Anchor Bancorp - FORM 10-K/A - September 27, 2013

Attached files

file	filename
EX-31 - EXHIBIT 31.3 FOR THE FORM 10-K/A FOR JUNE 30, 2013 - Anchor Bancorp	ex31310ka63013.htm
EX-31 - EXHIBIT 31.4 FOR THE FORM 10-K/A FOR JUNE 30, 2013 - Anchor Bancorp	ex31410ka63013.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________

FORM 10-K/A

Amendment No. One

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

For the fiscal year ended June 30, 2013 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: 001-34965

ANCHOR BANCORP
(Exact name of registrant as specified in its charter)

Washington		26-3356075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

601 Woodland Square Loop SE, Lacey, Washington		98503
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:		(360) 491-2250

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share		The Nasdaq Stock Market LLC
(Title of Class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:		None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO X

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

Large accelerated filer _____

Accelerated filer _____

Non-accelerated filer _____

Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X

As of September 3, 2013, there were issued and outstanding 2,550,000 shares of the registrant’s common stock, which are traded on the over-the-counter market through the NASDAQ Global Market under the symbol “ANCB.” The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of December 31, 2012, was $36.2 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2013 Annual Meeting of Stockholders are incorporated by reference into Part III.

EXPLANATORY NOTE

Anchor Bancorp (the “Company”) is filing this Amendment No. One on Form 10-K/A (this “Amendment”) to include additional information concerning the executive officers of the Company contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013, which was filed with Securities and Exchange Commission on September 13, 2013 (the “Original Filing”). The Company is also including new certifications of the Company’s chief executive officer and of the Company’s chief financial officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. The Company is not including certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350) as no financial statements are being filed with this Amendment.

Except as described above, this Amendment does not modify or update disclosure in, or exhibits to, the Original Filing. Furthermore, this Amendment does not change any previously reported financial results, nor does it reflect events occurring after the filing date of the Original Filing. Information not affected by this Amendment remains unchanged and reflects the disclosures made at the time the Original Filing was filed. This Amendment, together with the Original Filing, constitutes the Registrants’ Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

(i)

PART I

Item 1. Business

General

Anchor Bancorp, a Washington corporation, was formed for the purpose of becoming the bank holding company for Anchor Bank in connection with the Bank’s conversion from mutual to stock form, which was completed on January 25, 2011. In connection with the mutual to stock conversion, the Bank changed its name from “Anchor Mutual Savings Bank” to “Anchor Bank.” At June 30, 2013, we had total assets of $452.2 million, total deposits of $328.6 million and total stockholders' equity of $52.4 million. Anchor Bancorp’s business activities generally are limited to passive investment activities and oversight of its investment in Anchor Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to Anchor Bank.

Anchor Bancorp is a bank holding company and is subject to regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Anchor Bank is examined and regulated by the Washington State Department of Financial Institutions, Division of Banks (“DFI”) and by the Federal Deposit Insurance Corporation (“FDIC”). Anchor Bank is required to have certain reserves set by the Federal Reserve and is a member of the Federal Home Loan Bank of Seattle (“FHLB” or “FHLB of Seattle”), which is one of the 12 regional banks in the Federal Home Loan Bank System (“FHLB System”).

Anchor Bank is a community-based savings bank primarily serving Western Washington through our 11 full-service banking offices (including two Wal-Mart store locations) located within Grays Harbor, Thurston, Lewis, Pierce and Mason counties, Washington. In addition we have two loan production offices located in Grays Harbor. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers, however, at June 30, 2013, 90.3% of our loans were collateralized by real estate. Historically, lending activities have been primarily directed toward the origination of one-to-four family construction, commercial real estate and consumer loans. Since 1990, we have also offered commercial real estate loans and multi-family loans primarily in Western Washington. Lending activities also include the origination of residential construction loans, including prior to fiscal 2010, through brokers, in particular within the Portland, Oregon metropolitan area.

The executive office of the Company is located at 601 Woodland Square Loop SE, Lacey, Washington 98503, and its telephone number is (360) 491-2250.

Corporate Developments

Anchor Bank entered into an Order to Cease and Desist (“Order”) with the FDIC and the Washington DFI on August 12, 2009. On September 5, 2012, Anchor Bank’s regulators, the FDIC and the DFI terminated the Order as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank. In place of the Order, Anchor Bank entered into a Supervisory Directive with the DFI.

The Supervisory Directive contains provisions concerning (i) the management and directors of Anchor Bank; (ii) restrictions on paying dividends; (iii) reductions of classified assets; (iv) maintaining Tier 1 capital in an amount equal to or exceeding 10% of Anchor Bank's total assets; (v) policies concerning the allowance for loan and lease losses ("ALLL"); and (vi) requirements to furnish a revised three-year business plan to improve Anchor Bank's profitability and progress reports to the FDIC and DFI.

Management and the Board of Directors have and will be taking action and implementing programs to comply with the requirements of the Supervisory Directive. In particular, the Board of Directors has increased its participation in the affairs of Anchor Bank and assumed full responsibility for the formulation and monitoring of its policies and objectives, including the development and implementation of actions, plans, policies and procedures to improve Anchor Bank's operations and financial condition. In addition, we also have added experienced personnel to the department that monitors our loans to enable us to better identify problem loans in a timely manner and reduce our exposure to further deterioration in asset quality.

Anchor Bank has also been notified that it must notify the FDIC and DFI in writing at least 30 days prior to certain management changes. These changes include the addition or replacement of a board member, or the employment or change in responsibilities of anyone who is, who will become, or who performs the duties of a senior executive officer. In addition prior to entering into any agreement to pay and prior to making any golden parachute payment or excess nondiscriminatory severance plan payment to any institution-affiliated party, Anchor Bank must file an application to obtain the consent of the FDIC. For additional details, see Item 1A., "Risk Factors - Risks Related to Our Business - We are subject to increased regulatory scrutiny and are subject to certain business limitations. Further, we may be subject to more severe future regulatory enforcement actions if our financial condition or performance weakens further."

Anchor Bank believes that it is in compliance with the requirements set forth in the Supervisory Directive.

Market Area

Anchor Bank is a community-based financial institution primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, and Mason counties. Prior to 2007 we also had conducted lending operations in the Portland, Oregon metropolitan area. Our lending activities have been materially limited in recent periods as we focused on reducing our nonperforming assets. Since the latter half of 2007, depressed economic conditions have prevailed in portions of the United States, including Western Washington and the Portland, Oregon metropolitan area, which have experienced substantial home price declines, lower levels of existing home sale activity, increased foreclosures and above average unemployment rates. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in our five-county market area was $168,560, which was a 28.4% decline compared to the quarter ended September 30, 2007. Existing home sales in our five-county primary market area for the quarter ended June 30, 2013 totaled $19.1 million, which reflected a 12.1% decrease compared to the quarter ended September 30, 2007. Using data from the FDIC, foreclosures as a percentage of all mortgage loans in the State of Washington increased from approximately 0.32% as of September 2007 to approximately 0.70% for June 2013. According to the Department of Labor, the unemployment rate in our five-county primary market area averaged 10.4% during June 2013 compared to 11.2% during June 2012, and an average of 6.2% during September 2007. These unemployment rates are higher than the national unemployment rates of 7.6%, 8.9% and 4.5%, as of June 2013, June 2012 and September 2007, respectively. A continuation of the overall economic weakness in the counties in our market area could negatively impact our lending opportunities and profitability.

Grays Harbor County has a population of 72,793 and a median household income of $40,074 according to the latest 2012 information available from the U.S. Census Bureau. The economic base in Grays Harbor has been historically dependent on the timber and fishing industries. Other industries that support the economic base are tourism, manufacturing, agriculture, shipping, transportation and technology. The 2013 estimated median family income as provided by data from the FDIC was $54,300. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in Grays Harbor County was $112,300 compared to $115,600 for the quarter ended June 30, 2012, and represents a decline of 37.6% from the median home price of $180,000 for the quarter ended September 30, 2007. In addition, existing home sales in Grays Harbor County for the quarter ended June 30, 2013 declined by 20.6% from the total for the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Grays Harbor County decreased to 12.5% at June 30, 2013 from 13.2% at June 30, 2012. We have six branches (including our home office) located throughout this county.

Thurston County has a population of 255,913 and a median household income of $57,837 according to the latest 2012 information available from the U.S. Census Bureau. Thurston County is home of Washington State’s capital (Olympia) and its economic base is largely driven by state government related employment. The 2012 estimated median family income for Thurston County as provided by data from the FDIC was $77,300. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in Thurston County was $217,100 compared to $225,000 for the quarter ended June 30, 2012, and represents a 19.6% decline from the median home price of $270,000 for the quarter ended September 30, 2007. In addition, existing home sales in Thurston County for the quarter ended June 30, 2013 declined by 26.9% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Thurston County area decreased to 7.8% at June 30, 2013 from 8.3% at June 30, 2012. We currently have two branches in Thurston County. Thurston County has a stable economic base primarily attributable to the state government presence.

Lewis County has a population of 79,017 and a median household income of $42,513 according to the latest 2012 information available from the U.S. Census Bureau. The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services. The 2013 estimated median family income for Lewis County as provided by data from the FDIC was $54,600. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in Lewis County was $154,000 compared to $158,000 for the quarter ended June 30, 2012, and represents a 28.1% decline from the median home price of $214,100 for the quarter ended September 30, 2007. In addition, existing home sales in Lewis County for the quarter ended June 30, 2013 declined by 31.1% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Lewis County decreased to 12.4% at June 30, 2013 from 13.4% at June 30, 2012. We have one branch located in Lewis County.

Pierce County is the second most populous county in the state and has a population of 801,981 and a median household income of $55,899 according to the latest 2012 information available from the U.S. Census Bureau. The economy in Pierce County is diversified with the presence of military related government employment (Lewis/McChord JBLM Base), transportation and shipping employment (Port of Tacoma), and aerospace related employment (Boeing). The 2013 estimated median family income for Pierce County as provided by data from the FDIC was $70,200. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in Pierce County was $201,600 compared to $195,200

for the quarter ended June 30, 2012, and represents a 30.2% decline from the median home price of $288,700 for the quarter ended September 30, 2007. In addition, existing home sales in Pierce County for the quarter ended June 30, 2013 declined by 2.7% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Pierce County area decreased to 8.9% at June 30, 2013 from 9.8% at June 30, 2012. We have one branch located in Pierce County.

Mason County has a population of 61,339 and a median household income of $43,912 according to the latest information available from the U.S. Department of Labor. The economic base in Mason County is supported by wood products. The 2013 estimated median family income for Mason County as provided by data from the FDIC was $60,400. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2013, the median home price in Mason County was $157,800 compared to $156,200 for the quarter ended June 30, 2012, and represents a 29.8% decline from the median home price of $224,700 for the quarter ended September 30, 2007. In addition, existing home sales in Mason County for the quarter ended June 30, 2013 declined by 8.5% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Mason County decreased to 10.4% at June 30, 2013 from 11.2% at June 30, 2012. We have one branch located in Mason County.

For a discussion regarding the competition in our primary market area, see “– Competition.”

Lending Activities

General. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences. We also originate consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington. A substantial portion of our loan portfolio is secured by real estate, either as primary or secondary collateral, located in our primary market area. As of June 30, 2013, the net loan portfolio totaled $277.5 million and represented 61.4% of our total assets. As of June 30, 2013, 26.1% of our total loan portfolio was comprised of one-to-four family loans, 9.1% of home equity loans and lines of credit, 37.7% of commercial real estate loans, 13.6% of multi-family real estate loans, 6.4% of commercial business loans, 3.9% of construction and land loans, 2.7% of unsecured consumer loans and 0.7% of automobile loans.

As a state chartered savings bank chartered under Washington law, we are subject to 20% of total risk based capital as our statutory lending limit. At June 30, 2013, there were no borrowing relationships that were over the legal amount. Our ten largest credit relationships at June 30, 2013 were as follows:

•	Our largest single borrower relationship totaled $8.2 million and consisted of three loans secured by office and light industrial buildings;

•	The second largest borrower relationship totaled $6.0 million and consisted of 12 loans which range in size from $1.5 million to a line of credit of $5,000 that had a zero balance at that date. Collateral consists primarily of owner- and non-owner-occupied light industrial commercial real estate;

•	The third largest borrower relationship totaled $5.7 million, secured by a purchased minority interest in a national shared loan secured by an entertainment, hospitality and dining complex;

•	The fourth largest borrower relationship totaled $5.6 million and consisted of three loans secured by hospitality and commercial retail property;

•	The fifth largest borrower relationship totaled $5.3 million and consisted of 38 loans, each of which was secured by a single family rental house, with an average balance of $143,000;

•	The sixth largest borrower relationship totaled $5.2 million and consisted of three loans secured by commercial income-producing properties;

•	The seventh largest borrower relationship is one loan for $4.8 million, secured by a church complex;

•	The eighth largest borrower relationship is one loan for $4.5 million, secured by a commercial retail building;

•	The ninth largest borrower relationship totaled $4.3 million and consisted of four loans secured by multi-family and single family residential properties; and

•	The tenth largest borrower relationship totaled $4.3 million and consisted of five loans secured by industrial property and commercial equipment.

All of these relationships include personal guarantees except for the third largest borrower relationship which is a minority interest in a shared national credit. All of the properties securing these loans are located in our primary or secondary market area. These loans were all performing according to their repayment terms as of June 30, 2013.

Loan Portfolio Analysis. The following table sets forth the composition of Anchor Bank’s loan portfolio by type of loan at the dates indicated:

	At June 30,
	2013				2012				2011				2010				2009
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Real Estate:
One-to-four family	$	73,901	26.1	%	$	82,709	28.0	%	$	97,133	29.1	%	$	112,835	27.7	%	$	114,823	22.9	%
Multi-family	38,425		13.6		42,032		14.2		42,608		12.8		45,983		11.3		52,661		10.5
Commercial	106,859		37.7		97,306		32.9		105,997		31.8		118,492		29.1		123,902		24.7
Construction	5,641		2.0		6,696		2.3		11,650		3.5		36,812		9.0		106,163		21.2
Land loans	5,330		1.9		7,062		2.4		6,723		2.0		7,843		1.9		9,211		1.8
Total real estate	$	230,156	81.2	%	$	235,805	79.8	%	$	264,111	79.2	%	$	321,965	79.1	%	$	406,760	81.2	%
Consumer:
Home equity	25,835		9.1		31,504		10.7		35,729		10.7		42,446		10.4		49,028		9.8
Credit cards	4,741		1.7		5,180		1.8		7,101		2.1		7,943		2.0		8,617		1.7
Automobile	1,850		0.7		3,342		1.1		5,547		1.7		8,884		2.2		14,016		2.8
Other	2,723		1.0		2,968		1.0		3,595		1.1		4,160		1.0		5,142		1.0
Total consumer	35,149		12.4		42,994		14.6		51,972				63,433		15.6		76,803		15.3
Commercial business	18,211		6.4		16,618		5.6		17,268		5.2		21,718		5.3		17,172		3.4
Total loans	283,516		100.0	%	295,417		100.0	%	333,351		100.0	%	407,116		100.0	%	500,735		100.0	%
Less:
Deferred loan fees	915				605				648				917				1,315
Allowance for loan losses	5,147				7,057				7,239				16,788				24,463
Loans receivable, net	$	277,454			$	287,755			$	325,464			$	389,411			$	474,957

The following table shows the composition of Anchor Bank’s loan portfolio by fixed- and adjustable-rate loans at the dates indicated:

	At June 30,
	2013				2012				2011				2010				2009
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
FIXED-RATE LOANS	(Dollars in thousands)
Real estate:
One-to-four family	$	58,639	20.7	%	$	69,635	23.6	%	$	80,938	24.3	%	$	94,872	23.3	%	$	95,931	19.2	%
Multi-family	29,603		10.4		33,174		11.2		32,967		9.9		33,606		8.3		42,032		8.4
Commercial	42,128		14.9		57,449		19.4		71,493		21.4		86,667		21.3		94,567		18.9
Land loans	4,316		1.5		6,045		2.0		5,869		1.8		7,244		1.8		8,759		1.7
Total real estate	134,686		47.5		166,303		56.3		191,267		57.4		222,389		54.6		241,289		48.2
Real estate construction:
One-to-four family	—		—		449		0.2		1,481		0.4		9,481		2.3		27,671		5.5
Multi-family	2,254		0.8		1,370		0.5		—		—		—		—		—		—
Commercial	88		—		4,044		1.4		3,642		1.1		7,690		1.9		5,809		1.2
Total real estate construction	2,342		0.8		5,863		2.0		5,123		1.5		17,171		4.2		33,480		6.7
Consumer:
Home equity	15,848		5.6		20,805		7.0		25,806		7.7		31,074		7.6		36,260		7.2
Automobile	1,850		0.7		3,342		1.1		5,547		1.7		8,884		2.2		14,016		2.8
Other	2,723		1.0		2,968		1.0		3,510		1.1		4,084		1.0		5,078		1.0
Total consumer	20,421		7.2		27,115		9.2		34,863		10.5		44,042		10.8		55,354		11.1
Commercial business	11,050		3.9		9,690		3.3		8,460		2.5		9,226		2.3		8,721		1.7
Total fixed-rate loans	$	168,499	59.4		$	208,971	70.7		$	239,713	71.9		$	292,828	71.9		$	338,844	67.7
ADJUSTABLE-RATE LOANS
Real estate:
One-to-four family	$	15,262	5.4		$	13,074	4.4		$	16,195	4.9		$	17,963	4.4		$	18,892	3.8
Multi-family	8,822		3.1		8,858		3.0		9,641		2.9		12,377		3.0		10,629		2.1
Commercial	64,731		22.8		39,857		13.5		34,504		10.4		31,825		7.8		29,335		5.9
Land loans	1,014		0.4		1,017		0.3		854		0.3		599		0.1		452		0.1
Total real estate	89,829		31.7		62,806		21.3		61,194		18.4		62,764		15.4		59,308		11.8
Real estate construction:
One-to-four family	858		0.3		—		—		3,829		1.1		7,299		1.8		37,187		7.4
Multi-family	1,270		0.4		—		—		—		—		—		—		2,493		0.5
Commercial	1,171		0.4		833		0.3		2,698		0.8		12,342		3.0		33,003		6.6
Total real estate construction	3,299		1.2		833		0.3		6,527		2.0		19,641		4.8		72,683		14.5

	At June 30,
	2013				2012				2011				2010				2009
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Consumer:
Home equity	9,987		3.5		10,699		3.6		9,923		3.0		11,372		2.8		12,768		2.6
Automobile	—		—		—		—		—		—		—		—		—		—
Credit cards	4,741		1.7		5,180		1.8		7,101		2.1		7,943		2.0		8,617		1.7
Other	—		—		—		—		85		—		76		—		64		—
Total consumer	14,728		5.2		15,879		5.4		17,109		5.1		19,391		4.8		21,449		4.3
Commercial business	7,161		2.5		6,928		2.3		8,808		2.6		12,492		3.1		8,451		1.7
Total adjustable rate loans	115,017		40.6		86,446		29.3		93,638		28.1		114,288		28.1		161,891		32.3
Total loans	283,516		100.0	%	295,417		100.0	%	333,351		100.0	%	407,116		100.0	%	500,735		100.0	%
Less:
Deferred loan fees	915				605				648				917				1,315
Allowance for loan losses	5,147				7,057				7,239				16,788				24,463
Loans receivable, net	$	277,454			$	287,755			$	325,464			$	389,411			$	474,957

One-to-Four Family Real Estate Lending. As of June 30, 2013, $73.9 million, or 26.1%, of our total loan portfolio consisted of permanent loans secured by one-to-four family residences of which $4.8 million secured by non-owner occupied residential properties were nonperforming. We originate both fixed rate and adjustable rate loans in our residential lending program and use Freddie Mac underwriting guidelines. None of our residential loan products allow for negative amortization of principal. We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs. Although we have sold the majority of our residential loans over the last two years, we do not sell all qualified loans on the secondary market as we hold in our portfolio many residential loans that may not meet all Freddie Mac guidelines yet meet our investment and liquidity objectives.

At June 30, 2013, $58.6 million of this loan portfolio consisted of fixed rate loans which was 79.3% of our total one-to-four family portfolio and 20.7% of our total loans at that date. Specifically, we offer fixed rate, residential mortgages from 10 to 30 year terms and we use Freddie Mac daily pricing to set our pricing. Borrowers have a variety of buy-down options with each loan and most mortgages have a duration of less than ten years. The average loan duration is a function of several factors, including real estate supply and demand, current interest rates, expected future rates and interest rates payable on outstanding loans.

Additionally, we offer a full range of adjustable rate mortgage products. These loans offer three, five or seven year fixed-rate terms with annual adjustments thereafter. The annual adjustments are limited to increases or decreases of no more than two percent and carry a typical lifetime cap of five percent above the original rate. At this time, we hold these adjustable rate mortgages in our portfolio. Similar to fixed rate loans, borrower demand for adjustable rate mortgage loans is a function of the current rate environment, the expectations of future interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed rate mortgage loans and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

While adjustable rate mortgages in our loan portfolio help us reduce our exposure to changes in interest rates, it is possible that, during periods of rising interest rates, the risk of default on adjustable rate mortgage loans may increase as a result of annual repricing and the subsequent higher payment to the borrower. In some rate environments, adjustable rate mortgages may be offered at initial rates of interest below a comparable fixed rate and could result in a higher risk of default or delinquency. Another consideration is that although adjustable rate mortgage loans allow us to decrease the sensitivity of our asset base as a result of changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Our historical experience with adjustable rate mortgages has been very favorable. We do not, however, offer adjustable rate mortgages with initial teaser rates. At June 30, 2013, $15.3 million of our permanent one-to-four family mortgage loans were adjustable rate loans which was 20.7% of our total one-to-four family loan portfolio and 5.4% of our total loans at that date.

Regardless of the type of loan, we underwrite our residential loans based on Freddie Mac's Loan Prospector guidelines. This underwriting considers a variety of factors such as credit history, debt to income, property type, loan-to-value, and occupancy, to name a few. Generally, we use the same Freddie Mac criteria for establishing maximum loan-to-values and also consider whether a transaction is a purchase, rate and term refinance, or cash-out refinance. For loans above 80% loan-to-value, we typically require private mortgage insurance in order to reduce our risk exposure should the loan default. Regardless of the loan-to-value, our one-to-four family loans are appraised by independent fee appraisers that have been approved by us and generally carry no prepayment restrictions. We also require title insurance, hazard insurance, and if necessary, flood insurance in an amount not less than the current regulatory requirements.

We also have additional products designed to make home ownership available to qualified low to moderate income borrowers. The underwriting guidelines for these programs are usually more flexible in the areas of credit or work history. For example, some segments of the low to moderate income population have non-traditional credit histories and pay cash for many of their consumer purchases. They may also work in seasonal industries that do not offer a standard work schedule or salary. Loans such as Freddie Mac's “Homestart Program” are designed to meet this market's needs and often require a borrower to show a history of saving and budgeting. These types of programs also provide education on the costs and benefits of homeownership. We plan on continuing to offer these and other programs which reach out to qualifying borrowers in all the markets we serve.

The following table describes certain credit risk characteristics of Anchor Bank’s one-to-four family loan portfolio held for investment as of June 30, 2013:

	Outstanding Principal Balance (1)		Weighted- Average FICO (2)	Weighted- Average LTV (3)		Weighted- Average Seasoning (4)
	(Dollars in thousands)
Interest only	$	2,698	709	97.1	%	41
Stated income (5)	538		725	75.2		59
FICO less than or equal to 660 (6)	5,265		621	77.1		61

__________

(1)	The outstanding balance presented in this table may overlap more than one category.

(2)	The FICO score represents the creditworthiness, as reported by an independent third party, of a borrower based on the borrower’s credit history. A higher FICO score indicates a greater degree of creditworthiness.

(3)

LTV (loan-to-value) is the ratio calculated by dividing the original loan balance by the original appraised value of the real estate collateral. As a result of the decline in single-family real estate values, the weighted-average LTV presented above may be substantially understated compared to the current market value.

(4)	Seasoning describes the number of months since the funding date of the loans.

(5)	Stated income is defined as a borrower provided level of income which was not subject to verification during the loan origination process.

(6)	These loans are considered “subprime” as defined by the FDIC.

Anchor Bank does not actively engage in subprime lending, either through advertising, marketing, underwriting and/or risk selection, and has no established program to originate or purchase subprime loans to be held in its portfolio. Residential mortgage loans identified as subprime, with FICO scores of less than 660, were originated and managed in the ordinary course of business, and totaled $5.3 million at June 30, 2013, representing 1.9% of total loans, 7.1% of one-to-four family mortgage loans, and 10.0% of Tier 1 Capital. Our one-to-four family mortgage loans identified as subprime based on the borrower’s FICO score at time the loan was originated do not represent a material part of our lending activity. Accordingly, these loans are identified as “exclusions” as defined pursuant to regulatory guidance issued by the FDIC in Financial Institutions Letter FIL-9-2001.

Construction and Land Loans. We had been an active originator of real estate construction loans in our market area since 1990 although we have been significantly reducing the balance of these loans since 2009 in accordance with the Order and limited new loan originations. At June 30, 2013, our construction loans amounted to $5.6 million, or 2.0% of the total loan portfolio, most of which is for the construction of commercial and multi-family real estate. Prior to fiscal 2010, a substantial number of our speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans were referred through a broker relationship in Portland, Oregon, and were secured by first lien construction deeds of trust on properties in the greater Portland, Oregon metropolitan area. Much of the increase in our nonperforming assets since 2007 was related to these construction loans. We originated $2.7 million, $32.9 million and $48.9 million of construction loans through this broker during the years ended June 30, 2009, 2008, 2007, respectively, of which none remained outstanding at June 30, 2013.

We generally provide an interest reserve for funds on builder construction loans that have been advanced. Interest reserves are a means by which a lender builds in, as a part of the loan approval and as a component of the cost of the project, the amount of the monthly interest required to service the debt during the construction period of the loan.

At June 30, 2013, our construction loan portfolio did not contain any loans which had been previously extended or renewed and which included unfunded interest reserves. Our entire construction loan portfolio at June 30, 2013 consisted of loans requiring interest only payments, six of which totaled $5.4 million and were relying on the interest reserve to make this payment. At June 30, 2013, no construction loans were delinquent. During the years ended June 30, 2013, 2012, and 2011, one, seven and 22 construction loans were charged-off totaling $105,000, $561,000 and $8.9 million, respectively.

At the dates indicated, the composition of our construction portfolio was as follows:

	At June 30,
	2013		2012		2011
	(In thousands)
One-to-four family:
Speculative	$	589	$	308	$	3,984
Permanent	—		—		1,326
Custom	269		141		2,053
Land acquisition and development loans	—		833		—
Multi-family	3,524		1,370		—
Commercial real estate:
Construction	1,259		4,044		4,287
Total construction (1)	$	5,641	$	6,696	$	11,650

(1)	Loans in process for these loans at June 30, 2013, 2012 and 2011 were $5.4 million, $1.9 million and $1.4 million, respectively.

For the year ended June 30, 2013, we originated one builder construction loan to fund the construction of one-to-four family properties totaling $1.8 million, as compared to none during the years ended June 30, 2012 and 2011 and the origination of 17 loans during the year ended June 30, 2009, aggregating $6.0 million. We originate construction and site development loans to experienced contractors and builders in our market area primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $200,000 to $500,000. All builders were qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 75% of the appraised market value or sales price upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. We also require that builders maintain adequate insurance coverage. Maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally did not exceed 18 months for residential subdivision development loans at the time of origination. Our residential construction loans typically have adjustable rates of interest based on The Wall Street Journal prime rate and during the term of construction, the accumulated interest is added to the principal of the loan through an interest reserve. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant. At June 30, 2013, our largest builder and sole remaining relationship consisted of one loan for $1.8 million, including $1.2 million which is undisbursed.

We have made, from time to time, construction loans for commercial development projects. These projects include multi-family, apartment, retail, office/warehouse and office buildings. These loans generally have an interest-only phase during construction, rely on an interest reserve to fund interest payments and generally convert to permanent financing when construction is completed. Disbursement of funds is at our sole discretion and is based on the progress of the construction. The maximum loan-to-value limit applicable to these loans is generally 75% of the appraised post-construction value. Additional analysis and underwriting of these loans typically results in lower loan-to-value ratios based on the debt service coverage analysis, including our interest rate and vacancy stress testing. Our target minimum debt coverage ratio is 1.20 for loans on these projects. At June 30, 2013, our portfolio of construction loans for commercial projects included six loans totaling $4.8 million, in addition $3.9 million which is undisbursed. These loans consisted of three multi-family complexes, a commercial industrial property, a school, and a restaurant all located in Washington.

Properties which are the subject of a construction loan are monitored for progress through our construction loan administration department, and include monthly site inspections, inspection reports and photographs provided by a qualified staff inspector or a licensed and bonded third party inspection service contracted by and for us. If we make a determination that there is deterioration, or if the loan becomes nonperforming, we halt any disbursement of those funds identified for use in paying interest and bill the borrower directly for interest payments. Construction loans with interest reserves are underwritten similarly to construction loans without interest reserves.

We have in the past originated land acquisition and development loans to local contractors and developers for the purpose of holding the land for future development. These loans are secured by a first lien on the property, are generally limited up to 75% of the lower of the acquisition price or the appraised value of the land or sales price, and generally have a term of one to two years

with a fixed interest rate based on the prime rate. Our land acquisition and development loans are generally secured by property in our primary market area. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste. At June 30, 2013, we had no land acquisition and development loans.

We also originate land loans which are typically made to individual consumers to buy a lot or parcel of land for the future construction of the buyer’s primary residence and are included in “land loans”. At June 30, 2013, our land loans to individuals totaled $5.3 million or 1.9% of the total loan portfolio of which $734,000 were delinquent more than 90 days and nonaccrual status.

Construction lending contains the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, no payment from the borrower is generally required since the accumulated interest is added to the principal of the loan through an interest reserve. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can be significantly impacted by the supply and demand conditions. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property rather than the ability of the borrower or guarantor themselves to repay principal and interest.

Commercial and Multi-Family Real Estate Lending. As of June 30, 2013, $145.3 million, or 51.3% of our total loan portfolio was secured by commercial and multi-family real estate property. Of this amount, $32.0 million was identified as owner occupied commercial real estate, and the remaining $124.3 million, or 43.8% of our total loan portfolio was secured by income producing, or non-owner occupied commercial real estate. Our commercial real estate loans include loans secured by hotels and motels, office space, office/warehouse, retail strip centers, self-storage facilities, mobile home parks, medical and professional office buildings, and assisted living facilities in our market area. As of June 30, 2013, commercial real estate loans totaled $106.9 million, or 37.7% of our portfolio and multi-family real estate totaled $38.4 million, or 13.6% of our portfolio. These loans generally are priced at a higher rate of interest than one-to-four family loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one-to-four family loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

The average loan size in our commercial and multi-family real estate portfolio was $765,000 as of June 30, 2013. We target individual commercial and multi-family real estate loans to small and mid-size owner occupants and investors in our market area, between $1.0 million and $6.0 million. At June 30, 2013, the largest commercial loan in our portfolio was a $5.7 million purchased minority interest in a national shared loan secured by a dining, entertainment, and hotel facility, located near Olympia, Washington. Our largest multi-family loan as of June 30, 2013, was a 75 unit apartment complex with an outstanding principal balance of $2.9 million, located in Pacific, Washington. These loans were performing according to their repayment terms as of June 30, 2013.

We offer both fixed and adjustable rates on commercial and multi-family real estate loans. Loans originated on a fixed rate basis generally are originated at terms up to ten years, with amortization terms up to 30 years. As of June 30, 2013, we had $29.6 million and $8.8 million in fixed and adjustable rate multi-family loans, respectively, and $42.1 million and $64.7 million in fixed and adjustable rate commercial real estate loans, respectively.

Commercial and multi-family real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family and commercial real estate loans are generally priced utilizing the applicable FHLB or U.S. Treasury Term Borrowing Rate plus an acceptable margin. These loans are typically amortized for up to 30 years with a prepayment penalty. The maximum loan-to-value ratio for commercial and multi-family real estate loans is generally 75%. We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us. We require our commercial and multi-family real estate loan borrowers with outstanding balances in excess of $750,000, or a loan-to-value ratio in excess of 60% to submit annual financial statements and rent rolls on the subject property. The properties that fit within this profile are also inspected annually, and an inspection report and photograph are included. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by commercial and multi-family properties.

The following is an analysis of the types of collateral securing our commercial real estate and multi-family loans at June 30, 2013:

Collateral	Amount		Percent of Total
	(Dollars in thousands)
Multi-family	$	38,425	26.4	%
Office	25,592		17.6
Hospitality	9,132		6.3
Mini storage	29,494		20.3
Mobile home park	4,145		2.9
Congregate care	6,642		4.6
Retail	4,912		3.4
Education/Worship	6,222		4.3
Other non-residential	20,720		14.3
Total	$	145,284	100.0	%

If we foreclose on a multi-family or commercial real estate loan, our holding period for the collateral typically is longer than for one-to-four family mortgage loans because there are fewer potential purchasers of the collateral. Additionally, as a result of our increasing emphasis on this type of lending, a portion of our multi-family and commercial real estate loan portfolio is relatively unseasoned and has not been subjected to unfavorable economic conditions. As a result, we may not have enough payment history with which to judge future collectability or to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, our multi-family and commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if we make any errors in judgment in the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. At June 30, 2013, there were no commercial real estate loans or multi-family loans that were delinquent in excess of 90 days and on nonaccrual status. There were no commercial real estate loan charge offs for the year ended June 30, 2013. Commercial real estate loan charge offs for the years ended June 30, 2012 and 2011 were $571,000 and $584,000, respectively. There were no multi-family loan charge-offs during these periods.

Consumer Lending. We offer a variety of consumer loans, including home equity loans and lines of credit, automobile loans, credit cards and personal lines of credit. At June 30, 2013, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit, which totaled $25.8 million, or 9.1%, of the total loan portfolio. Our home equity loans are risk priced using credit score, loan-to-value and overall credit quality of the applicant. Home equity loans are made for, among other purposes, the improvement of residential properties, debt consolidation and education expenses. The majority of these loans are secured by a second deed of trust on residential property. Fixed rate terms are available up to 240 months, and our equity line of credit is a prime rate based loan with the ability to lock in portions of the line for five to 20 years. Maximum loan-to-values are dependent on creditworthiness and may be originated at up to 95% of collateral value.

Our credit card portfolio includes both VISA and MasterCard brands, and totaled $4.7 million, or 1.7% of the total loan portfolio at June 30, 2013. We have been offering credit cards for more than 20 years but no new credit cards were issued during the last three fiscal years. All of our credit cards have interest rates and credit limits determined by the creditworthiness of the borrower. We use credit bureau scores in addition to other criteria such as income in our underwriting decision process on these loans.

Our automobile loan portfolio totaled $1.9 million, or 0.7% of the total loan portfolio at June 30, 2013. We offer several options for vehicle purchase or refinance with a maximum term of 84 months for newer vehicles and 72 months for older vehicles. As with home equity loans, our vehicle and recreational vehicle loans are risk priced based on creditworthiness, loan term and loan-to-value. We currently access a Carfax Vehicle Report to ensure that the collateral being loaned against is acceptable and to protect borrowers from a “lemon” or other undesirable histories. Other consumer loans, consisting primarily of unsecured personal lines of credit totaled $2.7 million or 1.0% of our total loan portfolio at June 30, 2013.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the

borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. These risks are not as prevalent with respect to our consumer loan portfolio because a large percentage of the portfolio consists of home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one-to-four family mortgage loans. Nevertheless, home equity lines of credit have greater credit risk than one-to-four family mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold and do not have private mortgage insurance coverage. At June 30, 2013, consumer loans of $448,000 were delinquent in excess of 90 days or in nonaccrual status. Consumer loans of $1.2 million were charged off during the year ended June 30, 2013 compared to $1.4 million and $1.9 million of consumer loans that were charged-off during the years ended June 30, 2012 and 2011, respectively.

Commercial Business Lending. These loans are primarily originated as conventional loans to business borrowers, which include lines of credit, term loans and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment and general investments. Loan terms vary from one to seven years. The interest rates on such loans are generally floating rates indexed to The Wall Street Journal prime rate. Inherent with our extension of business credit is the business deposit relationship which frequently includes multiple accounts and related services from which we realize low cost deposits plus service and ancillary fee income.

Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market area. Our commercial business lending policy includes credit file documentation and analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans. At June 30, 2013, commercial business loans totaled $18.2 million, or 6.4% of our loan portfolio comprised of 161 loans in 89 different business classifications as identified by the North American Industrial Classification System. The largest commercial business relationship at June 30, 2013 included three loans which totaled $1.7 million to a borrower located in Washington secured by the assets of a machine shop.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. For the years ended June 30, 2013 and 2012, Anchor Bank charged off $1.5 million and $63,000 from its commercial business loan portfolio.

Loan Maturity and Repricing. The following table sets forth certain information at June 30, 2013 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Beyond 10 Years		Total
	(In thousands)
Real Estate:
One-to-four family	$	4,231	$	4,606	$	4,589	$	4,775	$	55,700	$	73,901
Multi-family	992		8,041		3,108		14,351		11,933		38,425
Commercial	9,515		26,340		12,126		47,467		11,411		106,859
Construction	5,611		30		—		—		—		5,641
Land loans	1,599		1,786		971		485		489		5,330
Total real estate	21,948		40,803		20,794		67,078		79,533		230,156
Consumer:
Home equity	26		1,432		5,182		9,854		9,341		25,835
Credit cards	4,741		—		—		—		—		4,741
Automobile	113		465		494		385		393		1,850
Other	394		459		289		371		1,210		2,723
Total consumer	5,274		2,356		5,965		10,610		10,944		35,149
Commercial business	4,557		4,519		3,665		5,218		252		18,211
Total	$	31,779	$	47,678	$	30,424	$	82,906	$	90,729	$	283,516

The following table sets forth the dollar amount of all loans due after June 30, 2014, which have fixed interest rates and have floating or adjustable interest rates:

	Fixed Rates		Floating or Adjustable Rates		Total
	(In thousands)
Real Estate:
One-to-four family	$	54,490	$	15,180	$	69,670
Multi-family	28,611		8,822		37,433
Commercial	33,507		63,837		97,344
Construction	10		2,441		2,451
Land loans	2,717		1,014		3,731
Total real estate	119,335		91,294		210,629

Consumer:
Home equity	15,822		9,987		25,809
Automobile	1,737		—		1,737
Other	2,329		—		2,329
Total consumer	19,888		9,987		29,875

Commercial business	9,044		4,610		13,654
Total	$	148,267	$	105,891	$	254,158

Loan Solicitation and Processing Loan originations are obtained from a variety of sources, including direct mail and telephone solicitation, trade and business organization participation. Our management and staff are also involved in a wide variety of professional, charitable, service and social organizations within the communities in which we operate, and our branch managers, loan representatives and business bankers solicit referrals from existing clients and new prospects. We also originate and cross sell loans and services to our existing customer base as well as our walk-in/call-in/internet traffic as a result of our long standing community presence and broad based advertising efforts. Loan processing and underwriting, closing and funding are determined

by the type of loan. Consumer loans, including conforming one-to-four family mortgage loans are processed, underwritten, documented and funded through our centralized processing and underwriting center located in Aberdeen, Washington. Commercial business loans, including commercial and multi-family real estate loans and any non-conforming one-to-four family mortgage loans are processed and underwritten in one of our two Business Banking Center offices located in Lacey and Aberdeen, Washington. Our consumer and residential loan underwriters have specific approval authority, and requests that exceed such authority are referred to the appropriate supervisory level.

Depending upon the size of the loan request and the total borrower credit relationship with us, loan decisions may include the Executive Loan Committee, Senior Loan Committee, and/or Board of Directors. Credit relationships up to $4 million may be approved by the Executive Loan Committee. Loans or aggregated credit relationships which exceed $4 million must be approved by the Board of Directors, either in the form of its Senior Loan Committee with an authority limit of $6 million, or by the full membership of the Board.

Commercial and multi-family real estate loans can be approved up to $250,000 by the Chief Financial Officer, and up to $500,000 by any of the Credit Administrator, Business Banking Manager or Loan Operations Officer. These loans can be approved up to $1.0 million by either the President/Chief Executive Officer or Chief Lending Officer, and up to $2.0 million with the combination of both President/Chief Executive Officer and Chief Lending Officer. Our Executive Loan Committee, which presently consists of the President/Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Credit Administrator, Business Banking Manager, Note Department Manager, and Loan Operations Manager is authorized to approve loans to one borrower or a group of related borrowers up to $4.0 million. Loans over $4.0 million must be approved by the Senior Loan Committee of the Board with a limit of $6.0 million, or the full Board of Directors.

Loan Originations, Servicing, Purchases and Sales. During the years ended June 30, 2013 and 2012, our total loan originations were $93.5 million and $55.8 million, respectively.

One-to-four family loans are generally originated in accordance with the guidelines established by Freddie Mac, with the exception of our special community development loans under the Community Reinvestment Act. We utilize the Freddie Mac Loan Prospector, an automated loan system to underwrite the majority of our residential first mortgage loans (excluding community development loans). The remaining loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our Board-approved loan policy.

We actively sell the majority of our residential fixed rate first mortgage loans to the secondary market at the time of origination. During the years ended June 30, 2013 and 2012, we sold $22.6 million and $20.6 million, respectively, in whole loans to the secondary market and $1.7 million and $4.7 million, respectively, were securitized. The increase in whole loan sales and securitizations was attributable to an increase in the origination of one-to-four family loans to $28.1 million from $26.8 million during the years ended June 30, 2013 and 2012, respectively. Our secondary market relationship is with Freddie Mac. We generally retain the servicing on the loans we sell into the secondary market. Loans are generally sold on a non-recourse basis. As of June 30, 2013, our residential loan servicing portfolio was $109.8 million.

The following table shows total loans originated, purchased, sold and repaid during the periods indicated:

	Year Ended June 30,
	2013			2012			2011
Loans originated:	(In thousands)
Real estate:
One-to-four family	$	28,120		$	26,840		$	15,819
Multi-family	1,069			6,682			1,976
Commercial	41,157			12,415			3,101
Construction	13,632			4,385			1,319
Land loans	252			117			355
Total real estate	84,230			50,439			22,570
Consumer:
Home equity	283			204			397
Credit cards	—			—			—
Automobile	221			295			467
Other	562			615			840
Total consumer	1,066			1,114			1,704
Commercial business	8,238			4,284			6,549
Total loans originated	93,534			55,837			30,823
Loans sold:
One-to-four family	22,566			20,641			15,503
Commercial real estate	—			—			—
Participation loans	—			—			—
Total loans sold	22,566			20,641			15,503
Principal repayments	79,419			55,030			46,678
Loans securitized	1,069			4,682			—
Transfer to real estate owned	5,365			11,810			11,615
Increase (decrease) in other items, net	(4,806		)	(1,071		)	(20,749		)
Loans held for sale	222			312			225
Net increase (decrease) in loans receivable, net	$	(19,913	)	$	(37,709	)	$	(63,947	)

Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate related products. Loan fees generally represent a percentage of the principal amount of the loan that is paid by the borrower. Accounting standards require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or sold are recognized as income at the time of prepayment. We had $915,000 of net deferred loan fees and costs as of June 30, 2013 compared to $605,000 and $648,000 at June 30, 2012 and 2011, respectively.

Asset Quality

The objective of our loan review process is to determine risk levels and exposure to loss. The depth of review varies by asset types, depending on the nature of those assets. While certain assets may represent a substantial investment and warrant individual reviews, other assets may have less risk because the asset size is small, the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of individual assets would expand the review process without measurable advantage to risk assessment. Asset types with these characteristics may be reviewed as a total portfolio on the basis of risk indicators such as delinquency (consumer and residential real estate loans) or credit rating. A formal review process is conducted on individual assets that represent greater potential risk. A formal review process is a total re-evaluation of the risks associated with the asset and is documented by completing an asset review report. Certain real estate-related assets must be evaluated in terms of their fair

market value or net realizable value in order to determine the likelihood of loss exposure and, consequently, the adequacy of valuation allowances.

We define a loan as being impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Large groups of smaller balance homogeneous loans such as consumer secured loans, residential mortgage loans and consumer unsecured loans are collectively evaluated for potential loss. All other loans are evaluated for impairment on an individual basis.

We generally assess late fees or penalty charges on delinquent loans of five percent of the monthly payment amount due. Substantially all fixed rate and adjustable rate mortgage loan payments are due on the first day of the month; however, the borrower is given a 15-day grace period to make the loan payment. When a mortgage loan borrower fails to make a required payment when it is due, we institute collection procedures. The first notice is mailed to the borrower on the 16th day requesting payment and assessing a late charge. Attempts to contact the borrower by telephone generally begin upon the 30th day of delinquency. If a satisfactory response is not obtained, continual follow-up contacts are attempted until the loan has been brought current. Before the 90th day of delinquency, attempts to interview the borrower are made to establish the cause of the delinquency, whether the cause is temporary, the attitude of the borrower toward the debt and a mutually satisfactory arrangement for curing the default.

When a consumer loan borrower fails to make a required payment on a consumer loan by the payment due date, we institute the same collection procedures as for our mortgage loan borrowers.

The Board of Directors is informed monthly as to the number and dollar amount of mortgage and consumer loans that are delinquent by more than 30 days, and is given information regarding classified assets.

If the borrower is chronically delinquent and all reasonable means of obtaining payments have been exercised, we will seek to recover the collateral securing the loan according to the terms of the security instrument and applicable law. In the event of an unsecured loan, we will either seek legal action against the borrower or refer the loan to an outside collection agency.

Nonperforming Assets. The following table sets forth information with respect to our nonperforming assets and restructured loans for the periods indicated.

	At June 30,
	2013			2012			2011			2010			2009
Loans accounted for on a nonaccrual basis:	(Dollars in thousands)
Real estate:
One-to-four family	$	4,758		$	1,878		$	3,113		$	3,855		$	3,803
Multi-family	—			—			—			—			—
Commercial	—			—			2,280			433			—
Construction	—			3,369			4,055			13,964			36,954
Land loans	734			109			90			—			—
Total real estate	5,492			5,356			9,538			18,252			40,757
Consumer:
Home equity	428			159			121			70			347
Credit cards	—			16			—			—			—
Automobile	2			66			63			63			190
Other	—			1			9			47			54
Total consumer	430			242			193			180			591
Commercial business	219			3,124			1,245			1,324			997
Total	6,141			8,722			10,976			19,756			42,345
Accruing loans which are contractually past due 90 days or more:
One-to-four family	—			55			44			—			—
Multi-family	—			—			—			—			—
Commercial	—			—			—			—			—
Construction	—			—			2,845			822			17,575
Land loans	—			—			—			—			—
Total real estate	—			55			2,889			822			17,575
Consumer:
Home equity	—			—			1			—			—
Credit cards	18			—			137			—			—
Automobile	—			—			—			—			—
Other	—			—			42			64			143
Total consumer	18			—			180			64			143
Commercial business	—			—			124			—			586
Total of nonaccrual and 90 days past due loans	6,159			8,722			14,169			20,642			60,649
Real estate owned	6,212			6,708			12,597			14,570			2,990
Repossessed automobiles	21			—			130			21			69
Total nonperforming assets	$	12,392		$	15,430		$	26,896		$	35,233		$	63,708
Restructured loans	$	17,469		$	15,112		$	15,034		$	13,491		$	2,670
Allowance for loan loss as a percent of nonperforming loans	83.6		%	80.9		%	51.1		%	81.3		%	40.3		%
Classified assets included in nonperforming assets	$	6,159		$	8,722		$	14,169		$	20,642		$	60,649
Nonaccrual and 90 days or more past due loans as percentage of total loans	2.2		%	3.0		%	4.3		%	5.1		%	12.1		%
Nonaccrual and 90 days or more past due loans as a percentage of total assets	1.4		%	1.9		%	2.9		%	3.8		%	9.2		%
Nonperforming assets as a percentage of total assets	2.7		%	3.3		%	5.5		%	6.5		%	9.8		%
Nonaccrued interest (1)	$	475		$	665		$	783		$	731		$	2,664

(1) Represents foregone interest on nonaccural loans.

With the exception of $734,000 in construction and land loans that were past due 90 days or more at June 30, 2013, all of our construction loans from which repayment is delayed are a result of the slowdown in the real estate market and, in many cases, a corresponding decline in the value of the collateral. As a result of a decline in home sales and value, Anchor Bank has undertaken

to re-evaluate the collectability of interest payments, the efficacy of collateral for these loans, including updated and/or new appraisals, to identify additional collateral and or curtailment opportunities with borrowers, and to update current and future exit strategies as part of its portfolio risk management.

Real Estate Owned and Other Repossessed Assets. As of June 30, 2013, the Company had 21 properties in real estate owned (“REO”) with an aggregate book value of $6.2 million compared to 71 properties with an aggregate book value of $6.7 million at June 30, 2012, and 31 properties in REO with an aggregate book value of $7.0 million at March 31, 2013. The decrease in number of properties during the twelve months ended June 30, 2013 was primarily attributable to ongoing sales of residential properties. Our largest REO property at June 30, 2013 had an aggregate book value of $3.4 million and consisted of a commercial real estate property located in Pierce County, Washington. At June 30, 2013, the Company owned 12 one-to-four family residential properties with an aggregate book value of $2.1 million, four residential building lots with an aggregate book value of $179,000, one vacant land parcel with a book value of $10,000, and four parcels of commercial real estate with an aggregate book value of $3.9 million. Our REO properties are located in Pierce County, southwest Washington and the greater Portland area of northwest Oregon, with 16 of the parcels in Washington and the remaining five in Oregon.

Restructured Loans. According to generally accepted accounting principles, we are required to account for certain loan modifications or restructurings as “troubled debt restructurings.” Our policy is to track and report all loans modified to terms not generally available in the market, except for those outside of the materiality threshold established for such tracking and reporting. Loans with principal balances of less than $50,000, and loans with temporary modifications of six months or less are deemed to be immaterial and not included within the tracking and reporting of troubled debt restructurings. In general, the modification or restructuring of a debt is considered a troubled debt restructuring if we, for economic or legal reasons related to a borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. We will modify the loan when upon completion of the residence the home is rented instead of sold, or when the borrower can continue to make interest payments and is unable to repay the loan until the property is sold as a result of current market conditions. In connection with a loan modification, we may lower the interest rate, extend the maturity date and require monthly payments when monthly payments are not otherwise required. We may also require additional collateral. All loans which are extended with rates and/or terms below market are identified as impaired loans and an appropriate allowance is established pursuant to generally accepted accounting principles. A loan guarantee, in and by itself, is not considered in either the classification of an impaired loan, the determination of the amount of the allowance or the carrying value of the loan, unless the guarantor provides additional collateral which, when independently evaluated, reduces or eliminates the conditions which caused the loan to be determined as impaired. Accordingly, the existence of a loan guarantee does not result in the carrying value of an impaired loan at a value in excess of the appraised value of the collateral. Loans which are placed in nonaccrual status and subsequently modified are not returned to accruing status until there has been at least six months of consecutive satisfactory performance. As of June 30, 2013, there were 48 loans with aggregate net principal balances of $17.5 million that we have identified as “troubled debt restructures.” In connection with these loans, a valuation allowance in the form of charged-off principal equal to $692,000 has been taken. Of these 48 loans, four loans totaling $3.6 million were not performing according to the modified repayment terms at June 30, 2013.

The existence of a guarantor is an important factor that we consider in every deteriorating credit relationship and in our determination as to whether or not to restructure the loan. Additional factors we consider include the cooperation we receive from the borrower and/or guarantor as determined by the timeliness and quality of their direct and indirect communication, including providing us with current financial information; their willingness to develop new, and report on, previously identified risk mitigation strategies; and whether we receive additional collateral. The financial wherewithal of the borrower and/or guarantor is determined through a review and analysis of personal and business financial statements, tax return filings, liquidity verifications, personal and business credit reports, rent rolls, and direct reference checks. The type of financial statements required of a borrower and/or guarantor varies based upon the credit risk and our aggregate credit exposure as it relates to the borrower and any guarantor. Audited financial statements are required for commercial business loans greater than $1.5 million and for commercial real estate loans greater than $10 million, with the level of outside independent accounting review decreasing as our risk exposure decreases. We conduct reviews of the financial condition of borrowers and guarantors at least annually for credits of $750,000 or more, and for aggregate relationships of $1.5 million or more.

At both the time of loan origination and when considering a restructuring of a loan, we also assess the guarantor's character and reputation. This assessment is made by reviewing both the duration or length of time such guarantor has been providing credit guarantees, the aggregate of the contingent liabilities of such guarantor as it relates to guarantees of additional debt provided to other lenders, and the results of direct reference checks. Cooperative and communicative borrowers and/or guarantors may create opportunities for restructuring a loan, however, this cooperation does not affect the amount of the allowance for loan losses recorded or the timing of charging off the loan.

We pursue guarantees where the cost/benefit analysis results in the likelihood of some recovery. Recoveries and settlements range from zero to 100% of the potential unmitigated loan loss, with the lower end generally being the result of a guarantor filing

bankruptcy. At June 30, 2013, we were pursuing guarantors related to three defaulted loans, and had established settlements and repayment arrangements during the past few years from an additional 25 guarantors for repayment of approximately $3.1 million of previously taken losses. These arrangements had individual remaining balances ranging from $300 to $1.2 million at June 30, 2013, and included a variety of repayment terms including principal only and principal plus negotiated interest.

Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and repayment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent and approved by senior management or the Classified Asset Committee to address the risk specifically or we may allow the loss to be charged-off against the general loan allowance. General loan allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are considered either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by our regulators, which can order the establishment of additional loss allowances.

In connection with the filing of periodic reports with the FDIC classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. On the basis of our review of our loans, as of June 30, 2013, we had classified loans of $17.3 million. The total amount classified represented 33.0% of equity capital and 3.8% of assets at June 30, 2013.

The aggregate amounts of our classified loans at the date indicated (as determined by management), were as follows:

	At June 30,
	2013		2012
	(In thousands)
Classified Loans:
Substandard	$	17,290	$	30,471
Doubtful	—		2,316
Loss	—		—
Total	$	17,290	$	32,787

Our $17.3 million of substandard loans at June 30, 2013, consisted primarily of $15.7 million of real estate secured loans and $1.5 million of consumer and commercial business loans. Of the $15.7 million of substandard loans which were real estate secured, $1.1 million were construction and land loans. The $1.1 million in substandard construction and land loans were land loans made to individuals of which $734,000 was on nonaccrual status. Also included in the total of substandard real estate secured loans at June 30, 2013 was $3.4 million of commercial real estate loans and $2.3 million of multi-family loans, secured by property located in Washington and Oregon. The balance of our substandard real estate secured loans at June 30, 2013 was $8.9 million, which consisted of loans secured by one-to-four family properties, and an additional $1.0 million in home equity loans.

Potential Problem Loans. Potential problem loans are loans that do not yet meet the criteria for identification as classified assets graded as substandard or doubtful, but where known information about the borrower causes management to have serious concerns about the ability of the borrower to comply with present loan repayment terms and may result in the loan being included as a classified asset for future periods. At June 30, 2013, we had $39.3 million, or 14.2% of our net loans that were identified as potential problem loans compared to $41.2 million or 13.9% of our net loans at June 30, 2012.

Within these problem loans were the following lending relationships:

•	a loan of $4.8 million secured by a church in Washington;

•	a relationship of $4.3 million in four loans secured by multi-family property in Washington;

•	a relationship of $3.7 million in two loans secured by residential condominiums and commercial office property in Oregon;

•	a relationship of $2.2 million in two term loans secured by multi-family property in Oregon;

•	a loan of $2.0 million secured by commercial real estate in Washington;

•	a loan of $1.9 million secured by commercial real estate in Washington; and

•	a loan of $1.4 million secured by accounts receivable and inventory of a wood preservation company in Washington.

The seven relationships described above comprise $20.3 million, or 51.7% of the potential problem loans that were identified as of June 30, 2013. All of the loans identified above are located in Western Washington and/or Portland, Oregon and were in compliance with their repayment terms at June 30, 2013.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Chief Lending Officer assesses the allowance for loan and lease losses on a monthly basis and reports to the Board of Directors no less than quarterly. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

We believe that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period and requires management to make assumptions about probable losses inherent in the loan portfolio. The impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.

Our methodology for analyzing the allowance for loan losses consists of two components: formula and specific allowances. The formula allowance is determined by applying an estimated loss percentage to various groups of loans. The loss percentages are generally based on various historical measures such as the amount and type of classified loans, past due ratios and loss experience, which could affect the collectibility of the respective loan types.

The specific allowance component is created when management believes that the collectibility of a specific large loan, such as a real estate, multi-family or commercial real estate loan, has been impaired and a loss is probable.

The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the amount of actual loan charge-offs, net of recoveries.

The provision for loan losses was $750,000 and $2.7 million for the years ended June 30, 2013 and 2012, respectively. We decreased the provision primarily as a result of the decrease in loan delinquencies, in particular our higher risk nonperforming construction loans. The specific risks that are considered in our analysis for determining the provision for loan losses include an automatic elevation in risk grade and corresponding reserve requirement based on loan payment and payment delinquencies, including debt to the borrower and related entities under loans to one borrower guidelines; and a qualitative analysis of the economic and portfolio trends. The provision for loan losses for the year ended June 30, 2013 included an incremental component, a qualitative component, and specific reserve as a result of impairment analysis. The total allowance for loan losses was $5.1 million and $7.1 million at June 30, 2013 and 2012, respectively. Of the total allowance at June 30, 2013, specific reserves decreased to $1.3 million and general reserves decreased to $3.8 million from specific reserves of $1.9 million and general reserves of $5.2 million, respectively, at June 30, 2012. Included in the general reserve amount of $3.8 million at June 30, 2013 was $1.1 million based on incremental changes in asset quality and $500,000 based on qualitative analysis.

The decrease in the provision for loan losses was a result of the decrease in delinquent and classified loans, and loan charge-offs together with our recognition of qualitative factors. We continually monitor the market conditions reported at national, regional, and local levels including those from the FDIC, Case-Schiller, and Realtor Boards. Delinquent residential lot loans decreased to $734,000, or 0.25% of total loans at June 30, 2013, compared to $3.4 million, or 1.14% of total loans at June 30, 2012. Qualitative factors developed from this analysis along with the incremental changes discussed above resulted in an increase to the provision for the period.

Levels and trends in delinquencies and nonperforming loans have decreased during the year ended June 30, 2013. During the current economic cycle, we have experienced changes in our portfolio with respect to delinquent, nonperforming and impaired

loans. At June 30, 2013 and June 30, 2012, our total delinquent loans, including loans 30 or more days past due, were $10.2 million and $14.2 million, respectively, which included nonperforming loans of $6.2 million and $8.7 million, respectively. Net charge-offs during the years ended June 30, 2013 and June 30, 2012 were $2.7 million and $2.9 million, respectively.

Management identifies a loan as impaired when the source of repayment of the loan is recognized as being in jeopardy, such that economic or other changes have affected the borrower to the extent that it may not be able to meet repayment terms, and that resources available to the borrower, including the liquidation of collateral, may be insufficient. Impairment is measured on a loan-by-loan basis for each loan based upon its source or sources of repayment. For collateral dependent loans management utilizes the valuation from an appraisal obtained within the last six months in establishing the allowance for loan losses, unless additional information known to management results in management applying a downward adjustment to the valuation. Appraisals are updated subsequent to the time of origination when management identifies a loan as impaired or potentially being impaired, as indicated by the borrower’s payment and loan covenant performance, an analysis of the borrower’s financial condition, property tax and/or assessment delinquency, increases in deferred maintenance or other information known to management. When the results of the impairment analysis indicate a potential loss, the loan is classified as substandard and a specific reserve is established for such loan in the amount determined. Further, the specific reserve amount is adjusted to reflect any further deterioration in the value of the collateral that may occur prior to liquidation or reinstatement. The impairment analysis takes into consideration the primary, secondary, and tertiary sources of repayment, whether impairment is likely to be temporary in nature or liquidation is anticipated.

Our nonperforming loans include collateral secured and unsecured loans, which totaled $6.2 million and $8.7 million at June 30, 2013 and 2012, respectively. At June 30, 2013, our nonperforming loans secured by first mortgage liens consisted of $734,000 in residential land loans and $4.8 million of one-to-four family mortgage loans.

The remainder of our nonperforming loans at June 30, 2013 and 2012 included secured and unsecured credits from our consumer and commercial business loan portfolios, totaling $667,000 and $3.4 million, respectively.

During the year ended June 30, 2013, we recorded a provision for loan losses which was significantly less than the provision for loan losses we recorded for the year ended June 30, 2012. The decreased provision for 2013 was primarily a result of decreased loan delinquencies and loan charge-off amounts.

The allowance for loan losses was $5.1 million or 1.8% of total loans at June 30, 2013 as compared to $7.1 million or 2.4% of total loans outstanding at June 30, 2012. The level of the allowance is based on estimates, and the ultimate losses may vary from the estimates. Management will continue to review the adequacy of the allowance for loan losses and make adjustments to the provision for loan losses based on loan growth, economic conditions, charge-offs and portfolio composition. For the years ended June 30, 2013 and 2012 the provision for loan losses was $750,000 and $2.7 million, respectively.

A loan is considered impaired when we have determined that we may be unable to collect payments of principal and/or interest when due under the terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance.

Impairment is measured on a loan by loan basis for all loans in the portfolio except for the smaller groups of homogeneous consumer loans in the portfolio.

As of June 30, 2013 and 2012, we had impaired loans of $23.6 million and $23.8 million, respectively. Included within the impaired loan totals are loans identified as troubled debt restructures. At June 30, 2013 and 2012, the aggregate amount of troubled debt restructure loans with valuation allowances were $17.5 million and $15.1 million, respectively.

The following table summarizes the distribution of the allowance for loan losses by loan category:

	At June 30,
	2013						2012						2011						2010						2009
	Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans
	(Dollars in thousands)
Real estate:
One-to-four family	$	73,901	$	1,393	26.1	%	$	82,709	$	1,659	28.0	%	$	97,133	$	1,980	29.1	%	$	112,835	$	2,975	27.7	%	$	114,823	$	861	22.9	%
Multi-family	38,425		156		13.6		42,032		238		14.2		42,608		88		12.8		45,983		552		11.3		52,661		632		10.5
Commercial	106,859		671		37.7		97,306		578		32.9		105,997		173		31.8		118,492		1,422		29.1		123,902		1,487		24.7
Construction	5,641		356		2.0		6,696		148		2.3		11,650		1,163		3.5		36,812		7,952		9.0		106,163		16,558		21.2
Land loans	5,330		531		1.9		7,062		368		2.4		6,723		191		2.0		7,843		157		1.9		9,211		184		1.8
Total real estate	230,156		3,107		81.2		235,805		2,991		79.8		264,111		3,595		79.2		321,965		13,058		79.1		406,760		19,722		81.2
Consumer:
Home equity	25,835		376		9.1		31,504		681		10.7		35,729		739		10.7		42,446		1,818		10.4		49,028		368		9.8
Credit cards	4,741		283		1.7		5,180		328		1.8		7,101		568		2.1		7,943		477		2.0		8,617		517		1.7
Automobile	1,850		103		0.7		3,342		373		1.1		5,547		675		1.7		8,884		533		2.2		14,016		841		2.8
Other	2,723		55		1.0		2,968		126		1.0		3,595		153		1.1		4,160		250		1.0		5,142		309		1.0
Total consumer	35,149		817		12.4		42,994		1,508		14.6		51,972		2,135		15.6		63,433		3,078		15.6		76,803		2,035		15.3
Commercial business	18,211		1,172		6.4		16,618		2,558		5.6		17,268		1,509		5.2		21,718		652		5.3		17,172		206		3.4
Unallocated	—		51		—		—		—		—		—		—		—		—		—		—		—		2,500		—
Total	$	283,516	$	5,147	100.0	%	$	295,417	$	7,057	100.0	%	$	333,351	$	7,239	100.0	%	$	407,116	$	16,788	100.0	%	$	500,735	$	24,463	100.0	%

anagement believes that it uses the best information available to determine the allowance for loan losses. However, unforeseen market conditions could result in adjustments to the allowance for loan losses and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance.

The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated:

	Year Ended June 30,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Allowance at beginning of period	$	7,057		$	7,239		$	16,788		$	24,463		$	7,485
Provision for loan losses	750			2,735			8,078			2,615			20,263
Recoveries:
Real estate loans:
One-to-four family	143			498			238			146			3
Multi-family	—			—			—			—			20
Commercial	201			18			5			—			—
Construction	43			271			502			—			—
Land loans	—			—			—			—			—
Total real estate	387			787			745			146			23
Consumer:
Home equity	57			20			9			1			3
Credit cards	51			121			98			55			45
Automobile	23			20			62			95			33
Other	68			22			27			39			—
Total consumer	199			183			196			190			81
Commercial business	37			131			3			—			—
Total recoveries	623			1,101			944			336			104
Charge-offs:
Real estate loans:
One-to-four family	416			1,465			3,003			747			283
Multi-family	—			—			—			—			—
Commercial	—			571			584			31			—
Construction	105			561			8,915			4,970			2,086
Land loans	—			—			—			2,836			—
Total real estate	521			2,597			12,502			8,584			2,369
Consumer:
Home equity	356			337			465			847			222
Credit cards	212			492			591			605			374
Automobile	30			59			55			254			17
Other	633			470			777			336			407
Total consumer	1,231			1,358			1,888			2,042			1,020
Commercial business	1,531			63			4,181			—			—
Total charge-offs	3,283			4,018			18,571			10,626			3,389
Net charge-offs	2,660			2,917			17,627			10,290			3,285
Balance at end of period	$	5,147		$	7,057		$	7,239		$	16,788		$	24,463
Allowance for loan losses as a percentage of total loans outstanding at the end of the period	1.8		%	2.4		%	2.2		%	4.1		%	4.9		%
Net charge-offs as a percentage of average total loans outstanding during the period	0.9		%	0.9		%	4.7		%	2.3		%	0.6		%
Allowance for loan losses as a percentage of nonperforming loans at the end of period	83.6		%	80.9		%	51.1		%	81.3		%	40.3		%

Our Executive Loan Committee reviews the appropriate level of the allowance for loan losses on a quarterly basis and establishes the provision for loan losses based on the risk composition of our loan portfolio, delinquency levels, loss experience, economic conditions, bank regulatory examination results, seasoning of the loan portfolios and other factors related to the collectability of the loan portfolio as detailed further in this Form 10-K under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Loan Losses.” The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

Management believes that our allowance for loan losses as of June 30, 2013 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provision that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

The following table provides certain information with respect to our allowance for loan losses, including charge-offs, recoveries and selected ratios for the periods indicated.

	Year Ended June 30,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Provision for loan losses	$	750		$	2,735		$	8,078		$	2,615		$	20,263
Allowance for loan losses	5,147			7,057			7,239			16,788			24,463
Allowance for loan losses as a percentage of total loans outstanding at the end of the period	1.8		%	2.4		%	2.2		%	4.1		%	4.9		%
Net charge-offs	2,660			2,917			17,627			10,290			3,285
Total of nonaccrual and 90 days past due loans	6,159			8,722			14,169			20,642			60,649
Allowance for loan losses as a percentage of nonperforming loans at end of period	83.6		%	80.9		%	51.1		%	81.3		%	40.3		%
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable	2.2		%	3.0		%	4.3		%	5.1		%	12.1		%
Total loans	$	283,516		$	295,417		$	333,351		$	407,116		$	500,735

Investment Activities

General. Under Washington law, savings banks are permitted to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities, and obligations of states and their political sub-divisions.

The Investment Committee has the authority and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate changes to policy and strategies to the Board. On a monthly basis, our management reports to the Board a summary of investment holdings with respective market values, and all purchases and sales of investments. The Chief Financial Officer has the primary responsibility for the management of the investment portfolio. The Chief Financial Officer considers various factors when making decisions regarding proposed investments, including the marketability, maturity and tax consequences. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk.

At June 30, 2013, our investment portfolio consisted principally of mortgage-backed securities, U.S. Government Agency obligations, municipal bonds and mutual funds consisting of mortgage-backed securities. From time to time, investment levels may increase or decrease depending upon yields available on investment opportunities and management’s projected demand for funds for loan originations, deposits and other activities.

Mortgage-Backed Securities. The mortgage-backed securities in our investment portfolio were comprised of Freddie Mac, Fannie Mae and Ginnie Mae mortgage-backed securities. At June 30, 2013, the amortized cost of mortgage-backed securities held in the available-for-sale category was $47.8 million with a weighted average yield of 1.41%, while the mortgage-backed securities in the held-to-maturity category was $10.2 million with a weighted average yield of 2.57%.

Municipal Bonds. The tax-exempt and taxable municipal bond portfolios were comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. All bonds are rated “A” or better and are from issuers located within the State of Washington. The weighted average yield on the tax exempt bonds (on a tax equivalent basis) was 4.94% at June 30, 2013, and the total amount of our municipal bonds was $1.6 million at that date, of which $1.4 million was available-for-sale and the remaining balance categorized as held-to-maturity.

Federal Home Loan Bank Stock. As a member of the FHLB of Seattle, we are required to own capital stock in the FHLB of Seattle. The amount of stock we hold is based on guidelines specified by the FHLB of Seattle. The redemption of any excess stock we hold is at the discretion of the FHLB of Seattle. The carrying value of FHLB stock was $6.3 million at June 30, 2013.

Our investment in FHLB stock is carried at cost, which approximates fair value. As a member of the FHLB System, we are required to maintain a minimum level of investment in FHLB stock based on specific percentages of our outstanding mortgages, total assets, or FHLB advances. At both June 30, 2013 and 2012, our minimum investment requirement was approximately $2.9 million. We were in compliance with the FHLB minimum investment requirement at June 30, 2013 and 2012. For the year ended June 30, 2013, we did not receive any dividends from the FHLB.

Bank-Owned Life Insurance. We purchase bank-owned life insurance policies (“BOLI”) to offset future employee benefit costs. At June 30, 2013, we had a $18.9 million investment in life insurance contracts. The purchase of BOLI policies, and its increase in cash surrender value, is classified as “Life insurance investment, net of surrender charges” in our Consolidated Statement of Financial Condition. The income related to the BOLI, which is generated by the increase in the cash surrender value of the policy is recorded within "Other Income" in our Consolidated Statement of Operations. See Item 8. "Financial Statements and Supplementary Data" of this Form 10-K for our Consolidated Financial Statements and specifically the Consolidated Statement of Cash Flow and Consolidated Statement of Operations regarding BOLI.

The following table sets forth the composition of our investment portfolio at the dates indicated.

	At June 30,
	2013				2012				2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Available-for-sale:
Securities:
U.S. Government Agency obligations	$	—	$	—	$	—	$	—	$	3,000	$	3,045
Municipal bonds	1,446		1,456		1,623		1,656		2,355		2,400
Mortgage-backed securities:
FHLMC	20,675		20,415		—		—		—		—
FNMA	25,639		24,971		—		—		—		—
GNMA	1,499		1,466		—		—		—		—
Total available-for-sale	49,259		48,308		48,170		48,717		35,814		38,163
Held-to-maturity:
Securities:
Municipal bonds	135		135		142		142		149		149
Mortgage-backed securities:
FHLMC	4,744		4,754		7,037		7,548		7,438		8,008
FNMA	2,931		3,048		—		—		—		—
GNMA	2,485		2,379		—		—		—		—
Total held-to-maturity	10,295		10,316		7,179		7,690		7,587		8,157
Total securities	$	59,554	$	58,624	$	55,349	$	56,407	$	43,401	$	46,320

The table below sets forth information regarding the amortized cost, weighted average yields and maturities or call dates of Anchor Bank’s investment portfolio at June 30, 2013:

					At June 30, 2013
	At June 30, 2013				One Year or Less				Over One to Five Years				Over Five to Ten Years				Over Ten Years				Mortgage-Backed Securities				Totals
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		MBS Securities Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available-for-sale:
Securities:
Municipal bonds (1)	$	1,446	4.24	%	$	—	—	%	$	600	4.17	%	$	645	5.25	%	$	201	6.23	%	$	—	—	%	$	1,446	4.24	%
Mortgage-backed securities:
FHLMC	20,675		1.82		—		—		—		—		—		—		—		—		20,675		1.82		20,675		1.82
FNMA	25,639		1.11		—		—		—		—		—		—		—		—		25,639		1.11		25,639		1.11
GNMA	1,499		0.88		—		—		—		—		—		—		—		—		1,499		0.88		1,499		0.88
Total available-for-sale	49,259				—				600				645				201				47,813				49,259
Held-to-maturity:
Securities:
Municipal bonds (1)	135		6.38		—		—		—		—		—		—		135		6.38		—		—		135		6.38
Mortgage-backed securities:
FHLMC	4,744		2.35		—		—		—		—		—		—		—		—		4,744		2.35		4,744		2.35
FNMA	2,931		3.82		—		—		—		—		—		—		—		—		2,931		3.82		2,931		3.82
GNMA	2,485		1.54		—		—		—		—		—		—		—		—		2,485		1.54		2,485		1.54
Total held-to-maturity	10,295				—				—				—				135				10,160				10,295
Total	$	59,554			$	—			$	600			$	645			$	336			$	57,973			$	59,554

(1) Yields on tax exempt obligations are computed on a tax equivalent basis.

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings from the FHLB of Seattle are used to supplement the availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.

Our deposit composition reflects a mixture with certificates of deposit accounting for approximately one-half of the total deposits and interest and noninterest-bearing checking, savings and money market accounts comprising the balance of total deposits. We rely on marketing activities, convenience, customer service and the availability of a broad range of deposit products and services to attract and retain customer deposits.

Deposits. Substantially all of our depositors are residents of Washington State. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including checking accounts, money market deposit accounts, savings accounts and certificates of deposit with a variety of rates. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the development of long term profitable customer relationships, current market interest rates, current maturity structure and deposit mix, our customer preferences and the profitability of acquiring customer deposits compared to alternative sources.

At June 30, 2013, we had $70.3 million of jumbo ($100,000 or more) retail certificates of deposit. We also had $8.0 million in public funds, which represented 2.4% of total deposits at June 30, 2013. Anchor Bank had no brokered deposits at June 30, 2013.

In the unlikely event we are liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to Anchor Bancorp, as the sole shareholder of Anchor Bank.

Deposit Activities. The following table sets forth our total deposit activities for the periods indicated:

	Year Ended June 30,
	2013			2012		2011
	(In thousands)
Beginning balance	$	345,798		$	339,474	$	355,788
Net deposits (withdrawals) before interest credited	(20,736		)	1,606		(22,144		)
Interest credited	3,522			4,718		5,830
Net increase (decrease) in deposits	(17,214		)	6,324		(16,314		)
Ending balance	$	328,584		$	345,798	$	339,474

The following table sets forth information concerning our time deposits and other deposits at June 30, 2013:

Weighted Average Interest Rate						Percentage of Total Deposits
					Minimum Balance
	Term	Category	Amount		Minimum Balance
			(In thousands)
—	N/A	Savings accounts	$	36,518	100	(11.1	)%
—	N/A	Demand deposit accounts	59,780		10	(18.2	)
—	N/A	Money market accounts	82,603		1,000	(25.1	)

		Certificates of Deposit
0.10	6 month	Fixed-term, fixed rate	2,284		500	(0.7	)
0.32	9-12 month	Fixed-term, fixed rate	13,822		500	(4.2	)
0.33	13-16 month	Fixed-term, fixed rate	629		500	(0.2	)
0.48	18-20 month	Fixed term-fixed or variable rate	11,462		500	(3.5	)
0.62	24 month	Fixed term-fixed or variable rate	20,741		2,000	(6.3	)
1.19	30-36 month	Fixed term-fixed or variable rate	7,451		500	(2.3	)
1.73	48 month	Fixed term-fixed or variable rate	4,419		500	(1.3	)
2.09	60 month	Fixed term-fixed or variable rate	8,683		500	(2.6	)
3.26	96 month	Fixed term-fixed or variable rate	70,659		500	(21.5	)
0.57	Other	Fixed term-fixed or variable rate	9,533		500	(2.9	)
		Total	$	149,683		(100.0	)%

Time Deposits by Rate. The following table sets forth our time deposits classified by rates as of the dates indicated:

	At June 30,
	2013		2012		2011
	(In thousands)
0.00 - 0.99%	$	57,443	$	40,996	$	22,996
1.00 - 1.99	19,946		51,994		71,215
2.00 - 2.99	21,169		23,898		26,068
3.00 - 3.99	44,565		46,364		50,615
4.00 - 4.99	6,167		7,555		9,932
5.00 - 5.99	393		391		693
Total	$	149,683	$	171,198	$	181,519

Time Deposit Certificates. The following table sets forth the amount and maturities of time deposit certificates at June 30, 2013:

	Amount Due
	Within 1 Year		After 1 Year Through 2 Years		After 2 Years Through 3 Years		After 3 Years Through 4 Years		Beyond 4 Years		Total
	(In thousands)
0.00 - 0.99%	$	40,134	$	14,787	$	1,122	$	709	$	691	$	57,443
1.00 - 1.99	8,233		1,727		1,087		2,985		5,914		19,946
2.00 - 2.99	1,123		1,664		2,101		299		15,982		21,169
3.00 - 3.99	881		—		772		5,577		37,335		44,565
4.00 - 4.99	1,110		318		4,211		528		—		6,167
5.00 - 5.99	252		—		141		—		—		393
Total	$	51,733	$	18,496	$	9,434	$	10,098	$	59,922	$	149,683

The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of June 30, 2013. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.

	Time Deposit Certificates
Maturity Period	Time Deposit Certificates
	(In thousands)

Three months or less	$	8,301
Over three through six months	5,481
Over six through twelve months	9,476
Over twelve months	47,001
Total	$	70,259

Deposits. The following table sets forth the balances of deposits in the various types of accounts we offered at the dates indicated:

	At June 30,
	2013							2012							2011
	Amount		Percent of Total		Increase/ (Decrease)			Amount		Percent of Total		Increase/ (Decrease)			Amount		Percent of Total
	(Dollars in thousands)
Savings deposits	$	36,518	11.1	%	$	43		$	36,475	10.5	%	$	4,212		$	32,263	9.5	%
Demand deposit accounts	59,780		18.2		5,405			54,375		15.7		6,700			47,675		14.0
Money market accounts	82,603		25.1		(1,147		)	83,750		24.2		5,733			78,017		23.0
Fixed-rate certificates which mature in the year ending:
Within 1 year	44,522		13.5		(2,298		)	46,820		13.5		(5,007		)	51,827		15.3
After 1 year, but within 2 years	9,153		2.8		(6,288		)	15,441		4.5		2,029			13,412		4.0
After 2 years, but within 5 years	39,413		12.0		18,119			21,294		6.2		5,083			16,211		4.8
Certificates maturing thereafter	40,031		12.2		(16,141		)	56,172		16.2		1,186			54,986		16.2
Variable rate certificates	16,564		5.0		(14,907		)	31,471		9.1		(13,612		)	45,083		13.3
Total	$	328,584			$	(17,214	)	$	345,798			$	6,324		$	339,474

Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We do, however, use advances from the FHLB of Seattle to supplement our supply of lendable funds, to meet short-term deposit withdrawal requirements and also to provide longer term funding to better match the duration of selected loan and investment maturities.

As one of our capital management strategies, we have used advances from the FHLB of Seattle to fund loan originations in order to increase our net interest income. Depending upon the retail banking activity and the availability of excess capital, we will consider and undertake additional leverage strategies within applicable regulatory requirements or restrictions. Such borrowings would be expected to primarily consist of FHLB of Seattle advances.

As a member of the FHLB of Seattle, we are required to own capital stock in the FHLB of Seattle and are authorized to apply for advances on the security of that stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. We also maintain a committed credit facility with the FHLB of Seattle that provides for immediately available advances up to an aggregate of 25% of the prior quarter’s total assets of Anchor Bank. At June 30, 2013, outstanding advances to Anchor Bank from the FHLB of Seattle totaled $64.9 million.

The following tables set forth information regarding FHLB of Seattle advances by us at the end of and during the periods indicated. The table includes both long- and short-term borrowings.

	Year Ended June 30,
	2013			2012			2011
	(Dollars in thousands)
Maximum amount of borrowing outstanding at any month end:
FHLB advances	$	64,900		$	74,900		$	121,900
Approximate average borrowing outstanding:
FHLB advances	64,900			73,242			104,408
Approximate weighted average rate paid on:
FHLB advances	1.91		%	1.87		%	2.08		%

	At June 30,
	2013			2012			2011
	(Dollars in thousands)
Balance outstanding at end of period:
FHLB advances	$	64,900		$	64,900		$	85,900
Weighted average rate paid on:
FHLB advances	1.91		%	1.91		%	1.75		%

Subsidiaries and Other Activities

Anchor Bank. Anchor Bank has one wholly-owned subsidiary, Anchor Financial Services, Inc., that is currently inactive. At June 30, 2013, Anchor Bank’s equity investment in Anchor Financial Services, Inc. was $303,000.

Competition

Anchor Bank operates in an intensely competitive market for the attraction of deposits (generally its primary source of lendable funds) and in the origination of loans. Historically, its most direct competition for deposits has come from large commercial banks, thrift institutions and credit unions in its primary market area. In times of high interest rates, Anchor Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. Anchor Bank's competition for loans comes principally from mortgage bankers, commercial banks and other thrift institutions. Such competition for deposits and the origination of loans may limit Anchor Bank's future growth and earnings prospects.

Natural Disasters

Grays Harbor, Thurston, Lewis, Pierce, Mason and King counties, where substantially all of the real and personal properties securing our loans are located, is an earthquake-prone region. We have not suffered any losses in the last fifteen years from earthquake damage to collateral secured loans, which include the July 1999 and February 2001 major earthquakes in the region. Although we have experienced no losses related to earthquakes, a major earthquake could result in material loss to us in two primary ways. If an earthquake damages real or personal properties collateralizing outstanding loans to the point of insurable loss, material loss would be suffered to the extent that the properties are uninsured or inadequately insured. A substantial number of our borrowers do not have insurance which provides for coverage as a result of losses from earthquakes. Earthquake insurance is generally not required by other lenders in the market area, and as a result in order to remain competitive in the marketplace, we do not require earthquake insurance as a condition of making a loan. Earthquake insurance is also not always available at a reasonable coverage level and cost because of changing insurance underwriting practices in our market area resulting from past earthquake activity and the likelihood of future earthquake activity in the region. In addition, if the collateralized properties are only damaged and not destroyed to the point of total insurable loss, borrowers may suffer sustained job interruptions or job loss, which may materially impair their ability to meet the terms of their loan obligations. While risk of credit loss can be insured against by, for example, job interruption insurance or “umbrella” insurance policies, such forms of insurance often are beyond the financial means of many individuals. Accordingly, for most individuals, sustained job interruption or job loss would likely result in financial hardship that could lead to delinquency in their financial obligations or even bankruptcy. Accordingly, no assurances can be given that a major earthquake in our primary market area will not result in material losses to us.

Employees

At June 30, 2013, we had 134 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

Executive Officers of Anchor Bancorp. The following table sets forth information regarding the executive officers of the Company and the Bank:

	Age at June 30, 2013	Position
Name	Age at June 30, 2013	Company	Bank
Jerald L. Shaw	67	President and Chief Executive Officer	President and Chief Executive Officer
Terri L. Degner	50	Chief Financial Officer	Chief Financial Officer
Gregory H. Schultz	59	Executive Vice President	Executive Vice President and Chief Lending Officer

Biographical Information. The following is a description of the principal occupation and employment of the executive officers of the Company and the Bank during at least the past five years:

Jerald L. Shaw is the President and Chief Executive Officer of Anchor Bank, positions he has held since July 2006. He has also served in those capacities for Anchor Bancorp since its formation is September 2008. Prior to serving as President and Chief Executive Officer, he served as Chief Operating Officer from 2004 to 2006 and Chief Financial Officer from 1988 to 2002. Prior to that, he served Anchor Bank and its predecessor, Aberdeen Federal Savings and Loan Association, in a variety of capacities since 1976. Prior to that time, Mr. Shaw piloted C-130 aircraft for the U.S. Air Force including numerous combat missions during the Vietnam War. Having performed virtually every position at Anchor Bank, he has extensive knowledge of our operations. He is a distinguished graduate of the School for Executive Development of the U.S. League of Savings Institutions at the University of Washington. Mr. Shaw is also a graduate of the Asset Liability Management School of America's Community Bankers, and many other educational programs. He is a member of the Board of Trustees for the Thurston County Chamber of Commerce, as well as South Sound YMCA. Mr. Shaw also holds a position on the Board of Washington Banker's Association.

Terri L. Degner is the Executive Vice President, Chief Financial Officer and Treasurer of Anchor Bank, positions she has held since 2004. She has also served in those capacities for Anchor Bancorp since its formation in September 2008. Prior to serving as Executive Vice President, Chief Financial Officer and Treasurer, Ms. Degner has served Anchor Bank in a variety of capacities since 1990, including as Senior Vice President and Controller from 1994 to 2004. Ms. Degner has been in banking since high school. She has worked in multiple lending positions in various size institutions. Since 1990, she has held a variety of positions in the finance area of Anchor Bank. Ms. Degner demonstrated her determination to succeed when she worked full time in Anchor’s Accounting Department and commuted 60 miles to evening classes at St. Martin’s College where she received her Bachelor’s Degree in Accounting. At the same time she worked full days and met all expectations for performance. In 2000, she graduated

from the Pacific Coast Banking School at the University of Washington in the top 10% of her class and her thesis was published in the University’s library. She has become the management expert on issues ranging from information technology to asset-liability management. Ms. Degner also serves on the board of directors and finance committee of NeighborWorks of Grays Harbor, sits on the St. Martins University Accounting Advisory Committee and is on the Executive Committee of the Providence St. Peter Foundation Christmas Forest.

Gregory H. Schultz, is an Executive Vice President of Anchor Bancorp, a position he has held since January 2011. Mr. Schultz also is an Executive Vice President and Chief Lending Officer of Anchor Bank, positions he has held since October 2010 and May 2008, respectively. Prior to his appointment as Executive Vice President of Anchor Bank, Mr. Schultz had served as Senior Vice President since joining Anchor Bank in February 2008. In his current capacity, Mr. Schultz serves on many Bank committees, including Chair of the Executive Loan and Problem Asset committees, and as a member of the Executive Management, Senior Management, Risk Management, ALCO, IT, and Loan Policy committees. Mr. Schultz has more than 37 years of experience in banking and finance, beginning as a collector in 1974 with a subsidiary of Bank of America. His career includes three years in consumer lending, four years in the thrift industry, and 30 years in community and regional commercial banking, working in Utah, Idaho, Nevada and Washington. Prior to joining Anchor Bank in February 2008, Mr. Schultz was the Senior Commercial Lending Officer for Silverstate Bank from May 2007 through January 2008, and was previously employed by Community Bank of Nevada for ten years in a variety of positions, including most recently as Chief Lending Officer. Mr. Schultz earned an Associate of Arts Degree in Speech and Drama from Treasure Valley Community College and has extensive training in most aspects of banking including accounting, credit, law, sales, marketing, valuation, management and administration. Mr. Schultz also participates as a volunteer for charitable organizations, including Relay for Life and Rebuilding Together, and participates in community fund raising activities for Habitat for Humanity, the Kiwanis Club and the Chamber of Commerce. Mr. Schultz initiated personal bankruptcy proceedings in Washington State in September 2013 and in connection therewith he filed a Chapter 13, wage-earner plan. His first meeting with creditors is scheduled for mid-October as he works to resolve this situation.

How We Are Regulated

The following is a brief description of certain laws and regulations applicable to Anchor Bancorp and Anchor Bank. Descriptions of laws and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Washington State Legislature that may affect the operations of Anchor Bancorp and Anchor Bank. In addition, the regulations governing us may be amended from time to time by our regulators, the FDIC, DFI, Federal Reserve and the Consumer Financial Protection Bureau ("CFPB"). Any such legislation or regulatory changes in the future could adversely affect us. We cannot predict whether any such changes may occur.

Regulatory Impact of the Dodd-Frank Act. The following summarizes significant aspects of the Dodd-Frank Act that may materially affect the operations and condition of Anchor Bank and Anchor Bancorp.

•

Centralize responsibility for consumer financial protection in the CFPB, which has broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to their compliance with the federal consumer financial protection laws.

•	Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions.

•	Require the federal banking regulators to make their capital requirements counter cyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

•	Provide for new disclosure and other requirements relating to executive compensation and corporate governance.

•	Make permanent the $250,000 limit for federal deposit insurance.

•	Repeal the prohibition on the payment of interest on demand deposits and eliminate the unlimited federal deposit insurance for non interest-bearing demand transaction accounts effective January 1, 2013.

•	Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

•	Change the deposit insurance assessment base for FDIC insurance to the depository institution's total average assets minus the sum of its average tangible equity during the assessment period, rather the level of deposits.

•

Increase the minimum reserve ratio of the FDIC deposit insurance fund to 1.35% of estimated annual insured deposits or assessment base. However, the FDIC is directed to "offset the effect" of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10.0 billion.

Many aspects of the Dodd-Frank Act are subject to rulemaking by the federal banking agencies, which has not been completed and will not take effect for some time, making it difficult to anticipate the overall financial impact of the Dodd-Frank Act on the Corporation, the Bank and the financial services industry more generally.

Regulation and Supervision of Anchor Bank

General. Anchor Bank, as a state-chartered savings bank, is subject to applicable provisions of Washington law and to regulations and examinations of the DFI. As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of Anchor Bank to the maximum permitted by law. During these state or federal regulatory examinations, the examiners may require Anchor Bank to provide for higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of Anchor Bank is intended for the protection of depositors and the Deposit Insurance Fund ("DIF") of the FDIC and not for the purpose of protecting shareholders of Anchor Bank or Anchor Bancorp. Anchor Bank is required to maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to Anchor Bancorp. See "- Regulatory Capital Requirements" and "- Limitations on Dividends and Stock Repurchases."

Federal and State Enforcement Authority and Actions. As part of its supervisory authority over Washington-chartered savings banks, the DFI may initiate enforcement proceedings to obtain a cease-and-desist order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.

Regulation by the Washington Department of Financial Institutions. State law and regulations govern Anchor Bank's ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. As a state savings bank, Anchor Bank must pay semi-annual assessments, examination costs and certain other charges to the DFI.

Washington law generally provides the same powers for Washington savings banks as federally and other-state chartered savings institutions and banks with branches in Washington, subject to the approval of the DFI. Washington law allows Washington savings banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the DFI may approve applications by Washington savings banks to engage in an otherwise unauthorized activity, if the DFI determines that the activity is closely related to banking, and Anchor Bank is otherwise qualified under the statute. This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks.

Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in Anchor Bank up to $250,000 per separately insured depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended June 30, 2013, were $651,000. Those premiums have increased in recent years due to recent strains on the FDIC deposit insurance fund as a result of the cost of large bank failures and increases in the number of troubled banks. Management is not aware of any existing circumstances which would result in termination of Anchor Bank's deposit insurance.

As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion is assigned one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF. A range of initial base assessment rates apply to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Total base assessment rates range from 2.5 to nine basis points for Risk Category I, nine to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion for the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio the FDIC must designate a reserve ratio, known as the designated reserve ratio (“DRR”), which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in the years 2017 through 2019. This payment is established quarterly and during the year ending March 31, 2013 averaged 8.20 basis points (annualized) of assessable assets. The Financing Corporation was chartered in 1987 by the Federal Home Loan Bank Board solely for the purpose of functioning as a vehicle for the recapitalization of the deposit insurance system.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what changes in insurance assessment rates may be made in the future.

Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio of not less than 4%. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by an institution to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

At June 30, 2013, Anchor Bank was categorized as well capitalized.

Capital Requirements. On July 2, 2013, the Federal Reserve approved a final rule (“Final Rules”) to establish a new comprehensive regulatory capital framework for all U.S. financial institutions and their holding companies. On July 9, the Final Rule was approved as an interim final rule by the FDIC. The Final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act, which is discussed below in the section entitled “-New Capital Rules.” The following is a discussion of the capital requirements Anchor Bank was subject to as of June 30, 2013.

Anchor Bank is required by FDIC regulations to maintain specified levels of regulatory capital under regulation of the FDIC consisting of core (Tier 1) capital and supplementary (Tier 2) capital. Tier 1 capital generally includes common shareholders' equity and noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.

At June 30, 2013, the FDIC measured an institution’s capital using a leverage limit together with certain risk-based ratios. The FDIC’s minimum leverage capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage ratio of at least 4% to 5% of total assets. At June 30, 2013, Anchor Bank had a Tier 1 leverage capital ratio of 11.4%. The FDIC retains the right to require a particular institution to maintain a higher capital level based on its particular risk profile.

FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight based on the relative risk of that category. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, for a bank to be considered adequately capitalized the ratio of total capital (Tier 1 capital

plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets (the Tier 1 risk based capital ratio) must be at least 4%. In evaluating the adequacy of a bank’s capital, the FDIC may also consider other factors that may affect a bank’s financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks.

The DFI requires that net worth equal at least five percent of total assets. At June 30, 2013, Anchor Bank had Tier 1 risk-based capital of 16.7%.

The table below sets forth Anchor Bank’s capital position under the prompt corrective action regulations of the FDIC at June 30, 2013 and 2012 and the requirements pursuant to the Order, which the Bank was subject to until September 5, 2012, at which time it became subject to the Supervisory Directive. The Bank’s Tier 1 leverage capital ratio was 11.4% at June 30, 2013, which exceeded the requirements of the Supervisory Directive of 10%.

	At June 30,
	2013				2012
	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank equity capital under GAAP	$	52,368			$	54,024

Total risk-based capital	$	56,289	18.0	%	$	56,143	18.2	%
Total risk-based capital requirement	25,060		8.0		24,634		8.0
Excess	$	31,229	10.0	%	$	31,509	10.2	%

Tier 1 risk-based capital	$	52,450	16.7	%	$	52,254	17.0	%
Tier 1 risk-based capital requirement	12,530		4.0		12,317		4.0
Excess	$	39,920	12.7	%	$	39,937	13.0	%

Tier 1 leverage capital	$	52,450	11.4	%	$	52,254	10.9	%
Tier 1 leverage capital requirement	18,358		4.0		19,094		4.0
Excess	$	34,092	7.4	%	$	33,160	6.9	%

Pursuant to minimum capital requirements of the FDIC, Anchor Bank is required to maintain a leverage ratio (capital to assets ratio) of 4% and risk-based capital ratios of Tier 1 capital and total capital (to total risk-weighted assets) of 4% and 8%, respectively. The Order required Anchor Bank to maintain Tier 1 capital and total risk-based capital ratios at a minimum of 10% and 12%, respectively. The Supervisory Directive requires Anchor Bank to maintain a Tier 1 capital ratio of at least 10%) As of June 30, 2013 and 2012, the Bank was classified as a “well capitalized” institution under the criteria established by the FDIC.

Anchor Bank’s management believes that, under the current regulations, Anchor Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of Anchor Bank, such as a downturn in the economy in areas where it has most of its loans, could adversely affect future earnings and, consequently, the ability of Anchor Bank to meet its capital requirements.

New Capital Rules. The Final Rules approved by the Federal Reserve and subsequently approved as an interim final rule by the FDIC substantially amends the regulatory risk-based capital rules applicable to Anchor Bancorp and Anchor Bank.

Effective in 2015 (with some changes generally transitioned into full effectiveness over two to four years), the Bank will be subject to new capital requirements adopted by the FDIC. These new requirements create a new required ratio for common equity Tier 1 (“CET1”) capital, increases the leverage and Tier 1 capital ratios, changes the risk-weights of certain assets for purposes of the risk-based capital ratios, creates an additional capital conservation buffer over the required capital ratios and changes what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

When these new requirements become effective in 2015, the Bank's leverage ratio of 4% of adjusted total assets and total capital ratio of 8% of risk-weighted assets will remain the same; however, the Tier 1 capital ratio requirement will increase from 4.0% to

6.5% of risk-weighted assets. In addition, the Bank will have to meet the new CET1 capital ratio of 4.5% of risk-weighted assets, with CET1 consisting of qualifying Tier 1 capital less all capital components that are not considered common equity.

For all of these capital requirements, there are a number of changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital.

Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be deducted from capital, subject to a two-year transition period. In addition, Tier 1 capital will include accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a two-year transition period. Because of its asset size, the Bank has the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the inclusion of accumulated other comprehensive income in its capital calculations. The Bank is considering whether to take advantage of this opt-out to reduce the impact of market volatility on its regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (0% to 600%) for equity exposures.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% in January 2019.

The FDIC's prompt corrective action standards will change when these new capital ratios become effective. Under the new standards, in order to be considered well-capitalized, the Bank would have to have a CET1 ratio of 6.5% (new), a Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged). Anchor Bank has conducted a pro forma analysis of the application of these new capital requirements as of June 30, 2013. We have determined that Anchor Bank meets all these new requirements, including the full 2.5% capital conservation buffer, and remains well-capitalized, if these new requirements had been effect on that date. Anchor Bancorp has also conducted a pro forma analysis of the application of these new capital requirements as of June 30, 2013. We have determined that Anchor Bancorp meets all these new requirements, including the full 2.5% capital conservation buffer, and remains well-capitalized, if these new requirements had been in effect on that date.

The application of these more stringent capital requirements could, among other things, result in lower returns on invested capital, over time require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Any additional changes in our regulation and oversight, in the form of new laws, rules and regulations could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.

Federal Home Loan Bank System. Anchor Bank is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.

As a member, Anchor Bank is required to purchase and maintain stock in the FHLB of Seattle. At June 30, 2013, Anchor Bank had $6.3 million in FHLB stock, which was in compliance with this requirement. Anchor Bank did not receive any dividends from the FHLB of Seattle for the year ended June 30, 2013. Subsequent to December 31, 2008, the FHLB of Seattle announced

that it was below its regulatory risk-based capital requirement and that it would suspend future dividends and the repurchase and redemption of outstanding common stock. As a result, the FHLB has not paid a dividend since the fourth quarter of 2008. In September 2012, the FHLB announced that the FHFA considered the FHLB to be adequately capitalized. The FHLB also announced that it had been granted authority to repurchase up to $25 million of excess capital stock per quarter, provided they receive a non-objection from the FHFA. As of June 30, 2013, the FHLB had repurchased $231,700 of its stock, at par, from Anchor Bank. The FHLB announced July 22, 2013 that, based on second quarter 2013 financial results, their Board of Directors had declared a $0.025 per share cash dividend. It is the first dividend in a number of years and represents a significant milestone in FHLB's return to normal operations.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of Anchor Bank's FHLB stock may result in a corresponding reduction in its capital.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that Anchor Bank fails to meet any standard prescribed by the guidelines, it may require Anchor Bank to submit an acceptable plan to achieve compliance with the standard. FDIC regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Management of Anchor Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.

Real Estate Lending Standards. FDIC regulations require Anchor Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with safe and sound banking practices, must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. Anchor Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. Anchor Bank’s Board of Directors is required to review and approve Anchor Bank’s standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate amount of all loans in excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural, multifamily or other non-one-to-four-family properties should not exceed 30% of total capital. Loans in excess of the supervisory loan-to-value ratio limitations must be identified in Anchor Bank’s records and reported at least quarterly to Anchor Bank’s Board of Directors. Anchor Bank is in compliance with the record and reporting requirements. As of June 30, 2013, Anchor Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were 11.97% and Anchor Bank’s loans on commercial, agricultural, multifamily or other non-one-to-four-family properties in excess of the supervisory loan-to-value ratios were 5.25%. Based on strong risk management practices, Anchor Bank has consistently operated above the aggregate 100% of capital guideline limit since these standards were imposed.

Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, directors’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.

Washington State has enacted a law regarding financial institution parity. Primarily, the law affords Washington-chartered commercial banks the same powers as Washington-chartered savings banks. In order for a bank to exercise these powers, it must provide 30 days notice to the Director of Financial Institutions and the Director must authorize the requested activity. In addition, the law provides that Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the Director in certain situations. Finally, the law provides additional flexibility for Washington-chartered commercial and savings banks with respect to interest rates on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.

Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous waste. However, Congress asked to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including Anchor Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Federal Reserve System. The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or noninterest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of June 30, 2013, Anchor Bank’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Community Reinvestment Act and Consumer Protection Laws. Anchor Bank is subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s CRA performance must be considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. Anchor Bank received a “satisfactory” rating during its most recent examination.

In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending to various sectors of the economy and population. The CFPB issues regulations and standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its rulemaking authority, the CFPB has promulgated several proposed and final regulations under these laws that will affect our consumer businesses. Among these regulatory initiatives, are final regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank is evaluating these recent CFPB regulations and proposals and devotes substantial compliance, legal and operational business resources to ensure compliance with these consumer protection standards. In addition, the FDIC has enacted customer privacy regulations that limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

Bank Secrecy Act/Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the

USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Dividends. The amount of dividends payable by Anchor Bank to Anchor Bancorp depends upon Anchor Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, Anchor Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. Dividends on Anchor Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of Anchor Bank, without the approval of the Director of the DFI.

The amount of dividends actually paid during any one period is strongly affected by Anchor Bank’s policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice. In addition, as noted above, beginning in 2016, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company would be limited, which may limit the ability of the Company to pay dividends to its shareholders.

Under the Supervisory Directive, Anchor Bank is not able to pay dividends to Anchor Bancorp without the prior approval of the DFI and the FDIC and we do not expect to be permitted to pay dividends as long as the Supervisory Directive remains in effect. In addition, we are restricted by the FDIC from making any distributions to shareholders that represent a return of capital without the written non-objection of the FDIC Regional Director and the DFI.

Regulation and Supervision of Anchor Bancorp

General. Anchor Bancorp is a bank holding company registered with the Federal Reserve and the sole shareholder of Anchor Bank. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, (“BHCA”), and the regulations promulgated thereunder. This regulation and oversight is generally intended to ensure that Anchor Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of Anchor Bank.

As a bank holding company, Anchor Bancorp is required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and will be subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

The Bank Holding Company Act. Under the BHCA, Anchor Bancorp is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both.

Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally include, among others, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit related insurance; leasing property on a full payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and implements new capital regulations that Anchor Bancorp will become subject to and that are discussed above under “- Regulation and Supervision of Anchor Bank - New Capital Rules.” In addition, among other changes, the Dodd-Frank Act requires public companies, such as Anchor Bancorp, to (i) provide their shareholders with a

non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

Sarbanes-Oxley Act of 2002. As a public company, Anchor Bancorp is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act was enacted in 2002 in response to public concerns regarding corporate accountability in connection with various accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and corporate governance rules and required the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a Board of Directors and management and between a Board of Directors and its committees.

Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

Interstate Banking. The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state. Nor may the Federal Reserve approve an application if the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above.

Regulatory Capital Requirements. Anchor Bancorp is subject to the new capital regulations reflected in the Final Rule and discussed above under “- Regulation and Supervision of Anchor Bank - New Capital Rules.” In addition, under the Dodd-Frank Act, the federal banking regulators require any company that controls an FDIC-insured depository institution, such as Anchor Bank, to serve as a source of strength for the institution, with the ability to provide financial assistance if the institution suffers financial distress.

Restrictions on Dividends. Anchor Bancorp’s ability to declare and pay dividends may depend in part on dividends received from Anchor Bank. The Revised Code of Washington regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out of accumulated net earnings, provided that the bank continues to meet its surplus

requirements. In addition, dividends may not be declared or paid if Anchor Bank is in default in payment of any assessment due the FDIC.

A policy of the Federal Reserve limits the payment of a cash dividend by a bank holding company if the holding company's net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A bank holding company not subject to consolidated capital requirements is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.

Except for a company that meets the well-capitalized standard for bank holding companies, is well managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement. A bank holding company is considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure.

Stock Repurchases. Bank holding companies, except for certain “well-capitalized” and highly rated bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.

TAXATION

Federal Taxation

General. Anchor Bancorp and Anchor Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Anchor Bancorp or Anchor Bank. The Company files income tax returns in the U.S. federal jurisdiction. With few exceptions, the Company is no longer subject to

U.S. federal or state/local income tax examinations by tax authorities for years before 2010.

Anchor Bancorp files a consolidated federal income tax return with Anchor Bank. Any cash distributions made by Anchor Bancorp to its shareholders would be considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.

Method of Accounting. For federal income tax purposes, Anchor Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on June 30 for filing its federal income tax return.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.

Net Operating Loss Carryovers. A financial institution may carryback net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997.

Corporate Dividends-Received Deduction. Anchor Bancorp may eliminate from its income dividends received from Anchor Bank as a wholly-owned subsidiary of Anchor Bancorp if it elects to file a consolidated return with Anchor Bank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which

own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

Washington Taxation

Anchor Bank is subject to a business and occupation tax imposed under Washington law at the rate of 1.8% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties and certain securities are exempt from this tax.

Oregon Taxation

The Company files income tax returns in Oregon state and within local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2009.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1. Financial Statements.

For a list of the financial statements filed as part of this report see Part II – Item 8.

2. Financial Statement Schedules.

All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in Part II, Item 8 of this Form 10-K.

3. Exhibits:

Exhibits are available from the Company by written request.

	3.1	Articles of Incorporation (1)
	3.2	Amended and Restated Bylaws (2)
	4.1	Form of Stock Certificate of the Company (1)
	10.1	Form of Anchor Bank Employee Severance Compensation Plan (1)
	10.2	Anchor Bank Phantom Stock Plan (1)
	10.3	Form of 401(k) Retirement Plan (1)
	14	Code of Ethics (3)
	21	Subsidiaries of Registrant
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
	31.3	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
	31.4	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
	101	The following materials from Anchor Bancorp's Annual Report on Form 10-K for the year ended June 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Statement of Financial Condition; (2) Consolidated Statement of Operations; (3) Consolidated Statement of Comprehensive Loss; (4) Consolidated Statement of Stockholders' Equity; (5) Consolidated Statement of Cash Flows; and (6) Notes to Consolidated Financial Statements (4)*

___________________

	*	Filed with Original Filing
	(1)	Filed on October 24, 2008, as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-154734) and incorporated herein by reference.
	(2)	Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 13, 2011 and incorporated herein by reference.
	(3)	The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.anchornetbank.com.
	(4)	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) 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

September 27, 2013	By:/s/Jerald L. Shaw
	Jerald L. Shaw
	President, Chief Executive Officer and Director
	(Duly Authorized Representative)

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