UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





Form 10-Q





R
            
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934For
      the quarterly period ended March 31, 2008OR*
            
            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
            R
            
            No
            *





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





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





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





Yes
            *
            
            No
            R





The number of shares outstanding of the
issuer’s common stock, $0.01 par value per share, was 31,250,897 at April 30,
2008.







WAUWATOSA HOLDINGS,
INC.





10-Q
INDEX


























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








- 2
-





PART
I — FINANCIAL INFORMATION


Item 1. Financial
Statements





WAUWATOSA
HOLDINGS, INC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION





(Unaudited)March
      31,
            
            
            December
      31,2008
            
            
            2007Assets
            
            (In
      Thousands, except share data)Cash
            
            $
            5,083
            
            
            
            5,492Federal
      funds sold
            
            
            31,072
            
            
            
            11,833Interest-earning
      deposits in other financial institutionsand
      other short term investments
            
            
            568
            
            
            
            559Cash
      and cash equivalents
            
            
            36,723
            
            
            
            17,884Securities
      available-for-sale (at fair value)
            
            
            181,076
            
            
            
            172,137Securities
      held-to-maturity (at amortized cost)fair
      value of $9,617 in 2008 and $7,174 in 2007
            
            
            9,937
            
            
            
            7,646Loans
      held for sale
            
            
            20,281
            
            
            
            23,108Loans
      receivable
            
            
            1,436,138
            
            
            
            1,402,048Less:
      Allowance for loan losses
            
            
            14,780
            
            
            
            12,839Loans
      receivable, net
            
            
            1,421,358
            
            
            
            1,389,209Office
      properties and equipment, net
            
            
            31,830
            
            
            
            32,018Federal
      Home Loan Bank stock, at cost
            
            
            19,698
            
            
            
            19,289Cash
      surrender value of life insurance
            
            
            30,886
            
            
            
            25,649Real
      estate owned
            
            
            9,788
            
            
            
            8,543Prepaid
      expenses and other assets
            
            
            15,831
            
            
            
            14,719Total
      assets
            
            $
            1,777,408
            
            
            
            1,710,202Liabilities
      and Shareholders’ EquityLiabilities:Demand
      deposits
            
            $
            49,087
            
            
            
            53,210Money
      market and savings deposits
            
            
            120,633
            
            
            
            115,135Time
      deposits
            
            
            911,012
            
            
            
            826,190Total
      deposits
            
            
            1,080,732
            
            
            
            994,535Short
      term borrowings
            
            
            30,050
            
            
            
            53,484Long
      term borrowings
            
            
            437,000
            
            
            
            422,000Advance
      payments by borrowers for taxes
            
            
            8,367
            
            
            
            607Other
      liabilities
            
            
            18,603
            
            
            
            37,757Total
      liabilities
            
            
            1,574,752
            
            
            
            1,508,383Shareholders’
      equity:Preferred
      stock (par value $.01 per share)Authorized
      20,000,000 shares, no shares issued
            
            
            —
            
            
            
            —Common
      stock (par value $.01 per share)Authorized
      - 200,000,000 shares in 2008 and 2007Issued
      - 33,975,250 shares in 2008 and in 2007Outstanding
      - 31,250,897 shares in 2008 and in 2007
            
            
            340
            
            
            
            340Additional
      paid-in capital
            
            
            106,763
            
            
            
            106,306Accumulated
      other comprehensive income (loss) net of taxes
            
            
            (398
            )
            
            
            44Retained
      earnings, substantially restricted
            
            
            146,976
            
            
            
            146,367Unearned
      ESOP shares
            
            
            (5,764
            )
            
            
            (5,977
            )Treasury
      shares (2,724,353 shares), at cost
            
            
            (45,261
            )
            
            
            (45,261
            )Total
      shareholders’ equity
            
            
            202,656
            
            
            
            201,819Total
      liabilities and shareholders’ equity
            
            $
            1,777,408
            
            
            
            1,710,202





See
Accompanying Notes to Consolidated Financial Statements.





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 Table of Contents





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





See
Accompanying Notes to Consolidated Financial Statements.








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 Table of Contents





WAUWATOSA
HOLDINGS, INC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY


(Unaudited)





Common
      Stock
            
            
            Paid-In
            
            
            Comprehensive
            
            
            Retained
            
            
            ESOP
            
            
            TreasuryShares
            
            
            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
            )
            
            
            —
            
            
            
            241,272Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,099
            
            
            
            —
            
            
            
            —
            
            
            
            2,099Other
      comprehensive income (loss):Net
      unrealized holding gains onavailable
      for sale securities arising during the period, net of taxes of
      $256
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            474
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            474Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,573ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            123
            
            
            
            —
            
            
            
            —
            
            
            
            213
            
            
            
            —
            
            
            
            336Stock
      based compensation
            
            
            252
            
            
            
            3
            
            
            
            445
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            448Purchase
      of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (14,476
            )
            
            
            (14,476
            )Balances
      at March 31, 2007
            
            
            33,976
            
            
            $
            340
            
            
            
            104,750
            
            
            
            (751
            )
            
            
            146,908
            
            
            
            (6,618
            )
            
            
            (14,476
            )
            
            
            230,153Balances
      at December 31, 2007
            
            
            31,251
            
            
            $
            340
            
            
            
            106,306
            
            
            
            44
            
            
            
            146,367
            
            
            
            (5,977
            )
            
            
            (45,261
            )
            
            
            201,819Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            609
            
            
            
            —
            
            
            
            —
            
            
            
            609Other
      comprehensive income (loss):Net
      unrealized holding loss onavailable
      for sale securities arising during the period, net of taxes of
      $239
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (442
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (442
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            167ESOP
      shares committed to be released to Plan participants
            
            
            —
            
            
            
            —
            
            
            
            20
            
            
            
            —
            
            
            
            —
            
            
            
            213
            
            
            
            —
            
            
            
            233Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            437
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            437Balances
      at March 31, 2008
            
            
            31,251
            
            
            $
            340
            
            
            
            106,763
            
            
            
            (398
            )
            
            
            146,976
            
            
            
            (5,764
            )
            
            
            (45,261
            )
            
            
            202,656





See
Accompanying Notes to Consolidated Financial Statements.





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 Table of Contents





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
            
            
            
            2,099Adjustments
      to reconcile net income to netcash
      (used in) provided by operating activities:Provision
      for loan losses
            
            
            2,699
            
            
            
            350Provision
      for depreciation
            
            
            648
            
            
            
            631Deferred
      income taxes
            
            
            (553
            )
            
            
            197Stock
      based compensation
            
            
            437
            
            
            
            448Net
      amortization of premium on debt and mortgage-related
      securities
            
            
            (105
            )
            
            
            (24
            )Amortization
      of unearned ESOP shares
            
            
            233
            
            
            
            336Gain
      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
            
            
            
            43,104Increase
      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
            )
            
            
            4,182Gain
      on sale of real estate owned and other assets
            
            
            (71
            )
            
            
            (71
            )Other
            
            
            67
            
            
            
            412Net
      cash (used in) provided by operating activities
            
            
            6,476
            
            
            
            5,058Investing
      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
            
            
            
            3,998Maturities
      of debt securities
            
            
            984
            
            
            
            —Calls
      on structured notes
            
            
            1,998
            
            
            
            —Sales
      of real estate owned and other assets
            
            
            2,646
            
            
            
            505Net
      cash used in investing activities
            
            
            (53,874
            )
            
            
            (12,444
            )





See
Accompanying Notes to Consolidated Financial Statements.





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 Table of Contents





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
            
            
            
            36,000Net
      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
            
            
            
            73,807Cash
      and cash equivalents at end of period
            
            $
            36,723
            
            
            
            58,315Supplemental
      information:Cash
      paid or credited during the period for:Income
      tax payments
            
            
            1,242
            
            
            
            1,757Interest
      payments
            
            
            14,479
            
            
            
            15,712Noncash
      investing activities:Loans
      receivable transferred to foreclosed properties
            
            
            4,672
            
            
            
            614Noncash
      financing activities:Long-term
      FHLB advances reclassified to short-term
            
            
            —
            
            
            
            17,729



























































See
Accompanying Notes to Consolidated Financial Statements.





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 Table of Contents





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.







- 8
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 Table of Contents




Note
3 — Securities





Securities
Available for Sale





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







March
      31, 2008(In
      Thousands)Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealizedcost
            
            
            gains
            
            
            losses
            
            
            Fair
      valueMortgage-backed
      securities
            
            $
            34,253
            
            
            
            557
            
            
            
            (35
            )
            
            
            34,775Collateralized
      mortgage obligations
            
            
            106,880
            
            
            
            1,217
            
            
            
            (2,059
            )
            
            
            106,038Mortgage-related
      securities
            
            
            141,133
            
            
            
            1,774
            
            
            
            (2,094
            )
            
            
            140,813Government
      sponsored entity bonds
            
            
            13,000
            
            
            
            397
            
            
            
            —
            
            
            
            13,397Municipal
      securities
            
            
            27,305
            
            
            
            226
            
            
            
            (915
            )
            
            
            26,616Debt
      securities
            
            
            40,305
            
            
            
            623
            
            
            
            (915
            )
            
            
            40,013Other
      securities
            
            
            250
            
            
            
            —
            
            
            
            —
            
            
            
            250$
            181,688
            
            
            
            2,397
            
            
            
            (3,009
            )
            
            
            181,076















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







- 9
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 Table of Contents





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
            
            
            FairCost
            
            
            Value(In
      Thousands)Due
      within one year
            
            $
            5,493
            
            
            
            5,565Due
      after one year through five years
            
            
            7,807
            
            
            
            8,138Due
      after five years through ten years
            
            
            1,353
            
            
            
            1,383Due
      after ten years
            
            
            25,652
            
            
            
            24,927Mortgage-related
      securities
            
            
            141,133
            
            
            
            140,813Other
      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, 2008Less
      than 12 months
            
            
            12
      months or longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealizedvalue
            
            
            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.







- 10
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 Table of Contents





Note
4 — Loans Receivable





Loans
receivable are summarized as follows:









March
      31,
            
            
            December
      31,2008
            
            
            2007Mortgage
      loans:Residential
      real estate:One-
      to four-family
            
            $
            703,928
            
            
            
            672,362Over
      four-family residential
            
            
            489,936
            
            
            
            477,766Commercial
      real estate
            
            
            52,168
            
            
            
            51,983Construction
      and land
            
            
            142,999
            
            
            
            156,289Home
      equity
            
            
            84,889
            
            
            
            85,954Consumer
      loans
            
            
            316
            
            
            
            286Commercial
      business loans
            
            
            32,645
            
            
            
            28,222Gross
      loans receivable
            
            
            1,506,881
            
            
            
            1,472,862Less:Undisbursed
      loan proceeds
            
            
            67,858
            
            
            
            67,549Unearned
      loan fees
            
            
            2,885
            
            
            
            3,265Total
      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
            
            
            
            27,896Impaired
      loans for which no allowance has been provided
            
            
            48,641
            
            
            
            54,632Total
      loans determined to be impaired
            
            $
            90,749
            
            
            
            82,528Allowance
      for loan losses related to impaired loans
            
            $
            7,543
            
            
            
            5,783








- 11
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 Table of Contents





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








For
      the Three Months EndedMarch
      31,2008
            
            
            2007Balance
      at beginning of period
            
            $
            12,839
            
            
            
            7,195Provision
      for loan losses
            
            
            2,699
            
            
            
            350Charge-offs
            
            
            (914
            )
            
            
            (301
            )Recoveries
            
            
            156
            
            
            
            0Balance
      at end of period
            
            $
            14,780
            
            
            
            7,244Allowance
      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
            
            $
            746,897One
      to two years
            
            
            103,808Two
      to three years
            
            
            38,414Three
      to four years
            
            
            8,998Four
      through five years
            
            
            12,865After
      five years
            
            
            30$
            911,012










- 12
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 Table of Contents





Note
6 — Borrowings




Borrowings
consist of the following:









March
      31, 2008
            
            
            December
      31, 2007Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            AverageBalance
            
            
            Rate
            
            
            Balance
            
            
            Rate(In
      Thousands)
            
            
            
            
            
            (In
      Thousands)Federal
      funds maturing2007
            
            
            —
            
            
            
            —
            
            
            
            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
            
            
            
            3,211Tax
      at federal statutory rate
            
            $
            182
            
            
            
            1,124Effect
      of:State
      income taxes, net of Federal income tax benefit
            
            
            (96
            )
            
            
            114Cash
      surrender value of life insurance
            
            
            (83
            )
            
            
            (63
            )Non-deductible
      ESOP and stock options expense
            
            
            38
            
            
            
            43Tax-exempt
      interest income
            
            
            (103
            )
            
            
            (18
            )Other
            
            
            (28
            )
            
            
            (8
            )Income
      tax provision
            
            $
            (90
            )
            
            
            1,112Effective
      tax rate
            
            
            (17.3
            %)
            
            
            34.6
            %







- 13
-


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 representpotential
      credit risk:Commitments
      to extend credit under first mortgage loans
            
            $
            35,331
            
            
            
            16,674Unused
      portion of home equity lines of credit
            
            
            30,697
            
            
            
            31,492Unused
      portion of construction loans
            
            
            25,511
            
            
            
            27,336Unused
      portion of business lines of credit
            
            
            11,649
            
            
            
            8,721Standby
      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
            
            
            
            2,099Weighted
      average shares outstanding
            
            
            30,642
            
            
            
            32,921Effect
      of dilutive potential common shares
            
            
            -
            
            
            
            6Diluted
      weighted average shares outstanding
            
            
            30,642
            
            
            
            32,927Basic
      earnings per share
            
            $
            0.02
            
            
            
            0.06Diluted
      earnings per share
            
            $
            0.02
            
            
            
            0.06








- 14
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 Table of Contents








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.





- 15
-
 Table of Contents











Available-for-sale
      securties(In
      Thousands)Balance
      December 31, 2007
            
            $
            7,073Unrealized
      holding losses arising during the period:Included
      in other comprehensive income
            
            
            (133
            )Principal
      repayments
            
            
            519Balance
      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





- 16
-
 Table of Contents





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.





- 17
-
 Table of Contents








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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 Table of Contents





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 theThree
      Months Ended
            
            
            Year
      EndedMarch
      31, 2008
            
            
            December
      31, 2007(In
      Thousands)Total
      gross loans receivable and held for sale at beginning of
      period
            
            $
            1,495,970
            
            
            
            1,450,170Real
      estate loans originated for investment:ResidentialOne-
      to four-family
            
            
            42,530
            
            
            
            65,851Over
      four-family
            
            
            29,957
            
            
            
            64,857Construction
      and land
            
            
            8,698
            
            
            
            33,705Commercial
            
            
            754
            
            
            
            13,494Home
      equity
            
            
            3,914
            
            
            
            15,886Total
      real estate loans originated for investment
            
            
            85,853
            
            
            
            193,793Consumer
      loans originated for investment
            
            
            52
            
            
            
            157Commerical
      loans originated for investment
            
            
            2,879
            
            
            
            25,229Total
      loans originated for investment
            
            
            88,784
            
            
            
            219,179Principal
      repayments
            
            
            (54,765
            )
            
            
            (191,100
            )Net
      activity in loans held for investment
            
            
            34,019
            
            
            
            28,079Loans
      originated for sale
            
            
            137,269
            
            
            
            242,120Loans
      sold
            
            
            (140,096
            )
            
            
            (224,399
            )Net
      activity in loans held for sale
            
            
            (2,827
            )
            
            
            17,721Total
      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
            
            
            2007Average
      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
            
            
            
            
            
            
            
            5.25Debt
      securities (2),
      federal funds sold and short-term investments
            
            
            105,119
            
            
            
            877
            
            
            
            
            
            
            
            3.35
            
            
            
            87,372
            
            
            
            988
            
            
            
            
            
            
            
            4.59Total
      interest-earning assets
            
            
            1,675,393
            
            
            
            24,577
            
            
            
            
            
            
            
            5.88
            
            
            
            1,569,364
            
            
            
            23,575
            
            
            
            
            
            
            
            6.09Noninterest-earning
      assets
            
            
            76,226
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            66,236Total
      assets
            
            $
            1,751,619
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,635,600Interest-bearing
      liabilities:Demand
      and money market accounts
            
            $
            143,642
            
            
            
            825
            
            
            
            
            
            
            
            2.30
            
            
            $
            137,591
            
            
            
            1,047
            
            
            
            
            
            
            
            3.09Savings
      accounts
            
            
            22,559
            
            
            
            57
            
            
            
            
            
            
            
            1.01
            
            
            
            19,002
            
            
            
            19
            
            
            
            
            
            
            
            0.41Certificates
      of deposit
            
            
            882,879
            
            
            
            10,177
            
            
            
            
            
            
            
            4.62
            
            
            
            867,632
            
            
            
            9,954
            
            
            
            
            
            
            
            4.65Total
      interest-bearing deposits
            
            
            1,049,080
            
            
            
            11,059
            
            
            
            
            
            
            
            4.23
            
            
            
            1,024,225
            
            
            
            11,020
            
            
            
            
            
            
            
            4.36Borrowings
            
            
            471,297
            
            
            
            4,911
            
            
            
            
            
            
            
            4.18
            
            
            
            345,999
            
            
            
            3,691
            
            
            
            
            
            
            
            4.33Other
      interest bearing liabilities
            
            
            11,128
            
            
            
            114
            
            
            
            
            
            
            
            4.11
            
            
            
            11,733
            
            
            
            98
            
            
            
            
            
            
            
            3.39Total
      interest-bearing liabilities
            
            
            1,531,505
            
            
            
            16,084
            
            
            
            
            
            
            
            4.21
            
            
            
            1,381,957
            
            
            
            14,809
            
            
            
            
            
            
            
            4.35Noninterest-bearing
      liabilities
            
            
            18,803
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,535Total
      liabilities
            
            
            1,550,308
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,397,492Equity
            
            
            201,311
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            238,108Total
      liabilities and equity
            
            $
            1,751,619
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,635,600Net
      interest income
            
            
            
            
            
            
            8,493
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,766Net interest rate spread (3)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.67
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.74
            %Net interest-earning assets (4)
            
            $
            143,888
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            187,407Net 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 2007Increase
      (Decrease) due toVolume
            
            
            Rate
            
            
            Net(In
      Thousands)Interest
      and dividend income:Loans
      receivable(1)
      (2)
            
            $
            1,333
            
            
            
            (777
            )
            
            
            556Mortgage
      related securities
            
            $
            507
            
            
            
            50
            
            
            
            557Other
      earning assets(3)
            
            
            336
            
            
            
            (447
            )
            
            
            (111
            )Total
      interest-earning assets
            
            
            2,176
            
            
            
            (1,174
            )
            
            
            1,002Interest
      expense:Demand
      and money market accounts
            
            
            47
            
            
            
            (269
            )
            
            
            (222
            )Savings
      accounts
            
            
            4
            
            
            
            34
            
            
            
            38Certificates
      of deposit
            
            
            347
            
            
            
            (124
            )
            
            
            223Total
      interest-bearing deposits
            
            
            398
            
            
            
            (359
            )
            
            
            39Borrowings
            
            
            1,346
            
            
            
            (126
            )
            
            
            1,220Other
      interest bearing liabilities
            
            
            (5
            )
            
            
            21
            
            
            
            16Total
      interest-bearing liabilities
            
            
            1,739
            
            
            
            (464
            )
            
            
            1,275Net
      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:ResidentialOne-
      to four-family
            
            $
            30,907
            
            
            
            32,587Over
      four-family
            
            
            42,286
            
            
            
            38,218Construction
      and land
            
            
            5,423
            
            
            
            3,855Commercial
      real estate
            
            
            7,842
            
            
            
            4,358Home
      equity
            
            
            1,620
            
            
            
            1,332Total
      non-accrual loans
            
            
            88,078
            
            
            
            80,350Real
      estate owned
            
            
            9,788
            
            
            
            8,543Total
      non-performing assets
            
            $
            97,866
            
            
            
            88,893Total
      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 MonthsEnded
      March 31,2008
            
            
            2007(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            12,839
            
            
            $
            7,195Provision
      for loan losses
            
            
            2,699
            
            
            
            350Charge-offs:MortgageOne-
      to four-family
            
            
            547
            
            
            
            301Over
      four-family
            
            
            14
            
            
            
            -Construction
      and land
            
            
            349
            
            
            
            -Consumer
            
            
            4
            
            
            
            -Total
      charge-offs
            
            
            914
            
            
            
            301Recoveries:MortgageOne-
      to four-family
            
            
            44
            
            
            
            -Construction
      and land
            
            
            106
            
            
            
            -Consumer
            
            
            6
            
            
            
            -Total
      recoveries
            
            
            156
            
            
            
            -Net
      charge-offs
            
            
            758
            
            
            
            301Allowance
      at end of period
            
            $
            14,780
            
            
            $
            7,244Ratios: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 $746.9million.  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, 2008To
      Be Well-CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioWauwatosa
      SavingsTotal
      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
      ObligationsMore
      than
            
            
            More
      thanOne
      Year
            
            
            Three
      Years
            
            
            OverOne
      Year
            
            
            Through
            
            
            Through
            
            
            FiveTotal
            
            
            or
      Less
            
            
            Three
      Years
            
            
            Five
      Years
            
            
            Years(In
      Thousands)Deposits
      without a stated maturity (5)
            
            $
            169,720
            
            
            
            169,720
            
            
            
            -
            
            
            
            -
            
            
            
            -Certificates
      of deposit (5)
            
            
            911,012
            
            
            
            746,897
            
            
            
            142,222
            
            
            
            21,863
            
            
            
            30Federal
      Home Loan Bank advances (1)
            
            
            383,050
            
            
            
            30,050
            
            
            
            53,000
            
            
            
            -
            
            
            
            300,000Repurchase
      agreements (2)(5)
            
            
            84,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            84,000Operating
      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 dueto 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
      CommitmentsMore
      than
            
            
            More
      thanOne
      Year
            
            
            Three
      Years
            
            
            OverOne
      Year
            
            
            Through
            
            
            Through
            
            
            FiveTotal
            
            
            or
      Less
            
            
            Three
      Years
            
            
            Five
      Years
            
            
            Years(In
      Thousands)Real
      estate loan commitments (1)
            
            $
            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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 Table of Contents





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 Months300
      basis point increase in rates
            
            
            3.94
            %200
      basis point increase in rates
            
            
            4.71100
      basis point increase in rates
            
            
            2.65100
      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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 Table of Contents





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. GordonDouglas
      S. GordonChief
      Executive OfficerDate:
      May 9, 2008/s/
      Richard C. LarsonRichard
      C. LarsonChief
      Financial Officer








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EXHIBIT INDEX





WAUWATOSA
HOLDINGS, INC.





Form 10-Q
for Quarter Ended March 31, 2008











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











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