third
parties.


- 25
-
 Table of Contents


Loans
Receivable - Loans receivable increased $120.2 million, or 8.6%, to $1.52
billion at June 30, 2008 from $1.40 billion at December 31, 2007.  The
2008 total increase in loans receivable was primarily attributable to an $84.6
million increase in one- to four-family loans, a $17.8 million increase in over
four-family loans, a $5.2 million increase in commercial real estate and a $6.8
million increase in commercial business.  During the three-month
period ended June 30, 2008, $14.5 million in loans were transferred to real
estate owned.





The
following table shows loan origination, principal repayment and sales activity
during the periods indicated.







As
      of or for the
            
            
            As
      of or for theSix
      Months Ended
            
            
            Year
      EndedJune
      30, 2008
            
            
            December
      31, 2007(In
      Thousands)Total
      gross loans receivable and held for sale at beginning of
      period
            
            $
            1,495,970
            
            
            
            1,450,170Real
      estate loans originated for investment:ResidentialOne-
      to four-family
            
            
            122,364
            
            
            
            65,851Over
      four-family
            
            
            54,837
            
            
            
            64,857Construction
      and land
            
            
            43,131
            
            
            
            33,705Commercial
      real estate
            
            
            7,599
            
            
            
            13,494Home
      equity
            
            
            10,393
            
            
            
            15,886Total
      real estate loans originated for investment
            
            
            238,324
            
            
            
            193,793Consumer
      loans originated for investment
            
            
            115
            
            
            
            157Commerical
      business loans originated for investment
            
            
            9,874
            
            
            
            25,229Total
      loans originated for investment
            
            
            248,313
            
            
            
            219,179Principal
      repayments
            
            
            (128,334
            )
            
            
            (191,100
            )Net
      activity in loans held for investment
            
            
            119,979
            
            
            
            28,079Loans
      originated for sale
            
            
            165,464
            
            
            
            242,120Loans
      sold
            
            
            (176,307
            )
            
            
            (224,399
            )Net
      activity in loans held for sale
            
            
            (10,843
            )
            
            
            17,721Total
      gross loans receivable and held for sale at end of period
            
            $
            1,605,106
            
            
            
            1,495,970








Cash
Surrender Value of Life Insurance – Cash surrender value of life
insurance increased $5.8 million, or 22.5%, to $31.4 million at June 30, 2008
from $25.6 million at December 31, 2007.  A new $5 million bank owned
life insurance contract was entered into during the six months ended June 30,
2008.





Deposits
– Total deposits increased $98.3 million, or 9.9%, to $1.09 billion at June 30,
2008 from $994.5 million at December 31, 2007.  Total time deposits
increased $94.1 million, or 11.4%, to $920.2 million from $826.2 million at
December 31, 2007.  The increase in time deposits resulted from the
promotion of competitive rates in both the local retail and non-local wholesale
markets.  Time deposits originated through local retail outlets
increased $50.9 million, or 6.3%, to $862.8 million at June 30, 2008 from $811.9
million at December 31, 2007.  Time deposits originated through the
wholesale market increased $43.2 million, to $57.5 million at June 30, 2008 from
$14.3 million at December 31, 2007.  Total money market and savings
deposits increased $5.7 million, or 4.9%, to $120.8 million at June 30, 2008
from $115.1 million at December 31, 2007.  Partially offsetting the
increase in time and money market and savings
deposits, total demand deposits decreased $1.4 million, or 2.7%, to $51.8
million at June 30, 2008 from $53.2 million at December 31, 2007.  The
increase in money market account balances included amounts transferred from
existing demand accounts.





Borrowings
– Total borrowings increased $43.8 million, or 9.2%, to $519.3 million at June
30, 2008 from $475.5 million at December 31, 2007.  The overall
increase in borrowings at June 30, 2008 was a result of an increase of $47.3
million in FHLBC advances, partially offset by a decrease of $3.5 million in
federal funds borrowed.





Advance
Payments by Borrowers for Taxes - Advance payments by borrowers for taxes
and insurance increased $15.6 million to $16.2 million at June 30, 2008 from
$607,000 at December 31, 2007.  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 $16.6 million, or 43.9%, to
$21.2 million at June 30, 2008 from $37.8 million at December 31,
2007.  The decrease, which is seasonally normal, was primarily due to
a decrease in amounts due to mortgage holders related to advance payments by
borrowers for taxes.  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 $245,000 at June 30, 2008 and $17.4 million at
December 31, 2007.





Shareholders’
Equity – Shareholders’ equity decreased $2.9 million, or 1.4%, to $198.9
million at June 30, 2008 from $201.8 million at December 31,
2007.  The decrease was primarily a result of net loss of $1.9 million
recognized during the six months ended June 30, 2008.  In addition,
shareholders’ equity increased by $1.3 million due to the net impact of employee
benefits including ESOP, incentive stock options and restricted stock
awards.  This increase was partially offset by a $2.3 million increase
in accumulated other comprehensive loss, net of taxes.  Accumulated
other comprehensive loss is the estimated unrealized loss attributable to the
decline in market value of available-for-sale investment
securities.  Volatility in both the mortgage-backed securities market
and the municipal bond market has resulted in large declines in the estimated
market value of these securities.


- 26
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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.









Six
      Months Ended June 30,2008
            
            
            2007Average
      Balance
            
            
            Interest
      and Dividends
            
            
            
            
            
            Yield/Cost
            
            
            Average
      Balance
            
            
            Interest
      and Dividends
            
            
            
            
            
            Yield/Cost(Dollars
      in Thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            1,462,151
            
            
            
            44,418
            
            
            
            (1
            )
            
            
            6.09
            %
            
            $
            1,385,317
            
            
            
            43,308
            
            
            
            (1
            )
            
            
            6.30
            %Mortgage
      related securities(2)
            
            
            137,969
            
            
            
            3,740
            
            
            
            
            
            
            
            5.44
            
            
            
            97,947
            
            
            
            2,542
            
            
            
            
            
            
            
            5.23Debt
      securities (2),
      federal funds sold and short-term investments
            
            
            101,322
            
            
            
            1,667
            
            
            
            
            
            
            
            3.30
            
            
            
            91,444
            
            
            
            2,060
            
            
            
            
            
            
            
            4.54Total
      interest-earning assets
            
            
            1,701,442
            
            
            
            49,825
            
            
            
            
            
            
            
            5.87
            
            
            
            1,574,708
            
            
            
            47,910
            
            
            
            
            
            
            
            6.14Noninterest-earning
      assets
            
            
            77,798
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            67,795Total
      assets
            
            $
            1,779,240
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,642,503Interest-bearing
      liabilities:Demand
      and money market accounts
            
            $
            145,547
            
            
            
            1,339
            
            
            
            
            
            
            
            1.84
            
            
            $
            138,618
            
            
            
            2,174
            
            
            
            
            
            
            
            3.16Savings
      accounts
            
            
            24,235
            
            
            
            116
            
            
            
            
            
            
            
            0.96
            
            
            
            19,392
            
            
            
            40
            
            
            
            
            
            
            
            0.42Certificates
      of deposit
            
            
            896,258
            
            
            
            19,949
            
            
            
            
            
            
            
            4.46
            
            
            
            863,862
            
            
            
            19,938
            
            
            
            
            
            
            
            4.65Total
      interest-bearing deposits
            
            
            1,066,040
            
            
            
            21,404
            
            
            
            
            
            
            
            4.03
            
            
            
            1,021,872
            
            
            
            22,152
            
            
            
            
            
            
            
            4.37Borrowings
            
            
            480,717
            
            
            
            9,951
            
            
            
            
            
            
            
            4.15
            
            
            
            355,841
            
            
            
            7,780
            
            
            
            
            
            
            
            4.41Other
      interest bearing liabilities
            
            
            15,051
            
            
            
            227
            
            
            
            
            
            
            
            3.01
            
            
            
            15,127
            
            
            
            223
            
            
            
            
            
            
            
            2.97Total
      interest-bearing liabilities
            
            
            1,561,808
            
            
            
            31,582
            
            
            
            
            
            
            
            4.05
            
            
            
            1,392,840
            
            
            
            30,155
            
            
            
            
            
            
            
            4.37Noninterest-bearing
      liabilities
            
            
            15,974
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,850Total
      liabilities
            
            
            1,577,782
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,408,690Equity
            
            
            201,458
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            233,813Total
      liabilities and equity
            
            $
            1,779,240
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,642,503Net
      interest income
            
            
            
            
            
            
            18,243
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,755Net
      interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.82
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.77
            %Net
      interest-earning assets (4)
            
            $
            139,634
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            181,868Net
      interest margin (5)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2.15
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2.27
            %Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            108.94
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            113.06
            %


______________




(1)  Includes net deferred loan fee amortization income of $871,000
and $1,185,000 for the six months ended June 30, 2008 and 2007,
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.








- 27
-
 Table of Contents





Three
      Months Ended June 30,2008
            
            
            2007Average
      Balance
            
            
            Interest
      and Dividends
            
            
            
            
            
            Yield/Cost
            
            
            Average
      Balance
            
            
            Interest
      and Dividends
            
            
            
            
            
            Yield/Cost(Dollars
      in Thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            1,489,112
            
            
            
            22,539
            
            
            
            (1
            )
            
            
            6.01
            %
            
            $
            1,388,292
            
            
            
            21,985
            
            
            
            (1
            )
            
            
            6.35
            %Mortgage
      related securities(2)
            
            
            141,803
            
            
            
            1,919
            
            
            
            
            
            
            
            5.37
            
            
            
            97,816
            
            
            
            1,278
            
            
            
            
            
            
            
            5.24Debt
      securities (2),
      federal funds sold and short-term investments
            
            
            97,525
            
            
            
            790
            
            
            
            
            
            
            
            3.21
            
            
            
            96,684
            
            
            
            1,072
            
            
            
            
            
            
            
            4.45Total
      interest-earning assets
            
            
            1,728,440
            
            
            
            25,248
            
            
            
            
            
            
            
            5.80
            
            
            
            1,582,792
            
            
            
            24,335
            
            
            
            
            
            
            
            6.17Noninterest-earning
      assets
            
            
            79,416
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            66,454Total
      assets
            
            $
            1,807,856
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,649,246Interest-bearing
      liabilities:Demand
      and money market accounts
            
            $
            147,452
            
            
            
            514
            
            
            
            
            
            
            
            1.38
            
            
            $
            141,930
            
            
            
            1,126
            
            
            
            
            
            
            
            3.18Savings
      accounts
            
            
            25,912
            
            
            
            59
            
            
            
            
            
            
            
            0.90
            
            
            
            19,762
            
            
            
            20
            
            
            
            
            
            
            
            0.41Certificates
      of deposit
            
            
            909,637
            
            
            
            9,773
            
            
            
            
            
            
            
            4.26
            
            
            
            856,041
            
            
            
            9,984
            
            
            
            
            
            
            
            4.68Total
      interest-bearing deposits
            
            
            1,083,001
            
            
            
            10,346
            
            
            
            
            
            
            
            3.79
            
            
            
            1,017,733
            
            
            
            11,130
            
            
            
            
            
            
            
            4.39Borrowings
            
            
            490,136
            
            
            
            5,041
            
            
            
            
            
            
            
            4.08
            
            
            
            370,197
            
            
            
            4,089
            
            
            
            
            
            
            
            4.43Other
      interest bearing liabilities
            
            
            18,973
            
            
            
            111
            
            
            
            
            
            
            
            2.35
            
            
            
            19,253
            
            
            
            126
            
            
            
            
            
            
            
            2.62Total
      interest-bearing liabilities
            
            
            1,592,110
            
            
            
            15,498
            
            
            
            
            
            
            
            3.87
            
            
            
            1,407,183
            
            
            
            15,345
            
            
            
            
            
            
            
            4.38Noninterest-bearing
      liabilities
            
            
            14,141
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            14,371Total
      liabilities
            
            
            1,606,251
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,421,554Equity
            
            
            201,605
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            227,692Total
      liabilities and equity
            
            $
            1,807,856
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,649,246Net
      interest income
            
            
            
            
            
            
            9,750
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,990Net
      interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.93
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.79
            %Net
      interest-earning assets (4)
            
            $
            136,330
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            175,609Net
      interest margin (5)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2.24
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2.28
            %Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            108.56
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            112.48
            %





______________


(1)  Includes net deferred loan fee amortization income of $441,000
and $667,000 for the three months ended June 30, 2008 and 2007,
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.











- 28
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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.







Six
      Months Ended June 30,
            
            
            Three
      Months Ended June 30,2008
      versus 2007
            
            
            2008
      versus 2007Increase
      (Decrease) due to
            
            
            Increase
      (Decrease) due toVolume
            
            
            Rate
            
            
            Net
            
            
            Volume
            
            
            Rate
            
            
            Net(In
      Thousands)
            
            
            (In
      Thousands)Interest
      and dividend income:Loans
      receivable(1)
      (2)
            
            $
            2,816
            
            
            
            (1,706
            )
            
            
            1,110
            
            
            $
            2,232
            
            
            
            (1,678
            )
            
            
            554Mortgage
      related securities
            
            
            1,094
            
            
            
            104
            
            
            
            1,198
            
            
            
            608
            
            
            
            33
            
            
            
            641Other
      earning assets(3)
            
            
            257
            
            
            
            (650
            )
            
            
            (393
            )
            
            
            9
            
            
            
            (291
            )
            
            
            (282
            )Total
      interest-earning assets
            
            
            4,167
            
            
            
            (2,252
            )
            
            
            1,915
            
            
            
            2,849
            
            
            
            (1,936
            )
            
            
            913Interest
      expense:Demand
      and money market accounts
            
            
            114
            
            
            
            (949
            )
            
            
            (835
            )
            
            
            45
            
            
            
            (658
            )
            
            
            (613
            )Savings
      accounts
            
            
            12
            
            
            
            64
            
            
            
            76
            
            
            
            8
            
            
            
            31
            
            
            
            39Certificates
      of deposit
            
            
            (125
            )
            
            
            136
            
            
            
            11
            
            
            
            504
            
            
            
            (715
            )
            
            
            (211
            )Total
      interest-bearing deposits
            
            
            1
            
            
            
            (749
            )
            
            
            (748
            )
            
            
            557
            
            
            
            (1,342
            )
            
            
            (785
            )Borrowings
            
            
            2,605
            
            
            
            (433
            )
            
            
            2,172
            
            
            
            1,259
            
            
            
            (307
            )
            
            
            952Other
      interest bearing liabilities
            
            
            (2
            )
            
            
            5
            
            
            
            3
            
            
            
            (2
            )
            
            
            (12
            )
            
            
            (14
            )Total
      interest-bearing liabilities
            
            
            2,604
            
            
            
            (1,177
            )
            
            
            1,427
            
            
            
            1,814
            
            
            
            (1,661
            )
            
            
            153Net
      change in net interest income
            
            
            1,563
            
            
            
            (1,075
            )
            
            
            488
            
            
            
            1,035
            
            
            
            (275
            )
            
            
            760





______________


(1)
            Includes
      net deferred loan fee amortization income of $871,000, $1,185,000,
      $441,000 and $667,000 for the six and three months ended June 30, 2008 and
      2007, 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.





- 29
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 Table of Contents


ASSET
QUALITY





The
following table summarizes non-performing loans and assets:




NON-PERFORMING
ASSETS







At
      June 30,
            
            
            At
      December 31,2008
            
            
            2007(Dollars
      in Thousands)Non-accrual
      loans:ResidentialOne-
      to four-family
            
            $
            29,421
            
            
            
            32,587Over
      four-family
            
            
            41,331
            
            
            
            38,218Construction
      and land
            
            
            9,024
            
            
            
            3,855Commercial
      real estate
            
            
            10,724
            
            
            
            4,358Home
      equity
            
            
            1,261
            
            
            
            1,332Total
      non-accrual loans
            
            
            91,761
            
            
            
            80,350Real
      estate owned
            
            
            16,557
            
            
            
            8,543Total
      non-performing assets
            
            $
            108,318
            
            
            
            88,893Total
      non-accrual loans to total loans receivable
            
            
            6.03
            %
            
            
            5.73
            %Total
      non-accrual loans to total assets
            
            
            4.96
            %
            
            
            4.70
            %Total
      non-performing assets to total assets
            
            
            5.86
            %
            
            
            5.20
            %








Total
non-accrual loans increased by $11.4 million to $91.8 million as of June 30,
2008, compared to $80.4 million as of December 31, 2007.  The ratio of
non-accrual loans to total loans at June 30, 2008 was 6.03% compared to 5.73% at
December 31, 2007.  The increase in non-accrual loans was primarily
attributable to the construction and land and commercial real estate
categories.  The $5.2 million increase in the construction and land
category was attributable to two relationships.  The first
relationship consists of two loans totaling $2.7 million.  The Company
believes that the value of the collateral, which consists of land and
improvements related to an 82-unit condominium development and a single family
home, is not sufficient to allow for the recovery of the outstanding
balance.  As a result, a $148,000 specific reserve has been
established with respect to this relationship.  The second lending
relationship is with an individual with two loans totaling $2.1
million.  The Company believes that the collateral, which consists of
land and improvements related to an 18-unit condominium development is not
sufficient to allow for the recovery of the outstanding loan
balance.  As a result, a $213,000 specific reserve has been
established with respect to this relationship.  The $6.4 million
increase in the commercial real estate and land category was attributable to two
relationships.  The first relationship consists of a $2.8 million loan
related to a mixed use retail and residential building.  The second
relationship consists of a $2.4 million loan secured by a light industrial
building and land.  Based upon a review of the underlying collateral,
management has determined that the value is adequate to recover the outstanding
principal balance of each of the loans should the borrowers cease efforts to
return the loan to a performing status.





Of the
$91.8 million in total non-accrual loans as of June 30, 2008, $35.2 million
related to three borrower relationships.  The first is a $17.4 million
relationship with a borrower who has 19 loans that are all secured by
multi-family 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 $2.4 million specific reserve has been established with respect to
this relationship.  The second is a relationship with a borrower that
has eight loans totaling $11.5 million.  The Company believes that the
collateral, which consists of a single family home, two- to four-family and
multifamily rental units and commercial real estate, 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 $903,000 specific reserve has been established with respect to this
relationship.  The third is a relationship with a borrower that has
six loans totaling $6.2 million.  The Company believes that the
collateral, which consists of two- to four-family and multifamily 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 $737,000 specific reserve has been established
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 June 30, 2008, $11.7 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, a $1.8 million specific reserve has been
established with respect to this general category of borrowers.





Total
real estate owned increased by $8.0 million, to $16.6 million as of June 30,
2008, compared to $8.5 million as of December 31, 2007.  Of this
increase, $7.0 million relates to three former lending
relationships.  The first relationship consisted of a real estate
investor with fourteen one-to four-family and multifamily properties with an
estimated net realizable value of $2.8 million.  The second
significant relationship consisted of a real estate investor with a 60-unit
multifamily property with an estimated net realizable value of $2.4
million.  The final relationship consisted of a real estate investor
with a portfolio of properties with an estimated net realizable value of $1.9
million.  These properties consist of the borrower’s primary
residence, along with two other single family homes held for
investment.  In addition to these three relationships, $4.5 million of
the overall June 30, 2008 balance represented non-owner occupied one- to
four-family properties owned by small real estate investors, $1.8 million
related to a single lending relationship, consisting of three notes
collateralized by two parcels of undeveloped land that was to have been
developed into residential real estate and $1.4 million related to a single
family lake home.  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.  Upon foreclosure and transfer to real
estate owned the Company recognized approximately $4.0 million and $3.0 million
in charge-offs related to these properties during the six and three-month
periods ended June 30, 2008.


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 Table of Contents


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





ALLOWANCE
FOR LOAN LOSSES





At
      or for the Six MonthsEnded
      June 30,2008
            
            
            2007(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            12,839
            
            
            $
            7,195Provision
      for loan losses
            
            
            11,276
            
            
            
            6,026Charge-offs:MortgageOne-
      to four-family
            
            
            3,098
            
            
            
            585Over
      four-family
            
            
            1,203
            
            
            
            215Construction
      and land
            
            
            405
            
            
            
            2,852Consumer
            
            
            3
            
            
            
            3Total
      charge-offs
            
            
            4,709
            
            
            
            3,655Recoveries:MortgageOne-
      to four-family
            
            
            83
            
            
            
            -Over
      four-family
            
            
            10
            
            
            
            -Construction
      and land
            
            
            106
            
            
            
            -Consumer
            
            
            6
            
            
            
            4Total
      recoveries
            
            
            205
            
            
            
            4Net
      charge-offs
            
            
            4,504
            
            
            
            3,651Allowance
      at end of period
            
            $
            19,611
            
            
            $
            9,570Ratios:Allowance
      for loan losses to non-accrual loans at end of period
            
            
            21.37
            %
            
            
            19.25
            %Allowance
      for loan losses to loans receivable at end of period
            
            
            1.29
            %
            
            
            0.70
            %Net
      charge-offs to average loans outstanding (annualized)
            
            
            0.62
            %
            
            
            0.53
            %










Net
charge-offs totaled $4.5 million, or 0.62% of average loans for the six months
ended June 30, 2008 on an annualized basis, compared to $3.7 million, or 0.53%
of average loans for the comparable period in 2007.  Of the $4.5
million in net charge-offs for the six months ended June 30, 2008, $3.0 million
related to loans secured by one- to four-family loans.  The vast
majority of charge-offs in this category relate to losses sustained on
properties owned and managed by small real estate investors.  An
additional $1.2 million in net charge-offs related to over four-family
loans.  Of this total, approximately $530,000 related to an over
four-family property that is now included in real estate owned.  Of
the $299,000 in net charge-offs related to construction and land loans, the
majority of the activity related to loans made to a number of borrowers to
finance single-family speculative home construction using a common
contractor.  The contractor was unable to deliver according to plan
and the borrowers were unable to cover cost over runs.  The
charge-offs are based on either “as is” or “as completed” updated
appraisals.


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 Table of Contents


The
allowance for loan loss totaled $19.6 million or 1.29% of loans outstanding as
of June 30, 2008 compared to $12.8 million or 0.92% of loans outstanding as of
December 31, 2007.  The majority of the $6.8 million increase in the
allowance for loan loss during the six months ended June 30, 2008 resulted from
the establishment of specific reserves on new and existing non-accrual
loans.  The increase in specific reserves primarily resulted from
estimated collateral shortfalls noted in the one- to four-family loan category
related to small real estate investors and construction and land
loans.  The shortfall in values generally results from property
mismanagement as well as a softening of the overall real estate
market.





The $6.8
million increase in the estimated allowance for loan losses for the period is
primarily attributable to the increase in non-accrual loans, growth of the
overall loan portfolio and an increase in loss experience directly related to
the weak real estate market.





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 non-performing 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.





As the
weakness in the residential real estate market enters its second year, risk of
loss on loans secured by residential real estate continues to
rise.  Due to these unprecedented market conditions, the Company has
expanded its loan review process to identify additional potential loan
collateral short falls.  The result of this expanded process could
have a significant negative impact on the Company’s results of operations in
upcoming periods.





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 1.9% and 3.1% for the six months
ended June 30, 2008 and 2007 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 $20 million in federal funds
lines of credit with a commercial bank and advances from the Federal Home Loan
Bank of Chicago (FHLBC).




A portion
of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities.  At June 30, 2008
and 2007, respectively, $16.6 million and $28.4 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.




- 32
-
 Table of Contents


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 six months ended June 30, 2008 and 2007, loan originations, net of collected
principal and transfers to real estate owned, totaled $139.2 million and $8.8
million, respectively, reflecting net growth in our portfolio.




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 $98.3 million for the three months
ended June 30, 2008 primarily as the result of competitive pricing offered in
the local market as well as the non-local wholesale 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 June 30, 2008, we had $433.1 million
in advances from the FHLBC, of which $30.1 million was due within 12 months, and
an additional available borrowing limit of $75.9 million based on collateral
requirements of the FHLBC.  As an additional source of funds, we also
enter into repurchase agreements.  At June 30, 2008, we had $84.0
million in repurchase agreements.  The agreements mature at various
times beginning in 2017, however, both all are callable beginning in 2009 and
quarterly thereafter.




At June
30, 2008, we had outstanding commitments to originate loans of $40.6 million,
unfunded commitments under construction loans of $28.0 million, unfunded
commitments under business lines of credit of $8.3 million and unfunded
commitments under lines of credit and standby letters of credit of $33.7
million.  At June 30, 2008, certificates of deposit scheduled to
mature in one year or less totaled $757.1million.  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 June 30, 2008, the Bank met all
capital adequacy requirements to which it is subject.




As of
June 30, 2008 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 June 30, 2008 are
presented in the table below:









June
      30, 2008To
      Be Well-CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in Thousands)Wauwatosa
      SavingsTotal
      capital (to risk-weighted assets)
            
            $
            186,064
            
            
            
            12.16
            %
            
            $
            121,777
            
            
            
            8.00
            %
            
            $
            152,221
            
            
            
            10.00
            %Tier
      I capital (to risk-weighted assets)
            
            
            166,037
            
            
            
            10.91
            %
            
            
            60,888
            
            
            
            4.00
            %
            
            
            91,333
            
            
            
            6.00
            %Tier
      I capital (to average assets)
            
            
            166,037
            
            
            
            9.24
            %
            
            
            71,858
            
            
            
            4.00
            %
            
            
            89,823
            
            
            
            5.00
            %State
      of Wisconsin (to total assets)
            
            
            166,037
            
            
            
            9.03
            %
            
            
            110,273
            
            
            
            6.00
            %
            
            
            N/A
            
            
            
            N/A


_____________




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 Table of Contents
 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 June 30, 2008 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)
            
            $
            172,579
            
            
            
            172,579
            
            
            
            -
            
            
            
            -
            
            
            
            -Certificates
      of deposit (5)
            
            
            920,277
            
            
            
            757,146
            
            
            
            141,218
            
            
            
            21,870
            
            
            
            43Federal
      Home Loan Bank advances (1)
            
            
            433,050
            
            
            
            30,050
            
            
            
            53,000
            
            
            
            -
            
            
            
            350,000Repurchase
      agreements (2)(5)
            
            
            84,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            84,000Operating
      leases (3)
            
            
            157
            
            
            
            105
            
            
            
            52
            
            
            
            -
            
            
            
            -Capital
      lease
            
            
            3,525
            
            
            
            3,525
            
            
            
            -
            
            
            
            -
            
            
            
            -State
      income tax obligation (4)
            
            
            2,484
            
            
            
            1,242
            
            
            
            1,242
            
            
            
            -
            
            
            
            -Salary
      continuation agreements
            
            
            2,545
            
            
            
            576
            
            
            
            949
            
            
            
            340
            
            
            
            680$
            1,618,617
            
            
            
            965,223
            
            
            
            196,461
            
            
            
            22,210
            
            
            
            434,723


______


(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 five years are callable on a quarterly
      basis with the initial call at various times through March
      2009.


(2)  The
repurchase agreements are callable on a quarterly basis with the initial call in
March 2009.


(3)  Represents
non-cancelable operating leases for offices and equipment.


(4)  Represents remainingamounts due to the Wisconsin Department of
Revenue related to the operations of the Company’s Nevada
subsidiary.


(5)Excludes
interest.





- 35
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 Table of Contents


The
following table details the amounts and expected maturities of significant
off-balance sheet commitments as of June 30, 2008.








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)
            
            $
            40,632
            
            
            
            40,632
            
            
            
            -
            
            
            
            -
            
            
            
            -Unused
      portion of home equity lines of credit (2)
            
            
            31,554
            
            
            
            31,554
            
            
            
            -
            
            
            
            -
            
            
            
            -Unused
      portion of business lines of credit
            
            
            8,291
            
            
            
            8,291
            
            
            
            -
            
            
            
            -
            
            
            
            -Unused
      portion of construction loans (3)
            
            
            27,968
            
            
            
            27,968
            
            
            
            -
            
            
            
            -
            
            
            
            -Standby
      letters of credit
            
            
            2,170
            
            
            
            1,815
            
            
            
            315
            
            
            
            40
            
            
            
            -Total
      Other Commitments
            
            $
            110,615
            
            
            
            110,260
            
            
            
            315
            
            
            
            40
            
            
            
            0





______________


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 June 30, 2008 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
            
            
            (2.74
            )%200
      basis point increase in rates
            
            
            1.23100
      basis point increase in rates
            
            
            1.81100
      basis point decrease in rates
            
            
            (4.45
            )200
      basis point decrease in rates
            
            
            (6.26
            )300
      basis point decrease in rates
            
            
            (12.56
            )







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 June 30, 2008, a 100 basis point immediate and
instantaneous increase in interest rates had the effect of increasing estimated
net interest income by 1.81% while a 100 basis point decrease in rates had the
affect of decreasing net interest income by 4.45%.  At June 30, 2008,
a 100 basis point immediate and instantaneous increase in interest rates had the
effect of increasing the estimated return on assets by 0.03% while a 100 basis
point decrease in rates had the effect of decreasing the return on assets by
0.07%.  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.










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
June 30, 2008, 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, 2007.




Item 4. Submission of Matters to a
Vote of Security Holders




On May
13, 2008 at the Annual Meeting of Shareholders, shareholders took the following
actions:





1.
            Elected
      as directors all nominees designated in the proxy statement dated March
      28, 2008 as follows:








Number
      of VotesFor
            
            
            AgainstMichael
      L. Hansen
            
            
            29,080,989
            
            
            
            156,407Stephen
      J. Schmidt
            
            
            29,071,429
            
            
            
            160,967








2.
Ratified the Audit Committee’s selection of KPMG LLP as independent registered
public accounting firm for Waterstone Financial, Inc. for 2008: 29,176,336 votes
cast for, 49,663 votes cast against, and 11,396 votes abstained.





On July
18, 2007 at the Special Meeting of Shareholders, shareholders took the following
actions:




Approved
an amendment to the Company’s charter changing its name to Waterstone Financial,
Inc. The charter amendment is effective August 1, 2008: 29,176,078 votes cast
for, 75,596 votes cast against, and 24,488 votes abstained.




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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:
      August 8, 2008/s/Douglas
      S. GordonDouglas
      S. GordonChief
      Executive OfficerDate:
      August 8, 2008/s/
      Richard C. LarsonRichard
      C. LarsonChief
      Financial Officer





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EXHIBIT INDEX





WATERSTONE
FINANCIAL, INC.





Form 10-Q
for Quarter Ended June 30, 2008











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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