Anchor Bancorp - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Anchor Bancorp	exhibit32.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorp	exhibit31-1.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorp	exhibit31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

[ ]	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		(I.R.S. Employer
or organization)		I.D. Number)

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

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

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 13, 2011, there were 2,550,000, shares of common stock, $.01 par value per share, outstanding.

ANCHOR BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

Anchor Bancorp, a Washington corporation, was formed in connection with the conversion of Anchor Mutual Savings Bank (the “Bank”) from the mutual to the stock form of organization. On January 25, 2011, the Bank completed its conversion from mutual to stock form, changed its name to “Anchor Bank” and became the wholly owned subsidiary of the Company. In the conversion, the Company sold an aggregate of 2,550,000 shares of common stock at a price of $10.00 per share in a subscription, community and syndicated community offering. Since the Bank’s conversion and the Company’s stock offering were consummated on January 25, 2011, the information contained in this document before that date, pertain to the operations of the Bank. For a further discussion of Anchor Bancorp’s formation and operations, see the Registration Statement (SEC Registration No. 333-154734), which includes financial statements for the year ended June 30, 2010.

	Page
Item 1 - Financial Statements	1

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	39

Item 4 - Controls and Procedures	39

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	39

Item 1A - Risk Factors	39

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3 - Defaults Upon Senior Securities	39

Item 4 – [Removed and Reserved]	39

Item 5 - Other Information	39

Item 6 - Exhibits	39

SIGNATURES	41

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (Unaudited)	March 31, 2011			June 30, 2010

ASSETS
Cash and due from banks	$	62,586		$	32,831
Securities available for sale, at fair value, amortized cost of $37,035 and $45,811		39,027			48,779
Securities held to maturity, at amortized cost, fair value of $8,547 and $10,035		8,044			10,035
Loans held for sale		581			3,947
Loans receivable, net of allowance for loan losses of $7,775
and $16,788		341,488			389,411
Life Insurance Investment, net or surrender charges		17,443			16,920
Accrued interest receivable		1,852			2,158
Real estate owned, net		14,878			14,570
Federal Home Loan Bank (FHLB) stock, at cost		6,510			6,510
Property, premises and equipment, at cost, less accumulated depreciation of $15,053 and $14,489		13,299			14,435
Federal income tax receivable		2,277			2,336
Deferred tax asset, net		728			373
Prepaid expenses and other assets		1,418			2,524
Total assets	$	510,131		$	544,829

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	31,241		$	28,718
Interest-bearing		311,218			327,070
Total deposits		342,459			355,788
FHLB advances		98,400			136,900
Advance payments by borrowers for taxes and insurance		2,278			1,423
Supplemental Executive Retirement Plan liability		1,911			1,939
Accounts payable and other liabilities		2,948			4,109
Total liabilities		447,996			500,159

STOCKHOLDERS’ EQUITY Preferred stock, $.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding		-			-
Common stock, $.01 par value per share; authorized 45,000,000
Shares; issued and outstanding 2,550,000 shares at
March 31, 2011 and 0 shares at June 30 2010		25			-
Additional paid-in capital		23,215			-
Retained earnings, substantially restricted		38,154			42,278
Unearned Employee stock ownership plan (ESOP) shares		(1,008	)		-
Accumulated other comprehensive income, net of tax		1,749			2,392
Total stockholders’ equity		62,135			44,670
Total liabilities and stockholders’ equity	$	510,131		$	544,829

See accompanying notes to consolidated financial statements

ANCHOR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands, except share data) (Unaudited)	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Interest income:
Loans receivable, including fees	$	5,613		$	7,145		$	17,963		$	22,292
Securities		85			85			259			315
Mortgage-backed securities		503			683			1,659			2,354
Total interest income		6,201			7,913			19,881			24,961

Interest expense:
Deposits		1,292			2,187			4,564			7,628
FHLB advances		401			1,186			1,779			4,029
Total interest expense		1,693			3,373			6,343			11,657
Net interest income before provision for loan losses		4,508			4,540			13,538			13,304
Provision for loan losses		3,608			666			5,118			2,249
Net interest income after provision for loan losses		900			3,874			8,420			11,055

Noninterest income
Deposit service fees		503			632			1,767			2,052
Other deposit fees		211			209			642			602
Gain on sale of investments		-			-			135			25
Loan fees		217			217			750			700
Gain (loss) on sale of loans		(14	)		67			174			896
Other income		308			388			979			943
Total noninterest income		1,225			1,513			4,447			5,218

Noninterest expense
Compensation and benefits		2,077			2,217			6,406			6,588
General and administrative expenses		1,019			1,134			3,489			3,664
Real estate owned impairment		759			611			2,046			1,959
Federal Deposit Insurance Corporation (FDIC) insurance premiums		262			300			887			1,200
Information technology		495			477			1,507			1,400
Occupancy and equipment		612			630			1,783			1,927
Deposit services		172			232			517			693
Marketing		131			103			406			317
Loss on sale of property, premises and equipment		-			-			168			2
(Gain) loss on sale of real estate owned		(52	)		9			(218	)		(28	)
Total noninterest expense		5,475			5,713			16,991			17,722
Loss before benefit for federal income tax		(3,350	)		(326	)		(4,124	)		(1,449	)
Provision (benefit) for income tax		-			-			-			(2,957	)
Net income (loss)	$	(3,350	)	$	(326	)	$	(4,124	)	$	1,508
Basic loss per share	$	(1.36	)		N/A		$	(1.36	)		N/A
Diluted loss per share	$	(1.36	)		N/A		$	(1.36	)		N/A

See accompanying notes to consolidated financial statements.

ANCHOR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands, except share data) (Unaudited)	Nine Months Ended March 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(4,124	)	$	1,508
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization		863			1,014
Net amortization of premiums on securities		72			97
Provision for loan losses		5,118			2,249
ESOP expense		13			-
Real estate owned impairment		2,046			1,959
Deferred income taxes, net of valuation allowance		(355	)		(2,723	)
Income from life insurance investment		(524	)		(522	)
Originations of loans held for sale		(9,827	)		(16,122	)
Proceeds from sale of loans held for sale		13,368			35,958
Loss on sale of property, premises and equipment		168			2
Gain on sale of real estate owned		(218	)		(28	)
Change in operating assets and liabilities:
Accrued interest receivable		306			263
Prepaid expenses, other assets, and federal income tax receivable		1165			(783	)
Change in supplemental Executive Retirement Plan liability		(28	)		(28	)
Accounts payable and other liabilities		(1,264	)		522
Net cash from operating activities		6,779			23,366

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of available for sale securities		4,035			15,848
Principal payments on mortgage-backed securities available for sale		4,945			5,363
Principal payments on mortgage-backed securities held to maturity		1,978			1,834
Loan originations, net of undisbursed loan proceeds and principal repayments		34,349			18,742
Proceeds from sale of real estate owned		6,593			3,429
Capitalized improvements on real estate owned		(273	)		(137	)
Purchase of property, premises and equipment		105			(461	)
Net cash from investing activities		51,732			44,618

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decreases in deposits		(13,330	)		(95,692	)
Net change in advance payments by borrowers for taxes and insurance		855			973
Proceeds from FHLB advances		47,543			50,900
Repayment of FHLB advances		(86,043	)		(43,500	)
Proceeds from stock offering, net of costs		23,239			-
Purchase of ESOP shares		(1,020	)		-
Net cash used in financing activities		(28,756	)		(87,319	)

(Continued)

See accompanying notes to consolidated financial statements.

ANCHOR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (dollars in thousands, except share data) (Unaudited)	Nine Months Ended March 31,
	2011		2010

Net Change in Cash and Due From Banks		29,755		(19,335	)

Beginning of period		32,831		42,388

End of period	$	62,586	$	23,053

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing activities
Net loans transferred to real estate owned	$	8,456	$	18,217

Loans securitized into mortgage-backed securities	$	-	$	5,016

Cash paid during the period for:
Interest	$	6,567	$	11,880
Non Cash Financing Activities: On January 25, 2011, the Company issued 102,000 shares of common stock to the Employee Stock Ownership Plan (ESOP) and recorded a note receivable from the ESOP. The note receivable is shown as Unearned Employee Stock Ownership Plan (ESOP) shares in the consolidated balance sheet.

See accompanying notes to consolidated financial statements.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Nature of Business

Anchor Bancorp (“Company”) was incorporated in September 2008 as the proposed holding company for Anchor Bank (“Bank”) in connection with the Bank’s conversion from mutual to stock form of ownership (See Note 3 of these Selected Notes to Consolidated Financial Statements), which was completed on January 25, 2011.

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 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. Anchor Bank’s business consists of attracting deposits from the public and utilizing those deposits to originate loans.

Note 2 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three and nine months ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. For further information, refer to the Bank’s annual audited consolidated financial statements and related notes for the year ended June 30, 2010 included in the Company’s prospectus dated November 12, 2011. Certain prior year amounts have been reclassified to conform to current year presentation. The reclassifications had no impact on net income (loss) or equity.

Note 3 – Plan of Conversion and Change in Corporate Form and Subsequent Events

On January 25, 2011, in accordance with a Plan of Conversion (“Plan”) adopted by its Board of Directors and as approved by its depositors and borrower members, the Bank (i) converted from a mutual savings bank to a stock savings bank, (ii) changed its name to “Anchor Bank” and (iii) became the wholly-owned subsidiary of the Company, a bank holding company registered with the Board of Governors of the Federal Reserve System. In connection with the conversion, the Company issued an aggregate of 2,550,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $25.5 million. The cost of conversion and the issuance of capital stock was approximately $2.1 million which was deducted from the proceeds of the offering.

The Company retained 10% or $2.3 million of the net conversion proceeds and downstreamed the remaining 90% or $21.1 million of the net conversion proceeds to the Bank in exchange a 100% ownership interest in the Bank. The Bank intends to use this additional capital for future lending and investment activities and for general and other corporate purposes subject to regulatory limitations.

Pursuant to the Plan, the Bank’s Board of Directors adopted an employee stock ownership plan (“ESOP”) which subscribed for 4% of the common stock sold in the offering or 102,000 shares. As provided for in the Plan, the Bank established a liquidation account in the amount of retained earnings as of June 30, 2010,. The liquidation account will be maintained for the benefits of eligible savings account holders as of June 30, 2007 and supplemental eligible account holders as of September 30, 2010 who maintain deposit accounts in the Bank after conversion. The conversion will be accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities, and equity unchanged as a result.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 – Recently Issued Accounting Pronouncements

In December 2009, the FASB issued Accounting Standards Update (ASU) 2009-16, Transfer and Servicing (Topic 860) Accounting for Transfers of Financial Assets which amends ASC 860-10, Transfers and Servicing-Overall (ASC 860-10) and adds transition paragraphs 860-10-65-3 of ASC 860-10. ASC 860-10 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets, and requires additional disclosures. ASC 860-10 is effective for the Bank for the fiscal year beginning July 1, 2010. The adoption of ASC 860-10 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, (Topic 820)-Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurement and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosure should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 10. These new disclosure requirements were adopted by the Bank during the year ended June 30, 2010, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impact on the Bank’s consolidated financial statements. Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Company’s consolidated financial statements.

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables, and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact, and the segment information of troubled debt restructurings will also be required. The

disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. The Company adopted ASU during the quarter ended March 31, 2011. Adoption of this ASU has significantly expanded the disclosures within the consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, The Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update provides additional guidance in determining what is considered a troubled debt restructuring (“TDR”). The update clarifies the two criteria that are required in determining a TDR. The update is effective for interim or annual periods beginning after June 15, 2011. The Company is currently evaluating the impact of this update to its consolidated financial statements.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 –Regulatory Order, Economic Environment, and Management’s Plans

On August 12, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Order”) with the FDIC, and the Washington Department of Financial Institutions, Division of Banks (“DFI”). The FDIC and DFI determined that the Bank had engaged in unsafe or unsound banking practices. Under the terms of the Order, the Bank cannot declare dividends without the prior written approval of the FDIC and the DFI. Other material provisions of the Order require the Bank to: (i) maintain specified capital and liquidity ratios and (ii) prepare and submit progress reports to the FDIC and DFI. The Order will remain in effect until modified or terminated by the FDIC and the DFI. The Bank has been actively engaged in responding to the concerns raised by the Order.

The Order does not restrict the Bank from transacting its normal banking business. The Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits, and processing banking transactions. All customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and DFI did not impose any monetary penalties. In response to financial results for the year ended June 30, 2010, and to address the provisions of the Order, the Bank has developed specific plans focused on increasing liquidity, reducing nonperforming assets, and improving capital levels.

The Bank’s first priority is to maintain liquidity sufficient to continue to meet all obligations as they come due. The Bank’s second priority is to reduce nonperforming assets. The Bank’s third priority is to increase capital levels in order to offset net losses incurred. The Bank plans to improve capital levels by managing the Bank’s asset size and composition, reducing or maintaining operating costs, as necessary.

Although the Bank is “well capitalized” at March 31, 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, because of the deficiencies cited in the Order, we are no longer regarded as “well capitalized” for federal regulatory purposes. The Bank intends to use this additional capital raised in its recent public offering for future lending and investment activities and for general and other corporate purposes pursuant to regulatory limitations included in the Order.

Management believes the Bank is taking appropriate steps to comply with the Order.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Earnings (Loss) Per Share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following table presents a reconciliation of the components used to compute basic and diluted loss per share. The Company completed its stock conversion on January 25, 2011.

	For the Period January 25, 2011 to March 31, 2011
	(Dollars in thousands, except share data)

Net loss January 25, 2011 through March 31, 2011	$(3,328)

Weighted-average common shares outstanding	2,448,567

Basic loss per share	$(1.36)

Diluted loss per share	$(1.36)

Basic and diluted income (loss) per share are the same amount at March 31, 2011 as the Company does not have any additional potential common shares issuable under stock options.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Investments

The amortized cost and estimated fair market values of investment securities, including mortgage-backed securities, available-for-sale, and held-to-maturity (classified by type and contractual maturity) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
March 31, 2011
Securities available for sale
Municipal bonds	$	2,717	$	40	$	-	$	2,757
U.S. government agency securities		3,000		73		-		3,073
FHLMC mortgage-backed securities		31,318		1,879		-		33,197
	$	37,035	$	1,992	$	-	$	39,027

Securities held to maturity
FHLMC mortgage-backed securities	$	7,894	$	503	$	-	$	8,397
Municipal bonds		150		-		-		150
	$	8,044	$	503	$	-	$	8,547

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2010
Securities available for sale
Municipal bonds	$	3,372	$	67	$	(8	)	$	3,431
U.S. government agency securities		2,999		152		-			3,151
FHLMC mortgage-backed securities		39,440		2,757		-			42,197
	$	45,811	$	2,976	$	(8	)	$	48,779

Securities held to maturity
FHLMC mortgage-backed securities	$	9,880	$	675	$	-		$	10,555
Municipal bonds		155		-		-			155
	$	10,035	$	675	$	-		$	10,710

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2011, there were no securities in an unrealized loss position. At June 30, 2010, there was one security in an unrealized loss position for less than twelve months. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of March 31, 2011 and June 30, 2010, are as follows:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

	(In thousands)
March 31, 2011
Securities available for sale
Municipal bonds	$	-	$	-	$	-	$	-	$	-	$	-


June 30, 2010
Securities available for sale
Municipal bonds	$	636	$	8	$	-	$	-	$	636	$	8

Contractual maturities of securities at March 31, 2011 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore these securities are classified separately with no specific maturity date.

March 31, 2011	Amortized Cost		Fair Value
Securities available for sale	(In thousands)
Due within one year	$	3,745	$	3,826
Due one to five years		785		815
Due five years to ten years		325		327
Due after ten years		862		862
		5,717		5,830

Mortgage-backed securities		31,318		33,197

	$	37,035	$	39,027

March 31, 2011	Amortized Cost		Fair Value
Securities held to maturity	(In thousands)
Due after ten years	$	150	$	150

Mortgage-backed securities		7,894		8,397

	$	8,044	$	8,547

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three and nine months ended March 31, 2011, proceeds from sales and maturities of securities available-for-sale were $0 and $4.0 million, respectively, compared to $2.0 million and $15.9 million respectively, for the same periods in 2010. Gross realized gains for the three and nine months were $0 and $135,000, respectively, with no gross realized losses on the sale of securities available-for-sale for the three and nine months ended March 31, 2011. There were $0 and $57,000 of gross realized gains on the sale of securities available-for-sale for the three and nine months ended March 31, 2010, respectively, with gross realized losses of $0 and $33,000 for the same periods.

At March 31, 2011, securities with total par values of $4.6 million and total fair values of $4.9 million were pledged to secure certain public deposits. Securities with total par values of $932,000 and total fair values of $979,000 were pledged to secure certificates of deposit in excess of FDIC-insured limits. Securities with total par values of $8.8 million and total fair values of $9.2 million were pledged to secure FHLB borrowings.

Note 8 - Loans Receivable, net

Loans receivable consisted of the following:

	March 31, 2011		June 30, 2010
	(In thousands)

Real estate:
One- to four-family residential	$	101,782	$	112,835
Multi-family residential		42,829		45,983
Commercial		108,450		118,492
Construction		15,784		36,812
Land loans		7,250		7,843
Total real estate		276,095		321,965

Consumer:
Home equity		37,977		42,446
Credit cards		7,098		7,943
Automobile		6,288		8,884
Other consumer loans		3,579		4,160
Total consumer		54,942		63,433

Commercial business loans		18,938		21,718
Total loans		349,975		407,116

Less
Deferred loan fees and unamortized
discount on purchased loans		712		917
Allowance for loan losses		7,775		16,788
	$	341,488	$	389,411

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Allowance for Possible Loan Losses. 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. 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. During the quarter, $6.2 million of loans specifically allowed for in the prior quarter were charged off as confirmed losses against the allowance for loan losses.

The following table presents the activity in the allowance for loan losses and impairment method by segment for the nine months ended March 31, 2011.

	One- to four- family	Multi- family residential	Commercial real estate		Construction	Land	Consumer(1)	Commercial business	Unallocated	Total
(In thousands)
Allowance for loan losses:
Beginning balance	$3,694	$ 363	$1,000	$ 7,676		$296	$2,330	$ 1,429	-	$ 16,788
Provision for loan losses	(600)	510	1,340	847		(110)	305	2,826	-	5,118
Charge-offs	(1,369)	(11)	(100)	(8,300)		(40)	(1,152)	(3,407)	-	(14,379)
Recoveries	116	-	-	-		-	132	-	-	248

Ending balance	$ 1,841	$ 862	$ 2,240	$ 223		$ 146	$ 1,615	$ 848	$ -	$ 7,775

The following table presents the activity in the allowance for loan losses and impairment method by segment for the nine months ended March 31, 2010.

	One- to four- family		Multi- family residential	Commercial real estate		Construction	Land	Consumer(1)	Commercial business	Unallocated	Total
(In thousands)
Allowance for loan losses:
Beginning balance	$861		$ 632	$1,487	$ 19,058		$ -	$2,219	$ 206	-	$ 24,463
Provision for loan losses	1,269		2	(16)	(3,111)		-	3,561	544		2,249
Charge-offs	(376)		-	-	(6,750)		,	(1,547)	-		(8,673)
Recoveries	-		-	-	-		-	118	-	-	118

Ending balance		$ 1,754	$ 634	$ 1,471	$ 9,197		$ -	$ 4,351	$ 750	$ -	$ 18,157

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A loan is considered impaired when we have determined that we may be unable to collect payments of principal 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.

The following table presents loans individually evaluated for impairment by type of loans as of March 31, 2011.
	Recorded Investments (Loan Balance Less Charge off)	Unpaid Principal Balance	Related Allowance	Interest Income Recognized

Totals
One- to four-family residential	$13,901	$13,878	$ -	$313
Multi family residential	917	917	-	25
Commercial real Estate	1,391	1,387	-	4
Construction	10,268	10,268	-	24
Land	383	383	-	4
Home equity	548	547	-	10
Credit cards	-	-	-	-
Automobile	-	-	-	-
Other consumer	-	-	-	-
Commercial business	3,706	3,702	-	47
Total	$31,114	$31,082	$ -	427

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011.

	One- to four- family		Multi- family residential	Commercial real estate		Construction	Land	Consumer(1)	Commercial business	Unallocated	Total
(In thousands)
Allowance for loan losses:
Ending balance	$1,841		$ 862	$2,240	$ 223		$146	$1,615	$ 848	$ -	$ 7,775
Ending balance: individually evaluated for impairment	-		-	-	-		-	-	-	-	-
Ending balance: collectively evaluated for impairment	1,841		862	2,240	223		146	1,615	848	-	7,775
Ending balance: loans acquired with deteriorated credit quality	-		-	-	-		-	-	-	-	-
Loans receivable:
Ending balance		$ 101,782	$ 42,829	$ 108,450	$15,784		7,250	$ 54,942	$18,938	$ -	$349,975
Ending balance: individually evaluated for impairment		13,901	917	1,391	10,268		383	548	3,706	-	31,114
Ending balance: collectively evaluated for impairment		87,881	41,912	107,059	5,516		6,867	54,394	15,232	-	318,861
Ending balance: loans acquired with deteriorated credit quality		-	-	-	-		-	-	-	-	-

(1)	Consumer loans include home equity, credit cards, auto and other loans. The only type of consumer loans with an impairment are home equity loans.

Nonaccrual loans totaled $18.8 million and $19.8 million at March 31, 2011 and June 30, 2010, respectively. Average investment in impaired loans was $24.8 million and $33.6 million at March 31, 2011 and June 30, 2010, respectively. Interest income recognized on a cash basis on impaired loans was $427,000 and $57,000 for the periods ended March 31, 2011 and June 30, 2010, respectively.

The following table presents the recorded investment in nonaccrual and loans past due 90 days still on accrual by type of loans as of March 31, 2011.

	Balance
	(In thousands)

One- to four-family residential	$4,727
Multi- family residential	-
Commercial	1,095
Construction	9,694
Land loans	304
Home equity	342
Automobile	61
Credit cards	54
Other	72
Commercial business loans	2,404
Total	$18,753

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual when, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

	30-59 Days Past Due	60-89 Days Past Due	Greater than 90 Days Past Due	Total Past Due	Current	Total Loans
			(In thousands)

One- to four-family	$1,190	$856	$4,727	$6,773	$95,009	$101,782
Multi-family residential	480	-	-	480	42,349	42,829
Commercial	-	-	1,095	1095	107,355	108,450
Construction	1,210	873	9,694	11,777	4,007	15,784
Land	72	74	304	450	6,800	7,250
Home equity	404	91	342	837	37,140	37,977
Credit cards	174	53	54	281	6,817	7,098
Automobile	42	78	61	181	6,107	6,288
Other	9	1	72	82	3,497	3,579
Commercial business loan	280	42	2,404	2,276	16,212	18,938

Total	$3,861	$2,068	$18,753	$24,682	$325,293	$349,975

Credit Quality Indicators. 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 pay 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 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 required to be classified as either watch or special mention assets.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We also use early indicator loan grades to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful, or loss) are subject to problem loan reporting not less than every three months.

The following table represents the internally assigned grade as of March 31, 2011, by type of loans.

Credit Exposure
Credit Risk Profile by Internally Assigned Grade
	One- to four-family	Multi- family	Commercial real estate	Construction	Land	Home equity	Credit cards	Automobile	Other	Commercial business	Total
					(In thousands)
Grade:

Pass	$81,550	$30,771	$76,463	$3,358	$ 5,731	$35,929	$6,817	$6,007	$3,298	$9,035	$ 258,959
Watch	6,454	5,793	19,805	980	195	1,398	227	83	195	1,754	33,884
Special Mention	3,305	5,251	1,803	-	-	90	-	57	1	742	11,249

Substandard	10,473	1,014	10,379	11,446	1,324	560	54	141	85	7,407	42,883

Total	$ 101,782	$42,829	$108,450	$ 15,784	$7,250	$ 37,977	$7,098	$ 6,288	$3,579	$ 18,938	$349,975



The following table represents the credit risk profile based on payment activity as of March 31, 2011, by type of loans.

Credit Exposure
Credit Risk Profile based on Payment Activity

	One- to four-family	Multi- family	Commercial Real Estate	Construction	Land	Home Equity	Credit Cards	Automobile	Other	Commercial Business	Total
					(In thousands)
Performing	$97,055	$42,829	$107,355	$ 6,090	$6,946	$37,635	$7,044	$6,227	$ 3,507	$16,534	$331,222

Nonperforming	4,727	-	1,095	9,694	304	342	54	61	72	2,404	18,753

Total	$101,782	$ 42,829	$ 108,450	$ 15,784	$ 7,250	$ 37,977	$ 7,098	$ 6,288	$ 3,579	$18,938	$349,975

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Adjustable rate loans have interest rate adjustment limitations and are generally indexed to either the one-year Treasury bill or the monthly weighted-average cost of funds for 11th district institutions regulated by the Office of Thrift Supervision, as published by the FHLB of Seattle.

Outstanding commitments to borrowers for loans as of March 31, 2011 and June 30, 2010 totaled $118,000 and $579,000, respectively. Unfunded commitments under lines of credit as of March 31, 2011 and June 30, 2010 totaled $37.2 million and $36.7 million, respectively.

Trouble Debt Restructure. At March 31, 2011, troubled debt restructured loans, included in impaired loans above, totaled $12.6 million with $1.9 million currently in non-accrual. Restructured loans are an option that the Bank uses to minimize risk of loss. The modifications have included items such as lowering the interest on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank’s best interest. At March 31, 2011, there were no commitments to lend additional funds to borrowers whose loans have been modified in troubled debt restructurings.

Note 9 – Real Estate Owned

The following table is a summary of real estate owned for the nine months ended March 31, 2011 and 2010 :

	Nine Months Ended			Nine Months Ended
	March 31, 2011			March 31, 2010
	Amount			Amount
	(In thousands)
Balance at the beginning of the period	$	14,570		$	2,990
Loans transferred to REO		8,456			18,217
Capitalized improvements		273			137
Impairment		(2,046	)		(1,959	)
Dispositions of REO		(6,375	)		(3,429	)
Balance at the end of the period	$	14,878		$	15,956

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Employee Benefit Plans

Employee Stock Ownership Plan

On January 25, 2011, the Bank established an ESOP for the benefit of substantially all employees. The ESOP borrowed $1.0 million from the Company and used those funds to acquire 102,000 shares of the Company’s stock at the time of the initial public offering at a price of $10.00 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on June 30, the Company’s fiscal year end.

As shares are committed to be released from collateral, we report compensation expense equal to the daily average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued throughout the year.

Shares held by the ESOP are as follows:

	March 31, 2011
	(In thousands, except share data)
Allocated shares	1,133
Unallocated shares	100,867
Total ESOP shares	102,000

Fair value of unallocated shares	$1,079

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly. The following definitions describe the levels of inputs that may be used to measure fair value:

The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions market participants would use in pricing an asset or liability based on the best information available in the circumstances.

The following table shows the Company’s assets and liabilities measured at fair value on a recurring basis (there were no transfers between Level 1 and Level 2 during the nine months ended March 31, 2011).

	March 31, 2011
	Level 1	Level 2	Level 3	Total
	(In thousands)
Municipal bonds	$ -	$ 2,757	$ -	$ 2,757
U.S. government agency securities	-	3,073	-	3,073
FHLMC mortgage-backed securities	-	33,197	-	33,197

	June 30, 2010
	Level 1	Level 2	Level 3	Total
	(In thousands)
Municipal bonds	$ -	$ 3,431	$ -	$ 3,431
U.S. government agency securities	-	3,151	-	152
FHLMC mortgage-backed securities	-	42,197	-	42,197

Assets and liabilities measured at fair value on a nonrecurring basis - Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The following table presents the Company’s assets measured at fair value on a nonrecurring basis:

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	March 31, 2011
	Level 1	Level 2	Level 3	Total	Total Gains (Losses)
	(In thousands)
Impaired loans (1)	$ -	$ -	$ 31,114	$ 31,114	$ ( 6,188)
Real estate owned	-	-	14,878	14,878	(12,073)
Loans held for sale (2)	581	-	-	581	-

(1) The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at March 31, 2011.

(2) The fair value is based on quoted market prices obtained from Federal Home Loan Mortgage Corporation (“FHLMC”) or from direct sales to other third parties. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

	June 30, 2010
	Level 1	Level 2	Level 3	Total	Total Gains (Losses)
	(In thousands)
Impaired loans (3)	$ -	$ -	$ 16,473	$ 16,473	$ (8,187)
Real estate owned	-	-	14,570	14,570	(8,047)
Loans held for sale (4)	3,391	-	-	3,391	(52)

(3) The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at June 30, 2010.

(4) The fair value is based on quoted market prices obtained from Federal Home Loan Mortgage Corporation (“FHLMC”) or from direct sales to other third parties. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

The impaired loans amount above represents impaired, collateral dependent loans that have been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral.

The real estate owned amount above represents impaired real estate that has been adjusted to fair value. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands) (Unaudited)

The fair value of impaired loans and real estate owned is estimated using the fair value of the collateral less estimated selling costs.

There were no transfers out of Level 3 during the nine months ended March 31, 2011. The estimated fair values of financial instruments are as follows:

	March 31, 2011				June 30, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Assets:
Cash and due from banks	$	62,586	$	62,586	$	32,831	$	32,831
Securities available for sale		39,027		39,027		48,779		48,779
Securities held to maturity		8,044		8,547		10,035		10,710
Loans held for sale		581		581		3,947		3,961
Loans receivable, net		341,488		326,875		389,411		360,697
Bank owned life insurance		17,443		17,443		16,920		16,920
Accrued interest receivable		1,852		1,852		2,158		2,158
FHLB stock		6,510		6,510		6,510		6,510

Liabilities:
Demand deposits, savings and money market		160,236		160,236		154,324		154,324
Certificates of deposit		182,223		180,377		201,464		200,976
FHLB advances		98,400		97,896		136,900		138,312
Advance payments by borrowers for taxes and insurance		2,278		2,278		1,423		1,423

Commitments to extend credit represent the principal categories of off-balance-sheet financial instruments. The fair values of these commitments are not material since they are for a short period of time and are subject to customary credit terms.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and due from banks - For cash, the carrying amount is a reasonable estimate of fair value.

Securities - The estimated fair values of Securities in debt securities were based on quoted market prices of similar securities.

Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. The FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market. For impaired loans, the fair value was based on the face amount of the collateral.

Loans receivable, net - As of March 31, 2011 and June 30, 2010, loans were priced using comparable market statistics. The loan portfolio was segregated into various categories and a weighted average valuation discount that approximated similar loan sales was applied to each category. For impaired loans the fair value was based on the collateral less estimated selling costs.

Bank owned life insurance - The carrying amount is a reasonable estimate of its fair value.

FHLB stock - FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the member institutions, and can only be purchased and redeemed at par. Due to ongoing turmoil in the capital and mortgage markets, the FHLB of Seattle has a risk-based capital deficiency largely as a result of write-downs on their private label mortgage-backed securities portfolios.

Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank’s demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.

FHLB advances - The fair value of the Bank’s FHLB advances was calculated using the discounted cash flow method. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.

Accrued interest receivable and advance payments by borrowers for taxes and insurance - The carrying value has been determined to be a reasonable estimate of their fair value.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which are not statements of historical fact and 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.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. 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 FDIC, 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 the Order or other regulatory enforcement actions;

•

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

•

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;

•

increased competitive pressures among financial services companies;

•

changes in consumer spending, borrowing and savings habits;

•

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

•

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 accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and

•

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report.

Some of these and other factors are discussed in our prospectus dated November 12, 2011 under the caption “Risk Factors.” Such developments could have an adverse impact on our financial position and our results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for fiscal year 2011 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s financial condition, liquidity and operating performance.

Background and Overview

Anchor Bank is a Washington chartered savings bank that was organized in 1907 as a Washington state chartered savings and loan association, converted to a federal mutual savings and loan association in 1935, and converted to a Washington state chartered mutual savings bank in 1990. Effective January 25, 2011, the Bank converted from mutual to stock form. Anchor Bank is a community-based savings bank primarily serving Western Washington through 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. 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-deposit sources of funds.

On August 12, 2009, Anchor Bank became subject to the Order, issued with its consent, by the FDIC and DFI. 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. Management and the Bank’s Board of Directors have been taking action and implementing programs to comply with the requirements of the Order. Information regarding Anchor Bank’s compliance with the Order is included in Note 3 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q and “Risk Factors - Cease and Desist Order” in the prospectus dated November 12, 2010.

Critical Accounting Estimates and Related Accounting Policies

We use estimates and assumptions in our consolidated 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 consolidated 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 collectability 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 $3.2 million at March 31, 2011. 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 securities 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 March 31, 2011 and June 30, 2010

General. Total assets decreased $34.7 million, or 6.4%, to $510.1 million at March 31, 2011 from $544.8 million at June 30, 2010. The decrease in assets during this period was primarily a result of a $47.9 million, or 12.3%, decrease in loans receivable and a $9.8 million, or 20.0%, decrease in securities available for sale, partially offset by a $29.8 million, or 90.6%, increase in cash and cash due from banks. The proceeds from loan maturities and pay-offs and the sale of securities during the period, together with the $21.1 million in net conversion proceeds raised during the quarter, were used to reduced outstanding borrowings and eliminate brokered deposits, with the excess proceeds resulting in an increase in cash and cash due from banks. Total liabilities decreased $52.2 million, or 10.4%, to $448.0 million at March 31, 2011 from $500.2 million at June 30, 2010. The decrease in liabilities during the period was primarily the result of a $13.3 million, or 3.7%, decrease in deposits, which included a $21.7 million, or 100%, decrease in brokered deposits partially offset by an increase in other deposits, and a $38.5 million, or 28.1%, decrease in FHLB advances.. These decreases were due to our continued focus to replace wholesale deposits and borrowings with core deposits.

Assets. Total assets decreased $34.7 million at March 31, 2011 from June 30, 2010. The following table details the increases and decreases in the composition of our assets from June 30, 2010 to March 31, 2011:

					Increase/(Decrease)
	Balance at March 31, 2011		Balance at June 30, 2010		Amount			Percent
	(Dollars in thousands)
Cash and due from banks	$	62,586	$	32,831	$	29,755			90.6	%
Mortgage-backed securities, available for sale		39,027		48,779		(9,752	)		(20.0	)
Mortgage-backed securities, held to maturity		8,044		10,035		(1,991	)		(19.8	)
Loans receivable, net of allowance for loan losses		341,488		389,411		(47,923	)		(12.3	)

Cash and due from banks increased $29.8 million or 90.6% at March 31, 2011 from June 30, 2010. This increase was primarily related to the $23.2 million net proceeds the Company received upon completion of the Company’s initial public offering on January 25, 2011.

Securities available for sale decreased $9.8 million or 20.0% to $39.0 million at March 31, 2011 from $48.8 million at June 30, 2010. The decrease in this portfolio was primarily the result of sales and maturities of securities of $4.0 million and contractual repayments of $4.9 million. Securities held-to-maturity decreased $2.0 million or 19.8% due to contractual repayments.

Loans receivable, net, decreased $47.9 million or 12.3% to $341.5 million at March 31, 2011 from $389.4 million at June 30, 2010. The total construction loan portfolio decreased $18.1 million due to loan repayments and the transfer of loans to real estate owned. Our total commercial loan real estate portfolio decreased $10.0 million as a result of our continued focus to reduce this portion of the loan portfolio.

Deposits. Deposits decreased $13.3 million, or 3.7%, to $342.5 million at March 31, 2011 from $355.8 million at June 30, 2010. A significant portion of the decrease was in brokered certificates of deposit which decreased $21.7 million and a $6.3 million decrease in interest-bearing demand deposits. These decreases were partially offset by increases in our money market accounts of $8.1 million and retail certificates of deposit of $2.5 million.

The following table details the changes in deposit accounts:

					Increase/(Decrease)
	Balance at March 31, 2011		Balance at June 30, 2010		Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	31,241	$	28,718	$	2,523			8.8	%
Interest-bearing demand deposits		19,139		25,483		(6,344	)		(24.9	)
Money market accounts		78,424		70,367		8,057			11.4
Savings deposits		31,432		29,756		1,676			5.6
Certificates of deposit
Retail certificates		182,223		179,739		2,484			1.4
Brokered certificates		-		21,725		(21,725	)		(100.0	)
Total deposit accounts	$	342,459	$	355,788	$	(13,329	)		(3.7	)%

Borrowings. FHLB advances decreased $38.5 million, or 28.1%, to $98.4 million at March 31, 2011 from $136.9 million at June 30, 2010. The decrease was related to our continued focus on reducing our reliance on outside borrowings and our emphasis on retail deposits.

Stockholders’ Equity. Total stockholders’ equity increased $17.4 million or 38.9% to $62.1 million at March 31, 2011 from $44.7 million at June 30, 2010. The increase was primarily due to net proceeds of $23.2 million generated by the Company’s public offering, offset by a net loss for the nine months ended March 31, 2011 of $4.1 million, the purchase of shares for the Employee Stock Ownership Plan (ESOP) of $1.0 million and a decrease in other accumulated comprehensive income, net of tax of $643,000.

Comparison of Operating Results for the Three and Nine Months ended March 31, 2011 and 2010

General. Net loss for the three months ended March 31, 2011 was $3.4 million compared to a net loss of $326,000 for the three months ended March 31, 2010. For the nine months ended March 31, 2011, the net loss was $4.1 million compared to net income of $1.5 million for the comparable period in 2010.

Net Interest Income. Net interest income remained relatively unchanged at $4.5 million for both the three months ended March 31, 2011 and March 31, 2010. For the nine months ended March 31, 2011, net interest income increased $234,000 or 1.8%, to $13.5 million from $13.3 million for the nine months ended March 31, 2010.

Our net interest margin increased 54 basis points to 3.87% for the three months ended March 31, 2011, from 3.33% for the same period the prior year. The average yield on interest-earning assets decreased 48 basis points to 5.32% for the three months ended March 31, 2011 from 5.80% for the comparable quarter in 2010. The decrease in yield was the result of the cash received through the offering. The average cost of interest-bearing liabilities decreased 106 basis points to 1.65% for the three months ended March 31, 2011, compared to 2.71% for the same period the prior year, primarily due to a lower rate and average balance of FHLB borrowings and certificates of deposit.

The following table sets forth the results of balance sheet decreases and changes in interest rates to our net interest income for the three months ended March 31, 2011 compared to the same period in 2010. 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.

	Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(185	)	$	(1,347	)	$	(1,532	)
Mortgage-backed securities		(11	)		(169	)		(180	)
Investment securities, FHLB stock and cash and due from banks		(37	)		37			0
Total net change in income on interest-earning assets	$	(233	)	$	(1,479	)	$	(1,712	)
Interest-bearing liabilities:
Savings deposits
Interest-bearing demand deposits	$	(4	)	$	4		$	-
Money market accounts		(11	)		(9	)		(20	)
Certificates of deposit		(44	)		3			(41	)
FHLB advances		(454	)		(380	)		(834	)
Total net change in expense on interest-bearing liabilities		(451	)		(334	)		(785	)
Total increase in net interest income		(964	)		(716	)		(1,680	)
	$	731		$	(763	)	$	(32	)

For the nine months ended March 31, 2011, our net interest margin increased 55 basis points to 3.77% compared to 3.08% for the same period in 2010. The average cost of interest-bearing liabilities decreased 101 basis points to 1.96% for the nine months ended March 31, 2011 compared to 2.97% for the same period of the prior year. This decrease is primarily as a result of a 177 basis point decrease in the average cost of FHLB borrowings due to the elimination of higher priced borrowings through payoff at normal maturity dates and a 87 basis point decrease in the average cost of certificates of deposit due to the decline in brokered certificates of deposit during the nine months ended March 31, 2011.

The following table sets forth the results of balance sheet decreases and changes in interest rates to our net interest income for the nine months ended March 31, 2011 compared to the same period in 2010.

	Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(166	)	$	(4,163	)	$	(4,329	)
Mortgage-backed securities		(43	)		(652	)		(695	)
Investment securities, FHLB stock and cash and due from banks		(106	)		50			(56	)
Total net change in income on interest-earning assets	$	(315	)	$	(4,765	)	$	(5,080	)

Interest-bearing liabilities:
Savings deposits	$	(4	)	$	10		$	6
Interest-bearing demand deposits		(39	)		(18	)		(57	)
Money market accounts		(318	)		(170	)		(488	)
Certificates of deposit		(1,280	)		(1,245	)		(2,525	)
FHLB advances		(1,436	)		(814	)		(2,250	)
Total net change in expense on interest-bearing liabilities		(3,077	)		(2,237	)		(5,314	)
Total increase in net interest income	$	2,762		$	(2,528	)	$	234

Interest Income. Total interest income for the three months ended March 31, 2011 decreased $1.7 million, or 21.6%, to $6.2 million, from $7.9 million for the three months ended March 31, 2010. The decrease during the period was primarily attributable to the decline in net loans receivable over the last year.

The following tables compare detailed average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011					2010					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest and Dividend Income from 2010
	(Dollars in thousands)

Loans receivable, net (1)	$	362,275		6.20	%	$	446,466		6.40	%	$	(1,531	)
Mortgage-backed securities		42,408		4.74			56,333		4.85			(180	)
Investment securities		5,989		4.27			7,653		3.87			(10	)
FHLB stock		6,510		-			6,510		-			-
Cash and due from banks		48,746		0.16			28,345		0.16			9
Total interest-earning assets	$	465,928		5.32	%	$	545,307		5.80	%	$	(1,712	)

(1)	Non-accruing loans have been included in the table as loans carrying a zero yield for the period that they have been on non-accrual. Calculated net of deferred loan fees, loan discounts, and loans in process.

For the nine months ended March 31, 2011, total interest income decreased $5.1 million, or 20.4%, to $19.9 million, from $25.0 million for the nine months ended March 31, 2010. The decrease was primarily the result of a $87.3 million decrease in the average balance of loans receivable during the period. The decrease in the average balance of loans receivable was a part of the strategy employed by the Bank to maximize its regulatory capital ratios prior to the stock offering.

The following tables compare detailed average interest-earning asset balances, associated yields, and resulting changes in interest income for the nine months ended March 31, 2011 and 2010:

	Nine Months Ended March 31,
	2011					2010					Increase/
	Average Balance		Yield			Average Balance		Yield			(Decrease) in Interest and Dividend Income from 2010
	(Dollars in thousands)

Loans receivable, net (1)	$	380,055		6.30	%	$	467,321		6.36	%	$	(4,329	)
Mortgage-backed securities		46,772		4.73			64,674		4.85			(695	)
Investment securities		6,407		4.22			8,641		4.15			(66	)
FHLB stock		6,510		-			6,510		-			-
Cash and due from banks		38,654		0.19			29,403		0.21			10
Total interest-earning assets	$	478,398		5.54	%	$	576,549		5.77	%	$	(5,080	)

(1)	Non-accruing loans have been included in the table as loans carrying a zero yield for the period that they have been on non-accrual. Calculated net of deferred loan fees, loan discounts, and loans in process.

Interest Expense. Interest expense decreased $1.7 million, or 49.8%, to $1.7 million for the three months ended March 31, 2011, from $3.4 million for the three months ended March 31, 2010. The average cost of interest-bearing liabilities decreased 106 basis points to 1.65% for the three months ended March 31, 2011 compared to 2.71% for the same period of the prior year. The decrease was primarily due to a 99 basis point decline in our average cost of certificates of deposit and a 184 basis point decline in the average cost of Federal Home Loan Bank advances. The average balance of total interest-bearing liabilities decreased $88.3 million, or 17.7%, to $409.3 million for the three months ended March 31, 2011 from $497.6 million for the three months ended March 31, 2010. The decrease was primarily a result of a $34.2 million decline due a decrease in average retail certificates of deposits, a decrease in $11.8 million of average brokered deposits, and a $38.5 million decrease in average FHLB advances.

The following table details average balances, cost of funds and the change in interest expense for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011					2010					Increase/
	Average Balance		Cost			Average Balance		Cost			(Decrease) in Interest Expense from 2010
	(Dollars in thousands)

Savings deposits	$	30,847		0.70	%	$	28,743		0.75	%	$	-
Interest-bearing demand deposits		18,983		0.30			25,577		0.53			(20	)
Money market deposits		76,826		0.87			75,676		1.10			(41	)
Certificates of deposit		184,270		2.29			230,748		3.28			(834	)
FHLB advances		98,400		1.63			136,900		3.47			(785	)
Total interest-bearing liabilities	$	409,326		1.65	%	$	497,644		2.71	%	$	(1,680	)

For the nine months ended March 31, 2011 interest expense decreased $5.3 million, or 45.6%, to $6.3 million for the nine months ended March 31, 2011 from $11.6 million for the nine months ended March 31, 2010. Average interest-bearing liabilities decreased $92.6 million or 17.7% to $430.6 million for the nine months ended March 31, 2011 compared to $523.2 million for the same period in 2010. The average cost of interest-bearing liabilities decreased 101 basis points to 1.96% for the nine months ended March 31, 2011 compared to 2.97% for the same period of the prior year. The decrease was primarily a result of a 177 basis point decrease in the average cost of FHLB borrowings due to the elimination of higher priced borrowings through payoff at normal maturity dates and a 87 basis point decrease in the average cost of certificates of deposit due to the decline in brokered certificates of deposit during the nine months ended March 31, 2011.

The following table details average balances, cost of funds and the change in interest expense for the nine months ended March 31, 2011 and 2010:

	Nine Months Ended March 31,
	2011					2010					Increase/
	Average Balance		Cost			Average Balance		Cost			(Decrease) in Interest Expense from 2010
	(Dollars in thousands)

Savings deposits	$	30,636		0.74	%	$	28,823		0.76	%	$	6
Interest-bearing demand deposits		20,995		0.30			25,323		0.55			(57	)
Money market deposits		74,928		0.99			89,483		1.56			(488	)
Certificates of deposit		195,867		2.58			243,960		3.45			(2,525	)
FHLB advances		108,191		2.19			135,604		3.96			(2,250	)
Total interest-bearing liabilities	$	430,617		1.96	%	$	523,193		2.97	%	$	(5,314	)

Provision for Loan Losses. In connection with its analysis of the loan portfolio at March 31, 2011, management determined that a provision for loan losses of $3.6 million was required for the three months ended March 31, 2011, compared to the $666,000 provision for loan losses established for the three months ended

March 31, 2010. Most of the increases in the provision relates to the single family, home equity, and consumer loan portfolios and results from continued weakness in employment within Anchor’s primary market areas. The specific allowance component is created when management believes that the collectability 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. During the quarter, $6.2 million of loans specifically allowed for in the prior quarter were charged off as confirmed losses against the allowance for loan losses. Included in the $6.2 million is one large credit relationship for $4.2 million that, as previously disclosed, was classified as Substandard at December 31, 2010 and that experienced further deterioration during the quarter ended March 31, 2011. This relationship, which was originated by a former loan officer, had a principal balance totaling $4.2 million at March 31, 2011 and has been reserved to a level of fifty percent (50%), based on estimates of the value of the Bank’s security positions.

The provision for loan losses for the nine months ended March 31, 2011 was $5.1 million, an increase of $2.9 million from the $2.2 million provision for loan losses for the nine months ended March 31, 2010. Management considers the allowance for loan losses at March 31, 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 provision for loan losses is impacted by the types of loans and the risk factors associated with each loan type in the Bank’s portfolio. As the Bank increases its commercial and commercial real estate loan portfolios, the Bank anticipates it will increase its allowance for loan losses based upon the higher risk characteristics associated with commercial loans compared with one- to four- family residential loans, which have historically comprised the majority of the Bank’s loan portfolio.

Non-performing loans were $18.8 million or 3.7% of total assets at March 31, 2011, compared to $20.0 million, or 3.6% of total assets at March 31, 2010. The following table details activity and information related to the allowance for loan losses at and for the nine months ended March 31, 2011 and 2010.

	At or For the Nine Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Provision for loan losses	$	5,118		$	2,249
Net charge-offs	$	14,131		$	8,791
Allowance for loan losses	$	7,775		$	18,157
Allowance for loan losses as a percentage of gross loans receivable at the end of the period		2.2	%		4.2	%
Nonaccrual and 90 days or more past due loans	$	18,753		$	20,045
Allowance for loan losses as a percentage of nonperforming loans at the end of the period		41.5	%		90.6	%
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable at the end of the period		5.4	%		4.6	%
Total loans	$	349,975		$	434,030

Noninterest Income. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended March 31, 2011 compared to the same period in 2010:

	Three Months Ended March 31,					Increase (decrease)
	2011			2010		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	503		$	632	$	(129	)		(20.4	)%
Other deposit fees		211			209		2			1.0
Loan fees		217			217		-			-
Gain (loss) on sale of loans		(14	)		67		(81	)		(120.9	)
Other income		308			388		(80	)		(20.6	)
Total noninterest income	$	1,225		$	1,513	$	(288	)		(19.0	)%

Noninterest income decreased $288,000 or 19.0% to $1.2 million for the three months ended March 31, 2011 from $1.5 million for the same quarter in 2010. The decrease in deposit services fees is related to our two branch closures, and a decrease in ATM fee income as a result of the closures. The decrease in the amount of gain on the sale of loans was the result of a lower volume of loans sold into the secondary market during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 due to lower demand for one-to-four home loans.

The following table provides a detailed analysis of the changes in the components of noninterest income for the nine months ended March 31, 2011 compared to the same period in 2010:

	Nine Months Ended March 31,				Increase (decrease)
	2011		2010		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	1,767	$	2,052	$	(285	)		(13.9	)%
Other deposit fees		642		602		40			6.6
Gain on the sale of securities		135		25		110			440.0
Loan fees		750		700		50			7.1
Gain on sale of loans		174		896		(722	)		(80.6	)
Other income		979		943		36			3.8
Total noninterest income	$	4,447	$	5,218	$	(771	)		(14.8	)%

Noninterest income decreased $771,000 during the nine months ended March 31, 2011 from the same period in 2010 primarily as a result of a $722,000 decrease in gains on the sales of loan. There was a sale in August 2010 of $13.2 million in single family loans that resulted in a gain of $331,000 with no comparable gain during the nine months ended March 31, 2011. Deposit fees decreased due to two Wal-Mart branch closures. Gain on sale of Securities increased due to the sale of mortgage backed securities used to eliminate wholesale funds.

Noninterest Expense. The following tables provide an analysis of the changes in the components of noninterest expense for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,					Increase (decrease)
	2011			2010		Amount			Percent
	(Dollars in thousands)

Compensation and benefits	$	2,077		$	2,217	$	(140	)		(6.3	)%
General and administrative expenses		1,019			1,134		(115	)		(10.1	)
Real estate owned impairment		759			611		148			24.2
FDIC Insurance premium		262			300		(38	)		(12.7	)
Information technology		495			477		18			3.8
Occupancy and equipment		612			630		(18	)		(2.9	)
Deposit services		172			232		(60	)		(25.9	)
Marketing		131			103		28			27.2
(Gain) on sale of real estate owned		(52	)		9		(61	)		(677.8	)
Total noninterest expense	$	5,475		$	5,713	$	(238	)		(4.2	)%

Noninterest expense decreased $238,000, or 4.2%, to $5.5 million for the three months ended March 31, 2011 from $5.7 million for the three months ended March 31, 2010. Compensation and benefits decreased $140,000 or 6.3% to $2.1 million as a result of two Wal-Mart branch closures. REO impaired increased $148,000 or 24.2% to $759,000 due to continued deterioration in the real estate market. Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 95.5% for the three months ended March 31, 2011 compared to 94.4% for the three months ended March 31, 2010.

The following tables provide an analysis of the changes in the components of noninterest expense for the nine months ended March 31, 2011 and 2010:

	Nine Months Ended March 31,						Increase (decrease)
	2011			2010			Amount			Percent
	(Dollars in thousands)

Compensation and benefits	$	6,406		$	6,588		$	(182	)		(2.8	)%
General and administrative expenses		3,489			3,664			(175	)		(4.8	)
Real estate owned impairment		2,046			1,959			87			4.4
FDIC Insurance premium		887			1,200			(313	)		(26.1	)
Information technology		1,507			1,400			107			7.6
Occupancy and equipment		1,783			1,927			(144	)		(7.5	)
Deposit services		517			693			(176	)		(25.4	)
Marketing		406			317			89			28.1
Loss on sale of premises, and equipment		168			2			166			8300.0
(Gain) on sale of real estate owned		(218	)		(28	)		(190	)		(678.6	)
Total noninterest expense	$	16,991		$	17,722		$	(731	)		(4.1	)%

For the nine months ended March 31, 2011, noninterest expense decreased $731,000 or 4.1%, to $17.0 million from $17.7 million for the nine months ended March 31, 2010. FDIC insurance premiums expense decreased $313,000 due to lower balances in our deposit accounts as the Bank reduced its brokered certificate of deposits. Gain on sale of real estate owned also increased $190,000 during the period. As a result of our branch closures

occupancy expense decreased $144,000. Compensation and benefits decreased as a result of two Wal-Mart branch closures. REO impaired increased due to continued deterioration in the real estate market.

Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 94.5% for the nine months ended March 31, 2011 compared to 95.7% for the nine months ended March 31, 2010.

Liquidity, Commitments and Capital Resources

Liquidity. We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. Historically, we have maintained cash flow above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a monthly basis, we review and update cash flow projections to ensure that adequate liquidity is maintained.

Our primary sources of funds are from customer deposits, loan repayments, loan sales, investment payments, maturing investment securities and advances from the FHLB of Seattle. These funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition.

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At March 31, 2011, the total approved loan origination commitments outstanding amounted to $118,000. At the same date, unused lines of credit were $37.2 million.

For purposes of determining our liquidity position, we use a concept of basic surplus, which is derived from the total of available for sale securities, as well as other liquid assets, less short-term liabilities. Our Board of Directors has established a target range for basic surplus of 5% to 7%. For the three and nine months ended March 31, 2011, our average basic surplus was 12.9% and 10.2%, respectively, which indicates we exceed the liquidity standard set by the Board. The Order requires Anchor Bank to establish a liquidity and funds management policy that includes specific provisions to maintain a liquidity ratio of at least 15%. As of March 31, 2011 our liquidity ratio is 26.86%.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or mortgage-backed securities. On a longer-term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed securities and investment securities.

Certificates of deposit scheduled to mature in one year or less at March 31, 2011 totaled $71.5 million with no brokered deposits. Management’s policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with Anchor Bank. In addition, we had the ability to borrow an additional $25.7 million from the FHLB of Seattle.

We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices, or in a reasonable time frame, to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements

Our primary source of funds is our deposits. When deposits are not available to provide the funds for our assets, we use alternative funding sources. These sources include, but are not limited to: cash management from the FHLB of Seattle, wholesale funding, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. Alternatively, we may also liquidate assets to meet our funding needs. On a monthly basis, we estimate our liquidity sources and needs for the corning three-month, nine-month, and one-year

time periods. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset Liability Management Committee in forecasting funding needs and investing opportunities.

The Company is a separate legal entity from the Bank and will have to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income will be ESOP loan payments, operating expense, and management expense reimbursement with no ability to pay dividends from Bank in the near future. Our strategic business plan filed with the FDIC 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.

Commitments and Off-Balance Sheet Arrangements. The Bank is party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of the Bank’s customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the

borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary.

Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit.

Commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of

March 31, 2011:

	Amount of Commitment Expiration Per Period
	Total Amounts Committed		Due in One Year
	(In thousands)
Commitments to originate loans (1)	$	118	$	118
Lines of Credit (2)
Fixed rate (3)	$	10,871	$	10,871
Adjustable rate	$	26,351	$	26,351
Undisbursed balance of loans closed	$	37,222	$	37,222

(1)	Interest rates on fixed rate loans range from 3.875% to 4.875%.
(2)	At March 31, 2011 there were no reserves for unfunded commitments.
(3)	Includes standby letters of credit.

Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards and the Order. Anchor Bank’s total regulatory capital was $63.1 million at March 31, 2011, or 12.4%, of total assets on that date. As of March 31, 2011, we exceeded all regulatory capital requirements to be considered well capitalized as of that date. Our regulatory capital ratios at March 31, 2011, were as follows: Tier 1 capital 16.3%; Tier 1 (core) risk-based capital 11.6%; and total risk-based capital 17.6%. The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively. Although we were “well capitalized” at March 31, 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. For additional information, see the discussion included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.

						Minimum					Capitalized Under Prompt
	Actual					Capital Requirement					Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2011
Total capital
(to risk-weighted
assets)	$	63,102		17.6	%	$	5,048		8.0	%	$	6,310		10.0	%
Tier I capital
(to risk-weighted
assets)	$	58,577		16.3	%	$	2,524		4.0	%	$	3,786		6.0	%
Tier I leverage capital
(to average assets)	$	58,577		11.6	%	$	2,343		4.0	%	$	2,929		5.0	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in the Company’s prospectus dated November 12, 2011.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer, and other members of the Company’s management team as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2011, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company’s internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. A number of internal control procedures were, however, modified during the quarter in conjunction with the Bank's internal control testing. The Company also continued to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations.

Item 1A. Risk Factors

For information regarding the company’s risk factors, see “Risk Factors” in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on November 12, 2011. As of March 31, 2011, the risk factors of the Company have not changed materially from those disclosed in the prospectus

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 12, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Order”) with the FDIC, and the Washington Department of Financial Institutions, Division of Banks (“DFI”). Under the terms of the Order, the Bank, among other things, cannot declare dividends to the Company without the prior written approval of the FDIC and the DFI. In addition, the FDIC’s non-objection of our recently completed conversion from mutual to stock form restricts the Company from making any distributions to stockholders that represent a return of capital without the written non-objection of the FDIC Regional Director. We do not expect to be permitted to pay dividends as long as the Order remains in effect.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. [Removed and Reserved]

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1	Articles of Incorporation of the Registrant (1)
3.2	Bylaws of the Registrant (1)
10.1	Form of Anchor Bank Employee Severance Compensation Plan (1)
10.2	Anchor Mutual Savings Bank Phantom Stock Plan (1)
10.3	Form of 401(k) Retirement Plan (1)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

______

(1)	Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-154734)

SIGNATURES

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

	ANCHOR BANCORP



Date: May 6, 2011	/s/ Jerald L. Shaw
	Jerald L. Shaw
	President and Chief Executive Officer
	(Principal Executive Officer)



Date: May 6, 2011	/s/ Terri L. Degner
	Terri L. Degner
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT INDEX

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

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