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 September 30, 2013

 or

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

For the transition period from _____ to _____

Commission File Number: 001-34965

ANCHOR BANCORP

(Exact name of registrant as specified in its charter)

Washington	26-3356075
(State or other jurisdiction of incorporation	(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 [X] 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 November 6, 2013, 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
	Page
Item 1 - Financial Statements	1
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	42
Item 4 - Controls and Procedures	45
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings	45
Item 1A - Risk Factors	45
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3 – Defaults Upon Senior Securities	45
Item 4 – Mine Safety Disclosures	46
Item 5 - Other Information	46
Item 6 - Exhibits	46
SIGNATURES	47

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)	September 30, 2013			June 30, 2013
ASSETS
Cash and cash equivalents	$	21,591		$	65,353
Securities available-for-sale, at fair value, amortized cost of $45,979 and $49,259	45,231			48,308
Securities held-to-maturity, at amortized cost, fair value of $9,733 and $10,316	9,709			10,295
Loans held for sale	—			222
Loans receivable, net of allowance for loan losses of $4,941 and $5,147	280,667			277,454
Bank owned life insurance investment, net of surrender charges	19,021			18,879
Accrued interest receivable	1,589			1,583
Real estate owned, net	5,766			6,212
Federal Home Loan Bank  ("FHLB") stock, at cost	6,220			6,278
Property, premises, and equipment, at cost, less accumulated depreciation of $15,422 and $15,324	11,369			11,394
Deferred tax asset, net	555			555
Prepaid expenses and other assets	1,569			5,646
Total assets	$	403,287		$	452,179
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	42,507		$	39,713
Interest-bearing	283,469			288,871
Total deposits	325,976			328,584
FHLB advances	17,500			64,900
Advance payments by borrowers for taxes and insurance	1,390			791
Supplemental Executive Retirement Plan liability	1,688			1,703
Accounts payable and other liabilities	4,145			3,833
Total liabilities	350,699			399,811
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; 2,550,000 issued and 2,466,133 outstanding at September 30, 2013 and 2,550,000 shares issued and 2,464,433 outstanding at June 30, 2013, respectively	25			25
Additional paid-in capital	23,241			23,229
Retained earnings, substantially restricted	31,479			31,491
Unearned Employee Stock Ownership Plan ("ESOP") shares	(839		)	(856		)
Accumulated other comprehensive loss, net of tax	(1,318		)	(1,521		)
Total stockholders’ equity	52,588			52,368
Total liabilities and stockholders’ equity	$	403,287		$	452,179

See accompanying notes to condensed consolidated financial statements (unaudited).

1

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) (Unaudited)	Three Months Ended September 30,
	2013			2012
Interest income:
Loans receivable, including fees	$	4,321		$	4,745
Securities	57			61
Mortgage-backed securities	259			474
Total interest income	4,637			5,280
Interest expense:
Deposits	773			990
FHLB advances	270			313
Total interest expense	1,043			1,303
Net interest income before provision for loan losses	3,594			3,977
Provision for loan losses	—			300
Net interest income after provision for loan losses	3,594			3,677
Noninterest income
Deposit service fees	377			391
Other deposit fees	200			189
Loan fees	149			185
(Loss) gain on sale of loans	(17		)	177
Bank owned life insurance investment	143			163
Other income	115			267
Total noninterest income	967			1,372
Noninterest expense
Compensation and benefits	2,006			2,135
General and administrative expenses	798			819
Real estate owned impairment	360			235
Real estate owned holding costs	77			185
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	142			162
Information technology	428			360
Occupancy and equipment	464			539
Deposit services	136			189
Marketing	162			127
Gain on sale of property, premises and equipment	(5		)	—
Loss on sale of real estate owned	5			20
Total noninterest expense	4,573			4,771
(Loss) income before provision for income taxes	(12		)	278
Provision for income taxes	—			—
Net (loss) income	$	(12	)	$	278
Basic (loss) earnings per share	$	0.00		$	0.11
Diluted (loss) earnings per share	$	0.00		$	0.11

See accompanying notes to condensed consolidated financial statements(unaudited).

2

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)	Three Months Ended September 30,
	2013			2012
NET (LOSS) INCOME	$	(12	)	$	278
OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
Unrealized holding losses on available-for-sale securities during the period	203			128
Other comprehensive income net of income tax	203			128
COMPREHENSIVE INCOME	$	191		$	406

See accompanying notes to condensed consolidated financial statements(unaudited).

3

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except share data) (Unaudited)	Three Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(12	)	$	278
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization	155			243
Net amortization of premiums on securities	192			39
Provision for loan losses	—			300
ESOP expense	29			20
Real estate owned impairment	360			235
Income from bank owned life insurance investment	(143		)	(163		)
Loss (gain) on sale of loans	17			(177		)
Originations of loans held for sale	(4,623		)	(7,296		)
Proceeds from sale of loans held for sale	4,827			6,357
Gain on sale of property, premises, and equipment	(5		)	—
Loss on sale of real estate owned	5			20
(Decrease) Increase in operating assets and liabilities:
Accrued interest receivable	(6		)	(178		)
Prepaid expenses, other assets, and income tax receivable	4,077			917
Supplemental Executive Retirement Plan	(15		)	(41		)
Accounts payable and other liabilities	312			2,593
Net cash provided by operating activities	5,170			3,147
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale investments	—			(4,526		)
Purchase of held-to-maturity investments	—			(1,354		)
Principal repayments on mortgage-backed securities available-for-sale	3,090			3,967
Principal repayments on mortgage-backed securities held-to-maturity	566			600
Loan originations, net of undisbursed loan proceeds and principal repayments	(3,658		)	(685		)
Proceeds from sale of real estate owned	967			1,677
Capital  improvements on real estate owned	(363		)	(30		)
Proceeds from sale of property, premises, and equipment	5			—
Purchase of fixed assets	(130		)	(23		)
Net cash provided by (used in) investing activities	477			(374		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits	(2,608		)	(8,229		)
Net change in advance payments by borrowers for taxes and insurance	599			568
Repayment of FHLB advances	(47,400		)	—
Net cash used in financing activities	$	(49,409	)	$	(7,661	)
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(43,762	)	$	(4,888	)
Beginning of period	65,353			78,673
End of period	$	21,591		$	73,785

4

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except share data) (Unaudited)	Three Months Ended September 30,
	2013		2012
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities
Net loans transferred to real estate owned	$	523	$	676
Loans securitized into mortgage-backed securities	$	—	$	1,069
Cash paid during the period for interest	$	1,095	$	1,305

See accompanying notes to condensed consolidated financial statements (unaudited).

5

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Nature of Business

Anchor Bancorp (the “Company”), 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.

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 11 full-service bank offices (including two Wal-Mart store locations) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington.  In addition we have two loan production offices located in Grays Harbor County.  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. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2013 (“2013 Form 10-K”). The results of operations for the three months ended September 30, 2013 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2014. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported net income (loss) or equity.

Note 3 - Conversion and Change in Corporate Form

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 borrowers, Anchor Mutual Savings 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 Anchor Bancorp, 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 $2.3 million, which was deducted from the proceeds of the offering.

Pursuant to the Plan, the Company formed 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 is maintained for the benefit 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 the conversion. The conversion was accounted for as a change in corporate form with the historic basis of the Bank's assets, liabilities, and equity unchanged as a result.

Note 4 - Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index SwapRate)as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did not have a material impact on the Company's consolidated financial statements.

6

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In July 2013, the FASB issued ASU No. 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's consolidated financial statements.

Note 5- Supervisory Directive

Anchor Bank entered into an Order to Cease and Desist (“Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions, Division of Banks (“DFI”) on August 12, 2009. On September 5, 2012, the FDIC and the DFI terminated the Order and it was replaced with a Supervisory Directive.

The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank.

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

Anchor Bank has also been notified that it must notify the FDIC and DFI in writing at least 30 days prior to certain management changes. These changes include the addition or replacement of a board member, or the employment or change in responsibilities of anyone who is, who will become, or who performs the duties of a senior executive officer. In addition prior to entering into any agreement to pay and prior to making any golden parachute payment or excess nondiscriminatory severance plan payment to any institution-affiliated party, Anchor Bank must file an application to obtain the consent of the FDIC.

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

Note 6 - Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income or loss, as applicable, available to common stockholders by the weighted average number of common shares outstanding for the period. As ESOP shares are committed to be released they become outstanding for EPS calculation purposes. ESOP shares not committed to be released are not considered outstanding. 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 Company. There were no other securities or issues that can convert to common stock during the following periods. The following table presents a reconciliation of the components used to compute basic and diluted earnings (loss) per share:

	For the Three Months Ended September 30,
	2013			2012
	(Dollars in thousands, except share data)
Net (loss) income	$	(12	)	$	278
Weighted-average common shares outstanding	2,465,283			2,458,483
Basic earnings per share	$	0.00		$	0.11
Diluted earnings per share	$	0.00		$	0.11

7

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no antidilutive options at or for the three months ended September 30, 2013 and 2012.

Note 7 - Investments

The amortized cost and estimated fair market values of investment securities as of September 30, 2013 and June 30, 2013, were as follows:

September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	1,444	$	11	$	—		$	1,455
Mortgage-backed securities:
FHLMC (1)	19,438		190		(384		)	19,244
FNMA (2)	23,693		73		(620		)	23,146
GNMA (3)	1,404		—		(18		)	1,386
	$	45,979	$	274	$	(1,022	)	$	45,231
Securities held-to-maturity
Municipal bonds	$	133	$	—	$	—		$	133
Mortgage-backed securities:
FHLMC	4,433		111		(101		)	4,443
FNMA	2,677		140		(43		)	2,774
GNMA	2,466		—		(83		)	2,383
	$	9,709	$	251	$	(227	)	$	9,733

⁽¹⁾ Federal Home Loan Mortgage Corporation ("Freddie Mac")

⁽²⁾ Federal National Mortgage Association ("Fannie Mae")

⁽³⁾ Government National Mortgage Association ("Ginnie Mae")

June 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	1,446	$	10	$	—		$	1,456
Mortgage-backed securities:
FHLMC	20,675		210		(470		)	20,415
FNMA	25,639		76		(744		)	24,971
GNMA	1,499		—		(33		)	1,466
	$	49,259	$	296	$	(1,247	)	$	48,308
Securities held-to-maturity
Municipal bonds	$	135	$	—	$	—		$	135
Mortgage-backed securities:
FHLMC	4,744		119		(109		)	4,754
FNMA	2,931		164		(47		)	3,048
GNMA	2,485		—		(106		)	2,379
	$	10,295	$	283	$	(262	)	$	10,316

8

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were 51 securities in an unrealized loss position at both September 30, 2013 and June 30, 2013. The unrealized losses on investments in mortgage-backed securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities. We do expect to recover the entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of September 30, 2013 and June 30, 2013, were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2013	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	8,029		(205		)	5,327		(179		)	13,356		(384		)
FNMA	11,908		(252		)	10,255		(368		)	22,163		(620		)
GNMA	1,386		(18		)	—		—			1,386		(18		)
	$	21,323	$	(475	)	$	15,582	$	(547	)	$	36,905	$	(1,022	)

	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2013	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	2,860		(101		)	—		—		2,860		(101		)
FNMA	914		(43		)	—		—		914		(43		)
GNMA	2,383		(83		)	—		—		2,383		(83		)
	$	6,157	$	(227	)	$	—	$	—	$	6,157	$	(227	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2013	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	9,559		(281		)	4,760		(189		)	14,319		(470		)
FNMA	17,904		(502		)	6,077		(242		)	23,981		(744		)
GNMA	1,466		(33		)	—		—			1,466		(33		)
	$	28,929	$	(816	)	$	10,837	$	(431	)	$	39,766	$	(1,247	)

9

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2013	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	2,960		(109		)	—		—		2,960		(109		)
FNMA	938		(47		)	—		—		938		(47		)
GNMA	2,379		(106		)	—		—		2,379		(106		)
	$	6,277	$	(262	)	$	—	$	—	$	6,277	$	(262	)

Contractual maturities of securities at September 30, 2013 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.

September 30, 2013	Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale
Due within one year	$	—	$	—
Due after one to five years	600		608
Due after five to ten years	645		648
Due after ten years	199		199
Mortgage-backed securities:
FHLMC	19,438		19,244
FNMA	23,693		23,146
GNMA	1,404		1,386
	$	45,979	$	45,231

Securities held-to-maturity
Due after ten years	$	133	$	133
Mortgage-backed securities:
FHLMC	4,433		4,443
FNMA	2,677		2,774
GNMA	2,466		2,383
	$	9,709	$	9,733

There were no sales, maturities, and calls for the three months ended September 30, 2013 and 2012.

Pledged securities for the dates indicated are summarized as follows:

	September 30, 2013				June 30, 2013
Pledged to secure:	Book Value		Fair Value		Book Value		Fair Value
	(In thousands)
Public deposits	$	8,897	$	8,889	$	9,601	$	9,557
Certificates of deposit in excess of FDIC-insured limits	—		—		1,573		1,514
FHLB borrowings	2,671		2,702		3,012		3,039
Federal Reserve borrowings	1,152		1,125		1,161		1,120

10

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:

	September 30, 2013		June 30, 2013
	(In thousands)
Real estate
One-to-four family	$	71,440	$	73,901
Multi-family	45,011		38,425
Commercial	105,710		106,859
Construction	9,735		5,641
Land	5,118		5,330
Total real estate	237,014		230,156
Consumer
Home equity	24,570		25,835
Credit cards	4,175		4,741
Automobile	1,688		1,850
Other consumer	3,039		2,723
Total consumer	33,472		35,149
Commercial business	16,197		18,211
Total loans	286,683		283,516
Less
Deferred loan fees and unamortized
discount on purchased loans	1,075		915
Allowance for loan losses	4,941		5,147
	$	280,667	$	277,454

Allowance for 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.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2013:

	One-to- four family			Multi- family		Commercial real estate			Construction			Land			Consumer (1)			Commercial business			Unallocated		Three months ended 9/30/13
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,393		$	156	$	671		$	356		$	531		$	817		$	1,172		$	51	$	5,147
Provision (benefit) for loan losses	208			50		(206		)	(158		)	(88		)	251			(57		)	—		—
Charge-offs	(199		)	—		—			—			—			(298		)	(21		)	—		(518		)
Recoveries	52			—		209			8			—			30			13			—		312
Ending balance	$	1,454		$	206	$	674		$	206		$	443		$	800		$	1,107		$	51	$	4,941

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2012:

	One-to- four family			Multi- family		Commercial real estate		Construction		Land			Consumer (1)			Commercial business			Unallocated		Three months ended 9/30/12
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,659		$	238	$	578	$	148	$	368		$	1,508		$	2,558		$	—	$	7,057
Provision (benefit) for loan losses	(160		)	7		14		68		(40		)	182			229			—		300
Charge-offs	(95		)	—		—		—		—			(499		)	(181		)	—		(775		)
Recoveries	21			—		4		18		—			52			3			—		98
Ending balance	$	1,425		$	245	$	596	$	234	$	328		$	1,243		$	2,609		$	—	$	6,680

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

A loan is considered impaired when the Company has determined that it 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.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2013:

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	6,004	$	6,639	$	—
Multi-family	2,263		2,408		—
Commercial real estate	1,951		1,951		—
Land	309		323		—
Home equity	224		219		—
Commercial business	375		455		—
With an allowance recorded
One-to-four family	$	8,613	$	8,639	$	845
Land	1,121		1,121		355
Home equity	304		312		111
Commercial business	62		62		2
Total
One-to-four family	$	14,617	$	15,278	$	845
Multi-family	2,263		2,408		—
Commercial real estate	1,951		1,951		—
Land	1,430		1,444		355
Home equity	528		531		111
Commercial business	437		517		2
Total	$	21,226	$	22,129	$	1,313

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013:

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	5,744	$	6,418	$	—
Multi-family	2,263		2,408		—
Commercial real estate	1,968		1,968		—
Land	464		478		—
Home equity	240		241		—
Commercial business	1,319		2,637		—
With an allowance recorded
One-to-four family	$	8,235	$	8,262	$	804
Land	1,122		1,122		353
Home equity	437		444		147
Commercial business	69		69		2
Total
One-to-four family	$	13,979	$	14,680	$	804
Multi-family	2,263		2,408		—
Commercial real state	1,968		1,968		—
Land	1,586		1,600		353
Home equity	677		685		147
Commercial business	1,388		2,706		2
Total	$	21,861	$	24,047	$	1,306

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended September 30, 2013:

	Three Months Ended September 30, 2013
	Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	6,192	$	31
Multi-family	2,336		31
Commercial real estate	1,960		20
Land	394		6
Home equity	230		2
Commercial business	887		8
With an allowance recorded
One-to-four family	$	8,437	$	97
Land	1,122		7
Home equity	375		2
Commercial business	66		2
Total
One-to-four family	$	14,629	$	128
Multi-family	2,336		31
Commercial real estate	1,960		20
Land	1,516		13
Home equity	605		4
Commercial business	953		10
Total	$	21,999	$	206

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended September 30, 2012:

	Three Months Ended September 30, 2012
	Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no Allowance recorded
One-to-four family	$	10,396	$	104
Multi-family	2,314		20
Commercial real estate	5,501		64
Construction	4,081		19
Land	574		7
Home equity	243		2
Commercial business	2,140		25
With an Allowance recorded
One-to-four family	$	1,331	$	23
Home equity	50		—
Commercial business	2,491		—
Total
One-to-four family	$	11,727	$	127
Multi-family	2,314		20
Commercial real estate	5,501		64
Construction	4,081		19
Land	574		7
Home equity	293		2
Commercial Business	4,631		25
Total	$	29,121	$	264

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED 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 September 30, 2013:

	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	1,454	$	206	$	674	$	206	$	443	$	800	$	1,107	$	51	$	4,941
Ending balance: individually evaluated for impairment	845		—		—		—		355		111		2		—		1,313
Ending balance: collectively evaluated for impairment	$	609	$	206	$	674	$	206	$	88	$	689	$	1,105	$	51	$	3,628
Loans receivable:
Ending balance	$	71,440	$	45,011	$	105,710	$	9,735	$	5,118	$	33,472	$	16,197	$	—	$	286,683
Ending balance: individually evaluated for impairment	14,617		2,263		1,951		—		1,430		528		437		—		21,226
Ending balance: collectively evaluated for impairment	$	56,823	$	42,748	$	103,759	$	9,735	$	3,688	$	32,944	$	15,760	$	—	$	265,457

⁽¹⁾   Consumer loans include home equity, credit cards, auto and other consumer loans.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED 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 June 30, 2013:

	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	1,393	$	156	$	671	$	356	$	531	$	817	$	1,172	$	51	$	5,147
Ending balance: individually evaluated for impairment	804		—		—		—		353		147		2		—		1,306
Ending balance: collectively evaluated for impairment	$	589	$	156	$	671	$	356	$	178	$	670	$	1,170	$	51	$	3,841
Loans receivable:
Ending balance	$	73,901	$	38,425	$	106,859	$	5,641	$	5,330	$	35,149	$	18,211	$	—	$	283,516
Ending balance: individually evaluated for impairment	13,979		2,263		1,968		—		1,586		677		1,388		—		21,861
Ending balance: collectively evaluated for impairment	$	59,922	$	36,162	$	104,891	$	5,641	$	3,744	$	34,472	$	16,823	$	—	$	261,655

⁽¹⁾   Consumer loans include home equity, credit cards, auto, and other consumer loans.

Nonaccrual 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 nonaccrual 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.

The following table presents the recorded investment in nonaccrual and loans past due 90 days still on accrual by type of loans as of the dates indicated:

	September 30, 2013		June 30, 2013
	(In thousands)
One-to-four family	$	5,075	$	4,758
Land loans	774		734
Home equity	299		428
Automobile	—		2
Credit cards	29		18
Commercial business	—		219
Total	$	6,177	$	6,159

The table above includes $6,148 in nonaccrual, net of partial loan charge-offs at September 30, 2013. There were $6,141 in nonaccrual, net partial loan charge-offs at June 30, 2013.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class, as of September 30, 2013:

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due (1)		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	1,557	$	1,219	$	5,075	$	7,851	$	63,589	$	71,440
Multi-family	—		154		—		154		44,857		45,011
Commercial real estate	—		1,951		—		1,951		103,759		105,710
Construction	—		—		—		—		9,735		9,735
Land	—		87		774		861		4,257		5,118
Home equity	320		81		299		700		23,870		24,570
Credit cards	68		56		29		153		4,022		4,175
Automobile	37		—		—		37		1,651		1,688
Other consumer	85		7		—		92		2,947		3,039
Commercial business	—		72		—		72		16,125		16,197
Total	$	2,067	$	3,627	$	6,177	$	11,871	$	274,812	$	286,683

⁽¹⁾ Includes loans on nonaccrual status and loans that may be less than 90 days past due.

The following table presents past due loans, net of partial loan charge-offs, by type as of June 30, 2013:

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due (1)		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	1,853	$	1,469	$	4,758	$	8,080	$	65,821	$	73,901
Multi-family	149		—		—		149		38,276		38,425
Commercial real estate	101		—		—		101		106,758		106,859
Construction	—		—		—		—		5,641		5,641
Land	—		38		734		772		4,558		5,330
Home equity	84		68		428		580		25,255		25,835
Credit cards	54		6		18		78		4,663		4,741
Automobile	66		—		2		68		1,782		1,850
Other consumer	32		1		—		33		2,690		2,723
Commercial business	78		52		219		349		17,862		18,211
Total	$	2,417	$	1,634	$	6,159	$	10,210	$	273,306	$	283,516

⁽¹⁾ Includes loans on nonaccrual status and loans that may be less than 90 days past due.

Credit Quality Indicators. We utilize a ten-point risk rating system and assign a risk rating for all credit exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension.

Credits risk rated 1 through 7 are considered to be “pass” credits. Pass credits can be assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on our watch and special mention lists, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower's financial capacity and threaten their ability to fulfill debt obligations in the future.

Credits classified as Watch are risk rated 6 and possess weaknesses that deserve management's close attention. These assets do not expose the Bank to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. We use this rating when a material documentation deficiency exists but correction is anticipated within an acceptable time frame.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A loan classified as Watch may have the following characteristics:

• Acceptable asset quality, but requiring increased monitoring. Strained liquidity and less than anticipated performance. The loan may be fully leveraged.

• Apparent management weakness, perhaps demonstrated by an irregular flow of adequate and/or timely performance information required to support the credit.

• The borrower has a plausible plan to correct problem(s) in the near future that is devoid of material uncertainties.

• Lacks reserve capacity, so the risk rating will improve or decline in relatively short time (results of corrective actions should be apparent within six months or less).

• A seasoned loan with a Debt Service Coverage Ratio (“DSCR”) of less than 1.00 is not considered a pass credit.

Credits classified as Special Mention are risk rated 7. These credits have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

A loan classified as Special Mention may have the following characteristics:

• Performance is poor or significantly less than expected. A debt service deficiency either exists or cannot be ruled out.

• Generally an undesirable business credit. Assets in this category are protected, but are potentially weak. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard. Special Mention assets have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.

• Assets which might be detailed in this category include credits that the lending officer may be unable to supervise properly because of lack of expertise, an inadequate loan agreement, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices.

• An adverse trend in the borrower's operations or an imbalanced position in the balance sheet which does not jeopardize liquidation may best be handled by this classification.

• A Special Mention classification should not be used as a compromise between a pass and substandard rating. Assets in which actual, not potential, weaknesses are evident and significant, and should be considered for more serious criticism.

• A seasoned loan with a DSCR of greater than 1.00 is the minimum acceptable level for a “Pass Credit”. Particular attention should be paid to coverage trend analysis as a declining trend may warrant an elevated risk grade regardless of current coverage at or above the threshold.

A loan classified as Substandard is risk rated 8. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. An asset is considered Substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

A loan classified as Substandard may have the following characteristics:

• Unacceptable business credit. The asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.

• Though no loss is envisioned, the outlook is sufficiently uncertain to preclude ruling out the possibility. Some liquidation of assets will likely be necessary as a corrective measure.

• Assets in this category may demonstrate performance problems such as debt servicing deficiencies with no immediate relief. Borrowers have an inability to adjust to prolonged and unfavorable industry or economic trends. Management's character and/or effectiveness have become suspect.

A loan classified as Doubtful is risk rated 9 and has all the inherent weaknesses as those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable is improbable.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A loan classified as Doubtful is risk rated 9 and has the following characteristics:

• The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

• Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

A loan risk rated 10 is a loan for which a total loss is expected.

A loan classified as a Loss has the following characteristics:

• An uncollectible asset or one of such little value that it does not warrant classification as an active, earning asset. Such an asset may, however, have recovery or salvageable value, but not to the point of deferring full write off, even though some recovery may occur in the future.

• The Bank will charge off such assets as a loss during the accounting period in which they were identified.

• Loan to be eliminated from the active loan reporting system via charge off.

The following table represents the internally assigned grade as of September 30, 2013, by class of loans:

	One-to- four family		Multi- family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Grade:
Pass	$	51,955	$	36,199	$	88,829	$	9,735	$	3,521	$	21,820	$	4,023	$	1,536	$	2,883	$	11,353	$	231,854
Watch	2,752		6,395		8,525		—		427		1,469		123		152		103		379		20,325
Special Mention	8,796		154		4,980		—		396		429		—		—		53		3,547		18,355
Substandard	7,937		2,263		3,376		—		774		852		29		—		—		918		16,149
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	71,440	$	45,011	$	105,710	$	9,735	$	5,118	$	24,570	$	4,175	$	1,688	$	3,039	$	16,197	$	286,683

The following table represents the credit risk profile based on payment activity as of September 30, 2013, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Performing	$	66,365	$	45,011	$	105,710	$	9,735	$	4,344	$	24,271	$	4,146	$	1,688	$	3,039	$	16,197	$	280,506
Nonperforming (1)	5,075		—		—		—		774		299		29		—		—		—		6,177
Total	$	71,440	$	45,011	$	105,710	$	9,735	$	5,118	$	24,570	$	4,175	$	1,688	$	3,039	$	16,197	$	286,683

⁽¹⁾ Loans that are more than 90 days past due and still accruing and nonaccrual loans are considered nonperforming.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the internally assigned grade as of June 30, 2013, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Grade:
Pass	$	54,534	$	31,613	$	88,825	$	3,387	$	3,665	$	23,554	$	4,663	$	1,635	$	2,614	$	12,417	$	226,907
Watch	2,832		3,536		8,659		—		429		941		60		213		61		612		17,343
Special Mention	7,587		1,013		5,977		2,254		111		308		—		—		48		4,677		21,975
Substandard	8,948		2,263		3,398		—		1,125		1,032		18		2		—		505		17,291
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	73,901	$	38,425	$	106,859	$	5,641	$	5,330	$	25,835	$	4,741	$	1,850	$	2,723	$	18,211	$	283,516

The following table represents the credit risk profile based on payment activity as of June 30, 2013, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Performing	$	69,143	$	38,425	$	106,859	$	5,641	$	4,596	$	25,407	$	4,723	$	1,848	$	2,723	$	17,992	$	277,357
Nonperforming (1)	4,758		—		—		—		734		428		18		2		—		219		6,159
Total	$	73,901	$	38,425	$	106,859	$	5,641	$	5,330	$	25,835	$	4,741	$	1,850	$	2,723	$	18,211	$	283,516

⁽¹⁾  Loans that are more than 90 days past due and still accruing and nonaccrual loans are considered nonperforming.

Troubled Debt Restructure. At September 30, 2013 and June 30, 2013, troubled debt restructured loans (“TDRs”), included in impaired loans above, totaled $17.0 million with $3.7 million in nonaccrual and $17.5 million with $1.2 million in nonaccrual, respectively. Restructured loans are an option that the Bank uses to minimize risk of loss and are a concession granted to a borrower experiencing financial difficulties that it would not otherwise consider. The modifications have included items such as lowering the interest rate 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 September 30, 2013, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

The following table represents TDR loans by accrual versus nonaccrual status and by loan class as of September 30, 2013:

	September 30, 2013
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	9,553	$	3,578	$	13,131
Multi-family	2,263		—		2,263
Land	736		—		736
Home equity	291		156		447
Commercial business	437		—		437
Total	$	13,280	$	3,734	$	17,014

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents TDR loans by accrual versus nonaccrual status and by loan class as of June 30, 2013:

	June 30, 2013
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	9,221	$	3,479	$	12,700
Multi-family	2,263		—		2,263
Construction	391		—		391
Land	502		—		502
Home equity	288		157		445
Commercial business	1,168		—		1,168
Total	$	13,833	$	3,636	$	17,469

The following table presents new TDR loans by type of modification that occurred during the three months ended September 30, 2013:

Pre-TDR recorded investment	Number of Contracts	Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(Dollars in thousands)
One-to-four family	3	$	—	$	—	$	—	$	481	$	481
Total	3	$	—	$	—	$	—	$	481	$	481

Post-TDR recorded investment	Number of Contracts	Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(Dollars in thousands)
One-to-four family	3	$	—	$	—	$	—	$	501	$	501
Total	3	$	—	$	—	$	—	$	501	$	501

The following table presents new TDR loans by type of modification that occurred during the three months ended September 30, 2012:

Pre-TDR recorded investment	Number of Contracts	Rate Modifications		Term Modifications		Payment Modifications		Combo Modifications		Total Modifications
	(Dollars in thousands)
One-to-four family	5	$	—	$	—	$	—	$	1,338	$	1,338
Total	5	$	—	$	—	$	—	$	1,338	$	1,338

Post-TDR recorded investment	Number of Contracts	Rate Modifications		Term Modifications		Payment Modifications		Combo Modifications		Total Modifications
	(Dollars in thousands)
One-to-four family	5	$	—	$	—	$	—	$	1,287	$	1,287
Total	5	$	—	$	—	$	—	$	1,287	$	1,287

23

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table below represents loans modified as a TDR within the previous 12 months for which there was a payment default during the periods presented:

	Three Months Ended September 30,
	2013		2012
	(In thousands)
One-to-four family	$	372	$	684
Total	$	372	$	684

Note 9 - Real Estate Owned, net

The following table is a summary of real estate owned for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30,
	2013			2012
	(In thousands)
Balance at the beginning of the  period	$	6,212		$	6,708
Net loans transferred to real estate owned	523			676
Capitalized improvements	363			30
Sales	(972		)	(1,697		)
Impairments	(360		)	(235		)
Balance at the end of the period	$	5,766		$	5,482

Note 10 - Employee Benefit Plans

Employee Stock Ownership Plan

On January 25, 2011, the Company 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 common 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, the Company reports 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.

Compensation expense related to the ESOP for the three months ended September 30, 2013 and 2012 was $28,747 and $19,833, respectively.

24

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Shares held by the ESOP as of the dates indicated are as follows:

	September 30, 2013		June 30, 2013
	(Dollars in thousands)
Allocated shares	18,133		16,433
Unallocated shares	83,867		85,567
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,450	$	1,435

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:

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.

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended September 30, 2013.The following table shows the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	1,455	$	—	$	1,455
Mortgage-backed securities:
FHLMC	—		19,244		—		19,244
FNMA	—		23,146		—		23,146
GNMA	—		1,386		—		1,386

	June 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	1,456	$	—	$	1,456
Mortgage-backed securities:
FHLMC	—		20,415		—		20,415
FNMA	—		24,971		—		24,971
GNMA	—		1,466		—		1,466

25

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, a 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 assetsmeasured at fair value on a nonrecurring basis at the dates indicated:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans (1)	$	—	$	—	$	21,226	$	21,226
Real estate owned	$	—	$	—	$	5,766	$	5,766
Loans held for sale	$	—	$	—	$	—	$	—

⁽¹⁾  The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at September 30, 2013.

	June 30, 2013
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans (1)	$	—	$	—	$	21,861	$	21,861
Real estate owned	$	—	$	—	$	6,212	$	6,212
Loans held for sale	$	222	$	—	$	—	$	222

⁽¹⁾  The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at June 30, 2013.

The fair value of real estate owned properties is generally based on third party appraisal of the property, resulting in Level 3 classification.

The following table presents quantitative information about Level 3 fair value instruments measured at fair value on a recurring basis:

	September 30, 2013
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Average Discount
	(Dollars in thousands)
Impaired Loans	$	21,226	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 4% (4%)
Real estate owned	$	5,766	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 90% (37%)

	June 30, 2013
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Average Discount
	(Dollars in thousands)
Impaired Loans	$	21,861	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 49% (9%)
Real estate owned	$	6,212	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 90% (22%)

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.

26

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of September 30, 2013 and June 30, 2013: 

	September 30, 2013
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	21,591	$	21,591	$	21,591	$	—	$	—
Securities available-for-sale	45,231		45,231		—		45,231		—
Securities held-to-maturity	9,709		9,733		—		9,733		—
FHLB stock	6,220		6,220		—		6,220		—
Loans held for sale	—		—		—		—		—
Loans	280,667		276,146		—		—		276,146
Bank owned life insurance investment	19,021		19,021		—		19,021		—
Accrued interest receivable	1,589		1,589		—		—		1,589
Financial Instruments-Liabilities
Demand deposits, savings and money market	$	179,977	$	179,977	$	179,977	$	—	$	—
Certificates of deposit	145,999		145,058		—		145,058		—
FHLB advances	17,500		17,951		—		17,951		—
Advance payments by borrowers taxes and insurance	1,390		1,390		1,390		—		—
Supplemental Executive Retirement Plan	1,688		1,688		—		—		1,688

27

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	June 30, 2013
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	65,353	$	65,353	$	65,353	$	—	$	—
Securities available-for-sale	48,308		48,308		—		48,308		—
Securities held-to-maturity	10,295		10,316		—		10,316		—
FHLB stock	6,278		6,278		—		6,278		—
Loans held for sale	222		222		222		—		—
Loans	277,454		272,777		—		—		272,777
Bank owned life insurance investment	18,879		18,879		—		18,879		—
Accrued interest receivable	1,583		1,583		—		1,583		—
Financial Instruments-Liabilities
Demand deposits, savings and money market	178,901		178,901		178,901		—		—
Certificates of deposit	149,683		148,808		—		148,808		—
FHLB advances	64,900		65,426		—		65,426		—
Advance payments by borrowers taxes and insurance	791		791		791		—		—
Supplemental Executive Retirement Plan	1,703		1,703		—		—		1,703

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

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

Securities - The estimated fair values of securities are 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.

Loans receivable, net - The fair value of loans is estimated by 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.

Bank owned life insurance investment - 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.

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.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

Supplemental Executive Retirement Plan - The carrying amount is a reasonable estimate of its fair value.

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

• our ability to attract and retain deposits;

• increases in premiums for deposit insurance;

• management's assumptions in determining the adequacy of the allowance for loan losses;

• our ability to control operating costs and expenses;

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

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

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

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

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

• costs and effects of litigation, including settlements and judgments;

• our ability to manage loan delinquency rates;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

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

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

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

• our ability to pay dividends on our common stock;

• adverse changes in the securities markets;

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

• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on 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 our filings with the Securities and Exchange Commission, including this Form 10-Q.

30

Some of these and other factors are discussed in our 2013 Form10-K under Item 1A. “Risk Factors.” Such developments could have an adverse impact on our financial position and 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. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Because of these and other uncertainties, our actual results for fiscal year 2014 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity and operating and stock price performance.

Background and Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank. Anchor Bank is a community-based savings bank primarily serving Western Washington through our 11 full-service banking offices (including two Wal-Mart store locations) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington. In addition we have two loan production offices located in Grays Harbor County. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, lending activities have been primarily directed toward the origination of one-to-four family construction, commercial real estate and consumer loans. Since 1990, we have also offered commercial real estate loans and multi-family loans primarily in Western Washington.

Lending activities also include the origination of residential construction loans, and prior to fiscal 2010, a significant amount of originations through brokers, in particular within the Portland, Oregon metropolitan area.

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

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

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

Anchor Bank entered into the Order with the FDIC and the Washington DFI on August 12, 2009. Anchor Bank became subject to the Order primarily because of its increased level of nonperforming assets, reduced capital position and pre-tax operating losses in 2010 and 2009. On September 5, 2012, Anchor Bank's regulators, the FDIC and the DFI terminated the Order and the Bank became subject to a Supervisory Directive. The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank. The Bank believes that it is in compliance with the requirements set forth in the Supervisory Directive.

31

Additional information regarding the Supervisory Directive is included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q and Item 1A. “Risk Factors - Compliance with Regulatory Restrictions” in the 2013 Form10-K.

Correcting the problems identified in the Order has had a resulting impact on our financial condition and results of operations. We have reduced our asset size and sold relatively high yielding performing fixed rate single family loans. Also, because of the reduced demand for commercial real estate loans, we have sold these loans at a discount. Although the reduction in asset size and loan sales have helped us preserve our capital and maximize our regulatory capital ratios, these actions have also negatively impacted our operating results, including reducing our net interest income in recent periods.

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, 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 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 assess 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, the 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 classes 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. 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.

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 method. 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 carried a valuation allowance of $8.7 million at September 30, 2013. The tax provision for the period is equal to the net change

32

in the net deferred tax asset from the beginning to the end of the period, 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 fair value and subsequently carried at the lower of cost or market. 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 quarterly 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 September 30, 2013 and June 30, 2013

General.Total assets decreased by $48.9 million, or 10.8%, to $403.3 million at September 30, 2013 from $452.2 million at June 30, 2013. The decrease in assets during this period was primarily a result of cash and cash equivalents decreasing $43.8 million or 67.0% as we used our excess cash to repay $47.4 million of maturing FHLB advances, and to increase our loans receivable, net, by $3.2 million, or 1.2% since June 30, 2013. Total liabilities decreased $49.1 million or 12.3% to $350.7 million at September 30, 2013 compared to $399.8 million at June 30, 2013 primarily due to the decrease in FHLB advances. Total deposits decreased $2.6 million, or 0.8%, to $326.0 million at September 30, 2013 from $328.6 million at June 30, 2013 primarily as a result of decreases in certificates of deposit.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2013 to September 30, 2013:

	Balance at September 30, 2013		Balance at June 30, 2013		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	21,591	$	65,353	$	(43,762	)	(67.0	)%
Mortgage-backed securities, available-for-sale	43,776		46,852		(3,076		)	(6.6	)
Mortgage-backed securities, held to maturity	9,576		10,160		(584		)	(5.7	)
Loans receivable, net of allowance for loan losses	280,667		277,454		3,213			1.2
Real estate owned, net	5,766		6,212		(446		)	(7.2	)

Mortgage-backed securities available-for-sale decreased $3.1 million, or 6.6%, to $43.8 million at September 30, 2013 from $46.9 million at June 30, 2013. Mortgage-backed securities held-to-maturity decreased $584,000 or 5.7%, to $9.6 million at September 30, 2013 from $10.2 million at June 30, 2013. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, increased $3.2 million or 1.2% to $280.7 million at September 30, 2013 from $277.5 million at June 30, 2013 as a result of new loan production exceeding principal reductions, transfers to real estate owned ("REO") and loan charge-offs. Multi-family loans increased $6.6 million or 17.1% to $45.0 million at September 30, 2013 from $38.4 million at June 30, 2013. Construction and land loans increased $3.9 million or 35.4% to $14.9 million at September 30, 2013 from $11.0 million at June 30, 2013. Commercial real estate loans decreased $1.2 million or 1.1% to $105.7 million at September 30, 2013 from $106.9 million at June 30, 2013 and one-to-four family loans decreased $2.5 million or 3.4% to $71.4 million from $73.9 million at June 30, 2013. Commercial business loans decreased $2.0 million or 11.0% to $16.2 million at September 30, 2013 from $18.2 million at June 30, 2013. The decrease was primarily due to one large $1.1 million loan paying off during the quarter, a payment of $219,000 from a bankruptcy, and normal fluctuations in revolving business lines of credit. Consumer loans decreased $1.7 million or 4.8% to $33.5 million at September 30, 2013 from $35.1 million at June 30, 2013 as consumers continue to reduce their debt. The demand for consumer loans has been modest during the current economic uncertainty.

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As of September 30, 2013, the Company had 17 properties in REO with an aggregate book value of $5.8 million compared to 21 properties with an aggregate book value of $6.2 million at June 30, 2013, and 42 properties with an aggregate book value of$5.5 million at September 30, 2012. The decrease in number of properties during the quarter ended September 30, 2013 was primarily attributable to ongoing sales of residential properties. During the quarter ended September 30, 2013, the Company sold four residential real estate properties located in Washington State for $411,000, two in Oregon for $381,000, and one commercial real estate property in Washington State for $180,000, resulting in an aggregate loss of $5,000. The largest of the REO properties at September 30, 2013 had an aggregate book value of $3.7 million and consisted of commercial real estate property located in Pierce County, Washington. At September 30, 2013, the Company owned 10 one-to-four family residential properties with an aggregate book value of $1.6 million, four vacant land parcels with an aggregate book value of $123,000, and three parcels of commercial real estate with an aggregate book value of $4.0 million. Our REO properties are located in Pierce County, southwest Washington and the greater Portland area of northwest Oregon, with 15 of the parcels in Washington and the remaining two in Oregon.

Liabilities. Total liabilities decreased $49.1 million between June 30, 2013 and September 30, 2013, primarily as the result of a $47.4 million or 73.0% decrease in Federal Home Loan Bank advances.

Deposits decreased $2.6 million, or 0.8%, to $325.9 million at September 30, 2013 from $328.6 million at June 30, 2013. Our core deposits, which consist of all deposits other than certificates of deposit increased by $1.1 million or 0.6% to $180.0 million from $178.9 million at June 30, 2013.

The following table details the changes in deposit accounts at the dates indicated:

	Balance at September 30, 2013		Balance at June 30, 2013		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	42,507	$	39,713	$	2,794		7.0	%
Interest-bearing demand deposits	19,177		20,067		(890		)	(4.4	)
Money market accounts	80,270		82,603		(2,333		)	(2.8	)
Savings deposits	38,023		36,518		1,505			4.1
Certificates of deposit	145,999		149,683		(3,684		)	(2.5	)
Total deposit accounts	$	325,976	$	328,584	$	(2,608	)	(0.8	)%

Stockholders'Equity. Total stockholders' equity increased $220,000 or 0.42% to $52.6 million at September 30, 2013 from $52.4 million at June 30, 2013. The increase was primarily due to a $203,000 decrease in accumulated other comprehensive loss related to our unrealized losses on securities available-for-sale. Accumulated other comprehensive loss was $1.3 million at September 30, 2013 as compared to of $1.5 million at June 30, 2013.

Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General. Net loss for the three months ended September 30, 2013 was $12,000 or $0.00 per diluted share compared to a net income of $278,000 or $0.11 per diluted share for the three months ended September 30, 2012.

Net Interest Income. Net interest income before the provision for loan losses decreased $383,000, or 9.6%, to $3.6 million for the quarter ended September 30, 2013 from $4.0 million for the quarter ended September 30, 2012.

The Company's net interest margin decreased seven basis points to 3.61% for the quarter ended September 30, 2013 from 3.68% for the comparable period in 2012 as the average yield on interest-earning assets decreased 24 basis points to 4.65% for the quarter ended September 30, 2013 compared to the 4.89% for the same period in the prior year. The decrease was primarily due to the decrease in the yield of loans receivable, net, which decreased 37 basis points to 6.03% during the quarter ended September 30, 2013 compared to 6.40% for the same period in the prior year. The average cost of interest-bearing liabilities decreased 17 basis points to 1.24% for the quarter ended September 30, 2013 compared to 1.41% for the same period in the prior year primarily due to the renewal of certificates of deposit at currently low interest rates and the reduction in the balance of these higher costing deposits. All these declines are primarily due to the low interest rate environment.

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The following table sets forth the changes to our net interest income for the three months ended September 30, 2013 compared to the same period in 2012. 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). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

	Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(264	)	$	(160	)	$	(424	)
Mortgage-backed securities	(227		)	12			(215		)
Investment securities, FHLB stock and cash and cash equivalents	14			(18		)	(4		)
Total net change in income on interest-earning assets	$	(477	)	$	(166	)	$	(643	)
Interest-bearing liabilities:
Savings deposits	$	(15	)	$	1		$	(14	)
Interest-bearing demand deposits	(4		)	—			(4		)
Money market accounts	(49		)	—			(49		)
Certificates of deposit	(44		)	(107		)	(151		)
FHLB advances	23			(65		)	(42		)
Total net change in expense on interest-bearing liabilities	(89		)	(171		)	(260		)
Total increase (decrease) in net interest income	$	(388	)	$	5		$	(383	)

Interest Income. Total interest income for the three months ended September 30, 2013 decreased $643,000 or 12.2%, to $4.6 million, from $5.3million for the three months ended September 30, 2012. The decrease during the period was primarily attributable to the declines in the average balance of loans receivable, net, and the average yield earned on both loans and mortgage-backed securities. The average yield on loans receivable, net, decreased 37 basis points to 6.03% for the three months ended September 30, 2013 compared to 6.40% for the same period in the prior year. Average loans receivable, net, declined $10.0 million during the quarter ended September 30, 2013 compared to the same quarter last year. The average yield on mortgage-backed securities decreased 165 basis points to 1.88% for the three months ended September 30, 2013 compared to 3.53% for the same period in the prior year.

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The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30,
	2013				2012				Increase/(Decrease) in Interest and Dividend Income from 2012
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net (1)	$	286,452	6.03	%	$	296,466	6.40	%	$	(424	)
Mortgage-backed securities	55,100		1.88		53,735		3.53		(215		)
Investment securities	1,588		5.04		1,795		4.90		(2		)
FHLB stock	6,268		0.13		6,505		—		2
Cash and cash equivalents	49,359		0.28		73,264		0.21		(4		)
Total interest-earning assets	$	398,767	4.65	%	$	431,765	4.89	%	$	(643	)

⁽¹⁾  Nonaccruing loans have been included in the table as loans carrying a zero yield for the period that they have been on nonaccrual.  Calculated net of deferred loan fees and loans in process.

Interest Expense. Interest expense decreased $260,000 or 20.0%, to $1.0 million for the three months ended September 30, 2013 from $1.3 million for the three months ended September 30, 2012. The decrease during the period was primarily attributable to the reduction of the average balances of certificates of deposit and FHLB advances and in the average rate paid for most interest-bearing liabilities over that time period, especially certificates of deposit. The average cost of certificates of deposit decreased 12 basis points to 1.97% for the three months ended September 30, 2013 compared to 2.09% for the same period of the prior year while the average balance of these deposits declined $20.5 million or 12.2% to $147.9 million for the current quarter. This decrease was also due to a 23 basis point decline in the average cost of money market accounts. Average interest-bearing liabilities decreased $31.9 million or 8.6% to $337.2 million for the three months ended September 30, 2013 compared to $369.1 million for the same period in 2012.

The following table details average balances, cost of funds and the change in interest expense for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30,
	2013				2012				Increase/(Decrease) in Interest Expense from 2012
	Average Balance		Cost		Average Balance		Cost
	(Dollars in thousands)
Savings deposits	$	37,430	0.15	%	$	36,323	0.31	%	$	(14	)
Interest-bearing demand deposits	17,844		0.04		16,747		0.14		(4		)
Money market deposits	82,751		0.15		82,808		0.38		(49		)
Certificates of deposit	147,899		1.97		168,358		2.09		(151		)
FHLB advances	51,281		2.11		64,900		1.92		(42		)
Total interest-bearing liabilities	$	337,205	1.24	%	$	369,136	1.41	%	$	(260	)

Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that no provision for loan losses was required for the three months ended September 30, 2013 compared to the $300,000 provision for loan losses established for the same period last year. The decrease in the provision during this period was primarily a result of some stabilization in the general economy and local real estate market as well as the decline in the level of nonperforming and classified loans and net loan charge-offs. Net loan charge-offs were $206,000 during the three months ended September 30, 2013 as compared to $677,000 for the same fiscal quarter last year. Nonperforming loans, those loans which are 90 days past

36

due or on nonaccrual status, were $6.2 million or 1.5% of total assets, at September 30, 2013 compared to $8.5 million, or 1.8% of total assets, at September 30, 2012. The ratio of nonperforming loans to total loans was 2.2% at September 30, 2013 compared to 2.9% at September 30, 2012. Total classified loans decreased $15.2 million or 48.6% to $16.1 million at September 30, 2013 compared to $31.3 million at September 30, 2012.

Management considers the allowance for loan losses at September 30, 2013 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 our 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 historical performance and current risk factors associated with each loan type in our portfolio.  As we increase the loan portfolio, we anticipate an increase in the allowance for loan losses based upon both portfolio growth and the risk characteristics associated with the respective portfolio type. 

The following table details activity and information related to the allowance for loan losses at and for the three months ended September 30, 2013 and 2012:

	At or For the Three Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Provision for loan losses	$	—		$	300
Net charge-offs	206			677
Allowance for loan losses	4,941			6,680
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.7		%	2.3		%
Nonaccrual and 90 days or more past due loans still accruing	$	6,177		$	8,525
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	80.0		%	78.4		%
Nonaccrual and 90 days or more past due loans and still accruing as a percentage of loans receivable at the end of the period	2.2		%	2.9		%
Total loans	$	286,683		$	294,982

We continue to actively restructure our delinquent loans when feasible so our borrowers can continue to make payments while minimizing the Company's potential loss. As of September 30, 2013 and September 30, 2012 there were 49 and 33 loans, respectively, with aggregate net principal balances of $17.0 million, and $15.4 million, respectively, that we have identified as TDRs. At September 30, 2013 and September 30, 2012 there were $3.7 million, and $695,000, respectively, of TDRs included in nonaccrual loans.

Noninterest Income. Noninterest income decreased $405,000 or 29.5%, to $967,000 for the three months ended September 30, 2013 from $1.4 million for the same quarter in 2012.The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended September 30, 2013 compared to the same period in 2012:

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	Three Months Ended September 30,					Increase (decrease)
	2013			2012		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	377		$	391	$	(14	)	(3.6	)%
Other deposit fees	200			189		11			5.8
Loan fees	149			185		(36		)	(19.5	)
Gain on sale of loans	(17		)	177		(194		)	(109.6	)
Bank owned life insurance investment	143			163		(20		)	(12.3	)
Other income	115			267		(152		)	(56.9	)
Total noninterest income	$	967		$	1,372	$	(405	)	(29.5	)%

The decrease in noninterest income was attributable to a $194,000 decline in gain on sale of loans to a loss on sale of loans of $17,000 for the quarter ended September 30, 2013 compared to a $177,000 gain on sale of loans for quarter ended September 30, 2012, and other income decreasing $152,000 or 56.9% due primarily to the decrease in secondary market activity. These decreases were partially offset by an increase of $11,000 for other deposit fees for the quarter ended September 30, 2013 compared to the same quarter of 2012.

Noninterest Expense. For the three months ended September 30, 2013, noninterest expense decreased $198,000 or 4.2%, to $4.6 million from $4.8 million for the three months ended September 30, 2012. The following tables provide an analysis of the changes in the components of noninterest expense for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30,					Increase (decrease)
	2013			2012		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	2,006		$	2,135	$	(129	)	(6.0	)%
General and administrative expenses	798			819		(21		)	(2.6	)
Real estate owned impairment	360			235		125			53.2
Real estate holding costs	77			185		(108		)	(58.4	)
FDIC Insurance premium	142			162		(20		)	(12.3	)
Information technology	428			360		68			18.9
Occupancy and equipment	464			539		(75		)	(13.9	)
Deposit services	136			189		(53		)	(28.0	)
Marketing	162			127		35			27.6
Gain on sale of property, premises and equipment	(5		)	—		(5		)	(100.0	)
Loss on sale of real estate owned	5			20		(15		)	(75.0	)
Total noninterest expense	$	4,573		$	4,771	$	(198	)	(4.2	)%

The decrease was primarily due to compensation and benefits expense decreasing $129,000 or 6.0% to $2.0 million from $2.1 million as we realized the savings from the closure of two Wal-Mart branches during the past year. REO holding costs decreased $108,000 or 58.4% to $77,000 from $185,000 during the quarter ended September 30, 2013 compared to September 30, 2012, reflecting the decrease in the number of our REO properties which was offset by an increase in REO impairment expense of $125,000 or 53.2% to $360,000 from $235,000 during the same quarter last year. The majority of the increase in impairment expense was attributed to aggregate impairments of $215,000 for four one-to-four family REO properties in Oregon.

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Provision (benefit) for Income Tax. As a result of uncertainties surrounding our realization of additional deferred tax assets, we did not record a tax benefit or expense for the three months ended September 30, 2013 and 2012.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available information, we recorded a valuation allowance of $8.7 million at September 30, 2013 and $7.8 million at September 30, 2012.

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 September 30, 2013, the total approved loan origination commitments outstanding amounted to $220,000. At the same date, unused lines of credit were $28.4 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 months ended September 30, 2013, our average basic surplus was 13.4%, which indicates we exceeded the liquidity standard set by our Board. The relatively high level of liquidity is consistent with our strategy to mitigate liquidity risk during the current economic uncertainty and difficult banking environment as well as provide for potential lending opportunities in the future.

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 September 30, 2013 totaled $50.7 million. We had no brokered deposits at September 30, 2013. 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 us. In addition, we had the ability to borrow an additional $57.7 million from the FHLB of Seattle.

We measure our liquidity based on our ability to fund 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 liabilities to manage effectively our liquidity and funding requirements.

Our primary source of funds is the Bank's 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 coming six-month, nine-month, and one-year time periods. Also, we determine funding

39

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 provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are ESOP loan payments and ESOP loan interest income as there is limited ability to receive dividends from the Bank in the near future. Pursuant to the Supervisory Directive, the Bank may not pay any dividends or any other form of payment or distribution representing a reduction of capital to us without prior written approval of the DFI's Director of Banks and the Regional Director of the FDIC.

Commitments and Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of our 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. Our 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. We use the same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is not required to support commitments.

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 September 30, 2013:

	Amount of Commitment Expiration Per Period
	Total Amounts Committed (2)		Due in One Year
	(In thousands)
Commitments to originate loans (1)	$	220	$	220
Lines of  Credit
Fixed rate (3)	5,518		4,011
Adjustable rate	22,906		6,864
Undisbursed balance of lines of credit	$	28,424	$	10,875

⁽¹⁾  Interest rates on fixed rate loans range from 3.75% to 12.25%. 

⁽²⁾  At September 30, 2013 there were $51 in reserves for unfunded commitments. 

⁽³⁾  Includes standby letters of credit. 

Operating lease commitment - The Bank leases space for branches and operations located in Olympia, Hoquiam, Shelton, and Puyallup, Washington. These leases run for periods ranging from three to five years. All leases require the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitments for the next five years are as follows:

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Year Ended June 30,
	Amount
	(In thousands)
2014	$	82
2015	$	87
2016	$	56
2017	$	56
2018	$	51

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. As of September 30, 2013, the Bank exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios of 11.9%, 16.9%, and 18.2% respectively. As of June 30, 2013 these ratios were 11.4%, 16.7%, and 18.0%, respectively.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 12.2%, 17.3%, and 18.6%, respectively, as of September 30, 2013. As of June 30, 2013, these ratios were 11.7%, 17.2% and 18.4%, respectively.

For additional information regarding the Supervisory Directive, see the discussion included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.

The Bank's actual capital amounts and ratios at September 30, 2013 are presented in the following table:

Anchor Bank									Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
					Minimum Capital Requirement
	Actual
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
September 30, 2013
Total capital (to risk-weighted assets)	$	56,474	18.2	%	$	24,866	8.0	%	$	31,082	10.0	%
Tier I capital (to risk-weighted assets)	$	52,576	16.9	%	$	12,433	4.0	%	$	18,649	6.0	%
Tier I leverage capital (to average assets)	$	52,576	11.9	%	$	17,627	4.0	%	$	22,034	5.0	%

The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of September 30, 2013, were as follows:

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Anchor Bancorp	Actual
	Amount		Ratio
	(Dollars in thousands)
September 30, 2013
Total capital (to risk-weighted assets)	$	57,759	18.6	%
Tier I capital (to risk-weighted assets)	$	53,861	17.3	%
Tier I leverage capital (to average assets)	$	53,861	12.2	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

General. Our Board of Directors has established an asset and liability management policy to guide management in maximizing net interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate sensitivity, changes in net interest income, credit risk and profitability. The policy includes the use of an Asset Liability Management Committee whose members include certain members of senior management. The Committee’s purpose is to communicate, coordinate and manage our asset/liability positions consistent with our business plan and Board-approved policies. The Asset Liability Management Committee meets monthly to review various areas including:

• economic conditions;

• interest rate outlook;

• asset/liability mix;

• interest rate risk sensitivity;

• change in net interest income;

• current market opportunities to promote specific products;

• historical financial results;

• projected financial results; and

• capital position.

The Committee also reviews current and projected liquidity needs monthly. As part of its procedures, the Asset Liability Management Committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential change in market value of portfolio equity that is authorized by the Board of Directors.

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk:

• we have increased our originations of shorter term loans and particularly, home equity loans (limited recent originations) and commercial business loans;

• we have structured certain borrowings with maturities that match fund our loan portfolios; and

• we have securitized our single family loans to available-for-sale investments which generates cash flow as well as allows the flexibility of managing interest rate risk as well as selling the investment when appropriate.

How We Measure the Risk of Interest Rate Changes. We measure our interest rate sensitivity on a quarterly basis utilizing an internal model. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or

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actual experience differs from such assumptions. The assumptions we use are based upon proprietary and market data and reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. An independent service was used to provide market rates of interest and certain interest rate assumptions to determine prepayments and maturities of loans, investments and borrowings and decay rates on deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We assumed that non-maturity deposits can be maintained with rate adjustments not directly proportionate to the change in market interest rates.

In the past, we have demonstrated that the tiering structure of our deposit accounts during changing rate environments results in relatively low volatility and less than market rate changes in our interest expense for deposits. Our deposit accounts are tiered by balance and rate, whereby higher balances within an account earn higher rates of interest. Therefore, deposits that are not very rate sensitive (generally, lower balance tiers) are separated from deposits that are rate sensitive (generally, higher balance tiers).

We generally have found that a number of our deposit accounts are less rate sensitive than others. Thus, when interest rates increase, the interest rates paid on these deposit accounts do not require a proportionate increase in order for us to retain them. These assumptions are based upon an analysis of our customer base, competitive factors and historical experience. The following table shows the change in our net portfolio value at September 30, 2013 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of

equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.

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	Net Portfolio Value (1)							Net Portfolio as % of Portfolio Value of Assets
Basis Point Change in Rates												Market Value of Assets (5)
	Amount		$ Change (2)			% Change		NPV Ratio (3)		% Change (4)
	(Dollars in thousands)
300	$	49,937	$	(6,822	)	(12.02	)%	13.03	%	(0.98	)%	$	383,356
200	53,122		(3,637		)	(6.41	)	13.57		(0.43	)	391,346
100	55,417		(1,342		)	(2.36	)	13.90		(0.11	)	398,659
Base	56,759		—			—		14.01		—		405,242
(100)	57,784		1,025			1.81		14.06		0.05		411,124

___________

(1)	The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
(2)	Represents the increase (decrease) in the estimated net portfolio value at the indicated change in interest rates compared to the net portfolio value assuming no change in interest rates.
(3)	Calculated as the net portfolio value divided by the market value of assets (“net portfolio value ratio”).
(4)	Calculated as the increase (decrease) in the net portfolio value ratio assuming the indicated change in interest rates over the estimated net portfolio value ratio assuming no change in interest rates.
(5)	Calculated based on the present value of the discounted cash flows from assets. The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity of those assets to interest rate changes.

The following table illustrates the change in net interest income that would occur in the event of an immediate change in interest rates at September 30, 2013, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.

Basis Point Change in Rates	Net Interest Income
	Amount		$ Change (1)			% Change
	(Dollars in thousands)
300	$	14,387	$	889		6.6	%
200	14,256		758			5.6
100	13,980		482			3.6
Base	13,498		—			—
(100)	12,396		(1,102		)	(8.2	)

⁽¹⁾    Represents the increase (decrease) of the estimated net interest income at the indicated change in interest rates compared to net interest income assuming no change in interest rates.

We use certain assumptions in assessing our interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in the market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

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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 September 30, 2013, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company inthe 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 September 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 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

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.

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

During the three months ended September 30, 2013, we did not sell any securities that were not registered under the Securities Act of 1933. We did not execute any open market repurchases of our common stock from July 1, 2013 through September 30, 2013.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1	Articles of Incorporation of the Registrant (1)
3.2	Amended and Restated Bylaws of the Registrant (2)
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
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements *

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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

(2) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2011.

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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: November 6, 2013	/s/Jerald L. Shaw
	Jerald L. Shaw
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 6, 2013	/s/Terri L. Degner
	Terri L. Degner
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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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
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements *

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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