Wauwatosa Holdings, Inc. - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Wauwatosa Hldgs (MM)	NASDAQ:WAUW	NASDAQ	Common Stock

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 March 31, 2008

		OR


*		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-51507

WAUWATOSA HOLDINGS, 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 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 31,250,897 at April 30, 2008.

WAUWATOSA HOLDINGS, INC.

10-Q INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2008 (unaudited) and December 31, 2007	3
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2008 and 2007 (unaudited)	5
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)	6-7
Notes to Consolidated Financial Statements	8-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-36
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37-38
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION	39
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 6. Exhibits	39
Signatures	39
Certification
Certification
Certification
Certification

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	March 31,			December 31,
	2008			2007
Assets	(In Thousands, except share data)
Cash	$	5,083			5,492
Federal funds sold		31,072			11,833
Interest-earning deposits in other financial institutions
and other short term investments		568			559
Cash and cash equivalents		36,723			17,884
Securities available-for-sale (at fair value)		181,076			172,137
Securities held-to-maturity (at amortized cost)
fair value of $9,617 in 2008 and $7,174 in 2007		9,937			7,646
Loans held for sale		20,281			23,108
Loans receivable		1,436,138			1,402,048
Less: Allowance for loan losses		14,780			12,839
Loans receivable, net		1,421,358			1,389,209

Office properties and equipment, net		31,830			32,018
Federal Home Loan Bank stock, at cost		19,698			19,289
Cash surrender value of life insurance		30,886			25,649
Real estate owned		9,788			8,543
Prepaid expenses and other assets		15,831			14,719
Total assets	$	1,777,408			1,710,202

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	49,087			53,210
Money market and savings deposits		120,633			115,135
Time deposits		911,012			826,190
Total deposits		1,080,732			994,535

Short term borrowings		30,050			53,484
Long term borrowings		437,000			422,000
Advance payments by borrowers for taxes		8,367			607
Other liabilities		18,603			37,757
Total liabilities		1,574,752			1,508,383

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 2008 and 2007
Issued - 33,975,250 shares in 2008 and in 2007
Outstanding - 31,250,897 shares in 2008 and in 2007		340			340
Additional paid-in capital		106,763			106,306
Accumulated other comprehensive income (loss) net of taxes		(398	)		44
Retained earnings, substantially restricted		146,976			146,367
Unearned ESOP shares		(5,764	)		(5,977	)
Treasury shares (2,724,353 shares), at cost		(45,261	)		(45,261	)
Total shareholders’ equity		202,656			201,819
Total liabilities and shareholders’ equity	$	1,777,408			1,710,202

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended March 31,
	2008			2007
	(In thousands, except per share data)
Interest income:
Loans	$	21,879			21,323
Mortgage-related securities		1,821			1,264
Debt securities, federal funds sold and
short-term investments		877			988
Total interest income		24,577			23,575
Interest expense:
Deposits		11,064			11,024
Borrowings		5,020			3,785
Total interest expense		16,084			14,809
Net interest income		8,493			8,766
Provision for loan losses		2,699			350
Net interest income after provision for loan losses		5,794			8,416
Noninterest income:
Service charges on loans and deposits		536			517
Increase in cash surrender value of life insurance		236			181
Mortgage banking income		750			568
Other		205			337
Total noninterest income		1,727			1,603
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		3,825			4,000
Occupancy, office furniture and equipment		1,253			1,224
Advertising		164			273
Data processing		368			239
Communications		168			216
Professional fees		217			270
Real estate owned		383			—
Other		624			586
Total noninterest expenses		7,002			6,808
Income before income taxes		519			3,211
Income taxes (benefit)		(90	)		1,112
Net income	$	609			2,099
Earnings per share:
Basic	$	0.02			0.06
Diluted	$	0.02			0.06
Weighted average shares outstanding:
Basic		30,641,728			32,920,752
Diluted		30,641,728			32,927,095

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock				Paid-In		Comprehensive			Retained		ESOP			Treasury
	Shares		Amount		Capital		Income (Loss)			Earnings		Shares			Stock			Equity
	(In Thousands)
Balances at December 31, 2006		33,724	$	337		104,182		(1,225	)		144,809		(6,831	)		—			241,272

Comprehensive income:
Net income		—		—		—		—			2,099		—			—			2,099
Other comprehensive income (loss):
Net unrealized holding gains on
available for sale securities arising during the period, net of taxes of $256		—		—		—		474			—		—			—			474
Total comprehensive income																			2,573
ESOP shares committed to be released to Plan participants		—		—		123		—			—		213			—			336
Stock based compensation		252		3		445													448
Purchase of treasury stock		—		—		—		—			—		—			(14,476	)		(14,476	)

Balances at March 31, 2007		33,976	$	340		104,750		(751	)		146,908		(6,618	)		(14,476	)		230,153

Balances at December 31, 2007		31,251	$	340		106,306		44			146,367		(5,977	)		(45,261	)		201,819

Comprehensive income:
Net income		—		—		—		—			609		—			—			609
Other comprehensive income (loss):
Net unrealized holding loss on
available for sale securities arising during the period, net of taxes of $239		—		—		—		(442	)		—		—			—			(442	)
Total comprehensive income																			167
ESOP shares committed to be released to Plan participants		—		—		20		—			—		213			—			233
Stock based compensation		—		—		437		—			—		—			—			437

Balances at March 31, 2008		31,251	$	340		106,763		(398	)		146,976		(5,764	)		(45,261	)		202,656

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2008			2007
	(In Thousands)
Operating activities:
Net income	$	609			2,099
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for loan losses		2,699			350
Provision for depreciation		648			631
Deferred income taxes		(553	)		197
Stock based compensation		437			448
Net amortization of premium on debt and mortgage-related securities		(105	)		(24	)
Amortization of unearned ESOP shares		233			336
Gain on sale of loans held for sale		(469	)		(308	)
Loans originated for sale		(137,269	)		(45,093	)
Proceeds on sales of loans originated for sale		140,564			43,104
Increase in accrued interest receivable		(218	)		(662	)
Increase in cash surrender value of bank owned life insurance		(236	)		(181	)
(Increase) decrease in accrued interest on deposits and borrowings		1,605			(362	)
Increase (decrease) in other liabilities		(1,465	)		4,182
Gain on sale of real estate owned and other assets		(71	)		(71	)
Other		67			412
Net cash (used in) provided by operating activities		6,476			5,058
Investing activities:
Net increase in loans receivable		(38,783	)		(5,034	)
Purchases of:
Debt securities		—			(1,385	)
Mortgage-related securities		(15,049	)		(2,057	)
Structured notes, held-to-maturity		(4,289	)		(7,646	)
Premises and equipment, net		(486	)		(825	)
Bank owned life insurance		(5,000	)		—
FHLB stock		(409	)		—
Proceeds from:
Principal repayments on mortgage-related securities		4,514			3,998
Maturities of debt securities		984			—
Calls on structured notes		1,998			—
Sales of real estate owned and other assets		2,646			505
Net cash used in investing activities		(53,874	)		(12,444	)

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2008			2007
	(In Thousands)
Financing activities:
Net increase (decrease) in deposits		86,197			(13,280	)
Net change in short-term borrowings		(23,434	)		(7,000	)
Proceeds from long-term borrowings		15,000			36,000
Net increase in advance payments by borrowers for taxes		(11,526	)		(9,350	)
Purchase of treasury stock		—			(14,476	)
Net cash provided by (used in) financing activities		66,237			(8,106	)
Increase (decrease) in cash and cash equivalents		18,839			(15,492	)
Cash and cash equivalents at beginning of period		17,884			73,807
Cash and cash equivalents at end of period	$	36,723			58,315

Supplemental information:
Cash paid or credited during the period for:
Income tax payments		1,242			1,757
Interest payments		14,479			15,712
Noncash investing activities:
Loans receivable transferred to foreclosed properties		4,672			614
Noncash financing activities:
Long-term FHLB advances reclassified to short-term		—			17,729

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

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

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

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2007 Annual Report on Form 10-K. Operating results for the three months ended March 31, 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 March 31, 2008 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:

	March 31, 2008
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	34,253		557		(35	)		34,775
Collateralized mortgage obligations		106,880		1,217		(2,059	)		106,038
Mortgage-related securities		141,133		1,774		(2,094	)		140,813

Government sponsored entity bonds		13,000		397		—			13,397
Municipal securities		27,305		226		(915	)		26,616
Debt securities		40,305		623		(915	)		40,013
Other securities		250		—		—			250
	$	181,688		2,397		(3,009	)		181,076

	December 31, 2007
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	20,128		154		(68	)		20,214
Collateralized mortgage obligations		110,419		1,050		(1,073	)		110,396
Mortgage-related securities		130,547		1,204		(1,141	)		130,610
Government sponsored entity bonds		13,996		187		(1	)		14,182
Municipal securities		27,277		209		(391	)		27,095
Debt securities		41,273		396		(392	)		41,277
Other securities		250		—		—			250
	$	172,070		1,600		(1,533	)		172,137

At March 31, 2008, $13.4 million of the Company’s government sponsored entity bonds and $76.1 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 March 31, 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		Fair
	Cost		Value
	(In Thousands)
Due within one year	$	5,493		5,565
Due after one year through five years		7,807		8,138
Due after five years through ten years		1,353		1,383
Due after ten years		25,652		24,927
Mortgage-related securities		141,133		140,813
Other securities		250		250
	$	181,688		181,076

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

	March 31, 2008
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		loss			value		loss			value		loss
	(In Thousands)
Mortgage backed securites	$	7,527		(35	)		—		—			7,527		(35	)
Collateralized mortgage obligations		28,288		(1,284	)		18,725		(775	)		47,013		(2,059	)
Municipal securities		16,618		(909	)		1,379		(6	)		17,997		(915	)
	$	52,433		(2,228	)		20,104		(781	)		72,537		(3,009	)

There are eight collateralized mortgage obligation securities and one municipal security at March 31, 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 March 31, 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 $9.6 million. Each security is callable quarterly, two beginning in the first quarter of 2009 with a final maturity in 2022. The remaining security is callable beginning in the first quarter of 2009 with a final maturity in 2023.

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Note 4 — Loans Receivable

Loans receivable are summarized as follows:

	March 31,		December 31,
	2008		2007

Mortgage loans:
Residential real estate:
One- to four-family	$	703,928		672,362
Over four-family residential		489,936		477,766
Commercial real estate		52,168		51,983
Construction and land		142,999		156,289
Home equity		84,889		85,954
Consumer loans		316		286
Commercial business loans		32,645		28,222
Gross loans receivable		1,506,881		1,472,862
Less:
Undisbursed loan proceeds		67,858		67,549
Unearned loan fees		2,885		3,265
Total loans receivable, net	$	1,436,138		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.

Non-accrual loans totaled $88.1 million at March 31, 2008 and $80.4 million at December 31, 2007.

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

	March 31,		December 31,
	2008		2007
	(In Thousands)
Impaired loans for which an allowance has been provided	$	42,108		27,896
Impaired loans for which no allowance has been provided		48,641		54,632
Total loans determined to be impaired	$	90,749		82,528

Allowance for loan losses related to impaired loans	$	7,543		5,783

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

	For the Three Months Ended
	March 31,
	2008			2007


Balance at beginning of period	$	12,839			7,195
Provision for loan losses		2,699			350
Charge-offs		(914	)		(301	)
Recoveries		156			0
Balance at end of period	$	14,780			7,244

Allowance for loan losses to loans receivable		1.03	%		0.53	%
Net charge-offs to average loans outstanding (annualized)		0.25	%		0.09	%
Allowance for loan losses to non-performing loans		16.78	%		17.21	%
Non-performing loans to loans receivable		6.13	%		3.06	%

Note 5 — Deposits

A summary of the contractual maturities of certificate accounts at March 31, 2008 is as follows:

	(In Thousands)

Within one year	$	746,897
One to two years		103,808
Two to three years		38,414
Three to four years		8,998
Four through five years		12,865
After five years		30
	$	911,012

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Note 6 — Borrowings

Borrowings consist of the following:

	March 31, 2008					December 31, 2007
			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate
	(In Thousands)					(In Thousands)

Federal funds maturing
2007		—		—			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		15,000		2.73	%		—		—

Repurchase agreements maturing:
2017		84,000		3.97	%		84,000		3.97	%
	$	467,050		4.13	%		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% one of which is callable in July 2008, and the other of which is callable in August 2008 and both of which are callable quarterly thereafter, and two $50 million advances at a weighted average rate of 4.13% one of which is callable in January 2009 and the other of which is callable in March 2009 and both of which are callable 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 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 $89.5 million at March 31, 2008.

The Company selects loans that meet underwriting criteria established by the FHLBC as collateral for outstanding advances. The Company’s FHLB 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 $19.7 million at March 31, 2008 and $19.3 million at December 31, 2007.

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 March 31, 2008 and 2007 as follows:

	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands)
Income before income taxes	$	519			3,211
Tax at federal statutory rate	$	182			1,124
Effect of:
State income taxes, net of Federal income tax benefit		(96	)		114
Cash surrender value of life insurance		(83	)		(63	)
Non-deductible ESOP and stock options expense		38			43
Tax-exempt interest income		(103	)		(18	)
Other		(28	)		(8	)
Income tax provision	$	(90	)		1,112

Effective tax rate		(17.3	%)		34.6	%

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Note 8 – Financial Instruments with Off-Balance Sheet Risk

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

	March 31,		December 31,
	2008		2007
	(In Thousands)
Financial instruments whose contract amounts represent
potential credit risk:
Commitments to extend credit under first mortgage loans	$	35,331		16,674
Unused portion of home equity lines of credit		30,697		31,492
Unused portion of construction loans		25,511		27,336
Unused portion of business lines of credit		11,649		8,721
Standby letters of credit		2,283		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 March 31, 2008 and December 31, 2007, the Company had $20.3 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.

Note 9 – Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings is computed by dividing net income 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 per share only. Nonvested restriced stock and stock options at March 31, 2008 are antidilutive and are excluded from the earnings per share calculation.

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

	Three Months Ended March 31,
	2008		2007
	(In Thousands, except per share data)

Net income	$	609		2,099

Weighted average shares outstanding		30,642		32,921
Effect of dilutive potential common shares		-		6
Diluted weighted average shares outstanding		30,642		32,927

Basic earnings per share	$	0.02		0.06
Diluted earnings per share	$	0.02		0.06

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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 March 31, 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 March 31, 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	$	181,076		-		174,655		6,421

The following summarizes the valuation techniques for assets recorded in our consolidated statement of financial position 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.

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	Available-for-sale securties
	(In Thousands)

Balance December 31, 2007	$	7,073

Unrealized holding losses arising during the period:
Included in other comprehensive income		(133	)

Principal repayments		519

Balance March 31, 2008	$	6,421

Level 3 available-for sale securities includes a single corporate collateralized mortgage obligation. At March 31, 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 statement of financial position at fair value. Fair value is determined based on third party appraisals. At March 31, 2008, loans determined to be impaired with an outstanding balance of $42.1 million were carried net of specific reserves of $7.5 million for a fair value of $34.6 million.

Loans held for sale - On a non-recurring basis, loans held for sale are recorded in our consolidated statement of financial position 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 statement of financial position 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.

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

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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.

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

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, Wauwatosa Savings Bank (“Wauwatosa Savings”), is primarily a mortgage lender with such loans comprising 97.8% of total loans receivable on March 31, 2008. Further, 79.2% of loans receivable are residential mortgage loans with over four-family loans comprising 32.5% of all loans on March 31, 2008. Wauwatosa Savings funds loan production primarily with retail deposits and Federal Home Loan Bank advances. On March 31, 2008, deposits comprised 68.6% of total liabilities. Time deposits, also known as certificates of deposit, accounted for 84.3% of total deposits at March 31, 2008. Federal Home Loan Bank advances outstanding on March 31, 2008 totaled $383.1 million, or 24.3% of total liabilities.

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Our results of operations for the quarter ended March 31, 2008 have been significantly affected by the Federal Reserve’s aggressive reduction of short term interest rates and the concurrent steepening of the yield curve.

Our results of operations also are affected by our provision for loan losses, net interest income, 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 and occupancy expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities. During the three months ended March 31, 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. As a consequence we determined that significant additional provisions for loan losses were warranted. As discussed below, during the three months ended March 31, 2008, the Company significantly increased its provision for loan losses to $2.7 million from $350,000 for the three months ended March 31, 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 29 .

The following discussion and analysis is presented to assist the reader in the understanding and evaluation of the Company’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on the results of operations for the three month period ended March 31, 2008 and 2007 and the financial condition as of March 31, 2008 compared to the financial condition as of December 31, 2007.

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. Wauwatosa Savings establishes valuation allowances on loans considered impaired. A loan is considered impaired when, based on current information and events, it is probable that Wauwatosa Savings 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. Wauwatosa Savings 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 Wauwatosa Savings 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 Wauwatosa Savings board of directors.

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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 Wauwatosa Savings allowance for loan losses. Such regulators have the authority to require Wauwatosa Savings 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. 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 of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest and penalties on income tax uncertainties are classified within income tax expense in the income statement.

Management believes its tax policies and practices are critical because the determination of the tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. If our estimated valuation allowance is too high or too low it will affect our future net income. Net deferred tax assets totaled $10.5 million and $9.7 million on March 31, 2008 and December 31, 2007, respectively. As of March 31, 2008 and December 31, 2007, there was a valuation allowance of $244,000, net of $131,000 federal income tax benefit, related to the deferred tax asset recognized for the Wisconsin charitable contribution deduction carryforward. 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.

Comparison of Operating Results for the Three Months Ended March 31, 2008 and 2007

General - Net income for the three months ended March 31, 2008 totaled $609,000, or $0.02 for both basic and diluted earnings per share compared to net income of $2.1 million , or $0.06 for both basic and diluted earnings per share for the three months ended March 31, 2007. The quarter ended March 31, 2008 generated an annualized return on average assets of 0.14% and an annualized return on average equity of 1.22%, compared to returns of 0.52% and 3.58%, respectively, for the comparable period in 2007. The decrease in net income was due to a $2.3 million increase in provisions for loan losses, a $273,000 decrease in net interest income and a $194,000 increase in noninterest expense offset by $1.3 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 29. The net interest margin for the three months ended March 31, 2008 was 2.03% compared to 2.27% for the three months ended March 31, 2007.

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Total Interest Income - Total interest income increased $1.0 million, or 4.3%, to $24.6 million during the three months ended March 31, 2008 compared to $23.6 million for the three months ended March 31, 2008. Interest income on loans increased $556,000, or 2.6%, to $21.9 million for the three months ended March 31, 2008 compared to $21.3 million for the comparable period of 2007. The increase resulted primarily from an increase of $51.8 million, or 3.7%, in the average loan balance to $1.44 billion during the three-month period ended March 31, 2008 from $1.38 billion during the comparable period in 2007. The increase in average balance was partially offset by a 14 basis point decrease in the average yield on loans to 6.11% for the three-month period ended March 31, 2008 from 6.25% for the comparable period in 2007. The decrease in average yield on loans was significantly impacted by non-accrual loans. Unrecognized interest income on non-accrual loans increased by $975,000 in the quarter ended March 31, 2008. This had the effect of reducing the average yield on loans for the quarter by seven basis points. Unrecognized interest income on non-accrual loans increased by $476,000 in the quarter ended March 31, 2007 effectively reducing the average yield on loans for that period by three basis points.

In addition, interest income from mortgage-related securities increased $557,000, or 44.1%, to $1.8 million for the quarter ended March 31, 2008 compared to $1.3 million for the comparable quarter in 2007. This was primarily due to the increase of $36.5 million, or 37.4%, in the average balance to $134.1 million for the three months ended March 31, 2008 from $97.6 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 20 basis point increase in the average yield on mortgage-related securities to 5.45% for the quarter ended March 31, 2008 from 5.25% for the comparable period in 2007. Finally, interest income from debt securities, federal funds sold and short-term investments decreased $111,000, or 11.2%, to $877,000 for the three months ended March 31, 2008 compared to $988,000 for the comparable period in 2007. This was due to a 124 basis point decrease in the average yield on other earning assets to 3.35% for the three-month period ended March 31, 2008 from 4.59% for the comparable period in 2007, partially offset by an increase of $17.7 million, or 20.3%, in the average balance of other earning assets to $105.1 million during the three-month period ended March 31, 2008 from $87.4 million during the comparable period in 2007. The decrease in average yield on other earning assets results primarily from a decline in dividends received on the Company’s FHLB stock. The FHLBC stock yielded a return of 3.16% during the three months ended March 31, 2007, however, no dividend was received during the three months ended March 31, 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.

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Total Interest Expense - Total interest expense increased by $1.3 million, or 8.6%, to $16.1 million during the three months ended March 31, 2008 from $14.8 million during the three months ended March 31, 2007. This increase was the result of an increase an increase in average interest bearing deposits and borrowings outstanding.

Interest expense on deposits increased $40,000, or 0.4%, to $11.1 million during the three months ended March 31, 2008 from $11.0 million during the comparable period in 2007. This was due to an increase of $24.9 million, or 2.4%, in the average balance of other interest bearing deposits to $1.05 billion during the three-month period ended March 31, 2008 from $1.02 billion during the comparable period in 2007. The increase in interest expense attributable to the increase in average balance was partially offset by a decrease in the cost of total average deposits of 13 basis points to 4.23% for the three-month period ended March 31, 2008 compared to 4.36% for the comparable period during 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 $1.2 million, or 32.6%, to $5.0 million during the three months ended March 31, 2008 from $3.8 million during the comparable period in 2007. The increase resulted primarily from an increase in average borrowings outstanding of $125.3 million, or 36.2%, to $471.3 million during the three-month period ended March 31, 2008 from $346.0 million during the comparable period in 2007. The increase in average borrowings was partially offset by a 15 basis point decrease in the average cost of borrowings to 4.18% during the three-month period ended March 31, 2008 from 4.33% during the comparable period in 2007.The increased use of borrowings as a source of funding during the year ended December 31, 2007 and the early portion of the quarter ended March 31, 2008 was due to favorable rates and terms compared to alternate funding sources including retail and wholesale deposits.

Net Interest Income - Net interest income decreased by $273,000 or 3.1%, during the three months ended March 31, 2008 as compared to the same period in 2007. The decrease resulted primarily from a 7 basis point decrease in our net interest rate spread to 1.67% for the three month period ended March 31, 2008 from 1.74% for the comparable period in 2007. The 7 basis point decrease in the net interest rate spread resulted from a 21 basis point decrease in the yield on interest earning assets, which was partially offset by a 14 basis point decrease in the cost of interest bearing liabilities. The decrease in net interest income resulting from a decrease in our net interest rate spread was compounded by a decrease in net average earning assets of $43.5 million, or 23.2%, to $143.9 million for the three-month period ended March 31, 2008 from $187.4 million from the comparable period in 2007. The decrease in net average earning assets was primarily attributable to the repurchase of outstanding Company common stock throughout the year ended December 31, 2007.

Provision for Loan Losses - Provision for loan losses increased $2.3 million to $2.7 million during the three months ended March 31, 2008, from $350,000 during the comparable period during 2007. The increased provision for the three months ended March 31, 2007 was the result of $758,000 of net loan charge-offs, specific loss provisions and a continued increase in non-performing assets. See Asset Quality section beginning on page 29 for an analysis of charge-offs, non-performing assets specific reserves and additional provisions.

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Noninterest Income - Total noninterest income increased $124,000, or 7.7%, to $1.7 million during the three months ended March 31, 2008 from $1.6 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 $194,000, or 2.9%, to $7.0 million during the three months ended March 31, 2008 from $6.8 million during the comparable period in 2007. The increase was primarily the result of increase in real estate owned expense and data processing expense, offset by decreases in compensation, payroll taxes and other employee benefits and advertising expense.

Compensation, payroll taxes and other employee benefit expense decreased $175,000, or 4.4%, to $3.8 million during the three months ended March 31, 2008 from $4.0 million during the comparable period in 2007. This decrease resulted primarily from a reduction in expense related to the ESOP plan in addition to a reduction in salaries. Expense related to the Company’s ESOP plan decreased $103,000, or 30.7%, to $233,000 during the three months ended March 31, 2008 compared to $336,000 during the comparable period in 2007. This decrease is directly related to the decrease in the Company’s average share price during the quarter ended March 31, 2008 compared to the comparable period in 2007. Salary expense decreased by $80,000, or 3.0% to $2.6 million during the three months ended March 31, 2008 compared to $2.7 million during the comparable period in 2007. Salary expense decreased as a result of a decrease in the overall level of full-time equivalent employees.

Advertising expense decreased $109,000, or 39.9%, for the three months ended March 31, 2008 to $164,000 from $273,000 during the comparable period in 2007. The Company has scaled back its advertising efforts during the three months ended March 31, 2008. Advertising activity is expected to increase later in 2008 in connection with the marketing of the new Bank name, WaterStone Bank SSB.

Data processing expense increased $129,000, or 54.0%, for the three months ended March 31, 2008 to $368,000 from $239,000 during the comparable period in 2007. The increase in data processing expense for the quarter ended March 31, 2008 as compared to the comparable period in 2007 was due to increased usage of services offered by our core data processing service provider partially offset by a reduction in the use of other third party information technology consultants and service providers.

Real estate owned expense totaled $383,000 for the three months ended March 31, 2008. There was no comparable expense during the three months ended March 31, 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 March 31, 2008, operational expenses totaled $454,000 and net gains on sales totaled $71,000. 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 $9.8 million at March 31, 2008 and $733,000 at March 31, 2007.

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Income Taxes - The effective tax rate for the three months ended March 31, 2008 provided a 17.3% benefit as compared to a 34.6% expense for the comparable period during 2007. The change between first quarter 2007 pre-tax income and 2008 income tax benefit was the result of a combination of a federal effective tax rate of 11.1% and an effective state benefit of 28.3%. The low federal rate is the result of low consolidated pre-tax income due to the high loan loss provision. 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 income for the three months ended March 31, 2008 decreased $1.5 million, or 71.0%, to $609,000, from $2.1 million during the comparable period in 2007.

Comparison of Financial Condition at March 31, 2008 and December 31, 2007

Total Assets - Total assets increased by $67.2 million, or 3.9%, to $1.78 billion at March 31, 2008 from $1.71 billion at December 31, 2007. The increase in total assets is reflected in increases in cash and cash equivalents of $18.8 million, increases in securities available for sale and held to maturity of $11.2 million, and an increase in loans receivable of $34.1 million.

Cash and Cash Equivalents – Cash and cash equivalents increased by $18.8 million to $36.7 million at March 31, 2008 from $17.9 million at December 31, 2007. The increase in cash and cash equivalents funded primarily by an increase in time deposits.

Securities Available for Sale – Securities available for sale increased by $8.9 million, or 5.2%, to $181.1 million at March 31, 2008 from $172.1 million at December 31, 2007. The Company invested an additional $10.0 million in its Nevada investment subsidiary during the three months ended March 31, 2008. The investment subsidiary used the proceeds of the capital infusion to purchase additional mortgage-related securities.

Securities Held to Maturity – Securities held to maturity increased by $2.3 million, or 30.0%, to $9.9 million at March 31, 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 $2.8 million, or 12.2%, to $20.3 million at March 31, 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.

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Loans Receivable - Loans receivable increased $34.1 million, or 2.4%, to $1.44 billion at March 31, 2008 from $1.40 billion at December 31, 2007. Loans receivable increased by $4.1 million, or 0.3%, during the three months ended March 31, 2007. The 2008 total increase in loans receivable was primarily attributable to a $31.6 million increase in one –to four-family loans and a $12.2 million increase in over four-family loans and a $4.4 million increase in commercial business, offset by a $13.3 million decrease in construction and land loans. During the three-month period ended March 31, 2008, $4.7 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 the
	Three Months Ended			Year Ended
	March 31, 2008			December 31, 2007
	(In Thousands)
Total gross loans receivable and held for sale at beginning of period	$	1,495,970			1,450,170
Real estate loans originated for investment:
Residential
One- to four-family		42,530			65,851
Over four-family		29,957			64,857
Construction and land		8,698			33,705
Commercial		754			13,494
Home equity		3,914			15,886
Total real estate loans originated for investment		85,853			193,793
Consumer loans originated for investment		52			157
Commerical loans originated for investment		2,879			25,229
Total loans originated for investment		88,784			219,179
Principal repayments		(54,765	)		(191,100	)
Net activity in loans held for investment		34,019			28,079
Loans originated for sale		137,269			242,120
Loans sold		(140,096	)		(224,399	)
Net activity in loans held for sale		(2,827	)		17,721
Total gross loans receivable and held for sale at end of period	$	1,527,162			1,495,970

Cash Surrender Value of Life Insurance – Cash surrender value of life insurance increased $5.2 million, or 20.4%, to $30.9 million at March 31, 2008 from $25.6 million at December 31, 2007. A new $5 million bank owned life insurance contract was executed in the quarter ended March 31, 2008.

Deposits – Total deposits increased $86.2 million, or 8.7%, to $1.08 billion at March 31, 2008 from $994.5 million at December 31, 2007. Total time deposits increased $84.8 million, or 10.3%, to $911.0 million from $826.2 million at December 31, 2007. The increase in time deposits resulted from the promotion of competitive rates on both the local retail and non-local wholesale markets. Time deposits originated through local retail outlets increased $51.4 million, or 6.3%, to $863.3 million at March 31, 2008 from $811.9 million at December 31, 2007. Time deposits originated through the wholesale market increased $33.4 million, to $47.7 million at March 31, 2008 from $14.3 million at December 31, 2007. Total money market and savings deposits increased $6.2 million, or 5.5%, to $120.6 million at March 31, 2008 from $114.4 million at December 31, 2007. Partially offsetting the increase in time and money market and

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savings deposits, total demand deposits decreased $4.1 million, or 7.7%, to $49.1 million at March 31, 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 decreased $8.4 million, or 1.8%, to $467.1 million at March 31, 2008 from $475.5 million at December 31, 2007. The overall decrease in borrowings at March 31, 2008 was a result of a decrease of $17.7 million in FHLB advances and a decrease of $5.7 million in short-term federal funds borrowed, partially offset by a new $15.0 million FHLB advance at a rate of 2.73%, due in January 2018 and with quarterly calls beginning in April 2008.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes and insurance increased $7.8 million to $8.4 million at March 31, 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 $19.2 million, or 50.7%, to $18.6 million at March 31, 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 $579,000 at March 31, 2008 and $17.4 million at December 31, 2007.

Shareholders’ Equity – Shareholders’ equity increased $837,000 million, or 0.4%, to $202.7 million at March 31, 2008 from $201.8 million at December 31, 2007. The increase was primarily a result of net income recognized during the three months ended March 31, 2008, which totaled $609,000. In addition, shareholders’ equity increased by $670,000 due to the net impact of employee benefits including ESOP, incentive stock options and restricted stock awards. This increase was partially offset by a $442,000 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.

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Average Balance Sheets, Interest and Yields/Costs

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

	Three Months Ended March 31,
	2008									2007
	Average Balance		Interest and Dividends				Yield/Cost			Average Balance		Interest and Dividends				Yield/Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	1,436,140		21,879	(1	)		6.11	%	$	1,384,345		21,323	(1	)		6.25	%
Mortgage related securities (2)		134,134		1,821				5.45			97,647		1,264				5.25
Debt securities (2) , federal funds sold and short-term investments		105,119		877				3.35			87,372		988				4.59
Total interest-earning assets		1,675,393		24,577				5.88			1,569,364		23,575				6.09
Noninterest-earning assets		76,226									66,236
Total assets	$	1,751,619								$	1,635,600
Interest-bearing liabilities:
Demand and money market accounts	$	143,642		825				2.30		$	137,591		1,047				3.09
Savings accounts		22,559		57				1.01			19,002		19				0.41
Certificates of deposit		882,879		10,177				4.62			867,632		9,954				4.65
Total interest-bearing deposits		1,049,080		11,059				4.23			1,024,225		11,020				4.36
Borrowings		471,297		4,911				4.18			345,999		3,691				4.33
Other interest bearing liabilities		11,128		114				4.11			11,733		98				3.39
Total interest-bearing liabilities		1,531,505		16,084				4.21			1,381,957		14,809				4.35
Noninterest-bearing liabilities		18,803									15,535
Total liabilities		1,550,308									1,397,492
Equity		201,311									238,108
Total liabilities and equity	$	1,751,619								$	1,635,600
Net interest income				8,493									8,766
Net interest rate spread (3)								1.67	%								1.74	%
Net interest-earning assets (4)	$	143,888								$	187,407
Net interest margin (5)								2.03	%								2.27	%
Average interest-earning assets to average interest-bearing liabilities								109.40	%								113.56	%

______________

(1) Includes net deferred loan fee amortization income of $430,000 and $518,000 for the three months ended March 31,2008 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.

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Rate/Volume Analysis

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

	Three Months Ended March 31,
	2008 versus 2007
	Increase (Decrease) due to
	Volume			Rate			Net
	(In Thousands)
Interest and dividend income:
Loans receivable (1) (2)	$	1,333			(777	)		556
Mortgage related securities	$	507			50			557
Other earning assets (3)		336			(447	)		(111	)
Total interest-earning assets		2,176			(1,174	)		1,002

Interest expense:
Demand and money market accounts		47			(269	)		(222	)
Savings accounts		4			34			38
Certificates of deposit		347			(124	)		223
Total interest-bearing deposits		398			(359	)		39
Borrowings		1,346			(126	)		1,220
Other interest bearing liabilities		(5	)		21			16
Total interest-bearing liabilities		1,739			(464	)		1,275
Net change in net interest income	$	437			(710	)		(273	)

(1)	Includes net deferred loan fee amortization income of $430,000 and $518,000 for the three months ended March 31, 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.

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ASSET QUALITY

The following table summarizes non-performing loans and assets:

NON-PERFORMING ASSETS

	At March 31,			At December 31,
	2008			2007
	(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	30,907			32,587
Over four-family		42,286			38,218
Construction and land		5,423			3,855
Commercial real estate		7,842			4,358
Home equity		1,620			1,332
Total non-accrual loans		88,078			80,350
Real estate owned		9,788			8,543
Total non-performing assets	$	97,866			88,893

Total non-accrual loans to total loans receivable		6.13	%		5.73	%
Total non-accrual loans to total assets		4.95	%		4.70	%
Total non-performing assets to total assets		5.51	%		5.20	%

Total non-accrual loans increased by $7.7 million to $88.1 million as of March 31, 2008, compared to $80.4 million as of December 31, 2007. The ratio of non-accrual loans to total loans at March 31, 2008 was 6.13% compared to 5.73% at December 31, 2007. All categories of loans with the exception of one- to four-family loans experienced an increase in non-accrual loans. The $7.7 million increase in non-accrual loans between December 31, 2007 and March 31, 2008, primarily relates to three borrowers. The first is a $3.8 million relationship with a borrower who has fifteen loans that are secured by one- to four-family, over four-family and commercial real estate properties. Based upon a review of the underlying collateral, the Company has determined that the value of the properties is not sufficient to allow for the recovery of the outstanding balance. As a result, a $168,000 specific reserve has been established with respect to this relationship. The second lending relationship that has contributed to the increase in non-accrual loans is an individual with two loans totaling $3.3 million. The Company believes that the collateral, which consists of commercial real estate and land, is adequate to recover the outstanding principal balance of each of the loans, should the borrower cease efforts to return the loan to a performing status. The third is a $1.9 million relationship with borrower with a loan secured by land to be used for residential development. 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 borrower cease efforts to return the loan to a performing status.

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Of the $88.1 million in total non-accrual loans as of March 31, 2008, the Company has determined that $36.8 million represent loans in which the estimated realizable value of the underlying collateral is not sufficient to allow for the recovery of the outstanding balance. As a result of this collateral shortfall, the Company recorded charge-offs totaling $291,000 and specific reserves totaling $6.5 million. Based upon its review of the remaining $51.3 million in non-accrual loans, the Company believes that the value of the underlying collateral securing these loans is adequate to recover the outstanding principal balance of each of the loans, should the respective borrower cease efforts to return the loan to a performing status.

Of the $88.1 million in total non-accrual loans as of March 31, 2008, $26.6 million related to two borrower relationships. The first is a $17.9 million relationship with a borrower who has twenty 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 $2.0 million specific reserve has been established with respect to this relationship. The second is a relationship with a borrower that has twelve loans totaling $8.7 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 $380,000 specific reserve has been established with respect to this relationship. In addition to the two borrower relationships noted previously, a significant portion of total non-accrual loans relates to a number of lending relationships with small real estate investors, whose collateral consists of non-owner occupied one- to four-family properties. As of March 31, 2008, $17.7 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 $2.0 million specific reserve has been established with respect to this general category of borrowers.

Total real estate owned increased by $1.2 million, or 14.6%, to $9.8 million as of March 31, 2008, compared to $8.5 million as of December 31, 2007. The entire $1.2 million increase relates to one- to four-family properties, the majority of which were non-owner occupied properties repossessed from small real estate investors. Of the $9.8 million in total real estate owned as of March 31, 2008, $4.2 million represented non-owner occupied one- to four-family properties owned by small real estate investors, $1.9 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 $1.0 million related to a number of borrowers who contracted to construct single-family homes on a speculative basis, using a common contractor. 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 $881,000 in charge-offs related to these properties during the three months ended March 31, 2008.

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

ALLOWANCE FOR LOAN LOSSES

	At or for the Three Months
	Ended March 31,
	2008			2007
	(Dollars in Thousands)

Balance at beginning of period	$	12,839		$	7,195
Provision for loan losses		2,699			350
Charge-offs:
Mortgage
One- to four-family		547			301
Over four-family		14			-
Construction and land		349			-
Consumer		4			-
Total charge-offs		914			301
Recoveries:
Mortgage
One- to four-family		44			-
Construction and land		106			-
Consumer		6			-
Total recoveries		156			-
Net charge-offs		758			301
Allowance at end of period	$	14,780		$	7,244

Ratios:
Allowance for loan losses to non-accrual loans at end of period		16.78	%		17.21	%
Allowance for loan losses to loans receivable at end of period		1.03	%		0.53	%
Net charge-offs to average loans outstanding (annualized)		0.25	%		0.09	%

_______________

Net charge-offs totaled $758,000, or 0.25% of average loans for the three months ended March 31, 2008 on an annualized basis, compared to $301,000, or 0.09% of average loans for the comparable period in 2007. Of the $758,000 in net charge-offs for the three months ended March 31, 2008, approximately $503,000 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 $243,000 in net charge-offs related to construction and land loans. Of this total, approximately $218,000 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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The allowance for loan loss totaled $14.8 million or 1.03% of loans outstanding as of March 31, 2008 compared to $12.8 million or 0.92% of loans outstanding as of December 31, 2007. Of the $1.9 million, or 15.1% increase during the three months ended March 31, 2008, $1.8 million 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. The shortfall in value generally results from property mismanagement as well as a softening of the overall real estate market.

The remaining $100,000 increase in the March 31, 2008 allowance for loan losses is attributable to the general valuation allowance intended to cover probable losses in the existing loan portfolio and was based on the increases in actual charge-off experience and in non-performing assets as previously described plus the increase in past due but still performing loans. Total loans past due in excess of 60 days increased $1.5 million, or 1.5%, to $98.8 million as of March 31, 2008, compared to $97.3 million as of December 31, 2007.

The increase in the estimated allowance for loan losses for the period of $1.9 million plus the $758,000 in net charge-offs results in the $2.7 million loan loss provision for the three months ended March 31, 2008. The net increase in the allowance for loan loss is primarily attributable to the increase in non-accrual loans, growth of the overall loan portfolio and an increase in loss experience.

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.

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.

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Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our liquidity ratio averaged 2.3% and 3.3% for the three months ended March 31, 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.

Regulatory liquidity, as required by the Wisconsin Department of Financial Institutions, is based on current liquid assets as a percentage of the prior month’s average deposits and short-term borrowings. Minimum primary liquidity is equal to 4.0% of deposits and short-term borrowings and minimum total regulatory liquidity is equal to 8.0% of deposits and short-term borrowings. Wauwatosa Savings’ primary and total regulatory liquidity at March 31, 2008 was 5.5% and 14.0%, respectively.

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 $50 million in federal funds lines of credit with three commercial banks 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 March 31, 2008 and 2007, respectively, $36.7 million and $17.9 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. We currently hold, at cost, $19.7 million of FHLBC stock, all of which we believe we will ultimately be able to recover. Based upon correspondence we received from the FHLBC, also incorporated into FHLBC’s 8-K, there is currently no expectation that this cease and desist order will impact the short- and long-term funding options provided by the FHLBC.

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.

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During the three months ended March 31, 2008 and 2007, loan originations, net of collected principal and transfers to real estate owned, totaled $34.0 million and $5.0 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 $86.2 million for the three months ended March 31, 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 March 31, 2008, we had $383.1 million in advances from the FHLBC, of which $30.1 million was due within 12 months, and an additional available borrowing limit of $123.5 million based on collateral requirements of the FHLBC. As an additional source of funds, we also enter into repurchase agreements. At March 31, 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 March 31, 2008, we had outstanding commitments to originate loans of $35.3 million, unfunded commitments under construction loans of $25.5 million, unfunded commitments under business lines of credit of $11.6 million and unfunded commitments under lines of credit and standby letters of credit of $32.9 million. At March 31, 2008, certificates of deposit scheduled to mature in one year or less totaled $746.9 million. 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

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, that as of March 31, 2008, the Bank met all capital adequacy requirements to which it is subject.

As of March 31, 2008 the most recent notification from the Federal Deposit Insurance Corporation categorized Wauwatosa Savings as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” Wauwatosa Savings 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 Wauwatosa Savings’ category.

As a state-chartered savings bank, Wauwatosa Savings 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 Wauwatosa Savings as of March 31, 2008 are presented in the table below:

	March 31, 2008
											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Wauwatosa Savings
Total capital (to risk-weighted assets)	$	184,655		12.63	%	$	116,996		8.00	%	$	146,245		10.00	%
Tier I capital (to risk-weighted assets)		170,399		11.65	%		58,498		4.00	%		87,747		6.00	%
Tier I capital (to average assets)		170,399		9.77	%		69,749		4.00	%		87,186		5.00	%
State of Wisconsin (to total assets)		170,399		9.62	%		106,308		6.00	%		N/A		N/A

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

The following tables present information indicating various contractual obligations and commitments of Wauwatosa Savings as of March 31, 2008 and the respective maturity dates.

Contractual Obligations
					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Deposits without a stated maturity (5)	$	169,720		169,720		-		-		-
Certificates of deposit (5)		911,012		746,897		142,222		21,863		30
Federal Home Loan Bank advances (1)		383,050		30,050		53,000		-		300,000
Repurchase agreements (2)(5)		84,000		-		-		-		84,000
Operating leases (3)		183		105		78		-		-
Capital lease		3,600		3,600		-		-		-
State income tax obligation (4)		2,484		1,242		1,242		-		-
Salary continuation agreements		2,689		576		1,050		340		723
	$	1,556,738		952,190		197,592		22,203		384,753

(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 remaining amounts due to the Wisconsin Department of Revenue related to the operations of the Company’s Nevada subsidiary.

(5) Excludes interest.

The following table details the amounts and expected maturities of significant off-balance sheet commitments as of March 31, 2008.

Other Commitments
					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Real estate loan commitments (1)	$	35,331		35,331		-		-		-
Unused portion of home equity lines of credit (2)		30,697		30,697		-		-		-
Unused portion of business lines of credit		11,649		11,649		-		-		-
Unused portion of construction loans (3)		25,511		25,511		-		-		-
Standby letters of credit		2,283		2,066		132		85		-
Total Other Commitments	$	105,471		105,254		132		85		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 Wauwatosa Savings Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

Income Simulation. Simulation analysis is used to estimate our interest rate risk exposure at a particular point in time. At least quarterly we review the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation used projected repricing of assets and liabilities at March 31, 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 Months

300 basis point increase in rates		3.94	%
200 basis point increase in rates		4.71
100 basis point increase in rates		2.65
100 basis point decrease in rates		(9.51	)
200 basis point decrease in rates		(12.89	)
300 basis point decrease in rates		(22.42	)

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Wauwatosa Savings’ Asset/Liability policy limits projected changes in net average annual interest income to a maximum variance of (10%) to (50%) for various levels of interest rate changes measured over a 24-month period when compared to the flat rate scenario. In addition, projected changes in the capital ratio are limited to (0.15%) to (1.00%) for various levels of changes in interest rates when compared to the flat rate scenario. These limits are re-evaluated on a periodic basis and may be modified, as appropriate. Because our balance sheet is asset sensitive, income is projected to increase proportionately with increases in interest rates. At March 31, 2008, a 100 basis point immediate and instantaneous increase in interest rates had the effect of increasing estimated net interest income by 2.65% while a 100 basis point decrease in rates had the affect of decreasing net interest income by 9.51%. At March 31, 2008, a 100 basis point immediate and instantaneous increase in interest rates had the effect of increasing the estimated return on assets by 0.04% while a 100 basis point decrease in rates had the effect of decreasing the return on assets by 0.15%. 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 March 31, 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 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.

	WAUWATOSA HOLDINGS, INC. (Registrant)
Date: May 9, 2008
	/s/Douglas S. Gordon
	Douglas S. Gordon
	Chief Executive Officer
Date: May 9, 2008
	/s/ Richard C. Larson
	Richard C. Larson
	Chief Financial Officer

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EXHIBIT INDEX

WAUWATOSA HOLDINGS, INC.

Form 10-Q for Quarter Ended March 31, 2008

Exhibit No.	Description	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Wauwatosa Holdings, Inc.	X
31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Wauwatosa Holdings, Inc.	X
32.1	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 Wauwatosa Holdings, Inc.	X
32.2	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 Wauwatosa Holdings, Inc.	X

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