Quarterly Report

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 1934


		For the quarterly period ended June 30, 2010

		OR


*		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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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

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

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 31,250,097 at July 31, 2010.

WATERSTONE FINANCIAL, INC.

10-Q INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2010 (unaudited) and December 31, 2009	3
Consolidated Statements of Operations for the six and three months ended June 30, 2010 and 2009 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2010 and 2009 (unaudited)	5
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)	6-7
Notes to Consolidated Financial Statements (unaudited)	8-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-44
Item 3. Quantitative and Qualitative Disclosures about Market Risk	45-46
Item 4. Controls and Procedures	46
PART II. OTHER INFORMATION	47
Item 1. Legal Proceedings	47
Item 1A. Risk Factors	47
Item 4. Submission of Matters to a Vote of Security Holders	48
Item 6. Exhibits	48
Signatures	48
Certification
Certification
Certification
Certification

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	June 30,			December 31,
	2010			2009
Assets	(In Thousands, except share data)
Cash	$	100,295			57,234
Federal funds sold		8,817			9,631
Short term investments		-			4,255
Cash and cash equivalents		109,112			71,120
Securities available for sale (at fair value)		206,554			205,415
Securities held to maturity (at amortized cost)
fair value of $2,251in 2010 and $1,930 in 2009		2,648			2,648
Loans held for sale (at fair value)		65,576			45,052
Loans receivable		1,384,377			1,420,010
Less: Allowance for loan losses		34,374			28,494
Loans receivable, net		1,350,003			1,391,516
Office properties and equipment, net		28,546			29,144
Federal Home Loan Bank stock (at cost)		21,653			21,653
Cash surrender value of life insurance		34,587			33,941
Real estate owned		51,312			50,929
Prepaid expenses and other assets		11,034			16,848
Total assets	$	1,881,025			1,868,266

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	64,546			61,420
Money market and savings deposits		97,456			92,028
Time deposits		1,023,182			1,011,442
Total deposits		1,185,184			1,164,890

Short term borrowings		57,901			73,900
Long term borrowings		434,000			434,000
Advance payments by borrowers for taxes		15,796			630
Other liabilities		14,843			26,254
Total liabilities		1,707,724			1,699,674

Shareholders’ 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 2010 and 2009
Issued - 33,974,450 shares in 2010 and in 2009
Outstanding - 31,250,097 shares in 2010 and in 2009		340			340
Additional paid-in capital		109,403			108,883
Accumulated other comprehensive income (loss), net of taxes		2,707			(2,001	)
Retained earnings		109,954			110,900
Unearned ESOP shares		(3,842	)		(4,269	)
Treasury shares (2,724,353 shares), at cost		(45,261	)		(45,261	)
Total shareholders’ equity		173,301			168,592
Total liabilities and shareholders’ equity	$	1,881,025			1,868,266

See Accompanying Notes to Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
	(In thousands, except per share data)
Interest income:
Loans	$	40,565			44,374			19,812			22,107
Mortgage-related securities		2,863			3,764			1,373			1,852
Debt securities, cash and cash equivalents		1,647			1,666			841			855
Total interest income		45,075			49,804			22,026			24,814
Interest expense:
Deposits		11,214			19,091			5,369			9,354
Borrowings		9,453			9,978			4,682			5,007
Total interest expense		20,667			29,069			10,051			14,361
Net interest income		24,408			20,735			11,975			10,453
Provision for loan losses		12,488			10,202			7,031			3,001
Net interest income after provision for loan losses		11,920			10,533			4,944			7,452
Noninterest income:
Service charges on loans and deposits		541			571			255			277
Increase in cash surrender value of life insurance		467			508			285			292
Mortgage banking income		8,586			3,889			4,995			2,989
Total other-than-temporary impairment losses		-			(8,555	)		-			(7,648	)
Portion of loss recognized in other comprehensive income (before taxes)		-			7,443			-			7,443
Net impairment losses recognized in earnings		-			(1,112	)		-			(205	)
Other		537			437			295			221
Total noninterest income		10,131			4,293			5,830			3,574
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		11,165			8,391			6,052			4,581
Occupancy, office furniture and equipment		2,719			2,368			1,412			1,146
Advertising		530			450			326			228
Data processing		701			708			337			343
Communications		453			349			220			155
Professional fees		737			692			428			350
Real estate owned		2,170			1,209			740			389
Other		4,500			2,915			2,359			1,985
Total noninterest expenses		22,975			17,082			11,874			9,177
Income (loss) before income taxes		(924	)		(2,256	)		(1,100	)		1,849
Income taxes (benefit)		22			(5	)		22			498
Net income (loss)	$	(946	)		(2,251	)		(1,122	)		1,351
Income (loss) per share:
Basic	$	(0.03	)		(0.07	)		(0.04	)		0.04
Diluted	$	(0.03	)		(0.07	)		(0.04	)		0.04
Weighted average shares outstanding:
Basic		30,783,883			30,661,074			30,794,314			30,333,527
Diluted		30,783,883			30,661,074			30,794,314			30,333,527

See Accompanying Notes to Consolidated Financial Statements.

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WATERSONE FINANCIAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

								Accumulated
					Additional			Other						Unearned						Total
	Common Stock				Paid-In			Comprehensive			Retained			ESOP			Treasury			Shareholders'
	Shares		Amount		Capital			Loss			Earnings			Shares			Shares			Equity
	(In Thousands)
Balances at December 31, 2008		31,250	$	340		107,839			(6,449	)		119,921			(5,123	)		(45,261	)		171,267

Cumulative effect adjustment related to a change in accounting
principle related to available for sale securities, net of taxes of $448									(669	)		1,117									448

Comprehensive income:
Net loss		—		—		—			—			(2,251	)		—			—			(2,251	)
Other comprehensive income:
Net unrealized holding gain on
available for sale securities arising during the period, net of taxes of $652		—		—		—			2,231			—			—			—			2,231
Reclassification of adjustment for net losses on available for sale
securities realized during the period, net of taxes of $446		—		—		—			666			—			—			—			666
Total comprehensive income																					646

ESOP shares committed to be released to Plan participants		—		—		(320	)		—			—			427			—			107
Stock based compensation		—		—		837			—			—			—			—			837

Balances at June 30, 2009		31,250	$	340		108,356			(4,221	)		118,787			(4,696	)		(45,261	)		173,305


Balances at December 31, 2009		31,250	$	340		108,883			(2,001	)		110,900			(4,269	)		(45,261	)		168,592

Comprehensive income:
Net income		—		—		—			—			(946	)		—			—			(946	)
Other comprehensive income:
Net unrealized holding gain on
available for sale securities arising during the period, net of taxes of $2,323		—		—		—			4,712			—			—			—			4,712
Reclassification of adjustment for net gains on available for
sale securities realized during the period, net of taxes of $3		—		—		—			(4	)		—			—			—			(4	)
Total comprehensive income																					3,762

ESOP shares committed to be released to Plan participants		—		—		(308	)		—			—			427			—			119
Stock based compensation		—		—		828			—			—			—			—			828

Balances at June 30, 2010		31,250	$	340		109,403			2,707			109,954			(3,842	)		(45,261	)		173,301

See Accompanying Notes to Consolidated Financial Statements.

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WATERSONE FINANCIAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2010			2009
	(In Thousands)
Operating activities:
Net loss	$	(946	)		(2,251	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for loan losses		12,488			10,202
Depreciation		926			1,012
Deferred income taxes		(501	)		(308	)
Stock based compensation		828			837
Net amortization of premium on debt and mortgage-related securities		(22	)		(109	)
Amortization of unearned ESOP shares		119			107
Loss on impairment of securities		—			1,112
Gain on sale of real estate owned and other assets		(701	)		(356	)
Gain on sale of loans held for sale		(8,140	)		(3,500	)
Loans originated for sale		(374,146	)		(367,362	)
Proceeds on sales of loans originated for sale		361,763			353,326
Decrease in accrued interest receivable		361			108
Increase in cash surrender value of bank owned life insurance		(467	)		(508	)
Decrease in accrued interest on deposits and borrowings		(737	)		(1,341	)
(Decrease) increase in other liabilities		(7,673	)		5,698
Decrease in accrued tax receivable		3,125			168
Other		430			(1,282	)
Net cash used in operating activities		(13,293	)		(4,447	)

Investing activities:
Net decrease in loans receivable		15,672			40,589
Purchases of:
Debt securities		(48,764	)		(19,349	)
Mortgage-related securities		(1,000	)		(13,010	)
Premises and equipment, net		(327	)		(3,480	)
Bank owned life insurance		(180	)		(180	)
Proceeds from:
Principal repayments on mortgage-related securities		18,788			18,011
Sales of mortgage-related securities		2,056			—
Sales of debt securities		10,018			—
Maturities of debt securities		21,820			5,000
Sales of real estate owned and other assets		13,741			8,723
Net cash provided by investing activities		31,824			36,304

See Accompanying Notes to Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2010			2009
	(In Thousands)
Financing activities:
Net increase in deposits		20,294			11,545
Net change in short-term borrowings		(15,999	)		25,000
Net change in advance payments by borrowers for taxes		15,166			2,620
Net cash provided by financing activities		19,461			39,165
Increase in cash and cash equivalents		37,992			71,022
Cash and cash equivalents at beginning of period		71,120			23,849
Cash and cash equivalents at end of period	$	109,112			94,871

Supplemental information:
Cash paid, credited or (received) during the period for:
Income tax payments (refunds)		(3,111	)		1,247
Interest payments		21,404			30,410
Noncash investing activities:
Loans receivable transferred to real estate owned		13,353			28,438
Noncash financing activities:
Long-term FHLB advances reclassified to short-term		—			23,900

See Accompanying Notes to Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) 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, 2009 Annual Report on Form 10-K. Operating results for the six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

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, deferred income taxes, certain investment securities and real estate owned. Actual results could differ from those estimates.

Note 2 — Reclassifications

Certain items in the prior period consolidated financial statements have been reclassified to conform to the June 30, 2010 presentation.

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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, 2010
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	33,497		2,320		—			35,817
Collateralized mortgage obligations:
Government agency issue		32,501		1,396		—			33,897
Private label issue		33,985		176		(1,424	)		32,737
Mortgage-related securities		99,983		3,892		(1,424	)		102,451

Government sponsored entity bonds		67,162		710		—			67,872
Municipal securities		30,803		796		(678	)		30,921
Other debt securities		5,250		60		—			5,310
Debt securities		103,215		1,566		(678	)		104,103
	$	203,198		5,458		(2,102	)		206,554

	December 31, 2009
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	39,785		1,728		—			41,513
Collateralized mortgage obligations:
Government agency issue		43,372		1,614		(26	)		44,960
Private label issue		36,681		—		(6,319	)		30,362
Mortgage-related securities		119,838		3,342		(6,345	)		116,835

Government sponsored entity bonds		40,400		238		(49	)		40,589
Municipal securities		43,599		631		(989	)		43,241
Other debt securities		5,250		—		(500	)		4,750
Debt securities		89,249		869		(1,538	)		88,580
	$	209,087		4,211		(7,883	)		205,415

At June 30, 2010, $31.7 million of the Company’s government sponsored entity bonds and $67.7 million of the Company’s mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.

The amortized cost and fair values of investment securities by contractual maturity at June 30, 2010, 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		Fair
	Cost		Value
	(In Thousands)
Debt securities
Due within one year	$	3,252		3,340
Due after one year through five years		71,170		72,212
Due after five years through ten years		13,602		13,981
Due after ten years		15,191		14,570
Mortgage-related securities		99,983		102,451
	$	203,198		206,554

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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, 2010
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		loss			value		loss			value		loss
	(In Thousands)
Collateralized mortgage obligations:
Private-label issue		—		—			26,263		(1,424	)		26,263		(1,424	)
Municipal securities		1,575		(18	)		6,166		(660	)		7,741		(678	)
	$	1,575		(18	)		32,429		(2,084	)		34,004		(2,102	)


	December 31, 2009
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		loss			value		loss			value		loss
Collateralized mortgage obligations:
Government agency issue	$	1,507		(26	)		—		—			1,507		(26	)
Private-label issue		1,519		(7	)		28,843		(6,312	)		30,362		(6,319	)
Government sponsored entity bonds		7,351		(49	)		—		—			7,351		(49	)
Municipal securities		12,802		(114	)		7,713		(875	)		20,515		(989	)
Other debt securities		—		—			4,500		(500	)		4,500		(500	)
	$	23,179		(196	)		41,056		(7,687	)		62,728		(7,883	)

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in fair value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than amortized cost, financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, with regard to its debt securities, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, the Company prepares a cash flow analysis to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

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As of June 30, 2010, the Company had eleven securities which had been in an unrealized loss position for twelve months or longer, including: four private-label issue collateralized mortgage obligation securities and seven municipal securities. Based upon the aforementioned factors, the Company identified two collateralized mortgage obligation securities at June 30, 2010 with a combined amortized cost of $21.7 million for which a cash flow analysis was performed to determine whether an other than temporary impairment charge was warranted. This evaluation indicated that the two collateralized mortgage obligations were other-than-temporarily impaired. Estimates of discounted cash flows based on expected yield at time of original purchase, prepayment assumptions based on actual and anticipated prepayment speed, actual and anticipated default rates and estimated level of severity given the loan to value ratios, credit scores, geographic locations, vintage and levels of subordination related to the security and its underlying collateral resulted in a projected credit loss on the collateralized mortgage obligations. One of these securities had been deemed other-than-temporarily impaired in 2008 resulting in a cumulative-effect adjustment of $1.1 million was made to retained earnings as of January 1, 2009 to reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis as of the beginning of the period in which the aforementioned accounting principals were adopted. Additional estimated credit losses on the two collateralized mortgage obligations of $1.1 million were charged to earnings during the year ended December 31, 2009. These two securities had an amortized cost of $21.7 million and a fair value of $20.4 million as of June 30, 2010. As of June 30, 2010, unrealized losses on these collateralized mortgage obligations include other-than-temporary impairment recognized in other comprehensive income (before taxes) of $1.3 million.

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

	(in thousands)
Credit related impairments on securties as of December 31, 2008	$	1,872
Cummulative effect adjustment related to a change in accounting principle		(1,117	)
Credit related impairments related to securites for which an other-than-temporary
impairment was not previously recognized		977
Increase in credit related impairments related to securities for which an other-than-
temporary impairment was previously recognized		135
Credit related impairments on securities as of December 31, 2009		1,867
Credit related impairments related to securites for which an other-than-temporary
impairment was not previously recognized		-
Increase in credit related impairments related to securities for which an other-than-
temporary impairment was previously recognized		-
Credit related impairments on securities as of June 30, 2010	$	1,867

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

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

Securities Held to Maturity

As of June 30, 2010, the Company held one security that has been designated as held to maturity. The security has an amortized cost of $2.6 million and an estimated fair value of $2.3 million. The final maturity of this security is 2022, however, it is callable quarterly. Due to the magnitude of the difference between fair value and amortized cost, the Company has performed an assessment to determine whether this security is other than temporarily impaired. Based upon a number of factors, including significant and repeated investments on the part of the United States government, the Company has determined that the security is not other than temporarily impaired at June 30, 2010.

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Note 4 — Loans Receivable

Loans receivable are summarized as follows:

	June 30,		December 31,
	2010		2009
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	646,479		681,578
Over four-family residential		552,785		536,731
Home equity		75,102		85,964
Commercial real estate		48,742		48,948
Construction and land		63,180		69,814
Consumer loans		418		619
Commercial business loans		43,764		48,094
Gross loans receivable		1,430,470		1,471,748
Less:
Undisbursed loan proceeds		44,166		49,818
Unearned loan fees		1,927		1,920
Total loans receivable	$	1,384,377		1,420,010

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. The Company does not have a concentration of loans in any specific industry. Credit risks tend to be geographically concentrated since a majority of the Company’s customer base lies in the Milwaukee metropolitan area. Furthermore, as of June 30, 2010, 87.6% of the Company’s loan portfolio consists of loans that are secured by real estate properties located primarily within the Milwaukee metropolitan area. Residential real estate collateralizing $132.7 million, or 9.3%, of gross loans receivable is located outside of the state of Wisconsin.

The unpaid principal balance of loans serviced for others was $4.6 million at June 30, 2010 and $4.7 million at December 31, 2009. These loans are not reflected in the consolidated financial statements.

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

	For the Six Months Ended
	June 30,
	2010			2009
	(In Thousands)

Balance at beginning of period	$	28,494			25,167
Provision for loan losses		12,488			10,202
Charge-offs		(6,712	)		(9,843	)
Recoveries		104			112
Balance at end of period	$	34,374			25,638

Allowance for loan losses to loans receivable		2.48	%		1.73	%
Net charge-offs to average loans outstanding (annualized)		0.93	%		1.26	%
Allowance for loan losses to non-accrual loans		35.43	%		26.63	%
Non-accrual loans to loans receivable		7.01	%		6.50	%

Non-accrual loans totaled $97.0 million at June 30, 2010 and $75.3 million at December 31, 2009.

Beginning in 2007 and continuing through the current quarter, the Company experienced significant deterioration in credit quality, primarily in its residential and construction and land portfolios. These two segments represent a significant portion of the overall loan portfolio. The downturn in the residential real estate market has reduced demand and market prices for vacant land, new construction and existing residential units. The overall economic downturn and the depressed real estate market have negatively impacted many residential real estate customers and have resulted in an increase in nonperforming assets.

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The following table presents data on impaired loans at June 30, 2010 and December 31, 2009.

	June 30,		December 31,
	2010		2009
	(In Thousands)

Impaired loans for which a specific allowance has been provided	$	99,291		90,787
Impaired loans for which no specifc allowance has been provided		64,827		61,123
Total loans determined to be impaired	$	164,118		151,910

Specific allowance for loan losses related to all impaired loans	$	16,396		12,517

The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $64.8 million of impaired loans for which no allowance has been provided, $16.0 million represent loans on which a total of $6.0 million in charge-offs have been recorded to reduce the outstanding loans balance to an amount that is commensurate with the estimated net realizable value of the underlying collateral. To the extent that further deterioration in collateral value continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.

At June 30, 2010 and December 31, 2009, total impaired loans include $44.9 million and $42.7 million, respectively of troubled debt restructurings that are performing in accordance with their restructured terms and are accounted for on an accrual basis. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months.

The Company serves the credit needs of its customers by offering a variety of loan programs. The loan portfolio is diversified by types of borrowers, property type, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2010 and December 31, 2009, no loans to one borrower or industry concentrations in excess of 10% existed in the Company’s loan portfolio of total loans.

Note 5 — Deposits

A summary of the contractual maturities of time deposits at June 30, 2010 is as follows:

	(In Thousands)

Within one year	$	639,564
One to two years		363,318
Two to three years		12,022
Three to four years		2,888
Four through five years		5,390
	$	1,023,182

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Note 6 — Borrowings

Borrowings consist of the following:

	June 30, 2010					December 31, 2009
			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate
	(Dollars in Thousands)

Bank line of credit	$	32,901		5.00	%		-		-

Federal Home Loan Bank, Chicago (FHLBC) advances maturing:
2010		25,000		4.72	%		73,900		3.61	%
2016		220,000		4.34	%		220,000		4.34	%
2017		65,000		3.19	%		65,000		3.19	%
2018		65,000		2.97	%		65,000		2.97	%

Repurchase agreements maturing
2017		84,000		3.96	%		84,000		3.96	%
	$	491,901		4.01	%	$	507,900		3.85	%

The bank line of credit is the outstanding portion of revolving lines with two unrelated banks. The $20.0 million and $25.0 million lines of credit are utilized by Waterstone Mortgage Corporation to finance loans originated for sale. Related interest rates are based upon the note rate associated with the loans being financed.

The $25.0 million advance due in 2010 matures in October.

The $220.0 million in advances due in 2016 consist of eight advances with rates ranging from 4.01% to 4.82% callable quarterly until maturity.

The $65.0 million in advances due in 2017 consist of three advances with rates ranging from 3.09% to 3.46% callable quarterly until maturity.

The $65.0 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 $84.0 million in repurchase agreements have rates ranging from 2.89% to 4.31% callable quarterly until maturity.

The Company selects loans that meet underwriting criteria established by the FHLBC as collateral for outstanding advances. The Company’s FHLBC borrowings are limited to 60% of the carrying value of qualifying, unencumbered one- to four-family mortgage loans, 25% of the carrying value of home equity loans and 60% of the carrying value of over four-family loans. In addition, these advances are collateralized by FHLBC stock totaling $21.7 million at June 30, 2010 and December 31, 2009.

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Note 7 – Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, 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 classifications 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). As of June 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject. On December 18, 2009, WaterStone Bank entered into a consent order with its federal and state bank regulators whereby it has agreed to maintain a minimum Tier 1 capital ratio of 8.50% and a minimum total risk based capital ratio of 12.00%. At June 30, 2010, we were in compliance with these higher capital requirements.

As of June 30, 2010 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as quantitatively “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the 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 the Bank’s category, however, the outstanding consent order limits transactions otherwise available to “well capitalized” banks.

As a state-chartered savings bank, the 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, 2010 are presented in the table below:

	June 30, 2010
											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Thousands)
WaterStone Bank
Total capital (to risk-weighted assets)	$	180,863		13.66	%	$	105,952		8.00	%	$	132,440		10.00	%
Tier I capital (to risk-weighted assets)		164,089		12.39	%		52,976		4.00	%		79,464		6.00	%
Tier I capital (to average assets)		164,089		8.95	%		73,368		4.00	%		91,710		5.00	%
State of Wisconsin capital required (to total assets)		164,089		8.76	%		112,410		6.00	%		N/A		N/A

	December 31, 2009
WaterStone Bank
Total capital (to risk-weighted assets)	$	181,344		13.74	%	$	105,559		8.00	%	$	131,949		10.00	%
Tier I capital (to risk-weighted assets)		164,693		12.48	%		52,780		4.00	%		79,170		6.00	%
Tier I capital (to average assets)		164,693		8.71	%		75,674		4.00	%		94,592		5.00	%
State of Wisconsin capital required (to total assets)		164,693		8.86	%		111,484		6.00	%		N/A		N/A

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Note 8 – Income Taxes

Despite a pre-tax loss, we recorded income tax expense of $22,000 through the second quarter of 2010. Because of the valuation allowance on our deferred tax asset we were not able to record an income tax benefit related to the pre-tax loss incurred. A current income tax benefit that would normally result from a pre-tax loss was offset by additional deferred tax expense due to an increase in the required valuation allowance. The income tax expense recorded through the second quarter of 2010 is related to certain states in which our mortgage banking subsidiary does business and will file a separate company state income tax return.

Under generally accepted accounting principles, a deferred tax asset valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. We currently maintain a valuation allowance against substantially all of our net deferred tax assets because it is "more likely than not" that all of these net deferred tax assets will not be realized. This determination was based, largely, on the negative evidence of a cumulative loss in the most recent three year period caused primarily by the loan loss provisions made during those periods. In addition, general uncertainty surrounding future economic and business conditions has increased the likelihood of volatility in our future earnings.

Note 9 – 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,
	2010		2009
	(In Thousands)
Financial instruments whose contract amounts represent
potential credit risk:
Commitments to extend credit under amortizing loans (1)	$	8,151		13,607
Unused portion of home equity lines of credit		26,903		28,376
Unused portion of construction loans		5,516		7,861
Unused portion of business lines of credit		11,746		13,581
Standby letters of credit		1,001		1,001

(1) Excludes commitments to originate loans held for sale which are derivative instruments.

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate.

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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of June 30, 2010 and December 31, 2009.

Residential mortgage loans sold to others are conventional residential first lien mortgages that are sold on a servicing released basis. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold, related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. There have been insignificant instances of repurchase under representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages and that historical experience shows negligible losses and insignificant repurchase activity, management believes that losses and repurchases under the limited recourse provisions will continue to be insignificant.

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 interest rate lock commitments to originate loans and loans held for sale. Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income. The net fair value of the mortgage derivatives at June 30, 2010, was a loss of $748,000, comprised of the net loss of $1.2 million on forward commitments to sell $87.8 million of residential mortgage loans to various investors and the net gain of $462,000 on interest rate lock commitments to originate approximately $45.9 million of residential mortgage loans held for sale to individual borrowers.

Note 10 – Earnings (loss) per share

Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities have the right to receive dividends at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. Unvested restricted stock and stock options are considered outstanding for diluted earnings (loss) per share only. Unvested restricted stock and stock options totaling 103,400 and 314,000 shares for the six and three month periods ended June 30, 2010 and 149,900 and 462,000 shares for the six and three month periods ended June 30, 2009 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						Three Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(In Thousands, except per share data)

Net income (loss)	$	(946	)		(2,251	)	$	(1,122	)		1,345
Net income (loss) available to unvested restricted shares		-			-			-			-
Net income (loss) available to common stockholders	$	(946	)		(2,251	)	$	(1,122	)		1,345

Weighted average shares outstanding		30,784			30,661			30,794			30,334
Effect of dilutive potential common shares		-			-			-			-
Diluted weighted average shares outstanding		30,784			30,661			30,794