ANCHOR BANCORP WISCONSIN INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

or

[ ] 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.
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(Exact name of registrant as specified in its charter)

Wisconsin 39-1726871
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

25 West Main Street
Madison, Wisconsin 53703
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(Address of principal executive office) (Zip Code)

(608) 252-8700
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Registrant's telephone number, including area code

Not Applicable
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(Former name, former address, and former fiscal year,
if changed since last report)

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

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

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

Class: Common stock -- $.10 Par Value

Number of shares outstanding as of October 31, 2003: 23,140,496

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ANCHOR BANCORP WISCONSIN INC.
INDEX - FORM 10-Q

1

CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Unaudited Consolidated Financial Statements.

2

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

4

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Unaudited)

See accompanying Notes to Unaudited Consolidated Financial Statements

5

ANCHOR BANCORP WISCONSIN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION

The unaudited consolidated financial statements include the accounts and results
of operations of Anchor BanCorp Wisconsin Inc. (the "Corporation") and its
wholly-owned subsidiaries, AnchorBank fsb (the "Bank"), and Investment
Directions, Inc. ("IDI"). The Bank's accounts and results of operations include
its wholly-owned subsidiaries, Anchor Investment Services, Inc. ("AIS"), ADPC
Corporation ("ADPC") and Anchor Investment Corporation ("AIC"). All significant
intercompany balances and transactions have been eliminated. Investments in 50%
owned partnerships are accounted for by the equity method.

NOTE 2 - BASIS OF PRESENTATION

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

In preparing the unaudited consolidated financial statements in conformity with
GAAP, management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. The results of
operations and other data for the six-month period ended September 30, 2003 are
not necessarily indicative of results that may be expected for any other interim
period or the entire fiscal year ending March 31, 2004. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in the Corporation's Annual Report for the year ended March 31, 2003.

Unrealized gains or losses on the Corporation's available-for-sale securities
are included in other comprehensive income. During the quarter ended September
30, 2003 and 2002, total comprehensive income amounted to $10.5 million and
$10.7 million, respectively. For the six months ended September 30, 2003 and
2002, comprehensive income was $24.0 million and $23.5 million, respectively.

NEW ACCOUNTING STANDARDS In November 2002, the FASB issued Financial
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45").
FIN 45 significantly changes current practice in the accounting for, and
disclosure of, guarantees. FIN 45 requires certain guarantees to be recorded at
fair value as a liability at inception and when a loss is probable and
reasonably estimatable, as those terms are defined in FASB Statement No. 5
"Accounting for Contingencies." The recording of the liability will not
significantly affect the Corporation's financial condition. FIN 45 also requires
a guarantor to make significant new disclosures (see below) even when the
likelihood of making any payments under the guarantee is remote.

6

The Corporation's real estate investment subsidiary guarantees some loans for
some of the development partnerships that it invests in to complete developed
homes for sale. As of September 30, 2003 the Corporation's real estate
investment subsidiary, IDI, has guaranteed $56.5 million for the following
partnerships on behalf of the respective subsidiaries listed below.

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

The Corporation presently accounts for these partnerships under the equity
method of accounting, recording its share of the net income or loss based upon
the terms of the partnership agreements. As a limited partner, the Corporation
still has the ability to exercise significant influence over operating and
financial policies. This influence is evident in the terms of the respective
partnership agreements and participation in policy-making processes. The
Corporation has a 50% controlling interest in the respective limited
partnerships and therefore has significant influence over the right to approve
the sale or refinancing of assets of the respective partnerships in accordance
with those partnership agreements.

In acting as a partner with a controlling interest, the Corporation is committed
to providing additional levels of funding to meet partnership operating deficits
up to an aggregate amount of $56.5 million. At September 30, 2003, the
Corporation's aggregate net investment in these partnerships totaled $42.3
million. These amounts represent the Corporation's maximum exposure to loss at
September 30, 2003 as a result of involvement with these limited partnerships.

The partnership agreements generally contain buy-sell provisions whereby certain
partners can require the purchase or sale of ownership interests by certain
partners. Additionally, there are provisions whereby the Corporation has
guaranteed certain partners' preference returns and equity investments.

In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51" ("FIN 46"). FIN 46 requires the

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consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity. The provisions of this statement are
effective immediately for variable interests in variable interest entities
("VIE") created after January 31, 2003. It applies in the first fiscal year or
interim period beginning after December 15, 2003.

The Corporation has evaluated the effects of the issuance of FIN 46 on the
accounting for its ownership interests in the limited partnerships and will
implement the accounting treatment for the partnerships it has a controlling
interest in for the quarter ended December 31, 2003. As a result of the
consolidation of the partnerships into the Corporation's financial statements,
assets will increase by approximately $23.1 million (largely due to construction
in progress) and liabilities will increase by approximately $16.8 million
(largely due to the addition of notes payable at the partnership level). The
increases in assets and liabilities will be offset by minority interest in
investment by real estate partnerships on the statement of financial condition.

On December 31, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of significant accounting policies
of the effect of the Company's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148's amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective for fiscal years
ending after December 15, 2002. The Corporation will continue to account for
stock-based compensation in accordance with APB Opinion 25 as allowed under FASB
No. 123.

The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value at the
date of grant for awards under the stock option plans consistent with the method
of SFAS No. 123, the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated (in thousands, except per share
amounts):

The pro forma amounts indicated above may not be representative of the effects
on reported net income for future years. The fair values of stock options
granted in the six months ended September 30, 2003 and September 30, 2002 were
estimated on the date of grant using the Black-Scholes option-pricing model.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for classifying and measuring as liabilities certain

8

financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments and certain equity
derivatives that frequently are used in connection with share repurchase
programs. The provisions of this statement are effective for all financial
instruments created or modified after May 31, 2003, and to other instruments at
the beginning of the first interim period beginning after June 15, 2003 and are
not expected to have a material impact on the Corporation's consolidated
financial statements.

Certain 2002 accounts have been reclassified to conform to the 2003
presentations.

NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS

The Corporation's carrying value of goodwill was $20.0 million at September 30,
2003 and at March 31, 2003. Information regarding the Company's other intangible
assets follows:

The projections of amortization expense for mortgage servicing rights set forth
below are based on asset balances and the interest rate environment as of
September 30, 2003. Future amortization expense may be significantly different
depending upon changes in the mortgage servicing portfolio, mortgage interest
rates and market conditions.

The following table shows the current period and estimated future amortization
expense for amortized intangible assets:

9

NOTE 4 - STOCKHOLDERS' EQUITY

During the quarter ended September 30, 2003, options for 98,037 shares of common
stock were exercised at a weighted-average price of $9.14 per share. Treasury
shares were issued in exchange for the options using the last-in-first-out
method. The cost of the treasury shares issued in excess of the option price
paid $1.6 million was charged to retained earnings. During the quarter ended
September 30, 2003, the Corporation repurchased 656,520 shares of common stock
and reissued 23,515 shares of treasury stock to the Corporation's retirement
plans. The weighted-average cost of these shares was $19.11 per share or
$449,000 in the aggregate and the $97,000 excess of the market price over the
cost of the treasury shares was charged to retained earnings. On August 15,
2003, the Corporation paid a cash dividend of $0.11 per share, amounting to $2.6
million.

NOTE 5 - EARNINGS PER SHARE

Basic earnings per share for the three and six months ended September 30, 2003
and 2002 have been determined by dividing net income for the respective periods
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding plus common stock equivalents. Common stock
equivalents are computed using the treasury stock method.

10

11

NOTE 6 - SUBSEQUENT EVENTS

On October 20, 2003, the Corporation declared an $0.11 per share cash dividend
on its common stock to be paid on November 14, 2003 to stockholders of record on
October 31, 2003.

NOTE 7 - CONTINGENCIES

The Bank's income and franchise tax liability to the State of Wisconsin may be
affected by recent developments. Like many financial institutions located in
Wisconsin, the Bank transferred investment securities to its subsidiary in the
state of Nevada, AIC, which now holds and manages those assets. AIC, whose
operations are solely in Nevada, has not filed returns with, or paid income or
franchise taxes to, the State of Wisconsin. The Department has recently
implemented a program for the audit of Wisconsin financial institutions who have
formed investment subsidiaries located in Nevada. The Department has generally
indicated that it may try to assess income or franchise taxes on the income of
the Nevada investment subsidiaries of Wisconsin banks. The Bank is currently
undergoing such an audit. Given that the audit is at a preliminary stage, we
cannot determine whether the outcome will be material to the Bank.

12

ANCHOR BANCORP WISCONSIN INC.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
describe future plans or strategies and include the Corporation's expectations
of future financial results. The Corporation's ability to predict results or the
effect of future plans or strategies is inherently uncertain and the Corporation
can give no assurance that those results or expectations will be attained.
Factors that could affect actual results include but are not limited to i)
general market rates, ii) changes in market interest rates and the shape of the
yield curve, iii) general economic conditions, iv) real estate markets, v)
legislative/regulatory changes, vi) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve Board, vii) changes in the quality or
composition of the Corporation's loan and investment portfolios, viii) demand
for loan products, ix) the level of loan and MBS repayments, x) deposit flows,
xi) competition, xii) demand for financial services in the Corporation's
markets, and xiii) changes in accounting principles, policies or guidelines. In
addition, acquisitions may result in large one-time charges to income, may not
produce revenue enhancements or cost savings at levels or within time frames
originally anticipated and may result in unforeseen integration difficulties.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.

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

SIGNIFICANT ACCOUNTING POLICIES

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

o Establishing the amount of the allowance for loan losses requires the use of
judgment as well as other systematic objective and quantitative methods.
Assets are evaluated at least quarterly and risk components reviewed as a
part of that evaluation. See Notes to Consolidated Financial Statements -
Summary of Significant Accounting Policies "Allowances for Loan Losses" in
the Corporation's Annual Report for the year ended March 31, 2003, for a
discussion of risk components.

o Valuation of mortgage servicing rights requires the use of judgment.
Mortgage servicing rights are established on loans that are originated and
subsequently sold. A portion of the loan's book basis is allocated to
mortgage servicing rights when a loan is sold. The fair value of mortgage
servicing rights is the present value of estimated future net cash flows
from the servicing relationship using current market assumptions for
prepayments, servicing costs and other factors. As the loans are repaid and
net servicing revenue is earned, mortgage servicing rights are amortized
into expense. Net servicing revenues are expected to exceed this
amortization expense. However, if actual prepayment experience exceeds what
was originally anticipated, net servicing revenues may be less than expected
and mortgage servicing rights may be impaired.

o Judgment is also used in the valuation of other intangible assets (core
deposit intangibles). Core deposit intangibles have been recorded for core
deposits (defined as checking, money market and savings deposits) that have
been acquired in acquisitions that were accounted for as purchase business
combinations. The core deposit intangible assets have been recorded using
the assumption that they provide a more favorable source of funding than
more expensive wholesale borrowings. An intangible asset has been recorded
for the present value of the difference between the expected interest to be
incurred on these deposits and interest expense that would be expected if
these deposits were replaced by wholesale borrowings, over the expected
lives of the core deposits.

13

The current estimate of the underlying lives of the core deposits is seven
to fifteen years. If it is determined that these deposits have a shorter
life, the asset will be adjusted to reflect an expense associated with the
amount that is impaired.

o Goodwill is reviewed at least annually for impairment, which requires
judgment. Goodwill has been recorded as a result of an acquisition in which
purchase price exceeded the fair value of net assets acquired. The price
paid for the acquisition is analyzed and compared to a number of current
indices. If goodwill is determined to be impaired, it would be expensed in
the period in which it became impaired.

Set forth below is management's discussion and analysis of the Corporation's
financial condition and results of operations for the three and six months ended
September 30, 2003, which includes information on the Corporation's
asset/liability management strategies, sources of liquidity and capital
resources. This discussion should be read in conjunction with the consolidated
financial statements and supplemental data contained elsewhere in this report.

RESULTS OF OPERATIONS

General. Net income for the three and six months ended September 30, 2003
decreased $910,000 to $11.2 million from $12.1 million and increased $2.4
million to $25.3 million from $22.9 million, respectively, for the same periods
in the prior year. The decrease in net income for the three-month period
compared to the same period last year was largely due to a decrease in interest
income of $5.4 million. In addition, non-interest expense increased $130,000 for
the three-month period as compared to the same period in the prior year. This
decrease in net income was partially offset by a decrease in interest expense of
$3.5 million, an increase of $890,000 in non-interest income, and a decrease in
income tax expense of $310,000 for the three months ended September 30, 2003.
The increase in net income for the six-month period compared to the same period
last year was largely due to the increase in non-interest income of $8.5 million
primarily due to an increase in the gain on sale of loans of $5.1 million and an
increase in net income from operations of real estate investments of $4.3
million. In addition, interest expense decreased $8.5 million for the six months
ended September 30, 2003, as compared to the same period in the prior year,
primarily due to a decrease in the weighted average rate paid on
interest-bearing liabilities. These increases were partially offset by a
decrease in interest income of $10.9 million, an increase in income tax expense
of $2.1 million, and an increase in non-interest expense of $1.7 million. The
provision for loan losses remained constant during the three and six months
ended September 30, 2003, as compared to the same periods in the prior year.

Net Interest Income. Net interest income decreased $2.0 million and $2.3 million
for the three and six months ended September 30, 2003, as compared to the same
periods in the prior year. The net interest margin decreased to 3.26% from 3.68%
for the respective three-month periods and decreased to 3.35% from 3.60% for the
respective six-month periods. The interest rate spread decreased to 3.20% from
3.58% and decreased to 3.28% from 3.51%, respectively, for the same periods.

Interest income on loans decreased $3.9 million and $7.8 million, respectively,
for the three- and six-month periods due primarily to the decrease of 101 basis
points in the average yield on loans to 6.08% from 7.09% for the respective
three-month period and a decrease of 107 basis points to 6.16% from 7.23% for
the respective six-month period. Interest income on mortgage-related securities
decreased $1.7 million and $3.1 million, respectively, for the three- and six
month periods primarily due to a decrease of 189 basis points in the average
yield on mortgage-related securities to 4.13% from 6.02% for the respective
three months ended September 30, 2003 and a decrease of 150 basis points to
4.49% from 5.99% for the respective six months ended September 30, 2003. In
addition, the average balance of mortgage related securities decreased $45.4
million and $45.6 million for the three- and six-month periods ended September
30, 2003 as compared to the same periods in the prior year. In addition,
interest income on interest-bearing deposits decreased $140,000 and $570,000,
respectively, for the three and six months ended September 30, 2003, as compared
to the same periods in 2002. Interest income on investment securities (including
Federal Home Loan Bank stock) increased $280,000 and $580,000 for the three- and
six-month periods ended September 30, 2003, as compared to the same periods in
the prior year. This was primarily a result of an increase of $11.6 million and
$24.5 million in the average balance of investment securities for the respective
three- and six-month periods ended September 30, 2003.

14

Interest expense on deposits decreased $3.0 million and $6.9 million,
respectively, for the three and six months ended September 30, 2003, as compared
to the same periods in 2002. These decreases were due primarily to a decrease of
59 basis points in the weighted average cost of deposits to 2.09% from 2.68% for
the respective three-month periods and a decrease of 63 basis points in the
weighted average cost of deposits to 2.16% from 2.79% for the respective
six-month periods. Interest expense on notes payable and other borrowings
decreased $390,000 and $1.5 million during the respective three and six months
ended September 30, 2003, as compared to the same periods in the prior year. The
decrease was due primarily to a decrease in the weighted average cost of notes
payable and other borrowings of 70 basis points to 3.96% from 4.66% for the
three-month period and a decrease of 53 basis points to 3.99% from 4.52% for the
six-month period ended September 30, 2003, as compared to the same periods in
2002. Other interest expense decreased $80,000 and $120,000 for the respective
three and six months ended September 30, 2003, as compared to the same periods
in the prior year.

Provision for Loan Losses. Provision for loan losses remained constant at
$450,000 and $900,000 for the respective three- and six-month periods ended
September 30, 2003, as compared to the same periods for the prior year. The
provisions were based on management's ongoing evaluation of asset quality and
pursuant to a policy to maintain an allowance for losses at a level which
management believes is adequate to absorb probable and estimable losses in the
portfolio.

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

15

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(1) Annualized

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(1) Annualized

17

Non-Interest Income. Non-interest income increased $890,000 to $7.9 million and
$8.5 million to $21.0 million, respectively, for the three and six months ended
September 30, 2003, as compared to $7.0 million and $12.4 million for the same
periods in the prior year, primarily due to an increase in net income from
operations of real estate investments of $3.7 million and $4.3 million,
respectively, as well as an increase in net gain on sale of loans of $5.1
million in the six-month period. These increases in net income from operations
of real estate investments were due to a gain on the sale of a partnership of
$2.7 million, as well as increased lot sales. Other non-interest income which
includes a variety of loan fee and other miscellaneous fee income increased
$700,000 and $1.7 million for the respective three- and six-month periods ended
September 30, 2003. Service charges on deposit accounts increased $250,000 and
$560,000, respectively, for the three and six months ended September 30, 2003.
Insurance commissions increased $60,000 and $50,000, respectively, for the
three- and six-month periods ended September 30, 2003, as compared to the same
periods in the prior year. Net gain on sale of loans decreased $2.7 million and
increased $5.1 million, respectively, for the three and six months ended
September 30, 2003. The decrease in the net gain on sale of loans in the
three-month period was primarily due to the changing interest rate environment.
The increase in the gain on sale of loans in the six-month period was primarily
due to a higher volume of loan originations as a result of the low interest rate
environment. These increases were partially offset by a decrease in loan
servicing income of $520,000 and $2.8 million, respectively, during the three
and six months ended September 30, 2003, as compared to the same periods in the
prior year. The decrease in loan servicing income was due primarily to increased
amortization of mortgage servicing rights, which resulted from increases in
mortgage loan refinancings in the declining interest rate environment. In
addition, net gain on sale of investments and mortgage-related securities
decreased $680,000 and $410,000, respectively, for the three- and six-month
periods ended September 30, 2003, as compared to the same periods in the prior
year.

Non-Interest Expense. Non-interest expense increased $130,000 to $16.9 million
and $1.7 million to $35.0 million, respectively, for the three and six months
ended September 30, 2003, as compared to $16.7 million and $33.3 million for the
same periods in 2002, as a result of several factors. Compensation expense
increased $390,000 and $1.6 million, respectively, for the three- and six-month
periods compared to the same periods in the prior year due primarily to an
increase in incentive compensation resulting from increased loan production and
increased employee benefits. In addition, occupancy expense increased $220,000
and $470,000, respectively, for the three and six months ended September 30,
2003. Marketing expense increased $90,000 and $160,000, respectively, for the
three-and six-month periods compared to the same periods in the prior year.
Furniture and equipment expense increased $50,000 and $370,000, respectively,
for the three and six months ended September 30, 2003, as compared to the same
periods in the prior year. These increases were partially offset by a decrease
in other non-interest expense of $540,000 and $630,000, respectively, for the
three- and six-month periods as compared to the same periods in the prior year.
Data processing expense decreased $90,000 and $260,000, respectively for the
three- and six-month periods ended September 30, 2003, as compared to the same
periods in the prior year.

Income Taxes. Income tax expense decreased $310,000 and increased $2.1 million,
respectively, during the three and six months ended September 30, 2003, as
compared to the same periods in 2002. The effective tax rate was 38.4% and
38.5%, respectively, for the current three- and six-month periods, as compared
to 37.6% and 37.4% for the three- and six-month periods last year.

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FINANCIAL CONDITION

During the six months ended September 30, 2003, the Corporation's assets
increased by $122.9 million from $3.54 billion at March 31, 2003 to $3.66
billion. The majority of this increase was attributable to increases in loans
and investments, which were partially offset by decreases in other categories
such as mortgage-related securities.

Total loans (including loans held for sale) increased $146.0 million during the
six months ended September 30, 2003. Loan activity for the period consisted of
(i) originations of $1.98 billion, (ii) sales of $1.04 billion, and (iii)
principal repayments and other adjustments of $794.0 million.

Mortgage-related securities (both available for sale and held to maturity)
decreased $52.2 million during the six months ended September 30, 2003 as a
result of principal repayments and market value adjustments of $117.7 million
and sales of $4.5 million. These decreases were partially offset by purchases of
$70.0 million of mortgage-related securities in this six-month period.
Mortgage-related securities consisted of $118.5 million of mortgage-backed
securities and $78.1 million of Collateralized Mortgage Obligations ("CMO's")
and Real Estate Mortgage Investment Conduits ("REMIC's") at September 30, 2003.

The Corporation invests in corporate CMOs and agency-issued REMICs. These
investments are deemed to have limited credit risk. The investments do have
interest rate risk due to, among other things, actual prepayments being more or
less than those predicted at the time of purchase. The Corporation invests only
in short-term tranches in order to limit the reinvestment risk associated with
greater than anticipated prepayments, as well as changes in value resulting from
changes in interest rates.

Investment securities (both available for sale and held to maturity) increased
$76.0 million during the six months ended September 30, 2003 as a result of
purchases of $274.3 million of U.S. Government and agency securities, largely
offset by sales and maturities of $199.6 million of such securities.

Total liabilities increased $122.9 million during the six months ended September
30, 2003. This increase was largely due to a $126.2 million increase in FHLB
advances and other borrowings, an $11.6 million increase in advance payments by
borrowers for taxes and insurance, and a $5.2 million increase in deposits
during the six-month period. These increases were partially offset by a decrease
in other liabilities of $20.1 million. Brokered deposits have been used in the
past and may be used in the future as the need for funds requires them. Brokered
deposits totaled $240.9 million at September 30, 2003 and $240.5 million at
September 30, 2002, and generally mature within one to five years.

Stockholders' equity increased $10,000 during the six months ended September 30,
2003 as a net result of (i) comprehensive income of $24.0 million, (ii) stock
options exercised of $4.8 million (with the ($4.1 million) excess of the cost of
treasury shares over the option price charged to retained earnings), (iii) the
purchase of stock by retirement plans of $970,000 (with the ($80,000) excess of
the cost of treasury shares over the option price charged to retained earnings),
and (iv) benefit plan shares earned and related tax adjustments totaling $1.6
million. These increases were partially offset by (i) purchases of treasury
stock of $20.0 million, (ii) cash dividends of $5.0 million, and (iii) common
stock purchased in a rabbi trust established pursuant to the Corporation's
supplemental retirement plan of $2.3 million.

19

ASSET QUALITY

Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Corporation does not accrue interest on loans past due 90 days or more.

Non-performing assets increased $3.0 million to $14.7 million at September 30,
2003 from $11.7 million at March 31, 2003 and increased as a percentage of total
assets to 0.40% from 0.33% at such dates, respectively.

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

Non-accrual loans increased $4.0 million during the six months ended September
30, 2003. The increase was largely attributable to two commercial loans. One was
a $3.3 million commercial real estate loan secured by retail property located in
Dallas, Texas. The other one was a $2.3 million commercial business loan secured
by a milling machining company located in Montello, Wisconsin. At September 30,
2003, there was one other non-accrual commercial loan with a carrying value
greater than $1.0 million. The loan is a commercial real estate loan which is
secured by a 161 unit motel located in Schiller Park, Illinois, with a carrying
value of $1.5 million at September 30, 2003.

Non-performing real estate held for development and sale remained relatively
constant for the six months ended September 30, 2003.

Foreclosed properties and repossessed assets decreased $960,000 for the six
months ended September 30, 2003. There were no foreclosed properties and
repossessed assets with a carrying value greater than $1.0 million at September
30, 2003.

Performing troubled debt restructurings increased $90,000 during the six months
ended September 30, 2003.

20

At September 30, 2003, assets that the Corporation has classified as
substandard, net of reserves, consisted of $34.1 million of loans and foreclosed
properties. As of March 31, 2003, substandard assets amounted to $25.1 million.
An asset is classified as substandard when it is determined that it is
inadequately protected by the current net worth and paying capacity of the
obligor or by the collateral pledged, if any, and that the Corporation will
sustain some loss if the deficiencies are not corrected.

The increase in substandard loans is largely attributable to the addition of
three loans. The first loan with a carrying value of $2.5 million is secured by
a hotel located in Janesville, Wisconsin. The second loan, with a carrying value
of $1.9 million, is secured by a multi-family residential property located in
Cottage Grove, Wisconsin. The third loan, with a carrying value of $4.0 million,
is secured by the assets of a stainless tank operation is located in Cottage
Grove, Wisconsin. The category of substandard assets contains several loans with
a carrying value of greater than $1.0 million, including the loans discussed
above. Six other loans classified as substandard have a carrying value of
greater than $1.0 million. One loan, with a carrying value of $5.2 million, is
secured by a computer networking and consulting business is located in Phoenix,
Arizona. A second loan is a $3.3 million commercial real estate loan secured by
retail property located in Dallas, Texas. A third loan, with a carrying value of
$2.1 million, is secured by a hotel located in Kenosha, Wisconsin. A fourth
loan, with a carrying value of $1.3 million, is secured by a milling machining
company located in Montello, Wisconsin. A fifth loan with a carrying value of
$1.5 million is a commercial real estate loan which is secured by a 161 unit
motel located in Schiller Park, Illinois. A sixth loan is secured by a hotel
with a carrying value of $1.1 million located in Sonoma, California.

At September 30, 2003, assets that the Corporation has identified as impaired,
net of reserves, consisted of $5.2 million. As of March 31, 2003, impaired loans
were $4.8 million. A loan is defined as impaired when, according to FAS 114,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Such loans are not nor have been on a past due and non-accrual
status. A summary of the details regarding impaired loans follows (in
thousands):

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

21

The Corporation's loan portfolio, foreclosed properties and repossessed assets
are evaluated on a continuing basis to determine the necessity for additions and
recaptures to the allowance for losses and the related adequacy of the balance
in the allowance for loan losses account. These evaluations consider several
factors, including, but not limited to, general economic conditions, loan
portfolio composition, loan delinquencies, prior loss experience, collateral
value, anticipated loss of interest and management's estimation of future
losses. The evaluation of the allowance for loan losses includes a review of
known loan problems as well as inherent problems based upon historical trends
and ratios. Foreclosed properties are recorded at the lower of carrying value or
fair value with charge-offs, if any, charged to the allowance for loan losses
prior to transfer to foreclosed property. The fair value is primarily based on
appraisals, discounted cash flow analysis (the majority of which are based on
current occupancy and lease rates) and pending offers.

A summary of the activity in the allowance for losses on loans follows:

Although management believes that the September 30, 2003 allowance for loan
losses is adequate based upon the current evaluation of loan delinquencies,
non-performing assets, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance will not be
necessary. Management continues to pursue all practical and legal methods of
collection, repossession and disposal, and adheres to high underwriting
standards in the origination process in order to continue to maintain strong
asset quality.

LIQUIDITY AND CAPITAL RESOURCES

On an unconsolidated basis, the Corporation's sources of funds include dividends
from its subsidiaries, including the Bank, interest on its investments and
returns on its real estate held for sale. The Bank's primary sources of funds
are payments on loans and securities, deposits from retail and wholesale
sources, advances and other borrowings.

At September 30, 2003, the Corporation had outstanding commitments to originate
loans of $174.6 million, commitments to extend funds to, or on behalf of,
customers pursuant to lines and letters of credit of $256.0 million and loans
sold with recourse to the Corporation in the event of default by the borrower of
$320,000. The

22

Corporation had sold loans with recourse in the amount of $10.5 million through
the FHLB Mortgage Partnership Finance Program at September 30, 2003. Scheduled
maturities of certificates of deposit during the twelve months following
September 30, 2003 amounted to $1.07 billion and scheduled maturities of FHLB
advances during the same period totaled $163.7 million. At September 30, 2003,
the Corporation had no reverse repurchase agreements. Management believes
adequate resources are available to fund all commitments to the extent required.

The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
liquid investments in qualifying types of U.S. Government and agency securities
and other investments sufficient to ensure its safe and sound operation. During
the quarter ended September 30, 2003, the Bank's average liquidity ratio was
11.56%.

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

The following summarizes the Bank's capital levels and ratios and the levels and
ratios required by the OTS at September 30, 2003 and March 31, 2003 (dollars in
thousands):

23

The following table reconciles the Corporation's stockholders' equity to
regulatory capital at September 30, 2003 and March 31, 2003 (dollars in
thousands):

ASSET/LIABILITY MANAGEMENT

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

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

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

The calculation of a gap position requires management to make a number of
assumptions as to when an asset or liability will reprice or mature. Management
believes that its assumptions approximate actual experience and considers them
reasonable, although the actual amortization and repayment of assets and
liabilities may vary substantially. The cumulative net gap position at September
30, 2003 has not changed materially since March 31, 2003.

24

SEGMENT REPORTING

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

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

REAL ESTATE INVESTMENTS: The Corporation's non-banking subsidiary, IDI, and its
subsidiary, NIDI, invest in limited partnerships in real estate developments.
Such developments include recreational residential developments and industrial
developments (such as office parks).

The following represents reconciliations of reportable segment revenues, profit
or loss, and assets to the Corporation's consolidated totals for the three and
six months ended September 30, 2003 and 2002, respectively.

25

27

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Corporation's market rate risk has not materially changed
from March 31, 2003. See the Corporation's Annual Report on
Form 10-K for the year ended March 31, 2003.

ITEM 4 CONTROLS AND PROCEDURES

The management of the Corporation evaluated, with the
participation of the Chief Executive Officer and Chief
Financial Officer, the effectiveness of the Corporation's
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report.
Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Corporation's
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that are
filed or submitted under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and
are operating in an effective manner.

No change in the Corporation's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under
the Securities Exchange Act of 1934) occurred during the most
recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Corporation's
internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS.

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

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

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.

The Bank is presently being audited by the State of Wisconsin
Department of Revenue Franchise Tax Division. The results of
the audit have not yet been reported to the Bank.

28

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS.

Exhibit 31.1 Certification of Chief Executive
Officer Pursuant to Rules 13a-14 and 15d-14
of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of
2002

Exhibit 31.2 Certification of Chief Financial
Officer Pursuant to Rules 13a-14 and 15d-14
of the Securities Exchange Act of 1934 and
Section 302 of the Sarbanes-Oxley Act of
2002

Exhibit 32.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

Exhibit 32.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

(b) REPORTS ON FORM 8-K.

Press release dated July 22, 2003 announcing the Corporation's
results for the three months ending June 30, 2003 and its
financial condition as of June 30, 2003 filed under Items 9
and 12 of Form 8K on July 23, 2003.

29

SIGNATURES

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

ANCHOR BANCORP WISCONSIN INC.

Date: October 31, 2003 By:/s/ Douglas J. Timmerman
------------------- ------------------------------------------
Douglas J. Timmerman,
Chairman of the Board,
President and Chief Executive Officer

Date: October 31, 2003 By:/s/ Michael W. Helser
------------------- ------------------------------------------
Michael W. Helser, Treasurer and
Chief Financial Officer

30

INDEX TO EXHIBITS