Waterstone Financial 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2006

OR

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

Commission File Number 000-51507

WAUWATOSA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Wisconsin	20-3598485
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

11200 W. Plank Ct.
Wauwatosa, WI 53226
(414) 761-1000
(Address, including Zip Code, and telephone number,
including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ       Noo

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

Large accelerated filero      Accelerated filero       Non-accelerated filerþ

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 33,101,812 at October 31, 2006.

WAUWATOSA HOLDINGS, INC.

10-Q INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2006 (unaudited) and December 31, 2005	3
Consolidated Statements of Income for the three and nine months ended September 30, 2006 and 2005 (unaudited)	4
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2006 and 2005 (unaudited)	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)	7
Notes to Consolidated Financial Statements	8-15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-37
Item 3. Quantitative and Qualitative Disclosures about Market Risk	38-40
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 6. Exhibits	42
Signatures	43
Certification
Certification
Certification
Certification
Section 302 Certification Signed by the Chairman and CEO
Section 302 Certification Signed by the CFO
Section 906 Certification Signed by the Chairman and CEO
Section 906 Certification Signed by the CFO

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PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	September 30,			December 31,
	2006			2005
	(In Thousands, except share data)
Assets
Cash	$	41,313			8,761
Federal funds sold		30,009			5,388
Short-term investments		70,857			2,349
Cash and cash equivalents		142,179			16,498
Securities available-for-sale (at fair value)		114,967			121,955
Loans held for sale		3,139			—
Loans receivable		1,354,183			1,306,018
Less: Allowance for loan losses		7,093			5,250
Loans receivable, net		1,347,090			1,300,768
Office properties and equipment, net		31,168			25,022
Federal Home Loan Bank stock, at cost		17,450			14,406
Cash surrender value of life insurance		23,972			22,792
Prepaid expenses and other assets		12,102			9,768
Total assets	$	1,692,067			1,511,209
Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	59,446			82,290
Money market and savings deposits		86,835			33,565
Time deposits		915,118			929,738
Total deposits		1,061,399			1,045,593
Federal Home Loan Bank advances short-term		31,531			87,209
Federal Home Loan Bank advances long-term		317,472			114,003
Advance payments by borrowers for taxes		24,916			181
Other liabilities		17,894			32,527
Total liabilities		1,453,212			1,279,513
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, 33,723,750 shares issued, 33,095,344 and 33,038,385 shares outstanding, respectively)		337			337
Additional paid-in-capital		104,057			103,859
Accumulated other comprehensive loss (net of taxes)		(1,019	)		(1,571	)
Retained earnings		142,525			136,756
Unearned ESOP shares		(7,045	)		(7,685	)
Total shareholders’ equity		238,855			231,696
Total liabilities and shareholders’ equity	$	1,692,067			1,511,209

     See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited)
	Three Months Ended September 30,
	2006			2005
	(In Thousands, except share data)
Interest income:
Loans	$	21,313			18,917
Mortgage-related securities		975			476
Debt securities, federal funds sold and short-term investments		978			1,177
Total interest income		23,266			20,570
Interest expense:
Deposits		11,067			9,288
Borrowings		3,023			943
Total interest expense		14,090			10,231
Net interest income		9,176			10,339
Provision for loan losses		1,191			209
Net interest income after provision for loan losses		7,985			10,130
Noninterest income:
Service charges on loans and deposits		563			471
Increase in cash surrender value of life insurance		488			436
Loss on sale/impairment of securities		(784	)		—
Mortgage banking income		657			—
Other		305			78
Total noninterest income		1,229			985
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,389			3,028
Occupancy, office furniture, and equipment		1,142			837
Advertising		375			410
Data processing		708			349
Charitable contributions		—			188
Communications		147			158
Professional fees		327			120
Other		683			663
Total noninterest expenses		7,771			5,753
Income before income taxes		1,443			5,362
Income taxes		537			1,940
Net income	$	906			3,422
Earnings per share:
Basic	$	0.03			N/A
Diluted		0.03			N/A
Weighted average shares outstanding:
Basic		33,085,851			N/A
Diluted		33,085,851			N/A

     See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited)
	Nine Months Ended September 30,
	2006			2005
	(In Thousands, except share data)
Interest income:
Loans	$	62,314			54,421
Mortgage-related securities		3,056			1,552
Debt securities, federal funds sold and short-term investments		2,172			2,296
Total interest income		67,542			58,269
Interest expense:
Deposits		30,758			26,460
Borrowings		7,958			2,549
Total interest expense		38,716			29,009
Net interest income		28,826			29,260
Provision for loan losses		1,844			1,084
Net interest income after provision for loan losses		26,982			28,176
Noninterest income:
Service charges on loans and deposits		1,500			1,276
Increase in cash surrender value of life insurance		875			654
Gain (loss) on sale/impairment of securities		(784	)		12
Mortgage banking income		1,752			—
Other		569			297
Total noninterest income		3,912			2,239
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		12,491			8,757
Occupancy, office furniture, and equipment		3,136			2,605
Advertising		946			1,002
Data processing		1,501			921
Communications		468			477
Charitable contributions		—			562
Professional fees		793			518
Other		2,416			2,225
Total noninterest expenses		21,751			17,067
Income before income taxes		9,143			13,348
Income taxes		3,374			6,596
Net income	$	5,769			6,752
Earnings per share:
Basic	$	0.17			N/A
Diluted		0.17			N/A
Weighted average shares outstanding:
Basic		33,066,970			N/A
Diluted		33,066,970			N/A

     See Accompanying Notes to Consolidated Financial Statements.

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WAUWATOSA HOLDINGS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

												Accumulated
	Common				Additional				Unearned			Other
	Stock				Paid-In		Retained		ESOP			Comprehensive			Total
	Shares		Amount		Capital		Earnings		Shares			Income (Loss)			Equity
	(In Thousands)
Balances at December 31, 2004		—	$	—		—		130,713		—			(390	)		130,323
Comprehensive income:
Net income		—		—		—		6,752		—			—			6,752
Other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities arising during the period, net of taxes $248		—		—		—		—		—			(481	)		(481	)
Reclassification adjustment for net gains on available for sale securities realized in net income, net of taxes of $4		—		—		—		—		—			(8	)		(8	)
Total comprehensive income																6,263
Balances at September 30, 2005		—	$	—		—		137,465		—			(879	)		136,586
Balances at December 31, 2005		33,724	$	337		103,859		136,756		(7,685	)		(1,571	)		231,696
Comprehensive income:
Net income		—		—		—		5,769		—			—			5,769
Other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities arising during the period, net of taxes $569		—		—		—		—		—			1,061			1,061
Reclassification adjustment for net losses on available for sale securities realized in net income, net of taxes of $275		—		—		—		—		—			(509	)		(509	)
Total comprehensive income																6,452
ESOP shares committed to be released to Plan participants		—		—		198		—		640			—			838
Balances at September 30, 2006		33,724		337		104,057		142,525		(7,045	)		(1,019	)		238,855

     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,
	2006			2005
	(In Thousands)
Operating activities:
Net income	$	5,769			6,752
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,844			1,084
Provision for depreciation		1,739			1,463
Deferred income taxes		(1,116	)		(1,460	)
Net amortization of premium on debt and mortgage-related securities		33			173
Amortization of unearned ESOP shares		838			—
Gain on sale of loans held for sale		(653	)		—
Loans originated for sale		(48,798	)		—
Proceeds from sale of loans held for sale		46,312			—
Increase in accrued interest receivable		(323	)		(553	)
Increase in cash surrender value of life insurance		(875	)		(903	)
Increase in accrued interest on deposits		966			793
Decrease in other liabilities		625			1,207
FHLB stock dividends		—			(550	)
(Gain) loss on sale/impairment of securities		784			(12	)
(Gain) loss on sale of other real estate owned		85			(45	)
Other		(620	)		(1,110	)
Net cash provided by operating activities		6,610			6,839
Investing activities:
Principal repayments on mortgage-related securities		11,841			11,529
Purchases of mortgage- related securities		(9,266	)		—
Purchase of debt securities		—			(1,745	)
Proceeds from sale of mortgage-related securities		5,360			—
Proceeds from sales of debt securities		—			262
Proceeds from maturities of debt securities		—			1,003
Net increase in loans receivable		(49,619	)		(118,206	)
Net purchases of office properties and equipment		(6,687	)		(3,254	)
Purchase and premiums on life insurance		(306	)		(180	)
Net increase in FHLB stock		(3,045	)		—
Purchase of land		(2,817	)		—
Proceeds from sale of land		1,751			—
Purchase of Waterstone Mortgage Corporation, net of cash received		(1,081	)		—
Proceeds from sales of foreclosed properties		896			1,609
Net cash used in investing activities		(52,973	)		(108,982	)
Financing activities:
Net increase in deposits		15,806			25,826
Wauwatosa Holdings, Inc. stock subscription escrow		—			386,944
Net change in short-term FHLB advances		(97,209	)		29,496
Proceeds from long-term FHLB advances		245,000			—
Net decrease in advance payments by borrowers for taxes		8,447			11,461
Net cash provided by financing activities		172,044			453,727
Increase in cash and cash equivalents		125,681			351,584
Cash and cash equivalents at beginning of period		16,498			13,570
Cash and cash equivalents at end of period	$	142,179			365,154
Supplemental information:

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	(Unaudited)
	Nine Months Ended September 30,
	2006		2005
	(In Thousands)
Cash paid or credited during the period for:
Income tax payments	$	2,940		3,154
Interest payments		37,750		28,217
Noncash investing activities:
Loans receivable transferred to foreclosed properties		1,454		269
Capital leases originated		—		3,423
Non Cash financing activities:
Long-term FHLB advances reclassified to short-term		41,531		12,703

     See Accompanying Notes to Consolidated Financial Statements.

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, 2005 Transition Report on Form 10-K. Operating results for the three and nine months ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

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, 2006 presentation.

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Note 3 — Securities Available-for-Sale

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

	September 30, 2006
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	15,943		3		(314	)		15,632
Collateralized mortgage obligations		69,256		—		(1,182	)		68,074
Mortgage-related securities		85,199		3		(1,496	)		83,706
Government agency bonds		26,271		—		(227	)		26,044
Municipals		4,278		169		(3	)		4,444
Debt securities		30,549		169		(230	)		30,488
Other securities		788		—		(15	)		773
	$	116,536		172		(1,741	)		114,967

	December 31, 2005
	(In Thousands)
			Gross		Gross
	Amortized		unrealized		unrealized
	cost		gains		losses			Fair value
Mortgage-backed securities	$	17,478		3		(340	)		17,141
Collateralized mortgage obligations		76,037		—		(1,600	)		74,437
Mortgage-related securities		93,515		3		(1,940	)		91,578
Government agency bonds		26,577		—		(627	)		25,950
Municipals		4,278		176		(27	)		4,427
Debt securities		30,855		176		(654	)		30,377
	$	124,370		179		(2,594	)		121,955

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2006, 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.

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	Amortized		Fair
	Cost		Value
	(In Thousands)
Due within one year	$	5,503	$	5,420
Due after one year through five years		22,586		22,542
Due after five years through ten years		2,460		2,526
Due after ten years		—		—
Mutual funds		788		773
Mortgage-related securities		85,199		83,706
	$	116,536	$	114,967

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, 2006
	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		loss			value		loss			value		loss
	(In Thousands)
Government agency bonds	$	—		—			13,217		(227	)		13,217		(227	)
Municipals		972		(3	)		—		—			972		(3	)
Mortgage-related securities		46,696		(466	)		28,991		(1,030	)		75,687		(1,496	)
Other securities		773		(15	)		—		—			773		(15	)
	$	48,441		(484	)		42,208		(1,257	)		90,649		(1,741	)

In September of 2006, $26.7 million of investment securities were designated for sale as part of the Company’s initiative to enhance investment yield on a prospective basis. As of September 30, 2006, $5.4 million of these securities had been sold at a loss of $90,000. The remaining $21.3 million of securities were sold in October of 2006. As the Company no longer had the intent to hold these securities until such time as they recover their amortized cost, the loss related to these securities was determined to be other-than-temporary. As such, a write down of $694,000 was recorded as of September 30, 2006 for the $21.3 million of securities, representing the difference between amortized cost and fair value which had previously been recorded through other comprehensive income/loss. The Company does not have a historical pattern of restructuring its balance sheet through large investment reductions. Circumstances in the third quarter of 2006 led to the targeted sale decision and did not change the Company’s intent to hold until a market price recovery or to maturity, with respect to the remaining investment portfolio .

In relation to the remainder of the portfolio, the unrealized losses reported for government agency bonds and mortgage-related securities relate exclusively to debt securities issued by government agencies such as the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). The unrealized loss reported for other securities relates to a mutual fund with mortgage-related investments. Because the decline in fair value 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. There are seven and sixteen individual securities at September 30, 2006 that comprise the government agency bonds and mortgage-related securities, respectively, which have been in an unrealized loss position for twelve months or longer.

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Note 4 — Loans Receivable

Loans receivable are summarized as follows:

	September 30,		December 31,
	2006		2005
	(In Thousands)
Mortgage loans:
Residential real estate:
Single family	$	473,452		469,395
Two- to four-family		254,704		256,270
Over four-family		472,158		443,528
Construction		179,126		165,516
Commercial real estate		35,937		34,543
Land		26,143		23,685
Credit cards		136		126
Other		17		33
		1,441,673		1,393,096
Less:
Undisbursed loan proceeds		82,986		82,712
Unearned loan fees		4,504		4,366
Loans Receivable	$	1,354,183		1,306,018

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

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

	For the nine months ended
	September 30,
	2006			2005
	(In Thousands)
Balance at beginning of period	$	5,250			3,737
Provision for loan losses		1,844			1,084
Charge-offs		(258	)		(16	)
Recoveries		257			1
Balance at end of period	$	7,093			4,806
Allowance as a percentage of loans receivable		0.52	%		0.38	%

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Note 5 — Deposits

A summary of the contractual maturities of certificate accounts at September 30, 2006 is as follows:

	(In Thousands)
Within one year	$	674,323
One to two years		147,907
Two to three years		53,281
Three to four years		33,194
Four through five years		6,228
After five years		185
	$	915,118

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Note 6 — FHLB Advances

FHLB advances consist of the following:

	September 30,		December 31,
	2006		2005
	(In Thousands)
Federal Home Loan Bank (FHLB) advances:
Short-term FHLB advances:
FHLB advance, 4.41%, due January 2006	$	—		23,000
FHLB advance, 2.62%, due January 2006		—		25,000
FHLB advance, 2.21%, due January 2006		—		10,000
FHLB advance, 3.26%, due July 2006		—		11,777
FHLB advance, 2.83%, due September 2006		—		2,432
FHLB advance, 4.49%, due October 2006		15,000		15,000
FHLB advance, 3.56%, due February 2007		7,000		—
FHLB advance, 3.17%, due August 2007		5,408		—
FHLB advance, 3.19%, due September 2007		4,123		—
Total short-term FHLB advances		31,531		87,209
Long-term FHLB advances:
FHLB advance, 3.56%, due February 2007		—		7,000
FHLB advance, 3.17%, due August 2007		—		5,408
FHLB advance, 3.19%, due September 2007		—		4,123
FHLB advance, 3.09%, due October 2007		4,693		4,693
FHLB advance, 4.56%, due October 2007		10,000		10,000
FHLB advance, 4.73%, due December 2007		10,000		10,000
FHLB advance, 3.67%, due January 2008		6,819		6,819
FHLB advance, 3.63%, due January 2008		3,074		3,074
FHLB advance, 3.80%, due February 2008		7,836		7,836
FHLB advance, 3.58%, due August 2008		5,000		5,000
FHLB advance, 4.78%, due November 2008		9,150		9,150
FHLB advance, 4.69%, due November 2008		8,900		8,900
FHLB advance, 4.76%, due December 2008		7,000		7,000
FHLB advance, 4.72%, due October 2010		25,000		25,000
FHLB advance, 4.01%, due January 2016		50,000		—
FHLB advance, 4.48%, due May 2016		10,000		—
FHLB advance, 4.49%, due June 2016		10,000		—
FHLB advance, 4.82%, due July 2016		25,000		—
FHLB advance, 4.51%, due July 2016		25,000		—
FHLB advance, 4.33%, due August 2016		25,000		—
FHLB advance, 4.46%, due August 2016		25,000		—
FHLB advance, 4.25%, due September 2016		50,000		—
Total long-term FHLB advances		317,472		114,003
Total FHLB advances	$	349,003		201,212

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 $17.4 million at September 30, 2006 and $14.4 million at December 31, 2005. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

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The $50,000 advance due in January of 2016 is callable beginning in January of 2009 and quarterly thereafter. The $10,000 advance due in May of 2016 is callable beginning in May of 2007 and quarterly thereafter. The $10,000 advance due in June of 2016 is callable in June of 2007 and quarterly thereafter. The $25,000 advance due in July of 2016 is callable in July of 2007 and quarterly thereafter. The $25,000 advance due in July of 2016 is callable in July of 2008 and quarterly thereafter. The $25,000 advance due in August of 2016 is callable in August of 2007 and quarterly thereafter. The $25,000 advance due in August of 2016 is callable in August of 2008 and quarterly thereafter. The $50,000 advance due in September of 2016 is callable in March of 2009 and quarterly thereafter.

Note 7 — 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,
	2006		2005
	(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit under first mortgage loans	$	51,317		43,375
Commitments to extend credit under home equity lines of credit		33,715		31,809
Standby letters of credit		696		1,576

Forward commitments to sell mortgage loans of $3,139 at September 30, 2006, represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company. Commitments to sell loans expose the Company to interest rate risk if market interest rates decrease during the commitment period. Commitments to sell loans are made to mitigate interest rate risk on commitments to originate loans and loans held for sale.

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Note 8 — Earnings per share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS 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, 2006, 133,107 shares of the Wauwatosa Savings Bank Employee Stock Ownership Plan have been released or are committed to be released to Plan participants and are considered outstanding for both common and dilutive earnings per share. No earnings per share are reflected for periods prior to October 4, 2005, as there were no shares outstanding prior to the reorganization that occurred on that date.

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

	Three Months		Nine Months
	Ended		Ended
	September 30, 2006		September 30, 2006
	(In Thousands, except per share data)
Net income	$	906	$	5,769
Weighted average shares outstanding		33,086		33,067
Effect of dilutive potential common shares		—		—
Diluted weighted average shares outstanding		33,086		33,067
Basic earnings per share	$	0.03	$	0.17
Diluted earnings per share	$	0.03	$	0.17

Note 9 — Recent Accounting Developments

In September 2006, the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of Financial Accounting Standards Boards Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation is effective for fiscal years beginning after December 31, 2006. The Company will adopt FIN 48 in 2007 and is currently evaluating the impact of the adoption of FIN 48, with respect to its results of operations, financial position and liquidity.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) in Issue No. 06-5, “Accounting for Purchase of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance,” (EITF 06-5). EITF 06-5 concluded that companies purchasing a life insurance policy including COLI or BOLI should record the amount that could be realized, considering any additional amounts beyond cash surrender value included in the contractual terms of the policy. The amount that could be realized should be based on assumed surrender at the individual policy or certificate level, unless all policies or certificates are required to be

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surrendered as a group. When it is probable that contractual restrictions would limit the amount that could be realized, such contractual limitations should be considered and any amounts recoverable at the insurance company’s discretion should be excluded from the amount that could be realized. Companies are permitted to recognize the effects of applying the consensus through either (1) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets as of the beginning of the year of adoption or (2) a change in accounting principle through retrospective application to all prior periods. EITF 06-5 will be effective for fiscal years beginning after December 15, 2006. The Company will adopt EITF 06-5 in 2007 and is in the process of assessing the impact on its results of operations, financial position, and liquidity.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatemnets when Quantifying Misstatements in Current Year Financial Statements,” (SAB 108). SAB 108 provides guidance regarding the process of quantifying financial statements misstatements. SAB 108 dictates that registrants should quantify errors using both a balance sheet approach (the “iron curtain” method) and an income statement approach (the “rollover” approach). The balance sheet approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year of origination. The income statement method quantifies a misstatement based on the amount of the error originating in the current year income statement, while ignoring the carryover effects of a prior year misstatement. SAB 108 indicates companies should quantify an error under both methods and by evaluating the materiality under both methods. If deemed material, companies are required to adjust their financial statements. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The Company will adopt SAB 108 in the fourth quarter of 2006. No impact on results of operations, financial position, and liquidity is anticipated .

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements Regarding Forward-Looking Information

This report contains or incorporates by reference various forward-looking statements concerning the Company’s prospects that are based on the current expectations and beliefs of management. Forward-looking statements may also be made by the Company from time to time in other reports and documents as well as in oral presentations. When used in written documents or oral statements, the words “anticipate,” “believe,” “estimate,” “expect,” “objective” and similar expressions and verbs in the future tense, are intended to identify forward-looking statements. The statements contained herein and such future statements involve or may involve certain assumptions, risks and uncertainties, many of which are beyond the Company’s control, that could cause the Company’s actual results and performance to differ materially from what is expected. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of the Company:

• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• legislative or regulatory changes that adversely affect our business;

• our ability to enter new markets successfully and take advantage of growth opportunities;

• general economic conditions, either nationally or in our market areas, that are worse than expected;

• significantly increased competition among depository and other financial institutions;

• adverse changes in the securities markets;

• 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 2005 Transition Report on Form 10-K).

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of mortgage loans, investment securities and cash and cash equivalents and the interest we pay on our interest-bearing liabilities, consisting primarily of time deposits and borrowings from the Federal Home Loan Bank of Chicago. The Company’s banking subsidiary, Wauwatosa Savings Bank (“Wauwatosa Savings”), is a lender with mortgage loans comprising virtually 100% of total loans receivable on September 30, 2006. Further, 83.3% of loans receivable are residential mortgage loans with over four-family loans comprising 32.7% of all residential

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mortgage loans on September 30, 2006. Wauwatosa Savings funds loan production primarily with retail deposits and Federal Home Loan Bank advances. On September 30, 2006, total deposits comprised 73.0% of total liabilities. Time deposits, also known as certificates of deposit, account for 86.2% of total deposits. Wauwatosa Savings borrows from the Federal Home Loan Bank of Chicago as a secondary source of funding. Federal Home Loan Bank advances outstanding on September 30, 2006 totaled $349.0, million or 24.0% of total liabilities.

Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of service charges and mortgage banking income. Noninterest expense currently 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.

On February 9, 2006, the Company, through its bank subsidiary, completed the acquisition of Waterstone Mortgage Corporation (“Waterstone”). Waterstone is a mortgage broker with offices in Pewaukee, Madison, Sheboygan and Lake Geneva, Wisconsin and Livonia, Michigan. Waterstone offers real estate mortgage options that are currently not being offered by Wauwatosa Savings. Revenue generated through Waterstone’s mortgage brokerage and sale activities is included in the Consolidated Statements of Income contained in this report under the caption “Mortgage banking income.”

The following discussion and analysis is presented to assist in the understanding and evaluation of the Company’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on the results of operations for the three and nine-month periods ended September 30, 2006 and 2005 and the financial condition as of September 30, 2006 compared to the financial condition as of December 31, 2005.

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

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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, federal regulators periodically review the Wauwatosa Savings allowance for loan losses. Such regulators have the authority to require Wauwatosa Savings to recognize additions to the allowance at the time of their examination.

Income Taxes.We recognize income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized.

Wauwatosa Savings has an investment subsidiary operating in Nevada. The income earned by that corporation is not subject to tax in Wisconsin nor has any such tax been paid. An accrued liability has been recorded pursuant to the Statement of Financial Accounting Standards Board No. 5 because the Wisconsin Department of Revenue has generally indicated that it will assess franchise taxes on certain income of such out-of-state subsidiaries. The Company has accrued an estimated liability, as of September 30, 2006, of $2.9 million net of the federal deferred tax benefit. The Company will continue to accrue state income tax on certain Nevada subsidiary earnings until such time as this issue is resolved.

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.

Comparison of Operating Results for the Nine Months Ended September 30, 2006 and 2005

General — Net income for the nine months ended September 30, 2006 totaled $5.8 million, or $0.17 for both basic and diluted earnings per share compared to net income of $6.8 million for the nine months ended September 30, 2005. There was no comparable earnings per share amount for the nine months ended September 30, 2005. Year-to-date 2006 results generated an annualized return on average assets of 0.49% and an annualized return on average equity of

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3.26%, compared to 0.65% and 6.79%, respectively, for the comparable period in 2005. Net income for the nine months ended September 30, 2006 was lower than that of the comparable prior nine-month period and total equity was substantially higher due to the initial public sale of Company stock on October 4, 2005. The net interest margin for the first nine months of 2005 was 2.56% compared to 2.94% for the first nine months of 2005. While non-interest income for the nine months ended September 30, 2006 was $1.7 million higher than that of the comparable prior nine-month period, primarily as the result of the Waterstone acquisition, this increase was more than offset by a $434,000 decrease in net interest income, a $760,000 increase in the provision for loan losses and a $4.7 million increase in non interest expense. The 12.5% decline in the effective tax rate of 49.4% for the nine months ended September 30, 2005 to 36.9% for the nine months ended September 30, 2006 was due to the March 2005 accrual of estimated state tax liability net of federal deferred tax benefit related to the Wisconsin Department of Revenue is general indication that it will assess franchise taxes on certain income of the Wauwatosa Savings out-of-state investment subsidiary.

Total Interest Income — Total interest income increased $9.3 million, or 15.9%, to $67.5 million during the nine months ended September 30, 2006 compared to $58.3 million for the nine months ended September 30, 2005. Interest income on loans increased $7.9 million, or 14.5%, to $62.3 million for the nine months ended September 30, 2006 compared to $54.4 million for the comparable period of 2005. The increase primarily resulted from an increase in average loan balance of $149.1 million, or 12.4%, to $1.3 billion during the nine-month period ended September 30, 2006 from $1.2 billion during the comparable period in 2005. The increase in volume was compounded by an 11 basis point increase in the average yield on loans to 6.18% for the nine-month period ended September 30, 2006 from 6.07% for the comparable period in 2005. Much of the remaining increase in total interest income reflected interest income from investment securities which increased $1.5 million, or 96.9%, to $3.1 million for the nine months ended September 30, 2006 compared to $1.6 million for the comparable period in 2005. This was primarily due to the increase in the average balance of investment securities of $14.3 million, or 14.0%, to $116.6 million during the nine-month period ended September 30, 2006 from $102.3 million during the comparable period in 2005. The increase in volume was compounded by a 83 basis point increase in the average yield on investment securities to 4.54% for the nine-month period ended September 30, 2006 from 3.71% for the comparable period in 2005. Finally, the average balance of other earning assets increased by $11.4 million, or 38.9%, to $40.6 million during the nine months ended September 30, 2006 from $29.3 during the comparable period in the prior year. In this case, however, the increase in volume was offset by a 43 basis point decrease in the average yield on other earning assets to 4.18% during the nine month period in 2006 from 4.61% during the nine month quarter in 2005.

Total Interest Expense — Total interest expense increased by $9.7 million, or 33.5%, to $38.7 million during the nine months ended September 30, 2006 from $29.0 million during the nine months ended September 30, 2005. 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 $4.3 million, or 16.2%, to $30.8 million during the nine months ended September 30, 2006 from $26.5 million during the comparable period in 2005 as a result of an increase in the cost of deposits, which was partially offset by a decrease in average

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deposits outstanding. The cost of total average deposits increased by 65 basis points to 3.87% for the nine-month period ended September 30, 2006 compared to 3.22% for the comparable period during 2005. As market interest rates (in particular short-term interest rates) increased and deposit rates offered by competitors increased, it was necessary to increase the interest rates we offered on deposits to attract and retain new deposits, thereby increasing our cost of deposits.

Interest expense on borrowings increased $5.4 million, or 212.2%, to $8.0 million during the nine months ended September 30, 2006 from $2.5 million during the comparable period in 2005. This increase was the result of increased average borrowings outstanding plus an increase in the related weighted average interest cost of such borrowings. The weighted average cost of advances from the Federal Home Loan Bank and of federal funds purchased increased 95 basis points to 4.28% for the nine months ended September 30, 2006 compared to 3.33% for the comparable period during 2005.

Net Interest Income — Net interest income decreased by $434,000 or 1.5%, during the nine months ended September 30, 2006 as compared to the same period in 2005. The decrease resulted primarily from a 58 basis point decrease in our net interest rate spread to 2.06% for the nine month period ended September 30, 2006 from 2.64% for the comparable period in 2005. The 58 basis point decrease in the net interest rate spread resulted from a 72 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 14 basis point increase in the yield on interest earning assets. Consistent with industry trends, the Company has experienced net interest margin compression as the yield curve continues to flatten and invert. In addition to the flattening yield curve, net interest margin has been compressed as the repricing of interest bearing liabilities has outpaced that of interest earning assets. The decrease in net interest income resulting from a decrease in our net interest rate spread was partially offset by an increase in net average earning assets of $66.1 million, or 52.3%, to $192.3 million for the nine-month period ended September 30, 2006 from $126.2 million from the comparable period in 2005.

Provision for Loan Losses — Provision for loan losses increased $760,000, or 70.1%, to $1.8 million during the nine months ended September 30, 2006, from $1.1 million during the comparable period during 2005. The higher provision for the nine months ended September 30, 2006 was the result of growth of the overall loan portfolio, a continued increase in classified assets and specific loan loss provisions identified and recognized during the period.

Noninterest Income — Total noninterest income increased $1.7 million, or 74.7%, to $3.9 million during the nine months ended September 30, 2006 from $2.2 million during the comparable period in 2005. The increase resulted primarily from increased mortgage banking income generated by Waterstone. Increases in 2006 related to service charges, cash surrender value of life insurance and other income were fully offset by loss on the sale and impairment of securities. 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 September. Management intends to use the proceeds from the sales to enhance future investment yield. This transaction was analyzed and executed in conjunction with the semi-annual Board of Directors meeting of the Wauwatosa Savings investment subsidiary. The size of the transaction was limited by federal capital gains available to offset

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capital losses incurred as a result of the sales.

Noninterest Expense — Total noninterest expense increased $4.7 million, or 27.4%, to $21.8 million during the nine months ended September 30, 2006 from $17.1 million during the comparable period in 2005. The increase was primarily the result of increases in compensation, payroll taxes and other employee benefits. Waterstone accounted for $1.3 million, or 34.7%, of that $3.7 million increase for the period.

Compensation, payroll taxes and other employee benefit expense increased $3.7 million, or 42.6%, to $12.5 million during the nine months ended September 30, 2006 from $8.8 million during the comparable period in 2005. Wauwatosa Savings’ salary expense increased by $1.6 million, primarily as a result of an 11% increase in the overall level of full-time equivalent staff members. Salary expense related to Waterstone totaled $1.1 million during the nine months ended September 30, 2006. There was no compensation expense related to Waterstone during the comparable period of 2005. Compensation expense related to the ESOP Plan totaled $838,000 during the nine months ended September 30, 2006. There was no expense related to the ESOP Plan during the comparable period of 2005, as the ESOP Plan did not exist until the fourth quarter of 2005. A $290,000 increase in employee health care benefits was entirely offset by a $374,000 reduction in pension benefits. The Company elected to freeze benefits accruing in the defined benefit pension plan in December 2005.

Occupancy, office furniture and equipment increased by $531,000, or 20.4%, to $3.1 million during the nine months ended September 30, 2006 from $2.6 million during the comparable period in 2005. The increase relates primarily to a new branch office located in Waukesha that opened in September 2005, as well as real estate taxes on property purchased in 2006 for new branches in Franklin, Germantown and West Allis, Wisconsin.

Data processing expense increased $580,000, or 63.0%, for the nine months ended September 30, 2006 to $1.5 million from $921,000 during the comparable period in 2005. Contract termination costs of $333,000 were recognized during the nine months ended September 30, 2006 as the result of a planned conversion of Wauwatosa Savings’ core data processor to Metavante Corporation effective February 19, 2007.

Income Taxes — The effective tax rate for the nine months ended September 30, 2006 was 36.9% as compared to 49.4% for the comparable period during 2005. The 2005 effective tax rate was abnormally high as a result of an accrual of state income taxes recorded in 2005 attributable to an ongoing dispute with the Wisconsin Department of Revenue. Wauwatosa Savings has an investment subsidiary operating in Nevada. The income earned by that corporation is not subject to tax in the state of Wisconsin nor has any such tax been paid. During the nine-month period ended September 30, 2005, an accrued liability of $2.0 million was established because the Wisconsin Department of Revenue has generally indicated that it will assess franchise taxes on certain income of such out-of-state subsidiaries. As of September 30, 2006, the Company has accrued an estimated liability of $2.9 million net of the federal deferred tax benefit of $1.6 million.

Net Income — As a result of the foregoing factors, net income for the nine months ended September 30, 2006 decreased $983,000, or 14.6%, to $5.8 million, from $6.8 million during the comparable period in 2005.

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Comparison of Operating results for the Three Months Ended September 30, 2006 and 2005

General — Net income for the quarter ended September 30, 2006 totaled $906,000, or $0.03 per share, as compared to $3.4 million for the quarter ended September 30, 2005. There was no comparable earnings per share amount for the quarter ended September 30, 2005. The $2.5 million, or 73.5%, decrease in net income between the comparable quarters was the result of a decrease in net interest income, an increase in the provision for loan losses, an increase in non-interest expense, partially offset by an increase in noninterest income, and a decrease in income tax expense.

Total Interest Income — Total interest income increased $2.7 million, or 13.1%, to $23.3 million for the third quarter of 2006 as compared to $20.6 million for the third quarter of 2005. Interest income on loans increased $2.4 million, or 12.7%, to $21.3 million in the third quarter of 2006 as compared to $18.9 million for the third quarter of 2005. The increase resulted from an increase in average loan balance of $125.8 million, or 10.2%, to $1.4 billion during the three-month period ended September 30, 2006 from $1.2 billion for the comparable period in 2005. Interest income from loans was also positively affected by a 13 basis point increase in the average yield on loans to 6.21% for the three-month period ended September 30, 2006 from 6.08% for the comparable period in 2005. Much of the remaining increase in overall interest income reflected interest income from investment securities which increased $499,000, or 104.8%, to $975,000 for the third quarter ended September 30, 2006 from $476,000 for the comparable period in 2005. This was primarily due to a 91 basis point increase in the average yield on investment securities to 4.52% for the three-month period ended September 30, 2006 from 3.61% for the comparable period in 2005. The increase in yield was partially offset by a decrease in the average balance of investment securities of $18.8 million, or 14.5%, to $111.2 million during the three-month period ended September 30, 2006 from $130.1 million during the comparable period ended in 2005. Interest income was also positively affected by an increase in the average balance of other earning assets of $27.0 million, or 62.8%, to $70.1 million during the quarter ended in 2006 from $43.1 million during the comparable quarter in 2005. The increase in volume was partially offset by a 44 basis point decrease in the average yield on other earning assets to 3.89% for the quarter ended September 30, 2006 from 4.33% during the comparable quarter in 2005.

Total Interest Expense — Total interest expense increased by $3.9 million, or 37.7%, to $14.1 million in the third quarter of 2006 from $10.2 million in the third quarter of 2005. 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 $1.8 million, or 19.2%, to $11.1 million for the third quarter of 2006 from $9.3 million during the comparable period in 2005, as a result of an increase in the cost of deposits, which was partially offset by a decrease in average deposits outstanding. The cost of total average deposits increased by 82 basis points to 4.14% for the

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quarter ended September 30, 2006 as compared to 3.32% for the quarter ended September 30, 2005. As market interest rates (in particular short-term interest rates) increased, it was necessary to increase the interest rates we offered on deposits to attract and retain new deposits, thereby increasing our cost of deposits.

Interest expense on borrowings increased $2.1 million, or 220.6%, to $3.0 million for the third quarter of 2006 from $943,000 during the comparable period in 2005. This increase was the result of increased average borrowings outstanding plus an increase in our weighted average cost of borrowings. The cost of advances from the Federal Home Loan Bank and of federal funds purchased increased 88 basis points to 4.35% for the quarter ended September 30, 2006 as compared to 3.47% for the quarter ended September 30, 2005.

Net Interest Income — Net interest income decreased $1.2 million, or 11.2%, in the third quarter of 2006 as compared to the same period in 2005. The decrease resulted primarily from a 64 basis point decrease in the net interest rate spread to 1.85% for the quarter ended September 30, 2006 from 2.49% for the comparable period in 2005. The 64 basis point decrease in the net interest rate spread resulted from an 83 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 19 basis point increase in the yield on interest earning assets. Consistent with industry trends, the Company has experienced net interest margin compression as the yield curve continues to flatten and invert. In addition to the flattening yield curve, net interest margin has been compressed as the repricing of interest bearing liabilities has outpaced that of interest earning assets. This decrease was partially offset by an increase in net average earning assets of $10.3 million, or 5.6%, to $193.3 million for the quarter ended September 30, 2006 from $183.0 million from the comparable period in 2005.

Provision for Loan Losses — The provision for loan losses totaled $1.2 million during the quarter ended September 30, 2006 as compared to $209,000 for the quarter ended September 30, 2005. The provision for loan losses recorded during the third quarter of fiscal 2006 was reflective of a continued increase in classified assets and specific loan loss provisions identified and recognized during the quarter ended September 30, 2006.

Noninterest Income — Total noninterest income increased $244,000, or 24.8%, to $1.2 million for the third quarter of 2006 from $985,000 during the comparable period in 2005. The increase resulted primarily from increases in rental income of $101,000 and prepayment penalties on mortgage loans of $91,000. 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 September. Management intends to use the proceeds from the sales to enhance future investment yield. This transaction was analyzed and executed in conjunction with the semi-annual Board of Directors meeting of the Wauwatosa Savings investment subsidiary. The size of the transaction was limited by federal capital gains available to offset capital losses incurred as a result of the sales. Losses on the sale and impairment of investment securities of $784,000 were fully offset by Waterstone mortgage banking income and Waterstone other income in 2006. None of these items were present in the quarter ended September 30, 2005.

Noninterest Expense — Noninterest expense increased $2.0 million, or 35.1%, to $7.8 million during the quarter ended September 30, 2006 compared to $5.8 million during the quarter ended September 30, 2005. The increase in noninterest expense resulted primarily from an increase in compensation, payroll taxes and other employee benefits. Noninterest expense attributable to Waterstone for the quarter ended September 30, 2006 totaled $731,000, or 36.2%, of the $2.0 million increase.

Compensation, payroll taxes and other employee benefit expense increased $1.4 million, or 44.9%, to $4.4 million in the third quarter of 2006 from $3.0 million during the comparable

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period in 2005. Wauwatosa Savings’ salary expense increased by $537,000, primarily as a result of an 11% increase in the overall level of full-time equivalent staff members. Salary expense related to Waterstone totaled $502,000 during the third quarter of 2006. There was no comparable expense during the second quarter of 2005. Compensation expense related to the ESOP Plan totaled $324,000 during the third quarter of 2006. There was no comparable expense during the third quarter of 2005, as the ESOP Plan did not exist until the fourth quarter of 2005. An increase of $51,000 in employee health care benefits was offset by a $148,000 reduction in pension expense. The Company elected to freeze the benefits accruing in the defined benefit pension plan in December of 2005.

Occupancy, office furniture and equipment increased by $305,000, or 36.4%, to $1.1 million during the third quarter of 2006 from $837,000 during the comparable period in 2005. The increase related primarily to a new branch office located in Waukesha that opened in September 2005 plus real estate taxes on property purchased in 2006 for new branches in Franklin, Germantown and West Allis, Wisconsin.

Data processing expense increased $359,000, or 102.9%, during the third quarter of 2006 to $708,000 from $349,000 during the comparable period in 2005. Contract termination costs of $312,000 were recognized during the nine months ended September 30, 2006 as the result of a planned conversion of Wauwatosa Savings’ core data processor to Metavante Corporation effective February 19, 2007.

Income Taxes — The effective tax rate for the third quarter of 2006 was 37.2%, compared to 36.2% for the third quarter of 2005.

Net Income — As a result of the foregoing factors, net income for the three months ended September 30, 2006 decreased $2.5 million, or 73.5%, to $906,000, from $3.4 million during the comparable period in 2005.

Comparison of Financial Condition at September 30, 2006 and December 31, 2005

Total Assets — Total assets increased by $180.9 million, or 12.0%, to $1.7 billion at September 30, 2006 from $1.5 billion at December 31, 2005. The increase in total assets resulted primarily from increases in cash and cash equivalents and continued growth of the loan portfolio.

Cash and Cash Equivalents — Cash and cash equivalents increased by $125.9 million to $142.2 million at September 30, 2006 from $15.7 million at December 31, 2005. The increase was the direct result of $100 million in Federal Home Loan Bank advances that were taken to pre-fund operations, year-end tax escrow disbursements and upcoming wholesale funding maturities. In the current interest rate environment, this transaction resulted in arbitrage earnings of approximately 0.84% when investing the proceeds of the Federal Home Loan Bank advances, with an average cost of 4.32%, in short-term Federal Home Loan Bank time deposits, with an average yield of 5.16%.

Loans Held for Sale — Loans held for sale totaled $2.9 million as of September 30, 2006. This represents mortgage loans originated by Waterstone that will be sold in the secondary market.

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As Wauwatosa Savings has not historically originated loans for sale in the secondary market, and Waterstone was not purchased until February 2006, there is no comparable balance as of December 31, 2005.

Loans Receivable — Loans receivable increased $48.4 million, or 3.7%, to $1.4 billion at September 30, 2006 from $1.3 billion at December 31, 2005, primarily as a result of an increase in residential mortgage loans. Of the total increase in loans receivable, $31.4 million, or 64.3% was attributable to residential mortgage loans, of which $28.6 million was secured by over four-family residential properties and $4.3 million was secured by single family residential properties. An additional $13.6 million of the overall increase in loans receivable was attributable to construction loans.

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

	As of or for the			As of or for the
	Nine Months Ended			Six Months Ended
	September 30, 2006			December 31, 2005
	(In Thousands)
Total loans at beginning of period	$	1,393,096			1,299,812
Real estate loans originated:
Residential(1) Single family		60,717			81,397
Two- to four-family		46,835			52,030
Over four-family		88,361			95,734
Construction		36,715			43,865
Commercial		9,156			2,658
Land		7,883			10,451
Total loans originated		249,667			286,135
Other loans — net activity		(7	)		(43	)
Principal repayments		(201,083	)		(192,808	)
Net loan activity		48,577			93,284
Total loans at end of period	$	1,441,673			1,393,096

(1) Residential mortgage loans include home equity loans and home equity lines of credit.

Office Properties and Equipment — Office properties and equipment increased $6.1 million, or 24.6%, to $31.2 million at September 30, 2006 from $25.0 million at December 31, 2005. The increase was attributable to the purchase of a building in West Allis, Wisconsin for $2.8 million and land in Franklin and Germantown, Wisconsin, totaling $2.1 million for expansion of our branch network. In addition, $1.6 million has been incurred with respect to the Franklin branch which opened in September and $3.2 million has been incurred with respect to the Germantown and West Allis branches due to open in 2006 and 2007 respectively.

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Federal Home Loan Bank Stock— Federal Home Loan Bank stock increased by $3.0 million, or 21.1%, to $17.5 million at September 30, 2006 from $14.5 million at December 31, 2005. This increase is the direct result of the increase in Federal Home Loan Bank advances outstanding at September 30, 2006 as compared to December 31, 2005. Minimum stock ownership is based on a combination of member bank mortgage loans and Federal Home Loan Bank advances outstanding. Wauwatosa Savings owns the minimum required amount of stock. Dividends paid by the Federal Home Loan Bank of Chicago averaged 3.07% for the first three quarters of 2006.

Prepaid Expenses and Other Assets — Prepaid expenses and other assets increased by $2.3 million, or 23.9%, to $12.1 million at September 30, 2006 from $9.8 million at December 31, 2005. The biggest single increase was for deferred federal and state income taxes which increased by $1.1 million from December 31, 2005 to September 30 2006. In addition, $882,000 of Waterstone assets are included in the September 30, 2006 total. There were no comparable assets at December 31, 2005.

Deposits — Total deposits increased $15.8 million, or 1.5%, to $1.1 billion at September 30, 2006 from $1.0 billion at December 31, 2005. Total money market and savings deposits increased $53.3 million, or 158.7%, to $86.8 million at September 30, 2006 from $33.6 million at December 31, 2005. Partially offsetting the overall increase in money market and savings deposits, demand deposits decreased $22.8 million, or 27.8%, to $59.4 million at September 30, 2006 from $82.3 million at December 31, 2005. 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, 2006. The increase in money market account balances included amounts transferred from existing demand accounts.

Federal Home Loan Bank Advances — Total Federal Home Loan Bank advances increased $147.8 million, or 73.5%, to $349.0 million at September 30, 2006 from $201.2 million at December 31, 2005. The increase was the direct result of $100 million in Federal Home Loan Bank advances that were taken to pre-fund operations, year-end tax escrow disbursements and upcoming wholesale funding maturities. In the current rate environment, the pre-funding resulted in arbitrage earnings of approximately 0.84% when investing the proceeds of the Federal Home Loan Bank advances with an average cost of 4.32% in short-term Federal Home Loan Bank time deposits with an average yield of 5.16%.

Advance Payments by Borrowers for Taxes — Advance payments by borrowers for taxes and insurance increased $24.7 million to $24.9 million at September 30, 2006 from $181,000 at December 31, 2005. The increase was the result of payments received from borrowers for their real estate taxes and is seasonally normal, as balances increase during the course of the calendar year until real estate tax obligations are paid out, primarily in December.

Other Liabilities — Other liabilities decreased $14.6 million, or 45.0%, to $17.9 million at September 30, 2006 from $32.5 million at December 31, 2005. The decrease, which is seasonally normal, was primarily due to a decrease in outstanding checks related to advance payments by borrowers for taxes. The Company receives payments from borrowers for their real

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estate taxes during the course of the calendar year until real estate tax obligations are paid out, primarily in December. The outstanding checks remain classified as another liability until paid. The balance of these outstanding checks was $21,000 at September 30, 2006 and $16.4 million at December 31, 2005.

Shareholders’ Equity — Shareholders’ equity increased $7.2 million, or 3.1%, to $238.9 million at September 30, 2006 from $231.7 at December 31, 2005. The increase was primarily attributable to net income for the nine months ended September 30, 2006, which totaled $5.8 million partially offset by the increase in unearned ESOP shares and by accumulated other comprehensive loss. Accumulated other comprehensive loss is the estimated unrealized loss attributable to the decline in market value of investment securities during the current rising interest rate environment.

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. All average balances are daily average balances. 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.

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	Three Months Ended September 30,
	2006									2005
				Interest and									Interest and
	Average Balance			Dividends			Yield/Cost			Average Balance			Dividends			Yield/Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	1,360,697	(1)	$	21,313			6.21	%		1,234,933	(1)	$	18,917			6.08	%
Available for sale securities(2)		111,241			1,266			4.52			130,085			1,183			3.61
Other earning assets		70,134			687			3.89			43,093			470			4.33
Total interest-earning assets		1,542,072			23,266			5.99			1,408,111			20,570			5.80
Noninterest-earning assets		72,796									65,868
Total assets	$	1,614,868								$	1,473,979
Interest-bearing liabilities:
Demand and money market accounts	$	115,723		$	811			2.78		$	96,954			366			1.50
Savings accounts		20,671			26			0.50			24,107			30			0.49
Certificates of deposit		923,379			10,215			4.39			985,999			8,878			3.57
Total interest-bearing deposits		1,059,773			11,052			4.14			1,107,060			9,274			3.32
Advances from the Federal Home Loan Bank		275,209			3,017			4.35			104,016			910			3.47
Other interest-bearing liabilities		13,742			21			0.61			14,023			47			1.33
Total interest-bearing liabilities		1,348,724			14,090			4.14			1,225,099			10,231			3.31
Noninterest-bearing liabilities		30,352									113,922
Total liabilities		1,379,076									1,339,021
Equity		235,792									134,958
Total liabilities and equity	$	1,614,868								$	1,473,979
Net interest income					9,176									10,339
Net interest rate spread(3)								1.85	%								2.49	%
Net interest-earning assets(4)	$	193,348								$	183,012
Net interest margin(5)					2.36	%								2.91	%
Average interest-earning assets to average interest-bearing liabilities					114.34	%								114.94	%

(1)	Includes net deferred loan fee amortization income of $223 and $285 for the three months ended September 30, 2006 and 2005, respectively.
(2)	Average balance of available for sale 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,
	2006									2005
				Interest and									Interest and
	Average Balance			Dividends			Yield/Cost			Average Balance			Dividends			Yield/Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	1,347,925	(1)	$	62,314			6.18	%	$	1,198,857	(1)		54,421			6.07	%
Available for sale securities(2)		116,583			3,958			4.54			102,284			2,840			3.71
Other earning assets		40,633			1,270			4.18			29,254			1,008			4.61
Total interest-earning assets		1,505,141			67,542			6.00			1,330,395			58,269			5.86
Noninterest-earning assets		66,568									56,580
Total assets	$	1,571,709								$	1,386,975
Interest-bearing liabilities:
Demand and money market accounts	$	105,255			1,865			2.37		$	90,463			852			1.26
Savings accounts		20,882			78			0.50			23,998			90			0.50
Certificates of deposit		934,132			28,786			4.12			982,539			25,492			3.47
Total interest-bearing deposits		1,060,269			30,729			3.87			1,097,000			26,434			3.22
Advances from the Federal Home Loan Bank		241,856			7,751			4.28			97,947			2,440			3.33
Other interest-bearing liabilities		10,697			236			2.95			9,200			135			1.96
Total interest-bearing liabilities		1,312,822			38,716			3.94			1,204,147			29,009			3.22
Noninterest-bearing liabilities		22,876									49,924
Total liabilities		1,335,698									1254,071
Equity		236,011									132,904
Total liabilities and equity	$	1,571,709								$	1,386,975
Net interest income					28,826									29,260
Net interest rate spread(3)								2.06	%								2.64	%
Net interest-earning assets(4)	$	192,319								$	126,248
Net interest margin(5)					2.56	%								2.94	%
Average interest-earning assets to average interest-bearing liabilities					114.65	%								110.48	%

(1)	Includes net deferred loan fee amortization income of $614 and $713 for the nine months ended September 30, 2006 and 2005, respectively.
(2)	Average balance of available for sale 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,
	2006 versus 2005									2006 versus 2005
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest and dividend income:
Loans receivable(1) (2)	$	1,991			405			2,396		$	8,478			(585	)		7,893
Securities interest and income from other earning assets(3)		(70	)		(230	)		(300	)		3,432			(2,052	)		1,380
Total interest-earning assets		2,061			635			2,696			11,910			(2,637	)		9,273
Interest expense:
Demand and Money Market accounts		52			393			445			(116	)		1,129			1,013
Savings accounts		(4	)		0			(4	)		(12	)		0			(12	)
Certificates of deposit		(585	)		1,923			1,338			20			3,274			3,294
Total interest-bearing deposits		(537	)		2,316			1,779			(108	)		4,403			4,295
FHLB Advances		1,950			157			2,107			6,017			(706	)		5,311
Other interest-bearing liabilities		(1	)		(26	)		(27	)		(27	)		128			101
Total interest-bearing liabilities		1,412			2,447			3,859			5,882			3,825			9,707
Net change in net interest income	$	649			(1,812	)		(1,163	)	$	6,028			(6,462	)		(434	)

(1)	Includes net deferred loan fee amortization income of $223, $285, $615 and $713 for the three months ended September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005, respectively.
(2)	Non-accrual loans have been included in average loans receivable balance.
(3)	Average balance of available for sale securities is based on amortized historical cost.

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ASSET QUALITY

The following table summarizes non-performing loans and assets:

NON-PERFORMING LOANS AND ASSETS

	At September 30,			At December 31,
	2006			2005
	(Dollars in Thousands)
Non-accrual loans:
Residential(1)
Single family	$	7,830			5,654
Two- to four-family		3,377			3,386
Over four-family		6,102			6,703
Construction		3,615			760
Commercial		323			962
Land		552			600
Total non-performing loans		21,799			18,065
Real estate owned		691			215
Total non-performing assets	$	22,490			18,280
Total non-performing loans to total loans receivable		1.61	%		1.38	%
Total non-performing loans to total assets		1.29	%		1.20	%
Total non-performing assets to total assets		1.33	%		1.21	%

(1) Residential mortgage loans include home equity loans and home equity lines of credit.

Total non-performing loans increased by $3.7 million, or 20.7%, to $21.8 million as of September 30, 2006, compared to $18.3 million as of December 31, 2005, primarily as a result of an increase in non-performing construction loans. Of the total increase in non-performing construction loans, $3.3 million relates to three loans on which management has established $777,000 in specific loan loss reserves based on estimated net realizable values.

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

	At or for the Nine			At or for the Nine
	Months Ended			Months Ended
	September 30, 2006			September 30, 2005
	(Dollars in Thousands)
Balance at beginning of period	$	5,250			3,737
Provision for loan losses		1,844			1,084
Charge-offs:
Residential(1)
Single family		88			—
Two- to four-family		160			—
Over four-family		—			—
Construction		—			—
Commercial		3			4
Land		—			—
Other loans		7			12
Total charge-offs		258			16
Total recoveries		257			1
Net charge-offs		1			15
Allowance at end of period	$	7,093			4,806
Ratios:
Allowance for loan losses to non-performing loans at end of period		32.54	%		32.38	%
Allowance for loan losses to loans receivable at end of period		0.52	%		0.38	%
Net charge-offs to average loans outstanding (annualized)		0.00	%		0.00	%

⁽¹⁾ Residential loans include home equity loans and home equity lines of credit.

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

The establishment of the amount of the loan loss allowance inherently involves judgments by management as to the adequacy of the allowance, which ultimately may or may not be correct. Higher rates of loan defaults than anticipated would likely result in a need to increase provisions in future years. Also, as over four-family loan portfolios increase, additional provisions would likely be added to the loan loss allowances as they carry a higher risk of loss. The dollar amount of the typical over four-family loan tends to be larger than our average single family loan and,

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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.

Impact of Inflation and Changing Prices

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

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our liquidity ratio averaged 1.8% for both the nine months ended September 30, 2006 and 2005. 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, 2006 was 13.7% and 21.0%, respectively.

Our primary sources of liquidity are deposits, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term, interest-earning assets, which provide liquidity to meet lending requirements. Additional sources of liquidity used for the purpose of managing long- and short-term cash flows include $65 million in federal funds lines of credit with four commercial banks and advances from the Federal Home Loan Bank of Chicago.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At September 30, 2006 and 2005, respectively,

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$142.2 million and $364.4 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt and mortgage-related securities, increases in deposit accounts, federal funds purchased and advances from the Federal Home Loan Bank of Chicago.

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

During the nine months ended September 30, 2006 and 2005, loan originations, net of collected principal, totaled $49.9 million and $118.2 million, respectively, reflecting net growth in our portfolio. Growth has declined in 2006 with the rise in short-term interest rates and the decline in residential real estate transactions.

Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. Deposits increased by $15.8 million for the nine months ended September 30, 2006 primarily as the result of competitive pricing offered on money market accounts.

Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provide an additional source of funds. At September 30, 2006, we had $349.0 million in advances from the Federal Home Loan Bank of Chicago, of which $31.5 million was due within 12 months, and an additional available borrowing limit of $153.7 million based on collateral requirements of the Federal Home Loan Bank of Chicago.

At September 30, 2006, we had outstanding commitments to originate loans of $51.3 million, unfunded commitments under construction loans of $83.0 million and unfunded commitments under lines of credit and standby letters of credit of $34.4 million. At September 30, 2006, certificates of deposit scheduled to mature in one year or less totaled $674.3 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago advances in order to maintain our level of assets. However, we cannot assure that such borrowings would be available on attractive terms, or at all, if and when needed. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents and securities available-for-sale in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

Regulatory Capital

The Company and Wauwatosa Savings are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if

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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, 2006, the Company met all capital adequacy requirements to which it is subject.

As of September 30, 2006 the most recent notification from the Federal Deposit Insurance Corporation categorized the Wauwatosa Savings as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the 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 the Wauwatosa Savings’ category.

As a state-chartered savings bank, the Wauwatosa Savings is required to meet minimum capital levels established by the state of Wisconsin in addition to federal requirements. For the state of Wisconsin, regulatory capital consists of retained income, paid-in-capital, capital stock equity and other forms of capital considered to be qualifying capital by the Federal Deposit Insurance Corporation.

The actual capital amounts and ratios for the Company and Wauwatosa Savings as of September 30, 2006 are presented in the table below:

	September 30, 2006
											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)	$	246,174		21.32	%		92,391		8.00	%		N/A		N/A
Tier I capital (to risk-weighted assets)		239,171		20.71	%		46,195		4.00	%		N/A		N/A
Tier I capital (to average assets)		239,171		14.85	%		64,402		4.00	%		N/A		N/A
Wauwatosa Savings
Total capital (to risk-weighted assets)	$	200,812		18.11	%		88,700		8.00	%		110,875		10.00	%
Tier I capital (to risk-weighted assets)		193,976		17.50	%		44,350		4.00	%		66,525		6.00	%
Tier I capital (to average assets)		193,976		12.22	%		63,484		4.00	%		79,355		5.00	%
State of Wisconsin (to total assets) (2)		193,976		11.78	%		98,778		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, 2006 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	$	146,281		146,281		—		—		—
Certificates of deposit		915,118		674,323		201,188		33,195		6,412
Federal Home Loan Bank advances(1)		349,003		31,531		72,472		25,000		220,000
Operating leases (2)		386		121		239		26		—
Capital lease		4,050		300		3,750		—		—
Salary continuation agreements		3,426		449		1,152		848		977
	$	1,418,264		853,005		278,801		59,069		227,389

(1)	Secured under a blanket security agreement on qualifying assets, principally, mortgage loans. Excludes interest which will accrue on the advances.
(2)	Represents non-cancelable operating leases for offices.

     The following table details the amounts and expected maturities of significant off-balance sheet commitments as of September 30, 2006.

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)	$	51,316		51,316		—		—		—
Unused portion of home equity lines of credit(2)		33,715		33,715		—		—		—
Unused portion of construction loans(3)		82,986		82,986		—		—		—
Standby letters of credit		696		667		9		20		—
Total Other Commitments	$	168,713		168,684		9		20		—

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 180 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 Federal Home Loan Bank advances. 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, 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.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that existed in recent years, we implemented the following strategies to manage our interest rate risk: (i) emphasized variable rate loans including variable rate one- to four-family, and commercial loans as well as three- to five- year commercial balloon loans, (ii) reduced and shortened the expected average life of the investment portfolio; and (iii) whenever possible, lengthened the term structure of our deposit base and our borrowings from the Federal Home Loan Bank of Chicago. These measures should reduce the volatility of our net interest income in changing interest rate environments.

Income Simulation.Simulation analysis is an estimate of 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 uses projected repricing of assets and liabilities at September 30, 2006 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 would tend to lengthen more than the expected average lives of our liabilities and, therefore, would most likely result in an increase to our liability sensitive position.

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	Percentage
	Increase (Decrease) in Estimated Net
	Annual Interest Income
	Over 24 Months
300 basis point increase in rates		(19.40	)%
200 basis point increase in rates		(11.86	)
100 basis point increase in rates		(5.36	)
100 basis point decrease in rates		4.22

Wauwatosa Savings’ Asset/Liability policy limits projected changes in net average annual interest income to a maximum variance of (10%) to (50%) for various levels of interest rate changes measured over a 24-month period when compared to the flat rate scenario. In addition, projected changes in the capital ratio are limited to (.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, 2006, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing forecasted net interest income by 19.40%, while a 100 basis point decrease in rates had the affect of increasing net interest income by 4.22%. At September 30, 2006, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing the forecasted return on assets by 0.28%, while a 100 basis point decrease in rates had the effect of increasing the return on assets by 0.06%. At September 30, 2006, a 300 basis point immediate and instantaneous increase in interest rates had the effect of reducing the capital ratio by 0.26%, while a 100 basis point decrease in rates had the effect of increasing the capital ratio 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.

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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, 2006, 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 6.Exhibits

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

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WAUWATOSA HOLDINGS, INC.
	(Registrant)
Date: October 31, 2006
	/s/Donald J. Stephens
	Donald J. Stephens
	Chairman and Chief Executive Officer
Date: October 31, 2006
	/s/ Richard C. Larson
	Richard C. Larson
	Chief Financial Officer

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EXHIBIT INDEX

WAUWATOSA HOLDINGS, INC.

Form 10-Q for Quarter Ended September 30, 2006

Exhibit No.	Description	Filed Herewith
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chairman and 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 Chairman and 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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