Anchor BanCorp Wisconsin (ABCW) 10-Q 2006 Q4 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 December 31, 2006

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 (IRS Employer Identification No.) incorporation or organization)

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.

Yes  þ           No  o

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

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

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

Yes  o           No  þ

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 January 31, 2007: 21,875,285

ANCHOR BANCORP WISCONSIN INC.

INDEX — FORM 10-Q

				Page #
Part I — Financial Information
	Item 1	Financial Statements (Unaudited)
			Consolidated Balance Sheets as of December 31, 2006 and March 31, 2006		2
			Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2006 and 2005		3
			Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2006 and 2005		5
			Notes to Unaudited Consolidated Financial Statements		7
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
			Results of Operations		26
			Financial Condition		31
			Asset Quality		32
			Liquidity & Capital Resources		35
			Guarantees		37
			Asset/Liability Management		38
	Item 3	Quantitative and Qualitative Disclosures About Market Risk			39
	Item 4	Controls and Procedures			39
Part II — Other Information
	Item 1	Legal Proceedings			39
	Item 1A	Risk Factors			39
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds			40
	Item 3	Defaults upon Senior Securities			40
	Item 4	Submission of Matters to a Vote of Security Holders			40
	Item 5	Other Information			40
	Item 6	Exhibits			41
Signatures					42
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer

1

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31,			March 31,
	2006			2006
	(Unaudited)
	(In Thousands, Except Share Data)
Assets
Cash	$	87,379		$	66,192
Interest-bearing deposits		63,725			86,352
Cash and cash equivalents		151,104			152,544
Investment securities available for sale		41,990			49,521
Mortgage-related securities available for sale		258,685			247,438
Mortgage-related securities held to maturity (fair value of $70 and $77, respectively)		70			77
Loans, less allowance for loan losses of $20,031 at December 31, 2006 and $15,570 at March 31, 2006:
Held for sale		4,470			5,509
Held for investment		3,834,381			3,614,265
Foreclosed properties and repossessed assets, net		4,499			2,192
Real estate held for development and sale		61,624			54,330
Office properties and equipment		30,684			29,867
Federal Home Loan Bank stock—at cost		40,214			45,348
Accrued interest on investments and loans and other assets		58,219			54,093
Goodwill		19,956			19,956
Total assets	$	4,505,896		$	4,275,140
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	254,454		$	242,924
Interest bearing		2,986,086			2,797,293
Total deposits		3,240,540			3,040,217
Short-term borrowings		334,400			186,200
Long-term borrowings		506,819			675,661
Other liabilities		79,902			45,040
Total liabilities		4,161,661			3,947,118
Minority interest in real estate partnerships		7,713			6,997
Commitments and contingent liabilities (Note 8)
Preferred stock, $.10 par value, 5,000,000 shares authorized, none outstanding		—			—
Common stock, $.10 par value, 100,000,000 shares authorized, 25,363,339 shares issued, 21,782,729 and 21,854,303 shares outstanding, respectively		2,536			2,536
Additional paid-in capital		71,283			70,517
Retained earnings		357,616			340,364
Accumulated other comprehensive loss		(1,152	)		(2,558	)
Treasury stock (3,580,610 shares and 3,509,036 shares, respectively), at cost		(88,781	)		(82,144	)
Deferred compensation obligation		(4,980	)		(7,690	)
Total stockholders’ equity		336,522			321,025
Total liabilities and stockholders’ equity	$	4,505,896		$	4,275,140

See accompanying Notes to Unaudited Consolidated Financial Statements.

2

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2006		2005		2006			2005
	(In Thousands, Except Per Share Data)
Interest income:
Loans	$	67,265	$	56,443	$	194,779		$	161,192
Mortgage-related securities		3,112		2,962		9,078			8,639
Investment securities		1,386		1,004		3,583			2,907
Interest-bearing deposits		814		988		1,884			2,888
Total interest income		72,577		61,397		209,324			175,626
Interest expense:
Deposits		30,746		20,257		84,720			54,845
Short-term borrowings		4,220		2,958		10,032			7,725
Long-term borrowings		5,082		4,345		16,360			13,646
Total interest expense		40,048		27,560		111,112			76,216
Net interest income		32,529		33,837		98,212			99,410
Provision for loan losses		3,375		700		7,205			2,450
Net interest income after provision for loan losses		29,154		33,137		91,007			96,960
Non-interest income:
Real estate investment partnership revenue		8,009		6,378		16,126			29,450
Loan servicing income		1,155		1,280		3,569			3,681
Credit enhancement income		418		414		1,252			1,216
Service charges on deposits		2,684		2,355		7,629			7,084
Insurance commissions		1,002		589		2,800			1,897
Net gain on sale of loans		776		144		2,995			1,460
Net gain (loss) on sale of investments and mortgage-related securities		—		120		(283	)		394
Other revenue from real estate operations		863		1,470		4,585			3,384
Other		1,209		1,670		3,806			4,476
Total non-interest income		16,116		14,420		42,479			53,042

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

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2006			2005		2006		2005
	(In Thousands, Except Per Share Data)
Non-interest expense:
Compensation	$	11,340		$	11,862	$	33,645	$	34,032
Real estate investment partnership cost of sales		7,115			5,527		14,454		24,718
Occupancy		1,904			1,820		5,888		5,144
Furniture and equipment		1,418			1,423		4,465		4,609
Data processing		1,445			1,425		4,505		4,074
Marketing		1,152			1,108		3,463		3,294
Other expenses from real estate partnership operations		1,878			2,467		6,635		6,721
Other		3,306			3,133		9,856		9,531
Total non-interest expense		29,558			28,765		82,911		92,123
Minority interest in income (loss) of real estate partnership operations		(31	)		304		332		1,694
Income before income taxes		15,743			18,488		50,243		56,185
Income taxes		5,308			7,595		19,500		22,954
Net income	$	10,435		$	10,893	$	30,743	$	33,231
Earnings per share:
Basic	$	0.49		$	0.51	$	1.43	$	1.53
Diluted		0.48			0.50		1.42		1.50
Dividends declared per share		0.17			0.16		0.50		0.46

See accompanying Notes to Unaudited Consolidated Financial Statements.

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended December 31,
	2006			2005
	(In Thousands)
Operating Activities
Net income	$	30,743		$	33,231
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,205			2,450
Provision for depreciation and amortization		3,075			3,131
Cash paid due to origination of loans held for sale		(303,102	)		(567,011	)
Cash received due to sale of loans held for sale		307,136			565,525
Net gain on sales of loans		(2,995	)		(1,460	)
Loss (gain) on sale of investments		283			(394	)
Increase in accrued interest receivable		(3,641	)		(3,441	)
(Increase) decrease in prepaid exp and other assets		(485	)		3,870
Increase in accrued interest payable		1,279			2,161
Increase in accounts payable		34,915			16,300
Other		(8,354	)		(4,647	)
Net cash provided by operating activities		66,059			49,715
Investing Activities
Proceeds from sales of investment securities available for sale		65			—
Proceeds from maturities of investment securities		157,520			144,080
Purchase of investment securities available for sale		(148,688	)		(127,888	)
Proceeds from sale of mortgage-related securities available for sale		—			13,042
Purchase of mortgage-related securities available for sale		(47,779	)		(23,718	)
Principal collected on mortgage-related securities		38,749			49,954
Decrease (Increase) in FHLB stock		5,134			(425	)
Net increase in loans held for investment		(223,111	)		(224,957	)
Purchases of office properties and equipment		(3,701	)		(1,746	)
Sales of office properties and equipment		161			9
Sales of real estate		—			425
Investment in real estate held for development and sale		(7,546	)		(2,682	)
Net cash used in investing activities		(229,196	)		(173,906	)

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

	Nine Months Ended December 31,
	2006			2005
	(In Thousands)
Financing Activities
Increase in deposit accounts	$	205,295		$	117,680
Decrease in advance payments by borrowers for taxes and insurance		(6,304	)		(6,211	)
Increase in short-term borrowings		148,200			64,200
Proceeds from long-term borrowings		10,806			110,680
Repayment of long-term borrowings		(179,648	)		(153,848	)
Treasury stock purchased		(7,930	)		(23,283	)
Exercise of stock options		1,056			297
Cash received from employee stock purchase plan		182			307
Tax benefit from stock related compensation		766			1,886
Payments of cash dividends to stockholders		(10,726	)		(9,897	)
Net cash provided by financing activities		161,697			101,811
Net decrease in cash and cash equivalents		(1,440	)		(22,380	)
Cash and cash equivalents at beginning of period		152,544			166,436
Cash and cash equivalents at end of period	$	151,104		$	144,056
Supplementary cash flow information:
Cash paid or credited to accounts:
Interest on deposits and borrowings	$	109,833		$	74,055
Income taxes		26,690			21,221
Non-cash transactions:
Transfer of mortgage loans held to maturity to held for sale		—			94,129
Securitization of mortgage loans held for sale to mortgage-backed securities		—			94,165

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

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. Investments in 50% owned partnerships are treated as variable interest entities and are consolidated into the Corporation’s balance sheet and income statement.

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. The results of operations and other data for the three-month and nine-month periods ended December 31, 2006 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2007. 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, 2006.

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 Financial Accounting Standards Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 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.

Real estate investment partnership revenue is presented in non-interest income and represents revenue recognized upon the closing of sales of developed lots and homes to independent third parties. Real estate investment partnership cost of sales is included in non-interest expense and represents the costs of such closed sales. Other revenue and other expenses from real estate operations are also included in non-interest income and non-interest expense, respectively.

Minority 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 minority interest in income of real estate partnership operations.

Certain prior period accounts have been reclassified to conform to the current period presentations.

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Note 3 — Stock-Based Compensation

The Corporation has stock compensation plans under which shares of common stock are reserved for the grant of incentive and non-incentive stock options and restricted stock or restricted stock units to directors, officers and employees. The date the options are first exercisable is determined by a committee of the Board of Directors of the Corporation. The options expire no later than ten years from the grant date.

At December 31, 2006, an aggregate of 908,332 shares were available for future grants, including up to 300,000 shares that may be awarded in the form of restricted stock or restricted stock units which are not subject to the achievement of a performance target or targets. A summary of stock option activity is provided in the following table:

	Nine Months Ended December 31, 2006
				Weighted
				Average
	Options			Price
Outstanding at beginning of period		1,159,022		$	17.75
Granted		—			—
Exercised		(147,806	)		11.24
Forfeited		—			—
Outstanding at end of period		1,011,216		$	18.70
Options exercisable at December 31, 2006		1,011,216		$	18.70

In March 2006, the Board approved the accelerated vesting and exercisability of all unvested and unexercisable stock options to purchase common stock of the Corporation outstanding as of March 31, 2006. As a result, options to purchase 67,240 shares of common stock, which would have otherwise vested and become exercisable from time to time over the next four years (including options to purchase 30,168 shares of common stock that would have vested and become exercisable in June 2006), became vested and exercisable on March 31, 2006. The number of shares and exercise price of the options subject to acceleration are unchanged. The accelerated options have exercise prices between $23.77 and $31.945 per share, with a weighted average exercise price of $26.43 per share.

The Corporation estimates that accelerating the vesting and exercisability of these options eliminated approximately $0.5 million of non-cash compensation expense that would otherwise have been recorded in the Corporation’s income statements in future periods upon its adoption of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as of April 1, 2006.

The following table represents outstanding stock options and exercisable stock options at their respective ranges of exercise prices at December 31, 2006:

	Options Outstanding						Exercisable Options
			Weighted-
			Average
			Remaining		Weighted-				Weighted-
			Contractual		Average				Average
Range of Exercise Prices	Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$10.78 - $12.99		193,446		0.49	$	11.66		193,446	$	11.66
$15.06 - $23.77		741,680		4.22		19.38		741,680		19.38
$28.50 - $31.95		76,090		8.19		29.99		76,090		29.99
		1,011,216		3.81		18.70		1,011,216		18.70

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A summary of restricted stock grants is provided in the following table:

	Nine Months Ended December 31, 2006
				Weighted
	Number of Shares			Average
	of Restricted Stock			Price
Balance at beginning of period		20,700		$	31.95
Restricted stock granted		55,000			28.47
Restricted stock vested		(2,500	)		31.95
Restricted stock forfeited		—			—
Balance at end of period		73,200		$	29.62

Prior to April 1, 2006, the Corporation accounted for stock awards under the recognition and measurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“FAS 123”). No stock-based employee compensation cost was recognized in the Statements of Income for the years ended March 31, 2006 and 2005, nor the three- and nine-month periods ended December 31, 2005, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective April 1, 2006, the Corporation adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (“FAS 123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). Results for the prior periods have not been restated.

As a result of adopting FAS 123(R) on April 1, 2006, the Corporation’s income before taxes and net income for the nine-month period ended December 31, 2006 were no different than if it had continued to account for share-based compensation under APB No. 25 due to the fact that no compensation expense was recognized in the current period.

Prior to the adoption of FAS 123(R), the Corporation presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123(R) requires the cash flow resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FAS 123 to options granted under the Corporation’s stock compensation plans in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized expense over the options’ vesting periods.

9

	Three Months			Nine Months
	Ended			Ended
	December 31, 2005			December 31, 2005
	(Dollars in thousands, except per share data)
Net income, as reported	$	10,893		$	33,231
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(47	)		(179	)
Pro forma net income	$	10,846		$	33,052
Earnings per share:
Basic:
As reported	$	0.51		$	1.53
Pro forma		0.50			1.52
Diluted:
As reported	$	0.50		$	1.50
Pro forma		0.49			1.49

Note 4 — Goodwill and Other Intangible Assets

The Corporation’s carrying value of goodwill was $20.0 million at December 31, 2006 and at March 31, 2006.

The Corporation adopted FAS 156 – “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” (“FAS 156”) as of April 1, 2006. FAS 156 changes the way the Corporation accounts for servicing assets and obligations associated with financial assets acquired or disposed of. 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 defined two classes of MSRs to be accounted for under FAS 156 – residential (one to four family) and large multi-family/commercial real estate serviced for private investors.

The first class, residential MSRs, which 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 obtains a servicing asset when we deliver loans “as an agent” to the FHLB of Chicago under its MPF program. Initial fair value of the servicing right is calculated by a discounted cash flow model based on market value assumptions at the time of origination. In addition, this class includes similar residential loans purchased from other banks at an agreed upon purchase price which becomes the initial fair value. The Corporation assesses this class for impairment using current market value assumptions at each reporting period.

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 estimated by using an internal valuation model and a third party opinion of value. Both methods are based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, prepayments and servicing costs.

Critical assumptions used in our discounted cash flow model include mortgage prepayment speeds, discount rates, costs to service and ancillary income. Variations in our assumptions could materially affect the estimated fair values. Changes to our 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 9 to 20 percent and national prepayment speeds. Many of these assumptions are subjective and require a high level of management judgment. MSR valuation assumptions are

10

reviewed and approved by management on a quarterly basis. In addition, our MSR portfolio and assumptions are evaluated quarterly by a third party and the results are reviewed by management.

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 and an increase in fair value of MSRs. National prepayment speeds, obtained from a third party source, are imported into our valuation model monthly.

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.

Information regarding the Corporation’s mortgage servicing rights follows:

	Residential			Other
	(In Thousands)
Mortgage servicing rights at beginning of period March 31, 2005	$	5,797		$	1,153
Additions		1,532			808
Amortization		(1,594	)		(637	)
Mortgage servicing rights before valuation allowance at end of period		5,735			1,324
Valuation allowance		(456	)		—
Net mortgage servicing rights at end of period March 31, 2006	$	5,279		$	1,324
Fair Market Value at the end of the period	$	12,431		$	1,678
Key Assumptions:
Weighted average discount		11.05	%		16.99	%
Weighted average prepayment speed assumption		11.18	%		22.35	%
Mortgage servicing rights at beginning of period March 31, 2006	$	5,735		$	1,324
Additions		1,865			301
Amortization		(1,369	)		(559	)
Mortgage servicing rights before valuation allowance at end of period		6,231			1,066
Valuation allowance		(300	)		—
Net mortgage servicing rights at end of period December 31, 2006	$	5,931		$	1,066
Fair Market Value at the end of the period	$	11,284		$	1,677
Key Assumptions:
Weighted average discount		11.20	%		19.29	%
Weighted average prepayment speed assumption		13.57	%		15.64	%

11

The projections of amortization expense for mortgage servicing rights set forth below are based on asset balances and the interest rate environment as of December 31, 2006. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

The following table shows the current period and estimated future amortization expense for mortgage servicing rights:

	Residential		Other
	(In Thousands)
Quarter ended December 31, 2006 (actual)	$	479	$	114
Estimate for the year ended March 31,
2007	$	1,826	$	746
2008		1,826		320
2009		1,826		—
2010		753		—
	$	6,231	$	1,066

12

Note 5 — Stockholders’ Equity

During the quarter ended December 31, 2006, options for 7,950 shares of common stock were exercised at a weighted-average price of $17.54 per share for a total of 147,806 shares for the nine-month period at a weighted-average price of $11.24 per share. Treasury shares were issued in exchange for the options using the last-in-first-out method. The cost of the treasury shares issued in excess of the option price paid of $88,000 was charged to retained earnings. During the quarter ended December 31, 2006, the Corporation issued 67,522 shares of treasury stock to the Corporation’s retirement plans. The weighted-average cost of these shares was $28.44 per share or $1.9 million in the aggregate. The $7,000 excess of the cost over the market price of the treasury shares was charged to retained earnings. During the quarter ended December 31, 2006, the Corporation acquired an aggregate of 76,800 shares of its common stock at a weighted-average price of $28.55 per share, or an aggregate of $2.2 million, as a result of purchases in the open market. See Part II, Item 2. On November 15, 2006, the Corporation paid a cash dividend of $.17 per share, amounting to $3.6 million, in the aggregate.

Unrealized gains or losses on the Corporation’s available-for-sale securities are included in other comprehensive income. During the quarters ended December 31, 2006 and 2005, total comprehensive income amounted to $11.3 million and $9.5 million, respectively. For the nine months ended December 31, 2006 and 2005, comprehensive income was $32.1 million and $32.1 million, respectively.

Upon adoption of Financial Accounting Standard 123(R), the accounting for restricted stock was changed to prospectively recognize the unearned deferred compensation. The unearned portion was previously shown as a reduction of equity.

13

Note 6 — Earnings Per Share

Basic earnings per share for the three and nine months ended December 31, 2006 and 2005 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 common shares outstanding plus the effect of dilutive securities. The effects of dilutive securities are computed using the treasury stock method.

14

	Three Months Ended December 31,
	2006		2005
Numerator:
Net income	$	10,435,100	$	10,893,097
Numerator for basic and diluted earnings per share—income available to common stockholders	$	10,435,100	$	10,893,097
Denominator:
Denominator for basic earnings per share—weighted-average shares		21,346,065		21,489,319
Effect of dilutive securities:
Employee stock options		268,287		385,011
Management Recognition Plans		—		—
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,614,352		21,874,330
Basic earnings per share	$	0.49	$	0.51
Diluted earnings per share	$	0.48	$	0.50

	Nine Months Ended December 31,
	2006		2005
Numerator:
Net income	$	30,742,722	$	33,231,176
Numerator for basic and diluted earnings per share—income available to common stockholders	$	30,742,722	$	33,231,176
Denominator:
Denominator for basic earnings per share—weighted-average shares		21,429,886		21,706,059
Effect of dilutive securities:
Employee stock options		292,944		402,083
Management Recognition Plans		—		1,690
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,722,830		22,109,832
Basic earnings per share	$	1.43	$	1.53
Diluted earnings per share	$	1.42	$	1.50

15

Note 7 — Segment Information

According to the materiality thresholds of SFAS No. 131, the Corporation is required to report each operating segment based on materiality thresholds of ten percent or more of certain amounts, such as revenue. Additionally, the Corporation is required to report separate operating segments until the revenue attributable to such segments is at least 75 percent of total consolidated revenue. SFAS No. 131 allows the Corporation to combine operating segments, even though they may be individually material, if the segments have similar basic characteristics in the nature of the products, production processes, and type or class of customer for products or services. Based on the above criteria, the Corporation has two reportable segments: community banking and real estate investments.

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, and its subsidiary, NIDI, invest in limited partnerships in real estate developments. Such developments include recreational residential developments and industrial developments (such as office parks).

Net loss from the real estate investment segment decreased $350,000 to a net loss of $302,000 and increased $132,000 to a net loss of $1.3 million for the three and nine months ended December 31, 2006, respectively, as compared to net losses of $652,000 and $1.2 million for the same respective periods in 2005. The decreased loss for the three-month period was primarily due to an increase in real estate investment partnership revenue, which was the result of an increase in sales at the partnership level, and the increase in net loss for the nine-month period was primarily due to a decrease in sales at the partnership level. For the three-month period, other revenue from real estate operations, which is comprised of rental income at the partnership level, decreased $607,000. In addition, there was an increase of $1.6 million in partnership sales which was offset in part by a $1.6 million increase in real estate investment cost of sales and a $335,000 decrease in minority interest in income of real estate partnerships for the three months ended December 31, 2006 as compared to the same respective period in the prior year. For the nine-month period, there was a decrease of $13.3 million in partnership sales, which was offset in part by a $10.3 million decrease in real estate investment cost of sales. There was also a $1.4 million decrease in minority interest in income of real estate partnerships and a $508,000 decrease in income tax expense for the nine-month period ended December 31, 2006. These decreases were partially offset by a $1.2 million increase in other revenue from real estate operations as a result of a legal settlement related to the Indian Palms property for the nine months ended December 31, 2006, as compared to the same respective period in the prior year. The decrease in sales was due to the slowing of housing sales in the California market, which is reflective of the national trend. The partnerships currently have approximately 47 single family housing units and approximately 100 individual lots for sale. Management anticipates continued lower sales activity for the remainder of the fiscal year.

The following represents reconciliations of reportable segment revenues, profit or loss and assets to the Corporation’s consolidated totals for the three and nine months ended December 31, 2006 and 2005, respectively.

16

	Three Months Ended December 31, 2006
				(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	88		$	73,005		$	(516	)	$	72,577
Interest expense		508			40,056			(516	)		40,048
Net interest income (loss)		(420	)		32,949			—			32,529
Provision for loan losses		—			3,375			—			3,375
Net interest income (loss) after provision for loan losses		(420	)		29,574			—			29,154
Real estate investment partnership revenue		8,009			—			—			8,009
Other revenue from real estate operations		863			—			—			863
Other income		—			7,274			(30	)		7,244
Real estate investment partnership cost of sales		(7,115	)		—			—			(7,115	)
Other expense from real estate partnership operations		(1,908	)		—			30			(1,878	)
Minority interest in loss of real estate partnerships		31			—			—			31
Other expense		—			(20,565	)		—			(20,565	)
Income (loss) before income taxes		(540	)		16,283			—			15,743
Income tax expense (benefit)		(238	)		5,546			—			5,308
Net income (loss)	$	(302	)	$	10,737		$	—		$	10,435
Total assets at end of period	$	75,561		$	4,430,335		$	—		$	4,505,896

	Three Months Ended December 31, 2005
				(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	84		$	61,731		$	(418	)	$	61,397
Interest expense		417			27,561			(418	)		27,560
Net interest income (loss)		(333	)		34,170			—			33,837
Provision for loan losses		—			700			—			700
Net interest income (loss) after provision for loan losses		(333	)		33,470			—			33,137
Real estate investment partnership revenue		6,378			—			—			6,378
Other revenue from real estate operations		1,470			—			—			1,470
Other income		—			6,602			(30	)		6,572
Real estate investment partnership cost of sales		(5,527	)		—			—			(5,527	)
Other expense from real estate partnership operations		(2,497	)		—			30			(2,467	)
Minority interest in income of real estate partnerships		(304	)		—			—			(304	)
Other expense		—			(20,771	)		—			(20,771	)
Income (loss) before income taxes		(813	)		19,301			—			18,488
Income tax expense (benefit)		(161	)		7,756			—			7,595
Net income (loss)	$	(652	)	$	11,545		$	—		$	10,893
Total assets at end of period	$	77,283		$	4,122,951		$	—		$	4,200,234

17

	Nine Months Ended December 31, 2006
				(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	279		$	210,523		$	(1,478	)	$	209,324
Interest expense		1,439			111,151			(1,478	)		111,112
Net interest income (loss)		(1,160	)		99,372			—			98,212
Provision for loan losses		—			7,205			—			7,205
Net interest income (loss) after provision for loan losses		(1,160	)		92,167			—			91,007
Real estate investment partnership revenue		16,126			—			—			16,126
Other revenue from real estate operations		4,585			—			—			4,585
Other income		—			21,857			(89	)		21,768
Real estate investment partnership cost of sales		(14,454	)		—			—			(14,454	)
Other expense from real estate partnership operations		(6,724	)		—			89			(6,635	)
Minority interest in income of real estate partnerships		(332	)		—			—			(332	)
Other expense		—			(61,822	)		—			(61,822	)
Income (loss) before income taxes		(1,959	)		52,202			—			50,243
Income tax expense (benefit)		(637	)		20,137			—			19,500
Net income (loss)	$	(1,322	)	$	32,065		$	—		$	30,743
Total assets at end of period	$	75,561		$	4,430,335		$	—		$	4,505,896

	Nine Months Ended December 31, 2005
				(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	247		$	176,561		$	(1,182	)	$	175,626
Interest expense		1,178			76,220			(1,182	)		76,216
Net interest income (loss)		(931	)		100,341			—			99,410
Provision for loan losses		—			2,450			—			2,450
Net interest income (loss) after provision for loan losses		(931	)		97,891			—			96,960
Real estate investment partnership revenue		29,450			—			—			29,450
Other revenue from real estate operations		3,384			—			—			3,384
Other income		—			20,297			(89	)		20,208
Real estate investment partnership cost of sales		(24,718	)		—			—			(24,718	)
Other expense from real estate partnership operations		(6,810	)		—			89			(6,721	)
Minority interest in income of real estate partnerships		(1,694	)		—			—			(1,694	)
Other expense		—			(60,684	)		—			(60,684	)
Income (loss) before income taxes		(1,319	)		57,504			—			56,185
Income tax expense (benefit)		(129	)		23,083			—			22,954
Net income (loss)	$	(1,190	)	$	34,421		$	—		$	33,231
Total assets at end of period	$	77,283		$	4,122,951		$	—		$	4,200,234

18

Note 8 — 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):

	December 31,		March 31,
	2006		2006
Commitments to extend credit:	$	75,792	$	95,209
Unused lines of credit:
Home equity		91,675		94,844
Credit cards		40,643		43,255
Commercial		120,870		138,751
Letters of credit		74,087		68,282
Credit enhancement under the Federal Home Loan Bank of Chicago Mortgage Partnership Finance Program		20,257		17,977
Real estate investment segment borrowing guarantees unfunded		18,656		18,041
Other financial guarantees		900		—

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 real estate investment segment borrowing guarantees unfunded represent the Corporation’s commitment through its Investment Directions, Inc. (“IDI”) subsidiary to guarantee the borrowings of the related real estate investment partnerships up to a total of $44.4 million. 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.

19

Note 9 — Subsequent Events

On January 19, 2007, the Corporation declared a $0.17 per share cash dividend on its common stock, amounting to $3.7 million in the aggregate, to be paid on February 15, 2007 to stockholders of record on January 31, 2007.

20

ANCHOR BANCORP WISCONSIN INC.

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

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. These forward-looking statements describe future plans or strategies and include the Corporation’s expectations of future financial results. The Corporation’s ability to predict results or the effect of future plans or strategies is inherently uncertain and the Corporation can give no assurance that those results or expectations will be attained. 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. Treasury and the Federal Reserve Board, vii) changes in the quality or composition of the Corporation’s loan and investment portfolios, viii) demand for loan products, ix) the level of loan and mortgage-backed securities repayments, x) deposit flows, xi) competition, xii) demand for financial services in the Corporation’s markets, and xiii) changes in accounting principles, policies or guidelines. In addition, acquisitions 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.

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.

Executive Overview

Highlights for the third quarter ended December 31, 2006 include:

• Diluted earnings per share decreased to $0.48 for the quarter ended December 31, 2006 compared to $0.50 per share for the quarter ended December 31, 2005 primarily due to a $2.7 million increase in the loan loss provision and a $1.3 million decrease net interest income, which were partially offset by a $2.3 million decrease in income tax expense;

• The net interest margin decreased to 3.05% for the quarter ended December 31, 2006 compared to 3.39% for the quarter ended December 31, 2005 because interest-bearing liabilities repriced upward faster than interest-earning assets;

• Loans receivable increased $287.6 million or 8.10% since December 31, 2005 and increased $219.1 million, or 6.05%, since March 31, 2006;

• Deposits grew $253.3 million or 8.48% since December 31, 2005 and $200.3 million, or 6.59%, since March 31, 2006;

• Book value per share increased to $15.45 at December 31, 2006 compared to $14.69 at March 31, 2006 and $14.32 at December 31, 2005; and

• Non-performing assets increased $23.8 million to $39.5 million from March 31, 2006 primarily due to the addition of $21.5 million in non-accrual loans. Management believes that changing economic conditions in the real estate market significantly attributed to the increase in non-performing assets.

21

• Real estate investment partnership revenue increased $1.6 million from $6.4 million for the three months ended December 31, 2005 to $8.0 million for the three months ended December 31, 2006. Real estate investment partnership cost of sales increased $1.6 million from $5.5 million at December 31, 2005 to $7.1 million. These increases were due to the increase in the number of sales at the real estate partnership level. Net loss from the real estate investment segment decreased from $652,000 to $302,000 for the three months ended December 31, 2005 and 2006, respectively. Net loss from the real estate investment segment increased from $1.2 million to $1.3 million for the nine months ended December 31, 2005 and 2006, respectively. The partnerships currently have approximately 47 single family housing units and approximately 100 individual lots for sale. Management anticipates continued lower sales activity for the remainder of the fiscal year.

• On November 2, 2006, the Federal Deposit Insurance Corporation (“FDIC”) adopted final regulations to implement the Federal Deposit Insurance Reform Act of 2005 passed by Congress earlier this year to create a stronger and more stable insurance system. The final regulations include the annual assessment rates that became effective at the beginning of 2007. The new rates for nearly all banks will vary between five and seven cents for every $100 of domestic deposits. Applied to the Bank’s assessment base of approximately $3.2 billion, this translates to an annual deposit premium of approximately $1.6 to $2.3 million. Most banks, including the Bank, have not been required to pay any deposit insurance premiums since 1995. As part of the Reform Act, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC’s insurance reserves. As a result, the majority of banks will have assessment credits to initially offset all of their premiums in 2007. The preliminary assessment credit for the Bank was calculated at $2.7 million.

22

Selected quarterly data are set forth in the following tables.

	Three Months Ended
(Dollars in thousands - except per share amounts)
	12/31/2006			9/30/2006			6/30/2006			3/31/2006
Operations Data:
Net interest income	$	32,529		$	32,838		$	32,845		$	33,294
Provision for loan losses		3,375			2,625			1,205			1,450
Net gain on sale of loans		776			1,349			869			1,348
Real estate investment partnership revenue		8,009			3,631			4,486			4,524
Other non-interest income		7,331			8,075			7,952			8,063
Real estate investment partnership cost of sales		7,115			3,486			3,853			3,791
Other non-interest expense		22,443			23,427			22,586			22,534
Minority interest in income (loss) of real estate partnership operations		(31	)		(75	)		438			29
Income before income taxes		15,743			16,430			18,070			19,425
Income taxes		5,308			6,769			7,423			7,973
Net income		10,435			9,661			10,647			11,452
Selected Financial Ratios(1):
Yield on earning assets		6.81	%		6.76	%		6.52	%		6.34	%
Cost of funds		3.92			3.75			3.43			3.11
Interest rate spread		2.89			3.01			3.09			3.23
Net interest margin		3.05			3.15			3.23			3.35
Return on average assets		0.93			0.88			1.00			1.10
Return on average equity		12.51			11.72			13.14			14.46
Average equity to average assets		7.45			7.53			7.60			7.59
Non-interest expense to average assets		2.64			2.46			2.48			2.52
Per Share:
Basic earnings per share	$	0.49		$	0.45		$	0.50		$	0.54
Diluted earnings per share		0.48			0.44			0.49			0.53
Dividends per share		0.17			0.17			0.16			0.16
Book value per share		15.45			15.18			14.91			14.69
Financial Condition:
Total assets	$	4,505,896		$	4,481,586		$	4,356,921		$	4,275,140
Loans receivable, net
Held for sale		4,470			5,393			4,118			5,509
Held for investment		3,834,381			3,794,039			3,709,745			3,614,265
Deposits		3,240,540			3,223,759			3,177,220			3,040,217
Borrowings		841,219			875,014			791,098			861,861
Stockholders’ equity		336,522			330,774			326,495			321,025
Allowance for loan losses		20,031			18,393			15,636			15,570
Non-performing assets		39,484			22,506			18,836			15,721

⁽¹⁾ Annualized when appropriate.

23

	Three Months Ended
(Dollars in thousands - except per share amounts)
	12/31/2005			9/30/2005			6/30/2005			3/31/2005
Operations Data:
Net interest income	$	33,837		$	33,428		$	32,145		$	31,231
Provision for loan losses		700			1,485			265			165
Net gain on sale of loans		144			1,193			123			763
Real estate investment partnership revenue		6,378			11,559			11,513			51,112
Other non-interest income		7,898			7,090			7,143			7,838
Real estate investment partnership cost of sales		5,527			10,780			8,411			30,966
Other non-interest expense		23,238			22,536			21,630			24,682
Minority interest in income of real estate partnership operations		304			102			1,288			8,582
Income before income taxes		18,488			18,367			19,330			26,549
Income taxes		7,595			7,589			7,770			9,748
Net income		10,893			10,778			11,560			16,801
Selected Financial Ratios(1):
Yield on earning assets		6.15	%		5.97	%		5.73	%		5.56	%
Cost of funds		2.88			2.68			2.53			2.37
Interest rate spread		3.27			3.29			3.20			3.19
Net interest margin		3.39			3.40			3.32			3.29
Return on average assets		1.04			1.04			1.14			1.68
Return on average equity		13.91			13.62			14.70			21.44
Average equity to average assets		7.45			7.66			7.75			7.82
Non-interest expense to average assets		2.74			3.22			2.96			5.56
Per Share:
Basic earnings per share	$	0.51		$	0.49		$	0.53		$	0.75
Diluted earnings per share		0.50			0.48			0.52			0.74
Dividends per share		0.16			0.16			0.14			0.13
Book value per share		14.32			14.28			14.22			13.92
Financial Condition:
Total assets	$	4,200,234		$	4,204,470		$	4,136,822		$	4,050,456
Loans receivable, net
Held for sale		5,847			6,957			6,313			4,361
Held for investment		3,545,436			3,466,265			3,383,250			3,414,608
Deposits		2,987,284			3,032,976			2,960,468			2,873,533
Borrowings		814,641			794,044			798,927			793,609
Stockholders’ equity		312,089			315,349			315,416			310,678
Allowance for loan losses		15,252			22,582			26,532			26,444
Non-performing assets		17,265			16,201			17,030			15,908

⁽¹⁾ Annualized when appropriate.

24

Significant Accounting Policies

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

•	The allowance for loan losses is maintained at a level believed adequate by management to absorb probable and estimable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio; an assessment of individual problem loans; actual and anticipated loss experience; and current economic events in specific industries and geographical areas. These economic events include unemployment levels, regulatory guidance, and general economic conditions. Determination of the reserve is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operating expense based on management’s periodic evaluation of the factors previously mentioned as well as other pertinent factors.
	Specific reserves are established for expected losses resulting from analysis developed through specific credit allocations on individual loans and are based on a regular analysis of impaired loans where the internal credit rating is at or below a predetermined classification. A loan is considered impaired when it is probable that the Corporation will be unable to collect all contractual principal and interest due according to the terms of the loan agreement. Loans subject to impairment are defined as non-accrual and restructured loans exclusive of smaller homogeneous loans such as home equity, installment, and 1-4 family residential loans. The fair value of the loans is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the underlying collateral less costs to sell, if the loan is collateral dependent.
•	Valuation of mortgage servicing rights requires the use of judgment. Mortgage servicing rights are established on loans that are originated and subsequently sold with servicing rights retained. A portion of the loan’s book basis is allocated to mortgage servicing rights when a loan is sold. The fair value of mortgage servicing rights is the present value of estimated future net cash flows from the servicing relationship using current market 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.
•	Goodwill is reviewed at least annually for impairment, which requires judgment. Goodwill has been recorded as a result of an acquisition in which purchase price exceeded fair value of net assets acquired. The price paid for the acquisition is analyzed and compared to a number of current indices. If goodwill is determined to be impaired, it would be expensed in the period in which it became impaired.

Set forth below is management’s discussion and analysis of the Corporation’s financial condition and results of operations for the three and nine months ended December 31, 2006, 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.

25

RESULTS OF OPERATIONS

General. Net income for the three and nine months ended December 31, 2006 decreased $458,000 or 4.2% to $10.4 million from $10.9 million and decreased $2.5 million or 7.5% to $30.7 million from $33.2 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 $2.7 million, a decrease in net interest income of $1.3 million and an increase in non-interest expense of $793,000, which were partially offset by an increase in non-interest income of $1.7 million, a decrease in income tax expense of $2.3 million and a decrease in minority interest income of real estate partnership operations of $335,000. The decrease in net income for the nine-month period compared to the same period last year was largely due to an increase in provision for loan losses of $4.8 million, a decrease in net interest income of $1.2 million and a decrease in non-interest income of $10.6 million, which were partially offset by a decrease in non-interest expense of $9.2 million, a decrease in income tax expense of $3.5 million and a decrease in minority interest income of real estate partnership operations of $1.4 million.

Net Interest Income. Net interest income decreased $1.3 million or 3.9% for the three months ended December 31, 2006 and decreased $1.2 million or 1.2% for the nine months ended December 31, 2006, as compared to the same respective periods in the prior year. Interest income increased $11.2 million or 18.2% for the three months ended December 31, 2006 as compared to the same period in the prior year. Interest expense increased $12.5 million or 45.3% for the three months ended December 31, 2006 as compared to the same period in the prior year. The net interest margin decreased to 3.05% for the three-month period ended December 31, 2006 from 3.39% for the same period in the prior year and decreased to 3.14% for the nine-month period ended December 31, 2006 from 3.37% for the same period in the prior year. The change in the net interest margin reflects the increase in the costs of interest-bearing liabilities, which was partially offset by the increase in yields on interest-earning assets. The interest rate spread decreased to 2.89% from 3.27% for the three-month period and decreased to 3.00% from 3.25% for the nine-month period ended December 31, 2006 as compared to the same respective periods in the prior year.

Interest income on loans increased $10.8 million or 19.2% and $33.6 million or 20.8%, for the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in the prior year. These increases were primarily attributable to an increase in the average balance of loans, which increased $291.9 million and $289.7 million in the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in the prior year. There was also an increase of 64 basis points in the average yield on loans to 7.05% from 6.41% for the three-month period and an increase of 71 basis points to 6.92% from 6.21% for the nine-month period. These increases were the result of loans being originated at higher interest rates and the upward pricing of adjustable rate mortgages. Interest income on mortgage-related securities increased $150,000 or 5.1% and increased $439,000 or 5.1% for the three- and nine-month periods ended December 31, 2006, respectively, as compared to the same respective periods in the prior year, primarily due to an increase of 36 basis points in the average yield on mortgage-related securities to 4.80% from 4.44% for the three-month period and an increase of 37 basis points to 4.75% from 4.38% for the nine-month period. These increases were partially offset by a decrease of $7.1 million and $8.3 million, respectively, in the three- and nine-month average balances of mortgage-related securities. Interest income on investment securities (including Federal Home Loan Bank stock) increased $382,000 or 38.0% and $676,000 or 23.3%, for the three- and nine-month periods ended December 31, 2006, respectively, as compared to the same respective periods in the prior year. These increases were primarily a result of an increase of $25.2 million and $22.2 million, in the average balance of investment securities for the three- and nine-month periods ended December 31, 2006, respectively, as compared to the same respective periods in 2005, and an increase of 43 basis points and a decrease of 2 basis points in the average yield on investment securities for the three- and nine-month periods, respectively. Interest income on interest-bearing deposits decreased $174,000 and $1.0 million for the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in 2005, primarily due to decreases in average balances.

Interest expense on deposits increased $10.5 million or 51.8% and $29.9 million or 54.5% for the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in 2005. These increases were primarily attributable to an increase in the average balance of deposits, which increased $212.2 million and $194.1 million, respectively, primarily as a result of increases in certificates of deposit and money market accounts, and an increase of 112 basis points in the weighted average cost of deposits to 3.79% from 2.67% for the respective three-month periods and an increase of 111 basis points in the weighted average cost of deposits

26

to 3.57% from 2.46% for the respective nine-month periods. Interest expense on notes payable and other borrowings increased $2.0 million or 27.4% and $5.0 million or 23.5% during the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in the prior year. For the three-month period ended December 31, 2006, the average balance of notes payable increased $46.7 million as compared to the same respective period in 2005. The increase in interest expense for the nine-month period ended December 31, 2006 was due primarily to an increase of $41.4 million in the average balance of notes payable and other borrowings as compared to the same respective period in 2005. The weighted average cost of notes payable and other borrowings increased 74 basis points to 4.40% from 3.66% for the three-month period and increased 63 basis points to 4.22% from 3.59% for the nine-month period.

Provision for Loan Losses. Provision for loan losses increased $2.7 million or 382.1% and $4.8 million or 194.1% for the three- and nine-month periods ended December 31, 2006, respectively, as compared to the same respective periods for the prior year. During the quarter, management evaluates a variety of qualitative and quantitative factors when determining the adequacy of the allowance for losses. Due to the current economic climate and recent increases in delinquent loans, non-accrual loans and non-performing assets (as discussed under “Asset Quality” below), management determined that increased provisions for loan losses were appropriate to reflect the risks inherent in the various lending portfolios during the current quarter. 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 future charge-offs of loans deemed uncollectible.

Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread. The tables on the following pages show the Corporation’s average balances, interest, average rates, net interest margin and the spread between the weighted-average rates earned on interest-earning assets and weighted-average cost of interest-bearing liabilities for the periods indicated. The average balances are derived from average daily balances.

27

	Three Months Ended December 31,
	2006							2005
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost(1)			Balance		Interest		Cost(1)
	(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	2,967,524	$	50,906		6.86	%	$	2,706,411	$	42,219		6.24	%
Consumer loans		629,809		11,810		7.50			625,701		10,596		6.77
Commercial business loans		218,092		4,549		8.34			191,412		3,628		7.58
Total loans receivable(2) (3)		3,815,425		67,265		7.05			3,523,524		56,443		6.41
Mortgage-related securities(4)		259,449		3,112		4.80			266,581		2,962		4.44
Investment securities(4)		86,813		1,061		4.89			57,773		579		4.01
Interest-bearing deposits		60,382		814		5.39			103,313		988		3.83
Federal Home Loan Bank stock		41,327		325		3.15			45,140		425		3.77
Total interest-earning assets		4,263,396		72,577		6.81			3,996,331		61,397		6.15
Non-interest-earning assets		211,173							206,983
Total assets	$	4,474,569						$	4,203,314
Interest-Bearing Liabilities
Demand deposits	$	927,042		5,664		2.44		$	797,137		2,977		1.49
Regular passbook savings		204,235		236		0.46			232,021		262		0.45
Certificates of deposit		2,114,254		24,846		4.70			2,004,133		17,018		3.40
Total deposits		3,245,531		30,746		3.79			3,033,291		20,257		2.67
Short-term borrowings		303,040		4,220		5.57			301,068		2,958		3.93
Long-term borrowings		542,657		5,082		3.75			497,940		4,345		3.49
Total interest-bearing liabilities		4,091,228		40,048		3.92			3,832,299		27,560		2.88
Non-interest-bearing liabilities		49,770							57,671
Total liabilities		4,140,998							3,889,970
Stockholders’ equity		333,571							313,344
Total liabilities and stockholders’ equity	$	4,474,569						$	4,203,314
Net interest income/interest rate spread(5)			$	32,529		2.89	%			$	33,837		3.27	%
Net interest-earning assets	$	172,168						$	164,032
Net interest margin(6)						3.05	%						3.39	%
Ratio of average interest-earning assets to average interest-bearing liabilities		1.04							1.04

(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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	Nine Months Ended December 31,
	2006							2005
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost(1)			Balance		Interest		Cost(1)
	(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	2,912,886	$	147,146		6.74	%	$	2,657,952	$	120,931		6.07	%
Consumer loans		626,945		34,282		7.29			611,318		29,951		6.53
Commercial business loans		210,968		13,351		8.44			191,852		10,310		7.17
Total loans receivable(2) (3)		3,750,799		194,779		6.92			3,461,122		161,192		6.21
Mortgage-related securities(4)		254,837		9,078		4.75			263,153		8,639		4.38
Investment securities(4)		71,811		2,564		4.76			47,249		1,313		3.71
Interest-bearing deposits		47,721		1,884		5.26			117,914		2,888		3.27
Federal Home Loan Bank stock		42,598		1,019		3.19			44,996		1,594		4.72
Total interest-earning assets		4,167,766		209,324		6.70			3,934,434		175,626		5.95
Non-interest-earning assets		206,512							197,672
Total assets	$	4,374,278						$	4,132,106
Interest-Bearing Liabilities
Demand deposits	$	880,228		15,499		2.35		$	779,887		7,732		1.32
Regular passbook savings		209,627		721		0.46			237,916		788		0.44
Certificates of deposit		2,077,987		68,500		4.40			1,955,969		46,325		3.16
Total deposits		3,167,842		84,720		3.57			2,973,772		54,845		2.46
Short-term borrowings		241,040		10,032		5.55			276,871		7,725		3.72
Long-term borrowings		593,186		16,360		3.68			515,941		13,646		3.53
Total interest-bearing liabilities		4,002,068		111,112		3.70			3,766,584		76,216		2.70
Non-interest-bearing liabilities		42,925							50,849
Total liabilities		4,044,993							3,817,433
Stockholders’ equity		329,285							314,673
Total liabilities and stockholders’ equity	$	4,374,278						$	4,132,106
Net interest income/interest rate spread(5)			$	98,212		3.00	%			$	99,410		3.25	%
Net interest-earning assets	$	165,698						$	167,850
Net interest margin(6)						3.14	%						3.37	%
Ratio of average interest-earning assets to average interest-bearing liabilities		1.04							1.04

(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.

29

Non-Interest Income. Non-interest income increased $1.7 million or 11.8% to $16.1 million and decreased $10.6 million or 19.9% to $42.5 million for the three and nine months ended December 31, 2006, respectively, as compared to $14.4 million and $53.0 million for the same respective periods in 2005. The increase for the three-month period ended December 31, 2006 was primarily due to the increase of real estate investment partnership revenue of $1.6 million due to the increase in the number of sales at the partnership level. In addition, net gain on sale of loans increased $632,000, insurance commissions increased $413,000 and service charges on deposits increased $329,000. These increases were partially offset by a decrease in other revenue from real estate operations of $607,000, a decrease in other non-interest income of $461,000, a decrease in loan servicing income of $125,000 and a decrease in net gain on sale of investments and mortgage-related securities of $120,000 for the three-month period ended December 31, 2006, as compared to the same period in the prior year.

The decrease in non-interest income for the nine-month period ended December 31, 2006 was primarily due to the decrease of real estate investment partnership revenue of $13.3 million as the result of a decrease in sales at the partnership level. The decrease in sales at the partnership level was due to a slowdown in the single family housing market in California, which is reflective of the national trend. In addition, net gain on sale of investments and mortgage-related securities decreased $677,000, other non-interest income decreased $670,000 and loan servicing income decreased $112,000. These decreases were partially offset by an increase in other revenue from real estate operations of $1.2 million as a result of a legal settlement related to the Indian Palms property. There was also an increase in net gain on sale of loans of $1.5 million, which includes a gain on sale of education loans of approximately $605,000, an increase in mortgage servicing rights gains of $345,000 and an increase in gain on sale of mortgage loans of $306,000. In addition, there was an increase in insurance commissions of $903,000 and an increase in service charges on deposits of $545,000 for the nine-month period ended December 31, 2006, as compared to the same period in the prior year.

Non-Interest Expense. Non-interest expense increased $793,000 or 2.8% to $29.6 million and decreased $9.2 million or 10.0% to $82.9 million for the three and nine months ended December 31, 2006, respectively, as compared to $28.8 million and $92.1 million for the same respective periods in 2005. The increase for the three-month period ended December 31, 2006 was primarily due to the increase of real estate investment partnership cost of sales of $1.6 million, the increase of other non-interest expense of $173,000 and the increase in occupancy expense of $84,000 as compared to the same respective period in the prior year. These increases were partially offset by a decrease in other expenses from real estate operations of $589,000 and a decrease in compensation expense of $522,000 for the three months ended December 31, 2006 as compared to the same period in the prior year. The decrease for the nine-month period was primarily due to the decrease of real estate investment partnership cost of sales of $10.3 million due to a decrease in sales at the partnership level, which corresponds to the decrease in real estate partnership revenue for the nine-month period ended December 31, 2006 as compared to the same period in the prior year. In addition, compensation expense decreased $387,000 and furniture and equipment expense decreased $144,000. These decreases were partially offset by an increase in occupancy expense of $744,000, an increase in data processing expense of $431,000, an increase in other non-interest expense of $325,000 and an increase in marketing expense of $169,000 for the nine months ended December 31, 2006 as compared to the same period in the prior year.

Income Taxes. Income tax expense decreased $2.3 million or 30.1% and $3.5 million or 15.0%, during the three and nine months ended December 31, 2006, respectively, as compared to the same respective periods in 2005. This decrease was due to a decrease in income before income taxes. The effective tax rate was 33.7% and 38.8% for the three- and nine-month periods ended December 31, 2006, respectively, as compared to 41.1% and 40.9% for the same respective periods last year. The decrease in the effective tax rate for the three months ended December 31, 2006 was due to the tax benefit recorded for the deduction of dividends paid by the Corporation to employee benefit plans in prior periods of approximately $1.0 million.

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FINANCIAL CONDITION

During the nine months ended December 31, 2006, the Corporation’s assets increased by $230.8 million from $4.28 billion at March 31, 2006 to $4.51 billion at December 31, 2006. The majority of this increase was attributable to increases in loans receivable, real estate held for development and mortgage-related securities, which were partially offset by decreases in other categories such as Federal Home Loan Bank stock and investment securities.

Total loans (including loans held for sale) increased $219.1 million during the nine months ended December 31, 2006. Activity for the period consisted of (i) originations and purchases of $1.43 billion, (ii) sales of $304.1 million and (iii) principal repayments and other adjustments of $907.3 million.

Mortgage-related securities (both available for sale and held to maturity) increased $11.2 million during the nine months ended December 31, 2006 as a result of purchases of $47.8 million, which were partially offset by principal repayments and market value adjustments of $36.5 million in this nine-month period. Mortgage-related securities consisted of $175.4 million of mortgage-backed securities and $83.4 million of collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”) at December 31, 2006.

The Corporation invests in corporate CMOs and agency-issued REMICs. These investments are deemed to have limited credit risk. The investments do have interest rate risk due to, among other things, actual prepayments being more or less than those predicted at the time of purchase. 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.

Investment securities decreased $7.5 million during the nine months ended December 31, 2006 as a result of sales and maturities of $157.5 million of U.S. Government and agency securities, which were partially offset by purchases of $148.7 million of such securities.

Federal Home Loan Bank (“FHLB”) stock decreased $5.1 million during the nine months ended December 31, 2006 due to the redemption of stock.

Real estate held for development and sale increased $7.3 million to $61.6 million as of December 31, 2006 from $54.3 million as of March 31, 2006. This net increase was the result of additional development of a commercial project in Texas, which was partially offset by continued home and land lot sales.

Total liabilities increased $214.5 million during the nine months ended December 31, 2006. This increase was largely due to a $200.3 million increase in deposits primarily as a result of a $103.5 million increase in certificates of deposit and a $129.6 million increase in money market accounts, and a $34.9 million increase in other liabilities. These increases were partially offset by a $20.6 million decrease in borrowings during the nine-month period. Brokered deposits have been used in the past and may be used in the future as the need for funds requires them. Brokered deposits totaled $396.7 million at December 31, 2006 and $399.3 million at March 31, 2006, and generally mature within one to five years.

Stockholders’ equity increased $15.5 million during the nine months ended December 31, 2006 as a net result of (i) comprehensive income of $32.1 million, (ii) stock options exercised of $3.8 million (with the excess of the cost of treasury shares over the option price ($2.7 million) charged to retained earnings), (iii) benefit plan shares earned and related tax adjustments totaling $766,000 and (iv) the issuance of shares for management and benefit plans of $182,000. These increases were partially offset by (i) cash dividends of $10.7 million and (ii) purchases of treasury stock of $7.9 million.

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ASSET QUALITY

Non-performing assets increased $23.8 million to $39.5 million at December 31, 2006 from $15.7 million at March 31, 2006 and increased as a percentage of total assets to .88% from .37% at such dates, respectively.

Non-performing assets are summarized as follows at the dates indicated:

	At December 31,			At March 31,
	2006			2006			2005			2004
	(Dollars In Thousands)
Non-accrual loans:
Single-family residential	$	6,546		$	2,856		$	2,406		$	3,247
Multi-family residential		11,693			4,214			—			—
Commercial real estate		11,782			3,398			4,894			8,764
Construction and land		581			—			—			—
Consumer		561			548			453			642
Commercial business		3,822			2,513			6,697			2,268
Total non-accrual loans		34,985			13,529			14,450			14,921
Foreclosed properties and repossessed assets, net		4,499			2,192			1,458			2,422
Total non-performing assets	$	39,484		$	15,721		$	15,908		$	17,343
Performing troubled debt restructurings	$	400		$	—		$	—		$	2,649
Total non-accrual loans to total loans(1)		0.87	%		0.35	%		0.40	%		0.45	%
Total non-performing assets to total assets		0.88			0.37			0.39			0.46
Allowance for loan losses to total loans(1)		0.50			0.41			0.73			0.87
Allowance for loan losses to total non-accrual loans		57.26			115.09			183.00			191.72
Allowance for loan and foreclosure losses to total non-performing assets		50.86			100.48			167.39			165.78

⁽¹⁾ Total loans are gross loans receivable before the reduction for loans in process, unearned interest and loan fees and the allowance for loan losses.

Non-accrual loans increased $21.5 million during the nine months ended December 31, 2006. Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against interest income. As a matter of policy, the Corporation does not accrue interest on loans past due more than 90 days. The increase in non-accrual loans was primarily attributable to the addition of five single-family residential loans that totaled $3.5 million, five multi-family residential loans that totaled $7.5 million and four commercial real estate loans that totaled $7.9 million. This increase was partially offset by the charge-off of a commercial business loan totaling approximately $815,000. Management believes that loans added to the non-accrual category are adequately collateralized and that reserves placed on the loans are appropriate. Management evaluates these loans to determine if there are probable and estimable losses. At December 31, 2006, there were six non-accrual loans with loan balances greater than $1.0 million. One was a $3.4 million multi-family residential loan secured by two multi-family properties located in central Wisconsin. The second was a $1.1 million multi-family residential real estate loan secured by an apartment complex located in southern Wisconsin. The third was a $2.1 million multi-family residential loan secured by an apartment complex located in central Wisconsin. The fourth was a $2.5 million multi-family residential loan secured by a condominium project located in southern Wisconsin. The fifth was a $4.3 million commercial real estate loan secured by commercial properties located throughout Wisconsin. The sixth was a $1.9 million commercial real estate loan secured by an office building located in southern Wisconsin.

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Foreclosed properties and repossessed assets increased $2.3 million for the nine months ended December 31, 2006. The increase was largely attributable to three loans that went to foreclosure in the nine-month period. One was a $999,000 commercial real estate loan on a warehouse in Minnesota; another was a $504,000 multi-family residential loan in northern Wisconsin; and the third was an $808,000 single family residential/lot loan in northern Wisconsin.

At December 31, 2006, assets that the Corporation had classified as substandard, net of reserves, consisted of $42.1 million of loans and foreclosed properties. As of March 31, 2006, substandard assets amounted to $15.8 million. An asset is classified as substandard when it is determined that it is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any, and that the Corporation will sustain some loss if the deficiencies are not corrected. The increase of $26.3 million in the substandard balance for the nine months ended December 31, 2006 was largely attributable to the addition of seven loans totaling $14.0 million secured by commercial real estate property and general business assets located in Wisconsin as well as the addition of two loan relationships with loans totaling $4.9 million secured by single-family properties located in Wisconsin and Minnesota. The increase was also attributable to the addition of a $2.4 million commercial business loan secured by general business assets located throughout Wisconsin and the addition of two loans totaling $1.8 million secured by a single family residence in northern Wisconsin and a commercial property located in Minnesota.

The category of substandard assets contains six loans with a carrying value of greater than $1.0 million. One loan, with a carrying value of $4.3 million, is secured by various commercial properties throughout Wisconsin. A second loan, with a carrying value of $3.4 million, is secured by the assets of two multi-family properties located in central Wisconsin. A third loan, with a carrying value of $1.9 million, is secured by an office building located in southern Wisconsin. A fourth loan, with a carrying value of $2.1 million, is secured by a multifamily residential property located in north central Wisconsin. A fifth loan, with a carrying value of $1.1 million, is secured by an apartment complex located in southern Wisconsin. A sixth loan, with a carrying value of $2.5 million, is secured by a condominium project located in southern Wisconsin.

At December 31, 2006, the Corporation had $954,000 of impaired loans, net of reserves. At March 31, 2006, impaired loans were $3.3 million, net. The majority of the decrease in impaired loans since March 31, 2006 was attributable to two loans with a carrying value of $2.6 million. One loan was paid off and the other loan is no longer considered impaired. A loan is defined as impaired when, according to FAS 114, 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. A summary of the details regarding impaired loans follows:

	At December 31,		At March 31,
	2006		2006		2005		2004
			(In Thousands)
Impaired loans with valuation reserve required	$	1,596	$	6,381	$	10,827	$	17,126
Less:
Specific valuation allowance		642		3,111		7,126		5,382
Total impaired loans	$	954	$	3,270	$	3,701	$	11,744
Average impaired loans	$	2,948	$	3,829	$	11,535	$	6,389
Interest income recognized
on impaired loans	$	42	$	208	$	249	$	710
Interest income recognized on a cash basis
on impaired loans	$	42	$	208	$	249	$	710

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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 December 31,		At March 31,
	2006		2006		2005		2004
			(In Thousands)
30 to 59 days	$	17,814	$	9,874	$	5,853	$	4,887
60 to 89 days		5,571		733		714		10,941
Total	$	23,385	$	10,607	$	6,567	$	15,828

The majority of the increase in loans 30-59 days delinquent since March 31, 2006 was substantially due to three borrowers with loans totaling approximately $7.0 million secured by commercial and multi-family residential properties. The majority of the increase in loans 60 to 89 days delinquent was substantially due to two loan relationships totaling approximately $1.7 million.

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. These evaluations consider several factors, including, but not limited to, general economic conditions, loan portfolio composition, loan delinquencies, prior loss experience, collateral value, anticipated loss of interest and management’s estimation of future losses. The evaluation of the allowance for loan losses includes a review of known loan problems as well as inherent problems based upon historical trends and ratios. Foreclosed properties are recorded at the lower of carrying value or fair value with charge-offs, if any, charged to the allowance for loan losses prior to transfer to foreclosed property. The fair value is primarily based on appraisals, discounted cash flow analysis (the majority of which are 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						Nine Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
				(Dollars In Thousands)
Allowance at beginning of period	$	18,393		$	22,582		$	15,570		$	26,444
Charge-offs:
Mortgage		(360	)		(900	)		(985	)		(1,044	)
Consumer		(137	)		(181	)		(297	)		(469	)
Commercial business		(1,380	)		(6,964	)		(2,226	)		(12,319	)
Total charge-offs		(1,877	)		(8,045	)		(3,508	)		(13,832	)
Recoveries:
Mortgage		35			1			36			82
Consumer		13			8			28			51
Commercial business		92			6			700			57
Total recoveries		140			15			764			190
Net (charge-offs) recoveries		(1,737	)		(8,030	)		(2,744	)		(13,642	)
Provision for loan losses		3,375			700			7,205			2,450
Allowance at end of period	$	20,031		$	15,252		$	20,031		$	15,252
Net charge-offs to average loans		(0.18	)%		(0.91	)%		(0.10	)%		(0.53	)%

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During the nine months ended December 31, 2006, the Corporation incurred one large commercial business loan loss totaling approximately $815,000 which was charged off based on credit evaluation.

Although management believes that the December 31, 2006 allowance for loan losses is adequate based upon the current evaluation of loan delinquencies, non-performing assets, charge-off trends, economic conditions and other factors, there can be no assurance that future adjustments to the allowance will not be necessary. Management also continues to pursue all practical and legal methods of collection, repossession and disposal, and adheres to high underwriting standards in the origination process in order to continue to maintain 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’s primary sources of funds are payments on loans and securities, deposits from retail and wholesale sources, FHLB advances and other borrowings.

At December 31, 2006, the Corporation had outstanding commitments to originate loans of $75.8 million and commitments to extend funds to, or on behalf of, customers pursuant to lines and letters of credit of $327.3 million. Scheduled maturities of certificates of deposit during the twelve months following December 31, 2006 amounted to $1.85 billion and scheduled maturities of borrowings during the same period totaled $612.2 million. At December 31, 2006, the Corporation had no reverse repurchase agreements. Management believes adequate resources are available to fund all commitments to the extent required.

The Corporation participates in the Mortgage Partnership Finance Program of the Federal Home Loan Bank of Chicago (“FHLB”). Pursuant to the credit enhancement feature of that Program, the Corporation has retained a secondary credit loss exposure in the amount of $20.3 million at December 31, 2006 related to approximately $1.52 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.

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.

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The following summarizes the Bank’s capital levels and ratios and the levels and ratios required by the OTS at December 31, 2006 and March 31, 2006:

											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)
As of December 31, 2006:
Tier 1 capital
(to adjusted tangible assets)	$	351,600		8.04	%	$	131,216		3.00	%	$	218,693		5.00	%
Risk-based capital
(to risk-based assets)		370,989		10.88			272,796		8.00			340,996		10.00
Tangible capital
(to tangible assets)		351,600		8.04			65,608		1.50			N/A		N/A
As of March 31, 2006:
Tier 1 capital
(to adjusted tangible assets)	$	333,342		7.96	%	$	125,590		3.00	%	$	209,316		5.00	%
Risk-based capital
(to risk-based assets)		345,801		10.48			263,914		8.00			329,893		10.00
Tangible capital
(to tangible assets)		333,342		7.96			62,795		1.50			N/A		N/A

The following table reconciles the Corporation’s stockholders’ equity to regulatory capital at December 31, 2006 and March 31, 2006:

	December 31,			March 31,
	2006			2006
	(In Thousands)
Stockholders’ equity of the Bank	$	370,337		$	350,696
Less: Goodwill and intangible assets		(19,956	)		(19,956	)
Accumulated other comprehensive income		1,219			2,602
Tier 1 and tangible capital		351,600			333,342
Plus: Allowable general valuation allowances		19,389			12,459
Risk based capital	$	370,989		$	345,801

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GUARANTEES

Financial Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”) 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 FASB Statement No. 5 “Accounting for Contingencies.” The recording of the outstanding liability in accordance with FIN 46 has not significantly affected the Corporation’s financial condition.

The Corporation’s real estate investment segment, IDI, is required to guarantee the partnership loans of its subsidiaries for the development of homes for sale. At December 31, 2006, IDI had guaranteed $44.4 million for the following partnerships on behalf of the respective subsidiaries. At the same date, $25.8 million of such loans were outstanding. The table below summarizes the individual subsidiaries and their respective guarantees and outstanding loan balances.

				Amount		Amount
Subsidiary	Partnership	Amount		Outstanding		Outstanding
of IDI	Entity	Guaranteed		at 12/31/06		at 3/31/06
	(Dollars in thousands)
Oakmont	Chandler Creek	$	14,150	$	12,350	$	14,150
Davsha III	Indian Palms 147, LLC		4,655		1,215		1,322
Davsha V	Villa Santa Rosa, LLC		11,000		1,569		4,765
Davsha VII	La Vista Grande 121, LLC		14,619		10,634		6,146
Total		$	44,424	$	25,768	$	26,383

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

As a limited partner, the Corporation still has 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 has a 50% controlling interest in the respective limited partnerships and therefore has significant influence over the right to approve the sale or refinancing of assets of the respective partnerships in accordance with those partnership agreements.

In acting as a partner with a controlling interest, the Corporation is committed to providing additional levels of funding to meet partnership operating deficits up to an aggregate amount of $44.4 million. At December 31, 2006, the Corporation’s investment in these partnerships consisted of assets of $50.7 million and cash and other assets of $15.5 million. The liabilities of these partnerships consisted of other borrowings of $26.1 million (reported as a part of FHLB and other borrowings), other liabilities of $2.0 million (reported as a part of other liabilities) and minority interest of $7.7 million. These amounts represent the Corporation’s maximum exposure to loss at December 31, 2006 as a result of involvement with these limited partnerships.

The partnership agreements generally contain buy-sell provisions whereby certain partners can require the purchase or sale of ownership interests by certain partners.

In addition, IDI has guaranteed a loan from Power Designers, Inc. in the amount of $1.2 million, of which there was an outstanding balance of $300,000 at December 31, 2006. Power Designers, Inc. is a heavy industrial battery charger manufacturer in which IDI has a 57.4% ownership interest.

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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 December 31, 2006 has not changed materially since March 31, 2006. See “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, 2006.

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Item 3 Quantitative and Qualitative Disclosures About Market Risk.

The Corporation’s market rate risk has not materially changed from March 31, 2006. See the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2006. See ”Asset/Liability Management” in Part I, Item 2 of this report.

Item 4 Controls and Procedures

The Corporation’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report and, based on this evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are operating in an effective manner.

No change in the Corporation’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has 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.

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.

There have been no material changes to the factors disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2006.

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

(a) - (b) Not applicable.

(c) The following table sets forth information with respect to any purchase made by or on behalf of the Corporation or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Exchange Act, of shares of the Corporation’s Common Stock during the indicated periods.

						Total Number of
						Shares Purchased		Maximum Number of
	Total Number			Average		as Part of Publicly		Shares that May Yet Be
	of Shares			Price Paid		Announced Plans		Purchased Under the
Period	Purchased			per Share		or Programs		Plans or Programs(2)
October 1 - October 31, 2006		10,000		$	28.50		10,000		1,308,360
November 1 - November 30, 2006		—			—		—		1,308,360
December 1 - December 31, 2006		69,576			28.56		66,800		1,241,560
Total		79,576	(1)	$	28.56		76,800		1,241,560

(1)

Consists of 76,800 shares purchased pursuant to a publicly announced repurchase program, and 2,776 shares acquired from employees in payment for the exercise price of stock options granted to them pursuant to the Corporation’s stock option program.

(2)

Effective November 3, 2006, the Board of Directors extended the current share repurchase program of approximately 1.3 million shares of its outstanding common stock in the open market for an additional year. The repurchases are authorized to be made from time to time in open-market and/or negotiated transactions as, in the opinion of management, market conditions may warrant. The repurchased shares will be held as treasury stock and will be available for general corporate purposes. The Corporation utilizes various securities brokers as its agent for the stock repurchase program.

Item 3 Defaults upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5 Other Information.

None.

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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:	February 5, 2007	By:	/s/ Douglas J. Timmerman
			Douglas J. Timmerman, Chairman of the
			Board, President and Chief Executive Officer
Date:	February 5, 2007	By:	/s/ Michael W. Helser
			Michael W. Helser, Treasurer and
			Chief Financial Officer

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