Anchor BanCorp Wisconsin (ABCW) 10-Q 2007 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

or

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

For the transition period from                    to                    

COMMISSION FILE NUMBER 0-20006

ANCHOR BANCORP WISCONSIN INC.

(Exact name of registrant as specified in its charter)

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

(608) 252-8700

Registrant’s telephone number, including area code

Not Applicable

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

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

Yesþ Noo

Indicate by check mark whether the registrant 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 filero           Accelerated filerþ           Non-accelerated filero

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

Yeso Noþ

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

Class: Common stock — $.10 Par Value

Number of shares outstanding as of October 31, 2007: 21,289,599

ANCHOR BANCORP WISCONSIN INC.
INDEX — FORM 10-Q

				Page #
Part I — Financial Information
	Item 1	Financial Statements (Unaudited)
			Consolidated Balance Sheets as of September 30, 2007 and March 31, 2007		2
			Consolidated Statements of Income for the Three and Six Months Ended September 30, 2007 and 2006		3
			Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2007 and 2006		5
			Notes to Unaudited Consolidated Financial Statements		7
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
			Results of Operations		24
			Financial Condition		29
			Asset Quality		30
			Liquidity & Capital Resources		33
			Guarantees		35
			Asset/Liability Management		36
	Item 3	Quantitative and Qualitative Disclosures About Market Risk			37
	Item 4	Controls and Procedures			37
Part II — Other Information
	Item 1	Legal Proceedings			37
	Item 1A	Risk Factors			37
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds			38
	Item 3	Defaults upon Senior Securities			38
	Item 4	Submission of Matters to a Vote of Security Holders			38
	Item 5	Other Information			38
	Item 6	Exhibits			38
Signatures					40
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

1

ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	September 30,			March 31,
	2007			2007
	(Unaudited)
	(In Thousands, Except Share Data)
Assets
Cash	$	55,995		$	77,951
Interest-bearing deposits		11,665			44,087
Cash and cash equivalents		67,660			122,038
Investment securities available for sale		121,323			73,545
Mortgage-related securities available for sale		242,962			247,971
Mortgage-related securities held to maturity (fair value of $64 and $68, respectively)		64			68
Loans, less allowance for loan losses of $22,002 at September 30, 2007 and $20,517 at March 31, 2007:
Held for sale		5,403			4,474
Held for investment		3,944,980			3,874,049
Foreclosed properties and repossessed assets, net		7,497			7,411
Real estate held for development and sale		58,063			60,303
Office properties and equipment		31,812			32,034
Federal Home Loan Bank stock—at cost		47,401			41,361
Accrued interest on investments, loans and other assets		64,405			56,475
Goodwill		19,956			19,956
Total assets	$	4,611,526		$	4,539,685
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	254,994		$	241,234
Interest bearing		2,923,594			3,007,012
Total deposits		3,178,588			3,248,246
Short-term borrowings		731,765			472,400
Long-term borrowings		307,775			428,077
Other liabilities		47,713			46,610
Total liabilities		4,265,841			4,195,333
Minority interest in real estate partnerships		6,778			7,486
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, 21,342,399 and 21,669,094 shares outstanding, respectively		2,536			2,536
Additional paid-in capital		72,136			72,122
Retained earnings		370,516			359,570
Accumulated other comprehensive loss		(293	)		(542	)
Treasury stock (4,020,940 and 3,694,245 shares, respectively), at cost		(100,725	)		(91,751	)
Deferred compensation obligation		(5,263	)		(5,069	)
Total stockholders’ equity		338,907			336,866
Total liabilities and stockholders’ equity	$	4,611,526		$	4,539,685

See accompanying Notes to Unaudited Consolidated Financial Statements.

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(In Thousands, Except Per Share Data)
Interest income:
Loans	$	69,714	$	65,740	$	137,745	$	127,515
Mortgage-related securities		3,028		3,061		6,034		5,965
Investment securities		1,345		1,240		2,560		2,197
Interest-bearing deposits		636		439		1,031		1,070
Total interest income		74,723		70,480		147,370		136,747
Interest expense:
Deposits		31,424		28,618		62,870		53,974
Short-term borrowings		8,474		3,550		15,132		5,812
Long-term borrowings		3,241		5,474		6,767		11,278
Total interest expense		43,139		37,642		84,769		71,064
Net interest income		31,584		32,838		62,601		65,683
Provision for loan losses		2,095		2,625		4,366		3,830
Net interest income after provision for loan losses		29,489		30,213		58,235		61,853
Non-interest income:
Real estate investment partnership revenue		2,428		3,631		7,154		8,117
Loan servicing income		1,375		1,417		2,855		2,414
Credit enhancement income		424		417		845		834
Service charges on deposits		3,148		2,517		6,239		4,945
Investment and insurance commissions		1,058		973		2,040		1,799
Net gain on sale of loans		814		1,349		2,401		2,219
Net gain (loss) on sale of investments and mortgage-related securities		3		—		15		(283	)
Other revenue from real estate operations		992		1,575		2,215		3,722
Other		696		1,176		1,814		2,595
Total non-interest income		10,938		13,055		25,578		26,362

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Income(Cont’d)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(In Thousands, Except Per Share Data)
Non-interest expense:
Compensation	$	11,301		$	11,579		$	22,571		$	22,305
Real estate investment partnership cost of sales		2,669			3,486			7,009			7,339
Occupancy		1,937			1,986			3,874			3,985
Furniture and equipment		1,543			1,595			3,024			3,048
Data processing		1,520			1,639			3,007			3,060
Marketing		1,086			1,158			2,170			2,310
Other expenses from real estate partnership operations		1,797			2,179			3,882			4,757
Other		3,475			3,291			6,678			6,548
Total non-interest expense		25,328			26,913			52,215			53,352
Minority interest in income (loss) of real estate partnership operations		(203	)		(75	)		(278	)		363
Income before income taxes		15,302			16,430			31,876			34,500
Income taxes		6,028			6,769			12,716			14,192
Net income	$	9,274		$	9,661		$	19,160		$	20,308
Earnings per share:
Basic	$	0.44		$	0.45		$	0.91		$	0.95
Diluted		0.44			0.44			0.91			0.93
Dividends declared per share		0.18			0.17			0.35			0.33

See accompanying Notes to Unaudited Consolidated Financial Statements.

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended September 30,
	2007			2006
	(In Thousands)
Operating Activities
Net income	$	19,160		$	20,308
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,366			3,830
Provision for depreciation and amortization		2,067			2,132
Cash paid due to origination of loans held for sale		(209,170	)		(202,642	)
Cash received due to sale of loans held for sale		210,642			204,977
Net gain on sales of loans		(2,401	)		(2,219	)
Loss (gain) on sale of investments		(15	)		283
Increase in accrued interest receivable		(1,940	)		(1,285	)
(Increase) decrease in other assets		(5,991	)		1,716
Increase in accrued interest payable		2,084			1,965
Increase (decrease) in other payable		122			(447	)
Other		(3,361	)		(4,783	)
Net cash provided by operating activities		15,563			23,835
Investing Activities
Proceeds from sales of investment securities available for sale		9,867			65
Proceeds from maturities of investment securities		56,507			53,875
Purchase of investment securities available for sale		(113,979	)		(93,571	)
Purchase of mortgage-related securities available for sale		(25,106	)		(38,308	)
Principal collected on mortgage-related securities		30,749			25,851
FHLB Stock Redemption		—			3,750
FHLB Stock Purchase		(6,040	)		—
Net increase in loans held for investment		(73,332	)		(181,993	)
Purchases of office properties and equipment		(1,652	)		(2,100	)
Sales of office properties and equipment		39			161
Investment in real estate held for development and sale		2,072			(7,388	)
Net cash used in investing activities		(120,875	)		(239,658	)

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ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows(Cont’d)

(Unaudited)

	Six Months Ended September 30,
	2007			2006
	(In Thousands)
Financing Activities
(Decrease) increase in deposit accounts	$	(81,263	)	$	170,160
Increase in advance payments by borrowers for taxes and insurance		10,502			11,569
Increase in short-term borrowings		259,365			107,175
Proceeds from long-term borrowings		143,324			7,297
Repayment of long-term borrowings		(263,626	)		(101,319	)
Treasury stock purchased		(10,897	)		(5,740	)
Exercise of stock options		634			996
Cash received from employee stock purchase plan		257			(8	)
Tax benefit from stock related compensation		14			766
Payments of cash dividends to stockholders		(7,376	)		(7,092	)
Net cash provided by financing activities		50,934			183,804
Net decrease in cash and cash equivalents		(54,378	)		(32,019	)
Cash and cash equivalents at beginning of period		122,038			152,544
Cash and cash equivalents at end of period	$	67,660		$	120,525
Supplementary cash flow information:
Cash paid or credited to accounts:
Interest on deposits and borrowings	$	45,223		$	73,029
Income taxes		14,199			17,890

See accompanying Notes to Unaudited Consolidated Financial Statements

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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 six-month periods ended September 30, 2007 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2008. 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, 2007.

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. The reclassifications had no impact on prior year’s net income or stockholders’ equity.

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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 September 30, 2007, 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:

	Six Months Ended September 30, 2007
				Weighted
				Average
	Options			Price
Outstanding at beginning of period		837,296		$	19.82
Granted		—			—
Exercised		(61,682	)		13.76
Forfeited		(11,740	)		12.99
Outstanding at end of period		763,874		$	20.41
Options exercisable at September 30, 2007		763,874		$	20.41

The following table represents outstanding stock options and exercisable stock options at their respective ranges of exercise prices at September 30, 2007:

	Options Outstanding						Exercisable Options
			Weighted-
			Average
			Remaining		Weighted-				Weighted-
			Contractual		Average				Average
Range of Exercise Prices	Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$15.06 - $15.70		261,700		3.40	$	15.32		261,700	$	15.32
$16.12 - $22.07		266,634		2.53		20.68		266,634		20.68
$23.77 - $31.95		234,340		6.26		25.79		234,340		25.79
		762,674		3.97		20.41		762,674		20.41

The aggregate intrinsic value of options outstanding and exercisable at September 30, 2007 was $5.5 million.

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

	Six Months Ended September 30, 2007
				Weighted
				Average
	Options			Price
Balance at beginning of period		66,600		$	29.62
Restricted stock granted		—			—
Restricted stock vested		(2,500	)		31.75
Restriced stock forfeited		—			—
Balance at end of period		64,100		$	29.62

Note 4 — Goodwill and Other Intangible Assets

The Corporation’s carrying value of goodwill was $20.0 million at September 30, 2007 and at March 31, 2007.

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 sale. 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 of the servicing right is calculated by a discounted cash flow model based on market value assumptions at the time of sale. This method is 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 11 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 reviewed and approved by management on a quarterly basis. In addition, our MSR portfolio and assumptions are evaluated annually 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

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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 as of March 31, 2006	$	5,735		$	1,324
Additions		2,464			456
Amortization		(1,835	)		(733	)
Mortgage servicing rights before valuation allowance at end of period		6,364			1,047
Valuation allowance		(709	)		—
Net mortgage servicing rights as of March 31, 2007	$	5,655		$	1,047
Fair market value at the end of the period	$	10,489		$	1,673
Key assumptions:
Weighted average discount		11.23	%		18.65	%
Weighted average prepayment speed assumption		13.43	%		12.90	%
Mortgage servicing rights as of March 31, 2007	$	6,364		$	1,047
Additions		1,807			186
Amortization		(581	)		(158	)
Reclassification		(135	)		135
Mortgage servicing rights before valuation allowance at end of period		7,455			1,210
Valuation allowance		—			—
Net mortgage servicing rights as of September 30, 2007	$	7,455		$	1,210
Fair market value at the end of the period	$	13,103		$	2,052
Key assumptions:
Weighted average discount		11.29	%		19.41	%
Weighted average prepayment speed assumption		14.22	%		13.90	%

The projections of amortization expense for mortgage servicing rights set forth below are based on asset balances and the interest rate environment as of September 30, 2007. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

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

	Residential		Other
	(In Thousands)
Quarter ended September 30, 2007 (actual)	$	302	$	80
Estimate for the year ended March 31,
2008	$	1,162	$	316
2009		1,162		316
2010		1,162		316
2011		1,162		262
Thereafter		2,807		—
	$	7,455	$	1,210

Note 5 — Stockholders’ Equity

During the quarter ended September 30, 2007, options for 11,250 shares of common stock were exercised at a weighted-average price of $13.49 per share for a total of $152,000 for the three-month period. During the six months ended September 30, 2007, options for 61,682 shares of common stock were exercised at a weighted average price of $13.76 per share for a total of $849,000 for the six-month period. 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 $812,000 was charged to retained earnings. During the quarter ended September 30, 2007, the Corporation issued 7,155 shares of treasury stock to the Corporation’s retirement plans. The weighted-average cost of these shares was $23.90 per share or $171,000 in the aggregate. The $18,000 excess of the cost over the market price of the treasury shares was charged to retained earnings. During the quarter ended September 30, 2007, the Corporation acquired an aggregate of 18,700 shares of its common stock at a weighted-average price of $27.95 per share, or an aggregate of $523,000, as a result of purchases in the open market. See Part II, Item 2. On August 15, 2007, the Corporation paid a cash dividend of $.18 per share, amounting to $3.8 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 September 30, 2007 and 2006, total comprehensive income amounted to $11.4 million and $11.7 million, respectively. For the six months ended September 30, 2007 and 2006, comprehensive income was $19.4 million and $20.8 million, respectively.

Upon adoption of Financial Accounting Standard 123(R) on April 1, 2007, 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.

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Note 6 — Earnings Per Share

Basic earnings per share for the three and six months ended September 30, 2007 and 2006 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.

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	Three Months Ended September 30,
	2007		2006
Numerator:
Net income	$	9,274,128	$	9,660,194
Numerator for basic and diluted earnings per share—income available to common stockholders	$	9,274,128	$	9,660,194
Denominator:
Denominator for basic earnings per share—weighted-average shares		20,879,592		21,478,523
Effect of dilutive securities:
Employee stock options		120,984		278,365
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,000,576		21,756,888
Basic earnings per share	$	0.44	$	0.45
Diluted earnings per share	$	0.44	$	0.44

	Six Months Ended September 30,
	2007		2006
Numerator:
Net income	$	19,159,761	$	20,307,622
Numerator for basic and diluted earnings per share—income available to common stockholders	$	19,159,761	$	20,307,622
Denominator:
Denominator for basic earnings per share—weighted-average shares		21,001,210		21,472,026
Effect of dilutive securities:
Employee stock options		158,358		305,340
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		21,159,568		21,777,366
Basic earnings per share	$	0.91	$	0.95
Diluted earnings per share	$	0.91	$	0.93

13

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 increased $11,000 to a net loss of $655,000 and increased $194,000 to a net loss of $1.2 million for the three and six months ended September 30, 2007, respectively, as compared to net losses of $644,000 and $1.0 million for the same respective periods in 2006. The increased loss for the three-month period was due to a $1.2 million decrease in partnership sales, which was offset in part by an $817,000 decrease in real estate investment cost of sales. In addition, there was a $583,000 decrease in other revenue from real estate operations and a $382,000 decrease in other expense from real estate partnership operations for the three months ended September 30, 2007 as compared to the same respective period in the prior year. For the six-month period, there was a decrease of $963,000 in partnership sales, which was offset in part by a $330,000 decrease in real estate investment cost of sales. In addition, other revenue from real estate operations decreased $1.5 million as a result of a legal settlement related to the Indian Palms property in the prior year and other expense from real estate partnership operations decreased $875,000 for the six months ending September 30, 2007, as compared to the same respective period in the prior year. There was also a $641,000 decrease in minority interest in income of real estate partnerships and a $410,000 decrease in income tax expense during the six-month period ending September 30, 2007. 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 45 single family housing units and approximately 100 individual lots for sale.

The following represents reconciliations of reportable segment revenues, profit or loss and assets to the Corporation’s consolidated totals for the three and six months ended September 30, 2007 and 2006, respectively.

14

	Three Months Ended September 30, 2007
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	106		$	75,133		$	(516	)	$	74,723
Interest expense		464			43,191			(516	)		43,139
Net interest income (loss)		(358	)		31,942			—			31,584
Provision for loan losses		—			2,095			—			2,095
Net interest income (loss) after provision for loan losses		(358	)		29,847			—			29,489
Real estate investment partnership revenue		2,428			—			—			2,428
Other revenue from real estate operations		992			—			—			992
Other income		—			7,548			(30	)		7,518
Real estate investment partnership cost of sales		(2,669	)		—			—			(2,669	)
Other expense from real estate partnership operations		(1,827	)		—			30			(1,797	)
Minority interest in loss of real estate partnerships		203			—			—			203
Other expense		—			(20,862	)		—			(20,862	)
Income (loss) before income taxes		(1,231	)		16,533			—			15,302
Income tax expense (benefit)		(576	)		6,604			—			6,028
Net income (loss)	$	(655	)	$	9,929		$	—		$	9,274
Total assets at end of period	$	71,333		$	4,540,193		$	—		$	4,611,526

	Three Months Ended September 30, 2006
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	86		$	70,915		$	(521	)	$	70,480
Interest expense		508			37,655			(521	)		37,642
Net interest income (loss)		(422	)		33,260			—			32,838
Provision for loan losses		—			2,625			—			2,625
Net interest income (loss) after provision for loan losses		(422	)		30,635			—			30,213
Real estate investment partnership revenue		3,631			—			—			3,631
Other revenue from real estate operations		1,575			—			—			1,575
Other income		—			7,879			(30	)		7,849
Real estate investment partnership cost of sales		(3,486	)		—			—			(3,486	)
Other expense from real estate partnership operations		(2,209	)		—			30			(2,179	)
Minority interest in loss of real estate partnerships		75			—			—			75
Other expense		—			(21,248	)		—			(21,248	)
Income (loss) before income taxes		(836	)		17,266			—			16,430
Income tax expense (benefit)		(192	)		6,961			—			6,769
Net income (loss)	$	(644	)	$	10,305		$	—		$	9,661
Total assets at end of period	$	76,508		$	4,405,078		$	—		$	4,481,586

15

	Six Months Ended September 30, 2007
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	191		$	148,191		$	(1,012	)	$	147,370
Interest expense		912			84,869			(1,012	)		84,769
Net interest income (loss)		(721	)		63,322			—			62,601
Provision for loan losses		—			4,366			—			4,366
Net interest income (loss) after provision for loan losses		(721	)		58,956			—			58,235
Real estate investment partnership revenue		7,154			—			—			7,154
Other revenue from real estate operations		2,215			—			—			2,215
Other income		—			16,269			(60	)		16,209
Real estate investment partnership cost of sales		(7,009	)		—			—			(7,009	)
Other expense from real estate partnership operations		(3,942	)		—			60			(3,882	)
Minority interest in loss of real estate partnerships		278			—			—			278
Other expense		—			(41,324	)		—			(41,324	)
Income (loss) before income taxes		(2,025	)		33,901			—			31,876
Income tax expense (benefit)		(809	)		13,525			—			12,716
Net income (loss)	$	(1,216	)	$	20,376		$	—		$	19,160
Total assets at end of period	$	71,333		$	4,540,193		$	—		$	4,611,526

	Six Months Ended September 30, 2006
	(In Thousands)
										Consolidated
	Real Estate			Community			Intersegment			Financial
	Investments			Banking			Eliminations			Statements
Interest income	$	190		$	137,519		$	(962	)	$	136,747
Interest expense		931			71,095			(962	)		71,064
Net interest income (loss)		(741	)		66,424			—			65,683
Provision for loan losses		—			3,830			—			3,830
Net interest income (loss) after provision for loan losses		(741	)		62,594			—			61,853
Real estate investment partnership revenue		8,117			—			—			8,117
Other revenue from real estate operations		3,722			—			—			3,722
Other income		—			14,583			(60	)		14,523
Real estate investment partnership cost of sales		(7,339	)		—			—			(7,339	)
Other expense from real estate partnership operations		(4,817	)		—			60			(4,757	)
Minority interest in income of real estate partnerships		(363	)		—			—			(363	)
Other expense		—			(41,256	)		—			(41,256	)
Income (loss) before income taxes		(1,421	)		35,921			—			34,500
Income tax expense (benefit)		(399	)		14,591			—			14,192
Net income (loss)	$	(1,022	)	$	21,330		$	—		$	20,308
Total assets at end of period	$	76,508		$	4,405,078		$	—		$	4,481,586

16

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):

	September 30,		March 31,
	2007		2007
Commitments to extend credit:	$	123,954	$	91,081
Unused lines of credit:
Home equity		92,105		91,630
Credit cards		37,193		40,799
Commercial		121,549		125,560
Letters of credit		47,470		59,910
Credit enhancement under the Federal
Home Loan Bank of Chicago Mortgage
Partnership Finance Program		21,401		20,902
Real estate investment segment borrowing guarantees unfunded		21,677		18,555
Other financial guarantees		669		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 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.

17

Note 9 — Subsequent Events

On October 19, 2007, the Corporation declared a $0.18 per share cash dividend on its common stock, amounting to $3.8 million in the aggregate, to be paid on November 15, 2007 to stockholders of record on November 1, 2007.

On July 11, the Corporation entered into a definitive agreement with S&C Bank, whereby the Corporation has agreed to acquire S&C Bank for approximately $106 million in cash, funded primarily through the liquidation of short-term investments and borrowings. S&C Bank, based in New Richmond, Wisconsin, is a community bank with seventeen banking locations in Northwestern Wisconsin and the Greater Twin Cities area. As of September 30, 2007, S&C Bank had total assets of $405 million and total liabilities of $355 million. The transaction is currently expected to be completed during the second half of 2007, subject to regulatory approvals and the approval of S&C Bank’s shareholders. The Corporation expects the transaction to be accretive to earnings for fiscal year 2009.

18

ANCHOR BANCORP WISCONSIN INC.

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

Set forth below is management’s discussion and analysis of the consolidated financial condition and results of operations of Anchor Bancorp Wisconsin Inc. (the “Corporation”) and its wholly-owned subsidiaries, AnchorBank fsb (the “Bank”) and Investment Directions Inc. (“IDI”), for the three and six months ended September 30, 2007, which includes information on the Corporation’s asset/liability management strategies, sources of liquidity and capital resources. This discussion should be read in conjunction with the unaudited consolidated financial statements and supplemental data contained elsewhere in this report.

Executive Overview

Highlights for the second quarter ended September 30, 2007 include:

• Diluted earnings per share remained constant at $0.44 for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006;

• The interest rate spread decreased to 2.77% for the quarter ended September 30, 2007 compared to 3.01% for the quarter ended September 30, 2006 because interest-bearing liabilities repriced upward faster than interest-earning assets;

• Loans receivable increased $71.9 million, or 1.85%, since March 31, 2007;

• Deposits declined $69.7 million, or 2.14%, since March 31, 2007;

• Book value per share was $15.88 at September 30, 2007 compared to $15.55 at March 31, 2007 and $15.18 at September 30, 2006; and

• Total non-performing assets increased $8.6 million to $63.1 million at September 30, 2007 from March 31, 2007 and total non-accrual loans increased $8.5 million to $55.6 million at September 30, 2007 from March 31, 2007.

19

• Real estate investment partnership revenue declined $963,000 from $8.1 million for the six months ended September 30, 2006 to $7.2 million for the six months ended September 30, 2007. Real estate investment partnership cost of sales declined $330,000 from $7.3 million to $7.0 million during the same respective periods. These decreases were due to the decline in the number of sales at the real estate partnership level. Net loss from the real estate investment segment increased from $1.0 million to $1.2 million for the six months ended September 30, 2006 and 2007, respectively. The partnerships currently have approximately 45 single family housing units and approximately 100 individual lots for sale. Management anticipates continued lower sales activity for the remainder of the fiscal year.

20

Selected quarterly data are set forth in the following tables.

	Three Months Ended
(Dollars in thousands - except per share amounts)	9/30/2007			6/30/2007			3/31/2007			12/31/2006
Operations Data:
Net interest income	$	31,584		$	31,017		$	29,834		$	32,529
Provision for loan losses		2,095			2,271			4,050			3,375
Net gain on sale of loans		814			1,587			465			776
Real estate investment partnership revenue		2,428			4,726			2,851			8,009
Other non-interest income		7,696			8,327			8,205			7,331
Real estate investment partnership cost of sales		2,669			4,340			3,153			7,115
Other non-interest expense		22,659			22,547			21,410			22,443
Minority interest in loss of real estate partnership operations		(203	)		(75	)		(573	)		(31	)
Income before income taxes		15,302			16,574			13,315			15,743
Income taxes		6,028			6,688			5,086			5,308
Net income		9,274			9,886			8,229			10,435
Selected Financial Ratios(1):
Yield on earning assets		6.90	%		6.80	%		6.73	%		6.81	%
Cost of funds		4.13			4.05			4.08			3.92
Interest rate spread		2.77			2.75			2.65			2.89
Net interest margin		2.92			2.90			2.81			3.05
Return on average assets		0.82			0.88			0.74			0.93
Return on average equity		11.07			11.77			9.72			12.51
Average equity to average assets		7.37			7.49			7.61			7.45
Non-interest expense to average assets		2.23			2.40			2.21			2.64
Per Share:
Basic earnings per share	$	0.44		$	0.47		$	0.39		$	0.49
Diluted earnings per share		0.44			0.46			0.38			0.48
Dividends per share		0.18			0.17			0.17			0.17
Book value per share		15.88			15.54			15.55			15.45
Financial Condition:
Total assets	$	4,611,526		$	4,532,758		$	4,539,685		$	4,505,896
Loans receivable, net
Held for sale		5,403			9,062			4,474			4,470
Held for investment		3,944,980			3,890,053			3,874,049			3,834,381
Deposits		3,178,588			3,248,964			3,248,246			3,240,540
Borrowings		1,039,540			891,016			900,477			841,219
Stockholders’ equity		338,907			331,593			336,866			336,522
Allowance for loan losses		22,002			22,220			20,517			20,031
Non-performing assets		63,078			53,180			54,452			39,484

⁽¹⁾ Annualized when appropriate.

21

	Three Months Ended
(Dollars in thousands - except per share amounts)	9/30/2006			6/30/2006			3/31/2006			12/31/2005
Operations Data:
Net interest income	$	32,838		$	32,845		$	33,294		$	33,837
Provision for loan losses		2,625			1,205			1,450			700
Net gain on sale of loans		1,349			869			1,348			144
Real estate investment partnership revenue		3,631			4,486			4,524			6,378
Other non-interest income		8,075			7,952			8,063			7,898
Real estate investment partnership cost of sales		3,486			3,853			3,791			5,527
Other non-interest expense		23,427			22,586			22,534			23,238
Minority interest in income (loss) of real estate partnership operations		(75	)		438			29			304
Income before income taxes		16,430			18,070			19,425			18,488
Income taxes		6,769			7,423			7,973			7,595
Net income		9,661			10,647			11,452			10,893
Selected Financial Ratios(1):
Yield on earning assets		6.76	%		6.52	%		6.34	%		6.15	%
Cost of funds		3.75			3.43			3.11			2.88
Interest rate spread		3.01			3.09			3.23			3.27
Net interest margin		3.15			3.23			3.35			3.39
Return on average assets		0.88			1.00			1.10			1.04
Return on average equity		11.72			13.14			14.46			13.91
Average equity to average assets		7.53			7.60			7.59			7.45
Non-interest expense to average assets		2.46			2.48			2.52			2.74
Per Share:
Basic earnings per share	$	0.45		$	0.50		$	0.54		$	0.51
Diluted earnings per share		0.44			0.49			0.53			0.50
Dividends per share		0.17			0.16			0.16			0.16
Book value per share		15.18			14.91			14.69			14.32
Financial Condition:
Total assets	$	4,481,586		$	4,356,921		$	4,275,140		$	4,200,234
Loans receivable, net
Held for sale		5,393			4,118			5,509			5,847
Held for investment		3,794,039			3,709,745			3,614,265			3,545,436
Deposits		3,223,759			3,177,220			3,040,217			2,987,284
Borrowings		875,014			791,098			861,861			814,641
Stockholders’ equity		330,774			326,495			321,025			312,089
Allowance for loan losses		18,393			15,636			15,570			15,252
Non-performing assets		22,506			18,836			15,721			17,265

⁽¹⁾ Annualized when appropriate.

22

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 allowance 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.
	Allowances are established for expected losses resulting from analysis developed through 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.

23

RESULTS OF OPERATIONS

General. Net income for the three and six months ended September 30, 2007 decreased $387,000 or 4.0% to $9.3 million from $9.7 million and decreased $1.1 million or 5.7% to $19.2 million from $20.3 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 a decrease in non-interest income of $2.1 million and a decrease in net interest income of $1.3 million, which were partially offset by a decrease in non-interest expense of $1.6 million, a decrease in income tax expense of $741,000 and a decrease in provision for loan losses of $530,000. The decrease in net income for the six-month period compared to the same period last year was largely due to a decrease in net interest income of $3.1 million, a decrease in non-interest income of $784,000 and an increase in provision for loan losses of $536,000, which were partially offset by a decrease in non-interest expense of $1.1 million, a decrease in income tax expense of $1.5 million and a decrease in minority interest income of real estate partnership operations of $641,000.

Net Interest Income. Net interest income decreased $1.3 million or 3.8% for the three months ended September 30, 2007 and decreased $3.1 million or 4.7% for the six months ended September 30, 2007, respectively, as compared to the same respective periods in the prior year. Interest income increased $4.2 million or 6.0% for the three months ended September 30, 2007 as compared to the same period in the prior year. Interest expense increased $5.5 million or 14.6% for the three months ended September 30, 2007 as compared to the same period in the prior year. The net interest margin decreased to 2.92% for the three-month period ended September 30, 2007 from 3.15% for the same period in the prior year and decreased to 2.91% for the six-month period ended September 30, 2007 from 3.19% 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 2.77% from 3.01% for the three-month period and decreased to 2.76% from 3.05% for the six-month period ended September 30, 2007 as compared to the same respective periods in the prior year.

Interest income on loans increased $4.0 million or 6.0% and $10.2 million or 8.0%, respectively, for the three and six months ended September 30, 2007, 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 $145.3 million and $183.6 million in the three and six months ended September 30, 2007, respectively, as compared to the same respective periods in the prior year. There was also an increase of 15 basis points in the average yield on loans to 7.12% from 6.97% for the three-month period and an increase of 20 basis points to 7.06% from 6.86% for the six-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 decreased $33,000 or 1.1% and increased $69,000 or 1.2% for the three- and six-month periods ended September 30, 2007, as compared to the same respective periods in the prior year, primarily due to an increase of 24 basis points in the average yield on mortgage-related securities to 5.02% from 4.78% for the three-month period and an increase of 24 basis points to 4.96% from 4.72% for the six-month period. These increases were partially offset by a decrease of $14.7 million and $9.4 million, respectively, in the three- and six-month average balances of mortgage-related securities. Interest income on investment securities (including Federal Home Loan Bank stock) increased $105,000 or 8.5% and $363,000 or 16.5%, respectively, for the three- and six-month periods ended September 30, 2007 as compared to the same respective periods in the prior year. These increases were primarily a result of an increase of $23.2 million and $20.6 million, respectively, in the average balance of investment securities for the three- and six-month periods ended September 30, 2007 as compared to the same respective periods in 2006, offset in part by a decrease of 42 basis points and 9 basis points in the average yield on investment securities for the three- and six-month periods, respectively. Interest income on interest-bearing deposits increased $197,000 and decreased $39,000, respectively, for the three and six months ended September 30, 2007 as compared to the same respective periods in 2006, primarily due to increases in the average balances for the three-month period and decreases in the average balances for the six-month period.

Interest expense on deposits increased $2.8 million or 9.8% and $8.9 million or 16.5% for the three and six months ended September 30, 2007, respectively, as compared to the same respective periods in 2006. These increases were primarily attributable to an increase in the average balance of deposits, which increased $34.7 million and $94.2 million in the three and six month periods, respectively, primarily as a result of increases in demand deposits, and an increase of 31 basis points in the weighted average cost of deposits to 3.92% from 3.61% for the respective three-month period and an increase of 45 basis points in the weighted average cost of deposits to 3.90% from 3.45% for

24

the respective six-month period. Interest expense on notes payable and other borrowings increased $2.7 million or 29.8% and $4.8 million or 28.1% during the three and six months ended September 30, 2007, as compared to the same respective periods in the prior year. For the three- and six-month periods ended September 30, 2007, the average balance of notes payable increased $127.0 million and $92.3 million, respectively, as compared to the same respective period in 2006. The weighted average cost of notes payable and other borrowings increased 55 basis points to 4.82% from 4.27% for the three-month period and increased 63 basis points to 4.76% from 4.13% for the six-month period.

Provision for Loan Losses. Provision for loan losses decreased $530,000 or 20.2% for the three-month period ended September 30, 2007, but increased $536,000 or 14.0% for the six-month period ended September 30, 2007, as compared to the same respective periods last year. Management evaluates a variety of qualitative and quantitative factors when determining the adequacy of the allowance for losses. Management continues to evaluate and monitor the individual borrowers and underlying collateral as it relates to the current economic conditions. Due to the current economic climate and recent increases in delinquent loans and non-accrual loans (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 period. 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 interest rate spread for the periods indicated. The average balances are derived from average daily balances.

25

	Three Months Ended September 30,
	2007							2006
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost(1)			Balance		Interest		Cost(1)
	(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	3,027,068	$	52,658		6.96	%	$	2,929,479	$	49,753		6.79	%
Consumer loans		650,225		12,129		7.46			630,121		11,458		7.27
Commercial business loans		239,140		4,927		8.24			211,529		4,529		8.56
Total loans receivable(2) (3)		3,916,433		69,714		7.12			3,771,129		65,740		6.97
Mortgage-related securities(4)		241,394		3,028		5.02			256,050		3,061		4.78
Investment securities(4)		94,020		1,056		4.49			73,531		893		4.86
Interest-bearing deposits		37,592		636		6.77			31,140		439		5.64
Federal Home Loan Bank stock		44,271		289		2.61			41,598		347		3.34
Total interest-earning assets		4,333,710		74,723		6.90			4,173,448		70,480		6.76
Non-interest-earning assets		217,345							207,613
Total assets	$	4,551,055						$	4,381,061
Interest-Bearing Liabilities
Demand deposits	$	958,627		5,694		2.38		$	882,308		5,427		2.46
Regular passbook savings		195,910		225		0.46			210,632		242		0.46
Certificates of deposit		2,048,115		25,505		4.98			2,075,036		22,949		4.42
Total deposits		3,202,652		31,424		3.92			3,167,976		28,618		3.61
Short-term borrowings		667,165		8,474		5.08			253,174		3,550		5.61
Long-term borrowings		304,296		3,241		4.26			591,298		5,474		3.70
Total interest-bearing liabilities		4,174,113		43,139		4.13			4,012,448		37,642		3.75
Non-interest-bearing liabilities		41,701							38,876
Total liabilities		4,215,814							4,051,324
Stockholders’ equity		335,241							329,737
Total liabilities and stockholders’ equity	$	4,551,055						$	4,381,061
Net interest income/interest rate spread(5)			$	31,584		2.77	%			$	32,838		3.01	%
Net interest-earning assets	$	159,597						$	161,000
Net interest margin(6)						2.92	%						3.15	%
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.

26

	Six Months Ended September 30,
	2007							2006
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost(1)			Balance		Interest		Cost(1)
	(Dollars In Thousands)
Interest-Earning Assets
Mortgage loans	$	3,021,682	$	104,132		6.89	%	$	2,885,418	$	96,241		6.67	%
Consumer loans		644,763		23,916		7.42			625,506		22,472		7.19
Commercial business loans		235,489		9,697		8.24			207,386		8,802		8.49
Total loans receivable(2) (3)		3,901,934		137,745		7.06			3,718,310		127,515		6.86
Mortgage-related securities(4)		243,074		6,034		4.96			252,519		5,965		4.72
Investment securities(4)		85,271		1,988		4.66			64,269		1,503		4.68
Interest-bearing deposits		32,156		1,031		6.41			41,356		1,070		5.17
Federal Home Loan Bank stock		42,824		572		2.67			43,237		694		3.21
Total interest-earning assets		4,305,259		147,370		6.85			4,119,691		136,747		6.64
Non-interest-earning assets		215,023							204,086
Total assets	$	4,520,282						$	4,323,777
Interest-Bearing Liabilities
Demand deposits	$	949,536		11,398		2.40		$	856,693		9,835		2.30
Regular passbook savings		194,776		437		0.45			212,338		486		0.46
Certificates of deposit		2,078,707		51,035		4.91			2,059,754		43,653		4.24
Total deposits		3,223,019		62,870		3.90			3,128,785		53,974		3.45
Short-term borrowings		581,196		15,132		5.21			209,870		5,812		5.54
Long-term borrowings		339,612		6,767		3.99			618,589		11,278		3.65
Total interest-bearing liabilities		4,143,827		84,769		4.09			3,957,244		71,064		3.59
Non-interest-bearing liabilities		40,206							39,484
Total liabilities		4,184,033							3,996,728
Stockholders’ equity		336,249							327,049
Total liabilities and stockholders’ equity	$	4,520,282						$	4,323,777
Net interest income/interest rate spread(5)			$	62,601		2.76	%			$	65,683		3.05	%
Net interest-earning assets	$	161,432						$	162,447
Net interest margin(6)						2.91	%						3.19	%
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.

27

Non-Interest Income. Non-interest income decreased $2.1 million or 16.2% to $10.9 million and decreased $784,000 or 3.0% to $25.6 million for the three and six months ended September 30, 2007, respectively, as compared to $13.1 million and $26.4 million for the same respective periods in 2006. The decrease for the three-month period ended September 30, 2007 was primarily due to the decrease in real estate partnership revenue of $1.2 million. In addition, other revenue from real estate operations decreased $583,000, net gain on sale of loans decreased $535,000 and other non-interest income decreased $480,000. These decreases were partially offset by an increase in service charges on deposits of $631,000 and an increase in investments and insurance commissions of $85,000 for the three-month period ended September 30, 2007, as compared to the same respective period in the prior year. The decrease in non-interest income for the six month period ended September 30, 2007 was primarily due to the decrease in other revenue from real estate operations of $1.5 million. In addition, real estate partnership revenue decreased $963,000 other non-interest income decreased $781,000. These decreases were partially offset by an increase in service charges on deposits of $1.3 million, an increase in loan servicing income of $441,000, an increase in net gain on sale of investments and mortgage-related securities of $298,000, an increase in investments and insurance commissions of $241,000 and an increase in net gain on sale of loans of $182,000 for the six-month period ended September 30, 2007, as compared to the same respective period in the prior year.

Non-Interest Expense. Non-interest expense decreased $1.6 million or 5.9% to $25.3 million and decreased $1.1 million or 2.1% to $52.2 million for the three and six months ended September 30, 2007, respectively, as compared to $26.9 million and $53.4 million for the same respective periods in 2006. The decrease for the three-month period was primarily due to the decrease of real estate investment partnership cost of sales of $817,000, the decrease in other expenses from real estate operations of $382,000, the decrease in compensation expense of $278,000 and the decrease in data processing expense of $119,000. These decreases were partially offset by an increase in other non-interest expense of $184,000 for the three months ended September 30, 2007 as compared to the same period in the prior year. The decrease for the six-month period was primarily due to the decrease in other expenses from real estate partnership operations of $875,000. In addition, real estate investment partnership cost of sales decreased $330,000, marketing expense decreased $140,000 and occupancy expense decreased $111,000 for the six-month period ended September 30, 2007 as compared to the same period in the prior year. These decreases were partially offset by an increase in compensation expense of $266,000 and an increase in other non-interest expense of $130,000 for the six months ended September 30, 2007 as compared to the same period in the prior year.

Income Taxes. The Corporation adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” on April 1, 2007. As a result of the implementation of FIN 48, there were no adjustments in the liability for unrecognized income tax benefits.

The Corporation recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the Corporation has not recognized any accrued interest and penalties related to uncertain tax positions.

The Corporation is subject to U.S. federal income tax as well as income tax of state jurisdictions. The tax years 2003-2006 remain open to examination by the U.S. federal and state jurisdictions to which we are subject.

Income tax expense decreased $741,000 or 10.9% and $1.5 million or 10.4%, during the three and six months ended September 30, 2007, respectively, as compared to the same respective periods in 2006. This decrease was due to a decrease in income before income taxes. The effective tax rate was 39.4% and 39.9% for the three- and six-month periods ended September 30, 2007, respectively, as compared to 41.2% and 41.1% for the same respective periods last year. The decrease in the effective tax rate is due to the tax benefit recorded in the current periods for the deduction of dividends paid by the Corporation to employee benefit plans.

28

FINANCIAL CONDITION

During the six months ended September 30, 2007, the Corporation’s assets increased by $71.8 million from $4.54 billion at March 31, 2007 to $4.61 billion at September 30, 2007. The majority of this increase was attributable to a $71.9 million increase in loans receivable and a $47.8 million increase in investment securities, which were partially offset by decreases in other categories including a $54.4 million decrease in cash and cash equivalents.

Total loans (including loans held for sale) increased $71.9 million during the six months ended September 30, 2007. Activity for the period consisted of (i) originations and purchases of $815.5 million, (ii) sales of $208.2 million and (iii) principal repayments and other adjustments of $535.4 million.

Mortgage-related securities (both available for sale and held to maturity) decreased $5.0 million during the six months ended September 30, 2007 as a result of principal repayments and market value adjustments of $30.1 million, which were partially offset by purchases of $25.1 million in this period. Mortgage-related securities consisted of $154.3 million of mortgage-backed securities and $88.7 million of corporate collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”) issued by government agencies at September 30, 2007.

Management believes that the Corporation’s CMOs and REMICs 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 increased $47.8 million during the six months ended September 30, 2007 as a result of purchases of $114.0 million of such securities, which were partially offset by sales and maturities of $66.4 million of U.S. Government and agency securities.

Federal Home Loan Bank (“FHLB”) stock increased $6.0 million during the six months ended September 30, 2007 due to the purchase of additional stock.

Real estate held for development and sale decreased $2.2 million to $58.1 million at September 30, 2007 from $60.3 million at March 31, 2007. This net decrease was the result of continued home and land lot sales.

Total liabilities increased $70.5 million during the six months ended September 30, 2007. This increase was largely due to a $139.1 million increase in borrowings, which was partially offset by a $69.7 million decrease in deposits. 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 $287.4 million at September 30, 2007 and $363.7 million at March 31, 2007, and generally mature within one to five years.

Stockholders’ equity increased $2.0 million during the six months ended September 30, 2007 as a net result of (i) comprehensive income of $19.4 million, (ii) stock options exercised of $1.4 million (with the excess of the cost of treasury shares over the option price ($812,000) charged to retained earnings), (iii) benefit plan shares earned and related tax adjustments totaling $14,000 and (iv) the issuance of shares for management and benefit plans of $257,000. These decreases were partially offset by (i) cash dividends of $7.4 million and (ii) purchases of treasury stock of $10.9 million.

29

ASSET QUALITY

Non-performing assets increased $8.6 million to $63.1 million at September 30, 2007 from $54.5 million at March 31, 2007 and increased as a percentage of total assets to 1.37% from 1.20% at such dates, respectively.

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

	At September 30,			At March 31,
	2007			2007			2006			2005
	(Dollars In Thousands)
Non-accrual loans:
Single-family residential	$	15,197		$	13,038		$	2,856		$	2,406
Multi-family residential		16,315			17,289			4,214			—
Commercial real estate		10,412			12,030			3,398			4,894
Construction and land		8,133			1,696			—			—
Consumer		1,027			705			548			453
Commercial business		4,497			2,283			2,513			6,697
Total non-accrual loans		55,581			47,041			13,529			14,450
Foreclosed properties and repossessed assets, net		7,497			7,411			2,192			1,458
Total non-performing assets	$	63,078		$	54,452		$	15,721		$	15,908
Performing troubled debt restructurings	$	400		$	400		$	—		$	—
Total non-accrual loans to total loans(1)		1.34	%		1.16	%		0.35	%		0.40	%
Total non-performing assets to total assets		1.37			1.20			0.37			0.39
Allowance for loan losses to total loans(1)		0.53			0.50			0.41			0.73
Allowance for loan losses to total non-accrual loans		39.59			43.62			115.09			183.00
Allowance for loan and foreclosure losses to total non-performing assets		34.91			37.71			100.48			167.39

⁽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 $8.5 million during the six months ended September 30, 2007. 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 eleven single-family residential loans to one borrower that totaled $1.2 million, a multi-family loan in the amount of $1.3 million, three multi-family residential loans to one borrower that totaled $1.5 million, a multi-family loan in the amount of $4.2 million, a construction and land loan in the amount of $3.1 million and a commercial business loan in the amount of $1.2 million. This increase was partially offset by the pay off of a non-accrual multi-family residential loan totaling approximately $2.1 million as well as the sale of a foreclosed commercial real estate property totaling approximately $1.5 million. At September 30, 2007, there were seven non-accrual loans with loan balances greater than $1.0 million. One was a $2.3 million commercial real estate loan secured by commercial properties located throughout Wisconsin. The second was a $2.7 million multi-family residential loan secured by two multi-family properties located in central Wisconsin. The third was a $1.2 million multi-family residential loan secured by duplexes and lots located in southern Wisconsin. The fourth was a $4.2 million multi-family residential loan secured by a multi-family property located in Minnesota. The fifth was a $1.8 million construction loan secured by condominiums and single family lots located in northeast Wisconsin. The sixth was a $3.1 million construction loan secured by a retail development located in northeast Wisconsin. The seventh was a $1.2 million commercial business loan secured by a manufacturing plant in northern Wisconsin.

30

Foreclosed properties and repossessed assets increased $86,000 during the six months ended September 30, 2007.

At September 30, 2007, assets that the Corporation had classified as substandard, net of reserves, consisted of $71.0 million of loans and foreclosed properties. At March 31, 2007, substandard assets amounted to $61.1 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 $9.9 million in the substandard balance in the six months ended September 30, 2007 was largely attributable to the addition of a multi-family loan in the amount of $1.3 million, a construction loan in the amount of $3.1 million, a multi-family loan in the amount of $4.2 million and a commercial business loan in the amount of $1.2 million.

At September 30, 2007, substandard assets included eight loans with a carrying value of greater than $1.0 million, each of which is noted above.

At September 30, 2007, the Corporation had $7.9 million of impaired loans, net of charge off of $2.0 million during the quarter. At March 31, 2007, impaired loans were $922,000, net. The increase in impaired loans since March 31, 2007 was attributable to the addition of two loans described above which totaled $6.4 million in the aggregate. 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 September 30,		March 31,
	2007		2007		2006		2005
	(In Thousands)
Impaired loans	$	7,929	$	1,426	$	6,381	$	10,827
Less:
Specific valuation allowance		—		504		3,111		7,126
Total impaired loans, net of specific valuation allowance	$	7,929	$	922	$	3,270	$	3,701
Average impaired loans	$	2,881	$	2,360	$	3,829	$	11,535
Interest income recognized on impaired loans	$	2	$	44	$	208	$	249
Interest income recognized on a cash basis on impaired loans	$	2	$	44	$	208	$	249

31

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

	At September 30,		At March 31,
	2007		2007		2006		2005
	(In Thousands)
30 to 59 days	$	40,290	$	12,776	$	9,874	$	5,853
60 to 89 days		8,947		5,414		733		714
Total	$	49,237	$	18,190	$	10,607	$	6,567

The increase in loans 30-59 days delinquent since March 31, 2007 was in part due to ten borrowers with loans totaling approximately $19.9 million secured by commercial and multi-family residential properties. Management continues to evaluate and monitor the individual borrowers and underlying collateral as it relates to the current economic conditions.

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						Six Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Dollars In Thousands)
Allowance at beginning of period	$	22,220		$	15,636		$	20,517		$	15,570
Charge-offs:
Mortgage		(1,965	)		(210	)		(2,415	)		(625	)
Consumer		(107	)		(90	)		(313	)		(160	)
Commercial business		(385	)		(10	)		(388	)		(846	)
Total charge-offs		(2,457	)		(310	)		(3,116	)		(1,631	)
Recoveries:
Mortgage		77			—			84			1
Consumer		8			9			22			15
Commercial business		59			433			129			608
Total recoveries		144			442			235			624
Net (charge-offs) recoveries		(2,313	)		132			(2,881	)		(1,007	)
Provision for loan losses		2,095			2,625			4,366			3,830
Allowance at end of period	$	22,002		$	18,393		$	22,002		$	18,393
Net charge-offs to average loans		(0.24	)%		0.01	%		(0.15	)%		(0.05	)%

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Although management believes that the September 30, 2007 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 September 30, 2007, the Bank had outstanding commitments to originate loans of $124.0 million and commitments to extend funds to, or on behalf of, customers pursuant to lines and letters of credit of $298.3 million. Scheduled maturities of certificates of deposit for the Bank during the twelve months following September 30, 2007 amounted to $1.83 billion. Scheduled maturities of borrowings during the same period totaled $855.3 million for the Bank and $66.5 million for the Corporation. 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 $21.4 million at September 30, 2007 related to approximately $1.54 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 September 30, 2007 and March 31, 2007:

											Minimum Required
						Minimum Required					to be Well
						For Capital					Capitalized Under
	Actual					Adequacy Purposes					OTS Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
At September 30, 2007:
Tier 1 capital
(to adjusted tangible assets)	$	357,597		7.91	%	$	135,669		3.00	%	$	226,115		5.00	%
Risk-based capital
(to risk-based assets)		379,599		10.64			285,526		8.00			356,907		10.00
Tangible capital
(to tangible assets)		357,597		7.91			67,835		1.50			N/A		N/A
At March 31, 2007:
Tier 1 capital
(to adjusted tangible assets)	$	352,333		7.92	%	$	133,407		3.00	%	$	222,344		5.00	%
Risk-based capital
(to risk-based assets)		372,346		10.84			274,773		8.00			343,466		10.00
Tangible capital
(to tangible assets)		352,333		7.92			66,703		1.50			N/A		N/A

The following table reconciles the Bank’s stockholders’ equity to regulatory capital at September 30, 2007 and March 31, 2007:

	September 30,			March 31,
	2007			2007
	(In Thousands)
Stockholders’ equity of the Bank	$	377,348		$	371,708
Less: Goodwill and intangible assets		(19,956	)		(19,956	)
Accumulated other comprehensive income		205			581
Tier 1 and tangible capital		357,597			352,333
Plus: Allowable general valuation allowances		22,002			20,013
Risk-based capital	$	379,599		$	372,346

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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 principal real estate investment subsidiary, IDI, is required to guarantee the partnership loans of its subsidiaries for the development of homes for sale. At September 30, 2007, IDI had guaranteed $44.4 million of loans to partnerships made by subsidiaries of IDI. At the same date, $22.7 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 9/30/07		at 3/31/07
(Dollars in thousands)
Oakmont	Chandler Creek	$	14,150	$	12,350	$	12,350
Davsha III	Indian Palms 147, LLC		4,655		226		851
Davsha V	Villa Santa Rosa, LLC		11,000		341		1,601
Davsha VII	La Vista Grande 121, LLC		14,619		9,830		11,067
Total		$	44,424	$	22,747	$	25,869

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 September 30, 2007, the Corporation’s investment in these partnerships consisted of assets of $46.8 million and cash and other assets of $2.8 million. The liabilities of these partnerships consisted of other borrowings of $25.1 million (reported as a part of FHLB and other borrowings), other liabilities of $1.5 million (reported as a part of other liabilities) and minority interest of $6.8 million. These amounts represent the Corporation’s maximum exposure to loss at September 30, 2007 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 of Power Designers, Inc. in the amount of $1.2 million, of which there was an outstanding balance of $531,000 at September 30, 2007. 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 September 30, 2007 has not changed materially since March 31, 2007. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset/Liability Management” in the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2007.

REGULATORY DEVELOPMENTS

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 million 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.

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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

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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.

Item 3 Quantitative and Qualitative Disclosures About Market Risk.

The Corporation’s market rate risk has not materially changed from March 31, 2007. See Item 7A in the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2007. See also “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, 2007.

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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)
July 1 -July 31, 2007		1,999		$	25.98		—		1,650,860
August 1 - August 31, 2007		—			—		—		1,650,860
September 1 - September 30, 2007		18,700			27.95		18,700		1,632,160
Total		20,699	(1)	$	27.76		18,700		1,632,160

(1)

Consists of 18,700 shares purchased pursuant to a publicly announced repurchase program, and 1,999 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. In July 2007, the Board of Directors approved the repurchase of an additional 5% of the Corporation’s common stock, representing approximately 1,068,000 of outstanding shares. 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.

Item 6 Exhibits

The following exhibits are filed with this report:

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

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SIGNATURES

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

ANCHOR BANCORP WISCONSIN INC.

Date: November 6, 2007	By:	/s/ Douglas J. Timmerman
		Douglas J. Timmerman, Chairman of the
		Board, President and Chief Executive Officer
Date: November 6, 2007	By:	/s/ Dale C. Ringgenberg
		Dale C. Ringgenberg, Treasurer and
		Chief Financial Officer

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