Waterstone Financial 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2007

OR

o 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)

Wisconsin
(State or other jurisdiction of
incorporation or organization) 20-3598485
(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. Yesþ     Noo

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 filero     Accelerated filerþ      Non-accelerated filero

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

The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 30,853,919 at July 31, 2007.

WAUWATOSA HOLDINGS, INC.

10-Q INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2007 (unaudited) and December 31, 2006	3
Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited)	4-5
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2007 and 2006 (unaudited)	6
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)	7-8
Notes to Consolidated Financial Statements	9-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-42
Item 3. Quantitative and Qualitative Disclosures about Market Risk	43-44
Item 4. Controls and Procedures	44
PART II. OTHER INFORMATION	45
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 4. Submission of Matters to a Vote of Security Holders	46
Item 6. Exhibits	46
Signatures	47
Certification
Certification
Certification
Certification
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

-2-

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	June 30,			December 31,
	2007			2006
	(In Thousands, except share data)
Assets
Cash	$	5,061			26,745
Federal funds sold		22,583			21,800
Interest-earning deposits in other financial institutions and other short term investments		798			25,262
Cash and cash equivalents		28,442			73,807
Securities available-for-sale (at fair value)		145,320			117,330
Securities held-to-maturity (at amortized cost)		7,646			—
Loans held for sale		8,728			5,387
Loans receivable		1,376,540			1,372,907
Less: Allowance for loan losses		9,570			7,195
Loans receivable, net		1,366,970			1,365,712
Office properties and equipment, net		32,741			32,625
Federal Home Loan Bank stock, at cost		17,550			17,213
Cash surrender value of life insurance		24,780			24,152
Prepaid expenses and other assets		14,834			12,244
Total assets	$	1,647,011			1,648,470
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	51,182			58,407
Money market and savings deposits		109,508			94,472
Time deposits		858,223			883,339
Total deposits		1,018,913			1,036,218
Short term borrowings		51,953			41,224
Long term borrowings		322,950			292,779
Advance payments by borrowers for taxes		16,484			190
Other liabilities		19,882			36,787
Total liabilities		1,430,182			1,407,198
Shareholders’ equity:
Preferred stock (par value $.01 per share, authorized 20,000,000 shares, no shares issued)		—			—
Common stock (par value $.01 per share, authorized 200,000,000 200,000,000 shares, 33,975,250 shares issued, 31,917,522 and 33,114,539 shares outstanding at June 30, 2007 and December 31, 2006, respectively)		340			337
Additional paid-in capital		105,281			104,182
Accumulated other comprehensive loss (net of taxes)		(2,249	)		(1,225	)
Retained earnings, substantially restricted		145,639			144,809
Unearned ESOP shares		(6,404	)		(6,831	)
Treasury shares (1,486,278 shares), at cost		(25,778	)		—
Total shareholders’ equity		216,829			241,272
Total liabilities and shareholders’ equity	$	1,647,011			1,648,470

See Accompanying Notes to Consolidated Financial Statements.

-3-

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited)
	Three months ended June 30,
	2007			2006
	(In thousands, except per share data)
Interest income:
Loans	$	21,985			20,795
Mortgage-related securities		1,278			1,018
Debt securities, federal funds sold and short-term investments		1,072			605
Total interest income		24,335			22,418
Interest expense:
Deposits		11,141			10,356
Borrowings		4,204			2,472
Total interest expense		15,345			12,828
Net interest income		8,990			9,590
Provision for loan losses		5,676			345
Net interest income after provision for loan losses		3,314			9,245
Noninterest income:
Service charges on loans and deposits		536			452
Increase in cash surrender value of life insurance		267			230
Mortgage banking income		824			756
Other		102			53
Total noninterest income		1,729			1,491
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		3,919			4,239
Occupancy, office furniture and equipment		1,270			1,032
Advertising		282			286
Data processing		415			418
Communications		167			161
Professional fees		368			289
Other		585			902
Total noninterest expenses		7,006			7,327
Income (loss) before income taxes		(1,963	)		3,409
Income taxes (benefit)		(694	)		1,252
Net income (loss)	$	(1,269	)		2,157
Earnings (loss) per share:
Basic	$	(0.04	)		0.07
Diluted	$	(0.04	)		0.07
Weighted average shares outstanding:
Basic		32,041,622			33,066,761
Diluted		32,053,131			33,066,761

See Accompanying Notes to Consolidated Financial Statements.

-4-

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	(Unaudited)
	Six months ended June 30,
	2007		2006
	(In thousands, except per share data)
Interest income:
Loans	$	43,308		41,001
Mortgage-related securities		2,542		2,081
Debt securities, federal funds sold and short-term investments		2,060		1,193
Total interest income		47,910		44,275
Interest expense:
Deposits		22,166		19,690
Borrowings		7,989		4,935
Total interest expense		30,155		24,625
Net interest income		17,755		19,650
Provision for loan losses		6,026		652
Net interest income after provision for loan losses		11,729		18,998
Noninterest income:
Service charges on loans and deposits		1,053		937
Increase in cash surrender value of life insurance		448		387
Mortgage banking income		1,393		1,095
Other		447		265
Total noninterest income		3,341		2,684
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		7,919		8,102
Occupancy, office furniture and equipment		2,494		1,994
Advertising		555		571
Data processing		654		793
Communications		383		322
Professional fees		638		467
Other		1,179		1,734
Total noninterest expenses		13,822		13,983
Income before income taxes		1,248		7,699
Income taxes		418		2,836
Net income	$	830		4,863
Earnings per share:
Basic	$	0.03		0.15
Diluted	$	0.03		0.15
Weighted average shares outstanding:
Basic		32,478,758		33,057,373
Diluted		32,487,551		33,057,373

See Accompanying Notes to Consolidated Financial Statements.

-5-

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Common Stock				Paid-In		Comprehensive			Retained		ESOP			Treasury
	Shares		Amount		Capital		Income (Loss)			Earnings		Shares			Stock			Equity
	(In Thousands)
Balances at December 31, 2005		33,724	$	337		103,859		(1,571	)		136,756		(7,685	)		—			231,696
Comprehensive income:
Net income		—		—		—		—			4,863		—			—			4,863
Other comprehensive income (loss):
Net unrealized holding losses on available for sale securities arising during the period, net of tax benefit of $828
		—		—		—		(1,535	)		—		—			—			(1,535	)
Total comprehensive income																			3,328
ESOP shares committed to be released to Plan participants		—		—		87		—			—		427			—			514
Balances at June 30, 2006		33,724	$	337		103,946		(3,106	)		141,619		(7,258	)		—			235,538
Balances at December 31, 2006		33,724	$	337		104,182		(1,225	)		144,809		(6,831	)		—			241,272
Comprehensive income:
Net income		—		—		—		—			830		—			—			830
Other comprehensive income (loss):
Net unrealized holding losses on available for sale securities arising during the period, net of tax benefit of $551		—		—		—		(1,024	)		—		—			—			(1,024	)
Total comprehensive income																			(194	)
ESOP shares committed to be released to Plan participants		—		—		236		—			—		427			—			663
Stock based compensation		252		3		863		—			—		—			—			866
Purchase of treasury stock		—		—		—		—			—		—			(25,778	)		(25,778	)
Balances at June 30, 2007		33,976	$	340		105,281		(2,249	)		145,639		(6,404	)		(25,778	)		216,829

See Accompanying Notes to Consolidated Financial Statements.

-6-

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Six months ended June 30,
	2007			2006
	(In Thousands)
Operating activities:
Net income	$	830			4,863
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,026			652
Provision for depreciation		1,313			1,142
Deferred income taxes		(858	)		(890	)
Stock based compensation expense		866			—
Net amortization of premium on debt and mortgage-related securities		(65	)		23
Fair value of ESOP shares committed to be released		663			514
Gain on sale of loans held for sale		(766	)		(1,095	)
Loans originated for sale		(108,856	)		(27,249	)
Proceeds on sales of loans originated for sale		106,281			22,778
Increase in accrued interest receivable		(543	)		(57	)
Increase in cash surrender value of life insurance		(448	)		(387	)
Increase (decrease) in accrued interest on deposits		(249	)		596
Increase (decrease) in other liabilities		1,202			(888	)
Gain on sale of real estate owned and other assets		(42	)		(109	)
Other		(62	)		52
Net cash provided by (used in) operating activities		5,292			(55	)
Investing activities:
Net increase in loans receivable		(8,754	)		(62,299	)
Purchases of:
Debt securities		(28,660	)		—
Mortgage-related securities		(12,952	)		—
Structured notes, held-to-maturity		(7,646	)		—
Premises and equipment, net		(1,134	)		(7,162	)
Waterstone Mortgage Corporation		—			(1,082	)
Life insurance		(180	)		(180	)
FHLB stock		(337	)		—
Proceeds from:
Principal repayments on mortgage-related securities		8,543			7,789
Maturities of debt securities		3,001			—
Sales of real estate owned and other assets		1,196			891
Redemption of FHLB stock		—			1,040
Net cash used in investing activities		(46,923	)		(61,003	)

See Accompanying Notes to Consolidated Financial Statements.

-7-

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited)
	Six months ended June 30,
	2007			2006
	(In Thousands)
Financing activities:
Net increase (decrease) in deposits		(17,305	)		22,966
Net change in short-term borrowings		(7,000	)		(51,000	)
Proceeds from long-term borrowings		47,900			88,000
Net increase (decrease) in advance payments by borrowers for taxes		(1,551	)		503
Purchase of treasury stock		(25,778	)		—
Net cash provided by (used in) financing activities		(3,734	)		60,469
Increase (decrease) in cash and cash equivalents		(45,365	)		(589	)
Cash and cash equivalents at beginning of period		73,807			16,498
Cash and cash equivalents at end of period		28,442			15,909
Supplemental information:
Cash paid or credited during the period for:
Income tax payments		2,542			2,940
Interest payments		30,128			24,029
Noncash investing activities:
Loans receivable transferred to foreclosed properties		1,472			626
Noncash financing activities:
Long-term FHLB advances reclassified to short-term		17,729			7,000

See Accompanying Notes to Consolidated Financial Statements.

-8-

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, 2006 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

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

Note 2 — Reclassifications

Certain items in the prior period consolidated financial statements have been reclassified to conform with the June 30, 2007 presentation.

-9-

Note 3 — Securities

Securities Available for Sale

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

	June 30, 2007
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	17,000		3		(481	)		16,522
Collateralized mortgage obligations		88,117		—		(2,040	)		86,077
Mortgage-related securities		105,117		3		(2,521	)		102,599
Government sponsored entity bonds		16,490		—		(179	)		16,311
Municipal securities		26,923		108		(871	)		26,160
Debt securities		43,413		108		(1,050	)		42,471
Other securities		250		—		—			250
	$	148,780		111		(3,571	)		145,320

	December 31, 2006
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	18,274		3		(275	)		18,002
Collateralized mortgage obligations		82,419		1		(1,549	)		80,871
Mortgage-related securities		100,693		4		(1,824	)		98,873
Government sponsored entity bonds		13,450		—		(193	)		13,257
Municipal securities		4,278		151		(8	)		4,421
Debt securities		17,728		151		(201	)		17,678
Other securities		794		—		(15	)		779
	$	119,215		155		(2,040	)		117,330

At June 30, 2007, $14.3 million of the Company’s government sponsored entity bonds and $12.4 million of the Company’s mortgage backed securities were pledged as collateral to secure repurchase agreement obligations of the Company.

-10-

The amortized cost and fair values of investment securities by contractual maturity at June 30, 2007, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In Thousands)
Due within one year	$	3,498		3,479
Due after one year through five years		12,992		12,832
Due after five years through ten years		1,354		1,320
Due after ten years		25,569		24,840
Mortgage-related securities		105,117		102,599
Other securities		250		250
	$	148,780		145,320

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

	June 30, 2007
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		loss			value		loss			value		loss
	(In Thousands)
Mortgage backed securites	$	2,590		(41	)		13,717		(440	)		16,307		(481	)
Collateralized mortgage obligations		41,070		(417	)		45,006		(1,623	)		86,076		(2,040	)
Government sponsored entity bonds		5,981		(47	)		10,329		(132	)		16,310		(179	)
Municipal securities		22,665		(859	)		463		(12	)		23,128		(871	)
	$	72,306		(1,364	)		69,515		(2,207	)		141,821		(3,571	)

There are three, fifteen, six and one individual securities at June 30, 2007 that comprise the mortgage backed securities, collateralized mortgage obligations, government sponsored entity bonds and municipal securities, respectively, which have been in an unrealized loss position for twelve months or longer. Because the decline in fair value of all aforementioned securities is attributable to changes in interest rates and not credit deterioration, and because the Company has the ability and intent to hold these securities until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Securities Held-to-Maturity

As of June 30, 2007, the Company held three securities that have been designated as held-to-maturity. The securities have a total amortized cost of $7.6 million and an estimated fair value $7.3 million. Each security is callable quarterly, one beginning in the first quarter of 2008 with a final maturity in 2019. The remaining two securities are callable beginning in the first quarter of 2009 with a final maturity in 2022.

-11-

Note 4 — Loans Receivable

Loans receivable are summarized as follows:

	June 30,		December 31,
	2007		2006
	(In Thousands)
Mortgage loans:
One- to four-family	$	660,550		666,167
Over four-family residential		488,463		480,722
Commercial real estate		49,501		48,836
Construction and land		170,792		168,523
Total mortgage loans		1,369,306		1,364,248
Consumer loans		72,577		77,878
Commercial business loans		10,495		2,657
		1,452,378		1,444,783
Less:
Undisbursed loan proceeds		72,017		67,390
Unearned loan fees		3,821		4,486
Total loans receivable, net	$	1,376,540		1,372,907

Real estate collateralizing the Company’s first mortgage loans is primarily located in the Company’s general lending area of metropolitan Milwaukee.

Non-performing loans totaled $49.7 million at June 30, 2007 and $28.9 million at December 31, 2006.

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

-12-

	For the Six Months Ended
	June 30,
	2007			2006
	(In Thousands)
Balance at beginning of period	$	7,195			5,250
Provision for loan losses		6,026			652
Charge-offs		(3,655	)		(144	)
Recoveries		4			225
Balance at end of period	$	9,570			5,983
Allowance for loan losses to loans receivable		0.70	%		0.44	%
Net charge-offs to average loans outstanding (annualized)		0.53	%		(0.01	%)
Allowance for loan losses to non-performing loans		19.25	%		38.69	%
Non-performing loans to loans receivable		3.61	%		2.10	%

-13-

Note 5 — Deposits

A summary of the contractual maturities of certificate accounts at June 30, 2007 is as follows:

	(In Thousands)
Within one year	$	709,186
One to two years		75,663
Two to three years		45,250
Three to four years		15,720
Four through five years		11,634
After five years		770
	$	858,223

-14-

Note 6 — Borrowings

Borrowings consist of the following:

	June 30, 2007					December 31, 2006
			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate
	(In Thousands)					(In Thousands)
Federal Home Loan Bank (FHLB) advances maturing:
2007	$	34,224		4.02	%		41,224		3.94	%
2008		47,779		4.24	%		47,779		4.24	%
2010		48,900		4.80	%		25,000		4.24	%
2016		220,000		4.34	%		220,000		4.34	%
Repurchase agreements maturing:
2017		24,000		4.21	%		—
	$	374,903		4.35	%		334,003		4.31	%

The $220 million in advances due in 2016 consist of eight callable advances. The call features are as follows: $10 million callable beginning in May 2007 and quarterly thereafter, $10 million callable in June 2007 and quarterly thereafter, four $25 million advances callable beginning in July 2007, August 2007, July 2008, and August 2008 and quarterly thereafter, and two $50 million advances callable beginning in January 2009 and March 2009 and quarterly thereafter.

The $24 million in repurchase agreements are callable beginning in March 2009 and quarterly thereafter. The repurchase agreements are collateralized by securities available for sale with an estimated market value of $26.7 million at June 30, 2007.

The Company selects loans that meet underwriting criteria established by the FHLB as collateral for outstanding advances. The Company’s FHLB borrowings are limited to 60% of the carrying value of unencumbered one- to four-family mortgage loans. In addition, these advances are collateralized by FHLB stock of $17.6 million at June 30, 2007 and $17.2 million at December 31, 2006.

Note 7 — Stock-Based Compensation

Stock-Based Compensation Plan

In 2005, the Company’s shareholders approved the 2006 Equity Incentive Plan. During the quarter ended March 31, 2007, the Company granted 782,500 stock options in tandem with stock appreciation rights and 251,500 shares of restricted stock. The restricted shares were issued from previously unissued shares. All stock awards granted under these plans vest over a period of five years and are required to be settled in shares of the Company’s common stock. The exercise price for all stock options granted is equal to the quoted NASDAQ market close price on the date that the awards were granted and expire ten years after the grant date, if not exercised.

Accounting for Stock-Based Compensation Plan

The fair value of stock options granted is estimated on the grant date using a Black-Scholes pricing model. The fair value of restricted shares is equal to the quoted NASDAQ market close price on the date of grant. The fair value of stock grants is recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense is included in compensation, payroll taxes and other employee benefits in the consolidated statements of income.

-15-

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represent the period of time that the options are expected to be outstanding and is based on the SEC simplified approach to calculating expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility for a group of selected peers. The following assumptions were used in estimating the fair value of options granted in the six month period ended June 30, 2007.

Dividend Yield		1.32	%
Risk-free interest rate		4.44	%
Expected volatility		31.86	%
Weighted average expected life	6.5 years
Weighted average per share value of options	$	6.27

In accordance with Statement on Financial Standards No. 123R, Share-Based Payment, the Company is required to estimate potential forfeitures of stock grants and adjust compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

A summary of the Company’s stock option activity for the six months ended June 30, 2007, is presented below.

						Weighted Average		Aggregate
				Weighted Average		Years Remaining in		Instrinsic Value
Stock Options	Shares			Exercise Price		Contractual Term		(000’s)
Outstanding December 31, 2006		—							—
Granted		782,500		$	17.67		9.50		—
Excercised		—							—
Forfeited		(7,500	)		17.67		9.50		—
Outstanding June 30, 2007		775,000			17.67		9.50		—
Options exercisable at June 30, 2007		—			17.67				—

The following table summarizes information about the Company’s nonvested stock option activity for the three months ended June 30, 2007:

				Weighted Average
Stock Options	Shares			Grant Date Fair Value
Nonvested at December 31, 2006		—			—
Granted		782,500		$	6.27
Vested		—			—
Forfeited		(7,500	)		6.27
Nonvested at June 30, 2007		775,000			6.27

The Company amortizes the expense related to stock options as compensation expense over the vesting period. During the six months ended June 30, 2007, 782,500 options were granted, of which 7,500 have been forfeited. Expense for the stock options granted of approximately $422,000 and $196,000 was

-16-

recognized during the six and three month periods ended June 30, 2007. At June 30, 2007, the Company had $4.2 million in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over the next 54 months.

The following table summarizes information about the Company’s restricted stock shares activity for the six months ended June 30, 2007:

			Weighted Average
Restricted Stock	Shares		Grant Date Fair Value
Nonvested at December 31, 2006		—
Granted		251,500	$	17.67
Vested		—
Forfeited		—
Nonvested at June 30, 2007		251,500		17.67

The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. During the six months ended June 30, 2007, 251,500 shares of restricted stock were awarded, of which no shares have been forfeited. Expense for the restricted stock awards of approximately $444,000 and $222,000 was recorded for the six and three month periods ended June 30, 2007. At June 30, 2007, the Company had $4.0 million of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a period of 54 months.

-17-

Note 8 — Financial Instruments with Off-Balance Sheet Risk

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

	June 30,		December 31,
	2007		2006
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit	$	23,858		28,067
Unused portion of home equity lines of credit		32,277		34,676
Unused portion of construction loans		39,741		32,714
Standby letters of credit		350		639

In connection with its mortgage banking activities, the Company enters into forward loan sale commitments. Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on commitments to originate loans and loans held for sale. As of June 30, 2007 and December 31, 2006, the Company had $8.7 million and $5.4 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.

-18-

Note 9 — Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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. At June 30, 2007, nonvested restricted stock is considered outstanding for dilutive earnings per share only. Nonvested stock options at June 30, 2007 are antidilutive and are excluded from the earnings per share calculation.

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007		2006
	(In Thousands, except per share data)
Net income (loss)	$	(1,269	)	$	2,157	$	830	$	4,863
Weighted average shares outstanding		32,042			33,067		32,479		33,057
Effect of dilutive potential common shares		11			—		9		—
Diluted weighted average shares outstanding		32,053			33,067		32,488		33,057
Basic earnings (loss) per share	$	(0.04	)	$	0.07	$	0.03	$	0.15
Diluted earnings (loss) per share	$	(0.04	)	$	0.07	$	0.03	$	0.15

-19-

Note 10 — Recent Accounting Developments

The Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” in the quarter ended March 31, 2007. Total unrecognized tax benefits as of January 1, 2007 totaled $4.1 million. This unrecognized benefit is primarily Wisconsin tax on a portion of the income generated by the Company’s subsidiary located in the state of Nevada for the period July 1, 2002 through December 31, 2006. If recognized, the Company’s effective tax rate would be impacted by the $4.1 million in unrecognized tax benefits, plus $811,000 in interest, less the federal tax effect of $1.7 million for a net benefit of $3.2 million.

A State of Wisconsin closing agreement regarding this matter was executed on March 30, 2007. The Wisconsin settlement had an effect of reclassifying $4.0 million in unrecognized benefits as of January 1, 2007 as accrued state tax liability at March 31, 2007. Under the terms of the closing agreement, the Company paid $1.2 million, including interest, on the settlement date with the remaining $3.7 million, including interest, to be paid over the next three years. It is Company policy to recognize interest and penalties as income tax expense. As of January 1, 2007, $811,000 in interest payable had been accrued.

The IRS completed its examination of the Company’s consolidated federal income tax returns for 2003 and 2004. As such, only 2005 and 2006 remain as open years for federal purposes. The Company’s Wisconsin tax returns are open to further audit for the years ended December 31, 2004 through 2006.

In September 2006, the FASB issued SFAS 157,Fair Value Measurements, which upon adoption will replace various definitions of fair value in existing accounting literature with a single definition, will establish a framework for measuring fair value, and will require additional disclosures about fair value measurements. The statement clarifies that fair value is the price that would be received to sell an asset or the price paid to transfer a liability in the most advantageous market available to the entity and emphasizes that fair value is a market-based measurement and should be based on the assumptions market participants would use. The statement also creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. This hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and the gains and losses associated with those estimates. SFAS 157 is required to be applied whenever another financial accounting standard requires or permits an asset or liability to be measured at fair value. The statement does not expand the use of fair value to any new circumstances. The Company will be required to apply the new guidance beginning January 1, 2008, and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items generally on an instrument-by-instrument basis at fair value that are not currently required

-20-

to be measured at fair value. SFAS 159 is intended to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 does not change requirements for recognizing and measuring dividend income, interest income, or interest expense. The Company will be required to apply the new guidance beginning January 1, 2008, and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

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 2006 Annual Report on Form 10-K).

-21-

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 a lender with mortgage loans comprising 94.3% of total loans receivable on June 30, 2007. Further, 79.1% of loans receivable are residential mortgage loans with over four-family loans comprising 35.7% of all mortgage loans on June 30, 2007. Wauwatosa Savings funds loan production primarily with retail deposits and Federal Home Loan Bank advances. On June 30, 2007, deposits comprised 71.3% of total liabilities. Time deposits, also known as certificates of deposit, account for 84.2% of total deposits at June 30, 2007. Wauwatosa Savings uses the Federal Home Loan Bank of Chicago as a significant source of funding. Federal Home Loan Bank advances outstanding on June 30, 2007 totaled $350.9 million, or 24.5% of total liabilities.

Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of service charges and mortgage banking 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 six months ended June 30, 2007, our results of operation were adversely affected by a significant increase in loan charge-offs and subsequent need to make additional provisions for loan losses. As discussed below, during the three and six months ended June 30, 2007, the Company significantly increased its provision for loan losses to $5.7 million and $6.0 million, respectively, from $345,000 and $652,000 for the three and six months ended June 30, 2006. 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 36.

On June 12, 2007 at the Special Meeting of Shareholders, shareholders of the Company approved a Plan of Charter Conversion by which Wauwatosa Holdings, Inc will convert from a Wisconsin corporation to a federal corporation chartered by the Office of Thrift Supervision (OTS). The application for charter conversion has been approved by the OTS and the conversion is expected to be completed during the third quarter of 2007.

The following discussion and analysis is presented to assist 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 and six month periods ended June 30, 2007 and 2006 and the financial condition as of June 30, 2007 compared to the financial condition as of December 31, 2006.

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.

-22-

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.

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.We recognize income taxes under the asset and liability method. Under this method, 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 in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized.

If our estimated current and deferred tax assets, liabilities or any related estimated valuation allowance are too high or too low, it will affect our future net income in the period that the new information resulting in a better estimate of income tax assets and liabilities becomes available.

During the first quarter of 2007, the Company settled a dispute with the state of Wisconsin regarding the operations of the Company’s investment subsidiary located in the state of Nevada. The settlement covered the Nevada operations through the March 30, 2007 settlement date. The settlement had no material effect on net income for the period as the full liability of $4.9 million, including interest, net of deferred Federal tax benefit of $1.7 million, was accrued in prior periods. The settlement had the effect of reducing the estimated effective tax rate for the year

-23-

ended December 31, 2007 from the year ended December 31, 2006 as statutory interest will no longer accrue as the liability has been settled.

Comparison of Operating Results for the Six Months Ended June 30, 2007 and 2006

General — Net income for the six months ended June 30, 2007 totaled $830,000, or $0.03 for both basic and diluted earnings per share compared to net income of $4.9 million, or $0.15 for both basic and diluted earnings per share for the six months ended June 30, 2006. Year-to-date 2007 results generated an annualized return on average assets of 0.10% and an annualized return on average equity of 0.72%, compared to 0.63% and 4.19%, respectively, for the comparable period in 2006. The decrease in net income was a result of a $5.4 million increase in the provision for loan losses and a $1.9 million decrease in net interest income, partially offset by a $657,000 increase in non-interest income. 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 required on a number of classified loans. Loan charge-off activity and specific loan reserves will be discussed in additional detail in the Asset Quality section beginning on page 36. The net interest margin for the first six months of 2007 was 2.27% compared to 2.67% for the first six months of 2006.

Total Interest Income — Total interest income increased $3.6 million, or 8.2%, to $47.9 million during the six months ended June 30, 2007 compared to $44.3 million for the six months ended June 30, 2006. Interest income on loans increased $2.3 million, or 5.6%, to $43.3 million for the six months ended June 30, 2007 compared to $41.0 million for the comparable period in 2006. The increase resulted primarily from an increase of $43.7 million, or 3.3%, in the average loan balance to $1.4 billion during the six-month period ended June 30, 2007 from $1.3 billion during the comparable period in 2006. The increase in volume was compounded by a 14 basis point increase in the average yield on loans to 6.30% for the six-month period ended June 30, 2007 from 6.16% for the comparable period in 2006. In addition, interest income from debt securities, federal funds sold and short-term investments increased $867,000, or 72.7%, to $2.1 million for the six months ended June 30, 2007 compared to $1.2 million for the comparable period in 2006. This was primarily due to the increase of $34.2 million, or 59.7%, in the average balance to $91.4 million during the six-month period ended June 30, 2007 from $57.3 million during the comparable period in 2006. The increase in volume was compounded by a 34 basis point increase in the average yield on other earning assets to 4.54% for the six-month period ended June 30, 2007 from 4.20% for the comparable period in 2006. Finally, interest income from mortgage-related securities increased $461,000, or 22.2%, to $2.5 million for the six months ended June 30, 2007 compared to $2.1 million for the comparable period in 2006. This was primarily due to the increase of $10.1 million, or 11.5%, in the average balance to $97.9 million during the six-month period ended June 30, 2007 from $87.8 million during the comparable period in 2006. The increase in volume was compounded by a 45 basis point increase in the average yield on mortgage-related securities to 5.23% for the six-month period ended June 30, 2007 from 4.78% for the comparable period in 2006.

Total Interest Expense-Total interest expense increased by $5.5 million, or 22.5%, to $30.2 million during the six months ended June 30, 2007 from $24.6 million during the six months ended June 30, 2006. This increase was the result of an increase in both the rate paid on deposits and borrowings and an increase in average borrowings outstanding.

-24-

Interest expense on deposits increased $2.5 million, or 12.6%, to $22.2 million during the six months ended June 30, 2007 from $19.7 million during the comparable period in 2006. The increase resulted primarily from an increase in the average cost of deposits to 4.37% for the six-month period ended June 30, 2007 compared to 3.74% for the comparable period in 2006. The increase in cost of deposits was partially offset by a decrease of $38.9 million, or 3.7%, in the average balance of deposits to $1.0 billion at June 30, 2007 from $1.1 billion during the comparable period in 2006. As both market interest rates and deposit rates offered by competitors remained at levels higher than those of previous periods, it was necessary to continue offering the higher interest rates required to attract and retain deposits, thereby increasing our cost of deposits.

Interest expense on borrowings increased $3.1 million, or 61.9%, to $8.0 million during the six months ended June 30, 2007 from $4.9 million during the comparable period in 2006. The increase resulted primarily from an increase in average borrowings outstanding of $130.8 million, or 58.2%, to $355.8 million during the six-month period ended June 30, 2007 from $225.0 million during the comparable period in 2006. The increase in volume was compounded by a 17 basis point increase in the average cost of borrowings to 4.41% during the six-month period ended June 30, 2007 from 4.24% during the comparable period in 2006.

Net Interest Income — Net interest income decreased by $1.9 million or 9.6%, during the six months ended June 30, 2007 as compared to the same period in 2006. The decrease resulted primarily from a 41 basis point decrease in our net interest rate spread to 1.77% for the six-month period ended June 30, 2007 from 2.18% for the comparable period in 2006. The 41 basis point decrease in the net interest rate spread resulted from a 54 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 13 basis point increase in the yield on interest earning assets. The Company has experienced net interest margin compression as the yield curve remains relatively flat. 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 $9.5 million, or 5.0%, to $182.3 million for the six-month period ended June 30, 2007 from $191.7 million for the comparable period in 2006. The decrease in average net assets was primarily attributable to the repurchase of outstanding Company stock.

Provision for Loan Losses — Provision for loan losses increased $5.4 million, to $6.0 million during the six months ended June 30, 2007, from $652,000 during the comparable period during 2006. The increased provision for the six months ended June 30, 2007 was the result of $3.7 million in loan charge-offs, specific loss provisions and a continued increase in non-performing assets. See the Asset Quality section beginning on page 36 for an analysis of charge-offs, non-performing assets, specific reserves and additional provisions.

Noninterest Income — Total noninterest income increased $657,000, or 24.5%, to $3.3 million during the six months ended June 30, 2007 from $2.7 million during the comparable period in 2006. The increase resulted primarily from increased mortgage banking income generated by Waterstone Mortgage Corporation, the Bank’s mortgage banking subsidiary, and an increase in other noninterest income. Mortgage banking income increased $298,000, or 27.2% to $1.4 million during the six months ended June 30, 2007 from $1.1 million during the comparable

-25-

period in 2006. The six-month period ended June 30, 2007 includes a full six months of mortgage banking income, while the comparable period of 2006 only includes mortgage banking income from the February 9, 2006 acquisition of Waterstone through June 30, 2006.

Noninterest Expense — Total noninterest expense decreased $161,000, or 1.2%, to $13.8 million during the six months ended June 30, 2007 from $14.0 million during the comparable period in 2006. The decrease was primarily the result of decreases in compensation, payroll taxes and other employee benefits, data processing expense and other noninterest expense, partially offset by occupancy, office furniture and equipment expenses.

Compensation, payroll taxes and other employee benefit expense decreased $183,000, or 2.3%, to $7.9 million during the six months ended June 30, 2007 from $8.1 million during the comparable period in 2006. Expense related to the Company’s stock option and restricted stock plans totaled $866,000 during the six months ended June 30, 2007. There was no comparable expense in the prior year. Compensation expense related to the ESOP totaled $663,000 during the six months ended June 30, 2007 compared to $513,000 during the comparable period of 2006. The increase in ESOP expense resulted from an increase in the average market price of the Company’s common stock during the six months ended June 30, 2007 compared to the same period in 2006. These increases were offset by a decrease in salary expense. Salary expense decreased by $1.2 million, or 18.6% to $5.3 million during the six months ended June 30, 2007 compared to $6.5 million during the comparable period in 2006. Salary expense decreased as a result of a 20% reduction in full-time equivalent staff combined with a shift from cash bonus compensation to equity incentives.

Occupancy, office furniture and equipment increased by $500,000, or 25.1%, to $2.5 million during the six months ended June 30, 2007 from $2.0 million during the comparable period in 2006. The increase relates primarily to new branch offices located in Franklin, Germantown and West Allis, Wisconsin that opened in August 2006, November 2006 and March 2007, respectively.

Data processing expense decreased $139,000, or 17.5%, for the six months ended June 30, 2007 to $654,000 from $793,000 during the comparable period in 2006 due to a reduction in consulting costs.

Professional fees increased by $171,000, or 36.6% for the six months ended June 30, 2007 to $638,000 from $467,000 for the six months ended June 30, 2006. The increase is comprised of legal fees related to the Company’s change from a state charter to a federal charter, legal fees related to the termination of a defined benefit pension plan and additional audit expenses related to non-recurring auditing and reporting issues.

Other noninterest expense decreased $555,000, or 32.0%, to $1.2 million for the six months ended June 30, 2007 from $1.7 million during the comparable period in 2006. The decrease is the result of the reduction in amortization of Waterstone Mortgage Corporation intangibles and decreases in brokered deposit fees, employee related business expenses and insurance expense.

-26-

Income Taxes — The effective tax rate for the six months ended June 30, 2007 was 33.5% as compared to 36.8% for the comparable period during 2006. Of the total 3.3% decrease in effective tax rate, approximately 1.1% of the decrease results from the Company’s decrease in forecast income for the current year, resulting from the aforementioned loan related losses. The remaining 2.2% of the decrease relates to the Company’s settlement with the Wisconsin Department of Revenue. On March 30, 2007, the Company settled its dispute with the state of Wisconsin regarding its investment subsidiary located in the state of Nevada. The settlement covered the Nevada operations through the March 30, 2007 settlement date. The settlement had no material effect on net income for the period as the full liability of $4.9 million, including interest, net of deferred Federal tax benefit of $1.7 million, was accrued in prior periods. The settlement had the effect of reducing the estimated effective tax rate for the year ended December 31, 2007 as statutory interest no longer accrues to the liability.

Net Income-As a result of the foregoing factors, net income for the six months ended June 30, 2007 decreased $4.0 million, or 82.9%, to $830,000, from $4.9 million during the comparable period in 2006.

Comparison of Operating Results for the Three Months Ended June 30, 2007 and 2006

General — Net loss for the three months ended June 30, 2007 totaled $1.3 million, or $0.04 for both basic and diluted loss per share compared to net income of $2.2 million, or $0.07 for both basic and diluted earnings per share for the three months ended June 30, 2006. The quarter ended June 30, 2007 generated an annualized loss on average assets of 0.31% and an annualized loss on average equity of 2.24%, compared to returns of 0.55% and 3.70%, respectively, for the comparable period in 2006. The loss was the result of a $5.3 million increase in provision for loan losses and a $600,000 decrease in net interest income. 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 required on a number of classified loans. Loan charge-off activity and specific loan reserves are discussed in additional detail in the Asset Quality section beginning on page 36. The net interest margin for the three months ended June 30, 2007 was 2.28% compared to 2.56% for the three months ended June 30, 2006.

Total Interest Income — Total interest income increased $1.9 million, or 8.6%, to $24.3 million during the three months ended June 30, 2007 compared to $22.4 million for the three months ended June 30, 2006. Interest income on loans increased $1.2 million, or 5.7%, to $22.0 million for the three months ended June 30, 2007 compared to $20.8 million for the comparable period of 2006. The increase resulted primarily from 21 basis point increase in the average yield on loans to 6.35% for the three-month period ended June 30, 2007 from 6.14% for the comparable period in 2006. The increase in yield was compounded by an increase of $30.5 million, or 2.2%, in the average loan balance to $1.39 billion during the three-month period ended June 30, 2007 from $1.36 billion during the comparable period in 2006. In addition, interest income reflected interest income from debt securities, federal funds sold and short-term investments increased $467,000, or 77.2%, to $1.1 million for the three months ended June 30, 2007 compared to $605,000 for the comparable period in 2006. This was primarily due to the increase of $38.8 million, or 67.2%, in the average balance of other earning assets to $96.7 million during the three-month period ended June 30, 2007 from $57.8 million during the comparable period in 2006. The increase in volume was compounded by a 25 basis point increase in the average yield

-27-

on other earning assets to 4.45% for the three-month period ended June 30, 2007 from 4.20% for the comparable period in 2006. Finally, interest income from mortgage-related securities increased $260,000, or 25.5%, to $1.3 million for the quarter ended June 30, 2007 compared to $1.0 million for the comparable quarter in 2006. This was primarily due to the increase of $12.2 million, or 14.3%, in the average balance to $97.8 million for the three months ended June 30, 2007 from $85.6 million during the comparable period in 2006. The increase in volume was compounded by a 47 basis point increase in the average yield on mortgage-related securities to 5.24% for the quarter ended June 30, 2007 from 4.77% for the comparable period in 2006.

Total Interest Expense-Total interest expense increased by $2.5 million, or 19.6%, to $15.3 million during the three months ended June 30, 2007 from $12.8 million during the three months ended June 30, 2006. This increase was the result of an increase in both the rate paid on deposits and borrowings and an increase in average borrowings outstanding.

Interest expense on deposits increased $785,000, or 7.6%, to $11.1 million during the three months ended June 30, 2007 from $10.4 million during the comparable period in 2006 as a result of an increase in the cost of deposits, which was partially offset by a decrease in average deposits outstanding. The cost of total average deposits increased by 53 basis points to 4.39% for the three-month period ended June 30, 2007 compared to 3.86% for the comparable period during 2006. As both market interest rates and deposit rates offered by competitors remained at levels higher than those of previous periods, it was necessary to continue offering the higher interest rates required to attract and retain deposits, thereby increasing our cost of deposits.

Interest expense on borrowings increased $1.7 million, or 70.1%, to $4.2 million during the three months ended June 30, 2007 from $2.5 million during the comparable period in 2006. The increase resulted primarily from an increase in average borrowings outstanding of $145.1 million, or 64.5%, to $370.2 million during the three-month period ended June 30, 2007 from $225.1 million during the comparable period in 2006. The increase in volume was compounded by a 20 basis point increase in the average cost of borrowings to 4.43% during the three-month period ended June 30, 2007 from 4.23% during the comparable period in 2006.

Net Interest Income — Net interest income decreased by $600,000 or 6.3%, during the three months ended June 30, 2007 as compared to the same period in 2006. The decrease resulted primarily from a 27 basis point decrease in our net interest rate spread to 1.79% for the three month period ended June 30, 2007 from 2.06% for the comparable period in 2006. The 27 basis point decrease in the net interest rate spread resulted from a 45 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 18 basis point increase in the yield on interest earning assets. The Company has experienced net interest margin compression as the yield curve remains relatively flat. 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 $15.4 million, or 8.0%, to $176.0 million for the three-month period ended June 30, 2007 from $191.4 million from the comparable period in 2006. The decrease in average net assets was primarily attributable to the repurchase of outstanding Company stock.

Provision for Loan Losses — Provision for loan losses increased $5.3 million to $5.7 million during the three months ended June 30, 2007, from $345,000 during the comparable period

-28-

during 2006. The increased provision for the three months ended June 30, 2007 was the result of $3.4 million of net loan charge-offs, specific loss provisions and a continued increase in non-performing assets. See Asset Quality section beginning on page 36 for an analysis of charge-offs, non-performing assets specific reserves and additional provisions.

Noninterest Income — Total noninterest income increased $238,000, or 16.0%, to $1.7 million during the three months ended June 30, 2007 from $1.5 million during the comparable period in 2006. The increase resulted primarily from increased service charges on loans and deposits and an increase in mortgage banking income generated by Waterstone. Service charges on loans and deposits increased by $84,000, or 18.6%, to $536,000 during the three months ended June 30, 2007 from $452,000 during the comparable period in 2006. The increase in service charges was primarily the result of increased loan prepayment penalties and deposit overdraft fees. Mortgage banking income increased $68,000, or 9.0% to $824,000 during the three months ended June 30, 2007 from $756,000 during the comparable period in 2006. The increase resulted from higher loan sale and brokerage volumes at Waterstone.

Noninterest Expense — Total noninterest expense decreased $321,000, or 4.4%, to $7.0 million during the three months ended June 30, 2007 from $7.3 million during the comparable period in 2006. The decrease was primarily the result of decreases in compensation, payroll taxes and other employee benefits and other noninterest expense, partially offset by increases in occupancy, office furniture and equipment expense.

Compensation, payroll taxes and other employee benefit expense decreased $320,000, or 7.5%, to $3.9 million during the three months ended June 30, 2007 from $4.2 million during the comparable period in 2006. This decrease resulted primarily from a reduction in the overall level of staffing compared to the prior year. Expense related to the Company’s stock option and restricted stock plans totaled $418,000 during the three months ended June 30, 2007. There was no comparable expense in the prior year. Compensation expense related to the ESOP totaled $326,000 during the three months ended June 30, 2007 compared to $278,000 during the comparable period of 2006. The increase in ESOP expense resulted from an increase in the average market price of the Company’s common stock during the three months ended June 30, 2007 compared to the same period in 2006. These increases were partially offset by a decrease in salary expense. Salary expense decreased by $762,000, or 22.7% to $2.6 million during the three months ended June 30, 2007 compared to $3.4 million during the comparable period in 2006. Salary expense decreased as a result of a 20% decrease in the overall level of full-time equivalent staff members and a shift from cash to stock-based compensation.

Occupancy, office furniture and equipment increased by $238,000, or 23.1%, to $1.3 million during the three months ended June 30, 2007 from $1.0 million during the comparable period in 2006. The increase relates primarily to new branch offices located in Franklin, Germantown and West Allis, Wisconsin that opened in August 2006, November 2006 and March 2007, respectively.

Other noninterest expense decreased $317,000, or 35.1%, to $585,000 for the quarter ended June 30, 2007 from $902,000 during the comparable quarter in 2006. The decrease is the result of reductions in expenses related to real estate owned, ATM service charges, brokered deposit fees and employee related business expenses.

-29-

Income Taxes — Due to the pretax loss of $2.0 million generated during the three months ended June 30, 2007, a tax benefit of $694,000 was recognized for the period. This compares to income tax expense of $1.3 million reported for the three months ended June 30, 2006. The tax benefit for the quarter ended June 20, 2007 was calculated at 35.4% of pretax loss resulting in an effective tax rate for the six months ended June 30, 2007 of 33.5%. The effective tax rate for the three months ended June 30, 2006 was 36.7%. On March 30, 2007, the Company settled its dispute with the state of Wisconsin regarding its investment subsidiary located in the state of Nevada. The settlement covered the Nevada operations through the March 30, 2007 settlement date. The settlement had no material effect on net income for the period as the full liability of $4.9 million, including interest, net of deferred Federal tax benefit of $1.7 million, was accrued in prior periods. The settlement had the effect of reducing the estimated effective tax rate for the year ended December 31, 2007 as statutory interest no longer accrues to the liability.

Net Loss-As a result of the foregoing factors, net results of operations for the three months ended June 30, 2007 decreased $3.4 million, to a net loss of 1.3 million, from net income of $2.2 million during the comparable period in 2006.

Comparison of Financial Condition at June 30, 2007 and December 31, 2006

Total Assets — Total assets decreased by $1.1 million, or 0.1%, to $1.647 billion at June 30, 2007 from $1.648 billion at December 31, 2006. The decrease in total assets resulted primarily from decreases in cash and cash equivalents of $45.4 million, offset by increases in securities both available for sale and held to maturity of $35.6 million. Loans held for sale and loans receivable also increased by a combined $7.1 million.

Cash and Cash Equivalents-Cash and cash equivalents decreased by $45.4 million, or 61.5%, to $28.4 million at June 30, 2007 from $73.8 million at December 31, 2006. Cash was used to purchase investment securities, to fund loans receivable and loans held for sale and to repurchase Company shares on the open market.

Securities Available for Sale — Securities available for sale increased by $28.0 million, or 23.9%, to $145.3 million at June 30, 2007 from $117.3 million at December 31, 2006. The Company invested an additional $21.7 million in its Nevada investment subsidiary during the quarter ended June 30, 2007 for the purpose of increasing the investment portfolio due to limited growth in the loan portfolio as a result of a downturn in the local real estate market. The investment subsidiary used the proceeds of the capital infusion to purchase additional municipal debt and mortgage-related securities.

Securities Held to Maturity — Three structured corporate notes valued at $7.6 million were added to the investment portfolio in the first quarter of 2007. The terms of these high yield securities result in a high potential for market value volatility. As a result, they have been classified as held-to-maturity rather than as available-for-sale.

Loans Held for Sale-Loans held for sale increased by $3.3 million, or 62.0%, to $8.7 million at June 30, 2007, from $5.4 million at December 31, 2006.

-30-

Loans Receivable — Loans receivable increased $3.6 million, or 0.3%, to $1.38 billion at June 30, 2007 from $1.37 billion at December 31, 2006. Loans receivable increased by $61.9 million, or 4.7%, during the six months ended June 30, 2006. The total increase in loans receivable was primarily attributable to a $7.8 million increase in commercial business loans and a $7.7 million increase in over four family loans, offset by a $5.6 million decrease in one- to four-family loans and a $5.3 million decrease in consumer loans. In addition, $1.5 million in loans were transferred to real estate owned during the six-month period ended June 30, 2007. The slower growth in loans receivable in 2007 compared to 2006 is directly tied to the downturn in the local real estate market.

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

	As of or for the			As of or for the
	Six Months Ended			Year Ended
	June 30, 2007			December 31, 2006
	(In Thousands)
Total loans receivable and held for sale at beginning of period	$	1,450,170			1,393,096
Real estate loans originated for investment:
Residential
One- to four-family		40,877			111,384
Over four-family		40,212			99,420
Construction and land		14,252			74,104
Commercial		9,607			19,867
Total real estate loans originated for investment		104,948			304,775
Consumer loans originated for investment		7,642			11,915
Commerical loans originated for investment		15,414			2,867
Total loans originated for investment		128,004			319,557
Principal repayments		(120,409	)		(267,870	)
Net activity in loans held for investment		7,595			51,687
Loans originated for sale		108,856			84,603
Loans sold		(105,515	)		(79,216	)
Net activity in loans held for sale		3,341			5,387
Total loans receivable and held for sale at end of period	$	1,461,106			1,450,170

Deposits — Total deposits decreased $17.3 million, or 1.7%, to $1.02 billion at June 30, 2007 from $1.04 billion at December 31, 2006. Total time deposits decreased $25.1 million, or 2.8%, to $858.2 million from $883.3 million at December 31, 2006. Non-local, wholesale time deposits decreased $21.5 million, or 43.2%, from $49.8 million at December 31, 2006 to $28.3 million at June 30, 2007. Partially offsetting the decrease in time deposits, total money market and savings deposits increased $15.0 million, or 15.9%, to $109.5 million at June 30, 2007 from $94.5 million at December 31, 2006. The development and promotion of competitive retail and

-31-

business money market accounts resulted in the significant increase in money market account balances during the period ended June 30, 2007. The increase in money market account balances included amounts transferred from existing demand accounts.

Borrowings — Total borrowings increased $40.9 million, or 12.2%, to $374.9 million at June 30, 2007 from $334.0 million at December 31, 2006. During the current year, the Company entered into two repurchase agreements totaling $24.0 million. The agreements have a weighted average interest rate of 4.21% and mature in 2017. Both agreements are callable beginning in March of 2009 and quarterly thereafter.

Advance Payments by Borrowers for Taxes — Advance payments by borrowers for taxes and insurance increased $16.3 million to $16.5 million at June 30, 2007 from $190,000 at December 31, 2006. 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, primarily in December.

Other Liabilities — Other liabilities decreased $16.8 million, or 46.0%, to $19.9 million at June 30, 2007 from $36.8 million at December 31, 2006. The decrease, which is seasonally normal, was primarily due to a decrease in outstanding checks 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, primarily in December. The outstanding checks remain classified as an other liability until paid. The balance of these outstanding checks was $460,000 at June 30, 2007 and $18.1 million at December 31, 2006.

Shareholders’ Equity — Shareholders’ equity decreased $24.4 million, or 10.0%, to $216.8 million at June 30, 2007 from $241.3 million at December 31, 2006. The decrease was primarily attributable to the repurchase of 1,486,278 shares at a cost of $25.8 million. This decrease was partially offset by net income recognized during the six months ended June 30, 2007, which totaled $830,000.

Accumulated other comprehensive loss is the estimated unrealized loss attributable to the decline in market value of investment securities attributable solely to increases in interest rates since the date of purchase.

-32-

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 June 30,
	2007								2006
	Average		Interest and						Average		Interest and
	Balance		Dividends			Yield/Cost			Balance		Dividends			Yield/Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	1,388,292		21,985	(1)		6.35	%	$	1,357,788		20,795	(1)		6.14	%
Mortgage related securities(2)		97,816		1,278			5.24			85,613		1,018			4.77
Debt securities (2) , federal funds sold and short-term investments		96,684		1,072			4.45			57,838		605			4.20
Total interest-earning assets		1,582,792		24,335			6.17			1,501,239		22,418			5.99
Noninterest-earning assets		66,454								67,068
Total assets	$	1,649,246								1,568,307
Interest-bearing liabilities:
Demand and money market accounts	$	141,930		1,126			3.18		$	105,872		604			2.29
Savings accounts		19,762		20			0.41			20,846		26			0.50
Certificates of deposit		856,041		9,984			4.68			947,275		9,717			4.11
Total interest-bearing deposits		1,017,733		11,130			4.39			1,073,993		10,347			3.86
Borrowings		370,197		4,089			4.43			225,051		2,373			4.23
Other interest bearing liabilities		18,827		126			2.68			10,803		108			4.01
Total interest-bearing liabilities		1,406,757		15,345			4.38			1,309,847		12,828			3.93
Noninterest-bearing liabilities		14,797								24,575
Total liabilities		1,421,554								1,334,422
Equity		227,692								233,885
Total liabilities and equity	$	1,649,246							$	1,568,307
Net interest income				8,990								9,590
Net interest rate spread(3)							1.79	%							2.06	%
Net interest-earning assets(4)	$	176,035							$	191,392
Net interest margin(5)							2.28	%							2.56	%
Average interest-earning assets to average interest-bearing liabilities							112.51	%							114.61	%

(1)	Includes net deferred loan fee amortization income of $667,000 and $194,000 for the three months ended June 30,2007 and 2006, 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.

-33-

	Six Months Ended June 30,
	2007								2006
	Average		Interest and						Average		Interest and
	Balance		Dividends			Yield/Cost			Balance		Dividends			Yield/Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	1,385,317		43,308	(1)		6.30	%	$	1,341,583		41,001	(1)		6.16	%
Mortgage related securities(2)		97,947		2,542			5.23			87,822		2,081			4.78
Debt securities (2), federal funds sold and short-term investments		91,444		2,060			4.54			57,265		1,193			4.20
Total interest-earning assets		1,574,708		47,910			6.14			1,486,670		44,275			6.01
Noninterest-earning assets		67,795								63,647
Total assets	$	1,642,503								1,550,317
Interest-bearing liabilities:
Demand and money market accounts	$	138,618		2,174			3.16		$	100,036		1,041			2.10
Savings accounts		19,392		40			0.42			20,986		52			0.50
Certificates of deposit		863,862		19,938			4.65			939,721		18,585			3.99
Total interest-bearing deposits		1,021,872		22,152			4.37			1,060,743		19,678			3.74
Borrowings		355,841		7,780			4.41			225,000		4,733			4.24
Other interest bearing liabilities		14,743		223			3.05			9,180		214			4.70
Total interest-bearing liabilities		1,392,456		30,155			4.37			1,294,923		24,625			3.83
Noninterest-bearing liabilities		16,234								21,102
Total liabilities		1,408,690								1,316,025
Equity		233,813								234,292
Total liabilities and equity	$	1,642,503							$	1,550,317
Net interest income				17,755								19,650
Net interest rate spread(3)							1.77	%							2.18	%
Net interest-earning assets(4)	$	182,252							$	191,747
Net interest margin(5)							2.27	%							2.67	%
Average interest-earning assets to average interest-bearing liabilities							113.09	%							114.81	%

(1)	Includes net deferred loan fee amortization income of $1,185,000 and $391,000 for the six months ended June 30,2007 and 2006, 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

-34-

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 June 30,									Six Months Ended June 30,
	2007 versus 2006									2007 versus 2006
	Increase (Decrease) due to									Increase (Decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest and dividend income:
Loans receivable(1) (2)	$	473			718			1,191		$	1,355			952			2,307
Securites interest and income from other earning assets(3)		611			115			726			1,062			266			1,328
Total interest-earning assets		1,084			833			1,917			2,417			1,218			3,635
Interest expense:
Demand and money market accounts		243			279			522			489			644			1,133
Savings accounts		(1	)		(5	)		(6	)		(4	)		(8	)		(12	)
Certificates of deposit		(632	)		899			267			(1,266	)		2,619			1,353
Total interest-bearing deposits		(390	)		1,173			783			(781	)		3,255			2,474
Borrowings		1,598			118			1,716			2,854			193			3,047
Other interest bearing liabilities		32			(14	)		18			21			(12	)		9
Total interest-bearing liabilities		1,240			1,277			2,517			2,094			3,436			5,530
Net change in net interest income	$	(156	)		(444	)		(600	)	$	323			(2,218	)		(1,895	)

(1)	Includes net deferred loan fee amortization income of $667,000, $194,000, $1,185,000 and $391,000 for the three months ended June 30, 2007 and 2006 and the six months ended June 30, 2007 and 2006, 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.

-35-

ASSET QUALITY

The following table summarizes non-performing loans and assets:

NON-PERFORMING LOANS AND ASSETS

	At June 30,			At December 31,
	2007			2006
	(Dollars in Thousands)
Non-accrual loans:
Mortgage loans
One- to four-family		23,342			12,376
Over four-family		14,960			8,384
Construction and land		7,790			7,664
Commercial		3,207			357
Total mortgage		49,299			28,781
Consumer		423			107
Total non-performing loans		49,722			28,888
Real estate owned		819			520
Total non-performing assets	$	50,541			29,408
Total non-performing loans to total loans receivable		3.61	%		2.10	%
Total non-performing loans to total assets		3.02	%		1.75	%
Total non-performing assets to total assets		3.07	%		1.79	%

Total non-performing loans increased by $20.8 million, or 72.1%, to $49.7 million as of June 30, 2007, compared to $28.9 million as of December 31, 2006. The ratio of non-performing loans to total loans at June 30, 2007 was 3.61% compared to 2.10% at December 31, 2006. All categories of loans experienced an increase in non-performing loans. Of the $20.8 million increase in non-performing loans between December 31, 2006 and June 30, 2007, $12.7 million related to two borrowers, each with a number of loans collateralized by one- to four-family and over four-family rental properties. An additional $3.3 million related to a number of lending relationships with real estate investors whose collateral consist of one- and two-unit rental properties. Lastly, $2.7 million of the addition related to a number of borrowers who contracted to construct single-family homes on a speculative basis, using a common contractor.

Of the $49.7 million in non-performing loans as of June 30, 2007, the Company has determined that $13.6 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 $3.4 million and specific reserves totaling $1.8 million. In general, the losses have been somewhat isolated to borrowers that fall into the small real estate investor class, those with multiple rental properties or those who have built single family homes on a speculative basis. Generally, loan performance and collateral shortfall issues have resulted from both property mismanagement and a soft real estate market. Based upon its review of the remaining $36.1 million in non-performing loans, the Company

-36-

believes that the value of the underlying collateral securing these loans is adequate to recover the outstanding principal balance of the loan, should the respective borrower cease efforts to return the loan to a performing status.

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

	At or for the Six			At or for the Six
	Months Ended			Months Ended
	June 30, 2007			June 30, 2006
	(Dollars in Thousands)
Balance at beginning of period	$	7,195			5,250
Provision for loan losses		6,026			652
Charge-offs:
Mortgage
One- to four-family		585			137
Over four-family		215			—
Construction and land		2,852			—
Commercial		—			2
Consumer		3			5
Total charge-offs		3,655			144
Total recoveries		4			225
Net charge-offs		3,651			(81	)
Allowance at end of period	$	9,570			5,983
Ratios:
Allowance for loan losses to non-performing loans at end of period		19.25	%		38.69	%
Allowance for loan losses to loans receivable at end of period		0.70	%		0.44	%
Net charge-offs to average loans outstanding		0.53	%		(0.01	%)

Net charge-offs were $3.7 million, or 0.53% of average loans for the six months ended June 30, 2007 on an annualized basis, compared to a net recovery of $81,000 for the six months ended June 30, 2006. Of the $3.7 million in total charge-offs, approximately $2.8 million related to loans secured by construction and land. One lending relationship, consisting of three notes collateralized by two parcels of undeveloped land that was to have been developed into residential real estate, accounted for $2.3 million of the construction and land charge-offs. Management ordered new appraisals on the two parcels in the second quarter of 2007 after the borrower’s stated plans to refinance the loans or sell the land were delayed or abandoned. The updated appraised values reduced by estimated costs of disposal provided the basis for the charge-off.

The remaining $526,000 in construction and land charge-offs relate 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” new appraisals.

-37-

The allowance for loan loss totaled $9.6 million or 0.70% of average loans as of June 30, 2007 compared to $7.2 million or 0.52% of average loans as of December 31, 2006. Of the $2.4 million, or 33.0% increase, $1.1 million related to the net increase in specific reserves on a number of loans. Specific reserves totaling $1.0 million were established during the quarter ended June 30, 2007 to cover the estimated loss on 18 loans made to a group of related borrowers and collateralized by residential rental properties. Management ordered new appraisals on each of the properties in the second quarter of 2007 after the borrowers’ stated workout plans were found to be inadequate. The updated appraised values reduced by estimated costs of disposal provided the basis for the charge-off.

The other $1.3 million increase in the June 30, 2007 allowance for loan losses is attributable to the general valuation allowance intended to cover probable future losses in the existing loan portfolio and was based on the significant increases in actual charge-off experience and in non-performing assets as previously described plus the significant increase in past due but still performing loans. Total loans past due in excess of 60 days increased $17.5 million, or 41.5%, to $59.6 million as of June 30, 2007, compared to $42.1 million as of December 31, 2006. As of June 30, 2007, 79% of loans past due were originated prior to 2006 and 61% were originated in 2004 and 2005.

The $6.0 million loan loss provision for the six months ended June 30, 2007 is the direct result of the net increase in the ending allowance during the period and the net charge-offs recorded during the period. The increase in the estimated allowance for loan losses for the period of $2.4 million plus the $3.6 million in net charge-offs results in the loan loss provision for the six months ended June 30, 2007.

The allowance for loan losses has been determined in accordance with accounting principles generally accepted in the United States. 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 rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. Also, as over four-family loan portfolios increase, additional provisions would likely be added to the loan loss allowances as they carry a higher risk of loss. The dollar amount of the typical over four-family loan tends to be larger than our average single family loan and, therefore, any loss that we experience on these loans could be larger than what we have historically experienced on our single-family loans. See “Significant Accounting Policies” above for a discussion on the use of judgment in determining the amount of the allowance for loan losses.

-38-

Impact of Inflation and Changing Prices

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

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our liquidity ratio averaged 3.1% and 1.2% for the six months ended June 30, 2007 and 2006 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 June 30, 2007 was 5.1% and 10.8%, 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 four commercial banks and advances from the Federal Home Loan Bank of Chicago.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At June 30, 2007 and 2006, respectively, $28.4 million and $73.8 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

-39-

and mortgage-related securities, increases in deposit accounts, federal funds purchased and advances from the Federal Home Loan Bank of Chicago.

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

During the six months ended June 30, 2007 and 2006, loan originations, net of collected principal, totaled $3.7 million and $62.3 million, respectively, reflecting net growth in our portfolio. Growth has declined in 2007 with the rise in short-term interest rates and the decline in residential real estate transactions.

Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. Deposits decreased by $17.3 million for the six months ended June 30, 2007 primarily as the result of competitive pricing offered in the local market and reductions in the use of non-local, wholesale deposit funding.

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 Federal Home Loan Bank of Chicago, which provide an additional source of funds. At June 30, 2007, we had $350.9 million in advances from the Federal Home Loan Bank of Chicago, of which $51.2 million was due within 12 months, and an additional available borrowing limit of $149.3 million based on collateral requirements of the Federal Home Loan Bank of Chicago. As an additional source of funds, we also enter into repurchase agreements. During the quarter ended March 31, 2007, the Company entered into two repurchase agreements totaling $24.0 million. The agreements mature in 2017, however, both are callable beginning in 2009 and quarterly thereafter.

At June 30, 2007, we had outstanding commitments to originate loans of $23.9 million, unfunded commitments under construction loans of $39.7 million and unfunded commitments under lines of credit and standby letters of credit of $32.6 million. At June 30, 2007, certificates of deposit scheduled to mature in one year or less totaled $709.2 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago 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.

Regulatory Capital

The Company and Wauwatosa Savings are 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

-40-

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 Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Company’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 Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, that as of June 30, 2007, the Company met all capital adequacy requirements to which it is subject.

As of June 30, 2007 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 Wauwatosa Savings capital ratios decreased significantly from March 31, 2007 to June 30, 2007 as the direct result of a $30 million dividend paid by the Wauwatosa Savings to the Company in June 2007.

The actual capital amounts and ratios for the Company and Wauwatosa Savings as of June 30, 2007 are presented in the table below:

	June 30, 2007
											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions (1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Wauwatosa Holdings
Total capital (to risk-weighted assets)	$	228,564		17.59	%		103,952		8.00	%		N/A		N/A
Tier I capital (to risk-weighted assets)		219,081		16.86	%		51,976		4.00	%		N/A		N/A
Tier I capital (to average assets)		219,081		13.29	%		65,934		4.00	%		N/A		N/A
Wauwatosa Savings
Total capital (to risk-weighted assets)	$	177,040		13.87	%		102,142		8.00	%		127,678		10.00	%
Tier I capital (to risk-weighted assets)		167,999		13.16	%		51,071		4.00	%		76,607		6.00	%
Tier I capital (to average assets)		167,999		10.33	%		65,066		4.00	%		81,333		5.00	%
State of Wisconsin (to total assets) (2)		167,999		10.34	%		97,488		6.00	%		N/A		N/A

(1)	Prompt corrective action provisions are not applicable at the bank holding company level.
(2)	State of Wisconsin regulatory capital requirements are not applicable at the bank holding company level.

-41-

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 June 30, 2007 and the respective maturity dates.

Contractual Obligations

					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Deposits without a stated maturity	$	160,690		160,690		—		—		—
Certificates of deposit		858,223		709,186		120,913		27,354		770
Federal Home Loan Bank advances(1)		350,903		51,953		53,950		25,000		220,000
Repurchase agreements(2)		24,000		—		—		—		24,000
Operating leases (3)		260		103		157		—		—
Capital lease		3,825		300		3,525		—		—
State income tax obligation(4)		3,726		1,242		2,484
Salary continuation agreements		3,121		576		1,152		543		850
	$	1,404,748		924,050		182,181		52,897		245,620

(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 from July 2007 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.
(4)	Represents remaining amounts due to the Wisconsin Department of Revenue related to the operations of the Company’s Nevada subsidiary.

     The following table details the amounts and expected maturities of significant off-balance sheet commitments as of June 30, 2007.

Other Commitments

					More than		More than
					One Year		Three Years		Over
			One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years
	(In Thousands)
Real estate loan commitments(1)	$	23,858		23,858		—		—		—
Unused portion of home equity lines of credit(2)		32,277		32,277		—		—		—
Unused portion of construction loans(3)		39,741		39,741		—		—		—
Standby letters of credit		350		349		—		1		—
Total Other Commitments	$	96,226		96,225		—		1		—

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.

-42-

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 June 30, 2007 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, likely result in an increase in our liability sensitive position.

	Percentage
	Increase (Decrease) in Estimated Net
	Annual Interest Income
	Over 24 Months
300 basis point increase in rates		(13.46	)%
200 basis point increase in rates		(7.01	)
100 basis point increase in rates		(1.45	)
100 basis point decrease in rates		6.98
200 basis point decrease in rates		17.06	%

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

-43-

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 (.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 liability sensitive, income is projected to decrease proportionately with increases in interest rates. At June 30, 2007, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing forecasted net interest income by 13.46%, while a 100 basis point decrease in rates had the affect of increasing net interest income by 6.98%. At June 30, 2007, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing the forecasted return on assets by 0.18%, while a 100 basis point decrease in rates had the effect of increasing the return on assets by 0.09%. 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.

-44-

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At June 30, 2007, 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, 2006.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides the specified information about the repurchases of shares by the Company during the six months ended June 30, 2007.

					Total number of		Maximum number
					shares purchased		of shares that may
	Total number		Average		as part of		yet be purchased
	of shares		price paid		publicly announced		under the
Period	purchased		per share		plans or programs		plans or programs
January 1 - January 31, 2007		—	$	—				1,494,298
February 1 - February 28, 2007		112,863		17.77		112,863		1,381,435
March 1 - March 31, 2007		713,938		17.47		826,801		667,497
April 1 - April 30, 2007		108,968		17.67		935,769		558,529
May 1 - May 31, 2007		241,573		17.55		1,177,342		316,956
June 1 - June 30, 2007		308,936		16.62		1,486,278		8,020
		1,486,278		17.34

-45-

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

On May 16, 2007 at the Annual Meeting of Shareholders, shareholders took the following actions:

1. Elected as directors all nominees designated in the proxy statement dated March 28, 2007 as follows:

	Number of Votes
	For		Against
Thomas E. Dalum		31,624,890		158,607
Barbara J. Coutley		31,609,198		174,299

2. Ratified the Audit Committee’s selection of KPMG LLP as independent registered public accounting firm for Wauwatosa Holdings, Inc. for 2007: 31,645,051 votes cast for, 79,275 votes cast against, and 59,171 votes abstained.

On June 12, 2007 at the Special Meeting of Shareholders, shareholders took the following actions:

Approved a Plan of Charter Conversion by which Wauwatosa Holdings, Inc will convert from a Wisconsin corporation to a federal corporation chartered by the Office of Thrift Supervision: 28,571,546 votes for, 74,257 votes against, and 40,780 votes abstained.

Item 6.Exhibits

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

-46-

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: August 9, 2007
	/s/ Douglas S. Gordon
	Douglas S. Gordon
	Chief Executive Officer
Date: August 9, 2007	/s/ Richard C. Larson
	Richard C. Larson
	Chief Financial Officer

-47-

EXHIBIT INDEX

WAUWATOSA HOLDINGS, INC.

Form 10-Q for Quarter Ended June 30, 2007

Exhibit No.	Description	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Wauwatosa Holdings, Inc.	X
31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Wauwatosa Holdings, Inc.	X
32.1	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Wauwatosa Holdings, Inc.	X
32.2	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Wauwatosa Holdings, Inc.	X

-48-