e10vq

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 September 30, 2007


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)


Federal (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. Yes þ No o

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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 31,418,902 at October 31, 2007.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)
	September 30,			December 31,
	2007			2006
	(In Thousands, except share data)
Assets
Cash	$	5,563			26,745
Federal funds sold		16,271			21,800
Interest-earning deposits in other financial institutions and other short term investments		812			25,262

Cash and cash equivalents		22,646			73,807
Securities available-for-sale (at fair value)		171,324			117,330
Securities held-to-maturity (at amortized cost)		7,646			—
Loans held for sale		10,462			5,387
Loans receivable		1,381,087			1,372,907
Less: Allowance for loan losses		11,482			7,195

Loans receivable, net		1,369,605			1,365,712

Office properties and equipment, net		32,424			32,625
Federal Home Loan Bank stock, at cost		17,550			17,213
Cash surrender value of life insurance		25,445			24,152
Prepaid expenses and other assets		22,542			12,244

Total assets	$	1,679,644			1,648,470

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	50,107			58,407
Money market and savings deposits		116,156			94,472
Time deposits		857,444			883,339

Total deposits		1,023,707			1,036,218

Short term borrowings		47,422			41,224
Long term borrowings		362,950			292,779
Advance payments by borrowers for taxes		24,394			190
Other liabilities		18,880			36,787

Total liabilities		1,477,353			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 shares in 2007 and 2006 Issued - 33,975,250 shares in 2007 and 33,723,750 in 2006 Outstanding - 31,418,902 in 2007 and 33,723,750 in 2006		340			337
Additional paid-in capital		105,804			104,182
Accumulated other comprehensive loss (net of taxes)		(847	)		(1,225	)
Retained earnings, substantially restricted		146,060			144,809
Unearned ESOP shares		(6,191	)		(6,831	)
Treasury shares (2,556,348 shares), at cost		(42,875	)		—

Total shareholders’ equity		202,291			241,272

Total liabilities and shareholders’ equity	$	1,679,644			1,648,470

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Nine months ended September 30,					Three months ended September 30,
	2007		2006			2007			2006
			(In thousands, except per share data)
Interest income:
Loans	$	65,077		62,314			21,769			21,313
Mortgage-related securities		4,075		3,056			1,533			975
Debt securities, federal funds sold and short-term investments		3,178		2,172			1,118			978

Total interest income		72,330		67,542			24,420			23,266

Interest expense:
Deposits		33,641		30,758			11,475			11,067
Borrowings		12,427		7,958			4,438			3,023

Total interest expense		46,068		38,716			15,913			14,090

Net interest income		26,262		28,826			8,507			9,176
Provision for loan losses		8,852		1,844			2,826			1,191

Net interest income after provision for loan losses		17,410		26,982			5,681			7,985

Noninterest income:
Service charges on loans and deposits		1,479		1,500			426			563
Increase in cash surrender value of life insurance		988		875			540			488
Loss on sale/impariment of securities		—		(784	)		—			(784	)
Mortgage banking income		2,138		1,752			745			657
Other		626		569			179			305

Total noninterest income		5,231		3,912			1,890			1,229

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		11,778		12,491			3,859			4,389
Occupancy, office furniture and equipment		3,779		3,136			1,285			1,142
Advertising		870		946			315			375
Data processing		1,148		1,501			494			708
Communications		554		468			171			147
Professional fees		911		793			273			327
Other		1,987		2,416			808			683

Total noninterest expenses		21,027		21,751			7,205			7,771

Income before income taxes		1,614		9,143			366			1,443
Income taxes (benefit)		363		3,374			(55	)		537

Net income	$	1,251		5,769			421			906

Earnings per share:
Basic	$	0.04		0.17			0.01			0.03
Diluted	$	0.04		0.17			0.01			0.03
Weighted average shares outstanding:
Basic		31,912,040		33,066,970			30,797,083			33,085,851
Diluted		31,920,231		33,066,970			30,804,538			33,085,851

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Common Stock					Paid-In		Comprehensive			Retained		ESOP			Treasury
	Shares			Amount		Capital		Income (Loss)			Earnings		Shares			Stock			Equity
								(In Thousands)
Balances at December 31, 2005		33,724		$	337		103,859		(1,571	)		136,756		(7,685	)		—			231,696
Comprehensive income:
Net income		—			—		—		—			5,769		—			—			5,769
Other comprehensive income (loss):
Net unrealized holding gains on available for sale securities arising during the period, net of taxes of $569		—			—		—		1,061			—		—			—			1,061
Reclassification adjustment for net losses available for sale securities realized in net income, net of taxes of $275		—			—		—		(509	)		—		—			—			(509	)

Total comprehensive income																				6,321
ESOP shares committed to be released to Plan participants		—			—		198		—			—		640			—			838

Balances at September 30, 2006		33,724		$	337		104,057		(1,019	)		142,525		(7,045	)		—			238,855


Balances at December 31, 2006		33,724		$	337		104,182		(1,225	)		144,809		(6,831	)		—			241,272

Comprehensive income:
Net income		—			—		—		—			1,251		—			—			1,251
Other comprehensive income (loss):
Net unrealized holding gains on available for sale securities arising during the period, net of taxes of $203		—			—		—		378			—		—			—			378

Total comprehensive income																				1,629
ESOP shares committed to be released to Plan participants		—			—		326		—			—		640			—			966
Stock based compensation		251			3		1,296		—			—		—			—			1,299
Purchase of treasury stock		(2,556	)		—		—		—			—		—			(42,875	)		(42,875	)

Balances at September 30, 2007		31,419		$	340		105,804		(847	)		146,060		(6,191	)		(42,875	)		202,291

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended September 30,
	2007			2006
	(In Thousands)
Operating activities:
Net income	$	1,251			5,769
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		8,852			1,844
Provision for depreciation		1,960			1,739
Deferred income taxes		(1,957	)		(1,116	)
Stock based compensation expense		1,299			—
Net amortization of premium on debt and mortgage-related securities		(125	)		33
Fair value of ESOP shares committed to be released		966			838
Gain on sale of loans held for sale		(1,069	)		(653	)
Loans originated for sale		(160,916	)		(48,798	)
Proceeds on sales of loans originated for sale		156,910			46,312
Increase in accrued interest receivable		(875	)		(323	)
Increase in cash surrender value of life insurance		(988	)		(875	)
Increase in accrued interest on deposits		139			966
Increase in other liabilities		513			625
Loss on sale/impairment of securities		—			784
(Gain) loss on sale of real estate owned and other assets		(13	)		85
Other		(132	)		(620	)

Net cash provided by operating activities		5,815			6,610

Investing activities:
Net increase in loans receivable		(21,118	)		(49,619	)
Purchases of:
Debt securities		(28,958	)		—
Mortgage-related securities		(44,212	)		(9,266	)
Structured notes, held-to-maturity		(7,646	)		—
Premises and equipment, net		(1,781	)		(9,504	)
Waterstone Mortgage Corporation		—			(1,081	)
Life insurance		(306	)		(306	)
FHLB stock		(337	)		(4,085	)
Proceeds from:
Principal repayments on mortgage-related securities		13,796			11,841
Sales of mortgage related securities		—			5,360
Maturities of debt securities		5,510			—
Sales of real estate owned and other assets		1,425			2,647
Redmption of FHLB stock		—			1,040

Net cash used in investing activities		(83,627	)		(52,973	)

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine months ended September 30,
	2007			2006
	(In Thousands)
Financing activities:
Net increase (decrease) in deposits		(13,190	)		15,806
Net change in short-term borrowings		(16,531	)		(97,209	)
Proceeds from long-term borrowings		92,900			245,000
Net increase in advance payments by borrowers for taxes		6,347			8,447
Purchase of treasury stock		(42,875	)		—


Net cash provided by financing activities		26,651			172,044

Increase (decrease) in cash and cash equivalents		(51,161	)		125,681
Cash and cash equivalents at beginning of period		73,807			16,498

Cash and cash equivalents at end of period		22,646			142,179


Supplemental information:
Cash paid or credited during the period for:
Income tax payments		3,187			2,940
Interest payments		45,930			37,750
Noncash investing activities:
Loans receivable transferred to foreclosed properties		8,347			1,454
Noncash financing activities:
Long-term FHLB advances reclassified to short-term		22,729			41,531

See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

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

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

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2006 Annual Report on Form 10-K. Operating results for the three and nine months ended September 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 September 30, 2007 presentation.

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Note 3 — Securities

Securities Available for Sale

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


			September 30, 2007
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	20,793		61		(293	)		20,561
Collateralized mortgage obligations		110,342		451		(1,231	)		109,562

Mortgage-related securities		131,135		512		(1,524	)		130,123


Government sponsored entity bonds		13,992		72		(36	)		14,028
Municipal securities		27,250		134		(461	)		26,923

Debt securities		41,242		206		(497	)		40,951

Other securities		250		—		—			250


	$	172,627		718		(2,021	)		171,324


			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 September 30, 2007, $14.0 million of the Company’s government sponsored entity bonds and $61.9 million of the Company’s mortgage backed securities were pledged as collateral to secure repurchase agreement obligations of the Company.

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The amortized cost and fair values of investment securities by contractual maturity at September 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	$	998		994
Due after one year through five years		12,994		13,034
Due after five years through ten years		1,654		1,651
Due after ten years		25,596		25,272
Mortgage-related securities		131,135		130,123
Other securities		250		250

	$	172,627		171,324

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:


						September 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	$	2,541		(8	)		13,237		(285	)		15,778		(293	)
Collateralized mortgage obligations		8,676		(41	)		49,584		(1,190	)		58,260		(1,231	)
Government sponsored entity bonds		—		—			7,931		(36	)		7,931		(36	)
Municipal securities		22,375		(459	)		473		(2	)		22,848		(461	)


	$	33,592		(508	)		71,225		(1,513	)		104,817		(2,021	)

There are three, seventeen, five and one individual securities at September 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 September 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 $7.1 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.

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Note 4 — Loans Receivable

Loans receivable are summarized as follows:


	September 30,		December 31,
	2007		2006
	(In Thousands)
Mortgage loans:
One- to four-family	$	664,912		666,167
Over four-family residential		483,708		480,722
Commercial real estate		50,271		48,836
Construction and land		166,539		168,523

Total mortgage loans		1,365,430		1,364,248
Consumer loans		70,782		77,878
Commercial business loans		17,286		2,657

Gross loans receivable		1,453,498		1,444,783
Less:
Undisbursed loan proceeds		68,677		67,390
Unearned loan fees		3,734		4,486

Total loans receivable, net	$	1,381,087		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 $68.9 million at September 30, 2007 and $28.9 million at December 31, 2006.

Commercial, commercial real estate and multi-family loans with nonaccrual status or having restructured terms are considered to be impaired loans. The following table presents data on impaired loans at September 30, 2007 and December 31, 2006.


	September 30,		December 31,
	2007		2006
	(In Thousands)
Impaired loans for which an allowance has been provided	$	33,075		11,430
Impaired loans for which no allowance has been provided		30,529		18,499

Total loans determined to be impaired	$	63,604		29,929

Allowance for loan losses related to impaired loans	$	4,959		1,616

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


	For the Nine Months Ended
	September 30,
	2007			2006
	(In Thousands)
Balance at beginning of period	$	7,195			5,250
Provision for loan losses		8,852			1,844
Charge-offs		(4,598	)		(258	)
Recoveries		33			257

Balance at end of period	$	11,482			7,093


Allowance for loan losses to loans receivable		0.83	%		0.52	%
Net charge-offs to average loans outstanding (annualized)		0.44	%		0.00	%
Allowance for loan losses to non-performing loans		16.65	%		33.01	%
Non-performing loans to loans receivable		4.99	%		1.59	%

Note 5 — Deposits

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


	(In Thousands)
Within one year	$	659,768
One to two years		124,559
Two to three years		48,031
Three to four years		8,184
Four through five years		16,454
After five years		448


	$	857,444

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Note 6 — Borrowings

Borrowings consist of the following:


	September 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	$	24,693		4.35	%		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		69,000		4.20	%		—

	$	410,372		4.36	%		334,003		4.31	%

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

The $69 million in repurchase agreements include quarterly call options beginning in 2009. The repurchase agreements are collateralized by securities available for sale with an estimated fair value of $75.9 million at September 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 September 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

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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.

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 nine month period ended September 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 nine months ended September 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		9.25		—
Excercised		—							—
Forfeited		(15,000	)		17.67		9.25		—

Outstanding September 30, 2007		767,500			17.67		9.25		—

Options exercisable at September 30, 2007		—			17.67				—

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


				Weighted Average
Stock Options	Shares			Grant Date Fair Value

Nonvested at December 31, 2006		—			—
Granted		782,500		$	6.27
Vested		—			—
Forfeited		(15,000	)		6.27

Nonvested at September 30, 2007		767,500			6.27

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The Company amortizes the expense related to stock options as compensation expense over the vesting period. During the nine months ended September 30, 2007, 782,500 options were granted, of which 15,000 have been forfeited. Expense for the stock options granted of approximately $632,000 and $211,000 was recognized during the nine and three month periods ended September 30, 2007. At September 30, 2007, the Company had $4.0 million in estimated unrecognized compensation costs related to outstanding stock options that is expected to be recognized over the next 51 months.

The following table summarizes information about the Company’s restricted stock shares activity for the nine months ended September 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 nine months ended September 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 $667,000 and $222,000 was recorded for the nine and three month periods ended September 30, 2007. At September 30, 2007, the Company had $3.8 million of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a period of 51 months.

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Note 8 – Income Taxes

The income tax provisions differ from that computed at the Federal statutory corporate tax rate for the nine and three month periods ended September 30, 2007 and 2006 as follows:


	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(Dollars in thousands)
Income before income taxes	$	1,614			9,143			366			1,443

Tax at federal statutory rate		565			3,200			128			505
Add effect of:
State income taxes, net of Federal income tax benefit		46			398			29			79
Cash surrender value of life insurance		(346	)		(306	)		(189	)		(171	)
Non-deductible ESOP and stock options expense		180			69			54			39
Tax-exempt interest income		(179	)		(52	)		(102	)		(17	)
Other		97			65			25			102

Income tax provision		363			3,374			(55	)		537


Effective tax rate		22.5%			36.9%			(14.9%	)		36.9%

Note 9 – Financial Instruments with Off-Balance Sheet Risk

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


	September 30,		December 31,
	2007		2006
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit	$	17,073		28,067
Unused portion of home equity lines of credit		31,861		34,676
Unused portion of construction loans		36,816		32,714
Standby letters of credit		940		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 September 30, 2007 and December 31, 2006, the Company had $10.5 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

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Note 10 – Earnings per share

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
			(In Thousands, except per share data)
Net income	$	421	$	906	$	1,251	$	5,769


Weighted average shares outstanding		30,797		33,086		31,912		33,067
Effect of dilutive potential common shares		8		—		8		—

Diluted weighted average shares outstanding		30,805		33,086		31,920		33,067


Basic earnings per share	$	0.01	$	0.03	$	0.04	$	0.17

Diluted earnings per share	$	0.01	$	0.03	$	0.04	$	0.17

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Note 11 – Charter Conversion

On September 28, 2007, the Company completed its charter conversion to change the Company’s charter from a Wisconsin corporation to that of a federal corporation regulated exclusively by the Office of Thrift Supervision (the “OTS”). Similarly, the Company’s mutual holding company parent, Lamplighter Financial, MHC (the “MHC”) also completed its charter conversion to change the MHC’s charter from a Wisconsin chartered mutual holding company to a federally chartered mutual holding company exclusively regulated by the OTS. The charter conversions were approved by the OTS and the Company’s charter conversion was approved by its shareholders at a special meeting held on June 12, 2007. Wauwatosa Savings continues to be a Wisconsin chartered savings bank.

Pursuant to the plan of charter conversion, the outstanding shares of common stock, par value $.01 per share of the Company as a Wisconsin corporation, became by operation of law, on a one-for-one basis, common stock, par value $.01 per share of the Company as a federal corporation.

Note 12 – 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

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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 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;

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	•		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).

Overview

Generally, our results of operations depend on our net interest income. Net interest income is the difference between the interest income we earn on loans receivable, investment securities and cash and cash equivalents and the interest we pay on deposits and other borrowings. The Company’s banking subsidiary, Wauwatosa Savings Bank (“Wauwatosa Savings”), is primarily a mortgage lender with such loans comprising 93.9% of total loans receivable on September 30, 2007. Further, 79.0% of loans receivable are residential mortgage loans with over four-family loans comprising 33.4% of all loans on September 30, 2007. Wauwatosa Savings funds loan production primarily with retail deposits and Federal Home Loan Bank advances. On September 30, 2007, deposits comprised 69.3% of total liabilities. Time deposits, also known as certificates of deposit, accounted for 83.8% of total deposits at September 30, 2007. Federal Home Loan Bank advances outstanding on September 30, 2007 totaled $341.4 million, or 23.1% 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 fee income. Noninterest expense consists primarily of compensation and employee benefits and occupancy expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, governmental policies and actions of regulatory authorities. During the nine months ended September 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 nine months ended September 30, 2007, the Company significantly increased its provision for loan losses to $2.8 million and $8.9 million, respectively, from $1.2 million and $1.8 million for the three and nine months ended September 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.

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The following discussion and analysis is presented to assist the reader in the understanding and evaluation of the Company’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on the results of operations for the three and nine month periods ended September 30, 2007 and 2006 and the financial condition as of September 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.

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

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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 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 Nine Months Ended September 30, 2007 and 2006

General — Net income for the nine months ended September 30, 2007 totaled $1.3 million, or $0.04 for both basic and diluted earnings per share compared to net income of $5.8 million, or $0.17 for both basic and diluted earnings per share for the nine months ended September 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 0.75%, compared to 0.49% and 3.27%, respectively, for the comparable period in 2006. The decrease in net income was a result of a $7.0 million increase in the provision for loan losses and a $2.6 million decrease in net interest income, partially offset by a $1.3 million increase in non-interest income and a $724,000 decrease in other noninterest expense. The increase in the provision for loan losses was the direct result of an increase in loan charge-offs and an increase in specific loan losses attributable to 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 nine months of 2007 was 2.22% compared to 2.56% for the first nine months of 2006.

Total Interest Income — Total interest income increased $4.8 million, or 7.1%, to $72.3 million during the nine months ended September 30, 2007 compared to $67.5 million for the nine months ended September 30, 2006. Interest income on loans increased $2.8 million, or 4.4%, to $65.1 million for the nine months ended September 30, 2007 compared to $62.3 million for the comparable period in 2006. The increase resulted primarily from an increase of $36.7 million, or 2.7%, in the average loan balance to $1.4 billion during the nine-month period ended September 30, 2007 from $1.3 billion during the comparable period in 2006. The increase in average loans was compounded by a 10 basis point increase in the average yield on loans to 6.28% for the nine-month period ended September 30, 2007 from 6.18% for the comparable period in 2006. In addition, interest income from mortgage-related securities increased $1.0 million, or 33.3%, to $4.1 million for the nine months ended September 30, 2007 compared to $3.1 million for the comparable period in 2006. This was primarily due to the increase of $19.0 million, or 22.2%, in the average balance to $104.6 million during the nine-month period ended September 30, 2007

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from $85.6 million during the comparable period in 2006. The increase in average mortgage-related securities was compounded by a 44 basis point increase in the average yield on mortgage-related securities to 5.21% for the nine-month period ended September 30, 2007 from 4.77% for the comparable period in 2006. Finally, interest income from debt securities, federal funds sold and short-term investments increased $1.0 million, or 46.3%, to $3.2 million for the nine months ended September 30, 2007 compared to $2.2 million for the comparable period in 2006. This was primarily due to the increase of $20.6 million, or 28.7%, in the average balance to $92.2 million during the nine-month period ended September 30, 2007 from $71.6 million during the comparable period in 2006. The increase in average other earning assets was compounded by a 56 basis point increase in the average yield on other earning assets to 4.61% for the nine-month period ended September 30, 2007 from 4.05% for the comparable period in 2006.

Total Interest Expense - Total interest expense increased by $7.4 million, or 19.0%, to $46.1 million during the nine months ended September 30, 2007 from $38.7 million during the nine months ended September 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 $2.9 million, or 9.4%, to $33.6 million during the nine months ended September 30, 2007 from $30.8 million during the comparable period in 2006. The increase resulted primarily from an increase in the average cost of deposits to 4.39% for the nine-month period ended September 30, 2007 compared to 3.87% for the comparable period in 2006. The increase in the cost of deposits was partially offset by a decrease of $36.8 million, or 3.5%, in the average balance of deposits to $1.0 billion at September 30, 2007 from $1.1 billion during the comparable period in 2006.

Interest expense on borrowings increased $4.4 million, or 56.2%, to $12.4 million during the nine months ended September 30, 2007 from $8.0 million during the comparable period in 2006. The increase resulted primarily from an increase in average borrowings outstanding of $125.1 million, or 51.7%, to $366.9 million during the nine-month period ended September 30, 2007 from $241.9 million during the comparable period in 2006. The increase in average borrowings was compounded by a 13 basis point increase in the average cost of borrowings to 4.41% during the nine-month period ended September 30, 2007 from 4.28% during the comparable period in 2006.

Net Interest Income — Net interest income decreased by $2.6 million or 9.0%, during the nine months ended September 30, 2007 as compared to the same period in 2006. The decrease resulted primarily from a 31 basis point decrease in our net interest rate spread to 1.75% for the nine-month period ended September 30, 2007 from 2.06% for the comparable period in 2006. The 31 basis point decrease in the net interest rate spread resulted from a 43 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 12 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 $20.4 million, or 10.6%, to $171.9 million for the nine-month period ended September 30, 2007 from $192.3 million for the comparable period in 2006. The decrease in average net assets was primarily attributable to the repurchase of outstanding Company common stock.

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Provision for Loan Losses — Provision for loan losses increased $7.0 million, to $8.8 million during the nine months ended September 30, 2007, from $1.8 million during the comparable period during 2006. The increased provision for the nine months ended September 30, 2007 was the result of $4.6 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 $1.3 million, or 33.7%, to $5.2 million during the nine months ended September 30, 2007 from $3.9 million during the comparable period in 2006. The increase resulted primarily from a decrease in the loss on sale of securities and an increase in mortgage banking income generated by Waterstone Mortgage Corporation, the Bank’s mortgage banking subsidiary. In September 2006, $26.7 million of investment securities with unrealized losses approximating $784,000 were designated for sale. The related realized and unrealized losses were recognized as reductions to income in that quarter. There was no comparable activity during the nine months ended September 30, 2007. Mortgage banking income increased $386,000, or 22.0% to $2.1 million during the nine months ended September 30, 2007 from $1.8 million during the comparable period in 2006. The nine-month period ended September 30, 2007 includes a full nine 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 September 30, 2006.

Noninterest Expense — Total noninterest expense decreased $724,000, or 3.3%, to $21.0 million during the nine months ended September 30, 2007 from $21.8 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 increases in occupancy, office furniture and equipment expenses and professional fees.

Compensation, payroll taxes and other employee benefit expense decreased $713,000, or 5.7%, to $11.8 million during the nine months ended September 30, 2007 from $12.5 million during the comparable period in 2006. Expense related to the Company’s stock option and restricted stock plans totaled $1.3 million during the nine months ended September 30, 2007. There was no comparable expense in the prior year. Compensation expense related to the ESOP totaled $966,000 during the nine months ended September 30, 2007 compared to $838,000 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 nine months ended September 30, 2007 compared to the same period in 2006. These increases were offset by a decrease in salary expense. Salary expense decreased by $2.1 million, or 20.9% to $8.0 million during the nine months ended September 30, 2007 compared to $10.0 million during the comparable period in 2006. Salary expense decreased as a result of a 19% reduction in full-time equivalent staff combined with a shift from cash bonus compensation to equity incentives.

Occupancy, office furniture and equipment increased by $643,000, or 20.5%, to $3.8 million during the nine months ended September 30, 2007 from $3.1 million during the comparable

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period in 2006. The increase relates primarily to the operation of three 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 $353,000, or 23.5%, for the nine months ended September 30, 2007 to $1.1 million from $1.5 million during the comparable period in 2006. Contract termination costs of $333,000 were recognized during the nine months ended September 30, 2006 as a result of the conversion of Wauwatosa Savings’ core processor to Metavante as of February 19, 2007.

Professional fees increased by $118,000, or 14.9% for the nine months ended September 30, 2007 to $911,000 from $793,000 for the nine months ended September 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 $429,000, or 17.8%, to $2.0 million for the nine months ended September 30, 2007 from $2.4 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.

Income Taxes — The effective tax rate for the nine months ended September 30, 2007 was 22.5% as compared to 36.9% for the comparable period during 2006. Of the total 14.4% decrease in effective tax rate, 1.5% was the result of a decline in state tax expense and 12.9% was the result of an increase in net non-taxable income as a percentage of total pre-tax income. Net non-taxable income increased by $67,000, or 10.4%, even as total pre-tax income declined by $7.5 million, or 82.3%. Net non-taxable income is comprised of the increase in cash surrender value of life insurance and municipal bond income partially offset by non-deductible ESOP and stock option expenses.

Net Income - As a result of the foregoing factors, net income for the nine months ended September 30, 2007 decreased $4.5 million, or 78.3%, to $1.3 million, from $5.8 million during the comparable period in 2006.

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

General — Net income for the three months ended September 30, 2007 totaled $421,000, or $0.01 for both basic and diluted earnings per share compared to net income of $906,000, or $0.03 for both basic and diluted earnings per share for the three months ended September 30, 2006. The quarter ended September 30, 2007 generated an annualized return on average assets of 0.10% and an annualized return on average equity of 0.82%, compared to returns of 0.22% and 1.52%, respectively, for the comparable period in 2006. The decrease in net income was due to an $1.6 million increase in provisions for loan loss and a $669,000 decrease in net interest income, partially offset by an $661,000 increase in noninterest income, a $566,000 decrease in noninterest expense and a $592,000 decrease in income taxes. The increase in the provision for

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loan losses was the direct result of an increase in loan charge-offs and an increase in specific loan losses attributable to 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 September 30, 2007 was 2.12% compared to 2.36% for the three months ended September 30, 2006.

Total Interest Income — Total interest income increased $1.2 million, or 5.0%, to $24.4 million during the three months ended September 30, 2007 compared to $23.3 million for the three months ended September 30, 2006. Interest income on loans increased $456,000, or 2.1%, to $21.8 million for the three months ended September 30, 2007 compared to $21.3 million for the comparable period of 2006. The increase resulted primarily from an increase of $22.6 million, or 1.7%, in the average loan balance to $1.38 billion during the three-month period ended September 30, 2007 from $1.36 billion during the comparable period in 2006. The increase in average balance was compounded by a 3 basis point increase in the average yield on loans to 6.24% for the three-month period ended September 30, 2007 from 6.21% for the comparable period in 2006. In addition, interest income from mortgage-related securities increased $558,000, or 57.2%, to $1.5 million for the quarter ended September 30, 2007 compared to $975,000 for the comparable quarter in 2006. This was primarily due to the increase of $36.5 million, or 45.0%, in the average balance to $117.5 million for the three months ended September 30, 2007 from $81.0 million during the comparable period in 2006. The increase in average mortgage-related securities was compounded by a 41 basis point increase in the average yield on mortgage-related securities to 5.18% for the quarter ended September 30, 2007 from 4.77% for the comparable period in 2006. Finally, interest income from debt securities, federal funds sold and short-term investments increased $140,000, or 14.3%, to $1.1 million for the three months ended September 30, 2007 compared to $978,000 for the comparable period in 2006. This was due to an 86 basis point increase in the average yield on other earning assets to 4.73% for the three-month period ended September 30, 2007 from 3.87% for the comparable period in 2006. The increase in average yield was partially offset by a decrease of $6.5 million, or 6.5%, in the average balance of other earning assets to $93.8 million during the three-month period ended September 30, 2007 from $100.3 million during the comparable period in 2006.

Total Interest Expense - Total interest expense increased by $1.8 million, or 12.9%, to $15.9 million during the three months ended September 30, 2007 from $14.1 million during the three months ended September 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 $408,000, or 3.7%, to $11.5 million during the three months ended September 30, 2007 from $11.1 million during the comparable period in 2006 primarily as a result of an increase in the cost of deposits. The cost of total average deposits increased by 29 basis points to 4.43% for the three-month period ended September 30, 2007 compared to 4.14% for the comparable period during 2006. The increase in average yield was partially offset by a decrease of $33.3 million, or 3.1%, in the average balance of other earning assets to $1.0 billion during the three-month period ended September 30, 2007 from $1.1 billion during the comparable period in 2006.

Interest expense on borrowings increased $1.4 million, or 46.8%, to $4.4 million during the three

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months ended September 30, 2007 from $3.0 million during the comparable period in 2006. The increase resulted primarily from an increase in average borrowings outstanding of $113.5 million, or 41.2%, to $388.7 million during the three-month period ended September 30, 2007 from $275.2 million during the comparable period in 2006. The increase in average borrowings was compounded by a 7 basis point increase in the average cost of borrowings to 4.42% during the three-month period ended September 30, 2007 from 4.35% during the comparable period in 2006.

Net Interest Income — Net interest income decreased by $669,000 or 7.3%, during the three months ended September 30, 2007 as compared to the same period in 2006. The decrease resulted primarily from a 15 basis point decrease in our net interest rate spread to 1.70% for the three month period ended September 30, 2007 from 1.85% for the comparable period in 2006. The 14 basis point decrease in the net interest rate spread resulted from a 24 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 9 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 $41.1 million, or 21.3%, to $152.3 million for the three-month period ended September 30, 2007 from $193.3 million from the comparable period in 2006. The decrease in average net assets was primarily attributable to the repurchase of outstanding Company common stock.

Provision for Loan Losses — Provision for loan losses increased $1.6 million to $2.8 million during the three months ended September 30, 2007, from $1.2 million during the comparable period during 2006. The increased provision for the three months ended September 30, 2007 was the result of $914,000 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 $661,000, or 53.8%, to $1.9 million during the three months ended September 30, 2007 from $1.2 million during the comparable period in 2006. The increase resulted primarily from a decrease in the loss on sale of securities and an increase in mortgage banking income generated by Waterstone Mortgage Corporation. During the quarter ended September 30, 2006, $26.7 million of investment securities with unrealized losses approximating $784,000 were designated for sale. The related realized and unrealized losses were recognized as reductions to income in that quarter. There was no comparable activity during the quarter ended September 30, 2007.

Noninterest Expense — Total noninterest expense decreased $566,000, or 7.3%, to $7.2 million during the three months ended September 30, 2007 from $7.8 million during the comparable period in 2006. The decrease was primarily the result of decreases in compensation, payroll taxes and other employee benefits and data processing expenses, partially offset by increases in occupancy, office furniture and equipment expense and other noninterest expense.

Compensation, payroll taxes and other employee benefit expense decreased $530,000, or 12.1%, to $3.9 million during the three months ended September 30, 2007 from $4.4 million during the

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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 $433,000 during the three months ended September 30, 2007. There was no comparable expense in the prior year. This increase was partially offset by a decrease in salary expense. Salary expense decreased by $898,000, or 25.1% to $2.7 million during the three months ended September 30, 2007 compared to $3.6 million during the comparable period in 2006. Salary expense decreased as a result of a 19% 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 $143,000, or 12.5%, to $1.3 million during the three months ended September 30, 2007 from $1.1 million during the comparable period in 2006. The increase relates primarily to the operation of three 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 $214,000, or 30.2%, for the three months ended September 30, 2007 to $494,000 from $708,000 during the comparable period in 2006. Contract termination costs of $312,000 were recognized during the three months ended September 30, 2006 as a result of the conversion of Wauwatosa Savings’ core processor to Metavante. There were no such expenses during the comparable period in 2007.

Other noninterest expense increased $125,000, or 18.3%, to $808,000 for the quarter ended September 30, 2007 from $683,000 during the comparable quarter in 2006. The increase is primarily the result of an increase in expenses related to real estate owned. Real estate owned expense increased $178,000 to $219,000 during the three months ended September 30, 2007 from $41,000 during the comparable period in 2006. The increase in expense related to real estate owned was partially offset by reductions in expenses related to brokered deposit fees and employee related business expenses.

Income Taxes — The effective tax rate for the three months ended September 30, 2007 provided a 14.9% benefit as compared to a 36.9% expense for the comparable period during 2006. The inverse relationship between third quarter 2007 pre-tax income and income tax benefit was the result of the decline of the estimated annual effective tax rate to 22.5% calculated as of September 30, 2007 from 33.5% calculated as of June 30, 2007. The effective tax rate declined in proportion to the relationship between declining total pre-tax book income compared to stable net non-taxable book income.

Net Income - As a result of the foregoing factors, net income for the three months ended September 30, 2007 decreased $485,000, or 53.5%, to $421,000, from $906,000 during the comparable period in 2006.

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

Total Assets — Total assets increased by $31.2 million, or 1.9%, to $1.68 billion at September 30, 2007 from $1.65 billion at December 31, 2006. The increase in total assets resulted primarily

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from increases in securities both available for sale and held to maturity of $61.6 million, an increase in loans held for sale of $5.1 million, an increase in net loans receivable of $3.9 million and an increase in prepaid expenses and other assets of $10.3 million, offset by decreases in cash and cash equivalents of $51.2 million.

Cash and Cash Equivalents – Cash and cash equivalents decreased by $51.2 million, or 69.3%, to $22.6 million at September 30, 2007 from $73.8 million at December 31, 2006. The decrease in cash was primarily attributable to the repurchase of Company shares at a cost of $42.9 million. In addition, cash was used to purchase investment securities and to fund loans receivable and loans held for sale.

Securities Available for Sale – Securities available for sale increased by $54.0 million, or 46.0%, to $171.3 million at September 30, 2007 from $117.3 million at December 31, 2006. The Company invested an additional $58.0 million in its Nevada investment subsidiary during the nine months ended September 30, 2007 for the purpose of obtaining the best rate of return in light of 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 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 the Company has the intent and ability to hold these securities until maturity, the structured corporate notes have been classified as held-to-maturity rather than as available-for-sale.

Loans Held for Sale – Loans held for sale increased by $5.1 million, or 94.2%, to $10.5 million at September 30, 2007, from $5.4 million at December 31, 2006. Fluctuations in the balance of loans held for sale result primarily from the timing of loan closings and sales to third parties.

Loans Receivable — Loans receivable increased $8.2 million, or 0.6%, to $1.38 billion at September 30, 2007 from $1.37 billion at December 31, 2006. Loans receivable increased by $48.2 million, or 3.7%, during the nine months ended September 30, 2006. The 2007 total increase in loans receivable was primarily attributable to a $14.6 million increase in commercial business loans and a $1.2 million increase in mortgage loans, offset by a $7.1 million decrease in consumer loans. During the nine-month period ended September 30, 2007, $8.3 million in loans were transferred to real estate owned during the nine-month period ended September 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.

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


	As of or for the			As of or for the
	Nine Months Ended			Year Ended
	September 30, 2007			December 31, 2006
	(In Thousands)
Total gross 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		55,711			111,384
Over four-family		48,651			99,420
Construction and land		25,070			74,104
Commercial		11,557			19,867

Total real estate loans originated for investment		140,989			304,775
Consumer loans originated for investment		10,950			11,915
Commerical loans originated for investment		23,060			2,867

Total loans originated for investment		174,999			319,557
Principal repayments		(166,284	)		(267,870	)

Net activity in loans held for investment		8,715			51,687

Loans originated for sale		160,916			84,603
Loans sold		(155,841	)		(79,216	)

Net activity in loans held for sale		5,075			5,387


Total gross loans receivable and held for sale at end of period	$	1,463,960			1,450,170

Deposits — Total deposits decreased $12.5 million, or 1.2%, to $1.02 billion at September 30, 2007 from $1.04 billion at December 31, 2006. Total time deposits decreased $25.9 million, or 2.9%, to $857.4 million from $883.3 million at December 31, 2006. Non-local, wholesale time deposits decreased $30.3 million, or 60.9%, from $49.8 million at December 31, 2006 to $19.5 million at September 30, 2007. Total demand deposits decreased $8.3 million, or 14.2%, from $58.4 million at December 31, 2006 to $50.1 million at September 30, 2007. Partially offsetting the decrease in time and demand deposits, total money market and savings deposits increased $21.7 million, or 23.0%, to $116.2 million at September 30, 2007 from $94.5 million at December 31, 2006. The development and promotion of competitive retail and business money market accounts resulted in the significant increase in money market account balances during the period ended September 30, 2007. The increase in money market account balances included amounts transferred from existing demand accounts.

Borrowings — Total borrowings increased $76.4 million, or 22.9%, to $410.4 million at September 30, 2007 from $334.0 million at December 31, 2006. During the current year, the Company entered into five repurchase agreements totaling $69.0 million. The agreements have a weighted average interest rate of 4.20% and mature in 2017. All agreements include quarterly call options beginning in 2009.

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Advance Payments by Borrowers for Taxes — Advance payments by borrowers for taxes and insurance increased $24.2 million to $24.4 million at September 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 in the fourth quarter.

Other Liabilities — Other liabilities decreased $17.9 million, or 48.7%, to $18.9 million at September 30, 2007 from $36.8 million at December 31, 2006. The decrease, which is seasonally normal, was primarily due to a decrease in amounts due to mortgage holders related to advance payments by borrowers for taxes. The Company receives payments from borrowers for their real estate taxes during the course of the calendar year until real estate tax obligations are paid out in the fourth quarter. These amounts remain classified as an other liability until paid. The balance of these outstanding checks was $261,000 at September 30, 2007 and $18.1 million at December 31, 2006.

Shareholders’ Equity — Shareholders’ equity decreased $39.0 million, or 16.2%, to $202.3 million at September 30, 2007 from $241.3 million at December 31, 2006. The decrease was primarily attributable to the repurchase of 2,556,348 shares at an average purchase price of $16.77 per share, which resulted in a total cost of $42.9 million. This decrease was partially offset by net income recognized during the nine months ended September 30, 2007, which totaled $1.3 million.

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

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Average Balance Sheets, Interest and Yields/Costs

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


	Three Months Ended September 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	$	1,383,271		21,769	(1)		6.24	%	$	1,360,697		21,313	(1)		6.21	%
Mortgage related securities⁽²⁾		117,489		1,533			5.18			81,039		975			4.77
Debt securities (2), federal funds sold and short-term investments		93,827		1,118			4.73			100,336		978			3.87

Total interest-earning assets		1,594,587		24,420			6.08			1,542,072		23,266			5.99

Noninterest-earning assets		67,889								72,796

Total assets	$	1,662,476								1,614,868

Interest-bearing liabilities:

Demand and money market accounts	$	147,598		1,200			3.23		$	115,723		811			2.78
Savings accounts		19,485		20			0.41			20,671		26			0.50
Certificates of deposit		859,382		10,237			4.73			923,379		10,215			4.39

Total interest-bearing deposits		1,026,465		11,457			4.43			1,059,773		11,052			4.14
Borrowings		388,679		4,327			4.42			275,209		3,017			4.35
Other interest bearing liabilities		27,193		129			1.88			13,742		21			0.61

Total interest-bearing liabilities		1,442,337		15,913			4.38			1,348,724		14,090			4.14

Noninterest-bearing liabilities		15,248								30,352

Total liabilities		1,457,585								1,379,076
Equity		204,891								235,792

Total liabilities and equity	$	1,662,476							$	1,614,868

Net interest income				8,507								9,176

Net interest rate spread ⁽³⁾							1.70	%							1.85	%
Net interest-earning assets ⁽⁴⁾	$	152,250							$	193,348

Net interest margin ⁽⁵⁾							2.12	%							2.36	%

Average interest-earning assets to average interest-bearing liabilities							110.56	%							114.34	%


(1)		Includes net deferred loan fee amortization income of $498,000 and $223,000 for the three months ended September 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.

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	Nine Months Ended September 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	$	1,384,608			65,077	(1)		6.28	%	$	1,347,925		62,314	(1)		6.18	%
Mortgage related securities⁽²⁾		104,557			4,075			5.21			85,573		3,056			4.77
Debt securities (2), federal funds sold and short-term investments		92,227			3,178			4.61			71,643		2,172			4.05

Total interest-earning assets		1,581,392			72,330			6.12			1,505,141		67,542			6.00

Noninterest-earning assets		67,895									66,568

Total assets	$	1,649,287									1,571,709

Interest-bearing liabilities:

Demand and money market accounts	$	141,644			3,378			3.19		$	105,255		1,865			2.37
Savings accounts		19,424			60			0.41			20,882		78			0.50
Certificates of deposit		862,352			30,171			4.68			934,132		28,786			4.12

Total interest-bearing deposits		1,023,420			33,609			4.39			1,060,269		30,729			3.87
Borrowings		366,907			12,107			4.41			241,856		7,751			4.28
Other interest bearing liabilities		19,193			352			2.45			10,697		236			2.95

Total interest-bearing liabilities		1,409,520			46,068			4.37			1,312,822		38,716			3.94

Noninterest-bearing liabilities		17,678									22,876

Total liabilities		1,427,198									1,335,698
Equity		222,089									236,011

Total liabilities and equity	$	1,649,287								$	1,571,709

Net interest income					26,262								28,826

Net interest rate spread ⁽³⁾								1.75	%							2.06	%
Net interest-earning assets ⁽⁴⁾	$	171,872								$	192,319

Net interest margin ⁽⁵⁾								2.22	%							2.56	%

Average interest-earning assets to average interest-bearing liabilities								112.19	%							114.65	%


(1)		Includes net deferred loan fee amortization income of $1,683,000 and $713,000 for the nine months ended September 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

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Rate/Volume Analysis

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


	Three Months Ended September 30,									Nine Months Ended September 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)}	$	355			101			456		$	1,713			1,050			2,763
Securites interest and income from other earning assets⁽³⁾		349			349			698			1,416			609			2,025

Total interest-earning assets		704			450			1,154			3,129			1,659			4,788


Interest expense:
Demand and money market accounts		246			143			389			756			757			1,513
Savings accounts		(1	)		(5	)		(6	)		(5	)		(13	)		(18	)
Certificates of deposit		(204	)		226			22			(1,819	)		3,204			1,385

Total interest-bearing deposits		41			364			405			(1,068	)		3,948			2,880
Borrowings		1,263			47			1,310			4,120			236			4,356
Other interest bearing liabilities		34			74			108			147			(31	)		116

Total interest-bearing liabilities		1,338			485			1,823			3,199			4,153			7,352

Net change in net interest income	$	(634	)		(35	)		(669	)	$	(70	)		(2,494	)		(2,564	)


(1)		Includes net deferred loan fee amortization income of $498,000, $223,000, $1,683,000 and $713,000 for the three months ended September 30, 2007 and 2006 and the nine months ended September 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.

The net decline in net interest income attributable to rate was significantly less in the quarter ended September 30, 2007 versus 2006 than the comparable change for the prior two quarters of 2007 as a result of the stabilization of short-term interest rates. Short-term interest rates correlated to the federal funds rate peaked in mid-2006 and remained unchanged until they declined by 50 basis points in September 2007. The Company’s cost of funding similarly leveled off with a third quarter 2007 4.38% cost of funds equal to that of the quarter ended June 30, 2007. The Company’s cost of funds for the quarter ended September 30, 2007 was 25 basis points higher than that of the quarter ended September 30, 2006. By contrast, the Company’s cost of funds for the quarters ended March 31 and June 30, 2007 were 61 and 45 basis points higher than the comparable quarters in 2006.

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ASSET QUALITY

The following table summarizes non-performing loans and assets:

NON-PERFORMING LOANS AND ASSETS


	At September 30,			At December 31,
	2007			2006
	(Dollars in Thousands)
Non-accrual loans:
Mortgage loans
One- to four-family		23,773			12,376
Over four-family		34,033			8,384
Construction and land		5,884			7,664
Commercial		4,811			357

Total mortgage		68,501			28,781
Consumer		441			107

Total non-performing loans `		68,942			28,888
Real estate owned		7,408			520

Total non-performing assets	$	76,350			29,408


Total non-performing loans to total loans receivable		4.99	%		2.10	%
Total non-performing loans to total assets		4.10	%		1.75	%
Total non-performing assets to total assets		4.56	%		1.79	%

Total non-performing loans increased by $40.1 million to $68.9 million as of September 30, 2007, compared to $28.9 million as of December 31, 2006. The ratio of non-performing loans to total loans at September 30, 2007 was 4.99% compared to 2.10% at December 31, 2006. All categories of loans with the exception of construction and land loans experienced an increase in non-performing loans. Of the $40.1 million increase in non-performing loans between December 31, 2006 and September 30, 2007, $28.0 million related to three borrowers. The first is a $16.1 million relationship with a borrower who has twelve loans that are all secured by multi-family properties. Based upon a review of the underlying collateral, the Company has determined that the value of the properties is not sufficient to allow for the recovery of the outstanding balance. As a result, a $1.6 million specific reserve has been established with respect to this relationship. The second borrower that has contributed to the increase in non-performing loans is an individual with twelve loans totaling $8.8 million. The Company believes that the collateral, which consists of two- to four-family and multifamily rental units, is adequate to recover the outstanding principal balance of each of the loans, should the respective borrower cease efforts to return the loan to a performing status. The third borrower is an individual with three loans totaling $3.1 million. Based upon a review of the underlying collateral, which primarily consists of a multi-family rental property, the Company has determined that the value of the properties is not sufficient to allow for the recovery of the outstanding balance. As a result, a $78,000 specific reserve has been established with respect to this relationship. The majority of the remainder of the increase in non-performing loans relates to two general categories of borrowers. The first, $6.1 million related to a number of lending relationships with small real estate investors whose collateral consist of one- and two-unit rental properties and

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lastly, $3.1 million related to a number of borrowers who contracted to construct single-family homes on a speculative basis, using a common contractor.

Of the $68.9 million in total non-performing loans as of September 30, 2007, the Company has determined that $33.7 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 $1.3 million and specific reserves totaling $5.0 million. In general, the losses have been somewhat isolated to borrowers that fall into the small real estate investor class which includes borrowers with multiple one- to four-family 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 $36.5 million in non-performing loans, the Company believes that the value of the underlying collateral securing these loans is adequate to recover the outstanding principal balance of each of the loans, should the respective borrower cease efforts to return the loan to a performing status.

Total real estate owned increased by $6.9 million to $7.4 million as of September 30, 2007, compared to $520,000 as of December 31, 2006. Of the $6.9 million increase in real estate owned between December 31, 2006 and September 30, 2007, $1.9 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. An additional $1.7 million related to a single lending relationship, consisting of three notes collateralized by two parcels of undeveloped land that was to have been developed into residential real estate. Lastly, $1.9 million related to a number of lending relationships with real estate investors whose collateral consist of one- and two-unit rental properties. Foreclosed properties are recorded at the lower of carrying value or fair value with charge-offs, if any, charged to the allowance for loan losses upon transfer to real estate owned. The fair value is primarily based upon updated appraisals in addition to an analysis of current real estate market conditions. Upon foreclosure and transfer to real estate owned the Company recognized approximately $2.8 million in charge-offs related to these properties during the nine months ended September 30, 2007.

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

ALLOWANCE FOR LOAN LOSSES


	At or for the Nine Months						At or for the Three Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006
				(Dollars in Thousands)
Balance at beginning of period	$	7,195			5,250			9,570			5,983
Provision for loan losses		8,852			1,844			2,826			1,191
Charge-offs:
Mortgage
One- to four-family		979			248			394			111
Over four-family		314			—			99			—
Construction and land		3,278			—			426			—
Commercial		—			3			—			1
Consumer		27			7			24			1

Total charge-offs		4,598			258			943			113
Total recoveries		33			257			29			32

Net charge-offs		4,565			1			914			81

Allowance at end of period	$	11,482			7,093			11,482			7,093


Ratios:
Allowance for loan losses to non-performing loans at end of period		16.65	%		32.54	%		16.65	%		32.54
Allowance for loan losses to loans receivable at end of period		0.83	%		0.52	%		0.83	%		0.52	%
Net charge-offs to average loans outstanding		0.44	%		0.00	%		0.26	%		0.02	%

Net charge-offs were $4.6 million, or 0.44% of average loans for the nine months ended September 30, 2007 on an annualized basis, compared to $1,000 for the nine months ended September 30, 2006. Net charge-offs totaled $914,000, or 0.26% of average loans for the three months ended September 30, 2007 on an annualized basis, compared to $81,000, or 0.02% of average loans for the comparable period in 2006. Of the $4.6 million in total charge-offs for the nine months ended September 31, 2007, approximately $3.3 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 $2.4 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. This property was foreclosed upon and is currently held by the Company as real estate owned.

The remaining $882,000 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.

The allowance for loan loss totaled $11.5 million or 0.83% of loans outstanding as of September 30, 2007 compared to $7.2 million or 0.52% of loans outstanding as of December 31, 2006. Of

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the $4.3 million, or 60.0% increase, $2.7 million resulted from the establishment of specific reserves related to two lending relationships during the nine months ended September 30, 2007. The first relationship, described previously, is an individual with twelve loans collateralized by multi-family properties with an estimated collateral value shortfall of $1.6 million. The second relationship relates to eighteen 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 $1.1 million specific reserve.

The remaining $1.6 million increase in the September 30, 2007 allowance for loan losses is attributable to the general valuation allowance intended to cover probable losses in the existing loan portfolio and was based on the 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 $36.4 million, or 86.4%, to $78.4 million as of September 30, 2007, compared to $42.1 million as of December 31, 2006. As of September 30, 2007, 94.2% of loans past due were originated prior to 2006 and 52.4% were originated in 2004 and 2005.

The $8.9 million loan loss provision for the nine months ended September 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 $4.3 million plus the $4.6 million in net charge-offs results in the loan loss provision for the nine months ended September 30, 2007.

The allowance for loan losses has been determined in accordance with accounting principles generally accepted in the United States (GAAP). We are responsible for the timely and periodic determination of the amount of the allowance required. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors. To the best of management’s knowledge, all probable losses have been provided for in the allowance for loan losses.

The establishment of the amount of the loan loss allowance inherently involves judgments by management as to the adequacy of the allowance, which ultimately may or may not be correct. Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years. 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.

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Impact of Inflation and Changing Prices

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

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our liquidity ratio averaged 2.6% and 1.8% for the nine months ended September 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 September 30, 2007 was 4.4% and 12.5%, 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 (FHLBC).

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At September 30, 2007 and 2006, respectively, $22.6 million and $142.2 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

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maturities of debt and mortgage-related securities, increases in deposit accounts, federal funds purchased and advances from the FHLBC.

On October 10, 2007, the FHLBC entered into a consensual cease and desist order with it regulator, the Federal Housing Finance Board. Under the terms of the order, capital stock repurchases and redemptions, including redemptions upon membership withdrawal or other termination, are prohibited unless the FHLBC has received approval of the Director of the Office of Supervision of the Federal Housing Finance Board (“OS Director”). The order also provides that dividend declarations are subject to the prior written approval of the OS Director. We currently hold, at cost, $17.6 million of FHLBC stock, all of which we believe we will ultimately be able to recover. Based upon correspondence we received from the FHLBC, also incorporated into FHLBC’s 8-K, there is currently no expectation that this cease and desist order will impact the short- and long-term funding options provided by the FHLBC.

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

During the nine months ended September 30, 2007 and 2006, loan originations, net of collected principal and transfers to real estate owned, totaled $8.7 million and $48.6 million, respectively, reflecting net growth in our portfolio. Growth has declined in 2007 with 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 $12.5 million for the nine months ended September 30, 2007 primarily as the result of competitive pricing offered in the local market.

Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBC, which provide an additional source of funds. At September 30, 2007, we had $341.4 million in advances from the FHLBC, of which $47.4 million was due within 12 months, and an additional available borrowing limit of $140.8 million based on collateral requirements of the FHLBC. As an additional source of funds, we also enter into repurchase agreements. During the nine months ended September 30, 2007, the Company entered into five repurchase agreements totaling $69.0 million. The agreements mature in 2017, however, both are callable beginning in 2009 and quarterly thereafter.

At September 30, 2007, we had outstanding commitments to originate loans of $17.1 million, unfunded commitments under construction loans of $36.8 million and unfunded commitments under lines of credit and standby letters of credit of $31.9 million. At September 30, 2007, certificates of deposit scheduled to mature in one year or less totaled $659.8 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as FHLBC advances in order to maintain our level of assets.

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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 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 September 30, 2007, the Company met all capital adequacy requirements to which it is subject.

As of September 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 September 30, 2007 as the direct result of a $30 million dividend paid by Wauwatosa Savings to the Company in June 2007.

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


	September 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)	$	213,851		16.05	%		106,583		8.00	%		N/A		N/A
Tier I capital (to risk-weighted assets)		202,454		15.20	%		53,292		4.00	%		N/A		N/A
Tier I capital (to average assets)		202,454		12.18	%		66,461		4.00	%		N/A		N/A

Wauwatosa Savings
Total capital (to risk-weighted assets)	$	179,480		13.53	%		106,124		8.00	%		132,690		10.00	%
Tier I capital (to risk-weighted assets)		168,525		12.70	%		53,062		4.00	%		79,614		6.00	%
Tier I capital (to average assets)		168,525		10.25	%		65,755		4.00	%		82,194		5.00	%
State of Wisconsin (to total assets) (2)		168,525		10.06	%		100,503		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.

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

The following tables present information indicating various contractual obligations and commitments of Wauwatosa Savings as of September 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	$	166,263		166,263		—		—		—
Certificates of deposit		857,444		659,768		172,590		24,638		448
Federal Home Loan Bank advances ⁽¹⁾		341,372		47,422		48,950		25,000		220,000
Repurchase agreements ⁽²⁾		69,000		—		—		—		69,000
Operating leases⁽³⁾		236		106		130		—		—
Capital lease		3,750		300		3,450		—		—
State income tax obligation⁽⁴⁾		3,726		1,242		2,484		—		—
Salary continuation agreements		2,977		576		1,152		441		808

	$	1,444,768		875,677		228,756		50,079		290,256


⁽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 September 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⁾	$	17,073		17,073		—		—		—
Unused portion of home equity lines of credit ⁽²⁾		31,861		31,861		—		—		—
Unused portion of construction loans ⁽³⁾		36,816		36,816		—		—		—
Standby letters of credit		940		265		590		85		—

Total Other Commitments	$	86,690		86,015		590		85		—

General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.

⁽¹⁾ Commitments for loans are extended to customers for up to 90 days after which they expire.

⁽²⁾ Unused portions of home equity loans are available to the borrower for up to 10 years.

⁽³⁾ Unused portions of construction loans are available to the borrower for up to 1 year.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, the Wauwatosa Savings Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

Income Simulation. Simulation analysis is used to estimate our interest rate risk exposure at a particular point in time. At least quarterly we review the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation used projected repricing of assets and liabilities at September 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
	Annual Net Interest Income
	Over 24 Months
300 basis point increase in rates		(5.37	)%
200 basis point increase in rates		(2.82	)
100 basis point increase in rates		(1.12	)
100 basis point decrease in rates		(3.75	)
200 basis point decrease in rates		(4.72	)

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

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changes measured over a 24-month period when compared to the flat rate scenario. In addition, projected changes in the capital ratio are limited to (0.15%) to (1.00%) for various levels of changes in interest rates when compared to the flat rate scenario. These limits are re-evaluated on a periodic basis and may be modified, as appropriate. Because our balance sheet is liability sensitive, income is projected to decrease proportionately with increases in interest rates. At September 30, 2007, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing forecasted net interest income by 5.37%, while a 100 basis point decrease in rates had the affect of decreasing net interest income by 3.75%. At September 30, 2007, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing the forecasted return on assets by 0.09%, while a 100 basis point decrease in rates had the effect of decreasing the return on assets by 0.06%. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

Item 4. Controls and Procedures

Disclosure Controls and Procedures : Company management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting : There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 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 nine months ended September 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		1,422,635
July 1 - July 31, 2007 (1)		1,070,070		15.98		2,556,348		352,565
August 1 - August 31, 2007		—		—
September 1 - September 30, 2007		—		—

		2,556,348		16.77


(1)		On June 12, 2007, the Board of Directors of the Company approved a share repurchase program for approximately 1.4 million shares, or 15% of its outstanding common stock held by shareholders other than Lamplighter Financial, MHC.

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EXHIBIT INDEX

WAUWATOSA HOLDINGS, INC.

Form 10-Q for Quarter Ended September 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

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	Page No.
PART I. FINANCIAL INFORMATION

Item l. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2007 (unaudited) and December 31, 2006		3
Consolidated Statements of Operations for the nine and three months ended September 30, 2007 and 2006 (unaudited)		4
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2007 and 2006 (unaudited)		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)		6-7
Notes to Consolidated Financial Statements		8-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-44
Item 3. Quantitative and Qualitative Disclosures about Market Risk		45-46
Item 4. Controls and Procedures		46
PART II. OTHER INFORMATION		47
Item 1. Legal Proceedings		47
Item 1A. Risk Factors		47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 6. Exhibits		48
Signatures		49
Certification
Certification
Certification
Certification


		WAUWATOSA HOLDINGS, INC.

		(Registrant)

Date: November 9, 2007
		/s/Douglas S. Gordon
		Douglas S. Gordon
		Chief Executive Officer

Date: November 9, 2007
		/s/ Richard C. Larson
		Richard C. Larson
		Chief Financial Officer