Anchor Bancorp (ANCB) SEC Annual Report (10-K) for 2011

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________

FORM 10-K

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

	For the fiscal year ended June 30, 2011 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		98530
(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:		None

Securities registered pursuant to Section 12(g) of the Act:		Common Stock, par value $0.01 per share
		(Title of Class)

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 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 7, 2011, 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 September 7, 2011, was $18.3 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

1.	Portions of the Registrant's Proxy Statement for the 2011 Annual Meeting of Stockholders. (Part III)

ANCHOR BANCORP

2011 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

			Page

Forward-Looking Statements			(iii)
Available Information			(iv)

PART I .
	Item 1. Business		1
		General	1
		Corporate Developments	1
		Market Area	3
		Lending Activities	5
		Asset Quality	21
		Investment Activities	30
		Deposit Activities and Other Sources of Funds	34
		Subsidiaries and Other Activities	39
		Competition	39
		Natural Disasters	39
		Employees	39
		How We Are Regulated	41
		Taxation	51
	Item 1A. Risk Factors		53
	Item 2. Properties		63
	Item 3. Legal Proceedings		64
	Item 4. [Removed and Reserved]		64
PART II.
	Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		65
	Item 6. Selected Financial Data		66
	Item 7. Management's Discussion and Analysis of Financial Condition and Results
	of Operations		68
		Overview	68
		Compliance With Order	68
		Operating Strategy	69
		Critical Accounting Policies	70
		Comparison of Financial Condition at June 30, 2011 and June 30, 2010	72
		Comparison of Operating Results for the Years Ended June 30, 2011 and June 30, 2010	73
		Comparison of Operating Results for the Years Ended June 30, 2010 and June 30, 2009	78
		Average Balances, Interest and Average Yields/Costs	81
		Yields Earned and Rates Paid	83
		Rate/Volume Analysis	84
		Asset and Liability Management and Market Risk	84
		Liquidity	88
		Contractual Obligations	89
		Commitments and Off-Balance Sheet Arrangements	90
		Capital	90
		Impact of Inflation	90
		Recent Accounting Pronouncements	91

	(Table of Contents continued on following page)

(i)



	Item 7A. Quantitative and Qualitative Disclosures About Market Risk	92
	Item 8. Financial Statements and Supplementary Data	92
	Item 9. Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure	133
	Item 9A. Controls and Procedures	133
	Item 9B. Other Information	134
PART III.
	Item 10. Directors, Executive Officers and Corporate Governance	134
	Item 11. Executive Compensation	134
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	135
	Item 13. Certain Relationships and Related Transactions and Director Independence	135
	Item 14. Principal Accountant Fees and Services	135
PART IV.
	Item 15. Exhibits and Financial Statement Schedules	136
	Signatures	137

As used in this report, the terms, "we," "our," and "us," and "Company" refer to Anchor Bancorp and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to the "Anchor Bank" or the "Bank" in this report, we are referring to Anchor Bank, a wholly owned subsidiary of Anchor Bancorp.

(ii)

Forward-Looking Statements

This Form 10-K, including information included or incorporated by reference, contents, and future filings by the Company on Form 10-Q, and Form 8-K, and future oral and written statements by Anchor Bancorp (the "Company") and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:

•

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

•

changes in general economic conditions, either nationally or in our market areas;

•

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

•

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;

•

secondary market conditions for loans and our ability to sell loans in the secondary market;

•

results of examinations of us by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institution, Division of Banks ("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

•

our compliance with regulatory enforcement actions, including the requirements and restrictions with the Order to Cease and Desist the Bank entered into with the FDIC and the DFI and the possibility that the Bank will be unable to fully comply with this enforcement action which could result in the imposition of additional requirements or restrictions;;

•

our ability to attract and retain deposits;

•

further increases in premiums for deposit insurance;

•

our ability to control operating costs and expenses;

•

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•

difficulties in reducing risks associated with the loans on our balance sheet;

•

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•

computer systems on which we depend could fail or experience a security breach;

•

our ability to retain key members of our senior management team;

•

costs and effects of litigation, including settlements and judgments;

•

our ability to manage loan delinquency rates;

•

increased competitive pressures among financial services companies;

(iii)

•

changes in consumer spending, borrowing and savings habits;

•

legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•

changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules;

•

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•

our ability to pay dividends on our common stock;

•

adverse changes in the securities markets;

•

inability of key third-party providers to perform their obligations to us;

•

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on existing accounting issues and details of the implementation of new accounting methods; and

•

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services.

These developments could have an adverse impact on our financial position and our results of operations.

Any forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements.

Available Information

The Company provides a link on its investor information page at www.anchornetbank.com to the Securities and Exchange Commission's ("SEC") website ( www.sec.gov ) for purposes of providing copies of its annual report to shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases. Other than an investor's own internet access charges, these filings are available free of charge and also can be obtained by calling the SEC at 1-800-SEC-0330. The information contained on the Company's website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

(iv)

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, 2011, we had total assets of $488.9 million, total deposits of $339.5 million and total stockholders' equity of $57.5 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 14 full-service banking offices (including four Wal-Mart store locations) and located within Grays Harbor, Thurston, Lewis, Pierce and Mason counties, Washington. 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, 2011, 89.9% of our loans were collateralized by real estate. Historically, lending activities have been primarily directed toward the origination of one- to four-family residential 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. To an increasing extent in recent years, lending activities have also included the origination of residential construction loans through brokers, in particular within the Portland, Oregon metropolitan area and increased reliance on non-core deposit sources of funds.

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. Anchor Bank became subject to the Order primarily because of its increased level of non-performing assets, reduced capital position and pre-tax operating losses in 2010 and 2009. The Order is a formal corrective action pursuant to which Anchor Bank has agreed to take certain measures in the areas of capital, loan loss allowance determination, risk management, liquidity management, Board of Directors oversight and monitoring of compliance, and imposes certain operating restrictions on Anchor Bank. In particular, under the Order, Anchor Bank has agreed to desist from operating with (i) management whose policies and practices are detrimental to Anchor Bank and with a Board of Directors providing inadequate supervision and direction to the management of Anchor Bank; (ii) inadequate capital, loan valuation reserves and liquidity resources; (iii) unsatisfactory lending and collection practices and (iv) a large volume of poor quality loans or in a manner as to produce operating losses.

The material provisions of the Order require Anchor Bank to:

●	retain qualified management of Anchor Bank;

●	increase in connection with its mutual to stock conversion, and subsequently maintain, Tier 1 capital in an amount equal to or exceeding 10% of Anchor Bank's total assets by May 2010;

●	enhance its practices and written policies for determining the adequacy of the allowance for loan and lease losses;

●	eliminate loans classified as Loss at its regulatory examination, and reduce the loans classified as Substandard and/or Doubtful as a percent of capital;

●	not extend additional credit to borrowers whose loan had been classified as Loss or Doubtful and is uncollected;

●	develop a plan to reduce delinquent loans and enhance its collection practices to provide effective guidance and control over Anchor Bank's lending function;

●	develop a plan to reduce the amount of commercial real estate and acquisition, development and construction loans;

●	develop a three year strategic plan outlining specific goals for loans, investments and deposits, acceptable to the FDIC;

●	develop and implement a written profit plan acceptable to the FDIC;

●	enhance its written funds management and liquidity policy and maintain a liquidity ratio of 15%;

●	not increase brokered deposits unless approved by the FDIC;

●	develop, adopt and implement a written policy regarding the relationship between Anchor Bank and its affiliates; and

●	prepare and submit quarterly progress reports to the FDIC and the DFI.

The mutual to stock conversion of Anchor Mutual Savings Bank was primarily undertaken to raise capital to comply with the capital requirements set forth in the Order, strengthen Anchor Bank's capital position and to permit future managed increases in earning assets. At June 30, 2011, our Tier 1 capital was $54.0 million, or $3.7 million in excess of the 10.0% requirement of the Order and $20.1 million in excess of the 4% Tier 1 capital requirement.

Management and the Board of Directors have been taking action and implementing programs to comply with the requirements of the Order. 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 as required by the Order. 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. Since the Order was issued, we have been successful in reducing nonaccrual loans to $14.2 million at June 30, 2011, from $42.3 million at June 30, 2009.

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

As a result of the Order, we are subject to certain business limitations, including our ability to retain executive officers and directors, extending credit, extending additional credit to any loan that has been adversely classified and is uncollected, significant limitations in our flexibility to make commercial real estate and acquisition and development construction loans and utilizing brokered deposits. For additional details regarding the Order, 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."

Market Area

Anchor Bank is a community-based financial institution primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, Mason and Clark counties. We also conduct lending operations in the Portland, Oregon metropolitan area. However, our lending activities have been materially limited in recent periods. Since the latter half of 2007, depressed economic conditions have prevailed in portions of the United States, including our market area of 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 March 31, 2011, the median home price in our five-county market area was $181,000, which was a 24% decline compared to the quarter ended September 30, 2007. In addition, existing home sales in our six-county market area for the quarter ended March 31, 2011 was $17.1 million, which reflected a 21.3% 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 0.79% for June 2011. According to the Department of Labor, the average unemployment rate in the counties in our market area averaged 11.3% during June 2011 compared to 10.6% during June 2010, which reflected an increase from an average of 5.1% during September 2007. These unemployment rates are higher than the national unemployment rates of 9.2%, 9.5% and 4.5%, as of June 2011, June 2010 and September 2007, respectively.

Grays Harbor County has a population of 72,000 and a median household income of $43,095 according to the latest 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 2011 estimated median family income as provided by data from the FDIC was $43,100. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2010, the median home price in Grays Harbor County was $121,500 compared to $140,000 for the quarter ended March 31, 2010, which reflected a decline of 22% 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 March 31, 2011 declined by 28.4% 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 increased to 13.8% at June 30, 2011 from 12.0% at June 30, 2010. We have six branches (including our home office) located throughout this county. A slowdown in the Grays Harbor County economy could negatively impact our profitability in this market area.

Thurston County has a population of 256,000 and a median household income of $60,237 according to the latest 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 2011 estimated median family income for Thurston County as provided by data from the FDIC was $60,200. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2011, the median home price in Thurston County was $209,500, which reflects a 22% 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 March 31, 2011 declined by 33.1% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Thurston County area had increased to 8.5% at June 30, 2011 from 7.3% at June 30, 2010. We currently have four branches in Thurston County. Thurston County has a stable economic base primarily attributable to the state government presence. A slowdown in the Thurston County economy could negatively impact Anchor Bank's lending opportunities in this market.

Lewis County has a population of 75,000 and a median household income of $44,581 according to the latest 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 2011 estimated median family income for Lewis County as provided by data from the FDIC was $44,600. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2011, the median home price in Lewis County was $137,500, which is a 35% 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 March 31, 2011 declined by 30.3% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Lewis County increased to 13.0% at June 30, 2011 from 12.1% at June 30, 2010. We have two branches located in Lewis County. A slowdown in the Lewis County economy could negatively impact our lending opportunities in this market.

Pierce County is the second most populous county in the state and has a population of 813,000 and a median household income of $57,879 according to the latest 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 2011 estimated median family income for Pierce County as provided by data from the FDIC was $57,900. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2011, the median home price in Pierce County was $199,900, which is a 31% 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 March 31, 2011 declined by 14.3% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Pierce County area increased to 10.0% at June 30, 2011 from 9.0% at June 30, 2010. A slowdown in the Pierce County economy could negatively impact the demand for construction loans and could negatively impact our profitability.

Mason County has a population of 59,000 and a median household income of $48,522 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 2011 estimated median family income for Mason County as provided by data from the FDIC was $48,500. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2011, the median home price in Mason County was $154,500, which is a 29% 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 March 31, 2011 declined by 28.7% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Mason County increased to 11.0% at June 30, 2011 from 9.9% at June 30, 2010. We have one branch located in Mason County. A slowdown in the Mason County economy could negatively impact our lending opportunities in this market.

Clark County has a population of 438,000 and a median household income of $63,611 according to the latest information available from the U.S. Census Bureau. The economic base in Clark County is supported by wood products and computer technology (Hewlett-Packard). The 2011 estimated median family income for Clark County as provided by data from the FDIC was $63,611. Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2011, the median home price in Clark County was $194,200, compared to $218,000 for the quarter ended March 31, 2010, which is a 22% decline from the median home price of $278,700 for the quarter ended September 30, 2007. In addition, existing home sales in our six-county market area for the quarter ended March 31, 2011 declined by 10.9% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Clark County was 9.9% at June 30, 2011 compared to 12.4% at June 30, 2010. We have one branch located in Clark County. A slowdown in the Clark County economy could negatively impact our lending opportunities in this market.

The Portland, Oregon metropolitan area, which includes the Oregon counties of Clackamas, Columbia, Multnomah, Washington, Yamhill and the Washington counties of Clark and Skamania, as well as the principal cities of Vancouver, Washington and Beaverton, Oregon, has a population of 2.3 million according to the latest information available from the U.S. Census Bureau and a median household income of $61,800. The economic base is supported by construction, semi conductor manufacturing, sports apparel and solar energy. According to the U.S. Department of Labor, the unemployment rate for Multnomah County decreased to 8.5% at June 30, 2011 from 10.2% at June 30, 2010.

We have a moderate amount of construction loans secured by property located in the Portland, Oregon metropolitan area. A slowdown in the Portland economy could negatively impact our lending opportunities in this market.

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, 2011, the net loan portfolio totaled $325.5 million and represented 66.6% of our total assets. As of June 30, 2011, 29.1% of our total loan portfolio was comprised of one- to four-family residential loans, 10.7% of home equity loans and lines of credit, 31.8% of commercial real estate loans, 12.8% of multi-family real estate loans, 5.2% of commercial business loans, 1.7% of secured consumer loans, 3.2% of unsecured consumer loans and 3.5% of construction loans.

At June 30, 2011, we were limited to 20% of total capital and surplus, or $11.5 million, as to the maximum amount that we could have loaned to any one borrower and the borrower's related entities under applicable State of Washington regulations. Our internal policy, however, limits loans to one borrower and the borrower's related entities to the lesser of 15% of our total capital or $8.0 million, without the express prior consent of the Board of Directors. At June 30, 2011, there were no borrowing relationships that were over the legal amount and one relationship for $10.3 million that was over our internal limit, which received the approval of the Board of Directors. Our ten largest credit relationships at June 30, 2011 were as follows:

●	Our largest single borrower relationship at June 30, 2011, as explained above, consisted of seven commercial real estate loans secured by income producing properties in the total amount of $10.3 million secured by professional office buildings;

●	The second largest relationship consisted of three commercial real estate loans totaling $7.8 million secured by light industrial buildings;

●	The third largest lending relationship consisted of three loans secured by intermediate care facilities aggregating $7.1 million;

●	The fourth largest lending relationship totaled $5.7 million, secured by a minority interest in a national shared credit which in turn is secured by an entertainment, hospitality and dining complex;

●	The fifth largest lending relationship totaled $5.6 million and consists of 38 loans, each of which was secured by a single family residential rental house, with an average balance of $147,000;

●	The sixth largest borrower relationship is one loan for $5.0 million, secured by a church complex;

●	The seventh largest lending relationship totaled $4.4 million consisting of 14 loans which range in size from $1.6 million to a zero balance line of credit. Collateral consists primarily of owner and non-owner occupied light industrial commercial real estate;

●	Our eighth largest borrower relationship totaled $4.2 million, consisted of one loan of $4.0 million and one loan of $200,000, and is secured by a limited service hotel managed by a national hotel chain;

●	The ninth largest relationship totaled $3.8 million and consisted of three loans. One loan of $100,000 was secured by a single family residential rental property, one loan of $1.2 million was secured by a 66 lot residential subdivision in Washington, and one loan of $2.5 million was secured by a

66 lot residential subdivision in Washington, and one loan of $2.5 million was secured by a multi-family residential condominium project in Oregon; and

●	The tenth largest credit relationship totaled $3.6 million and consisted of five loans secured by single and multi-family residential rental properties.

All of these relationships include personal guarantees except for the fourth largest (minority interest in the shared national credit), and all of the properties securing these loans are in our primary market area. These loans were all performing according to their repayment terms as of June 30, 2011, except for the following:

●

The second largest borrower relationship is in default. We have made a demand for payment, and are currently engaged in workout negotiations with the borrower. One of the three loans in this relationship is for $2.8 million and is a construction loan for the development of an industrial park. The loan is delinquent and past maturity, and construction had been delayed. Current appraisals of all collateral properties have been received and no valuation allowance is indicated. Negotiations with the borrower have resulted in the successful recommencement of construction of the industrial park with formal forbearance, extension and modification documentation in process for the loans.

●

The ninth largest borrower relationship consisting of three loans has two loans for $1.2 million and $2.5 million that are in default and that are the subject of foreclosure actions. Impairment analysis has been completed for these two loans and allowances have been taken in preparation for liquidation. The remaining loan for $100,000 is secured by tenant occupied single family residence property and is performing according to its terms.

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

	At June 30,
	2011					2010					2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Real Estate:
One- to four-family residential	$	97,133		29.1	%	$	112,835		27.7	%	$	114,823		22.9	%	$	114,695		23.0	%	$	94,197		19.5	%
Multi-family residential		42,608		12.8			45,983		11.3			52,661		10.5			59,114		11.8			63,117		13.1
Commercial		105,997		31.8			118,492		29.1			123,902		24.7			117,439		23.5			127,440		26.4
Construction		11,650		3.5			36,812		9.0			106,163		21.2			103,924		20.8			104,802		21.7
Land loans		6,723		2.0			7,843		1.9			9,211		1.8			6,957		1.4			12,504		2.6
Total real estate		264,111		79.2			321,965		79.1			406,760		81.2			402,129		80.5			402,060		83.3

Consumer:
Home equity		35,729		10.7			42,446		10.4			49,028		9.8			46,790		9.4			32,214		6.7
Credit cards		7,101		2.1			7,943		2.0			8,617		1.7			7,989		1.6			7,555		1.6
Automobile		5,547		1.7			8,884		2.2			14,016		2.8			18,095		3.6			19,169		4.0
Other		3,595		1.1			4,160		1.0			5,142		1.0			5,757		1.2			5,278		1.1
Total consumer		51,972					63,433		15.6			76,803		15.3			78,631		15.7			64,216		13.3

Commercial business		17,268		5.2			21,718		5.3			17,172		3.4			18,507		3.7			16,113		3.3
Total loans		333,351		100.0	%		407,116		100.0	%		500,735		100.0	%		499,267		100.0	%		482,389		100.0	%

Less:
Deferred loan fees		648					917					1,315					1,267					1,362

Allowance for loan losses		7,239					16,788					24,463					7,485					4,644

Loans receivable, net	$	325,464				$	389,411				$	474,957				$	490,515				$	476,383

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,
	2011					2010					2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
FIXED-RATE LOANS	(Dollars in Thousands)
Real estate:
One- to four-family residential	$	80,938		24.3	%	$	94,872		23.3	%	$	95,931		19.2	%	$	94,498		18.9	%	$	70,134		14.5	%
Multi-family residential		32,967		9.9			33,606		8.3			42,032		8.4			55,157		11.0			56,372		11.7
Commercial		71,493		21.4			86,667		21.3			94,567		18.9			104,680		21.0			116,395		24.1
Land loans		5,869		1.8			7,244		1.8			8,759		1.7			6,505		1.3			8,118		1.7
Total real estate		191,267		57.4			222,389		54.6			241,289		48.2			260,840		52.2			251,019		52.0

Real estate construction:
One- to four-family residential		1,481		0.4			9,481		2.3			27,671		5.5			23,725		4.8			13,959		2.9
Multi-family residential		--		--			--		--			--		--			4,713		0.9			--		--
Commercial		3,642		1.1			7,690		1.9			5,809		1.2			3,959		0.8			16,645		3.5
Total real estate construction		5,123		1.5			17,171		4.2			33,480		6.7			32,397		6.5			30,604		6.3

Consumer:
Home equity		25,806		7.7			31,074		7.6			36,260		7.2			45,796		9.2			30,064		6.2
Automobile		5,547		1.7			8,884		2.2			14,016		2.8			18,095		3.6			19,169		4.0
Other		3,510		1.1			4,084		1.0			5,078		1.0			5,741		1.1			5,278		1.1
Total consumer		34,663		10.5			44,042		10.8			55,354		11.1			69,632		13.9			54,511		11.3

Commercial business		8,460		2.5			9,226		2.3			8,721		1.7			13,265		2.7			9,092		1.9

Total fixed-rate loans	$	239,713				$	292,828				$	338,844				$	376,134				$	345,226

ADJUSTABLE-RATE LOANS
Real estate:
One- to four-family residential	$	16,195		4.9		$	17,963		4.4		$	18,892		3.8		$	20,197		4.0		$	24,063		5.0
Multi-family residential		9,641		2.9			12,377		3.0			10,629		2.1			3,957		0.8			6,745		1.4
Commercial		34,504		10.4			31,825		7.8			29,335		5.9			12,759		2.6			11,045		2.3
Land loans		854		0.3			599		0.1			452		0.1			452		0.1			4,386		0.9
Total real estate		61,194		18.4			62,764		15.4			59,308		11.8			37,365		7.5			46,239		9.6

Real estate construction:
One- to four-family residential		3,829		1.1			7,299		1.8			37,187		7.4			46,298		9.3			60,419		12.5
Multi-family residential		--		--			--		--			2,493		0.5			6,041		1.2			--		--
Commercial		2,698		0.8			12,342		3.0			33,003		6.6			19,188		3.8			13,779		2.9
Total real estate construction		6,527		2.0			19,641		4.8			72,683		14.5			71,527		14.3			74,198		15.4
(table continued on following page)

	At June 30,
	2011				2010				2009				2008				2007
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)

Consumer:
Home equity		9,923		3.0		11,372		2.8		12,768		2.6		994		0.2		2,150		0.4
Automobile		--		--		--		--		--		--		--		--		--		--
Credit cards		7,101		2.1		7,943		2.0		8,617		1.7		7,988		1.6		7,555		1.6
Other		85		--		76		--		64		--		16		--		--		--
Total consumer		17,109		5.1		19,391		4.8		21,449		4.3		8,999		1.8		9,705		2.0

Commercial business		8,808		2.6		12,492		3.1		8,451		1.7		5,242		1.0		7,021		1.5

Total adjustable rate loans		93,638		28.1		114,288		28.1		161,891		32.3		123,133		--		137,163		--

Total loans		333,351				407,116				500,735				499,267				482,389

Less:
Deferred loan fees		648				917				1,315				1,267				1,362
Allowance for loan losses		7,239				16,788				24,463				7,485				4,644
Loans receivable, net	$	325,464			$	389,411			$	474,957			$	490,515			$	476,383

One- to Four-Family Residential Real Estate Lending. As of June 30, 2011, $97.1 million, or 29.1%, of our total loan portfolio consisted of permanent loans secured by one- to four-family residences. We originate both fixed rate and adjustable rate loans in our residential lending program and use secondary market underwriting guidelines. 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, 2011, $80.9 million of this loan portfolio consisted of fixed rate loans. This amount was 83.3% of our total one- to four-family portfolio and 24.3% of our total loans at that date.

Specifically, we offer fixed rate, residential mortgages from 15 to 30 year terms and we use Freddie Mac daily pricing to set our own 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 5% above the original rate. At this time, we carry these adjustable rate mortgages in our portfolio and generally carry no prepayment restrictions. We do have an initial interest adjustable rate mortgage but all of our products adhere to Freddie Mac standards and none of them allow negative amortization of principal. 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 helps 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, 2011, $16.2 million of our permanent one- to four-family mortgage loans were adjustable rate loans. This amount represents 16.7% of our total one- to four-family loan portfolio and 4.9% of our total loans at that date.

Regardless of the type of loan product chosen, 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. 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 borrowers in low to moderate income brackets. 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 as well as providing 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 single-family first trust deed mortgage loans held for investment as of June 30, 2011.

	Outstanding Balance (1)		Weighted- Average FICO (2)		Weighted- Average LTV (3)			Weighted- Average Seasoning (4)
	(Dollars in Thousands)

Interest only	$	3,840		712		100.0	%		20
Stated income (5)		1,926		716		70.0			36
FICO less than or equal to 660 (6)		8,665		619		63.0			45

__________

(1)	The outstanding balance presented on 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 to 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 $8.7 million at June 30, 2011, representing 2.6% of total loans, 8.9% of one-to-four family mortgage loans, and 16.1% of Tier 1 Capital. Our one-to-four family residential 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 recently we have been significantly reducing the balance of these loans in accordance with the Order and limited new loan originations. At June 30, 2011, our construction loans amounted to $11.7 million, or 3.5% of the total loan portfolio, most of which is for the construction of single family residences. Included within our construction loan portfolio are $3.9 million of land acquisition and development loans to developers. In addition, a substantial number of our construction loans were referred through a broker relationship in Portland, Oregon, and are secured by first lien construction deeds of trust on properties in the greater Portland, Oregon metropolitan area. This relationship resulted in a high volume of speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans. Prior to the latter part of 2007, construction loan referrals from the Portland broker relationship received limited analysis and underwriting as our underwriting guidelines at that time focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower's debt servicing capacity or other credit factors. As a result, much of the increase in non-performing assets since 2007 was related to these construction loans and we ceased working with this broker. Beginning in the last half of 2007, our underwriting guidelines were revised to put greater emphasis on the borrower's credit, debt service coverage and cash flows in addition to collateral appraisals. In addition, our policies with respect to loan extensions became more restrictive than our previous policies, requiring that a review of all relevant factors, including loan terms, the condition of the security property and financial condition of the borrower conform to our revised underwriting guidelines and that

the extension is in our best interest. Because few of the loans from the Portland, Oregon broker met our enhanced credit standards, loans from this broker decreased substantially beginning in 2007. We did not originate any construction loans through this broker during the years ended June 30, 2011 and 2010. This compares to $2.7 million, $32.9 million and $48.9 million of construction loans originated through this broker during the years ended June 30, 2009, 2008 and 2007. At June 30, 2011, $5.3 million or 45% of our total construction loans had been originated through this broker. Of this amount, $3.7 million were past their maturity date and were more than 90 days delinquent. In addition, as a result of the recent slowdown in the housing market, we have extended the terms of construction loans totaling $2.3 million at June 30, 2011 to permit completion of the project or the borrower additional time to market the underlying collateral. Most of these loans mature within 12 months. To the extent these loans are not further extended or the borrower cannot otherwise refinance with a third party lender our non-performing construction loans may increase further. At June 30, 2011, construction loans totaling $2.8 million were delinquent more than 90 days and accruing interest and five construction loans totaling $4.1 million were on non-accrual status. Of this amount at June 30, 2011, $2.8 million was in the process of being extended and the remaining $1.3 million were in foreclosure. During the years ended June 30, 2011, 2010, and 2009, 22, 27 and 21 construction loans were charged-off totaling $8.9 million, $5.0 million and $2.1 million. respectively.

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

	At June 30,
	2011		2010		2009
	(In Thousands)
One- to four-family residential:
Speculative	$	3,984	$	9,448	$	48,407
Permanent		1,326		--		--
Custom		2,053		9,468		26,924
Land acquisition and development loans		--		11,100		14,424
Multi-family residential		--		--		--

Commercial real estate:
Construction		4,287		6,796		16,408

Total construction (1)	$	11,650	$	36,812	$	106,163

___________

(1)	Loans in process for these loans at June 30, 2011, 2010 and 2009 were $1.4 million, $3.2 million and $16.5 million, respectively.

We are also not currently originating builder construction loans. Our recent emphasis has been on originating custom construction loans to individual borrowers in an attempt to reduce future credit risk in our construction lending portfolio. During the year ended June 30, 2011, we originated four loans aggregating $457,200 to individual borrowers for the construction of custom homes. The average loan size in our custom construction loan portfolio was $319,000 as of June 30, 2011. Our construction loans to individuals to build their personal residences typically are structured either to be converted to fixed or adjustable rate permanent loans at the completion of the construction phase whereby there is one closing for both the construction loan and the permanent financing or as a construction loan without permanent financing. During the construction phase, which typically lasts for six to twelve months, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion. Custom construction loans require payment of interest only during the construction phase. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent fee appraiser. The maximum loan to value ratio for custom construction loans to individuals is 90% of the appraised value upon completion. Subject to market conditions, we expect this type of lending to grow as part of our expansion and change in the mix of our loan portfolio.

During the years ended June 30, 2011 and 2010 we did not originate any builder construction loans to fund the construction of one- to four-family residential properties, as compared to the origination of 17 loans during the year ended June 30, 2009, aggregating $6.0 million. We originated construction and site development loans to contractors and builders 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. Loans to finance the construction of single-family homes and subdivisions were generally offered to experienced builders and builders in our primary market areas. 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 was generally up to 75% of the appraised market value or sales price upon completion of the project. We generally did 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 required that builders maintain adequate insurance coverage. Maturity dates for residential construction loans were 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. Substantially all of our residential construction loans 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, 2011, our largest builder relationship consisted of three loans which totaled $3.8 million. One of the loans for $1.2 million is secured by 66 residential lots, another loan of $2.5 million was a bridge loan secured by residential condominium rentals, and one loan of $106,000 was secured by a single family rental house. The second largest builder relationship totaled $703,000, consisted of five loans secured by three single family houses and 10 residential lots. We have no other multi-loan builder relationships as of June 30, 2011.

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, 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 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, 2011 our portfolio of construction loans for commercial projects included one loan of $2.8 million, for development of a light industrial park in Washington.

The Company generally provides interest reserves 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. In some cases, we require additional interest reserves by use of deposited funds or through credit lines secured by separate and additional collateral. At June 30, 2011, we had one construction project totaling $2.8 million, or 22% of the total construction loan portfolio with an interest reserve component. At June 30, 2011, this loan had matured, was on non-accrual status, and was the subject of a workout agreement. We do not utilize additional interest reserves to prevent a loan from becoming non-performing. We allow disbursements from the interest reserve and recognize this disbursement as interest income as long as the project is progressing as originally projected and if there has not been any deterioration in the financial standing of the borrower or the underlying project. 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 non-performing, we halt any disbursement of those funds identified for use in paying interest and bill the borrower directly for interest payments. At June 30, 2011, our construction loan portfolio did not contain any loans which had been previously extended or renewed and which included unfunded interest reserves. Construction loans with interest reserves are underwritten similarly to construction loans without interest reserves.

We have 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.

We also originate land loans to individuals, although since 2008 we have originated only $355,000 as we are reducing our exposure to these types of loans in compliance with the Order. Land loans are secured by a first lien on the property, generally have a maximum loan to value ratio of 70% at a fixed rate of interest for a three to five year term with a maximum amortization of 30 years. At June 30, 2011, our land loans totaled $6.7 million or 2.0% of the total loan portfolio.

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. At June 30, 2011, all of our construction loan portfolio consisted of loans requiring interest only payments, one of which was a $2.8 million loan that is relying on the interest reserve to make this payment. 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, 2011, $148.6 million, or 44.6% of our total loan portfolio was secured by commercial and multi-family real estate property. Of that amount, $26.5 million was identified as owner occupied commercial real estate, and the remainder or $122.1 million, or 36.6% of our total loan portfolio was secured by income producing, or non-owner occupied commercial real estate. In accordance with the Order, we have been reducing the balance of our commercial real estate loans. 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, 2011, commercial real estate loans totaled $106.0 million, or 31.8% of our portfolio and multi-family real estate totaled $42.6 million, or 12.8% of our portfolio. These loans generally are priced at a higher rate of interest than one- to four-family residential 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 residential 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 $718,000 as of June 30, 2011. 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, 2011, the largest commercial loan in our portfolio was a $5.7 million purchased minority interest in a loan secured by a dining, entertainment, and hotel facility, located near Olympia, Washington. Our largest multi-family loan as of June 30, 2011, was an 75 unit apartment complex with an outstanding principal balance of $3.0 million, located in Kent, Washington. These loans were performing according to repayment terms as of June 30, 2011.

We offer both fixed and adjustable rate loans on commercial and multi-family real estate loans. Loans originated on a fixed rate basis generally are originated at fixed terms up to ten years, with amortization terms up to 30 years. As of June 30, 2011, we had $33.0 million and $9.7 million in fixed and adjustable rate multi-family residential loans, respectively and $71.5 million and $34.5 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 residential and commercial real estate loans are generally priced utilizing the applicable FHLB 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% on purchases and refinances. 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 $1.5 million, or loan to value 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, 2011.

Collateral	Amount		Percent of Total
	(Dollars in Thousands)

Multi-family	$	42,608		28.7	%
Office		21,712		14.6
Mini storage		11,556		7.8
Non-residential		44,862		30.2
Warehouse		12,866		8.6
Mobile home park		4,306		2.9
Assisted living		9,640		6.5
Shopping center		1,055		0.7
Total	$	148,605

Commercial and multi-family real estate loans can be approved up to $250,000 by either the Chief Financial Officer or Construction Manager, and up to $500,000 by any of the Credit Administrator, Business Banking Manager, Loan Service/Special Assets Manager, or Retail Banking Manager. These loans can be approved up to $1.0 million by either of 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, and Loan Service/Special Assets Manager is authorized to approve loans to one borrower or a group of related borrowers up to $4.0 million, with no limitation on individual loan size. 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.

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 residential 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 collectibility 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 collectibility 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, 2011 , there

was one $2.3 million commercial real estate loans that was delinquent in excess of 90 days and on non-accrual status. Multi-family and commercial real estate loan delinquencies totalled $6.2 million at June 30, 2011, including $5.9 million and $300,000 of commercial and multi-family loans, respectively. At June 30, 2011, no multi-family loans were delinquent in excess of 90 days or in non-accrual status. Commercial and multi-family loan charge offs for the years ended June 30, 2011, 2010 and 2009 were $584,000, $31,000 and $0, respectively.

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, 2011, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit, which totaled $35.7 million, or 10.7%, of the total loan portfolio. Our equity loans are risk priced based on 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 $7.1 million, or 2.1% of the total loan portfolio at June 30, 2011. We have been offering credit cards for more then 20 years, and currently offer only business credit card products. 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.

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 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.

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 residential mortgage loans. Nevertheless, home equity lines of credit have greater credit risk than one- to four-family residential 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, 2011, consumer loans of $373,000 were delinquent in excess of 90 days or in nonaccrual status. Consumer loans of $1.9 million were charged off during the year ended June 30, 2011 compared to $2.0 million and $1.0 million of consumer loans that were charged-off during the years ended June 30, 2010 and 2009, respectively, primarily as a result of increased delinquencies on our credit cards.

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. At June 30, 2011, commercial business loans totaled $17.3 million, or 5.2%, of our loan portfolio. 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.

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 year ended June 30, 2011, the Bank charged off $4.2 million of its commercial business loans, including one borrower relationship for $2.9 million involved in rock extraction and crushing operations. The business filed a Chapter 7 bankruptcy and the Bank recognized losses under a liquidation analysis. The opportunity for recovery of the Bank's losses is minimal, although the Bank is taking legal action to obtain recovery of its losses from the principals of the company. The remaining losses of $1.3 million in commercial business loans included 11 different borrowers, the largest of which was for $1.0 million by a business involved in land development and sales.

The remaining portfolio of commercial and business loans includes 147 loans in 85 different business classifications as identified by the North American Industrial Classification System. The largest remaining relationship includes five loans which totalled $2.7 million to a borrower located in Washington and involved in the manufacture of veneer, plywood and engineered wood products.

Loan Maturity and Repricing . The following table sets forth certain information at June 30, 2011 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.

			After		After		After
			One Year		3 Years		5 Years
	Within		Through		Through		Through		Beyond
	One Year		3 Years		5 Years		10 Years		10 Years		Total
	(In Thousands)
Real Estate:
One- to four-family residential	$	366	$	7,567	$	8,351	$	6,545	$	74,304	$	97,133
Multi-family residential		1,712		2,953		8,325		13,977		15,641		42,608
Commercial		6,962		29,868		42,416		23,867		2,884		105,997
Construction		9,561		2,089		--		--		--		11,650
Land loans		1,020		4,042		905		262		494		6,723
Total real estate		19,621		46,519		59,997		44,651		93,323		264,111

Consumer:
Home equity		38		351		1,069		14,090		20,181		35,729
Credit cards		7,101		--		--		--		--		7,101
Automobile		210		2,085		1,645		401		1,206		5,547
Other		667		630		341		140		1,817		3,595
Total consumer		8,016		3,066		3,055		14,631		23,204		51,972

Commercial business		5,302		1,793		6,052		3,913		208		17,268

Total	$	32,939	$	51,378	$	69,104	$	63,195	$	116,735	$	333,351

The following table sets forth the dollar amount of all loans due after June 30, 2012, which have fixed interest rates and have floating or adjustable interest rates.

	Fixed		Floating or
	Rates		Adjustable Rates		Total
	(In Thousands)
Real Estate:
One- to four-family residential	$	80,706	$	16,061	$	96,767
Multi-family residential		31,255		9,641		40,896
Commercial		64,531		34,504		99,035
Construction		--		2,089		2,089
Land loans		4,849		854		5,703
Total real estate		181,341		63,149		244,490

Consumer:
Home equity		25,793		9,898		35,691
Automobile		5,337		--		5,337
Other		2,870		58		2,928
Total consumer		34,000		9,956		43,956

Commercial business		7,111		4,855		11,966

Total	$	222,452	$	77,960	$	300,412

Loan Solicitation and Processing Loan originations are obtained from a variety of sources but primarily involve existing or walk-in customers. Our loan representatives and business banking officers also receive referrals from builders, realtors, and current business or personal customers. Loan originations are further supported by lending services offered through our internet website, direct mail, advertising, cross-selling, employees' community service, and broker relationships. All of our consumer loan products, including residential mortgage loans, secured and unsecured consumer loans, and credit cards are processed through our centralized processing and underwriting center. Commercial business loans, including commercial and multi-family real estate loans are processed and underwritten in one of the two Business Banking Centers operated by Anchor Bank in Aberdeen and Lacey, Washington. Residential and consumer underwriters have an assigned approval level and loans above that level must be forwarded to the next higher authority in accordance with our underwriting guidelines and policies. For loans that exceed underwriter and supervisor authority, and for all commercial business loans, approval could be obtained from one or more members of the Executive Loan Committee or possibly the Board of Directors. Multi-family and commercial real estate loans are approved by designated members of our management, Executive Loan Committee, Senior Loan Committee, and/or Board of Directors depending on the size of the loan and relationship. All loans or aggregated loans to one borrower over $4.0 million must be approved by the Board of Directors.

Loan Originations, Servicing, Purchases and Sales. During the years ended June 30, 2011 and 2010, our total loan originations were $30.8 million and $67.2 million, respectively.

One- to four-family home 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, 2011 and 2010, we sold $15.5 million and $43.1 million (including $4.3 million of commercial real estate loans), respectively, in whole loans to the secondary market and $0 and $5.0 million, respectively, were securitized. The decrease in whole loan sales and securitizations was attributable to a decrease in the origination of one-to four-family residential loans to $15.8 million from $41.4 million during the years ended June 30, 2011 and 2010, respectively. Our secondary market relationship is with Freddie Mac and Branch Bank & Trust. 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, 2011, our residential loan servicing portfolio was $141.4 million.

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


	Year Ended June 30,
	2011			2010			2009
Loans originated:	(In Thousands)

Real estate:
One- to four-family residential	$	15,819		$	41,401		$	51,870
Multi-family residential		1,976			580			4,473
Commercial		3,101			4,677			21,456
Construction		1,319			8,281			36,523
Land loans		355			655			--
Total real estate		22,570			55,594			114,322

Consumer:
Home equity		397			1,920			15,729
Credit cards		--			13			1,390
Automobile		467			475			3,515
Other		840			1,126			2,097
Total consumer		1,704			3,534			22,731

Commercial business		6,549			8,081			7,804

Total loans originated		30,823			67,209			144,857

Loans purchased:
Real estate loans:
One- to four-family residential		--			--			--
Multi-family residential		--			--			--
Commercial		--			--			--
Construction		--			--			--
Total real estate		--			--			--

Total loans purchased		--			--			--

Loans sold:
Total whole loans sold (1)		15,503			38,846			33,916
Commercial real estate		--			4,250			--
Participation loans		--			--			--
Total loans sold		15,503			43,096			33,916

Principal repayments		46,678			62,097			78,731
Loans securitized		--			5,016			30,269
Transfer to real estate owned		11,615			30,220			5,350

Increase (decrease) in other items, net		(20,749	)		(8,310	)		(7,017	)
Loans held for sale		225			4,016			5,132

Net increase (decrease) in loans receivable, net	$	(63,947	)	$	(85,546	)	$	(15,558	)

__________

(1) Including $13.2 million of fixed rate loans from our loan portfolio for the years ended June 30, 2010.

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 $648,000 of net deferred loan fees and costs as of June 30, 2011 compared to $917,000 and $1.3 million at June 30, 2010 and 2009, 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 reevaluation 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 homogenous 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.

Non-performing Assets. The following table sets forth information with respect to our non-performing assets and restructured loans for the periods indicated.


	At June 30,
	2011			2010			2009			2008			2007
Loans accounted for on a nonaccrual basis:	(Dollars in Thousands)
Real estate:
One- to four-family residential	$	3,113		$	3,855		$	3,803		$	337		$	70
Mulit-family residential		--			--			--			--			--
Commercial		2,280			433			--			51			301
Construction		4,055			13,964			36,954			6,719			--
Land loans		90			--			--			--			--
Total real estate		9,538			18,252			40,757			7,107			371

Consumer:
Home equity		121			70			347			190			63
Credit cards		--			--			--			--			--
Automobile		63			63			190			92			--
Other		9			47			54			9			--
Total consumer		193			180			591			291			63

Commercial business		1,245			1,324			997			--			--
Total		10,976			19,756			42,345			7,398			434
Accruing loans which are contractually past
due 90 days or more:
One- to four-family residential		44			--			--			--			--
Multi-family residential		--			--			--			--			--
Commercial		--			--			--			598			--
Construction		2,845			822			17,575			15,298			1,690
Land loans		--			--			--			--			--
Total real estate		2,889			822			17,575			15,896			1,690

Consumer:
Home equity		1			--			--			15			--
Credit cards		137			--			--			--			--
Automobile		--			--			--			--			--
Other		42			64			143			61			51
Total consumer		180			64			143			76			51

Commercial business		124			--			586			--			637

Total of nonaccrual and 90 days past due loans		14,169			20,642			60,649			23,370			2,812
Real estate owned		12,597			14,570			2,990			1,524			2,087
Repossessed automobiles		130			21			69			109			16
Total non-performing assets		26,896			35,233			63,708			25,003			4,915

Restructured loans		15,034			13,491			2,670			--			--

Allowance for loan loss as a percent of non-performing loans		51.1	%		81.3	%		40.3	%		32.0	%		165.1	%

Classified assets included in non- performing assets		14,169			20,642			60,649			23,370			2,812

Nonaccrual and 90 days or more past due
loans as a percentage of total loans		4.3	%		5.1	%		12.1	%		4.7	%		0.6	%

Nonaccrual and 90 days or more past due
loans as a percentage of total assets		2.9	%		3.8	%		9.2	%		3.7	%		0.5	%

Non-performing assets as a percentage of total assets		5.5	%		6.5	%		9.8	%		4.0	%		0.8	%

Nonaccrued interest (1)		783			731			2,664			2,335			105

_______

(1) Represents foregone interest on nonaccural loans.

With the exception of $2.8 million in construction and land development loans that were past due 90 days and still accruing interest at June 30, 2011, 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, identify additional collateral and or curtailment opportunities with borrowers, and update current and future exit strategies as part of its portfolio risk management.

All of the construction/land development loans which were 90 days delinquent and still accruing interest at June 30, 2011 included interest reserves based upon original loan budget and pro forma payments at the time of loan origination. At June 30, 2011 none of these loans were dependant upon interest reserves for payments, and all payments were being made in cash by borrowers.

Real Estate Owned and Other Repossessed Assets. As of June 30, 2011, we had 97 properties in real estate owned with an aggregate book value of $12.6 million. The largest of these properties had an aggregate book value of $1.7 million and consisted of a residential property located in Tacoma, Washington. At June 30, 2011, we had 33 one-to-four family residential properties with an aggregate book value of $7.5 million, five one-to-four family residential condominium units with an aggregate book value of $1.1 million, 50 residential building lots with an aggregate book value of $900,000, six vacant land parcels with an aggregate book value of $2.3 million, and three parcels of commercial real estate with an aggregate book value of $800,000. The geographic distribution of our real estate owned is limited to southwest Washington and the greater Portland area of northwest Oregon, with 75 of the parcels in Washington and the remaining 22 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. Our loan modifications are typically done in connection with a construction loan in non-accrual status. 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 non-accrual status and subsequently modified are not returned to accruing status until there has been at least three months of consecutive satisfactory performance. As of June 30, 2011, there were 31 loans with aggregate net principal balances of $15.4 million that we have identified as "troubled debt restructures." In connection with these loans, a valuation allowance in the form of charged off principal amounts equal to $763,000 has been taken. Of these 31 loans, one loan totaling $900,000 was not performing according to its modified repayment terms at June 30, 2011.

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. Since 2008, we have pursued the guarantors on approximately 20 credit relationships, 15 of which have resulted in legal or negotiated guarantor settlements resulting in loss mitigation ranging from approximately 10% up to 100% of the potential unmitigated loan loss. The other five guarantors we have pursued have not resulted, thus far, in any loss mitigation or recovery as a result of the guarantor's bankruptcy or ongoing litigation which has not yet been resolved.

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 addressed in the general allowance. General 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 the FDIC, 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 assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets, as of June 30, 2011, we had classified assets of $48.4 million. The total amount classified represented 84.2% of equity capital and 9.9% of assets at June 30, 2011.

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

	At June 30,
	2011		2010
	(In Thousands)
Classified Assets:
Substandard	$	48,372	$	40,354
Doubtful		--		--
Loss		--		--
Total	$	48,372	$	40,354

Our $48.4 million of substandard loans at June 30, 2011, consisted primarily of $42.0 million of real estate secured loans and $6.4 million of consumer and commercial business loans. Of the $42.0 million of substandard loans which were real estate secured, $9.6 million were construction and land development loans including $4.0 million secured by properties in Oregon. Included within the $9.6 million of substandard construction and land development loans were $500,000 of loans made to individuals for custom residential construction projects, and the balance of $9.1 million were loans to builder/developers. Also included in the total of substandard real estate secured loans at June 30, 2011 was $14.2 million of commercial real estate loans of which $400,000 were secured by properties in Oregon. The balance of our substandard real estate secured loans at June 30, 2011, was $18.3 million of loans secured by one-to-four family residential properties.

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, 2011, we had $31.5 million, or 9.4% of our net loans that were identified as potential problem loans as compared to $47.2 million or 12.1% of our net loans at June 30, 2010.

Within these problem loans were the following lending relationships:

●	a loan of $5.0 million secured by a church in Washington;

●	a relationship of $4.2 million in two loans secured by commercial real estate in Washington;

●	a relationship of $3.5 million in five loans secured by single family and multi-family rental property in Washington;

●	a loan of $2.6 million secured by multi-family real estate in Washington;

●	a loan of $2.3 million secured by commercial real estate in Washington;

●	a relationship of $2.3 million in two term loans secured by multi-family properties in Oregon;

●	a loan of $2.1 million secured by a multi-family income property in Washington;

●	a loan of $1.2 million secured by equipment, accounts receivable and inventory in Washington;

●	a loan of $1.1 million secured by commercial real estate in Washington; and

●	a loan of $1.1 million secured by commercial real estate in Washington.

The 10 relationships described above comprise $25.4 million, or 80.6% of the potential problem loans that were identified as of June 30, 2011. All of the loans identified above were in compliance with their repayment terms at June 30, 2011.

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 requiring management to make assumptions about probable losses inherent in the loan portfolio; and 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 $8.1 million and $2.6 million for the years ended June 30, 2011 and 2010, respectively. We increased the provision as a result of our experience with our delinquencies. The specific risks that are considered in our analysis for determining the provisions for loans 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, 2011, included an incremental increase component, a qualitative increase component, and specific reserve increase as a result of impairment analyses. The total allowance for loan losses was $7.2 million and $16.8 million at June 30, 2011 and 2010, respectively. Of the total allowance at June 30, 2011, specific reserves decreased to $1.2 million and general reserves decreased to $6.0 million from specific reserves of $8.6 million and general reserves of $8.3 million, respectively, at June 30, 2010. Included in the general reserve amount of $7.2 million at June 30, 2011 was $2.4 million based on incremental changes in asset quality and $1.1 million based on qualitative analysis.

The increase in the provision for loan losses was a result of the increase in 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 construction and development loans decreased to $7.8 million, or 2.3% of total loans at June 30, 2011, compared to $17.3 million or 4.4% of total loans at June 30, 2010. The $9.5 million decline in delinquent residential construction and development loans and the proactive identification and assessment of the loan portfolio was offset by an increase in charge offs during the period. 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 non-performing loans have decreased. During the current economic cycle we have experienced changes in our portfolio with respect to delinquent, non-performing and impaired loans. At June 30, 2011 and June 30, 2010, our total delinquent loans, including loans 30 or more days past due, were $26.0 million and $28.5 million, respectively, which included non-performing loans of $14.2 million and $20.6 million, respectively. Net charge offs during the years ended June 30, 2011 and June 30, 2010 were $17.6 million and $10.3 million, respectively.

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. 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 a current analysis of the net value of the collateral is determined utilizing the new appraisal. Once an updated appraisal is obtained, our policy is to update this appraisal every nine months if the collateral is considered impaired, however, because of the current economic conditions, we have accelerated the appraisal cycle so that appraisals are updated every six months. 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 non-performing loans include collateral secured and unsecured loans, which totaled $14.2 million and $20.6 million at June 30, 2011 and 2010, respectively, with the majority of these loans secured by first mortgage liens. At June 30, 2011, $1.6 million of loans were not secured by first mortgage liens, and of the remaining $12.6 million, $7.0 million of loans were for construction or land development loans. At the time of origination our construction and land development loans are limited to 75% or less of the value of the collateral, verified by a current appraisal report. The balance of $5.6 million of non-performing loans secured by a first mortgage lien was comprised of $3.3 million of one-to-four family residential mortgage loans and $2.3 million of commercial real estate loans.

The remainder of our non-performing loans at June 30, 2011 and 2010, included secured and unsecured credits from consumer and commercial business loan portfolios, and totaled $1.6 million and $1.5 million, respectively.

During the year ended June 30, 2011, we recorded a provision for loan losses which was significantly more than the provision for loan losses we recorded for the year ended June 30, 2010. The increased provision for 2011 was primarily a result of increased charge-off amounts due to business and individual borrower defaults, including bankruptcies.

The allowance for loan losses was $7.2 million or 2.2% of total loans at June 30, 2011 as compared to $16.8 million, or 4.1% of total loans outstanding at June 30, 2010. 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, 2011 and 2010 the provision for loan losses was $8.1 million and $2.6 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, 2011 and 2010, we had impaired loans of $34.5 million and $33.3 million, respectively. Included within the impaired loan totals are loans identified as troubled debt restructures. At June 30, 2011 and 2010, the aggregate amount of troubled debt restructure loans with valuation allowances were $15.0 million and $7.4 million, respectively.

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

	At June 30,
	2011							2010							2009							2008							2007
	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 residential	$	97,133	$	1,980		29.1	%	$	112,835	$	2,975		27.7	%	$	114,823	$	861		22.9	%	$	114,695	$	229		23.0	%	$	94,197	$	188		19.5	%
Multi-family residential		42,608		88		12.8			45,983		552		11.3			52,661		632		10.5			59,114		591		11.8			63,117		631		13.1
Commercial		105,997		173		31.8			118,492		1,422		29.1			123,902		1,487		24.7			117,439		1,174		23.5			127,440		957		26.4
Construction		11,650		1,163		3.5			36,812		7,952		9.0			106,163		16,558		21.2			103,924		4,309		20.8			104,802		1,272		21.7
Land loans		6,723		91		2.0			7,843		157		1.9			9,211		184		1.8			6,957		139		1.4			12,504		250		2.6
Total real estate		264,111		3,595		79.2			321,965		13,058		79.1			406,760		19,722		81.2			402,129		6,442		80.5			402,060		3,298		83.3

Consumer:
Home equity		35,729		739		10.7			42,446		1,818		10.4			49,028		368		9.8			46,790		94		9.4			32,214		64		6.7
Credit cards		7,101		568		2.1			7,943		477		2.0			8,617		517		1.7			7,989		240		1.6			7,555		227		1.6
Automobile		5,547		675		1.7			8,884		533		2.2			14,016		841		2.8			18,095		241		3.6			19,169		575		4.0
Other		3,595		153		1.1			4,160		250		1.0			5,142		309		1.0			5,757		283		1.2			5,278		158		1.1
Total consumer		51,972		2,135		15.6			63,433		3,078		15.6			76,803		2,035		15.3			78,631		858		15.7			64,216		1,024		13.3

Commercial business		17,268		1,509		5.2			21,718		652		5.3			17,172		206		3.4			18,507		185		3.7			16,113		322		3.3
Unallocated		--		--		--			--		--		--			--		2,500		--			--		--		--			--		--		--

Total	$	333,351	$	7,239		100.0	%	$	407,116	$	16,788		100.0	%	$	500,735	$	24,463		100.0	%	$	499,267	$	7,485		100.0	%	$	482,389	$	4,644		100.0	%

Management 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,
	2011			2010			2009			2008			2007
	(Dollars in Thousands)

Allowance at beginning of period	$	16,788		$	24,463		$	7,485		$	4,644		$	4,417
Provision for loan losses		8,078			2,615			20,263			3,545			720

Recoveries:
Real Estate loans:
One- to four-family residential		238			146			3			1			--
Multi-family residential		--			--			20			--			--
Commercial		5			--			--			112			352
Construction		502			--			--			--			---
Land loans		--			--			--			--			--
Total real estate		745			146			23			113			352

Consumer:
Home equity		9			1			3			1			--
Credit cards		98			55			45			--			--
Automobile		62			95			33			--			--
Other		27			39			--			18			14
Total consumer		196			190			81			19			14

Commercial business		3			--			--			6			--
Total recoveries		944			336			104			138			366

Charge-offs:
Real Estate loans:
One- to four-family residential		3,003			747			283			10			--
Multi-family residential		--			--			--			--			--
Commercial		584			31			--			--			--
Construction		8,915			4,970			2,086			259			617
Land loans		--			2,836			--			--			--
Total real estate		12,502			8,584			2,369			269			617

Consumer:
Home equity		465			847			222			--			--
Credit cards		591			605			374			--			--
Automobile		55			254			17			--			--
Other		777			336			407			568			242
Total consumer		1,888			2,042			1,020			568			242

Commercial business		4,181			--			--			5			--
Total charge-offs		18,571			10,626			3,389			842			859

Net charge-offs		17,627			10,290			3,285			704			493
Balance at end of period		7,239			16,788			24,463			7,485			4,644

Allowance for loan losses as a percentage
of total loans outstanding at the end of
the period		2.2	%		4.1	%		4.9	%		1.5	%		1.0	%

Net charge-offs as a percentage of average
total loans outstanding during the period		4.7	%		2.3	%		0.6	%		0.1	%		0.1	%

Allowance for loan losses as a percentage
of non-performing loans at end of period		51.1	%		81.3	%		40.3	%		32.0	%		165.1	%

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 collectibility of the loan portfolio as detailed further under "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, 2011 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,
	2011			2010			2009			2008			2007
	(Dollars in Thousands)

Provisions for loan losses	$	8,078		$	2,615		$	20,263		$	3,545		$	720
Allowance for loan losses		7,239			16,788			24,463			7,485			4,644
Allowance for loan losses as a
percentage of total loans
outstanding at the end of the
period		2.2	%		4.1	%		4.9	%		1.5	%		1.0	%

Net charge-offs		17,627			10,290			3,285			704			493
Total of nonaccrual and 90
days past due loans		14,169			20,642			60,649			23,370			2,812
Allowance for loan losses as a percentage of non-performing loans at end of period		51.1	%		81.3	%		40.3	%		32.0	%		165.1	%
Nonaccrual and 90 days or more
past due loans as a percentage of
loans receivable		4.3	%		5.1	%		12.1	%		4.7	%		0.6	%

Total loans	$	333,351		$	407,116		$	500,735		$	499,267		$	482,389

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, consisting of Directors Ruecker, Shaw and Degner, have 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 investment securities. The Chief Executive Officer has the primary responsibility for the management of the investment portfolio. The Chief Executive Officer considers

various factors when making decisions, including the marketability, maturity and tax consequences of proposed investments. 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, 2011, our investment portfolios 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 portfolios were comprised of Freddie Mac mortgage-backed securities. At June 30, 2011 the amortized cost was $30.5 million of mortgage-backed securities held in the available for sale category with a weighted average yield of 4.84%, while the mortgage-backed securities in the held to maturity portfolio was $7.4 million with a weighted average yield of 5.29%.

U.S. Government Agency Obligations . At June 30, 2011, the U.S Government and Agency Obligations available for sale amortized costs was $3.0 million with a weighted average yield of 4.38%. At June 30, 2011, no securities were held to maturity within this category.

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 rate "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 4.48% at June 30, 2011, and the total amount of our municipal bonds was $2.5 million at that date,of which $2.3 million was available for sale.

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 $6.5 million at June 30, 2011.

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 June 30, 2011 and 2010, our minimum investment requirement was approximately $3.8 million and $5.8 million, respectively. We were in compliance with the FHLB minimum investment requirement at June 30, 2011 and 2010.

Bank-Owned Life Insurance. We purchase bank-owned life insurance policies ("BOLI") to offset future employee benefit costs. At June 30, 2011, we had a $17.6 million investment in life insurance contracts. The purchase of BOLI policies, and its increase in cash surrender value, is classified as "Investment in life insurance contracts" in our consolidated statement of operations. The income related to the BOLI, which is generated by the increase in the cash surrender value of the policy, is classified in "increase in cash surrender value of life insurance" in our consolidated statement of operations.

The following table sets forth the composition of our investment securities portfolios at the dates indicated. The amortized cost of the available for sale investments is their net book value before the mark-to-market fair value adjustment.

	At June 30,
	2011				2010				2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in Thousands)

Available for sale:
Investment securities:
U.S. Government Agencies obligations	$	3,000	$	3,045	$	2,999	$	3,151	$	4,998	$	5,233
Municipal bonds		2,355		2,400		3,372		3,431		3,900		3,943
Mortgage-backed securities:
Freddie Mac		30,459		32,718		39,440		42,197		56,820		58,142
Total available for sale		35,814		38,163		45,811		48,779		65,718		67,318

Held to maturity:
Investment securities:
Municipal bonds		149		149		155		155		161		161
Mortgage-backed securities:
Freddie Mac		7,438		8,008		9,880		10,555		12,388		12,720
Total held to maturity		7,587		8,157		10,035		10,710		12,549		12,881

Total investment securities	$	43,401	$	46,320	$	55,846	$	59,489	$	78,267	$	80,199

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, 2011.


	At					At June 30, 2011
	June 30,										Over One to					Over Five to										Mortgage-Backed
	2011					One Year or Less					Five Years					Ten Years					Over Ten Years					Securities					Totals
			Weighted					Weighted					Weighted					Weighted					Weighted			MBS Securities		Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Available for sale:
Investment securities:
U.S. Treasury obligations
U.S. Government agencies obligations	$	3,000		4.38	%	$	3,000		4.38	%	$	--		--	%	$	--		--	%	$	--		--	%	$	--		--	%	$	3,000		4.38	%
Municipal bonds (1)		2,355		4.48			520		3.48			1,415		4.62			205		4.15			215		6.23			--		--			2,355		4.48
Mortgage-backed securities:
Freddie Mac		30,459		4.84			--		--			--		--			--		--			--		--			30,459		4.84			30,459		4.84
Total available for sale		35,814					3,520					1,415					205					215					30,459					35,814

Held to maturity:
Investment securities:
U.S. Treasury obligations		--		--			--		--			--		--			--		--			--		--			--		--			--		--
U.S. Government Agency obligations
Municipal bonds (1)		149		6.38			--		--			--		--			--		--			149		6.38								149		6.38
Mortgage-backed securities:
Freddie Mac		7,438		5.29			--		--			--		--			--		--			--		--			7,438		5.29			7,438		5.29
Total held to maturity		7,587					--					--					--					149					7,438					7,587

Total	$	43,401				$	3,520				$	1,415				$	205				$	364				$	37,897				$	43,401

______________
(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 non-interest-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, 2011, we had $77.7 million of jumbo ($100,000 or more) retail certificates of deposit. We also have $8.0 million in public funds, which represented 2.4% of total deposits at June 30, 2011. Anchor Bank had no brokered deposits at June 30, 2011. Pursuant to the Order we may not accept brokered deposits without regulatory approval. During the year ended June 30, 2011, brokered certificates of deposit decreased $21.7 million.

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,
	2011			2010			2009
	(In Thousands)

Beginning balance	$	355,788		$	471,713		$	389,949
Net deposits (withdrawals) before interest credited		(22,144	)		(125,473	)		68,456
Interest credited		5,830			9,548			13,308
Net increase (decrease) in deposits		(16,314	)		(115,925	)		81,764
Ending balance	$	339,474		$	355,788		$	471,713

The following table sets forth information concerning our time deposits and other deposits at June 30, 2011.

Weighted
Average									Percentage
Interest							Minimum		of Total
Rate		Term		Category	Amount		Balance		Deposits
					(In Thousands)
			N/A	Savings accounts	$	32,263				9.5	%
			N/A	Demand deposit accounts		47,675				14.0
			N/A	Money market accounts		78,017				23.0

				Certificates of Deposit
	0.68%	6 month		Fixed-term, fixed rate		5,670		500		1.7
	1.04	9-12 month		Fixed-term, fixed rate		21,981		500		6.5
	0.69	13-16 month		Fixed-term, fixed rate		2,810		500		0.8
	1.60	18-20 month		Fixed term-fixed or variable rate		19,322		500		5.7
	1.62	24 month		Fixed term-fixed or variable rate		40,722		2,000		12.0
	2.12	30-36 month		Fixed term-fixed or variable rate		7,552		500		2.2
	3.37	48 month		Fixed term-fixed or variable rate		5,342		500		1.6
	3.24	60 month		Fixed term-fixed or variable rate		6,073		500		1.8
	3.34	96 month		Fixed term-fixed or variable rate		65,469		500		19.3
	1.24	Other		Fixed term-fixed or variable rate		6,578		500		1.9
				TOTAL	$	181,519				100.0	%

Time Deposits by Rate. The following table sets forth the time deposits in Anchor Bank classified by rates as of the dates indicated.

	At June 30,
	2011		2010		2009
	(In Thousands)

0.00 - 0.99%	$	22,996	$	2,157	$	4,003
1.00 - 1.99%		71,215		68,318		15,874
2.00 - 2.99%		26,068		24,345		27,765
3.00 - 3.99%		50,615		53,847		134,431
4.00 - 4.99%		9,932		46,217		82,931
5.00 - 5.99%		693		6,580		7,268
6.00 - 6.99%		--		--		--
7.00 - 7.99%		--		--		--
8.00 - 8.99%		--		--		--
Total	$	181,519	$	201,464	$	272,272

Time Deposit Certificates. The following table sets forth the amount and maturities of time deposit certificates at June 30, 2011.

	Amount Due
			After 1 Year		After 2 Years		After 3 Years
	Within		Through		Through		Through		Beyond
	1 Year		2 Years		3 Years		4 Years		4 Years		Total
	(In Thousands)

0.00 - 0.99%	$	20,595	$	2,401	$	--	$	--	$	--	$	22,996
1.00 - 1.99%		38,355		30,194		2,458		208		--		71,215
2.00 - 2.99%		6,676		2,528		1,115		1,918		13,831		26,068
3.00 - 3.99%		4,238		1,640		1,120		--		43,617		50,615
4.00 - 4.99%		2,042		1,304		1,085		473		5,028		9,932
5.00 - 5.99%		305		--		251		--		137		693
Total	$	72,211	$	38,067	$	6,029	$	2,599	$	62,613	$	181,519

The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of June 30, 2011. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.

	Time Deposit
Maturity Period	Certificates
	(In Thousands)

Three months or less	$	7,962
Over three through six months		7,426
Over six through twelve months		13,716
Over twelve months		48,631
Total	$	77,735

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

	At June 30,
	2011								2010								2009
			Percent								Percent								Percent
			of			Increase/					of			Increase/					of
	Amount		Total			(Decrease)			Amount		Total			(Decrease)			Amount		Total
(Dollars in Thousands)

Savings deposits	$	32,263		9.5	%	$	2,507		$	29,756		8.4	%	$	1,167		$	28,589		6.1	%
Demand deposit accounts		47,675		14.0			(6,526	)		54,201		15.2			525			53,676		11.4
Money market accounts		78,017		23.0			7,650			70,367		19.8			(46,809	)		117,176		24.8
Fixed-rate certificates which mature in the year ending:
Within 1 year		51,827		15.3			(32,809	)		84,636		23.8			(65,803	)		150,439		31.9
After 1 year, but within 2 years		13,412		4.0			(5,384	)		18,796		5.3			(24,404	)		43,200		9.2
After 2 years, but within 5 years		16,211		4.8			5,309			10,902		3.1			(7,762	)		18,664		4.0
Certificates maturing thereafter		54,936		16.2			25,081			29,905		8.4			18,288			11,617		2.5
Variable rate certificates		45,083		13.3			(12,142	)		57,225		16.1			8,873			48,352		10.3
Total	$	339,474				$	(16,314	)	$	355,788				$	(115,925	)	$	471,713

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, or 90% of pledged collateral, or $7.0 million. At June 30, 2011, outstanding advances to Anchor Bank from the FHLB of Seattle totaled $85.9 million.

The following table sets 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,
	2011			2010			2009
	(Dollars in Thousands)
Maximum amount of borrowing outstanding
at any month end:
Federal Home Loan Bank advances	$	121,900		$	136,900		$	175,828

Approximate average borrowing outstanding:
Federal Home Loan Bank advances		104,408			135,975			151,193

Approximate weighted average rate paid on:
Federal Home Loan Bank advances		1.69	%		3.75	%		4.92	%


	At June 30,
	2011			2010			2009
	(Dollars in Thousands)

Balance outstanding at end of period:
Federal Home Loan Bank advances	$	85,900		$	136,900		$	129,500

Weighted average rate paid on:
Federal Home Loan Bank advances		1.75	%		3.07	%		4.94	%

Subsidiaries and Other Activities

Anchor Bank. Anchor Bank has one wholly-owned subsidiary, Anchor Financial Services, Inc., that is currently inactive. At June 30, 2011, 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, Kitsap, Clark 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 ten 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, 2011, we had 138 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

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

	Age at
	June 30,	Position
Name	2011	Company	Bank

Jerald L. Shaw	65	President and Chief Executive Officer	President and Chief Executive Officer
Terri L. Degner	48	Chief Financial Officer	Chief Financial Officer
Gregory H. Schultz	57	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 in September 2008. Prior to serving as President and Chief Executive Officer, he served as Chief Operating Officer from 2004 to 2006 and as 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. Mr. Shaw has been with Anchor Bank and its predecessor, Aberdeen Federal Savings and Loan Association, since 1976. Prior to that time, Mr. Shaw piloted C-130 aircraft for the U.S. Air Force, including combat missions during the Vietnam War. Having performed or directly supervised 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 Institution at the University of Washington. He has also attended asset-liability management training, directors' colleges, and other banking-related training. He is an active in the Thurston County Chamber of Commerce and American Bankers Association, and is a board member of the Washington Financial League. Mr. Shaw is on the Aberdeen Rotary Club and the Aberdeen Lions Club, and volunteers for Habitat for Humanity.

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.

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.

How We Are Regulated

The following is a brief description of certain laws and regulations which are applicable to Anchor Bancorp and Anchor Bank. Legislation is introduced from time to time in the United States Congress 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 the respective regulators. Any such legislation or regulatory changes in the future could adversely affect us. We cannot predict whether any such changes may occur.

Anchor Bancorp is registered as a bank holding company under the Bank Holding Company Act and is subject to regulation and supervision by the Federal Reserve Board and the DFI. Anchor Bancorp is also be required to file annually a report of operations with, and is subject to examination by, the Federal Reserve Board and the DFI. 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.

Regulation and Supervision of Anchor Bank

New Legislation. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

●

Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with 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 Anchor Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

●	Require the federal banking regulators to seek to make their capital requirements countercyclical, 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 and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions

●	Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

●	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.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on Anchor Bancorp and the financial services industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending our competitors' responses. Provisions in the legislation that require revisions to the capital requirements of Anchor and Anchor Bank could require Anchor and Anchor Bank to seek additional sources of capital in the future.

General. As a state-chartered savings bank, Anchor Bank is subject to applicable provisions of Washington law and regulations of the DFI. 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. Under state law, savings banks in Washington also generally have all of the powers that federal savings banks have under federal laws and regulations. Anchor Bank is subject to periodic examination and reporting requirements by and of the DFI.

Insurance of Accounts and Regulation by the FDIC. Anchor Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC. Deposits are insured up to the applicable limits by the FDIC, backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and 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 risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

In connection with the Order, the FDIC has notified Anchor Bank that it may not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the FDIC. In addition, Anchor Bank may not make indemnification and severance payments without complying with certain statutory restrictions, including prior written approval of the FDIC. For additional information, see "– Corporate Developments."

In addition to the regular quarterly assessments, due to losses and projected losses attributed to failed institutions, the FDIC imposed a special assessment of five basis points on the amount of each depository institution's assets reduced by the amount of its Tier 1 capital (not to exceed 10 basis points of its assessment base for regularly quarterly premiums) as of June 30, 2009, which was collected on September 30, 2009.

As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC has adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution's assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on the institution's assessment base for the third quarter of 2009, with deposit growth assumed quarterly at annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 30, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely. We were exempt from the three year prepaid assessment.

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 will be assigned to a Risk

Category as described above and a range of initial base assessment rates will 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 9 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 requires the FDIC to offset the effect on institutions with assets less than $10 billion of 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, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to fund the costs of failed thrifts in the 1980s. For the quarterly period ended June 30, 2011, the Financing Corporation assessment equaled 1.00 basis points for each $100 in domestic deposits. 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.

Under the Dodd-Frank Act, beginning on January 1, 2011, all non-interest bearing transaction accounts and IOLTA accounts qualify for unlimited deposit insurance by the FDIC through December 31, 2012. NOW accounts, which were previously fully insured under the Transaction Account Guarantee Program, are no longer eligible for an unlimited guarantee due to the expiration of this program on December 31, 2010. NOW accounts, along with all other deposits maintained at Anchor Bank, are now insured by the FDIC up to $250,000 per account owner.

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.

Federally insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarterly period ended June 30, 2011, the Financing Corporation assessment equaled 1.00 basis points for each $100 in domestic deposits. 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. For 2011, the Bank did not incur any FICO assessments.

The Dodd-Frank Act contains a number of provisions that will affect the capital requirements applicable to Anchor Bancorp and Anchor Bank. In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules. These rules, which will be phased in over a period of years, set new standards for common equity, tier 1 and total capital, determined on a risk-weighted basis. The impact on Anchor Bancorp and Anchor Bank of the Basel III rules cannot be determined at this time. For additional information, see "– Capital Requirements – Possible Changes to Capital Requirements Resulting from Basel III" set forth below.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Anchor Bank. There can be no prediction as to what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of Anchor Bank is not aware of any practice, condition or violation that might lead to termination of Anchor Bank's deposit insurance.

The FDIC may terminate the deposit insurance of any insured depository institution, including Anchor Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution meets certain criteria. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. We are not aware of any practice, condition or violation that might lead to termination of Anchor Bank's deposit insurance.

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 institutions 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, 2011, Anchor Bank was categorized as "well capitalized" under the prompt corrective action regulations of the FDIC. Although we were "well capitalized" at June 30, 2011 based on financial statements prepared in accordance with generally accepted accounting principles in the United States and the general percentages in the regulatory guidelines, we are no longer regarded as "well capitalized" for federal regulatory purposes as a result of the deficiencies cited in the Order. As a result of this reclassification, our borrowing costs and terms from the Federal Reserve and the FHLB, as well as our FDIC deposit insurance premiums, increased.

Capital Requirements. Federally insured savings institutions, such as Anchor Bank, are required to maintain a minimum level of regulatory capital. FDIC regulations recognize two types, or tiers, of capital: 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 for risk-based capital purposes (after any deductions for disallowed intangibles and disallowed deferred tax assets), includes such items as qualifying general loan loss reserves (up to 1.25% of risk-weighted assets), cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years), certain perpetual preferred stock, hybrid capital instruments including mandatory convertible debt, term subordinated debt, intermediate-term preferred stock (original average maturity of at least five years) and net unrealized holding gains on equity securities (subject to certain limitations); provided, however, the amount of term subordinated debt and intermediate term preferred stock that may be included in Tier 2 capital for risk-based capital purposes is limited to 50.0% of Tier 1 capital.

The FDIC currently measures 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,

2011, Anchor Bank had a Tier 1 leverage capital ratio of 10.7%. 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, 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 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, 2011, Anchor Bank had Tier 1 risk-based capital of 15.9%.

The table below sets forth Anchor Bank's capital position under the prompt corrective action regulations of the FDIC at June 30, 2011 and 2010 and the requirements pursuant to the Order. The Bank's Tier 1 capital ratio was 15.8% and our total risk-based capital ratio was 17.1% at June 30, 2011, which exceeded the requirements of the Order of 10% and 12%, respectively.

	At June 30,
	2011					2010
	Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)

Bank equity capital under GAAP	$	57,452				$	44,670

Total risk-based capital	$	57,812		17.1	%	$	47,232		11.8	%
Total risk-based capital requirement		27,085		8.0			32,050		8.0
Excess	$	30,727		9.1	%	$	15,182		3.8	%

Tier 1 risk-based capital	$	53,543		15.8	%	$	42,184		10.5	%
Tier 1 risk-based capital requirement		13,543		4.0			16,025		4.0
Excess	$	40,000		11.8	%	$	26,159		6.5	%

Tier 1 leverage capital	$	53,543		10.7	%	$	42,184		7.6	%
Tier 1 leverage capital requirement		20,093		4.0			22,200		4.0
Excess	$	33,450		6.7	%	$	19,984		3.6	%

Pursuant to minimum capital requirements of the FDIC, the 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 requires the Bank to maintain Tier 1 capital and total risk-based capital ratios at a minimum of 10% and 12%, respectively. As of June 30, 2011 and 2010, the Bank was classified as an "adequately 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.

Possible Changes to Capital Requirements Resulting from Basel III. In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred

to as "Basel III." Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Anchor Bank.

For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

●	A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period.

●	A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period.

●	A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase-in period.

●	An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.

●	Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

●	Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

●	Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.

●

For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.

The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio ("LCR") and net stable funding ratio ("NSFR"). The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress scenario. The purpose of the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although Basel III is described as a "final text," it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.

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. See "Business – Deposit Activities and Other Sources of Funds – Borrowings."

As a member, Anchor Bank is required to purchase and maintain stock in the FHLB of Seattle. At June 30, 2011, Anchor Bank had $6.5 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, 2011. Subsequent to December 31, 2008, the FHLB of Seattle announced that it was below its regulatory risk-based capital requirement and it is now precluded from paying dividends or repurchasing capital stock. The FHLB of Seattle is not anticipated to resume dividend payments until its financial results improve. The FHLB of Seattle has not indicated when dividend payments may resume.

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 residential 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, 2011, Anchor Bank's aggregate loans in excess of the supervisory loan-to-value ratios were 5.78% and Anchor Bank's loans on commercial, agricultural, multifamily or other non-one-to-four-family residential properties in excess of the supervisory loan-to-value ratios were 2.66%. 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 Board 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 non-interest-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, 2011, 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. Banks are also 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.

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.

Under the Order, Anchor Bank is not be able to pay dividends to Anchor Bancorp without the prior approval of the DFI and the FDIC. In addition, our strategic business plan filed with in connection with the Order contemplates no payment of dividends throughout the three-year period covered by the plan and we do not expect to be permitted to pay dividends as long as the Order remains in effect. In addition, we are restricted by the FDIC from making any distributions to stockholders that represent a return of capital without the written non-objection of the FDIC Regional Director.

Other Consumer Protection Laws and Regulations. Anchor Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject Anchor Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

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, and the regulations of the Federal Reserve. 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 Bank Holding Company Act, 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.

Anchor Bancorp and any subsidiaries that it may control are considered "affiliates" within the meaning of the Federal Reserve Act, and transactions between its bank subsidiary and affiliates are subject to numerous restrictions. With some exceptions, Anchor Bancorp and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Anchor Bancorp, or its affiliates.

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 signed into law on July 30, 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 Bank Holding Company Act 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. Under the Bank Holding Company Act, 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 include: 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.

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. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board's capital adequacy guidelines for Anchor Bancorp, on a consolidated basis, are similar to those imposed on Anchor Bank by the FDIC. See "– Regulation and Supervision of Anchor Bank – Capital Requirements."

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 Federal Reserve Board policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve Board also has indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.

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. Anchor Bank's federal income tax returns have never been audited.

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 investment securities are exempt from this tax.

Item 1A. Risk Factors.

An investment in our common stock involves various risks which are particular to Anchor Bancorp, our industry, and our market area. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

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.

Primarily because of its increased level of non-performing assets, on August 12, 2009, Anchor Bank became subject to the Order, issued with its consent, by the FDIC and DFI because they had reason to believe that Anchor Bank had engaged in unsafe and unsound banking practices and violations of law and/or regulations. The Order is a formal corrective action pursuant to which Anchor Bank has agreed to take certain measures in the areas of capital, loan loss allowance determination, risk management, liquidity management, board oversight and monitoring of compliance, and imposes certain operating restrictions on Anchor Bank. The Order will remain in effect until modified or terminated by the FDIC and DFI. See Item 1., "Business – Corporate Developments" for a more detailed discussion of the Order.

If the FDIC or DFI were to determine that Anchor Bank was not in compliance with the Order, it would have available various remedies, including among others, the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to direct an increase in capital, to remove officers and/or directors, to assess civil monetary penalties or to enforce the Order through court proceedings.

Management has been taking action and implementing programs to comply with the requirements of the Order. Anchor Bank believes that as of June 30, 2011, it was in compliance with the requirements set forth in the Order, other than the requirement to reduce classified assets to 30% of capital. At June 30, 2011, classified assets were 22.8% of capital. Compliance with the Order, however, is subject to a determination by the FDIC and DFI. The FDIC or DFI may determine, in its sole discretion, that we have not addressed the issues raised by the Order satisfactorily, or that any current or past actions, violations or deficiencies could be the subject of further regulatory enforcement actions taken by it. Such enforcement actions could involve penalties or limitations on our business and negatively affect our ability to implement our business plan, the value of our common stock as well as our financial condition and results of operations.

Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for

higher levels of capital than, current regulations. In addition, the banking regulators are required to seek to make capital requirements for banks and bank holding companies, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor and non-interest-bearing transaction accounts and IOLTA accounts have unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called "golden parachute" payments and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. The legislation also directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions with $10 billion or less in assets, such as Anchor Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. Any additional changes in our regulation and oversight, whether 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.

The current economic recession in the market areas we serve may continue to adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

Substantially all of our loans are to businesses and individuals in the states of Washington and Oregon. A continuing decline in the economies of the six counties in which we operate, including the Portland, Oregon metropolitan area, which we consider to be our primary market areas could have a material adverse effect on our business, financial condition, results of operations and prospects. In particular, Washington and Oregon have experienced substantial home price declines and increased foreclosures and have experienced above average unemployment rates.

A further deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

●	loan delinquencies, problem assets and foreclosures may increase;

●	demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;

●	collateral for loans made may decline further in value, in turn reducing customers' borrowing power, reducing the value of assets and collateral associated with existing loans; and

●	the amount of our low-cost or noninterest bearing deposits may decrease.

Our business may be adversely affected by credit risk associated with residential property.

At June 30, 2011, $97.1 million, or 29.1% of our total loan portfolio, was secured by one-to-four single-family residential real property. This type of lending is generally sensitive to regional and local economic conditions that may significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Washington housing market has reduced the value of the real estate collateral securing the majority of our loans and increased the risk that we would incur losses if borrowers default on their loans. Continued declines in both the volume of real estate sales and the sales prices, coupled with the recent recession and the associated increases in unemployment, may result in higher loan delinquencies or problem assets, a decline in demand for our products and services, or lack of growth or a decrease in our deposits. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. These declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.

Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas. Residential loans with combined higher loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses. See Item 1., "Business – Lending Activities – One- to Four-Family Residential Real Estate Lending."

Our loan portfolio is concentrated in loans with a higher risk of loss.

We originate construction and land loans, commercial and multi-family mortgage loans, commercial business loans, consumer loans, as well as residential mortgage loans primarily within our market areas. Generally, these types of loans, other than the residential mortgage loans, have a higher risk of loss than the residential mortgage loans. At June 30, 2011, we had $236.2 million outstanding in these types of higher risk loans, a decrease of $58.1 million compared to $294.3 million outstanding at June 30, 2010. For the year ended June 30, 2011, loans delinquent 30 days or more, including non-performing loans, decreased to $26.0 million, of which $3.6 million was in one-to-four family residential construction loans and $4.4 million was in other construction and land development loans. For the comparable period in 2010, we had $28.5 million loans that were delinquent 30 days or more, including non-performing loans, which included $6.7 million in one-to-four family residential construction loans and $10.5 million in other construction and land development loans. At June 30, 2011, delinquent loans represented 7.8% of total loans, including construction loans which represented 2.3% of total loans. For the comparable period in 2010, delinquent loans represented 7.0% of total loans, including construction loans which represented 4.2% of total loans. These loans have greater credit risk than residential real estate loans for a number of reasons, including those described below:

Construction and Land Loans. At June 30, 2011, we had $11.7 million or 3.5% of total loans in construction loans, including $2.1 million, net of loans in process, of land acquisition and development loans to three builders. In addition, we had $6.7 million of land loans to individuals at June 30, 2011. During the year ended June 30, 2007, we significantly increased our origination of construction and land acquisition and development loans to builders. Since 2008, and as required by the Order, we have significantly decreased our origination of construction and land acquisition and development loans to builders. Most of our construction loans relate to the construction of single family residences. At June 30, 2011, $4.0 million of our construction loans were to builders for speculative construction loans. Speculative construction loans are loans made to builders who have not identified a buyer for the completed property at the time of origination. All of our construction loan portfolio consists of loans requiring interest only payments, of which a $2.8 million construction loan was relying on an interest reserve to make required payments. This loan has matured, on non-

accrual status and is subject to a workout agreement. Interest reserves are a means through which a lender builds in, as a part of the loan approval, the amount of the monthly interest for a specified period of time.

These loan types exposes us to a greater risk of non-payment and loss than residential mortgage loans because construction and land 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 to independently repay principal and interest. In addition, many borrowers of these types of loans have more than one loan outstanding with us so an adverse development with respect to one loan or credit relationship can expose us to significantly greater risk of non-payment and loss. Included within the construction loan portfolio are a substantial number of loans referred through a broker relationship from the Portland, Oregon metropolitan area, secured by first lien construction deeds of trust on speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans located in the greater Portland metropolitan area. Many of these loans were originated utilizing our prior underwriting guidelines that focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower's debt servicing capacity or other credit factors. As a result, much of the increase in our non-performing assets since 2007 was related to these construction loans and we ceased working with this broker. At June 30, 2011, $5.5 million of our total construction loans had been originated through this broker of which $1.3 million were included in our $11.0 million of non-accruing loans at that date. For more information about the credit risk we face with respect to these types of loans, see Item 1., "Business – Lending Activities – Construction and Land Loans."

Commercial and Multi-family Mortgage Loans. These loans typically involve higher principal amounts than other types of loans. Repayment is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial and multi-family mortgage loans also expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. This risk is exacerbated in this current environment. As required by the Order, we also are implementing a plan to reduce the balance of these loans. At June 30, 2011, we had $148.6 million or 44.6% of total loans in commercial and multi-family mortgage loans. For more information about the credit risk we face with respect to these types of loans, see Item 1., "Business – Lending Activities – Commercial and Multi-Family Real Estate Lending."

Commercial Business Loans. At June 30, 2011, we had $17.3 million or 5.2% of total loans in commercial business loans, however, we are currently planning on expanding our commercial business lending, subject to market conditions. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower. For more information about the credit risk we face with respect to these types of loans, see Item 1., "Business – Lending Activities – Commercial Business Lending."

Consumer Loans. We make secured and unsecured consumer loans. Our secured consumer loans are collateralized with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus 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. At June 30, 2011, we had $52.0 million or 15.6% of total loans in consumer loans. Of this amount, $35.7 million were in home equity loans, some of which are loans in amounts for up to 100% of collateral value. For more information about the credit risk, we face with respect to these types of loans, see "Our business may be adversely affected by credit risk associated with residential property," above and Item 1., "Business – Lending Activities – Consumer Lending."

Our loan portfolio possesses increased risk as the result of subprime loans.

As of June 30, 2011, we held in our loan portfolio $8.7 million in one- to four-family mortgage loans (all of which were fixed rate), $1.0 million of automobile loans (all of which were fixed rate), $3.1 million of home equity loans (of which $2.5 million were fixed rate) and $300,000 of other types of consumer loans (all of which were fixed rate), which are considered "subprime" by federal banking regulators. The aggregate amount of loans considered subprime at June 30, 2011 was $13.0 million or 3.9% of our total loan portfolio. In exchange for the additional lender risk associated with these loans, these borrowers generally are required to pay a higher interest rate, and depending on the severity of the credit history, a lower loan-to-value ratio may be required than for a conforming loan borrower. At the time of loan origination, our subprime borrowers had an average Fair Isaac and Company, Incorporated, or FICO, credit score of 622 and a weighted average loan-to-value ratio of 63%, which may be significantly understated if current market values are used. A FICO score is a principal measure of credit quality and is one of the significant criteria we rely upon in our underwriting. Generally, a FICO score of 660 or higher indicates the borrower has an acceptable credit reputation. At June 30, 2011, $80,000 of our subprime loans was categorized as non-performing assets and all of these loans were categorized as nonaccrual. Subprime loans are generally considered to have an increased risk of delinquency and foreclosure than do conforming loans, especially when adjustable rate loans adjust to a higher interest rate. We had not experienced such increased delinquencies or foreclosures at June 30, 2011, however, our subprime loan portfolio will be adversely affected in the event of a further downturn in regional or national economic conditions. In addition, we may not recover funds in an amount equal to any remaining loan balance. Consequently, we could sustain loan losses and potentially incur a higher provision for loan loss expense.

Our concentration in non-owner occupied residential real estate loans may expose us to increased credit risk.

At June 30, 2011, $20.2 million, or 21.3% of our residential mortgage loan portfolio and 6.1% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant's continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner's ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. At June 30, 2011, we had 16 non-owner occupied residential loan relationships, with aggregate outstanding balances of $14.0 million, of which eight loan relationships had an aggregate outstanding balance over $500,000. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan. At June 30, 2011, all of our non-owner occupied residential mortgage loans were complying with their loan repayment terms, except for seven loans which totaled $1.1 million at that date.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans

otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Our total non-owner occupied commercial real estate loans were $144.3 million or 246.5% of total capital at June 30, 2011 compared to $178.2 million or 377.4% of total capital at June 30, 2010. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio, which could adversely affect our results of operations and regulatory capital.

For the year ended June 30, 2011 we recorded a provision for loan losses of $8.1 million compared to $2.6 million for the year ended June 30, 2010. We also recorded net loan charge-offs of $17.6 million for the year ended June 30, 2011 compared to $10.3 million for the comparable period in 2010. Since 2007 we have experienced significant loan delinquencies and credit losses. At June 30, 2011, our total non-performing assets had decreased to $26.9 million compared to $35.2 million at June 30, 2010. Slower sales and excess inventory in the housing market has been the primary cause our delinquencies and foreclosures, as residential construction and land development loans represented approximately 25.7% of our non-performing assets at June 30, 2011. We have extended $2.7 million in construction loans that were otherwise due to permit completion of the project or to provide the borrower additional time to market the underlying collateral. Most of these loans mature within 24 months. To the extent these loans are not further extended or the borrower cannot otherwise refinance with a third party lender our non-performing assets may increase further. Further, our portfolio is concentrated in construction loans and commercial and multi-family loans, all of which have a higher risk of loss than residential mortgage loans. See "– Our loan portfolio is concentrated in loans with a higher risk of loss" above. While construction loans, which includes land acquisition and development loans, represented 3.5% of our total loan portfolio at June 30, 2011 they represented 26.0% of our non-performing assets at that date. This compares to construction loans representing 9.0% of our total loan portfolio and 42.0% of our non-performing assets at June 30, 2010.

If current trends in the housing and real estate markets continue, we expect that we will continue to experience higher than normal delinquencies and credit losses. Moreover, until economic conditions improve, we expect that we will continue to experience significantly higher than normal delinquencies and credit losses. As a result, we could be required to make further increases in our provision for loan losses to increase our allowance for loan losses. Our allowance for loan losses was 2.2% of total loans held for investment and 51.1% of non-performing loans at June 30, 2011. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital. See Item 1., "Business – Asset Quality – Allowance for Loan Losses."

In addition, Western Washington and the Portland, Oregon metropolitan area, where substantially all of the real and personal property securing our loans is located, is an earthquake-prone region. A major earthquake could result in our significantly increasing our allowance for loan losses resulting in material losses to us, although we have not experienced any losses in the past ten years as a result of earthquake damage to collateral securing loans. See Item 1., "Business – Natural Disasters."

The maturity and repricing characteristics of our assets and liabilities are mismatched and subject us to interest rate risk which could adversely affect our results of operations and financial condition.

Our financial condition and results of operations are influenced significantly by general economic conditions, including the absolute level of interest rates, as well as changes in interest rates and the slope of the yield curve. Our profitably is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Significant changes in market interest rates or errors or misjudgments in our interest rate risk management procedures could have a material adverse effect on our results of operations and financial condition.

Our activities, like other financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on our financial condition and results of operations. Interest rate risk is determined by the maturity and repricing characteristics of our assets, liabilities and off-balance sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance.

We believe that the greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for our rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch, or "gap," is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest- earning assets. Additional interest rate risk results from mismatched repricing indices and formulae (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to us.

Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income and net market value of equity resulting from those movements under different rate environments. We update and prepare our simulation modeling at least quarterly for review by senior management and our directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net market value of our equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used and, as a result, our interest rate risk management strategies may prove to be inadequate.

Decreases in noninterest income could adversely affect our profitability and if we cannot generate and increase our income our stock price may be adversely affected.

Our net income has decreased steadily in recent years. We also face significant challenges that will hinder our ability to generate competitive returns. Our most significant challenge has been our low interest rate spread and margin during recent periods. As a result, we have become even more reliant on our noninterest income in order to generate net income. While we have identified various strategic initiatives that we will pursue in our efforts to overcome these challenges and improve earnings,, our strategic initiatives may not succeed in generating and increasing income. If we are unable to generate or increase income, our stock price may be adversely affected. For a description of our strategic initiatives to improve earnings, see Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations – Operating Strategy."

In addition, we originate and sell residential mortgage loans. Changes in interest rates affect demand for our residential loan products and the revenue realized on the sale of loans. A decrease in the volume of loans sold can decrease our revenues and net income. Further, recent regulatory changes to the rules for overdraft fees for debit transactions and interchange fees could reduce our fee income which would result in a reduction of our noninterest income.

Increases in deposit insurance premiums and special FDIC assessments will hurt our earnings.

FDIC insurance premiums increased significantly in 2009 and we may pay higher FDIC premiums in the future.

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

As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution's total assets minus its tangible equity instead of its deposits. While our FDIC insurance premiums initially will be reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and advances from the Federal Home Loan Bank of Seattle ("FHLB") and other borrowings to fund our operations. At June 30, 2011, we had $85.9 million of FHLB advances outstanding with an additional $38.0 million of available borrowing capacity. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington or Oregon markets where our loans are concentrated, or adverse regulatory action against us. In addition, under the Order our ability to use brokered deposits as a source of liquidity is limited.

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. At some point, we may need to raise additional capital to support continued growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the FDIC and DFI, we may be subject to additional adverse regulatory action. See "– 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." above.

Our investment in Federal Home Loan Bank stock may become impaired.

At June 30, 2011, we owned $6.5 million in FHLB stock. As a condition of membership at the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a par value of $100, is carried at cost, and it is subject to recoverability testing per applicable accounting standards. The FHLB has announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency, or the FHFA, its primary regulator, as of December 31, 2008, 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. The FHLB has communicated that it believes the calculation of risk-based capital under the current rules of the FHFA significantly overstates the market risk of the FHLB's private-label mortgage-backed securities in the current market environment and that it has enough capital to cover the risks reflected in its balance sheet. As a result, we have not recorded an other-than-temporary impairment on our investment in FHLB stock. However, continued deterioration in the FHLB's financial position may result in impairment in the value of those securities. In addition, on October 25, 2010, the FHLB received a consent order from the FHFA. Management is currently reviewing the redeemability of the FHLB stock. The potential impact of the consent order is unknown at this time. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.

New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company's stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading "Item 1. Business –How We Are Regulated – Regulation and Supervision of Anchor Bank" and " – Regulation and Supervision of Anchor Bancorp." These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

Such changes could subject us to additional costs, limit the types of financial services and products we may offer, restrict mergers and acquisitions, investments, access to capital, the location of banking offices, and/or increase the ability of non-banks to offer competing financial services and products, among other things. For example, a federal rule which took effect on July 1, 2010 prohibits a financial institution from automatically enrolling customers in overdraft protection programs, on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service. This new rule adversely affected our non-interest income during the second half of 2010 and is likely to continue to adversely affect the results of our operations by reducing the amount of our non-interest income.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property taken in as real estate owned and at certain other times during the assets holding period. Our net book value ("NBV") in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs ("fair value"). A charge-off is recorded for any excess in the asset's NBV over its fair value. If our valuation process is incorrect, the fair value of the investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-

offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our real estate owned and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by the bank regulators, may have a material adverse effect on our financial condition and results of operations.

You may not receive dividends on our common stock.

It is not expected that we will pay cash dividends on our common stock in the near future. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Our strategic business plan filed with in connection with the Order contemplates no payment of dividends throughout the three-year period covered by the plan and we do not expect to be permitted to pay dividends as long as the Order remains in effect. In addition, the FDIC's non-objection of the conversion restricts us from making any distributions to stockholders that represent a return of capital without the written non-objection of the FDIC Regional Director. The declaration and payment of future cash dividends will be subject to, among other things, our then current and projected consolidated operating results, financial condition, tax considerations, statutory and regulatory restrictions, future growth plans, general economic conditions, and other factors the board deems relevant. In addition, we are subject to government regulations that could limit or prevent us from paying dividends on our common stock, including those described under Item 1. "Business-How We Are Regulated".

Item 2. Properties

At June 30, 2011, we had one administrative office, 14 full service banking offices and one loan center of which 11 of the locations are owned and eight locations are leased. At June 30, 2011, the net book value of our investment in premises, equipment and leaseholds was $13.1 million. The net book value of our data processing and computer equipment at June 30, 2011 was $280,000.

The following table provides a list of our main and branch offices and indicates whether the properties are owned or leased:

Location	Leased or Owned	Lease Expiration Date	Square Footage	Net Book Value at June 30, 2011
				(In Thousands)
ADMINISTRATIVE OFFICE
100 West First Aberdeen, Washington 98520	Owned	--	7,410	2,353
BRANCH OFFICES:
Aberdeen (1) (2) 120 N. Broadway Aberdeen, Washington 98520	Owned	--	17,550	1,326
Centralia (2) 604 S. Tower Centralia, Washington 98531	Owned	--	3,000	684
Chehalis (3) 1601 NW Louisiana Avenue Chehalis, Washington 98532	Leased	4/30/13	683	190
Elma (2) 216 S. Third Street Elma, Washington 98541	Owned	--	2,252	316
Hoquiam 701 Simpson Avenue Hoquiam, Washington 98550	Leased	3/31/12	550	4
Lacey (4) 601 Woodland Square Loop SE Lacey, Washington 98503	Owned	--	13,505	2,105
Martin Way 4250 Martin Way E. Building 4, Suite 107 Olympia, Washington 98516	Leased	6/30/13	1,813	136

(table continued on following page)

Location	Leased or Owned	Lease Expiration Date	Square Footage	Net Book Value at June 30, 2011
				(In Thousands)
Montesano 211-B Pioneer Avenue East Montesano, Washington 98563	Owned	--	2,125	3,150
Ocean Shores (2) 795 Pt. Brown Avenue NW Ocean Shores, Washington 98569	Owned	--	2,550	663
Olympia (2) 2610 Harrison Avenue West Olympia, Washington 98507	Owned	--	1,882	487
Puyallup (3) 16502 Meridian Avenue E, Suite B Puyallup, Washington 98375	Leased	1/31/12	982	153
Shelton (3) 100 E. Wallace Kneeland Boulevard Shelton, Washington 98584	Leased	5/31/13	673	42
Westport (2) 915 N. Montesano Westport, Washington 98595	Owned	--	3,850	1,048
Yelm (3) 17100 State Route 507 SE Yelm, Washington 98597	Leased	7/30/12	577	171
LOAN OFFICES:
Aberdeen 211 E. Market Street Aberdeen, Washington 98520	Owned	--	12,825	186

Aberdeen 215 E. Market Street Aberdeen, Washington 98520	Owned	--	12,000	62

________

(1) Includes our home branch.

(2)	Drive-up ATM available.

(3) Wal-Mart locations.

(4) Includes space leased.

Item 3. Legal Proceedings

Anchor Bank from time to time is involved in various claims and legal actions arising in the ordinary course of business. There are currently no matters that in the opinion of management, would have material adverse effect on our consolidated financial position, results of operation, or liquidity.

Item 4. [Removed and Reserved]

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on The Nasdaq Stock Market LLC's Global Market, under the symbol "ANCB." As of June 30, 2011, there were 2,550,000 shares of common stock issued and outstanding and we had approximately 285 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers. The Company has not paid any dividends to shareholders since its formation.

Stock Repurchases. The Company had no stock repurchases of its outstanding common stock during the fourth quarter of the year ended June 30, 2011.

Equity Compensation Plan Information. The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.

Performance Graph. The following graph compares the cumulative total shareholder return on the Company's Common Stock with the cumulative total return on the NASDAQ Composite Index and a peer group of the SNL All Thrift Index. Total return assumes the reinvestment of all dividends and that the value of Common Stock and each index was $100 on January 26, 2011.

	Period Ending
Index	1/26/11		2/28/11		3/31/11		4/30/11		5/31/11			6/3011
Anchor Bancorp	$	100.00	$	105.60	$	107.00	$	101.60	$	95.10	$	92.00
NASDAQ Composite		100.00		101.68		101.71		105.13		103.87		101.67
SNL Thrift Index		100.00		103.46		100.08		99.87		97.96		94.32

Item 6.

Selected Financial Data

The following table sets forth certain information concerning our consolidated financial position and results of operations at and for the dates indicated and have been derived from our audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."

	At June 30,
	2011		2010		2009		2008		2007
FINANCIAL CONDITION DATA:	(In Thousands)

Total assets	$	488,935	$	544,829	$	652,435	$	626,445	$	608,696
Investment securities		5,594		6,737		9,337		26,643		29,066
Mortgage-backed securities		40,156		52,077		70,530		51,023		46,921
Loans receivable, net (1)		325,464		389,411		474,957		490,515		476,383
Deposits		339,474		355,788		471,713		389,949		443,354
Federal Home Loan Bank advances		85,900		136,900		129,500		165,165		96,665
Total equity		57,452		44,670		42,914		62,362		60,520



	Year Ended June 30,
OPERATING DATA:	2011			2010			2009			2008			2007
	(In Thousands)

Total interest income	$	25,969		$	32,503		$	37,050		$	40,131		$	40,872
Total interest expense		8,002			14,650			20,748			22,665			22,203

Net interest income before provision for loan losses		17,967			17,853			16,302			17,466			18,669
Provision for loan losses		8,078			2,615			20,263			3,545			720

Net interest income (loss) after
provision for loan losses		9,889			15,238			(3,961	)		13,921			17,949

Noninterest income		5,752			6,807			5,777			5,652			5,813
Noninterest expense		24,461			24,583			24,992			18,789			18,379

Income (loss) before provision (benefit) for income tax		(8,820	)		(2,538	)		(23,176	)		784			5,383
Total benefit for income tax		--			(2,958	)		(2,923	)		(2	)		1,544

Net income (loss)	$	(8,820	)	$	420		$	(20,253	)	$	786		$	3,839

___________________

(1) Net of allowances for loan losses, loans in process and deferred loan fees.

	At June 30,
OTHER DATA:	2011		2010		2009		2008		2007

Number of:
Real estate loans outstanding		2,222		2,463		2,499		2,398		2,235
Deposit accounts		26,837		29,035		31,951		31,613		31,689
Full-service offices		14		16		16		20		20



	At or For the
	Year Ended June 30,
KEY FINANCIAL RATIOS:	2011			2010			2009			2008			2007

Performance Ratios:
Return on assets (1)		(1.72	)%		0.07	%		(3.02	)%		0.13	%		0.63	%
Return on equity (2)		(16.66	)		0.86			(34.70	)		1.27			6.65
Equity to total assets ratio (3)		10.32			8.07			8.72			9.90			9.53
Interest rate spread (4)		3.57			3.00			2.17			2.48			2.72
Net interest margin (5)		3.78			3.22			2.58			2.97			3.26
Average interest-earning assets to
average interest-bearing liabilities		112.3			108.5			112.5			112.6			113.9
Efficiency ratio (6)		103.1			99.7			113.2			81.4			75.1
Other operating expenses as a
percent of average total assets		4.8			4.1			3.7			3.0			3.0

Capital Ratios:
Tier I leverage		10.7			7.6			6.2			10.1			10.1
Tier I risk-based		15.8			10.5			8.9			12.6			12.7
Total risk-based		17.1			11.8			10.1			13.6			13.7

Asset Quality Ratios:
Non-accrual and 90 days or
more past due loans as a
percent of total loans		4.3			5.1			12.1			4.7			0.6
Non-performing assets as a
percent of total assets		5.5			6.5			9.8			4.0			0.8
Allowance for loan losses as a percent
of total loans		2.2			4.1			4.9			1.5			1.0
Allowance for loan losses as a percent
of non-performing loans		51.1			81.3			40.3			32.0			165.1
Net charge-offs to average
outstanding loans		4.7			2.3			0.6			0.1			0.1

_______________________

(1)	Net income (loss) divided by average total assets.

(2)	Net income (loss) divided by monthly average equity.

(3)	Average equity divided by average total assets.

(4)	Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities.

(5)	Net interest income as a percentage of average interest-earning assets.

(6)	The efficiency ratio represents the ratio of noninterest expense divided by the sum of net interest income and noninterest income (expense).

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial conditions and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto, which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of Anchor Bancorp and its subsidiary.

Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank. Anchor Bank is a community-based savings bank primarily serving Western Washington through our 14 full-service banking offices (including four Wal-Mart store locations) and one loan production office located within Grays Harbor, Thurston, Lewis, Pierce, Mason and Clark counties, Washington. 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. Historically, lending activities have been primarily directed toward the origination of one- to four-family residential construction, commercial real estate and consumer loans. Since 1990, we have been also offered commercial real estate loans and multi-family loans primarily in Western Washington. To an increasing extent in recent years, lending activities have also included the origination of residential construction loans through brokers, in particular within the Portland, Oregon metropolitan area and increased reliance on non-deposit sources of funds.

Historically we used wholesale sources to fund wholesale loan growth; typically FHLB advances or brokered certificates of deposit depending on the relative cost of each and our interest rate position. Under the Order, however, we currently may not increase our brokered deposits and our current strategy is to utilize FHLB advances consistent with our asset liability objectives and replace brokered deposits with retail deposits while limiting loan growth consistent with our regulatory and capital objectives. While continuing our commitment to all real estate lending, management expects to continue to reduce our exposure to construction loans while commercial business lending becomes increasingly more important for us.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates also affect our net interest income. Additionally, to offset the impact of the current interest rate environment, we are seeking to find means of increasing interest income while controlling expenses. We intend to enhance the mix of our assets by increasing commercial business relationships which have higher risk-adjusted returns as well as deposits. A secondary source of income is noninterest income, which includes gains on sales of assets, and revenue we receive from providing products and services. From time to time, our noninterest expense has exceeded our net interest income after provision for loan losses and we have relied primarily upon gains on sales of assets (primarily sales of mortgage loans to Freddie Mac) to supplement our net interest income and to improve earnings.

Our operating expenses consist primarily of compensation and benefits, general and administrative, information technology, occupancy and equipment, deposit, services and marketing expenses. Compensation and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities.

Compliance With the Order

Correcting the problems identified in the Order has caused us to revise our operating strategy and has had a resulting impact on our financial condition and results of operations. We have reduced our asset size from $652.4 million at June 30, 2009 to $488.9 million at June 30, 2011 as we have sought to reduce our commercial real estate loans,

specifically our concentration in construction lending to preserve our capital and maximize our regulatory capital ratios. In particular, in fiscal 2010 we sold high yielding performing loans which has reduced our net interest income in recent periods. Also, because of the reduced demand for commercial real estate loans, we have sold these loans at a discount which has negatively impacted our operating results. Compliance with the Order has also increased our non-interest expense from $18.9 million for the year ended June 30, 2008 to $24.5 million for the year ended June 30, 2011 as we have increased our use of third party consultants. The reduction in asset size has helped us preserve our capital and maximize our regulatory capital ratios as we took action to achieve compliance with the requirements of the Order.

In addition to the reduction in assets we also reduced certain types of liabilities. We had relied on wholesale funds such as brokered deposits in some cases to fund lending transactions and as a result of the Order these funding sources are no longer available to us. For example, in the past Anchor Bank had used wholesale funds as an additional funding source, in many cases they were used to "match" fund loan purchases, or in other words to provide the specific source funds to purchase loans. The majority of these purchases were commercial real estate or multi-family loans. As a result of the Order we are eliminating all brokered certificates and reducing our reliance on wholesale funds and have decreased our reliance on core deposits which has decreased our cost of funds. At June 30, 2011, we had reduced our brokered deposits from $84.7 million at June 30, 2009.

The area that will continue to adversely impact us is related to the ongoing challenges in the economy. These challenges are discussed in further detail in the section entitled Item 1., "Business – Market Area." We have enhanced our loan policies, reduced our concentrations in construction lending which is the area that has negatively impacted our financial condition by requiring increases to our provision for loan losses.

Operating Strategy

Our focus is on managing our problem assets, increasing our higher-yielding assets (in particular commercial business loans), increasing our core deposit balances, reducing expenses, and retaining experienced employees with a commercial lending focus. We seek to achieve these results by focusing on the following objectives:

Focusing on Asset Quality. We have de-emphasized new loan originations for investment purposes to focus on monitoring existing performing loans, resolving non-performing loans and selling foreclosed assets. We have aggressively sought to reduce our level of non-performing assets through write-downs, collections, modifications and sales of non-performing loans and the sale of properties once they become real estate owned. We have taken proactive steps to resolve our non-performing loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate, and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. 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 a further deterioration in asset quality, including a new Chief Lending Officer in 2008 and a new Credit Administration Officer in 2009. During the latter part of fiscal 2007, as part of management's decision to reduce the risk profile of our loan portfolio, we implemented more stringent underwriting guidelines and procedures. Prior to this time our underwriting emphasis with respect to commercial real estate, multi-family and construction loans focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower's debt servicing capacity or other credit factors. Our revised underwriting guidelines place greater emphasis on the borrower's credit, debt service coverage and cash flows as well as on collateral appraisals. Additionally, our policies with respect to loan extensions became more conservative than our previous policies, and now require that a review of all relevant factors, including loan terms, the condition of the security property, market changes and trends that may affect the security property and financial condition of the borrower conform to our revised underwriting guidelines and that the extension be in our best interest.

Improving our Earnings by Expanding Our Product Offerings . We intend, subject to market conditions, to prudently increase the percentage of our assets consisting of higher-yielding commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations. At June 30, 2011 our commercial business loans totaled $17.3 million, or 5.2% of our total loan portfolio. We also intend to selectively add additional products to further diversify revenue sources and to capture more of each customer's banking relationship by

cross selling our loan and deposit products and additional services to our customers such as electronic invoicing and payroll services for our business customers.

Attracting Core Deposits and Other Deposit Products. Our strategic focus is to emphasize total relationship banking with our customers to increase core deposits to internally fund our loan growth. We believe that by focusing on customer relationships, our level of core deposits and locally-based retail certificates of deposit will increase.

As a result of the Order, however, we are focused on reducing our reliance on other wholesale funding sources such as brokered deposits and reducing our asset size for the purpose of preserving capital and to facilitate our efforts in complying with the requirements of the Order. During the year ended June 30, 2011, our deposits decreased by $16.3 million. This decrease was primarily as a result of our elimination of $21.7 million in brokered deposits as part of our strategy to reduce our reliance on wholesale funding sources.

Continued Expense Control. Beginning in fiscal 2009 and continuing into fiscal 2011, management has undertaken several initiatives to reduce noninterest expense and will continue to make it a priority to identify cost savings opportunities throughout all phases of our operations. Beginning in fiscal 2009, we instituted expense control measures such as reducing staff, eliminating Anchor Bank's discretionary matching contribution to its 401(k) plan, reducing most marketing expenses and charitable contributions, cancelling certain projects and capital purchases, and reducing travel and entertainment expenditures. We have also reduced our number of full-time equivalent employees from 194 at September 30, 2008 to 138 at June 30, 2011. During fiscal 2009, four in store Wal-Mart branch offices were closed as a result of their failure to meet our required growth standards. During fiscal 2010, two additional in store Wal-Mart branch offices were closed. The reduction in personnel, cost savings and closure of offices, resulted in savings of approximately $1.8 million per year from the closure of these six offices. Notwithstanding these initiatives, our efforts to reduce non-interest expense have been adversely affected by the $1.3 million annual increase in our FDIC insurance premiums beginning in fiscal 2009 and increases of $599,000, $2.4 million and $1.5 million in real estate owned reserve expense during fiscal 2009, 2010 and 2011, respectively. Despite these significant increases, non-interest expense decreased by $122,000 or 0.5% during fiscal 2011.

Retaining Experienced Personnel with a Focus on Relationship Banking. Our ability to continue to retain banking professionals with strong community relationships and significant knowledge of our markets will be a key to our success. We believe that we enhance our market position and add profitable growth opportunities by focusing on retaining experienced bankers who are established in their communities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete with other financial service providers by relying on the strength of our customer service and relationship banking approach.

Disciplined Franchise Expansion. Currently we cannot increase our asset size because of the capital and other requirements of the Order. As a result of these requirements, we have instead reduced our asset size to facilitate our efforts to comply with the Order and to preserve our capital. Once the Order is lifted and general economic conditions improve, we anticipate modest organic growth. We will seek to increase our loan originations and core deposits through targeted marketing efforts designed to take advantage of the opportunities being created as a result of the consolidation of financial institutions that is occurring in our market area.

Critical Accounting Policies

We use estimates and assumptions in our financial statements in accordance with generally accepted accounting principles. Management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to the determination of the allowance for loan losses and the associated provision for loan losses, the valuation of capitalized mortgage servicing rights, deferred income taxes and the associated income tax expense, as well as valuation of real estate owned. Management reviews the allowance for loan losses for adequacy on a monthly basis and establishes a provision for loan losses that it believes is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio. The carrying value of the capitalized mortgage servicing rights are evaluated annually and the carrying

value of real estate owned is assessed on a quarterly basis. Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management's understanding of our effective tax rate and the tax code.

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 Board of Directors and management assesses the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates, 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, requiring management to make assumptions about future losses on loans. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

Our methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits that meet the definition of impaired and a general allowance amount. The specific allowance component is determined when management believes that the collectibility of a specifically identified large loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been realized. The general allowance is determined by applying an expected loss percentage to various types of loans with similar characteristics and classified loans that are not analyzed specifically for impairment. Because of the imprecision in calculating inherent and potential losses, the national and local economic conditions are also assessed to determine if the general allowance is adequate to cover losses. We factored in an unallocated portion for market risk.

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.

Mortgage Servicing Rights. Mortgage servicing rights represent the present value of the future loan servicing fees from the right to service loans for others. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, the most critical of which is the mortgage loan prepayment speeds assumption. The mortgage loan prepayment speeds assumption is significantly impacted by interest rates. In general, during periods of falling interest rates, the mortgage loans prepay faster and the value of our mortgage servicing asset declines. Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases due to slower rates of prepayments. We account for mortgage servicing rights initially at fair value and on an ongoing basis evaluate the fair value. We use the direct write off method, thus minimizing the potential for impairment. We perform an annual review of mortgage servicing rights for potential changes in value. This review includes an independent appraisal by an outside party of the fair value of the mortgage servicing rights.

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we recorded a

valuation allowance of $6.4 million and $3.0 million at June 30, 2011 and 2010, respectively. The deferred tax provision for the year is equal to the net change in the net deferred tax asset from the beginning to the end of the year, less amounts applicable to the change in value related to investments available for sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from deferred loan fees and costs, mortgage servicing rights, loan loss reserves and dividends received from the FHLB of Seattle. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at the lesser of "cost" (principal balance less unearned loan fees, plus capitalized expenses of acquisition, if any) or "fair value" (estimated fair market value less estimated costs of disposal). Costs associated with real estate owned for maintenance, repair, property tax, etc., are expensed during the period incurred. Assets held in real estate owned are reviewed monthly for potential impairment. When impairment is indicated the impairment is charged against current period operating results and netted against the real estate owned to reflect a net book value. At disposition any residual difference is either charged to current period earnings as a loss on sale or reflected as income in a gain on sale.

Comparison of Financial Condition at June 30, 2011 and June 30, 2010

General. Total assets decreased $55.9 million, or 10.3%, to $488.9 million at June 30, 2011 from $544.8 million at June 30, 2010. The decrease in assets during this period was primarily a result of a $63.9 million or 16.4% decrease in loans receivable. Total real estate owned decreased $2.0 million, or 13.5%, to $12.6 million at June 30, 2011 from $14.6 million at June 30, 2010. Total liabilities decreased $68.7 million or 13.7% to $431.5 million at June 30, 2011 compared to $500.2 million at June 30, 2010. The decrease in our balance sheet facilitated our efforts to comply with the regulatory capital requirements under the Order. Total deposits decreased $16.3 million, or 4.6%, to $339.5 million at June 30, 2011 from $355.8 million at June 30, 2010 primarily as a result of our elimination of $21.7 million in brokered deposits partially offset by an increase of $7.7 million or 10.9% in money market deposits. Our total borrowings, which consisted of FHLB advances, decreased $51.0 million from June 30, 2010 to June 30, 2011. The average cost of advances decreased from 3.75% during the year ended June 30, 2010 to 2.08% during the year ended June 30, 2011.

Assets. For the year ended June 30, 2011, total assets decreased $55.9 million. The following table details the increases and decreases in the composition of our assets from June 30, 2010 to June 30, 2011:

	Balance at June 30, 2011		Balance at June 30, 2010		Increase (Decrease)
		Amount		Percent
	(Dollars in Thousands)
Cash and due from banks	$ 63,757		$32,831		$ 30,926		94.2	%
Mortgage-backed securities, available for sale	32,718		42,197		(9,479	)	(22.5)
Mortgage-backed securities, held to maturity	7,438		9,880		(2,442)	)	(24.7)
Loans receivable, net of allowance for loan losses	325,464		389,411		(63,947)	)	(16.4)

From June 30, 2010 to June 30, 2011, cash and due from banks increased $30.9 million. This increase was primarily a result of our public offering in January 2011 as well as funds received from normal operations.

Mortgage-backed securities decreased $11.9 million to $40.2 million at June 30, 2011 from $52.1 million at June 30, 2010. During the year ended June 30, 2010, we did not securitize any fixed rate mortgage-backed securities through Freddie Mac. We securitize and sell mortgage loans to manage interest rate sensitivity and capital requirements,

supplement loan originations and provide liquidity. During the year ended June 30, 2011, we sold $3.3 million in securities compared to $5.0 million in securities for the year ended June 30, 2010.

Loans receivable, net, decreased $63.9 million to $325.5 million at June 30, 2011 from $389.4 million at June 30, 2010 primarily as a result of lower loan demand from creditworthy borrowers, charge-offs, and transfers of nonperforming loans to real estate owned, as well as pay downs due to normal borrower activity. During the year ended June 30, 2011, $11.6 million of non-performing loans were transferred to real estate owned. During the year ended June 30, 2011, we continued to reduce our exposure to construction and land loans. The total construction and land loan portfolios declined to $18.4 million or 5.5% of the total loan portfolio at June 30, 2011 compared to $44.7 million or 11.0 % of the total loan portfolio a year ago. In addition to the significant decline in the construction and land loan portfolios, our commercial real estate loan portfolio decreased $12.5 million as a result of our continued focus on reducing the overall risk profile of our loan portfolio. One- to- four family residential loans decreased $15.7 million primarily due to repayments and lower loan demand. Consumer loans decreased $11.5 million primarily due to a $6.7 million decrease in home equity loans and a $3.3 million reduction in automobile loans.

Deposits. Deposits decreased $16.3 million, or 4.6%, to $339.5 million at June 30, 2011 from $355.8 million at June 30, 2010. We reduced brokered deposits $21.7 million in order to comply with the Order and as part of our strategy to reduce outstanding brokered deposits. The increase in money market deposits was due in part to our ongoing marketing strategy to focus on core deposits, as well as customer preference between demand deposits and money market accounts.

The following table details the changes in deposit accounts:

	Balance at June 30, 2011		Balance at June 30, 2010		Increase (Decrease)
		Amount		Percent
	(Dollars in Thousands)
Noninterest-bearing demand deposits	$ 30,288		$28,718		$ 1,570		5.5	%
Interest-bearing demand deposits	17,387		25,483		(8,096	)	(31.8)
Money market accounts	78,017		70,367		7,650		10.9
Savings deposits	32,263		29,756		2,507		8.4
Certificates of deposit
Retail certificates	181,519		179,739		1,780		1.0
Brokered certificates	--		21,725		(21,725	)	(100.0)
Total deposit accounts	$339,474		$355,788		$(16,314	)	(4.6)

Borrowings. FHLB advances decreased $51.0 million, or 37.3%, to $85.9 million at June 30, 2011 from $136.9 million at June 30, 2010. The decrease in borrowing was related to our continuing focus on reducing wholesale funds.

Equity. Total equity increased $12.8 million, or 28.6%, to $57.5 million at June 30, 2011 from $44.7 million at June 30, 2010. The increase was due to our public offering which increased equity by $22.2 million, an $8.8 million net loss and an $600,000 decrease in other comprehensive income.

Comparison of Operating Results for the Years Ended June 30, 2011 and June 30, 2010

General. Net loss for the year ended June 30, 2011 was $8.8 million compared to net income of $420,000 for the year ended June 30, 2010.

Net Interest Income. Net interest income increased $114,000, or 0.64%, to $18.0 million for the year ended June 30, 2011, from $17.9 million for the year ended June 30, 2010. The increase in net interest income was primarily attributable to the increase in our net interest margin.

Our net interest margin increased 56 basis points to 3.78% for the year ended June 30, 2011, from 3.22% for the same period of the prior year. Over the last year, our net interest margin has improved as a result of the decrease in our non-performing loans and the decline in our cost of funds exceeding the reduction in yield on interest-earning asses. Our yield on earnings assets decreased to 5.46% for the year ended June 30, 2011 from 5.87% for the year ended June 30, 2010. Our funding costs have decreased from 2.87% during the year ended June 30, 2010 to 1.89% during the year ended June 30, 2011. The decline was related to the repricing of our FHLB borrowings certificates of deposit to lower current rates and a $21.7 million decline in brokered certificates of deposit during the year ended June 30, 2011. Our net interest rate spread increased to 3.57% for the year ended June 30, 2011 as compared to 3.00% for the year ended June 30, 2010.

The cost of borrowed funds from the FHLB decreased to 2.08% during the year ended June 30, 2011 from 3.75% for the same period of the prior year. The following table sets forth the results of balance sheet growth and changes in interest rates to our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

	Year Ended June 30, 2011 Compared to June 30, 2010
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In Thousands)
Interest-earning assets:
Loans receivable, net	$	(695	)	$	(4,949	)	$	(5,644	)
Mortgage-backed securities		(133	)		(713	)		(846	)
Investment securities, FHLB and cash and due from banks		(155	)		171			(44	)
Total net change in income on interest-earning assets		(983	)		(5,551	)		(6,534	)

Interest-bearing liabilities:
Savings deposits		(12	)		15			3
Interest bearing demand deposits		(54	)		(25	)		(79	)
Money market accounts		(385	)		(135	)		(520	)
Certificates of deposit		(1,657	)		(1,465	)		(3,122	)
FHLB advances		(1,746	)		(1,184	)		(2,930	)
Total net change in expense on interest-bearing liabilities		(3,854	)		(2,794	)		(6,648	)

Net change in net interest income	$	2,871		$	(2,757	)	$	114

Interest Income. Total interest income for the year ended June 30, 2011 decreased $6.5 million, or 20.1%, to $26.0 million, from $32.5 million for the year ended June 30, 2010. The decrease during the period was primarily attributable to the decline in net loans receivable over the last year.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2011 and 2010:

	Year Ended June 30,
	2011					2010					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest Income from 2010
	(Dollars in Thousands)

Loans receivable, net	$	373,099		6.29	%	$	449,527		6.48	%	$	(5,644	)
Mortgage-backed securities		45,271		4.74			59,436		5.03			(846	)
Investment securities		6,259		4.25			7,966		4.27			(74	)
FHLB stock		6,510		--			6,510		--			--
Cash and due from banks		44,602		0.21			30,492		0.20			30
Total interest-earning assets	$	475,741		5.46	%	$	553,931		5.87	%	$	(6,534	)

Interest Expense. Interest expense decreased $6.6 million, or 45.4%, to $8.0 million for the year ended June 30, 2011 from $14.7 million for the year ended June 30, 2010 primarily due to a decline in our cost of funds. In addition, the average balance of total interest-bearing liabilities decreased $87.0 million, or 17.0%, to $423.7 million for the year ended June 30, 2011 from $510.7 million for the year ended June 30, 2010. The decrease was primarily a result of a decline in FHLB advances of $51.0 million and $21.7 million in brokered certificates of deposit.

As a result of general market rate decreases along with the reduction in outstanding brokered certificates of deposits, the average cost of funds for total interest-bearing liabilities decreased 98 basis points to 1.89% for the year ended June 30, 2011 compared to 2.87% for the year ended June 30, 2010.

The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2011 and 2010:

	Year Ended June 30,
	2011					2010					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest Expense from 2010
	(Dollars in Thousands)

Savings deposits	$	30,864		0.72	%	$	28,954		0.76	%	$	3
Interest-bearing demand deposits		20,423		0.29			25,033		0.55			(79	)
Money market accounts		75,661		0.95			84,933		1.46			(520	)
Certificates of deposit		192,334		2.51			235,785		3.37			(3,122	)
FHLB advances		104,408		2.08			135,975		3.75	%		(2,930	)
Total interest-bearing liabilities	$	423,695		1.89	%	$	510,680		2.87	%	$	(6,648	)

Provision for Loan Losses. In connection with our analysis of the loan portfolio for the year ended June 30, 2011, management determined that a provision for loan losses of $8.1 million was required for the year ended June 30, 2011, compared to a provision for loan losses of $2.6 million established for the year ended June 30, 2010. The $5.5 million increase in the provision primarily reflects an increase in charge-offs to $18.6 million for year ended June 30, 2011 as compared to $10.6 million for the last fiscal year. The $18.6 million of loans charged off during the fiscal year included $8.9 million of construction loans, $3.0 million of one-four family residential mortgage loans, $4.2 million of commercial business loans, $584,000 of commercial real estate loans, $465,000 of consumer home equity loans, and

$1.4 million of direct consumer loans, including credit cards. Non-performing assets were $26.9 million or 5.5% of total assets at June 30, 2011, compared to $35.2 million, or 6.5% of total assets at June 30, 2010. Management considers the allowance for loan losses at June 30, 2011 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. 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 provisions 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 details activity and information related to the allowance for loan losses for the year ended June 30, 2011 and 2010:

	At or For the Year
	Ended June 30,
	2011			2010
	(Dollars in Thousands)

Provision for loan losses	$	8,078		$	2,615
Net charge-offs		17,627			10,290
Allowance for loan losses		7,239			16,788
Allowance for losses as a percentage of total loans receivable at the end of this period		2.2	%		4.1	%
Nonaccrual and 90 days or more past due loans		14,169			20,642
Allowance for loan losses as a percentage of non-performing loans at end of period		51.1	%		81.3	%
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable at the end of the period		4.3	%		5.1	%
Total loans	$	333,351		$	407,116

Noninterest Income. Noninterest income decreased $1.1 million, or 15.5%, to $5.8 million for the year ended June 30, 2011 from $6.8 million for the year ended June 30, 2010. The following table provides a detailed analysis of the changes in the components of noninterest income:

	Year Ended June 30				Increase (Decrease)
	2011		2010		Amount			Percent
	(Dollars in Thousands)

Deposit services fees	$	2,288	$	2,719	$	(431	)		(15.9	)%
Other deposit fees		860		816		44			5.4
Loan fees		971		913		58			6.4
Gain (loss) on sale of investments		135		956		(821	)		(85.9	)
Gain on sale of loans		174		--		174
Other income		1,324		1,403		(79	)		(5.6	)
Total noninterest income	$	5,752	$	6,807	$	1,055			(15.5	)

Noninterest income decreased during the year ended June 30, 2011, primarily as a result of reduced gains on sale of investments and a decline in deposit service fees. Deposit service fees decreased as a result of the six branch closures as well as reductions in overdraft fees.

Noninterest Expense. Noninterest expense decreased $122,000, or 0.5%, to $24.5 million for the year ended June 30, 2011 from $24.6 million for the year ended June 30, 2010. The following table provides an analysis of the changes in the components of noninterest expense:

	At or For the Year Ended June 30,					Increase (Decrease)
	2011			2010		Amount			Percent
	(Dollars in Thousands)

Compensation and benefits	$	8,365		$	8,973	$	(608	)		(6.8	)%
General and administrative expenses		4,827			5,036		(209	)		(4.2	)
Real estate owned reserve		4,624			3,143		1,481			47.1
FDIC insurance premium		1,164			1,414		(250	)		(17.7	)
Information technology		2,049			1,952		97			5.0
Occupancy and equipment		2,337			2,581		(244	)		(9.5	)
Deposit services		708			885		(177	)		(20.0	)
Marketing		543			474		69			14.6
Net (gain) loss on sale of REO		(324	)		10		(334	)		(3,340.0	)
Loss on sale of property, premises and
equipment		168			115		53			46.1
Total noninterest expense	$	24,461		$	24,583	$	122			(0.5	)%

Major components of the increase in noninterest expense include:

Compensation and benefits decreased $608,000, or 6.8%, to $8.4 million for the year ended June 30, 2011 from $9.0 million for the same period a year ago as a result of the closure of one branch in June 2010 and one in January 2011 which resulted in a reduction of employees as well as a $244,000 reduction in occupancy and equipment expense. At June 30, 2011 we employed 138 full-time equivalent employees compared to 157 at June 30, 2010. In addition, we realized a $324,000 gain on sale of real estate owned during fiscal 2011. These reductions in non-interest expenses were partially offset by a $1.5 million increase in our real estate owned reserve for the year ended June 30, 2011 as a result of the decline in real estate owned values.

Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 103.1% for the year ended June 30, 2011 compared to 99.7% for the year ended June 30, 2010. The increase in efficiency ratio was primarily attributable to the decrease in noninterest income. By definition, a lower efficiency ratio would be an indication that we are more efficiently utilizing resources to generate net interest income and other fee income.

Provision (benefit) for Income Tax. The benefit for income tax for the year ended June 30, 2011 as compared to a benefit for income tax of $(3.0 million) for the same period a year ago as a result of the net operating loss for the year ended June 30, 2010. Our combined federal and state effective income tax rate for the current period was a tax benefit of (0%), as compared to (116.5%) for the same period a year ago.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we recorded a valuation allowance of $6.4 million, $3.0 million and $5.2 million at June 30, 2011, June 30, 2010 and 2009, respectively.

Comparison of Operating Results for the Years Ended June 30, 2010 and June 30, 2009

General. Net income for the year ended June 30, 2010 was $420,000 compared to a net loss of $(20.3 million) for the year ended June 30, 2009.

Net Interest Income. Net interest income increased $1.6 million, or 9.5%, to $17.9 million for the year ended June 30, 2010, from $16.3 million for the year ended June 30, 2009. The increase in net interest income was primarily attributable to the increase of our net interest margin.

Our net interest margin increased 64 basis points to 3.22% for the year ended June 30, 2010, from 2.58% for the same period of the prior year. The cost of interest-bearing liabilities decreased 83 basis points to 2.87% for the year ended June 30, 2010 compared to 3.70% for the same period of the prior year primarily due to a lower cost of funds. The decline was related to the repricing of our FHLB borrowings, money market accounts and certificates of deposit to lower current rates and a $63.0 million decline in brokered certificates of deposit during the year ended June 30, 2010.

The cost of borrowed funds from the FHLB decreased to 3.75% during the year ended June 30, 2010 from 4.92% for the same period of the prior year. The following table sets forth the results of balance sheet growth and changes in interest rates to our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

	Year Ended June 30, 2010 Compared to June 30, 2009
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In Thousands)
Interest-earning assets:
Loans receivable, net	$	532		$	(4,546	)	$	(4,014	)
Mortgage-backed securities		(125	)		219			94
Investment securities, FHLB stock and cash and due from banks		(446	)		(181	)		(627	)
Total net change in income on interest-earning assets	$	(39	)	$	(4,508	)	$	(4,547	)

Interest-bearing liabilities:
Savings deposits	$	(52	)	$	(9	)	$	(61	)
Interest bearing demand deposits		(12	)		55			43
Money market accounts		(998	)		(26	)		(1,024	)
Certificates of deposit		(1,112	)		(1606	)		(2,718	)
FHLB advances		(1,589	)		(749	)		(2,338	)
Total net change in expense on interest-bearing liabilities		(3,763	)		(2,335	)		(6,098	)

Net change in net interest income	$	3,724		$	(2,173	)	$	1,551

Interest Income. Total interest income for the year ended June 30, 2010 decreased $4.5 million, or 12.3%, to $32.5 million, from $37.1 million for the year ended June 30, 2009. The decrease during the period was primarily attributable to the decline in net loans receivable over the last year.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2010 and 2009:

	Year Ended June 30,
	2010					2009					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest Income from 2009
	(Dollars in Thousands)

Loans receivable, net	$	449,527		6.48	%	$	520,915		6.36	%	$	(4,014	)
Mortgage-backed securities		59,436		5.03			55,258		5.24			94
Investment securities		7,966		4.27			19,405		4.98			(626	)
FHLB stock		6,510		--			6,531		0.32			(21	)
Cash and due from banks		30,492		0.20			28,655		0.15			20
Total interest-earning assets	$	553,931		5.87	%	$	630,674		5.87	%	$	(4,547	)

Interest Expense. Interest expense decreased $6.1 million, or 29.4%, to $14.7 million for the year ended June 30, 2010 from $20.7 million for the year ended June 30, 2009 primarily due to a decline in our cost of funds. The average balance of total interest-bearing liabilities decreased $49.8 million, or 8.9%, to $510.7 million for the year ended June 30, 2010 from $560.5 million for the year ended June 30, 2009. The decrease was primarily a result of a decline in brokered certificates of deposits of $63.0 million.

As a result of general market rate decreases along with the reduction in outstanding brokered certificates of deposits, the average cost of funds for total interest-bearing liabilities decreased 83 basis points to 2.87% for the year ended June 30, 2010 compared to 3.70% for the year ended June 30, 2009.

The following table details average balances, cost of funds and the change in interest expense for the year ended June 30, 2010 and 2009:

	Year Ended June 30,
	2010					2009					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest Expense from 2009
	(Dollars in Thousands)

Savings deposits	$	28,954		0.76	%	$	29,940		0.94	%	$	(61	)
Interest-bearing demand deposits		25,033		0.55			15,905		0.60			43
Money market accounts		84,933		1.46			85,914		2.64			(1,024	)
Certificates of deposit		235,785		3.37			277,571		3.84			(2,718	)
FHLB advances		135,975		3.75	%		151,193		4.92	%		(2,338	)
Total interest-bearing liabilities	$	510,680		2.87	%	$	560,523		3.70	%	$	(6,098	)

Provision for Loan Losses. In connection with its analysis of the loan portfolio for the year ended June 30, 2010, management determined that a provision for loan losses of $2.6 million was required for the year ended June 30, 2010, compared to a provision for loan losses of $20.3 million established for the year ended June 30, 2009. The $17.6 million decrease in the provision primarily reflected the decrease in our non-performing assets. Non-performing assets were $35.2 million or 6.5% of total assets at June 30, 2010, compared to $63.7 million, or 9.8% of total assets at June 30, 2009.

The following table details activity and information related to the allowance for loan losses for the year ended June 30, 2010 and 2009:

	At or For the Year
	Ended June 30,
	2010			2009
	(Dollars in Thousands)

Provision for loan losses	$	2,615		$	20,263
Net charge-offs		10,290			3,285
Allowance for loan losses		16,788			24,463
Allowance for losses as a percentage of total loans
receivable at the end of this period		4.1	%		4.9	%
Nonaccrual and 90 days or more past due loans		20,642			60,649
Allowance for loan losses as a percentage of
non-performing loans at end of period		81.3	%		40.3	%
Nonaccrual and 90 days or more past due loans as a
percentage of loans receivable at the end of the period		5.1	%		12.1	%
Total loans	$	407,116		$	500,735

Noninterest Income. Noninterest income increased $1.0 million, or 17.8%, to $6.8 million for the year ended June 30, 2010 from $5.8 million for the year ended June 30, 2009. The following table provides a detailed analysis of the changes in the components of noninterest income:

	Year Ended June 30					Increase (Decrease)
	2010		2009			Amount			Percent
	(Dollars in Thousands)

Deposit services fees	$	2,719	$	2,945		$	(226	)		(7.7	)%
Other deposit fees		816		778			38			4.9
Loan fees		913		1,158			(245	)		(21.2	)
Profit (loss) on sale of loans		956		443			513			115.8
Other-than temporary impairment on FNMA preferred stock		--		(635	)		635			(100.0	)
Other income		1,403		1,088			315			29.0
Total noninterest income	$	6,807	$	5,777		$	1,030			17.8	%

Noninterest income increased during the year ended June 30, 2010, primarily as a result of no additional impairments related to our investments.

Noninterest Expense. Noninterest expense decreased $409,000, or 1.6%, to $24.6 million for the year ended June 30, 2010 from $25.0 million for the year ended June 30, 2009. The following table provides an analysis of the changes in the components of noninterest expense:

	At or For the Year Ended June, 30				Increase (Decrease)
	2010		2009		Amount			Percent
	(Dollars in Thousands)

Compensation and benefits	$	8,973	$	10,178	$	(1,205	)		(11.8	)%
General and administrative expenses		5,036		4,669		367			7.9
Real estate owned reserve		3,143		723		2,420			334.7
FDIC insurance premium		1,414		1,447		(33	)		(2.3	)
Information technology		1,952		2,090		(138	)		(6.6	)
Occupancy and equipment		2,581		3,147		(566	)		(18.0	)
Deposit services		885		889		(4	)		(0.4	)
Marketing		474		796		(322	)		(40.5	)
Net loss on sale of REO		10		322		(312	)		(96.9	)
Loss on sale of property, premises and
equipment		115		731		(616	)		(84.3	)
Total noninterest expense	$	24,583	$	24,992	$	(409	)		(1.6	)%

Major components of the increase in noninterest expense include:

Compensation and benefits decreased $1.2 million, or 11.8%, to $9.0 million for the year ended June 30, 2010 from $10.2 million for the same period a year ago as a result of the closure of four branches in June 2009 which resulted in a reduction of employees. At June 30, 2010 we employed 157 full-time equivalent employees compared to 173 at June 30, 2009. Our real estate owned reserve increased $2.4 million for the year ended June 30, 2010 as a result of the decline in real estate owned values.

Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 99.7% for the year ended June 30, 2010 compared to 113.2% for the year ended June 30, 2009. The decrease in efficiency ratio was primarily attributable to the increase in fee income and the decrease in expenses.

Provision (benefit) for Income Tax. The benefit for income tax for the year ended June 30, 2010 was ($3.0 million) compared to a benefit for income tax of $(2.9 million) for the same period a year ago as a result of the net operating loss for the year ended June 30, 2009. Our loss before income tax benefit declined $20.6 million, or 89.0%, to $(2.5 million) for the year ended June 30, 2010 compared to $(23.2 million) for the year ended June 30, 2009. Our combined federal and state effective income tax rate for the current period was a tax benefit of (116.5%), as compared to (12.6%) for the same period a year ago. Based upon the available evidence, we recorded a valuation allowance of $3.0 million, $5.2 million, and $0 at June 30, 2010, 2009 and 2008, respectively.

Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using the average of weekly interest-earning assets and interest-bearing liabilities. Noninterest-earning assets and noninterest-bearing liabilities have been computed on a monthly basis.

Year Ended June 30,

2011

2010

2009

Average

Balance (1)

Interest

and

Dividends

Yield/

Cost

Average

Balance (1)

Interest

and Dividends

Yield/

Cost

Average

Balance (1)

Interest

and Dividends

Yield/

Cost

(Dollars in Thousands)

Interest-earning assets: