Anchor Bancorp (ANCB) SEC Annual Report (10-K) for 2012

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      X        No 

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

Yes     X       No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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):

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, 2012, there were issued and outstanding 2,550,000 shares of the registrant's Common Stock, which are traded on the over-the-counter market through the NASDAQ Global Market under the symbol "ANCB."  The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of December 31, 2011, was $15.8 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

ANCHOR BANCORP

2012 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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 "Anchor Bank" or the "Bank" in this report, we are referring to Anchor Bank, a wholly owned subsidiary of Anchor Bancorp.

Forward-Looking Statements

This Form 10-K, including information included or incorporated by reference, 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:

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.

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, 2012, we had total assets of $470.8 million, total deposits of $345.8 million and total stockholders' equity of $54.0 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 13 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, 2012, 90.5% of our loans were collateralized by real estate. Historically, lending activities have been primarily directed toward the origination of one- to four-family construction, commercial real estate and consumer loans.  Since 1990, we have also offered commercial real estate loans and multi-family loans primarily in Western Washington. In prior years, lending activities had 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.   On September 5, 2012, Anchor Bank's regulators, the FDIC and the DFI terminated the Order, 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 was a formal corrective action pursuant to which Anchor Bank 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 imposed certain operating restrictions on Anchor Bank, including (i) increasing, 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; (ii) eliminating loans classified as Loss at its regulatory examination, and reducing the loans classified as Substandard and/or Doubtful as a percent of capital; (iii) enhancing its written funds management and liquidity policy and maintaining a liquidity ratio of 15%; and (iv) not increase brokered deposits unless approved by the FDIC.

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, 2012, our Tier 1 capital was $52.3 million, or $4.5 million in excess of the 10.0% requirement of the Order and $33.2 million in excess of the 4% Tier 1 capital requirement.  Since the Order was issued, we have successfully reduced nonaccrual loans to $8.7 million at June 30, 2012, from $42.3 million

at June 30, 2009. The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank. In place of the Order, Anchor Bank entered into a Supervisory Directive with the DFI.

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

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

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

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

Market Area

Anchor Bank is a community-based financial institution primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, and Mason 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 June 30, 2012, the median home price in our five-county market area was $170,120, which was a 26.0% decline compared to the quarter ended September 30, 2007.  In addition, existing home sales in our five-county market area for the quarter ended June 30, 2012 was $17.6 million, which reflected a 2.7% increase 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 0.41% for June 2012.  According to the Department of Labor, the average unemployment rate in the counties in our market area averaged 11.2% during June 2012 compared to 11.3% during June 2011, which reflected an increase from an average of 5.1% during September 2007.  These unemployment rates are higher than the national unemployment rates of 8.9%, 9.2% and 4.5%, as of June 2012, June 2011 and September 2007, respectively.  A continuation of the overall economic weakness in the counties in our market area could negatively impact our lending opportunities and profitability.

Grays Harbor County has a population of 72,000 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 2012 estimated median family income as

provided by data from the FDIC was $38,463.  Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2012, the median home price in Grays Harbor County was $115,600 compared to $121,500 for the quarter ended March 31, 2011, which reflected a decline of 35.8% from the median home price of $180,000 for the quarter ended September 30, 2007.  In addition, existing home sales in Grays Harbor County for the quarter ended June 30, 2012 declined by 26.1% from the total for the quarter ended September 30, 2007.  According to the U.S. Department of Labor, the unemployment rate in Grays Harbor County decreased to 13.2% at June 30, 2012 from 13.8% at June 30, 2011.  We have six branches (including our home office) located throughout this county.

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 $56,845. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2012, the median home price in Thurston County was $225,600, which reflects a 16.4% decline from the median home price of $270,000 for the quarter ended September 30, 2007.  In addition, existing home sales in Thurston County for the quarter ended June 30, 2012 declined by 26.4% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Thurston County area had decreased to 8.3% at June 30, 2012 from 8.5% at June 30, 2011.  We currently have four branches in Thurston County.  Thurston County has a stable economic base primarily attributable to the state government presence.

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 2012 estimated median family income for Lewis County as provided by data from the FDIC was $41,358. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2012, the median home price in Lewis County was $158,000, which is a 26.2% decline from the median home price of $214,100 for the quarter ended September 30, 2007.  In addition, existing home sales in Lewis County for the quarter ended June 30, 2012 or by 33.6% from the quarter ended September 30, 2007.  According to the U.S. Department of Labor, the unemployment rate in Lewis County increased to 13.4% at June 30, 2012 from 13.0% at June 30, 2011.  We have two branches located in Lewis County.

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 2012 estimated median family income for Pierce County as provided by data from the FDIC was $54,956. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2012, the median home price in Pierce County was $195,200, which is a 32.4% decline from the median home price of $288,700 for the quarter ended September 30, 2007.  In addition, existing home sales in Pierce County for the quarter ended June 30, 2012 declined by 12.9% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate for the Pierce County area decreased to 9.8% at June 30, 2012 from 10.0% at June 30, 2011.

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 2012 estimated median family income for Mason County as provided by data from the FDIC was $45,120. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2012, the median home price in Mason County was $156,200, which is a 30.5% decline from the median home price of $224,700 for the quarter ended September 30, 2007.  In addition, existing home sales in Mason County for the quarter ended June 30, 2012 declined by 23.3% from the quarter ended September 30, 2007. According to the U.S. Department of Labor, the unemployment rate in Mason County increased to 11.2% at June 30, 2012 from 11.0% at June 30, 2011.  We have  one branch located in Mason County.

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

Lending Activities

General. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences and loans for the construction of one- to four-family residences. We also originate consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington.  A substantial portion of our loan portfolio is secured by real estate, either as primary or secondary collateral, located in our primary market area. As of June 30, 2012, the net loan portfolio totaled $287.8 million and represented 61.1% of our total assets. As of June 30, 2012, 28.0% of our total loan portfolio was comprised of one- to four-family loans, 10.7% of home equity loans and lines of credit, 32.9% of commercial real estate loans, 14.2% of multi-family real estate loans, 5.6% of commercial business loans, 4.7% of construction and land loans, 2.8% of unsecured consumer loans and 1.1% of secured consumer loans.

As a state chartered savings bank chartered under Washington law, we are not subject to any statutory lending limits.  At June 30, 2012, however, our internal policy 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, 2012, there were no borrowing relationships that were over the legal amount and no relationships that were over our internal limit.  Our ten largest credit relationships at June 30, 2012 were as follows:

All of these relationships include personal guarantees except for the second 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, 2012, except for the following:

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

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

One- to Four-Family Real Estate Lending. As of June 30, 2012, $82.7 million, or 28.0%, 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 Freddie Mac underwriting guidelines.  None of our residential loan products allow for negative amortization of principal.  We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs.  Although we have sold the majority of our residential loans over the last two years, we do not sell all qualified loans on the secondary market as we hold in our portfolio many residential loans that may not meet all Freddie Mac guidelines yet meet our investment and liquidity objectives.  At June 30, 2012, $69.6 million of this loan portfolio consisted of fixed rate loans.  This amount was 84.2% of our total one- to four-family portfolio and 23.6% 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 hold these adjustable rate mortgages in our portfolio.  Similar to fixed rate loans, borrower demand for adjustable rate mortgage loans is a function of the current rate environment, the expectations of future interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed rate mortgage loans and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

While adjustable rate mortgages in our loan portfolio 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, 2012, $13.1 million of our permanent one- to four-family mortgage loans were adjustable rate loans.  This amount represents 15.8% of our total one- to four-family loan portfolio and 4.4% 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 and generally carry no prepayment restrictions. We also require title insurance, hazard insurance, and if necessary, flood insurance in an amount not less than the current regulatory requirements.

We also have additional products designed to make home ownership available to qualified 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, 2012.

__________

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 $6.4 million at June 30, 2012, representing 2.2% of total loans, 7.7% of one-to-four family mortgage loans, and 12.2% of Tier 1 Capital.  Our one-to-four family mortgage loans identified as subprime based on the borrower's FICO score at time the loan was originated do not represent a material part of our lending activity.  Accordingly, these loans are identified as "exclusions" as defined pursuant to regulatory guidance issued by the FDIC in Financial Institutions Letter FIL-9-2001.

Construction and Land Loans.   We had been an active originator of real estate construction loans in our market area since 1990 although recently we have been significantly reducing the balance of these loans in accordance with the Order and limited new loan originations.  At June 30, 2012, our construction loans amounted to $6.7 million, or 2.3% of the total loan portfolio, most of which is for the construction of commercial and multi-family real estate.  Included within our construction loan portfolio are $308,000 of land acquisition and development loans to developers.  Prior to fiscal 2010 a substantial number of our speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans were referred through a broker relationship in Portland, Oregon, and were secured by first lien construction deeds of trust on properties in the greater Portland, Oregon metroplitan area.  We originated $2.7 million, $32.9 million and $48.9 million of construction loans through this broker during the years ended June 30, 2009, 2008, 2007 of which $700,000 remains outstanding at June 30, 2012. Much of the increase in our non-performing assets since 2007 was related to these construction loans and we ceased working with this broker.

As a result of the recent slowdown in the housing market, we have extended the terms of construction loans totaling $1.8 million at June 30, 2012 to permit completion of the project or the borrower additional time to market the underlying collateral.  All 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.  We generally provide an interest reserve for funds on builder construction loans that have been advanced.  Interest reserves are a means by which a lender builds in, as a part of the loan approval and as a component of the cost of the project, the amount of the monthly interest required to service the debt during the construction period of the loan.  

At June 30, 2012, our construction loan portfolio did not contain any loans which had been previously extended or renewed and which included unfunded interest reserves.  Our entire construction loan portfolio at June 30, 2012 consisted of loans requiring interest only payments, two of which totaled $1.3 million and were relying on the interest reserve to make this payment. At June 30, 2012, no construction loans were delinquent more than 90 days and accruing interest and one commercial real estate construction loan totaling $3.4 million was on non-accrual status.  This loan is in bankruptcy with foreclosure likely in fiscal 2013.  During the years ended June 30, 2012, 2011, and 2010, seven, 22 and 27 construction loans were charged-off totaling $561,000, $8.9 million and $5.0 million, respectively.

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

           ___________

For the year ended June 30, 2012 we originated two builder construction loans to fund the construction of one- to four-family properties totaling $284,000, as compared to none during the years ended June 30, 2011 and 2012 and the origination of 17 loans during the year ended June 30, 2009, aggregating $6.0 million.  We originate construction and site development loans to experienced contractors and builders in our primary market area primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $200,000 to $500,000.  All builders were qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 75% of the appraised market value or sales price upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. We also require that builders maintain adequate insurance coverage. Maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally did not exceed 18 months for residential subdivision development loans at the time of origination. 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, 2012, our largest builder and sole remaining relationship consisted of one loan for $308,000.

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, 2012 our portfolio of construction loans for commercial projects included five loans totaling $5.4 million of which one commercial real estate loan of $3.4 million secured by light industrial office warehouse property located in Puyallup, Washington and is on non-accrual status.  The other four construction loans consisted of two multi-family complexes, rehabilitation of a multi-family complex, and one school remodel project all in Washington.

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

We have originated land acquisition and development loans to local contractors and developers for the purpose of holding the land for future development. These loans are secured by a first lien on the property, are generally limited up to 75% of the lower of the acquisition price or the appraised value of the land or sales price, and generally have a term of one to two years with a fixed interest rate based on the prime rate. Our land acquisition and development loans are generally secured by property in our primary market area. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste.

At June 30, 2012, our land acquisition and development loans totaled $833,000.  We also originate land loans.  These loans are typically made to individual consumers to buy a lot or parcel of land for the future construction of the buyer's primary residence and are included in "land loans".   At June 30, 2012, our land loans to individuals totaled $7.1 million or 2.4% 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.  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, 2012, $139.3 million, or 47.2%  of our total loan portfolio was secured by commercial and multi-family real estate property.  Of this amount, $26.2 million was identified as owner occupied commercial real estate, and the remainder or $113.1 million, or 38.3% 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, 2012, commercial real estate loans totaled $97.3 million, or 32.9% of our portfolio and multi-family real estate totaled $42.0 million, or 14.2% of our portfolio.  These loans generally are priced at a higher rate of interest than one- to four-family loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family loans. Often payments on loans secured by commercial or

multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

The average loan size in our commercial and multi-family real estate portfolio was $770,000 as of June 30, 2012.  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, 2012, the largest commercial loan in our portfolio was a $5.5 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, 2012, was an 75 unit apartment complex with an outstanding principal balance of $2.9 million, located in Pacific, Washington.  These loans were performing according to repayment terms as of June 30, 2012.

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, 2012, we had $33.2 million and $8.9 million in fixed and adjustable rate multi-family loans, respectively, and $57.4 million and $39.9 million in fixed and adjustable rate commercial real estate loans, respectively.

Commercial and multi-family real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family and commercial real estate loans are generally priced utilizing the applicable FHLB or U.S. Treasury Term Borrowing Rate plus an acceptable margin. These loans are typically amortized for up to 30 years with a prepayment penalty.  The maximum loan to value ratio for commercial and multi-family real estate loans is generally 75%.  We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us.  We require our commercial and multi-family real estate loan borrowers with outstanding balances in excess of $750,000, or a loan to value 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, 2012.

If we foreclose on a multi-family or commercial real estate loan, our holding period for the collateral typically is longer than for one- to four-family mortgage loans because there are fewer potential purchasers of the collateral. Additionally, as a result of our increasing emphasis on this type of lending, a portion of our multi-family and commercial real estate loan portfolio is relatively unseasoned and has not been subjected to unfavorable economic conditions. As a result, we may not have enough payment history with which to judge future 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, 2012 , there were no commercial real estate loans or multi-family loans that were delinquent in excess of 90 days and on non-accrual status.  Commercial real estate loan charge offs for the years ended June 30, 2012, 2011 and 2010 were $571,000, $584,000 and  $31,000, respectively.  There were no multi-family loan charge-offs during these periods.

Consumer Lending.   We offer a variety of consumer loans, including home equity loans and lines of credit, automobile loans, credit cards and personal lines of credit. At June 30, 2012, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit, which totaled $31.5 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 $5.2 million, or 1.8% of the total loan portfolio at June 30, 2012.  We have been offering credit cards for more than 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.

Our automobile loan portfolio totaled $3.3 million, or 1.1% of the total loan portfolio at June 30, 2012.  We offer several options for vehicle purchase or refinance with a maximum term of 84 months for newer vehicles and 72 months for older vehicles.  As with home equity loans, our vehicle and recreational vehicle loans are risk priced based on creditworthiness, loan term and loan-to-value.  We currently access a Carfax Vehicle Report to ensure that the collateral being loaned against is acceptable and to protect borrowers from a "lemon" or other undesirable histories.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.  In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment.  In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.  These risks are not as prevalent with respect to our consumer loan portfolio because a large percentage of the portfolio consists of home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family mortgage loans.  Nevertheless, home equity lines of credit have greater credit risk than one- to four-family  mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold and do not have private mortgage insurance coverage.  At June 30, 2012, consumer loans of $242,000 were delinquent in excess of 90 days or in nonaccrual status.  Consumer loans of $1.4 million were charged off during the year ended June 30, 2012 compared to $1.9 million and $2.0 million of consumer loans that were charged-off during the years ended June 30, 2011 and 2010, 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. Our commercial business lending policy includes credit file documentation and analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans.  At June 30, 2012, commercial business loans totaled $16.6 million, or 5.6% of our loan portfolio comprised of 161 loans in 93 different business classifications as identified by the North American Industrial Classification System.  The largest commercial business relationship at June 30, 2012 included four loans whish totalled $2.4 million to a borrower located in Washington and involved in the manufacture of veneer, plywood and engineered wood projects.  These loans are on non-accrual status as the borrower is operating under a Chapter 11 bankruptcy filing.

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, 2012, Anchor Bank charged off $63,000 from its commercial business loan portfolio.

Loan Maturity and Repricing .  The following table sets forth certain information at June 30, 2012 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.

The following table sets forth the dollar amount of all loans due after June 30, 2013, which have fixed interest rates and have floating or adjustable interest rates.

Loan Solicitation and Processing   Loan originations are obtained from a variety of sources, including follow up, direct mail and telephone solicitation, trade and business organization participation.  Our management and staff are also involved in a wide variety of professional, charitable, service and social organizations within the communities in which we operate, and our branch managers, loan representatives and business bankers solicit referrals from existing clients and new prospects.  We also originate and cross sell loans and services to our existing customer base as well as our walk-in/call-in/internet traffic as a result of our long standing community presence and broad based advertising efforts.  Loan processing and underwriting, closing and funding are determined by the type of loan.. Consumer loans, including conforming one-to-four family  mortgage loans are processed, underwritten, documented and funded through our centralized processing and underwriting center located in Aberdeen, Washington.  Commercial business loans, including commercial and multi-family real estate loans and any non-conforming one-to-four family mortgage loans are processed and underwritten in one of our two Business Banking Center offices located in Lacey and Aberdeen, Washington. Our consumer and residential loan underwriters have specific approval authority, and requests that exceed such authority are referred to the appropriate supervisory level.

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

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

Loan Originations, Servicing, Purchases and Sales.   During the years ended June 30, 2012 and 2011, our total loan originations were $55.8 million and $30.8 million, respectively.

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

We actively sell the majority of our residential fixed rate first mortgage loans to the secondary market at the time of origination. During the years ended June 30, 2012 and 2011, we sold $20.6 million and $15.5 million, respectively, in whole loans to the secondary market and $4.7 million and $0, respectively, were securitized.  The increase in whole loan sales and securitizations was attributable to an increase in the origination of one-to four-family  loans to $26.8 million from $15.8 million during the years ended June 30, 2012 and 2011, respectively.  Our secondary market relationships are 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, 2012, our residential loan servicing portfolio was $124.5 million.

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

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(1)           Including $13.2 million of fixed rate loans from our loan portfolio for the year 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 $605,000 of net deferred loan fees and costs as of June 30, 2012 compared to $648,000 and $917,000 at June 30, 2011 and 2010, 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.