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  **SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-Q**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended September 30, 2006****or**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****COMMISSION FILE NUMBER 0-20006****ANCHOR BANCORP WISCONSIN INC.****(Exact name of registrant as specified in its charter)**   Wisconsin 39-1726871   (State or other jurisdiction of (IRS Employer Identification No.)incorporation or organization)     25 West Main Street  Madison, Wisconsin 53703   (Address of principal executive office) (Zip Code)(608) 252-8700 Registrant’s telephone number, including area code Not Applicable(Former name, former address, and former fiscal year, if changed since last report)Indicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.Yes þ            No oIndicate 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” inRule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o            Accelerated filer þ            Non-accelerated filer oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o            No þIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date.Class: Common stock — $.10 Par ValueNumber of shares outstanding as of October 31, 2006: 21,778,783  
 

 
**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, 2006 and March 31, 2006 2           Consolidated Statements of Income for the Three and Six Months Ended September 30, 2006 and 2005 3           Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005 5           Notes to Unaudited Consolidated Financial Statements 7       Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 21           Results of Operations 26           Financial Condition 31           Asset Quality 32           Liquidity & Capital Resources 35           Guarantees 37           Asset/Liability Management 38       Item 3 Quantitative and Qualitative Disclosures About Market Risk 39       Item 4 Controls and Procedures 39       **Part II — Other Information**         Item 1 Legal Proceedings 39    Item 1A Risk Factors 39Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 40Item 3 Defaults upon Senior Securities 40Item 4 Submission of Matters to a Vote of Security Holders 40Item 5 Other Information 40Item 6 Exhibits 41       **Signatures**     42 302 Certification of Chief Executive Officer 302 Certification of Chief Financial Officer 906 Certification of Chief Executive Officer 906 Certification of Chief Financial Officer
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**ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES****Consolidated Balance Sheets**           **September 30,**  **March 31,**   **2006**  **2006**   (Unaudited)       (In Thousands, Except Share Data) **Assets**        Cash $81,867  $66,192 Interest-bearing deposits  38,658   86,352        Cash and cash equivalents  120,525   152,544 Investment securities available for sale  89,794   49,521 Mortgage-related securities available for sale  260,722   247,438 Mortgage-related securities held to maturity (fair value of $72and $77, respectively)  72   77 Loans, less allowance for loan losses of $18,393 at September 30, 2006and $15,570 at March 31, 2006:        Held for sale  5,393   5,509 Held for investment  3,794,039   3,614,265 Foreclosed properties and repossessed assets, net  4,366   2,192 Real estate held for development and sale  61,550   54,330 Office properties and equipment  29,909   29,867 Federal Home Loan Bank stock—at cost  41,598   45,348 Accrued interest on investments and loans and other assets  53,662   54,093 Goodwill  19,956   19,956        Total assets $4,481,586  $4,275,140                 **Liabilities and Stockholders’ Equity**        Deposits        Non-interest bearing $277,575  $242,924 Interest bearing  2,946,184   2,797,293        Total deposits  3,223,759   3,040,217 Short-term borrowings  293,375   186,200 Long-term borrowings  581,639   675,661 Other liabilities  44,745   45,040        Total liabilities  4,143,518   3,947,118        Minority interest in real estate partnerships  7,294   6,997        Commitments and contingent liabilities (Note 8)        Preferred stock, $.10 par value, 5,000,000 sharesauthorized, none outstanding  —   — Common stock, $.10 par value, 100,000,000 shares authorized,25,363,339 shares issued, 21,786,833 and 21,854,303 shares outstanding,respectively  2,536   2,536 Additional paid-in capital  71,283   70,517 Retained earnings  350,910   340,364 Accumulated other comprehensive loss  (2,039)  (2,558)Treasury stock (3,576,506 shares and 3,509,036 shares, respectively), at cost  (83,885)  (82,144)Unearned deferred compensation  (8,031)  (7,690)       Total stockholders’ equity  330,774   321,025        Total liabilities and stockholders’ equity $4,481,586  $4,275,140        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,**   **2006**  **2005**  **2006**  **2005**   (In Thousands, Except Per Share Data) **Interest income:**                Loans $65,740  $53,525  $127,515  $104,750 Mortgage-related securities  3,061   3,133   5,965   5,676 Investment securities  1,240   886   2,197   1,903 Interest-bearing deposits  439   1,118   1,070   1,899              Total interest income  70,480   58,662   136,747   114,228 **Interest expense:**                Deposits  28,618   18,116   53,974   34,588 Short-term borrowings  3,550   2,504   5,812   4,767 Long-term borrowings  5,474   4,614   11,278   9,300              Total interest expense  37,642   25,234   71,064   48,655              Net interest income  32,838   33,428   65,683   65,573 Provision for loan losses  2,625   1,485   3,830   1,750              Net interest income after provision for loan losses  30,213   31,943   61,853   63,823 **Non-interest income:**                Real estate investment partnership revenue  3,631   11,559   8,117   23,072 Loan servicing income  1,417   1,090   2,414   2,401 Credit enhancement income  417   406   834   802 Service charges on deposits  2,517   2,357   4,945   4,729 Insurance commissions  973   621   1,799   1,308 Net gain on sale of loans  1,349   1,193   2,219   1,316 Net gain (loss) on sale of investments andmortgage-related securities  —   267   (283)  274 Other revenue from real estate operations  1,575   698   3,722   1,913 Other  1,176   1,651   2,595   2,806              Total non-interest income  13,055   19,842   26,362   38,621 
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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,**   **2006**  **2005**  **2006**  **2005**   (In Thousands, Except Per Share Data) **Non-interest expense:**                Compensation  11,579   11,298   22,305   22,170 Real estate investment partnership cost of sales  3,486   10,780   7,339   19,191 Occupancy  1,986   1,748   3,985   3,324 Furniture and equipment  1,595   1,619   3,048   3,186 Data processing  1,639   1,369   3,060   2,650 Marketing  1,158   1,091   2,310   2,186 Other expenses from real estate partnership operations  2,179   2,205   4,757   4,254 Other  3,291   3,206   6,548   6,395              Total non-interest expense  26,913   33,316   53,352   63,356              Minority interest in income (loss) of real estate partnership operations  (75)  102   363   1,391              Income before income taxes  16,430   18,367   34,500   37,697 Income taxes  6,769   7,589   14,192   15,359              Net income $9,661  $10,778  $20,308  $22,338              Earnings per share:                Basic $0.45  $0.49  $0.95  $1.02 Diluted  0.44   0.48   0.93   1.00 Dividends declared per share  0.17   0.16   0.33   0.30 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,**   **2006**  **2005**   **(In Thousands)** **Operating Activities**        Net income $20,308  $22,338 Adjustments to reconcile net income to netcash provided by operating activities:        Provision for loan losses  3,830   1,750 Provision for depreciation and amortization  2,132   2,232 Cash paid due to origination of loans held for sale  (202,642)  (460,761)Cash received due to sale of loans held for sale  204,977   458,165 Net gain on sales of loans  (2,219)  (1,316)Loss (gain) on sale of investments  283   (274)Increase in accrued interest receivable  (1,285)  (1,279)(Increase) decrease in prepaid exp and other assets  1,716   (103)Increase in accrued interest payable  1,965   1,216 Decrease in accounts payable  (447)  (7,785)Other  (4,783)  (4,208)       Net cash provided by operating activities  23,835   9,975          **Investing Activities**        Proceeds from sales of investment securities available for sale  65   — Proceeds from maturities of investment securities  53,875   63,080 Purchase of investment securities available for sale  (93,571)  (56,893)Proceeds from sale of mortgage-related securities available for sale  —   7,964 Purchase of mortgage-related securities available for sale  (38,308)  (15,000)Principal collected on mortgage-related securities  25,851   34,025 Decrease in FHLB stock  3,750   — Net increase in loans held for investment  (181,993)  (145,786)Purchases of office properties and equipment  (2,100)  (1,162)Sales of office properties and equipment  161   — Sales of real estate  —   133 Investment in real estate held for development and sale  (7,388)  (1,811)       Net cash used in investing activities  (239,658)  (115,450)
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**ANCHOR BANCORP WISCONSIN INC. AND SUBSIDIARIES****Consolidated Statements of Cash Flows***(Cont’d)*(Unaudited)           **Six Months Ended September 30,**   **2006**  **2005**   **(In Thousands)** **Financing Activities**        Increase in deposit accounts $170,160  $146,176 Increase in advance payments by borrowersfor taxes and insurance  11,569   11,952 Increase in short-term borrowings  107,175   12,700 Proceeds from long-term borrowings  7,297   87,796 Repayment of long-term borrowings  (101,319)  (100,061)Treasury stock purchased  (5,740)  (13,653)Exercise of stock options  996   (18)Cash received from employee stock purchase plan  (8)  307 Tax benefit from stock related compensation  766   1,844 Payments of cash dividends to stockholders  (7,092)  (6,453)       Net cash provided by financing activities  183,804   140,590        Net increase (decrease) in cash and cash equivalents  (32,019)  35,115 Cash and cash equivalents at beginning of period  152,544   166,436        Cash and cash equivalents at end of period $120,525  $201,551                 **Supplementary cash flow information:**        Cash paid or credited to accounts:        Interest on deposits and borrowings $73,029  $47,439 Income taxes  17,890   18,146          Non-cash transactions:        Transfer of mortgage loans held to maturity to held for sale  —   94,129 Securitization of mortgage loans held for sale to mortgage-backedsecurities  —   94,165 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 ofAnchor 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 ofoperations include its wholly-owned subsidiaries ADPC Corporation (“ADPC”) and Anchor InvestmentCorporation (“AIC”). Significant inter-company balances and transactions have been eliminated.Investments in 50% owned partnerships are treated as variable interest entities and areconsolidated 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 withU.S. generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q andRule 10-01 of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by GAAP for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) necessary for a fair presentation of theunaudited consolidated financial statements have been included.In preparing the unaudited consolidated financial statements in conformity with GAAP, management isrequired to make estimates and assumptions that affect the amounts reported in the unauditedconsolidated financial statements and accompanying notes. Actual results could differ from thoseestimates. The results of operations and other data for the three-month and six-month periodsended September 30, 2006 are not necessarily indicative of results that may be expected for thefiscal year ending March 31, 2007. The unaudited consolidated financial statements presentedherein should be read in conjunction with the audited consolidated financial statements and relatednotes thereto included in the Corporation’s Annual Report for the year ended March 31, 2006.The Corporation’s investment in real estate held for investment and sale includes 50% owned realestate partnerships which are considered variable interest entities (“VIE’s”) and therefore subjectto the requirements of Financial Accounting Standards Interpretation No. 46, Consolidation ofVariable 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 theentity’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 representsrevenue recognized upon the closing of sales of developed lots and homes to independent thirdparties. Real estate investment partnership cost of sales is included in non-interest expense andrepresents the costs of such closed sales. Other revenue and other expenses from real estateoperations are also included in non-interest income and non-interest expense, respectively.Minority interest in real estate partnerships represents the equity interests of developmentpartners in the real estate investment partnerships. The development partners’ share of income isreflected as minority interest in income of real estate partnership operations.Certain prior period accounts have been reclassified to conform to the current periodpresentations.
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**Note 3 – Stock-Based Compensation**The Corporation has stock compensation plans under which shares of common stock are reserved forthe grant of incentive and non-incentive stock options and restricted stock or restricted stockunits to directors, officers and employees. The date the options are first exercisable isdetermined by a committee of the Board of Directors of the Corporation. The options expire nolater than ten years from the grant date.At September 30, 2006, an aggregate of 963,332 shares were available for future grants, includingup to 300,000 shares that may be awarded in the form of restricted stock or restricted stock unitswhich are not subject to the achievement of a performance target or targets. A summary of stockoption activity is provided in the following table:           **Six Months Ended September 30, 2006**       **Weighted**       **Average**   **Options**  **Price** Outstanding at beginning of period  1,159,022  $17.75 Granted  —   — Exercised  (139,856)  10.88 Forfeited  —   —        Outstanding at end of period  1,019,166  $18.69                 Options exercisable at September 30, 2006  1,019,166  $18.69        In March 2006, the Board approved the accelerated vesting and exercisability of all unvestedand unexercisable stock options to purchase common stock of the Corporation outstanding as of March31, 2006. As a result, options to purchase 67,240 shares of common stock, which would haveotherwise vested and become exercisable from time to time over the next four years (includingoptions to purchase 30,168 shares of common stock that would have vested and become exercisable inJune 2006), became vested and exercisable on March 31, 2006. The number of shares and exerciseprice of the options subject to acceleration are unchanged. The accelerated options have exerciseprices between $23.77 and $31.945 per share, with a weighted average exercise price of $26.43 pershare.The Corporation estimates that accelerating the vesting and exercisability of these optionseliminated approximately $0.5 million of non-cash compensation expense that would otherwise havebeen recorded in the Corporation’s income statements in future periods upon its adoption ofFinancial Accounting Standards Board Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, as of April 1, 2006.The following table represents outstanding stock options and exercisable stock options at theirrespective ranges of exercise prices at September 30, 2006:                       Options Outstanding Exercisable Options      Weighted-              Average              Remaining Weighted-     Weighted-      Contractual Average     AverageRange of Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price$10.78 - $12.99  196,196   0.74  $11.68   196,196  $11.68 $15.06 - $23.77  746,880   4.46   19.38   746,880   19.38 $28.50 - $31.95  76,090   8.44   29.99   76,090   29.99                         1,019,166   4.04   18.69   1,019,166   18.69                      
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A summary of restricted stock grants is provided in the following table:           **Six Months Ended September 30, 2006**       **Weighted**   **Number of Shares**  **Average**   **of Restricted Stock**  **Price** Balance at beginning of period  20,700  $31.95 Restricted stock granted  —   — Restricted stock vested  (2,500)  31.95 Restriced stock forfeited  —   —                 Balance at end of period  18,200  $31.95        Prior to April 1, 2006, the Corporation accounted for stock awards under the recognition andmeasurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and relatedInterpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation(“FAS 123”). No stock-based employee compensation cost was recognized in the Statements of Incomefor the years ended March 31, 2006 and 2005, nor the three- and six-month periods ended September30, 2005, as all options granted under the plan had an exercise price equal to the market value ofthe underlying common stock on the date of grant. Effective April 1, 2006, the Corporation adoptedthe fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (“FAS123(R)”), using the modified-prospective-transition method. Under that transition method,compensation cost recognized in 2006 includes: (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of April 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of FAS 123, and (b) compensation cost for allshare-based payments granted subsequent to April 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of FAS 123(R). Results for the prior periods have notbeen restated.As a result of adopting FAS 123(R) on April 1, 2006, the Corporation’s income before taxes and netincome for the six-month period ended September 30, 2006 were no different than if it had continuedto account for share-based compensation under APB No. 25 due to the fact that no compensationexpense was recognized in the current period.Prior to the adoption of FAS 123(R), the Corporation presented all tax benefits of deductionsresulting from the exercise of stock options as operating cash flows in the Statement of CashFlows. FAS 123(R) requires the cash flow resulting from the tax benefits resulting from taxdeductions in excess of the compensation cost recognized for those options (excess tax benefits) tobe classified as financing cash flows.The following table illustrates the effect on net income and earnings per share if the Corporationhad applied the fair value recognition provisions of FAS 123 to options granted under theCorporation’s stock compensation plans in all periods presented. For purposes of this pro formadisclosure, the value of the options is estimated using a Black-Scholes option-pricing formula andamortized expense over the options’ vesting periods.
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           Three Months  Six Months   Ended  Ended   September 30, 2005  September 30, 2005   (Dollars in thousands, except per share data) Net income, as reported $10,778  $22,338 Deduct: Total stock-based employee compensationexpense determined under fair value basedmethod for all awards, net of related tax effects  (47)  (132)       Pro forma net income $10,731  $22,206                 Earnings per share:        Basic:        As reported $0.49  $1.02 Pro forma  0.49   1.02 Diluted:        As reported $0.48  $1.00 Pro forma  0.48   1.00 **Note 4 – Goodwill and Other Intangible Assets**The Corporation’s carrying value of goodwill was $20.0 million at September 30, 2006 and at March31, 2006.The Corporation adopted FAS 156 – “Accounting for Servicing of Financial Assets – an amendment ofFASB Statement No. 140” (“FAS 156”) as of April 1, 2006. FAS 156 changes the way the Corporationaccounts for servicing assets and obligations associated with financial assets acquired or disposedof. Mortgage servicing rights (MSRs) are recorded when loans are sold to third-parties withservicing of those loans retained. In addition, MSRs are recorded when acquiring or assuming anobligation to service a financial (loan) asset that does not relate to a financial asset that isowned. The servicing asset is initially measured at fair value. The Corporation has defined twoclasses of MSRs to be accounted for under FAS 156 – residential (one to four family) and largemulti-family/commercial real estate serviced for private investors.The first class, residential MSRs, which are servicing rights on one to four family mortgage loanssold to public agencies and servicing assets related to the FHLB MPF program. The Corporationobtains a servicing asset when we deliver loans “as an agent” to the FHLB of Chicago under its MPFprogram. Initial fair value of the servicing right is calculated by a discounted cash flow modelbased on market value assumptions at the time of origination. In addition, this class includessimilar residential loans purchased from other banks at an agreed upon purchase price which becomesthe initial fair value. The Corporation assesses this class for impairment using current marketvalue assumptions at each reporting period.The other class of mortgage servicing rights is for large multi-family/commercial real estate loanspartially sold to private investors. The initial fair value is estimated by using an internalvaluation model and a third party opinion of value. Both methods are based on calculating thepresent value of estimated future net servicing cash flows, taking into consideration discountrates, 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 couldmaterially affect the estimated fair values. Changes to our assumptions are made when currenttrends and market data indicate that new trends have developed. Current market value assumptionsbased on loan product types – fixed rate, adjustable rate and balloon loans — include discountrates in the range of 9 to 15 percent and national prepayment speeds. Many of these assumptions aresubjective and require a high level of management judgment. MSR valuation assumptions are
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reviewed and approved by management on a quarterly basis. In addition, our MSR portfolio and assumptions areevaluated quarterly by a third party and the results are reviewed by management.Prepayment speeds may be affected by economic factors such as home price appreciation, marketinterest rates, the availability of other credit products to our borrowers and customer paymentpatterns. 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. Asmarket interest rates decline, prepayment speeds will generally increase as customers refinanceexisting mortgages under more favorable interest rate terms. As prepayment speeds increase,anticipated cash flows will generally decline resulting in a potential reduction, or impairment, tothe fair value of the capitalized MSRs. Alternatively, an increase in market interest rates maycause 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 valuationmodel monthlyThe Corporation has chosen to use the amortization method to measure each class of separatelyrecognized servicing assets. Under the amortization method, the Corporation amortizes servicingassets in proportion to and over the period of net servicing income. Income generated as theresult of new servicing assets is reported as net gain on sale of loans and the amortization ofservicing assets is reported as a reduction to loan servicing income in the Corporation’sconsolidated statements of income. Ancillary income is recorded in other non-interest income.Information regarding the Corporation’s mortgage servicing rights follows:           **Residential**  **Other**   (In Thousands) Mortgage servicing rights at beginning of period March 31, 2005 $5,797  $1,153 Additions  1,532   808 Amortization  (1,594)  (637)       Mortgage servicing rights before valuation allowance at end of period  5,735   1,324 Valuation allowance  (456)  —        Net mortgage servicing rights at end of period March 31, 2006 $5,279  $1,324        Fair Market Value at the end of the period $12,431  $1,678 Key Assumptions:        Weighted average discount  11.05%  16.99%Weighted average remaining term in years  22.14   4.50 Weighted average prepayment speed assumption  11.18%  22.35%         Mortgage servicing rights at beginning of period March 31, 2006 $5,735  $1,324 Additions  1,342   167 Amortization  (890)  (445)       Mortgage servicing rights before valuation allowance at end of period  6,187   1,046 Valuation allowance  —   —        Net mortgage servicing rights at end of period September 30, 2006 $6,187  $1,046        Fair Market Value at the end of the period $11,811  $1,603 Key Assumptions:        Weighted average discount  11.05%  15.66%Weighted average remaining term in years  25.68   4.50 Weighted average prepayment speed assumption  12.76%  23.14%
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The projections of amortization expense for mortgage servicing rights set forth below arebased on asset balances and the interest rate environment as of September 30, 2006. Futureamortization expense may be significantly different depending upon changes in the mortgageservicing portfolio, mortgage interest rates and market conditions.The following table shows the current period and estimated future amortization expense for mortgageservicing rights:           **Residential**  **Other**   (In Thousands) Quarter ended September 30, 2006 (actual) $250  $243                 Estimate for the year ended March 31,        2007 $890  $445 2008  1,780   301 2009  1,780   300 2010  1,737   —          $6,187  $1,046        
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**Note 5 – Stockholders’ Equity**During the quarter ended September 30, 2006, options for 27,232 shares of common stock wereexercised at a weighted-average price of $15.77 per share for a total of 139,856 shares for thesix-month period at a weighted-average price of $10.88 per share. Treasury shares were issued inexchange for the options using the last-in-first-out method. The cost of the treasury sharesissued in excess of the option price paid of $353,000 was charged to retained earnings. During thequarter ended September 30, 2006, the Corporation issued 12,302 shares of treasury stock to theCorporation’s retirement plans. The weighted-average cost of these shares was $28.73 per share or$354,000 in the aggregate. The $3,000 excess of the market price over the cost of the treasuryshares was credited to retained earnings. During the quarter ended September 30, 2006, theCorporation acquired an aggregate of 151,000 shares of its common stock at a weighted-average priceof $28.56 per share, or an aggregate of $4.3 million, as a result of purchases in the open market.See Part II, Item 2. On August 15, 2006, the Corporation paid a cash dividend of $.17 per share,amounting to $3.7 million, in the aggregate.Unrealized gains or losses on the Corporation’s available-for-sale securities are included in othercomprehensive income. During the quarters ended September 30, 2006 and 2005, total comprehensiveincome amounted to $11.7 million and $9.7 million, respectively. For the six months endedSeptember 30, 2006 and 2005, comprehensive income was $20.8 million and $22.6 million,respectively.
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**Note 6 – Earnings Per Share**Basic earnings per share for the three and six months ended September 30, 2006 and 2005 have beendetermined by dividing net income for the respective periods by the weighted average number ofshares of common stock outstanding. Diluted earnings per share is computed by dividing net incomeby 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,**   **2006**  **2005** Numerator:        Net income $9,660,194  $10,777,921        Numerator for basic and diluted earningsper share—income available to commonstockholders $9,660,194  $10,777,921          Denominator:        Denominator for basic earnings pershare—weighted-average shares  21,478,523   21,841,708 Effect of dilutive securities:        Employee stock options  278,365   393,456 Management Recognition Plans  —   —        Denominator for diluted earnings pershare—adjusted weighted-average shares and assumed conversions  21,756,888   22,235,164        Basic earnings per share $0.45  $0.49        Diluted earnings per share $0.44  $0.48                   **Six Months Ended September 30,**   **2006**  **2005** Numerator:        Net income $20,307,622  $22,338,079        Numerator for basic and diluted earningsper share—income available to commonstockholders $20,307,622  $22,338,079          Denominator:        Denominator for basic earnings pershare—weighted-average shares  21,472,026   21,815,021 Effect of dilutive securities:        Employee stock options  305,340   410,665 Management Recognition Plans  —   2,539        Denominator for diluted earnings pershare—adjusted weighted-average shares and assumed conversions  21,777,366   22,228,225        Basic earnings per share $0.95  $1.02        Diluted earnings per share $0.93  $1.00        
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**Note 7 – Segment Information**According to the materiality thresholds of SFAS No. 131, the Corporation is required to report eachoperating segment based on materiality thresholds of ten percent or more of certain amounts, suchas revenue. Additionally, the Corporation is required to report separate operating segments untilthe 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 beindividually material, if the segments have similar basic characteristics in the nature of theproducts, production processes, and type or class of customer for products or services. Based onthe above criteria, the Corporation has two reportable segments.**Community Banking:**This segment is the main basis of operation for the Corporation and includes thebranch network and other deposit support services; origination, sales and servicing of one-to-fourfamily loans; origination of multifamily, commercial real estate and business loans; origination ofa variety of consumer loans; and sales of alternative financial investments such as tax deferredannuities.**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 recreationalresidential developments and industrial developments (such as office parks).Net income generated by the real estate investment segment increased $255,000 to a net loss of($644,000) and decreased $481,000 to a net loss of ($1.0 million) for the three and six monthsended September 30, 2006, respectively, as compared to net losses of ($899,000) and ($541,000) forthe same respective periods in 2005. The increase in net income for the three-month period wasprimarily due to an increase in other revenue from real estate operations and the decrease in netincome for the six-month period was primarily due to a decrease in sales at the partnership level.For the three-month period, other revenue from real estate operations increased $877,000 as aresult of a legal settlement related to the Indian Palms property. In addition, there was adecrease of $7.9 million in partnership sales which was offset in part by a $7.3 million decreasein real estate investment cost of sales and a $177,000 decrease in minority interest in income ofreal estate partnerships for the three months ending September 30, 2006 as compared to the samerespective period in the prior year. For the six-month period, there was a decrease of $15.0million in partnership sales which was offset in part by a $11.9 million decrease in real estateinvestment cost of sales. There was also a $1.0 million decrease in minority interest in income ofreal estate partnerships and a $431,000 decrease in income tax expense for the six-month periodending September 30, 2006. In addition, other revenue from real estate operations increased $1.8million as a result of a legal settlement related to the Indian Palms property and other expensefrom real estate partnership operations increased $503,000 for the six months ending September 30,2006, as compared to the same respective period in the prior year. The decrease in sales was due tothe slowing of housing sales in the California market, which is reflective of the national trend.The partnerships currently have approximately 40 single family housing units and approximately 100individual lots for sale. Management anticipates continued lower sales activity for the remainderof the fiscal year.The following represents reconciliations of reportable segment revenues, profit or loss and assetsto the Corporation’s consolidated totals for the three and six months ended September 30, 2006 and2005, respectively.
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                   **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 income 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                    **Three Months Ended September 30, 2005**   **(In Thousands)**               **Consolidated**   **Real Estate**  **Community**  **Intersegment**  **Financial**   **Investments**  **Banking**  **Eliminations**  **Statements** Interest income $93  $58,962  $(393) $58,662 Interest expense  391   25,236   (393)  25,234              Net interest income (loss)  (298)  33,726   —   33,428 Provision for loan losses  —   1,485   —   1,485              Net interest income (loss) after provision for loan losses  (298)  32,241   —   31,943 Real estate investment partnership revenue  11,559   —   —   11,559 Other revenue from real estate operations  698   —   —   698 Other income  —   7,615   (30)  7,585 Real estate investment partnership cost of sales  (10,780)  —   —   (10,780)Other expense from real estate partnership operations  (2,235)  —   30   (2,205)Minority interest in income of real estate partnerships  (102)  —   —   (102)Other expense  —   (20,331)  —   (20,331)             Income (loss) before income taxes  (1,158)  19,525   —   18,367 Income tax expense (benefit)  (259)  7,848   —   7,589              Net income (loss) $(899) $11,677  $—  $10,778                               Total assets at end of period $73,678  $4,130,792  $—  $4,204,470 
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                   **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  (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                    **Six Months Ended September 30, 2005**   **(In Thousands)**               **Consolidated**   **Real Estate**  **Community**  **Intersegment**  **Financial**   **Investments**  **Banking**  **Eliminations**  **Statements** Interest income $163  $114,829  $(764) $114,228 Interest expense  761   48,658   (764)  48,655              Net interest income (loss)  (598)  66,171   —   65,573 Provision for loan losses  —   1,750   —   1,750              Net interest income (loss) after provision for loan losses  (598)  64,421   —   63,823 Real estate investment partnership revenue  23,072   —   —   23,072 Other revenue from real estate operations  1,913   —   —   1,913 Other income  —   13,696   (60)  13,636 Real estate investment partnership cost of sales  (19,191)  —   —   (19,191)Other expense from real estate partnership operations  (4,314)  —   60   (4,254)Minority interest in income of real estate partnerships  (1,391)  —   —   (1,391)Other expense  —   (39,911)  —   (39,911)             Income (loss) before income taxes  (509)  38,206   —   37,697 Income tax expense  32   15,327   —   15,359              Net income (loss) $(541) $22,879  $—  $22,338                               Total assets at end of period $73,678  $4,130,792  $—  $4,204,470 
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**Note 8 – Commitments and Contingent Liabilities**The Corporation is a party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers. These financial instrumentsinclude 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 consolidatedbalance sheets. The contract amounts of those instruments reflect the extent of involvement andexposure to credit loss the Corporation has in particular classes of financial instruments. TheCorporation uses the same credit policies in making commitments and conditional obligations as itdoes for on-balance-sheet instruments. Since many of the commitments are expected to expirewithout being drawn upon, the total committed amounts do not necessarily represent future cashrequirements.Financial instruments whose contract amounts represent credit risk are as follows (in thousands):           **September 30,** **March 31,**  **2006** **2006**Commitments to extend credit: $68,899  $95,209 Unused lines of credit:        Home equity  94,430   94,844 Credit cards  41,174   43,255 Commercial  125,907   138,751 Letters of credit  75,848   68,282 Credit enhancement under the Federal        Home Loan Bank of Chicago Mortgage        Partnership Finance Program  19,488   17,977 Real estate investment segment borrowing guarantees unfunded  17,563   18,041 Other financial guarantees  700   — Commitments to extend credit and unused lines of credit are agreements to lend to a customeras long as there is no violation of any condition established in the contract. Letters of creditcommit the Corporation to make payments on behalf of customers when certain specified future eventsoccur. Commitments and letters of credit generally have fixed expiration dates or othertermination clauses and may require payment of a fee. As some such commitments expire withoutbeing drawn upon or funded by the Federal Home Loan Bank of Chicago (FHLB) under the MortgagePartnership Finance Program, the total commitment amounts do not necessarily represent future cashrequirements. 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 ona secured basis. Collateral obtained varies, but consists primarily of single-family residencesand income-producing commercial properties. Fixed-rate loan commitments expose the Corporation toa certain amount of interest rate risk if market rates of interest substantially increase duringthe commitment period.The real estate investment segment borrowing guarantees unfunded represent the Corporation’scommitment through its Investment Directions, Inc. (“IDI”) subsidiary to guarantee the borrowingsof the related real estate investment partnerships up to a total of $44.4 million. For additionalinformation, see “Guarantees” in Item 2- Management’s Discussion and Analysis of FinancialCondition and Results of Operations.Except for the above-noted commitments to originate and/or sell mortgage loans in the normal courseof business, the Corporation and the Bank have not undertaken the use of off-balance-sheetderivative financial instruments for any purpose.In the ordinary course of business, there are legal proceedings against the Corporation and itssubsidiaries. Management considers that the aggregate liabilities, if any, resulting from suchactions would not have a material, adverse effect on the financial position of the Corporation.
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**Note 9 – Subsequent Events**On October 20, 2006, the Corporation declared a $0.17 per share cash dividend on its common stock,amounting to $3.7 million in the aggregate, to be paid on November 15, 2006 to stockholders ofrecord on November 1, 2006.
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**ANCHOR BANCORP WISCONSIN INC.****ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**This report contains certain “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended. These forward-looking statements describe future plans or strategies and include theCorporation’s expectations of future financial results. The Corporation’s ability to predictresults or the effect of future plans or strategies is inherently uncertain and the Corporation cangive no assurance that those results or expectations will be attained. Factors that could affectactual results include but are not limited to i) general market rates, ii) changes in marketinterest rates and the shape of the yield curve, iii) general economic conditions, iv) real estatemarkets, v) legislative/regulatory changes, vi) monetary and fiscal policies of the U.S. Treasuryand the Federal Reserve Board, vii) changes in the quality or composition of the Corporation’s loanand investment portfolios, viii) demand for loan products, ix) the level of loan andmortgage-backed securities repayments, x) deposit flows, xi) competition, xii) demand for financialservices in the Corporation’s markets, and xiii) changes in accounting principles, policies orguidelines. In addition, acquisitions may result in large one-time charges to income, may notproduce revenue enhancements or cost savings at levels or within time frames originally anticipatedand may result in unforeseen integration difficulties. These factors should be considered inevaluating the forward-looking statements, and undue reliance should not be placed on suchstatements.The Corporation does not undertake and specifically disclaims any obligation to update anyforward-looking statements to reflect occurrence of anticipated or unanticipated events orcircumstances after the date of such statements.**Executive Overview**Highlights for the second quarter ended September 30, 2006 include: **•** Diluted earnings per share decreased to $0.44 for the quarter ended September 30, 2006compared to $0.48 per share for the quarter ended September 30, 2005 primarily due to a$1.1 million increase in the loan loss provision;  **•** The net interest margin decreased to 3.15% for the quarter ended September 30, 2006compared to 3.40% for the quarter ended September 30, 2005 because interest-bearingliabilities repriced upward faster then interest-earning assets;  **•** Loans receivable increased $326.2 million or 9.39% since September 30, 2005 andincreased $179.7 million, or 4.96%, since March 31, 2006;  **•** Deposits grew $190.8 million or 6.29% since September 30, 2005 and $183.5 million, or6.04%, since March 31, 2006; and  **•** Book value per share increased to $15.18 at September 30, 2006 compared to $14.69 atMarch 31, 2006 and $14.28 at September 30, 2005.  **•** Non-performing assets increased $6.8 million to $22.5 million from March 31, 2006primarily due to the addition of $4.6 million in non-accrual loans
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 **•** Real estate investment partnership revenue declined $7.9 million from $11.6 million atSeptember 30, 2005 to $3.6 million. Real estate investment partnership cost of salesdeclined $7.3 million from $10.8 million at September 30, 2005 to $3.5 million. Thesedecreases were due to the slowing of housing sales in the California market, which isreflective of the national trend. The partnerships currently have approximately 40 singlefamily housing units and approximately 100 individual lots for sale. Management anticipatescontinued lower sales activity for the remainder of the fiscal year.  **•** On November 2, 2006, the Federal Deposit Insurance Corporation (“FDIC”) adopted finalregulations to implement the Federal Deposit Insurance Reform Act of 2005 passed byCongress earlier this year to create a stronger and more stable insurance system. The finalregulations include the annual assessment rates that will take effect at the beginning of2007. 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 $3.2billion, this translates to an annual deposit premium of approximately $1.6 to $2.2million. Most banks, including the Bank have not been required to pay any depositinsurance premiums since 1995. As part of the Reform Act, Congress provided credits toinstitutions 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 oftheir premiums in 2007. The preliminary assessment credit for the Bank was calculated at$2.7 million.
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Selected quarterly data are set forth in the following tables.                   **Three Months Ended**(Dollarsin 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) ofreal 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.
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                   **Three Months Ended**(Dollarsin thousands — except per share amounts) **9/30/2005** **6/30/2005** **3/31/2005** **12/31/2004****Operations Data:**                Net interest income $33,428  $32,145  $31,231  $31,651 Provision for loan losses  1,485   265   165   664 Net gain on sale of loans  1,193   123   763   1,001 Real estate investment partnership revenue  11,559   11,513   51,112   16,104 Other non-interest income  7,090   7,143   7,838   5,758 Real estate investment partnership cost of sales  10,780   8,411   30,966   13,131 Other non-interest expense  22,536   21,630   24,682   20,368 Minority interest in income ofreal estate partnership operations  102   1,288   8,582   2,023 Income before income taxes  18,367   19,330   26,549   18,328 Income taxes  7,589   7,770   9,748   7,618 Net income  10,778   11,560   16,801   10,710                  **Selected Financial Ratios****(1)****:**                Yield on earning assets  5.97%  5.73%  5.56%  5.51%Cost of funds  2.68   2.53   2.37   2.22 Interest rate spread  3.29   3.20   3.19   3.29 Net interest margin  3.40   3.32   3.29   3.40 Return on average assets  1.04   1.14   1.68   1.09 Return on average equity  13.62   14.70   21.44   13.64 Average equity to average assets  7.66   7.75   7.82   8.01 Non-interest expense to average assets  3.22   2.96   5.56   3.42                  **Per Share:**                Basic earnings per share $0.49  $0.53  $0.75  $0.47 Diluted earnings per share  0.48   0.52   0.74   0.46 Dividends per share  0.16   0.14   0.13   0.13 Book value per share  14.28   14.22   13.92   13.77                  **Financial Condition:**                Total assets $4,204,470  $4,136,822  $4,050,456  $3,929,881 Loans receivable, net                Held for sale  6,957   6,313   4,361   11,816 Held for investment  3,466,265   3,383,250   3,414,608   3,292,339 Deposits  3,032,976   2,960,468   2,873,533   2,705,495 Borrowings  794,044   798,927   793,609   826,928 Stockholders’ equity  315,349   315,416   310,678   316,243 Allowance for loan losses  22,582   26,532   26,444   27,526 Non-performing assets  16,201   17,030   15,908   21,029  (1) Annualized when appropriate.
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**Significant Accounting Policies**                   There are a number of accounting policies that require the use of judgment. Some of the moresignificant policies are as follows: **•** The allowance for loan losses is maintained at a level believed adequate by management toabsorb probable and estimable losses inherent in the loan portfolio and is based on the sizeand current risk characteristics of the loan portfolio; an assessment of individual problemloans; actual and anticipated loss experience; and current economic events in specificindustries and geographical areas. These economic events include unemployment levels,regulatory guidance, and general economic conditions. Determination of the reserve isinherently subjective as it requires significant estimates, including the amounts and timingof expected future cash flows on impaired loans, estimated losses on pools of homogeneousloans based on historical loss experience, and consideration of current economic trends, allof which may be susceptible to significant change. Loan losses are charged off against theallowance, 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 periodicevaluation of the factors previously mentioned as well as other pertinent factors.    Specific reserves are established for expected losses resulting from analysis developed throughspecific credit allocations on individual loans and are based on a regular analysis of impairedloans where the internal credit rating is at or below a predetermined classification. A loan isconsidered impaired when it is probable that the Corporation will be unable to collect allcontractual principal and interest due according to the terms of the loan agreement. Loanssubject to impairment are defined as non-accrual and restructured loans exclusive of smallerhomogeneous loans such as home equity, installment, and 1-4 family residential loans. The fairvalue of the loans is determined based on the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the market price of the loan, or the fairvalue of the underlying collateral less costs to sell, if the loan is collateral dependent.  **•** Valuation of mortgage servicing rights requires the use ofjudgment. Mortgage servicing rights are established on loans thatare originated and subsequently sold with servicing rightsretained. A portion of the loan’s book basis is allocated tomortgage servicing rights when a loan is sold. The fair value ofmortgage servicing rights is the present value of estimated futurenet cash flows from the servicing relationship using currentmarket assumptions for prepayments, servicing costs and otherfactors. As the loans are repaid and net servicing revenue isearned, mortgage servicing rights are amortized into expense. Netservicing revenues are expected to exceed this amortizationexpense. However, if actual prepayment experience exceeds whatwas originally anticipated, net servicing revenues may be lessthan expected and mortgage servicing rights may be impaired.  **•** Goodwill is reviewed at least annually for impairment, whichrequires judgment. Goodwill has been recorded as a result of anacquisition in which purchase price exceeded fair value of netassets acquired. The price paid for the acquisition is analyzedand compared to a number of current indices. If goodwill isdetermined to be impaired, it would be expensed in the period inwhich it became impaired.Set forth below is management’s discussion and analysis of the Corporation’s financial conditionand results of operations for the three and six months ended September 30, 2006, which includesinformation on the Corporation’s asset/liability management strategies, sources of liquidity andcapital resources. This discussion should be read in conjunction with the unaudited consolidatedfinancial statements and supplemental data contained elsewhere in this report.
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**RESULTS OF OPERATIONS**General. Net income for the three months ended September 30, 2006 decreased $1.1 millionor 10.4% to $9.7 million from $10.8 million and decreased $2.0 million or 9.1% to $20.3 millionfrom $22.3 million as compared to the same respective periods in the prior year. The decrease innet income for the three-month period compared to the same period last year was largely due to anincrease in provision for loan losses of $1.1 million and a decrease in non-interest income of $6.8million, which were partially offset by a decrease in non-interest expense of $6.4 million, adecrease in income tax expense of $820,000 and a decrease in minority interest income of realestate partnership operations of $177,000. The decrease in net income for the six-month periodcompared to the same period last year was largely due to an increase in provision for loan lossesof $2.1 million and a decrease in non-interest income of $12.3 million, which were partially offsetby a decrease in non-interest expense of $10.0 million, a decrease in income tax expense of $1.2million and a decrease in minority interest income of real estate partnership operations of $1.0million.Net Interest Income. Net interest income decreased $590,000 or 1.8% for the three monthsended September 30, 2006 and increased $110,000 or 0.2% for the six months ended September 30,2006, respectively, as compared to the same respective periods in the prior year. Interest incomeincreased $11.8 million or 20.1% for the three months ended September 30, 2006 as compared to thesame period in the prior year. Interest expense increased $12.4 million or 49.2% for the threemonths ended September 30, 2006 as compared to the same period in the prior year. The net interestmargin decreased to 3.15% for the three-month period ended September 30, 2006 from 3.40% for thesame period in the prior year and decreased to 3.19% for the six-month period ended September 30,2006 from 3.36% for the same period in the prior year. The change in the net interest marginreflects the increase in the costs of interest-bearing liabilities offset by the increase in yieldson interest-earning assets. The interest rate spread decreased to 3.01% from 3.29% for thethree-month period and decreased to 3.05% from 3.24% for the six-month period ended September 30,2006 as compared to the same respective periods in the prior year.Interest income on loans increased $12.2 million or 22.8% and $22.8 million or 21.7%, respectively,for the three and six months ended September 30, 2006, as compared to the same periods in the prioryear. These increases were primarily attributable to an increase in the average balance of loans,which increased $344.0 million and $288.7 million in the three and six months ended September 30,2006, respectively, as compared to the same respective periods in the prior year. There was alsoan increase of 72 basis points in the average yield on loans to 6.97% from 6.25% for thethree-month period and an increase of 75 basis points to 6.86% from 6.11% for the six-month period.This increase is the result of loans being originated at higher interest rates and upward pricingof adjustable rate mortgages to current market levels. Interest income on mortgage-relatedsecurities decreased $72,000 or 2.3% and increased $289,000 or 5.1% for the three- and six-monthperiods ended September 30, 2006, as compared to the same respective periods in the prior year,primarily due to a decrease of $29.0 million and $8.9 million, respectively, in the three- andsix-month average balances of mortgage-related securities. This increase was also due to anincrease of 38 basis points in the average yield on mortgage-related securities to 4.78% from 4.40%for the three-month period and an increase of 38 basis points to 4.72% from 4.34% for the six-monthperiod. In addition, interest income on investment securities (including Federal Home Loan Bankstock) increased $354,000 or 40.0% and $294,000 or 15.4%, respectively, for the three- andsix-month periods ended September 30, 2006, as compared to the same respective periods in the prioryear. This was primarily a result of an increase of $35.1 million and $20.6 million, respectively,in the average balance of investment securities for the three- and six-month periods endedSeptember 30, 2006, as compared to the same respective periods in 2005, and a decrease of 12 basispoints and 29 basis points in the average yield on investment securities for the three- andsix-month periods, respectively. Interest income on interest-bearing deposits decreased $679,000and $829,000 respectively, for the three and six months ended September 30, 2006, as compared tothe same respective periods in 2005, primarily due to decreases in average balances.Interest expense on deposits increased $10.5 million or 58.0% and $19.4 million or 56.0% for thethree and six months ended September 30, 2006, respectively, as compared to the same periods in2005. These increases were primarily attributable to an increase in the average balance ofdeposits, which increased $196.4 million and $184.9 million, respectively, primarily as a result ofincreases in certificates of deposit and money market accounts, and an increase of 117 basis pointsin the weighted average cost of deposits to 3.61% from 2.44% for the respective three-month periodand an increase of 110 basis points in the weighted average cost of deposits to 3.45% from 2.35%for the respective six-month period. Interest expense on notes payable and other borrowingsincreased $1.9 million or
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26.8% and $3.0 million or 21.5% during the three and six months ended September 30, 2006, ascompared to the same respective periods in the prior year. For the three-month period endedSeptember 30, 2006, the average balance of notes payable increased $50.6 million as compared to thesame respective period in 2005. The increase in interest expense for the six-month period endedSeptember 30, 2006 was due primarily to an increase of $38.8 million in the average balance ofnotes payable and other borrowings as compared to the same respective period in 2005. The weightedaverage cost of notes payable and other borrowings increased 69 basis points to 4.27% from 3.59%for the three-month period and increased 57 basis points to 4.13% from 3.56% for the six-monthperiod.Provision for Loan Losses. Provision for loan losses increased $1.1 million or 76.8% and$2.1 million or 118.9% for the three- and six-month periods ended September 30, 2006, as comparedto the same respective periods for the prior year. During the quarter, management evaluates avariety of qualitative and quantitative factors when determining the adequacy of the allowance forlosses. Due to the current economic climate and recent increases in delinquent loans, non-accrualloans and non-performing assets (as discussed under “Asset Quality” below), management determinedthat increased provisions for loan losses were appropriate to reflect the risks inherent in thevarious lending portfolios during the current quarter. The provisions were based on management’songoing evaluation of asset quality and pursuant to a policy to maintain an allowance for losses ata level which management believes is adequate to absorb future charge-offs of loans deemeduncollectible.Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest RateSpread. The tables on the following pages show the Corporation’s average balances, interest,average rates, net interest margin and the spread between the weighted-average rates earned oninterest-earning assets and weighted-average cost of interest-bearing liabilities for the periodsindicated. The average balances are derived from average daily balances.
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                           **Three Months Ended September 30,**   **2006**  **2005**           **Average**          **Average**   **Average**      **Yield/**  **Average**      **Yield/**   **Balance**  **Interest**  **Cost****(1)**  **Balance**  **Interest**  **Cost****(1)**   (Dollars In Thousands) **Interest-Earning Assets**                        Mortgage loans $2,929,479  $49,753   6.79% $2,621,049  $40,060   6.11%Consumer loans  630,121   11,458   7.27   613,061   9,974   6.51 Commercial business loans  211,529   4,529   8.56   192,983   3,491   7.24                      Total loans receivable (2) (3)  3,771,129   65,740   6.97   3,427,093   53,525   6.25 Mortgage-related securities (4)  256,050   3,061   4.78   285,066   3,133   4.40 Investment securities (4)  73,531   893   4.86   35,106   326   3.71 Interest-bearing deposits  31,140   439   5.64   136,967   1,118   3.27 Federal Home Loan Bank stock  41,598   347   3.34   44,923   560   4.99                      Total interest-earning assets  4,173,448   70,480   6.76   3,929,155   58,662   5.97                        Non-interest-earning assets  207,613           203,215                                Total assets $4,381,061          $4,132,370                                                         **Interest-Bearing Liabilities**                        Demand deposits $882,308   5,427   2.46  $782,949   2,552   1.30 Regular passbook savings  210,632   242   0.46   242,112   270   0.45 Certificates of deposit  2,075,036   22,949   4.42   1,946,466   15,294   3.14                      Total deposits  3,167,976   28,618   3.61   2,971,527   18,116   2.44 Short-term borrowings  253,174   3,550   5.61   271,775   2,504   3.69 Long-term borrowings  591,298   5,474   3.70   522,096   4,614   3.53                      Total interest-bearing liabilities  4,012,448   37,642   3.75   3,765,398   25,234   2.68                        Non-interest-bearing liabilities  38,876           50,411                                Total liabilities  4,051,324           3,815,809         Stockholders’ equity  329,737           316,561                                Total liabilities and stockholders’equity $4,381,061          $4,132,370                                Net interest income/interest rate spread(5)     $32,838   3.01%     $33,428   3.29%                     Net interest-earning assets $161,000          $163,757                                Net interest margin (6)          3.15%          3.40%                       Ratio of average interest-earning assetsto average interest-bearing liabilities  1.04           1.04                                 (1) Annualized (2) For the purpose of these computations, non-accrual loans are included in the dailyaverage loan amounts outstanding. (3) Interest earned on loans includes loan fees (which are not material in amount) andinterest income which has been received from borrowers whose loans were removed from non-accrualstatus 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 oninterest-earning assets and the weighted-average cost of interest-bearing liabilities and isrepresented on a fully tax equivalent basis. (6) Net interest margin represents net interest income as a percentage of averageinterest-earning assets.
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                           **Six Months Ended September 30,**   **2006**  **2005**           **Average**          **Average**   **Average**      **Yield/**  **Average**      **Yield/**   **Balance**  **Interest**  **Cost****(1)**  **Balance**  **Interest**  **Cost****(1)**   (Dollars In Thousands) **Interest-Earning Assets**                        Mortgage loans $2,885,418  $96,241   6.67% $2,633,591  $78,713   5.98%Consumer loans  625,506   22,472   7.19   604,086   19,356   6.41 Commercial business loans  207,386   8,802   8.49   191,945   6,681   6.96                      Total loans receivable (2) (3)  3,718,310   127,515   6.86   3,429,622   104,750   6.11 Mortgage-related securities (4)  252,519   5,965   4.72   261,430   5,676   4.34 Investment securities (4)  64,269   1,503   4.68   41,959   734   3.50 Interest-bearing deposits  41,356   1,070   5.17   125,254   1,899   3.03 Federal Home Loan Bank stock  43,237   694   3.21   44,923   1,169   5.20                      Total interest-earning assets  4,119,691   136,747   6.64   3,903,188   114,228   5.85                        Non-interest-earning assets  204,086           193,307                                Total assets $4,323,777          $4,096,495                                                         **Interest-Bearing Liabilities**                        Demand deposits $856,693   9,835   2.30  $771,215   4,756   1.23 Regular passbook savings  212,338   486   0.46   240,879   526   0.44 Certificates of deposit  2,059,754   43,653   4.24   1,931,755   29,306   3.03                      Total deposits  3,128,785   53,974   3.45   2,943,849   34,588   2.35 Short-term borrowings  209,870   5,812   5.54   264,707   4,767   3.60 Long-term borrowings  618,589   11,278   3.65   524,990   9,300   3.54                      Total interest-bearing liabilities  3,957,244   71,064   3.59   3,733,546   48,655   2.61                        Non-interest-bearing liabilities  39,484           47,419                                Total liabilities  3,996,728           3,780,965         Stockholders’ equity  327,049           315,530                                Total liabilities and stockholders’equity $4,323,777          $4,096,495                                Net interest income/interest rate spread(5)     $65,683   3.05%     $65,573   3.24%                     Net interest-earning assets $162,447          $169,642                                Net interest margin (6)          3.19%          3.36%                       Ratio of average interest-earning assetsto average interest-bearing liabilities  1.04           1.05                                 (1) Annualized (2) For the purpose of these computations, non-accrual loans are included in the dailyaverage loan amounts outstanding. (3) Interest earned on loans includes loan fees (which are not material in amount) andinterest income which has been received from borrowers whose loans were removed from non-accrualstatus 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 oninterest-earning assets and the weighted-average cost of interest-bearing liabilities and isrepresented on a fully tax equivalent basis. (6) Net interest margin represents net interest income as a percentage of averageinterest-earning assets.
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Non-Interest Income. Non-interest income decreased $6.8 million or 34.2% to $13.1million and decreased $12.3 million or 31.7% to $26.4 million for the three and six months endedSeptember 30, 2006, respectively, as compared to $19.8 million and $38.6 million for the sameperiods in 2005. The decrease was primarily due to the decrease of real estate investmentpartnership revenue of $7.9 million due to the decrease in the number of sales at the partnershiplevel for the three-month period ended September 30, 2006. In addition, other non-interest incomedecreased $475,000 and net gain on sale of investments and mortgage-related securities decreased$267,000. These decreases were partially offset by an increase in other revenue from real estateoperations of $877,000 as a result of a legal settlement related to the Indian Palms property, anincrease in insurance commissions of $352,000, an increase in loan servicing income of $327,000, anincrease in service charges on deposits of $160,000 and an increase in net gain on sale of loans of$156,000 for the three-month period ended September 30, 2006, as compared to the same respectiveperiod in the prior year. The decrease in non-interest income for the six-month period endedSeptember 30, 2006 was primarily due to the decrease of real estate investment partnership revenueof $15.0 million as the result of a decrease in sales at the partnership level. The decrease insales at the partnership level was due to a slow down in the single family housing market inCalifornia, which is reflective of the national trend. In addition, net gain on sale of investmentsand mortgage-related securities decreased $557,000 and other non-interest income decreased$211,000. These decreases were partially offset by an increase in other revenue from real estateoperations of $1.8 million as a result of a legal settlement related to the Indian Palms property.There was also an increase in net gain on sale of loans of $903,000, which includes a gain on saleof education loans of approximately $310,000 and a valuation reversal of $435,000 for mortgageservicing rights due to the evaluation of impairment. In addition, there was an increase ininsurance commissions of $491,000 and an increase in service charges on deposits of $216,000 forthe six-month period ended September 30, 2006, as compared to the same respective period in theprior year.Non-Interest Expense. Non-interest expense decreased $6.4 million or 19.2% to $26.9million and decreased $10.0 million or 15.8% to $53.4 million for the three and six months endedSeptember 30, 2006, respectively, as compared to $33.3 million and $63.4 million for the sameperiods in 2005. The decrease for the three-month period was primarily due to the decrease of realestate investment partnership cost of sales of $7.3 million for the three months ended September30, 2006 as compared to the same respective period in the prior year. This decrease was partiallyoffset by an increase in compensation expense of $281,000, an increase in data processing expenseof $270,000 and an increase in occupancy expense of $238,000 for the three months ended September30, 2006 as compared to the same period in the prior year. The decrease for the six-month periodwas primarily due to the decrease of real estate investment partnership cost of sales of $11.9million due to a decrease in sales at the partnership level which corresponds to the decrease inreal estate partnership revenue for the six-month period ended September 30, 2006 as compared tothe same period in the prior year, as well as the decrease in furniture and equipment of $138,000.These decreases were partially offset by an increase in occupancy expense of $661,000 and anincrease in other expenses from real estate partnership operations of $503,000 which includedadditional expenses for improvements to the drainage for the housing development. In addition, dataprocessing expense increased $410,000, other non-interest expense increased $153,000, compensationexpense increased $135,000 and marketing expense increased $124,000 for the six months endedSeptember 30, 2006 as compared to the same period in the prior year.Income Taxes. Income tax expense decreased $820,000 or 10.8% and $1.2 million or 7.6%,respectively, during the three and six months ended September 30, 2006, as compared to the samerespective periods in 2005. This decrease was due to a decrease in income before income taxes. Theeffective tax rate was 41.2% and 41.1% for the three- and six-month periods ended September 30,2006, respectively, as compared to 41.3% and 40.7% for the same respective periods last year.
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**FINANCIAL CONDITION**During the six months ended September 30, 2006, the Corporation’s assets increased by $206.4million from $4.28 billion at March 31, 2006 to $4.48 billion at September 30, 2006. The majorityof this increase was attributable to increases in loans receivable, investment securities andmortgage-related securities, which were partially offset by decreases in other categories such asFederal Home Loan Bank stock and accrued interest on investments and loans and other assets.Total loans (including loans held for sale) increased $179.7 million during the six months endedSeptember 30, 2006. Activity for the period consisted of (i) originations and purchases of $1.01billion, (ii) sales of $202.8 million and (iii) principal repayments and other adjustments of$623.4 million.Mortgage-related securities (both available for sale and held to maturity) increased $13.3 millionduring the six months ended September 30, 2006 as a result of purchases of $38.3 million, partiallyoffset by principal repayments and market value adjustments of $25.0 million in this six-monthperiod. Mortgage-related securities consisted of $83.7 million of mortgage-backed securities and$177.1 million of collateralized mortgage obligations (“CMOs”) and real estate mortgage investmentconduits (“REMICs”) at September 30, 2006.The Corporation invests in corporate CMOs and agency-issued REMICs. These investments are deemedto have limited credit risk. The investments do have interest rate risk due to, among otherthings, actual prepayments being more or less than those predicted at the time of purchase. TheCorporation invests only in short-term tranches in order to limit the reinvestment risk associatedwith greater than anticipated prepayments, as well as changes in value resulting from changes ininterest rates.Investment securities increased $40.3 million during the six months ended September 30, 2006 as aresult of purchases of $93.6 million of such securities, which were partially offset by sales andmaturities of $53.9 million of U.S. Government and agency securities.Federal Home Loan Bank (“FHLB”) stock decreased $3.8 million during the six months ended September30, 2006 due to the redemption of stock.Real estate held for development and sale increased $7.2 million to $61.6 million as of September30, 2006 from $54.3 million as of March 31, 2006. This net increase was the result of additionaldevelopment of a commercial project in Texas offset by continued home and land lot sales.Total liabilities increased $196.4 million during the six months ended September 30, 2006. Thisincrease was largely due to a $183.5 million increase in deposits primarily as a result of an $85.9million increase in certificates of deposit and a $102.3 million increase in money market accounts,and a $13.2 million increase in borrowings. These increases were partially offset by a $295,000decrease in other liabilities during the six-month period. Brokered deposits have been used in thepast and may be used in the future as the need for funds requires them. Brokered deposits totaled$398.0 million at September 30, 2006 and $399.3 million at March 31, 2006, and generally maturewithin one to five years.Stockholders’ equity increased $9.7 million during the six months ended September 30, 2006 as a netresult of (i) comprehensive income of $20.8 million, (ii) stock options exercised of $3.7 million(with the excess of the cost of treasury shares over the option price ($2.7 million) charged toretained earnings) and (iii) benefit plan shares earned and related tax adjustments totaling$766,000. These increases were partially offset by (i) cash dividends of $7.1 million, (ii)purchases of treasury stock of $5.7 million and (iii) the issuance of shares for management andbenefit plans of $8,000.
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**ASSET QUALITY**Non-performing assets increased $6.8 million to $22.5 million at September 30, 2006 from $15.7million at March 31, 2006 and increased as a percentage of total assets to .50% from .37% at suchdates, respectively.Non-performing assets are summarized as follows at the dates indicated:                   **At September 30,**  **At March 31,**   **2006**  **2006**  **2005**  **2004**   (Dollars In Thousands) Non-accrual loans:                Single-family residential $2,802  $2,856  $2,406  $3,247 Multi-family residential  7,626   4,214   —   — Commercial real estate  5,666   3,398   4,894   8,764 Consumer  492   548   453   642 Commercial business  1,554   2,513   6,697   2,268              Total non-accrual loans  18,140   13,529   14,450   14,921 Foreclosed properties and repossessed assets, net  4,366   2,192   1,458   2,422              Total non-performing assets $22,506  $15,721  $15,908  $17,343                               Performing troubled debt restructurings $—  $—  $—  $2,649                               Total non-accrual loans to total loans(1)  0.45%  0.35%  0.40%  0.45%Total non-performing assets to total assets  0.50   0.37   0.39   0.46 Allowance for loan losses to total loans(1)  0.46   0.41   0.73   0.87 Allowance for loan losses to totalnon-accrual loans  101.39   115.09   183.00   191.72 Allowance for loan and foreclosure lossesto total non-performing assets  81.94   100.48   167.39   165.78  (1) Total loans are gross loans receivable before the reduction for loans in process,unearned interest and loan fees and the allowance for loan losses.Non-accrual loans increased $4.6 million during the six months ended September 30, 2006. Theincrease was primarily attributable to the addition of three multi-family residential loans thattotaled $4.0 million and two commercial real estate loans that totaled $1.4 million. This increasewas partially offset by the charge-off of a commercial business loan totaling approximately$815,000. Management believes that loans added to the non-accrual category are adequatelycollateralized and that reserves placed on the loans are appropriate. Management evaluates theseloans to determine if there are probable and estimable losses. At September 30, 2006, there werefour non-accrual loans with loan balances greater than $1.0 million. One was a $3.4 millionmulti-family residential loan secured by two multi-family properties located in central Wisconsin.The second was a $1.1 million multi-family residential real estate loan secured by an apartmentcomplex located in southern Wisconsin. The third was a $2.1 million multi-family residential loansecured by an apartment complex located in central Wisconsin. The fourth was a $1.5 millioncommercial real estate loan secured by a manufacturing facility located in southern Wisconsin.Loans are placed on non-accrual status when, in the judgment of management, the probability ofcollection of interest is deemed to be insufficient to warrant further accrual. When a loan isplaced on non-accrual status, previously accrued but unpaid interest is reversed against interestincome. As a matter of policy, the Corporation does not accrue interest on loans past due morethan 90 days.Foreclosed properties and repossessed assets increased $2.2 million for the six months endedSeptember 30, 2006. The increase was largely attributable to three loans that went to foreclosurein the six-month period. One was a
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$999,000 commercial real estate loan on a warehouse inMinnesota; another was a $504,000 multi-family residential loan in northern Wisconsin; and thethird was an $806,000 single family residential/lot loan in northern Wisconsin.At September 30, 2006, assets that the Corporation had classified as substandard, net of reserves,consisted of $31.9 million of loans and foreclosed properties. As of March 31, 2006, substandardassets amounted to $15.8 million. An asset is classified as substandard when it is determined thatit is inadequately protected by the current net worth and paying capacity of the obligor or by thecollateral pledged, if any, and that the Corporation will sustain some loss if the deficiencies arenot corrected. The increase of $16.1 million in the substandard balance for the six months endedSeptember 30, 2006 was largely attributable to the addition of seven loans totaling $7.0 millionsecured by commercial real estate property and general business assets located in Wisconsin. Theincrease was also attributable to the addition of a $2.1 million commercial business loan securedby general business assets located in southern Wisconsin, the addition of two multifamilyresidential loans totaling approximately $3.0 million secured by multi-family properties located incentral Wisconsin, the addition of an $867,000 commercial real estate loan secured by a commercialproperty located in southern Wisconsin, the addition of a $635,000 multi-family residential loansecured by the property located in southern Wisconsin and the addition of a $806,000 single familyresidential/lot loan secured by the property in northern Wisconsin.The category of substandard assets contains five loans with a carrying value of greater than $1.0million. One loan with a carrying value of $4.3 million, is secured by various commercialproperties in southern Wisconsin. A second loan, with a carrying value of $3.4 million, is securedby the assets of two multi-family properties located in central Wisconsin. A third loan, with acarrying value of $2.1 million, is secured by the assets of a commercial business property locatedin southern Wisconsin. A fourth loan, with a carrying value of $2.1 million, is secured by amultifamily residential property located in southern Wisconsin. A fifth loan, with a carrying valueof $1.2 million, is secured by a commercial property located in central Wisconsin.At September 30, 2006, the Corporation had identified assets of $3.7 million as impaired, net ofreserves. As of March 31, 2006, impaired loans were $3.3 million. The increase since March 31,2006 was not attributable to one loan. 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 collectall amounts due according to the contractual terms of the loan agreement. A summary of the detailsregarding impaired loans follows:                   **At September 30,**  **At March 31,**   **2006**  **2006**  **2005**  **2004**   (In Thousands) Impaired loans with valuationreserve required $6,468  $6,381  $10,827  $17,126                  Less:                Specific valuation allowance  2,815   3,111   7,126   5,382                               Total impaired loans $3,653  $3,270  $3,701  $11,744                               Average impaired loans $3,782  $3,829  $11,535  $6,389                  Interest income recognizedon impaired loans $40  $208  $249  $710                  Interest income recognizedon a cash basison impaired loans $40  $208  $249  $710 
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The following table sets forth information relating to the Corporation’s loans that were lessthan 90 days delinquent at the dates indicated.                   **At September 30,**  **At March 31,**   **2006**  **2006**  **2005**  **2004**   (In Thousands) 30 to 59 days $23,210  $9,874  $5,853  $4,887 60 to 89 days  5,174   733   714   10,941              Total $28,384  $10,607  $6,567  $15,828              The majority of the increase in loans 30-59 days delinquent since March 31, 2006 wassubstantially due to four borrowers with loans secured by commercial and residential properties.The majority of the increase in loans 60 to 89 days delinquent was substantially due to twomulti-family residential loans.The Corporation’s loan portfolio, foreclosed properties and repossessed assets are evaluated on acontinuing basis to determine the necessity for additions and recaptures to the allowance for loanlosses and the related adequacy of the balance in the allowance for loan losses account. Theseevaluations 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 theallowance for loan losses includes a review of known loan problems as well as inherent problemsbased upon historical trends and ratios. Foreclosed properties are recorded at the lower ofcarrying value or fair value with charge-offs, if any, charged to the allowance for loan lossesprior 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 leaserates) 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,**   **2006**  **2005**  **2006**  **2005**       (Dollars In Thousands)     Allowance at beginning of period $15,636  $26,532  $15,570  $26,444 Charge-offs:                Mortgage  (210)  (121)  (625)  (144)Consumer  (90)  (86)  (160)  (288)Commercial business  (10)  (5,338)  (846)  (5,355)             Total charge-offs  (310)  (5,545)  (1,631)  (5,787)Recoveries:                Mortgage  —   80   1   81 Consumer  9   27   15   43 Commercial business  433   3   608   51              Total recoveries  442   110   624   175              Net (charge-offs) recoveries  132   (5,435)  (1,007)  (5,612)Provision for loan losses  2,625   1,485   3,830   1,750              Allowance at end of period $18,393  $22,582  $18,393  $22,582                               Net charge-offs to average loans  0.01%  (0.63)%  (0.05)%  (0.33)%             
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During the six months ended September 30, 2006, the Corporation incurred one large commercialbusiness loan loss totaling approximately $815,000 which was charged off based on creditevaluation.Although management believes that the September 30, 2006 allowance for loan losses is adequatebased upon the current evaluation of loan delinquencies, non-performing assets, charge-off trends,economic conditions and otherfactors, 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 anddisposal, and adheres to high underwriting standards in the origination process in order tocontinue to maintain strong asset quality.**LIQUIDITY AND CAPITAL RESOURCES**On an unconsolidated basis, the Corporation’s sources of funds include dividends from itssubsidiaries, including the Bank, interest on its investments and returns on its real estate heldfor sale. The Bank’s primary sources of funds are payments on loans and securities, deposits fromretail and wholesale sources, FHLB advances and other borrowings.At September 30, 2006, the Corporation had outstanding commitments to originate loans of $68.9million and commitments to extend funds to, or on behalf of, customers pursuant to lines andletters of credit of $337.4 million. Scheduled maturities of certificates of deposit during thetwelve months following September 30, 2006 amounted to $1.78 billion and scheduled maturities ofborrowings during the same period totaled $597.5 million. At September 30, 2006, the Corporationhad no reverse repurchase agreements. Management believes adequate resources are available tofund all commitments to the extent required.The Corporation participates in the Mortgage Partnership Finance Program of the Federal Home LoanBank of Chicago (“FHLB”). Pursuant to the credit enhancement feature of that Program, theCorporation has retained a secondary credit loss exposure in the amount of $19.5 million atSeptember 30, 2006 related to approximately $1.51 billion of residential mortgage loans that theCorporation has originated as agent for the FHLB. Under the credit enhancement, the FHLB is liablefor losses on loans up to one percent of the original delivered loan balances in each pool. TheCorporation is then liable for losses over and above the first position up to a contractuallyagreed-upon maximum amount in each pool that was delivered to the Program. The Corporation receivesa monthly fee for this credit enhancement obligation based on the outstanding loan balances. TheCorporation does not anticipate that any credit losses will be incurred under the creditenhancement obligation.Under federal law and regulation, the Bank is required to meet certain tangible, core andrisk-based capital requirements. Tangible capital generally consists of stockholders’ equity minuscertain intangible assets. Core capital generally consists of tangible capital plus qualifyingintangible assets. The risk-based capital requirements presently address credit risk related toboth recorded and off-balance sheet commitments and obligations. The OTS requirement for the corecapital ratio for the Bank is currently 3.00%. The requirement is 4.00% for all but the mosthighly-rated financial institutions.
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The following summarizes the Bank’s capital levels and ratios and the levels and ratios required bythe OTS at September 30, 2006 and March 31, 2006:                                           **Minimum Required**          **Minimum Required** **to be Well**          **For Capital** **Capitalized Under**  **Actual** **Adequacy Purposes** **OTS Requirements**  **Amount** **Ratio** **Amount** **Ratio** **Amount** **Ratio**  (Dollars In Thousands) **As of September 30, 2006:**                        Tier 1 capital(to adjusted tangible assets) $345,404   7.87% $131,646   3.00% $219,410   5.00%Risk-based capital(to risk-based assets)  360,981   10.46   276,034   8.00   345,042   10.00 Tangible capital(to tangible assets)  345,404   7.87   65,823   1.50   N/A   N/A                          **As of March 31, 2006:**                        Tier 1 capital(to adjusted tangible assets) $333,342   7.96% $125,590   3.00% $209,316   5.00%Risk-based capital(to risk-based assets)  345,801   10.48   263,914   8.00   329,893   10.00 Tangible capital(to tangible assets)  333,342   7.96   62,795   1.50   N/A   N/A The following table reconciles the Corporation’s stockholders’ equity to regulatory capital atSeptember 30, 2006 and March 31, 2006:           **September 30,**  **March 31,**   **2006**  **2006**   (In Thousands) Stockholders’ equity of the Bank $363,283  $350,696 Less: Goodwill and intangible assets  (19,956)  (19,956)Accumulated other comprehensive income  2,077   2,602        Tier 1 and tangible capital  345,404   333,342 Plus: Allowable general valuation allowances  15,577   12,459        Risk based capital $360,981  $345,801        
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**GUARANTEES**Financial Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”) requires certain guarantees tobe recorded at fair value as a liability at inception and when a loss is probable and reasonablyestimatable, 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 affectedthe Corporation’s financial condition.The Corporation’s real estate investment segment, IDI, is required to guarantee the partnershiploans of its subsidiaries for the development of homes for sale. As of September 30, 2006, IDI hadguaranteed $44.4 million for the following partnerships on behalf of the respective subsidiaries.As of the same date, $26.9 million of such loans were outstanding. The table below summarizes theindividual subsidiaries and their respective guarantees and outstanding loan balances.                       **Amount**  **Amount** **Subsidiary** **Partnership** **Amount**  **Outstanding**  **Outstanding** **of IDI** **Entity** **Guaranteed**  **at 9/30/06**  **at 3/31/06** (Dollars in thousands) Oakmont Chandler Creek $14,150  $12,350  $14,150 Davsha III Indian Palms 147, LLC  4,655   1,215   1,322 Davsha V Villa Santa Rosa, LLC  11,000   4,236   4,765 Davsha VII La Vista Grande 121, LLC  14,619   9,060   6,146             Total   $44,424  $26,861  $26,383             IDI has real estate partnership investments within its subsidiaries for which it guaranteesthe above loans. These partnerships are also funded by financing with loans guaranteed by IDI andsecured 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 overoperating and financial policies. This influence is evident in the terms of the respectivepartnership agreements and participation in policy-making processes. The Corporation has a 50%controlling interest in the respective limited partnerships and therefore has significant influenceover the right to approve the sale or refinancing of assets of the respective partnerships inaccordance with those partnership agreements.In acting as a partner with a controlling interest, the Corporation is committed to providingadditional levels of funding to meet partnership operating deficits up to an aggregate amount of$44.4 million. At September 30, 2006, the Corporation’s investment in these partnerships consistedof assets of $50.7 million and cash and other assets of $3.6 million. The liabilities of thesepartnerships consisted of other borrowings of $27.0 million (reported as a part of FHLB and otherborrowings), other liabilities of $1.9 million (reported as a part of other liabilities) andminority interest of $7.3 million. These amounts represent the Corporation’s maximum exposure toloss at September 30, 2006 as a result of involvement with these limited partnerships.The partnership agreements generally contain buy-sell provisions whereby certain partners canrequire the purchase or sale of ownership interests by certain partners.In addition, IDI has guaranteed a loan from Power Designers, Inc. in the amount of $1.2 million, ofwhich there was an outstanding balance of $500,000 at September 30, 2006. Power Designers, Inc. isa 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 anappropriate balance between interest-earning assets and interest-bearing liabilities withinspecified maturities and/or repricing dates. Interest rate risk is the imbalance betweeninterest-earning assets and interest-bearing liabilities at a given maturity or repricing date, andis commonly referred to as the interest rate gap (the “gap”). A positive gap exists when there aremore assets than liabilities maturing or repricing within the same time frame. A negative gapoccurs when there are more liabilities than assets maturing or repricing within the same timeframe. During a period of rising interest rates, a negative gap over a particular period wouldtend to adversely affect net interest income over such period, while a positive gap over aparticular 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 gapthat minimizes the impact of interest rate movements on the net interest margin. As part of thisstrategy, 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 ormedium-term, fixed-rate, single-family residential mortgage loans, medium-term mortgage-relatedsecurities and consumer loans, which generally have shorter terms to maturity and higher interestrates than single-family mortgage loans.The Corporation also originates multi-family residential and commercial real estate loans, whichgenerally have adjustable or floating interest rates and/or shorter terms to maturity thanconventional single-family residential loans. Long-term, fixed-rate, single-family residentialmortgage loans originated for sale in the secondary market are generally committed for sale at thetime the interest rate is locked with the borrower. As such, these loans involve little interestrate risk to the Corporation.The calculation of a gap position requires management to make a number of assumptions as to when anasset or liability will reprice or mature. Management believes that its assumptions approximateactual experience and considers them reasonable, although the actual amortization and repayment ofassets and liabilities may vary substantially. The Corporation’s cumulative net gap position atSeptember 30, 2006 has not changed materially since March 31, 2006. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations – Asset/Liability Management” in theCorporation’s Annual Report on Form 10-K for the year ended March 31, 2006.
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**Item 3** **Quantitative and Qualitative Disclosures About Market Risk.** The Corporation’s market rate risk has not materially changed from March 31, 2006.See the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2006.See ”Asset/Liability Management” in Part I, Item 2 of this report.**Item 4** **Controls and Procedures** The Corporation’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness of theCorporation’s disclosure controls and procedures (as defined in Exchange Act Rule13a-15(e)) as of the end of the period covered by this report and, based on thisevaluation, the Corporation’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are operating in aneffective manner. No change in the Corporation’s internal control over financial reporting (as definedin Exchange Act Rule 13a-15(f)) has occurred during the Corporation’s most recentfiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, 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 ordinarycourse of business which, in the aggregate, are believed by management of theCorporation to be immaterial to the financial condition and results of operations ofthe Corporation.**Item 1A** **Risk Factors.** There have been no material changes to the factors disclosed in Part I, Item1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31,2006.
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**Item 2** **Unregistered Sales of Equity Securities and Use of Proceeds.** (a) — (b) Not applicable. (c) The following table sets forth information with respect to any purchase made by or onbehalf ofthe Corporation or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under theExchangeAct, 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 31,2006  3,976  $29.90   —   1,469,360 August 1 - August31, 2006  20,000   28.45   20,000   1,449,360 September 1 -September 30,2006  131,000   28.58   131,000   1,318,360                               Total  154,976(1) $28.60   151,000   1,318,360               (1) Consists of 151,000 shares purchased pursuant to a publicly announced repurchaseprogram, and 3,976 shares acquired from employees in payment for the exercise price of stockoptions granted to them pursuant to the Corporation’s stock option program. (2) Effective November 7, 2005, the Board of Directors extended the current share repurchaseprogram and authorized an additional share repurchase program of 5% or approximately 1.10million shares of its outstanding common stock in the open market. The repurchases areauthorized to be made from time to time in open-market and/or negotiated transactions as, inthe opinion of management, market conditions may warrant. The repurchased shares will be heldas treasury stock and will be available for general corporate purposes. The Corporationutilizes various securities brokers as its agent for the stock repurchase program.**Item 3** **Defaults upon Senior Securities.** Not applicable.**Item 4** **Submission of Matters to a Vote of Security Holders.** Not applicable.**Item 5** **Other Information.** None**.**
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**Item 6** **Exhibits** The following exhibits are filed with this report: Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rules 13a-14 and15d-14 of the Securities Exchange Act of 1934 and   Section 302 of theSarbanes-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 and15d-14 of the Securities Exchange Act of 1934 and   Section 302 of theSarbanes-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 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is   included herein as anexhibit to this Report. Exhibit 32.2 Certification of the Chief Financial Officer pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is   included herein as anexhibit to this Report.
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**SIGNATURES**Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authorized.ANCHOR BANCORP WISCONSIN INC.       Date: November 8, 2006 By: /s/ Douglas J. Timmerman Douglas J. Timmerman, Chairman of the      Board, President and Chief Executive Officer         Date: November 8, 2006 By: /s/ Michael W. Helser Michael W. Helser, Treasurer and      Chief Financial Officer  
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