Anchor BanCorp Wisconsin (ABCW) 10-Q 2009 Q3 Quarterly report

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, 2009

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

COMMISSION FILE NUMBER 0-20006

ANCHOR BANCORP WISCONSIN INC.

(Exact name of registrant as specified in its charter)

Wisconsin	39-1726871
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
25 West Main Street Madison, Wisconsin	53703
(Address of principal executive office)	(Zip Code)

(608) 252-8700

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyo

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

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class: Common stock — $.10 Par Value
Number of shares outstanding as of October 31, 2009: 21,589,792

ANCHOR BANCORP WISCONSIN INC.
INDEX — FORM 10-Q

	Page #
Part I — Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2009 and March 31, 2009	2
Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2009 and 2008	3
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2009	5
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2009 and 2008	6
Notes to Unaudited Consolidated Financial Statements	8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Results of Operations	44
Financial Condition	49
Asset Quality	51
Liquidity & Capital Resources	56
Guarantees	59
Asset/Liability Management	60
Item 3 Quantitative and Qualitative Disclosures About Market Risk	64
Item 4 Controls and Procedures	64
Part II — Other Information
Item 1 Legal Proceedings	67
Item 1A Risk Factors	67
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3 Defaults upon Senior Securities	75
Item 4 Submission of Matters to a Vote of Security Holders	75
Item 5 Other Information	75
Item 6 Exhibits	76
Signatures	77
EX-31.1
EX-31.2
EX-32.1
EX-32.2

1

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	September 30,			March 31,
	2009			2009
	(unaudited)
	(In Thousands, Except Share Data)
Assets
Cash	$	45,638		$	59,654
Interest-bearing deposits		324,384			374,172
Cash and cash equivalents		370,022			433,826
Investment securities available for sale		24,833			77,684
Mortgage-related securities available for sale		449,177			407,301
Mortgage-related securities held to maturity (fair value of $45 and $50, respectively)		44			50
Loans, less allowance for loan losses of $170,664 at September 30, 2009 and $137,165 at March 31, 2009:
Held for sale		28,904			161,964
Held for investment		3,506,464			3,896,439
Foreclosed properties and repossessed assets, net		38,431			52,563
Real estate held for development and sale		2,042			16,120
Office properties and equipment		47,396			48,123
Federal Home Loan Bank stock—at cost		54,829			54,829
Deferred tax asset, net of valuation allowance		—			16,202
Accrued interest and other assets		115,570			107,954
Total assets	$	4,637,712		$	5,273,055
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	295,096		$	274,392
Interest bearing deposits and accrued interest		3,444,901			3,649,435
Total deposits and accrued interest		3,739,997			3,923,827
Other borrowed funds		759,479			1,078,392
Other liabilities		57,161			56,704
Total liabilities		4,556,637			5,058,923
Commitments and contingent liabilities (Note 13)		—			—
Preferred stock, $.10 par value, 5,000,000 shares authorized, 110,000 shares issued and outstanding		77,900			74,185
Common stock, $.10 par value, 100,000,000 shares authorized, 25,363,339 shares issued, 21,589,792 and 21,569,785 shares outstanding, respectively		2,536			2,536
Additional paid-in capital		109,317			109,327
Retained earnings (deficit)		(7,645	)		134,234
Accumulated other comprehensive income related to AFS securities		4,759			10
Accumulated other comprehensive loss related to OTTI non credit issues		(6,125	)		(6,347	)
Total accumulated other comprehensive loss		(1,366	)		(6,337	)
Treasury stock (3,773,547 and 3,793,554 shares, respectively), at cost		(94,155	)		(94,744	)
Deferred compensation obligation		(5,512	)		(5,480	)
Total Anchor BanCorp stockholders’ equity		81,075			213,721
Non-controlling interest in real estate partnerships		—			411
Total liabilities and stockholders’ equity	$	4,637,712		$	5,273,055

See accompanying Notes to Unaudited Consolidated Financial Statements.

2

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009				2008
	(In Thousands, Except Per Share Data)
Interest income:
Loans	$	49,551		$	59,450		$	103,341			$	125,161
Mortgage-related securities		5,174			3,687			10,750				7,355
Investment securities and Federal Home Loan Bank stock		299			780			770				1,581
Interest-bearing deposits		361			71			630				399
Total interest income		55,385			63,988			115,491				134,496
Interest expense:
Deposits		23,040			23,898			47,173				50,740
Other borrowed funds		13,406			10,136			24,464				20,381
										��
Total interest expense		36,446			34,034			71,637				71,121
Net interest income		18,939			29,954			43,854				63,375
Provision for loan losses		60,900			46,964			131,300				56,364
Net interest income (loss) after provision for loan losses		(41,961	)		(17,010	)		(87,446	)			7,011
Non-interest income:
Loan servicing income		669			1,414			487				2,614
Credit enhancement income		319			479			696				896
Service charges on deposits		4,146			4,134			7,975				7,993
Investment and insurance commissions		798			1,073			1,602				2,254
Net gain on sale of loans		1,062			808			12,465				3,051
Net gain (loss) on sale of investments and mortgage-related securities		2,108			(1,902	)		3,613				(1,902	)
Total other than temporary losses		(874	)		—			(1,038	)			—
Portion of loss recognized in other comprehensive income		795			—			955				—
Reclassification from other comprehensive income		(107	)		—			(316	)			—
Net impairment losses recognized in earnings		(186	)		—			(399	)			—
Other revenue from real estate partnership operations		1,482			1,032			2,393				2,505
Other		460			1,209			1,586				2,645
Total non-interest income		10,858			8,247			30,418				20,056

(Continued)

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Operations(Cont’d)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
				(In Thousands, Except Per Share Data)
Non-interest expense:
Compensation	$	14,026		$	14,665		$	28,316		$	27,972
Occupancy		2,647			2,557			5,060			4,973
Federal insurance premiums		1,407			162			4,837			260
Furniture and equipment		2,092			2,067			4,142			4,193
Data processing		1,689			1,823			3,621			3,635
Marketing		642			741			1,015			1,327
Other expenses from real estate partnership operations		2,208			1,724			3,659			3,915
Net expense — REO operations		7,245			1,952			11,177			2,141
Mortgage servicing rights impairment recovery		(6	)		—			(1,350	)		—
Foreclosure cost advance impairment		—			—			3,708			—
Other		8,841			4,476			13,670			8,542
Total non-interest expense		40,791			30,167			77,855			56,958
Loss before income tax benefit		(71,894	)		(38,930	)		(134,883	)		(29,891	)
Income tax benefit		—			(15,618	)		—			(12,052	)
Net loss	$	(71,894	)	$	(23,312	)	$	(134,883	)	$	(17,839	)
(Income) loss attributable to non-controlling interest in real estate partnerships		(85	)		13			—			52
Preferred stock dividends and discount accretion		(3,228	)		—			(6,472	)		—
Net loss available to common equity of Anchor BanCorp	$	(75,207	)	$	(23,299	)	$	(141,355	)	$	(17,787	)
Comprehensive loss	$	(68,994	)	$	(24,048	)	$	(129,912	)	$	(23,435	)
Earnings (loss) per common share:
Basic	$	(3.56	)	$	(1.11	)	$	(6.68	)	$	(0.85	)
Diluted		(3.56	)		(1.11	)		(6.68	)		(0.85	)
Dividends declared per common share		—			0.10			—			0.28

See accompanying Notes to Unaudited Consolidated Financial Statements.

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

																				Accu-
																				mulated
																				Other
																				Compre-
	Non-							Additional			Retained						Deferred			hensive
	Controlling			Preferred		Common		Paid-in			Earnings			Treasury			Compensation			Income
	Interest			Stock		Stock		Capital			(Deficit)			Stock			Obligation			(Loss)			Total
											(Dollars in thousands except per share data)
Balance at April 1, 2009	$	411		$	74,185	$	2,536	$	109,327		$	134,234		$	(94,744	)	$	(5,480	)	$	(6,337	)	$	214,132
Comprehensive income (loss):
Net loss		—			—		—		—			(134,883	)		—			—			—			(134,883	)
Non-credit portion of other-than-temporary impairments:
Available-for-sale securities, net of tax of $0		—			—		—		—			—			—			—			(955	)		(955	)
Reclassification adjustment for net gains realized in income, net of tax of $0		—			—		—		—			—			—			—			(3,613	)		(3,613	)
Reclassification adjustment for credit portion of other-than-temporary investments realized in income, net of tax of $0		—			—		—		—			—			—			—			316			316
Change in net unrealized gains (losses) on available-for-sale securities net of tax of $0			—		—		—		—			—			—			—			9,223			9,223
Comprehensive loss																							$	(129,912	)
Change in non-controlling interest		(411	)		—		—		—			—			—			—			—			(411	)
Dividend on preferred stock		—			—		—		—			(2,757	)		—			—			—			(2,757	)
Issuance of treasury stock		—			—		—		—			(524	)		589			(32	)		—			33
Tax benefit from stock related compensation		—			—		—		(10	)		—			—			—			—			(10	)
Accretion of preferred stock discount		—			3,715		—		—			(3,715	)		—			—			—			—
Balance at September 30, 2009	$	—		$	77,900	$	2,536	$	109,317		$	(7,645	)	$	(94,155	)	$	(5,512	)	$	(1,366	)	$	81,075

See accompanying Notes to Unaudited Consolidated Financial Statements

5

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended September 30,
	2009			2008
	(In Thousands)
Operating Activities
Net loss	$	(134,883	)	$	(17,787	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		131,300			56,364
Provision for OREO losses		9,376			1,298
Provision for depreciation and amortization		2,599			2,682
Amortization and accretion of investment securities, net		88			(94	)
Amortization and accretion of mortgage related securities, net		764			—
Mortgage servicing rights recovery		(1,350	)		—
Foreclosure cost advance impairment		3,708			—
Cash paid due to origination of loans held for sale		(801,974	)		(268,929	)
Cash received due to sale of loans held for sale		947,499			277,550
Net gain on sales of loans		(12,465	)		(3,051	)
Net (gain) loss on investments and mortgage- related securities		(3,613	)		1,902
Loss on sale of foreclosed properties		130			39
Net loss on impairment of securities available for sale		399			—
Stock-based compensation expense		33			238
Decrease in accrued interest receivable		3,479			3,881
(Increase) decrease in prepaid expense and other assets		2,749			(29,777	)
Decrease in accrued interest payable on deposits		(2,162	)		(7,437	)
Decrease in other liabilities		(2,300	)		(4,660	)
Net cash provided by operating activities		143,377			12,219
Investing Activities
Proceeds from sales of investment securities available for sale		19,425			—
Proceeds from maturities of investment securities available for sale		46,965			23,691
Purchase of investment securities available for sale		(13,530	)		(52,744	)
Purchase of mortgage-related securities available for sale		(171,758	)		(42,602	)
Proceeds from sale of mortgage-related securities available for sale		128,645			—
Principal collected on mortgage-related securities		57,445			30,865
Net decrease in loans held for investment		197,355			48,620
Purchases of office properties and equipment		(1,911	)		(1,730	)
Sales of office properties and equipment		201			79
Proceeds from sale of foreclosed properties		17,068			6,564
Sale of investment in real estate held for development and sale		13,932			—
Purchase of investment in real estate held for development and sale		(16	)		(1,605	)
Net cash provided by investing activities		293,821			11,138

6

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows(Cont’d)
(Unaudited)

	Six Months Ended September 30,
	2009			2008
	(In Thousands)
Financing Activities
Decrease in deposit accounts	$	(181,668	)	$	(183,222	)
Proceeds from borrowed funds		257			487,582
Repayment of borrowed funds		(319,170	)		(483,765	)
Decrease in minority interest in real estate partnerships		(411	)		(52	)
Exercise of stock options		—			1,485
Tax benefit from stock related compensation		(10	)		(12	)
Payments of cash dividends to stockholders		—			(5,891	)
Net cash used in financing activities		(501,002	)		(183,875	)
Net decrease in cash and cash equivalents		(63,804	)		(160,518	)
Cash and cash equivalents at beginning of period		433,826			257,743
Cash and cash equivalents at end of period	$	370,022		$	97,225
Supplementary cash flow information:
Cash paid or credited to accounts:
Interest on deposits and borrowings	$	72,689		$	80,856
Income taxes		(7,048	)		9,155
Non-cash transactions:
Transfer of loans to foreclosed properties		12,442			28,480
Securitization of mortgage loans held for sale to mortgage-backed securities		48,878			—

See accompanying Notes to Unaudited Consolidated Financial Statements

7

ANCHOR BANCORP WISCONSIN INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Principles of Consolidation

The unaudited consolidated financial statements include the accounts and results of operations of Anchor BanCorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiaries, AnchorBank fsb (the “Bank”) and Investment Directions, Inc. (“IDI”). The Bank’s accounts and results of operations include its wholly-owned subsidiaries ADPC Corporation (“ADPC”) and Anchor Investment Corporation (“AIC”). Significant inter-company balances and transactions have been eliminated. The Corporation also consolidates certain variable interest entities (joint ventures and other 50% or less owned partnerships) to which the Corporation is the primary beneficiary pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810-10-15, “Consolidation.”

Note 2 — Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements have been included.

In preparing the unaudited consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets, and the fair value of financial instruments. The results of operations and other data for the three- and six-month periods ended September 30, 2009 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2010. We have evaluated all subsequent events through the date of this filing. See Note 18 - Subsequent Events for further discussion. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Corporation’s Annual Report for the year ended March 31, 2009.

The Corporation’s investment in real estate held for investment and sale includes 50% owned real estate partnerships which are considered variable interest entities (“VIE’s”) and therefore subject to the requirements of ASC 810-10-15. ASC 810-10-15 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.

Other revenue and other expenses from real estate operations are also included in non-interest income and non-interest expense, respectively.

Noncontrolling interest in real estate partnerships represents the equity interests of development partners in the real estate investment partnerships. The development partners’ share of income is reflected as non-controlling interest in income of consolidated real estate partnership operations.

Certain prior period accounts have been reclassified to conform to the current period presentations. The reclassifications had no impact on prior year’s net loss or stockholders’ equity.

8

Note 3 — Significant Risks and Uncertainties

While the Corporation has devoted and will continue to devote substantial management resources toward the resolution of all delinquent, impaired and nonaccrual loans, no assurance can be made that management’s efforts will be successful. These conditions create an uncertainty about material adverse consequences that may occur in the near term. The continuing recession and the valuations of real estate have had a significant adverse impact on the Corporation’s financial condition and results of operations. As reported in the accompanying consolidated financial statements, the Corporation has incurred a net loss of $72.0 million for the three months ended September 30, 2009 and a net loss of $134.9 million for the six months ended September 30, 2009. Stockholders’ equity decreased from $214.1 million or 4.06% of total assets at March 31, 2009 to $81.1 million or 1.75% of total assets at September 30, 2009. At September 30, 2009, the Bank’s Risk-based capital is considered undercapitalized for regulatory purposes. Additionally, the Bank’s Risk-based capital and Tier 1 capital ratios are considered below the target levels of the order to Cease and Desist dated June 26, 2009. However, the Bank’s Tier 1 capital is above the threshold to be adequately capitalized for regulatory purposes. The recent losses originate from a provision for loan losses of $131.3 million, for the six-month period ended September 30, 2009 along with an increase in nonaccrual loans which has reduced the Corporation’s net interest income. The Corporation’s net interest income will continue to be negatively impacted by the level of nonperforming assets and the Corporation expects additional losses for the remainder of the fiscal year.

Management of the Corporation has taken significant action in the credit area to limit any material adverse consequences. These efforts include the following:

1. Realigned corporate structure to ensure that risk is adequately and appropriately identified, mitigated and where possible, eliminated:

Ÿ	Appointed a Chief Credit Risk Officer responsible for overseeing all aspects of corporate risk.
Ÿ	Created a Special Assets Group to properly assess potential shortfall exposure and to develop workout plans.

2.	Created and implemented a new loan risk rating system using qualitative metrics to proactively identify loans with potential risk so they could be properly classified and monitored.
3.	Implemented a new enhanced analysis approach to reevaluate all classified loans greater than $500,000, which resulted in the following action items:

Ÿ	Established standard discount rates applied to collateral types.
Ÿ	Identified all related entities associated with existing impaired loans to ensure that the impairment analysis represents a more accurate and thorough picture of the total borrowing relationship.
Ÿ	Changed the criteria for evaluating impaired loans using the collateral methodology for a more accurate assessment. Collateral is now evaluated on a loan by loan basis rather than from a total collateral pool perspective.
Ÿ	Determined the appropriate amount of the loan to be charged off versus to be put into a specific reserve.

4. Incorporated policy improvements to further streamline and improve the timeliness of specific reserves taken for the allowance for loan and lease calculation:

Ÿ	Developed standard reserve percentage based on collateral type to replace the individual loan analysis for all relationships under $500,000, with the average reserve of that impaired pool now being used.
Ÿ	Loans identified as impaired are immediately downgraded and assigned a specific reserve based on collateral type as described in the previous point versus waiting until appraisal or other data is received.
Ÿ	Established a maximum period of 90 days for management to obtain all necessary information to complete the impairment analysis.

5. Analyzed the population of recent appraisals received and developed a specific reserve amount to capture the probable deterioration in value above and beyond that anticipated in the individual impaired loan reviews and for which the appraisals are pending.

9

6.	Established an independent underwriting group that evaluates the total borrowing relationship using a global cash flow methodology and develops an individual grade of the loan and relationship based on the new risk rating system.
7.	Proactive monitoring of matured and delinquent loans between 30 and 89 days delinquent.
8.	Review of a substantial portion of the performing (non-impaired) portfolio for performance issues. All relationships over $5 million have been reviewed with a completion date for reviews of all relationships of $1 to $5 million targeted for the middle of the third quarter of fiscal 2010.
9.	Determined that the amounts previously reported as non-performing and impaired improperly included loans for which loss was not probable. Non-performing loans, non-performing assets and impaired loans, and the related ratios, at March 31, 2009 have been adjusted as a result.

The Corporation and the Bank have consented to the issuance of an Order to Cease and Desist by the Office of Thrift Supervision. The Orders, which are further described in Note 17, place certain restrictions on the Corporation and the Bank.

Further, the Corporation is in violation of all financial covenants related to the Credit Agreement as described in Note 16. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if all covenants are not complied with. Currently, no such action has been taken by the Agent or the lenders. Accordingly, this creates significant uncertainty related to the Corporation’s operations.

Note 4 — Investment Securities

The amortized cost and fair values of investment securities are as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
At September 30, 2009:
Available for Sale:
U.S. Government and federal agency obligations	$	17,703	$	456	$	(42	)	$	18,117
Mutual funds		1,822		—		—			1,822
Other		4,810		107		(23	)		4,894
	$	24,335	$	563	$	(65	)	$	24,833

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
At March 31, 2009:
Available for Sale:
U.S. Government and federal agency obligations	$	48,471	$	501	$	(53	)	$	48,919
Municipal Bonds		21,768		524		(59	)		22,233
Mutual funds		1,797		—		—			1,797
Other		4,806		33		(104	)		4,735
	$	76,842	$	1,058	$	(216	)	$	77,684

The table below shows the Corporation’s gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at September 30, 2009 and March 31, 2009.

10

	At September 30, 2009
	Less than 12 months					12 months or more					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
	(In Thousands)
US government and Federal Agency Obligations	$	4,940	$	(42	)	$	—	$	—		$	4,940	$	(42	)
Other		—		—			64		(23	)		64		(23	)
Total temporarily impaired securities	$	4,940	$	(42	)	$	64	$	(23	)	$	5,004	$	(65	)

	At March 31, 2009
	Less than 12 months					12 months or more				Total
			Unrealized					Unrealized				Unrealized
Description of Securities	Fair Value		Loss			Fair Value		Loss		Fair Value		Loss
	(In Thousands)
US government and Federal Agency Obligations	$	24,832	$	(53	)	$	—	$	—	$	24,832	$	(53	)
Municipal Bonds		1,455		(59	)		—		—		1,455		(59	)
Other		151		(104	)		—		—		151		(104	)
Total temporarily impaired securities	$	26,438	$	(216	)	$	—	$	—	$	26,438	$	(216	)

The tables above represent two investment securities at September 30, 2009 compared to ten at March 31, 2009 that, due to the current interest rate environment and other factors, have declined in value but do not presently represent realized losses. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In estimating other-than-temporary impairment losses on investment securities, management considers many factors which include: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. To determine if an other-than-temporary impairment exists on a debt security, the Corporation first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Corporation will recognize an other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Corporation determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income (loss).

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.

11

Sales of investment securities available for sale are summarized below:

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
			(in millions)
Proceeds from sales	$	13.1	$	—	$	19.4	$	—
Gross gains on sales		0.3		—		0.4		—
Gross losses on sales		—		—		—		—
Net gain on sales	$	0.3	$	—	$	0.4	$	—

At September 30, 2009 and March 31, 2009, investment securities with a fair value of approximately $5.5 million and $46.3 million, respectively were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

The fair value of investment securities by contractual maturity at September 30, 2009 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. Investment securities subject to six-month calls amount to $7.0 million at September 30, 2009. Investment securities subject to twelve-month calls at September 30, 2009 are $500,000.

			After 1		After 5				Non-
			Year		Years				Maturity
	Within 1		through 5		through 10		Over Ten		Equity
	Year		Years		Years		Years		Investments		Total
					(Dollars in Thousands)
Available for Sale, at fair value:
U.S. government and Federal
Agency Obligations	$	3,043	$	10,134	$	—	$	4,940	$	—	$	18,117
Mutual fund		1,822		—		—		—		—		1,822
Other		3,599		25		—		1,164		106		4,894
Total Investment Securities	$	8,464	$	10,159	$	—	$	6,104	$	106	$	24,833

Note 5 — Mortgage-Related Securities

Some of the Corporation’s mortgage-backed securities are backed by government sponsored agencies, which include the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Government National Mortgage Association (“GNMA”) securities are backed by the full faith and credit of the United States Government. CMOs and REMICs are trusts which own securities backed by the government sponsored agencies noted above and GNMA. Mortgage-backed securities, CMOs and REMICs have estimated average lives of five years or less.

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The amortized cost and fair values of mortgage-related securities are as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
At September 30, 2009:
Available for Sale:
Agency CMOs and REMICs	$	138,936	$	2,225	$	(31	)	$	141,130
Non-agency CMOs		103,324		161		(9,090	)		94,395
Residential mortgage-backed securities		84,747		3,875		(32	)		88,590
GNMA Securities		124,072		1,130		(140	)		125,062
	$	451,079	$	7,391	$	(9,293	)	$	449,177
Held to Maturity:
Residential mortgage-backed securities	$	44	$	1	$	—		$	45
	$	44	$	1	$	—		$	45

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
At March 31, 2009:
Available for Sale:
Agency CMOs and REMICs	$	142,692	$	1,732	$	(429	)	$	143,995
Non-agency CMOs		119,503		333		(12,309	)		107,527
Residential mortgage-backed securities		97,562		3,221		(29	)		100,754
GNMA Securities		54,753		417		(145	)		55,025
	$	414,510	$	5,703	$	(12,912	)	$	407,301
Held to Maturity:
Residential mortgage-backed securities	$	50	$	—	$	—		$	50
	$	50	$	—	$	—		$	50

The table below shows the Corporation’s mortgage-related securities’ gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009 and March 31, 2009.

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	At September 30, 2009
	Less than 12 months					12 months or more					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
						(In Thousands)
Agency CMO/REMICs	$	10,494	$	(31	)	$	—	$	—		$	10,494	$	(31	)
Non-Agency CMO’s		13,159		(810	)		34,394		(2,155	)		47,553		(2,965	)
Residential Mortgage-backed securities		1,432		(32	)		—		—			1,432		(32	)
GNMA Securities		23,384		(140	)		—		—			23,384		(140	)
Total temporarily impaired securities	$	48,469	$	(1,013	)	$	34,394	$	(2,155	)	$	82,863	$	(3,168	)
Other than temporarily impaired securities	$	7,342	$	(226	)	$	24,039	$	(5,899	)		31,381		(6,125	)
Total temporary and other than temporarily impaired securities	$	55,811	$	(1,239	)	$	58,433	$	(8,054	)	$	114,244	$	(9,293	)

	At March 31, 2009
	Less than 12 months					12 months or more					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
						(In Thousands)
Agency CMO/REMICs	$	43,931	$	(429	)	$	—	$	—		$	43,931	$	(429	)
Non-Agency CMO’s		33,715		(2,874	)		34,265		(3,014	)		67,980		(5,888	)
Residential Mortgage-backed securities		3,892		(29	)		—		—			3,892		(29	)
GNMA Securities		24,049		(135	)		1,803		(10	)		25,852		(145	)
	$	105,587	$	(3,467	)	$	36,068	$	(3,024	)	$	141,655	$	(6,491	)
Other than temporarily impaired securities	$	8,892	$	(2,281	)	$	11,211	$	(4,140	)		20,103		(6,421	)
Total temporary and other than temporarily impaired securities	$	114,479	$	(5,748	)	$	47,279	$	(7,164	)	$	161,758	$	(12,912	)

The tables above represent 38 securities at September 30, 2009 and 72 securities at March 31, 2009 that, due to the current interest rate environment and other factors, have declined in value but do not presently represent realized losses. Management evaluates securities for other-than-temporary impairment losses at least on a quarterly basis. To determine if an other-than-temporary impairment exists on a debt security, the Corporation first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Corporation will recognize an other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Corporation determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows

14

expected to be collected and the amortized cost basis is the credit loss. The credit loss is the amount of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The amount of total impairment related to all other factors is included in other comprehensive income.

The Corporation utilizes a discounted cash flow model to determine fair value, which is also used in the calculation of other-than-temporary impairments on non-agency CMOs. This model is also used to determine the portion of the other-than-temporary impairment that is due to credit losses, and the portion that is due to all other factors. On securities with other-than-temporary impairment, the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security is the credit loss.

The significant inputs used for calculating the credit loss portion of the OTTI include prepayment assumptions, loss severities, original FICO scores, historical rates of delinquency, percentage of loans with limited underwriting, historical rates of default, original loan-to-value ratio, aggregate property location by metropolitan statistical area, estimated loan to value ratio at the valuation date, original credit support, current credit support, and weighted-averaged maturity. The discount rate utilized to establish the net present value of projected cash flows ranged from 6% to 17%, depending upon the characteristics and estimated performance of each security. Default rates were based on current, 30 to 59 days delinquent, 60 to 89 days delinquent, 90+ days delinquent, and foreclosure balances of the loans as of September 1, 2009. These balances were entered into a loss migration model to calculate projected default rates, which are benchmarked against results that have recently been experienced by other major servicers on non-agency CMOs with similar attributes. The projected default rates used in the model ranged from 0.25% to 11.7%. In establishing the fair value of the securities, a discount rate of 6% to 15% was utilized. There are no payments in kind allowed on these non-agency CMOs.

Based on the Corporation’s impairment testing as of September 30, 2009, thirteen non-agency CMOs with a fair value of $31.4 million and an adjusted cost of $37.5 million were other-than-temporarily impaired. The portion of the other-than-temporary impairment due to credit of $186,000 and $399,000 was included in earnings for the three- and six-month periods ending September 30, 2009, respectively.

On a cumulative basis, other-than-temporary impairments due to credit were $1.2 million. Total unrealized losses on these securities were $7.3 million. The difference between the total unrealized losses of $7.3 million and the credit loss of $1.2 million, or $6.1 million, was charged against other comprehensive income. All of the Corporation’s other-than-temporary impaired debt securities are non-agency CMOs.

The following table summarizes the fair value of thirteen other-than-temporarily impaired non-agency CMOs by year of vintage, credit rating, and collateral loan type. This table also includes a breakout of OTTI between impairment due to credit loss and impairment due to other factors.

														Total OTTI			Total OTTI
	Year of Vintage													Related to			Related to
	Prior to 2005		2005		2006		2007		Total		Total OTTI			Credit Loss			Other Factors
	(in thousands)
Total Non-Agency CMOs Rating:
AAA	$	—	$	—	$	3,951	$	—	$	7,610	$	(225	)	$	(124	)	$	(101	)
AA		—		—		—		2,789		7,814		(1,083	)		(177	)		(906	)
A		1,515				—		—		3,347		(274	)		(18	)		(256	)
BBB		1,392		3,104		—		—		—		(710	)		(67	)		(643	)
BB and below		—		6,083		2,717		9,829		7,343		(5,036	)		(817	)		(4,219	)
Total Non-Agency CMOs	$	2,908	$	9,187	$	6,668	$	12,618	$	31,381	$	(7,328	)	$	(1,203	)	$	(6,125	)

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Cumulative other-than-temporary impairments related to credit loss by year of vintage were $633,000 for 2007, $330,000 for 2006, $215,000 for 2005 and $25,000 prior to 2005.

The following table is a rollforward of the amount of other-than-temporary impairment related to credit losses that have been recognized in earnings for the three and six months ended September 30, 2009:

	Three Months Ended		Six Months Ended
	September 30, 2009		September 30, 2009
Beginning balance of the amount of OTTI related to credit losses	$	1,018	$	805
The credit portion of other-than-temporary-impairment not previously recognized		79		83
Additional increases to the amount related to the credit loss for which OTTI was previously recognized		107		316
Ending balance of the amount of OTTI related to credit losses	$	1,203	$	1,203

Sales of mortgage-related securities are summarized below.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
			(in millions)
Proceeds from sales	$	88.3	$	—	$	128.6	$	—
Gross gains on sales		1.8		—		3.2		—
Gross losses on sales		—		—		—		—
Net gain on sales	$	1.8	$	—	$	3.2	$	—

At September 30, 2009 and March 31, 2009, mortgage-related securities available for sale with a fair value of approximately $354.1 million and $325.4 million, respectively, were pledged to secure deposits, borrowings and for other purposes as permitted or required by law.

The fair value of mortgage-related securities at September 30, 2009, by contractual maturity, is shown below. Given certain interest rate environments, some or all of these securities may be called by their issuers prior to the scheduled maturities. Maturities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without penalties.

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			After 1		After 5
			Year		Years
	Within 1		through 5		through 10		Over Ten
	Year		Years		Years		Years		Total
			(Dollars In Thousands)
Mortgage-related securities available for Sale, at fair value:
Agency CMOs and REMICs	$	—	$	—	$	15,331	$	125,799	$	141,130
Non-agency CMOs		—		43		21,134		73,218		94,395
Residential Mortgage-backed securities		948		1,114		44,412		42,116		88,590
GNMA Secrurities		—		—		4,872		120,190		125,062
Total	$	948	$	1,157	$	85,749	$	361,323	$	449,177
Held to Maturity, at fair value:
Residential Mortgage-backed securities	$	—	$	—	$	45	$	—	$	45
Total	$	—	$	—	$	45	$	—	$	45
Total Mortgage-related securities	$	948	$	1,157	$	85,794	$	361,323	$	449,222
Held to Maturity, at cost:
Residential Mortgage-backed securities	$	—	$	—	$	44	$	—	$	44

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Note 6 — Loans Receivable

Loans receivable held for investment consist of the following (in thousands):

	September 30,			March 31,
	2009			2009
First mortgage loans:
Single-family residential	$	800,936		$	843,482
Multi-family residential		615,453			662,483
Commercial real estate		903,553			1,020,981
Construction		191,946			267,375
Land		246,171			266,756
		2,758,059			3,061,077
Second mortgage loans		378,614			394,708
Education loans		351,220			358,784
Commercial business loans and leases		201,283			238,940
Credit card and other consumer loans		29,465			56,302
		3,718,641			4,109,811
Contras to loans:
Undisbursed loan proceeds*		(37,276	)		(71,672	)
Allowance for loan losses		(170,664	)		(137,165	)
Unearned loan fees		(4,161	)		(4,441	)
Net discount on loans purchased		(9	)		(10	)
Unearned interest		(67	)		(84	)
		(212,177	)		(213,372	)
	$	3,506,464		$	3,896,439

* Undisbursed loan proceeds are funds to be disbursed upon an authorized draw request.

A summary of the activity in the allowance for loan losses follows:

	Three Months Ended September 30,						Six Months Ended September 30,
	2009			2008			2009			2008
	(Dollars In Thousands)						(Dollars In Thousands)
Allowance at beginning of period	$	139,455		$	40,265		$	137,165		$	38,285
Provision		60,900			46,964			131,300			56,364
Charge-offs		(30,488	)		(23,556	)		(99,661	)		(30,982	)
Recoveries		797			941			1,860			947
Allowance at end of period	$	170,664		$	64,614		$	170,664		$	64,614

As of September 30, 2009, the Corporation had loans totaling $60.4 million that have an interest reserve. For these loans, no payments are typically received from the borrower since accumulated interest is added to the principal of the loan through the interest reserve. If appraisal values relating to these real estate secured loans, which include various assumptions, prove to be overstated and/or decline over the contractual term of the loan, the Corporation

18

may have inadequate security for the repayment of the loan. As of September 30, 2009, $26.1 million of our impaired loans have an interest reserve.

At September 30, 2009, the Corporation has identified $415.1 million of loans as impaired. A loan is identified as impaired when, according to ASC 310-10-35, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans considered trouble debt restructurings (TDRs), all loans 90 days or more delinquent and loans less than 90 days delinquent and for which management has determined a loss is probable. A summary of the details regarding impaired loans follows:

	At September 30,			At March 31,
	2009			2009			2008			2007
				(In Thousands)
Impaired loans with valuation reserve required	$	170,395		$	124,179		$	52,866		$	2,130
Impaired loans without a specific reserve		244,684			103,635			51,192			45,718
Total impaired loans		415,079			227,814			104,058			47,848
Less:
Specific valuation allowance		(35,356	)		(30,799	)		(17,639	)		(517	)
	$	379,723		$	197,015		$	86,419		$	47,331
Average impaired loans	$	292,050		$	194,923		$	67,138		$	26,458
Interest income recognized on impaired loans	$	7,264		$	9,484		$	107		$	44
Loans on nonaccrual status	$	288,027		$	166,354		$	101,241		$	47,040
Loans past due ninety days or more and still accruing	$	—		$	—		$	—		$	—
Troubled debt restructurings — nonaccrual	$	127,052		$	61,460		$	400		$	400
Troubled debt restructurings — accrual	$	—		$	—		$	—		$	—

Total impaired loans have increased $187.3 million since March 31, 2009. This increase is the result of certain steps taken by the Corporation in an effort to eliminate or limit any further material adverse consequences. See Note 3 — Significant Risks and Uncertainties for further discussion.

The Corporation is currently committed to lend approximately $12.0 million in additional funds on these impaired loans in accordance with the original terms of these loans; however, the Corporation is not legally obligated to, and will not, disburse additional funds on any loans while in nonaccrual status. Of the $12.0 million in committed funds all of it is applicable to nonaccrual loans at September 30, 2009.

The Corporation has experienced declines in the current valuations for real estate collateral supporting portions of its loan portfolio, primarily residential construction and residential land loans, throughout calendar year 2008 and 2009, as reflected in recently received appraisals. Currently, $283.9 million or approximately 55.2% of impaired loans secured by real estate have recent appraisals (i.e. within one year).

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Note 7 — Other Intangible Assets

The Corporation has other intangible assets consisting of core deposit intangibles with a remaining weighted average amortization period of approximately 7 years. The core deposit premium had a carrying amount and a value net of accumulated amortization of $4.4 million and $4.7 million at September 30, 2009 and March 31, 2009, respectively.

The following tables present the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization and net book value as of September 30, 2009 and March 31, 2009.

	For the			For the
	Six Months Ended			Year Ended
	September 30,			March 31,
	2009			2009
	(In Thousands)
Balance at beginning of period	$	4,725		$	5,359
Amortization expense		(317	)		(634	)
Balance at end of period	$	4,408		$	4,725

	September 30,			March 31,
	2009			2009
	(In Thousands)
Gross carrying amount	$	5,517		$	5,517
Accumulated amortization		(1,109	)		(792	)
Net book value	$	4,408		$	4,725

The Corporation adopted ASC 860-50, “Transfers and Servicing” (ASC 860-50) as of April 1, 2006. ASC 860-50 changes the way the Corporation accounts for servicing assets and obligations associated with financial assets disposed of or acquired. Mortgage servicing rights (MSRs) are recorded when loans are sold to third-parties with servicing of those loans retained. In addition, MSRs are recorded when acquiring or assuming an obligation to service a financial (loan) asset that does not relate to a financial asset that is owned. The servicing asset is initially measured at fair value. The Corporation has chosen to use the amortization method to measure each class of separately recognized servicing assets. Under the amortization method, the Corporation amortizes servicing assets in proportion to and over the period of net servicing income. Income generated as the result of new servicing assets is reported as net gain on sale of loans and the amortization of servicing assets is reported as a reduction to loan servicing income in the Corporation’s consolidated statements of income. Ancillary income is recorded in other non-interest income. The Corporation has defined two classes of MSRs to be accounted for under ASC 860-50 — residential (one to four family) and large multi-family/commercial real estate serviced for private investors.

The first class, residential MSRs, are servicing rights on one to four family mortgage loans sold to public agencies and servicing assets related to the FHLB MPF program. The Corporation obtained a servicing asset when we delivered loans “as an agent” to the FHLB of Chicago under its MPF program. Initial fair value of these residential mortgage servicing rights is calculated by a discounted cash flow model based on market value assumptions at the time of origination. In addition, this class includes servicing rights purchased from other banks for residential loans at an agreed upon purchase price which becomes the initial fair value. The Corporation assesses individual strata within this class for impairment using a discounted cash flow model based on current market value assumptions at each reporting period. A strata is a group of servicing rights with similar terms and rates.

The other class of mortgage servicing rights is for large multi-family/commercial real estate loans partially sold to private investors. The initial fair value is calculated by a discounted cash flow model based on market value assumptions at the time of origination at each reporting period.

20

Critical assumptions used in the discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in the assumptions could materially affect the estimated fair values. Changes to the assumptions are made when current trends and market data indicate that new trends have developed. Current market value assumptions based on loan product types — fixed rate, adjustable rate and balloon loans — include discount rates in the range of 10 to 21 percent as well as total portfolio weighted average prepayment speeds of 13 to 15 percent annual CPR. Many of these assumptions are subjective and require a high level of management judgment. MSR valuation assumptions are reviewed and approved by management on a quarterly basis.

Prepayment speeds may be affected by economic factors such as home price appreciation, market interest rates, the availability of other credit products to our borrowers and customer payment patterns. Prepayment speeds include the impact of all borrower prepayments, including full payoffs, additional principal payments and the impact of loans paid off due to foreclosure liquidations. As market interest rates decline, prepayment speeds will generally increase as customers refinance existing mortgages under more favorable interest rate terms. As prepayment speeds increase, anticipated cash flows will generally decline resulting in a potential reduction, or impairment, to the fair value of the capitalized MSRs. Alternatively, an increase in market interest rates may cause a decrease in prepayment speeds and therefore an increase in fair value of MSRs. Annually, external data is obtained to test the values and assumptions that are used in the initial valuations for the discounted cash flow model.

21

Information regarding the Corporation’s mortgage servicing rights follows:

	Residential			Other
	(In Thousands)
Mortgage servicing rights as of March 31, 2008	$	11,698		$	1,478
Additions		10,087			142
Amortization		(4,623	)		(362	)
Mortgage servicing rights before valuation allowance at end of period		17,162			1,258
Valuation allowance		(2,407	)		—
Net mortgage servicing rights as of March 31, 2009	$	14,755		$	1,258
Fair market value at the end of the period	$	15,292		$	1,662
Key assumptions:
Weighted average discount		11.14	%		21.12	%
Weighted average prepayment speed assumption		17.99	%		24.39	%
Mortgage servicing rights as of March 31, 2009	$	17,162		$	1,258
Additions		9,123			1
Amortization		(3,554	)		(135	)
Mortgage servicing rights before valuation allowance at end of period		22,731			1,124
Valuation allowance		(1,057	)		—
Net mortgage servicing rights as of September 30, 2009	$	21,674		$	1,124
Fair market value at the end of the period	$	21,954		$	1,681
Key assumptions:
Weighted average discount		10.74	%		20.83	%
Weighted average prepayment speed assumption		13.56	%		24.28	%

The projections of amortization expense for mortgage servicing rights and the core deposit premium set forth below are based on asset balances and the interest rate environment as of September 30, 2009. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

	Residential		Other		Core
	Mortgage		Mortgage		Deposit
	Servicing Rights		Servicing Rights		Premium		Total
	(In Thousands)
Quarter ended September 30, 2009 (actual)	$	1,434	$	63	$	158	$	1,655
Estimate for the year ended March 31,
2010	$	7,108	$	270	$	634	$	8,012
2011		7,108		270		634		8,012
2012		7,108		270		634		8,012
2013		350		270		634		1,254
Thereafter		—		44		1,872		1,916
	$	21,674	$	1,124	$	4,408	$	27,206

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Note 8 — Federal Home Loan Bank Stock

The Corporation views its investment in the Federal Home Loan Bank (“FHLB”) stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: 1) the significance of the decline in net assets of the FHLBs as compared to the capital stock amount and length of time a decline has persisted; 2) impact of legislative and regulatory changes on the FHLB and 3) the liquidity position of the FHLB.

The FHLB of Chicago filed an SEC form 10-Q on November 12, 2009 announcing its financial results for the third quarter of 2009. The FHLB of Chicago reported net loss of $150 million for third quarter of 2009, compared to net income of $33 million in the same period of the previous year. This $183 million decrease in net income was due to increases in other-than-temporary impairment charges of $160 million and a decrease in derivatives and hedging activities income of $132 million. These items were partially offset by an increase in net interest income of $91 million. The FHLB of Chicago is under a cease and desist order that restricts capital stock repurchases and redemptions. The FHLB of Chicago reported regulatory capital at September 30, 2009 of 5.16%, which was above its regulatory requirement of 4.76%. The FHLB of Chicago did not pay any dividends in 2008. The Corporation has concluded that its investment in the FHLB Chicago is not impaired as of September 30, 2009. However, this estimate could change in the near term by the following: 1) significant OTTI losses are incurred on the MBS causing a significant decline in their regulatory capital status; 2) the economic losses resulting from credit deterioration on the MBS increases significantly and 3) capital preservation strategies being utilized by the FHLB become ineffective.

Note 9 — Recent Accounting Pronouncements

In November 2007, the Financial Accounting Standards Board (“FASB”) Accounting Codification Statement (“ASC”) 810-10 “Non-controlling Interest in Consolidated Financial Statements — an amendment to ASC 860-10”was issued.ASC 810-10 changes the way consolidated net earnings are presented. The new standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest and will require disclosure on the face of the consolidated statement of operations amounts attributable to the parent and the non-controlling interest. The adoption of this statement will result in more transparent reporting of the net earnings attributable to the non-controlling interest. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. ASC 810-10 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Corporation adopted ASC 810-10 on April 1, 2009 and the adoption did not have a significant impact on the Corporation’s financial statements.

On December 4, 2007, the FASB issued FASB ASC 805-10, “Business Combinations.” ASC 805-10 will significantly change the accounting for business combinations. Under ASC 805-10, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. ASC 805-10 will change the accounting treatment for certain specific items, including:

• acquisition costs will be generally expensed as incurred;

• noncontrolling interests (formerly known as “minority interests”) will be recorded at fair value at the acquisition date;

• the acquirer shall not recognize a separate valuation allowance as of the acquisition date for assets acquired in a business that are measured at their acquisition-date fair value;

• restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

• changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

ASC 805-10 also includes a substantial number of new disclosure requirements. ASC 805-10 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation adopted ASC 805-10 on April 1, 2009 and did not have a significant impact on the Corporation’s financial statements.

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The FASB issued ASC 805-20, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” ASC 805-20 amends the guidance in ASC 805-10 to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC 942-310-25, “Accounting for Contingencies,” and ASC 450-20, “Reasonable Estimation of the Amount of a Loss.” ASC 805-20 removes subsequent accounting guidance for assets and liabilities arising from contingencies from ASC 805-10 and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. ASC 805-20 eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required by ASC 942-310-25. ASC 805-20 also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with ASC 805-10. ASC 805-20 is effective for assets or liabilities arising from contingencies the Corporation acquires in business combinations occurring after January 1, 2009.

In February 2008, the FASB issued ASC 860-10 “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” ASC 860-10 requires the initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with or in contemplation of the initial transfer, to be treated as a linked transaction under ASC 860-10, unless certain criteria are met, in which case the initial transfer and repurchase will not be evaluated as a linked transaction, but will be evaluated separately under ASC 860-10. ASC 860-10 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of ASC 860-10 did not have a significant impact on the Corporation’s financial statements.

In June 2008, the FASB issued ASC 350-10, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” ASC 350-10 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 350-10 is effective for fiscal years beginning after December 15, 2008, on a retrospective basis and will be adopted by the Company in the first quarter of the fiscal year ended March 31, 2010. The Corporation has some grants of restricted stock that contain non-forfeitable rights to dividends and will be considered participating securities upon adoption of ASC 350-10. As participating securities, the Corporation would be required to include these instruments in the calculation of earnings per share (EPS), and it will need to calculate EPS using the “two-class method.” The Corporation is currently evaluating the potential impact, if any, the adoption of ASC 350-10 could have on its calculation of EPS.

In April 2009, the FASB issued ASC 320-10 “Recognition and Presentation of Other-Than-Temporary Impairments.” ASC 320-10 amended the other-than-temporary guidance to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. ASC 320-10 modifies the current indicator that, to avoid considering an impairment to be other-than-temporary, management must assert that it has both the intent and ability to hold an impaired security for a period of time sufficient to allow for any anticipated recovery in fair value. ASC 320-10 would require management to assert that (a) it does not have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before its recovery. ASC 320-10 changes the total amount recognized in earnings when there are factors other than credit losses associated with an impairment of a debt security. The impairment is separated into impairments related to credit losses and impairments related to all other factors with only the portion of impairment related to credit losses included in earnings in the current period. ASC 320-10 is effective for interim and annual reporting periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Corporation has early adopted ASC 320-10 as of January 1, 2009. The bank recognized in earnings $213,000 and $805,000 of credit related other-than-temporary impairments on its non-agency mortgage-related securities portfolio during the quarter ending September 30, 2009 and March 31, 2009, respectively.

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In April 2009, FASB issued ASC 820-10, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” ASC 820-10 provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under ASC 820-10 “Fair Value Measurements.” ASC 820-10 is effective for interim and annual periods ending after June 15, 2009. The Corporation early adopted ASC 820-10 as of January 1, 2009. In April 2009, FASB also issued ASC 825-10 and ASC 270-10, “Interim Disclosures about Fair Value of Financial Instrument.” ASC 825-10 and ASC 270-10 require disclosures about fair value of financial instruments in interim periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of ASC 825-10 and ASC 270-10 were effective for the interim period ending June 30, 2009. Early adoption was permitted for periods ending after March 15, 2009. The Corporation has early adopted ASC 820-10 and ASC 270-10 for the period ending March 31, 2009. The disclosures required by ASC 820-10 and ASC 270-10 are included in the financial statements.

The FASB has issued FASB ASC 855-10, “Subsequent Events.” ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, ASC 855-10 provides:

• The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

• The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

• The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

ASC 855-10 became effective for the Corporation on June 30, 2009.

Topic 860 “Accounting for Transfers of Financial Assets, an Amendment of ASC 860-10” amends ASC 860-10, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASC 860-10 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASC 860-10 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. ASC 860-10 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. Management is currently evaluating the provisions of ASC 810-10 and their potential effect on its financial statements.

ASC 810-10, “Amendments to ASC 810-10, Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASC 810-10 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. ASC 810-10 will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. Management is currently evaluating the provisions of ASC 810-10 and their potential effect on its financial statements.

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Note 10 — Regulatory Capital

The following summarizes the Bank’s capital levels and ratios and the levels and ratios required by the OTS at September 30, 2009 and March 31, 2009:

											Minimum Required
						Minimum Required					to be Well
						For Capital					Capitalized Under
	Actual					Adequacy Purposes					OTS Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
At September 30, 2009:
Tier 1 capital (to adjusted tangible assets)	$	198,606		4.28	%	$	139,109		3.00	%	$	231,849		5.00	%
Risk-based capital (to risk-based assets)		239,673		7.59			252,459		8.00			315,574		10.00
Tangible capital (to tangible assets)		198,606		4.28			69,555		1.50			N/A		N/A
At March 31, 2009:
Tier 1 capital (to adjusted tangible assets)	$	324,130		6.17	%	$	157,527		3.00	%	$	262,545		5.00	%
Risk-based capital (to risk-based assets)		370,680		10.20			290,670		8.00			363,338		10.00
Tangible capital (to tangible assets)		324,130		6.17			78,763		1.50			N/A		N/A

At September 30, 2009, the Bank’s Risk-based capital is considered undercapitalized for regulatory purposes. Additionally, the Bank’s Risk-based capital and Tier 1 capital ratios are considered below the target levels of the order to Cease and Desist dated June 26, 2009. However, the Bank’s Tier 1 capital is above the threshold to be adequately capitalized for regulatory purposes. The following table reconciles the Bank’s stockholders’ equity to regulatory capital at September 30, 2009 and March 31, 2009:

	September 30,			March 31,
	2009			2009
	(In Thousands)
Stockholders’ equity of the Bank	$	201,577		$	322,505
Less: Goodwill and intangible assets		(4,408	)		(4,725	)
Accumulated other comprehensive income		1,437			6,350
Tier 1 and tangible capital		198,606			324,130
Plus: Allowable general valuation allowances		41,067			46,550
Risk-based capital	$	239,673		$	370,680

Note 11 — Earnings Per Share

Basic earnings per share for the three and six months ended September 30, 2009 and 2008 have been determined by dividing net income for the respective periods by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of

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common shares outstanding plus the effect of dilutive securities. The effects of dilutive securities are computed using the treasury stock method.

	Three Months Ended September 30,
	2009			2008
	(in thousands)
Numerator:
Numerator for basic and diluted earnings per share—loss available to common stockholders	$	(75,207	)	$	(23,299	)
Denominator:
Denominator for basic earnings per share—weighted-average shares		21,155			20,985
Effect of dilutive securities:
Employee stock options		—			—
Management Recognition Plans		—			—
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,155			20,985
Basic earnings (loss) per common share	$	(3.56	)	$	(1.11	)
Diluted earnings (loss) per common share	$	(3.56	)	$	(1.11	)

	Six Months Ended September 30,
	2009			2008
	(in thousands)
Numerator:
Numerator for basic and diluted earnings per share—loss available to common stockholders	$	(141,355	)	$	(17,787	)
Denominator:
Denominator for basic earnings per share—weighted-average shares		21,150			20,957
Effect of dilutive securities:
Employee stock options		—			—
Management Recognition Plans		—			—
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,150			20,957
Basic earnings (loss) per common share	$	(6.68	)	$	(0.85	)
Diluted earnings (loss) per common share	$	(6.68	)	$	(0.85	)

At September 30, 2009, approximately 511,000 stock options and restricted stock grants were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

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Note 12 — Segment Information

The Corporation provides a full range of banking services, as well as real estate investments through its two consolidated subsidiaries. The Corporation manages its business with a primary focus on each subsidiary. Thus, the Corporation has identified two reportable operating segments. The Corporation has not aggregated any operating segments.

Community Banking:This segment is the main basis of operation for the Corporation and includes the branch network and other deposit support services; origination, sales and servicing of one-to-four family loans; origination of multifamily, commercial real estate and business loans; origination of a variety of consumer loans; and sales of alternative financial investments such as tax deferred annuities.

Real Estate Investments:The Corporation’s non-banking subsidiary, IDI, invested in limited partnerships in real estate developments. Such developments included recreational residential developments. During the quarter ended September 30, 2009, IDI sold its interest in the limited partnerships as well as the golf course and resort, which included some developed lots. The assets that remain at IDI include an equity interest in one commercial real estate property and one real estate development along with various notes receivable.

The following represents reconciliations of reportable segment revenues, expenses and assets to the Corporation’s consolidated totals for the three and six months ended September 30, 2009 and 2008, respectively.

	Three Months Ended September 30, 2009
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	18		$	55,368		$	(1	)	$	55,385
Interest expense		—			36,447			(1	)		36,446
Net interest income		18			18,921			—			18,939
Provision for loan losses		—			60,900			—			60,900
Net interest loss after provision for loan losses		18			(41,979	)		—			(41,961	)
Real estate investment partnership revenue		—			—			—			—
Other revenue from real estate operations		1,482			—			—			1,482
Other income		—			9,376			—			9,376
Real estate investment partnership cost of sales		—			—			—			—
Other expense from real estate partnership operations		(2,208	)		—			—			(2,208	)
Non-controlling interest in income of real estate partnerships		(85	)		—			—			(85	)
Other expense		—			(38,583	)		—			(38,583	)
Loss before income taxes		(793	)		(71,186	)		—			(71,979	)
Income tax expense		8			(8	)		—			—
Net loss	$	(801	)	$	(71,178	)	$	—		$	(71,979	)
Total assets at end of period	$	7,651		$	4,630,061		$	—		$	4,637,712

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	Three Months Ended September 30, 2008
	(In Thousands)
											Consolidated
	Real Estate				Community			Intersegment			Financial
	Investments				Banking			Eliminations			Statements
Interest income	$	34			$	64,267		$	(313	)	$	63,988
Interest expense		291				34,056			(313	)		34,034
Net interest income (loss)		(257	)			30,211			—			29,954
Provision for loan losses		—				46,964			—			46,964
Net interest loss after provision for loan losses		(257	)			(16,753	)		—			(17,010	)
Real estate investment partnership revenue		—				—			—			—
Other revenue from real estate operations		1,032				—			—			1,032
Other income		—				7,245			(30	)		7,215
Real estate investment partnership cost of sales		—				—			—			—
Other expense from real estate partnership operations		(1,754	)			—			30			(1,724	)
Non-controlling interest in loss of real estate partnerships		13				—			—			13
Other expense		—				(28,443	)		—			(28,443	)
				��
Loss before income taxes		(966	)			(37,951	)		—			(38,917	)
Income tax benefit		(375	)			(15,243	)		—			(15,618	)
Net loss	$	(591	)		$	(22,708	)	$	—		$	(23,299	)
Total assets at end of period	$	71,390			$	4,856,684		$	—		$	4,928,074
Goodwill	$	—			$	72,181		$	—		$	72,181

	Six Months Ended September 30, 2009
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	36		$	115,596		$	(141	)	$	115,491
Interest expense		129			71,649			(141	)		71,637
Net interest income (loss)		(93	)		43,947			—			43,854
Provision for loan losses		—			131,300			—			131,300
Net interest income (loss) after provision for loan losses		(93	)		(87,353	)		—			(87,446	)
Real estate investment partnership revenue		—			—			—			—
Other revenue from real estate operations		2,393			—			—			2,393
Other income		—			28,025			—			28,025
Real estate investment partnership cost of sales		—			—			—			—
Other expense from real estate partnership operations		(3,659	)		—			—			(3,659	)
Non-controlling interest in income of real estate partnerships		—			—			—			—
Other expense		—			(74,196	)		—			(74,196	)
Income (loss) before income taxes		(1,359	)		(133,524	)		—			(134,883	)
Income tax (benefit) expense		8			(8	)		—			—
Net income (loss)	$	(1,367	)	$	(133,516	)	$	—		$	(134,883	)
Total assets at end of period	$	7,651		$	4,630,061		$	—		$	4,637,712

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	Six Months Ended September 30, 2008
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	61		$	135,087		$	(652	)	$	134,496
Interest expense		602			71,171			(652	)		71,121
Net interest income (loss)		(541	)		63,916			—			63,375
Provision for loan losses		—			56,364			—			56,364
Net interest income (loss) after provision for loan losses		(541	)		7,552			—			7,011
Real estate investment partnership revenue		—			—			—			—
Other revenue from real estate operations		2,505			—			—			2,505
Other income		—			17,610			(59	)		17,551
Real estate investment partnership cost of sales		—			—			—			—
Other expense from real estate partnership operations		(3,974	)		—			59			(3,915	)
Non-controlling interest in loss of real estate partnerships		52			—			—			52
Other expense		—			(53,043	)		—			(53,043	)
Income (loss) before income taxes		(1,958	)		(27,881	)		—			(29,839	)
Income tax (benefit) expense		(739	)		(11,313	)		—			(12,052	)
Net income (loss)	$	(1,219	)	$	(16,568	)	$	—		$	(17,787	)
Total assets at end of period	$	71,390		$	4,856,684		$	—		$	4,928,074
Goodwill	$	—		$	72,181		$	—		$	72,181

Note 13 — Commitments and Contingent Liabilities

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and financial guarantees which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement and exposure to credit loss the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements.

Financial instruments whose contract amounts represent credit risk are as follows (in thousands):

	September 30,		March 31,
	2009		2009
Commitments to extend credit:	$	14,709	$	52,427
Unused lines of credit:
Home equity		142,792		144,662
Credit cards		36,226		37,602
Commercial		58,081		89,300
Letters of credit		17,709		20,694
Credit enhancement under the Federal
Home Loan Bank of Chicago Mortgage
Partnership Finance Program		23,463		23,527
Real estate investment segment borrowing guarantees unfunded		—		1,936

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Commitments to extend credit and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit commit the Corporation to make payments on behalf of customers when certain specified future events occur. Commitments and letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. As some such commitments expire without being drawn upon or funded by the Federal Home Loan Bank of Chicago (“FHLB”) under the Mortgage Partnership Finance Program, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. With the exception of credit card lines of credit, the Corporation generally extends credit only on a secured basis. Collateral obtained varies, but consists primarily of single-family residences and income-producing commercial properties. Fixed-rate loan commitments expose the Corporation to a certain amount of interest rate risk if market rates of interest substantially increase during the commitment period.

The Corporation intends to fund commitments through current liquidity.

The real estate investment segment borrowing guarantees unfunded represented the Corporation’s commitment through its IDI subsidiary to guarantee the borrowings of the related real estate investment partnerships, which are included in the consolidated financial statements. During the quarter ended September 30, 2009, IDI sold its interest in the majority of the real estate segment. As part of the transaction, IDI was released from its guarantees. For additional information, see “Guarantees” in Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Except for the above-noted commitments to originate and/or sell mortgage loans in the normal course of business, the Corporation and the Bank have not undertaken the use of off-balance-sheet derivative financial instruments for any purpose.

In the ordinary course of business, there are legal proceedings against the Corporation and its subsidiaries. Management considers that the aggregate liabilities, if any, resulting from such actions would not have a material, adverse effect on the financial position of the Corporation.

Note 14 — Fair Value of Financial Instruments

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

The Corporation, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents and accrued interest:The carrying amounts reported in the consolidated balance sheets approximate those assets’ and liabilities’ fair values.

Investment and mortgage-related securities:Fair values for investment and mortgage-related securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. If quoted market prices of comparable instruments are not available, fair values are derived from other valuation methodologies, including option pricing models, discounted cash flow models or similar techniques.

Loans receivable:For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for loans held for sale are based on outstanding sale

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commitments or quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value of fixed-rate residential mortgage loans held for investment, commercial real estate loans, rental property mortgage loans and consumer and other loans and leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For construction loans, fair values are based on carrying values due to the short-term nature of the loans.

Federal Home Loan Bank stock:The carrying amount of FHLB stock approximates its fair value as it can only be redeemed to the FHLB at its par value of $100.

Deposits:The fair values disclosed for NOW accounts, passbook accounts and variable rate insured money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

Other Borrowed Funds:The fair value of the Corporation’s borrowings are estimated using discounted cash flow analysis, based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance-sheet instruments:Fair values of the Corporation’s off-balance-sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analyses. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and is not material at September 30, 2009 and March 31, 2009.

The carrying amounts and fair values of the Corporation’s financial instruments consist of the following (in thousands):

	September 30, 2009				March 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	370,022	$	370,022	$	433,826	$	433,826
Investment securities		24,833		24,833		77,684		77,684
Mortgage-related securities (available-for-sale and held-to-maturity)		449,221		449,222		407,351		407,351
Loans held for sale		28,904		28,904		161,964		161,964
Loans receivable		3,506,464		3,518,986		3,896,439		3,981,442
Federal Home Loan Bank stock		54,829		54,829		54,829		54,829
Accrued interest receivable		21,896		21,896		25,375		25,375
Financial liabilities:
Deposits		3,727,723		3,724,178		3,909,391		3,921,802
Other borrowed funds		759,479		751,752		1,078,392		1,079,556
Accrued interest payable—borrowings		5,092		5,092		2,833		2,833
Accrued interest payable—deposits		12,274		12,274		14,436		14,436

ASC 820-10 “Fair Value Measurements and Disclosures” (ASC 820-10) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820-10 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. ASC 820-10 was issued to increase consistency and comparability in reporting

32

fair values. In February 2008, the Financial Accounting Standards Board issued ASC 820-10-55, which delayed the effective date of ASC 820-10 for certain nonfinancial assets and nonfinancial liabilities, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The delay was intended to allow additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of ASC 820-10.

Effective January 1, 2009, the Corporation early adopted ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” ASC 820-10-65 provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for an asset or liability have significantly decreased when compared with normal activity for an asset or liability. Reduced activity is an indication that transactions or quoted prices may not be determinative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. If the reporting entity concludes that the quoted prices are not determinative of fair value, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with ASC 820-10.

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Corporation uses various valuation methods including market, income and cost approaches. Based on these approaches, the Corporation utilizes assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Corporation uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Corporation is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

• Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

• Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities.

• Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.

The Corporation adopted the provisions of ASC 820-10 with respect to certain nonfinancial assets, such as other real estate owned effective April 1, 2009. The adoption did not have a material impact on the consolidated financial statements, but resulted in additional disclosures related to the fair value of nonfinancial assets.

The Corporation has identified available-for-sale securities, loans held for sale, foreclosed properties and repossessed assets, mortgage servicing rights and impaired loans with allocated reserves under ASC 820-10 as those items requiring disclosure under ASC 820-10.

Fair Value on a Recurring Basis

The following table presents the financial instruments carried at fair value as of September 30, 2009, by the valuation hierarchy (as described above) (in thousands):

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			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Investment securities available for sale	$	24,833	$	770	$	24,063	$	—
Mortgage-related securities available for sale		449,177		—		—		449,177

The following is a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) (in thousands):

	Three Months Ended			Six Months Ended
	September 30, 2009			September 30, 2009
	Mortgage-Related Securities			Mortgage-Related Securities
	Available for Sale			Available for Sale
Balance at beginning of period	$	493,313		$	407,301
Total gains (losses) (realized/unrealized)
Included in earnings		989			2,415
Included in other comprehensive income		3,089			5,308
Included in earnings as other than temporary impairment		(186	)		(399	)
Purchases		68,805			171,758
Securitization of mortgage loans held for sale to mortgage-related securities		—			48,878
Principal repayments		(28,510	)		(57,439	)
Sales		(88,323	)		(128,645	)
Transfers in and/or out of level 3		—			—
Balance at September 30, 2009	$	449,177		$	449,177

The purchases of securities classified as level 3 during the quarter ended September 30, 2009 included collateralized mortgage obligations (CMOs) and U.S. agency real estate mortgage investment conduits (REMICs).

A pricing service was used to value our investment securities and mortgage-related securities as of September 30, 2009. Mortgage-related securities were considered a level 3 due to the fact that they were in an illiquid (i.e. inactive) market. The Corporation utilized fair value estimates obtained from an independent pricing service as of September 30, 2009 for all corporate mortgage-related securities that were rated below triple-A by at least one major rating service as of the measurement date. These estimates were determined using a discounted cash flow model in accordance with the guidance provided in ASC 820-10-65. The significant inputs to the model include the estimated cash flows, prepayment speeds, default rates, loss severity and the discount rate.

Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the consolidated balance sheet by caption and by level within the ASC 820-10 hierarchy as of September 30, 2009 (in thousands):

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			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	135,039	$	—	$	—	$	135,039
Loans held for sale		181		—		181		—
Mortgage servicing rights		6,640		—		—		6,640
Foreclosed properties and repossessed assets		38,431		—		—		38,431

The Corporation does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral was determined based on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement.

Loans held for sale generally consist of the current origination of certain fixed-rate mortgage loans and certain adjustable-rate mortgage loans and are carried at lower of cost or fair value, determined on an aggregate basis. Fees received from the borrower and direct costs to originate the loan are deferred and recorded as an adjustment of the sales price.

Mortgage servicing rights are recorded as an asset when loans are sold to third parties with servicing rights retained. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is initially recorded at fair value pursuant and is amortized in proportion to, and over the period of, estimated net servicing revenues. The carrying value of these assets is periodically reviewed for impairment using a lower of carrying value or fair value methodology. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs and other economic factors. For purposes of measuring impairment, the rights are stratified based on predominant risk characteristics of the underlying loans which include product type (i.e., fixed or adjustable) and interest rate bands. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights on a loan-by-loan basis exceed their fair value. Mortgage servicing rights are carried at the lower of cost or fair value.

Foreclosed properties and repossessed assets, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of foreclosed properties and repossessed assets, upon initial recognition, are estimated using Level 3 inputs based on appraisals adjusted for market discounts. Foreclosed properties and repossessed assets are re-measured at fair value after initial recognition through the use of a valuation allowance on foreclosed assets.

Note 15 — Income Taxes

The Corporation accounts for income taxes on the asset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, computed using enacted tax rates. We have maintained significant net deferred tax assets for deductible temporary differences, the largest of which relates to our allowance for loan losses. For income tax return purposes, only net charge-offs on uncollectible loan balances are deductible, not the provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods while negative evidence includes significant losses

35

in the current year or cumulative losses in the current and prior two years as well as general business and economic trends. At September 30, 2009 and March 31, 2009, we determined that a valuation allowance relating to our deferred tax asset was necessary. This determination was based largely on the negative evidence represented by the losses in the current and prior fiscal years caused by the significant loan loss provisions associated with our loan portfolio. In addition, general uncertainty surrounding future economic and business conditions have increased the potential volatility and uncertainty of our projected earnings. Therefore, a valuation allowance of $99.1 million at September 30, 2009 and $50.0 million at March 31, 2009 was recorded to offset net deferred tax assets that exceed the Corporation’s carryback potential.

The significant components of the Corporation’s deferred tax assets (liabilities) are as follows (in thousands):

	At September 30,			At March 31,
	2009			2009			2008			2007
Deferred tax assets:
Allowances for loan losses	$	72,628		$	58,442		$	15,081		$	8,238
Other loss reserves		3,308			4,822			269			557
Federal NOL carryforwards		21,010			—			—			—
State NOL carryforwards		9,116			3,604			631			469
Unrealized gains/(losses)		548			2,695			(738	)		389
Other		10,286			11,773			9,045			8,103
Total deferred tax assets		116,896			81,336			24,288			17,756
Valuation allowance		(99,112	)		(49,981	)		(997	)		(1,321	)
Adjusted deferred tax assets		17,784			31,355			23,291			16,435
Deferred tax liabilities:
FHLB stock dividends		(3,976	)		(3,997	)		(4,022	)		(3,824	)
Mortgage servicing rights		(8,867	)		(6,094	)		(4,888	)		(2,441	)
Purchase accounting		(3,253	)		(3,348	)		(4,713	)		—
Other		(1,688	)		(1,714	)		(1,513	)		(1,361	)
Total deferred tax liabilities		(17,784	)		(15,153	)		(15,136	)		(7,626	)
Net deferred tax assets	$	—		$	16,202		$	8,155		$	8,809

The Corporation is subject to U.S. federal income tax as well as income tax of state jurisdictions. The tax years 2006-2008 remain open to examination by the Internal Revenue Service and certain state jurisdictions while the years 2005-2008 remain open to examination by certain other state jurisdictions.

Income tax benefit decreased $15.6 million or 100.0% and $12.1 million or 100.0%, during the three and six months ended September 30, 2009, respectively, as compared to the same periods in 2008. This decrease was due to the tax benefit from the net operating loss being offset by the charge to taxes related to the valuation allowance against deferred tax assets. The effective tax rate was 0% for the three-and six-month periods ended September 30, 2009 due to a $25.8 million and $49.1 million valuation allowance charge in the respective periods. This rate compared to 40.1% and 40.4% for the same respective periods last year, which approximated a statutory tax rate.

The Corporation recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2009 and March 31, 2009, the Corporation has not recognized any accrued interest and penalties related to uncertain tax positions.

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Note 16 — Credit Agreement

Effective May 29, 2009 we entered into Amendment No. 4, or the “Amendment,” to the Amended and Restated Credit Agreement, dated as of June 9, 2008, the “Credit Agreement,”, among Anchor BanCorp, the lenders from time to time a party thereto, and U.S. Bank National Association, as administrative agent for such lenders, or the “Agent.” The Amendment provides that the Corporation must pay in full the outstanding balance under the Credit Agreement on the earlier of the Corporation’s receipt of net proceeds of a financing transaction from the sale of equity securities in an amount not less than $116.3 million or May 31, 2010. The Corporation incurred an amendment fee of $3.5 million that is being amortized to interest expense.

The Amendment also provides that the outstanding balance under the Credit Agreement shall bear interest equal to a “Base Rate” of 8% per annum plus a “Deferred Interest Rate” initially set at 4%; provided however, that in the event (i) the outstanding balance under the Credit Agreement is repaid in full (a) by September 30, 2009, the Deferred Interest Rate shall be reduced to 0.0% or (b) by December 31, 2009, the Deferred Interest Rate shall be reduced to 1.0%, or in the alternative, (ii) the outstanding balance under the Credit Agreement is reduced by $58.0 million (a) by September 30, 2009, the Deferred Interest Rate shall be reduced to 2.0% or (b) by December 31, 2009, the Deferred Interest Rate shall be reduced to 3.0%. Management is evaluating various equity raising alternatives to possibly reduce borrowings. These borrowings are shown in the Corporation’s financial statements as “other borrowed funds.”

The Credit Agreement and the Amendment also contain customary representations, warranties, conditions and events of default for agreements of such type. At September 30, 2009, the Corporation was not in compliance with all financial covenants contained in the Credit Agreement. The Agent has informed the Bank that it is in default of an obligation to make a payment of principal on the notes issued under the Credit Agreement, along with the violation of all covenants under the agreement. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if all covenants are not complied with. Currently, no such action has been taken by the Agent or the lenders. Accordingly, this creates significant uncertainty related to the Corporation’s operations.

Note 17 — Regulatory Matters

On June 26, 2009, Anchor Bancorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiary, Anchor Bank (the “Bank”) each consented to the issuance of an Order to Cease and Desist (the “Corporation Order” and the “Bank Order,” respectively, and together, the “Orders”) by the Office of Thrift Supervision (the “OTS”).

The Corporation Order requires that the Company notify, and in certain cases receive the permission of, the OTS prior to: (i) declaring, making or paying any dividends or other capital distributions on its capital stock, including the repurchase or redemption of its capital stock; (ii) incurring, issuing, renewing or rolling over any debt, increasing any current lines of credit or guaranteeing the debt of any entity; (iiv) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; and (v) making any golden parachute payments or prohibited indemnification payments. The Corporation’s board was also required to develop and submit to the OTS a three-year cash flow plan by July 31, 2009, which must be reviewed at least quarterly by the Corporation’s management and board for material deviations between the cash flow plan’s projections and actual results (the “Variance Analysis Report”). This plan has been submitted. Lastly, within thirty days following the end of each quarter, the Corporation is required to provide the OTS its Variance Analysis Report for that quarter.

The Bank Order requires that the Bank notify, or in certain cases receive the permission of, the OTS prior to (i) increasing its total assets in any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or renewing any brokered deposits; (iii) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; (v) making any golden parachute or prohibited indemnification payments; (vi) paying dividends or making other capital distributions on its capital stock; (vii) entering into certain transactions with affiliates; and (viii) entering into third-party contracts outside the normal course of business.

The Orders also require that, no later than September 30, 2009, the Bank meet and maintain both a core capital ratio equal to or greater than 7 percent and a total risk-based capital ratio equal to or greater than 11 percent. Further, no

37

later than December 31, 2009, the Bank must meet and maintain both a core capital ratio equal to or greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent. The Bank was required to submit to the OTS, and has submitted, a written capital contingency plan, a problem asset plan, a revised business plan, and an implementation plan resulting from a review of commercial lending practices. The Orders also require the Bank to review its current liquidity management policy and the adequacy of its allowance for loan and lease losses. The Bank has completed these reviews.

At September 30, 2009, the Bank had a core capital ratio of 4.28 percent and a total risk-based capital ratio of 7.59 percent, each below the required capital ratios set forth above. The Corporation is working with its advisors to explore possible alternatives to raise additional equity capital. If completed, any such transaction would likely result in significant dilution for the current common shareholders. No agreements have been reached with respect to any possible capital infusion transaction. As a result, the OTS may take additional significant regulatory action against the Bank and Corporation which could, among other things, materially adversely affect the Corporation’s shareholders. All customer deposits remain fully insured to the highest limits set by the FDIC. The OTS may grant extensions to the timelines established by the Orders.

The description of each of the Orders and the corresponding Stipulation and Consent to Issuance of Order to Cease and Desist (the “Stipulations”) set forth in this section is qualified in its entirety by reference to the Orders and Stipulations, copies of which are attached as Exhibits to the March 31, 2009 Annual Report on Form 10-K.

Note 18 – Subsequent Events

On November 13, 2009, AnchorBank, fsb, a wholly owned subsidiary of the Corporation, entered into a definitive agreement for the sale of 11 AnchorBank branches in northwestern Wisconsin to Royal Credit Union of Eau Claire, WI. This transaction, which is subject to regulatory and other customary closing conditions, is expected to be completed in the first quarter of calender 2010. Under the terms of the agreement, Royal Credit Union will assume approximately $177 million in deposits and a proportionate amount in loans, real estate and other assets.

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ANCHOR BANCORP WISCONSIN INC.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Set forth below is management’s discussion and analysis of the consolidated financial condition and results of operations of Anchor Bancorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiaries, AnchorBank fsb (the “Bank”) and Investment Directions Inc. (“IDI”), for the three and six months ended September 30, 2009, which includes information on the Corporation’s asset/liability management strategies, sources of liquidity and capital resources. This discussion should be read in conjunction with the unaudited consolidated financial statements and supplemental data contained elsewhere in this report.

Executive Overview

Highlights for the second quarter ended September 30, 2009 include:

• Diluted earnings per common share decreased to $(3.56) for the quarter ended September 30, 2009 compared to $(1.11) per share for the quarter ended September 30, 2008, primarily due to a $13.9 million increase in the provision for loan losses and a $10.6 million increase in non-interest expense;

• The interest rate spread decreased to 1.62% for the quarter ended September 30, 2009 compared to 2.59% for the quarter ended September 30, 2008;

• Loans receivable decreased $523.0 million, or 12.9%, since March 31, 2009;

• Deposits and accrued interest decreased $183.8 million, or 4.7%, since March 31, 2009;

• Book value per common share was $(1.34) at September 30, 2009 compared to $4.81 at March 31, 2009 and $14.76 at September 30, 2008;

• The Bank’s Risk-based capital and Tier 1 capital are undercapitalized per the target levels of the Order to Cease and Desist dated June 26, 2009. However, the Bank’s Tier 1 capital is considered adequately capitalized for regulatory purposes.

• Total non-performing assets increased $173.1 million, or 61.7%, to $453.5 million at September 30, 2009 from $280.4 million at March��31, 2009, and total non-performing loans increased $187.3 million, or 82.2% to $415.1 million at September 30, 2009 from $227.8 million at March 31, 2009; and

• Net loss from the real estate investment segment was $1.4 million and $1.2 million for the six months ended September 30, 2009 and 2008, respectively. These losses were mainly due to the sale of the remaining interest in the real estate developments as of September 30, 2009.

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Selected quarterly data are set forth in the following tables.

				Three Months Ended
	9/30/2009			6/30/2009			3/31/2009			12/31/2008
(Dollars in thousands - except per share amounts)				(restated)
Operations Data:
Net interest income	$	18,939		$	24,915		$	28,708		$	32,707
Provision for loan losses		60,900			70,400			56,385			92,970
Net gain (loss) on sale of loans		1,062			11,403			7,858			(228	)
Real estate investment partnership revenue		—			—			310			1,836
Other non-interest income		9,796			8,157			7,794			7,905
Real estate investment partnership cost of sales		—			—			545			1,191
Other non-interest expense		40,791			37,064			47,399			117,066
Non-controlling interest in income (loss) of real estate partnership operations		85			(85	)		(246	)		150
Loss before income taxes		(71,979	)		(62,904	)		(59,413	)		(169,157	)
Income taxes (benefit)		—			—			(16,147	)		(1,899	)
Net loss		(71,979	)		(62,904	)		(43,266	)		(167,258	)
Selected Financial Ratios(1):
Yield on earning assets		4.62	%		4.80	%		5.22	%		5.69	%
Cost of funds		3.00			2.79			2.72			2.81
Interest rate spread		1.62			2.01			2.50			2.88
Net interest margin		1.58			1.99			2.45			2.88
Return on average assets		(5.71	)		(4.76	)		(3.44	)		(13.72	)
Return on average equity		(222.48	)		(126.04	)		(79.64	)		(242.66	)
Average equity to average assets		2.57			3.77			4.32			5.66
Non-interest expense to average assets		3.23			2.80			3.81			9.70
Per Share:
Basic earnings (loss) per common share	$	(3.56	)	$	(2.97	)	$	(2.05	)	$	(7.96	)
Diluted earnings (loss) per common share		(3.56	)		(2.97	)		(2.05	)		(7.96	)
Dividends per common share		—			—			—			0.01
Book value per common share		(1.34	)		1.92			4.81			6.80
Financial Condition:
Total assets	$	4,637,712		$	5,238,320		$	5,273,055		$	4,798,847
Loans receivable, net
Held for sale		28,904			115,340			161,964			32,139
Held for investment		3,506,464			3,641,708			3,896,439			3,948,065
Deposits and accrued interest		3,739,997			3,987,906			3,923,827			3,413,449
Other borrowed funds		759,479			1,041,049			1,078,392			1,152,112
Stockholders’ equity		81,075			151,422			213,721			146,662
Allowance for loan losses		170,664			139,455			137,165			122,571
Non-performing assets(2)		453,510			347,795			280,377			410,695

(1)	Annualized when appropriate.
(2)	Non-performing assets consist of loans past due more than ninety days, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, troubled debt restructurings performing less than twelve months under the modified terms and foreclosed properties and repossessed assets.

40

				Three Months Ended
(Dollars in thousands - except per share amounts)	9/30/2008			6/30/2008			3/31/2008			12/31/2007
Operations Data:
Net interest income	$	29,954		$	33,421		$	35,066		$	31,338
Provision for loan losses		46,964			9,400			10,393			7,792
Net gain on sale of loans		808			2,243			2,984			1,468
Real estate investment partnership revenue		—			—			457			1,012
Other non-interest income		7,439			9,566			10,121			9,430
Real estate investment partnership cost of sales		—			—			548			932
Other non-interest expense		30,167			26,791			29,249			24,180
Non-controlling interest in loss of real estate partnership operations		(13	)		(39	)		(43	)		(81	)
Income (loss) before income taxes		(38,917	)		9,078			8,481			10,425
Income taxes (benefit)		(15,618	)		3,566			2,838			4,096
Net income (loss)		(23,299	)		5,512			5,643			6,329
Selected Financial Ratios(1):
Yield on earning assets		5.59	%		6.05	%		6.10	%		6.68	%
Cost of funds		3.00			3.22			3.31			4.01
Interest rate spread		2.59			2.83			2.79			2.67
Net interest margin		2.62			2.87			2.84			2.83
Return on average assets		(1.89	)		0.44			0.43			0.54
Return on average equity		(27.69	)		6.37			6.56			7.44
Average equity to average assets		6.84			6.93			6.55			7.31
Non-interest expense to average assets		2.45			2.15			2.27			2.16
Per Share:
Basic earnings (loss) per common share	$	(1.11	)	$	0.26		$	0.27		$	0.30
Diluted earnings (loss) per common share		(1.11	)		0.26			0.27			0.30
Dividends per common share		0.10			0.18			0.18			0.18
Book value per common share		14.76			16.00			16.17			15.98
Financial Condition:
Total assets	$	4,928,074		$	4,949,335		$	5,149,557		$	4,725,773
Loans receivable, net
Held for sale		4,099			6,619			9,669			6,170
Held for investment		4,069,369			4,129,075			4,202,833			3,941,891
Deposits and accrued interest		3,349,335			3,406,975			3,539,994			3,145,551
Other borrowed funds		1,210,562			1,147,329			1,206,761			1,150,914
Stockholders’ equity		317,501			343,599			345,116			341,084
Allowance for loan losses		64,614			40,265			38,285			28,761
Non-performing assets(2)		184,754			147,036			112,305			87,002

(1)	Annualized when appropriate.
(2)	Non-performing assets consist of loans past due more than ninety days, loans past due less than ninety days but placed on non-accrual status due to anticipated probable loss, troubled debt restructurings performing less than twelve months under the modified terms and foreclosed properties and repossessed assets.

41

Critical Accounting Policies

          There are a number of accounting policies that require the use of judgment. Some of the more significant policies are as follows:

•	Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary due to credit loss are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers many factors which include: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. To determine if an other-than-temporary impairment exists on a debt security, the Corporation first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Corporation will recognize an other-than-temporary impairment in earnings equal to the difference between the fair value of the security and its adjusted cost. If neither of the conditions is met, the Corporation determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the amount of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The amount of total impairment related to all other factors is included in other comprehensive income (loss). If a security is impaired, and the impairment is deemed other-than-temporary and material, a write down will occur in that quarter.
•	The allowance for loan losses is a valuation allowance for probable and inherent losses incurred in the loan portfolio. The allowance is comprised of both a specific and general component. Specific allowances are provided on impaired loans pursuant to ASC 310-10-35. The general allowance is based on historical loss experience, adjusted for qualitative and environmental factors pursuant to ASC 450-2 “Loss Contingencies” and other related regulatory guidance. At least quarterly, we review the assumptions and methodology related to the general allowance in an effort to update and refine the estimate.
	In determining the general allowance we have segregated the loan portfolio by collateral type. By doing so we are better able to identify trends in borrower behavior and loss severity. For each collateral type, we compute a historical factor. In determining the appropriate period of activity to use in computing the historical factor we look at trends in quarterly net charge-off ratios. It is our intention to utilize a period of activity that we believe to be most reflective of current experience. Changes in the historical period are made when there is a distinct change in the trend of net charge-off experience.
	In addition to the historical factor, we consider the impact of the following qualitative factors: changes in lending policies, procedures and practices, economic and industry trends and conditions, experience, ability and depth of lending management, level of and trends in past dues and delinquent loans, changes in the quality of the loan review system, changes in the value of the underlying collateral for collateral dependent loans, changes in credit concentrations, and other external factors such as legal and regulatory. In determining the impact, if any, of an individual qualitative factor, we compare the current underlying facts and circumstances surrounding a particular factor with those in the historical periods, adjusting the historical factor in a directionally consistent manner with changes in the qualitative factor. For example, current property values in many of our markets have declined when compared to the prior three years. This would indicate to us that the severity of losses may be greater than in the past. Accordingly, we increased the historical factor to account for this. We will continue to analyze the qualitative factors on a quarterly basis, adjusting the historical factor both up and down, to a factor we believe is appropriate for the probable and inherent risk of loss in our portfolio.
	Specific allowances are determined as a result of our loan review process. When a loan is identified as impaired it is evaluated for loss using either the fair value of collateral less selling costs or a discounted cash flow analysis as a determinant of fair value. If fair value exceeds the Bank’s carrying value of the

42

	loan no loss is anticipated and no specific reserve is established. However, if the Bank’s carrying value of the loan is greater than fair value a specific reserve is established. In either situation, loans identified as impaired are excluded from the calculation of the general reserve.
	We consider the allowance for loan losses at September 30, 2009 to be at an acceptable level. Although we believe that we have established and maintained the allowance for loan losses at an adequate level, changes may be necessary if future economic and other conditions differ substantially from the current environment. Although we use the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.
•	Valuation of mortgage servicing rights with servicing retained. Mortgage servicing rights are established on loans that are originated and subsequently sold. A portion of the loan’s book basis is allocated to mortgage servicing rights when a loan is sold with servicing retained. The fair value of mortgage servicing rights is the present value of estimated future net cash flows from the servicing relationship using current market participant assumptions for prepayments, servicing costs and other factors. As the loans are repaid and net servicing revenue is earned, mortgage servicing rights are amortized into expense. Net servicing revenues are expected to exceed this amortization expense. However, if actual prepayment experience exceeds what was originally anticipated, net servicing revenues may be less than expected and mortgage servicing rights may be impaired. Mortgage servicing rights are carried at the lower of amortized cost or fair value.
•	The Corporation accounts for federal income taxes in accordance with the provisions of ASC 740-10-25, “Income Taxes.” Pursuant to the provisions of ASC 740-10-25, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management’s estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. A full valuation allowance has been recorded on the deferred tax asset because the Corporation has exhausted its carryback potential and is in a cumulative loss position.

43

RESULTS OF OPERATIONS

General. Net income for the three and six months ended September 30, 2009 decreased $48.7 million or 2,089.4% to a net loss of $72.0 million from a net loss of $23.3 million and decreased $117.1 million or 6,583.2% to a net loss of $134.9 million from a net loss of $17.8 million as compared to the same respective periods in the prior year. The decrease in net income for the three-month period compared to the same period last year was largely due to an increase in provision for loan losses of $13.9 million, a decrease in net interest income of $11.0 million and an increase in non-interest expense of $10.6 million, which were partially offset by an increase in non-interest income of $2.6 million and a decrease in income tax expense of $15.6 million. The decrease in net income for the six-month period compared to the same period last year was largely due to an increase in provision for loan losses of $74.9 million, an increase in non-interest expense of $20.9 million and a decrease in net interest income of $19.5 million, which were partially offset by a decrease in income tax expense of $12.1 million and an increase in non-interest income of $10.4 million. A full valuation allowance has been recorded on the deferred tax asset because the Corporation has exhausted its carryback potential and is in a cumulative loss position.

Net Interest Income. Net interest income decreased $11.0 million or 36.8% and $19.5 million or 30.8% for the three and six months ended September 30, 2009, respectively, as compared to the same respective periods in the prior year. Interest income decreased $8.6 million or 13.4% for the three months ended September 30, 2009 as compared to the same period in the prior year. Interest expense increased $2.4 million or 7.1% for the three months ended September 30, 2009 as compared to the same period in the prior year. Interest income decreased $19.0 million or 14.1% for the six months ended September 30, 2009 as compared to the same period in the prior year. Interest expense increased $516,000 or 0.7% for the six months ended September 30, 2009 as compared to the same period in the prior year. The net interest margin decreased to 1.58% for the three-month period ended September 30, 2009 from 2.62% for the three-month period in the prior year and decreased to 1.79% for the six-month period ended September 30, 2009 from 2.74% for the same period in the prior year. The change in the net interest margin reflects the decrease in yield on interest-earning assets from 5.59% to 4.62% during the three months ended September 30, 2009 and 2008, respectively. The decrease in the yield on interest-earning assets is primarily the result of the reversal of interest income on nonaccrual loans as well as the decline in interest rates. The interest rate spread decreased to 1.62% from 2.59% for the three-month period and decreased to 1.82% from 2.71% for the six-month period ended September 30, 2009 as compared to the same respective periods in the prior year.

Interest income on loans decreased $9.9 million or 16.7% and $21.8 million or 17.4%, for the three and six months ended September 30, 2009, as compared to the same respective periods in the prior year. These decreases were primarily attributable to a decrease of 32 basis points in the average yield on loans to 5.44% from 5.76% for the three-month period and a decrease of 61 basis points to 5.42% from 6.03% for the six month period. The decrease in the yield on loans was due to the level of loans on nonaccrual status as well as a modest decline in rates on loans. In addition, the average balances of loans decreased $480.9 million in the three months and decreased $339.6 million in the six months ended September 30, 2009, respectively, as compared to the same periods in the prior year.

Interest income on mortgage-related securities increased $1.5 million or 40.3% and increased $3.4 million or 46.2% for the three- and six-month periods ended September 30, 2009, as compared to the same respective periods in the prior year, primarily due to an increase of $191.9 million in the three-month average balance and an increase of $168.3 million in the six-month average balance of mortgage-related securities. The increase in the average balance of mortgage-related securities is due to the purchase of securities (all of which were rated AAA) at a significant discount. This increase was offset by a decrease of 96 basis points in the average yield on mortgage-related securities to 4.47% from 5.43% for the three-month period and a decrease of 52 basis points in the average yield on mortgage-related securities to 4.87% from 5.39% for the six-month period. Interest income on investment securities (including Federal Home Loan Bank stock) decreased $481,000 or 61.7% and $811,000 or 51.3%, respectively, for the three- and six-month periods ended September 30, 2009 as compared to the same respective periods in the prior year. The decreases for the three- and six-month periods were due to a decrease in the average balances. Interest income on interest-bearing deposits increased $290,000 and $231,000, respectively, for the three and six months ended September 30, 2009 as compared to the same respective periods in 2008, primarily due to decreases in the average yields for the three- and six-month periods offset by an increase in the average balances.

Interest expense on deposits decreased $858,000 or 3.6% and decreased $3.6 million or 7.0%, respectively, for the three and six months ended September 30, 2009, as compared to the same respective periods in 2008. These decreases were primarily attributable to a decrease of 45 basis points in the weighted average cost of deposits to

44

2.38% from 2.83% and a decrease of 57 basis points in the weighted average cost of deposits to 2.40% from 2.97% for the three and six months ended September 30, 2009, respectively, as compared to the same respective periods in the prior year, partially offset by an increase in the average balance of deposits and accrued interest of $496.7 million and $504.7 million for the respective three- and six-month periods. The decrease in the cost of deposits was due to the fact that certificates are repricing at lower rates and interest rates on demand deposits have declined. Interest expense on other borrowed funds increased $3.3 million or 32.3% and $4.1 million or 20.0%, respectively, during the three and six months ended September 30, 2009, as compared to the same respective periods in the prior year. The weighted average cost of other borrowed funds increased 194 basis points to 5.40% from 3.46% for the three-month period and increased 124 basis points to 4.76% from 3.52% for the six-month period ended September 30, 2009, respectively, as compared to the same respective periods last year due to the fact that borrowings were prepaid and a prepayment fee was incurred. For the three- and six-month periods ended September 30, 2009, the average balance of other borrowed funds decreased $177.8 million and $130.2 million, respectively, as compared to the same respective periods in 2008.

Provision for Loan Losses. Provision for loan losses increased $13.9 million or 29.7% for the three-month period and increased $74.9 million or 133.0% for the six-month period ended September 30, 2009, as compared to the same respective periods last year. Management evaluates a variety of qualitative and quantitative factors when determining the adequacy of the allowance for losses. Management continues to evaluate and monitor the individual borrowers and underlying collateral as it relates to the current economic conditions. Due to recent increased charge-offs, declines in real estate values, the amounts of delinquent loans, non-accrual loans (as discussed under “Asset Quality” below), impaired loans and an increase in loans moved to REO, management determined that increased provisions for loan losses were appropriate to reflect the risks inherent in the various lending portfolios during the current period. In addition, management has evaluated collateral discount factors to ensure that standardized rates are being used as well as enacted an enhanced risk-rating system for loan evaluations. The provisions were based on management’s ongoing evaluation of asset quality and pursuant to a policy to maintain an allowance for losses at a level which management believes is adequate to absorb probable losses on loans as of the balance sheet date.

Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread. The table on the following page shows the Corporation’s average balances, interest, average rates, net interest margin and interest rate spread for the periods indicated. The average balances are derived from average daily balances.

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	Three Months Ended September 30,
	2009								2008
						Average							Average
	Average					Yield/			Average				Yield/
	Balance			Interest		Cost(1)			Balance		Interest		Cost(1)
						(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	2,710,901		$	37,162		5.48	%	$	3,111,614	$	44,830		5.76	%
Consumer loans		751,664			9,583		5.10			752,792		10,966		5.83
Commercial business loans		181,521			2,806		6.18			260,596		3,654		5.61
Total loans receivable(2) (3)		3,644,086			49,551		5.44			4,125,002		59,450		5.76
Mortgage-related securities(4)		463,343			5,174		4.47			271,445		3,687		5.43
Investment securities(4)		38,545			299		3.10			105,206		780		2.97
Interest-bearing deposits		589,944			361		0.24			20,845		71		1.36
Federal Home Loan Bank stock		54,829			—		0.00			54,829		—		0.00
Total interest-earning assets		4,790,747			55,385		4.62			4,577,327		63,988		5.59
Non-interest-earning assets		253,509								343,151
Total assets	$	5,044,256							$	4,920,478
Interest-Bearing Liabilities
Demand deposits	$	946,206			1,337		0.57		$	1,064,336		2,811		1.06
Regular passbook savings		247,344			181		0.29			238,704		283		0.47
Certificates of deposit		2,677,319			21,522		3.22			2,071,132		20,804		4.02
Total deposits and accrued interest		3,870,869			23,040		2.38			3,374,172		23,898		2.83
Other borrowed funds		992,841			13,406		5.40			1,170,592		10,136		3.46
Total interest-bearing liabilities		4,863,710			36,446		3.00			4,544,764		34,034		3.00
Non-interest-bearing liabilities		51,132								39,179
Total liabilities		4,914,842								4,583,943
Stockholders’ equity		129,414								336,535
Total liabilities and stockholders’ equity	$	5,044,256							$	4,920,478
Net interest income/interest rate spread(5)				$	18,939		1.62	%			$	29,954		2.59	%
Net interest-earning assets	$	(72,963	)						$	32,563
Net interest margin(6)							1.58	%						2.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities		0.98								1.01

(1)	Annualized
(2)	For the purpose of these computations, non-accrual loans are included in the daily average loan amounts outstanding.
(3)	Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual status during the period indicated.
(4)	Average balances of securities available-for-sale are based on amortized cost.
(5)	Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities and is represented on a fully tax equivalent basis.
(6)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

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	Six Months Ended September 30,
	2009								2008
						Average							Average
	Average					Yield/			Average				Yield/
	Balance			Interest		Cost(1)			Balance		Interest		Cost(1)
	(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	2,840,976		$	77,351		5.45	%	$	3,149,094	$	94,443		6.00	%
Consumer loans		777,095			20,329		5.23			740,819		23,115		6.24
Commercial business loans		195,663			5,661		5.79			263,421		7,603		5.77
Total loans receivable(2) (3)		3,813,734			103,341		5.42			4,153,334		125,161		6.03
Mortgage-related securities(4)		441,087			10,750		4.87			272,768		7,355		5.39
Investment securities(4)		52,670			770		2.92			97,315		1,581		3.25
Interest-bearing deposits		536,895			630		0.23			41,380		399		1.93
Federal Home Loan Bank stock		54,829			—		0.00			54,829		—		0.00
Total interest-earning assets		4,899,215			115,491		4.71			4,619,626		134,496		5.82
Non-interest-earning assets		268,821								336,863
Total assets	$	5,168,036							$	4,956,489
Interest-Bearing Liabilities
Demand deposits	$	945,169			2,703		0.57		$	1,080,116		6,070		1.12
Regular passbook savings		243,794			347		0.28			233,444		549		0.47
Certificates of deposit		2,734,413			44,123		3.23			2,105,141		44,121		4.19
Total deposits and accrued interest		3,923,376			47,173		2.40			3,418,701		50,740		2.97
Other borrowed funds		1,027,005			24,464		4.76			1,157,177		20,381		3.52
Total interest-bearing liabilities		4,950,381			71,637		2.89			4,575,878		71,121		3.11
Non-interest-bearing liabilities		51,256								39,740
Total liabilities		5,001,637								4,615,618
Stockholders’ equity		166,399								340,871
Total liabilities and stockholders’ equity	$	5,168,036							$	4,956,489
Net interest income/interest rate spread(5)				$	43,854		1.82	%			$	63,375		2.71	%
Net interest-earning assets	$	(51,166	)						$	43,748
Net interest margin(6)							1.79	%						2.74	%
Ratio of average interest-earning assets to average interest-bearing liabilities		0.99								1.01

(1)	Annualized
(2)	For the purpose of these computations, non-accrual loans are included in the daily average loan amounts outstanding.
(3)	Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual status during the period indicated.
(4)	Average balances of securities available-for-sale are based on amortized cost.
(5)	Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities and is represented on a fully tax equivalent basis.
(6)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

47

Non-Interest Income. Non-interest income increased $2.7 million or 31.7% to $10.9 million and increased $10.3 million or 51.7% to $30.4 million for the three and six months ended September 30, 2009, respectively, as compared to $8.2 million and $20.1 million for the same respective periods in 2008. The increase for the three-month period ended September 30, 2009 was primarily due to the increase net gain on investments and mortgage-related securities of $4.0 million as a result of the gain on sale of agency securities. In addition, other revenue from real estate partnership operations increased $450,000, net gain on sale of loans increased $254,000 and service charges on deposits increased $12,000. These increases were partially offset by a decrease in other non-interest income of $749,000 mainly due to a decline in fee income from loans, a decrease in loan servicing income of $745,000 due to increased amortization of mortgage servicing rights, a decrease in investment and insurance commissions of $275,000, an increase in net impairment losses recognized in earnings of $186,000 and a decrease in credit enhancement income of $160,000 for the three-month period ended September 30, 2009, as compared to the same respective period in the prior year. The increase for the six-month period ended September 30, 2009 was primarily due to the increase in net gain on sale of loans of $9.4 million due to an increase in refinancing activity. In addition, net gain on investments and mortgage-related securities increased $5.5 million as a result of the gain on sale of agency securities. These increases were partially offset by a decrease in loan servicing income of $2.1 million due to increased amortization of mortgage servicing rights, a decrease in other non-interest income of $1.1 million mainly due to a decline in fee income from loans, a decrease in investment and insurance commissions of $652,000 due to a decline in mortgage and credit life commission income, an increase in net impairment losses recognized in earnings of $399,000, a decrease in credit enhancement income of $200,000, a decrease in other revenue from real estate partnership operations of $112,000 and a decrease in service charges on deposits of $18,000 for the six-month period ended September 30, 2009, as compared to the same respective period in the prior year.

Non-Interest Expense. Non-interest expense increased $10.6 million or 35.2% to $40.8 million and increased $20.9 million or 36.7% to $77.9 million for the three and six months ended September 30, 2009, respectively, as compared to $30.2 million and $57.0 million for the same respective periods in 2008. The increase for the three-month period was primarily the result of the increase in net expense from REO operations of $5.3 million due to additional write downs and the increase in other non-interest expense of $4.4 million primarily due to increased legal expenses from foreclosure activity and increased consulting expenses for the review of the loan portfolio and concentrations as well as evaluating business and staffing practices. In addition, federal insurance premiums increased $1.2 million mainly due to a special assessment, other expense from real estate partnership operations increased $484,000, occupancy expense increased $90,000 and furniture and equipment expense increased $25,000. These increases were partially offset by a decrease in compensation expense of $639,000 mainly due to a decline in benefits expense, a decrease in data processing expense of $134,000, a decrease in marketing expense of $99,000 and a recovery of mortgage servicing rights impairment of $6,000 for the three months ended September 30, 2009 as compared to the same period in the prior year. The increase for the six-month period was primarily the result of an increase in net expense from REO operations of $9.0 million due to additional write downs as well as an increase in other non-interest expense of $5.1 million due to increased legal expenses from foreclosure activity and increased consulting expenses for the review of the loan portfolio and concentrations as well as evaluating business and staffing practices. In addition, federal insurance premiums increased $4.6 million mainly due to a special assessment, the impairment of foreclosure cost advances increased in the amount of $3.7 million due to the fact that previously capitalized foreclosure cost advances were deemed unrecoverable, compensation expense increased $344,000 mainly due to increased mortgage incentives and occupancy expense increased $87,000. These increases were partially offset by a recovery of mortgage servicing rights impairment of $1.4 million due to the fact that estimated prepayment speeds were reduced as the result of rising interest rates and less refinancing activity, a decrease in marketing expense of $312,000, a decrease in other expense from real estate partnership operations of $256,000, a decrease in furniture and equipment expense of $51,000 and a decrease in data processing expense of $14,000 for the six months ended September 30, 2009 as compared to the same period in the prior year.

Income Taxes. The Corporation adopted the provisions of ASC 740-10-25, “Income Taxes” on April 1, 2007. As a result of the implementation of ASC 740-10-25, there were no adjustments in the liability for unrecognized income tax benefits.

The Corporation recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2009, the Corporation has not recognized any accrued interest and penalties related to uncertain tax positions.

The Corporation is subject to U.S. federal income tax as well as income tax of state jurisdictions. The tax years 2005-2008 remain open to examination by the U.S. federal and state jurisdictions to which we are subject.

48

Income tax expense decreased $15.6 million or 100.0% and decreased $12.1 million or 100.0% during the three and six months ended September 30, 2009, as compared to the same respective periods in 2008. This decrease was due to the tax benefit from the net operating loss being offset by the charge to taxes related to the valuation allowance against deferred tax assets. The effective tax rate was 0% for the three and six month periods ended September 30, 2009 due to the $25.8 million and $49.1 million valuation allowance charge in each respective period. A full valuation allowance has been recorded on the deferred tax asset because the Corporation has exhausted its carryback potential and is in a cumulative loss position. This rate compared to 40.1% and 40.4% for the same respective period last year, which approximated a statutory tax rate.

FINANCIAL CONDITION

During the six months ended September 30, 2009, the Corporation’s assets decreased by $635.3 million from $5.27 billion at March 31, 2009 to $4.64 billion at September 30, 2009. The majority of this decrease was attributable to a decrease of $523.0 million in loans receivable, a decrease of $63.8 million cash and cash equivalents as well as a decrease of $52.9 million in investment securities available for sale, which were partially offset by a $41.9 million increase in mortgage-related securities available for sale.

Total loans (including loans held for sale) decreased $523.0 million during the six months ended September 30, 2009. Activity for the period consisted of (i) sales of one to four family loans to the Federal Home Loan Bank of $935.0 million, (ii) principal repayments and other adjustments (the majority of which are undisbursed loan proceeds) of $504.1 million, (iii) the securitization of mortgage loans to agency mortgage-backed securities of $48.9 million, (iv) transfer to foreclosed properties and repossessed assets of $12.4 million and (v) originations, refinances and purchases of $977.5 million.

Mortgage-related securities (both available for sale and held to maturity) increased $41.9 million during the six months ended September 30, 2009 as a result of purchases of $171.8 million, the securitization of mortgage loans to agency mortgage-backed securities of $48.9 million and market value adjustments of $4.1 million, which were partially offset by sales of $125.5 million and principal repayments of $57.4 million in this period. Mortgage-related securities consisted of $116.3 million of mortgage-backed securities and $332.9 million of corporate collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”) issued by government agencies at September 30, 2009.

The Corporation’s CMOs and REMICs have interest rate risk due to, among other things, actual prepayments being more or less than those predicted at the time of purchase. The majority of the Corporation’s CMO’s and REMICs are rated AA or above. The Corporation invests only in short-term tranches in order to limit the reinvestment risk associated with greater than anticipated prepayments, as well as changes in value resulting from changes in interest rates.

A collateralized debt obligation (“CDO’s”) is a type of asset-backed security and structured credit product which gains exposure to the credit of a portfolio of fixed-income assets and divides the credit risk among different tranches. The investment portfolio of the Corporation does not contain any CDO’s.

Investment securities decreased $52.9 million during the six months ended September 30, 2009 as a result of sales, maturities, amortization and market value adjustments of $66.4 million of U.S. Government and agency securities, which were partially offset by purchases of $13.5 million of such securities.

Federal Home Loan Bank (“FHLB”) stock remained constant during the six months ended September 30, 2009. The Corporation views its investment in the FHLB stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: 1) the significance of the decline in net assets of the FHLBs as compared to the capital stock amount and length of time a decline has persisted; 2) impact of legislative and regulatory changes on the FHLB and 3) the liquidity position of the FHLB.

The FHLB of Chicago filed an SEC form 10-Q on November 12, 2009 announcing its financial results for the third quarter of 2009. The FHLB of Chicago reported net loss of $150 million for third quarter of 2009, compared to net income of $33 million in the same period of the previous year. This $183 million decrease in net income was due to increases in other-than-temporary impairment charges of $160 million and a decrease in derivatives and

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hedging activities income of $132 million. These items were partially offset by an increase in net interest income of $91 million. The FHLB of Chicago is under a cease and desist order that restricts capital stock repurchases and redemptions. The FHLB of Chicago reported regulatory capital at September 30, 2009 of 5.16%, which was above its regulatory requirement of 4.76%. The FHLB of Chicago did not pay any dividends in 2008. The Corporation has concluded that its investment in the FHLB Chicago is not impaired as of September 30, 2009. However, this estimate could change in the near term by the following: 1) significant OTTI losses are incurred on the MBS causing a significant decline in their regulatory capital status; 2) the economic losses resulting from credit deterioration on the MBS increases significantly and 3) capital preservation strategies being utilized by the FHLB become ineffective.

Foreclosed properties and repossessed assets decreased $14.2 million to $38.4 million at September 30, 2009 from $52.6 million at March 31, 2009 due to (i) sales of $17.1 million and (ii) additional reserves placed on various properties of $9.4 million. These decreases were partially offset by (i) transfers in of $12.4 million.

Deferred tax asset decreased $16.2 million to zero at September 30, 2009 from $16.2 million at March 31, 2009 due to the recognition of all available recoverable income taxes as a result of the net loss for the period. An allowance of $49.1 million was placed on the deferred tax asset during the six months ended September 30, 2009. The valuation allowance is necessary since there is only a potential for recovery of the deferred asset valuation allowance if the Corporation has taxable income in future years.

Total liabilities decreased $502.3 million during the six months ended September 30, 2009. This decrease was largely due to a $318.9 million decrease in other borrowed funds and a $183.8 million decrease in deposits and accrued interest which were partially offset by a $457,000 increase in other liabilities. Brokered deposits totaled $274.4 million or approximately 7.3% of total deposits at September 30, 2009 and $457.3 million at March 31, 2009, and generally mature within one to five years.

Stockholders’ equity decreased $133.0 million during the six months ended September 30, 2009 as a net result of (i) comprehensive loss of $129.9 million, (ii) accrual of dividends on preferred stock of $2.8 million and (iii) tax benefit from stock-related compensation of $10,000. These decreases were partially offset by (i) the issuance of shares for management and benefit plans of $33,000.

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ASSET QUALITY

The composition of non-performing loans is summarized as follows for the dates indicated:

	September 30, 2009								March 31, 2009
	Non-					Percent of			Non-					Percent of
	Performing		%			Total Loans			Performing		%			Total Loans
	(Dollars in Thousands)
Single-family residential	$	58,100		14.0	%		1.56	%	$	31,868		14.0	%		0.78	%
Multi-family residential		63,930		15.4	%		1.72	%		50,090		22.0	%		1.22	%
Commercial real estate		131,228		31.6	%		3.53	%		56,972		25.0	%		1.39	%
Construction and land		133,073		32.1	%		3.58	%		70,536		31.0	%		1.72	%
Consumer		5,395		1.3	%		0.15	%		3,525		1.5	%		0.09	%
Commercial business		23,353		5.6	%		0.63	%		14,823		6.5	%		0.36	%
Total Non-Performing Loans	$	415,079		100.0	%		11.16	%	$	227,814		100.0	%		5.54	%

The composition of non-performing assets is summarized as follows for the dates indicated:

	At September 30,			At March 31,
	2009			2009
	(Dollars in thousands)
Total non-accrual loans	$	288,027		$	166,354
Troubled debt restructurings — non-accrual(2)		127,052			61,460
Troubled debt restructurings — accrual(3)		—			—
Other real estate owned (OREO)		38,431			52,563
Total non-performing assets	$	453,510		$	280,377
Total non-performing loans to total loans(1)		11.16	%		5.54	%
Total non-performing assets to total assets		9.78			5.32
Allowance for loan losses to total loans(1)		4.59			3.34
Allowance for loan losses to total non-performing loans		41.12			60.21
Allowance for loan and foreclosure losses to total non-performing assets		40.11			52.08

(1)	Total loans are gross loans receivable before the reduction for loans in process, unearned interest and loan fees and the allowance from loans losses.
(2)	Troubled debt restructurings — non-accrual represent loans that were modified in a troubled debt restructuring less than six months prior to the period end date.
(3)	Troubled debt restructurings — accrual represent loans that were modified in a troubled debt restructuring and have been performing in accordance with the modified terms for more than six months but less than twelve months.

Non-performing loans (consisting of loans past due more than 90 days, loans less than 90 days delinquent but placed on non-accrual status due to anticipated probable loss and troubled debt restructurings performing less than twelve months under the modified terms) increased $187.3 million during the six months ended September 30, 2009. Non-performing assets increased $173.1 million to $453.5 million at September 30, 2009 from $280.4 million at March 31, 2009 and increased as a percentage of total assets to 9.78% from 5.32% at such dates, respectively. The increase in non-performing loans at September 30, 2009 was the result of an increase of $74.3 million in non-performing commercial real estate, $62.5 million in non-performing construction and land loans, $26.2 million in non-

51

performing single-family residential loans, $13.8 million in non-performing multi-family loans, $8.5 million in non-performing commercial business loans and $1.9 million in non-performing consumer loans.

With only a few exceptions, loans modified in a troubled debt restructuring remain on non-accrual status for a period of at least six months. If after six months, or a period sufficient enough to demonstrate the willingness and ability of the borrower to perform under the modified terms, the borrower has made payments in accordance with the modified terms, the loan is returned to accrual status but retains its status as a troubled debt restructuring and non-performing loan. If after a year the borrower continues to make payments in accordance with the modified loan terms the designations as a troubled debt restructuring and non-performing are removed.

The increase in loans considered troubled debt restructurings of $65.6 million to $127.1 million at September 30, 2009 from $61.5 million at March 31, 2009 is a result of continued efforts by the Corporation to work with their borrowers experiencing financial difficulties. At September 30, 2009 there have been few opportunities to remove a loan from troubled debt restructuring status since the required twelve month timeframe has not passed. As time passes and borrowers continue to perform in accordance with the modified loan terms, we expect a portion of this balance to be returned to performing status.

Beginning late in the first quarter of fiscal 2010, management began significant efforts in the credit area to obtain a thorough understanding of the risk within the loan portfolio and to take action to eliminate or limit any further material adverse consequences. These efforts include the following:

1.	Realigned the corporate structure to ensure that credit risk is adequately and appropriately identified, mitigated and where possible, eliminated. This realignment included the appointment of a Chief Credit Risk Officer and creation of a Special Assets Group to properly assess potential shortfall exposure and to develop workout plans.
2.	Created and implemented a new loan risk rating system using qualitative metrics to proactively identify loans with potential risk so they could be properly classified and monitored.
3.	Re-evaluated all classified loans greater than $500,000. This resulted in the following action items:

a.	Established standard discount rates for various collateral types.
b.	Identified all related entities associated with the existing impaired loans to ensure that the impairment analysis represents a more accurate and thorough picture of the total borrowing relationship. This resulted in an increase of $2.6 million in specific reserves.
c.	Changed the evaluation of impairment when collateral is the primary source of repayment so that collateral is now evaluated on a loan by loan basis rather than from a total collateral pool for the relationship.
d.	Refined the determination of the bifurcation of the collateral shortfall between specific reserve and charge off.

4. Incorporated the following policy improvements to further streamline and improve the timeliness of reserves taken in the ALLL calculation:

a.	Developed a standard reserve percentage based on collateral type to replace the individual loan analysis for all relationships under $500,000, with the average reserve of the impaired pool of that collateral type greater than $500,000 now being used as the proxy. This resulted in an increase in the ALLL of $1.4 million.
b.	Loans identified as impaired are immediately downgraded with the standard impairment for its collateral type determined as described in item 4a above, versus waiting until appraisal or other date is received to perform an analyses. This resulted in an additional $6.3 million of specific reserves.
c.	Established a maximum period of 90 days for management to obtain all necessary information and complete a specific impairment analysis.

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5.	Analyzed the population of recent appraisals received and developed a specific reserve amount ($7.1 million at September 30, 2009) to capture the probable deterioration in collateral value on loans with appraisals pending above and beyond that already incorporated into the individual impaired loan reviews.
6.	Established an independent underwriting group that evaluates the total borrowing relationship using a global cash flow methodology and develops an individual grade of the loan and relationship based on the new risk rating system.
7.	Proactive monitoring of matured and delinquent loans between 30 and 89 days delinquent.
8.	Reviewed approximately 75 percent of the performing (non-impaired) portfolio for performance issues. All relationships over $5 million have been reviewed with a completion date for reviews of all relationships of $1 to $5 million targeted for the middle of the third quarter of fiscal 2010.
9.	Determined that the amounts previously reported as non-performing and impaired improperly included loans for which loss was not probable. Non-performing loans, non-performing assets and impaired loans, and the related ratios, at March 31, 2009 have been adjusted as a result.

In addition to the amounts specifically identified above, these efforts resulted in $19.7 million of additional specific reserves on impaired loans with no previous reserve and $15.4 million of charge-offs that had not previously been reserved for.

We believe that as a result of these efforts we have a better understanding of the non-performing loans and related probable and inherent losses within the loan portfolio, which resulted in an increase in non-performing loans, and has been considered in the determination of the ALLL at September 30, 2009 and the provision for loan losses for the six months ended September 30, 2009. While no assurances can be given as to whether significant increases in the level of non-performing loans and the ALLL through additional provisions for loan losses will be required in the future, we believe the magnitude of the increase in non-performing loans and in the level of non-performing loans and the provisions that were taken in fiscal 2009 and for the six months ended September 30, 2009 are a result of our efforts described above and are not indicative of a trend for the future.

Foreclosed properties and repossessed assets (also known as other real estate owned or OREO) decreased $14.2 million during the six months ended September 30, 2009. Properties included in OREO at September 30, 2009 with a recorded balance in excess of $1 million are listed below:

							Most
		Recorded			Date		Recent
		Balance			Placed in		Appraisal
Description	Location	(in millions)			OREO		Date
		(Restated)
Construction company/equipment	Southern Wisconsin	$	2.9			1/29/2009		N/A
Partially constructed condominium and retail complex	Southern Wisconsin		5.2			12/31/2008		11/1/2008
Partially constructed condominium project	Central Wisconsin		12.7			3/31/2009		1/1/2006
Property secured by CBRF	Northeast Wisconsin		4.2			12/31/2008		3/1/2009
Several single family properties	Minnesota		5.0			9/16/2008		6/1/2007
Commercial building	Southern Wisconsin		1.3			4/27/2009		7/11/2008
Commercial building	Southern Wisconsin		1.2			9/30/2009		8/10/2009
Commercial building	Central Wisconsin		1.0			8/31/2009		2/26/2009
Other properties individually less than $1 million			16.1
Valuation allowance on OREO			(11.2	)
		$	38.4

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Some properties were transferred to OREO at a value that was based upon a discounted cash flow of the property upon completion of the project. The appraisal received at the time the loan was made is no longer considered applicable.

On a quarterly basis, the Corporation reviews its list prices of its OREO properties and makes appropriate adjustments based upon updated appraisals or market analysis by brokers. The valuation allowance on OREO is due to the slow real estate market.

At September 30, 2009, the Corporation had $415.1 million of impaired loans. At March 31, 2009, impaired loans were $227.8 million. Total impaired loans have increased $187.3 million since March 31, 2009 as a result of the significant efforts of management in the credit area as previously discussed. The timing of the identification of impaired loans was accelerated as a result of the efforts previously discussed. A loan is defined as impaired in the accounting guidance when based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans considered trouble debt restructurings (TDRs), all loans 90 days or more delinquent, matured loans and loans less than 90 days delinquent and for which management has determined a loss is probable. A summary of the details regarding impaired loans follows:

	At September 30,			At March 31,
	2009			2009			2008			2007
				(In Thousands)
Impaired loans with valuation reserve required	$	170,395		$	124,179		$	52,866		$	2,130
Impaired loans without a specific reserve		244,684			103,635			51,192			45,718
Total impaired loans		415,079			227,814			104,058			47,848
Less:
Specific valuation allowance		(35,356	)		(30,799	)		(17,639	)		(517	)
	$	379,723		$	197,015		$	86,419		$	47,331
Average impaired loans	$	292,050		$	194,923		$	67,138		$	26,458
Interest income recognized on impaired loans	$	7,264		$	9,484		$	107		$	44
Loans on nonaccrual status	$	288,027		$	166,354		$	101,241		$	47,040
Loans past due ninety days or more and still accruing	$	—		$	—		$	—		$	—
Troubled debt restructurings — nonaccrual	$	127,052		$	61,460		$	400		$	400
Troubled debt restructurings — accrual	$	—		$	—		$	—		$	—

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The following table sets forth information relating to the Corporation’s loans that were less than 90 days delinquent at the dates indicated.

	At September 30,		At March 31,
	2009		2009		2008		2007
			(In Thousands)
30 to 59 days	$	46,007	$	57,746	$	66,617	$	12,776
60 to 89 days		11,817		20,927		12,928		5,414
Total	$	57,824	$	78,673	$	79,545	$	18,190

Delinquent loans decreased $20.9 million to $57.8 million at September 30, 2009 from $78.7 million at March 31, 2009 as a result of increased monitoring and loss mitigation efforts.

The Corporation’s loan portfolio, foreclosed properties and repossessed assets are evaluated on a continuing basis to determine the necessity for additions and recaptures to the allowance for loan losses and the related adequacy of the balance in the allowance for loan losses account. See the discussion on the allowance for loan losses under the Significant Accounting Policies section for a discussion of our methodology. Foreclosed properties are recorded at fair value with charge-offs, if any, charged to the allowance for loan losses upon transfer to foreclosed property. Subsequent decreases in the valuation of foreclosed properties are recorded as a valuation allowance on the foreclosed property with a corresponding charge to expense. The fair value is primarily based on appraisals, discounted cash flow analysis (the majority of which is based on current occupancy and lease rates) and pending offers.

A summary of the activity in the allowance for loan losses follows:

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
				(Dollars In Thousands)
Allowance at beginning of period	$	139,455		$	40,265		$	137,165		$	38,285
Charge-offs:
Construction		(10,480	)		(1,023	)		(25,792	)		(1,320	)
Mortgage		(14,268	)		(10,549	)		(53,720	)		(15,468	)
Consumer		(559	)		(214	)		(1,235	)		(480	)
Commercial business		(5,181	)		(11,770	)		(18,914	)		(13,714	)
Total charge-offs		(30,488	)		(23,556	)		(99,661	)		(30,982	)
Recoveries:
Mortgage		651			590			876			590
Consumer		8			4			25			10
Commercial business		138			347			959			347
Total recoveries		797			941			1,860			947
Net (charge-offs) recoveries		(29,691	)		(22,615	)		(97,801	)		(30,035	)
Provision for loan losses		60,900			46,964			131,300			56,364
Allowance at end of period	$	170,664		$	64,614		$	170,664		$	64,614
Net charge-offs to average loans		(3.26	)%		(2.19	)%		(5.13	)%		(1.45	)%

Although management believes that the September 30, 2009 allowance for loan losses is adequate there can be no assurance that future adjustments to the allowance, through increased provision for loan losses, will not be necessary. Management also continues to pursue all practical and legal methods of collection, repossession and

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disposal, and adheres to high underwriting standards in the origination process in order to achieve strong asset quality.

LIQUIDITY AND CAPITAL RESOURCES

On an unconsolidated basis, the Corporation’s sources of funds include dividends from its subsidiaries, including the Bank, interest on its investments and returns on its real estate held for sale. The Bank is currently not allowed to pay dividends to the Corporation. The Bank’s primary sources of funds are payments on loans and securities, deposits from retail and wholesale sources, FHLB advances and other borrowings. We use brokered CDs, which are rate sensitive. We also rely on advances from the FHLB of Chicago as a funding source. We have also been granted access to the Fed fund line with a correspondent bank as well as the Federal Reserve Bank of Chicago’s discount window, none of which had been borrowed as of September 30, 2009. In addition as of September 30, 2009, the Corporation had outstanding borrowings from the FHLB of $583.2 million, out of our maximum borrowing capacity of $228.63 billion, from the FHLB at this time.

On January 30, 2009, as part of the United States Department of the Treasury (the “UST”) Capital Purchase Program (the “CPP”), the Corporation entered into a Letter Agreement with the UST. Pursuant to the Securities Purchase Agreement — Standard Terms (the “Securities Purchase Agreement”) issued 110,000 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Preferred Stock”), having a liquidation amount per share of $1,000, for a total purchase price of $110,000,000. The Preferred Stock will pay cumulative compounding dividends at a rate of 5% per year for the first five years following issuance and 9% per year thereafter. The Corporation has deferred the payment of dividends during the quarters ending June 30, 2009 and September 30, 2009. The Corporation may not redeem the Preferred Stock during the first three years following issuance except with the proceeds from one or more qualified equity offerings. After three years, the Corporation may redeem shares of the Preferred Stock for the per share liquidation amount of $1,000 plus any accrued and unpaid dividends.

As long as any Preferred Stock is outstanding, the Corporation may pay dividends on its Common Stock, $.10 par value per share (the “Common Stock”), and redeem or repurchase its Common Stock, provided that all accrued and unpaid dividends for all past dividend periods on the Preferred Stock are fully paid. Prior to the third anniversary of the UST’s purchase of the Preferred Stock, unless Preferred Stock has been redeemed or the UST has transferred all of the Preferred Stock to third parties, the consent of the UST will be required for the Corporation to increase its Common Stock dividend or repurchase its Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. The Preferred Stock will be non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Preferred Stock.

As a condition to participating in the CPP, the Corporation issued and sold to the UST a warrant (the “Warrant”) to purchase up to 7,399,103 shares (the “Warrant Shares”) of the Corporation’s Common Stock, at an initial per share exercise price of $2.23, for an aggregate purchase price of approximately $16,500,000. The term of the Warrant is ten years. Exercise of the Warrant is subject to the receipt by the Corporation of shareholder approval. The Warrant provides for the adjustment of the exercise price should the Corporation not receive shareholder approval, as well as customary anti-dilution provisions. Pursuant to the Securities Purchase Agreement, the UST has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.

The terms of the Treasury Department’s purchase of the preferred securities include certain restrictions on certain forms of executive compensation and limits on the tax deductibility of compensation we pay to executive management. The Corporation invested the proceeds of the sale of Preferred Stock and Warrants in the Bank as Tier 1 capital.

At September 30, 2009, the Bank had outstanding commitments to originate loans of $14.7 million and commitments to extend funds to, or on behalf of, customers pursuant to lines and letters of credit of $254.8 million. Scheduled maturities of certificates of deposit for the Bank during the twelve months following September 30, 2009 amounted to $1.63 billion. Scheduled maturities of borrowings during the same period totaled $119.2 million for the Bank and $116.3 million for the Corporation. Management believes adequate resources are available to fund all

56

Bank commitments to the extent required. For more information regarding the Corporation���s borrowings, see “Credit Agreement” section below.

The Corporation previously participated in the Mortgage Partnership Finance Program of the FHLB. Pursuant to the credit enhancement feature of that Program, the Corporation has retained a secondary credit loss exposure in the amount of $23.5 million at September 30, 2009 related to approximately $1.07 billion of residential mortgage loans that the Corporation has originated as agent for the FHLB. Under the credit enhancement, the FHLB is liable for losses on loans up to one percent of the original delivered loan balances in each pool. The Corporation is then liable for losses over and above the first position up to a contractually agreed-upon maximum amount in each pool that was delivered to the Program. The Corporation receives a monthly fee for this credit enhancement obligation based on the outstanding loan balances. Based on historical experience, the Corporation does not anticipate that any credit losses will be incurred under the credit enhancement obligation. The program was discontinued in 2008 in its present format and the Corporation no longer funds loans through the MPF program.

The Bank has entered into agreements with certain brokers that will provide deposits obtained from their customers at specified interest rates for an identified fee, or so called “brokered deposits.” At September 30, 2009, the Bank had $274.4 million of brokered deposits. At September 30, 2009, the Bank was under a cease and desist agreement with the OTS which will limit the Bank’s ability to accept, renew or roll over brokered deposits without prior approval of the OTS.

Under federal law and regulation, the Bank is required to meet certain tangible, core and risk-based capital requirements. Tangible capital generally consists of stockholders’ equity minus certain intangible assets. Core capital generally consists of tangible capital plus qualifying intangible assets. The risk-based capital requirements presently address credit risk related to both recorded and off-balance sheet commitments and obligations. The OTS requirement for the core capital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all but the most highly-rated financial institutions.

Our ability to meet our short-term liquidity and capital resource requirements may be subject to our ability to obtain additional debt financing and equity capital. We may increase our capital resources through offerings of equity securities (possibly including common shares and one or more classes of preferred shares), commercial paper, medium-term notes, securitization transactions structured as secured financings, and senior or subordinated notes. Through participation in the CPP, on January 30, 2009 we issued and sold preferred shares and warrants to the U.S. Department of the Treasury.

Credit Agreement

Effective May 29, 2009 we entered into Amendment No. 4, or the “Amendment,” to the Amended and Restated Credit Agreement, dated as of June 9, 2008, the “Credit Agreement,” among Anchor BanCorp, the lenders from time to time a party thereto, and U.S. Bank National Association, as administrative agent for such lenders, or the “Agent.” The Amendment provides that the Corporation must pay in full the outstanding balance under the Credit Agreement on the earlier of the Corporation’s receipt of net proceeds of a financing transaction from the sale of equity securities in an amount not less than $116.3 million or May 31, 2010. Management is evaluating various equity raising alternatives to possibly reduce borrowings. The Corporation incurred an amendment fee of $3.5 million that is being amortized to interest expense.

The Amendment also provides that the outstanding balance under the Credit Agreement from time to time shall bear interest equal to a “Base Rate” of 8% per annum plus a “Deferred Interest Rate” initially set at 4%; provided however, that in the event (i) the outstanding balance under the Credit Agreement is repaid in full (a) by September 30, 2009, the Deferred Interest Rate shall be reduced to 0.0% or (b) by December 31, 2009, the Deferred Interest Rate shall be reduced to 1.0%, or in the alternative, (ii) the outstanding balance under the Credit Agreement is reduced by $58.0 million (a) by September 30, 2009, the Deferred Interest Rate shall be reduced to 2.0% or (b) by December 31, 2009, the Deferred Interest Rate shall be reduced to 3.0%. These borrowings are shown in the Corporation’s financial statements as “other borrowed funds.”

The Credit Agreement and the Amendment also contain customary representations, warranties, conditions and events of default for agreements of such type. At September 30, 2009, the Corporation was not in compliance

57

with all financial covenants contained in the Credit Agreement. The Agent has informed the Bank that it is in default of an obligation to make a payment of principal on the notes issued under the Credit Agreement, along with the violation of all covenants under the agreement. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if all covenants are not complied with. Currently, no such action has been taken by the Agent or the lenders. Accordingly, this creates significant uncertainty related to the Corporation’s operations.

The following summarizes the Bank’s capital levels and ratios and the levels and ratios required by the OTS at September 30, 2009 and March 31, 2009:

											Minimum Required
						Minimum Required					to be Well
						For Capital					Capitalized Under
	Actual					Adequacy Purposes					OTS Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars In Thousands)
At September 30, 2009:
Tier 1 capital (to adjusted tangible assets)	$	198,606		4.28	%	$	139,109		3.00	%	$	231,849		5.00	%
Risk-based capital (to risk-based assets)		239,673		7.59			252,459		8.00			315,574		10.00
Tangible capital (to tangible assets)		198,606		4.28			69,555		1.50			N/A		N/A
At March 31, 2009:
Tier 1 capital (to adjusted tangible assets)	$	324,130		6.17	%	$	157,527		3.00	%	$	262,545		5.00	%
Risk-based capital (to risk-based assets)		370,680		10.20			290,670		8.00			363,338		10.00
Tangible capital (to tangible assets)		324,130		6.17			78,763		1.50			N/A		N/A

The following table reconciles the Bank’s stockholders’ equity to regulatory capital at September 30, 2009 and March 31, 2009:

	September 30,			March 31,
	2009			2009
	(In Thousands)
Stockholders’ equity of the Bank	$	201,577		$	322,505
Less: Goodwill and intangible assets		(4,408	)		(4,725	)
Accumulated other comprehensive income		1,437			6,350
Tier 1 and tangible capital		198,606			324,130
Plus: Allowable general valuation allowances		41,067			46,550
Risk-based capital	$	239,673		$	370,680

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GUARANTEES

ASC 450-10-35 “Guarantees” requires certain guarantees to be recorded at fair value as a liability at inception and when a loss is probable and reasonably estimatable, as those terms are defined in ASC 450-20 “Loss Contingencies.” The recording of the outstanding liability in accordance with ASC 810-10-15 has not significantly affected the Corporation’s financial condition.

The Corporation’s consolidated real estate investment subsidiary, IDI, was required to guarantee the partnership loans of its consolidated subsidiaries for the development of homes for sale. During the quarter ended September 30, 2009, IDI sold its interest in the majority of the real estate segment. As part of the transaction, IDI was released from its guarantees. The table below summarizes the individual subsidiaries and their respective guarantees and outstanding loan balances.

		Amount		Amount			Amount
Subsidiary	Partnership	Guaranteed		Outstanding			Outstanding
of IDI	Entity	at 3/31/09		at 3/31/09			at 9/30/09
(Dollars in thousands)
Davsha III	Indian Palms 147, LLC	$	1,000	$	476	$	—
Davsha V	Villa Santa Rosa, LLC		500		346		—
Davsha VII	La Vista Grande 121, LLC		15,000		13,742		—
Total		$	16,500	$	14,564	$	—

IDI had real estate partnership investments within its consolidated subsidiaries for which it guaranteed the above loans. These partnerships were also funded by financing with loans that were guaranteed by IDI and were secured by the lots and homes being developed within each of the respective partnership entities.

As a limited partner, the Corporation had the ability to exercise significant influence over operating and financial policies. This influence is evident in the terms of the respective partnership agreements and participation in policy-making processes. The Corporation had a 50% controlling interest in the respective limited partnerships and therefore had significant influence over the right to approve the sale or refinancing of assets of the respective partnerships in accordance with those partnership agreements.

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ASSET/LIABILITY MANAGEMENT

The primary function of asset and liability management is to provide liquidity and maintain an appropriate balance between interest-earning assets and interest-bearing liabilities within specified maturities and/or repricing dates. Interest rate risk is the imbalance between interest-earning assets and interest-bearing liabilities at a given maturity or repricing date, and is commonly referred to as the interest rate gap (the “gap”). A positive gap exists when there are more assets than liabilities maturing or repricing within the same time frame. A negative gap occurs when there are more liabilities than assets maturing or repricing within the same time frame. During a period of rising interest rates, a negative gap over a particular period would tend to adversely affect net interest income over such period, while a positive gap over a particular period would tend to result in an increase in net interest income over such period.

The Corporation’s strategy for asset and liability management is to maintain an interest rate gap that minimizes the impact of interest rate movements on the net interest margin. As part of this strategy, the Corporation sells substantially all new originations of long-term, fixed-rate, single-family residential mortgage loans in the secondary market, and invests in adjustable-rate or medium-term, fixed-rate, single-family residential mortgage loans, medium-term mortgage-related securities and consumer loans, which generally have shorter terms to maturity and higher interest rates than single-family mortgage loans.

The Corporation also originates multi-family residential and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter terms to maturity than conventional single-family residential loans. Long-term, fixed-rate, single-family residential mortgage loans originated for sale in the secondary market are generally committed for sale at the time the interest rate is locked with the borrower. As such, these loans involve little interest rate risk to the Corporation.

The calculation of a gap position requires management to make a number of assumptions as to when an asset or liability will reprice or mature. Management believes that its assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. The Corporation’s cumulative net gap position at September 30, 2009 has not changed significantly since March 31, 2009. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset/Liability Management” in the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2009.

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REGULATORY DEVELOPMENTS

Temporary Liquidity Guarantee Program

In October 2008, the Secretary of the United States Department of the Treasury invoked the systemic risk exception of the FDIC Improvement Act of 1991 and the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”). The TLGP provides a guarantee, through the earlier of maturity or June 30, 2012, of certain senior unsecured debt issued by participating Eligible Entities (including the Corporation) between October 14, 2008 and June 30, 2009. The maximum amount of FDIC-guaranteed debt a participating Eligible Entity (including the Corporation) may have outstanding is 125% of the entity’s senior unsecured debt that was outstanding as of September 30, 2008 that was scheduled to mature on or before June 30, 2009. The ability of Eligible Entities (including the Corporation) to issue guaranteed debt under this program is scheduled to expire on June 30, 2009. As of June 30, 2009, the Corporation had no senior unsecured debt outstanding under the TLGP. The Corporation and the Bank signed a master agreement with the FDIC on December 5, 2008 for issuance of bonds under the program. The Corporation does not have any unsecured debt, thus must file for an exemption to be able to issue bonds under this program. The Bank is eligible to issue up to $88 million as of September 30, 2009. As of September 30, 2009 the Bank had $60.0 million of bonds were issued.

Emergency Economic Stabilization Act of 2008

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”), giving the United States Department of the Treasury (“Treasury”) authority to take certain actions to restore liquidity and stability to the U.S. banking markets. Based upon its authority in the EESA, a number of programs to implement EESA have been announced. Those programs include the following:

• Capital Purchase Program (“CPP”). Pursuant to this program, Treasury, on behalf of the US government, will purchase preferred stock, along with warrants to purchase common stock, from certain financial institutions, including bank holding companies, savings and loan holding companies and banks or savings associations not controlled by a holding company. The investment will have a dividend rate of 5% per year, until the fifth anniversary of Treasury’s investment and a dividend of 9% thereafter. During the time Treasury holds securities issued pursuant to this program, participating financial institutions will be required to comply with certain provisions regarding executive compensation and corporate governance. Participation in this program also imposes certain restrictions upon an institution’s dividends to common shareholders and stock repurchase activities. We elected to participate in the CPP and received $110 million pursuant to the program.

• Temporary Liquidity Guarantee Program. This program contained both (i) a debt guarantee component, whereby the FDIC will guarantee until June 30, 2012, the senior unsecured debt issued by eligible financial institutions between October 14, 2008 and June 30, 2009; and (ii) an account transaction guarantee component, whereby the FDIC will insure 100% of non-interest bearing deposit transaction accounts held at eligible financial institutions, such as payment processing accounts, payroll accounts and working capital accounts through December 31, 2009. The deadline for participation or opting out of this program was December 5, 2008. We elected not to opt out of the program.

• Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDIC temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The EESA provides that the basic deposit insurance limit will return to $100,000 after December 31, 2009.

The American Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed The American Recovery and Reinvestment Act of 2009 (“ARRA”) into law. The ARRA is intended to revive the US economy by creating millions of new jobs and stemming home foreclosures. For financial institutions that have received or will receive financial assistance under TARP or related programs, the ARRA significantly rewrites the original executive compensation and corporate governance provisions of Section 111 of the EESA. Among the most important changes instituted by the ARRA are new limits on the ability of TARP recipients to pay incentive compensation to up to 20 of the next most highly-compensated

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employees in addition to the “senior executive officers,” a restriction on termination of employment payments to senior executive officers and the five next most highly-compensated employees and a requirement that TARP recipients implement “say on pay” shareholder votes. Further legislation is anticipated to be passed with respect to the economic recovery.

In February 2009, the Administration also announced its Financial Stability Plan and Homeowners Affordability and Stability Plan (“HASP”). The Financial Stability Plan is the second phase of TARP, to be administrated by the Treasury. Its four key elements include:

• the development of a public/private investment fund essentially structured as a government sponsored enterprise with the mission to purchase troubled assets from banks with an initial capitalization from government funds;

• the Capital Assistance Program under which the Treasury will purchase additional preferred stock available only for banks that have undergone a new stress test given by their regulator;

• an expansion of the Federal Reserve’s term asset-backed liquidity facility to support the purchase of up to $1 trillion in AAA — rated asset backed securities backed by consumer, student, and small business loans, and possible other types of loans; and

• the establishment of a mortgage loan modification program with $50 billion in federal funds further detailed in the HASP.

The HASP is a program aimed to help seven to nine million families restructure their mortgages to avoid foreclosure. The plan also develops guidance for loan modifications nationwide. HASP provides programs and funding for eligible refinancing of loans owned or guaranteed by Fannie Mae or Freddie Mac, along with incentives to lenders, mortgage servicers, and borrowers to modify mortgages of “responsible” homeowners who are at risk of defaulting on their mortgage. The goals of HASP are to assist in the prevention of home foreclosures and to help stabilize falling home prices.

Beyond the Corporation’s participation in certain programs, such as TARP, the Corporation will benefit from these programs if they help stabilize the national banking system and aid in the recovery of the housing market.

OTS Order to Cease and Desist

On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease and Desist (the “Corporation Order” and the “Bank Order,” respectively, and together, the “Orders”) by the Office of Thrift Supervision (the “OTS”).

The Corporation Order requires that the Company notify, and in certain cases receive the permission of, the OTS prior to: (i) declaring, making or paying any dividends or other capital distributions on its capital stock, including the repurchase or redemption of its capital stock; (ii) incurring, issuing, renewing or rolling over any debt, increasing any current lines of credit or guaranteeing the debt of any entity; (iiv) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; and (v) making any golden parachute payments or prohibited indemnification payments. The Corporation’s board was also required to develop and submit to the OTS a three-year cash flow plan by July 31, 2009, which must be reviewed at least quarterly by the Corporation’s management and board for material deviations between the cash flow plan’s projections and actual results (the “Variance Analysis Report”). This plan has been submitted. Lastly, within thirty days following the end of each quarter, the Corporation is required to provide the OTS its Variance Analysis Report for that quarter.

The Bank Order requires that the Bank notify, or in certain cases receive the permission of, the OTS prior to (i) increasing its total assets in any quarter in excess of an amount equal to net interest credited on deposit liabilities during the quarter; (ii) accepting, rolling over or renewing any brokered deposits; (iii) making certain changes to its directors or senior executive officers; (iv) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; (v) making

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any golden parachute or prohibited indemnification payments; (vi) paying dividends or making other capital distributions on its capital stock; (vii) entering into certain transactions with affiliates; and (viii) entering into third-party contracts outside the normal course of business.

The Orders also require that, no later than September 30, 2009, the Bank meet and maintain both a core capital ratio equal to or greater than 7 percent and a total risk-based capital ratio equal to or greater than 11 percent. Further, no later than December 31, 2009, the Bank must meet and maintain both a core capital ratio equal to or greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent. The Bank must also submit to the OTS, within prescribed time periods, a written capital contingency plan, a problem asset plan, a revised business plan, and an implementation plan resulting from a review of commercial lending practices. The Orders also require the Bank to review its current liquidity management policy and the adequacy of its allowance for loan and lease losses.

At September 30, 2009, the Bank had a core capital ratio of 4.28 percent and a total risk-based capital ratio of 7.59 percent, each below the required capital ratios set forth above. The Corporation is working with its advisors to explore possible alternatives to raise additional equity capital. If completed, any such transaction would likely result in significant dilution for the current common shareholders. No agreements have been reached with respect to any possible capital infusion transaction. As a result, the OTS may take additional significant regulatory action against the Bank and Corporation which could, among other things, materially adversely affect the Corporation’s shareholders. All customer deposits remain fully insured to the highest limits set by the FDIC. The OTS may grant extensions to the timelines established by the Orders.

The description of each of the Orders and the corresponding Stipulation and Consent to Issuance of Order to Cease and Desist (the “Stipulations”) set forth in this section is qualified in its entirety by reference to the Orders and Stipulations, copies of which are attached as Exhibits to the March 31, 2009 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and Section 27A of the Securities Act. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption “Risk Factors” and elsewhere in this report as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009,. Factors that could affect actual results include but are not limited to; (i) general market rates; (ii) changes in market interest rates and the shape of the yield curve; (iii) general economic conditions; (iv) real estate markets; (v) legislative/regulatory changes; (vi) monetary and fiscal policies of the U.S. Department of the Treasury and the Federal Reserve Board; (vii) changes in the quality or composition of the Bank’s loan and investment portfolios; (viii) demand for loan products; (ix) level of loan and mortgage-backed securities repayments; (x) impact of the Emergency Economic Stabilization Act of 2008; (xi) changes in the U.S. Treasury’s Capital Purchase Program; (xii) unprecedented volatility in equity, fixed income and other market valuations; (xiii) higher-than-expected credit losses due to business losses, constraints on borrowers’ ability to repay outstanding loans or the diminishment of the value of collateral securing such loans, capital market disruptions, changes in commercial or residential real estate development and real estate prices or other economic factors; (xiv) substantial loss of customer deposit accounts; (xv) soundness of other financial institutions with which the Corporation and the Bank engage in transactions; (xvi) increases in Federal Deposit Insurance Corporation premiums due to market developments and regulatory changes; (xvii) competition; (xviii) demand for financial services in the Corporation’s market;, and (xx) changes in accounting principles, policies or guidelines.

In addition, to the extent that we engage in acquisition transactions, such transactions may result in large one-time charges to income, may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. All forward-looking

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statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this report. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

The Corporation does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Item 3 Quantitative and Qualitative Disclosures About Market Risk.

The Corporation’s market rate risk has not materially changed from March 31, 2009. See Item 7A in the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2009. See also “Asset/Liability Management” in Part I, Item 2 of this report.

Item 4 Controls and Procedures.

Internal Control over Financial Reporting

In our 10K for the fiscal year ended March 31, 2009, the Corporation identified material weaknesses in its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) related to the following:

1. Our Internal Control over Financial Reporting related to the allowance for loan losses and the completeness and accuracy of the provision for loan losses contained multiple deficiencies that represent material weaknesses. Specifically the Corporation failed to:

• Maintain policies and procedures to ensure that loan personnel performed an analysis adequate to risk classify the loan portfolio.

• Effectively monitor the loan portfolio and identify problem loans in a timely manner.

• Maintain policies and procedures to ensure that ASC 310-10-35 “Receivables” documentation is prepared timely, accurately and subject to supervisory review.

• Receive current financial information on problem loans, in a timely manner, to ensure that these loans were evaluated for impairment under ASC 310-10-35.

• Establish policies and procedures to ensure that an impairment calculation is prepared for all loans identified as impaired and that the impairment calculation is updated on a quarterly basis.

• Effectively monitor problem loans to ensure that recent appraisals are used to support collateral valuation utilized in the impairment analysis.

• Maintain policies and procedures to ensure that the supporting documentation for the allowance for loan loss calculation is reviewed and tested by an individual independent of the allowance for loan loss process.

• Re-evaluate the qualitative factors used in the allowance calculation on a quarterly basis to assess the continued decline in the local and national economy; exacerbation of certain negative trends in real estate values; increasing regional unemployment levels; slowed demand for both new and existing housing; and the resulting stress on the Bank’s real estate and development portfolios.

• Properly review subsequent events and therefore had to restate its first quarter financial statements.

• Apply consistent discounts in its impairment analysis.

2. The Corporation did not maintain effective controls over financial reporting over impairment charges, related to Other Real Estate Owned (‘OREO’). The existing policies and procedures

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did not provide for sufficient supervisory controls around the valuation and recording of impairment charges for other real estate owned to ensure impairment charges were properly recognized and recorded.

3.

The Corporation did not maintain effective entity-level controls to ensure that the financial statements were prepared in accordance with generally accepted accounting principles. This material weakness was identified by our auditors when they reviewed the financial statements and identified disclosures that either required significant modification or were missing altogether. The weakness relates primarily to disclosures required as a result of changing economic conditions, adoption of new accounting standards, and disclosure of unusual significant transactions. This material weakness was evidenced by the ineffective preparation of the financial statements and resulted from the lack of the necessary supervisory review to ensure accurate presentation and disclosure in the financial statements.

The Corporation’s principal executive officer and principal financial officer concluded that the disclosure controls and procedures are not operating in an effective manner. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The Corporation’s internal control processes and procedures were inadequate to ensure that appraisals were reviewed and incorporated into the calculation of the specific reserves on impaired loans by the time the Form 10-Q was issued. Following its identification of the weakness, the Corporation determined that an additional adjustment to the allowance for loan losses was necessary.

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Changes in Internal Control Over Financial Reporting

Other than the actions mentioned above, there has been no change in the Corporation’s internal control over financial reporting ((as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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Part II — Other Information

Item 1 Legal Proceedings.

The Corporation is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management of the Corporation to be immaterial to the financial condition and results of operations of the Corporation.

Item 1A Risk Factors.

In addition to the risk factors set forth below and the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report filed on Form 10-K for the fiscal year ended March 31, 2009, which could materially affect our business, financial condition or future results.

Risks Related to Our Business

We experienced a net loss in the second quarter of fiscal 2010 directly attributable to a substantial deterioration in our residential construction and residential land loan portfolio and the resulting increase in our provision for loan losses.

We realized a net loss of $72.0 million in the second quarter of fiscal 2010. The net loss is the direct result of a $60.9 million provision to our loan loss reserve. The loan loss reserve is the amount required to maintain the allowance for loan losses at an adequate level to absorb probable loan losses. The increase in the provision for loan losses is primarily attributable to our residential construction and residential land loan portfolios, which continue to experience deterioration in estimated collateral values and repayment abilities of some of our customers. Other reasons for the increase in the provision for loan losses are attributable to the continuing general weakening economic conditions and decline in real estate values in the markets served by the Corporation.

At September 30, 2009, our non-performing loans (loans past due 90 days or more) were $415.1 million compared to $227.8 million at March 31, 2009. For the three months ended September 30, 2009, annualized net charge-offs as a percentage of average loans were (3.26)% compared to (2.19)% for the corresponding period in 2008. These increases are primarily due to our commercial real estate and land development portfolios.

At September 30, 2009, approximately 74% of total gross loans were classified as first mortgage loans, with approximately 5% of loans being classified as construction loans and approximately 7% being classified as land loans.

The deterioration in our construction and land loan portfolios has been caused primarily by the weakening economy and the slow down in sales of the housing market. The local unemployment rate was 7.7% as of September 30, 2009 compared to 9.4% at March 31, 2009. With many real estate projects requiring an extended time to market, some of our borrowers have exhausted their liquidity which may require us to place their loans into nonaccrual status.

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Our business is subject to liquidity risk, and changes in our source of funds may adversely affect our performance and financial condition by increasing our cost of funds.

Our ability to make loans is directly related to our ability to secure funding. Retail deposits and core deposits are our primary source of liquidity. We also use brokered CDs, which are rate sensitive. We also rely on advances from the FHLB of Chicago as a funding source. We have also been granted access to the Fed fund line with a correspondent bank as well as the Federal Reserve Bank of Chicago’s discount window, none of which had been borrowed as of September 30, 2009. In addition as of September 30, 2009, the Corporation had outstanding borrowings from the FHLB of $583.2 million, out of our maximum borrowing capacity of $228.63 billion, from the FHLB at this time.

Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans and payment of operating expenses. Core deposits represent a significant source of low-cost funds. Alternative funding sources such as large balance time deposits or borrowings are a comparatively higher-cost source of funds. Liquidity risk arises from the inability to meet obligations when they come due or to manage unplanned decreases or changes in funding sources. Although we believe we can continue to pursue our core deposit funding strategy successfully, significant fluctuations in core deposit balances may adversely affect our financial condition and results of operations.

Additional increases in our level of non-performing assets will have an adverse effect on our financial condition and results of operations.

Weakening conditions in the real estate sector have adversely affected, and may continue to adversely affect, our loan portfolio. Non-performing assets increased by $173.1 million to $453.5 million, or 9.8% of total assets, at September 30, 2009 from $280.4 million, or 5.3% of total assets, at March 31, 2009. If loans that are currently non-performing further deteriorate we would need to increase our allowance to cover additional charge-offs. If loans that are currently performing become non-performing, we may need to continue to increase our allowance for loan losses if additional losses are anticipated which would have an adverse impact on our financial condition and results of operations. The increased time and expense associated with the work out of non-performing assets and potential non-performing assets also could adversely affect our operations.

Future sales or other dilution of the Corporation’s equity may adversely affect the market price of the Corporation’s common stock.

In connection with our participation in the CPP the Corporation has, or under other circumstances the Corporation may, issue additional common stock or preferred securities, including securities convertible or exchangeable for, or that represent the right to receive, common stock. Further, pursuant to the cease and desist order with the OTS, the Bank must meet certain capital ratios which may require additional equity capital, which would significantly dilute the current shareholders. The market price of the Corporation’s common stock could decline as a result of sales of a large number of shares of common stock, preferred stock or similar securities in the market. The issuance of additional common stock would dilute the ownership interest of the Corporation’s existing shareholders.

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Holders of our common stock have no preemptive rights and are subject to potential dilution.

Our articles of incorporation do not provide any shareholder with a preemptive right to subscribe for additional shares of common stock upon any increase thereof. Thus, upon the issuance of any additional shares of common stock or other voting securities of the Company or securities convertible into common stock or other voting securities, shareholders may be unable to maintain their pro rata voting or ownership interest in us.

On June 26, 2009, the Corporation and the Bank each consented to the issuance of an Order to Cease and Desist by the Office of Thrift Supervision. If we do not raise additional capital, we may not be in compliance with the capital requirements of the Bank’s Cease and Desist Order, which could have a material adverse effect upon us.

The Cease and Desist Orders require that, no later than September 30, 2009, the Bank meet and maintain both a core capital ratio equal to or greater than 7 percent and a total risk-based capital ratio equal to or greater than 11 percent. Further, no later than December 31, 2009, the Bank must meet and maintain both a core capital ratio equal to or greater than 8 percent and a total risk-based capital ratio equal to or greater than 12 percent. At September 30, 2009, the Bank, based upon presently available unaudited financial information, had a core capital ratio of 4.28 percent and a total risk-based capital ratio of 7.59 percent, each below the required capital ratios set forth above. The Company is working with its advisors to explore possible alternatives to raise additional equity capital. If completed, any such transaction would likely result in significant dilution for the current common shareholders. No agreements have been reached with respect to any possible capital infusion transaction.

To date, in the current economic environment, the Bank has not been able to raise sufficient additional capital to ensure compliance with the capital requirements of the Cease and Desist Order. Without a waiver by OTS or amendment or modification of the Cease and Desist Order, the Bank could be subject to further regulatory enforcement action, including, without limitation, the issuance of additional cease and desist orders (which may, among other things, further restrict the Bank ‘s business activities, or place the Bank in conservatorship or receivership). If the Bank is placed in conservatorship or receivership, it is highly likely that such action would lead to a complete loss of all value of the Company’s ownership interest in the Bank. In addition, further restrictions could be placed on the Bank if it were determined that the Bank was undercapitalized, significantly undercapitalized, or critically undercapitalized, with increasingly greater restrictions being imposed as any level of undercapitalization increased.

Anchor Bancorp and the Bank are no longer considered “well capitalized” for regulatory which will cause us to incur increased premiums for deposit insurance, require FDIC approval to gather brokered deposits, and will trigger acceleration of certain of our brokered deposits.

As of September 30, 2009, AnchorBank is not considered “well capitalized” for regulatory capital purposes. As a result, the FDIC will assess higher deposit insurance premiums on the Bank, which will impact our earnings. In addition, we will be required to obtain FDIC approval to gather brokered deposits during such times as we remain “adequately capitalized” for regulatory capital purposes. Requiring us to obtain regulatory approval prior to accepting brokered deposits will affect our ability to increase our liquidity position, in some cases, in a timely manner.

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Our allowance for losses on loans and leases may not be adequate to cover probable losses.

Our level of non-performing loans increased significantly in the fiscal year ended March 31, 2009 and for the three months ended September 30, 2009, relative to comparable periods for the preceding year. Our provision for loan losses increased by $183.1 million to $205.7 million for the fiscal year ended March 31, 2009 from $22.6 million for the fiscal year ended March 31, 2008. Our provision for loan losses was $60.9 million for the three months ended September 30, 2009 compared to $56.4 million for the three months ended March 31, 2009. Our allowance for loan losses increased by $33.5 million to $170.7 million, or 4.6% of total loans, at September 30, 2009 from $137.2 million, or 3.3% of total loans at March 31, 2009. Our allowance for loan losses also increased by $98.9 million to $137.2 million, or 3.3% of total loans, at March 31, 2009, from $38.3 million, or 0.9% of total loans, at March 31, 2008. Our allowance for loan and foreclosure losses was 40.1% at September 30, 2009, 52.1% at March 31, 2009 and 35.0% at March 31, 2008, respectively, of non-performing assets. There can be no assurance that any future declines in real estate market conditions and values, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan and lease losses, which would adversely affect our results of operations.

Our real estate operations have had and may continue to have an adverse effect on our results of operations.

We conduct real estate operations through Investment Directions, Inc, a wholly owned subsidiary, which invests in various real estate subsidiaries and partnerships and conducts real estate development and sales throughout California, Texas and Minnesota. As a result of weakening conditions in the real estate market and reduced sales of its properties, we have incurred losses from the operations of its real estate subsidiaries in recent years, which are expected to continue unless the real estate market improves. Losses from IDI’s real estate operations were $801,000 for the three months ended September 30, 2009 compared to $13.8 million for the three months ended March 31, 2009. Losses from IDI’s real estate operations increased by $16.1 million to $18.4 million for the fiscal year ended March 31, 2009 from $2.3 million for the fiscal year March 31, 2008. The increased loss for the year ended March 31, 2009 was the result of management applying a $17.6 million valuation allowance for the decline in the appraised value of real estate. We have no current plans to engage in additional real estate investment activities through IDI. We sold the majority of the real estate operations held by IDI during the quarter ended September 30, 2009. Additional losses from our real estate operations would have an adverse effect on our results of operations and capital.

Future Federal Deposit Insurance Corporation assessments will hurt our earnings.

In May 2009, the Federal Deposit Insurance Corporation adopted a final rule imposing a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounts to 5 basis points of total assets minus Tier 1 Capital as of June 30, 2009. We recorded an expense of $2.5 million during the quarter ended June 30, 2009, to reflect the special assessment. The assessment will be collected on September 30, 2009 and recorded against earnings for the quarter ended June 30, 2009. The special assessment will negatively impact the Company’s earnings and the Company expects that non-interest expenses will increase approximately $2.5 million for the year ended March 31, 2010 as compared to the year ended March 31, 2009 as a result of this special assessment. In addition, the final rule allows the Federal Deposit Insurance Corporation to impose additional emergency special assessments of up to 5 basis points per quarter for the third and fourth quarters of 2009 if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will further hurt the Company’s earnings.

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We are not paying dividends on our common stock and are deferring distributions on our preferred stock, and are otherwise restricted from paying cash dividends on our common stock. The failure to resume paying dividends on our preferred stock may adversely affect us.

We historically paid cash dividends before we suspended dividend payments on our common stock. The Federal Reserve, as a matter of policy, has indicated that bank holding companies should not pay dividends using funds from the TARP CPP. There is no assurance that we will resume paying cash dividends. Even if we resume paying dividends, future payment of cash dividends on our common stock, if any, will be subject to the prior payment of all unpaid dividends and deferred distributions on our Series B Preferred Stock. Further, we need prior Treasury approval to increase our quarterly cash dividends prior to January 30, 2012, or until the date we redeem all shares of Series B Preferred Stock or the Treasury has transferred all shares of Series B Preferred Stock to third parties. All dividends are declared and paid at the discretion of our board of directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements and such other factors as our board of directors may deem relevant.

Further, dividend payments on our Series B Preferred Stock are cumulative and therefore unpaid dividends and distributions will accrue and compound on each subsequent dividend payment date. In the event of any liquidation, dissolution or winding up of the affairs of our company, holders of the Series B Preferred Stock shall be entitled to receive for each share of Series B Preferred Stock the liquidation amount plus the amount of any accrued and unpaid dividends. If we miss six quarterly dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. We have deferred two dividend payments on the Series B Preferred Stock held by Treasury.

Risks Related to Our Credit Agreement

We are party to a credit agreement that requires us to observe certain covenants that limit our flexibility in operating our business.

We are party to a Credit Agreement, dated as of June 9, 2008, by and among the Corporation, the financial institutions from time to time party to the agreement and U.S. Bank National Association, as administrative agent for the lenders, as amended by Amendment No. 4 to Amended and Restated Credit Agreement, dated as of May 29, 2009 (the “Credit Agreement”). The Credit Agreement requires us to comply with affirmative and negative covenants customary for restricted indebtedness. These covenants limit our ability to, among other things:

• incur additional indebtedness or issue certain preferred shares;

• pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

• make certain investments;

• sell certain assets; and

• consolidate, merge, sell or otherwise dispose of all or substantially all of the Corporation’s assets.

The Credit Agreement and the Amendment also contain customary representations, warranties, conditions and events of default for agreements of such type. At September 30, 2009, the Corporation was not in compliance with all financial covenants contained in the Credit Agreement. The Agent has informed the Bank that it is in default of an obligation to make a payment of principal on the notes issued under the Credit Agreement, along with the violation of all financial covenants under

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the agreement. Under the terms of the Credit Agreement, the Agent and the lenders have certain rights, including the right to accelerate the maturity of the borrowings if all covenants are not complied with. Currently, no such action has been taken by the Agent or the lenders.

If the lenders under the secured credit facilities accelerate the repayment of borrowings, we may not have sufficient assets to make the payments when due.

Accordingly, this creates significant uncertainty related to the Corporation’s operations.

We must pay in full the outstanding balance under the Credit Agreement by the earlier of May 31, 2010 or the receipt of net proceeds of a financing transaction from the sale of equity securities.

As of September 30, 2009, the total revolving loan commitment under the Credit Agreement was $116.3 million and aggregate borrowings under the Credit Agreement were $116.3 million. We must pay in full the outstanding balance under the Credit Agreement by the earlier of May 31, 2010 or the receipt of net proceeds of a financing transaction from the sale of equity securities. If the net proceeds are received from the U.S. Department of the Treasury and the terms of such investment prohibit the use of the investment proceeds to repay senior debt, then no payment is required from the Treasury investment. As of the date of this filing, we do not have sufficient cash on hand to reduce our outstanding borrowings to zero. There can be no assurance that we will be able to raise sufficient capital or have sufficient cash on hand to reduce our outstanding borrowings to zero by May 31, 2010, which may limit our ability to fund ongoing operations.

Unless the maturity date is extended, our outstanding borrowings under our Credit Agreement are due on May 31, 2010. The Credit Agreement does not include a commitment to refinance the remaining outstanding balance of the loans when they mature and there is no guarantee that our lenders will renew their loans at that time. Refusal to provide us with renewals or refinancing opportunities would cause our indebtedness to become immediately due and payable upon the contractual maturity of such indebtedness, which could result in our insolvency if we are unable to repay the debt.

If we fail to meet our payment obligations under the Credit Agreement, such failure will constitute an event of default. When an event of default occurs, the agent, on behalf of the lenders may, among other remedies, seize the outstanding shares of the Bank’s capital stock held by the Corporation or other securities or assets of the Corporation’s subsidiaries which have been pledged as collateral for borrowings under the Credit Agreement. If the Agent were to take one or more of these actions, it could have a material adverse affect on our reputation, operations and ability to continue as a going concern, and you could lose your investment in the securities.

If we are unable to renew, replace or expand our sources of financing on acceptable terms, it may have an adverse effect on our business and results of operations and our ability to make distributions to shareholders. Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive, and any holders of preferred stock that is currently outstanding and that we may issue in the future may receive, a distribution of our available assets prior to holders of our common stock. The decisions by investors and lenders to enter into equity and financing transactions with us will depend upon a number of factors, including our historical and projected financial performance, compliance with the terms of our current credit arrangements, industry and market trends, the availability of capital and our investors’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities.

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Risks Related to Recent Market, Legislative and Regulatory Events

The TARP CPP and the ARRA impose certain executive compensation and corporate governance requirements that may adversely affect us and our business, including our ability to recruit and retain qualified employees.

The purchase agreement we entered into in connection with our participation in the TARP CPP required us to adopt the Treasury’s standards for executive compensation and corporate governance while the Treasury holds the equity issued pursuant to the TARP CPP, including the common stock which may be issued pursuant to the warrant to purchase 7,399,103 shares of common stock. These standards generally apply to our chief executive officer, chief financial officer and the three next most highly compensated senior executive officers. The standards include:

• ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

• required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;

• prohibition on making golden parachute payments to senior executives; and

• agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods.

The ARRA imposed further limitations on compensation during the TARP Assistance Period including

• a prohibition on making any golden parachute payment to a senior executive officer or any of our next five most highly compensated employees;

• a prohibition on any compensation plan that would encourage manipulation of the reported earnings to enhance the compensation of any of its employees; and

• a prohibition of the five highest paid executives from receiving or accruing any bonus, retention award, or incentive compensation, or bonus except for long-term restricted stock with a value not greater than one-third of the total amount of annual compensation of the employee receiving the stock.

The prohibition may expand to other employees based on increases in the aggregate value of financial assistance that we receive in the future.

The Treasury released an interim final rule on TARP standards for compensation and corporate governance on June 10, 2009, which implemented and further expanded the limitations and restrictions imposed on executive compensation and corporate governance by the TARP CPP and ARRA. The new Treasury interim final rules, which became effective on June 15, 2009, also prohibit any tax gross-up payments to senior executive officers and the next 20 highest paid executives. The rule further authorizes the Treasury to establish the Office of the Special Master for TARP Executive Compensation with broad powers to review compensation plans and corporate governance matters of TARP recipients.

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These provisions and any future rules issued by the Treasury could adversely affect our ability to attract and retain management capable and motivated sufficiently to manage and operate our business through difficult economic and market conditions. If we are unable to attract and retain qualified employees to manage and operate our business, we may not be able to successfully execute our business strategy.

TARP lending goals may not be attainable.

Congress and the bank regulators have encouraged recipients of TARP capital to use such capital to make loans and it may not be possible to safely, soundly and profitably make sufficient loans to creditworthy persons in the current economy to satisfy such goals. Congressional demands for additional lending by TARP capital recipients, and regulatory demands for demonstrating and reporting such lending are increasing. On November 12, 2008, the bank regulatory agencies issued a statement encouraging banks to, among other things, “lend prudently and responsibly to creditworthy borrowers” and to “work with borrowers to preserve homeownership and avoid preventable foreclosures.” We continue to lend and have expanded our mortgage loan originations, and to report our lending to the Treasury. The future demands for additional lending are unclear and uncertain, and we could be forced to make loans that involve risks or terms that we would not otherwise find acceptable or in our shareholders’ best interest. Such loans could adversely affect our results of operation and financial condition, and may be in conflict with bank regulations and requirements as to liquidity and capital. The profitability of funding such loans using deposits may be adversely affected by increased FDIC insurance premiums.

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

As of September 30, 2009, the Corporation does not have a stock repurchase plan in place.

Item 3 Defaults upon Senior Securities.

Not applicable.

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

The Annual Meeting of Stockholders was held on July 28, 2009. Information regarding the results voted upon is reported in Item 4 of the Form 10Q for the period ending June 30, 2009.

Item 5 Other Information.

Not applicable.

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Item 6 Exhibits.

The following exhibits are filed with this report:

Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included herein as an exhibit to this Report.
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included as an exhibit to this Report.
Exhibit 32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report.
Exhibit 32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report.

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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.

ANCHOR BANCORP WISCONSIN INC.

Date: November 16, 2009	By:	/s/ Chris Bauer
		Chris Bauer, President and Chief Executive Officer
Date: November 16, 2009	By:	/s/ Dale C. Ringgenberg
		Dale C. Ringgenberg, Treasurer and
		Chief Financial Officer

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