As filed with the Securities and Exchange Commission on October 24, 2008

Registration No. 333-____

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


ANCHOR BANCORP

(Exact name of registrant as specified in its charter)


Washington	6036	26-3356075

(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
incorporation or organization)	Classification Code Number)	Identification Number)


601 Woodland Square Loop SE
Lacey, Washington 98530
(360) 491-2250

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

John F. Breyer, Jr., Esquire
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, Virginia 22102
(703) 883-1100

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

Calculation of Registration Fee



Title of Each Class of Securities to be Registered	Amount to be Registered (1)	Proposed Maximum Offering Price Per Unit	Proposed Maximum Aggregate Offering Price (1)	Amount of Registration Fee

Common Stock, $0.01 par value	6,101,250	$10.00	$61,012,500.00	$2,398.00


(1)	Estimated solely for purposes of calculating the registration fee. As described in the prospectus, the actual number of shares to be issued and sold are subject to adjustment based upon the estimated pro forma market value of the registrant and market and financial conditions.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

PART I – INFORMATION REQUIRED IN PROSPECTUS

Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1


Item	1.	Forepart of the Registration Statement and Outside Front Cover of Prospectus	Forepart of the Registration Statement; Outside Front Cover Page

Item	2.	Inside Front and Outside Back Cover Pages of Prospectus	Inside Front Cover Page; Outside Back Cover Page

Item	3.	Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges	Summary; Risk Factors

Item	4.	Use of Proceeds	How We Intend to Use the Proceeds From this Offering; Capitalization

Item	5.	Determination of Offering Price	The Conversion and Stock Offering – How We Determined Our Price and the Number of Shares to be Issued in the Stock Offering

Item	6.	Dilution	*

Item	7.	Selling Security Holders	*


Item	8.	Plan of Distribution	The Conversion and Stock Offering

Item	9.	Description of Securities to be Registered	Description of Capital Stock of Anchor Bancorp

Item	10.	Interests of Named Experts and Counsel	Legal and Tax Opinions; Experts

Item	11.	Information with Respect to the Registrant

	(a) Description of Business		Business of Anchor Bancorp; Business of Anchor Bank

	(b) Description of Property		Business of Anchor Bank – Properties

	(c) Legal Proceedings		Business of Anchor Bank – Legal Proceedings

	(d) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters		Outside Front Cover Page; Market for the Common Stock; Our Policy Regarding Dividends

	(e) Financial Statements		Consolidated Financial Statements; Pro Forma Data

	(f) Selected Financial Data		Selected Financial and Other Data

	(g) Supplementary Financial Information		*

	(h) Management’s Discussion and Analysis of Financial Condition and Results of Operations		Management’s Discussion and Analysis of Financial Condition and Results of Operations

	(i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		*

I - 1


	(j) Quantitative and Qualitative Disclosures About Market Risk		Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk

	(k) Directors, Executive Officers, Promoters and Control Persons		Management

	(l) Executive Compensation		Management – Executive Compensation; Management – Benefits

	(m) Security Ownership of Certain Beneficial Owners and Management		*

	(n) Certain Relationships and Related Transactions		Management – Loans and Other Transactions with Officers and Directors

Item	12.	Disclosure of Commission Position on Indemnification for Securities Act Liabilities	Part II, Item 17

*Item is omitted because answer is negative or item inapplicable.

I - 2


PROSPECTUS
Up to 5,175,000 Shares of Common Stock
(Subject to increase to up to 5,951,250 shares)
	Anchor Bancorp
	(Proposed Holding Company for Anchor Bank)

We are offering up to 5,175,000 shares of our common stock for sale in connection with our conversion from the mutual to stock form of organization. As part of the conversion, Anchor Bank will become our wholly-owned subsidiary. We may increase the maximum number of shares that we sell in the offering by up to 15%, to 5,951,250 shares, as a result of the demand for shares or changes in market and financial conditions. The shares of our common stock are being offered for sale at a price of $10.00 per share. We expect our common stock will be listed on the Nasdaq Global Select Market under the symbol [“ANCB”]. In connection with the conversion, we will establish a charitable foundation funded with 150,000 shares of our common stock and $500,000. The shares issued to the foundation are in addition to the shares being sold in the offering.

We are offering these shares for sale first to our depositors and other eligible subscribers in a subscription offering. Concurrently with or immediately after the subscription offering, any shares not subscribed for in the subscription offering will be offered to the general public in a direct community offering and/or a syndicated community offering (collectively referred to as the “offering”). In order to complete the offering, we must sell, in the aggregate, at least 3,975,000 shares. The minimum purchase is 25 shares. The subscription offering is scheduled to end at 12:00 Noon, Pacific time, on ______ __, 2008. However, we may extend this expiration date, without notice to you, until______ __, 200_, unless the Washington Department of Financial Institutions approves a later date, which may not be extended beyond ______ __, 200_. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond ______ __, 200__. If the offering is extended beyond ______ __, 200__, subscribers will have the right to modify or rescind their purchase orders. Anchor Bancorp will hold all subscribers’ funds received before the completion of the conversion in a segregated account at Anchor Bank or, at our discretion, at an independent insured depository institution until the conversion is completed or terminated. We will pay interest on all funds received at a rate equal to Anchor Bank’s passbook (statement savings) rate, which is currently ___% per annum. Funds will be returned promptly with interest if the conversion is terminated.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 1.



TERMS OF THE OFFERING
Price Per Share: $10.00; Minimum Subscription: 25 shares or $250
	Minimum		Maximum		Maximum, as adjusted (1)


Number of Shares		3,825,000		5,175,000		5,951,250
Gross offering proceeds	$	38,250,000	$	51,750,000	$	59,512,500
Underwriting Commission		336,700		460,900		532,315
Other expenses		980,000		980,000		980,000
Net Proceeds to Anchor Bancorp	$	36,933,300	$	50,309,100	$	58,000,185
Net Proceeds Per Share	$	9.66	$	9.72	$	9.75



(1)	For information regarding underwriting compensation to be paid to Keefe, Bruyette & Woods, Inc., including the assumptions regarding the number of shares sold in the offering that we used to determine the estimated offering expenses, see “Pro Forma Data” and “The Conversion – Marketing Arrangements.”

Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock that is being offered for sale. Subscribers will not pay any commissions to purchase shares of common stock in the offering.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Neither the Securities and Exchange Commission, the Washington Department of Financial Institutions, the Federal Deposit Insurance Corporation nor any other federal agency or state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

For information on how to subscribe, call the stock information center at (360) __-____.




	KEEFE, BRUYETTE & WOODS



	______ __, 2008

TABLE OF CONTENTS

You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of Anchor Bancorp and its subsidiaries may change after the date of this prospectus. Delivery of this prospectus and the sales of shares made hereunder does not mean otherwise.


		Page



	Summary	i
	Risk Factors	1
	Selected Financial and Other Data	13
	A Warning About Forward-Looking Statements	15
	Anchor Bancorp	16
	Anchor Bank	16
	How We Intend to Use the Proceeds From this Offering	16
	Our Policy Regarding Dividends	17
	Market for the Common Stock	18
	Capitalization	19
	Anchor Bank Exceeds All Regulatory Capital Requirements	20
	Pro Forma Data	22
	Comparison of Valuation and Pro Forma Information With and Without Charitable Foundation	28
	Proposed Purchases by Management	29
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Business of Anchor Bancorp	56
	Business of Anchor Bank	56
	Management	94
	How We Are Regulated	108
	Taxation	114
	The Conversion	116
	Restrictions on Acquisition of Anchor Bancorp and Anchor Bank	134
	Description of Capital Stock of Anchor Bancorp	138
	Transfer Agent and Registrar	139
	Experts	139
	Legal and Tax Opinions	139
	Where You Can Find More Information	139
	Index to Consolidated Financial Statements	F-1

SUMMARY

This summary provides an overview of the key aspects of the stock offering as described in more detail elsewhere in this prospectus and may not contain all the information that is important to you. To completely understand the stock offering, you should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “The Conversion” and the consolidated financial statements and the notes to the consolidated financial statements beginning on page F-1, before making a decision to invest in our common stock.

Overview

As part of the conversion to stock ownership, Anchor Bancorp. is conducting this offering of between 3,825,000 and 5,175,000 shares of common stock to raise additional capital to support operational growth. We may increase the maximum number of shares that we sell in the offering by up to 15% to 5,951,250 shares, as a result of the demand for shares or changes in market and financial conditions. The offering includes a subscription offering in which certain persons, including depositors of Anchor Bank, have prioritized subscription rights. There are limitations on how many shares a person may purchase. The amount of capital being raised is based on an appraisal of Anchor Bancorp and a decision by management to offer all of our shares of common stock to the public. Most of the terms and requirements of this offering are required by the requirements of the Washington State Department of Financial Institutions. The same directors and certain officers who manage Anchor Bank will manage Anchor Bancorp.

The following tables show how many shares of common stock that may be issued in the offering, contributed to our charitable foundation and subsequently issued if our proposed stock benefit plans are adopted.


	Shares to be sold to the public in this offering			Shares to be sold to the employee stock ownership plan (2)			Shares proposed to be sold to directors and officers			Shares to be issued to the foundation (3)			Total shares of common stock to be outstanding after the offering

	Amount	% (1)		Amount	% (1)		Amount	% (1)		Amount	% (1)		Amount	%


Minimum	3,389,500	85.3	%	306,000	7.7	%	129,500	3.3	%	150,000	3.8	%	3,975,000	100.00	%
Midpoint	4,010,500	86.2		360,000	7.7		129,500	2.8		150,000	3.2		4,650,000	100.00
Maximum	4,631,500	87.0		414,000	7.8		129,500	2.4		150,000	2.8		5,325,000	100.00
Maximum, as adjusted	5,345,650	87.6		476,100	7.8		129,500	2.1		150,000	2.5		6,101,250	100.00


	Shares that may be awarded under a restricted stock plan			Shares that may be issued under a stock option plan

	Amount	% (1)		Amount	% (1)


Minimum	159,000	4.0	%	397,500	10.0	%
Midpoint	186,000	4.0		465,000	10.0
Maximum	213,000	4.0		532,500	10.0
Maximum, as adjusted	244,050	4.0		610,125	10.0



(1)	As a percentage of total shares outstanding after the offering.

(2)	Assumes 8% of the shares sold in the conversion are sold to the employee stock ownership plan in the offering.

The Companies:

Anchor Bancorp
601 Woodland Square Loop SE
Lacey, Washington 98503
(360) 491-2250

Anchor Bancorp is a newly formed Washington corporation that will hold all of the outstanding shares of Anchor Bank following the conversion to stock ownership. Anchor Bancorp is conducting the stock offering in connection with the conversion of Anchor Bank from the mutual to the stock form of organization. Following the completion of the offering, Anchor Bancorp will be the bank holding company of Anchor Bank and its primary regulator will be the Board of Governors of the Federal Reserve System.

Anchor Mutual Savings Bank
120 N. Broadway
Aberdeen, Washington 98520
(360) 532-6222

Anchor Mutual Savings Bank is a Washington chartered mutual savings bank and upon completion of the conversion will be the wholly-owned subsidiary of Anchor Bancorp. Anchor Bank was organized in 1907 as a Washington state chartered savings and loan association, converted to a federal mutual savings and loan association in 1935, and converted to a Washington state chartered mutual savings bank in 1990. As a mutual savings bank, Anchor Mutual Savings Bank has a board of trustees that oversees its activities. Following the conversion, Anchor Mutual Savings Bank’s existing board of trustees will continue as a board of directors. Also in connection with the conversion, Anchor Mutual Savings Bank is changing its name to “Anchor Bank.” For purposes of this prospectus, references herein to the board of directors also include the board of trustees of Anchor Mutual Savings Bank in its present mutual form, and references to Anchor Bank also include the institution in its present mutual form.

Anchor Bank is a community-based savings bank primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, Mason, Kitsap, Clark and King counties, through our 20 full-service banking offices. We also originate a significant amount of construction loans secured by properties located in the Portland, Oregon metropolitan area. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, lending activities have been primarily directed toward the origination of one- to four-family residential construction, commercial real estate and consumer loans. To an increasing extent in recent years, lending activities have also included the origination of residential construction loans through brokers and increased reliance on non-deposit sources of funds. Our current strategy is to increase our consumer, commercial business and commercial real estate lending funded by retail deposits.

Since 2006 there have been significant changes made to our management team. Management changes included appointing a new President and Chief Executive Officer in 2006 and a new Senior Vice President and Chief Lending Officer in 2008. During the latter part of fiscal 2007, as part of management’s decision to reduce the risk profile of our loan portfolio, we implemented more stringent underwriting guidelines and procedures. Prior to this time our underwriting emphasis with respect to commercial real estate, multi-family and construction loans focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower’s debt servicing capacity or other credit factors. Our underwriting guidelines were revised to put greater emphasis on the borrower’s credit, debt service coverage and cash flows as well as on collateral appraisals. Additionally, our policies with respect to loan extensions became more conservative than our previous policies, requiring that a review of all relevant factors, including loan terms, the condition of the security property, market changes and trends that may affect the security property and financial condition of the borrower conform to our revised underwriting guidelines and that the extension be in our best interest. As a result of the tightening of our credit standards and the slowdown in the housing industry, our non-performing loans and other loans of concern (other loans of concern consist of loans with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the collateral securing the respective loans has caused management to be concerned about the ability of the

borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the nonperforming loan category), consisting primarily of construction loans, totaled $9.9 million or 2.0% of total loans at June 30, 2008, compared to $31.3 million or 6.5% of total loans at June 30, 2007. Our new Chief Lending Officer is focused on the successful work-out and resolution of these loans. See “Asset Quality.”

At June 30, 2008, we had total assets of $626.4 million, deposits of $389.9 million and equity of $62.4 million. Anchor Bank maintains a website at www.anchornetbank.com. Upon completion of the subscription offering on _______ __, 2008, the website will provide an update on the status of the offering. The information on our website is not part of this prospectus.

Anchor Bancorp Foundation
601 Woodland Square Loop SE
Lacey, Washington 98503
(360) 491-2250

To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, the Anchor Bancorp Foundation, as a non-stock Washington corporation in connection with the conversion. We will fund the charitable foundation with 150,000 shares of common stock and $500,000. Our contribution to the charitable foundation would reduce pre-tax net earnings by $2.0 million in 2009, the year in which the charitable foundation is established. The Anchor Bancorp Foundation will make grants and donations to non-profit and community groups and projects located within our market areas. It is anticipated that the Anchor Bancorp Foundation will distribute at least 5% of its net investment assets each year.

Currently, there are no plans to make additional contributions to the charitable foundation in the future. Anchor Bancorp will review additional contribution considerations from time to time. The amount of common stock that we would offer for sale in the offering would be greater if the offering were to be completed without the contribution to the Anchor Bancorp Foundation. The establishment of the charitable foundation requires the affirmative vote of a majority of the votes eligible to be cast by Anchor Bank’s depositors. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Comparison of Valuation and Pro Forma Information With and Without Charitable Foundation” on page 28.

Operating Strategy

Our strategies center on our continued development into a full service, community-oriented bank. Our goal is to continue to enhance our franchise value and earnings through controlled growth in our banking operations, while maintaining the community-oriented customer service that has characterized our success to date. In order to be successful in this objective and increase shareholder value, we are committed to the following strategies:


	•	Increasing our focus on monitoring asset quality and controlling non-performing assets;

	•	Continuing to expand our branch network in our existing markets;

	•	Providing customers with local personalized services and decision making which cannot be provided by larger regional banks;

	•	Modifying our loan product mix by originating an increasing percentage of our assets in higher-yielding loans such as custom residential construction, commercial real estate and commercial business loans;

	•	Increasing our core transaction deposits to improve both the amount and the type of deposits that serve as a funding base for asset growth;

	•	Hiring experienced employees with a customer service focus; and

iii


	•	Continuing an internal management culture which is driven by a focus on profitability, productivity and accountability for results and which responds proactively to the challenge of change.

For a more detailed description of our products and services, as well as our business strategy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operating Strategy” beginning on page 32.

The Conversion

We do not have public shareholders in our current mutual form of ownership. Our depositors currently have the right to vote on certain matters, such as the conversion. Anchor Bank is converting to stock form and offering the common stock of Anchor Bancorp to the public primarily to allow us to grow through expanded operations, as well as through increased branching and potential acquisitions of other financial service providers, although no such acquisitions are currently contemplated. The stock form will also give us more flexibility to increase our capital position and to offer stock-based employee compensation which will provide greater incentive to improve corporate performance. Following the conversion, voting rights in Anchor Bancorp will be vested solely in the public shareholders. See “Anchor Bank’s Conversion - Our Reasons for the Conversion.”

This chart shows our structure after the conversion and offering:

Terms of the Offering

We are offering between 3,825,000 and 5,175,000 shares of common stock, excluding the contribution of shares to the Anchor Bancorp Foundation, to those with subscription rights in the following order of priority:


	(1)	Depositors who held at least $50 with us on June 30, 2007.

	(2)	The Anchor Bancorp employee stock ownership plan.

	(3)	Depositors who held at least $50 with us on _______, 2008.

	(4)	Depositors and borrowers with us as of ____ ___, 200__ to the extent not already included in a prior category.

In addition, we intend to contribute 150,000 shares of our authorized but unissued common stock and $500,000 to the Anchor Bancorp Foundation, a new charitable foundation to be established.

We may increase the maximum number of shares that we sell in the offering by up to 15% to 5,951,250 shares as a result of market demand, regulatory considerations or changes in financial conditions with the approval

of the Washington Department of Financial Institutions and without any notice to you. If we increase the offering, you will not have the opportunity to change or cancel your stock order. The offering price is $10.00 per share. All purchasers will pay the same purchase price per share. No commission will be charged to purchasers in the offering.

If we receive subscriptions for more shares than are to be sold in the subscription offering, shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. Any shares remaining will be allocated in the order of priorities described above. Shares of common stock not subscribed for in the subscription offering will be offered to the general public in a direct community offering with a preference to natural persons residing in Grays Harbor, Thurston, Lewis, Pierce, Mason, Kitsap, Clark and King counties , Washington and, if necessary, a syndicated community offering. The direct community offering, if any, shall begin at the same time as, during or promptly after the subscription offering. See “The Conversion – Subscription Offering and Subscription Rights,” “– Direct Community Offering” and “– Syndicated Community Offering.”

Keefe, Bruyette & Woods, Inc., our financial advisor and selling agent in connection with the offering, will use its best efforts to assist us in selling our common stock in the offering. Keefe, Bruyette & Woods, Inc. is not obligated to purchase any shares of common stock in the offering. For further information about the role of Keefe, Bruyette & Woods, Inc. in the offering, see “The Conversion – Marketing Arrangements.”

Reasons for the Conversion and Offering


	The primary reasons for the conversion and our decision to conduct the offering are to:

	•	increase our capital to support future growth; and

	•	provide us with greater operating flexibility and allow us to better compete with other financial institutions.

	The conversion and the capital raised in the offering are expected to:

	•	give us the financial strength to continue to grow our bank;

	•	better enable us to serve our customers in our market area;

	•	enable us to repay our maturing Federal Home Loan Bank borrowings;

	•	support our emphasis on custom residential construction, commercial real estate, and one- to four-family residential lending and the development of new products and services;

	•	help us retain and attract qualified management through stock-based compensation plans;

	•	enable us to form a charitable foundation to benefit the communities in which we do business; and

	•	structure our business in a form that will enable us to access the capital markets.

We do not have any specific plans or arrangements for acquisitions.

How We Determined the Offering Range and the $10.00 Price Per Share

The offering range is based on an independent appraisal of the market value of the common stock to be issued in the offering. RP Financial, LC., an appraisal firm experienced in appraisals of financial institutions, has advised us that, as of October 10, 2008, the estimated pro forma market value of our common stock, including offering shares and shares issued to the charitable foundation, ranges from a minimum of $39.8 million to a maximum of $53.3 million, with a midpoint of $46.5 million. Based on this valuation range, the percentage of Anchor Bank’s common stock owned by Anchor Bancorp, the shares issued to the charitable foundation and the $10.00 price per share, the respective boards of directors of Anchor Bancorp and Anchor Bank, determined to offer shares of Anchor Bancorp’s common stock ranging from a minimum of 3,825,000 shares to a maximum of

5,175,000 shares, with a midpoint of 4,500,000 shares. The pro forma market value can be adjusted upward by us subsequent to the expiration date of the offering and prior to closing to reflect the demand for shares in the offering or changes in market and financial conditions without the resolicitation of subscribers if supported by an appropriate change in our independent appraisal and the approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation. At the adjusted maximum, the estimated pro forma market value of Anchor Bancorp’s common stock would be $61.0 million and the number of shares issued would equal 6,101,250 shares (including shares issued to our foundation).

The independent appraisal was based in part on our financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of common stock in the offering, and an analysis of a peer group of companies that RP Financial considered comparable to us. The peer group shown below, consists of ten publicly traded savings institutions, includes companies that range in asset size from $700,000 to $2.1 billion, have market capitalizations that range from $22.0 million to $225.0 million, and have been in fully converted form for more than one year.


Peer Group	State	Assets

		(In Millions)

United Western Bancorp, Inc.	CO		$	2,174
Harrington West Financial Group, Inc.	CA			1,202
First Financial Northwest, Inc.	WA			1,196
HMN Financial, Inc.	MN			1,076
Riverview Bancorp, Inc.	WA			885
Rainier Pacific Financial Group, Inc.	WA			871
First PacTrust Bancorp, Inc.	CA			825
First Federal Bancshares, Inc.	AR			820
Meta Financial Group, Inc.	IA			782
Timberland Bancorp, Inc.	WA			664

As indicated in the table, a majority of the peer group companies are located in the State of Washington or other Western states.

The independent valuation was prepared by RP Financial in reliance upon the information contained in this prospectus, including the financial statements of Anchor Bank. RP Financial also considered the following factors, among others:


	•	the present results and financial condition of Anchor Bank;

	•	the economic and demographic conditions in Anchor Bank’s existing market area;

	•	certain historical, financial and other information relating to Anchor Bank;

	•	a comparative evaluation of the operating and financial characteristics of Anchor Bank with the peer group companies, which are headquartered in the states of Washington (four companies), California (two companies), Colorado (one company), Minnesota (one company), Arkansas (one company) and Iowa (one company);

	•	the impact of the conversion and the offering on Anchor Bancorp’s shareholders’ equity and earnings potential;

	•	the proposed dividend policy of Anchor Bancorp; and


	•	the trading market for the securities of the peer group institutions and general conditions in the stock market for the peer group institutions and all publicly traded thrift institutions.

RP Financial also considered that we intend to issue shares of Anchor Bancorp common stock to the Anchor Bancorp Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of shares of common stock to the charitable foundation has the effect of reducing the number of shares that may be offered in the offering. The foundation will be issued 150,000 shares of common stock from authorized but unissued shares and $500,000 in cash. We will not receive any conversion proceeds in connection with the issuance of these shares, and thus, our pro forma book value and earnings will be lower, resulting in a lower pro forma value for Anchor Bancorp. See “– Anchor Bancorp has Established a Charitable Foundation” and “Comparison of Valuation and Pro Forma Information With and Without Charitable Foundation.” RP Financial’s independent valuation will be updated before we complete our offering.

The following table presents a summary of selected pricing ratios for the companies comprising the peer group used by RP Financial in its independent appraisal report dated October 10, 2008 and the pro forma pricing ratios for us, as calculated in the tables beginning on page 24 in the section of this prospectus entitled “Pro Forma Data.” Compared to the median pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a premium of 1,023.7% on a price-to-earnings basis and a discount of 11.4% on a price-to-book value basis and a price-to-tangible book value basis. The estimated appraised value and the resulting premiums and discounts took into consideration the potential financial impact of the conversion and offering and RP Financial’s analysis of the results of operations and financial condition of Anchor Bancorp compared to the peer group.


	Price-to- earnings multiple(1)		Price-to-book value ratio		Price-to-tangible book value ratio

Anchor Bancorp
Minimum of offering range	71.43	x	41.93	%	41.93	%
Midpoint of offering range	90.91	x	46.17	%	46.17	%
Maximum of offering range	100.00	x	49.95	%	49.95	%
Maximum of offering range, as adjusted	125.00	x	53.82	%	53.82	%


Valuation of peer group
companies using stock market prices
as of October 10, 2008(2)
Average	8.20	x	52.84	%	57.27	%
Median	8.09	x	52.09	%	54.26	%


(1)	Reflects our pro forma price-to-earnings multiples based on unaudited pro forma net income for the year ended June 30, 2008.

(2)	Reflects earnings for the most recent twelve-month period for which data were publicly available (June 30, 2008) for all peer group members.

The independent appraisal is not necessarily indicative of post-offering trading value. You should not assume or expect that the valuation of Anchor Bancorp as indicated above means that the common stock will trade at or above the $10.00 purchase price after the offering is completed.

The independent appraisal will be updated before we complete the conversion. Any changes in the appraisal would be subject to the approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation. The estimated pro forma market value of Anchor Bancorp may be increased by up to 15%, up to $61.0 million, including shares issued to the charitable foundation. See “Pro Forma Data.”

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After-Market Performance Information Provided by the Independent Appraiser

The following table, prepared by our independent appraiser, presents for all conversions that began trading from July 1, 2007 to October 10, 2008, the percentage change in the trading price from the initial trading date of the offering to the dates shown in the table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This information relates to stock performance experienced by other companies that may have no similarities to us with regard to market capitalization, offering size, earnings quality and growth potential, among other factors.

The table is not intended to indicate how our common stock may perform. Data represented in the table reflects a small number of transactions and is not indicative of general stock market performance trends or of price performance trends of companies that undergo conversions. Furthermore, this table presents only short-term price performance and may not be indicative of the longer-term stock price performance of these companies. There can be no assurance that our stock price will appreciate or that our stock price will not trade below $10.00 per share. The movement of any particular company’s stock price is subject to various factors, including, but not limited to, the amount of proceeds a company raises, the company’s historical and anticipated operating results, the nature and quality of the company’s assets, the company’s market area and the quality of management and management’s ability to deploy proceeds (such as through loans and investments, the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and merger or takeover transactions and the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this prospectus, including “Risk Factors.”

After Market Trading Activity
Initial Stock Offerings - Standard Conversions
Completed Closing Dates between July 1, 2007 and October 10, 2008


		Price Performance from Initial Trading Date

Institution (Ticker)	Conversion Date	% Change 1 Day			% Change 1 Week			% Change 1 Month			Through October 10, 2008


First Savings Financial Group, Inc. (FSFG)	10/07/08		(1.0	)		(6.0	)		(6.0	)		(6.0	)
Home Bancorp, Inc. (HBCP)	10/03/08		14.9			2.5			2.5			2.5
Cape Bancorp, Inc. (CBNJ)	02/01/08		0.5			(1.0	)		(2.0	)		(15.1	)
Danvers Bancorp, Inc. (DNBK)	01/10/08		(2.6	)		(3.1	)		2.6			12.9
First Advantage Bancorp (FABK)	11/30/07		11.7			7.0			6.5			(4.0	)
First Financial Northwest, Inc. (FFNW)	10/10/07		17.3			15.0			8.1			(1.7	)
Beacon Federal Bancorp, Inc. (BFED)	10/02/07		16.0			17.9			6.0			(15.4	)
Louisiana Bancorp, Inc. (LABC)	07/10/07		9.5			4.0			9.1			16.8
Quaint Oak Bancorp, Inc. (QNTO)	07/05/07		(2.0	)		(7.0	)		(11.0	)		(8.1	)

Average			7.1	%		3.3	%		1.8	%		(2.0	)%
Median			9.5	%		2.5	%		2.6	%		(4.0	)%


(1)	The offering price for each transaction was $10.00 per share.

Termination of the Offering

The subscription offering will end at 12:00 Noon, Pacific time, on ______ _ _, 200__, unless extended. The direct community offering and syndicated offering, if any, will also end at 12:00 Noon, Pacific time, on _______ ___, 200__. If fewer than the minimum number of shares are subscribed for in the subscription offering and we do not get orders for at least the minimum number of shares by ____ ____ __, 200__, we will either:

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	(1)	promptly return any payment you made to us, with interest, or cancel any withdrawal authorization you gave us; or

	(2)	extend the offering, if allowed, and give you notice of the extension and of your rights to cancel, change or confirm your order. If we extend the offering and you do not respond to the notice, then we will cancel your order and return your payment, with interest, or cancel any withdrawal authorization you gave us. We must complete or terminate the offering by _______ __, 200__.

How We Will Use the Proceeds Raised From the Sale of Common Stock

We intend to use the net proceeds received from the stock offering as follows:


	Minimum			Maximum			Maximum, as adjusted

	(In Thousands)
Gross proceeds	$	38,250		$	51,750		$	59,513
Less: estimated underwriting commission and other offering commissions		(1,317	)		(1,441	)		(1,512	)
Less: repayment of Anchor Bank maturing and overnight FHLB advances and brokered certificates of deposit		(15,700	)		(15,700	)		(15,700	)
Less: loan to our employee stock ownership plan		(3,060	)		(4,140	)		(4,761	)

Net investable cash proceeds	$	18,173		$	30,469		$	37,540

Anchor Bancorp will retain 50% of the net conversion proceeds and will purchase all of the capital stock of Anchor Bank to be issued in the conversion in exchange for the remaining 50% of the net conversion proceeds. The net proceeds retained by Anchor Bancorp will initially be deposited with Anchor Bank and may ultimately be used to support lending and investment activities, future expansion of operations through the establishment or acquisition of banking offices or other financial service providers, to pay dividends or for other general corporate purposes, including repurchasing shares of its common stock. No such acquisitions are specifically being considered at this time. Anchor Bank intends to use its proceeds received as well as the amount deposited by Anchor Bancorp to repay a portion of its maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit, and the balance, if any, for future lending and investment activities, in addition to general and other corporate purposes. See “Risk Factors” and “How We Intend to Use the Proceeds From This Offering.”

We Currently Intend to Pay a Cash Dividend in the Future

We currently plan to pay cash dividends in the future, however, the amount and timing of any dividends has not yet been determined. Although future dividends are not guaranteed, based on our pro forma net income and shareholders’ equity, we believe Anchor Bancorp will be capable of paying a dividend after completion of this offering.

Plans to List the Common Stock for Trading on the Nasdaq Global Select Market

We plan to list our common stock for trading on the Nasdaq Global Select Market under the symbol [“ANCB”] and have submitted an application to The Nasdaq Stock Market LLC for this purpose. Keefe, Bruyette & Woods, Inc. currently intends to become a market maker in the common stock, but it is under no obligation to do so. We cannot assure that other market makers will be obtained or that an active and liquid trading market for the shares of common stock will develop or if developed, will be maintained. After shares of the common stock begin trading, you may contact a stock broker to buy or sell shares. As a result of the unpredictability of the stock market and other factors, persons purchasing shares may not be able to sell their shares when they want to, or at a price equal to or above $10.00.

Limitations on the Purchase of Common Stock in the Conversion

The minimum purchase is 25 shares.

The maximum purchase in the subscription offering by any person or group of persons through a single deposit account is $500,000 of common stock, which equals 50,000 shares.

The maximum purchase by any person in the community offering is $500,000 of common stock, which equals 50,000 shares.

The maximum purchase in the subscription offering and community offering combined by any person, related persons or persons acting together is five percent of the shares issued in the conversion.

If any of the following persons purchase common stock, their purchases when combined with your purchases cannot exceed five percent of the shares issued in the conversion:


	(1)	your spouse, or your relatives or your spouse’s relatives living in your house;

	(2)	companies or other entities in which you have a 10% or greater equity or substantial beneficial interest or in which you serve as a senior officer or partner;

	(3)	a trust or other estate if you have a substantial beneficial interest in the trust or estate or you are a trustee or fiduciary for the trust or other estate; or

	(4)	other persons who may be acting together with you (including, but not limited to, persons who file jointly a Schedule 13G or Schedule 13D Beneficial Ownership Report with the Securities and Exchange Commission, persons living at the same address or persons exercising subscription rights through qualifying deposits registered at the same address, whether or not related).

Subject to approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation, we may increase or decrease the purchase limitations in the offering at any time. Our tax-qualified benefit plans, including our employee stock ownership plan, are authorized to purchase up to 10% of the shares sold in the offering without regard to these purchase limitations. See “The Conversion – Limitations on Stock Purchases.”

How to Purchase Common Stock

Note: Once we receive your order, you cannot cancel or change it without our consent. If Anchor Bancorp intends to sell fewer than 3,825,000 shares or more than 5,951,250 shares, all subscribers will be notified and given the opportunity to change or cancel their orders. If you do not respond to this notice, we will return your funds promptly with interest or cancel your withdrawal authorization.

If you want to subscribe for shares, you must complete an original stock order form and drop it off at any Anchor Bank branch or send it, together with full payment or withdrawal authorization, to Anchor Bank in the postage-paid envelope provided or to the address on the top of the stock order form. You must sign the certification that is part of the stock order form. We must receive your stock order form before the end of the offering period.

You may pay for shares in any of the following ways:


	•	*By personal check, bank check or money order* made payable to Anchor Bancorp.

	•	*By authorizing a withdrawal from an account at Anchor Bank, including certificates of deposit, designated on the stock order form.* To use funds in an individual retirement account (“IRA”) at Anchor Bank, you must transfer your account to an unaffiliated institution or broker. Please contact the stock information center as soon as possible for assistance.

	•	*In cash,* if delivered in person to a full-service banking office of Anchor Bank, although we request that you exchange cash for a check with any of our tellers.

Anchor Bank is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use an Anchor Bank line of credit check or third party check to pay for shares of our common stock.

We will pay interest on your subscription funds at the rate Anchor Bank pays on passbook (statement) savings accounts from the date it receives your funds until the conversion is completed or terminated. All funds received before the completion of the conversion will be held in a segregated account at Anchor Bank or, at our discretion, at an independent insured depository institution. All funds authorized for withdrawal from deposit accounts with Anchor Bank will earn interest at the applicable account rate until the conversion is completed. There will be no early withdrawal penalty for withdrawals from certificates of deposit at Anchor Bank used to pay for stock.

You may subscribe for shares of common stock using funds in your IRA at Anchor Bank or elsewhere. However, common stock must be held in a self-directed retirement account. Anchor Bank’s IRAs are not self-directed, so they cannot be invested in common stock. If you wish to use some or all of the funds in your Anchor Bank IRA, the applicable funds must be transferred to a self-directed account reinvested by an independent trustee, such as a brokerage firm. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using your IRA or other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.

Purchases of Common Stock by Our Officers and Directors

Collectively, our directors and executive officers intend to subscribe for 129,500 shares regardless of the number of shares sold in the offering. This number equals 3.26% of the 3,975,000 shares that would be issued at the minimum of the offering range, including shares issued to the Anchor Bancorp Foundation. If fewer shares are issued in the conversion, then officers and directors will own a greater percentage of Anchor Bancorp. These shares do not include any shares that may be awarded or issued in the future under any stock option plan or restricted stock plan we intend to adopt. Directors and executive officers will pay the same $10.00 per share price for these shares as everyone else who purchases shares in the conversion.

These proposed purchases of common stock by our directors and executive officers (3.26% of the aggregate shares sold in the offering at the minimum of the offering range), together with the purchase by the employee stock ownership plan (8% of the aggregate shares sold in the offering), as well as the potential acquisition of common stock through the proposed stock option plan (10% of the aggregate shares sold in the offering and issued to the Anchor Bancorp Foundation) and restricted stock plan (4% of the aggregate shares sold in the offering and issued to the Anchor Bancorp Foundation) will result in ownership by insiders of Anchor Bancorp in excess of 25% of the total shares issued in the offering at the minimum of the offering range. As a result, it could be more difficult to obtain majority support for shareholder proposals opposed by the board and management. See “Risk Factors – Risks Related to This Offering – The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Anchor Bancorp.” In addition, we intend to issue to our charitable foundation, 150,000 shares of common stock sold in the offering. Although the trustees of our charitable foundation include three of our directors, Federal regulations impose a pro-rata voting limitation on the common stock held by the charitable foundation. This limitation provides that these shares must be voted in the same ratio as all other shares voting on all proposals considered by our shareholders.

Tax Consequences of the Conversion

As a general matter, the conversion and offering will not be taxable transactions for federal or state income tax purposes to Anchor Bancorp, Anchor Bank or persons eligible to subscribe in the subscription offering. Silver Freedman & Taff, L.L.P. has issued an opinion to us to the effect that consummation of transactions contemplated

by the conversion and offering qualifies as a tax-free transaction for federal income tax purposes and will not result in any adverse federal tax consequences to Anchor Bancorp, Anchor Bank or persons eligible to subscribe in the subscription offering before or after the conversion. Blado Kiger, P.S. has issued an opinion to us to the effect that consummation of transactions contemplated by the conversion and offering should qualify as a tax-free transaction for Washington State income tax purposes and should not result in any adverse Washington State tax consequences to Anchor Bancorp, Anchor Bank or persons eligible to subscribe in the subscription offering before or after the conversion. See “The Conversion – Effects of the Conversion – Tax Effects of the Conversion.”

Benefits to Management from the Offering

We intend to establish an employee stock ownership plan, which will purchase in the offering 8% of the aggregate shares sold in the offering, or if shares are not available, in the open market after the conversion. A loan from Anchor Bancorp to the employee stock ownership plan, funded by a portion of the proceeds from this offering, will be used to purchase these shares. The loan will accrue interest at an appropriate interest rate in effect at the time the employee stock ownership loan is entered into. The employee stock ownership plan will provide a retirement benefit to all employees eligible to participate in the plan.

We also intend to adopt, within one year after completion of the offering, a stock option plan and a restricted stock plan for the benefit of directors, officers and employees, subject to shareholder approval. If we adopt the restricted stock plan, some of these individuals will be awarded stock at no cost to them. As a result, both the employee stock ownership plan and the restricted stock plan will increase the voting control of management without any cash being paid by the recipient.

The number of options granted or shares awarded under the proposed stock option plan and restricted stock plan may not, pursuant to Federal regulations, exceed 10% and 4%, respectively, of our total outstanding shares (including shares sold to our employee stock ownership plan and issued to our charitable foundation).

The employee stock ownership plan and our stock-based incentive plans will increase our future compensation costs, thereby reducing our earnings. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be significant. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients. We estimate, once these plans are adopted, the increase in compensation expense will be approximately $1.0 million on an after-tax basis, based on the maximum of the valuation range. Additionally, shareholders will experience a reduction in their ownership interest if newly issued shares of common stock are used to fund stock options and restricted stock awards. In the event newly issued shares of our common stock are used to fund stock options and restricted stock option awards in an amount equal to 10% and 4%, respectively, of our total outstanding shares, including shares to be issued to our charitable foundation, shareholders would experience dilution in their ownership interest of 9.1% and 3.9%, respectively, or 13.0% in the aggregate. See “Risk Factors – Risks Related to this Offering – After this offering, our compensation expenses will increase and our return on equity will be low compared to other companies. These factors could negatively impact the price of our stock.” and “Management – Benefits to Be Considered Following Completion of the Conversion.”

The following table summarizes the stock benefits that our officers, directors and employees may receive following the offering at the maximum of the offering range. It assumes that the proposed stock option plan is approved by shareholders within one year after completion of the offering to permit the granting of options to purchase a number of shares equal to 10% of the shares outstanding after the offering (including shares issued to the Anchor Bancorp Foundation) and the proposed restricted stock plan is approved by shareholders within one year after completion of the offering to permit the awarding of a number of shares of common stock equal to 4% of the shares outstanding after the offering (including shares to be issued to the Anchor Bancorp Foundation). It further assumes that, at the maximum of the offering range, a total of 5,325,000 shares will be sold to the public and our

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employee stock ownership plan and issued to the charitable foundation and that our tangible regulatory capital is 10% or more following the proposed stock issuance.


Number of Shares Based on Minimum of Offering	Number of Shares Based on Maximum of Offering	Plan	As a % of Outstanding Shares Issued in the Conversion (including shares to be issued to the charitable foundation)		Individuals Eligible to Receive Awards	As % of Total Shares Sold in the Offering		Value of Benefits Based on Minimum of Offering Range (1)		Value of Benefits Based on Maximum of Offering Range (1)


306,000	414,000	Employee stock ownership plan	7.77	%	Employees	8.00	%	$	3,060,000	$	4,140,000

159,000	213,000	Restricted stock plan	4.00		Directors/ Employees	4.12			1,590,000		2,130,000

397,000	532,500	Stock option plan	8.73		Directors/ Employees	8.95			2,078,925		2,784,975

862,500	1,159,500		20.50	%		21.06	%	$	6,728,925	$	9,054,975



(1) The actual value of the restricted stock awards will be determined based on their fair value as of the date the grants are made. For purposes of this table, fair value is assumed to be the offering price of $10.00 per share. The fair value of stock options has been estimated at $5.23 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0.0%; expected option life of 10 years; risk free interest rate of 3.99% (based on the ten-year Treasury Note rate); and a volatility rate of 33.46% based on an index of publicly traded holding companies. The actual expense of the stock options will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted.

The value of the restricted stock awards will be based on the price of Anchor Bancorp’s common stock at the time those shares are granted, which, subject to shareholder approval, cannot occur until at least six months after the offering is completed. The following table presents the total value of all restricted shares to be available for award and issuance under the restricted stock plan, assuming the shares for the plan are issued in a range of market prices from $8.00 per share to $14.00 per share.


Share Price		159,000 Shares Awarded at Minimum of Range		186,000 Shares Awarded at Midpoint of Range		213,000 Shares Awarded at Maximum of Range	244,050 Shares Awarded at Maximum of Range, as adjusted

(In thousands, except per share amounts)
	$ 8.00		$ 1,272		$ 1,488	1,704	1,952
	10.00		1,590		1,860	2,130	2,441
	12.00		1,908		2,232	2,556	2,929
	14.00		2,226		2,604	2,982	3,417

The grant-date fair value of the options granted under the stock option plan will be based in part on the price of Anchor Bancorp’s common stock at the time the options are granted, which, subject to shareholder approval, cannot occur until at least six months after the offering is completed. The value also will depend on the various assumptions utilized in estimating the value using the Black-Scholes option pricing model. The following table presents the total estimated value of the options to be available for grant under the stock option plan, assuming the market price and exercise price for the stock options are equal, with a range of market prices for the shares from $8.00 per share to $14.00 per share.

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Market/Exercise Price		Grant-Date Fair Value Per Option		397,500 Options at Minimum of Range		465,000 Options at Midpoint of Range		532,500 Options at Maximum of Range		610,125 Options at Maximum of Range, as adjusted

(In thousands, except per share amounts)
	$ 8.00		$ 4.18		$ 1,662		$ 1,944		$ 2,226		$ 2,550
	10.00		5.23		2,079		2,432		2,785		3,191
	12.00		6.28		2,496		2,920		3,344		3,832
	14.00		7.32		2,910		3,404		3,898		4,466

We also will enter into an employment agreements with our chief executive officer and chief financial officer and change in control severance agreements with three other officers. For a further discussion of benefits to management, see “Management.”

Conditions to Completing the Conversion and Offering

We are conducting the conversion and offering under the terms of our plan of conversion. We cannot complete the conversion and offering unless:


•	our plan of conversion is approved by at least a majority of votes eligible to be cast by depositors and borrowers of Anchor Bank;

•	we sell at least the minimum number of shares of common stock offered; and

•	we receive approval from the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation to complete the conversion and offering.

Stock Information Center

If you have any questions regarding the offering or our conversion to stock form, please call the stock information center at (360) ___-___ from 9:00 a.m. to 5:00 p.m., Pacific time, Monday through Friday. The stock information center is closed on weekends and bank holidays. The stock information center is located at our Aberdeen branch at 120 N. Broadway, Aberdeen, Washington. The banking operations portion of our main office is separate and apart from the stock information center and will not have offering materials and cannot accept completed order forms or proxy cards.

To ensure that you receive a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days prior to such date or hand-deliver any prospectus later than two days prior to the date. Stock order forms may only be distributed with or preceded by a prospectus.

By signing the stock order form, you are acknowledging your receipt of a prospectus and your understanding that the shares are not a deposit account and are not insured or guaranteed by Anchor Bancorp, Anchor Bank, the Federal Deposit Insurance Corporation or any other federal or state governmental agency.

We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 12:00 Noon, Pacific time, on __________, 2008, whether or not we have been able to locate each person entitled to subscription rights.

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Delivery of Stock Certificates

Certificates representing shares of common stock issued in the offering will be mailed to the persons entitled to receive these certificates at the certificate registration address noted on the order form, as soon as practicable following completion of the offering and receipt of all necessary regulatory approvals . Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock which they ordered, even though the common stock will have begun trading.

Subscription Rights

Subscription rights are not allowed to be transferred, and we will act to ensure that you do not do so. We will not accept any stock orders that we believe involve the transfer of subscription rights.

Anchor Bancorp Has Established a Charitable Foundation

In connection with the conversion, Anchor Bancorp has established a charitable foundation, the Anchor Bancorp Foundation, in order to further its commitment to the local community. The foundation anticipates distributing at least 5% of Anchor Bank’s assets each year to support charitable organizations and activities that enhance the quality of life for residents within Anchor Bancorp’s market area. The Anchor Bancorp Foundation will allow the local communities to share in the anticipated future success of Anchor Bancorp through cash dividends payable on the common stock and potential appreciation of the value of the common stock, as well as enable Anchor Bancorp and its related entities to develop a unified charitable donation strategy. Trustees of the foundation will be charged with the specific development of a donation strategy consistent with the regulations set forth in Section 501(c)(3) of the Internal Revenue Code.

Anchor Bancorp will fund the foundation with a contribution of 150,000 shares of stock and $500,000. There are no plans by Anchor Bancorp to provide additional funding beyond this initial funding to the foundation over the next three years. As a result of the foundation’s establishment and funding, the appraisal will be reduced and Anchor Bancorp will sell fewer shares of common stock than if the conversion were completed without the foundation. The foundation will be issued shares of common stock from authorized but unissued shares. We will not receive any proceeds in connection with the issuance of these shares, and thus our pro forma book value and earnings will be lower, resulting in a lower pro forma value for Anchor Bancorp. See “Taxation – The Anchor Bancorp Foundation.”

Issuing shares of common stock to the charitable foundation will:


•	dilute the voting interests of purchasers of shares of our common stock in the offering; and

•	result in an expense, and a reduction in earnings, during the quarter in which the contribution is made, equal to the full amount of the contribution, offset in part by a corresponding tax benefit.

We have selected Jerald L. Shaw, Robert D. Ruecker, and Dennis C. Morrisette, who currently serve as directors of Anchor Bank, to serve as the trustees of the charitable foundation. As required by Federal regulations, we also will select one additional person to serve on the board of trustees of the charitable foundation who will not be one of our officers, directors or employees and who will have experience with local charitable organizations and grant making. This person has not been selected. Federal regulations impose a pro-rata voting limitation on the common stock held by the charitable foundation. This limitation provides that these shares must be voted in the same ratio as all other shares voting on all proposals considered by our shareholders.

See “Risk Factors – Risks Related to the Formation of Our Charitable Foundation – The contribution to the Anchor Bancorp Foundation will reduce our profits for fiscal year 2009 and dilute your ownership interest,” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “Business of Anchor Bank– Charitable Foundation.”

Restrictions on the Acquisition of Anchor Bancorp

Washington law, as well as provisions contained in our charter, restrict the ability of any person, firm or entity to acquire Anchor Bancorp or our capital stock. These restrictions include the requirement that a potential acquirer of common stock obtain the prior approval of the Washington Department of Financial Institutions before acquiring in excess of 10% of the voting stock of Anchor Bancorp. Additionally, regulations of the Washington Department of Financial Institutions prohibit anyone from acquiring Anchor Bancorp for a period of three years following the offering, unless this prohibition is waived by the Washington Department of Financial Institutions. See “Risk Factors – Risks Related to the Offering – The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Anchor Bancorp.”

Important Risks in Owning Anchor Bancorp’s Common Stock

Before you decide to purchase stock, you should read the “Risk Factors” section on pages 1 to 12 of this prospectus.

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RISK FACTORS

You should consider these risk factors, in addition to the other information in this prospectus, in deciding how to vote on the conversion and before deciding whether to make an investment in Anchor Bancorp’s stock.

Recent negative developments in the financial industry and credit markets may continue to adversely impact our financial condition and results of operations.

Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with substantially increased oil prices and other factors, have resulted in uncertainty in the financial markets in general and a related general economic downturn, which have continued in 2008. Many lending institutions, including us, have experienced substantial declines in the performance of their loans, including construction and land loans, multifamily loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many home mortgages, construction and land, commercial real estate, multi-family and commercial business loans have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. These conditions may have a material adverse effect on our financial condition and results of operations. In addition, as a result of the foregoing factors, there is a potential for new governmental initiatives, including new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of formal enforcement orders. Negative developments in the financial industry and the impact of new legislation in response to those developments could restrict our business operations, including our ability to originate or sell loans, and adversely impact our results of operations and financial condition.

Our business is subject to general economic risks that could adversely impact our results of operations and financial condition.


	•	Changes in economic conditions, particularly a further economic slowdown in Western Washington or the Portland, Oregon metropolitan area, will hurt our business.

Our business is directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. In 2007, the housing and real estate sectors experienced an economic slowdown that has continued into 2008. Further deterioration in economic conditions, in particular within the Western Washington or Portland, Oregon metropolitan area real estate markets, could result in the following consequences, among others, any of which would hurt our business materially:


	►	loan delinquencies may increase;

	►	problem assets and foreclosures may increase;

	►	demand for our products and services may decline; and

	►	collateral for loans made by us, especially real estate, may decline in value, in turn reducing a customer’s borrowing power and reducing the value of assets and collateral securing our loans.

	•	Further downturns in the Western Washington or the Portland, Oregon metropolitan area real estate markets would hurt our business.

Our business activities and credit exposure are concentrated in parts of Western Washington and the Portland, Oregon metropolitan area. Our construction and land loan portfolios, our commercial and multifamily loan portfolios and certain of our other loans have been affected by the downturn in the residential real estate market. We anticipate that further declines in the Western Washington or the Portland, Oregon metropolitan area real estate markets will hurt our business. As of June 30, 2008, substantially all of our loan portfolio consisted of loans secured by real estate located in Western Washington or the Portland, Oregon metropolitan area. If real estate values

continue to decline, especially in Western Washington or the Portland, Oregon metropolitan area, the collateral for our loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate will be diminished, and we would be more likely to suffer losses on defaulted loans. The events and conditions described in this risk factor may, therefore, have a material adverse effect on our business, results of operations and financial condition.


	•	We may suffer losses in our loan portfolio despite our underwriting practices.

We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

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

We originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, consumer loans, as well as residential mortgage loans primarily within our market areas. Generally, these types of loans, other than the residential mortgage loans, have a higher risk of loss than the residential mortgage loans. We had approximately $384.6 million outstanding in these types of higher risk loans at June 30, 2008, which is a slight decrease from the $388.2 million outstanding at June 30, 2007. These loans have greater credit risk than residential real estate loans for a number of reasons, including those described below:


	•	Construction and Land Loans. Most of our construction loans, which includes $15.8 million of land and acquisition development loans to builders, relate to the construction of single family residences. In addition, we have $7.0 million of land loans to individuals. This type of lending contains the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences. At June 30, 2008, $62.7 million of our construction loans were for speculative construction loans. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, no payment from the borrower is generally required since the accumulated interest is added to the principal of the loan through an interest reserve. Loans secured by land also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. At June 30, 2008, all of our construction loan portfolio consisted of loans requiring interest only payments of which $27.0 million of these construction loans were relying on the interest reserve to make this payment. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest. During the year ended June 30, 2007, we significantly increased our origination of construction and land acquisition and development loans to builders. While new construction loan originations decreased by approximately 19.4% in 2008, we continue to have a significant investment in construction loan balances. At June 30, 2008, we had $103.9 million or 20.8% of total loans in construction loans, including $62.7 million, net of loans in process, of land acquisition and development loans to 83 builders. Most of our construction loans are for the construction of single family residences.

	•	Commercial and Multi-family Mortgage Loans. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income generated, or


		expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial and multifamily mortgage loans also expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. At June 30, 2008, we had $176.6 million or 35.3% of total loans in commercial and multi-family mortgage loans.

·	•	Commercial Business Loans. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At June 30, 2008, we had $18.5 million or 3.7% of total loans in commercial business loans.

·	•	Consumer Loans. We make secured and unsecured consumer loans. Our secured consumer loans are collateralized with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower’s financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. At June 30, 2008, we had $78.6 million or 15.7% of total loans in consumer loans. Of this amount, $46.8 million were in home equity loans some of which are loans up to 100% of collateral value.

We have originated a large amount of construction loans through a broker and a significant amount of these loans are past due and delinquent.

Included within the construction loan portfolio are a substantial number of loans referred through a broker relationship out of the Portland, Oregon metropolitan area, secured by first lien construction deeds of trust on properties in the greater Portland metropolitan area. This relationship resulted in a high volume of speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans. Prior to the latter part of fiscal 2007, construction loan referrals from the Portland broker relationship received limited analysis and underwriting which has contributed to the growth in non-performing assets during the year ended June 30, 2008. Beginning in late fiscal 2007, limited analysis and underwriting was curtailed as we implemented more stringent underwriting guidelines and procedures resulting in loan originations from the Portland, Oregon broker decreasing substantially. During the year ended June 30, 2008, we originated $32.9 million of construction loans through this broker as compared to $48.9 million and $74.1 million during the years ended June 30, 2007 and 2006, respectively. At June 30, 2008, $63.4 million or 61.0% of our total construction loans had been originated through this broker. Of this amount, $19.8 million were past their maturity date and $4.4 million were more than 90 days delinquent.

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

As of June 30, 2008, we held in portfolio $10.9 million in one- to four-family mortgage loans (of which $1.5 million were adjustable rate), $2.1 million of automobile loans (all of which were fixed rate), and $2.7 million of home equity loans (of which $100,000 were adjustable rate) $600,000 of other types of consumer loans (all of which were fixed rate) which are considered “subprime” by federal banking regulators. The aggregate amount of

loans considered subprime at June 30, 2008 was $16.3 million or 3.3% of our total loan portfolio. In exchange for the additional lender risk associated with these loans, these borrowers generally are required to pay a higher interest rate, and depending on the severity of the credit history, a lower loan-to-value ratio may be required than for a conforming loan borrower. At the time of loan origination, our subprime borrowers had an average Fair Isaac and Company, Incorporated, or FICO, credit score of 632 and a weighted average loan-to-value ratio of 67%. A FICO score is a principal measure of credit quality and is one of the significant criteria we rely upon in our underwriting. Generally, a FICO score of 660 or higher indicates the borrower has an acceptable credit reputation. At June 30, 2008, $700,000 of our subprime loans was categorized as non-performing assets and $600,000 were categorized as nonaccrual. Subprime loans are generally considered to have an increased risk of delinquency and foreclosure than do conforming loans, especially when adjustable rate loans adjust to a higher interest rate. Although we had not experienced such increased delinquencies or foreclosures at June 30, 2008, our subprime loan portfolio will be adversely affected in the event of a further downturn in regional or national economic conditions. In addition, we may not recover funds in an amount equal to any remaining loan balance. Consequently, we could sustain loan losses and potentially incur a higher provision for loan loss expense.

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

At June 30, 2008, $18.8 million, or 16.3% of our residential mortgage loan portfolio and 3.8% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. At June 30, 2008, we had 23 non-owner occupied residential loan relationships, with aggregate outstanding balances of $17.8 million, of which ten loan relationships had an aggregate outstanding balance over $500,000. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan. At June 30, 2008, all of our non-owner occupied residential mortgage loans were complying with their loan repayment terms.

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

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. In addition, the guidance requires in this event that management employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance which could result in additional costs to us.

The U.S. government’s plan to purchase large amounts of illiquid, mortgage-backed and other securities from financial institutions may not be effective and/or it may not be available to us.

In response to the financial crises affecting the banking system and financial markets and the going concern threats to the ability of investment banks and other financial institutions, the U.S. Congress adopted the new Emergency Economic Stabilization Act of 2008 (“EESA”). The primary feature of the EESA is the establishment of a troubled asset relief program (“TARP”), under which the U.S. Treasury Department will purchase up to $700 billion of troubled assets, including mortgage-backed and other securities, from financial institutions for the purpose of stabilizing the financial markets and to purchase capital stock from these financial institutions. There can be no assurance as to what impact it will have on the financial markets, including the extreme levels of volatility currently being experienced. The failure of the U.S. government to execute this program expeditiously could have a material adverse effect on the financial markets, which in turn could materially and adversely affect our business, financial condition and results of operations. Since the rules and guidelines of the TARP have not yet been published, we are unable to assess whether any of our assets will qualify for the program or, if they do, whether participation in the program would be beneficial to us. In addition, we have elected not to participate in the capital assistance program as a result of the mutual to stock conversion.

We may elect, or be required, to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.

For the year ended June 30, 2008 we recorded a provision for loan losses of $3.5 million compared to $720,000 for the year ended June 30, 2007, which adversely affected our results of operations for 2008. We also recorded net loan charge-offs of $704,000 for the year ended June 30, 2008 compared to $493,000 for the year ended June 30, 2007. We are experiencing increasing loan delinquencies and credit losses. Generally, our non- performing loans and assets reflect operating difficulties of individual borrowers resulting from weakness in the economy of the Portland, Oregon metropolitan area and to a lesser extent Western Washington. In addition, slowing sales in certain housing markets have been a contributing factor to the increase in non-performing loans as well as the increase in delinquencies. We have extended $26.9 million in construction loans that were otherwise due to permit completion of the project or to provide the borrower additional time to market the underlying collateral. Most of these loans mature within 12 months. To the extent these loans are not further extended or the borrower cannot otherwise refinance with a third party lender our non-performing assets may increase further. At June 30, 2008 our total non-performing assets had increased to $25.0 million compared to $4.9 million at June 30, 2007. In that regard, our portfolio is concentrated in construction loans and commercial and multi-family loans, all of which have a higher risk of loss than residential mortgage loans. See “ Our loan portfolio is concentrated in loans with a higher risk of loss” below. While construction loans, which includes land acquisition and development loans, represented 20.8% of our total loan portfolio at June 30, 2008 they represented 88.1% of our non-performing assets at that date. If current trends in the housing and real estate markets continue, we expect that we will continue to experience increased delinquencies and credit losses. Moreover, if a recession occurs we expect that it would negatively impact economic conditions in our market areas and that we could experience significantly higher delinquencies and credit losses. An increase in our credit losses or our provision for loan losses would adversely affect our financial condition and results of operations, perhaps materially.

If our allowance for loan losses is not sufficient to cover actual loan losses or if we are required to increase our provision for loan losses, our results of operations and financial condition could be materially adversely affected.

We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Material additions to the allowance or increases in our provision for loan losses could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan

losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

Furthermore, we may elect to increase our provision for loan losses in light of our assessment of economic conditions and other factors from time to time. For example, as described above under “-We may elect, or be required, to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations,” we increased our provision for loan losses during 2008, which adversely affected our results of operations. We may elect, or be required, to make further increases in our quarterly provision for loan losses in the future, particularly if economic conditions continue to deteriorate, which also could have a material adverse effect on our financial condition and results of operations.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth and may jeopardize our financial condition.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which include Federal Home Loan Bank advances, proceeds from the sale of loans and brokered certificates of deposit. At June 30, 2008, we had $165.2 million of Federal Home Loan Bank advances outstanding with an additional $21.5 million of available borrowing capacity. In connection with the conversion it is our intention to repay a portion of these advances with proceeds from the offerings. For further information, see “How We Intend to Use the Proceeds From this Offering.” Adverse operating results or changes in industry conditions could lead to difficult or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

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

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

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

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

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

Our business strategy includes the relocation of our administrative operations and significant growth plans, which could negatively affect our financial condition and results of operations if we fail to grow or fail to manage our relocation and growth effectively.

We intend to continue to enhance our franchise value and earnings through controlled growth by building our market share in our market areas through our branching strategy. Achieving our growth targets requires us to attract customers that currently bank with other financial institutions in our market, thereby increasing our share of the market. Although the pace of our de novo branch expansion has slowed, we intend to pursue further expansion by opening additional new branches. Since August 2000 we have opened eight new branches within our existing markets. Largely as a result of this de novo branching strategy, our operating expenses have increased significantly, adversely affecting our operating efficiency. As a result, our efficiency ratio, which is the ratio of non-interest expense to net interest income and other income, is higher than many of our competitor institutions. We expect that it may take a period of time before certain of these branches can become profitable, especially in areas in which we do not have an established presence, and it is possible that some of these branches may not achieve profitability. In addition, we plan to continue to expand our presence in Thurston County and to relocate more of our administrative personnel and operations to that area. As a result, the expense of operating these branches and the costs of this relocation may negatively affect our results of operations. In addition, our ability to build market share will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market area and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be harmed.

We have had a number of changes in our personnel and we need to add an additional executive officer and integrate the new officers into our current operations.

Historically, as a result of operating a traditional thrift institution, we had very few officers, and until recently, had very few changes in our personnel. Our President and Chief Executive Officer, Jerald L. Shaw, was appointed to that position in 2006. Many of our lending personnel, including our Chief Lending Officer, Gregory H. Schultz, who joined Anchor Bank in February 2008, have been recently employed by Anchor Bank. As a result of our growth and more complex operations, we also now need to add a chief operating officer. These employees will be important to our operations and our inability to fill these positions could make continued growth difficult. Furthermore, these employees must be successfully integrated with our other personnel, which involves combining individuals with different business backgrounds, corporate cultures, and management styles, while retaining other key employees. The process of hiring these executive officers and integrating them into our organization could cause an interruption of, or loss of momentum in, our operations, including the loss of customers and key personnel.

Strong competition within our market areas may limit our growth and adversely affect our operating results.

Competition in the banking and financial services industry is intense. We compete in our market areas with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of these competitors have substantially greater resources and lending limits than we do, have greater name recognition and market presence that benefit them in attracting business and deposits, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we

do. Our results of operations depend upon our continued ability to successfully compete in our market areas. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase or maintain our interest-earning assets.

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

Our net income has decreased steadily in recent years. We also face significant challenges that will hinder our ability to generate competitive returns. Our most significant challenge has been our low interest rate spread and margin. Our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, declined steadily from 3.29% during the year ended June 30, 2006 to 2.48% during the year ended June 30, 2008. Similarly, our net interest rate margin, which is our net interest income as a percent of average interest-earning assets, has decreased during these time periods. As a result, we have become even more reliant on our non-interest income in order to generate net income. While we have identified various strategic initiatives that we will pursue in our efforts to overcome these challenges and improve earnings, including increasing our interest-earning assets by leveraging the proceeds of this offering, our strategic initiatives may not succeed in generating and increasing income. If we are unable to generate or increase income, our stock price may be adversely affected. For a description of our strategic initiatives to improve earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business and Operating Strategy and Goals.”

We are subject to extensive government regulation and supervision.

We are subject to extensive federal and state regulation and supervision through Anchor Bank. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, and not holders of our common stock. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. In addition, we may be subject to new governmental initiatives or legislation in response to negative developments in the financial industry and the economy as described under “Recent negative developments in the financial industry and credit markets may continue to adversely impact our financial condition and results of operations,” which also could have a material adverse effect on our results of operations and financial condition.

In addition, we are subject to government regulations that could limit or prevent us from paying dividends on our common stock, including those described under “Regulatory Considerations” in this prospectus supplement.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Earthquakes in our primary market area may result in material losses because of damage to collateral properties and our borrowers’ inability to repay loans.

Southwestern Washington and the Portland, Oregon metropolitan area, where substantially all of the real and personal property securing our loans is located, is an earthquake-prone region. A major earthquake could result in material losses to us, although we have not experienced any losses in the past ten years as a result of earthquake damage to collateral securing loans. Earthquake insurance is generally not required by other lenders in the market area, and as a result in order to remain competitive in the marketplace, we do not require earthquake insurance as a condition of making a loan. Earthquake insurance is also not always available at a reasonable coverage level and cost because of changing insurance underwriting practices in our market area resulting from past earthquake activity and the likelihood of future earthquake activity in the region. Additionally, if the collateralized properties are only damaged and not destroyed to the point of total insurable loss, borrowers may suffer sustained job interruption or job loss, which may materially impair their ability to meet the terms of their loan obligations. We cannot assure you that a major earthquake in our primary market area will not result in material losses to us. See “Business of Anchor Bank– Natural Disasters.”

Risks Related to this Offering

After this offering, our compensation expenses will increase and our return on equity will be low compared to other companies. These factors could negatively impact the price of our stock.

The proceeds we will receive from the sale of our common stock will significantly increase our capital and it will take us time to fully deploy those proceeds in our business operations. Our compensation expense will increase because of the costs associated with the employee stock ownership and stock-based incentive plans. These additional expenses will adversely affect our net income. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be significant. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients. We estimate, once these plans are adopted, the increase in compensation expense will be approximately $1.0 million on an after tax basis, based on the maximum of the offering range. On an after-tax basis, this expense will be approximately 207% of Anchor Bank’s pro forma net income for the year ended June 30, 2008, assuming the maximum of the offering. Expenses also are expected to increase as a result of the costs of being a public company as described below under “The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.” Therefore, we expect our return on equity to be below our historical level and less than many of our regional and national peers. For the year ended June 30, 2008 our return on equity was 1.27%. Although we expect that our net income will increase following the offering, we expect that our return on equity will also be reduced as a result of the additional capital that we will raise in the offering. For example, our pro forma return on equity for the year ended June 30, 2008 was 0.44%, assuming the sale of shares at the maximum of the offering range. In comparison, the peer group used by RP Financial in its appraisal had an average return on equity of 3.99% for the year ended June 30, 2008. If our return on equity remains below the industry average following the stock offering, this could hurt our stock price. We cannot guarantee when or if we will achieve returns on equity that are comparable to industry peers. For further information regarding pro forma income and expenses, see “Pro Forma Data.”

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. Compliance with the Sarbanes-Oxley Act of 2002, particularly Section 404 of the Sarbanes-Oxley Act regarding required internal controls and procedures, and the related rules and regulations of the Securities and Exchange Commission will require us to

assess our internal controls and procedures and evaluate our accounting systems. In addition, we have hired, and may need to hire further additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

Your subscription funds could be held for an extended time period and will be unavailable to you for other investments if completion of the conversion is delayed.

Your subscription funds could be held for an extended time period if the conversion is not completed by ______ __, 200_ and the regulators give Anchor Bancorp more time to complete the conversion. If this occurs, your funds would not be available to use for other purposes. If the regulators give Anchor Bancorp more time to complete the conversion, Anchor Bancorp will contact everyone who subscribed for shares to see if they still want to purchase stock. A material change in the independent appraisal of Anchor Bankwould be the most likely, but not necessarily the only, reason for a delay in completing the conversion. The conversion requirements permit the regulators to grant one or more time extensions, none of which may exceed 90 days. Extensions may not go beyond _______ __, 200_.

Management and the board of directors have significant discretion over the investment of the offering proceeds and may not be able to achieve acceptable returns on the proceeds from the offering.

We expect that a significant amount of capital will be raised in this offering. The board of directors and management of Anchor Bancorp will have discretion in the investment of this additional capital. We will use a portion of the net proceeds retained to finance the purchase of common stock in the offering by the employee stock ownership plan and may use the remaining net proceeds to pay dividends to shareholders, repurchase shares of common stock, purchase securities, deposit funds in Anchor Bank or other financial institutions, acquire other financial services companies or for other general corporate purposes. Anchor Bank may use the proceeds it receives to fund new loans, repay maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit, establish or acquire new branches or loan production offices, purchase securities, or for general corporate purposes. We have not, however, identified specific amounts of proceeds for any of these purposes other than the repayment of $15.7 million of maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit, and we will have significant flexibility in determining the amount of remaining net proceeds we apply to different uses and the timing of these applications. Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long we will require to effectively deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, return on assets and return on equity.

Holders of Anchor Bancorp common stock may not be able to sell their shares when desired if a liquid trading market does not develop, or for $10.00 or more per share even if a liquid trading market develops.

We have never issued common stock to the public. Consequently, there is no established market for the common stock. We expect our common stock to be listed for trading on the Nasdaq Global Select Market under the symbol [“ANCB”]. We cannot predict whether a liquid trading market in shares of Anchor Bancorp’s common stock will develop or how liquid that market might become. Persons purchasing shares may not be able to sell their shares when they desire if a liquid trading market does not develop and may not be able to sell them at a price equal to or above $10.00 per share even if a liquid trading market develops. The final aggregate purchase price of the shares of common stock in the offering will be based on an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time. After our shares begin trading, the trading price of our common stock will be determined by the marketplace and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of Anchor Bancorp and the outlook for the financial institutions industry in general. See “The Conversion – How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering.”

The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Anchor Bancorp.

Our board of directors and executive officers intend to purchase approximately 3.26% and 2.43% of our common stock at the minimum and maximum of the offering range (including shares contributed to the Anchor Bancorp Foundation), respectively. These purchases, together with the purchase by the employee stock ownership plan of 8% of the aggregate shares sold in the offering, as well as the potential acquisition of common stock through the proposed stock option and restricted stock plans will result in ownership by insiders of Anchor Bancorp in excess of 25% of the total shares issued in the offering at the maximum of the offering range. This inside ownership and provisions in our articles of incorporation and bylaws may discourage attempts to acquire Anchor Bancorp, pursue a proxy contest for control of Anchor Bancorp, assume control of Anchor Bancorp by a holder of a large block of common stock, and remove Anchor Bancorp’s management, all of which shareholders might think are in their best interests. These provisions include a prohibition on any holder of common stock voting more than 10% of the outstanding common stock. See “Restrictions on Acquisition of Anchor Bancorp and Anchor Bank– Anti-takeover Provisions in Anchor Bancorp’s Articles of Incorporation and Bylaws.”

In addition, the business corporation law of Washington, the state where Anchor Bancorp is incorporated, provides for certain restrictions on acquisition of Anchor Bancorp. Furthermore, federal law restricts acquisitions of control of bank holding companies such as Anchor Bancorp.

We intend to grant stock options and restricted stock to the board of directors and certain employees following the conversion which will likely reduce your ownership interest.

If approved by a vote of the shareholders following the conversion, we intend to establish a stock option plan with a number of shares equal to 10% of the shares issued in the conversion (including shares contributed to the Anchor Bancorp Foundation) and a restricted stock plan with a number of shares equal to 4% of the shares issued in the conversion (including shares contributed to the Anchor Bancorp Foundation). These stock benefit plans are being established for the benefit of selected directors, officers and employees of Anchor Bancorp and Anchor Bank and are worth a total of $7.5 million at the purchase price, based on the maximum of the estimated offering range (plus shares contributed to the Anchor Bancorp Foundation). Awards under these plans will likely reduce the ownership interest of all shareholders by increasing the number of shares outstanding. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under the stock option plan and the restricted stock plan would dilute the voting interests of existing shareholders, by up to 9.1% and 3.9%, respectively. For further discussion regarding these plans, see “Pro Forma Data” and “Management – Benefits to Be Considered Following Completion of the Conversion.”

Risks Related to the Formation of Our Charitable Foundation

The contribution to the Anchor Bancorp Foundation, Inc. will hurt our profits for fiscal year 2009 and dilute your ownership interest.

We intend to contribute 150,000 shares of our common stock sold in the offering and $500,000 to the Anchor Bancorp Foundation. This contribution will be an additional operating expense and will reduce net income during the fiscal year in which the foundation is established, which is expected to be this year. Based on the pro forma assumptions, the contribution to the Anchor Bancorp Foundation would reduce pre-tax net earnings by $2.0 million at the midpoint of the offering in fiscal year 2009. In addition, purchasers of shares in the offering will have their ownership and voting interests diluted by up to 3.8% at the close of the offering when we contribute the shares of our common stock to the Anchor Bancorp Foundation. For a further discussion regarding the effect of the contribution to the charitable foundation, see “Pro Forma Data” and “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.”

Our contribution to the Anchor Bancorp Foundation, Inc. may not be tax deductible, which could hurt our profits.

We believe that our contribution to the Anchor Bancorp Foundation, valued at $2.0 million, pre-tax, will be deductible for federal income tax purposes. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to immediately use the deduction. However, the nondeductible portion of the contribution may be carried over to future years in accordance with federal tax laws.

S ELECTED FINANCIAL AND OTHER DATA

The Financial Condition Data as of June 30, 2008 and 2007 and the Operating Data for the years ended June 30, 2008, 2007 and 2006 are derived from the audited consolidated financial statements and related notes included elsewhere in the prospectus. The Financial Condition Data as of June 30, 2006, 2005 and 2004 and the Operating Data for the years ended June 30, 2005 and 2004 are derived from audited consolidated financial statements, not included in this prospectus. Historical results are not necessarily indicative of results to be expected in any future period. The following information is only a summary and you should read it in conjunction with our consolidated financial statements and related notes beginning on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.


	At June 30,

	2008		2007		2006		2005		2004

	(In Thousands)
FINANCIAL CONDITION DATA:

Total assets	$	626,445	$	608,696	$	565,295	$	490,533	$	473,177
Investment securities		26,643		29,066		28,563		35,324		45,027
Mortgage-backed securities		51,023		46,921		45,635		44,603		64,805
Loans receivable, net (1)		490,515		476,383		439,706		358,059		312,029
Deposits		389,949		443,354		399,084		356,154		336,661
Federal Home Loan Bank advances		165,165		96,665		99,943		72,800		80,690
Total equity		62,362		60,520		56,224		53,871		49,025


	Year Ended June 30,

	2008			2007		2006		2005		2004

	(In Thousands)
OPERATING DATA:

Interest income	$	40,131		$	40,872	$	33,710	$	29,408	$	27,627
Interest expense		22,665			22,203		15,574		12,341		11,442


Net interest income		17,466			18,669		18,136		17,067		16,185
Provision for loan losses		3,545			720		546		615		240


Net interest income after provision for loan losses		13,921			17,949		17,590		16,452		15,945

Noninterest income		6,080			5,813		5,121		5,038		4,305
Noninterest expense		19,217			18,379		17,258		15,329		13,986


Income before provision for income tax		784			5,383		5,453		6,161		6,264
Provision (benefit) for income tax		(2	)		1,544		1,573		1,822		1,834


Net income	$	786		$	3,839	$	3,880	$	4,339	$	4,430



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


	At June 30,

	2008	2007	2006	2005	2004

OTHER DATA:

Number of:
Real estate loans outstanding	2,398	2,235	2,059	1,763	1,672
Deposit accounts	31,613	31,689	28,578	26,649	25,018
Full-service offices	20	20	17	15	14


	At or For the Year Ended June 30,

	2008		2007		2006		2005		2004

KEY FINANCIAL RATIOS:

Performance Ratios:
Return on assets (1)	0.13	%	0.63	%	0.74	%	0.91	%	0.99	%
Return on equity (2)	1.27		6.65		7.27		8.60		9.48
Equity to asset ratio (3)	9.90		9.53		10.11		10.53		10.43
Interest rate spread (4)	2.48		2.72		3.29		3.47		3.56
Net interest margin (5)	2.97		3.26		3.69		3.78		3.88
Average interest-earning assets to average interest-bearing liabilities	112.6		113.9		112.8		111.9		111.5
Efficiency ratio (6)	81.6		75.1		74.2		69.4		68.3
Other operating expenses as a percent of average total assets	3.1		3.0		3.3		3.2		3.1

Capital Ratios:
Tier I leverage	10.1		10.1		9.9		10.8		10.6
Tier I risk-based	12.6		12.7		12.1		14.2		14.5
Total risk-based	13.6		13.7		13.1		15.2		15.6

Asset Quality Ratios:
Non-accrual and 90 days or more past due loans as a percent of total loans, net	4.7		0.6		—		0.4		0.3
Non-performing assets as a percent of total assets	4.0		0.8		0.3		1.1		1.6
Allowance for loan losses as a percent of gross loans receivable	1.5		1.0		1.0		1.1		1.3
Allowance for loan losses as a percent of non-performing loans	32.0		165.1		73,616.7		291.5		519.9
Net charge-offs to average outstanding loans	0.1		0.1		0.1		0.2		0.4



(1)	Net income divided by average total assets.

(2)	Net income divided by average equity.

(3)	Average equity divided by average total assets.

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

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

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

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include:


	•	statements of our goals, intentions and expectations;

	•	statements regarding our business plans, prospects, growth and operating strategies;

	•	statements regarding the quality of our loan and investment portfolios; and

	•	estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:


	•	the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs;

	•	changes in general economic conditions, either nationally or in our market area, that are worse than expected;

	•	changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources;

	•	increased competitive pressures among financial services companies;

	•	changes in consumer spending, borrowing and savings habits;

	•	our ability to successfully manage our growth;

	•	legislative or regulatory changes, or other governmental initiatives, that adversely affect our business;

	•	results of examinations by our banking regulators;

	•	adverse changes in the securities markets; and

	•	changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board.

Any of the forward-looking statements that we make in this prospectus 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.

A NCHOR BANCORP

We are a newly formed Washington corporation that is conducting the stock offering in connection with the conversion of Anchor Bank from the mutual to the stock form of organization. Following the completion of the offering, we will be the bank holding company of Anchor Bank and its primary regulator will be the Board of Governors of the Federal Reserve System. See “How We Are Regulated – Regulation and Supervision of Anchor Bancorp.”

Following the conversion we will have no significant assets other than all of the outstanding shares of common stock of Anchor Bank, the net proceeds we keep from the offering and a loan to the Anchor Bancorp employee stock ownership plan. We will have no significant liabilities. See “How We Intend to Use the Proceeds From this Offering.” Our management, and the management of Anchor Bank, is substantially the same. We utilize the support staff and offices of Anchor Bank and pay Anchor Bank for these services. If we expand or change our business in the future, we may hire our own employees.

The principal executive offices of Anchor Bancorp are located at 601 Woodland Square Loop SE, Lacey, Washington 98503 and its telephone number is (360) 491-2250.

A NCHOR BANK

Anchor Bank is a Washington chartered mutual savings bank and upon completion of the conversion will be the wholly-owned subsidiary of Anchor Bancorp. Anchor Bank was organized in 1907 as a Washington state chartered savings and loan association, converted to a federal mutual savings and loan association in 1935, and converted to a Washington state chartered mutual savings bank in 1990. In connection with the conversion from mutual to stock form, Anchor Mutual Savings Bank is changing its name to “Anchor Bank.”

Anchor Bank is a community-based savings bank primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, Mason, Kitsap, Clark and King counties, through our 20 full-service banking offices. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, lending activities have been primarily directed toward the origination of one- to four-family residential construction, commercial real estate and consumer loans. To an increasing extent in recent years, lending activities have also included the origination of residential construction loans through brokers and increased reliance on non-deposit sources of funds. Our current strategy is to increase our consumer, commercial business and commercial real estate lending funded by retail deposits.

Anchor Bank is examined and regulated by the Washington Department of Financial Institutions, its primary regulator, and by the Federal Deposit Insurance Corporation. Anchor Bank is required to have certain reserves set by the Board of Governors of the Federal Reserve System and is a member of the Federal Home Loan Bank of Seattle, which is one of the 12 regional banks in the Federal Home Loan Bank System.

The principal executive offices of Anchor Bank are located at 120 N. Broadway, Aberdeen, Washington 98520 and its telephone number is (360) 532-6222.

H OW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

Although the actual net proceeds from the sale of the shares of common stock cannot be determined until the conversion is completed, we presently anticipate that the net proceeds will be between $36.9 million at the minimum of the offering range and $50.3 million at the maximum of the offering range and may be up to $58.0 million assuming an increase in the estimated offering range by 15%. See “Pro Forma Data” and “The Conversion – How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering” as to the assumptions used to arrive at these amounts.

We intend to use the net proceeds received from the stock offering as follows:


	Minimum			Maximum			Maximum, as adjusted

	(In Thousands)
Gross proceeds	$	38,250		$	51,750		$	59,513
Less: estimated underwriting commission and other offering expenses		(1,317	)		(1,441	)		(1,512	)
Less: repayment of Anchor Bank maturing and overnight FHLB advances and brokered certificates of deposit		(15,700	)		(15,700	)		(15,700	)
Less: loan to our employee stock ownership plan		(3,060	)		(4,140	)		(4,761	)

Net investable cash proceeds	$	18,173		$	30,469		$	37,540

Anchor Bancorp will retain 50% of the net conversion proceeds and will purchase all of the capital stock of Anchor Bank to be issued in the conversion in exchange for the remaining 50% of the net conversion proceeds. The net proceeds retained by Anchor Bancorp will initially be deposited with Anchor Bank and may ultimately be used to support lending and investment activities, future expansion of operations through the establishment or acquisition of banking offices or other financial service providers, to pay dividends or for other general corporate purposes, including repurchasing shares of its common stock. No such acquisitions are specifically being considered at this time. Anchor Bank intends to use the proceeds received from Anchor Bancorp to continue to manage its interest rate risk, which would include the repayment of a portion of the borrowings from the Federal Home Loan Bank, and the balance, if any, for future lending and investment activities, in addition to general and other corporate purposes. For the year ended June 30, 2008, the weighted average interest rate of our borrowings from the Federal Home Loan Bank was 5.15%. However, Anchor Bank may, as needed, borrow additional funds from the Federal Home Loan Bank of Seattle. See “Risk Factors.”

Anchor Bancorp intends to use a portion of the net proceeds to make a loan directly to the employee stock ownership plan to enable it to purchase up to 8% of the aggregate shares of common stock sold in the offering; or if shares are not available, in the open market after the conversion. Based upon the sale of 3,825,000 and 5,175,000 shares of common stock in the offering at the minimum and maximum of the estimated offering range, respectively, the loan to the Anchor Bancorp employee stock ownership plan would be $3.1 million and $4.1 million, respectively. See “Management – Benefits to Be Considered Following Completion of the Conversion – Employee Stock Ownership Plan.”

Anchor Bancorp will contribute to the Anchor Bancorp Foundation 150,000 shares of stock and $500,000. In addition, Anchor Bancorp intends to adopt a restricted stock plan, subject to shareholder approval, and will use a portion of its proceeds to fund the purchase of shares in the open market for the plan. The restricted stock plan intends to purchase in the open market 4% of the aggregate shares sold in the offering and contributed to the foundation, or $1.6 million and $2.1 million at the minimum and maximum of the estimated offering range, respectively.

The net proceeds may vary because total expenses of the conversion may be more or less than those estimated. The net proceeds will also vary if the number of shares to be issued in the conversion is adjusted to reflect a change in the estimated pro forma market value of Anchor Bank. Payments for shares made through withdrawals from existing deposit accounts at Anchor Bankwill not result in the receipt of new funds for investment by Anchor Bank but will result in a reduction of Anchor Bank’s interest expense and liabilities as funds are transferred from interest-bearing certificates or other deposit accounts.

O UR POLICY REGARDING DIVIDENDS

The board of directors of Anchor Bancorp currently intends to pay cash dividends on the common stock in the future. However, the amount and timing of any dividends has not yet been determined. The payment of dividends will depend upon a number of factors, including capital requirements, Anchor Bancorp’s and Anchor Bank’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, dividends

will not be reduced or eliminated in future periods. Anchor Bancorp may file consolidated tax returns with Anchor Bank. Accordingly, it is anticipated that any cash distributions made by Anchor Bancorp to its shareholders would be treated as cash dividends and not as a return of capital for federal and state tax purposes.

Dividends from Anchor Bancorp will depend, in large part, upon receipt of dividends from Anchor Bank, because Anchor Bancorp initially will have limited sources of income other than dividends from Anchor Bank, earnings from the investment of proceeds retained by Anchor Bancorp from the sale of shares of common stock and interest payments with respect to Anchor Bancorp’s loan to the Anchor Bancorp employee stock ownership plan. As a converted institution, Anchor Bank also will be subject to the regulatory restriction that it will not be permitted to declare or pay a dividend on or repurchase any of its capital stock if the effect thereof would be to cause its regulatory capital to be reduced below the amount required for the liquidation account established in connection with the conversion. Under Washington law, Anchor Bancorp is prohibited from paying a dividend if, as a result of its payment, it would be unable to pay its debts as they become due in the normal course of business, or if its total liabilities would exceed its total assets. In addition, as a bank holding company, the policy of the Federal Reserve permits Anchor Bancorp to pay a cash dividend only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with its capital needs, asset quality and overall financial condition. See “How We Are Regulated – Regulation and Supervision of Anchor Bancorp – Dividends.”

M ARKET FOR THE COMMON STOCK

Anchor Bancorp and Anchor Bank have never issued capital stock, and, consequently, there is no established market for the common stock at this time. Anchor Bancorp has applied to have its common stock listed on the Nasdaq Global Select Market under the symbol [“ANCB”]. There can be no assurance, however, that Anchor Bancorp will meet Nasdaq’s listing requirements. The development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of Anchor Bancorp, Anchor Bank or any market maker. Accordingly, the number of active buyers and sellers of the common stock at any particular time may be limited. There can be no assurance, however, that purchasers will be able to sell their shares at or above the initial purchase price of $10.00 per share.

C APITALIZATION

The following table presents the capitalization of Anchor Bank at June 30, 2008, and the pro forma consolidated capitalization of Anchor Bancorp after giving effect to the conversion, excluding assumed earnings on the net proceeds, based upon the sale of the number of shares shown below and the other assumptions set forth under “Pro Forma Data.”


				Anchor Bancorp – Pro Forma Based Upon Sale at $10.00 Per Share

	Capitalization At June 30, 2008			3,825,000 Shares (Minimum of Range)			4,500,000 Shares (Midpoint of Range)			5,175,000 Shares (Maximum of Range)			5,951,250 Shares (1) (Maximum of Range, as Adjusted)

	(Dollars in Thousands)

Deposits (2)	$	389,949		$	389,949		$	389,949		$	389,949		$	389,949
Borrowings (2)		165,165			149,465			149,465			149,465			149,465

Total deposits and borrowings	$	555,114		$	539,414		$	539,414		$	539,414		$	539,414


Shareholders’ equity
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued		—			—			—			—			—
Common stock, $0.01 par value, 45,000,000 shares authorized; shares to be issued as reflected (3)		—			40			46			53			61
Additional paid-in capital		—			38,393			45,074			51,756			59,439
Retained earnings (4)		62,111			62,111			62,111			62,111			62,111
Less:
Expense of stock contribution to the Anchor Bancorp Foundation		—			(1,500	)		(1,500	)		(1,500	)		(1,500	)
Expense of cash contribution to the Anchor Bancorp Foundation		—			(500	)		(500	)		(500	)		(500	)
Plus:
Tax benefit of contribution to the Anchor Bancorp Foundation		—			680			680			680			680
Accumulated other comprehensive income		251			251			251			251			251

Less:
Common stock to be acquired by the employee stock ownership plan (5)		—			(3,060	)		(3,600	)		(4,140	)		(4,761	)
Common stock to be acquired by the restricted stock plan (6)		—			(1,590	)		(1,860	)		(2,130	)		(2,441	)

Total shareholders’ equity	$	62,362		$	94,825		$	100,703		$	106,581		$	113,341

Total shareholders’ equity as a percentage of total assets (2)		9.95	%		14.74	%		15.51	%		16.27	%		17.13	%

Pro forma shares outstanding
Shares issued to foundation		—			150,000			150,000			150,000			150,000
Shares offered for sale in offering		—			3,825,000			4,500,000			5,175,000			5,951,250

Total shares outstanding		—			3,975,000			4,650,000			5,325,000			6,101,250

(footnotes on following page)



(1)	As adjusted to give effect to an increase in the number of shares of common stock which would be offered as a result of a 15% increase in the estimated offering range to reflect demand for shares, changes in market and general financial conditions following the commencement of the subscription and community offerings or regulatory considerations.

(2)	Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals. Assumes that maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit are paid off with conversion proceeds in the amount of $15.7 million at the minimum, midpoint, maximum and adjusted maximum of the offering range.

(3)	No effect has been given to the issuance of additional shares of common stock pursuant to the proposed stock option plan. If this plan is implemented, an amount up to 10% of the shares of Anchor Bancorp common stock sold in the offering and contributed to the Anchor Bancorp Foundation will be reserved for issuance upon the exercise of options under the stock option plan. See “Management – Benefits to be Considered Following Completion of the Conversion.”

(4)	The retained earnings of Anchor Bank will be substantially restricted after the conversion. Additionally, Anchor Bankwill be prohibited from paying any dividend that would reduce its regulatory capital below the amount required for the liquidation account that will be set up in connection with the conversion. See “The Conversion – Effects of the Conversion – Depositors’ Rights if We Liquidate.”

(5)	Assumes that 8% of the shares sold in the offering will be purchased by the employee stock ownership plan financed by a loan from Anchor Bancorp. The loan will be repaid principally from Anchor Bank’s contributions to the employee stock ownership plan. Since Anchor Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Anchor Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total shareholders’ equity.

(6)	Assumes 150,000 shares of common stock and $500,000 will be contributed to the Anchor Bancorp Foundation. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Anchor Bancorp accrues compensation expense to reflect the vesting of shares pursuant to the restricted stock plan, the credit to equity will be offset by a charge to noninterest expense. Implementation of the restricted stock plan will require shareholder approval. The funds to be used by the restricted stock plan to purchase the shares will be provided by Anchor Bancorp. See “Management – Benefits to Be Considered Following Completion of the Conversion – Restricted Stock Plan.”

A NCHOR BANK
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS

At June 30, 2008, Anchor Bank exceeded all of its applicable regulatory capital requirements. The table on the following page sets forth the regulatory capital of Anchor Bank at June 30, 2008 and the pro forma regulatory capital of Anchor Bank after giving effect to the conversion, based upon the sale of the number of shares shown in the table. The pro forma regulatory capital amounts reflect the receipt by Anchor Bank of 50% of the net stock proceeds, after expenses along with repayment of maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit in the amount of $15.7 million at the minimum, midpoint, maximum and the adjusted maximum of the valuation range. The pro forma risk-based capital amounts assume the investment of the net proceeds received by Anchor Bank in assets that have a risk-weight of 20% under applicable regulations, as if such net proceeds had been received and so applied at June 30, 2008.


					Pro Forma at June 30, 2008

	At June 30, 2008				3,825,000 Shares Sold at $10.00 per Share (Minimum of Range)					4,500,000 Shares Sold at $10.00 per Share (Midpoint of Range)					5,175,000 Shares Sold at $10.00 per Share (Maximum of Range)					5,951,250 Shares Sold at $10.00 per Share (Maximum of Range, as Adjusted)

	Amount		Percent of Assets (1)		Amount			Percent of Assets		Amount			Percent of Assets		Amount			Percent of Assets		Amount			Percent of Assets

	(Dollars in Thousands)

Equity capital under generally accepted accounting principles (“GAAP”)	$	62,362	9.95	%	$	77,269		12.29	%	$	80,073		12.67	%	$	82,877		13.04	%	$	86,101		13.47	%


Tier I leverage	$	62,287	10.13	%	$	77,194		12.51	%	$	79,998		12.89	%	$	82,802		13.27	%	$	86,026		13.70	%
Requirement		24,601	4.00			24,692		4.00			24,826		4.00			24,960		4.00			25,113		4.00

Excess	$	37,686	6.13	%	$	52,502		8.51	%	$	55,172		8.89	%	$	57,842		9.27	%	$	60,913		9.70	%


Tier I risk based	$	62,287	12.56	%	$	77,194		15.55	%	$	79,998		16.09	%	$	82,802		16.63	%	$	86,026		17.25	%
Requirement		19,842	4.00			19,861		4.00			19,887		4.00			19,914		4.00			19,945		4.00

Excess	$	42,445	8.56	%	$	57,333		11.55	%	$	60,111		12.09	%	$	62,888		12.63	%	$	66,081		13.25	%


Total risk based	$	67,332	13.57	%	$	82,239		16.56	%	$	85,043		17.11	%	$	87,847		17.65	%	$	91,071		18.26	%
Risk based requirement		39,685	8.00			39,721		8.00			39,775		8.00			39,828		8.00			39,890		8.00

Excess	$	27,647	5.57	%	$	42,518		8.56	%	$	45,268		9.11	%	$	48,019		9.65	%	$	51,181		10.26	%


Reconciliation of capital infused into Anchor Bank:
Net proceeds infused					$	18,467				$	21,811				$	25,155				$	29,000
Less:
Common stock acquired by employee stock ownership plan						(3,060	)				(3,600	)				(4,140	)				(4,761	)
Cash contribution to Foundation						(500	)				(500	)				(500	)				(500	)

Pro forma increase in GAAP and regulatory capital					$	14,907				$	17,711				$	20,515				$	23,739



(1)	Adjusted total or adjusted risk-weighted assets, as appropriate.

P RO FORMA DATA

We cannot determine the actual net proceeds from the sale of our common stock until the conversion is completed. However, we estimate that net proceeds will be between $36.9 million and $50.3 million, or $58.0 million if the estimated offering range is increased by 15%, based upon the following assumptions:


•	all shares of common stock will be sold through non-transferable rights to subscribe for the common stock, in order of priority, to:

	•	eligible account holders, who are depositors of Anchor Bank with account balances of at least $50.00 as of the close of business on June 30, 2007,

	•	the proposed employee stock ownership plan, which will purchase 8% of the shares of common stock sold in the offering,

	•	supplemental eligible account holders, who are depositors of Anchor Bank with account balances of at least $50.00 as of the close of business on _____, 200_, and

	•	other members, who are depositors of Anchor Bank and borrowers of Anchor Bank as of the close of business on ___ __, 200_, other than eligible account holders or supplemental eligible account holders.

•	Keefe, Bruyette & Woods, Inc. will receive a success fee equal to 1% of the gross proceeds from the offering, excluding shares of common stock sold to directors, officers, employees and the employee stock ownership plan and the contribution to the Anchor Bancorp Foundation;

•	total expenses, excluding the success fee paid to Keefe, Bruyette & Woods, Inc., are estimated to be approximately $1.0 million. Actual expenses may vary from those estimated; and

•	that maturing and overnight Federal Home Loan Bank advances and brokered certificates of deposit are paid off with conversion proceeds in the amount of $15.7 million.

Pro forma consolidated net income and shareholders’ equity of Anchor Bancorp have been calculated for the year ended June 30, 2008 as if the common stock to be issued in the conversion had been sold at the beginning of the period and the net proceeds had been invested at 2.36%, which represent the yields on one-year U.S. Government securities at June 30, 2008. We believe that this rate more accurately reflects a pro forma reinvestment rate than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average of the yield on interest-earning assets and the cost of deposits for these periods. The effect of withdrawals from deposit accounts for the purchase of common stock has not been reflected. A tax rate of 34% has been assumed for the period resulting in an after-tax yields of 1.51% for the year ended June 30, 2008. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of common stock, as adjusted to give effect to the shares purchased by the employee stock ownership plan. See Note 2 to the following tables. As discussed under “How We Intend to Use the Proceeds From this Offering,” Anchor Bancorp intends to make a loan to fund the purchase of 8% of the common stock sold in the offering by the employee stock ownership plan and intends to retain 50% of the net proceeds from the conversion.

No effect has been given in the tables to the issuance of additional shares of common stock pursuant to the proposed stock option plan. See “Management – Benefits to Be Considered Following Completion of the Conversion – Stock Option Plan.” The table below gives effect to the restricted stock plan, which is expected to be adopted by Anchor Bancorp following the conversion and presented along with the stock option plan to shareholders for approval at an annual or special meeting of shareholders to be held at least six months following the completion of the conversion. If the restricted stock plan is approved by shareholders, the restricted stock plan intends to acquire an amount of common stock equal to 4% of the shares of common stock issued in the conversion (including

shares contributed to the Anchor Bancorp Foundation), either through open market purchases or from authorized but unissued shares of common stock, if permissible. The following tables assume that shareholder approval has been obtained, as to which there can be no assurance, and that the shares acquired by the restricted stock plan are purchased in the open market at $10.00 per share. No effect has been given to Anchor Bancorp’s results of operations after the conversion, the market price of the common stock after the conversion or a less than 4% purchase by the restricted stock plan.

The following pro forma information may not be representative of the financial effects of the foregoing transactions at the dates on which such transactions actually occur and should not be taken as indicative of future results of operations. Pro forma shareholders’ equity represents the difference between the stated amount of assets and liabilities of Anchor Bancorp computed in accordance with GAAP. Shareholders’ equity does not give effect to intangible assets in the event of a liquidation, to Anchor Bank’s bad debt reserve or to the liquidation account to be maintained by Anchor Bank. The pro forma shareholders’ equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event of liquidation.

The tables on the following pages summarize historical consolidated data of Anchor Bank and Anchor Bancorp’s pro forma data at or for the dates and periods indicated based on the assumptions set forth above and in the table and should not be used as a basis for projection of the market value of our common stock following the conversion and the offering.


		At or For the Year Ended June 30, 2008

		3,825,000 Shares Sold at $10.00 Per Share (Minimum of Range)			4,500,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			5,175,000 Shares Sold at $10.00 Per Share (Maximum of Range)			5,951,250 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)

		(Dollars in Thousands)
Gross proceeds of offering		$	38,250		$	45,000		$	51,750		$	59,513
Plus:	Value of shares issued to the Anchor Bancorp Foundation		1,500			1,500			1,500			1,500

	Pro forma market capitalization	$	39,750		$	46,500		$	53,250		$	61,013


Gross proceeds of offering		$	38,250		$	45,000		$	51,750		$	59,513
	Less Expenses		(1,317	)		(1,379	)		(1,441	)		(1,512	)
	Less: Pay off maturing and overnight FHLB advances and brokered certificates of deposit		(15,700	)		(15,700	)		(15,700	)		(15,700	)
Estimated net proceeds			21,233			27,921			34,609			42,301
	Less: Cash contribution to the Anchor Bancorp Foundation		(500	)		(500	)		(500	)		(500	)
	Less: Common stock purchased by employee stock ownership plan (2)		(3,060	)		(3,600	)		(4,140	)		(4,761	)
	Less: Common stock purchased by the restricted stock plan (3)		(1,590	)		(1,860	)		(2,130	)		(2,441	)

Estimated investable net proceeds		$	16,083		$	21,961		$	27,839		$	34,599

For the Year ended June 30, 2008:
Consolidated net income:
	Historical	$	786		$	786		$	786		$	786
Pro forma income on net proceeds			251			342			434			539
	Reduction in maturing and overnight FHLB advances and brokered certificates of deposit interest expense		223			223			223			223
	Pro forma employee stock ownership plan adjustment (2)		(135	)		(158	)		(182	)		(209	)
	Pro forma restricted stock award adjustment (3)		(210	)		(246	)		(281	)		(322	)
	Pro forma stock option adjustment (4)		(380	)		(445	)		(510	)		(584	)

Pro forma net income		$	535		$	502		$	470		$	433

Per share net income:
	Historical	$	0.21		$	0.18		$	0.16		$	0.14
Pro forma income on net proceeds, as adjusted			0.07			0.08			0.09			0.10
	Reduction in maturing and overnight FHLB advances and brokered certificates of deposit interest expense		0.06			0.05			0.05			0.04
	Pro forma employee stock ownership plan adjustment (2)		(0.04	)		(0.04	)		(0.04	)		(0.04	)
	Pro forma restricted stock award adjustment (3)		(0.06	)		(0.06	)		(0.06	)		(0.06	)
	Pro forma stock option adjustment (4)		(0.10	)		(0.10	)		(0.10	)		(0.10	)

Pro forma net income per share (5)		$	0.14		$	0.11		$	0.10		$	0.08

Offering price as a multiple of pro forma net earnings per share			71.43			90.91			100.00			125.00
Number of shares outstanding for pro forma income per share calculations			3,689,400			4,314,000			4,938,600			5,656,890


	(table continued on following page)	(Footnotes on page 26)


		At or For the Year Ended June 30, 2008

		3,825,000 Shares Sold at $10.00 Per Share (Minimum of Range)			4,500,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			5,175,000 Shares Sold at $10.00 Per Share (Maximum of Range)			5,951,250 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)

		(Dollars in Thousands)
At June 30, 2008:
Shareholders’ equity:
Historical		$	62,362		$	62,362		$	62,362		$	62,362
Estimated net proceeds			36,933			43,621			50,309			58,001
Plus:	Shares issued to the Anchor Bancorp Foundation		1,500			1,500			1,500			1,500
Less:	Cash contribution to the Anchor Bancorp Foundation		(1,500	)		(1,500	)		(1,500	)		(1,500	)
Less:	Shares contributed to the Anchor Bancorp Foundation		(500	)		(500	)		(500	)		(500	)
Plus:	Tax benefit of contribution to the Anchor Bancorp Foundation		680			680			680			680
	Less: Common stock acquired by the employee stock ownership plan (2)		(3,060	)		(3,600	)		(4,140	)		(4,761	)
	Less: Common stock acquired by the restricted stock plan (3)(4)		(1,590	)		(1,860	)		(2,130	)		(2,441	)

	Pro forma shareholders’ equity	$	94,825		$	100,703		$	106,581		$	113,341
Less:	Intangibles		—			—			—			—

	Pro forma tangible stockholders’ equity	$	94,825		$	100,703		$	106,581		$	113,341


Shareholders’ equity per share:
Historical		$	15.69		$	13.41		$	11.71		$	10.22
Estimated net proceeds			9.29			9.38			9.45			9.51
Plus:	Shares issued to the Anchor Bancorp Foundation		0.38			0.32			0.28			0.25
Less:	Shares contributed to the Anchor Bancorp Foundation		(0.38	)		(0.32	)		(0.28	)		(0.25	)
Less:	Cash contribution to the Anchor Bancorp Foundation		(0.13	)		(0.11	)		(0.09	)		(0.08	)
Plus:	Tax benefit of contribution to the Anchor Bancorp Foundation		0.17			0.15			0.13			0.11
Less: Common stock acquired by the employee stock ownership plan (2)			(0.77	)		(0.77	)		(0.78	)		(0.78	)
Less: Common stock acquired by the restricted stock plan (3)(4)			(0.40	)		(0.40	)		(0.40	)		(0.40	)

Pro forma shareholders’ equity per share (6)		$	23.85		$	21.66		$	20.02		$	18.58
Less: Intangibles per share			—			—			—			—

Pro forma tangible shareholders equity per share		$	23.85		$	21.66		$	20.02		$	18.58

Offering price as a percentage of pro forma shareholders’ equity (5)			41.93	%		46.17	%		49.95	%		53.82	%
Offering price as a percentage of pro forma tangible shareholders’ equity per share			41.93	%		46.17	%		49.95	%		53.82	%

Number of shares outstanding for pro forma book value per share calculations			3,975,000			4,650,000			5,325,000			6,101,250

(Footnotes on page 26)



(1)	As adjusted to give effect to an increase in the number of shares which could occur as a result of a 15% increase in the offering range to reflect demand for the shares, changes in market and financial conditions following the commencement of the offering or regulatory considerations.

(2)	Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Anchor Bancorp. Anchor Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Anchor Bank’s total annual payments on the employee stock ownership plan debt are based upon 15 equal annual installments of principal and interest. Statement of Position 93-6 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Anchor Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34%. The unallocated employee stock ownership plan shares are reflected as a reduction of shareholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 20,400, 24,000, 27,600 and 31,740 shares were committed to be released during the year ending June 30, 2008; the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with Statement of Position 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations. See “Management – Benefits to Be Considered Following Completion of the Conversion – Employee Stock Ownership Plan.”

(3)	If approved by Anchor Bancorp’s shareholders, the restricted stock plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering and contributed to the Anchor Bancorp Foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Shareholder approval of the restricted stock plan, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Anchor Bancorp or through open market purchases. The funds to be used by the restricted stock plan to purchase the shares will be provided by Anchor Bancorp. The table assumes that (i) the restricted stock plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the restricted stock plan is amortized as an expense during the year ended June 30, 2008, and (iii) the restricted stock plan expense reflects an effective combined federal and state tax rate of 34%. Assuming shareholder approval of the restricted stock plan and that shares of common stock (equal to 4% of the shares sold in the offering and contributed to the Anchor Bancorp Foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 3.9%. See “Management – Benefits to Be Considered Following Completion of the Conversion – Restricted Stock Plan.”

(4)	If approved by Anchor Bancorp’s shareholders, the stock option plan may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering and contributed to the Anchor Bancorp Foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Shareholder approval of the stock option plan may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock option plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $5.23 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 34%. The actual expense of the stock option plan will be determined by the grant-date fair value of the options, which will depend on


	a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock option plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock option plan are obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’ equity per share will decrease. The issuance of authorized but previously unissued shares of common stock pursuant to the exercise of options under such plan would dilute existing shareholders’ ownership and voting interests by approximately 9.1%.

(5)	Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with Statement of Position 93-6, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2, above.

(6)	The retained earnings of Anchor Bank will be substantially restricted after the conversion. See “The Conversion – Effects of the Conversion – Depositors’ Rights if We Liquidate.”

C OMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT CHARITABLE FOUNDATION

If Anchor Bancorp does not establish or fund the charitable foundation as part of the conversion, RP Financial has estimated that the pro forma aggregate market value of Anchor Bancorp would be approximately $47.5 million at the midpoint of the estimated valuation range. This is approximately $1.0 million greater than the pro forma aggregate market capitalization of Anchor Bancorp including the foundation, and would result in a 2,500,000 share increase in the amount of common stock offered for sale in the conversion. The pro forma book value ratio would be similar, assuming the midpoint, under both the current appraisal and the estimate of the value of Anchor Bancorp without the foundation. The pro forma shareholders’ equity per share would also be similar with or without the foundation. Anchor Bancorp cannot assure you that, in the event the foundation is not formed, the appraisal prepared at that time would have concluded that the pro forma market value of Anchor Bancorp would be the same as was estimated.


	At the Minimum of Estimated Valuation Range						At the Midpoint of Estimated Valuation Range						At the Maximum of Estimated Valuation Range						At the Maximum, As Adjusted, of Estimated Valuation Range

	With Foundation			No Foundation			With Foundation			No Foundation			With Foundation			No Foundation			With Foundation			No Foundation

	(Dollars in Thousands)

Estimated offering amount	$	38,250		$	40,375		$	45,000		$	47,500		$	51,750		$	54,625		$	59,513		$	62,819
Pro forma market capitalization		39,750			40,375			46,500			47,500			53,250			54,625			61,013			62,819
Total assets		643,208			644,939			649,086			651,143			654,964			657,348			661,724			664,483
Total liabilities		548,383			548,383			548,383			548,383			548,383			548,383			548,383			548,383
Pro forma shareholders’ equity		94,825			96,556			100,703			102,760			106,581			108,965			113,341			116,100
Pro forma consolidated net income (year ended June 30, 2008)		535			556			502			521			470			487			1,813			1,833
Pro forma shareholders’ equity per share		23.85			23.92			21.66			21.63			20.02			19.95			18.58			18.48
Pro forma consolidated net income per share (year ended June 30, 2008)		0.14			0.15			0.11			0.12			0.10			0.10			0.08			0.08

Pro forma pricing ratios:
Offering price as a percentage of pro forma shareholders’ equity per share		41.93	%		41.81	%		41.17	%		46.23	%		50.00	%		50.13	%		53.82	%		54.11	%
Offering price to pro forma net income per share		71.43			66.67			90.91			83.33			100.00			100.00			125.00			125.00

Pro forma financial ratios:
Return on assets (annualized)		0.08	%		0.09	%		0.08	%		0.08	%		0.07	%		0.07	%		0.27	%		0.28	%
Return on shareholders’ equity (annualized)		0.56	%		0.58	%		0.50	%		0.51	%		0.44	%		0.45	%		1.60	%		1.58	%
Shareholders’ equity to assets		14.74	%		14.97	%		15.51	%		15.78	%		16.27	%		16.58	%		17.13	%		17.47	%
Total shares issued		3,975,000			4,037,500			4,650,000			4,750,000			5,325,000			5,462,000			6,101,250			6,281,875

P ROPOSED PURCHASES BY MANAGEMENT

The following table sets forth, for each of Anchor Bancorp’s directors and executive officers and for all of the directors and executive officers as a group, the proposed purchases of common stock, assuming sufficient shares are available to satisfy their subscriptions. The amounts include shares that may be purchased through individual retirement accounts and by associates. These purchases are intended for investment purposes only, and not for resale. Directors, officers, their associates and employees will pay the same price as all other subscribers for the shares for which they subscribe.


			At the Minimum of the Estimated Offering Range			At the Maximum of the Estimated Offering Range

Name	Amount		Number of Shares	As a Percent of Shares Offered		Number of Shares	As a Percent of Shares Offered


Directors :

Robert D. Ruecker	$	250,000	25,000	0.65	%	25,000	0.48	%
Douglas A. Kay		50,000	5,000	0.13		5,000	0.10
George W. Donovan		175,000	17,500	0.45		17,500	0.34
William Foster		100,000	10,000	0.26		10,000	0.19
Dennis C. Morrisette		70,000	7,000	0.18		7,000	0.13
James A. Boora		100,000	10,000	0.26		10,000	0.19
Jerald L. Shaw (1)		250,000	25,000	0.65		25,000	0.48
Terri L. Degner (1)		200,000	20,000	0.52		20,000	0.39


All directors and executive officers as a group (10 persons)	$	1,195,000	119,500	3.12	%	119,500	2.31	%



(1)	Mr. Shaw and Ms. Degner are also executive officers of Anchor Bank.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial conditions and results of operations. The information in this section has been derived from the consolidated financial statements and footnotes thereto, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Anchor Bank as provided in this prospectus. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of Anchor Bank and its subsidiary.

Overview

We are a community-based financial institution primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, Mason, Kitsap, Clark and King counties, through our 20 full-service banking offices. We also originate a significant amount of construction loans secured by properties located in the Portland, Oregon metropolitan area. 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. Our lending activities have been primarily directed toward the origination of residential construction, commercial real estate and consumer loans.

As part of our ongoing strategy we also use wholesale sources to fund wholesale loan growth; typically Federal Home Loan Bank advances or brokered certificates of deposit depending on the relative cost of each and our interest rate position. While continuing our commitment to all real estate lending, management expects commercial business lending to become increasingly 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 affect our net interest income. The recent interest rate environment, which has caused short-term market interest rates for deposits to rise, while longer term interest rates have remained stable, has had a negative impact on our interest rate spread and net interest margin, however we have been able to mitigate the impact due to our ability to re-price wholesale funds. Additionally to offset the impact of the current interest rate environment, we are seeking to find means of increasing interest income while controlling expenses. We intend to enhance the mix of our assets by increasing commercial business relationships which have higher risk-adjusted returns as well as deposits. A secondary source of income is noninterest income, which includes gains on sales of assets, and revenue we receive from providing products and services. From time to time, our noninterest expense has exceeded our net interest income after provision for loan losses and we have relied primarily upon gains on sales of assets (primarily sales of mortgage loans to Freddie Mac) to supplement our net interest income and to record net 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 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.

Over the last year, our net interest margin has narrowed and the level of our non-performing loans has increased. These trends are primarily attributable to non-performing residential construction loans, the effect of the economic slowdown that began during this period and the effect of declining short-term interest rates. As rates have declined, our yields on adjustable rate loans also declined. This decline was compounded by the adverse effect of an increase in the level of non-accrual loans and other non-performing assets. Reflecting these generally lower market interest rates as well as the higher level of non-accrual loans, the yield on earnings assets for the year ended June 30, 2008 decreased by 31 basis points compared to the prior year while funding costs for the year ended June 30, 2008

decreased by eight basis points compared to the prior year. Our net interest rate spread decreased to 2.48% for the year ended June 30, 2008 as compared to 2.72% for last year. In addition, to the extent the economic slowdown continues or worsens, our non-performing assets may increase, further reducing our earnings.

Following the completion of the offering, we anticipate that our operating expense will increase as a result of the increased compensation expenses associated with the purchases of shares of common stock by our employee stock ownership plan, and awards under additional stock-based incentive plans. While these additional expenses will negatively impact earnings, we do not expect them to completely offset the additional income we expect to receive by leveraging the proceeds from this offering.

Assuming that the adjusted maximum number of shares is sold in the offering:


	•	our employee stock ownership plan will acquire 476,100 shares of common stock with a $4.8 million loan from Anchor Bancorp that is expected to be repaid over 15 years, resulting in an annual pre-tax expense of approximately $320,000 (assuming that the common stock maintains a value of $10.00 per share);

	•	our stock option plan would grant options to purchase shares up to 10% of our total outstanding shares to eligible participants, which would result in compensation expense over the vesting period of the options. Assuming the market price of the common stock is $10.00 per share; all options are granted with an exercise price of $10.00 per share and have a term of 10 years; the dividend yield on the stock is zero; the risk free interest rate is 3.99%; and the volatility rate on the common stock is 33.46%, the estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis is $5.23 per option granted. Assuming this value is amortized over the five year vesting period, the corresponding annual pre-tax expense associated with the stock option plan would be approximately $640,000; and

	•	our restricted stock plan would award a number of shares equal to up to 4% of our total outstanding shares issued in the offering to eligible participants, which would be expensed as the awards vest. Assuming that all shares are awarded at a price of $10.00 per share, and that the awards vest over a five year period, the corresponding annual pre-tax expense would be approximately $490,000.

The actual expense that will be recorded for the employee stock ownership plan will be determined by the market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term allowing for an acceleration in the release of shares held as collateral for the loan. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan along with an accelerated release of shares will increase the annual employee stock ownership plan expense. Additionally, the actual expense of the restricted shares will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. Further, the actual expense of the stock options will be determined by the grant-date fair value of the options which will depend on a number of factors, including the valuation assumptions used in the Black-Scholes option pricing model. For more information of expenses associated with new equity based benefit plans, see “Pro Forma Data.”

In addition to the operating expenses we will experience from the implementation of our proposed stock benefit plans as described above, we also will likely have an increase in compensation in connection with the hiring of additional officers and employees. Following the offering, we intend to hire a chief operating officer, additional lending and credit administrative officers, which we estimate will increase our annual pre-tax compensation expenses by $230,000.

Following the offering our operating expenses are likely to also increase as a result of operating as a public company. These additional expenses will be primarily legal and accounting fees, expenses necessary to comply with

the internal control over financial reporting provisions of The Sarbanes-Oxley Act of 2002 and expenses related to shareholder communications and meetings. We estimate that we will have additional operating expenses as a public company during the first year following conversion of approximately $300,000, net of taxes.

In addition, our contribution to the charitable foundation will be an additional operating expense during the first quarter following the conversion estimated at $2.0 million on a pre-tax basis.

In summary, following the conversion we will have additional annual pre-tax operating expenses as a result of increased compensation costs with respect to the implementation of our employee stock ownership plan, stock option plan and restricted stock plan of $320,000, $640,000 and $490,000, respectively. We also anticipate that in connection with the hiring of new employees that we will have increased annual pre-tax compensation expenses of $300,000. In addition to these items, we also will have an additional operating expense of $400,000, net of taxes, during our first year as a public company, and an additional operating expense attributable to the foundation of approximately $1.3 million, net of taxes, during the first quarter following the conversion.

Operating Strategy

Our strategies center on our continued development into a full service, community-oriented bank. Our goal is to continue to enhance our franchise value and earnings through controlled growth in our banking operations, especially small business lending, while maintaining the community-oriented customer service and sales focus that has characterized our success to date. In order to be successful in this objective and increase stockholder value, we are committed to the following strategies:

Increasing Our Focus on Monitoring Asset Quality and Controlling Non-Performing Assets. We believe our success as a banking organization will depend, in part, on our approach to originating loans and monitoring the performance of our loan portfolio. At June 30, 2008, we have $23.4 million of non-performing loans or 4.7% of our total loans. Of this amount, $6.7 million relates to non-accruing construction loans to builders and $15.3 million relates to construction loans to builders which have matured and were accruing interest because borrowers were making cash payments of interest under their existing loan documents. At June 30, 2008, $6.1 million of the $15.3 million in accruing loans were in the process of being extended with the balance still being evaluated for either a possible extension, work-out or foreclosure. We are de-emphasizing builder construction loans in favor of custom residential construction loans to individual borrowers in an attempt to minimize our future credit risk in our construction lending portfolio. Despite the increase in nonperforming assets over the last two years, net charge-offs to average loans was 0.1% for each of the years ended June 30, 2008 and 2007.

Continuing to Expand Our Branch Network in Our Existing Markets. Branch expansion has played a significant role in our ability to increase loans, deposits and customer relationships. Since August 2000 we have opened eight branches in our existing markets. We are currently reviewing our footprint within Western Washington and are determining appropriate locations within our existing market area in which to establish additional branches. We currently have nine branches within Wal-Mart stores. Our strategy with Wal-Mart branches was to enter new markets and then, when appropriate, add additional brick and mortar branches to augment the in-store locations. We will also actively search for appropriate acquisitions to enhance our ability to deliver products and services in our existing markets and to expand into surrounding markets. There are, however, no specific acquisitions currently under consideration.

Providing Customers with Local Personalized Service and Decision Making. We believe there is a large customer base in our market that is dissatisfied with the service received from larger regional banks. By offering quicker decision making in the delivery of banking products and services, offering customized products where appropriate, and providing customer access to our senior managers, we hope to distinguish ourselves from larger, regional banks operating in our market areas. Our larger capital base resulting from this offering and our plans to diversify our product mix should allow us to compete effectively against smaller banks.

Modifying Our Loan Products. We intend to continue our emphasis on originating single family and consumer lending products, especially our home equity products. We plan to continue the diversification of our loan portfolio by increasing the percentage of our assets consisting of higher-yielding custom residential construction, commercial real estate and commercial business loans with higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations. In this regard we have recently established relationships with several “on your lot” custom builders for the referral of individual borrowers who require a custom residential construction loan. We also intend to selectively add products to provide diversification of revenue sources and to capture our customer’s full relationship. We intend to continue to expand our business by cross selling our loan and deposit products and services to our customers in order to increase our fee income.

Increasing Our Core Transaction Deposits. A fundamental part of our overall strategy is to improve both the level and the mix of deposits that serve as a funding base for asset growth. By increasing demand deposits and other transaction accounts, we intend to reduce our reliance on higher-cost certificates of deposit and borrowings such as brokered deposits and advances from the Federal Home Loan Bank of Seattle. In order to expand our core deposit franchise, we are focusing on introducing additional products and services to obtain business deposits such as our recent introduction of remote deposit capture targeted to small business customers.

Hire Experienced Employees With a Customer Service Focus. Our ability to continue to attract and retain banking professionals with strong business banking and service skills, community relationships and significant knowledge of our markets is key to our success. We believe that by focusing on experienced bankers who are established in their communities, we enhance our market position and add profitable growth opportunities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete by relying on the strength of our customer service and relationship banking approach.

Continuing an Internal Management Culture Which Is Driven by a Focus on Profitability, Productivity and Accountability for Results and Which Responds Proactively to the Challenge of Change. The primary method for reinforcing our culture is the comprehensive application of our “Pay for Performance” total compensation program. Every employee has clearly defined accountabilities and performance standards that tie directly to our profitability. All incentive compensation is based on specific profitability measures, or sales volume goals. This approach encourages all employees to focus on our profitability and has created an environment that embraces new products, services and delivery systems.

Critical Accounting Policies

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

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 assesses the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates,

charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

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

Our methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits that meet the definition of impaired and a general allowance amount. The specific allowance component is determined when management believes that the collectibility of a specific large loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been realized. The general allowance is determined by applying an expected loss percentage to various types of loans with similar characteristics and classified loans that are not analyzed specifically. 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.

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability approach as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” 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. The deferred tax provision for the year is equal to the net change in the net deferred tax asset from the beginning to the end of the year, less amounts applicable to the change in value related to investments available for sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from deferred loan fees and costs, mortgage servicing rights, loan loss reserves and dividends received from the Federal Home Loan Bank of Seattle. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at the lesser of “cost” (principal balance less unearned loan fees, plus capitalized expenses of acquisition, if any) or “fair value” (estimated fair market value less estimated costs of disposal). Costs associated with real estate owned for maintenance, repair, property tax, etc., are expensed during the period incurred. Assets held in real estate owned are reviewed monthly for potential impairment (FAS 114). When an impairment is indicated, the amount of impairment is debited from income and credited to loss reserve for real estate owned, until disposition of the asset occurs, at which time loss reserve for real estate owned is debited, net proceeds from disposition and loss reserve debit are credited to real estate owned. Any shortfall in the amount necessary to zero the

real estate owned asset is debited from loss on sale of real estate owned. Conversely, excess funds resulting from the combination of net proceeds and loss reserve debit are credited as income to gain on sale of real estate owned.

Comparison of Financial Condition at June 30, 2008 and June 30, 2007

General. Total assets increased $17.7 million, or 2.9%, to $626.4 million at June 30, 2008 from $608.7 million at June 30, 2007. The increase in assets during this period was primarily a result of the increase in loans receivable, net which increased $14.1 million or 3.0%. Total deposits decreased $53.4 million, or 12.0%, to $389.9 million at June 30, 2008. Certificates of deposit decreased $57.5 million and was primarily the result of our choosing not to renew brokered certificates of deposit, instead utilizing Federal Home Loan Bank advances, which lowered our cost of funds eight basis points. Our total borrowings, which consisted of Federal Home Loan Bank advances, increased $68.5 million from June 30, 2007 to June 30, 2008. The average cost of advances decreased from 5.59% during the year ended June 30, 2007 to 5.15% during the year ended June 30, 2008.

Assets. For the year ended June 30, 2008, total assets increased $17.7 million. The increases and decreases were primarily concentrated in the following asset categories:


	Balance at June 30, 2008			Balance at June 30, 2007			Increase (Decrease)

							Amount				Percent

	(Dollars in Thousands)
Cash and due from banks		$	11,003		$	10,916		$	87			0.8	%
Mortgage-backed securities, available for sale			37,427			31,560			5,867			18.6
Mortgage-backed securities, held to maturity			13,596			15,361			(1,765	)		(11.5	)
Loans receivable, net of allowance for loan losses			490,515			476,383			14,132			3.0

From June 30, 2007 to June 30, 2008, cash and due from banks remained virtually unchanged at $11.0 million.

Mortgage-backed securities increased $4.1 million to $51.0 million at June 30, 2008, from $46.9 million at June 30, 2007. During the year ended June 30, 2008, we securitized $10.8 million fixed rate mortgage-backed securities through Freddie Mac. We securitize and sell mortgage loans to manage interest rate sensitivity, supplement loan originations and provide liquidity.

Loans receivable, net, increased $14.1 million to $490.5 million at June 30, 2008, from $476.4 million at June 30, 2007 primarily as a result of an increase in one- to four-family residential loans, which increased $20.5 million. Our home equity loans increased $14.6 million, or 45.2% during the year ended June 30, 2008 as a result of several branch promotions. These increases were offset partially by a decline in commercial real estate loans of $10.0 million during the year ended June 30, 2008.

Deposits. Deposits decreased $53.4 million, or 12.0%, to $389.9 million at June 30, 2008, from $443.4 million at June 30, 2007. A significant portion of the decrease was in brokered certificates of deposits which decreased $41.5 million as a result of our strategy to reduce our cost of funds. These deposits were replaced with Federal Home Loan Bank borrowings as they matured. The decrease in retail certificates of deposit was primarily the result of our choosing not to match rates offered by local competitors that in some instances exceeded our alternative funding sources.

The following table details the changes in deposit accounts:


	Balance at June 30, 2008		Balance at June 30, 2007		Increase (Decrease)

					Amount			Percent

	(Dollars in Thousands)
Noninterest-bearing demand deposits	$	30,071	$	26,836	$	3,235			12.1	%
Interest-bearing demand deposits		17,123		16,691		432			2.6
Money market accounts		58,732		57,246		1,486			2.6
Savings deposits		30,765		31,814		(1,049	)		(3.3	)
Certificates of deposit
Retail certificates		218,339		234,322		(15,983	)		(6.8	)
Brokered certificates		34,919		76,445		(41,526	)		(54.3	)

Total deposit accounts	$	389,949	$	443,354	$	(53,405	)		(12.0	)%

Borrowings. Federal Home Loan Bank advances increased $68.5 million, or 70.9%, to $165.2 million at June 30, 2008, from $96.7 million at June 30, 2007. The increase in borrowings was related to rolling maturing brokered certificates of deposit into slightly lower costing Federal Home Loan Bank advances.

Equity. Total equity increased $1.8 million, or 3.0%, to $62.4 million at June 30, 2008, from $60.5 million at June 30, 2007. The increase was primarily a result of the $786,000 in net income and a $1.1 million change in unrealized losses on securities available for sale.

Comparison of Operating Results for the Years Ended June 30, 2008 and June 30, 2007

General. Net income for the year ended June 30, 2008 was $786,000 compared to net income of $3.8 million for the year ended June 30, 2007.

Net Interest Income. Net interest income decreased $1.2 million, or 6.4%, to $17.5 million for the year ended June 30, 2008, from $18.7 million for the year ended June 30, 2007. The decrease in net interest income was primarily attributable to the ongoing compression of our net interest margin, despite an overall increase in average interest-earning assets and interest-bearing liabilities of $15.1 million and $19.0 million, respectively.

Our net interest margin decreased 29 basis points to 2.97% for the year ended June 30, 2008, from 3.26% for the same period of the prior year. The cost of interest-bearing liabilities decreased eight basis points to 4.34% for the year ended fiscal 2008 compared to 4.42% for the same period of the prior year. The decline in the net interest margin reflects a decline in our yield on earning assets to 6.83% for the year ended June 30, 2008, from 7.14% for the same period of the prior year. During fiscal 2008, the prime rate declined 325 basis points, however, the yield on our loan portfolio only declined 60 basis points because the fixed rate loans in our loan portfolio, which included fixed rate home equity and residential loans, offset this decline.

The cost of borrowed funds from the Federal Home Loan Bank decreased to 5.15% during the year ended June 30, 2008 from 5.59% for the same period of the prior year. The following table sets forth the results of balance sheet growth and changes in interest rates to our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.


	Year Ended June 30, 2008 Compared to June 30, 2007

	Increase (Decrease)
	Due to

	Rate			Volume			Total

	(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net	$	(1,904	)	$	1,095		$	(809	)
Mortgage-backed securities		4			121			125
Investment securities, Federal Home Loan Bank Stock and cash and due from banks		17			(74	)		(57	)

Total net change in income on interest-earning assets	$	(1,883	)	$	1,142		$	(741	)


Interest-bearing liabilities:
Savings deposits	$	—		$	(25	)	$	(25	)
Interest bearing demand deposits		—			2			2
Money market accounts		(75	)		54			(21	)
Certificates of deposit		(93	)		(1,388	)		(1,481	)
Federal Home Loan Bank advances		(368	)		2,355			1,987

Total net change in expense on interest-bearing liabilities	$	(536	)	$	998		$	462


Net change in net interest income		(1,347	)		144			(1,203	)

Interest Income. Total interest income for the year ended June 30, 2008 decreased $741,000, or 1.8%, to $40.1 million, from $40.9 million for the year ended June 30, 2007. The decrease during the period was primarily attributable to the 325 basis decline in The Wall Street Journal prime rate during the year.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2008 and 2007:


	Year Ended June 30,

	2008					2007					Increase/ (Decrease) in Interest Income from 2007


	Average Balance		Yield			Average Balance		Yield

	(Dollars in Thousands)

Loans receivable, net	$	493,814		7.29	%	$	481,642		7.64	%	$	(809	)
Cash and due from banks		11,205		0.55			9,375		0.64			2

Investment securities		28,556		4.92			29,851		5.03			(97	)
Mortgage-backed securities		48,371		5.41			46,205		5.39			125
Federal Home Loan Bank stock		5,705		1.00			5,503		0.35			38

Total interest-earning assets	$	587,651		6.83	%	$	572,576		7.14	%	$	(741	)

Interest Expense. Interest expense increased $462,000, or 2.1%, to $22.7 million for the year ended June 30, 2008 from $22.2 million for the year ended June 30, 2007. The average balance of total interest-bearing liabilities increased $19.0 million, or 3.8%, to $521.7 million for the year ended June 30, 2008 from $502.7 million for the year ended June 30, 2007. The increase was primarily a result of growth in Federal Home Loan Bank advances.

The decrease in certificates of deposit at June 30, 2008 was primarily a result of a decrease of $41.5 million in brokered certificates of deposit with an average cost of 5.29%.

As a result of general market rate decreases along with our utilization of Federal Home Loan Bank advances instead of brokered certificates of deposits, the average cost of funds for total interest-bearing liabilities decreased eight basis points to 4.34% for the year ended June 30, 2008 compared to 4.42% for the year ended June 30, 2007. We use Federal Home Loan Bank advances as an alternative funding source to deposits, and to manage funding costs, reduce interest rate risk and reliance on brokered deposits and to leverage our balance sheet.

The following table details average balances, cost of funds and the change in interest expense for the year ended June 30, 2008 and 2007:


	Year Ended June 30,

	2008					2007					Increase/ (Decrease) in Interest Expense from 2007


	Average Balance		Yield			Average Balance		Yield

	(Dollars in Thousands)

Savings deposits	$	30,637		1.01	%	$	33,287		1.01	%	$	(25	)
Interest-bearing demand deposits		15,488		0.62			16,030		0.59			2
Money market accounts		57,889		3.32			52,929		3.67			(21	)
Certificates of deposit		272,709		4.72			302,355		4.75			(1,481	)
Federal Home Loan Bank advances		144,964		5.15			98,086		5.59			1,987

Total interest-bearing liabilities	$	521,687		4.34	%	$	502,687		4.42	%	$	462

Provision for Loan Losses. In connection with its analysis of the loan portfolio for the year ended June 30, 2008, management determined that a provision for loan losses of $3.5 million was required for the year ended June 30, 2008, compared to a provision for loan losses of $720,000 established for the year ended June 30, 2007. The $2.8 million increase in the provision primarily reflects the increase in our non-performing assets and a $14.1 million increase in net loans receivable for the current year. Non-performing assets were $25.0 million or 4.0% of total assets at June 30, 2008, compared to $4.9 million, or 0.8% of total assets, at June 30, 2007. Management considers the allowance for loan losses at June 30, 2008 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

The following table details activity and information related to the allowance for loan losses for the years ended June 30, 2008 and 2007:


	At or For the Year Ended June 30,

	2008			2007

	(Dollars in Thousands)

Provision for loan losses	$	3,545		$	720
Net charge-offs		704			493
Allowance for loan losses		7,485			4,644
Allowance for losses as a percentage of gross loans receivable at the end of this period		1.5	%		1.0	%
Non-performing loans	$	23,370		$	2,812
Allowance for loan losses as a percentage of non-performing loans at end of period		32.0	%		165.1	%
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable at the end of the period		4.8	%		0.6	%
Loans receivable, net	$	490,515		$	476,383

Noninterest Income. Noninterest income increased $267,000, or 4.6%, to $6.1 million for the year ended June 30, 2008 from $5.8 million for the year ended June 30, 2007. The following table provides a detailed analysis of the changes in the components of noninterest income:


	Year Ended June 30,				Increase (Decrease)

	2008		2007		Amount			Percent

	(Dollars in Thousands)

Deposit services fees	$	2,766	$	2,562	$	204			8.0	%
Other deposit fees		744		629		115			18.3
Loan fees		1,428		1,435		(7	)		(0.5	)
Other income		1,142		1,187		(45	)		(3.8	)

Total noninterest income	$	6,080	$	5,813	$	267			4.6	%

Deposit service fees increased to $2.8 million during the year ended June 30, 2008 from $2.6 million during the year ended June 30, 2007, primarily as a result of an increase in the number of demand deposit accounts held by us. There were several checking promotions during 2008 which increased the number of our customer accounts.

Noninterest Expense. Noninterest expense increased $838,000, or 4.6%, to $19.2 million for the year ended June 30, 2008 from $18.4 million for the year ended June 30, 2007. The following table provides an analysis of the changes in the components of noninterest expense:


	At or For the Year Ended June, 30				Increase (Decrease)

	2008		2007		Amount			Percent

	(Dollars in Thousands)

Compensation and benefits	$	8,758	$	9,354	$	(596	)		(6.4	)%
General and administrative expenses		4,067		2,719		1,348			49.6
Information technology		1,986		1,890		96			5.1
Occupancy and equipment		2,971		2,861		110			3.8
Deposit services		744		929		(185	)		(19.9	)
Marketing		691		626		65			10.4

Total noninterest expense	$	19,217	$	18,379	$	838			4.6	%

Major components of the increase in noninterest expense include:

Compensation and benefits decreased $596,000, or 6.4%, to $8.8 million for the year ended June 30, 2008 from $9.4 million for the same period a year ago as a result of the elimination of our defined benefit plan at June 30, 2007, which had a total expense $515,000. The defined benefit plan was eliminated and was fully funded at time of elimination. At June 30, 2008 we employed 191 full-time equivalent employees compared to 182 at June 30, 2007. Despite this increase, compensation and benefits expenses did not increase as a result of a restructuring of our staff and implementation of a pay for performance compensation policy. Marketing costs increased $65,000, or 10.4%, primarily as a result of increasing the number of marketing campaigns during 2008. Remaining noninterest expenses increased $1.4 million primarily as a result of costs incurred with two new Wal-Mart branch openings during the year ended June 30, 2008 along with the costs of our 100 year anniversary.

Our efficiency ratio, which is the percentage of non interest expense to net interest income plus noninterest income, was 81.6% for the year ended June 30, 2008 compared to 75.1% for the year ended June 30, 2007. The increase in efficiency ratio was primarily attributable to a $1.2 million, or 6.4%, decrease in net interest income. By definition, a lower efficiency ratio would be an indication that we are more efficiently utilizing resources to generate net interest income and other fee income.

Provision (benefit) for Income Tax. Provision (benefit) for income tax decreased to a benefit for income tax of $2,000 for the year ended June 30, 2008 from a provision for income tax of $1.5 million for the same period a year ago. Income before income taxes decreased $4.6 million, or 85.4%, to $784,000 for the year ended June 30, 2008 compared to $5.4 million for the year ended June 30, 2007. Our combined federal and state effective income tax rate for the current period was a tax benefit of (0.3)%, as compared to 28.7% in fiscal 2007.

Comparison of Financial Condition at June 30, 2007 and June 30, 2006

General. Total assets increased $43.4 million, or 7.7%, to $608.7 million at June 30, 2007 from $565.3 million at June 30, 2006. Loans receivable, net, increased $36.7 million, or 8.3%, to $476.4 million, and was the primary reason for the asset growth during the fiscal year. The demand for loans was funded with increased deposits of $44.3 million.

Assets. For the year ended June 30, 2007, total assets increased $43.4 million compared to the year ended June 30, 2006. The increases and decreases were primarily concentrated in the following asset categories:


	Balance at June 30, 2007			Balance at June 30, 2006			Increase (Decrease)

							Amount				Percent

	(Dollars in Thousands)

Mortgage-backed securities, available for sale		$	31,560		$	28,002		$	3,558			12.7	%
Mortgage-backed securities, held to maturity			15,361			17,633			(2,272	)		(12.9	)
Loans receivable, net of allowance for loan losses			476,383			439,706			36,677			8.3
Loans held for sale			1,757			1,953			(196	)		(10.0	)

Mortgage-backed securities increased $1.3 million to $46.9 million at June 30, 2007, from $45.6 million at June 30, 2006. For the year ended June 30, 2007, we securitized $6.6 million of mortgage-backed securities that consisted of fixed rate securities with terms of 15 and 30 years. Normal repayments of principal totaled $5.6 million for the year ended June 30, 2007. We may purchase or securitize mortgage-backed securities to manage interest rate sensitivity and to supplement loan originations during periods when we are not able to originate the desired type or volume of portfolio loans.

Loans receivable, net, increased $36.7 million to $476.4 million at June 30, 2007, from $439.7 million at June 30, 2006. Real estate loans, including one- to four-family, commercial and multi-family increased $2.0 million during the year ended June 30, 2007.

Loans held for sale decreased $196,000 to $1.8 million at June 30, 2007, from $2.0 million at June 30, 2006. The balance of loans held for sale can vary significantly from period to period reflecting loan demand by borrowers and the current interest rate environment. We originate fixed-rate residential loans, the majority of which are sold in the secondary market. Selling fixed-rate mortgage loans allows us to reduce interest rate risk associated with long term, fixed-rate products and provides funds to make new loans and diversify the loan portfolio.

Deposits. Deposits increased $44.3 million, or 11.1%, to $443.4 million at June 30, 2007, from $399.1 million at June 30, 2006. Certificates of deposit accounted for the majority of the increase in total deposits during the period with brokered certificates having the largest increase in balances. Demand deposits, money markets and savings accounts increased $10.2 million, or 8.4%. The following table details the changes in deposit accounts:


	Balance at June 30, 2007		Balance at June 30, 2006		Increase (Decrease)

					Amount			Percent

	(Dollars in Thousands)

Noninterest-bearing demand deposits	$	26,836	$	25,744	$	1,092			4.2	%
Interest-bearing demand deposits		16,691		17,069		(378	)		(2.2	)
Money market accounts		57,246		42,936		14,310			33.3
Savings deposits		31,814		36,614		(4,800	)		(13.1	)
Certificates of deposit
Retail deposits		234,322		210,482		23,840			11.3
Brokered deposits		76,445		66,239		10,206			15.4

Total deposit accounts	$	443,354	$	399,084	$	44,270			11.1	%

Borrowings. Federal Home Loan Bank advances decreased $3.3 million, or 3.3%, to $96.7 million at June 30, 2007, from $99.9 million at June 30, 2006.

Equity. Total equity increased $4.3 million, or 7.6%, to $60.5 million at June 30, 2007, from $56.2 million at June 30, 2006. The increase was primarily a result of the $3.8 million in net income and $457,000 other comprehensive income related to unrealized gains on available for sale investments.

Comparison of Operating Results for the Years Ended June 30, 2007 and June 30, 2006

General. Net income for the year ended June 30, 2007 was $3.8 million, compared to net income of $3.9 million for the year ended June 30, 2006. While net interest income and fee income increased slightly this was offset as total expenses increased. The increase in expenses was related to normal pay increases as well as the opening of two new branches in January 2007.

Net Interest Income. Net interest income increased $533,000, or 2.9%, to $18.7 million for the year ended June 30, 2007, from $18.1 million for the year ended June 30, 2006. Average total interest-earning assets increased $81.4 million, or 16.6% to $572.6 million for the year ended June 30, 2007 from $491.2 million for the same period in 2006. Average total interest-bearing liabilities increased $67.4 million, or 15.5%, to $502.7 million for the year ended June 30, 2007 from $435.3 million for the same period in the prior year.

Our net interest margin decreased 43 basis points to 3.26% for the year ended June 30, 2007, from 3.69% for the same period last year despite increases in both average interest-earning assets and the average yield of interest-earning assets. The average cost of interest-bearing liabilities increased 84 basis points to 4.42% for the year ended June 30, 2007 from 3.58% for the same period in the prior year. The decline in the net interest margin to

3.26% reflects competitive pricing pressures. The cost of borrowed funds from Federal Home Loan Bank increased from 5.50% to 5.59% during the same time period.

Interest Income. Total interest income for the year ended June 30, 2007 increased $7.2 million, or 21.2%, to $40.9 million, from $33.7 million for the year ended June 30, 2006. The increase was primarily attributable to the $81.4 million, or 16.6%, increase in the average balance of interest-earning assets and an increase in the yield on interest-earning assets to 7.14% from 6.84%% as a result of the general increase in interest rates.

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.


	Year Ended June 30, 2007 compared to Year Ended June 30, 2006 Increase (Decrease) Due to:

	Rate			Volume			Total

	(In Thousands)
Interest-earning assets:
Loans receivable, net	$	1,452		$	5,481		$	6,933
Mortgage-backed securities		119			184			303
Investment securities, and cash due from banks		42			(116	)		(74	)
Federal Home Loan Bank stock		—			—			—

Total net change in income on interest-earning assets	$	1,613		$	5,549		$	7,162


Interest-bearing liabilities:
Savings deposits		—			(83	)		(83	)
Interest-bearing demand deposits		—			(5	)		(5	)
Money market accounts		960			156			1,116
Certificates of deposits		2,981			1,602			4,583
Total average deposits		—
Federal Home Loan Bank advances		90			928			1,018

Total interest-bearing liabilities
Total net change in expense on interest-bearing liabilities	$	4,031		$	2,598		$	6,629


Net change in net interest income	($	2,418	)	$	2,951		$	533

No dividends were received from the Federal Home Loan Bank of Seattle for the years ended June 30, 2007 and 2006 as the Federal Home Loan Bank of Seattle suspended dividends on all classes of its stock during these periods in connection with its recapitalization plans.

Interest Expense. Interest expense increased $6.6 million, or 42.6%, to $22.2 million for the year ended June 30, 2007 from $15.6 million for the year ended June 30, 2006. The average balance of total interest-bearing liabilities increased $67.4 million, or 15.5%, to $502.7 million for the year ended June 30, 2007 from $435.3 million for the year ended June 30, 2006. The increase was primarily a result of growth in certificates of deposit. As a result of general market rate increases following the U.S. Federal Reserve Board rate increases during the past several quarters, the average cost of funds for total interest-bearing liabilities increased 84 basis points to 4.42% for the year ended June 30, 2007 compared to 3.58% for the year ended June 30, 2006.

The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2007 and 2006:


	Year Ended June 30,

	2007					2006					Increase/ (Decrease) in Interest Expense from 2006

	Average Balance		Cost			Average Balance		Cost

	(Dollars in Thousands)

Savings deposits	$	33,287		1.01	%	$	41,615		1.00	%	$	(83	)
Interest-bearing demand deposits		16,030		0.59			17,016		0.58			(5	)
Money market accounts		52,929		3.67			37,694		2.19			1,116
Certificates of deposit		302,355		4.75			257,944		3.79			4,583
Federal Home Loan Bank advances		98,086		5.59			81,058		5.50			1,018

Total interest-bearing liabilities	$	502,687		4.42	%	$	435,327		3.58	%	$	6,629

Provision for Loan Losses. A provision for loan losses of $720,000 was established by management in connection with its analysis of the loan portfolio for the year ended June 30, 2007, compared to a provision for loan losses of $546,000 established for the same period of 2006. The $174,000 increase in the provision took into account the increase in loans receivable during the 2007 fiscal year as well as an increase in classified assets. Non-performing assets were $4.9 million at June 30, 2007 compared to $1.8 million at June 30, 2006. The non-performing assets at June 30, 2007 were primarily comprised of $1.7 million of single-family construction loans, and real estate owned comprised of $2.0 million in single-family construction properties, $637,000 in commercial business assets and $301,000 of single-family residential properties.

The following table details selected activity associated with the allowance for loan losses for the years ended June 30, 2007 and 2006:


	At or For the Year Ended June 30,

	2007			2006

	(Dollars in Thousands)

Provision for loan losses	$	720		$	546
Net charge-offs		493			285
Allowance for loan losses		4,644			4,417
Allowance for loan losses as a percentage of gross loans receivable at the end of period		1.0	%		1.0	%
Allowance for loan losses as a percentage of non-performing loans at end of period		165.1	%		73,616.7	%
Non-performing loans	$	2,812		$	6
Nonaccrual and 90 days or more past due loans as a percentage of total loans receivable at the end of the period		0.6	%		—
Loans receivable, net	$	476,383		$	439,706

Noninterest Income. Noninterest income increased $692,000, or 13.5%, to $5.8 million for the year ended June 30, 2007 from $5.1 million for the year ended June 30, 2006. The increase in noninterest income was primarily attributable to a $388,000 increase in deposit service fees as a result of enhancements to the retail checking program as well as an increase in the number of accounts.

The following table provides a detailed analysis of the changes in components of noninterest income:


	Year Ended June 30,				Increase (Decrease)

	2007		2006		Amount		Percent

	(Dollars in Thousands)

Deposit service fees	$	2,562	$	2,174	$	388		17.8	%
Other deposit fees		629		507		122		24.1
Loan fees		1,435		1,341		94		7.0
Other income		1,187		1,099		88		8.0

Total noninterest income	$	5,813	$	5,121	$	692		13.5	%

Noninterest Expense. Noninterest expense increased $1.1 million, or 6.5%, to $18.4 million for the year ended June 30, 2007 from $17.3 million for the year ended June 30, 2006. The following table provides a detailed analysis of the changes in components of noninterest expense:


	Year Ended June 30,				Increase (Decrease)

	2007		2006		Amount		Percent

	(Dollars in Thousands)

Compensation and benefits	$	9,354	$	9,107	$	247		2.7	%
General and administrative expenses		2,719		2,691		28		1.0
Information technology		1,890		1,752		138		7.9
Occupancy and equipment		2,861		2,574		287		11.1
Deposit services		929		631		298		47.2
Marketing		626		503		123		24.5

Total noninterest expense	$	18,379	$	17,258	$	1,121		6.5	%

Compensation and benefits accounted for $247,000 of the total increase, increasing to $9.4 million for the year ended June 30, 2007 from $9.1 million for the same period a year ago. The majority of the increase in compensation and benefits was attributable to annual merit increases and commissions and incentive plans. As of June 30, 2007, we employed 182 full-time equivalent employees, compared to 184 at June 30, 2006. An additional $395,000 was attributable to the addition of two new branches located in Vancouver and Poulsbo, Washington both of which are located within Wal-Mart stores.

The efficiency ratio was 75.1% for the year ended June 30, 2007 compared to 74.2% for the year ended June 30, 2006.

Provision for Income Tax. The provision for income tax decreased $29,000, or 1.8%, to $1.5 million for the year ended June 30, 2007 from $1.6 million for the same period a year ago. Income before provision for income tax was $5.4 million for the year ended June 30, 2007 compared to $5.5 million for the year ended June 30, 2006. Our combined federal and state effective income tax rate for the year ended June 30, 2007 was 28.7% compared to 28.8% for the prior fiscal year.

Impact of Benefit Plans

Following the completion of the stock offering, we will have an employee stock ownership plan. We also intend to adopt, subject to approval by a majority of the total votes eligible to be cast at a duly called meeting of shareholders, a restricted stock plan and a stock option plan. The implementation of the employee stock ownership plan and the restricted stock plan will affect our results of operations as a component of employee compensation expense. The employee stock ownership plan will result in employee compensation expense equal to the current market price of the shares being released and allocated to the participants in the plan for that year. The effect the restricted stock plan will have on employee compensation expense will be equal to the current market price of the shares being awarded to the employees receiving the shares recognized as compensation expense over the vesting period of the shares. We will account for stock option awards issued to employees under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123R, which requires recognition of compensation expense based on the fair value of the award at the measurement date, which is generally the date of grant.

Average Balances, Interest and Average Yields/Cost

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


	Year Ended June 30,

	2008							2007							2006

	Average Balance (1)		Interest and Dividends		Yield/ Cost			Average Balance (1)		Interest and Dividends		Yield/ Cost			Average Balance (1)		Interest and Dividends		Yield/ Cost

	(Dollars in Thousands)

Interest-earning assets:
Loans receivable, net (1)	$	493,814	$	35,990		7.29	%	$	481,642	$	36,799		7.64	%	$	406,057	$	29,866		7.36	%
Mortgage-backed securities		48,371		2,617		5.41			46,205		2,492		5.39			42,604		2,189		5.14
Investment securities		28,556		1,405		4.92			29,851		1,502		5.03			31,962		1,596		4.99
Federal Home Loan Bank stock		5,705		57		1.00			5,503		19		0.35			—		—		—
Cash and due from banks		11,205		62		0.55			9,375		60		0.64			10,527		59		0.56

Total interest- earning assets		587,651		40,131		6.83			572,576		40,872		7.14			491,150		33,710		6.86

Noninterest earning assets		35,199							33,201							36,259


Total average assets	$	622,850						$	605,777						$	527,409


Interest-bearing liabilities:
Savings deposits	$	30,637		310		1.01		$	33,287		335		1.01		$	41,615		418		1.00
Interest-bearing demand deposits		15,488		96		0.62			16,030		94		0.59			17,016		99		0.58
Money market accounts		57,889		1,922		3.32			52,929		1,943		3.67			37,694		827		2.19
Certificates of deposit		272,709		12,870		4.72			302,355		14,351		4.75			257,944		9,768		3.79

Total deposits		376,723		15,198		4.03			404,601		16,723		4.13			354,269		11,112		3.14

Federal Home Loan Bank advances		144,964		7,467		5.15			98,086		5,480		5.59			81,058		4,462		5.50


Total interest-bearing liabilities		521,687		22,665		4.34			502,687		22,203		4.42			435,327		15,574		3.58

Noninterest-bearing liabilities		39,475							45,348							38,745

Total average liabilities		561,162							548,035							474,072

Average equity		61,688							57,742							53,337


Total liabilities and equity	$	622,850						$	605,777						$	527,409


Net interest income					$	17,466						$	18,669						$	18,136
Interest rate spread						2.48	%						2.72	%						3.29	%
Net interest margin						2.97	%						3.26	%						3.69	%
Ratio of average interest-earning assets to average interest-bearing liabilities						112.6	%						113.9	%						112.8	%



	(1)	Average loans receivable includes non-performing loans. Interest income does not include non-accrual loans.

Yields Earned and Rates Paid

The following table sets forth (on a consolidated basis) for the periods and at the dates indicated, the weighted average yields earned on our assets, the weighted average interest rates paid on our liabilities, together with the net yield on interest-earning assets.


	At June 30, 2008		Year Ended June 30,

			2008		2007		2006

Weighted average yield on:
Loans receivable, net	6.60	%	7.29	%	7.64	%	7.36	%
Mortgage-backed securities	5.22		5.41		5.39		5.14
Investment securities	4.88		4.92		5.03		4.99
Federal Home Loan Bank stock	—		1.00		0.35		—
Cash and due from banks	—		0.55		0.64		0.56
Total interest-earning assets	6.46		6.83		7.14		6.86

Weighted average rate paid on:
Savings accounts	1.01		1.01		1.01		1.00
Interest-bearing demand deposits	0.33		0.62		0.59		0.58
Money market accounts	2.70		3.32		3.67		2.19
Certificates of deposit	4.35		4.72		4.75		3.79
Total average deposits	3.37		4.03		4.13		3.14
Federal Home Loan Bank advances	4.99		5.15		5.59		5.50
Total interest-bearing liabilities	3.80		4.34		4.42		3.58

Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities)	2.66		2.48		2.72		3.29

Net interest margin (net interest income (expense) as a percentage of average interest-earning assets)	N/A		2.97		3.26		3.69

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.


	Year Ended June 30, 2008 Compared to June 30, 2007 Increase (Decrease) Due to									Year Ended June 30, 2007 Compared to June 30, 2006 Increase (Decrease) Due to

	Rate			Volume			Total			Rate			Volume			Total

	(In Thousands)
Interest-earning assets:
Loans receivable, net	$	(1,904	)	$	1,095		$	(809	)	$	1,452		$	5,481		$	6,933
Mortgage-backed securities		4			121			125			119			184			303
Investment securities and due from banks		17			(74	)		(57	)		42			(116	)		(74	)
Federal Home Loan Bank stock		—			—			—			—			—			—


Total net change in income on interest-earning assets	$	(1,883	)	$	1,142		$	(741	)	$	1,613		$	5,549		$	7,162


Interest-bearing liabilities:
Savings deposits		—			(25	)		(25	)		—			(83	)		(83	)
Interest-bearing demand deposits		—			2			2			—			(5	)		(5	)
Money market accounts		(75	)		54			(21	)		960			156			1,116
Certificates of deposit		(93	)		(1,388	)		(1,481	)		2,981			1,602			4,583
Federal Home Loan Bank advances		(368	)		2,355			1,987			90			928			1,018

Total interest-bearing liabilities

Total net change in expense on interest-bearing liabilities	$	(536	)	$	998		$	462		$	4,031		$	2,598		$	6,629


Net change in net interest income	$	(1,347	)	$	144		$	(1,203	)	$	(2,418	)	$	2,951		$	533

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, construction and land acquisition and development loans, home equity loans and business 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 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 June 30, 2008 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.


		Net Portfolio Value (1)								Net Portfolio as % of Portfolio Value of Assets

Basis Point Change in Rates (2)		Amount		$ Change (3 )			% Change			NPV Ratio (4)			% Change (5)			Market Value of Assets (6)

(Dollars in Thousands)

300		$	51,037	$	(34,869	)		(40.59	)%		8.67	%		(4.55	)%	$	588,541
200			62,995		(22,911	)		(26.67	)		10.34			(2.88	)		698,947
100			74,875		(11,031	)		(12.84	)		11.90			(1.32	)		623,392
—			85,906		—			—			13.22			BASE			649,723
(100	)		96,612		11,006			12.81			14.46			1.24			670,181
(200	)		110,125		24,219			28.19			15.89			2.66			693,193



(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)	We did not include the 300 basis point decrease in rates at June 30, 2008, because such a decrease in rates would not be possible given the interest rate levels on that date.

(3)	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.

(4)	Calculated as the net portfolio value divided by the market value of assets (“net portfolio value ratio”).

(5)	Calculated as the increase (decrease) in the net portfolio value ratio assuming the indicated change in interest rates over the estimated portfolio value of assets assuming no change in interest rates.

(6)	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 at June 30, 2008 that would occur in the event of an immediate change in interest rates, 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 (1)		Net Interest Income

		Amount		$ Change (2)			% Change

		(Dollars in Thousands)

300			20,010	$	365			1.86	%
200			19,955		310			1.58
100			19,830		185			0.94
Base			19,645		—			—
(100	)		19,499		(145	)		(0.74	)
(200	)		19,410		(235	)		(1.20	)



(1)	We did not include the 300 basis point decrease in rates at June 30, 2008, because such a decrease in rates would not be possible given the interest rate levels on that date.

(2)	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.

The following table presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at June 30, 2008. These amounts are based on daily averages.


	Within Six Months			Seven Months to One Year			Over 1 - 3 Years			Over 3 - 5 Years			Over 5 - 10 Years			Over 10 Years		Total

	(Dollars in Thousands)
Interest-earning assets:
Loans	$	156,574		$	46,314		$	89,061		$	65,997		$	70,826		$	71,924	$	500,696
Investments and other interest bearing deposits		20,469			16,308			6,753			6,919			18,776			26,090		95,315
Life insurance investment, net		—			15,537			—			—			—			—		15,537

Total rate sensitive assets	$	177,043		$	78,159		$	95,814		$	72,916		$	89,602		$	98,014	$	611,548


Interest-bearing liabilities:
Deposits	$	148,846		$	54,718		$	102,468		$	53,184		$	30,804		$	—	$	390,020
Borrowings		29,884			15,194			102,583			—			17,500			—		165,161

Total rate sensitive liabilities	$	178,730		$	69,912		$	205,051		$	53,184		$	48,304		$	—	$	555,181


Excess (deficiency) of interest sensitivity assets over interest sensitivity liabilities	$	(1,687	)	$	8,247		$	(109,237	)	$	19,732		$	41,298		$	98,014		56,367


Cumulative excess (deficiency) of interest sensitivity assets		(1,687	)		6,560			(102,677	)		(82,945	)		(41,647	)		56,367		—


Ratio of interest-earning assets to interest-bearing liabilities		0.44	%		1.12	%		0.47	%		1.37	%		1.85	%		—		—

Anchor Bank currently runs an internal model to simulate interest rate risk; the model in use is an IPS-Sendero model which calculates interest-earning assets and liabilities using a monthly average.

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 Federal Home Loan Bank 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 June 30, 2008, the total approved loan origination commitments outstanding amounted to $5.7 million. At the same date, unused lines of credit were $76.4 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 investments, 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%. During the year ended June 30, 2008, our average basic surplus has been 8.86%, however, at June 30, 2008, it had decreased to 4.46%.

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 as described in greater detail under “Business of Anchor Bank Lending Activities.”

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 June 30, 2008 totaled $179.0 million. Management’s policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with Anchor Bank. In addition, we had the ability at June 30, 2008 to borrow an additional $21.5 million from the Federal Home Loan Bank of Seattle.

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

Our primary source of funds is our deposits. When deposits are not available to provide the funds for our assets, we use alternative funding sources. These sources include, but are not limited to: cash management from the Federal Home Loan Bank of Seattle, wholesale funding, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. Alternatively, we may also liquidate assets to meet our funding needs. On a monthly basis, we estimate our liquidity sources and needs for the corning three-month, six-month, and one-year time periods. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset Liability Management Committee in forecasting funding needs and investing opportunities.

Contractual Obligations

Through the normal course of operations, we have entered into certain contractual obligations. Our obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Lease terms generally cover a five-year period, with options to extend, and are non-cancelable.

At June 30, 2008, our scheduled maturities of contractual obligations were as follows:


	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Balance

	(In Thousands)

Certificates of deposit	$	178,951	$	58,668	$	7,619	$	8,020	$	253,258
Federal Home Loan Bank advances		43,700		103,965		17,500		—		165,165
Operating leases		454		827		400		6		1,687

Total contractual obligations	$	223,105	$	163,460	$	25,519	$	8,026	$	420,110

Commitments and Off-Balance Sheet Arrangements

We are 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 the amount recognized in the balance sheet. 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 in making commitments as we do 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 to, home equity, commercial and consumer lines of credit.

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2008:


	Amount of Commitment Expiration - Per Period

	Total Amounts Committed		Through One Year

	(In Thousands)

Commitments to originate loans	$	5,660	$	5,660
Fixed rate		13,674		13,674
Adjustable rate		62,742		62,742

Undisbursed balance of loans closed	$	82,076	$	82,076

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. Anchor Bank’s total equity capital was $62.4 million at June 30, 2008, or 10.0%, of total assets on that date. As of June 30, 2008, we exceeded all regulatory capital requirements. Our regulatory capital ratios at June 30, 2008 were as follows: Tier 1 capital 10.1%; Tier 1 (core) risk-based capital 12.6%; and total risk-based capital 13.6%. The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively. See “How We Are Regulated — Regulation and Supervision of Anchor Bank — Capital Requirements” and “Pro Forma Data.”

Impact of Inflation

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. The primary impact of inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In

a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in dollar value of the collateral securing loans that we have made. Our management is unable to determine the extent, if any, to which properties securing loans have appreciated in dollar value due to inflation.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an interpretation of Statement of Financial Accounting Standard (“SFAS”) Statement No. 109.” This interpretation clarifies Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” to indicate a criterion that an individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s financial statements. The interpretation is effective for fiscal years beginning after December 15, 2006 and is not expected to have a significant impact on our consolidated financial condition or results of operations.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Statement of Financial Accounting Standards No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is not expected to have a material impact on our consolidated financial statements.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This standard requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. The new reporting requirements and related new footnote disclosure rules of Statement of Financial Accounting Standards No.158 are effective for fiscal years ending after December 15, 2008, and are not expected to have a material impact on our consolidated financial statements.

On February 15, 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” The statement permits entities to choose to measure selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. An entity may elect to early adopt as of the beginning of a fiscal year that begins on or before November 15, 2007. We are in the process of evaluating the impact of the statement on our consolidated financial position and results of operations.

In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of SFAS 133.” Statement of Financial Accounting Standards No. 161 changes the disclosure requirements for SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to mention how and why an entity uses derivative instruments, as well as how derivative instruments and related hedged items are accounted for. Statement of Financial Accounting Standards No. 161 is effective for fiscal years beginning on or after November 15, 2008, and is not expected to have a material impact on our consolidated financial statements.

BUSINESS OF ANCHOR BANCORP

General

Anchor Bancorp was organized as a Washington business corporation at the direction of Anchor Bank on September 8, 2008 for the purpose of becoming a holding company for Anchor Bank upon completion of the conversion. We have not engaged in any significant business to date. Upon completion of the conversion of Anchor Bank from the mutual to stock form of organization, Anchor Bank will be a wholly-owned subsidiary of Anchor Bancorp.

Business of Anchor Bancorp

We have not engaged in any significant business operations since our incorporation on September 8, 2008. Upon completion of the conversion, our primary business activity will be directing, planning and coordinating the business activities of Anchor Bank. In connection with the offering, we plan to retain up to 50% of the net proceeds from the offering and invest 100% of the remaining net proceeds in Anchor Bank as additional capital in exchange for 100% of the outstanding common stock of Anchor Bank. We will use a portion of the net proceeds to make a loan to the employee stock ownership plan and will invest our initial capital as discussed in “How We Intend to Use the Proceeds From this Offering.” At a later date, we may use the net proceeds to pay dividends to shareholders and to repurchase shares of common stock, subject to regulatory limitations.

In the future, as the holding company of Anchor Bank, we will be authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which may include the acquisition of banking and financial services companies. See “How We Are Regulated – Regulation and Supervision of Anchor Bancorp” for a discussion of the activities that are permitted for savings and loan holding companies. We currently have no plans regarding any specific acquisition transaction.

We do not plan to own any property. We will use the premises, equipment and furniture of Anchor Bank for the payment of appropriate rental fees, as required by applicable law. We will employ only officers, who also serve as officers of Anchor Bank, and we will use the support staff of Anchor Bank from time to time, but will not separately compensate these individuals. It is anticipated that we will enter into an expense sharing agreement with Anchor Bank so that Anchor Bank will be reimbursed for compensation and related costs associated with Anchor Bank officers and staff who spend time on Anchor Bancorp business activities.

As the holding company for Anchor Bank, our competitive conditions are the same as those confronting Anchor Bank. See “Business of Anchor Bank– Competition.”

BUSINESS OF ANCHOR BANK

General

We are a well-established financial institution with a 101 year history of meeting the financial needs of our customers, who are primarily located in our local market. Anchor Bank was organized in 1907 as a Washington state chartered savings and loan association, converted to a federal mutual savings and loan association in 1935, and converted to a Washington state chartered mutual savings bank under Title 32 of the Revised Code of Washington in 1990. In connection with the mutual to stock conversion, we are changing our name from Anchor Mutual Savings Bank to “Anchor Bank.”

Market Area

Washington has performed well over the last few years, spurred on by strong growth despite the downsizing of one of its major employers, the Boeing Company, during the past decade. In addition, the Microsoft Corporation, one of the world’s leading software companies and another major employer in the region, continues to report profitable operations in the current economic environment A reduction in growth in any of these markets can adversely affect the level of our construction and commercial real estate lending.

Grays Harbor County has a population of 72,000 and a median household income of $43,315 according to 2008 SNL Financial, L.C. estimates. The economic base in Grays Harbor has been historically dependent on the timber and fishing industries. Other industries that support the economic base are tourism, manufacturing, agriculture, shipping, transportation and technology. According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County increased to 8.1% at June 30, 2008 from 6.5% at June 30, 2007. We have six branches (including our home office) located throughout the county. A slowdown in the Grays Harbor County economy could negatively impact our profitability in this market area.

Thurston County has a population of 247,000 and a median household income of $60,384 according to 2008 SNL Financial, L.C. estimates. Thurston County is home of Washington State’s capital (Olympia) and its economic base is largely driven by state government related employment. According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area had increased to 5.6% at June 30, 2008 from 4.2% at June 30, 2007. We currently have five branches in Thurston County. Thurston County has a stable economic base primarily attributable to the state government presence. A slowdown in the Thurston County economy could negatively impact the Bank’s lending opportunities in this market.

Lewis County has a population of 76,000 and a median household income of $44,694 according to 2008 SNL Financial, L.C. estimates. The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services. According to the Washington State Employment Security Department, the unemployment rate in Lewis County increased to 8.5% at June 30, 2008 from 6.5% at June 30, 2007. We have two branches located in Lewis County. A slowdown in the Lewis County economy could negatively impact our lending opportunities in this market.

Pierce County is the second most populous county in the state and has a population of 804,000 and a median household income of $57,938 according to 2008 SNL Financial, L.C. estimates. The economy in Pierce County is diversified with the presence of military related government employment (Fort Lewis Army Base and McChord Air Force Base), transportation and shipping employment (Port of Tacoma), and aerospace related employment (Boeing). According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 6.3% at June 30, 2008 from 4.6% at June 30, 2007. We have three branches in Pierce County. A slowdown in the Pierce County economy could negatively impact the demand for construction loans and could negatively impact our profitability.

Mason County has a population of 58,000 and a median household income of $49,309 according to 2008 SNL Financial, L.C. estimates. The economic base in Mason County is supported by wood products. According to the Washington State Employment Security Department, the unemployment rate in Mason County increased to 7.3% at June 30, 2008 from 5.5% at June 30, 2007. We have one branch located in Mason County. A slowdown in the Mason County economy could negatively impact our lending opportunities in this market.

Kitsap County has a population of 248,000 and a median household income of $60,161 according to 2008 SNL Financial, L.C. estimates. Anchor Bank has one branch in Kitsap County. The economic base of Kitsap County is largely supported by military related government employment through the United States Navy. According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area increased to 5.9% at June 30, 2008 from 4.3% at June 30, 2007. Reductions in the naval personnel stationed in Kitsap County could have a negative impact on the county’s economy and could negatively impact our lending opportunities in this market.

Clark County has a population of 431,000 and a median household income of $64,039 according to 2008 SNL Financial, L.C. estimates. The economic base in Clark County is supported by wood products and computer technology

(Hewlett-Packard). According to the Washington State Employment Security Department, the unemployment rate in Clark County increased to 6.8% at June 30, 2008 from 5.3% at June 30, 2007. We have one branch located in Clark County. A slowdown in the Clark County economy could negatively impact our lending opportunities in this market.

King County is the most populous county in the state and has a population of 1.9 million and a median household income of $75,634 according to 2008 SNL Financial, L.C. estimates. King County’s economic base is diversified with many industries including shipping, transportation, aerospace (Boeing), computer technology and biotech industries. According to the Washington State Employment Security Department, the unemployment rate for the King County area increased to 3.9% at June 30, 2008 from 3.5% at June 30, 2007. Anchor Bank has one branch in King County. A slowdown in the King County economy could negatively impact our lending opportunities in this market.

The Portland, Oregon metropolitan area, which includes the Oregon counties of Clackamas, Columbia, Multnomah, Washington, Yamhill and the Washington counties of Clark and Skamania, as well as the principal cities of Vancouver, Washington and Beaverton, Oregon, has a population of 2.2 million and a median household income of $62,191 according to 2008 SNL Financial, L.C. estimates. The economic base is supported by construction, semi conductor manufacturing, sports approval and solar energy. According to the Oregon State Employment Security Department, the unemployment rate for Portland increased to 5.3% at June 30, 2008 from 4.9% at June 30, 2007. Anchor Bank has one branch in Vancouver. We originate a significant amount of construction loans secured by property located in the Portland, Oregon metropolitan area. A slowdown in the Portland economy could negatively impact our lending opportunities in this market.

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

Lending Activities

General. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences and loans for the construction of one- to four-family residences. We also originate consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington. A substantial portion of our loan portfolio is secured by real estate, either as primary or secondary collateral, located in our primary market area. As of June 30, 2008, the net loan portfolio totaled $490.5 million and represented 78.3% of our total assets. As of June 30, 2008, 23.0% of our total loan portfolio was comprised of one- to four-family home loans, 9.4% of home equity loans and lines of credit, 23.5% of commercial real estate loans, 11.8% of multi-family real estate loans, 3.7% of commercial business loans, 3.6% of secured consumer loans, 1.2% of unsecured consumer loans and 20.8% of construction loans.

At June 30, 2008, there is no specified maximum amount that we could have loaned to any one borrower and the borrower’s related entities under applicable regulations. Our internal policy, however, limits loans to one borrower and the borrower’s related entities to the lesser of 15% of our total capital or $8.0 million, without the express prior consent of the board of directors. At June 30, 2008, we had one borrowing relationship of $10.5 million that was over this amount, which received the approval of the board of directors and whose loans as of June 30, 2008 were performing in accordance with their repayment terms.

Our largest single borrower relationship at June 30, 2008, as explained above, consisted of six commercial real estate loans secured by income producing properties in the total amount of $10.5 million secured by professional office buildings. The second largest relationship consisted of three commercial real estate loans totaling $7.1 million secured by buildings housing intermediate care facilities. The third largest lending relationship consisted of 37 non-owner occupied residential mortgage loans aggregating $6.0 million. The fourth largest lending relationship was one commercial real estate loan totaling $6.0 million secured by a minority share purchased loan participation which in turn is secured by a hospitality, entertainment, and dining complex. Our fifth single borrower relationship totaled $5.7 million, consisting of four commercial real estate loans aggregating $5.7 million, the largest of which was for $3.9 million and secured by a mobile home park. The remaining these commercial real estate loans of $1.8 million were each

secured by non-owner occupied one- to four-family residential real estate. Two of these loans were post-maturity as of June 30, 2008, however, interest payments were current and loan extensions were in process and expected to be granted. The sixth largest relationship included three loans, totaling $5.7 million. One of the loans was for $3.2 million and is secured by a residential lot development of 66 lots, one loan was for $2.4 million and is secured by a construction bridge loan for multi-family condominium rentals, and the last loan was for $100,000 and is secured non-owner occupied one- to four-family residential real estate. All of these loans have personal guarantees in place as an additional source of repayment. All of the properties securing these loans are in our primary market area. These loans were performing according to their repayment terms at June 30, 2008, except as otherwise noted above.

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


	At June 30,

	2008					2007					2006					2005					2004

	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent

	(Dollars in Thousands)
Real Estate:
One- to four-family residential	$	114,695		23.0	%	$	94,197		19.5	%	$	81,515		18.3	%	$	61,412		16.9	%	$	54,361		17.1	%
Multi-family residential		59,114		11.8			63,117		13.1			65,129		14.6			63,512		17.4			59,349		18.6
Commercial		117,439		23.5			127,440		26.4			136,074		30.5			136,349		37.4			115,558		36.3
Construction		103,924		20.8			104,802		21.7			91,978		20.6			58,079		15.9			54,172		17.0
Land loans		6,957		1.4			12,504		2.6			11,157		2.5			2,423		0.7			803		0.3

Total real estate		402,129		80.5			402,060		83.3			385,853		86.5			321,775		88.4			284,243		89.3


Consumer:
Home equity		46,790		9.4			32,214		6.7			21,397		4.8			14,880		4.1			11,430		3.6
Credit cards		7,989		1.6			7,555		1.6			5,575		1.3			3,351		0.9			3,227		1.0
Automobile		18,095		3.6			19,169		4.0			15,624		3.5			11,848		3.3			9,574		3.0
Other		5,757		1.2			5,278		1.1			4,313		1.0			3,446		0.9			3,775		1.2

Total consumer		78,631		15.7			64,216		13.3			46,909		10.5			33,525		9.2			28,006		8.8

Commercial business		18,507		3.7			16,113		3.3			13,202		3.00			8,859		2.4			6,062		1.9

Total loans		499,267		100.0	%		482,389		100.0	%		445,964		100.00	%		364,159		100.0	%		318,311		100.0	%


Less:
Deferred loan fees		1,267					1,362					1,841					1,943					2,003

Allowance for loan losses		7,485					4,644					4,417					4,157					4,279


Loans receivable, net	$	490,515				$	476,383				$	439,706				$	358,059				$	312,029

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


	At June 30,

	2008					2007					2006					2005					2004

	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent

	(Dollars in Thousands)
FIXED-RATE LOANS
Real estate:
One- to four-family residential	$	94,498		18.9	%	$	70,134		14.5	%	$	57,198		12.8	%	$	44,813		12.3	%	$	33,568		10.5	%
Multi-family residential		55,157		11.0			56,372		11.7			58,125		13.0			43,530		12.0			47,738		15.0
Commercial		104,680		21.0			116,395		24.1			121,729		27.3			102,046		28.0			83,288		26.2
Land loans		6,505		1.3			8,118		1.7			11,157		2.5			2,423		0.7			803		0.3

Total real estate		260,840		52.2			251,019		52.0			248,209		55.7			192,812		52.9			165,397		52.0

Real estate construction:
One- to four-family residential		23,725		4.8			13,959		2.9			8,039		1.8			33,545		9.2			988		0.3
Multi-family residential		4,713		0.9			—		—			—		—			409		0.1			556		0.2
Commercial		3,959		0.8			16,645		3.5			5,982		1.3			6,566		1.8			12,923		4.1

Total real estate construction		32,397		6.5			30,604		6.3			14,021		3.1			40,520		11.1			14,467		4.5

Consumer:
Home equity		45,796		9.2			30,064		6.2			20,531		4.6			14,880		4.1			10,966		3.4
Automobile		18,095		3.6			19,169		4.0			15,624		3.5			11,848		3.3			9,574		3.0
Other		5,741		1.1			5,278		1.1			4,313		1.0			3,066		0.8			3,501		1.1

Total consumer		69,632		13.9			54,511		11.3			40,468		9.1			29,794		8.2			24,041		7.6

Commercial business		13,265		2.7			9,092		1.9			4,528		1.0			2,926		0.8			2,143		0.7


Total fixed-rate loans	$	376,134				$	345,226				$	307,226				$	266,052				$	206,048


ADJUSTABLE-RATE LOANS
Real estate:
One- to four-family residential	$	20,197		4.0		$	24,063		5.0		$	24,317		5.5		$	16,599		4.6		$	20,793		6.5	%
Multi-family residential		3,957		0.8			6,745		1.4			7,004		1.6			19,982		5.5			11,611		3.6
Commercial		12,759		2.6			11,045		2.3			14,345		3.2			34,303		9.4			32,270		10.1
Land loans		452		0.1			4,386		0.9			—		—			—		—			—		—

Total real estate		37,365		7.5			46,239		9.6			45,666		10.2			70,884		19.5			64,674		20.3

Real estate construction:
One- to four-family residential		46,298		9.3			60,419		12.5			63,254		14.5			14,239		3.9			30,854		9.7
Multi-family residential		6,041		1.2			—		—			—		—			3,320		0.9			5,436		1.7
Commercial		19,188		3.8			13,779		2.9			14,703		3.3			—		—			3,415		1.1

Total real estate construction		71,527		14.3			74,198		15.4			77,957		17.5			17,559		4.8			39,705		12.5

(table continued on following page)


	At June 30,

	2008				2007				2006				2005				2004

	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent

	(Dollars in Thousands)

Consumer:
Home equity		994		0.2		2,150		0.4		866		0.2		—		—		464		0.1
Automobile		—		—		—		—		—		—		—		—		—		—
Credit cards		7,988				7,555		1.6		5,575		1.3		3,446		0.9		3,227		1.0
Other		16		1.6		—		—		—		—		285		0.1		274		0.1

Total consumer		8,999		—		9,705		2.0		6,441		1.4		3,731		1.0		3,965		1.2

Commercial business		5,242		1.8		7,021		1.5		8,674		1.9		5,933		1.6		3,919		1.2


Total adjustable rate loans		123,133		1.0		137,163				138,738				98,107				112,283

Total loans		499,267				482,389				445,964				364,159				318,311

Less:
Deferred loan fees		1,267				1,362				1,841				1,943				2,003
Allowance for loan losses		7,485				4,644				4,417				4,157				4,279

Loans receivable, net	$	490,515			$	476,383			$	439,706			$	358,059			$	312,029

One- to Four-Family Residential Real Estate Lending. As of June 30, 2008, $114.7 million, or 23.0%, of our total loan portfolio consisted of permanent loans secured by one- to four-family residences. We originate both fixed rate and adjustable rate loans in our residential lending program and use secondary market underwriting guidelines. We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs. We do not sell all qualified loans on the secondary market as we hold in our portfolio many residential loans that may not meet all FHLMC guidelines yet meet our investment objectives. At June 30, 2008 $94.5 million of this loan portfolio, consisted of fixed rate loans. This amount is 82.4% of our total one- to four-family portfolio and 18.9% of our total loans.

Specifically, we offer fixed rate, residential mortgages from 15 to 40 year terms and we use Freddie Mac daily pricing to set our own pricing. Borrowers have a variety of buy-down options with each loan and we recently began offering a fixed rate, initial interest loan to compliment our standard products. Even with an extended 40 year loan available, most mortgages have a duration of less than ten years. The average loan duration is a function of several factors, including real estate supply and demand, current interest rates, expected future rates and interest rates payable on outstanding loans.

Additionally, we offer a full range of adjustable rate mortgage products. These loans offer three, five or seven year fixed-rate terms with annual adjustments thereafter. The annual adjustments are limited to increases or decreases of no more than two percent and carry a typical lifetime cap of 5% above the original rate. At this time, we carry these adjustable rate mortgages in our portfolio and generally carry no prepayment restrictions. We do have an initial interest adjustable rate mortgage but all of our products adhere to Freddie Mac standards and none of them allow negative amortization of principal. Similar to fixed rate loans, borrower demand for adjustable rate mortgage loans is a function of the current rate environment, the expectations of future interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed rate mortgage loans and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

While adjustable rate mortgages in our loan portfolio helps us reduce our exposure to changes in interest rates, it is possible that, during periods of rising interest rates, the risk of default on adjustable rate mortgage loans may increase as a result of annual repricing and the subsequent higher payment to the borrower. In some rate environments, adjustable rate mortgages may be offered at initial rates of interest below a comparable fixed rate and could result in a higher risk of default or delinquency. Another consideration is that although adjustable rate mortgage loans allow us to decrease the sensitivity of our asset base as a result of changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Our historical experience with adjustable rate mortgages has been very favorable, however, and we are very comfortable offering them to customers as appropriate. At June 30, 2008, we had $20.2 million of our permanent one- to four-family mortgage loans in adjustable rate loans. This amount represents 17.6% of our total one- to four-family loan portfolio and 4.0% of our total loans.

Regardless of the type of loan product chosen, we underwrite our residential loans based on Freddie Mac’s Loan Prospector guidelines. This underwriting considers a variety of factors such as credit history, debt to income, property type, loan to value, and occupancy, to name a few. Generally, we use the same Freddie Mac criteria for establishing maximum loan to values and also consider whether a transaction is a purchase, rate and term refinance, or cash-out refinance. For loans above 80% loan to value, we typically require private mortgage insurance in order to reduce our risk exposure should the loan default. Regardless of the loan to value, our one- to four-family loans are appraised by independent fee appraisers that have been approved by us. We also require title insurance, hazard insurance, and if necessary, flood insurance in an amount not less than the current regulatory requirements.

We also have additional products designed to make home ownership available to qualified borrowers in low to moderate income brackets. The underwriting guidelines for these programs are usually more flexible in the areas of credit or work history. For example, some segments of the low to moderate income population have non-traditional credit histories and pay cash for many of their consumer purchases. They may also work in seasonal industries that do not offer a standard work schedule or salary. Loans such as Freddie Mac’s “Homestart Program”

are designed to meet this market’s needs and often require a borrower to show a history of saving and budgeting as well as providing education on the costs and benefits of homeownership. We plan on continuing to offer these and other programs which reach out to qualifying borrowers in all the markets we serve.

The following table describes certain credit risk characteristics of Anchor Bank’s single-family first trust deed mortgage loans held for investment as of June 30, 2008.


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

	(Dollars in Thousands)

Interest only		$	846	527	59.0	%	6 mos.
Stated income (5)			2,152	712	68.0		6 mos.
FICO less than or equal to 660 (6)			10,932	632	67.0		14 mos.
Over 30-year amortization			376	698	68.0		14 mos.



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

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

(3)	LTV (loan-to-value) is the ratio calculated by dividing the original loan balance by the original appraised value of the real estate collateral.

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

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

(6)	These loans are considered “subprime” as defined by the Federal Deposit Insurance Corporation.

Construction and Land Loans. We have been an active originator of real estate construction loans in our market area for many years. At June 30, 2008, our construction loans amounted to $103.9 million, or 20.8% of the total loan portfolio, most of which is for the construction of single family residences. Included within our construction loan portfolio are $15.8 million of land acquisition and development loans to developers. In addition, a substantial number of our construction loans were referred through a broker relationship out of Portland, Oregon, and are secured by first lien construction deeds of trust on properties in the greater Portland, Oregon metropolitan area. This relationship resulted in a high volume of speculative residential construction loans for both attached and detached housing units, as well as residential land acquisition and development loans. Prior to the latter part of 2007, construction loan referrals from the Portland broker relationship received limited analysis and underwriting and our underwriting guidelines at that time focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower’s debt servicing capacity or other credit factors. As a result, much of our growth in non-performing assets is related to these construction loans. Beginning in the last half of 2007, our underwriting guidelines were revised to put greater emphasis of the borrower’s credit, debt service coverage and cash flows in addition to collateral appraisals. In addition, our policies with respect to loan extensions became more restrictive than our previous policies, requiring that a review of all relevant factors, including loan terms, the condition of the security property and financial condition of the borrower conform to our revised underwriting guidelines and that the extension is in our best interest. As a result of the tightening of our credit standards, loans from the Portland, Oregon broker decreased substantially. We only originated $32.9 million of construction loans through this broker during the year ended June 30, 2008 as compared to $48.9 million and $74.1 million during the years ended June 30, 2007 and 2006. At June 30, 2008, $62.5 million or 60.2% of our total construction loans had been originated through this broker. Of this amount, $24.1 million or 38.6% were past their maturity date and $15.1 million or 24.2% were more than 90 days delinquent, including $4.4 million or 7.0% which were more than 90 days delinquent as to interest payments. In addition, as a result of the recent slowdown in the housing market, we have extended construction loans totaling $26.9 million at June 30, 2008 to permit completion of the project or the borrower additional time to market the underlying collateral. Most of these loans mature within 12 months. To the extent these loans are not further

extended or the borrower cannot otherwise refinance with a third party lender our non-performing construction loans may increase further. At June 30, 2008 construction loans totaling $15.3 million were delinquent in excess of 90 days and accruing interest and 18 construction loans totaling $6.7 million were on non-accrual status. The $15.3 million of construction loans which have matured were making cash payments of interest under their existing loan documents. Of this amount at June 30, 2008 loans totaling $6.1 million are in the process of being extended with the balance still being evaluated for either a possible extension, work-out or foreclosure. No construction loans were charged-off during the years ended June 30, 2008, 2007 and 2006.


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

	At June 30,

	2008		2007		2006

		(In Thousands)
One- to four-family residential:
Speculative	$	62,719	$	78,460	$	74,373
Permanent		—		—		—
Custom		15,829		5,441		2,384
Land acquisition and development loans		15,781		16,351		10,810
Multi-family residential		—		—		—

Commercial real estate:
Construction		9,595		4,550		4,411


Total construction (1)	$	103,924	$	104,802	$	91,978



	(1)	Loans in process for these loans at June 30, 2008, 2007 and 2006 were $43.4 million, $42.0 million and $53.8 million, respectively.

We are also de-emphasizing builder construction loans in favor of custom construction loans to individual borrowers in an attempt to reduce future credit risk in our construction lending portfolio. In this regard we have recently established relationships with several “on your lot” custom builders for the referral of individual borrowers who require a custom construction loan. During the year ended June 30, 2008, we originated 115 loans aggregating $32.3 million to individual borrowers for the construction of custom homes. The average loan size in our custom construction loan portfolio was $220,000 as of June 30, 2008. Our construction loans to individuals to build their personal residences typically are structured either to be converted to fixed or adjustable rate permanent loans at the completion of the construction phase whereby there is one closing for both the construction loan and the permanent financing or as a construction loan without permanent financing. During the construction phase, which typically lasts for six to twelve months, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed based on a percentage of completion. Custom construction loans require payment of interest only during the construction phase. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent fee appraiser. The maximum loan to value ratio for custom construction loans to individuals is 90% of the appraised value upon completion. We expect this type of lending to grow as part of our expansion and change in the mix of our loan portfolio.

During the year ended June 30, 2008, we originated 66 loans aggregating $34.3 million of builder construction loans to fund the construction of one- to four-family residential properties. We originate construction and site development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $200,000 to $500,000. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders and builders in our primary market areas. All builders are qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction

completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 80% of the appraised market value or sales price upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. We require that builders maintain adequate insurance coverage. Maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally do not exceed 18 months for residential subdivision development loans. Substantially all of our residential construction loans have adjustable rates of interest based on The Wall Street Journal prime rate and during the term of construction, the accumulated interest is added to the principal of the loan through an interest reserve. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant. At June 30, 2008, our largest builder relationship consisted of two loans, which totaled $5.7 million. One of the loans was for $3.2 million and is secured by a residential lot development of 66 lots, and one loan was for $2.4 million and is secured by a construction bridge loan for multi-family condominium rentals. The second largest builder relationship totaled $5.1 million in four loans. The largest loan was for $4.1 million and is secured by a 103 lot residential development, and the balance was for three construction loans for single family houses that were not pre-sold. Our third largest builder relationship totaled $4.3 million in two construction loans for single family houses that were not pre-sold and for a mixed use commercial development project. At June 30, 2008, our fourth largest builder relationship totaled $4.2 million and consisted of seven loans, the largest of which was $2.0 million and is secured by a first mortgage lien on 39 single family building lots. This project has been granted two extensions because of the market slow down.The average size of our builder construction loans is approximately $520,000 and the average size of our loans to builders for residential land acquisition and development is approximately $1.1 million.

We also make construction loans for commercial development projects. These projects include multi-family, apartment, retail, office/warehouse and office buildings. These loans generally have an interest-only phase during construction, and generally convert to permanent financing when construction is completed. Disbursement of funds is at our sole discretion and is based on the progress of construction. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised post-construction value. Additional analysis and underwriting of these loans typically results in lower loan to value ratios based on the debt service coverage analysis, including our interest rate and vacancy stress testing. Our target minimum debt coverage ratio is 1.20 for loans on these projects.

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

We also originate land loans to individuals, which are secured by a first lien on the property, generally have a maximum loan to value ratio of 70% at a fixed rate of interest for a three to five year term with a maximum amortization of 30 years. At June 30, 2008, our land loans totaled $7.0 million or 1.4% of the total loan portfolio.

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

collateral. At June 30, 2008, all of our construction loan portfolio consisted of loans requiring interest only payments of which $27.0 million or 26.0% of the total construction loans were relying on the interest reserve to make this payment. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest.

Commercial and Multi-Family Real Estate Lending. As of June 30, 2008, $176.6 million, or 35.4% of our total loan portfolio was secured by commercial and multi-family real estate property, respectively. Our commercial real estate loans include loans secured by hotels and motels, office space, office/warehouse, retail strip centers, self-storage facilities, mobile home parks, medical and professional office buildings, and assisted living facilities in our market area. As of June 30, 2008, commercial real estate loans totaled $117.4 million, or 23.5% of our portfolio and multi-family real estate totaled $59.1 million, or 11.8% of our portfolio as of June 30, 2008. These loans generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

The average loan size in our commercial and multi-family real estate portfolio was $753,000 as of June 30, 2008. We target individual commercial and multi-family real estate loans to small and mid-size owner occupants and investors in our market area, between $1.0 million and $6.0 million. At June 30, 2008, the largest commercial loan in our portfolio was a $6.0 million purchased minority interest in a loan secured by a dining, entertainment, and hotel facility, located near Olympia, Washington. Our largest multi-family loan as of June 30, 2008, was an 81 unit apartment complex with an outstanding principal balance of $3.8 million, located in Kent, Washington. These loans were performing according to repayment terms as of June 30, 2008.

We offer both fixed and adjustable rate loans on commercial and multi-family real estate loans. Loans originated on a fixed rate basis generally are originated at fixed terms up to ten years, with amortization terms up to 30 years. As of June 30, 2008, we had $55.2 million in fixed rate multi-family residential loans and $104.7 million in fixed rate commercial real estate loans.

Commercial and multi-family real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family residential and commercial real estate loans are generally priced utilizing the applicable Federal Home Loan Bank Term Borrowing Rate plus an acceptable margin. These loans are typically amortized for up to 30 years with prepayment penalty. As of June 30, 2008, we had $24.2 million in adjustable rate multi-family and commercial real estate loans. The maximum loan to value ratio for commercial and multi-family real estate loans is generally 80% on purchases and refinances. We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us. We require our commercial and multi-family real estate loan borrowers with outstanding balances in excess of $2 million, or loan to value in excess of 60% to submit annual financial statements and rent rolls on the subject property. The properties that fit within this profile are also inspected annually, and an inspection report and photograph are included. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by commercial and multi-family properties.

The following is an analysis of the types of collateral securing our commercial real estate and multi-family loans at June 30, 2008.


Collateral	Amount		Percent of Total

	(Dollars in Thousands)
Multi-family	$	59,114		33.5	%
Office		37,936		21.5
Mini storage		17,816		10.1
Non residential		17,002		9.6
Warehouse		14,163		8.0
Mobile home park		11,286		6.4
Assisted living		10,265		5.8
Shopping center		8,971		5.1

Total	$	176,553		100.0	%

Commercial and multi-family real estate loans can be approved up to $500,000 by any of the Chief Lending Officer, Chief Commercial Lending Officer, Chief Retail Banking Officer, or Chief Credit Administrator. These loans can be approved up to $1.0 million by any two of officers named above, or by the President/CEO. Loans up to $1.5 million can be approved by the combination of the President/Chief Executive Officer and any one of the other named officers. Our Executive Loan Committee, which presently consists of the President/Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Chief Commercial Lending Officer, Chief Retail Banking Officer, Chief Credit Administrator, and Vice President/Credit Analyst, is authorized to approve loans to one borrower or a group of related borrowers up to $4.0 million, with no limitation on individual loan size. Loans over these amounts must be approved by the board of directors.

If we foreclose on a multi-family or commercial real estate loan, our holding period for the collateral typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Additionally, as a result of our increasing emphasis on this type of lending, a portion of our multi-family and commercial real estate loan portfolio is relatively unseasoned and has not been subjected to unfavorable economic conditions. As a result, we may not have enough payment history with which to judge future collectibility or to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, our multi-family and commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if we make any errors in judgment in the collectibility of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. At June 30, 2008, no multi-family or commercial real estate loans were delinquent in excess of 90 days or in nonaccrual status. No multi-family or commercial real estate loans were charged-off during the year ended June 30, 2008, June 30, 2007, $104,000 was charged off during the year ended June 30, 2006.

Consumer Lending. We offer a variety of consumer loans, including home equity loans and lines of credit, automobile loans, credit cards and personal lines of credit. At June 30, 2008, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit, which totaled $46.8 million, or 9.4%, of the total loan portfolio. Our equity loans are risk priced based on credit score, loan to value and overall credit quality of the applicant. Home equity loans are made for, among other purposes, the improvement of residential properties, debt consolidation and education expenses. The majority of these loans are secured by a second deed of trust on residential property. Fixed rate terms are available up to 240 months, and our equity line of credit is a prime rate based loan with the ability to lock in portions of the line for five to twenty years. Maximum loan to values are dependant on credit worthiness and may be originated at up to 100% of collateral value.

Our credit card portfolio includes both VISA and MasterCard brands, and totaled $8.0 million, or 1.6% of the total loan portfolio at June 30, 2008. We have been offering credit cards for more then 20 years, and offer three

credit card products. All of our credit cards are fixed rate products, with interest rate and credit limit determined by the creditworthiness of the borrower. We use credit bureau scores in addition to other criteria such as income in our underwriting decision process on these loans.

We offer several options for vehicle purchase or refinance with a maximum term of 84 months for newer vehicles and 72 months for older vehicles. As with equity loans, our vehicle and recreational vehicle loans are risk priced based on credit worthiness, loan term and loan-to-value. We currently access a Carfax Vehicle Report to ensure that the collateral being loaned against is acceptable and to protect borrowers from a “lemon” or other undesirable histories.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. These risks are not as prevalent with respect to our consumer loan portfolio because a large percentage of the portfolio consists of home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family residential mortgage loans. Nevertheless, home equity lines of credit have greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold and do not have private mortgage insurance coverage. At June 30, 2008, consumer loans of $367,000 were delinquent in excess of 90 days or in nonaccrual status. Consumer loans of $568,000 were charged-off during the year ended June 30, 2008 as compared to $242,000 during the year ended June 30, 2007 as a result of increased delinquencies on our credit cards.

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

Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market area. At June 30, 2008, commercial business loans totaled $18.5 million, or 3.7%, of our loan portfolio. Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral

securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Loan Maturity and Repricing . The following table sets forth certain information at June 30, 2008 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.


	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Beyond 10 Years		Total

					(In Thousands)
Real Estate:
One- to four-family residential	$	9,430	$	8,060	$	6,296	$	10,171	$	80,738	$	114,695
Multi-family residential		8,332		5,038		9,173		11,145		25,426		59,114
Commercial		19,081		17,450		21,060		58,081		1,767		117,439
Construction		89,958		13,902		—		—		64		103,924
Land loans		956		1,818		4,183		—		—		6,957

Total real estate		127,757		46,268		40,712		79,397		107,995		402,129

Consumer:
Home equity		8,123		322		588		4,100		33,657		46,790
Credit cards		7,989		—		—		—		—		7,989
Automobile		240		2,628		7,043		7,049		1,135		18,095
Other		1,252		1,498		426		321		2,260		5,757

Total consumer		17,604		4,448		8,057		11,470		37,052		78,631

Commercial business		8,882		2,600		1,868		4,925		232		18,507


Total	$	154,243	$	53,316	$	50,637	$	95,792	$	145,279	$	499,267

The following table sets forth the dollar amount of all loans due after June 30, 2009, which have fixed interest rates and have floating or adjustable interest rates.


	Fixed Rates		Floating or Adjustable Rates		Total

			(In Thousands)
Real Estate:
One- to four-family residential	$	90,184	$	15,082	$	105,266
Multi-family residential		42,129		8,653		50,782
Commercial		83,015		15,343		98,358
Construction		2,597		11,369		13,966
Land loans		5,549		451		6,000
Total real estate		223,474		50,898		274,372


Consumer:
Home equity		38,667		—		38,667
Automobile		17,855		—		17,855
Other		4,505		—		4,505

Total consumer		61,027		—		61,027


Commercial business		8,304		1,321		9,625

Total	$	292,805	$	52,219	$	345,024

Loan Solicitation and Processing Loan originations are obtained from a variety of sources but primarily involve existing or walk-in customers. Our loan representatives and business banking officers also receive referrals from builders, realtors, and current business or personal customers. Loan originations are further supported by lending services offered through our internet website, direct mail, advertising, cross-selling, employees’ community service, and broker relationships. All of our consumer loan products, including residential mortgage loans, secured and unsecured consumer loans, and credit cards are processed through our centralized processing and underwriting center. Commercial business loans, including commercial and multi-family real estate loans are processed and underwritten in one of the two Business Banking Centers operated by Anchor Bank in Aberdeen and Lacey, Washington. Residential and consumer underwriters have an assigned approval level and loans above that level must be forwarded to the next higher authority in accordance with our underwriting guidelines and policies. For loans that exceed underwriter and supervisor authority, and for all commercial loans, approval could be obtained from one or more members of the Executive Loan Committee or possibly the board of directors. All loans or aggregated loans to one borrower over $4 million must be approved by the board of directors.

Loan Originations, Servicing, Purchases and Sales. During the year ended June 30, 2008, our total loan originations were $176.8 million compared to $166.0 million for the year ended June 30, 2007.

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

We actively sell residential first mortgage loans to the secondary market. The majority of all residential mortgages are sold to the secondary market at the time of origination. During the year ended June 30, 2008, we sold $18.7 million in whole loans to the secondary market and $10.9 million were securitized. The increase was attributable to an increase in the origination of one-to four-family residential loans of $54.5 million during the year ended June 30, 2008 compared to $30.3 million during the year ended June 30, 2007. Our secondary market relationship is with Freddie Mac. We generally retain the servicing on the loans we sell into the secondary market. Loans are generally sold on a non-recourse basis. As of June 30, 2008, our residential loan servicing portfolio was $99.8 million. In addition we sold $8.0 million in commercial real estate loan participations during 2008.

New multi-family and commercial real estate loans are approved by designated members of our management, Executive Loan Committee, Senior Loan Committee, and/or Board of Directors depending on the size of the loan and relationship.

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


	Year Ended June 30,

	2008		2007		2006

			(In Thousands)
Loans originated:
Real estate:
One- to four-family residential	$	54,533	$	30,284	$	40,216
Multi-family residential		6,111		431		18,179
Commercial		8,781		6,740		16,742
Construction		44,121		76,243		106,660
Land loans		3,320		2,851		2,670

Total real estate		116,866		116,549		184,467

Consumer:
Home equity		34,350		21,351		11,435
Credit cards		5,702		4,571		2,344
Automobile		8,210		11,604		10,077
Other		3,554		4,198		3,365

Total consumer		51,816		41,724		27,221

Commercial business		8,118		7,742		8,937


Total loans originated		176,800		166,015		220,625

Loans purchased:
Real estate loans:
One- to four-family residential		—		—		—
Multi-family residential		—		1,825		9,568
Commercial		5,758		—		1,186
Construction		—		—		—

Total real estate		5,758		1,825		10,754

Total loans purchased		5,785		1,825		10,754

Loans sold:
Total whole loans sold		18,664		757		3,096
Participation loans		8,046		—		4,100

Total loans sold		26,710		757		7,196

Principal repayments		124,536		116,179		123,113
Loans securitized		10,866		6,579		12,929
Transfer to real estate owned		650		1,995		1,787

Increase (decrease) in other items, net		4,493		3,896		2,754
Loans held for sale		1,171		1,757		1,953


Net increase in loans receivable, net	$	14,132	$	36,677	$	81,647

Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate related products. Loan fees generally represent a percentage of the principal amount of the loan that is paid by the borrower. Accounting standards require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or

sold are recognized as income at the time of prepayment. We had $1.3 million of net deferred loan fees and costs as of June 30, 2008.

Asset Quality

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

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

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

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

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

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

The following table shows our delinquent loans by the type of loan and number of days delinquent as of June 30, 2008:


	Loans Delinquent For:

	61-90 Days				Over 90 Days Still Accruing				Over 90 Days				Total Delinquent Loans

	Number of Loans		Principal Balance Loans		Number of Loans		Principal Balance Loans		Number of Loans		Principal Balance Loans		Number of Loans		Principal Balance Loans

	(Dollars in Thousands)
LOAN DELINQUENCY:
Real estate:
One-to four-family residential		2	$	135		—		—		2	$	337		4	$	472
Multi-family residential		—		—		—		—		—		—		—		—
Commercial		3		514		—		—		1		51		4		565
Construction		8		4,418		29		15,298		19		6,719		56		26,435
Land loans		—		—		—		—		—		—		—		—


Total real estate		13		5,067		29		15,298		22		7,107		64		27,472


Consumer:
Home equity		2		10		1		15		6		190		9		214
Credit cards		—		—		13		61		—		—		—		—
Automobile		6		128		—		—		8		92		14		222
Other		2		7		1		598		3		9		19		674

Total consumer		10		145		15		674		17		291		42		1,110


Commercial business		—		—		—		—		—		—		—		—


Total delinquent loans		23	$	5,212		44	$	15,972		39	$	7,398		106	$	28,582

Non-performing Assets. The following table sets forth information with respect to our non-performing assets and restructured loans within the meaning of Statement of Financial Accounting Standards No. 15 for the periods indicated.


	At June 30,

	2008			2007			2006			2005			2004

	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family residential	$	337		$	70		$	—		$	—		$	426
Mulit-family residential		—			—			—			5			—
Commercial		51			301			—			—			307
Construction		6,719			—			—			—			—
Land loans		—			—			—			—			—

Total real estate		7,107			371			—			5			733

Consumer:
Home equity		190			63			—			5			52
Credit cards		—			—			6			17			—
Automobile		92			—			—			—			—
Other		9			—			—			—			38

Total consumer		291			63			6			21			90

Commercial business		—			—			—			1,400			—

Total		7,398			434						1,426			823
Accruing loans which are contractually past due 90 days or more:
One- to four-family residential		—			—			—			—			—
Multi-family residential		—			—			—			—			—
Commercial		598			—			—			—			—
Construction (1)		15,298			1,690			—			—			—
Land loans		—			—			—			—			—

Total real estate		15,896			1,690			—			—			—

Consumer:
Home equity		15			—			—			—			—
Credit cards		—			—			—			—			—
Automobile		—			—			—			—			—
Other		61			51			—			—			—

Total consumer		76			51			—			—			—

Commercial business		—			637			—			—			—

Total of nonaccrual and 90 days past due loans		23,370			2,812			6			1,426			823
Real estate owned		1,524			2,087			1,794			3,997			6,637
Repossessed automobiles		109			16			—			—			3

Total non-performing assets		25,003			4,915			1,800			5,423			7,463

Restructured loans		—			—			—			—			—

Allowance for loan loss as a percent of non-performing loans		32.0			165.1			73,616.7			291.5			519.9

Classified assets included in non-performing assets		23,370			2,812			6			1,426			823

Nonaccrual and 90 days or more past due loans as a percentage of total loans		4.7	%		0.6	%		—			0.4	%		0.3	%

Nonaccrual and 90 days or more past due loans as a percentage of total assets		3.7	%		0.5	%		—			0.3	%		0.2	%

Non-performing assets as a percentage of total assets		4.0	%		0.8	%		0.3	%		1.1	%		1.6	%

Nonaccrued interest (2)		2,335			105			1,136			203			1,162

(Footnotes on following page)

(1) Represents construction loans which have matured and were making cash payments of interest under their existing loan documents. Of this amount, loans totaling $6.1 million are in the process of an extension with the balance still being evaluated for either a possible extension, work-out or foreclosure.

(2) Represents foregone interest on nonaccural loans.

Real Estate Owned and Other Repossessed Assets Real estate we acquire as a result of foreclosure or deed in lieu of foreclosure is classified as real estate owned until it is sold. When the property is acquired, it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan, or the fair market value of the property. Other repossessed collateral, including autos, are also recorded at the lower of cost or fair market value. As of June 30, 2008, Anchor Bank had seven properties in real estate owned with an aggregate book value of $1.5 million consisting of three fully finished single family detached houses, one partially complete single family detached house, and three finished residential lots. All of the properties included in real estate owned were listed with a real estate broker for sale, included in the area multiple listing service, and were actively being marketed.

Restructured Loans. According to generally accepted accounting principles, we are required to account for certain loan modifications or restructuring as a “troubled debt restructuring.” In general, the modification or restructuring of a debt is considered a troubled debt restructuring if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of June 30, 2008 we did not have any restructured loans.

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

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

In connection with the filing of periodic reports with the FDIC classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets, as of June 30, 2008, we had classified assets of $23.4 million. The total amount classified represented 37.5% of equity capital and 3.7% of assets at June 30, 2008.

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


	At June 30,

	2008		2007

	(In Thousands)
Classified Assets:
Substandard	$	15,972	$	2,328
Doubtful		7,398		434
Loss		—		—

Total	$	23,370	$	2,762

Our substandard loans at June 30, 2008 consisted primarily of $15.9 million of builder construction loans of which $12.2 million in loans were secured by single family residential properties located in the Portland, Oregon metropolitan area, with the balance distributed throughout western Washington. Our doubtful loans at June 30, 2008 consisted primarily of $6.7 million in builder construction loans secured by single family residential projects, of which $5.0 million is secured by property located in the Portland, Oregon metropolitan area.

Potential Problem Loans. Potential problem loans are loans that do not yet meet the criteria for placement on non-accrual status, but where known information about the possible credit problems of the borrowers causes management to have serious concerns as to the ability of the borrower to comply with present loan repayment terms, and may result in the future inclusion of such loans in the non-accrual loan category. At June 30, 2008, we had $9.9 million of loans that were identified as potential problems consisting primarily of $8.4 million in builder construction loans secured by single family residential projects secured by property located in the Portland, Oregon metropolitan area.

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 Executive Loan Committee assesses the allowance for loan losses on a quarterly basis. The committee analyzes several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

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

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

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

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

The provision for loan losses was $3.5 million and $720,000 for the years ended June 30, 2008 and 2007, respectively. We increased the provision as a result of our increasing construction loans and the incremental risks associated with the increased lending activities not previously included in our analysis. The allowance for loan losses was $7.5 million or 1.5% of total loans at June 30, 2008 as compared to $4.6 million, or 1.0% of total loans outstanding at June 30, 2007. The level of the allowance is based on estimates, and the ultimate losses may vary from the estimates. Management will continue to review the adequacy of the allowance for loan losses and make adjustments to the provision for loan losses based on loan growth, economic conditions, charge-offs and portfolio composition. For the years ended June 30, 2007 and 2006 the provision for loan losses was $720,000 and $546,000, respectively.

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

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

As of June 30, 2008, 2007, and 2006, we had impaired loans in the amounts of $13.8 million, none and $79,000, respectively.

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


	At June 30,

	2008						2007						2006

	Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans

	(Dollars in Thousands)
Real estate:
One- to four-family residential	$	114,695	$	229	23.0	%	$	94,197	$	188	19.5	%	$	81,515	$	163	18.3	%
Multi-family residential		59,114		591	11.8			63,117		631	13.1			65,129		651	14.6
Commercial		117,439		1,174	23.5			127,440		957	26.4			136,074		1,655	30.5
Construction		103,924		4,309	20.8			104,802		1,272	21.7			91,978		653	20.6
Land loans		6,957		139	1.4			12,504		250	2.6			11,157		223	2.5

Total real estate		402,129		6,442	80.5			402,060		3,298	83.3			385,853		3,345	86.5

Consumer:
Home equity		46,790		94	9.4			32,214		64	6.7			21,397		43	4.8
Credit cards		7,989		240	1.6			7,555		227	1.6			5,575		167	1.3
Automobile		18,095		241	3.6			19,169		575	4.0			15,624		469	3.5
Other		5,757		283	1.2			5,278		158	1.1			4,313		129	1.0

Total consumer		78,631		858	15.7			64,216		1,024	13.3			46,909		808	10.5

Commercial business		18,507		185	3.7			16,113		322	3.3			13,202		264	3.0
Unallocated		—		—	—			—		—	—			—		—	—


Total	$	499,267	$	7,485	100.0	%	$	482,389	$	4,644	100.0	%	$	445,964	$	4,417	100.0	%


	At June 30,

	2005						2004

	Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans

	(Dollars in Thousands)
Real estate:
One- to four-family residential	$	61,412	$	123	16.9	%	$	54,361	$	109	17.1	%
Multi-family residential		63,512		635	17.4			59,349		742	18.6
Commercial		136,349		1,859	37.4			115,558		1,773	38.3
Construction		58,079		726	15.9			54,172		677	17.0
Land loans		2,423		48	0.7			803		16	0.3

Total real estate		321,775		3,391	88.4			284,243		3,317	89.3

Consumer:
Home equity		14,880		30	4.1			11,430		23	3.6
Credit cards		3,351		101	0.9			3,227		97	1.0
Automobile		11,848		355	3.3			9,574		287	3.0
Other		3,446		103	0.9			3,775		113	1.2

Total consumer		33,525		589	9.2			28,006		520	8.8

Commercial business		8,859		177	2.4			6,062		121	1.9
Unallocated		—		—	—			—		321	—


Total	$	364,159	$	4,157	100.0	%	$	318,311	$	4,279	100.0	%

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

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


	Year Ended June 30,

	2008			2007			2006			2005			2004

	(Dollars in Thousands)

Allowance at beginning of period	$	4,644		$	4,417		$	4,157		$	4,279		$	5,296
Provision for loan losses		3,545			720			546			615			240

Recoveries:
Real Estate loans:
One- to four-family residential		1			—			—			3			6
Multi-family residential		—			—			—			—			—
Commercial		112			352			2			33			4
Construction		—			—			—			—			—
Land loans		—			—			—			—			—

Total real estate		113			352			2			36			10

Consumer:
Home equity		1			—			—			—			—
Credit cards		—			—			—			—			—
Automobile		—			—			—			—			—
Other		18			14			11			—			5

Total consumer		19			14			11			—			5

Commercial business		6			—			—			—			56

Total recoveries		138			366			13			36			71

Charge-offs:
Real Estate loans:
One- to four-family residential		269			617			—			115			44
Multi-family residential		—			—			—			—			—
Commercial		—			—			104			514			860
Construction		—			—			—			—			—
Land loans		—			—			—			—			—

Total real estate		269			617			104			629			904

Consumer:
Home equity		—			—			—			6			—
Credit cards		—			—			—			—			—
Automobile		—			—			—			—			—
Other		568			242			195			132			185

Total consumer		568			242			195			138			185

Commercial business		5			—			—			—			239

Total charge-offs		842			859			299			773			1,328

Net charge-offs		704			493			286			737			1,257
Balance at end of period		7,485			4,644			4,417			4,157			4,279

Allowance for loan losses as a percentage of total loans outstanding at the end of the period		1.5	%		1.0	%		1.0	%		1.1	%		1.3	%

Net charge-offs as a percentage of average total loans outstanding during the period		0.1	%		0.1	%		0.1	%		0.2	%		0.4	%

Allowance for loan losses as a percentage of non-performing loans at end of period		32.0	%		165.1	%		73616.7	%		291.5	%		519.9	%

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

Management believes that our allowance for loan losses as of June 30, 2008 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provision that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of Anchor Bank’s allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

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


	Year Ended June 30,

	2008			2007			2006			2005			2004

	(Dollars in Thousands)

Provisions for loan losses	$	3,545		$	720		$	546		$	615		$	240
Allowance for loan losses		7,485			4,644			4,417			4,157			4,279
Allowance for loan losses as a percentage of total loans outstanding at the end of the period		1.5	%		1.0	%		1.0	%		1.1	%		1.3	%

Net charge-offs (recoveries)		704			493			285			738			1,257
Total of nonaccrual and 90 days past due loans		23,370			2,812			6			1,426			823
Nonaccrual and 90 days or more past due loans as a percentage of loans loans receivable		4.7	%		0.6	%		—			0.4	%		0.3	%

Loans receivable, net	$	490,515		$	476,383		$	439,706		$	358,059		$	312,029

Investment Activities

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

The investment committee, consisting of Directors Ruecker, Shaw and Degner, have the authority and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate changes to policy and strategies to the board. On a monthly basis, our management reports to the board a summary of investment holdings with respective market values, and all purchases and sales of investment securities. The Chief Executive Officer has the primary responsibility for the management of the investment portfolio. The Chief Executive Officer considers various factors when making decisions, including the marketability, maturity and tax consequences of proposed investments. The maturity structure of investments will be affected by various market

conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

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

At June 30, 2008, our investment portfolios consisted principally of mortgage-backed securities, U.S. Government Agency obligations, municipal bonds and mutual funds consisting of mortgage-backed securities. From time to time, investment levels may increase or decrease depending upon yields available on investment opportunities and management’s projected demand for funds for loan originations, deposits and other activities.

Mortgage-Backed Securities . The mortgage-backed securities in our portfolios were comprised of Freddie Mac mortgage-backed securities. At June 30, 2008 the amortized cost was $37.3 million of mortgage-backed securities held in the available for sale category with a weighted average yield of 5.34%, while the mortgage-backed securities in the held to maturity portfolio $13.6 million and a weighted average yield of 5.50%.

U.S. Government Agency Obligations . At June 30, 2008, the U.S Government and Agency Obligations available for sale amortized costs was $21.2 million with a weighted average yield of 5.02%. At June 30, 2008, no securities were held to maturity within this category.

Fannie Mae Preferred Stock. At June 30, 2008 we held $1.0 million of Fannie Mae stock that had fair market and a book value of $635,000. An other than temporary impairment charge of $365,000 was taken for the year ended June 30, 2008. The other than temporary impairment was a result of an ongoing analysis of Fannie Mae. On September 7, 2008, the United States Government took conservatorship of Fannie Mae and Freddie Mac. These actions resulted in significant doubt that preferred shareholders of these organizations would recover their investment. As of September 10, 2008, our shares of Fannie Mae Series L preferred stock were valued at approximately $64,000. The additional impairment from July 1, 2008 through September 30, 2008 will be recorded in the quarter ended September 30, 2008.

Municipal Bonds . The tax-exempt and taxable municipal bond portfolios were comprised of general obligation bonds ( i.e. , backed by the general credit of the issuer) and revenue bonds ( i.e. , backed by revenues from the specific project being financed) issued by various municipal corporations. All bonds are rate “A” or better and are from issuers located within the State of Washington. The weighted average yield on the tax exempt bonds (on a tax equivalent basis) was 5.32% at June 30, 2008, and the total amount of our municipal bonds was $4.6 million at June 30, 2008.

Federal Home Loan Bank Stock. As a member of the Federal Home Loan Bank of Seattle, we are required to own capital stock in the Federal Home Loan Bank of Seattle. The amount of stock we hold is based on guidelines specified by the Federal Home Loan Bank of Seattle. The redemption of any excess stock we hold is at the discretion of the Federal Home Loan Bank of Seattle. The carrying value of Federal Home Loan Bank stock totaled $6.1 million and had a weighted average yield of 0% at June 30, 2008.

Bank-Owned Life Insurance. We purchase bank-owned life insurance policies (“BOLI”) to offset future employee benefit costs. At June 30, 2008, we had a $15.5 million investment in life insurance contracts. The purchase of BOLI policies, and its increase in cash surrender value, is classified as “Investment in life insurance contracts” in our consolidated statements of financial condition. The income related to the BOLI, which is generated by the increase in the cash surrender value of the policy, is classified in “increase in cash surrender value of life insurance” in our consolidated statements of income.

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


	At June 30,

	2008				2007				2006

	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(Dollars in Thousands)
Available for sale:
Investment securities:
U.S. Government Agencies obligations	$	21,167	$	21,374	$	24,164	$	23,602	$	24,167	$	23,122
Municipal bonds		4,453		4,468		4,460		4,402		4,517		4,430
Mortgage-backed securities:
Freddie Mac		37,268		37,427		32,049		31,560		28,624		28,002
Fannie Mae stock		635		635		1,000		890		1,000		834

Total available for sale		63,523		63,904		61,673		60,454		58,308		56,388

Held to maturity:
Investment securities:
Municipal bonds		166		166		172		172		177		177
Mortgage-backed securities:
Freddie Mac		13,596		13,370		15,361		14,766		17,633		16,846

Total held to maturity		13,762		13,536		15,533		14,938		17,810		17,023

Total investment securities	$	77,285	$	77,440	$	77,206	$	75,392	$	76,118	$	73,411

The table below sets forth information regarding the amortized cost, weighted average yields and maturities or call dates of Anchor Bank’s investment portfolio at June 30, 2008.


	At June 30, 2008 Amount Due or Repricing within:

	One Year or Less					Over One to Five Years					Over Five to Ten Years

	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield

	(Dollars in Thousands)
Available for sale:
Investment securities:
U.S. Treasury obligations	$	—		—	%	$	—		—	%	$	—		—	%
U.S. Government agencies		2,200		4.08			4,997		4.35			—		—
Municipal bonds (1)		—		—			2,224		4.55			1,065		5.59
Freddie Mac common stock		—		—			—		—			—		—
Mortgage-backed securities:
Freddie Mac		—		—			—		—			—		—
Fannie Mae Preferred Stock		635		5.13			—		—			—		—

Total available for sale		2,835		—			7,221		—			1,065		—

Held to maturity:
Investment securities:
U.S. Treasury obligations		—		—			—		—			—		—
U.S. Government agencies		—		—			—		—			—		—
Municipal bonds (1)		—		—			—		—			—		—
Freddie Mac common stock		—		—			—		—			—		—
Mortgage-backed securities:
Freddie Mac		—		—			—		—			—		—
Total held to maturity		—		—			—		—			—		—


Total	$	2,835		—		$	7,221				$	1,065


	At June 30, 2008 Amount Due or Repricing within:

	Over Ten Years					Mortgage-Backed Securities					Totals

	Amortized Cost		Weighted Average Yield			MBS Securities Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield

	(Dollars in Thousands)
Available for sale:
Investment securities:
U.S. Treasury obligations	$	—		—	%	$	—		—	%	$	—		—	%
U.S. Government agencies		13,970		5.42			—		—			21,167		5.02
Municipal bonds (1)		1,164		7.02			—		—			4,453		5.44
Freddie Mac common stock		—		—			—		—			—		—
Mortgage-backed securities:
Freddie Mac		—		—			37,268		5.34			37,268		5.34
Fannie Mae Preferred Stock		—		—			—		—			635		5.13

Total available for sale		15,134		—			37,268		—			63,523

Held to maturity:
Investment securities:
U.S. Treasury obligations		—		—			—		—			—		—
U.S. Government agencies		—		—			—		—			—		—
Municipal bonds (1)		166		8.35			—		—			166		8.35
Freddie Mac common stock		—		—			—		—			—		—
Mortgage-backed securities:
Freddie Mac		—		—			13,596		5.50			13,596		5.50
Total held to maturity		166		—			13,596		—			13,762


Total	$	15,300				$	50,864				$	77,285


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

Deposit Activities and Other Sources of Funds

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

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

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

At June 30, 2008, we had $132.6 million of jumbo ($100,000 or more) certificates of deposit of which $19.1 million were public funds, which represent 34% and 4.9%, respectively, of total deposits at June 30, 2008. Anchor Bank had $34.9 million of brokered deposits at June 30, 2008. We use certificates of deposit as an alternative source of wholesale funds. In addition, at June 30, 2008 we had public unit funds of $20.1 million compared to $21.1 million at June 30, 2007. For the year ended June 30, 2008, brokered certificates of deposit decreased $41.5 million as Federal Home Loan Bank advances were used to replace these deposits as the average cost of deposits was reduced to 4.03% for the year ended June 30, 2008 from 4.13% for the year ended June 30, 2007.

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

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


	Year Ended June 30,

	2008			2007		2006

	(In Thousands)
Beginning balance	$	443,354		$	399,084	$	356,154
Net deposits (withdrawals) before interest credited		(68,603	)		27,547		31,818
Interest credited		15,198			16,723		11,112
Net increase (decrease) in deposits		(53,405	)		44,270		42,930

Ending balance	$	389,949		$	443,354	$	399,084

The following table sets forth information concerning our time deposits and other deposits at June 30, 2008.


Weighted Average Interest Rate		Term	Category	Amount		Minimum Balance	Percentage of Total Deposits

				(In Thousands)
1.01	%	N/A	Savings accounts	$	30,765		7.9	%
0.36		N/A	Demand deposit accounts		47,194		12.1
3.32		N/A	Money market accounts		58,732		15.1

			Certificates of Deposit
3.07		6 month	Fixed-term, fixed rate		11,897	500	3.1
4.01		9-12 month	Fixed-term, fixed rate		49,344	500	12.7
4.73		13-16 month	Fixed-term, fixed rate		43,491	500	11.1
3.88		18-20 month	Fixed term-fixed or variable rate		39,805	500	10.2
3.72		24 month	Fixed term-fixed or variable rate		8,792	2,000	2.2
4.30		30-36 month	Fixed term-fixed or variable rate		4,968	500	1.3
4.24		48 month	Fixed term-fixed or variable rate		6,274	500	1.6
4.81		60 month	Fixed term-fixed or variable rate		16,122	500	4.1
4.39		96 month	Fixed term-fixed or variable rate		15,250	500	3.9
4.20		Other	Fixed term-fixed or variable rate		57,315	500	14.7

			TOTAL	$	253,258		100.0	%

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


	At June 30,

	2008		2007		2006

	(In Thousands)

2.00 - 2.99%	$	—	$	—	$	—
3.00 - 3.99%		30,070		—		9,561
4.00 - 4.99%		50,741		25,770		92,623
5.00 - 5.99%		110,182		96,276		141,553
6.00 - 6.99%		62,085		184,244		28,319
7.00 - 7.99%		180		4,301		4,500
8.00 - 8.99%		—		176		165

Total	$	253,258	$	310,767	$	276,721

Time Deposit Certificates. The following table sets forth the amount and maturities of time deposit certificates at June 30, 2008.


	Amount Due

	Within 1 Year		After 1 Year Through 2 Years		After 2 Years Through 3 Years		After 3 Years Through 4 Years		Beyond 4 Years		Total

	(In Thousands)

2.00 - 2.99%	$	—	$	—	$	—	$	—	$	—	$	—
3.00 - 3.99%		27,651		2,419		—		—		—		30,070
4.00 - 4.99%		30,696		18,084		1,862		3,258		1,841		50,741
5.00 - 5.99%		66,306		30,987		3,699		1,851		7,339		110,182
6.00 - 6.99%		54,118		589		6,027		315		1,036		62,085
7.00 - 7.99%		180		—		—		—		—		180

Total	$	178,951	$	52,079	$	11,588	$	5,424	$	10,216	$	253,258

The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of June 30, 2008. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.


Maturity Period	Time Deposit Certificates

	(In Thousands)

Three months or less	$	201
Over three through six months		3,784
Over six through twelve months		13,163
Over twelve months		115,496

Total	$	132,644

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


	At June 30,

	2008								2007								2006

	Amount		Percent of Total			Increase/ (Decrease)			Amount		Percent of Total			Increase/ (Decrease)			Amount		Percent of Total

	(Dollars in Thousands)

Savings deposits	$	30,765		7.9	%	$	(1,049	)	$	31,814		7.2	%	$	(4,800	)	$	36,614		9.2	%
Demand deposit accounts		47,194		12.1			3,667			43,527		9.8			714			42,813		10.7
Money market accounts		58,732		15.1			1,486			57,246		12.9			14,309			42,936		10.8
Fixed-rate certificates which mature in the year ending:
Within 1 year		145,245		37.2			(38,659	)		183,904		41.5			(52,800	)		131,104		32.9
After 1 year, but within 2 years		38,676		9.9			5,589			33,087		7.5			(29,205	)		62,292		15.6
After 2 years, but within 5 years		19,203		4.9			(20,594	)		39,797		9.0			5,130			34,667		8.7
Certificates maturing thereafter		8,020		2.1			3,923			4,097		0.9			(4,721	)		8,818		2.2
Variable rate certificates		42,114		10.8			(7,768	)		49,882		11.3			10,042			39,840		10.0

Total	$	389,949				$	(53,405	)	$	443,354				$	44,270		$	399,084

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

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

As a member of the Federal Home Loan Bank of Seattle, we are required to own capital stock in the Federal Home Loan Bank of Seattle and are authorized to apply for advances on the security of that stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. We maintain a committed credit facility with the Federal Home Loan Bank of Seattle that provides for immediately available advances up to an aggregate of 30% of the prior quarter’s total assets of Anchor Bank, or $186.7 million. At June 30, 2008, outstanding advances to Anchor Bank from the Federal Home Loan Bank of Seattle totaled $165.2 million.

The following table sets forth information regarding Federal Home Loan Bank of Seattle advances by us at the end of and during the periods indicated. The table includes both long- and short-term borrowings.


	Year Ended June 30,

	2008				2007				2006

	(Dollars in Thousands)
Maximum amount of borrowing outstanding at any month end:
Federal Home Loan Bank advances		$	165,165			$	104,248			$	99,943

Approximate average borrowing outstanding:
Federal Home Loan Bank advances			144,964				98,086				81,058

Approximate weighted average rate paid on:
Federal Home Loan Bank advances			5.15	%			5.59	%			5.50	%


	At June 30,

	2008				2007				2006

	(Dollars in Thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances		$	165,165			$	96,665			$	99,943

Weighted average rate paid on:
Federal Home Loan Bank advances			5.00	%			5.47	%			5.57	%

Subsidiaries and Other Activities

Anchor Bank. Anchor Bank has one wholly-owned subsidiary, Anchor Financial Services, Inc., that is currently inactive. At June 30, 2008, Anchor Bank’s equity investment in Anchor Financial Services, Inc. was $302,000.

Competition

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

Charitable Foundation

General. In furtherance of our commitment to the communities we serve, we have voluntarily established a charitable foundation in connection with our conversion from the mutual to stock form of organization. The plan of conversion provides that the foundation will be established as a non-stock corporation and will be funded with an initial contribution of stock equal to 150,000 of the shares of common stock to be sold in the offering and $500,000. The form of funding shall be 100% common stock, with the value of the contribution being $2.0 million based on the maximum of the offering range. The contribution of common stock to the foundation will be dilutive to the interests of shareholders. Anchor Bancorp has no plans to provide additional funding beyond this initial contribution over the next three years. The contribution of common stock to the foundation will not be included in determining whether the minimum number of shares of common stock (3,825,000) has been sold in order to complete the offering.

Purpose of the Foundation. The purpose of the Anchor Bancorp Foundation is to provide funding to support charitable causes and community development activities in the communities we serve. The Anchor Bancorp Foundation is being formed as a complement to our existing community activities. We currently contribute funds to support local community activities and actively encourage our employees to volunteer their time, raise funds and contribute their personal funds to a wide range of local and national charitable organizations, including the United Way, the American Cancer Society, the Heart Association, Habitat for Humanity, local schools, and other community-oriented organizations. The foundation is completely dedicated to community activities and the promotion of charitable causes, and may be able to support these activities in ways that are not currently available to us.

We believe the establishment of a charitable foundation is consistent with our long-term commitment to community service. The board of directors further believes that the funding of the foundation with common stock of Anchor Bancorp is a means of enabling the communities served by us to share in the growth and success of Anchor Bancorp long after completion of the conversion. The foundation will accomplish that goal by providing for continued ties between the foundation and Anchor Bank, thereby forming a partnership with our community. The establishment of the foundation will also enable Anchor Bancorp and Anchor Bank to develop a unified charitable donation strategy and will centralize the responsibility for administration and allocation of corporate charitable funds.

Structure of the Anchor Bancorp Foundation. The foundation has been incorporated under Washington law as a non-stock corporation. Its initial board of trustees will consist of persons who are directors or employees of Anchor Bank, as well as one independent trustees. Trustees of the foundation who are affiliated with Anchor Bankare not expected to be paid additional compensation for their service on the foundation’s board. The articles of incorporation of the foundation will provide that the corporation is organized exclusively for charitable purposes, including development in the local community, as set forth in Section 501(c)(3) of the Internal Revenue Code. The

foundation’s articles of incorporation or bylaws also provide that no part of its earnings will inure to the benefit of, or be distributable to, its trustees, officers or members.

The authority for the affairs of the foundation will be vested in its board of trustees. The trustees of the foundation are responsible for establishing the foundation’s policies with respect to grants or donations by the foundation, consistent with the purpose for which the foundation was established. Although no formal policy governing the foundation grants exists at this time, the foundation’s board of trustees will adopt such a policy prior to receiving the contribution. As trustees of a not-for-profit corporation, trustees of the foundation are at all times be bound by their fiduciary duty to advance the foundation’s charitable goals, to protect the assets of the foundation and to act in a manner consistent with the charitable purpose for which the foundation was established. The trustees of the foundation are also responsible for directing the foundation’s activities, including the management of the common stock of Anchor Bancorp. The board of trustees of the foundation will appoint such officers as may be necessary to manage its operation. The foundation may use employees of Anchor Bank as its volunteer support staff.

The foundation has committed to the Federal Deposit Insurance Corporation that all shares of common stock held by the foundation will be voted in the same ratio as all other shares of Anchor Bancorp’s common stock on all proposals considered by shareholders of Anchor Bancorp.

As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the foundation is required to distribute annually in grants or donations, a minimum of 5% of the average fair market value of its net investment assets.

Upon completion of the conversion and the contribution of shares to the foundation, Anchor Bancorp would have 3,975,000, 4,650,000 and 5,325,000 shares issued and outstanding at the minimum, midpoint and maximum of the estimated valuation range. Because Anchor Bancorp will have an increased number of shares outstanding, the voting and ownership interests of purchasers of common stock in the offering will be diluted by 3.8% and 2.8% at the minimum and maximum of the offering, respectively, as compared to their interests in Anchor Bancorp if the foundation was not established. For additional discussion of the dilutive effect, see “Pro Forma Data.” If the foundation was not established and funded as part of the conversion, RP Financial estimates that the pro forma valuation of Anchor Bancorp would be greater; and as a result, a greater number of shares of common stock would be issued in the offering. At the minimum, midpoint and maximum of the valuation range, the pro forma valuation of Anchor Bancorp is $39.8 million, $46.5 million, and $53.3 million with the foundation, as compared with $40.4 million, $47.5 million, and $54.6 million, respectively, without the foundation. See “Comparison of Valuation and Pro Forma Information With and Without Charitable Foundation.”

Regulatory Conditions Imposed on the Anchor Bancorp Foundation. The Federal Deposit Insurance Corporation imposes numerous requirements on the establishment and operation of a charitable foundation. As a result, the Anchor Bancorp Foundation is subject to these requirements, including but not limited to the following:


	(a)	examination by the Federal Deposit Insurance Corporation, at the foundation’s expense, and compliance with supervisory directives imposed by the Federal Deposit Insurance Corporation;

	(b)	the foundation must provide the Federal Deposit Insurance Corporation with a copy of the annual report it submits to the Internal Revenue Service;

	(c)	as long as the foundation controls shares of Anchor Bancorp, those shares must be voted in the same ratio as all other shares are voted on each proposal considered by the shareholders, subject to certain exceptions;

	(d)	the foundation must operate according to written policies adopted by its board of trustees, including a conflict of interest policy; and


	(e)	the foundation must not engage in self-dealing, and must comply with all laws necessary to maintain the foundation’s tax-exempt status.

Natural Disasters

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

Employees

At June 30, 2008, we had 164 full-time employees and 26 part-time employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

Properties

At June 30, 2008, we had one administrative office, 20 full service banking offices and two loan centers. Ten of the locations are owned and 13 locations are leased. At June 30, 2008, the net book value of our investment in premises, equipment and leaseholds was approximately $15.1 million. The net book value of our data processing and computer equipment at June 30, 2008 was $285,000.

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

Location

Leased or
Owned

Lease
Expiration
Date

Square
Footage

Net Book Value
at
June 30, 2008

(In Thousands)

ADMINISTRATIVE OFFICE

100 West First
Aberdeen, Washington 98520

Owned

—

7,410

2,824

BRANCH OFFICES:

Aberdeen (1) (2)
120 N. Broadway
Aberdeen, Washington 98520

Owned

—

17,550

1,657


Location	Leased or Owned	Lease Expiration Date	Square Footage		Net Book Value at June 30, 2008

					(In Thousands)
Centralia (2) 604 S. Tower Centralia, Washington 98531	Owned	—		3,000		947

Chehalis (3) 1601 NW Louisiana Avenue Chehalis, Washington 98532	Leased	4/30/13		683		252

Covington (3) 17432 SE 270 ^th Place Covington, Washington 998042	Leased	1/31/10		582		160

Elma (2) 216 S. Third Street Elma, Washington 98541	Owned	—		2,252		415

Hawk’s Prairie (3) 1401 Galaxy Drive SE Lacey, Washington 98509	Leased	10/31/12		619		212

Hoquiam 701 Simpson Avenue Hoquiam, Washington 98550	Leased	3/31/09		550		28

Lacey (4) 601 Woodland Square Loop SE Lacey, Washington 98503	Owned	—		13,505		2,453

Lakewood 7001 Bridgeport Way W. Lakewood, Washington 98499	Leased	1/31/12		971		286

Martin Way 4250 Martin Way E. Building 4, Suite 107 Olympia, Washington 98516	Leased	6/30/13		1,813		327

Montesano (5) 211-B Pioneer Avenue East Montesano, Washington 98563	Leased	10/31/08		600		1,642

Ocean Shores (2) 795 Pt. Brown Avenue NW Ocean Shores, Washington 98569	Owned	—		2,550		759

Olympia (2) 2610 Harrison Avenue West Olympia, Washington 98507	Owned	—		1,882		584


Location	Leased or Owned	Lease Expiration Date	Square Footage		Net Book Value at June 30, 2008

					(In Thousands)
Poulsbo (3) 21200 Olhava Way NW Poulsbo, Washington 98370	Leased	1/31/11		612		218

Puyallup (3) 16502 Meridian Avenue E, Suite B Puyallup, Washington 98375	Leased	1/31/12		982		293

Shelton (3) 100 E. Wallace Kneeland Boulevard Shelton, Washington 98584	Leased	5/31/13		673		122

Spanaway (3) 20307 Mountain Highway Spanaway, Washington 98387	Leased	1/31/12		886		302

Vancouver SE (3) 430 SE 192nd Avenue Vancouver, Washington 98587	Leased	1/31/11		612		236

Westport (2) 915 N. Montesano Westport, Washington 98595	Owned	—		3,850		1,171

Yelm (3) 17100 State Route 507 SE Yelm, Washington 98597	Leased	7/30/12		577		313

LOAN OFFICES:

Aberdeen 211 E. Market Street Aberdeen, Washington 98520	Owned	—		12,825		97

Aberdeen 215 E. Market Street Aberdeen, Washington 98520	Owned	—		12,000		232



(1)	Includes home branch.

(2)	Drive-up ATM available.

(3)	Wal-Mart locations.

(4)	Includes space leased.

(5)	Includes construction in process for new location.

Legal Proceedings

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

MANAGEMENT

Management Structure

The board of directors of Anchor Bancorp consists of the same individuals who currently serve as directors of Anchor Bank. The composition of our board of directors and the board of Anchor Bank will remain unchanged following the conversion. In addition, following the conversion each of the executive officers of Anchor Bancorp will continue to serve as an executive officer of Anchor Bank.

Currently, Anchor Bank compensates all of the executive officers and directors. Anchor Bancorp reimburses Anchor Bank on a quarterly basis for the time that executive officers spend on holding company matters. Following the conversion, we intend to continue these practices unless Anchor Bancorp begins engaging in significant business apart from being the holding company of Anchor Bank, in which case, Anchor Bancorp may begin compensating its officers and directors separately.

Our Directors

The directors of Anchor Bancorp are the same persons who currently serve as directors of Anchor Bank. Each director will serve until the first annual meeting of shareholders of Anchor Bancorp, at which time each director will stand for election. The board will be divided into three classes, so that approximately one-third of the directors are elected at each annual meeting of shareholders. Currently, the directors of Anchor Bank are elected annually by the directors. Following the conversion, the directors of Anchor Bancorp will be elected annually by its shareholders. However, Anchor Bancorp will elect the directors of Anchor Bank, as its sole shareholder.

The table below sets forth certain information, as of June 30, 2008, regarding the members of the board of directors of Anchor Bank, including the term of office for each board member.


*Name*	*Age*	*Positions Held*	*Director Since*	Current Term of Office Expires


Robert D. Ruecker	59	Chairman of the Board	1984	2008
Jerald L. Shaw	62	President and Chief Executive Officer	1990	2008
Douglas A. Kay	52	Vice Chairman of the Board	1991	2009
George W. Donovan	53	Director	1998	2009
Terri L. Degner	45	Executive Vice President and Chief Financial Officer	2007	2009
James A. Boora	62	Director	1988	2010
Will Foster	57	Director	1990	2010
Dennis C. Morrisette	63	Director	1998	2010

The Business Background of Our Directors

The business experience of each director for at least the past five years is set forth below.

Robert D. Ruecker is retired. Prior to his retirement, he served as the Human Resources Director for Grays Harbor Paper, L.P., a business papers manufacturer, from September 2000 until June 2007. Currently, he volunteers for Rebuilding Together and assists the Grays Harbor College athletic director.

Jerald L. Shaw is the President and Chief Executive Officer of Anchor Bank, positions he has held since July 2006. He has also served in those capacities for Anchor Bancorp since its formation in September 2008. Prior to serving as President and Chief Executive Officer, he served as Chief Operating Officer from 2004 to 2006 and as Chief Financial Officer from 1988 to 2002. Prior to that, he served Anchor Bank and its predecessor, Aberdeen Federal Savings and Loan Association, in a variety of capacities since 1976. Mr. Shaw is on the Aberdeen Rotary Club and the Aberdeen Lions Club, and volunteers for Habitat for Humanity.

Douglas A. Kay is self-employed Certified Public Accountant specializing in accounting, consulting, business valuation, litigation support and fraud investigation. Prior to that, he was employed by the public accounting firm of McSwain and Company, PS from 2001 to 2006. Mr. Kay is active with a number of local youth sports organizations including Trinity Youth Sport, the YMCA and Black Hills Youth Baseball.

George W. Donovan is the Secretary and Treasurer of Barrier West, Inc., a trucking and heavy equipment provider, a position he has held since 1992. He is also President of Geo Dan Land, Inc., a position he has held since 1993. Mr. Donovan coaches several youth sports teams, is a member of the St. Mary’s Parish Council and is on the board of directors of the Grays Harbor Community Foundation.

Terri L. Degner is the Executive Vice President, Chief Financial Officer and Treasurer of Anchor Bank, positions she has held since 2004. She has also served in those capacities for Anchor Bancorp since its formation in September 2008. Prior to serving as Executive Vice President, Chief Financial Officer and Treasurer, Ms. Degner has served Anchor Bank in a variety of capacities since 1990, including as Senior Vice President and Controller from 1994 to 2004. Ms. Degner also serves on the board of directors and finance committee of NeighborWorks of Grays Harbor.

James A. Boora served as President and Chief Executive Officer of Anchor Bank from 1989 until his retirement in April 2006. Prior to that, he served Anchor Bank and its predecessor, Aberdeen Federal Savings and Loan Association, in a variety of capacities since 1971. Mr. Boora is active in a number of organizations in the local community and serves on the board of directors of the Grays Harbor College Foundation, the Grays Harbor Community Foundation and the Aberdeen Senior Center. He served as chairman of the Washington Community Reinvestment Association and is a member and past president of the Aberdeen Rotary Club. Mr. Boora is currently volunteering his time to assist on a financial services project for the Coastal Community Action Program in Aberdeen, Washington.

Will Foster is a principal and architect with Street Lundgren & Foster Architects, a firm with which he has been affiliated for 32 years. He is also involved in the Aberdeen Lions Club, is on the board of directors of NeighborWorks of Grays Harbor and is the Chairman of the Montesanto Planning Commission.

Dennis C. Morrisette is the retired sheriff of Grays Harbor County, a position he held from 1979 to 1998. In addition, he served as the Interim City Manager for the City of Ocean Shores from February until June 2008, the County Commissioner for Grays Harbor from 2001 until 2004 and the Grays Harbor Community Hospital Development Director for 2001. Mr. Morrisette serves on the board of directors of Grays Harbor Community Hospital and is Chairman of the Planning Committee. He also serves as Chairman of the Advisory Committee of the Aberdeen Senior Center.

Directors’ Compensation

The following table shows the compensation paid to our non-employee directors for the year ended June 30, 2008. Directors who are employees of Anchor Bank are not compensated for their services as directors; accordingly compensation information for Jerald Shaw, who is our President and Chief Executive Officer, and Terri Degner, who is our Executive Vice President and Chief Financial Officer, is included in the section entitled “Executive Compensation.”


*Name*	Fees Earned or Paid in Cash ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(1)	All Other Compensation ($)	*Total ($)*


James A. Boora	16,040	42,560	96,000 (2)	154,600
George W. Donovan	16,665	—	—	16,665
Will Foster	16,665	—	—	16,665
Douglas A. Kay	17,445	—	—	17,445
Dennis C. Morrisette	17,445	—	—	17,445
Robert D. Ruecker	17,445	—	—	17,445



(1)	Represents aggregate change between June 30, 2007 and June 30, 2008 in the actuarial present value of the director’s accumulated benefit under the phantom stock plan, which is described below. With the exception of Mr. Boora’s benefit, the values of the benefits for each of the other directors decreased. The aggregate decrease for each directors is as follows: $3,040 for Mr. Donovan, $5,121 for Mr. Foster, $4,066 for Mr. Kay, $5,359 for Mr. Morrisette and $5,986 for Mr. Ruecker.

(2)	Mr. Boora, our former President and Chief Executive Officer, receives payments pursuant to a retirement agreement which is described below.

Non-employee directors of Anchor Bank receive a monthly retainer of $625, as well as a fee of $625 for each board meeting attended. Members of the Audit and Senior Loan committees receive a fee of $260 per committee meeting attended. Anchor Bank’s board of directors sets the amount of fees paid for service on the board and has not increased these fees since 2005. For fiscal 2009, the board increased the directors’ fees to a monthly retainer of $700, with the exception of the chairman of the board, who receives a monthly retainer of $1,120, and the chairman of the audit committee, who receives a monthly retainer of $910. The board also increased the fee for board meeting attendance from $625 to $700.

Anchor Bank maintains a phantom stock plan for the benefit of the directors and certain executive officers. The plan is a non-qualified, unfunded deferred compensation plan. Each director participates in the plan. For more information regarding the phantom stock plan, see the discussion included in “– Non-Qualified Deferred Compensation” herein.

Anchor Bank entered into an agreement with James A. Boora in connection with his retirement as President and Chief Executive Officer in 2006. The agreement was effective as of June 1, 2006 and terminates on June 30, 2011. Pursuant to the agreement, Mr. Boora receives a monthly fee of $8,000 as compensation for past services and for any consulting services he provides at Anchor Bank’s request. However, Mr. Boora has not provided consulting services and it is not expected that he will provide any consulting services in the future. The agreement also requires Anchor Bank to provide the medical, dental and vision benefits Mr. Boora would have received had he remained President and Chief Executive Officer. The agreement contains a non-competition clause that prohibits Mr. Boora from competing with the business of Anchor Bank in any city, town or county in which it has an office.

Meetings and Committees of the Board of Directors

In connection with the completion of the conversion, Anchor Bancorp will establish a nominating and corporate governance committee, a compensation committee and an audit committee. All of the members of these committees will be independent directors as defined in the listing standards of The Nasdaq Stock Market. We plan to have written charters for each committee available on our website at www.anchornetbank.com.

The board of directors of Anchor Bank meets monthly plus strategic planning meetings once or twice per year. During the year ended June 30, 2008, the board of directors held 15 meetings. No director attended fewer than 75% of the total meetings of the board of directors and committees on which he or she served during this period.

Anchor Bank currently has standing Executive, Audit, Executive Loan, Senior Loan, Compensation and Nominating Committees.

The Executive Committee consists of Directors Shaw, Foster, Kay and Ruecker (Chairman). The committee meets on an as needed basis to discuss items of concern to Anchor Bank. The flexible meeting schedule allows for advance discussion of items appearing on the board agenda and review of issues of concern that arise in between scheduled board meetings. The Executive Committee met one time during the year ended June 30, 2008.

The Audit Committee consists of Directors Kay (Chairman), Morrisette and Ruecker. The Audit Committee meets quarterly and on an as needed basis. The Audit Committee oversees the design and operation of Anchor Bank’s internal controls for safeguarding its assets and ensuring the quality and integrity of financial reporting. The committee hires the independent auditor and reviews the audit report prepared by the independent auditor. The Audit Committee met four times during the year ended June 30, 2008.

The Executive Loan Committee consists Director Shaw, the Chief Lending Officer (Chairman), Chief Commercial Loan Officer, Chief Financial Officer, Credit Administrator and Senior Credit Analyst. The committee meets on a weekly basis to approve or decline those loans that exceed the authority vested in Anchor Bank’s Loan Approval Delegation and makes recommendations to the board of directors or the Senior Loan Committee regarding those loans that exceed its approval authority. The committee also has the authority to set interest rates, terms and conditions for the Bank’s loan programs and may extend, modify, defer, purchase, participate or sell Anchor Bank’s existing or potential investment in any loan or extension of credit subject to limitations established in the Loan Committee Authority and Approval Policy. The Executive Loan Committee met 50 times during the year ended June 30, 2008.

The Senior Loan Committee consists of Directors Shaw, Degner, Donovan and Foster, and Chief Lending Officer Gregory H. Schultz (Chairman). The Committee meets on an as needed basis to provide timely approval on those loans or other requests that exceed the authority of the Executive Loan Committee. The Senior Loan Committee has authority to set interest rates, terms and conditions for any loan, modification, extension, deferral or participation, or sell Anchor Bank’s existing or potential investment in any loan or extension of credit, provided that such authority shall be limited to transactions the aggregate of which shall not exceed $6 million in loans to one borrower. The Senior Loan Committee met once during the year ended June 30, 2008.

The Compensation Committee consists of Directors Ruecker (Chairman), Kay, Boora, Donovan, Foster and Morrisette. This committee meets n an as needed basis, and provides general oversight regarding the personnel, compensation and benefits matters of Anchor Bank. The Compensation Committee met once during the year ended June 30, 2008.

The Nominating Committee has a rotating membership so that no one standing for re-election is on the committee. The current committee consists of Directors Kay (Chairman), Boora and Donovan is responsible for the annual selection of nominees for election as directors. This committee met once during the year ended June 30, 2008.

Corporate Governance Policies and Procedures

Anchor Bank has adopted a Code of Business Conduct and Ethics and a Conflict of Interest Policy that are applicable to directors, officers and employees. Following the conversion, Anchor Bancorp will adopt a corporate governance policy and a code of business conduct and ethics. The corporate governance policy is expected to cover such matters as the following:


	•	the duties and responsibilities of each director;

	•	the composition, responsibilities and operation of the board of directors;

	•	the establishment and operation of board committees, including audit, nominating and compensation committees;


	•	succession planning;

	•	convening executive sessions of independent directors;

	•	the board of directors’ interaction with management and third parties; and

	•	the evaluation of the performance of the board of directors and the Chief Executive Officer.

The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct in every respect.

We currently do not have any outside shareholders. Following the conversion, Anchor Bancorp will establish a process for shareholders to communicate with the board of directors. A policy regarding board member attendance at annual meetings of shareholders will also be established.

Executive Officers Who Are Not Directors

The current executive officers of Anchor Bancorp consist of the same individuals who are executive officers of Anchor Bank. Each executive officer of Anchor Bank and Anchor Bancorp will retain his or her office following the conversion. The business experience for at least the past five years for the executive officers who do not serve as directors of Anchor Bancorp or Anchor Bank is set forth below.

Brett A. Nielsen , age 40, is our Senior Vice President and Retail Division Manager, a position he has held since June 2006. Prior to that, he served as our Vice President and Loan Sales Manager from 2005 to 2006 and as our Assistant Vice President and Branch Manager from 2005 to 2006. Prior to joining Anchor Bank, Mr. Nielsen was employed by Washington Mutual Bank from 1992 to 2005 in a variety of positions, including as a branch manager and residential lender. Mr. Nielsen volunteers with the Boy Scouts of America and the Salvation Army, and is a member of the Aberdeen Rotary Club.

Gregory H. Schultz , age 55, is our Senior Vice President and Chief Lending Officer, a position he has held since February 2008. Prior to joining Anchor Bank, Mr. Schultz was the Senior Commercial Lending Officer for Silverstate Bank from May 2007 through January 2008, and was employed by Community Bank of Nevada for ten years in a variety of positions, including most recently as Chief Lending Officer. Mr. Schultz volunteers with Rebuilding Together, the YMCA and the March of Dimes.

Compensation Discussion and Analysis

In this section, we will give an overview of our compensation program, the material compensation decisions we have made under the program and the material factors that we considered in making those decisions. Following this discussion, in the section entitled “Executive Compensation,” we provide a series of tables containing specific information about the compensation earned in the year ended June 30, 2008 by the following officers, who are known as our named executive officers:


	Jerald L. Shaw, President and Chief Executive Officer
	Terri L. Degner, Executive Vice President, Chief Financial Officer and Treasurer
	Brett A. Nielsen, Senior Vice President and Retail Division Manager

Compensation Committee. The Compensation Committee is responsible for evaluating the performance of our Chief Executive Officer, while the Chief Executive Officer evaluates the performance of other senior officers of the Bank and makes recommendations to the Committee regarding compensation levels.

Objectives and Overview of the Compensation Program. Our executive compensation policies are designed to establish an appropriate relationship between executive pay and the annual and long-term performance

of Anchor Bank, to reflect the attainment of short- and long-term financial performance goals, to enhance our ability to attract and retain qualified executive officers, and to align to the greatest extent possible the interests of management and shareholders. The principles underlying the executive compensation policies include the following:


	•	to attract and retain key executives who are vital to our long-term success and are of the highest caliber;

	•	to provide levels of compensation competitive with those offered to community banks in the Pacific Northwest and consistent with our level of performance;

	•	to motivate executives to enhance long-term financial performance of Anchor, and

	•	to integrate the compensation program with our annual and long-term strategic planning and performance measurement processes.

The Committee considers a variety of subjective and objective factors in determining the compensation package for individual executives, including: (1) the performance of Anchor Bank as a whole, with emphasis on annual performance factors and long-term objectives; (2) the responsibilities assigned to each executive; and (3) the performance of each executive of assigned responsibilities as measured by our progress during the year.

Compensation Program Elements. The Compensation Committee focuses primarily on the following three components in forming the total compensation program for our executive officers:


	•	base salary;

	•	incentive compensation; and

	•	deferred compensation.

The current compensation plans involve a combination of salary and incentive compensation to reward short-term performance, and phantom stock grants as a method of providing deferred compensation.

Base Salary. The purpose of base salary is to create a secure base of cash compensation for our employees, reflecting each employee’s level of responsibilities. Salary levels are designed to be competitive within the banking and financial services industries in the Northwest. In setting salary levels, the Compensation Committee regularly evaluates current salary levels by surveying similar institutions in Washington, Oregon, the Northwest and the United States. The survey analysis focuses primarily on asset size, nature of ownership, type of operation and other common factors. Specifically, the Committee annually reviews the Northwest Financial Industry Salary Survey prepared by Milliman USA in association with the Washington Bankers Association, the Washington Financial League and the Oregon Bankers Association, covering 116 Northwest financial organizations. The Committee also reviews comparative information gathered by management from FDIC data.

Incentive Compensation Program. We believe it is appropriate to provide individuals who have key decision-making roles with a meaningful portion of their expected compensation “at risk,” contingent upon meeting pre-defined Anchor Bank performance requirements and/or individual performance objectives. Our incentive compensation plan is designed to provide for incentive compensation with established targets of 30% salary for the Chief Executive Officer, 30% salary for the Chief Operating Officer, 15% to 30% salary for executive vice presidents and 10% to 15% of salary of senior management. Certain other officers may participate in the plan at a level of 10% to 30% of salary. We may utilize the services of compensation consultants, as needed, to remain fair and competitive in the future.

The Compensation Committee approves goals and incentive participation each year. Individual participant goals and performance modifier targets are communicated to participants in writing in the first quarter of the fiscal year to which the goals apply. Goals are measured against performance after the end of the fiscal year and results are communicated to each participant during the month following the year-end audit. The performance modifier ranges

from zero to a maximum of two times the salary at the risk percentage. In making awards under the incentive compensation plan, the Compensation Committee, the Chief Executive Officer and Chief Operating Officer or executive officers, as appropriate, review quantifiable data versus a plan approved by the Board. The plan also provides for subjective evaluation of performance by the Committee, the Chief Executive Officer and Chief Operating Officer or executive officers, as appropriate.

Currently, performance measures consist of profitability, loan production, deposit growth and efficiency. Participant salaries are recorded, with specific goals tied to Anchor Bank’s goals for the year, and a percentage of compensation is noted as “salary at risk.” For example, if the Chief Executive Officer’s salary is $215,000 per year with a 30% salary at risk factor, the opportunity for salary at risk compensation is $64,500 if goals are met at 100%. The salary at risk is divided into several goals based on annual goals of Anchor Bank. A performance modifier is used to determine the percentage of the goal met. A goal partially met at 88% with a weight factor of 25% of salary at risk would look like this:

$215,000 × 30% at risk = $64,500



*Goal Weight*	Performance Modifier	*Result*

0.25	0.88	0.22

$64,500 × .22 = $14,190


Performance goals are assessed annually and paid following the fiscal year end. The following table details the goals of each of the named executive officer’s performance incentive for the year ended June 30, 2009.

	*Performance Goal*

*Name*	*Profit*	Loan Production	Deposit Growth	Efficiency Ratio


Jerald L. Shaw	25%	25%	25%	25%
Terri L. Degner	25%	25%	25%	25%
Brett A. Nielsen	25%	30%	25%	20%

For the fiscal year ended June 30, 2008, Anchor Bank did not achieve any of the goals set with respect to annual performance incentives. Accordingly, the named executive officers did not receive any incentive plan compensation. For the fiscal year ending June 30, 2009, the following goals have been set:


	*Minimum Threshold*				*Maximum Threshold*


Net Worth		$	2,891,376			$	5,000,000
Loans		$	92,000,000			$	161,000,000
Deposits		$	80,000,000			$	126,000,000
Efficiency Ratio			76.92	%			75.00	%

Deferred Compensation. Anchor Bank maintains a phantom stock plan for the benefit of certain directors and executive officers. The plan is a non-qualified, unfunded deferred compensation plan. Awards under the plan are granted in the form of phantom stock shares. At the time an award is granted, the value of each share of awarded phantom stock is determined by the committee that administers the plan, based on its determination of Anchor Bank’s value at the time of grant. Each year thereafter, the value of the phantom stock is redetermined by the committee, to reflect the then-current value of Anchor Bank.

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Compensation Committee Report

The Compensation Committee of Anchor Bank has submitted the following report for inclusion in this prospectus:

We have reviewed and discussed the Compensation Discussion and Analysis contained in this prospectus with management. Based on our review of and the discussion with management with respect to the Compensation Discussion and Analysis, we recommend that the Compensation Discussion and Analysis be included in this prospectus.

The foregoing report is provided by the Compensation Committee:


	James A. Boora	Douglas A. Kay
	George W. Donovan	Dennis C. Morrisette
	Will Foster	Robert D. Ruecker

Executive Compensation

Summary Compensation Table. The following table shows information regarding 2008 compensation for our named executive officers.


*Name and Principal Position*	*Year*	*Salary ($)*	Non-Equity Incentive Plan Compensation ($)(1)	Change in Pension Value and Deferred Compensation Earnings ($)(2)	All Other Compen- sation ($)(3)	*Total ($)*


Jerald L. Shaw	2008	210,650	—	(4)	11,929	222,579
President and Chief Executive Officer

Terri L. Degner	2008	117,700	—	(5)	7,600	125,300
Executive Vice President, Chief Financial Officer and Treasurer

Brett A. Nielsen	2008	91,460	—	—	2,625	94,085
Senior Vice President and Retail Division Manager


(1)	Because the financial goals set under the incentive compensation plan were not reached, the named executive officers did not receive any incentive awards for the year ended June 30, 2008.

(2)	Represents aggregate change between June 30, 2007 and June 30, 2008 in the actuarial present value of the executive’s accumulated benefit under the phantom stock plan, which is described below. The only named executive officers who participate in this plan are Mr. Shaw and Ms. Degner.

(3)	Represents for Mr. Shaw, 401(k) match of $9,741, use of company car of $1,000 and life insurance premium of $1,188; for Ms. Degner, 401(k) match of $5,330, use of company car of $2,000 and life insurance premium of $270; and for Mr. Nielsen, 401(k) match of $2,625.

(4)	The value of Mr. Shaw’s aggregate benefit under the phantom stock plan decreased by $64,330.

(5)	The value of Ms. Degner’s aggregate benefit under the phantom stock plan decreased by $7,616.

Employment Agreements. In connection with the conversion, Anchor Bancorp and Anchor Bank intend to enter into three-year employment agreements with Mr. Shaw and Ms. Degner. Under the employment agreements, the initial base salary level will be $260,000 for Mr. Shaw and $150,000 for Ms. Degner, which amounts will be paid

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by Anchor Bank and may be increased at the discretion of the board of directors or an authorized committee of the board. On each anniversary of the initial date of the employment agreement, the term of the agreement will be extended for an additional year unless notice is given by the board of directors to the executive at least 90 days prior to the anniversary date. The agreement may be terminated by Anchor Bank, including for cause, and by the executive if assigned duties inconsistent with his or her initial position, duties or responsibilities, or upon the occurrence of certain events specified by federal regulations. In the event that the executive’s employment is terminated without cause or upon his or her voluntary termination following the occurrence of an event described in the preceding sentence, Anchor Bank would be required to honor the terms of the agreement through the expiration of the current term, including payment of the then current cash compensation and continuation of employee benefits.

The employment agreement will also provide for a severance payment and other benefits if the executive is involuntarily terminated in connection with a change in control of Anchor Bancorp or Anchor Bank. The agreement authorizes severance payments on a similar basis if the executive voluntarily terminates his or her employment because the executive is assigned duties inconsistent with his or her position, duties, and responsibilities immediately prior to such change in control. The agreement will define the term “change in control” as having occurred when, among other things: (1) a person other than Anchor Bancorp purchases shares of Anchor Bancorp’s common stock under a tender or exchange offer for the shares; (2) any person, as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, is or becomes the beneficial owner of securities of Anchor Bancorp representing 25% or more of the combined voting power of Anchor Bancorp’s then outstanding securities; (3) a majority of the membership of the board of directors changes as the result of a contested election; or (4) shareholders of Anchor Bancorp approve a merger, consolidation, sale or disposition of all or substantially all of Anchor Bancorp’s assets, or a plan of partial or complete liquidation.

In the event of a change in control, the employment agreement provides that the value of the maximum benefit be distributed in the form of a lump sum cash payment equal to 2.99 times the executive’s “base amount” (generally, the average of his taxable compensation for the past five years), and continued coverage under Anchor Bancorp’s and Anchor Bank’s health, life and disability programs for a 36-month period following the change in control, the total value of which does not exceed 2.99 times the executive’s base amount. Section 280G of the Internal Revenue Code provides that severance payments that equal or exceed three times the individual’s base amount are deemed to be “excess parachute payments” if they are associated with a change in control. Individuals are subject to a 20% excise tax on the amount of such excess parachute payments, and Anchor Bancorp and Anchor Bank would not be entitled to deduct the amount of such excess payments. The employment agreement will provide that severance and other payments that are subject to a change in control will be reduced to the extent necessary to ensure that no amounts payable to the executive will be considered excess parachute payments.

Severance Agreements for Executive Officers. In connection with the conversion, Anchor Bank intends to enter into a three-year change in control severance agreement with Mr. Nielsen and Mr. Schultz. On each anniversary of the initial date of the severance agreement, the term of the agreement may be extended for an additional year at the discretion of the board or an authorized committee of the board. The severance agreement will define the term “change in control” in the same manner as the employment agreements described above.

The severance agreement would provide for a severance payment and other benefits if the executive is involuntarily terminated within 12 months following a change in control of Anchor Bancorp or Anchor Bank. The agreement will authorize severance payments on a similar basis where the executive voluntarily terminates employment within 12 months following a change in control because of being assigned duties inconsistent with the executive’s position, duties, responsibilities and status immediately prior to such change in control. The severance agreement will provide that the value of the maximum benefit be distributed in the form of a lump sum cash payment equal to 2.99 times the executive’s base amount, and continued coverage under Anchor Bancorp’s and Anchor Bank’s health, life and disability programs for a 36-month period following the change in control, the total value of which does not exceed 2.99 times the executive’s base amount. Any payment would be subject to reduction pursuant to Section 280G of the Internal Revenue Code to avoid excess parachute payments.

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Employee Severance Compensation Plan. In connection with the conversion, Anchor Bank’s board of directors intends to establish the Anchor Bank Employee Severance Compensation Plan which will provide eligible employees with severance pay benefits in the event of a change in control of Anchor Bank or Anchor Bancorp following the conversion. The severance plan will define the term “change in control” in the same manner as the employment agreements described above.

Management personnel with employment agreements or severance agreements will not be eligible to participate in the severance plan. Generally, other employees will be eligible to participate in the severance plan if they have completed at least one year of service with Anchor Bank. Employees will be credited with service prior to adoption of the plan. The severance plan will vest in each participant a contractual right to the benefits the participant is entitled to thereunder. Under the plan, in the event of a change in control of Anchor Bank or Anchor Bancorp, eligible employees who are terminated or who terminate their employment within one year for reasons specified under the severance plan will be entitled to receive a severance payment. If a participant whose employment has terminated has completed at least one year of service, the participant will be entitled to a cash severance payment equal to three months for service of one to two years, six months for service of two to three years, and six months plus one month for each year of continuous employment over three years up to a maximum of one and one-half times the participant’s annual compensation. A participant who is an assistant vice president of Anchor Bank prior to the change in control will receive a minimum payment equal to one-half of the participant’s then-annual compensation. Individuals who are vice presidents and above of Anchor Bank prior to the change in control will receive a minimum payment equal to the participant’s then-annual compensation. These payments may tend to discourage takeover attempts by increasing costs to be incurred by Anchor Bank in the event of a takeover. If the provisions of the severance plan are triggered, then the total amount of payments that would be due thereunder, based solely upon current salary levels, would be approximately $3.3 million. It is management’s belief, however, that substantially all of Anchor Bank’s employees would be retained in their current positions in the event of a change in control, and that any amount payable under the severance plan would be considerably less than the total amount that could possibly be paid under the severance plan.

Grants of Plan-Based Awards

The following table shows information regarding grants of plan-based awards made to our named executive officers for the fiscal year ended June 30, 2008. We did not grant any equity incentive plan awards or other equity awards.


	Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1)


*Name*	*Threshold ($)*	*Target ($)*	*Maximum ($)*


Jerald L. Shaw	12,639	63,195	94,793
Terri L. Degner	5,885	29,425	44,138
Brett A. Nielsen	2,743	13,719	20,579


(1)	The performance goals and measurements associated with our executive officers’ non-equity incentive plan that generate the awards set forth above are provided in the “Incentive Compensation Program” discussion beginning on page 99. Because the goals were not reached, the named executive officers did not receive any incentive awards for the year ended June 30, 2008.

Non-Qualified Deferred Compensation

The following information is presented with respect to plans that provide for the deferral of compensation on a basis that is not tax-qualified in which the named executive officers participated in the year ended June 30, 2008.

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*Name*	Executive Contributions in Last FY ($)	Registrant Contributions in Last FY ($)	Aggregate Earnings in Last FY ($)	Aggregate Withdrawals/ Contributions ($)	Aggregate Balance at Last FYE ($)


Jerald L. Shaw	—	—	(1)	—	74,379
Terri L. Degner	—	—	(2)	—	26,798
Brett A. Nielsen	—	—	—	—	—


(1)	The value of Mr. Shaw’s benefit decreased by $64,330.

(2)	The value of Ms. Degner’s benefit decreased by $7,616.

Anchor Bank maintains a phantom stock plan for the benefit of certain directors and executive officers. The plan is a non-qualified, unfunded deferred compensation plan. The only named executive officers who participate in the plan are Jerald Shaw and Terri Degner. The plan is unfunded, but Anchor Bank has purchased life insurance policies on Mr. Shaw and Ms. Degner that are intended to offset the costs associated with the Plan during the life of the participant and provide a recovery of plan costs upon the participant’s death. Anchor Bank is the sole owner of the insurance policies. Awards under the plan are granted in the form of phantom stock shares. Phantom stock shares are hypothetical shares of stock determined by reference to the value of Anchor Bank. At the time an award is granted, the value of each share of awarded phantom stock is determined by the committee that administers the plan, based on its determination of Anchor Bank’s value at the time of grant. Each year thereafter, the value of the phantom stock is redetermined by the committee, to reflect the then-current value of Anchor Bank. In no year may the change in value of a phantom stock share be less than 90 percent, nor more than 125 percent, of the value of the phantom stock share in the previous year. No changes in value are taken into account after the participant’s separation from service or retirement age, or after a change in control. The value of a participant’s phantom stock benefit is based on the sum of the positive differences between the value of each share of phantom stock awarded to the participant (taking into account the valuation limitations described in the preceding two sentences) over the value of that phantom stock share as determined on the grant date.

A participant’s phantom stock plan benefit vests at a rate of 20 percent for each year of service, with full vesting occurring after 5 years of service. Full vesting also occurs upon death or disability while actively employed, separation from service after attaining age 65, a change in control involving Anchor Bank, or other circumstances described in a participant’s award agreement. On the June 30 ^th or December 31 ^st following the participant’s retirement age, a monthly benefit will be paid based on the value of the participant’s vested phantom stock benefit. The participant’s retirement age is the age set forth in the participant’s phantom stock plan agreement. The monthly benefit is paid over the number of months provided for in that agreement. Also, certain other awards will be paid upon the fifth anniversary of the award date, if elected by the participant at the time the award is granted. A participant who dies prior to the commencement of benefits will receive a lump sum death benefit equal to the present value of his or her remaining phantom stock plan benefit. The death benefit will not be paid under the plan, but instead under an insurance policy on the life of the participant.

Potential Payments Upon Termination or Change in Control

The phantom stock plan provides for potential payments upon a participant’s retirement or death, as well as upon a change in control. The following table shows, as of June 30, 2008, the value of potential payments under these scenarios.


*Name*	*Retirement ($)*		*Death ($)*		Change in Control ($)


Jerald L. Shaw	$	578,967	$	578,967	$	578,967
Terri L. Degner		68,542		68,542		68,542
Brett A. Nielsen		—		—		—

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Mr. Shaw and Ms. Degner are the only named executive officers who participate in the phantom stock plan. The participant’s retirement age is the age set forth in the participant’s phantom stock plan agreement. The monthly benefit is paid over the number of months provided for in that agreement. A participant who dies prior to the commencement of benefits will receive a lump sum death benefit equal to the present value of his or her remaining phantom stock plan benefit. In the event of a change in control, each participant employed by Anchor Bank immediately prior to the change in control will be 100 percent vested in his or her phantom stock benefit and will receive a lump sum equal to the value of his or her entire phantom stock benefit.

Benefits to Be Considered Following Completion of the Conversion

We intend to adopt and request shareholder approval of one or more stock-based incentive plans, including a stock option plan and a restricted stock plan, no earlier than six months after the completion of the conversion. The stock option plan and restricted stock plan may be established as separate plans or as part of a single plan.

Employee Stock Ownership Plan. The board of directors has authorized the adoption by Anchor Bank of an employee stock ownership plan for its eligible employees, subject to the completion of the conversion. The employee stock ownership plan will satisfy the requirements for an employee stock ownership plan under the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974. Employees of Anchor Bank who have been credited with at least 1,000 hours of service during a designated 12-month period and who have attained age 21 will be eligible to participate in the employee stock ownership plan.

It is intended that the employee stock ownership plan will purchase 8% of the shares sold in the offering. This would range between 306,000 shares, assuming 3,825,000 shares are sold in the offering, and 476,100 shares, assuming 5,951,250 shares are sold in the offering. We anticipate that the employee stock ownership plan will borrow funds from Anchor Bancorp to purchase the shares. This loan will equal 100% of the aggregate purchase price of the common stock purchased by the employee stock ownership plan. The employee stock ownership plan will repay the loan principally from the cash contributions from Anchor Bank and from dividends payable on the common stock held by the plan over the anticipated 15-year term of the loan. The interest rate for the plan loan is expected to be the prime rate as published in The Wall Street Journal on the closing date of the conversion or some other reasonable rate. See “Pro Forma Data.” To the extent that the employee stock ownership plan is unable to acquire 8% of the common stock sold in the offering, it is anticipated that it may acquire the shares following the conversion through open market purchases.

In any plan year, Anchor Bank may make additional discretionary contributions to the employee stock ownership plan for the benefit of participants. These contributions may be used to acquire shares of common stock through the purchase of outstanding shares in the market, from individual shareholders, or from shares which constitute authorized but unissued shares or shares held in trust by Anchor Bancorp. Several factors will affect the timing, amount and manner of any such discretionary contributions, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. It is not anticipated that additional discretionary contributions will be made until the employee stock ownership plan loan is repaid in full.

The shares purchased by the employee stock ownership plan with the proceeds of the loan will be held in a suspense account, and released for allocation among eligible participants as the loan is repaid. Share released from the suspense account and discretionary contributions to the employee stock ownership plan will be allocated among participants on the basis of each eligible participant’s proportional share of total compensation (as limited by the Internal Revenue Code). Forfeitures will be reallocated among the remaining plan participants.

Participants will vest in their employee stock ownership plan account at the rate of 20% per year, beginning upon the completion of two years of service, with full vesting occurring after six years of service. Employees will be credited for service prior to adoption of the employee stock ownership plan. A participant is fully vested at normal retirement (which is the attainment of age 65), in the event of death or disability while actively employed, or upon termination of the employee stock ownership plan. Benefits are distributable upon a participants’ normal retirement,

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death, disability, termination of employment or the termination of the plan. Contributions to the employee stock ownership plan are not fixed, so benefits payable under the employee stock ownership plan cannot be estimated.

The board of directors will select a trustee for the employee stock ownership plan. The trustee must vote all allocated shares held in the employee stock ownership plan in accordance with the instructions of plan participants and unallocated shares must be voted in the same ratio on any matter as those shares for which instructions are given. The trustee will vote the allocated shares for which no instructions are received as directed by the plan administrator.

Under applicable accounting requirements, compensation expense for a leveraged employee stock ownership plan is recorded at the fair market value of the employee stock ownership plan shares when committed to be released to participants’ accounts. See “Pro Forma Data.”

Stock Option Plan. We intend to adopt a stock option plan for our directors, officers and employees after the conversion, subject to shareholder approval. Federal regulations prohibit us from implementing this plan until six months after the conversion and offering. We expect the recognition plan will be implemented within the first 12 months after the conversion and offering.

Our proposed stock option plan will authorize a committee of non-employee directors or the full board of directors, to grant options to purchase up to 10% of the aggregate shares sold in the offering and issued to the Anchor Bancorp foundation. The stock option plan will have a term of ten years. The committee or the board will decide which directors, officers and employees will receive options and the terms of those options. No stock option will permit its recipient to purchase shares at a price that is less than the fair market value of a share on the date the option is granted, and no option will have a term that is longer than ten years. In addition, executive officers and directors would be required to exercise or forfeit their options if Anchor Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive.

If we implement a stock option plan before the first anniversary of the conversion, current regulations will require that:


	•	the total number of options available for grant to non-employee directors be limited to 30% of the options authorized under the plan;

	•	the number of options that may be granted to any one non-employee director be limited to 5% of the options authorized under the plan;

	•	the number of options that may be granted to any officer or employee be limited to 25% of the options authorized for the plan;

	•	the options may not vest more rapidly than 20% per year, beginning on the first anniversary of shareholder approval of the plan; and

	•	accelerated vesting not be permitted except for death, disability or upon a change in control of Anchor Bank or Anchor Bancorp.

We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases.

Restricted Stock Plan. We also expect to implement a restricted stock plan for our directors, officers and employees after the conversion and offering. Federal regulations prohibit us from implementing this plan until six months after the conversion and offering. We expect the recognition plan will be implemented within the first 12 months after the conversion and offering. Federal regulations require that the plan be approved by a majority of the outstanding shares of common stock of Anchor Bancorp.

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Our proposed restricted stock plan will authorize a committee of non-employee directors or the full board of directors to make restricted stock awards of up to 4% of the aggregate shares sold in the offering and issued to the Anchor Bancorp foundation. The committee of the board will decide which directors, officers and employees will receive restricted stock and the terms of those awards. Anchor Bancorp may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. If we implement a restricted stock plan before the first anniversary of the conversion and offering, current regulations will require that:


	•	the total number of shares that are awarded to non-employee directors be limited to 30% of the shares authorized under the plan;

	•	the number of shares that are awarded to any one non-employee director be limited to 5% of the shares authorized under the plan;

	•	the number of shares that are awarded to any officer or employee be limited to 25% of the shares authorized under the plan;

	•	the awards may not vest more rapidly than 20% per year, beginning on the first anniversary of shareholder approval of the plan; and

	•	accelerated vesting not be permitted except for death, disability or upon a change in control of Anchor Bank or Anchor Bancorp.

Restricted stock awards under this plan may feature employment restrictions that require continued employment for a period of time for the award to be vested. Awards would not be vested unless the specified employment restrictions are met. However, pending vesting, the award recipient may have voting and dividend rights. Executive officers and directors would be required to forfeit the unvested portion of their restricted stock if Anchor Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive.

Compensation Committee Interlocks and Insider Participation

Currently, the entire board of directors makes the compensation decisions for Anchor Bank. Except for James Boora, who is our former President and Chief Executive Officer, Jerald Shaw, who is our current President and Chief Executive Officer, and Terri Degner, who is our Executive Vice President and Chief Financial Officer, none of the members of the board of directors has served as an officer or employee of Anchor Bank or had any relationships otherwise requiring disclosure. In connection with the completion of the conversion, Anchor Bancorp will establish a compensation committee composed entirely of independent directors as defined in the listing standards of The Nasdaq Stock Market.

Transactions with Related Persons

Anchor Bank has followed a policy of granting loans to officers and directors, which fully complies with all applicable federal regulations. Loans to directors and executive officers are made in the ordinary course of business and on the same terms and conditions as those of comparable transactions with all customers prevailing at the time, in accordance with our underwriting guidelines, and do not involve more than the normal risk of collectibility or present other unfavorable features. Loans and aggregate loans of $500,000 or greater are reviewed and pre-approved by the board of directors, pursuant to Regulation O of the Federal Reserve Board. In addition, all loans to executive officers which do no require pre-approval must be reported to Board of Directors. All loan approval and review procedures are governed by written policies.

All loans made to our directors and executive officers are subject to federal regulations restricting loans and other transactions with affiliated persons of Anchor Bank. Loans and available lines of credit to all directors and executive officers and their associates totaled approximately $1.8 million at June 30, 2008, which was 2.8% of our equity at that date. All loans to directors and executive officers were performing in accordance with their terms at June 30, 2008. Total deposits of directors and executive officers were approximately $2.7 million at June 30, 2008.

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Director Foster is a principal of the firm, Street Lundgren & Foster Architects, located in Montesano, Washington. During 2008, the firm was retained as architect for construction of Anchor Bank’s new branch in Montesano. Street Lundgren & Foster Architects was paid a total of $230,978 for creation of plans and oversight of the project, of which 50%, or $115,489, represents Mr. Foster’s interest. We believe the amount paid was substantially equal to or less than other third party providers’ charges would have been for similar services.

Anchor Bank is a member of the Washington Community Reinvestment Association (“WCRA”), a nonprofit organization that administers loan pools that support low-income housing throughout Washington State. James A. Boora was a member of the board of directors of WCRA through February 2007. Anchor Bank participated in approximately $607,000 in loans and $400,000 in investments at June 30, 2008, and $571,000 in loans and $411,000 in investments at June 30, 2007, from the WCRA.

Any situation involving a potential conflict of interest or other violation of Anchor Bank’s Code of Business Conduct is governed by the Conflict of Interest Policy, a written policy. Under this policy, the individual must make full and prompt disclosure of any such situation. The policy governs all potential conflicts of interest and lists a number of examples, including investing in significant suppliers, customers or competitors, soliciting anything of value in return for business with Anchor Bank, misusing privileged information or revealing confidential information to outsiders, and associating Anchor Bank’s name with any outside business or political activity. Under the Conflict of Interest Policy, officers and directors must complete a statement of disclosure questionnaire to ensure that no potential conflicts are overlooked. In addition, the board of directors has an unwritten policy that requires board review of any activity (other than small credits, as defined in Regulation O of the Federal Reserve Board) involving a director or certain executive officers. If a director is involved, he or she abstains from discussion and voting on the matter. All proceedings are reflected in the minutes of the meetings of the board of directors.

HOW WE ARE REGULATED

The following is a brief description of certain laws and regulations which are applicable to Anchor Bancorp and Anchor Bank. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere in this prospectus, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. We believe, however, that we have included all descriptions of laws and regulations applicable to Anchor Bancorp and Anchor Bank that an investor needs to consider in making an investment decision. Legislation is introduced from time to time in the United States Congress that may affect the operations of Anchor Bancorp and Anchor Bank. In addition, the regulations governing us may be amended from time to time by the respective regulators. Any such legislation or regulatory changes in the future could adversely affect us. We cannot predict whether any such changes may occur.

Upon completion of the conversion, Anchor Bancorp will be registered as bank holding company under the Bank Holding Company Act and will be subject to regulation and supervision by the Federal Reserve Board and the Washington Department of Financial Institutions. Anchor Bancorp will also be required to file annually a report of operations with, and are subject to examination by, the Federal Reserve Board and the Washington Department of Financial Institutions. This regulation and oversight is generally intended to ensure that Anchor Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of Anchor Bank.

Regulation and Supervision of Anchor Bank

General. As a state-chartered savings bank, Anchor Bank is subject to applicable provisions of Washington law and regulations of the Washington Department of Financial Institutions. State law and regulations govern Anchor Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. Under state law, savings banks in Washington also generally have all of the powers that federal savings banks have under federal laws and regulations. Anchor Bank is subject to periodic examination and reporting requirements by and of the Washington Department of Financial Institutions.

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The Emergency Economic Stabilization Act of 2008. In response to the financial crises affecting the banking system and financial markets and the going concern threats to the ability of investment banks and other financial institutions, the U.S. Congress adopted the new Emergency Economic Stabilization Act of 2008 (“EESA”). The primary feature of the EESA is the establishment of a troubled asset relief program (“TARP”), under which the U.S. Treasury Department will purchase up to $700 billion of troubled assets, including mortgage-backed and other securities, from financial institutions for the purpose of stabilizing the financial markets and to purchase capital stock from these financial institutions. There can be no assurance as to what impact it will have on the financial markets, including the extreme levels of volatility currently being experienced.

Insurance of Accounts and Regulation by the FDIC. Anchor Bank is a member of the Deposit Insurance Fund, or DIF, which is administered by the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation insures deposits up to the applicable limits and this insurance is backed by the full faith and credit of the United States government. As insurer, the Federal Deposit Insurance Corporation imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by institutions insured by the Federal Deposit Insurance Corporation. It also may prohibit any institution insured by the Federal Deposit Insurance Corporation from engaging in any activity determined by regulation or order to pose a serious risk to the institution. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Under regulations effective January 1, 2007, the Federal Deposit Insurance Corporation adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. Well-capitalized institutions (generally those with capital adequacy, asset quality, management, earnings and liquidity, or “CAMELS” composite ratings of 1 or 2) are grouped in Risk Category I and assessed for deposit insurance at an annual rate of between five and seven basis points. The assessment rate for an individual institution is determined according to a formula based on a weighted average of the institution’s individual CAMEL component ratings plus either five financial ratios or, in the case of an institution with assets of $10.0 billion or more, the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV are assessed at annual rates of 10, 28 and 43 basis points, respectively.

Deposit Insurance Fund-insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the semi-annual period ended June 30, 2007, the Financing Corporation assessment equaled 1.25 basis points for each $100 in domestic deposits. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in the years 2017 through 2019.

The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Anchor Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Anchor Bank’s deposit insurance.

Capital Requirements. Federally insured savings institutions, such as Anchor Bank, are required to maintain a minimum level of regulatory capital. Federal Deposit Insurance Corporation regulations recognize two types, or tiers, of capital: core (“Tier 1”) capital and supplementary (“Tier 2”) capital. Tier 1 capital generally includes common shareholders’ equity and noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original

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maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.

The Federal Deposit Insurance Corporation currently measures an institution’s capital using a leverage limit together with certain risk-based ratios. The Federal Deposit Insurance Corporation’s minimum leverage capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage ratio of at least 4% to 5% of total assets. At June 30, 2008, Anchor Bank had a Tier 1 leverage capital ratio of 10.4%. The Federal Deposit Insurance Corporation retains the right to require a particular institution to maintain a higher capital level based on its particular risk profile.

Federal Deposit Insurance Corporation regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight based on the relative risk of that category. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets must be at least 4%. In evaluating the adequacy of a bank’s capital, the Federal Deposit Insurance Corporation may also consider other factors that may affect the bank’s financial condition, such as interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks.

The Washington Department of Financial Institutions requires that net worth equal at least five percent of total assets. At June 30, 2008, Anchor Bank had Tier 1 risk-based capital of 12.9%. For a complete description of Anchor Bank’s required and actual capital levels on June 30, 2008, see “Anchor Bank Exceeds All Regulatory Capital Requirements.”

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

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Federal Deposit Insurance Corporation determines that Anchor Bank fails to meet any standard prescribed by the guidelines, it may require Anchor Bank to submit an acceptable plan to achieve compliance with the standard.

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

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

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

To the extent that legal uncertainty exists in this area, all creditors, including Anchor Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Federal Reserve System. The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of June 30, 2008, Anchor Bank’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

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

Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank regulatory agency to assess a bank’s record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, an assessment is required of any bank which has applied to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. Anchor Bank received a “satisfactory” rating during its most recent examination.

Dividends. Dividends from Anchor Bank constitute the major source of funds for dividends which may be paid by Anchor Bancorp to shareholders after the conversion. The amount of dividends payable by Anchor Bank to

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

The amount of dividends actually paid during any one period will be strongly affected by Anchor Bank’s policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.

Privacy Standards. The Gramm-Leach-Bliley Act modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Anchor Bank is subject to Federal Deposit Insurance Corporation regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require Anchor Bank to disclose its privacy policy, including identifying with whom it shares “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter.

Anti-Money Laundering and Customer Identification. Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) on October 26, 2001 in response to the terrorist events of September 11, 2001. The USA Patriot Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Since its enactment, Congress has ratified certain expiring provisions of the USA Patriot Act.

Regulation and Supervision of Anchor Bancorp

General . Upon the completion of the conversion, Anchor Bancorp will be a bank holding company registered with the Federal Reserve and the sole shareholder of Anchor Bank. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. As a bank holding company, Anchor Bancorp will be required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and will be subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

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

Anchor Bancorp and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between its bank subsidiary and affiliates are subject to numerous

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restrictions. With some exceptions, Anchor Bancorp and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Anchor Bancorp, or its affiliates.

Sarbanes-Oxley Act of 2002 . As a public company, Anchor Bancorp, will be subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act was signed into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with various accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

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

Acquisitions . The Bank Holding Company Act prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the Bank Holding Company Act, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

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

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

Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in

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analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board’s capital adequacy guidelines for Anchor Bancorp, on a consolidated basis, are similar to those imposed on Anchor Bank by the Federal Deposit Insurance Corporation. See “– Regulation and Supervision of Anchor Bank – Capital Requirements.”

Restrictions on Dividends . Anchor Bancorp’s ability to declare and pay dividends may depend in part on dividends received from Anchor Bank. The Revised Code of Washington regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if Anchor Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation.

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

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

T AXATION

Federal Taxation

General. Anchor Bancorp and Anchor Bank will be subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Anchor Bancorp or Anchor Bank. Anchor Bank’s federal income tax returns have never been audited. See “Business of Anchor Bank - Properties.”

Following the conversion, Anchor Bancorp anticipates that it will file a consolidated federal income tax return with Anchor Bank commencing with the first taxable year after completion of the conversion. Accordingly, it is anticipated that any cash distributions made by Anchor Bancorp to its shareholders would be considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.

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

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Anchor Bank has not been subject to the alternative minimum tax, nor does it have any such amounts available as credits for carryover.

Net Operating Loss Carryovers . A financial institution may carryback net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred

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in taxable years beginning after August 6, 1997. At June 30, 2008, Anchor Bank had no net operating loss carryforwards for federal income tax purposes.

Corporate Dividends-Received Deduction. Anchor Bancorp may eliminate from its income dividends received from Anchor Bank as a wholly-owned subsidiary of Anchor Bancorp if it elects to file a consolidated return with Anchor Bank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

The Anchor Bancorp Foundation

Tax Considerations. Anchor Bancorp has been advised by its outside tax advisors that an organization created and operated for charitable purposes would generally qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code, and that this type of an organization would likely be classified as a private foundation as determined in Section 509 of the Internal Revenue Code. The foundation will submit a request to the Internal Revenue Service to be recognized as an exempt organization. As long as the foundation files its application for recognition of tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, the effective date of the foundation’s status as a Section 501(c)(3) organization will be retroactive to the date of its organization. Anchor Bancorp’s outside tax advisor, however, has not rendered any advice on the regulatory condition to the contribution to require that all shares of common stock of Anchor Bancorp held by the foundation must be voted in the same ratio as all other outstanding shares of common stock of Anchor Bancorp, on all proposals considered by shareholders of Anchor Bancorp. In the event that Anchor Bancorp or the foundation receives an opinion of its legal counsel that compliance with this voting restriction would have the effect of causing the foundation to lose its tax-exempt status or otherwise have a material and adverse tax consequence on the foundation, or subject the foundation to an excise tax under Section 4941 of the Internal Revenue Code, it is expected that the Federal Deposit Insurance Corporation would waive such voting restriction upon submission of a legal opinion(s) by Anchor Bancorp or the foundation satisfactory to them. See “Business of Anchor Bank – Charitable Foundation – Regulatory Conditions Imposed on the Anchor Bancorp Foundation.”

Under Washington law, Anchor Bancorp is authorized by statute to make charitable contributions and by law has recognized the benefits of such contributions to a Washington corporation. In this regard, Washington law provides that a charitable gift must be within reasonable limits to be valid.

Under the Internal Revenue Code, Anchor Bancorp is generally allowed a deduction for charitable contributions made to qualifying donees within the taxable year of up to 10% of its taxable income of the consolidated group of corporations (with certain modifications) for that year. Charitable contributions made by Anchor Bancorp in excess of the annual deductible amount will be deductible over each of the five succeeding taxable years, subject to certain limitations. Anchor Bancorp believes that the conversion presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised in the conversion. In making this determination, Anchor Bancorp considered the dilutive impact of the contribution of common stock to the foundation on the amount of common stock available to be offered for sale in the stock offering. Based on this consideration, Anchor Bancorp believes that the contribution to the foundation in excess of the 10% annual deduction limitation is justified given Anchor Bancorp’s capital position and its earnings, the substantial additional capital being raised in the stock offering and the potential benefits of the foundation to the communities served by Anchor Bancorp. In this regard, assuming the sale of shares at the maximum of the estimated offering range, Anchor Bancorp would have pro forma shareholders’ equity of $106.6 million or 16.27% of pro forma consolidated assets. See “Capitalization,” “Anchor Bank Exceeds All Regulatory Capital Requirements,” “Pro Forma Data” and “Comparison of Valuation and Pro Forma Information With and Without Charitable Foundation.”

Anchor Bancorp anticipates receiving an opinion of its outside tax advisor, Silver, Freedman & Taff, L.L.P., that the contribution of its own stock to the foundation should not constitute an act of self-dealing. However,

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any opinion received from outside tax advisors is not binding on the Internal Revenue Service or the State of Washington Department of Revenue. Anchor Bancorp should also be entitled to a deduction in the amount of the fair market value of the stock at the time of the contribution less the nominal par value that the foundation may be required to pay to Anchor Bancorp for such stock, subject to the annual deduction limitation described above. Anchor Bancorp, however, would be able to carry forward any unused portion of the deduction for five years following the contribution, subject to certain limitations. Anchor Bancorp’s outside tax advisor, however, has not rendered advice as to fair market value for purposes of determining the amount of the tax deduction. Assuming the close of the offering at the maximum of the estimated price range, Anchor Bancorp estimates that all or a substantial portion of the contribution should be deductible over the six-year period. Anchor Bancorp may make further contributions to the foundation following the initial contribution, although this is not anticipated. In addition, Anchor Bancorp and Anchor Bank may also continue to make charitable contributions to other qualifying organizations. Any of these future contributions would be based on an assessment of the financial condition of Anchor Bancorp at that time, the interests of shareholders and depositors of Anchor Bancorp and Anchor Bank, and the financial condition and operations of the foundation.

Although Anchor Bancorp expects to receive an opinion of its outside tax advisor that it will more likely than not be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize the foundation as a Section 501(c)(3) exempt organization or that a deduction for the charitable contribution will be allowed. In either case, Anchor Bancorp’s contribution to the foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes the determination.

As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are generally exempt from federal and state corporate income taxation. However, investment income, such as interest, dividends and capital gains, of a private foundation will generally be subject to a federal excise tax of 2.0%. The foundation will be required to make an annual filing with the Internal Revenue Service. The foundation also will be required to make available the annual information return for a period of three years. Numerous other restrictions exist regarding the operation of the foundation including transactions with related entities, level of investment and distributions for charitable purposes.

Washington Taxation

Anchor Bank is subject to a business and occupation tax imposed under Washington law at the rate of 1.5% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from this tax.

T HE CONVERSION

The board of directors of Anchor Bank has adopted the plan of conversion and an application for approval of the plan of conversion has been filed with the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation. The Washington Department of Financial Institutions has approved our application with the condition that the plan of conversion is approved by our members and that certain other conditions imposed are satisfied. The Washington Department of Financial Institutions’ approval does not constitute a recommendation or endorsement of the plan of conversion. We also must receive a letter of non-objection to the conversion from the Federal Deposit Insurance Corporation to consummate the conversion.

General

On July 15, 2008, we adopted a plan of conversion, pursuant to which we will convert from a state chartered mutual savings bank to a state chartered stock savings bank and at the same time become a wholly owned subsidiary of Anchor Bancorp. The conversion will include adoption of the proposed articles of incorporation and bylaws, which will authorize us to issue capital stock. Under the plan, Anchor Bank common stock is being sold to Anchor Bancorp and Anchor Bancorp common stock is being offered to our eligible depositors, the employee stock

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ownership plan, other depositors, and then to the public. The conversion will be accounted for at historical cost in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Anchor Bancorp has filed an application with the Federal Reserve to become a bank holding company and to acquire all of Anchor Bank’s common stock to be issued in the conversion.

We intend to contribute 50% of the net proceeds of the offering to Anchor Bank and lend our employee stock ownership plan cash to enable the plan to buy up to 8% of the shares sold in the offering. We will retain the balance of the net proceeds. We also intend to establish our charitable foundation. The conversion will be completed only upon the sale of at least 3,825,000 shares of our common stock offered pursuant to the plan of conversion.

The shares of Anchor Bancorp common stock are first being offered in a subscription offering to holders of subscription rights. To the extent shares of common stock remain available after the subscription offering, shares may be offered in a direct community offering on a best efforts basis through Keefe, Bruyette & Woods, Inc. in such a manner as to promote a wide distribution of the shares. Shares not subscribed for in the subscription offering and direct community offering may be offered for sale on a best efforts basis in a syndicated community offering conducted by Keefe, Bruyette & Woods, Inc. We have the right, in our sole discretion, to accept or reject, in whole or in part, any orders to purchase shares of common stock received in the direct community offering and any syndicated community offering. See “– Direct Community Offering” and “– Syndicated Community Offering.”

Subscriptions for shares will be subject to the maximum and minimum purchase limitations set forth in the plan of conversion. See “– Limitations on Stock Purchases.”

We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated consolidated pro forma market value of Anchor Bancorp. All shares of common stock to be sold in the offering will be sold at $10.00 per share. No commission will be charged to purchasers. The independent valuation will be updated and the final number of shares of our common stock to be issued in the offering will be determined at the completion of the offering. See “– How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering.”

The completion of the offering is subject to market conditions and other factors beyond our control. No assurance can be given as to the length of time following approval of the plan of conversion by our members that will be required to complete the sale of shares. If we experience delays, significant changes may occur in the estimated offering range with corresponding changes in the offering price and the net proceeds to be realized by us from the sale of the shares. If the conversion is terminated, we will charge all related expenses against current income and any funds collected by us in the offering will be promptly returned, with interest, to each subscriber.

The following is a brief summary of the conversion and is qualified in its entirety by reference to the applicable provision of the plan of conversion. A copy of the plan of conversion is available for inspection at Anchor Bank, at the Washington Department of Financial Institutions, Division of Banks, Department of Financial Institutions and at the Federal Deposit Insurance Corporation. The plan of conversion is also filed as an exhibit to the application to convert from mutual to stock form of which this prospectus is a part, copes of which may be obtained from the Washington Department of Financial Institutions. See “Where You Can Find More Information.”

Our Reasons for the Conversion

As a mutual institution, Anchor Bank has no authority to issue shares of capital stock and consequently has no access to market sources of equity capital. Only by generating and retaining earnings from year to year is Anchor Bank able to increase its capital position. This conversion is another step in our strategic plan to increase our capital and expand our operations.

As a stock corporation upon completion of the conversion, Anchor Bank will be organized in the form used by commercial banks, most major corporations and a majority of savings institutions. The ability to raise new equity

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capital through the issuance and sale of capital stock will allow Anchor Bank the flexibility to increase its capital position more rapidly than by accumulating earnings and at times deemed advantageous by the board of directors. It will also support future growth and expanded operations, including increased lending and investment activities, as business and regulatory needs require. The ability to attract new capital also will help better address the needs of the communities we serve and enhance our ability to make acquisitions or expand into new businesses. The acquisition alternatives available to Anchor Bank are quite limited as a mutual institution. However, after the conversion, we will have increased ability to merge with other institutions. Finally, the ability to issue capital stock will enable us to establish stock compensation plans for directors, officers and employees, giving them equity interests in Anchor Bancorp and greater incentive to improve its performance. For a description of the stock compensation plans which will be adopted by us in connection with the conversion, see “Management – Benefits to Be Considered Following Completion of the Conversion.”

The disadvantages of the offering considered are the additional expense and effort of operating as a public company, and the fact that operating in the stock holding company form of organization could subject Anchor Bancorp to contests for corporate control, including the possibility that a director could be elected that advocates the particular position of the group which elected him or her, rather than positions that are in the best interests of the Anchor Bank and all shareholders.

After considering the advantages and disadvantages of the conversion, as well as applicable fiduciary duties and alternative transactions, the board of directors of Anchor Bank approved the conversion as being in the best interests of Anchor Bank and equitable to its account holders.

Effects of the Conversion

General. The conversion will have no effect on Anchor Bank’s present business of accepting deposits and investing its funds in loans and other investments permitted by law. Following completion of the conversion, Anchor Bank will continue to be subject to regulation by the Washington Department of Financial Institutions, and its accounts will continue to be insured by the Federal Deposit Insurance Corporation, up to applicable limits, without interruption. After the conversion, Anchor Bank will continue to provide services for depositors and borrowers under current policies and by its present management and staff.

Deposits and Loans. Each holder of a deposit account in Anchor Bank at the time of the conversion will continue as an account holder in Anchor Bank after the conversion, and the conversion will not affect the deposit balance, interest rate or other terms of the depositor’s accounts. Each account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors in Anchor Bank will continue to hold their existing certificates, passbooks (statement savings) and other evidence of their accounts. The conversion will not affect the loan terms of any borrower from Anchor Bank. The amount, interest rate, maturity, security for and obligations under each loan will remain as they existed prior to the conversion. See “– Voting Rights” and “– Depositors’ Rights if We Liquidate” below for a discussion of the effects of the conversion on the voting and liquidation rights of the depositors of Anchor Bank.

Continuity. The board of directors presently serving Anchor Bank will serve as the board of directors of Anchor Bank after the conversion. The board of directors of Anchor Bancorp consists of the same individuals who serve as directors of Anchor Bank. After the conversion, the voting shareholders of Anchor Bancorp will elect approximately one-third of its directors annually. All current officers of Anchor Bank will retain their positions with Anchor Bank after the conversion.

Voting Rights. After completion of the conversion, depositor members will have no voting rights in Anchor Bank or Anchor Bancorp and, therefore, will not be able to elect directors of Anchor Bank or Anchor Bancorp or to control their affairs. Currently, depositors of Anchor Bank have only limited voting rights in matters such as the mutual to stock conversion. After the conversion, voting rights in Anchor Bancorp will be vested exclusively in the shareholders of Anchor Bancorp. Each holder of common stock will be entitled to vote on any matter to be

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considered by the shareholders of Anchor Bancorp. After completion of the conversion voting rights in Anchor Bank will be vested exclusively in its sole shareholder, Anchor Bancorp.

Depositors’ Rights if We Liquidate. We have no plans to liquidate. However, if there should ever be a complete liquidation of Anchor Bank, either before or after conversion, deposit account holders would receive the protection of insurance by the Federal Deposit Insurance Corporation up to applicable limits. In addition, liquidation rights before and after the conversion would be as follows:


	Liquidation Rights in Present Mutual Institution. In addition to the protection of Federal Deposit Insurance Corporation insurance up to applicable limits, in the event of the complete liquidation of Anchor Bank, each holder of a deposit account would receive his or her pro rata share of any assets of Anchor Bank remaining after payment of claims of all creditors (including the claims of all depositors in the amount of the withdrawal value of their accounts). Each holder’s pro rata share of the remaining assets, if any, would be in the same proportion of the assets as the balance in his or her deposit account was to the aggregate balance in all our deposit accounts at the time of liquidation.

	Liquidation Rights in Proposed Converted Institution. After conversion, each deposit account holder, in the event of the complete liquidation of Anchor Bank, would have a claim of the same general priority as the claims of all our other general creditors in addition to the protection of Federal Deposit Insurance Corporation insurance up to applicable limits. Therefore, except as described below, the deposit account holder’s claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. A deposit account holder would have no interest in the assets of Anchor Bank above that amount, if any.

	Anchor Bank will, at the time of the conversion, establish a liquidation account in an amount equal to its total equity as of the date of the latest statement of financial condition contained in the prospectus. The liquidation account will be a memorandum account on the records of Anchor Bank and there will be no segregation of assets of Anchor Bank related to it.

	The liquidation account will be maintained subsequent to the conversion for the benefit of eligible account holders and supplemental eligible account holders who retain their deposit accounts in Anchor Bank. Each eligible account holder and supplemental eligible account holder will, with respect to each deposit account held, have a related inchoate interest in a portion of the liquidation account balance called a subaccount.

	The initial subaccount balance for a deposit account held by an eligible account holder or a supplemental eligible account holder will be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the holder’s qualifying deposit in the deposit account and the denominator is the total amount of the qualifying deposits of all such holders. The initial subaccount balance will not be increased, and it will be subject to downward adjustment as provided below.

	If the balance in any deposit account of an eligible account holder or supplemental eligible account holder at the close of business on any on any annual closing date subsequent to the effective date of the conversion is less than the lesser of (1) the balance in the deposit account at the close of business on any other on any annual closing date subsequent to June 30, 2007, or _______, 2008, as applicable, or (2) the amount of the qualifying deposit in the deposit account on June 30, 2007, or ______, 2008, as applicable, then the subaccount balance for the deposit account will be adjusted by reducing the subaccount balance in an amount proportionate to the reduction in the deposit balance. In the event of a downward adjustment, the subaccount balance will not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the

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	related deposit account. If any such deposit account is closed, the related subaccount balance will be reduced to zero.

	In the event of a complete liquidation of Anchor Bank (and only in that event), each eligible account holder and supplemental eligible account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance(s) for the deposit account(s) then held by the holder before any liquidation distribution may be made to shareholders. No merger, consolidation, bulk purchase of assets with assumptions of deposit accounts and other liabilities or similar transactions with another federally-insured institution in which Anchor Bank is not the surviving institution will be considered to be a complete liquidation. In any such transaction, the liquidation account will be assumed by the surviving institution.

Tax Effects of the Conversion. We have received an opinion from our special counsel, Silver, Freedman & Taff, L.L.P., Washington, D.C. that the conversion will constitute a tax free reorganization under the Internal Revenue Code and that no gain or loss will be recognized for federal income tax purposes by Anchor Bank or Anchor Bancorp as a result of the completion of the conversion. However, this opinion is not binding on the Internal Revenue Service or the State of Washington Department of Revenue.

If the liquidation rights in Anchor Bank or subscription rights to purchase Anchor Bancorp common stock have a market value when received, or in the case of subscription rights, when exercised, then depositors receiving or exercising these rights may have a taxable gain. Any gain will be limited to the fair market value of these rights.

Liquidation rights are the proportionate interest of certain depositors of Anchor Bank in the special liquidation account to be established by Anchor Bancorp under the plan of conversion. See “– Depositors’ Rights if We Liquidate.” Special counsel has concluded that the liquidation rights will have nominal, if any, fair market value.

The subscription rights are the preferential rights of eligible subscribers to purchase shares of Anchor Bancorp common stock in the conversion. See “– Subscription Offering and Subscription Rights.” Because the subscription rights are acquired without cost, are not transferable, last for only a short time period and give the recipients a right to purchase stock in the conversion only at fair market value, special counsel believes these rights do not have any taxable value when they are granted or exercised. Special counsel’s opinion states that it is not aware of the Internal Revenue Service claiming in any similar conversion transaction that liquidation rights or subscription rights have any market value. Because there are no judicial opinions or official Internal Revenue Service positions on this issue, however, special counsel’s opinion relating to liquidation rights and subscription rights comes to a reasoned conclusion instead of an absolute conclusion on these issues. Special counsel’s conclusion is supported by a letter from RP Financial, LC. which states that the subscription rights do not have any value when they are distributed or exercised.

If the Internal Revenue Service disagrees and says the subscription rights have value, income may be recognized by recipients of these rights, in certain cases whether or not the rights are exercised. This income may be capital gain or ordinary income, and Anchor Bancorp and Anchor Bank could recognize gain on the distribution of these rights. Eligible subscribers are encouraged to consult with their own tax advisor regarding their own circumstances and any tax consequences if subscription rights are deemed to have value.

Special counsel has also concluded that there are no other material federal income tax consequences in connection with the conversion.

The opinion of special counsel makes certain assumptions consisting solely of factual matters that would be contained in a representation letter of Anchor Bank to the Internal Revenue Service if it were seeking a private letter ruling relating to the federal income tax consequences of the conversion. Special counsel’s opinion is based on the Internal Revenue Code, regulations now in effect or proposed, current administrative rulings and practice and judicial authority, all of which are subject to change. Any change may be made with retroactive effect. Unlike

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private letter rulings received from the Internal Revenue Service, special counsel’s opinion is not binding on the Internal Revenue Service and there can be no assurance that the Internal Revenue Service will not take a position contrary to the positions reflected in special counsel’s opinion, or that special counsel’s opinion will be upheld by the courts if challenged by the Internal Revenue Service.

Anchor Bank has also obtained an opinion from Blado Kiger, P.S., Tacoma, Washington that the income tax effects of the conversion under Washington tax laws will be substantially the same as the federal income tax consequences described above.

How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering

The plan of conversion requires that the purchase price of the common stock must be based on the appraised pro forma market value of Anchor Bancorp and Anchor Bank, as determined on the basis of an independent valuation. We have retained RP Financial, LC., a financial services industry consulting firm with over 20 years of experience in valuing financial institutions for mutual to stock conversions, to make this valuation. We have no prior relationship with RP Financial. For its services in making this appraisal, RP Financial’s fees and out-of-pocket expenses are estimated to be $75,000. We have agreed to indemnify RP Financial and any employees of RP Financial who act for or on behalf of RP Financial in connection with the appraisal against any and all loss, cost, damage, claim, liability or expense of any kind, including claims under federal and state securities laws, arising out of any misstatement, untrue statement of a material fact or omission to state a material fact in the information we supply to RP Financial, unless RP Financial is determined to be negligent or otherwise at fault.

The independent valuation appraisal considered the pro forma impact of the offering and applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies identified by RP Financial, subject to valuation adjustments applied by RP Financial to account for differences between Anchor Bancorp and the peer group. RP Financial placed the greatest emphasis on the price-to-core earnings and price-to-tangible book value approaches in estimating pro forma market value.


	•	the present results and financial condition of Anchor Bank, and the projected results and financial condition of Anchor Bancorp, a Washington corporation;

	•	the economic and demographic conditions in Anchor Bank’s existing market area;

	•	certain historical, financial and other information relating to Anchor Bank;

	•	a comparative evaluation of the operating and financial characteristics of Anchor Bank with the peer group companies, which are headquartered in the states of Washington (four companies), California (two companies), Colorado (one company), Minnesota (one company), Arkansas (one company) and Iowa (one company);

	•	the impact of the conversion and the offering on Anchor Bancorp’s shareholders’ equity and earnings potential;

	•	the proposed dividend policy of Anchor Bancorp; and

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	•	the trading market for the securities of the peer group institutions and general conditions in the stock market for the peer group institutions and all publicly traded thrift institutions.

Included in RP Financial’s independent valuation were certain assumptions as to the pro forma earnings of Anchor Bancorp after the conversion that were utilized in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds, the repayment of Federal Home Loan Bank advances by Anchor Bank, and purchases in the open market of 4% of the common stock issued in the offering by the restricted stock plan at the $10.00 purchase price. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.

The independent valuation states that as of October 10, 2008, the estimated pro forma market value of Anchor Bancorp (inclusive of shares issued to the Anchor Bancorp Foundation) ranged from $39.8 million to $53.3 million, with a midpoint of $46.5 million. The board of directors of Anchor Bancorp decided to offer the shares of common stock for a price of $10.00 per share primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The number of shares offered will be equal to the aggregate pro forma market value of Anchor Bancorp (excluding the Anchor Bancorp Foundation shares) divided by the price per share. Based on the valuation range and the $10.00 price per share, the minimum of the offering range will be 3,825,000 shares, the midpoint of the offering range will be 4,500,000 shares and the maximum of the offering range will be 5,175,000 shares, or 5,951,250 if the maximum amount is adjusted because of demand for shares or changes in market and financial conditions.


	Price-to- earnings multiple(1)	Price-to-book value ratio		Price-to-tangible book value ratio

Anchor Bancorp
Minimum of offering range	71.43x	41.93	%	41.93	%
Midpoint of offering range	90.91x	46.17	%	46.17	%
Maximum of offering range	100.00x	49.95	%	49.95	%
Maximum of offering range, as adjusted	125.00x	53.82	%	53.82	%

Valuation of peer group companies using stock market prices as of October 10, 2008(2)
Average	8.20x	52.84	%	57.27	%
Median	8.09x	52.09	%	54.26	%



(1)	Reflects our pro forma price-to-earnings multiples based on unaudited pro forma net income for the year ended June 30, 2008, annualized basis.

(2)	Reflects earnings for the most recent twelve-month period for which data were publicly available (June 30, 2008 for all peer group members).

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The board of directors of Anchor Bancorp reviewed the independent valuation and, in particular, considered the following:


	•	Anchor Bank’s financial condition and results of operations;

	•	comparison of financial performance ratios of Anchor Bank to those of other financial institutions of similar size; and

	•	market conditions generally and, in particular, for financial institutions.

All of these factors are set forth in the independent valuation. The board of directors also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation, if required, as a result of subsequent developments in the financial condition of Anchor Bancorp or Anchor Bank or market conditions generally.

The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. RP Financial, LC. did not independently verify our consolidated financial statements and other information that we provided to them, nor did RP Financial, LC. independently value our assets or liabilities. The independent valuation considers Anchor Bank as a going concern and should not be considered as an indication of the liquidation value of Anchor Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10.00 offering price per share.

Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15%, or up to $59.5 million, without resoliciting subscribers, which will result in a corresponding increase of up to 15% in the maximum of the offering range to up to 5,951,250 shares, in addition to the 150,000 shares to be issued to the Anchor Bancorp Foundation to reflect changes in the market and financial conditions or demand for the shares. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed. See “– Limitations on Common Stock Purchases” as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering range to fill unfilled orders in the offering.

If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $61.0 million and a corresponding increase in the offering range to more than 6,101,250 shares, or a decrease in the minimum of the valuation range to less than $39.8 million and a corresponding decrease in the offering range to fewer than 3,825,000 shares, then, with regulatory approval, we may terminate the offering and promptly return, with interest at Anchor Bank’s passbook (statement) savings rate, all funds previously delivered to us to purchase shares of common stock and cancel deposit account withdrawal authorizations, and, after consulting with the Washington Department of Financial Institutions, we may terminate the plan of conversion and the stock offering. Alternatively, we may establish a new offering range and extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the Washington Department of Financial Institutions in order to complete the conversion and the offering. In the event that a resolicitation is commenced, we will notify subscribers of the extension of time and of the rights of subscribers to confirm, change or cancel their stock orders for a specified resolicitation period. If a subscriber does not respond, we will cancel the stock order and return funds, as described above. Any resolicitation following the conclusion of the subscription and community offerings would not exceed 45 days.

An increase in the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and Anchor Bancorp’s pro forma earnings and shareholders’ equity on a per share basis while

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increasing pro forma earnings and shareholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber’s ownership interest and Anchor Bancorp’s pro forma earnings and shareholders’ equity on a per share basis, while decreasing pro forma earnings and shareholders’ equity on an aggregate basis. For a presentation of the effects of these changes, see “Pro Forma Data.”

Copies of the appraisal report of RP Financial, LC., including any amendments, and the detailed report of the appraiser setting forth the method and assumptions for the appraisal are available for inspection at the office of Anchor Bank and as specified under “Where You Can Find More Information.” In addition, the appraisal report is an exhibit to the registration statement of which this prospectus is a part. The registration statement is available on the SEC’s website (http://www.sec.gov).

Subscription Offering and Subscription Rights

Under the plan of conversion, rights to subscribe for the purchase of common stock have been granted to the following persons in the following order of descending priority:


	•	depositors of Anchor Bank with account balances of at least $50.00 as of the close of business on June 30, 2007 (“Eligible Account Holders”);

	•	the proposed employee stock ownership plan (“Tax-Qualified Employee Stock Benefit Plans”);

	•	depositors of Anchor Bank with account balances of at least $50.00 as of the close of business on _____, 2008 (“Supplemental Eligible Account Holders”); and

	•	depositors of Anchor Bank, as of the close of business on _____________, 2008, other than Eligible Account Holders or Supplemental Eligible Account Holders, and borrowers as of _______________, 2008 (“Other Members”).

All subscriptions received will be subject to the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion and as described below under “– Limitations on Stock Purchases.”

Preference Category No. 1: Eligible Account Holders. Each Eligible Account Holder shall receive, without payment, first priority, nontransferable subscription rights to subscribe for shares of common stock in an amount equal to the greater of:


	(1)	$500,000 or 50,000 shares of common stock;

	(2)	one-tenth of one percent of the total offering of shares of common stock; or

	(3)	15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in Anchor Bank in each case on the close of business on June 30, 2007 (the “Eligibility Record Date”), subject to the overall purchase limitations.

See “– Limitations on Stock Purchases.”

If there are not sufficient shares available to satisfy all subscriptions, shares first will be allocated among subscribing Eligible Account Holders so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to the lesser of the number of shares

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subscribed for or 100 shares. Thereafter, any shares remaining will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. For example, if an Eligible Account Holder with an unfilled subscription has qualifying deposits totaling $100, and the total amount of qualifying deposits for Eligible Account Holders with unfilled subscriptions was $1,000, then the number of shares that may be allocated to fill this Eligible Account Holder’s subscription would be 10% of the shares remaining available, up to the amount subscribed for.

To ensure proper allocation of stock, each Eligible Account Holder must list on his or her subscription order form all accounts in which he or she has an ownership interest. Failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. The subscription rights of Eligible Account Holders who are also directors or officers of Anchor Bank or their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the year preceding June 30, 2007.

Preference Category No. 2: Tax-Qualified Employee Stock Benefit Plans. The plan of conversion provides that each Tax-Qualified Employee Stock Benefit Plan, including the employee stock ownership plan, shall receive nontransferable subscription rights to purchase up to 10% of the common stock sold in the offering, provided that individually or in the aggregate these plans (other than that portion of these plans which is self-directed) shall not purchase more than 10% of the shares of common stock, including any increase in the number of shares of common stock after the date hereof as a result of an increase of up to 15% in the maximum of the estimated valuation range. The proposed employee stock ownership plan intends to purchase 8% of the shares of common stock sold in the offering, or 306,000 shares and 414,000 shares based on the minimum and maximum of the estimated offering range, respectively. Subscriptions by the Tax-Qualified Employee Stock Benefit Plans will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the subscription and direct community offerings, including subscriptions of any of Anchor Bank’s directors, officers, employees or associates thereof. Subscription rights received pursuant to this category shall be subordinated to all rights received by Eligible Account Holders to purchase shares pursuant to Preference Category No. 1; provided, however, that notwithstanding any other provisions of the plan of conversion to the contrary, the Tax-Qualified Employee Stock Benefit Plans shall have a first priority subscription right to the extent that the total number of shares of common stock sold in the stock offering exceeds the maximum of the estimated offering. If the total number of shares offered in the stock offering is increased to an amount greater than then number of shares representing the maximum of the estimated valuation range to be sold to the public, each Tax-Qualified Employee Stock Benefit Plan will have a priority right to purchase up to 8% of the shares exceeding the maximum of the estimated offering range, up to an aggregate of 10% of the common stock sold in the conversion. If the employee stock ownership plan’s subscription is not filled in its entirety, the plan may purchase shares in the open market. See “Management – Benefits to Be Considered Following Completion of the Conversion – Employee Stock Ownership Plan.”

Preference Category No. 3: Supplemental Eligible Account Holders. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders and the Tax-Qualified Employee Stock Benefit Plans, each Supplemental Eligible Account Holder shall be entitled to receive, without payment therefore, third priority, nontransferable subscription rights to subscribe for shares of common stock in an amount equal to the greater of:


	(1)	$500,000 or 50,000 shares of common stock;

	(2)	one-tenth of one percent of the total offering of shares of common stock; or

	(3)	15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in Anchor Bank

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		in each case on the close of business on _____, 2008 (the “Supplemental Eligibility Record Date”), subject to the overall purchase limitations.

See “– Limitations on Stock Purchases.”

If there are not sufficient shares available to satisfy all subscriptions of all Supplemental Eligible Account Holders, available shares first will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation (including the number of shares, if any, allocated in accordance with Category No. 1) equal to the lesser of the number of shares subscribed for or 100 shares. Thereafter, any shares remaining available will be allocated among the Supplemental Eligible Account Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.

Preference Category No. 4: Other Members. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, each Other Member shall receive, without payment therefore, fourth priority, nontransferable subscription rights to subscribe for shares of Anchor Bancorp common stock, up to the greater of:


	(1)	$500,000 or 50,000 shares of common stock; or

	(2)	one-tenth of one percent of the total offering of shares of common stock in the offerings, subject to the overall purchase limitations.

See“– Limitations on Stock Purchases.”

In the event the Other Members subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, is in excess of the total number of shares of common stock offered in the conversion, available shares will be allocated among the subscribing Other Members pro rata on the basis of the amounts of their respective subscriptions.

Expiration Date for the Subscription Offering. The subscription offering will expire at 12:00 Noon, Pacific time, on ________, 2008, unless extended for the full 45 day period to ________, 2008, and may be extended an additional 45 days to ________, 2008 without the approval of the Washington Department of Financial Institutions. Any further extensions of the subscription offering must be approved by the Washington Department of Financial Institutions. The subscription offering may not be extended beyond ________, 200_. Subscription rights which have not been exercised prior to ________, 2008 (unless extended) will become void.

Anchor Bancorp and Anchor Bank will not execute orders until at least the minimum number of shares of common stock, 3,825,000 shares, have been subscribed for or otherwise sold. If all shares have not been subscribed for or sold by ________, 2008, unless this period is extended with the consent of the Washington Department of Financial Institutions, all funds delivered to Anchor Bank pursuant to the subscription offering will be returned promptly to the subscribers with interest and all withdrawal authorizations will be canceled. If an extension beyond ________, 2008 is granted, Anchor Bancorp and Anchor Bank will notify subscribers of the extension of time and of any rights of subscribers to confirm, modify or rescind their subscriptions. This is commonly referred to as a “resolicitation offering.”

In a resolicitation offering, Anchor Bancorp would mail you a supplement to this prospectus if you subscribed for stock to let you confirm, modify or cancel your subscription. If you fail to respond to the resolicitation offering, it would be as if you had canceled your order and all subscription funds, together with accrued interest, would be returned to you. If you authorized payment by withdrawal of funds on deposit at Anchor Bank,

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that authorization would terminate. If you affirmatively confirm your subscription order during the resolicitation offering, Anchor Bancorp and Anchor Bank would continue to hold your subscription funds until the end of the resolicitation offering. Your resolicitation order would be irrevocable without the consent of Anchor Bancorp and Anchor Bank until the conversion is completed or terminated.

Direct Community Offering

To the extent that shares remain available for purchase after satisfaction of all subscription rights discussed above, we anticipate offering shares pursuant to the plan of conversion to members of the general public who receive a prospectus, with a preference given to natural persons residing in Grays Harbor, Thurston, Lewis, Pierce, Mason, Kitsap, Clark and King counties. These natural persons are referred to as preferred subscribers. We may limit total subscriptions in the direct community offering to ensure that the number of shares available for any syndicated community offering may be up to a specified percentage of the number of shares of common stock. Finally, we may reserve shares offered in the direct community offering for sales to institutional investors. The opportunity to subscribe for shares of common stock in any direct community offering will be subject to our right, in our sole discretion, to accept or reject any such orders either at the time of receipt of an order or as soon as practicable following ________, 2008. The direct community offering, if any, will begin at the same time as, during or promptly after the subscription offering and will not be for more than 45 days after the end of the subscription offering.

The price at which common stock is sold in the direct community offering will be the same price at which shares are offered and sold in the subscription offering. No person, by himself or herself, or with an associate or group of persons acting in concert, may purchase more than $500,000 of common stock in the direct community offering, subject to the maximum purchase limitations. See “– Limitations on Stock Purchases.” In the event of an oversubscription for shares in the direct community offering, shares may be allocated, to the extent shares remain available, on a pro rata basis to such person based on the amount of their respective subscriptions.

Syndicated Community Offering

As a final step in the conversion, the plan of conversion provides that, if feasible, all shares of common stock not purchased in the subscription offering and direct community offering may be offered for sale to selected members of the general public in a syndicated community offering through a syndicate of registered broker-dealers managed by Keefe, Bruyette & Woods, Inc. as agent of Anchor Bancorp. We call this the syndicated community offering. We expect that the syndicated community offering will begin as soon as practicable after termination of the subscription offering and the direct community offering, if any. We, in our sole discretion, have the right to reject orders in whole or in part received in the syndicated community offering. Neither Keefe, Bruyette & Woods, Inc. nor any registered broker-dealer shall have any obligation to take or purchase any shares of common stock in the syndicated community offering; however, Keefe, Bruyette & Woods, Inc. has agreed to use its best efforts in the sale of shares in any syndicated community offering.

The price at which common stock is sold in the syndicated community offering will be the same price at which shares are offered and sold in the subscription offering and direct community offering. No person, acting alone, or with an associate or group of persons acting in concert, may purchase more than $________ of common stock in the syndicated community offering, subject to the maximum purchase limitations. See “– Limitations on Stock Purchases.”

Keefe, Bruyette & Woods, Inc. may enter into agreements with broker-dealers to assist in the sale of the shares in the syndicated community offering, although no such agreements currently exist. No orders may be placed or filled by or for a selected dealer during the subscription offering. After the close of the subscription offering, Keefe, Bruyette & Woods, Inc. will instruct selected dealers as to the number of shares to be allocated to each dealer. Only after the close of the subscription offering and upon allocation of shares to selected dealers may selected dealers take orders from their customers. During the subscription offering and direct community offering, selected dealers may only solicit indications of interest from their customers to place orders as of a certain order date for the purchase of shares of Anchor Bancorp common stock. When, and if, Keefe, Bruyette & Woods, Inc. and

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Anchor Bank believe that enough indications of interest and orders have not been received in the subscription offering and direct community offering to consummate the conversion, Keefe, Bruyette & Woods, Inc. will request, as of the order date, selected dealers to submit orders to purchase shares for which they have previously received indications of interest from their customers. The dealers will send confirmations of the orders to their customers on the next business day after the order date. The dealers will debit the accounts of their customers on the settlement date, which will be three business days from the order date. Customers who authorize selected dealers to debit their brokerage accounts are required to have the funds for payment in their account on but not before the settlement date. On the settlement date, the dealers will deposit funds to the account established by Anchor Bank for each dealer. Each customer’s funds forwarded to Anchor Bank, along with all other accounts held in the same title, will be insured by the Federal Deposit Insurance Corporation up to $100,000 in accordance with applicable Federal Deposit Insurance Corporation regulations. After payment has been received by Anchor Bank from the dealers, funds will earn interest at Anchor Bank’s passbook (statement savings) account rate until the completion or termination of the conversion. Funds will be promptly returned, with interest, in the event the conversion is not consummated as described above. Notwithstanding the foregoing, any checks received by Keefe, Bruyette & Woods, Inc. or any selected dealer specifically for payment for the shares will be forwarded to Anchor Bank by noon of the day following receipt for deposit to the account established by Anchor Bank for each dealer. Keefe, Bruyette & Woods, Inc. shall also have the right, in its sole discretion, to permit investors to submit irrevocable orders together with legally binding commitments for payment for shares for which they subscribe at any time prior to the closing of the offering.

The syndicated community offering will be completed within 45 days after the termination of the subscription offering, unless extended by Anchor Bank with the approval of the Washington Department of Financial Institutions. The syndicated community offering may not be extended past ________, 200__. See “– How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering” above for a discussion of rights of subscribers, if any, in the event an extension is granted.

Persons Who Are Not Permitted to Participate in the Stock Offering

We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the plan of conversion reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country or resides in a state of the United States with respect to which:


	•	the number of persons otherwise eligible to subscribe for shares under the plan of conversion who reside in such state is small;

	•	the granting of subscription rights or the offer or sale of shares of common stock to such persons would require any of us or our officers, directors or employees, under the laws of such state to register as a broker, dealer, salesperson or selling agent or to register or otherwise qualify the securities of Anchor Bancorp for sale in such state; or

	•	such registration, qualification or filing in our judgment would be impracticable or unduly burdensome for reasons of cost or otherwise.

Where the number of persons eligible to subscribe for shares in one state is small, we will base our decision as to whether or not to offer the common stock in that state on a number of factors, including but not limited to the size of accounts held by account holders in the state, the cost of registering or qualifying the shares or the need to register us or our officers, directors or employees as brokers, dealers or salespersons.

Limitations on Stock Purchases

The plan of conversion includes the following limitations on the number of shares of Anchor Bancorp common stock which may be purchased in the conversion:

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(1)	No fewer than 25 shares of common stock may be purchased, to the extent shares are available;

(2)	Each Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:

	(a)	$500,000 or 50,000 shares of common stock;

	(b)	one-tenth of one percent of the total offering of shares of common stock; or

	(c)	15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in Anchor Bank in each case as of the close of business on the Eligibility Record Date, subject to the overall limitation in clause (7) below;

(3)	The Tax-Qualified Employee Stock Benefit Plans, including the employee stock ownership plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the conversion, and including any additional shares issued in the event of an increase in the estimated offering range; at this time the employee stock ownership plan intends to purchase only 8% of such shares;

(4)	Each Supplemental Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:

	(a)	$500,000 or 50,000 shares of common stock;

	(b)	one-tenth of one percent of the total offering of shares of common stock; or

	(c)	15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in Anchor Bank in each case as of the close of business on the Supplemental Eligibility Record Date, subject to the overall limitation in clause (7) below;

(5)	Each Other Member may subscribe for and purchase in the subscription offering up to the greater of:

	(a)	$500,000 or 50,000 shares of common stock; or

	(b)	one-tenth of one percent of the total offering of shares of common stock, subject to the overall limitation in clause (7) below;

(6)	Persons purchasing shares of common stock in the direct community offering or syndicated community offering may purchase in the direct community offering or syndicated community offering up to $500,000 or 50,000 shares of common stock, subject to the overall limitation in clause (7) below; and

(7)	Except for the Tax-Qualified Employee Stock Benefit Plans, and the Eligible Account Holders and Supplemental Eligible Account Holders whose subscription rights are based upon the amount of their deposits, as a result of (2)(c) and (4)(c) above the maximum number of shares of Anchor Bancorp common stock subscribed for or purchased in all categories of the offerings by any

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		person, together with associates of and groups of persons acting in concert with such persons, shall not exceed $500,000 or 50,000 shares of common stock.

Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the members of Anchor Bank, the boards of directors of Anchor Bancorp and Anchor Bank may, in their sole discretion, increase the maximum individual amount permitted to be subscribed for to provide that any person, group of associated persons, or persons otherwise acting in concert subscribing for five percent, may purchase between five and ten percent as long as the aggregate amount that the subscribers purchase does not exceed ten percent of the total stock offering. Requests to purchase additional shares of common stock will be allocated by the boards of directors on a pro rata basis giving priority in accordance with the preference categories set forth in this prospectus.

The term “associate” when used to indicate a relationship with any person means:


	•	any corporation or organization (other than Anchor Bank, Anchor Bancorp or a majority-owned subsidiary of any of them) of which such person is an officer or partner or is directly or indirectly the beneficial owner of 10% or more of any class of equity securities;

	•	any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity;

	•	any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of Anchor Bank, Anchor Bancorp, or any subsidiary of Anchor Bank or Anchor Bancorp, or any affiliate thereof, and

	•	any person acting in concert with any of the persons or entities specified above;

provided, however, that Tax-Qualified Employee Plans shall not be deemed to be an associate of any director or officer of Anchor Bank or Anchor Bancorp. When used to refer to a person other than an officer or director of Anchor Bank, the board of directors of Anchor Bank or officers delegated by the board of directors in their sole discretion may determine the persons that are associates of other persons.

The term “acting in concert” means knowing participation in a joint activity or parallel action towards a common goal whether or not pursuant to an express agreement, or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any arrangement. A person or company which acts in concert with another person or company shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that the Tax-Qualified Employee Stock Benefit Plans will not be deemed to be acting in concert with their trustees or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by each plan will be aggregated. The determination of whether a group is acting in concert shall be made solely by the board of directors of Anchor Bank or officers delegated by the board of directors and may be based on any evidence upon which the board or delegatee chooses to rely.

Marketing Arrangements

We have retained Keefe, Bruyette & Woods, Inc. to consult with and to advise Anchor Bank, and to assist Anchor Bancorp, on a best efforts basis, in the distribution of the shares of common stock in the subscription offering and direct community offering. The services that Keefe, Bruyette & Woods, Inc. will provide include:


	•	training the employees of Anchor Bank who will perform certain ministerial functions in the offering regarding the mechanics and regulatory requirements of the stock offering process;

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	•	managing the stock information center by assisting interested stock subscribers and by keeping records of all stock orders;

	•	preparing marketing materials; and

	•	assisting in the solicitation of proxies from Anchor Bank’s members for use at the special meeting.

For its services, Keefe, Bruyette & Woods, Inc. will receive a management fee of $50,000 and a success fee of 1.0% of the aggregate purchase price, less any shares of common stock sold to our directors, officers and employees (or members of their immediate family) and the Tax-Qualified Employee Stock Benefit Plans. If selected dealers are used to assist in the sale of shares of Anchor Bancorp common stock in the direct community offering, these dealers will be paid a fee of up to 5.5% of the total purchase price of the shares sold by the dealers. We have agreed to indemnify Keefe, Bruyette & Woods, Inc. against certain claims or liabilities, including certain liabilities under the Securities Act of 1933, as amended, and will contribute to payments Keefe, Bruyette & Woods, Inc. may be required to make in connection with any such claims or liabilities. In addition, Keefe, Bruyette & Woods, Inc. will be reimbursed for the fees of its legal counsel in an amount not to exceed $45,000, plus its reasonable out-of-pocket expenses.

Sales of shares of Anchor Bancorp common stock will be made by registered representatives affiliated with Keefe, Bruyette & Woods, Inc. or by the broker-dealers managed by Keefe, Bruyette & Woods, Inc. Keefe, Bruyette & Woods, Inc. has undertaken that the shares of Anchor Bancorp common stock will be sold in a manner which will ensure that the distribution standards of the Nasdaq Stock Market will be met. A stock information center will be established at Anchor Bank’s corporate office located at 120 N. Broadway in Aberdeen, Washington. Anchor Bancorp will rely on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of Anchor Bancorp common stock will be conducted within the requirements of this rule, so as to permit officers, directors and employees to participate in the sale of Anchor Bancorp common stock in those states where the law permits. No officer, director or employee of Anchor Bancorp or Anchor Bank will be compensated directly or indirectly by the payment of commissions or other remuneration in connection with his or her participation in the sale of common stock.

Procedure for Purchasing Shares in the Subscription Offering

To ensure that each purchaser receives a prospectus at least 48 hours before ________, 2008, the subscription expiration date, unless extended, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days prior to that date or hand delivered any later than two days prior to that date. Execution of the order form will confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will only be distributed with a prospectus.

To purchase shares in the subscription offering, an executed order form with the required payment for each share subscribed for, or with appropriate authorization for withdrawal from a deposit account at Anchor Bank must be received by Anchor Bank by 12:00 Noon, Pacific time, on __________, 2008, unless extended. In addition, Anchor Bancorp and Anchor Bank will require a prospective purchaser to execute a certification in the form required by the Washington Division of Financial Institutions. Order forms which are not received by this time or are executed defectively or are received without full payment, or appropriate withdrawal instructions, are not required to be accepted. In addition, Anchor Bank will not accept orders submitted on photocopied or facsimiled order forms nor order forms without an executed certification. Anchor Bank has the right to waive or permit the correction of incomplete or improperly executed forms, but does not represent that it will do so. Once received, an executed order form may not be modified, amended or rescinded without the consent of Anchor Bank, unless the conversion has not been completed within 45 days after the end of the subscription offering, or this period has been extended.

In order to ensure that Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priority, depositors as of the close of business on the Eligibility Record Date, June 30, 2007, or the Supplemental

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Eligibility Record Date, ___________, 2008, and depositors and borrowers as of the close of business on the Voting Record Date, ____________, 2008, must list all accounts on the stock order form giving all names in each account and the account numbers.

Payment for subscriptions may be made:


	•	by check or money order;

	•	by authorization of withdrawal from deposit accounts maintained with Anchor Bank (including a certificate of deposit); or

	•	in cash, if delivered in person to the full-service banking office of Anchor Bank, although we request that you exchange cash for a check with any of our tellers.

No wire transfers will be accepted. Funds received before the completion of the conversion will be held in a segregated account at the Anchor Bank or, at our discretion, at an independent insured depository institution. Interest will be paid on payments made by cash, check or money order at our then-current passbook (statement savings) rate from the date payment is received until completion of the conversion. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the contractual rate, but may not be used by the subscriber until all of Anchor Bancorp’s common stock has been sold or the plan of conversion is terminated, whichever is earlier. If a subscriber authorizes Anchor Bank to withdraw the amount of the purchase price from his or her deposit account, Anchor Bank will do so as of the effective date of the conversion. Anchor Bank will waive any applicable penalties for early withdrawal from certificate accounts. Please write a check if you wish to purchase stock from your Anchor Bank checking account.

If any amount of a subscription order is unfilled, Anchor Bank will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after completion of the conversion. If the conversion is not consummated, purchasers will have refunded to them all payments made, with interest, and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at Anchor Bank.

If any Tax-Qualified Employee Stock Benefit Plans subscribe for shares during the subscription offering, these plans will not be required to pay for the shares subscribed for at the time they subscribe, but rather, may pay for shares of common stock subscribed for at the purchase price upon completion of the subscription offering and direct community offering, if all shares are sold, or upon completion of the syndicated community offering if shares remain to be sold in such offering. If, after the completion of the subscription offering, the amount of shares to be issued is increased above the maximum of the estimated valuation range included in this prospectus, the Tax-Qualified Employee Stock Benefit Plans will be entitled to increase their subscriptions by a percentage equal to the percentage increase in the amount of shares to be issued above the maximum of the estimated valuation range, provided that such subscription will continue to be subject to applicable purchase limits and stock allocation procedures.

You may subscribe for shares of common stock using funds in your Individual Retirement Account at Anchor Bank or elsewhere. However, common stock must be held in a self-directed retirement account. Anchor Bank’s IRAs are not self-directed, so they cannot be invested in common stock. If you wish to use some or all of the funds in your Anchor Bank IRA, the applicable funds must be transferred to a self-directed account reinvested by an independent trustee, such as a brokerage firm. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using you IRA or other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.

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The records of Anchor Bank will control all matters related to the existence of subscription rights and/or one’s ability to purchase shares of common stock in the subscription offering.

Should an oversubscription result in an allocation of shares, the allocation of shares will be completed in accordance with the plan of conversion. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order form will be final. If a partial payment for your shares is required, we will first take the funds from the cash or check you paid with and secondly from any account from which you wanted funds withdrawn.

Restrictions on Transfer of Subscription Rights and Shares

No person with subscription rights may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for that person’s account. Each person exercising subscription rights will be required to certify that the person is purchasing shares solely for the person’s own account and that such person has no agreement or understanding regarding the sale or transfer of such shares. Regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock prior to the completion of the conversion.

Anchor Bank will refer to the Washington Department of Financial Institutions any situations that it believes may involve a transfer of subscription rights and will not honor orders believed by it to involve the transfer of such rights.

Issuance of Anchor Bancorp’s Common Stock

Certificates representing shares of common stock issued in the conversion will be mailed to the persons entitled thereto at the registration address noted on the order form, as soon as practicable following consummation of the conversion. Any certificates returned as undeliverable will be held by us until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock which they ordered.

Required Approvals

In order to complete the conversion, we will need to receive the approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation. We also will need to have our members approve the plan of conversion at a special meeting of members, which will be called for that purpose.

Anchor Bancorp may be required to make certain filings with state securities regulatory authorities in connection with the issuance of Anchor Bancorp common stock in the offerings.

Restrictions on Purchase or Transfer of Shares After the Conversion

All shares of common stock purchased in connection with the conversion by a director or an executive officer of Anchor Bancorp and Anchor Bank will be subject to a restriction that the shares not be sold for a period of one year following the conversion except in the event of the death of the director or officer or pursuant to a merger or similar transaction approved by the Washington Department of Financial Institutions. Each certificate for restricted shares will bear a legend giving notice of this restriction, and instructions will be issued to the effect that any transfer within the first year of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date within this one year period as a stock dividend, stock split or otherwise with respect to the restricted stock will be subject to the same restrictions.

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Purchases of common stock of Anchor Bancorp by directors, executive officers and their associates during the three-year period following completion of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Washington Department of Financial Institutions. This restriction does not apply, however, to negotiated transactions involving more than 1% of Anchor Bancorp’s outstanding common stock or to certain purchases of stock pursuant to an employee stock benefit plan.

For information regarding the proposed purchases of common stock by officers and directors of Anchor Bank and Anchor Bancorp, see “Proposed Purchases by Management.” Any purchases made by the officers and directors of Anchor Bank and Anchor Bancorp are intended for investment purposes only, and not for resale, including any purchases made for the purpose of meeting the minimum of the offering range.

Pursuant to regulations of the Washington Department of Financial Institutions, Anchor Bancorp may not, for a period of one year following completion of this offering, repurchase shares of the common stock except on a pro rata basis, pursuant to an offer approved by the Washington Department of Financial Institutions and made to all shareholders, or through open market purchases of up to five percent of the outstanding stock where extraordinary circumstances exist.

R ESTRICTIONS ON ACQUISITION
OF ANCHOR BANCORP AND ANCHOR BANK

The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire Anchor Bancorp, Anchor Bank or their respective capital stock are summarized below. Also discussed are certain provisions in Anchor Bancorp’s articles of incorporation and bylaws which may be deemed to affect the ability of a person, firm or entity to acquire it. These provisions include a prohibition on any holder of common stock voting more than 10% of the outstanding common stock.

Change of Control Regulations

The Change in Bank Control Act, together with Washington regulations, require the consent of the Washington Department of Financial Institutions and the Federal Reserve prior to any person or company acquiring “control” of a Washington-chartered savings bank or a Washington-chartered bank holding company. Upon acquiring control, the acquiror will be deemed to be a bank holding company. Control is conclusively presumed to exist if, among other things, an individual or company acquires the power to direct the management or policies of Anchor Bancorp or Anchor Bank or to vote 25% or more of any class of voting stock. Control is rebuttably presumed to exist under the Change in Bank Control Act if, among other things, a person acquires more than 10% of any class of voting stock, and the issuer’s securities are registered under Section 12 of the Securities and Exchange Act of 1934 or the person would be the single largest shareholder. Restrictions applicable to the operations of bank holding companies and conditions imposed by the Federal Reserve in connection with its approval of such acquisitions may deter potential acquirors from seeking to obtain control of Anchor Bancorp. See “How We Are Regulated - Regulation and Supervision of Anchor Bancorp.”

Anti-takeover Provisions in Anchor Bancorp’s Articles of Incorporation and Bylaws

The articles of incorporation and bylaws of Anchor Bancorp contain certain provisions that are intended to encourage a potential acquiror to negotiate any proposed acquisition of Anchor Bancorp directly with its board of directors. An unsolicited non-negotiated takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the board of directors believes it is in the best interests of Anchor Bancorp and its shareholders to encourage potential acquirors to negotiate directly with management. The board of directors believes that these provisions will encourage negotiations and discourage hostile takeover attempts. The board also believes that these provisions should not discourage persons from proposing a merger or transaction at prices reflective of the true value of Anchor Bancorp and that otherwise is in the best interests of all shareholders. However, these provisions may have the effect of discouraging offers to purchase Anchor Bancorp or

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its securities that are not approved by the board of directors but which certain of Anchor Bancorp’s shareholders may deem to be in their best interests or pursuant to which shareholders would receive a substantial premium for their shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. These provisions will also render the removal of the current board of directors and management more difficult. The boards of directors of Anchor Bank and Anchor Bancorp believe these provisions are in the best interests of the shareholders because they will assist Anchor Bancorp’s board of directors in managing the affairs of Anchor Bancorp in the manner they believe to be in the best interests of shareholders generally and because a company’s board of directors is often best able in terms of knowledge regarding the company’s business and prospects, as well as resources, to negotiate the best transaction for its shareholders as a whole.

The following description of certain of the provisions of the articles of incorporation and bylaws of Anchor Bancorp is necessarily general and reference should be made in each instance to such articles of incorporation and bylaws. See “Where You Can Find More Information” regarding how to obtain a copy of these documents.

Board of Directors. The articles of incorporation provide that the number of directors shall not be less than five nor more than 15. The initial number of directors is eight, but this number may be changed by resolution of the board of directors. The articles of incorporation also include a requirement that each director be a resident of the local community served by Anchor Bank. These provisions have the effect of enabling the board of directors to elect directors friendly to management in the event of a non-negotiated takeover attempt and may make it more difficult for a person seeking to acquire control of Anchor Bancorp to gain majority representation on the board of directors in a relatively short period of time. Anchor Bancorp believes these provisions to be important to continuity in the composition and policies of the board of directors.

The articles of incorporation provide that there will be staggered elections of directors so that the directors will each be initially elected to one-, two- or three-year terms, and thereafter all directors will be elected to terms of three years each. This provision also has the effect of making it more difficult for a person seeking to acquire control of Anchor Bancorp to gain majority representation on the board of directors.

Cumulative Voting. The articles of incorporation specifically do not permit cumulative voting for the election of directors. Cumulative voting in election of directors entitles a shareholder to cast a total number of votes equal to the number of directors to be elected multiplied by the number of his or her shares and to distribute that number of votes among such number of nominees as the shareholder chooses. The absence of cumulative voting for directors limits the ability of a minority shareholder to elect directors. Because the holder of less than a majority of Anchor Bancorp’s shares cannot be assured representation on the board of directors, the absence of cumulative voting may discourage accumulations of Anchor Bancorp’s shares or proxy contests that would result in changes in Anchor Bancorp’s management. The board of directors believes that elimination of cumulative voting will help to assure continuity and stability of management and policies; directors should be elected by a majority of the shareholders to represent the interests of the shareholders as a whole rather than be the special representatives of particular minority interests; and efforts to elect directors representing specific minority interests are potentially divisive and could impair the operations of Anchor Bancorp.

Special Meetings. The articles of incorporation of Anchor Bancorp provide that special meetings of shareholders of Anchor Bancorp may be called by the chief executive officer or by the board of directors. If a special meeting is not called, shareholder proposals cannot be presented to the shareholders for action until the next annual meeting. Shareholders are not permitted to call special meetings.

Authorized Capital Stock. The articles of incorporation of Anchor Bancorp authorize the issuance of 45,000,000 shares of common stock and 5,000,000 shares of preferred stock. The shares of common stock and preferred stock were authorized in an amount greater than that to be issued in the conversion to provide Anchor Bancorp’s board of directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the board of directors consistent with its fiduciary duty to deter future attempts to gain control of Anchor

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Bancorp. The board of directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board of directors has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a post tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. Anchor Bancorp’s board of directors currently has no plan to issue additional shares, other than the issuance of additional shares pursuant to stock benefit plans.

Director Nominations. The articles of incorporation of Anchor Bancorp require a shareholder who intends to nominate a candidate for election to the board of directors at a shareholders’ meeting to give written notice to the secretary of Anchor Bancorp at least 30 days (but not more than 60 days) in advance of the date of the meeting at which such nominations will be made. The nomination notice is also required to include specified information concerning the nominee and the proposing shareholder. The board of directors of Anchor Bancorp believes that it is in the best interests of Anchor Bancorp and its shareholders to provide sufficient time for the board of directors to study all nominations and to determine whether to recommend to the shareholders that such nominees be considered.

Supermajority Voting Provisions. Anchor Bancorp’s articles of incorporation require the affirmative vote of 80% of the outstanding shares entitled to vote to approve a merger, consolidation or other business combination, unless the transaction is approved, prior to consummation, by the vote of at least two-thirds of the number of the Continuing Directors (as defined in the articles of incorporation) on Anchor Bancorp’s board of directors. “Continuing Directors” generally includes all members of the board of directors who are not affiliated with any individual, partnership, trust or other person or entity (or the affiliates and associates of such person or entity) which is a beneficial owner of 10% or more of the voting shares of Anchor Bancorp. This provision could tend to make the acquisition of Anchor Bancorp more difficult to accomplish without the cooperation or favorable recommendation of Anchor Bancorp’s board of directors.

Amendment of Articles of Incorporation and Bylaws. Anchor Bancorp’s articles of incorporation may be amended by the vote of the holders of a majority of the outstanding shares of its common stock, except that the provisions of the articles of incorporation governing the duration of the corporation, the purpose and powers of the corporation, authorized capital stock, denial of preemptive rights, the number and staggered terms of directors, removal of directors, shareholder nominations and proposals, approval of certain business combinations, the evaluation of certain business combinations, limitation of directors’ liability, indemnification of officers and directors, calling of special meetings of shareholders, the authority to repurchase shares and the manner of amending the articles of incorporation may not be repealed, altered, amended or rescinded except by the vote of the holders of at least 80% of the outstanding shares of Anchor Bancorp. This provision is intended to prevent the holders of a lesser percentage of the outstanding stock of Anchor Bancorp from circumventing any of the foregoing provisions by amending the articles of incorporation to delete or modify one of such provisions.

Anchor Bancorp’s bylaws may only be amended by a majority vote of the board of directors of Anchor Bancorp or by the holders of at least 80% of the outstanding stock by Anchor Bancorp.

Purpose and Takeover Defensive Effects of Anchor Bancorp’s Articles of Incorporation and Bylaws. The board of directors believes that the provisions described above are prudent and will reduce Anchor Bancorp’s vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by its board of directors. These provisions will also assist in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion. The board of directors believes these provisions are in the best interest of Anchor Bank, and Anchor Bancorp and its shareholders. In the judgment of the board of directors, Anchor Bancorp’s board will be in the best position to determine the true value of Anchor Bancorp and to negotiate more effectively for what may be in the best interests of its shareholders. Accordingly, the board of directors believes that it is in the best interest of Anchor Bancorp and its shareholders to encourage potential acquirors to negotiate directly with the board of directors of Anchor Bancorp and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of the board of directors

136

that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of Anchor Bancorp and that is in the best interest of all shareholders.

Attempts to acquire control of financial institutions and their holding companies have recently become increasingly common. Takeover attempts that have not been negotiated with and approved by the board of directors present to shareholders the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the board of directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value of Anchor Bancorp for its shareholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of Anchor Bancorp’s assets.

An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause great expense. Although a tender offer or other takeover attempt may be made at a price substantially above the current market prices, these offers are sometimes made for less than all of the outstanding shares of a target company. As a result, shareholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining shareholders. The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive Anchor Bancorp’s remaining shareholders of benefits of certain protective provisions of the Securities Exchange Act of 1934, if the number of beneficial owners became less than 300, thereby allowing for deregistration.

Despite the belief of Anchor Bank and Anchor Bancorp as to the benefits to shareholders of these provisions of Anchor Bancorp’s articles of incorporation and bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would not be approved by Anchor Bancorp’s board of directors, but pursuant to which shareholders may receive a substantial premium for their shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of Anchor Bancorp’s board of directors and of management more difficult. The board of directors of Anchor Bank and Anchor Bancorp, however, have concluded that the potential benefits outweigh the possible disadvantages.

Following the conversion, pursuant to applicable law and, if required, following the approval by shareholders, Anchor Bancorp may adopt additional anti-takeover charter provisions or other devices regarding the acquisition of its equity securities that would be permitted for a Washington business corporation.

The cumulative effect of the restriction on acquisition of Anchor Bancorp contained in the articles of incorporation and bylaws of Anchor Bancorp and in Federal and Washington law may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain shareholders of Anchor Bancorp may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best interests.

Benefit Plans

In addition to the provisions of Anchor Bancorp’s articles of incorporation and bylaws described above, benefit plans of Anchor Bancorp and Anchor Bank intended to be adopted after completion of this offering contain provisions which also may discourage hostile takeover attempts which the board of directors of Anchor Bank might conclude are not in the best interests of Anchor Bancorp, Anchor Bancorp and Anchor Bank or Anchor Bancorp’s shareholders. For a description of the benefit plans and the provisions of these plans relating to changes in control of Anchor Bancorp or Anchor Bank, see “Management – Benefits to Be Considered Following Completion of the Conversion.”

137

D ESCRIPTION OF CAPITAL STOCK OF
ANCHOR BANCORP

General

Anchor Bancorp is authorized to issue 45,000,000 shares of common stock having a par value of $0.01 per share and 5,000,000 shares of preferred stock having a par value of $0.01 per share. Anchor Bancorp currently expects to issue up to 5,325,000 shares of common stock (including shares contributed to the Anchor Bancorp Foundation), subject to adjustment up to 6,101,250 shares (including shares contributed to the Anchor Bancorp Foundation), and no shares of preferred stock in the conversion. Each share of Anchor Bancorp’s common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock, in accordance with the plan of conversion, all such stock will be duly authorized, fully paid and nonassessable.

The common stock of Anchor Bancorp represents nonwithdrawable capital. The common stock is not a savings or deposit account and is not insured by the Federal Deposit Insurance Corporation or any other government agency.

Common Stock Dividends. Anchor Bancorp can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its board of directors. The payment of dividends by Anchor Bancorp is subject to limitations which are imposed by law and applicable regulation. See “Our Policy Regarding Dividends” and “How We Are Regulated.” The holders of common stock of Anchor Bancorp will be entitled to receive and share equally in the dividends declared by the board of directors of Anchor Bancorp out of funds legally available therefore. If Anchor Bancorp issues preferred stock, the holders of preferred stock may have a priority over the holders of the common stock with respect to dividends.

Stock Repurchases. Federal Reserve regulations place certain limitations on the repurchase of Anchor Bancorp’s capital stock. See “How We Intend to Use the Proceeds From this Offering.”

Voting Rights. Upon conversion, the holders of common stock of Anchor Bancorp will possess exclusive voting rights in Anchor Bancorp. They will elect Anchor Bancorp’s board of directors and act on such other matters as are required to be presented to them under Washington law or as are otherwise presented to them by the board of directors. Except as discussed in “Restrictions on Acquisition of Anchor Bancorp and Anchor Bank,” each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If Anchor Bancorp issues preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require a vote of 80% of the outstanding shares entitled to vote thereon. See “Restrictions on Acquisition of Anchor Bancorp and Anchor Bank.”

As a state-chartered stock savings bank that is the subsidiary of a holding company, voting rights are vested exclusively in the owners of the shares of capital stock of Anchor Bank, all of which will be owned by Anchor Bancorp, and voted at the direction of Anchor Bancorp’s board of directors. Consequently, the holders of the common stock will not have direct control of Anchor Bank.

Liquidation. In the event of any liquidation, dissolution or winding up of Anchor Bank, Anchor Bancorp, as holder of Anchor Bank’s capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities of Anchor Bank, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the special liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders, all assets of Anchor Bank available for distribution. In the event of liquidation, dissolution or winding up of Anchor Bancorp, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Anchor Bancorp available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.

138

Preemptive Rights. Holders of the common stock of Anchor Bancorp will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock is not subject to redemption.

Preferred Stock

None of the shares of Anchor Bancorp’s authorized preferred stock will be issued in the conversion and there are no current plans to issue the preferred stock. Preferred stock may be issued with such designations, powers, preferences and rights as the board of directors may determine. The board of directors can, without shareholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.

Restrictions on Acquisition

Acquisitions of Anchor Bancorp are restricted by provisions in its articles of incorporation and bylaws and by the rules and regulations of various regulatory agencies. See “How We Are Regulated – Regulation and Supervision of Anchor Bancorp” and “Restrictions on Acquisition of Anchor Bancorp and Anchor Bank.”

T RANSFER AGENT AND REGISTRAR

The transfer agent and registrar for Anchor Bancorp common stock is Registrar and Transfer Company, Cranford, New Jersey.

E XPERTS

Our consolidated financial statements as of June 30, 2008 and 2007 and for each of the three years in the three-year period ended June 30, 2008 have been included herein and in the registration statement in reliance upon the report of Moss Adams LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

RP Financial, LC. has consented to the publication herein of the summary of its report to Anchor Bank setting forth its opinion as to the estimated pro forma market value of the common stock upon conversion and its letter with respect to subscription rights.

L EGAL AND TAX OPINIONS

The legality of the common stock has been passed upon for Anchor Bank by Breyer & Associates PC, McLean, Virginia, special counsel to Anchor Bank and Anchor Bancorp. The federal income tax consequences of the conversion have been passed upon for Anchor Bank by Silver, Freedman and Taff, L.L.P., Washington D.C. The Washington income tax consequences of the conversion have been passed upon for Anchor Bank by Blado Kiger, P.S., Tacoma, Washington. Certain legal matters will be passed upon for Keefe, Bruyette & Woods, Inc., Inc. by Elias, Matz, Tiernan & Herrick, LLP, Washington, D.C.

W HERE YOU CAN FIND MORE INFORMATION

Anchor Bancorp has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. This information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549, and copies of this material can be obtained from the Securities and Exchange Commission at prescribed rates. You may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition, the

139

Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission, including Anchor Bancorp. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each statement is qualified by reference to the contract or document. We believe, however, that we have included the material information an investor needs to consider in making an investment decision. Anchor Bank also maintains a website (http://www.anchornetbank.com), which contains various information about Anchor Bank. In addition, Anchor Bank files quarterly call reports with the Federal Deposit Insurance Corporation, which are available at the Federal Deposit Insurance Corporation’s website (http://www.fdic.gov).

Anchor Bank has filed with the Washington Department of Financial Institutions an Application for Approval of Conversion, which includes proxy materials for the special meeting of members and certain other information. This prospectus omits certain information contained in the Application for Approval of Conversion. The Application for Approval of Conversion, including the proxy materials, exhibits and certain other information, may be inspected, without charge, at the office of the Washington Department of Financial Institutions, Division of Banks, Department of Financial Institutions, 150 Israel Road SW, Tumwater, Washington 98501. A copy of the Application for Approval of Conversion has also been filed with the Federal Deposit Insurance Corporation.

In connection with the conversion, Anchor Bancorp has registered its common stock with the Securities and Exchange Commission under Section 12 of the Securities Exchange Act of 1934, and, upon such registration, Anchor Bancorp and the holders of its stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% shareholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion, Anchor Bancorp has undertaken that it will not terminate this registration for a period of at least three years following the conversion.

A copy of the plan of conversion, the articles of incorporation and bylaws of Anchor Bancorp and Anchor Bank are available without charge from Anchor Bank. Requests for such information should be directed to: Jerald L. Shaw, Anchor Bank, 120 N Broadway, Aberdeen, Washington 98520.

140

ANCHOR MUTUAL SAVINGS BANK AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page


Report of Independent Registered Public Accounting Firm		F-2

Consolidated Statement of Financial Condition as of June 30, 2008 and June 30, 2007		F-3

Consolidated Statement of Income for the Years Ended June 30, 2008, 2007 and 2006		F-5

Consolidated Statement of Comprehensive Income for the Years Ended June 30, 2008, 2007 and 2006		F-6

Consolidated Statement of Equity for the Years Ended June 30, 2008, 2007 and 2006		F-7

Consolidated Statement of Cash Flows for the Years Ended June 30, 2008, 2007 and 2006		F-8

Notes to Consolidated Financial Statements		F-10

All schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements and related Notes.

The financial statements of Anchor Bancorp have been omitted because Anchor Bancorp has not yet issued any stock, has no assets or liabilities, and has not conducted any business other than that of an organizational nature.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees
Anchor Mutual Savings Bank

We have audited the accompanying consolidated statement of financial condition of Anchor Mutual Savings Bank (the Bank) as of June 30, 2008, and 2007, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the three years ended June 30, 2008. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Bank is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anchor Mutual Savings Bank as of June 30, 2008 and 2007, and the results of its operations and its cash flows for the three years ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

-S- MOSS ADAMS LLP

Spokane, Washington
October 23, 2008

F-2

ANCHOR MUTUAL SAVINGS BANK
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ($ in thousands)


ASSETS

	JUNE 30,

	2008		2007


CASH AND DUE FROM BANKS	$	11,003	$	10,916

SECURITIES AVAILABLE-FOR-SALE, at fair value, Amortized cost of $63,523 and $61,673		63,904		60,454

SECURITIES HELD-TO-MATURITY, at amortized cost, fair value of $13,536 and $14,938		13,762		15,533

LOANS HELD FOR SALE		1,171		1,757

LOANS RECEIVABLE, net of allowance for loan losses of $7,485 and $4,644		490,515		476,383

LIFE INSURANCE INVESTMENT, net of surrender charges		15,537		14,919

MORTGAGE SERVICING RIGHTS		652		572

ACCRUED INTEREST RECEIVABLE		3,033		3,199

REAL ESTATE OWNED		1,524		2,087

FEDERAL HOME LOAN BANK STOCK, at cost		6,123		5,503

PROPERTY, PREMISES, AND EQUIPMENT, at cost, less accumulated depreciation of $12,778 and $11,755		15,530		15,258

DEFERRED INCOME TAX ASSET, net		2,475		1,171

PREPAID EXPENSES AND OTHER ASSETS		1,216		944


Total assets	$	626,445	$	608,696

See accompanying notes.

F-3

ANCHOR MUTUAL SAVINGS BANK
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ($ in thousands)


LIABILITIES AND EQUITY

	JUNE 30,

	2008		2007

LIABILITIES

DEPOSITS
Noninterest bearing	$	30,071	$	26,836
Interest bearing		359,878		416,518


Total deposits		389,949		443,354

ACCOUNTS PAYABLE AND OTHER LIABILITIES		5,675		4,948

FEDERAL HOME LOAN BANK ADVANCES		165,165		96,665

SUPPLEMENTAL EXECUTIVE PLAN RETIREMENT LIABILITY		2,019		2,078

ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE		1,275		1,131


Total liabilities		564,083		548,176


COMMITMENTS AND CONTINGENCIES

EQUITY

RETAINED EARNINGS		62,111		61,325

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		251		(805	)


Total equity		62,362		60,520


Total liabilities and equity	$	626,445	$	608,696

See accompanying notes.

F-4

ANCHOR MUTUAL SAVINGS BANK
CONSOLIDATED STATEMENT OF INCOME ($ in thousands)


	YEAR ENDED JUNE 30,

	2008			2007			2006

INTEREST INCOME
Loans receivable, including fees	$	35,990		$	36,799		$	29,866
Investments		1,524			1,581			1,655
Mortgage-backed securities		2,617			2,492			2,189


Total interest income		40,131			40,872			33,710


INTEREST EXPENSE
Deposits		15,198			16,723			11,112
Federal Home Loan Bank advances		7,467			5,480			4,462


Total interest expense		22,665			22,203			15,574


Net interest income before provision for loan losses		17,466			18,669			18,136

PROVISION FOR LOAN LOSSES		3,545			720			546


Net interest income after provision for loan losses		13,921			17,949			17,590


NONINTEREST INCOME
Deposit service fees		2,766			2,562			2,174
Other deposit fees		744			629			507
Loan fees		1,428			1,435			1,341
Other income		1,142			1,187			1,099


Total noninterest income		6,080			5,813			5,121


NONINTEREST EXPENSE
Compensation and benefits		8,758			9,354			9,107
General and administrative expenses		3,702			2,719			2,691
Information technology		1,986			1,890			1,752
Occupancy and equipment		2,971			2,861			2,574
Deposit services		744			929			631
Marketing		691			626			503
Other than temporary impairment on FNMA preferred stock		365			—			—


Total noninterest expense		19,217			18,379			17,258


Income before provision (benefit) for income tax		784			5,383			5,453


PROVISION (BENEFIT) FOR INCOME TAX
Current		1,846			2,143			3,284
Deferred		(1,848	)		(599	)		(1,711	)


Total provision (benefit) for income tax		(2	)		1,544			1,573


NET INCOME	$	786		$	3,839		$	3,880

See accompanying notes.

F-5

ANCHOR MUTUAL SAVINGS BANK
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ($ in thousands)


	YEAR ENDED JUNE 30,

	2008		2007		2006


NET INCOME	$	786	$	3,839	$	3,880


OTHER COMPREHENSIVE INCOME, net of income tax

Unrealized holding gain (loss) during the period, net of income tax expense (benefit) of $420, $235, and ($868), respectively		815		457		(1,932	)

Adjustment for losses included in net income, net of income tax benefit of $124, $0, and $14, respectively		241		—		32

Minimum pension liability, net of income tax expense of $0, $0, and $167, respectively		—		—		373


Other comprehensive income (loss), net of income tax		1,056		457		(1,527	)


COMPREHENSIVE INCOME	$	1,842	$	4,296	$	2,353

See accompanying notes.

F-6

ANCHOR MUTUAL SAVINGS BANK
CONSOLIDATED STATEMENT OF EQUITY ($ in thousands)


	Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Income Tax			Total


BALANCE, June 30, 2005	$	53,606	$	265		$	53,871

Net income		3,880		—			3,880

Other comprehensive income (loss), net of income tax		—		(1,527	)		(1,527	)


BALANCE, June 30, 2006		57,486		(1,262	)		56,224

Net income		3,839		—			3,839

Other comprehensive income, net of income tax		—		457			457


BALANCE, June 30, 2007		61,325		(805	)		60,520

Net income		786		—			786

Other comprehensive income, net of income tax		—		1,056			1,056


BALANCE, June 30, 2008	$	62,111	$	251		$	62,362

See accompanying notes.

F-7

ANCHOR MUTUAL SAVINGS BANK

CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands)


	YEAR ENDED JUNE 30,

	2008			2007			2006

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	786		$	3,839		$	3,880
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		1,598			1,550			1,451
Net amortization of premiums on securities		73			65			58
Amortization and payoff of mortgage servicing rights		334			206			242
Provision for loan losses		3,545			720			546
Deferred income taxes		(1,848	)		(599	)		(1,711	)
Income from life insurance investment		(618	)		(613	)		(557	)
Net loss on sale of real estate owned, loans, investments, and property, premises, and equipment		686			149			211
Change in operating assets and liabilities
Accrued interest receivable		(166	)		(333	)		(486	)
Originations of loans held-for-sale		(29,586	)		(683	)		(1,424	)
Proceeds from sale of loans held-for-sale		18,529			757			2,557
Prepaid expenses and other assets		(272	)		(129	)		40
Change in Supplemental Executive Retirement Plan liability		(59	)		433			497
Accounts payable and other liabilities		727			(2,373	)		3,948


Net cash from operating activities		(6,271	)		2,989			9,252


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities		—			(1,016	)		(906	)
Proceeds from sales and maturities of available-for-sale securities		3,000			50			5,944
Principal payments on mortgage-backed securities available-for-sale		5,625			4,124			4,086
Proceeds from sale of mortgage-backed securities available-for-sale		—			—			2,671
Principal payments on mortgage-backed securities held-to-maturity		1,751			2,259			3,914
Loan originations, net of undisbursed loan proceeds and principal repayments		(18,271	)		(42,351	)		(82,511	)
Purchases of loans held for investment		—			(1,825	)		(10,825	)
Purchase of life insurance investment		—			—			(2,000	)
Proceeds from sale of real estate owned		1,124			113			428
Cash payments for real estate owned improvements		(222	)		(204	)		—
Proceeds from sale of premises and equipment		170			—			89
Purchase of premises and equipment		(2,058	)		(2,159	)		(1,516	)


Net cash from investing activities		(8,881	)		(41,009	)		(80,626	)

See accompanying notes.

F-8

ANCHOR MUTUAL SAVINGS BANK

CONSOLIDATED STATEMENT OF CASH FLOWS (continued) ($ in thousands)


	YEAR ENDED JUNE 30,

	2008			2007			2006

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in advances by borrowers for taxes and insurance		144			53			115
Net increase (decrease) in deposits		(53,405	)		44,271			42,929
Proceeds from Federal Home Loan Bank advances		217,040			155,420			168,925
Repayment on Federal Home Loan Bank advances		(148,540	)		(158,699	)		(141,782	)


Net cash from financing activities		15,239			41,045			70,187


NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		87			3,025			(1,187	)

CASH AND DUE FROM BANKS, beginning of year		10,916			7,891			9,078


CASH AND DUE FROM BANKS, end of year	$	11,003		$	10,916		$	7,891


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities
Loans transferred to real estate owned	$	650		$	1,995		$	1,787


Loans held for sale transferred to portfolio	$	642		$	—		$	—


Originations of mortgage servicing rights	$	414		$	74		$	174


Bank financed real estate owned sales transferred to loans	$	—		$	1,794		$	—


Loans securitized into mortgage-backed securities	$	10,866		$	6,579		$	12,929


Cash paid during the year for

Interest	$	22,541		$	22,283		$	15,123


Income taxes	$	1,545		$	1,890		$	676

See accompanying notes.

F-9

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies


	Subsequent event adoption of plan of conversion - On July 15, 2008, the board of trustees of Anchor Mutual Savings Bank (the Bank) approved a plan of conversion (the Plan) that provides for the conversion of the Bank from a Washington State-chartered mutual savings bank to a Washington State-chartered stock savings bank pursuant to the requirements of the Washington State Department of Financial Institutions and the FDIC. As part of the conversion, the Plan provides for the concurrent formation of a holding company to be known as Anchor Bancorp (the Holding Company) that will own 100% of the common stock of the Bank. Following receipt of all required regulatory approvals, the approval of the depositors and borrowers of the Bank eligible to vote on the Plan, and the satisfaction of all other conditions precedent to the conversion, the Bank will consummate the conversion.

	Upon the consummation of the conversion, the legal existence of the Bank shall not terminate but the stock bank shall be a continuation of the mutual bank. The stock bank shall have, hold, and enjoy the same in its own right as fully and to the same extent as the same was possessed, held, and enjoyed by the mutual bank. The stock bank at the time and the taking effect of the conversion shall continue to have and succeed to all the rights, obligations, and relations of the mutual bank. Also, upon consummation of the conversion, there will be restriction on dividends, loans, and advances of the stock bank.

	At the time of conversion, the Bank will establish a liquidation account in an amount equal to its total net worth as of the latest statement of financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of dividends.

	In connection with the Bank’s commitment to its community, the plan of conversion provides for the establishment of a charitable foundation as part of the conversion. The Holding Company intends to donate to the Foundation cash of $500,000 and 150,000 shares of Holding Company common stock. The Holding Company will recognize an expense equal to the cash and fair value of the stock in the quarter in which the contribution occurs.

F-10

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	Conversion costs will be deferred and deducted from the proceeds of the shares sold in the offering. If the conversion transaction is not completed, all costs will be charged to expense. As of June 30, 2008, there were $32 in conversion costs that had been deferred.

	General - The Bank is a Washington State-chartered mutual savings bank that provides a range of financial services to individuals and small businesses primarily in Washington State. The Bank’s financial services include the traditional savings bank activities of accepting deposits from the general public and making residential loans and commercial property loans. The Bank’s primary regulators are the Federal Deposit Insurance Corporation (FDIC) and the Department of Financial Institutions of the State of Washington, Division of Banks. The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC.

	Financial statement presentation and use of estimates - The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ from estimated amounts. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate owned, and the carrying value of mortgage servicing rights. In the ordinary course of business, the Bank enters into commitments to extend credit, including commitments under lines of credit, bank cards, letters of credit, standby letters of credit, and guarantees. Such financial instruments are recorded when they are funded.

	Principles of consolidation - The consolidated financial statements include the accounts of Anchor Mutual Savings Bank and its wholly owned subsidiary, Anchor Financial Services (inactive), collectively, the Bank. All material intercompany accounts have been eliminated in consolidation.

	Cash and due from banks - For purposes of the statement of cash flows, the Bank considers all deposits and funds in interest-bearing accounts with an original term to maturity of three months or less to be cash equivalents. The Bank maintains its cash in bank deposit accounts that, at times, may exceed the federally insured limits. The Bank has not experienced any losses in such accounts and evaluates the credit quality of these banks and financial institutions to mitigate its credit risk.

	Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances on deposit with the Federal Reserve Bank. The amount required to be on deposit was approximately $1,165 and $1,041 at June 30, 2008 and 2007, respectively. The Bank was in compliance with this requirement at June 30, 2008 and 2007.

F-11

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	Investment securities - The Bank accounts for securities in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115) . Securities are classified as held-to-maturity when the Bank has the ability and positive intent to hold them to maturity. Securities held-to-maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Securities bought and held principally for the purpose of sale in the near term are classified as trading securities and are carried at fair value. There were no trading securities at June 30, 2008 or 2007. Securities not classified as trading or held-to-maturity are classified as available-for-sale. Unrealized holding gains and losses on securities available-for-sale are excluded from earnings and are reported net of tax as a separate component of equity until realized. These unrealized holding gains and losses, net of tax, are also included as a component of comprehensive income. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Realized gains and losses are recorded on the trade date and are determined using the specific identification method.

	Federal Home Loan Bank stock - The Bank’s investment in Federal Home Loan Bank of Seattle (FHLB) stock is carried at cost, which approximates fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At June 30, 2008 and 2007, the Bank’s minimum investment requirement was approximately $5,500 and $3,209, respectively. The Bank was in compliance with the FHLB minimum investment requirement at June 30, 2008 and 2007. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are granted at the discretion of the FHLB.

	Securitizations - The Bank securitizes, sells, and services interests in residential home loans. The Bank securitizes through the Federal Home Loan Mortgage Corporation and no gain is recognized at the time of securitization on retained interests. The Bank generally retains the right to service sold loan securitizations, and gain on sale of assets is based, in part, on the Bank’s allocation of the previous carrying amount of the sold assets.

	Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over the loan term using a method that generally produces a level yield on the unpaid loan balance. Interest is accrued primarily on a simple interest basis.

F-12

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or because such loans have become contractually past due 90 days with respect to principal or interest. When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current-period interest income. All subsequent payments received are first applied to unpaid interest and then to unpaid principal. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management’s judgment, such loans are considered to be fully collectible.

	Loans are considered impaired when, based on current information, management determines it is probable that the Bank will be unable to collect all amounts due according to the terms of the loan agreement, including scheduled interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the estimated present value of expected future cash flows discounted at the loan’s effective date, or the fair value of the collateral if the loan is collateral dependent. Excluded from impairment analysis are large groups of smaller balance homogeneous loans, such as consumer and residential mortgage loans.

	Allowance for loan losses - The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current-period operating results and decreased by the amount of chargeoffs, net of recoveries.

	The Bank’s methodology for assessing the appropriateness of the allowance consists of several key elements, including the formula allowance, specific allowance, and the unallocated allowance.

	The formula allowance is calculated by applying a loss percentage factor to the various loan pool types based on past due ratios; historical loss experience; the regulatory and internal credit grading and classification system; and current economic, business, and regulatory conditions that could affect the collectibility of the portfolio. These factors may be adjusted for significant events, in management’s judgment, as of the evaluation date.

	Specific allowances are established when determined necessary for impaired loans when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

F-13

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	The unallocated allowance comprises two components. The first component recognizes the estimation risk associated with the formula and specific allowances. The second component is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions evaluated in connection with the unallocated allowance may include loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, governmental regulatory actions, recent loss experience in particular segments of the portfolio, and the duration of the current business cycle. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Bank’s allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additional losses based on their judgment using information available to them at the time of their examination.

	Loans held-for-sale - Loans originated as held-for-sale are carried at the lower of cost or market value on an aggregate basis. Net unrealized losses, if any, are recognized through a valuation allowance by a charge to income. Nonrefundable fees and direct loan origination costs related to loans held-for-sale are deferred and recognized when the loans are sold.

	Real estate owned - Real estate owned (REO) includes properties acquired through foreclosure that are transferred to REO. These properties are initially recorded at the lower of cost or fair value. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed accounts.

	Gains or losses at the time the property is sold are charged or credited to other income in the period in which they are realized. The amounts the Bank will ultimately recover from real estate owned may differ substantially from the carrying value of the assets because of future market factors beyond the control of the Bank or because of changes in the Bank’s strategy for recovering its investments.

	Life insurance investment - The Bank is the sole beneficiary of life insurance policies that are recorded at their cash surrender value, net of any surrender charges, and cover certain key executives of the Bank. The $618, $613, and $557 of income for the years ended June 30, 2008, 2007, and 2006, respectively, is tax-exempt and included in other income.

	Transfers of financial assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

F-14

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	Mortgage servicing rights - Mortgage servicing rights are recorded as separate assets when mortgage loans are originated and subsequently sold or securitized (and held as available-for-sale securities) with servicing rights retained. Annually, the Bank estimates the fair value of its mortgage servicing rights based upon observed market prices.

	Mortgage servicing rights are amortized in proportion to, and over, the estimated period that net servicing income will be collected. The carrying value of mortgage servicing rights is periodically evaluated in relation to estimated future cash flows to be received, and such carrying value is adjusted for indicated impairments based on management’s best estimate of the remaining cash flows. The Bank has stratified its mortgage servicing rights based on whether the loan was sold or securitized and the interest rate of the underlying loans. The Bank uses the direct write-down method for mortgage servicing rights where the serviced loan has paid off.

	Property, premises, and equipment - Property, premises, and equipment are stated at cost less accumulated depreciation. The depreciation charged is computed on the straight-line method over estimated useful lives as follows:


	Buildings	40 years
	Furniture and equipment	5 - 10 years
	Improvements	10 years
	Computer equipment	3 years


	Income taxes - The Bank accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), using the asset and liability method, and deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. These deferred taxes are measured by the provisions of currently enacted tax laws. When circumstances warrant, the Bank assesses the likelihood that the net deferred tax assets will more-likely-than-not be recovered from future projected taxable income.

	Advertising costs - The Bank expenses advertising costs as they are incurred. Total advertising expenses were approximately $510, $412, and $216 for the years ended June 30, 2008, 2007, and 2006, respectively.

	Financial instruments - In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

	Comprehensive income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of the equity section of the balance sheet. Other comprehensive income includes no reclassification adjustments.

F-15

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	Recent accounting pronouncements - In December 2007, FASB issued SFAS No. 141 (revised), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Accordingly, the Bank will apply SFAS No. 141(R) to business combinations occurring on or after July 1, 2009.

	In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS No. 157 is effective for the Bank for the fiscal year beginning July 1, 2008. The Bank expects that impaired loans evaluated under SFAS No. 114 will be fair value measurements using Level 3 inputs as the valuation is based on discounted cash flows. SFAS No. 157 is not expected to have a material impact on the financial statements.

	In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented. The Bank does not have a noncontrolling interest in one or more subsidiaries. Accordingly, the Bank does not anticipate that the initial application of SFAS No. 160 will have an impact on its financial statements.

F-16

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 1 - Organization and Summary of Significant Accounting Policies (continued)


	In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of SFAS 133 (SFAS No. 161). SFAS No. 161 changes the disclosure requirements for SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to mention how and why an entity uses derivative instruments, as well as how derivative instruments and related hedged items are accounted for. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008, and is not expected to have a material impact on the Bank’s consolidated financial statements.

	In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). The FASB believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles , and is not expected to have a material impact on our consolidated financial statements.

	In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts —an interpretation of SFAS 60 (SFAS No. 163). SFAS No. 163 clarifies SFAS No. 60, Accounting and Reporting by Insurance Enterprises, by requiring expanded disclosures about financial guarantee insurance contracts. Additionally, it requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. This Statement requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period (including interim periods) beginning after issuance of this Statement. Except for those disclosures, earlier application is not permitted. SFAS No. 163 is not expected to have a material impact on the Bank’s consolidated financial statements.

	In June 2008, FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This statement is effective on fiscal years beginning after December 15, 2008, for the Bank, to be applied retrospectively. The Bank is currently evaluating the impact of the adoption of FSP EITF 03-6-1.

	Reclassification - Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. The reclassifications had no effect on previously reported net income or equity.

F-17

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 2 - Securities


	The amortized cost and estimated fair market values of investment securities, including mortgage-backed securities, available-for-sale, and held-to-maturity (classified by type and contractual maturity) were as follows as of June 30, 2008 and 2007:


2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Securities available-for-sale
Debt securities
Municipal bonds
After 1 through 5 yr	$	2,224	$	21	$	—		$	2,245
After 5 through 10 yr		1,065		5		(7	)		1,063
After 10 yr		1,164		6		(10	)		1,160
U.S. government agency securities
Within 1 yr		2,200		23		—			2,223
After 1 through 5 yr		4,997		97		—			5,094
After 5 through 10 yr		—		—		—			—
After 10 yr		13,970		104		(17	)		14,057
FHLMC mortgage-backed securities		37,268		321		(162	)		37,427
Preferred stock
FNMA preferred stock		635		—		—			635


	$	63,523	$	577	$	(196	)	$	63,904


Securities held-to-maturity
FHLMC mortgage-backed securities	$	13,596	$	—	$	(226	)	$	13,370

Municipal bonds
After 10 years		166		—		—			166


	$	13,762	$	—	$	(226	)	$	13,536

F-18

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 2 - Securities (continued)


2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Securities available-for-sale
Debt securities
Municipal bonds
After 1 through 5 yr	$	2,056	$	—	$	(46	)	$	2,010
After 5 through 10 yr		1,415		—		(10	)		1,405
After 10 yr		989		—		(2	)		987
U.S. government agency securities
Within 1 yr		—		—		—			—
After 1 through 5 yr		7,196		—		(124	)		7,072
After 5 through 10 yr		16,968		—		(438	)		16,530
FHLMC mortgage-backed securities		32,049		112		(601	)		31,560
Preferred stock
FNMA preferred stock		1,000		—		(110	)		890


	$	61,673	$	112	$	(1,331	)	$	60,454


Securities held-to-maturity
FHLMC mortgage-backed securities	$	15,361	$	—	$	(595	)	$	14,766

Municipal bonds
After 10 years		172		—		—			172


	$	15,533	$	—	$	(595	)	$	14,938

F-19

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 2 - Securities (continued)


	The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of June 30, 2008 and 2007, respectively, are as follows:


						June 30, 2008

	Less Than 12 Months					12 Months or Longer					Total

	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

	(in thousands)
Securities available-for-sale
Debt securities
Municipal bonds
After 5 through 10 yr	$	—	$	—		$	593	$	(7	)	$	593	$	(7	)
After 10 yr		—		—			635		(10	)		635		(10	)
U.S. government agency securities
After 10 yr		—		—			3,954		(17	)		3,954		(17	)
FHLMC mortgage-backed securities		6,915		(56	)		10,188		(106	)		17,103		(162	)


Total	$	6,915	$	(56	)	$	15,370	$	(140	)	$	22,285	$	(196	)


Securities held-to-maturity
FHLMC mortgage-backed securities	$	—	$	—		$	13,370	$	(226	)	$	13,370	$	(226	)


Total	$	—	$	—		$	13,370	$	(226	)	$	13,370	$	(226	)

F-20

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 2 - Securities (continued)


	June 30, 2007

	Less Than 12 Months					12 Months or Longer					Total

	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

	(in thousands)
Securities available-for-sale
Debt securities
Municipal bonds
After 1 through 5 yr	$	—	$	—		$	2,010	$	(46	)	$	2,010	$	(46	)
After 5 through 10 yr		—		—			1,405		(10	)		1,405		(10	)
After 10 yr		—		—			987		(2	)		987		(2	)
U.S. government agency securities
After 1 through 5 yr		—		—			7,072		(124	)		7,072		(124	)
After 5 through 10 yr		—		—			16,530		(438	)		16,530		(438	)
FHLMC mortgage-backed securities		6,302		(86	)		18,716		(515	)		25,018		(601	)
FNMA preferred stock		—		—			890		(110	)		890		(110	)


Total	$	6,302	$	(86	)	$	47,610	$	(1,245	)	$	53,912	$	(1,331	)


Securities held-to-maturity
FHLMC mortgage-backed securities	$	—	$	—		$	14,766	$	(595	)	$	14,766	$	(595	)


Total	$	—	$	—		$	14,766	$	(595	)	$	14,766	$	(595	)


	Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations and are, therefore, classified separately with no specific maturity date.

	For the years ended June 30, 2008, 2007, and 2006, proceeds from sales and maturities of securities available-for-sale were $3,000, $50, and $8,615, respectively. Gross realized gains were $0, $0, and $60 and gross realized losses were $0, $0, and $106 on the sale of securities available-for-sale for June 30, 2008, 2007, and 2006, respectively.

	At June 30, 2008 and 2007, respectively, securities with total par values of $2,350 and $2,313 and total fair values of $2,330 and $2,225 were pledged to secure certain public deposits. Securities with a total par value of $5,297 and $4,689 and total fair values of $5,254 and $4,534 were pledged to secure certificates of deposit in excess of FDIC-insured limits. Securities with total par values of $9,325 and $10,550 and total fair values of $9,243 and $10,223 were pledged to secure Federal Home Loan Bank borrowings.

F-21

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 2 - Securities (continued)


	The expected maturities of investment securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties.

	Management evaluates securities for other-than-temporary impairment on an annual basis and, more frequently, when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Certain investment securities have fair values less than amortized cost and, therefore, contain unrealized losses. At June 30, 2008, 25 investment securities were in an unrealized loss position. The Bank has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company- or industry-specific event.

	During the year ended June 30, 2008, the Bank recorded a $365 other-than-temporary impairment write-down charge to reduce the carrying amount of the Bank’s investment in one issue of FNMA preferred stock to the securities market value of $635 at June 30, 2008. There were no other-than-temporary impairment write-downs recorded for the years ended June 30, 2007 and 2006.

F-22

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 3 - Loans Receivable

Loans receivable consisted of the following:


	June 30,

	2008		2007

Real estate
One- to four-family residential	$	114,695	$	94,197
Multi-family residential		59,114		63,117
Commercial		117,439		127,440
Construction		103,924		104,802
Land loans		6,957		12,504


Total real estate		402,129		402,060


Consumer
Home equity		46,790		32,214
Credit cards		7,989		7,555
Automobile		18,095		19,169
Other		5,757		5,278


Total consumer		78,631		64,216


Commercial business		18,507		16,113


Total loans		499,267		482,389

Less
Deferred loan fees and unamortized discount on purchased loans		1,267		1,362

Allowance for loan losses		7,485		4,644


	$	490,515	$	476,383


	The Bank originates both adjustable and fixed-interest-rate loans. At June 30, 2008, the composition of these loans, less undisbursed amounts, was as follows:


	Fixed Rate		Adjustable Rate		Total


Less than one year	$	41,334	$	73,879	$	115,213
After one through five		67,306		13,639		80,945
After five through ten years		112,463		16,680		129,143
After ten years		155,031		18,935		173,966


	$	376,134	$	123,133	$	499,267

F-23

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 3 - Loans Receivable


	Adjustable rate loans have interest rate adjustment limitations and are generally indexed to either the Treasury bill one-year rate or the monthly weighted-average cost of funds for 12th district institutions regulated by the Office of Thrift Supervision (OTS) as published by the Federal Home Loan Bank of Seattle (FHLB).

	Outstanding commitments to borrowers for loans as of June 30, 2008 and 2007, totaled $5,660 and $904, respectively. Unfunded commitments under lines of credit as of June 30, 2008 and 2007, totaled $76,417 and $65,229, respectively.

	The following table sets forth the activity in the allowance for loan losses account:


	June 30,

	2008			2007			2006


Beginning balance	$	4,644		$	4,417		$	4,157
Provision for losses		3,545			720			546
Chargeoffs		(842	)		(859	)		(299	)
Recoveries		138			366			13


	$	7,485		$	4,644		$	4,417

The following table sets forth the activity in impaired loans:


	June 30,

	2008		2007		2006


Impaired loans without a valuation allowance	$	19,673	$	5,496	$	—
Impaired loans with a valuation allowance		9,697		—		79


Total impaired loans	$	29,370	$	5,496	$	79


Valuation allowance related to impaired loans	$	2,440	$	—	$	22


Average investment in impaired loans	$	17,433	$	5,014	$	236


Interest income recognized on a cash basis on impaired loans	$	2,520	$	217	$	72

F-24

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 3 - Loans Receivable (continued)


	At June 30, 2008 and 2007, respectively, loans (including amounts committed) of $20,581 and $13,107 represent real estate secured loans that have loan-to-value ratios above supervisory guidelines.

	At June 30, 2008, there were no commitments to lend additional funds to borrowers whose loans have been modified. Nonaccrual loans totaled $7,398 at June 30, 2008, and $434 at June 30, 2007. Loans 90 days and over past due still accruing interest were $15,972 at June 30, 2008, and $2,378 at June 30, 2007.

Note 4 - Mortgage Servicing Rights


	At June 30, 2008 and 2007, the Bank was servicing loans (including participations) for others amounting to $105,164 and $96,198, respectively. Servicing loans for others generally consist of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with these loans serviced for others, the Bank held borrowers’ escrow balances of $567 and $507 at June 30, 2008 and 2007, respectively.

	As of July 1, 2007, the Bank adopted SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS No. 156), to measure mortgage servicing rights using the amortization method, which is consistent with the accounting treatment prior to the adoption of SFAS No. 156.

	Activity in the mortgage servicing rights account is summarized as follows:


	June 30,

	2008			2007			2006

Balance, beginning of year before valuation allowance	$	572		$	704		$	772
Originations Single-family residential loans		414			74			174
Amortization		(266	)		(135	)		(141	)
Payoffs		(68	)		(71	)		(101	)


Balance, end of year before valuation allowance	$	652		$	572		$	704

Activity in the valuation allowance for mortgage servicing rights is summarized as follows:


	June 30,

	2008		2007		2006


Balance, beginning of year	$	—	$	—	$	49
Reductions		—		—		(49	)


Balance, end of year	$	—	$	—	$	—

F-25

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 5 - Property, Premises, and Equipment

Property, premises, and equipment owned by the Bank are summarized as follows:


	June 30,

	2008			2007


Land	$	2,496		$	2,496
Building and improvements		16,416			16,394
Furniture and fixtures		6,537			6,597
Automobiles		270			224
Software		1,051			958
Leasehold improvements		1,538			344


		28,308			27,013
Less accumulated depreciation and amortization		(12,778	)		(11,755	)


Property, premises, and equipment, net of depreciation and amortization	$	15,530		$	15,258


	Depreciation and amortization expense for the years ended June 30, 2008, 2007, and 2006, was $1,598, $1,550, and $1,451, respectively.

F-26

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 6 - Deposits


	Deposits consist of the following at June 30:


	2008					2007

	Amount		Percent			Amount		Percent


Noninterest-bearing demand deposits	$	30,071		7.7	%	$	26,836		6.1	%
Interest-bearing demand deposits, weighted-average rate of 0.62% and 0.59% in 2008 and 2007, respectively		17,123		4.4	%		16,691		3.8	%
Savings deposits, weighted-average rate of 1.00% in 2008 and 2007		30,765		7.9	%		31,814		7.2	%
Money market accounts, weighted-average rate of 2.38% and 2.23% in 2008 and 2007, respectively		58,732		15.1	%		57,246		12.9	%
Certificates of deposit
0.00 to 3.49%		61,101		15.7	%		4,114		0.9	%
3.50 to 5.49%		184,081		47.2	%		289,901		65.4	%
5.50 to 6.99%		8,076		2.0	%		16,576		3.7	%
7.00 to 7.99%		—		0.0	%		176		0.0	%


Total certificates of deposit		253,258		64.9	%		310,767		70.0	%


Total deposits	$	389,949		100.0	%	$	443,354		100.0	%


	Certificates of deposits in denominations of $100 or more were $132,644 and $173,795 at June 30, 2008 and 2007, respectively. Interest on certificates of deposits in denominations of $100 or more totaled $7,099, $8,331, and $5,105 for the years ended June 30, 2008, 2007, and 2006, respectively. Included in deposit funds at June 30, 2008 and 2007, respectively, are $20,088 and $21,141 of public funds.

	As of June 30, certificates mature as follows:


	June 30,

	2008		2007


One year or less	$	178,951	$	215,518
After one year through three years		58,668		77,402
More than three years		15,639		17,847


	$	253,258	$	310,767

F-27

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 7 - Borrowings


	The Bank is a member of the FHLB of Seattle and, as such, has a committed credit line up to 30% of total eligible assets. Borrowings generally provide for interest at the then-current published rates. FHLB advances (at weighted-average interest rates of 5.00% and 5.47% at June 30, 2008 and 2007, respectively) and lines of credit are scheduled to mature as follows:


	June 30,

	2008		2007


One year or less	$	43,700	$	9,300
After one year through three years		103,965		77,365
More than three years		17,500		10,000


	$	165,165	$	96,665


	Advances from FHLB are collateralized by all FHLB stock owned by the Bank, deposits with the FHLB, investments, and certain mortgage loans and investment securities as described in the Advances, Pledge, and Security Agreement with the FHLB. The maximum and average outstanding advances and lines of credit from the FHLB for the years ended June 30, 2008 and 2007, are as follows:


	June 30,

	2008		2007

Highest outstanding advances at month-end for the previous 12 months	$	165,165	$	104,248

Average outstanding	$	144,964	$	98,086


	The Bank established a line of credit in the amount of $10,000 with the Federal Reserve Bank of San Francisco, subject to collateralization requirements. The line of credit is subject to annual renewal. At June 30, 2008 and 2007, there was no outstanding balance. Borrowed funds would accrue interest at the then-existing federal funds rate.

F-28

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)


Note 8 - Supplemental Executive Retirement Plan

	On July 1, 2002, the Bank implemented a nonqualified Supplemental Executive Retirement Plan (SERP) for the benefit of senior officers and trustees of the Bank. The agreements entitle these individuals to receive defined benefits upon their retirement or death based on the appreciation in Bank value. The Bank appreciation will be the difference between the most recent Bank valuation at the time of redemption and the Bank value established at the date of admission to the plan. On January 1, 2004, the plan was amended to provide that a participant’s SERP unit valuation shall be valued at no less than 90%, and no more than 125%, of the participant’s SERP unit as of the preceding valuation date. The value of the participant’s SERP unit is based upon the overall value of the Bank as determined annually by an outside firm. The accrual for the deferred compensation owed under the plan is based upon the net present value of the vested benefits expected to be paid under the plan. The Bank recognized $(25), $455, and $497 in compensation cost (benefit) related to the SERP for the years ended June 30, 2008, 2007, and 2006, respectively. The SERP liability totaled $2,019 and $2,078 at June 30, 2008 and 2007, respectively.

Note 9 - Income Taxes

	Provision (benefit) for income tax includes the following components:


	Year ended June 30,

	2008			2007			2006


Current	$	1,846		$	2,143		$	3,284
Deferred		(1,848	)		(599	)		(1,711	)


Total	$	(2	)	$	1,544		$	1,573


	The Bank qualified under prior provisions of the Internal Revenue Code to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deduction or based on the experience method. The experience method provided financial institutions the ability to add to the reserve for losses on loans the greater of two computational alternatives: the base-year amount or the six-year moving average amount.

	Retained earnings at June 30, 2008, include approximately $4,314 in tax-basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax-basis bad debt reserve is used for purposes other than to absorb bad debts, or if legislation is enacted requiring recapture of all tax-basis bad debt reserves, the Bank will incur a federal tax liability at the then-prevailing corporate tax rate.

F-29

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 9 - Income Taxes (continued)


	A reconciliation of the provision (benefit) for income tax based on statutory corporate tax rates on pre-tax income and the provision shown in the accompanying consolidated statement of income is summarized as follows for the years ended June 30:


	Amount			Percent of Pre-Tax Income


2008

Income taxes computed at statutory rates	$	267			34.0	%
Tax-exempt income		(274	)		-34.9	%
Other, net		5			0.6	%


Benefit for income tax	$	(2	)		-0.3	%


2007

Income taxes computed at statutory rates	$	1,830			34.0	%
Tax-exempt income		(265	)		-4.9	%
Other, net		(21	)		-0.4	%


Provision for income tax	$	1,544			28.7	%


2006

Income taxes computed at statutory rates	$	1,854			34.0	%
Tax-exempt income		(249	)		-4.6	%
Other, net		(32	)		-0.6	%


Provision for income tax	$	1,573			28.8	%

F-30

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 9 - Income Taxes (continued)

The components of net deferred tax assets and liabilities are summarized as follows:


	June 30,

	2008		2007

Deferred tax assets
Allowance for loan losses	$	3,932	$	2,601
Unrealized loss on securities available-for-sale		—		415
Other		694		566


Total deferred tax assets		4,626		3,582


Deferred tax liabilities
Deferred loan fees and costs		707		767
FHLB stock dividends		1,073		1,066
Mortgage servicing rights		222		271
Unrealized loss (gain) on securities available-for-sale		5		—
Accumulated depreciation		144		307


Total deferred tax liabilities		2,151		2,411


Net deferred tax asset	$	2,475	$	1,171


	As required by SFAS No. 109, the Bank continually reviews the likelihood that deferred tax assets will be realized in future tax periods under the “more-likely-than-not” criteria. In making this judgment, SFAS No. 109 requires that all available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, a valuation allowance is required. As of June 30, 2008, the Bank had $4,626 of deferred tax assets and net deferred tax assets (after deferred tax liabilities) of $2,475 related to the U.S. tax jurisdictions whose recoverability is dependent upon future profitability.

	In the future, the Bank’s effective tax rate could be adversely affected by several factors, many of which are outside of the Bank’s control. The Bank’s effective tax rate is affected by the proportion of revenues and income before taxes in the various domestic jurisdictions in which the Bank operates. Further, the Bank subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which the Bank operates, as well as the requirements, pronouncements and rulings of certain tax, regulatory and accounting organizations.

	A valuation allowance for deferred tax assets was not considered necessary at June 30, 2008 or 2007. Management believes the Bank will fully realize the total deferred income tax assets based upon its total deferred income tax liabilities, previous taxes paid and current and expected future levels of taxable income.

F-31

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)


Note 9 - Income Taxes (continued)

	The Bank adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on July 1, 2007. The Bank had no unrecognized tax benefits which would require an adjustment to the July 1, 2007 beginning balance of retained earnings. The Bank had no unrecognized tax benefits at July 1, 2007 and at June 30, 2008.


	The Bank recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended June 30, 2008 and 2007, the Bank recognized no interest and penalties.


	The Bank files income tax returns in the U.S. Federal jurisdiction. With few exceptions, the Bank is no longer subject to U.S. Federal or state/local income tax examinations by tax authorities for years before 2004.

Note 10 - Regulatory Capital Requirements

	The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

	Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2008, that the Bank meets all capital adequacy requirements to which it is subject.

	As of June 30, 2008, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

F-32

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)


Note 10 - Regulatory Capital Requirements (continued)

	The Bank’s actual capital amounts and ratios are also presented in the following table:


	Actual					Minimum Capital Requirement					Minimum to be Well Capitalized Under Prompt Corrective Action

	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of June 30, 2008
Total capital (to risk-weighted assets)	$	67,332		13.6	%	$	39,640		8.0	%	$	49,550		10.0	%
Tier I capital (to risk-weighted assets)	$	62,287		12.6	%	$	19,820		4.0	%	$	29,730		6.0	%
Tier I leverage capital (to average assets)	$	62,287		10.1	%	$	24,601		4.0	%	$	30,752		5.0	%

As of June 30, 2007
Total capital (to risk-weighted assets)	$	65,912		13.7	%	$	38,557		8.0	%	$	48,197		10.0	%
Tier I capital (to risk-weighted assets)	$	61,268		12.7	%	$	19,279		4.0	%	$	28,918		6.0	%
Tier I leverage capital (to average assets)	$	61,268		10.1	%	$	24,234		4.0	%	$	30,292		5.0	%


Note 11 - Employee Benefit Plans

	The Bank maintains a savings and investment plan under Section 401(k) of the Internal Revenue Code for all salaried employees with one year of service consisting of at least 1,000 hours. Effective April 1, 2007, the entry date for employee deferrals was amended to three consecutive months of service. The employer match remains at one year of service. The plan is funded by both voluntary employee salary deferrals of up to 50% of annual compensation and employer matching contributions as specified by the plan. Employer contributions to this plan totaled $124, $81, and $40 for the years ended 2008, 2007, and 2006, respectively.

	The Bank also maintained a noncontributory defined benefit pension plan for all employees who had completed six months of service and had attained the age of 21 years.

F-33

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 11 - Employee Benefit Plans (continued)

Effective June 29, 2006, the defined benefit pension plan was amended to cease all further benefit accruals. From June 29, 2006, forward, no additional employees were allowed to enter the defined benefit pension plan and no additional years of service were credited for benefit purposes. During the fiscal year ended June 29, 2007, the Bank filed PBGC Form 501, Post Distribution Certification for Standard Termination , with the Pension Benefit Guarantee Corporation. As of June 29, 2007, the defined benefit pension plan was liquidated and benefits in the amount of $5,446 were distributed to defined benefit pension plan participants. The Bank funded an additional $266 to the defined benefit pension plan during the fiscal year ended June 30, 2007, to make the final distributions. During the fiscal year ended June 30, 2007, all participants were required to make an election as to how they would like their accumulated benefit distributed. There was no remaining liability in the defined benefit pension plan as of June 30, 2007.

Note 12 - Related Party Transactions


	During the normal course of business, the Bank originates loans to trustees, committee members, and senior management. Such loans are granted with interest rates, terms, and collateral requirements substantially the same as those for all other customers.

	Loans to trustees, executive officers, and their affiliates are subject to regulatory limitations. Such loans had aggregate balances and activity as follows and were within regulatory limitations:


	June 30,

	2008		2007


Total loans	$	1,498	$	1,867


Total deposits	$	2,711	$	3,890

The Bank is a member of the Washington Community Reinvestment Association (WCRA), a nonprofit organization that administers loan pools that support low-income housing throughout Washington State. A member of the board of trustees of the Bank was a member of the board of directors of the WCRA through February 2007. The Bank participates in approximately $607 in loans and $400 in investments at June 30, 2008, and $571 in loans and $239 in investments at June 30, 2007, from the WCRA.

F-34

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 13 - Off-Balance-Sheet Activities


	Credit-related financial instruments - The Bank is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to a varying degree, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

	The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

	At June 30, the following financial instruments were outstanding whose contract amounts represent credit risk:


	June 30,

	2008		2007


Commitments to grant loans	$	5,660	$	904


Unfunded commitments under lines of credit	$	76,417	$	65,229


	Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

	Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent that the Bank is committed.

F-35

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 13 - Off-Balance-Sheet Activities (continued)

Operating lease commitment - The Bank leases space for branches and operations located in Olympia, Hoquiam, Spanaway, Shelton, Chehalis, Hawks Prairie, Vancouver, Poulsbo, Covington, and Yelm, Washington. These leases run for periods ranging from three to 10 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:


YEAR ENDING JUNE 30,	AMOUNT

2009	$	454
2010	$	442
2011	$	385
2012	$	282
2013	$	118
Thereafter	$	6


	Rental expense charged to operations was approximately $521, $411, and $322 for the years ended June 30, 2008, 2007, and 2006, respectively.

Note 14 - Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments . The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies; however, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

F-36

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 14 - Fair Value of Financial Instruments (continued)


	The estimated fair values of financial instruments are as follows as of June 30:


	2008				2007

	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Assets
Cash and due from banks	$	11,003	$	11,003	$	10,916	$	10,916
Securities available-for-sale		63,904		63,904		60,454		60,454
Securities held-to-maturity		13,762		13,536		15,533		14,938
Loans held-for-sale		1,171		1,171		1,757		1,757
Loans receivable		490,515		502,463		476,383		479,645
Accrued interest receivable		3,033		3,033		3,199		3,199
FHLB stock		6,123		6,123		5,503		5,503

Liabilities
Demand deposits, savings, and market	$	136,691	$	136,691	$	132,587	$	132,587
Certificates of deposit		253,258		253,458		310,767		310,976
FHLB advances		165,165		165,417		96,665		96,647
Advance payments by borrowers for taxes and insurance		1,275		1,275		1,131		1,131


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

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


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

	Securities - The estimated fair values of investments in debt and equity securities, by category, were based on quoted market prices.

	Loans held-for-sale - The fair value of loans held-for-sale is based on quoted market prices.

	Loans receivable - The fair value of the Bank’s loan portfolio has been estimated by discounting the projected cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. For all loans, estimated future cash flows have been computed using an average prepayment term based on published prepayment rates for similar loans.

F-37

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 14 - Fair Value of Financial Instruments (continued)


	No adjustment was made to the current rate or quoted market rate for changes in credit of performing loans for which there are no known credit concerns. Management believes that the risk factor embedded in the current interest rate, along with the general reserves applicable to the performing loan portfolio, for which there are no known credit concerns, results in a fair valuation of such loans.

	FHLB stock - The fair value is based upon the redemption value of the stock, which equates to its carrying value.

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

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

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

F-38

ANCHOR MUTUAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)


Note 15 - Selected Quarterly Financial Data (unaudited)

	Quarter Ended

	September 2007			December 2007			March 31, 2008			June 30, 2008


Interest income	$	10,330		$	10,425		$	9,841		$	9,535
Interest expense		5,830			5,925			5,616			5,294


Net interest income		4,500			4,500			4,225			4,241

Provision for loan losses		172			486			361			2,526

Other income (expense)		(3,187	)		(3,291	)		(3,473	)		(3,186	)


Income (loss) before provision for income taxes		1,141			723			391			(1,471	)

Provision (benefit) for income taxes		292			162			59			(515	)


Net income (loss)	$	849		$	561		$	332		$	(956	)


	Quarter Ended

	September 2006			December 2006			March 31, 2007			June 30, 2007


Interest income	$	9,719		$	10,196		$	10,245		$	10,712
Interest expense		5,135			5,641			5,663			5,764


Net interest income		4,584			4,555			4,582			4,948

Provision for loan losses		126			377			278			(61	)

Other income (expense)		(2,946	)		(2,930	)		(3,251	)		(3,439	)


Income before provision for income taxes		1,512			1,248			1,053			1,570

Provision for income taxes		448			347			291			458


Net income	$	1,064		$	901		$	762		$	1,112

F-39

ANCHOR MUTUAL SAVINGS BANK

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands)

Note 15 - Selected Quarterly Financial Data (unaudited) (continued)


	Quarter Ended

	September 2005			December 2005			March 31, 2006			June 30, 2006


Interest income	$	7,711		$	8,362		$	8,592		$	9,045
Interest expense		3,318			3,712			4,046			4,498


Net interest income		4,393			4,650			4,546			4,547

Provision for loan losses		120			175			156			95

Other income (expense)		(2,810	)		(3,342	)		(3,284	)		(2,701	)


Income before provision for income taxes		1,463			1,133			1,106			1,751

Provision for income taxes		454			351			302			466


Net income	$	1,009		$	782		$	804		$	1,285

Note 16 - Subsequent Event

On September 7, 2008, the United States Government took conservatorship of FNMA and FHLMC. The actions resulted in significant doubt that preferred shareholders of these organizations would recover their investment. As identified in Note 2, the Bank originally invested $1,000 in FNMA Series L preferred shares. As of June 30, 2008, the value of these shares was $635 and the Bank recorded an other than temporary impairment of $365 accordingly. As of September 30, 2008, the shares of FNMA Series L were valued at approximately $68. The additional impairment from July 1, 2008, through September 30, 2008, will be recorded in the quarter ended September 30, 2008.

F-40

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. If the laws of your state or other jurisdiction prohibit us from offering our common stock to you, then this prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of our common stock. Neither the delivery of this prospectus nor any sale hereunder shall imply that there has been no change in our affairs since any of the dates as of which information is furnished herein or since the date hereof.

5,175,000 Shares for Sale
(Anticipated Maximum,
Subject to Increase)

ANCHOR BANCORP

(Proposed Holding Company for Anchor Bank)

COMMON STOCK

PROSPECTUS

KEEFE, BRUYETTE & WOODS

Until the later of _____________, 2008 or 25 days after the commencement of the Syndicated Community Offering, if any, which is later, all dealers effecting transactions in our common stock may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to any unsold allotments or subscriptions.

PART II – INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution


Legal fees and expenses	$	250,000
Securities marketing legal fees		45,000
EDGAR, copying, printing, postage and mailing		200,000
Appraisal preparation fees and expenses		70,000
Business plan preparation fees and expenses		35,000
Accounting fees and expenses		130,000
Securities marketing fees and expenses		532,315
Data processing fees and expenses		35,000	(1)
SEC registration fee		2,417
Blue Sky filing fees and expenses		5,000
NASDAQ listing fee		125,000
Stock transfer agent and regular fees and expenses		50,000
Other expenses - NASD filing fee, certificate printing, telephone/stock center		32,583

Total		1,512,315


(1)	Included in securities marketing fees and expenses.

Item 14. Indemnification of Directors and Officers

In accordance with the Washington Business Corporation Act (“WBCA”), R.C.W. § 23 B.08.570, Article XIV of Anchor Bancorp’s Articles of Incorporation provides as follows:

Indemnification . The corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:

A. Directors and Officers . In all circumstances and to the full extent permitted by the WBCA, the corporation shall indemnify any person who is or was a director, officer or agent of the corporation and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (including an action by or in the right of the corporation), by reason of the fact that he is or was an agent of the corporation, against expenses, judgments, fines, and amounts paid in settlement and incurred by him in connection with such action, suit or proceeding. However, such indemnity shall not apply to: (a) acts or omissions of the director or officer finally adjudged to violate law; (b) conduct of the director or officer finally adjudged to violate RCW Chapter 23B.08.310 (relating to unlawful distributions by the corporation), or (c) any transaction with respect to which it was finally adjudged that such director and officer personally received a benefit in money, property, or services to which the director was not legally entitled. The corporation shall advance expenses incurred in a proceeding for such persons pursuant to the terms set forth in a separate directors’ resolution or contract.

B. Implementation . The board of directors may take such action as is necessary to carry out these indemnification and expense advancement provisions. It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such bylaws, resolutions, contracts, or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made.

C. Survival of Indemnification Rights . No amendment or repeal of this Article XIV shall apply to or have any effect on any right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.

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D. Service for Other Entities . The indemnification and advancement of expenses provided under this Article XIV shall apply to directors, officers, employees, or agents of the corporation for both (a) service in such capacities for the corporation, and (b) service at the corporation ‘s request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A person is considered to be serving an employee benefit plan at the corporation’s request if such person’s duties to the corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan.

E. Insurance . The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the corporation would have had the power to indemnify him against such liability under the provisions of this bylaw and the WBCA.

F. Other Rights . The indemnification provided by this section shall not be deemed exclusive of any other right to which those indemnified may be entitled under any other bylaw, agreement, vote of shareholders, or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person. Notwithstanding any other provisions contained herein, these Articles of Incorporation are subject to the requirements and limitations set forth in state and federal laws, rules, regulations, or orders regarding indemnification and prepayment of legal expenses, including Section 18(k) of the Federal Deposit Insurance Act and Part 359 of the Federal Deposit Insurance Corporation’s Rules and Regulations or any successor regulations thereto.

Item 15. Recent Sales of Unregistered Securities

Not Applicable.

Item 16. Exhibits and Financial Statement Schedules

The financial statements and exhibits filed as part of this registration statement are as follows:

(a) Exhibits


1.1	Engagement Letter between Anchor Mutual Savings Bank and Keefe, Bruyette & Woods, Inc.

1.2	Form of proposed Agency Agreement among Anchor Bancorp and Anchor Mutual Savings Bank and Keefe, Bruyette & Woods, Inc. (a)

2	Plan of Conversion of Anchor Mutual Savings Bank

3.1	Articles of Incorporation of Anchor Bancorp

3.2	Bylaws of Anchor Bancorp

4	Form of Certificate for Common Stock

5	Opinion of Breyer & Associates PC regarding legality of securities registered

8.1	Federal Tax Opinion of Silver Freedman & Taff, L.L.P.

8.2	State Tax Opinion of Blado Kiger, P.S.

II - 2


8.3	Opinion of RP Financial, LC. as to the value of subscription rights

10.1	Form of Employment Agreement for President and Chief Executive Officer, and the Chief Financial Officer

10.2	Form of Change in Control Severance Agreement for Executive Officers

10.3	Form of Anchor Bank Employee Severance Compensation Plan

10.4	Anchor Mutual Savings Bank Phantom Stock Plan

10.5	Form of 401(k) Retirement Plan

21	Subsidiaries of the Registrant

23.1	Consent of Moss Adams LLP

23.2	Consent of Breyer & Associates PC (contained in opinion included as Exhibit 5)

23.3	Consent of Silver Freedman & Taff, L.L.P. as to its Federal Tax Opinion (contained in opinion included as Exhibit 8.1)

23.4	Consent of Blado Kiger, P.S. as to its State Tax Opinion (contained in opinion included as Exhibit 8.2)

23.5	Consent of RP Financial, LC.

24	Power of Attorney (contained in signature page to the registration statement)

99.1	Order and Certification Form

99.2	Solicitation and Marketing Materials

99.3	Engagement Letters between Anchor Mutual Savings Bank and RP Financial, LC.

99.4	Appraisal Report of RP Financial, LC. (b)


(a)	To be filed by amendment.

(b)	Excludes certain tabular and statistical information pursuant to a hardship exemption request made under Rule 202 of Regulation S-T.

II - 3


(b)	Financial Statement Schedules

ANCHOR MUTUAL SAVINGS BANK

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page


Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of June 30, 2008 and 2007	F-3

Consolidated Statements of Income for the Years Ended June 30, 2008, 2007 and 2006	F-5

Consolidated Statements of Equity and Comprehensive Income for the Years Ended June 30, 2008, 2007 and 2006	F-6

Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and 2006	F-8

Notes to Consolidated Financial Statements	F-10


	All schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements and related Notes.

	The financial statements of Anchor Bancorp have been omitted because Anchor Bancorp has not yet issued any stock, has no assets or liabilities, and has not conducted any business other than that of an organizational nature.

Item 17. Undertakings

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be the initial bona fide offering thereof.

II - 4

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of any employee benefit plan’s annual report pursuant to Section 15 (d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.

II - 5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aberdeen, State of Washington on October 24, 2008.


	ANCHOR BANCORP

	By:	/s/Jerald L. Shaw

		Jerald L. Shaw
		President and Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned directors and officers of Anchor Bancorp, do hereby severally constitute and appoint Jerald L. Shaw, our true and lawful attorney and agent, to do any and all things and acts in our names in the capacities indicated below and to execute all instruments for us and in our names in the capacities indicated below which said Jerald L. Shaw may deem necessary or advisable to enable Anchor Bancorp, to comply with the Securities Act of 1933 and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of Anchor Bancorp’s Common Stock, including specifically but not limited to, power and authority to sign, for us or any of us in our names in the capacities indicated below, the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that Jerald L. Shaw shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.


Signature	Title	Date


/s/Jerald L. Shaw	President and Chief Executive Officer	October 24, 2008

Jerald L. Shaw	(Principal Executive Officer)

/s/Terri L. Degner	Executive Vice President and Chief	October 24, 2008

Terri L. Degner	Financial Officer
	(Principal Financial and Accounting
	Officer)

/s/Robert D. Ruecker	Chairman of the Board	October 24, 2008

Robert D. Ruecker

/s/Douglas A. Kay	Vice Chairman of the Board	October 24, 2008

Douglas A. Kay

II - 6


/s/George W. Donovan	Director	October 24, 2008

George W. Donovan

/s/William Foster	Director	October 24, 2008

William Foster

/s/Dennis C. Morrisette	Director	October 24, 2008

Dennis C. Morrisette

/s/James A. Boora	Director	October 24, 2008

James A. Boora

II - 7

Exhibit 1.1

(KEEFE, BRUYETTE & WOODS LOGO)

March 11, 2008

Mr. Jerald Shaw
President and Chief Executive Officer
Anchor Mutual Savings Bank
100 West First Street
Aberdeen, WA 98520

Dear Mr. Shaw:

This proposal is in connection with the intention of Anchor Mutual Savings Bank (“Savings Bank”), a state savings bank, to reorganize its existing savings bank structure into a full stock company pursuant to a Plan of Conversion and Reorganization. (“Plan of Conversion’). In order to effect the Plan of Conversion, it is contemplated that a new stock holding company will be established by the Savings Bank as part of the mutual to stock conversion (“Company”) and the Company will offer and sell shares of its common stock first to eligible persons in a Subscription and Community Offering as defined in the Plan of Conversion.

Keefe, Bruyette and Woods (“KBW”) will act as the Savings Bank’s and the Company’s exclusive financial advisor and marketing agent in connection with the Conversion and stock issuance. In addition, KBW will act as Conversion Agent to the Savings Bank and the Company in connection with the Conversion and stock issuance. This letter sets forth selected terms and conditions of our engagement for each service in two separate parts.

PART 1: FINANCIAL ADVISOR AND MARKETING AGENT TERMS AND CONDITIONS

1. Advisory/Conversion Services . As the Savings Bank’s and Company’s financial advisor and marketing agent, KBW will provide the Savings Bank and the Company with a comprehensive program of services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. KBW will provide financial and logistical advice to the Savings Bank and the Company concerning the Conversion and related issues. KBW will assist in providing Conversion enhancement services intended to maximize stock sales in the Subscription Offering and to residents of the Bank’s market area, if necessary, in the Community Offering.

KBW shall provide financial advisory services to the Savings Bank and the Company which are typical in connection with an equity offering and include, but are not limited to, financial analysis of the Savings Bank with a focus on identifying factors which impact the valuation of the common stock and provide the appropriate recommendations for the betterment of the equity valuation.

Additionally, post Conversion financial advisory services will include advice on shareholder relations, NASDAQ listing, after-market trading, dividend policy (for both regular and special dividends), stock repurchase strategy and communication with market makers. (The nature of the services to be provided by KBW as the Savings Bank’s and the Company’s financial advisor and marketing agent is further described in Exhibit A attached hereto.)

Keefe, Bruyette & Woods * 211 Bradenton Ave. * Dublin, OH 43017
614.766.8400 * Fax 614.766.8406

Mr. Jerald Shaw
March 11, 2008
Page 2

2. Preparation of Offering Documents . The Savings Bank, the Company and their counsel will draft the Registration Statement, Application for Conversion, Prospectus and other documents to be used in connection with the Conversion. KBW will attend meetings to review these documents and advise you on their form and content. KBW and its counsel will draft an appropriate agency agreement and related documents as well as marketing materials other than the Prospectus.

3. Due Diligence Review and Confidentiality . Prior to filing the Registration Statement, Application for Conversion or any offering or other documents naming KBW as the Savings Bank’s and the Company’s financial advisor and marketing agent, KBW and its representatives will undertake substantial investigations to learn about the Savings Bank’s business and operations (“due diligence review”) in order to confirm information provided to us and to evaluate information to be contained in the Company’s offering documents. The Savings Bank agrees that it will make available to KBW all relevant information, whether or not publicly available, which KBW reasonably requests, and will permit KBW to discuss with management the operations and prospects of the Savings Bank. The Savings Bank acknowledges that KBW will rely upon the accuracy and completeness of all information received from the Savings Bank, its officers, directors, employees, agents and representatives, accountants and counsel including this letter to serve as the Savings Bank’s and the Company’s financial advisor and marketing agent.

In connection with the engagement of KBW, it is contemplated that KBW will receive from the Savings Bank certain information the Savings Bank considers confidential. KBW agrees that it will keep confidential such information provided by and relating to the Savings Bank. KBW shall use this confidential information solely for the purpose of rendering services to the Savings Bank pursuant to this letter and shall not disclose any of such confidential information to any party (other than certain officers and employees of KBW providing services pursuant to this engagement letter) except with the prior written consent of the Savings Bank; provided, however, that the foregoing restriction shall not apply to any information that is publicly available when provided or thereafter becomes publicly available other than through disclosure by KBW or that is required to be disclosed by KBW by judicial or administrative process in connection with any action, suit, proceeding or investigation. Information shall be deemed “publicly available” if it becomes a matter of public knowledge or is contained in materials available to the public or is obtained by KBW from any source other than the Savings Bank or its representatives, provided that such source was not to the actual knowledge of KBW subject to a confidentiality agreement with the Savings Bank.

4. Regulatory Filings . The Savings Bank and/or the Company will cause appropriate Conversion and offering documents to be filed with all regulatory agencies including, the Securities and Exchange Commission (“SEC”), the National Association of Securities Dealers (“NASD”), FDIC, Washington Department of Financial Institutions (“DFI”), and such state banking and securities commissioners as may be determined by the Savings Bank.

5. Agency Agreement . The specific terms of KBW’s services, including stock offering enhancement and syndicated offering services contemplated in this letter shall be set forth in a

Mr. Jerald Shaw
March 11, 2008
Page 3

mutually agreed upon Agency Agreement between KBW and the Savings Bank and the Company to be executed prior to commencement of the offering, and dated the date that the Company’s Prospectus is declared effective and/or authorized to be disseminated by the appropriate regulatory agencies, the SEC, the NASD, the DFI, the FDIC and such state securities commissioners and other regulatory agencies as required by applicable law.

6. Representations, Warranties and Covenants . The Agency Agreement will provide for the final agreed upon representations, warranties and covenants by the Savings Bank and KBW, and for the Company to indemnify KBW and its controlling persons (and, if applicable, the member of the selling group and their controlling persons), and for KBW to indemnify the Savings Bank and the Company against certain liabilities, including, without limitation, liabilities under the Securities Act of 1933.

7. Fees . For the services hereunder, the Savings Bank or the Company, or the Savings Bank and the Company together, shall pay the following fees to KBW at closing unless stated otherwise:

(a) Management Fee. A Management Fee of $50,000 payable in four consecutive monthly installments of $12,500 commencing with the adoption of the Plan of Conversion. Such fees shall be deemed to have been earned when due. Should the Conversion be terminated for any reason not attributable to the action or inaction of KBW, KBW shall have earned and be entitled to be paid fees accruing through the stage at which point the termination occurred. The Management Fee will be credited against the Success Fee in (b).

(b) Success Fee: A Success Fee of 1.00% shall be charged based on the aggregate purchase price of common stock sold in the Subscription Offering and Community Offering excluding shares purchased by the Savings Bank’s officers, directors, or employees (or members of their immediate family) plus any ESOP, charitable foundations, tax-qualified or stock based compensation plans (except IRA’s) or similar plan created by the Savings Bank for some or all of its directors or employees.

(c) Broker-Dealer Pass-Through. If any shares of the Company’s stock remain available after the Subscription Offering and Community Offering, at the request of the Savings Bank, KBW will seek to form a syndicate of registered broker-dealers to assist in the sale of such common stock on a best efforts basis, subject to the terms and conditions set forth in the selected dealers agreement. KBW will endeavor to distribute the common stock among dealers in a fashion which best meets the distribution objectives of the Savings Bank and the Plan of Conversion. KBW will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the shares of common stock sold by them. From this fee, KBW will pass onto selected broker-dealers, who assist in the syndicated community, an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock sold at a comparable price per share in a similar market environment. Fees with respect to purchases affected with the assistance of a broker/dealer other than KBW shall be transmitted by KBW to such broker/dealer. The decision to utilize selected broker-dealers will be made by the Savings Bank upon

Mr. Jerald Shaw
March 11, 2008
Page 4

consultation with KBW. In the event, with respect to any stock purchases, fees are paid pursuant to this subparagraph 7(c), such fees shall be in lieu of, and not in addition to, payment pursuant to subparagraph 7(b).

8. Additional Services . KBW further agrees to provide financial advisory assistance to the Company and the Savings Bank for a period of one year following completion of the Conversion, including formation of a dividend policy and share repurchase program, assistance with shareholder reporting and shareholder relations matters, general advice on mergers and acquisitions, and other related financial matters (e.g., evaluation of business strategies regarding the use of net proceeds), without the payment by the Company and the Savings Bank of any fees in addition to those set forth in Section 7 hereof. Nothing in this Agreement shall require the Company and the Savings Bank to obtain such services from KBW.

9. Expenses . The Savings Bank and the Company will bear those expenses of the proposed offering customarily borne by issuers, including, without limitation, regulatory filing fees, SEC, DTC, “Blue Sky,” and NASD filing and registration fees; the fees of the Savings Bank’s accountants, attorneys, appraiser, transfer agent and registrar, printing, mailing and marketing and syndicate expenses associated with the Conversion; the fees set forth in Section 7; and fees for “Blue Sky” legal work.

KBW shall be reimbursed for reasonable out-of-pocket expenses, including costs of travel, meals and lodging, photocopying, telephone, facsimile and couriers. The selection of KBW’s counsel will be done by KBW, with the approval of the Savings Bank. The Savings Bank will reimburse KBW for the fees of its counsel which will not exceed $45,000.

10. Conditions . KBW’s willingness and obligation to proceed hereunder shall be subject to, among other things, satisfaction of the following conditions in KBW’s opinion, which opinion shall have been formed in good faith by KBW after reasonable determination and consideration of all relevant factors: (a) full and satisfactory disclosure of all relevant material, financial and other information in the disclosure documents and a determination by KBW, in its sole discretion, that the sale of stock on the terms proposed is reasonable given such disclosures; (b) no material adverse change in the condition or operations of the Savings Bank subsequent to the execution of the agreement; and (c) no adverse market conditions at the time of offering which in KBW’s opinion make the sale of the shares by the Company inadvisable.

11. Benefit . This Agreement shall inure to the benefit of the parties hereto and their respective successors and to the parties indemnified pursuant to the terms and conditions of the Agency Agreement and their successors, and the obligations and liabilities assumed hereunder by the parties hereto shall be binding upon their respective successors provided, however, that this Agreement shall not be assignable by KBW.

12. Definitive Agreement . This letter reflects KBW’s present intention of proceeding to work with the Savings Bank on its proposed Conversion. It does not create a binding obligation on the

Mr. Jerald Shaw
March 11, 2008
Page 5

part of the Savings Bank, the Company or KBW except as to the agreement to maintain the confidentiality of non-public information set forth in Section 3, the payment of certain fees as set forth in Section 7(a) and the assumption of expenses as set forth in Section 9, all of which shall constitute the binding obligations of the parties hereto and which shall survive the termination of this letter or the completion of the services furnished hereunder and shall remain operative and in full force and effect. You further acknowledge that any report or analysis rendered by KBW pursuant to this engagement is rendered for use solely by the Savings Bank and the Company and its agents in connection with the Conversion. Accordingly, you agree that you will not provide any such information to any other person without our prior written consent.

KBW acknowledges that in offering the Company’s common stock no person will be authorized to give any information or to make any representation not contained in the offering prospectus and related offering materials filed as part of a registration statement to be declared effective in connection with the offering. Accordingly, KBW agrees that in connection with the offering it will not give any unauthorized information or make any unauthorized representation. We will be pleased to elaborate on any of the matters discussed in this letter at your convenience.

PART 2: CONVERSION AGENT TERMS AND CONDITIONS

Conversion Agent Services and Fees : As Conversion Agent, KBW will provide the following services:


1.	Create the master file of account holders as of key record dates

2.	Consolidate accounts having the same ownership and separate the consolidated file information into necessary groupings to satisfy mailing requirements

3.	Provide conversion legal counsel with necessary supporting information for Blue Sky laws research and registration

4.	Assist the Bank’s financial printer with labeling of proxy and stock offering materials for mailing

5.	Provide support for any follow-up member mailings needed, i.e. ProxyGrams, etc.

6.	Provide software for the operation of the Bank’s Stock Information Center, including stock subscription management and proxy solicitation efforts

7.	Interface with the Bank’s transfer agent for generation and mailing of stock certificates

8.	Be the Inspector of Election for the Bank’s special meeting of members, if requested and the election is not contested

9.	Perform interest and refund calculations and provide a file to enable the Bank to generate interest and refund checks

10.	Create 1099-INT forms for interest reporting, as well as magnetic media reporting to the IRS, for subscribers paid $10 or more in interest on subscriptions paid for by check

Mr. Jerald Shaw
March 11, 2008
Page 6

For the Conversion Agent services outlined above, the Company agrees to pay Keefe, Bruyette & Woods a fee of $35,000 . This fee is based upon the requirements of current conversion regulations, the Plan of Conversion as currently contemplated, and the expectation that member data will be processed as of three key record dates. Any material changes in regulations or the Plan, or delays requiring duplicate or replacement processing due to changes to record dates, may result in additional fees. All fees under this agreement shall be payable as follows: (a) $5,000 payable upon execution of this agreement, which shall be non-refundable; and (b) the balance upon the completion of the Offering.

Reliance on Information Provided : The Savings Bank and the Company will provide KBW with such information as KBW may reasonably require to carry out its duties. The Company recognizes and confirms that KBW (a) will use and rely on such information in performing the services contemplated by this agreement without having independently verified the same, and (b) does not assume responsibility for the accuracy or completeness of the information.

Limitations : KBW, as Conversion Agent hereunder, (a) shall have no duties or obligations other than those specifically set forth herein; (b) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any order form or any stock certificates or the shares represented thereby, and will not be required to and will make no representations as to the validity, value or genuineness of the offer; (c) will not be obliged to take any legal action hereunder which might in its judgment involve any expense or liability, unless it shall have been furnished with reasonable indemnity satisfactory to it; and (d) may rely on and shall be protected in acting in reliance upon any certificate, instrument, opinion, notice, letter, telex, telegram, or other document or security delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties.

KBW, as Conversion Agent hereunder, shall not be liable to any person or entity by reason of any error of judgment, or for any act done by it in good faith or for any mistake of law or fact in connection with this agreement and the performance hereof, unless caused by or arising out of its own bad faith or gross negligence.

Indemnification : The Company agrees to indemnify and hold KBW and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons (KBW and each such person being an “Indemnified Party”) harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the engagement of KBW pursuant to, and the performance by KBW of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party. The Company will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to

Mr. Jerald Shaw
March 11, 2008
Page 7

have resulted primarily from KBW’s bad faith or gross negligence.

This letter constitutes the entire Agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties.

If the foregoing correctly sets forth our mutual understanding, please so indicate by signing and returning the original copy of this letter to the undersigned.

Sincerely,

KEEFE, BRUYETTE & WOODS


By:

	Patricia A. McJoynt, Managing Director

ANCHOR MUTUAL SAVINGS BANK, ABERDEEN, WA

By:		Date:	5/20/08

	Jerald L. Shaw, President & CEO

EXHIBIT A

CONVERSION SERVICES

KBW provides thrift institutions converting from the mutual to stock form of ownership with a comprehensive program of proxy solicitation and stock issuance services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. The following list is representative of the stock issuance services, if appropriate, we propose to perform on behalf of the Savings Bank.

General Services

Assist management and legal counsel with the design of the transaction structure.

Analyze and make recommendations on bids from printing, transfer agent, and appraisal firms.

Assist in drafting and distribution of press releases as required or appropriate.

Stock Offering Enhancement Services

Establish and manage Stock Information Center at the Savings Bank. Stock Information Center personnel will track prospective investors; record stock orders; mail order confirmations; provide the Savings Bank’s senior management with daily reports; solicit and process proxies; answer customer inquiries; and handle special situations as they arise.

Assign KBW’s personnel to be at the Savings Bank through completion of the Subscription and Community Offerings to manage the Stock Information Center, meet with prospective shareholders at individual and community information meetings (if applicable), solicit local investor interest through a tele-marketing campaign, answer inquiries, and otherwise assist in the sale of stock in the Subscription and Community Offerings. This effort will be lead by a Principal of KBW.

Create target investor list based upon review of the Bank’s depositor base.

Provide intensive financial and marketing input for drafting of the prospectus.

Prepare other marketing materials, including prospecting letters and brochures, and media advertisements.

Arrange logistics of community information meeting(s) as required.

Prepare audio-visual presentation by senior management for community information meeting(s).

Prepare management for question-and-answer period at community information meeting(s).

Attend and address community information meeting(s) and be available to answer questions.

Broker-Assisted Sales Services .

Arrange for broker information meeting(s) as required.

Conversion Services- Continued

Prepare audio-visual presentation for broker information meeting(s).

Prepare script for presentation by senior management at broker information meeting(s).

Prepare management for question-and-answer period at broker information meeting(s).

Attend and address broker information meeting(s) and be available to answer questions.

Produce confidential broker memorandum to assist participating brokers in selling the Company’s common stock.

After-market Support Services .

KBW will use their best efforts to secure a trading commitment from at least three NASD firms, one of which will be Keefe, Bruyette & Woods, Inc.

Exhibit 2

PLAN OF CONVERSION

ANCHOR MUTUAL SAVINGS BANK

Adopted by the Board of Trustees on July 15, 2008

ANCHOR MUTUAL SAVINGS BANK
ABERDEEN, WASHINGTON

PLAN OF CONVERSION
FROM STATE MUTUAL SAVINGS BANK
TO STATE STOCK SAVINGS BANK
AND FORMATION OF A HOLDING COMPANY

INTRODUCTION


I.	General

On July 15, 2008, the Board of Trustees of Anchor Mutual Savings Bank (“Anchor Mutual” or the “Savings Bank”), adopted by unanimous vote, this Plan of Conversion (“Plan”), which provides for the conversion of the Savings Bank from a state chartered mutual savings bank to a state chartered stock savings bank and the concurrent formation of a holding company for the Savings Bank (“Holding Company”). The Board of Trustees desires to attract new capital to the Savings Bank to increase its net worth, to support future savings growth, to increase the amount of funds available for other lending and investment, to provide greater resources for the expansion of customer services and to facilitate future expansion by the Savings Bank. The Board of Trustees further desires to reorganize the Savings Bank as the wholly owned subsidiary of a holding company to enhance flexibility of operations, diversification of business opportunities and financial capability for business and regulatory purposes and to enable the Savings Bank to compete more effectively with other financial service organizations.

All capitalized terms contained in the Plan shall have the meanings ascribed to them in Section II hereof.

Pursuant to the Plan, shares of Conversion Stock will be offered as part of the Conversion in a Subscription Offering pursuant to nontransferable Subscription Rights at a predetermined and uniform price first to the Savings Bank’s Eligible Account Holders, second to Tax-Qualified Employee Stock Benefit Plans, third to Supplemental Eligible Account Holders, and then to Other Members of the Savings Bank. Concurrently with the Subscription Offering, shares not subscribed for in the Subscription Offering will be offered as part of the Conversion to the general public in a Direct Community Offering. Shares remaining may then be offered to the general public in a Syndicated Community Offering, an underwritten public offering or otherwise. The aggregate Purchase Price of the Conversion Stock will be based upon an independent appraisal of the Savings Bank and will reflect the estimated pro forma market value of the Savings Bank as a subsidiary of the Holding Company. Members as of specified dates will be granted non-transferable Subscription Rights to purchase Conversion Stock, and a liquidation account will be established for the benefit of depositors as of specified dates.

Consummation of the Conversion is subject to the approval of this Plan and the Conversion by the Division and must be adopted by a majority of the total number of votes eligible to be cast at a special meeting of the Members of the Savings Bank to be called to consider the Conversion. In addition, in order to consummate the Conversion, this Plan must be filed with and receive the non-objection of the FDIC in accordance with applicable FDIC regulations.

After the Conversion, the Savings Bank will continue to be regulated by the Division, as its chartering authority, and by the FDIC, which insures the Savings Bank’s deposits. After the Conversion, the Holding Company will be regulated by the Federal Reserve. In addition, all insured savings deposits will continue to be insured by the FDIC up to the maximum provided by law.

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No change will be made in the existing Board of Trustees or management of the Savings Bank as a result of the Conversion. Following the Conversion, the existing Board of Trustees will continue as the Board of Directors of the Converted Savings Bank. For purposes of this Plan, the term “Board of Directors” shall include the Board of Directors of either the Holding Company or the Converted Savings Bank or of the Board of Trustees of the Savings Bank in its current mutual form.


II.	Definitions

As used in this Plan, the terms set forth below have the following meanings:

A. Acting in Concert : (1) Knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. Persons living at the same address as indicated on the records of the Savings Bank, whether or not related, will be deemed to be Acting in Concert, unless otherwise determined by the Boards of Directors of the Holding Company or the Savings Bank. A Person who acts in concert with another Person (“other party”) shall also be deemed to be acting in concert with any Person who is also acting in concert with that other party, except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert with its trustee or a Person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated, and participants or beneficiaries of any such Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert solely as a result of their common interests as participants or beneficiaries. When Persons act together for such purpose, their group is deemed to have acquired their stock. The determination of whether a group is Acting in Concert shall be made solely by the Boards of Directors of the Holding Company or the Savings Bank or Officers designated by such Boards and may be based on any evidence upon which the Board or such Officer chooses to rely, including, without limitation, the fact that such Persons have joint accounts at the Savings Bank or the fact that such Persons have filed joint Schedules 13D or Schedules 13G with the SEC with respect to other companies. Directors, Officers and employees of the Holding Company or the Savings Bank shall not be deemed to be Acting in Concert solely as a result of their capacities as such.

B. Application for Conversion : The application and related application materials submitted to the Division and the FDIC for approval of the Conversion.

C. Associate : When used to indicate a relationship with any Person, means (i) any corporation or organization (other than the Savings Bank or a majority-owned subsidiary of the Savings Bank, or the Holding Company) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, except a Tax-Qualified Employee Stock Benefit Plan, (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a Director or Officer of the Savings Bank, any of its subsidiaries, or the Holding Company and (iv) any person Acting in Concert with any of the persons or entities specified in clauses (i) through (iii) above; provided, however, that any Tax-Qualified or Non-Tax Qualified Employee Plan shall not be deemed to be an Associate of any Director or Officer of the Holding Company or the Savings Bank solely as a result of their capacities as such. When used to refer to a Person other than an Officer or Director of the Savings Bank, the Savings Bank in its sole discretion may determine the Persons that are Associates of other Persons.

D. Capital Stock : Any and all authorized capital stock in the Converted Savings Bank.

E. Common Stock : Any and all authorized common stock in the Holding Company subsequent to the Conversion.

F. Conversion : Collectively, (i) amendment of the Savings Bank’s Charter and Bylaws to authorize issuance of shares of Capital Stock by the Converted Savings Bank and to conform to the requirements of a Washington-chartered stock savings bank under the laws of the State of Washington and regulations of the Division; (ii) issuance and

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sale of Conversion Stock by the Holding Company in the Offerings; and (iii) purchase by the Holding Company of the Capital Stock of the Converted Savings Bank to be issued in the Conversion immediately following or concurrently with the close of the sale of all Conversion Stock. All transactions shall occur substantially simultaneously.

G. Conversion Stock : Holding Company Common Stock to be issued and sold by the Holding Company pursuant to this Plan.

H. Converted Savings Bank : Anchor Bank, in its form as a state chartered capital stock savings bank after the Conversion.

I. Deposit Account : Any withdrawable account maintained at the Savings Bank, including, without limitation, savings, time, demand, NOW, money market, certificate and passbook accounts.

J. Direct Community Offering : The offering for sale of Conversion Stock to the public of any unsubscribed shares which may be effected as provided in Section X hereof.

K. Director : A member of the Board of Directors of either the Holding Company or the Converted Savings Bank or of the Board of Trustees of the Savings Bank in its current mutual form.

L. Division : The Washington Department of Financial Institutions, Division of Banks.

M. Eligible Account Holder : Any Person holding a Qualifying Deposit in the Savings Bank on the Eligibility Record Date.

N. Eligibility Record Date : The date for determining Qualifying Deposits of Eligible Account Holdings shall be the close of business on June 30, 2007.

O. Estimated Valuation Range : The range of the minimum and maximum estimated aggregate pro forma market value of the Conversion Stock to be issued in the Offerings, as set forth in the independent valuation prepared by the Independent Appraiser in accordance with Section X hereof.

P. ESOP : The Tax-Qualified Employee Stock Benefit Plan adopted by the Holding Company or the Savings Bank in connection with the Conversion, the purpose of which shall be to acquire capital stock of the Holding Company, including Conversion Stock.

Q. FDIC : Federal Deposit Insurance Corporation.

R. Federal Reserve : The Board of Governors of the Federal Reserve System.

S. Foundation : The charitable foundation to be established by the Holding Company and the Savings Bank that will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code.

T. FR Y-3 Application : The application submitted to the Federal Reserve on FR Y-3, if necessary, for approval of the Holding Company’s acquisition of all of the Capital Stock of the Converted Savings Bank.

U. Holding Company : A corporation to be formed under Washington state law by the Savings Bank for the purpose of becoming a holding company through the issuance and sale of its stock under the Plan, and concurrent acquisition of 100% of the Capital Stock of the Converted Savings Bank to be issued pursuant to the Plan.

V. Holding Company Common Stock : The authorized common stock of the Holding Company, par value $.01 per share.

W. Holding Company Stock : Any and all authorized capital stock of the Holding Company.

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X. Independent Appraiser : The independent financial consulting firm retained by the Holding Company and the Savings Bank to prepare an appraisal of the estimated pro forma market value of the Conversion Stock.

Y. Liquidation Account : The account to be established by the Savings Bank pursuant to Section XV hereof.

Z. Local Community : Lewis, King, Grays Harbor, Thurston, Kitsap, Pierce, Mason and Clark Counties in the State of Washington, the counties in which the Savings Bank maintains offices.

AA. Market Maker : A dealer ( i.e. , any Person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers.

BB. Members : All Persons or entities who qualify as a member of the Savings Bank in accordance with its mutual charter and bylaws and applicable laws and regulations and shall include any Person holding a Deposit Account and borrowers from the Savings Bank as of the close of business on the Record Date.

CC. Non-Tax Qualified Employee Plan : Any defined benefit plan or defined contribution plan of the Savings Bank or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit sharing plan or other plan, which with its related trust does not meet the requirements to be “qualified” under Section 401 of the Internal Revenue Code.

DD. Notice : The Notice of Intent to Convert to Stock Form, including amendments thereto, as filed by the Savings Bank with the FDIC pursuant to 12 C.F.R. Part 303.

EE. Offerings : The Subscription Offering, the Direct Community Offering and Syndicated Community Offering, if any.

FF. Offering Range : The range of the minimum and maximum aggregate values determined by the Boards of Directors of the Savings Bank and the Holding Company within which the aggregate offering price of Holding Company Common Stock sold in the Conversion will fall. The Offering Range will be within the estimated aggregate pro forma market value of the Conversion Stock, as determined by the Independent Appraiser in accordance with Section X.B hereof. The maximum of the Offering Range shall be no more than 15% above the average of the minimum and maximum of such range and the minimum of which shall be no more than 15% below such average.

GG. Officer : An executive officer of either the Savings Bank, the Converted Savings Bank or the Holding Company, which includes the President, Executive Vice President, Senior Vice Presidents, Vice Presidents in charge of principal business functions, the Secretary and the Treasurer as well as any other person performing similar functions.

HH. Order Forms : Forms to be used to order Conversion Stock provided to Participants in the Offerings pursuant to this Plan.

II. Other Member : Holder of a Deposit Account (other than Eligible Account Holders or Supplemental Eligible Account Holders) and borrowers from the Savings Bank as of the Record Date.

JJ. Participant : Any Eligible Account Holder, Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder or Other Member.

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KK. Person : An individual, a corporation, a limited liability company, a partnership, a limited liability partnership, an association, a joint stock company, a trust, an unincorporated organization or a government or any political subdivision thereof.

LL. Plan or Plan of Conversion : This Plan of Conversion as adopted by the Board of Directors of the Savings Bank and any amendment hereto approved as provided herein. The Board of Directors of the Holding Company shall adopt this Plan as soon as practicable following its organization.

MM. Prospectus : The one or more documents to be used in offering the Conversion Stock in the Offerings.

NN. Proxy Statement : The document describing the Conversion to be used in connection with the solicitation of votes for the Special Meeting of Members.

OO. Purchase Price : The price per share at which the Conversion Stock is ultimately sold by the Holding Company in the Offerings in accordance with the terms hereof.

PP. Qualifying Deposit : The aggregate balance of all Deposit Accounts of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date; provided, however, in either case that no Deposit Account with a balance of less than $50 shall constitute a Qualifying Deposit.

QQ. RCW : Revised Code of Washington, as amended.

RR. Record Date : Date which determines which Members are entitled to vote at the Special Meeting as determined by the Board of Directors of the Savings Bank.

SS. Registration Statement : The registration statement on Form S-1 or other applicable forms filed by the Holding Company with the SEC for the purpose of registering the Conversion Stock under the Securities Act of 1933, as amended.

TT. Residence : The terms “residence,” “reside,” “resided” or “residing” as used herein with respect to any Person shall mean any Person who occupied a dwelling in the communities in which the Savings Bank does business, has an intent to remain with such communities for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within such communities together with an indication that such presence within such communities is something other than merely transitory in nature. To the extent the Person is a corporation or other business entity, the principal place of business or headquarters shall be in these communities. To the extent a Person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Savings Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a Person is a resident. Unless the Savings Bank determines otherwise, Persons having the same address and Persons exercising Subscription Rights through Qualifying Deposits at the same address will be subject to the overall purchase limitation contained in Section X.E.1. Any such determination as to Residence or the purchase limitations applicable to Persons at the same address shall be in the sole discretion of the Board of Directors of the Savings Bank.

UU. Savings Bank : Anchor Mutual Savings Bank.

VV. SEC : The United States Securities and Exchange Commission.

WW. Special Meeting : The special meeting of Members called for the purpose of considering and voting on this Plan, including any adjournments of such meeting.

XX. Subscription Offering : The offering of Conversion Stock to Participants in accordance with this Plan.

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YY. Subscription Rights : Non-transferable, non-negotiable, personal rights granted to Participants pursuant to the terms of this Plan to purchase Conversion Stock.

ZZ. Supplemental Eligibility Record Date : The date for determining Qualifying Deposits of Supplemental Eligible Account Holders and shall be the last day of the calendar quarter preceding the approval of this Plan by the Division.

AAA. Supplemental Eligible Account Holder : Any Person holding a Qualifying Deposit in the Savings Bank (other than an Officer or Director or their Associates) on the Supplemental Eligibility Record Date provided, however, that any Director or Officer of the Savings Bank employed, appointed or elected for the first time to such office after the Eligibility Record Date, and his or her Associates, shall not be precluded from being a Supplemental Eligible Account Holder solely by reason of holding such office.

BBB. Syndicated Community Offering : The offering for sale by a syndicate of broker-dealers to the general public of shares of Conversion Stock not purchased in the Subscription Offering and the Direct Community Offering.

CCC. Tax Qualified Employee Stock Benefit Plan : Any defined benefit plan or defined contribution plan of the Savings Bank or Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the employees of the Holding Company and/or the Savings Bank and which, with its related trust meets the requirements to be “qualified” under section 401of the Internal Revenue Code. A “non-tax-qualified employee stock benefit plan” is any defined benefit plan or defined contribution plan that is not so qualified.

III. General Procedure For Conversion .

A. The Board of Directors of the Savings Bank shall adopt the Plan by a vote of not less than two-thirds of its entire membership.

B. The Holding Company shall be incorporated under state law and the Board of Directors of the Holding Company shall concur in the Plan by at least a two-thirds vote.

C. An Application for Conversion, including the Plan, will be submitted, together with all requisite material, to the Division for approval and the FDIC for its non-objection, and the Holding Company shall file the FR Y-3 Application with the Federal Reserve. The Savings Bank also will cause notice of the adoption of the Plan by its Board of Directors to be given by publication in a newspaper having general circulation in each community in which an office of the Savings Bank is located; and will make available copies of the Plan at each office of the Savings Bank for inspection by Members. After receipt of notice from the Division to do so, the Savings Bank will again publish, in accordance with the requirements of applicable regulations of the Division, a notice of the filing with the Division of an application to convert the Savings Bank from mutual to stock form. The Holding Company will also publish such notices as may be required in connection with the FR Y-3 Application and by the regulations and policies of the Federal Reserve.

D. The Holding Company shall file a Registration Statement with the SEC to register the Conversion Stock under the Securities Act of 1933, as amended, and shall further register the Conversion Stock under any applicable state securities laws, subject to the limitations set forth in Section X.J hereof. Upon registration and after the receipt of all required regulatory approvals, the Conversion Stock shall be first offered for sale in a Subscription Offering to Participants. It is anticipated that any shares of Conversion Stock remaining unsold after the Subscription Offering will be sold through a Direct Community Offering and/or a Syndicated Community Offering. The purchase price per share for the Conversion Stock shall be a uniform price determined in accordance with Section X hereof. The Holding Company shall contribute to the Savings Bank an amount of the net proceeds received by the Holding Company from the sale of Conversion Stock as shall be determined by the Boards of Directors of the Holding Company and the Savings Bank and as shall be approved by the Division and the FDIC.

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E. Promptly following approval of the Application for Conversion by the Division and receipt of a notice of non-objection from the FDIC, this Plan will be submitted to the Members for their consideration and approval at the Special Meeting. The Savings Bank may, at its option, mail to all Members as of the Record Date, at their last known address appearing on the records of the Savings Bank, the Proxy Statement describing this Plan which will be submitted to a vote of the Members at the Special Meeting. The Holding Company shall also mail to Participants either a Prospectus and Order Form for the purchase of Conversion Stock or a letter informing them of their right to receive a Prospectus and Order Form and a postage prepaid card to request such materials, subject to the provisions of Section X hereof. In addition, Participants will receive, or be given the opportunity to request by either returning a postage prepaid card, which will be distributed with the Proxy Statement or letter or sending other written communication, a copy of the articles of incorporation and bylaws of the Holding Company. The Plan must be approved by the affirmative vote of at least a majority of the total number of votes eligible to be cast by Members at the Special Meeting.

F. Subscription Rights to purchase shares of Conversion Stock will be issued without payment therefor to Participants as set forth in Section X hereof.

G. The effective date of the Conversion shall be the date set forth in Section IX hereof. Upon the effective date, the following transactions shall occur:

(i) The Savings Bank shall convert from mutual to stock form;

(ii) Certain depositors of the Savings Bank will be granted interests in the Liquidation Account to be established by the Savings Bank pursuant to Section XV hereof;

(iii) The Holding Company shall sell an amount of Conversion Stock determined in accordance with Section X hereof; and

(iv) The Holding Company shall acquire 100% of the to be outstanding Capital Stock of the Converted Savings Bank in exchange for at least 50% of the sale of Conversion Stock in the Conversion.

H. The home office and branch offices of the Savings Bank shall be unaffected by the Conversion.

I. The Savings Bank shall obtain an opinion of its tax advisors or a favorable ruling from the United States Internal Revenue Service which shall state that the Conversion will not result in any gain or loss for Federal in- come tax purposes to the Savings Bank or its Eligible Account Holders, Supplemental Eligible Account Holders and Other Members. Receipt of a favorable opinion or ruling is a condition precedent to the completion of the Conversion.

J. The Savings Bank and the Holding Company may retain and pay for the services of financial and other advisors and investment bankers to assist in connection with any or all aspects of the Conversion, including in connection with the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering, the payment of fees to brokers and investment bankers for assisting Persons in completing and/or submitting Order Forms.


IV.	Meeting of Members

Upon receipt of approval of the Application for Conversion by the Division and (i) receipt from the FDIC of a conditional intention to issue a notice of non-objection or (ii) expiration of the time period for FDIC review and objection without receipt of an objection by the FDIC, the Special Meeting shall be scheduled in accordance with the Savings Bank’s Bylaws. Promptly after receipt of approval from the Division and at least 20 days but not more than 45 days prior to the Special Meeting, the Savings Bank shall distribute proxy solicitation materials to all Members and beneficial owners of accounts held in fiduciary capacities where the beneficial owners possess voting rights, as of the Record Date. The proxy solicitation materials shall include a copy of the Proxy Statement and other documents authorized for use by the regulatory authorities and may also include a copy of this Plan and/or the Prospectus. The Savings Bank shall also advise each Eligible Account Holder and Supplemental Eligible Account Holder not entitled to vote at the Special Meeting of the proposed Conversion and the scheduled Special Meeting, and provide a postage

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prepaid card on which to indicate whether he wishes to receive the Prospectus, if the Subscription Offering is not held concurrently with the proxy solicitation.

At the Special Meeting, an affirmative vote of not less than a majority of the total outstanding votes of the Members is required for approval of this Plan. For purposes of voting at the Special Meeting, Members who are depositors of the Savings Bank shall be entitled to cast one vote for each $100, or fraction thereof, of the aggregate withdrawable value of all of the depositor’s Deposit Accounts as of the Record Date. Members who are borrowers shall be entitled to cast one vote in addition to any votes they may also be entitled to cast as depositors, and no Member shall be entitled to cast more than 1,000 votes. Voting may be in person or by proxy. The Division and the FDIC shall be notified promptly of the actions of the Members.


V.	Summary Proxy Statement

The Proxy Statement furnished to Members may be in summary form, provided that a statement is made in bold-face type that a more detailed description of the Conversion may be obtained by returning an enclosed postage prepaid card or other written communication requesting supplemental information. Without prior approval of the Division, the Special Meeting shall not be held less than 20 days after the last day on which such supplemental information statement is mailed to requesting Members. The supplemental information statement may be combined with the Prospectus if the Subscription Offering is commenced concurrently with or during the proxy solicitation of Members for the Special Meeting.


VI.	Timing of Subscription Offering

The Holding Company may commence the Subscription Offering and, provided that the Subscription Offering has commenced, may commence the Direct Community Offering concurrently with or during the proxy solicitation of Members. The Holding Company may close the Subscription Offering before the Special Meeting, provided that the offer and sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting.

The timing of the commencement of the Subscription Offering shall be determined by the Savings Bank and the Holding Company in consultation with the Independent Appraiser and any financial or advisory or investment banking firm retained by them in connection with the Conversion. The Savings Bank and the Holding Company may consider a number of factors in determining such timing, including, but not limited to, their current and projected future earnings, local and national economic conditions, and the prevailing market for stocks in general and stocks of financial institutions in particular. The Savings Bank and the Holding Company shall have the right to withdraw, terminate, suspend, delay, revoke or modify any such Subscription Offering, at any time and from time to time, as they in their sole discretion may determine, without liability to any Person, subject to compliance with applicable securities laws and any necessary regulatory approval or concurrence.

The Savings Bank and the Holding Company shall promptly, after the Division has approved the Application for Conversion and authorized the Proxy Statement and Prospectus for use, the FDIC has issued its letter of non-objection, the SEC has declared the Registration Statement, which includes the Prospectus, effective and all other required regulatory approvals have been obtained, distribute or make available the Prospectus, together with Order Forms for the purchase of Conversion Stock, to all Participants at their last known addresses appearing on the records of the Savings Bank as of the Record Date for the purpose of enabling them to exercise their respective Subscription Rights.


VII.	Offering Documents

The Savings Bank’s proxy solicitation materials may require Participants to return to the Savings Bank by a reasonable certain date a postage prepaid card or other written communication requesting receipt of a Prospectus with respect to the Subscription Offering, provided that if the Prospectus is not mailed concurrently with the proxy solicitation materials, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing of the proxy solicitation materials. If the Subscription Offering is not commenced within 45 days after the Special Meeting, the

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Savings Bank may transmit, not more than 30 days prior to the commencement of the Subscription Offering, to each Eligible Account Holder, Supplemental Eligible Account Holder and other eligible subscribers who had been furnished with proxy solicitation materials a notice which shall state that the Savings Bank is not required to furnish a Prospectus to them unless they return by a reasonable date certain a postage prepaid card or other written communication requesting the receipt of the Prospectus.

Prior to commencement of the Offerings, the Holding Company shall file the Registration Statement. The Holding Company shall not distribute the final Prospectus until the Registration Statement containing same has been declared effective by the SEC.


VIII.	Combined Subscription and Direct Community Offering

Instead of a separate Subscription Offering, all Subscription Rights may be exercised by delivery of properly completed and executed Order Forms to the Savings Bank or selling group utilized in connection with the Direct Community Offering and the Syndicated Community Offering. If a separate Subscription Offering is not held, orders for Conversion Stock in the Direct Community Offering shall first be filled pursuant to the priorities and limitations stated in Section X.C. , below.


IX.	Effective Date

After receipt of all orders for Conversion Stock, and concurrently with the execution thereof, the amendment of the Savings Bank’s mutual Charter and Certificate of Reincorporation and Bylaws to authorize the issuance of shares of Capital Stock and to conform to the requirements of a Washington-chartered capital stock savings bank will be declared effective by the Division, the amended Articles of Incorporation and Bylaws approved by the Members will become effective. At such time, the Conversion Stock will be issued and sold by the Holding Company, the Capital Stock to be issued in the Conversion will be issued and sold to the Holding Company, and the Converted Savings Bank will become a wholly owned subsidiary of the Holding Company. The Converted Savings Bank will issue to the Holding Company 1,000 shares of its common stock, representing all of the shares of Capital Stock to be issued by the Converted Savings Bank, and the Holding Company will make payment to the Converted Savings Bank of that portion of the aggregate net proceeds realized by the Holding Company from the sale of the Conversion Stock under the Plan as may be authorized or required by the Division or the FDIC. The closing of the sale of all shares of Conversion Stock sold in the Offerings shall occur simultaneously on the effective date of the Conversion and only after all regulatory waiting periods have expired.


X.	Stock Offering

	A.	Number of Shares

The number of shares of Conversion Stock to be offered pursuant to this Plan shall be determined initially by the Boards of Directors of the Savings Bank and the Holding Company in conjunction with the determination of the Estimated Valuation Range. The number of shares to be offered may be subsequently adjusted by the Boards of Directors of the Savings Bank and the Holding Company prior to completion of the Offerings.


	B.	Independent Evaluation and Purchase Price of Shares

The aggregate price at which the Conversion Stock shall be sold shall be consistent with the estimated pro forma market value of the Conversion Stock, based upon an independent valuation as provided for in this Section X.B . The Savings Bank and the Holding Company shall cause the Independent Appraiser to prepare a pro forma valuation of the aggregate market value of the Holding Company Common Stock, giving effect to completion of the Conversion, which shall be submitted to the Division and the FDIC as part of the Savings Bank’s Application for Conversion, such valuation to be expressed in terms of an Estimated Valuation Range.

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Prior to the commencement of the Subscription Offering, an Estimated Valuation Range will be established, which shall be equal to the estimated pro forma market value of the Conversion Stock, as determined by the Independent Appraiser. The maximum of the Estimated Valuation Range shall be no more than 15% above the average of the minimum and maximum of such range and the minimum of which shall be no more than 15% below such average. The maximum of the Estimated Valuation Range may be increased by up to 15% subsequent to the Subscription Offering to reflect changes in market and financial conditions or demand for the shares. From time to time, as appropriate or as required by applicable law or the Division or the FDIC, the Savings Bank shall cause the Independent Appraiser to review developments subsequent to its valuation to determine whether the Estimated Valuation Range should be revised.

Based on the Estimated Valuation Range, the Boards of Directors of the Savings Bank and the Holding Company shall determine the Offering Range by fixing the Purchase Price and establishing a range of the number of shares of Conversion Stock to be offered. The total number of shares of Conversion Stock offered and the Purchase Price shall be subject to increase or decrease at any time prior to any Syndicated Community Offering or other method of sale to reflect changes in market and financial conditions. If the aggregate purchase price of the Conversion Stock sold in the Offerings is below the minimum of the Offering Range, or materially above the maximum of the Offering Range, resolicitation of purchasers may be required; provided, that up to a 15% increase in the number of shares to be issued which is supported by an appropriate change in the estimated pro forma market value of the Conversion Stock, will not be deemed material so as to require a resolicitation. If a resolicitation of purchasers is required, it shall be effected in such manner and within such time as the Savings Bank and Holding Company shall establish, with the approval of the Division and the FDIC.

Notwithstanding the foregoing, shares of Conversion Stock will not be issued unless, prior to the consummation of the Conversion, the Independent Appraiser confirms to the Savings Bank and the Holding Company and the Division and the FDIC that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the number of shares of Conversion Stock issued in the Conversion multiplied by the Purchase Price is incompatible with the estimate of the aggregate consolidated pro forma market value of the Conversion Stock. If such confirmation is not received, the Savings Bank and the Holding Company may cancel the Offerings, extend the Conversion and establish a new Offering Range, hold new Offerings, or take such other action as the Division and the FDIC may permit.

If subscriptions for shares of Conversion Stock are in excess of the maximum of the Offering Range, available shares shall be allocated in the following order of priority: (i) if there is an oversubscription at the Eligible Account Holder level, to fill unfulfilled subscriptions of Eligible Account Holders in accordance with Section X.C.1 ; (ii) to fill the Tax-Qualified Employee Stock Benefit Plans’ subscriptions in accordance with Section X.C.2 ; and (iii) if there is an oversubscription at the Supplemental Eligible Account Holder level, to fill unfulfilled subscriptions of Supplemental Eligible Account Holders in accordance with Section X.C.3 , and (iv) if there is an oversubscription at the Other Member level, to fill unfilled subscriptions of Other Members in accordance with Section X.C.4 .

The Holding Company Common Stock to be issued pursuant to this Plan shall upon issuance be fully paid and non-assessable.


	C.	Method of Offering Shares

Subscription Rights shall be issued at no cost to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members pursuant to priorities established by this Plan and the requirements of the Division and the FDIC. In order to effect the Conversion, all shares of Conversion Stock proposed to be issued in connection with the Conversion must be sold and, to the extent that shares are available, no subscriber shall be allowed to purchase less than 25 shares; provided, however, that if the purchase price is greater than $20 per share, the minimum number of shares which must be subscribed for shall be adjusted so that the aggregate actual purchase price required to be paid for such minimum number of shares does not exceed $500. The priorities established for the purchase of shares are as follows:

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	1.	Category 1: Eligible Account Holders

	a. Each Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of the maximum purchase limitation established for the Direct Community Offering, one-tenth of one percent of the total offering or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders in each case subject to Paragraphs X.E and X.J below.

	b. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among subscribing Eligible Account Holders as follows:


		(1) Shares of Conversion Stock shall be allocated so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less.

		(2) Any shares of Conversion Stock not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all Eligible Account Holders whose subscriptions remain unfilled.

c. Subscription Rights received by Officers and Directors of the Savings Bank and their Associates, as Eligible Account Holders, based on their increased deposits in the Savings Bank in the one-year period preceding the Eligibility Record Date shall be subordinated to all other subscriptions involving the exercise of Subscription Rights pursuant to this Category.

2.	Category 2: Tax-Qualified Employee Stock Benefit Plans

a. Tax-Qualified Employee Stock Benefit Plans shall receive, without payment, non-transferable Subscription Rights to purchase in the aggregate up to 10% of the Conversion Stock to be issued in the Conversion as a result of an increase in the Estimated Valuation Range after the commencement of the Subscription Offering and prior to the completion of the Conversion. The Subscription Rights granted to Tax-Qualified Stock Benefit Plans shall be subject to the availability of shares of Conversion Stock after taking into account the shares of Conversion Stock purchased by Eligible Account Holders. Because the Subscription Rights granted to Tax-Qualified Employee Stock Benefit Plans are subordinate to the Subscription Rights granted to Eligible Account Holders, it is possible that the subscription order of Tax-Qualified Employee Stock Benefit Plans will not be filled as a result of an oversubscription by Eligible Account Holders. To the extent that Tax-Qualified Employee Stock Benefit Plans are unable to purchase in the aggregate up to 8% of the shares of Conversion Stock issued in the Conversion as a result of such an oversubscription, Tax-Qualified Employee Stock Benefit Plans may purchase shares in the open market following the consummation of the Conversion.

b. Tax-Qualified Employee Stock Benefit Plans may use funds contributed or borrowed by the Holding Company or the Savings Bank and/or borrowed from an independent financial institution to exercise such Subscription Rights, and the Holding Company and the Savings Bank may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or the Savings Bank to fail to meet any applicable capital requirements.

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	c. Shares of Conversion Stock purchased by any individual Participant in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such Participant and/or purchases by such Participant in the Direct Community Offering shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of calculating the maximum amount of Conversion Stock that Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first sentence of subparagraph 2.a. above if the Participant controls or directs the investment authority with respect to such account or subaccount.

	3.	Category 3: Supplemental Eligible Account Holders

	a. In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application for Conversion filed prior to the Division’s approval, then, and only in that event, each Supplemental Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Supplemental Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of (i) the maximum purchase limitation established for the Direct Community Offering, (ii) one-tenth of one percent of the total offering or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders, in each case subject to Paragraphs X.E and X.J below.

	b. Subscription Rights received pursuant to this category shall be subordinated to Subscription Rights granted to Eligible Account Holders and Tax-Qualified Employee Stock Benefit Plans, therefore any Subscription Rights to purchase shares of Conversion Stock received by an Eligible Account Holder in accordance with Category Number 1 or a Tax-Qualified Employee Stock Benefit Plan in accordance with Category Number 2 shall reduce to the extent thereof the Subscription Rights to be distributed pursuant to this Category.

	c. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders as follows:

		(1) Shares of Conversion Stock shall be allocated so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation (including the number of shares of Conversion Stock, if any, allocated in accordance with Category Number 1) equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less.

		(2) Any shares of Conversion Stock not allocated in accordance with subparagraph (1) above shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled.

	d. If a Person is an Eligible Account Holder and a Supplemental Eligible Account Holder, such Person’s allocation as an Eligible Account Holder shall be included in determining the number of shares of Conversion Stock that may be allocated to the Person as a Supplemental Eligible Account Holder.

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	4.	Category 4: Other Members

Other Members shall receive Subscription Rights to purchase shares of Conversion Stock after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders pursuant to Category Nos. l, 2 and 3 above, respectively, subject to the following conditions:


		a. Each such Other Member shall be entitled to subscribe for the greater of the maximum purchase limitation established for the Direct Community Offering or one-tenth of one percent of the total offering.

		b. In the event of an oversubscription for shares of Conversion Stock pursuant to Category No. 4, the shares of Conversion Stock available shall be allocated among the subscribing Other Members pro rata on the basis of the amounts of their respective subscriptions.


	D.	Direct Community Offering and Syndicated Community Offering

	1. Any shares of Conversion Stock not purchased through the exercise of Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by the Savings Bank and the Holding Company to Persons under such terms and conditions as may be established by the Savings Bank’s and the Holding Company’s Boards of Directors with the concurrence of the Division. The Direct Community Offering may commence concurrently with or as soon as possible after the completion of the Subscription Offering and must be completed within 45 days after completion of the Subscription Offering, unless extended with the approval of the Division. No Person may purchase in the Direct Community Offering shares of Conversion Stock with an aggregate purchase price that exceeds $500,000. The right to purchase shares of Conversion Stock in the Direct Community Offering is subject to the right of the Savings Bank and the Holding Company to accept or reject such subscriptions in whole or in part. In the event of an oversubscription for shares in the Direct Community Offering, the shares available shall be allocated among prospective purchasers pro rata on the basis of the amounts of their respective orders. The offering price for which such shares of Conversion Stock are sold to the general public in the Direct Community Offering shall be the Purchase Price.

	2. Orders received in the Direct Community Offering first shall be filled up to a maximum of 2% of the Conversion Stock and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled.

	3. The Conversion Stock offered in the Direct Community Offering shall be offered and sold in a manner that will achieve the widest distribution thereof. Preference shall be given in the Direct Community Offering to natural Persons residing in the Local Community.

	4. Subject to such terms, conditions and procedures as may be determined by the Savings Bank and the Holding Company, all shares of Conversion Stock not subscribed for in the Subscription Offering or ordered in the Direct Community Offering may be sold by a syndicate of broker-dealers to the general public in a Syndicated Community Offering. Each order for Conversion Stock in the Syndicated Community Offering shall be subject to the absolute right of the Savings Bank and the Holding Company to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable after completion of the Syndicated Community Offering. No Person may purchase in the Syndicated Community Offering shares of Conversion Stock with an aggregate purchase price that exceeds $500,000. The Savings Bank and the Holding Company may commence the Syndicated Community Offering concurrently with, at any time during, or as soon as practicable after the end of the Subscription Offering and/or Direct Community Offering, provided that the Syndicated Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Savings Bank and the Holding Company with the approval of the Division.

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	5. If for any reason a Syndicated Community Offering of shares of Conversion Stock not sold in the Subscription Offering and the Direct Community Offering cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription Offering, Direct Community Offering or Syndicated Community Offering, the Savings Bank and the Holding Company shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the Division.

	6. In the event a Direct Community Offering or Syndicated Community Offering does not appear to be feasible, the Savings Bank and the Holding Company will immediately consult with the Division to determine the most viable alternative available to effect the completion of the Conversion. Should no viable alternative exist, the Savings Bank and the Holding Company may terminate the Conversion with the concurrence of the Division.

	E.	Limitations Upon Purchases

The following additional limitations and exceptions shall be imposed upon purchases of shares of Conversion Stock:

	1. Purchases of shares of Conversion Stock in the Conversion, including purchases in the Direct Community Offering or Syndicated Community Offering by any Person, and Associates thereof, or a group of Persons Acting in Concert, shall not exceed 5% of the total Conversion Stock issued in the Conversion, except that the ESOP may purchase up to 8% and all Tax-Qualified Employee Stock Benefit Plans may purchase up to 10% of the total Conversion Stock issued and shares held by the Tax-Qualified Employee Stock Benefit Plans and attributable to a Person shall not be aggregated with other shares purchased directly by or otherwise attributable to such Person.

	2. Officers and Directors and Associates thereof may not purchase in the aggregate more than 25% of the shares issued in the Conversion.

	3. The members of the Boards of Directors of the Savings Bank and the Holding Company will not be deemed to be Associates or a group of Persons Acting in Concert with other directors solely as a result of membership on the Boards of Directors.

	4. The Savings Bank’s and the Holding Company’s Boards of Directors with the approval of the Division and without further approval of Members, may, as a result of market conditions and other factors, increase or decrease the purchase limitation in Sections D.1 and E.1 above or the number of shares of Conversion Stock to be sold in the Conversion. The Boards of Directors of the Savings Bank and the Holding Company may, in their sole discretion, increase the maximum purchase limitation set forth above with Division approval to provide that any Person, group of associated Persons, or Persons otherwise Acting in Concert subscribing for 5%, may purchase between 5% and 10% as long as the aggregate amount that the subscribers purchase does not exceed 10% of the total stock offering. If the Savings Bank and the Holding Company increase the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion, the Savings Bank and the Holding Company are only required to resolicit Persons who subscribed for the maximum purchase amount and may, in the sole discretion of the Savings Bank and the Holding Company, resolicit certain other large subscribers. If the Savings Bank and the Holding Company decrease the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion, the orders of any Person who subscribed for the maximum purchase amount shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such Person.

	5. Notwithstanding any other provisions of this Plan, no person shall be entitled to purchase any Conversion Stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those

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	regarding free riding and withholding. The Holding Company and/or its agents may ask for a legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished or is not deemed acceptable in the sole discretion of the Holding Company.

	6. Prior to and during the Offerings, no Person shall (1) transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of any Subscription Rights or shares of Conversion Stock; (2) make any offer, or any announcement of an offer, to purchase any Conversion Stock from anyone but the Holding Company; or (3) knowingly acquire more than the maximum purchase allowable under this Plan.

EACH PERSON PURCHASING CONVERSION STOCK IN THE OFFERINGS WILL BE DEEMED TO CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN THIS PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL BE DETERMINED BY THE SAVINGS BANK AND THE HOLDING COMPANY IN THEIR SOLE DISCRETION. SUCH DETERMINATION SHALL BE CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS AND THE SAVINGS BANK AND THE HOLDING COMPANY MAY TAKE ANY REMEDIAL ACTION, INCLUDING WITHOUT LIMITATION REJECTING THE PURCHASE OR REFERRING THE MATTER TO THE DIVISION, THE FDIC OR THE SEC FOR INVESTIGATION AND ACTION, AS IN THEIR SOLE DISCRETION THE SAVINGS BANK AND THE HOLDING COMPANY MAY DEEM APPROPRIATE.

	F.	Restrictions On and Other Characteristics of the Conversion Stock

	1. Transferability . Conversion Stock purchased by Officers and Directors shall not be sold or otherwise disposed of for value for a period of one year from the effective date of Conversion, except for any disposition (i) following the death of the original purchaser or (ii) resulting from an exchange of securities in a merger or acquisition approved by the regulatory authorities having jurisdiction over such a transaction.

	The Conversion Stock issued by the Holding Company to such Officers and Directors shall bear a legend giving appropriate notice of the one-year holding period restriction. Said legend shall state as follows:

		“The shares evidenced by this certificate are restricted as to transfer for a period of one year from the date of this certificate pursuant to the laws of the State of Washington. These shares may not be transferred prior thereto without a legal opinion of counsel that said transfer is permissible under the provisions of applicable laws and regulations. This restrictive legend shall be deemed null and void after one year from the date of this Certificate.”

	In addition, the Holding Company shall give appropriate instructions to the transfer agent of the Holding Company Stock with respect to the foregoing restrictions. Any shares of Holding Company Stock subsequently issued as a stock dividend, stock split or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for such Persons as may be then applicable to such restricted stock.

	2. Subsequent Purchases by Officers and Directors . Without prior approval of the Division, Officers and Directors and their Associates, shall be prohibited for a period of three years following completion of the Conversion from purchasing outstanding shares of Holding Company Stock, except from a broker or dealer registered with the SEC and/or the Secretary of State of the State of Washington. Notwithstanding this restriction, purchases involving more than 1% of the total outstanding shares of Holding Company Stock and purchases made and shares held by a Tax-Qualified or non-Tax-Qualified Employee Stock Benefit Plan which

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	may be attributable to such Directors and Officers may be made in negotiated transactions without the Division’s permission or the use of a broker or dealer.

	3. Repurchase and Dividend Rights . The Holding Company may repurchase Holding Company Stock subject to applicable laws and regulations.

	The Converted Savings Bank may not declare or pay a cash dividend on the Capital Stock if the result thereof would be to reduce the regulatory capital of the Converted Savings Bank below (i) the amount required for the Liquidation Account or (ii) the amount required by the Division.

	Any dividend declared or paid on, or repurchase of, the Capital Stock shall be in compliance with the rules and regulations of the Division, or other applicable regulations. The above limitations shall not preclude payment of dividends on, or repurchases of, Capital Stock in the event applicable regulatory limitations are liberalized subsequent to the Conversion.

	4. Voting Rights . After the Conversion, exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock and the Holding Company will have exclusive voting rights with respect to the Capital Stock.

	G.	Mailing of Offering Materials and Collation of Subscriptions

The sale of all shares of Conversion Stock offered pursuant to this Plan must be completed within 24 months after approval of this Plan at the Special Meeting. After (i) approval of the Plan by the Division, (ii) the receipt of a notice of non-objection from the FDIC with respect to the Notice or expiration of the time period for FDIC review and objection without receipt of an objection from the FDIC and (iii) the declaration of the effectiveness of the Prospectus, the Holding Company shall distribute Prospectuses and Order Forms for the purchase of shares of Conversion Stock in accordance with the terms of this Plan.

The recipient of an Order Form shall be provided not less than 20 days nor more than 45 days from the date of mailing, unless extended, to properly complete, execute and return the Order Form to the Savings Bank and the Holding Company. Self-addressed, postage prepaid, return envelopes shall accompany all Order Forms when they are mailed. Failure of any eligible subscriber to return a properly completed and executed Order Form within the prescribed time limits shall be deemed a waiver and a release by such eligible subscriber of any rights to purchase shares of Conversion Stock under this Plan.

The sale of all shares of Conversion Stock proposed to be sold in connection with the Conversion must be completed within 45 days after the last day of the Subscription Offering, unless extended by the Savings Bank and the Holding Company with the approval of the Division.

	H.	Method of Payment

Payment for all shares of Conversion Stock may be made in cash, by check or by money order, or if a subscriber has a Deposit Account in the Savings Bank such subscriber may authorize the Savings Bank to charge the subscriber’s Deposit Account. The Savings Bank shall pay interest at not less than the passbook rate on all amounts paid in cash or by check or money order to purchase shares of Conversion Stock in the Subscription Offering from the date payment is received until the Conversion is completed or terminated. All funds received before the completion of the Conversion will be held in a segregated account at the Savings Bank, or at the Savings Bank’s discretion, at an independent insured depository institution. The Savings Bank is not permitted knowingly to loan funds, and will use its best efforts to insure that credit is not extended, to any Person for the purpose of purchasing Conversion Stock.

If a subscriber authorizes the Savings Bank to charge the subscriber’s Deposit Account, the funds shall remain in the subscriber’s Deposit Account and shall continue to earn interest, but may not be used by such subscriber until the Conversion is completed or terminated, whichever is earlier. The withdrawal shall be given effect only concurrently with

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the sale of all shares of Conversion Stock proposed to be sold in the Conversion and only to the extent necessary to satisfy the subscription at a price equal to the Purchase Price. The Savings Bank shall allow subscribers to purchase shares of Conversion Stock by withdrawing funds from certificate accounts held with the Savings Bank without the assessment of early withdrawal penalties, subject to the approval, if necessary, of the applicable regulatory authorities. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if the remaining balance of the account is less than the applicable minimum balance requirement. In that event, the remaining balance shall earn interest at the passbook rate. This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Conversion Stock under this Plan.

In the event of an unfilled amount of any subscription order, the Savings Bank will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after consummation of the sale of the Conversion Stock. If for any reason the sale of the Conversion Stock is not consummated, purchasers will have refunded to them all payments made and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at the Savings Bank.

Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by submitting an Order Form, along with evidence of a loan commitment from a financial institution for the purchase of shares, if applicable, during the Subscription Offering and by making payment for the shares on the date of the closing of the Conversion.


	I. Order Forms; Insufficient Payment

A single Order Form for all Deposit Accounts maintained with the Savings Bank by any Eligible Account Holder, any Supplemental Eligible Account Holder and any Other Member may be furnished, irrespective of the number of Deposit Accounts maintained with the Savings Bank on the applicable record date. No person holding a Subscription Right may exceed any otherwise applicable purchase limitation by submitting multiple orders for Conversion Stock. Multiple orders are subject to adjustment, as appropriate, on a pro rata basis and deposit balances will be divided equally among such orders in allocating shares in the event of an oversubscription.

The Savings Bank and the Holding Company shall have the absolute right, in their sole discretion and without liability to any Participant or other Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed; (ii) not timely received; (iii) not accompanied by the proper payment (or authorization of withdrawal from a Deposit Account with sufficient funds therein); or (iv) submitted by a Person whose representations the Savings Bank and the Holding Company believe to be false or who they otherwise believe, either alone, or Acting in Concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. Furthermore, in the event Order Forms (i) are not delivered and are returned, or notice of non-delivery is given, to the Savings Bank or the Holding Company by the United States Postal Service or (ii) are not mailed pursuant to a “no mail” order placed in effect by the account holder, the Subscription Rights of the Person to which such rights have been granted will lapse as though such Person failed to return the contemplated Order Form within the time period specified thereon. The Savings Bank and the Holding Company may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Conversion Stock by such date as they may specify. Subscription orders once tendered are irrevocable. The interpretation of the Savings Bank and the Holding Company of the terms and conditions of the Order Forms shall be final and conclusive, subject to the authority of the Division.


	J. Members in Non-Qualified States or in Foreign Countries

The Savings Bank and the Holding Company shall make reasonable efforts to comply with the securities laws of all states of the United States in which Persons entitled to subscribe for shares of Conversion Stock pursuant to this Plan reside. However, no such Person shall be offered or receive any such shares under this Plan who resides in a foreign country or who resides in a state of the United States with respect to which any of the following apply: (a) a small number of Persons otherwise eligible to subscribe for shares of Conversion Stock reside in such state; (b) the granting of Subscription Rights or offer or sale of shares of Conversion Stock to such Persons would require the Holding Company, the Savings Bank or their Officers, Directors or employees to register, under the securities laws of such state,

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as a broker, dealer, salesperson or selling agent or to register or otherwise qualify its securities for sale in such state; or (c) such registration or qualification, in the judgment of the Savings Bank and the Holding Company, would be impractical for reasons of cost or otherwise.


XI.	Articles of Incorporation and Bylaws

As part of the Conversion, Articles of Incorporation and Bylaws for the Converted Savings Bank will be adopted to authorize the Converted Savings Bank to operate as a Washington-chartered capital stock savings bank. By approving the Plan, the Members shall thereby approve such Articles of Incorporation and Bylaws. Prior to completion of the Conversion, the proposed Articles of Incorporation and Bylaws may be amended in accordance with the provisions and limitations for amending the Plan under Paragraph XIX below. The effective date of the adoption of the Articles of Incorporation and Bylaws shall be the date of the issuance of the Conversion Stock, which shall be the date of consummation of the Conversion.


XII.	Establishment and Funding of Charitable Foundation

As part of the Conversion, the Holding Company and the Savings Bank intend to establish the Foundation and to donate to the Foundation cash or stock from authorized, but unissued, shares of Common Stock of the Holding Company not to exceed 8% of the number of shares of Holding Company Common Stock sold in the Conversion. The Foundation is being formed in connection with the Conversion in order to complement the Savings Bank’s existing community reinvestment activities and to share with the Savings Bank’s local community a part of the Savings Bank’s financial success as a locally headquartered, community minded, financial services institution. The funding of the Foundation with Common Stock of the Holding Company accomplishes this goal as it enables the community to share in the growth and profitability of the Holding Company and the Savings Bank over the long term. The Foundation will be dedicated to the promotion of charitable purposes including community development, grants or donations to support housing assistance, not-for-profit community groups and other types of organizations or civic minded projects. The Foundation will annually distribute total grants to assist charitable organizations or to fund projects within its local community of not less than 5% of the average fair value of Foundation assets each year. In order to serve the purposes for which it was formed and maintain its 501(c)(3) qualification, the Foundation may sell, on an annual basis, a limited portion of its Holding Company Common Stock.

The Board of Directors of the Foundation will be comprised of individuals who are Officers and/or Directors of the Holding Company or Officers of the Savings Bank and, for at least five years after the Conversion, at least one member of the Savings Bank’s community who is not an Officer or Director of the Holding Company or the Savings Bank. Those Directors of the Savings Bank or the Holding Company who will also serve on the Board of Directors of the Foundation will be identified prior to adoption of this Plan by the Board of Directors of the Holding Company. Those Directors so identified will not participate in discussions concerning contributions to the Foundation and will not vote on such matters.

The Board of Directors of the Foundation will be responsible for establishing the polices of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. The establishment and funding of the Foundation as part of the Conversion is subject to the approval of the Division and, if applicable, the FDIC.


XIII.	Post Conversion Filing and Market Making

In connection with the Conversion, the Holding Company shall register the Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister the Conversion Stock for a period of three years thereafter.

The Holding Company shall use its best efforts to encourage and assist various Market Makers to establish and maintain a market for the shares of its stock. The Holding Company shall also use its best efforts to list its stock through The Nasdaq Stock Market LLC or on another national or regional securities exchange.

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XIV.	Status of Deposit Accounts and Loans Subsequent to Conversion

All Deposit Accounts shall retain the same status after Conversion (except as to voting and liquidation rights) as these accounts had prior thereto. Each Deposit Account holder shall retain, without payment, a withdrawable Deposit Account or accounts after the Conversion, equal in amount to the withdrawable value of such holder’s Deposit Account or accounts prior to Conversion as adjusted to give effect to any withdrawal made for the purchase of Conversion Stock. All Deposit Accounts will continue to be insured by the FDIC up to the applicable limits of insurance coverage. All loans shall retain the same status after the Conversion as they had prior to the Conversion. See Section X.F.4. with respect to the termination of voting rights of Members.


XV.	Liquidation Account

After the Conversion, holders of Deposit Accounts shall not be entitled to share in any residual assets in the event of liquidation of the Converted Savings Bank. However, the Converted Savings Bank shall, at the time of the Conversion, establish a Liquidation Account in an amount equal to its total net worth as of the date of the latest statement of financial condition contained in the final Prospectus utilized in the Conversion. The function of the Liquidation Account shall be to establish a priority on liquidation and, except as provided in Paragraph X.F.3 above, the existence of the Liquidation Account shall not operate to restrict the use or application of any of the net worth accounts of the Converted Savings Bank.

The Liquidation Account shall be maintained by the Converted Savings Bank subsequent to the Conversion for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who retain their Deposit Accounts in the Converted Savings Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to each Deposit Account held, have a related inchoate interest in a portion of the Liquidation Account balance which interest will be referred to in this Section XV as the “subaccount balance.” All Deposit Accounts having the same social security number will be aggregated for purposes of determining the initial subaccount balance with respect to such Deposit Accounts, except as set forth below.

The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and/or a Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the Liquidation Account by a fraction of which the numerator is the amount of such holder’s Qualifying Deposit in the Deposit Account and the denominator is the total amount of the Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders. Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided below.

If the deposit balance in any Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder at the close of business on any annual closing date subsequent to the Eligibility Record Date is less than the lesser of (i) the deposit balance in such Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the Qualifying Deposit in such Deposit Account on the Eligibility Record Date or the Supplemental Eligibility Record Date, then the subaccount balance for such Savings Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of a downward adjustment, such subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Deposit Account. If any such Deposit Account is closed, the related subaccount balance shall be reduced to zero.

In the event of a complete liquidation of the Converted Savings Bank, each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the Liquidation Account in the amount of the then current adjusted subaccount balance(s) for Deposit Account(s) then held by such holder before any liquidation distribution may be made to stockholders. No merger, consolidation, sale of bulk assets or similar transactions with another FDIC-insured institution in which the Converted Savings Bank is not the surviving entity shall be considered to be a complete liquidation. In any such transaction, the Liquidation Account shall be assumed by the surviving institution.

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Subsequent to the completion of the Conversion, the Converted Savings Bank may not declare or pay cash dividends on, or repurchase any of, its Capital Stock, if such dividend or repurchase would reduce the Converted Savings Bank’s regulatory capital below the amount then required for the Liquidation Account otherwise, the existence of the Converted Savings Bank’s obligation hereunder with respect to the Liquidation Account shall not operate to restrict the use or application of any of the capital accounts of the Converted Savings Bank. The Converted Savings Bank shall not be required to set aside funds in connection with its obligation hereunder with respect to the Liquidation Account. Eligible Account Holders and Supplemental Eligible Account Holders do not retain any voting rights in either the Holding Company or the Savings Bank based on their liquidation subaccounts.

For purposes of this Section XV , a Deposit Account includes a predecessor or successor account which is held by the holder of a Deposit Account with the same social security number.


XVI.	Restrictions on Acquisition of Stock of the Holding Company

A. For a period of three years following completion of the Conversion, no Person may make directly, or indirectly, any offer to acquire or actually acquire Capital Stock of the Converted Savings Bank if, after consummation of such acquisition, such person would be the beneficial owner of more than 10% of the Holding Company’s Common Stock, without the prior approval of the Division. However, approval is not required for purchases directly from the Holding Company or the underwriters or selling group acting on its behalf with a view towards public resale, or for purchases not exceeding one percent per annum of the shares outstanding. Civil penalties may be imposed by the Division for willful violation or assistance of any violation.

B. The Holding Company may provide in its articles of incorporation a provision that, for a specified period of up to five years following the date of the completion of the Conversion, no Person shall directly or indirectly offer to acquire or actually acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company. Such provisions would not apply to acquisition of securities by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not have beneficial ownership of more than 25% of any class of equity security of the Holding Company. The Holding Company may provide in its articles of incorporation for such other provisions affecting the acquisition of its stock as shall be determined by its Board of Directors.


XVII.	Directors and Officers of the Converted Savings Bank

The Conversion is not intended to result in any change in the Directors or Officers of the Savings Bank. Each person serving as a Director of the Savings Bank at the time of Conversion shall continue to serve as a member of the Converted Savings Bank’s Board of Directors, subject to the Converted Savings Bank’s Articles of Incorporation and Bylaws. The Persons serving as Officers immediately prior to the Conversion will continue to serve at the discretion of the Board of Directors in their respective capacities as Officers of the Converted Savings Bank. In connection with the Conversion, the Savings Bank and the Holding Company may enter into employment agreements and change of control agreements on such terms and with such officers as shall be determined by the Boards of Directors of the Savings Bank and the Holding Company.


XVIII.	Executive Compensation

A. The Holding Company and the Savings Bank are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion, including without limitation an employee stock ownership plan.

B. Subsequent to the Conversion, the Holding Company and the Savings Bank are authorized to adopt executive compensation or other benefit programs, including but not limited to, compensation plans involving stock options, stock appreciation rights, restricted stock plans, employee recognition programs and similar plans, provided, however, that with respect to any such plan implemented during the one-year period subsequent to the date of consummation of the Conversion, any such plan: (i) shall be disclosed in the proxy solicitation materials for the Special Meeting of Members and in the Registration Statement; (ii) in the case of stock option plans, shall have a total number of shares of common stock for which options may be granted of not more than 10% of the amount of shares issued in

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the Conversion; (iii) in the case of management or employee recognition or grant plans, shall have a total number of shares of common stock of not more than 4% of the amount of shares issued in the Conversion; (iv) in the case of stock option plans and employee recognition or grant plans, shall be submitted for approval by the holders of the Holding Company Common Stock no earlier than six months following consummation of the Conversion; and (v) shall comply with all other applicable requirements of the FDIC.

C. Existing, as well as any newly-created, Tax-Qualified Employee Stock Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the extent permitted by the terms of such benefit plans and this Plan.

D. The Holding Company and the Savings Bank are authorized to enter into employment or severance agreements with their executive officers.


XIX.	Amendment or Termination of Plan

If necessary or desirable, this Plan may be amended by a two-thirds vote of the Savings Bank’s Board of Directors, at any time prior to submission of this Plan and proxy materials to the Members. At any time after submission of the Plan and proxy materials to the Members, this Plan may be amended by a two-thirds vote of the Board of Directors only with the concurrence of the Division. This Plan may be terminated by a two-thirds vote of the Board of Directors at any time prior to the Special Meeting, and at any time following such Special Meeting with the concurrence of the Division. In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another meeting of the Members.

In the event that mandatory new regulations pertaining to conversions are adopted by the Division prior to the completion of the Conversion, this Plan shall be amended to conform to the new mandatory regulations without a resolicitation of proxies or another meeting of Members. In the event that new conversion regulations adopted by the Division prior to completion of the Conversion contain optional provisions, the Plan may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another meeting of Members.

By adoption of this Plan, the Members authorize the Board of Directors to amend and/or terminate the Plan under the circumstances set forth above.


XX.	Expenses of the Conversion

The Savings Bank and the Holding Company shall use their best efforts to assure that expenses incurred in connection with the Conversion shall be reasonable.


XXI.	Contributions to Tax-Qualified Plans

The Holding Company and/or the Converted Savings Bank may make discretionary contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such contributions do not cause the Converted Savings Bank or the Holding Company to fail to meet their regulatory capital requirements.


XXII.	Severability

If any term, provision, covenant or restriction contained in this Plan is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in this Plan shall remain in full force and effect, and shall in no way be affected, impaired or invalidated.

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XXIII.	Miscellaneous

This Plan is to be governed by and construed in accordance with the laws of the State of Washington. All interpretations of this Plan and application of its provisions to particular circumstances shall be made by the Board of Directors of the Savings Bank and all such interpretations shall be final, subject to the authority of the Division and the FDIC. Neither the cover page nor the section headings are to be considered a part of this Plan, but are included solely for convenience of reference and shall in no way define, limit, extend, or describe the scope or intent of any of the provisions hereof. Any reference to a Section or Paragraph shall refer to a Section or Paragraph of this Plan, unless otherwise stated. Except for such rights as are set forth herein for Eligible Account Holders and Supplemental Eligible Account Holders, this Plan shall create no rights in any Person. The terms defined in this Plan have the meanings assigned to them in this Plan and include the plural as well as the singular, and words of any gender shall include each other gender where appropriate.

* * * * *

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Exhibit 3.1


	APPROVED


	DIRECTOR OF BANKS
	DEPARTMENT OF FINANCIAL INSTITUTIONS

FILED
SECRETARY OF STATE

SEP 08 2008

STATE OF WASHINGTON

ARTICLES OF INCORPORATION
OF
ANCHOR BANCORP

Pursuant to the provisions of Title 23B of the Revised Code of Washington (“RCW”) (the Washington Business Corporation Act as now in existence or as may hereafter be amended, the “WBCA”), the following shall constitute the Articles of Incorporation of Anchor Bancorp, a Washington corporation:

ARTICLE I

Name

The name of the corporation is Anchor Bancorp (the “Corporation”).

ARTICLE II

Duration

The duration of the Corporation is perpetual.

ARTICLE III

Purpose and Powers

The purpose for which the Corporation is organized is to act as a bank holding company and to transact all other lawful business for which corporations may be incorporated under the WBCA. The Corporation shall have all the powers of a corporation organized under the WBCA.

ARTICLE IV

Capital Stock

The total number of shares of all classes of capital stock which the Corporation has authority to issue is 50,000,000, of which 45,000,000 shall be common stock of par value of $0.01 per share, and of which 5,000,000 shall be serial preferred stock of par value of $0.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of the shareholders, except to the extent that such approval is required by governing law, rule or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the stated par value per share. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. Upon authorization by its Board of Directors, the Corporation may issue its own shares in exchange for or in conversion of its outstanding shares or distribute its own shares, pro rata to its shareholders or the shareholders of one or more classes or series, to effectuate stock dividends or splits, and any such transaction shall not require consideration.

Except as expressly provided by applicable law, these Articles of Incorporation or by any resolution of the Board of Directors designating and establishing the terms of any series of preferred stock, no holders of any class or series of capital stock shall have any right to vote as a separate class or series or to vote more than one vote per share. The shareholders of the Corporation shall not be entitled to cumulative voting in any election of directors.

A description of the different classes and series (if any) of the Corporation’s capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class and series (if any) of capital stock are as follows:

A. Common Stock . On matters on which holders of common stock are entitled to vote, each holder of shares of common stock shall be entitled to one vote for each share held by such holder.

Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the Board of Directors.

In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Corporation available for distribution remaining after: (i) payment or provision for payment of the Corporation’s debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution or winding up of the Corporation. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.

B. Serial Preferred Stock . The Board of Directors of the Corporation is authorized by resolution or resolutions from time to time adopted to provide for the issuance of preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of any of the following:

(a) The distinctive serial designation and the number of shares constituting such series;

(b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;

(d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;

(e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

(f) Whether the shares or such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;

(g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and, if so convertible or exchangeable, the conversion price(s), or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

(h) The price or other consideration for which the shares of such series shall be issued; and

(i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.

Each share of each series of preferred stock shall have the same relative rights as and be identical in all respects with all other shares of the same series.

C. 1. Notwithstanding any other provision of these Articles of Incorporation, in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock (“Limit”), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit, unless a majority of the Whole Board (as hereinafter defined) shall have by resolution granted in advance such entitlement or permission. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of common stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all common stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of common stock beneficially owned by such person owning shares in excess of the Limit.

2. The following definitions shall apply to this Section C of this Article VII.

(a) “Affiliate” shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of these Articles of Incorporation.

(b) “Beneficial ownership” shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of these Articles of Incorporation; provided, however , that a person shall, in any event, also be deemed the “beneficial owner” of any common stock:

(i) which such person or any of its Affiliates beneficially owns, directly or indirectly; or

(ii) which such person or any of its Affiliates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction which is described in any one or more of subparagraphs A(1)(a) through (h) of Article X hereof or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise), or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of shareholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such Affiliate is otherwise deemed the beneficial owner); or

(iii) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; and provided further, however , that (i) no director or officer of the Corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any common stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (ii) neither any employee stock ownership or similar plan of the Corporation or any subsidiary of the Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any common stock held under any such plan. For purposes of computing the percentage beneficial ownership of common stock of a person, the outstanding common stock shall include shares deemed owned by such person through application of this subsection but shall not include any other common stock which may be

issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding common stock shall include only common stock then outstanding and shall not include any common stock which may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.

(d) “Whole Board” shall mean the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors.

3. The Board of Directors shall have the power to construe and apply the provisions of this Section C and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of common stock beneficially owned by any person, (ii) whether a person is an Affiliate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section C to the given facts or (v) any other matter relating to the applicability or effect of this Section C.

4. The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own common stock in excess of the Limit (or holds of record common stock beneficially owned by any person in excess of the Limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be required of such person.

5. Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Section C) entitled to be cast by the holders of shares of capital stock of the Corporation shall constitute a quorum at all meetings of the shareholders, and every reference in these Articles of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for shareholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock.

6. Any constructions, applications or determinations made by the Board of Directors pursuant to this Section C in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its shareholders.

7. In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section C shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its shareholders that each such remaining provision (or portion thereof) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, including shareholders owning an amount of stock over the Limit, notwithstanding any such finding.

ARTICLE V

Preemptive Rights

Holders of the capital stock of the Corporation shall not be entitled to preemptive rights with respect to any shares of the Corporation which may be issued.

ARTICLE VI

Initial Directors

The persons who shall serve as the initial directors of the Corporation are: Jerald L. Shaw, Robert D. Ruecker, Terri L. Degner, Douglas A. Kay, George W. Donovan, William Foster, Dennis Morrisette and James A. Boora. The address of each initial director is 601 Woodland Square Loop, SE, Lacey, Washington 98503. The initial directors shall serve until the first annual meeting of shareholders, at which time they may stand for reelection.

ARTICLE VII

Directors

A. Number . The Corporation shall be under the direction of a Board of Directors. The number of directors shall be as stated in the Corporation’s Bylaws, but in no event shall be fewer than five nor more than 15.

B. Classified Board . The Board of Directors, other than those who may be elected by the holders of any class or series of preferred stock, shall be divided into three groups, with each group containing one-third of the total number of directors, or as near as may be. The terms of the directors in the first group shall expire at the first annual shareholders’ meeting following their election, the terms of the second group shall expire at the second shareholders’ meeting following their election, and the terms of the third group shall expire at the third annual shareholders’ meeting following their election. At each annual shareholders’ meeting held thereafter, directors shall be chosen for a term of three years to succeed those whose terms expire.

C. Vacancies . Any vacancy occurring in the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors, whether or not there remains a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, rather than until the next annual meeting of shareholders. A directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term continuing only until the next election of directors by the shareholders.

ARTICLE VIII

Removal of Directors

Notwithstanding any other provisions of these Articles of Incorporation or the Corporation’s Bylaws (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the Corporation’s Bylaws), any director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of the holders of at least 80% of the total votes eligible to be cast at a legal meeting called expressly for such purpose. For purpose of this Article VIII, “cause” shall mean fraudulent or dishonest acts, a gross abuse of authority in discharge of duties to the Corporation or acts that are detrimental or hostile to the interests of the Corporation.

ARTICLE IX

Registered Office and Agent

The registered office of the Corporation shall be located at 601 Woodland Square Loop, SE, Lacey, Washington 98503. The initial registered agent of the Corporation at such address shall be Jerald L. Shaw.

ARTICLE X

Notice for Shareholder Nominations and Proposals

A. Nominations for the election of directors and proposals for any new business to be taken up at any annual or special meeting of shareholders may be made by the Board of Directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such nominations and/or proposals, he or she shall give notice thereof in writing, that is received by the Secretary of the Corporation not less than 30 days nor more than 60 days prior to any such meeting; provided, however, that if less than 31 days’ notice of the meeting is given to shareholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders. Each such notice given by a shareholder with respect to nominations for election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the General Rules and Regulations of the Securities Exchange Act of 1934, including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (v) as to the shareholder giving such notice (a) his or her name and address as they appear on the Corporation’s books and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation.

B. Each such notice given by a shareholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Articles of Incorporation to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article.

C. The Chairman of the annual or special meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination or proposal shall be disregarded and laid over for action at the next succeeding adjourned, special or annual meeting of the shareholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of shareholders for the purpose of considering such defective nomination or proposal.

ARTICLE XI

Approval of Certain Business Combinations

The shareholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this section.

A. 1. Except as otherwise expressly provided in this Article XI, the affirmative vote of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required to authorize any of the following:

(a) any merger or consolidation of the Corporation with or into a Related Person;

(b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person;

(d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation;

(e) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person;

(f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person;

(g) any reclassification of the common stock of the Corporation, or any recapitalization involving the common stock of the Corporation;

(h) any liquidation or dissolution of the Corporation; and

(i) any agreement, contract or other arrangement providing for any of the transactions described in this Article XI.

2. Such affirmative vote shall be required notwithstanding any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote.

3. The term “Business Combination” as used in this Article XI shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (i) above.

B. The provisions of Part A of this Article XI shall not be applicable to any particular Business Combination, which shall require only such affirmative vote as is required by any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange, if such particular Business Combination shall have been approved by two-thirds of the Continuing Directors (as hereinafter defined); provided, however , that such approval shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present.

C. For the purposes of this Article XI the following definitions apply:

1. The term “Related Person” shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its “affiliates” (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934), that “beneficially owns” (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Act of 1934) in the aggregate 10% or more of the outstanding shares of the common stock of the Corporation (excluding tax-qualified benefit plans of the Corporation); and (b) any “affiliate” (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the Corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed “beneficially owned” by such Related Person.

2. The term “Substantial Part” shall mean more than 25% of the total assets of the Corporation as of the end of its most recent fiscal year prior to when the determination is made.

3. The term “Continuing Director” shall mean any member of the Board of Directors of the Corporation who is unaffiliated with the Related Person and was a member of the Board of Directors prior to the time the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors.

4. The term “Continuing Director Quorum” shall mean seventy-five percent (75%) of the Continuing Directors capable of exercising the powers conferred on them.

D. Nothing contained in this Article XI shall be construed to relieve a Related Person from any fiduciary obligation imposed by law. In addition, nothing contained in the Article XI shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such shareholder.

E. No amendment, alteration, change or repeal of any provision of the Article XI may be effected unless it is approved at a meeting of the Corporation’s shareholders called for that purpose. Notwithstanding any other provision of these Articles of Incorporation, the affirmative vote of the holders of not less than 80% of the outstanding shares entitled to vote thereon shall be required to amend, alter, change, or repeal, directly or indirectly, any provision of this Article XI; provided, however , that the preceding provisions of this Part E shall not be applicable to any amendment to this Article XI if such amendment receives this affirmative vote required by law and any other provisions of these Articles of Incorporation and if such amendment has been approved by a majority of the Continuing Directors.

ARTICLE XII

Evaluation of Business Combinations

In connection with the exercise of its judgment in determining what is in the best interests of the Corporation and of the shareholders, when evaluating a Business Combination (as defined in Article XI) or a tender or exchange offer, the Board of Directors of the Corporation, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, shall consider all of the following factors and any other factors which it deems relevant: (i) the social and economic effects of the transaction on the Corporation and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring person or entity, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition and other likely financial obligations of the acquiring person or entity and the possible effect of such conditions upon the Corporation and its subsidiaries and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring person or entity and its or their management.

ARTICLE XIII

Limitation of Directors’ Liability

To the fullest extent permitted by the WBCA, a director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except for liability of the director for acts or omissions that involve: (i) intentional misconduct by the director; (ii) a knowing violation of law by the director; (iii) conduct violating RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation); or (iv) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the WBCA is amended in the future to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the full extent permitted by the WBCA, as so amended, without any requirement or further action by shareholders. An amendment or repeal of this Article XIII shall not adversely affect any right or protection of a director of the Corporation existing at the time of such amendment or repeal.

ARTICLE XIV

Indemnification

The Corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:

A. Directors and Officers . In all circumstances and to the full extent permitted by the WBCA, the Corporation shall indemnify any person who is or was a director, officer or agent of the Corporation and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (including an action by or in the right of the Corporation), by reason of the fact that he is or was an agent of the Corporation, against expenses, judgments, fines, and amounts paid in settlement and incurred by him in connection with such action, suit or proceeding. However, such indemnity shall not apply to: (a) acts or omissions of the director or officer in connection with a proceeding by or in the right of the Corporation in which the director or officer is finally adjudged liable to the Corporation; (b) conduct of the director or officer finally adjudged to violate RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation) or (c) any transaction with respect to which it was finally adjudged that such director and officer personally received a benefit in money, property or services to which the director was not legally entitled. The Corporation shall advance expenses incurred in a proceeding for such persons pursuant to the terms set forth in a separate directors’ resolution or contract.

B. Implementation . The Board of Directors may take such action as is necessary to carry out these indemnification and expense advancement provisions. It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such bylaws, resolutions, contracts or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made.

D. Service for Other Entities . The indemnification and advancement of expenses provided under this Article XIV shall apply to directors, officers, employees or agents of the Corporation for both (a) service in such capacities for the Corporation and (b) service at the Corporations’s request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. A person is considered to be serving an employee benefit plan at the Corporation’s request if such person’s duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan.

E. Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the Corporation would have had the power to indemnify him against such liability under the provisions of this bylaw and the WBCA.

ARTICLE XV

Special Meeting of Shareholders

Special meetings of the shareholders for any purpose or purposes may be called only by the Chief Executive Officer or by the Board of Directors. The right of shareholders of the Corporation to call special meetings is specifically denied.

ARTICLE XVI

Repurchase of Shares

The Corporation may from time to time, pursuant to authorization by the Board of Directors of the Corporation and without action by the shareholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness or other securities of the Corporation in such manner, upon such terms, and in such amounts as the Board of Directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law.

ARTICLE XVII

Amendment of Bylaws

In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation by a majority vote of the Board of Directors. Notwithstanding any other provision of these Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws shall not be adopted, repealed, altered, amended or rescinded by the shareholders of the Corporation except by the vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the Board of Directors.

ARTICLE XVIII

Amendment of Articles of Incorporation

The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in the Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles II, III, IV (other than a change to the number of authorized shares in connection with a split of, or stock dividend in, the Corporation’s own shares, provided the Corporation has only one class of shares outstanding or a change in the par value of such shares), V, VII, VIII, X, XI, XII, XIII, XIV, XV, XVI, XVII and this Article XVIII of these Articles of Incorporation may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by each separate voting group entitled to vote thereon, cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting).

ARTICLE XIX

Incorporator

The name and mailing address of the incorporator are Jerald L. Shaw, 601 Woodland Square Loop, SE, Lacey, Washington 98503.

* * *

Executed this 2nd day of September 2008.




	Jerald L. Shaw
	Incorporator

CONSENT TO APPOINTMENT AS REGISTERED AGENT

I, Jerald L. Shaw, hereby consent to serve as Registered Agent in the State of Washington for Anchor Bancorp. I understand that as agent for the Corporation, it will be my responsibility to accept Service of Process on behalf of the Corporation; to forward license renewals and other mail to the Corporation; and to immediately notify the Office of the Secretary of State in the event of my resignation or of any changes in the Registered Office address.


By:		Jerald L. Shaw, Incorporator	September 2, 2008

	(Signature of Registered Agent)	(Print Name and Title)	(Date)

Exhibit 3.2

BYLAWS
OF
ANCHOR BANCORP

ARTICLE I

Principal Office

SECTION 1. Principal Office . The principal office and place of business of the corporation in the state of Washington shall be located in the City of Lacey, Thurston County.

SECTION 2. Other Offices . The corporation may have such other offices as the Board of Directors may designate or the business of the corporation may require from time to time.

ARTICLE II

Shareholders

SECTION 1. Place of Meetings . All annual and special meetings of the shareholders shall be held at the principal office of the corporation or at such other place within the State of Washington as the Board of Directors may determine.

SECTION 2. Annual Meeting . A meeting of the shareholders of the corporation for the election of directors and for the transaction of any other business of the corporation shall be held annually on the third Wednesday of October, if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, at 10:00 a.m., Pacific time, or at such other date and time as the Board of Directors may determine.

SECTION 3. Special Meetings . Special meetings of the shareholders for any purpose or purposes shall be called in accordance with the procedures set forth in the Articles of Incorporation.

SECTION 4. Conduct of Meetings . Annual and special meetings shall be conducted in accordance with rules prescribed by the presiding officer of the meeting, unless otherwise prescribed by these Bylaws. The Board of Directors shall designate, when present, either the chairman of the board or the president to preside at such meetings.

SECTION 5. Notice of Meeting . Written notice stating the place, day and hour of the meeting and, in the case of a special meeting of shareholders, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting; provided, however , that notice of a shareholders meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of assets pursuant to Chapter 23B.12.020 of the Revised Code of Washington or its successor, or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the corporation as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 120 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 120 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.

SECTION 6. Fixing of Record Date . For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix, in advance, a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days, and in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.

SECTION 7. Voting Lists . At least 10 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the

number of shares held by each. This list of shareholders shall be kept on file at the home office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours, for a period of 10 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the entire time of the meeting. The original stock transfer book shall be prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this bylaw shall not affect the validity of any action taken at the meeting.

SECTION 8. Quorum . A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a quorum is present or represented at a meeting, a majority of those present or represented may transact any business which comes before the meeting, unless a greater percentage is required by law, the Articles of Incorporation, or these Bylaws. If less than a quorum of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified, and in the case of any adjourned meeting called for the election of directors, those who attend the second of the adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors.

SECTION 9. Proxies . At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the Board of Directors. All proxies shall be filed with the secretary of the corporation before or at the commencement of meetings. No proxy may be effectively revoked until notice in writing of such revocation has been given to the secretary of the corporation by the shareholder (or his duly authorized attorney in fact, as the case may be) granting the proxy. No proxy shall be valid after eleven months from the date of its execution unless it is coupled with an interest.

SECTION 10. Voting of Shares by Certain Holders . Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. A certified copy of a resolution adopted by such directors shall be conclusive as to their action.

Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name.

Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court or other public authority by which such receiver was appointed.

If shares are held jointly by three or more fiduciaries, the will of the majority of the fiduciaries shall control the manner of voting or giving of a proxy, unless the instrument or order appointing such fiduciaries otherwise directs.

A shareholder, whose shares are pledged, shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred.

Neither treasury shares of its own stock held by the corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

SECTION 11. Voting . Every holder of outstanding shares of capital stock of the corporation entitled to vote at any meeting shall be entitled to the number of votes (if any) as set forth in the Articles of Incorporation. Shareholders shall not be entitled to cumulative voting rights in the election of directors. Unless otherwise provided in the Articles of Incorporation, by statute, or by these Bylaws, a majority of those votes cast by shareholders at a lawful meeting shall be sufficient to pass on a transaction or matter.

SECTION 12. Informal Action by Shareholders . Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting

if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.

ARTICLE III

Board of Directors

SECTION 1. General Powers . All corporate powers shall be exercised by, or under authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors. The Board of Directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings.

SECTION 2. Number, Term and Election . The Board of Directors shall consist of eight (8) members divided into three classes as nearly equal in number as possible. The member of each class shall be elected by ballot for a term of (3) years and shall serve until his or her successor is elected and qualified. One class shall be elected by ballot each year at the annual meeting.

SECTION 3. Regular Meetings . A regular meeting of the Board of Directors shall be held without other notice than this bylaw immediately after the annual meeting of shareholders, and at the same place as other regularly scheduled meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution.

SECTION 4. Qualifications . A person shall not be a Director of the corporation if that individual: (i) is not a resident of the United States; (ii) has been adjudicated a bankrupt or has taken the benefit of any insolvency law or has made a general assignment for the benefit of creditors; (iii) has suffered a judgment for a sum of money which has remained unsatisfied after all legal proceedings have been of record or unsecured on appeal for a period of more than three months; or (iv) is a director of a bank, trust company, or national banking association, a majority of the Board of Directors of which are directors of this corporation.

SECTION 5. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President, or one-third of the directors. The persons authorized to call special meetings of the Board of Directors may fix any place, within the corporation’s normal lending territory, as the place for holding any special meeting of the Board of Directors called by such persons.

Members of the Board of Directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute attendance in person, but shall not constitute attendance for the purpose of compensation pursuant to Section 12 of this Article.

SECTION 6. Notice of Special Meetings . Written notice of any special meeting shall be given to each director at least two days prior thereto, when delivered personally or by telegram, or at least five days prior thereto, when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage thereon prepaid if mailed, or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

SECTION 7. Quorum . A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III.

SECTION 8. Manner of Acting . The act of the majority of the directors present at a meeting or adjourned meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is prescribed by these Bylaws.

SECTION 9. Action Without a Meeting . Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.

SECTION 10. Resignation . Any director may resign at any time by sending a written notice of such resignation to the home office of the corporation addressed to the chairman of the board or the president. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof by the chairman of the board or the president. More than three consecutive absences from regular meetings of the Board of Directors, unless excused by resolution of the Board of Directors, shall automatically constitute a resignation, effective when such resignation is accepted by the Board of Directors.

SECTION 11. Vacancies . Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. A directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term continuing only until the next election of directors by the shareholders.

SECTION 12. Compensation . A director may receive, by the affirmative vote of a majority of all the directors, reasonable compensation for (i) attendance at meetings of the Board of Directors; (ii) a retainer for services as a director (iii) service as an officer of the corporation, provided his duties as officer require and receive his regular and faithful attendance at the corporation; and (iv) service as a member of a committee of the Board of Directors; provided, however, that a director receiving compensation for services as an officer pursuant to (iii) shall not receive any additional compensation for service under (i) (ii) and (iv)

SECTION 13. Presumption of Assent . A director of the corporation who is present at a meeting of the Board of Directors at which action on a corporation matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation within five (5) days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.

SECTION 14. Performance of Duties. A director shall perform his or her duties as a director, including the duties as a member or any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interest of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. In performing such duties, a director shall be entitled to rely on information, opinion, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (ii) counsel, public accountants or other persons as to matters which the director reasonably believes to be within such person’s professional or expert competence; or (iii) a committee of the board upon which he or she does not serve, duly designated in accordance with a provision of these Bylaws, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. However, a director shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause such reliance to be unwarranted.

SECTION 15. Residency Requirement. A director of the corporation’s primary residence shall be located in the State of Washington. Any violation or deviation from this provision shall automatically constitute resignation from the Board effective upon acceptance by the Board.

SECTION 16. Qualifications. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the corporation, excluding any shares that the director has received pursuant to the corporation’s benefit programs. No person 75 years of age or more shall be eligible for election, reelection or appointment or reappointment to the Board of Directors.

SECTION 17. Advisory Directors and Directors Emeriti. The board of directors may by resolution appoint advisory directors and directors emeriti to the board, who shall have such authority and receive such compensation and reimbursement as the board of directors shall provide. Advisory directors or directors emeriti shall not have the authority to participate by vote in the transaction of business.

ARTICLE IV

Committees of the Board of Directors

SECTION 1. Appointment . The Board of Directors may, by resolution adopted by a majority of the full board, designate an executive officer of the corporation who also serves as a director of the corporation and two (2) or more of the other directors, who do not serve as executive officers of the corporation, to constitute an executive

committee. The designation of any committee pursuant to this Article IV, and the delegation of authority thereto, shall not operate to relieve the Board of Directors, or any director, of any responsibility imposed by law or regulation.

SECTION 2. Authority . The executive committee, when the Board of Directors is not in session, shall have and may exercise all of the authority of the Board of Directors, except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the Board of Directors with reference to: the declaration of dividends; the amendment of the Articles of Incorporation of the corporation or these Bylaws of the corporation, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of its business; a voluntary dissolution of the corporation; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.

SECTION 3. Tenure . Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the Board of Directors following his or her designation and until his or her successor is designated as a member of the executive committee.

SECTION 4. Meetings . Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day’s notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

SECTION 5. Quorum . A majority of the members of the executive committee shall constitute a quorum for the transaction of any business at a meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.

SECTION 6. Action Without a Meeting . Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.

SECTION 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full Board of Directors.

SECTION 8. Resignations and Removal . Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full Board of Directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the corporation. Unless otherwise specified thereon, such resignation shall take effect upon receipt. The acceptance of such resignation shall not be necessary to make it effective.

SECTION 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these Bylaws. The committee shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting held next after the proceedings shall have occurred.

SECTION 10. Audit Committee. At each annual meeting of the Board of Directors, the chairman, with the approval of the Board, shall appoint from among members of the Board, an Audit Committee consisting of not less than three members of the Board, none of whom may be members of management, all of whom shall serve until the next annual meeting and until their successors are appointed and confirmed.

SECTION 11. Other Committees. The Board of Directors may, by resolution, establish such other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the corporation and may prescribe the duties, constitution, and procedures thereof.

ARTICLE V

Officers

SECTION 1. Positions . The officers of the corporation shall be a president, a secretary and a treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may also designate the chairman of the board as an officer. The president shall be the chief executive officer unless the Board of Directors designates the

chairman of the Board as chief executive officer. The president shall be a director of the corporation. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The Board of Directors may designate one or more vice presidents as executive vice president or senior vice president. The Board of Directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine. In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices.

SECTION 2. Election and Term of Office . The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The Board of Directors may authorize the corporation to enter into an employment contract with any officer in accordance with applicable law.

SECTION 3. Removal . Any officer may be removed by vote of two-thirds of the Board of Directors whenever, in its judgment, the best interests of the corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed.

SECTION 4. Vacancies . A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

SECTION 5. Remuneration . The remuneration of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.

ARTICLE VI

Contracts, Loans, Checks and Deposits

SECTION 1. Contracts . Except as otherwise prescribed by these Bylaws with respect to certificates for shares, the Board of Directors may authorize any officer, employee, or agent of the corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances.

SECTION 2. Loans . No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors. Such authority may be general or confined to specific instances.

SECTION 3. Checks, Drafts, Etc . All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness in the name of the corporation shall be signed by one or more officer, employee, or agent of the corporation in such manner as shall from time to time be determined by the Board of Directors.

SECTION 4. Deposits . All funds of the corporation not otherwise employed shall be deposits from time to time to the credit of the corporation in any of its duly authorized depositories as the Board of Directors may select.

SECTION 5. Contracts with Directors and Officers. To the fullest extent authorized by and in conformance with Washington law, the corporation may enter into contracts with and otherwise transact business as vendor, purchaser, or otherwise, with its directors, officers, employees and shareholders and with corporations, associations, firms, and entities in which they are or may become interested as directors, officers, shareholders, or otherwise, as freely as though such interest did not exist, except that no loans shall be made by the corporation secured by its shares, other than a loan made by the corporation to a tax-qualified employee stock ownership plan of the corporation or any of its affiliates. In the absence of fraud, the fact that any director, officer, employee, shareholder, or any corporation, association, firm or other entity of which any director, officer, employee or shareholder is interested, is in any way interested in any transaction or contract shall not make the transaction or contract void or voidable, or require the director, officer, employee or shareholder to account to this corporation for any profits therefrom if the transaction or contract is or shall be authorized, ratified, or approved by (i) the vote of a majority of the Board of Directors excluding any interested director or directors, (ii) the written consent of the holders of a majority of the shares entitled to vote, or (iii) a general resolution approving the acts of the directors and officers adopted at a shareholders meeting by vote of the holders of the majority of the shares entitled to vote. All loans to officers and directors shall be subject to Federal and state laws and regulations. Nothing herein contained shall create or imply any liability in the circumstances above described or prevent the authorization, ratification or approval of such transactions or contracts in any other manner.

SECTION 6. Shares of Another Corporation . Shares of another corporation held by this corporation may be voted by the president or any vice president, or by proxy appointment form by either of them, unless the directors by resolution shall designate some other person to vote the shares.

ARTICLE VII

Certificates for Shares and Their Transfer

SECTION 1. Certificates for Shares and Uncertificated Shares . Certificates representing shares of capital stock of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the chief executive officer or by any other officer of the corporation authorized by the Board of Directors, attested by the secretary or an assistant secretary, and may be sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for the like number of shares has been surrendered and canceled, except that in case of a lost or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. Notwithstanding the foregoing, the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the corporation’s stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by certificates until such certificate is surrendered to the corporation. In addition, notwithstanding the adoption of any such resolution providing for uncertificated shares, every holder of capital stock of the corporation theretofore represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate for shares of capital stock of the corporation signed by, or in the name of the corporation as set forth above, certifying the number of shares owned by such stockholder in the Corporation.

SECTION 2. Transfer of Shares . Stock of the corporation shall be transferable in the manner prescribed by applicable law and in these Bylaws. Transfers of stock shall be made on the books of the corporation, and in the case of certificated shares of stock, only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; or, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such person’s attorney lawfully constituted in writing, and upon payment of all necessary transfer taxes and compliance with appropriate procedures for transferring shares in uncertificated form; provided, however, that such surrender and endorsement, compliance or payment of taxes shall not be required in any case in which the officers of the corporation shall determine to waive such requirement. With respect to certificated shares of stock, every certificate exchanged, returned or surrendered to the corporation shall be marked “Cancelled,” with the date of cancellation, by the Secretary or Assistant Secretary of the corporation or the transfer agent thereof. No transfer of stock shall be valid as against the corporation for any purpose until it shall have been entered in the stock records of the corporation by an entry showing from and to whom transferred.

SECTION 3. Certification of Beneficial Ownership . The Board of Directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.

SECTION 4. Lost Certificates . The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.

ARTICLE VIII

Fiscal Year; Annual Audit

The fiscal year of the corporation shall end on the last day of June of each year. The corporation shall be subject to an annual audit as of the end of its fiscal year by the independent public accountants appointed by and responsible to the Board of Directors.

ARTICLE IX

Dividends

Subject to the terms of the corporation’s Articles of Incorporation and the laws of the State of Washington, the Board of Directors may, from time to time, declare, and the corporation may pay, dividends upon its outstanding shares of capital stock.

ARTICLE X

Corporate Seal

The corporation need not have a corporate seal. If the directors adopt a corporate seal, the seal of the corporation shall be circular in form and consist of the name of the corporation, the state and year of incorporation, and the words “Corporate Seal.”

ARTICLE XI

Amendments

In accordance with the corporation’s Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the shareholders of the corporation only by vote of not less than 80% of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, the Board of Directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the Board of Directors at a legal meeting held in accordance with the provisions of these Bylaws.

* * *

Adopted this 9th day of September 2008.

Exhibit 4

ANCHOR BANCORP

INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON


COMMON STOCK	CUSIP See Reverse For Certain Definitions

THIS CERTIFIES THAT

is the owner of

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, OF

Anchor Bancorp (“Corporation”), a stock corporation incorporated under the laws of the State of Washington. The shares represented by this Certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof or by such holder’s duly authorized attorney or legal representative upon the surrender of this Certificate properly endorsed. Such shares are non-withdrawable and not insurable. Such shares are not insured by the federal government. The Articles and shares represented hereby are issued and shall be held subject to all provisions of the Articles of Incorporation and Bylaws of the Corporation and any amendments thereto (copies of which are on file with the Transfer Agent), to all of which provisions the holder by acceptance hereof, assents.

IN WITNESS WHEREOF, Anchor Bancorp has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed.


CORPORATE SECRETARY	PRESIDENT AND CHIEF EXECUTIVE OFFICER

	TRANSFER AGENT

[SEAL]

ANCHOR BANCORP

The shares represented by this Certificate are issued subject to all the provisions of the Articles of Incorporation and Bylaws of Anchor Bancorp (“Corporation”) as from time to time amended (copies of which are on file with the Transfer Agent and at the principal executive offices of the Corporation).

The shares represented by this Certificate are subject to a limitation contained in the Articles of Incorporation to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the “Limit”) be entitled or permitted to vote in respect of the shares held in excess of the Limit, unless a majority of the whole Board of Directors, as defined in the Articles of Incorporation shall have by resolution granted in advance such entitlement or permission.

The Board of Directors of the Corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of preferred stock in series and to fix and state the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.

The shares represented by this Certificate may not be cumulatively voted on any matter. The affirmative vote of the holders of at least 80% of the voting stock of the Corporation, voting together as a single class, shall be required to approve certain business combinations and other transactions, pursuant to the Articles of Incorporation, or to amend certain provisions of the Articles of Incorporation.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as through they were written out in full according to applicable laws or regulations.


TEN COM	-as tenants in common
TEN ENT	-as tenants by the entireties
JT TEN	-as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT MIN ACT	-_______Custodian_______ under Uniform Gifts to Minors Act _________
	(Cust)	(Minor)	(State)

Additional abbreviations may also be used though not in the above list.

For value received, ___________________________________________ hereby sell, assign and transfer unto


PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

Please print or typewrite name and address, including postal zip code, of assignee

shares of the common stock evidenced by this Certificate, and do hereby irrevocably constitute and appoint __________________________________, Attorney, to transfer the said shares on the books of the within named Corporation, with full power of substitution.

Dated _________________



	Signature


	Signature
	NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatever.

Exhibit 5

October 24, 2008

Board of Directors
Anchor Bancorp
601 Woodland Square Loop SE
Lacey, Washington 98503


	Re:	Anchor Bancorp

		Registration Statement on Form S-1

To the Board of Directors:

You have requested our opinion as special counsel for Anchor Bancorp, a Washington corporation, in connection with the above-referenced Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended.

In rendering this opinion, we understand that the common stock of Anchor Bancorp will be offered and sold in the manner described in the Prospectus, which is part of the Registration Statement. We have examined such records and documents and made such examination as we have deemed relevant in connection with this opinion.

Based upon the foregoing, it is our opinion that the shares of common stock of Anchor Bancorp will upon issuance be legally issued, fully paid and nonassessable.

This opinion is furnished for use as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading “Legal and Tax Opinions.”


	Very truly yours,


	BREYER & ASSOCIATES PC


Exhibit 8.1

LAW OFFICES

S ILVER , F REEDMAN & T AFF , L . L . P .
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

	3299 K STREET N.W. SUITE 100 WASHINGTON, D.C. 20007 PHONE (202) 295-4500 FAX: (202) 337-5502	WRITER’S DIRECT DIAL NUMBER (202) 295-4503
	WWW.SFTLAW.COM

September 10, 2008

Board of Trustees
Anchor Mutual Savings Bank
120 North Broadway
Aberdeen, WA 98520


	RE:	Federal Income Tax Opinion Relating To The Conversion Of Anchor Mutual Savings Bank, Aberdeen, Washington From A State-Chartered Mutual Savings Bank To A State-Chartered Stock Savings Bank Under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, As Amended

Ladies and Gentlemen:

In accordance with your request set forth hereinbelow is the opinion of this firm relating to the federal income tax consequences of the conversion of Anchor Mutual Savings Bank (“Mutual”) from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank (“Stock Bank”) pursuant to the provisions of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the “Code”).

Capitalized terms used herein which are not expressly defined herein shall have the meaning ascribed to them in the Plan of Conversion adopted by the Board of Trustees of Mutual on July 15, 2008 (the “Plan”).

The following assumptions have been made in connection with our opinions herein below:

1. The Conversion is implemented in accordance with the terms of the Plan and all conditions precedent contained in the Plan shall be performed or waived prior to the consummation of the Conversion.

2. No amount or a de minimus amount (i.e. substantially less than 1%) of the savings accounts and deposits of Mutual, as of the Eligibility Record Date or the Supplemental Eligibility Record Date, will be excluded from participating in the liquidation account of Stock

September 10, 2008
Page 2

Bank. To the best of the knowledge of the management of Mutual there is not now, nor will there be at the time of the Conversion, any plan or intention, on the part of the depositors in Mutual to withdraw their deposits following the Conversion. Deposits withdrawn immediately prior to or immediately subsequent to the Conversion (other than maturing deposits) are considered in making these assumptions.

3. Holding Company and Stock Bank each have no plan or intention to redeem or otherwise acquire any of the Conversion Stock to be issued in the proposed transaction.

4. Immediately following the consummation of the proposed transaction, Stock Bank will possess the same assets and liabilities as Mutual held immediately prior to the proposed transaction, plus substantially all of the net proceeds from the sale of its stock to Holding Company except for assets used to pay expenses of the Conversion. The liabilities transferred to Stock Bank were incurred by Mutual in the ordinary course of business.

5. No cash or property will be given to Deposit Account holders in lieu of Subscription Rights or an interest in the liquidation account of Stock Bank.

6. Following the Conversion, Stock Bank will continue to engage in its business in substantially the same manner as Mutual engaged in business prior to the Conversion, and it has no plan or intention to sell or otherwise dispose of any of its assets, except in the ordinary course of business.

7. There is no plan or intention for Stock Bank to be liquidated or merged with another corporation following the consummation of the Conversion.

8. The fair market value of each Deposit Account plus an interest in the liquidation account of Stock Bank will, in each instance, be approximately equal to the fair market value of each Deposit Account of Mutual plus the interest in the residual equity of Mutual surrendered in exchange therefor.

9. Mutual, Stock Bank and Holding Company are each corporations within the meaning of Section 7701(a)(3) of the Code. Mutual and Stock Bank are domestic building and loan associations within the meaning of Section 7701(a)(19)(C) of the Code.

10. Holding Company has no plan or intention to sell or otherwise dispose of the stock of Stock Bank received by it in the proposed transaction.

11. Both Stock Bank and Holding Company have no plan or intention, either currently or at the time of Conversion, to issue additional shares of common stock following the proposed transaction, other than shares that may be issued to employees and/or directors pursuant to certain stock option and stock incentive plans or that may be issued to employee benefit plans.

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September 10, 2008
Page 3

12. Assets used to pay expenses of the Conversion and all distributions (except for regular, normal interest payments and other payments in the normal course of business made by Mutual immediately preceding the transaction) will in the aggregate constitute less than 1% of the fair market value of the net assets of Mutual and any such expenses and distributions will be paid by Stock Bank from the proceeds of the sale of Conversion Stock.

13. All distributions to Deposit Account holders in their capacity as Deposit Account holders (except for regular, normal interest payments made by Mutual), will, in the aggregate, constitute less than 1% of the fair market value of the net assets of Mutual.

14. At the time of the proposed transaction, the fair market value of the assets of Mutual on a going concern basis (including intangibles) will equal or exceed the amount of its liabilities plus the amount of liabilities to which such assets are subject. Mutual will have a positive regulatory net worth at the time of the Conversion.

15. Mutual is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. The proposed transaction does not involve a receivership, foreclosure, or similar proceeding before a federal or state agency involving a financial institution to which Section 585 or 593 of the Code applies.

16. Mutual’s Eligible Account Holders and Supplemental Eligible Account Holders will pay expenses of the Conversion solely attributable to them, if any.

17. The liabilities of Mutual assumed by Stock Bank plus the liabilities, if any, to which the transferred assets are subject were incurred by Mutual in the ordinary course of its business and are associated with the assets being transferred.

18. There will be no purchase price advantage for Mutual’s Deposit Account holders who purchase Conversion Stock.

19. Neither Mutual nor Stock Bank is an investment company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.

20. None of the compensation to be received by any Deposit Account holder-employees of Mutual or Holding Company will be separate consideration for, or allocable to, any of their deposits in Mutual. No interest in the liquidation account of Stock Bank will be received by any Deposit Account holder-employees as separate consideration for, or will otherwise be allocable to, any employment agreement, and the compensation paid to each Deposit Account holder-employee, during the twelve-month period preceding or subsequent to the Conversion, will be for services actually rendered and will be commensurate with amounts paid to the third parties bargaining at arm’s-length for similar services. No shares of Conversion Stock will be issued to or purchased by any Deposit Account holder-employee of Mutual or Holding Company at a discount or as compensation in the proposed transaction.

21. No creditors of Mutual or the depositors in their role as creditors, have taken any steps to enforce their claims against Mutual by instituting bankruptcy or other legal

- 3 -

September 10, 2008
Page 4

proceedings, in either a court or appropriate regulatory agency, that would eliminate the proprietary interests of the Members prior to the Conversion of Mutual including depositors as the equity holders of Mutual.

22. The proposed transaction does not involve the payment to Stock Bank or Mutual of financial assistance from federal agencies within the meaning of Notice 89-102, 1989-40 C.B. 1.

23. On a per share basis, the purchase price of Conversion Stock will be equal to the fair market value of such stock at the time of the completion of the proposed transaction.

24. Mutual will not have any net operating losses, capital loss carryovers or built-in losses at the time of the Conversion.

OPINION

Based solely on the assumptions set forth hereinabove and our analysis and examination of applicable federal income tax laws, rulings, regulations, and judicial precedents, we are of the opinion that if the transaction is undertaken in accordance with the above assumptions:

(1) The Conversion will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code. Neither Mutual nor Stock Bank will recognize any gain or loss as a result of the transaction (Rev. Rul. 80-105, 1980-1 C.B. 78). Mutual and Stock Bank will each be a party to a re organization within the meaning of Section 368(b) of the Code.

(2) Stock Bank will recognize no gain or loss upon the receipt of money and other property, if any, in the Conversion, in exchange for its shares. (Section 1032(a) of the Code).

(3) No gain or loss will be recognized by Holding Company upon the receipt of money for Conversion Stock. (Section 1032(a) of the Code).

(4) The basis of Mutual’s assets in the hands of Stock Bank will be the same as the basis of those assets in the hands of Mutual immediately prior to the transaction. (Section 362(b) of the Code).

(5) Stock Bank’s holding period of the assets of Mutual will include the period during which such assets were held by Mutual prior to the Conversion. (Section 1223(2) of the Code).

(6) The creation of the liquidation account on the records of Stock Bank will have no effect on Mutual’s or Stock Bank’s taxable income, deductions, or additions to the reserve for bad debts.

- 4 -

September 10, 2008
Page 5

(7) No income will be recognized by Holding Company on the distribution of Subscription Rights unless the issuance of the Subscription Rights results in gain to recipients thereof. It is more likely than not that no income will be recognized by Holding Company on the distribution of Subscription Rights.

(8) It is more likely than not that the fair market value of the Subscription Rights is zero. Thus, it is more likely than not that no gain will be recognized by Eligible Account Holders, Supplemental Account Holders or Other Members upon their receipt of Subscription Rights. Gain, if any, realized by the aforesaid account holders and Other Members will not exceed the fair market value of the Subscription Rights received. If gain is recognized by such account holders and Other Members upon the distribution to them of Subscription Rights, the Holding Company could also recognize income on the distribution of Subscription Rights. No gain will be recognized by the recipients of Subscription Rights or Holding Company upon the exercise of Subscription Rights.

(9) A depositor’s basis in his Deposit Accounts of Stock Bank will be the same as the basis of his Deposit Accounts in Mutual. (Section 1012 of the Code). The basis of the interest in the liquidation account of Stock Bank received by Eligible Account Holders and Supplemental Eligible Account Holders will be equal to the cost of such property, i.e. , the fair market value of the proprietary interest in Mutual, which in this transaction we assume to be zero).

(10) The basis of Conversion Stock to its shareholders will be the purchase price thereof. (Section 1012 of the Code).

(11) A shareholder’s holding period for Conversion Stock acquired through the exercise of the Subscription Rights will begin on the date on which the Subscription Rights are exercised. (Section 1223(6) of the Code). The holding period for the Conversion Stock purchased pursuant to the Direct Community Offering or Syndicated Community Offering will commence on the date following the date on which such stock is purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168).

(12) Regardless of any book entries that are made for the establishment of a liquidation account, the reorganization will not diminish the accumulated earnings and profits of Mutual available for the subsequent distribution of dividends, within the meaning of Section 316 of the Code. Section 1.312-11(b) and (c) of the Regulations. Stock Bank will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of Mutual as of the date of Conversion.

(13) Our opinions in paragraph 7 and 8 are based upon the conclusion that the Subscription Rights have a fair market value of zero, which will be supported by a letter to be issued to you by RP Financial, LC in connection with the proposed transaction. Independent of the letter referred to in the preceding sentence, we believe that the Subscription Rights do not have any market value because they are granted without cost to recipients, are non-transferable, of short duration, and only entitle recipients to purchase Conversion Stock at the same price to be paid by the general public in the Direct Community Offering or Syndicated Community

- 5 -

September 10, 2008
Page 6

Offering. Although the Internal Revenue Service will not issue rulings on whether the Subscription Rights have a market value, we are not aware of the Internal Revenue Service claiming or asserting in any similar transaction that subscription rights of the type described above have any market value. Since there are no definitive judicial or administrative precedents or official Internal Revenue Service or Treasury position or guidance on this matter, our opinions in paragraphs 7 and 8 are reasoned conclusions instead of absolute conclusions. More likely than not means that there is a greater than fifty percent likelihood that our conclusions are correct.

The above opinions are effective to the extent that Mutual is solvent. No opinion is expressed about the tax treatment of the transaction if Mutual is insolvent. Whether or not Mutual is solvent will be determined at the end of the taxable year in which the transaction is consummated.

No opinion is expressed as to the tax treatment of the transaction under the provisions of any of the other sections of the Code and Income Tax Regulations which may also be applicable thereto, or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction which are not specifically covered by the opinions set forth above.

We hereby consent to the filing of this opinion as an exhibit to regulatory filings and applications seeking approval of the Conversion from the Division and the FDIC, and to Holding Company’s Registration Statement as filed with the SEC.


	Respectfully submitted,

	SILVER, FREEDMAN & TAFF, L.L.P.

- 6 -

Exhibit 8.2


	Bank of America Building, 2nd floor \| 3408 South 23rd Street
	Tacoma, Washington 98405
	Tel (253) 272-2997 \| Fax (253) 627-6252
	www.bladokiger.com

September 25, 2008

Board of Trustees
Anchor Mutual Savings Bank
120 N. Broadway
Aberdeen, Washington 98520

Board of Directors
Anchor Bancorp
601 Woodland Square Loop, SE
Lacey, Washington 98503


	RE:	Washington Tax Consequences Relating to Proposed Conversion of Anchor Mutual Savings Bank

To the Boards of Trustees and Directors:

In accordance with your request, set forth herein is the opinion of this firm relating to Washington tax consequences of (i) the proposed conversion of Anchor Mutual Savings Bank (the “Bank”) from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank (the “Converted Bank”) and (ii) the concurrent acquisition of 100% of the outstanding capital stock of the Converted Bank by a parent holding company formed at the direction of the Board of Directors of the Bank and to be known as Anchor Bancorp (the “Holding Company”) (collectively, the “Stock Conversion”), pursuant to a Plan of Conversion (the “Plan”).

You have received the September 10, 2008, opinion of Silver, Freedman & Taff, L.L.P., regarding the federal income tax consequences of the Stock Conversion to the Bank, the Converted Bank, the Holding Company, and the deposit account holders of the Bank under the Internal Revenue Code of 1986, as amended (the “Code”). The federal tax opinion concludes, inter alia , that the proposed transactions qualify as a tax-free reorganization under Section 368(a) (1) (F) of the Code. We express no opinion regarding the opinion of Silver, Freedman & Taff, L.L.P., but do also rely upon the assumptions expressed therein to the extent they are relevant to our opinion.

The State of Washington does not have a state income tax per se, but relies instead for its revenue on other types of taxes. These other taxes primarily include property taxes, retail sales/use taxes, and business and occupation taxes. Money, credits, accounts, bonds, stocks, and shares of private corporations, along with various other intangibles, are expressly exempted from ad valorem (property) taxation, under RCW 84.36.070. Through reasoning similar to that employed by the federal taxing authority in

Boards of Trustees and Directors

9/25/2008

Page 2 of 2

the case of exchanges described in under Code Section 351, the State of Washington, Department of Revenue, takes the position, in WAC 458-20-106 (current through July 2, 2008), that the retail sales/use tax does not apply to a transfer of capital to a corporation in exchange for stock therein. Likewise, the business and occupation (“B&O”) tax does not apply to “casual or isolated sales” under WAC 458-20-106, which are defined as “sale[s] made by a person who is not engaged in the business of selling the type of property involved.” Because Anchor Bancorp is not in the business of selling shares of stock in itself, we are of the opinion that issuance of shares of stock in exchange for capital contributions fits within this definition, and is, therefore, a casual or isolated sale not subject to the B&O tax.

Based upon the facts and circumstances attendant to the proposed reorganization, as they have been related to us via the September 10, 2008 Silver, Freedman & Taff, L.L.P., opinion letter referred to above, it is our opinion that, under the laws of the State of Washington, no adverse tax consequences will be incurred by either the Bank or its depositors as a result of the implementation of the transactions contemplated by the Plan.

No opinion is expressed on any matter other than state tax consequences which might result from the implementation of the Stock Conversion described in the September 10, 2008 Silver, Freedman & Taff, L.L.P. opinion letter.

We hereby consent to the filing of this opinion with the Washington Department of Financial Institutions, Division of Banks, and the Federal Deposit Insurance Corporation as an exhibit to the Application for Approval of Conversion.

We also hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form S-1 and to the reference on our firm in the Prospectus, which is a part of the Registration Statement, under the headings “The Conversion – Effects of the Conversion – Tax Effects of the Conversion” and “Legal and Tax Opinions.”


	Very truly yours,

	BLADO KIGER, P.S.

	Jonathan W. Blado
	Attorney at Law

JWB/lc
cc: Breyer & Associates PC

Exhibit 8.3


RP ^® FINANCIAL, LC.

Financial Services Industry Consultants

	October 24, 2008

Board of Directors
Anchor Mutual Savings Bank
120 North Broadway
Aberdeen, Washington 98520


Re:	Plan of Conversion: Subscription Rights
	Anchor Mutual Savings Bank

Members of the Boards of Directors:

All capitalized terms not otherwise defined in this letter have the meanings given such terms in the plan of conversion adopted by the Board of Directors of Anchor Mutual Savings Bank, Aberdeen, Washington (collectively “Anchor Mutual” or the “Bank”), whereby a newly-formed holding company, Anchor Bancorp (the “Company”) will hold all of the outstanding stock of the Bank, and the Company will issue shares of common stock.

We understand that in accordance with the plan of conversion, subscription rights to purchase shares of common stock in the Company are to be issued to: (1) Eligible Account Holders; (2) Tax-Qualified Employee Stock Benefit Plans; (3) Supplemental Eligible Account Holders; and (4) Other Members. Based solely upon our observation that the subscription rights will be available to such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of common stock at the same price as will be paid by members of the general public in the community offering, but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that, as a factual matter:


	(1)	the subscription rights will have no ascertainable market value; and

	(2)	the price at which the subscription rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance.

Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Company’s value alone. Accordingly, no assurance can be given that persons who subscribe to shares of common stock in the subscription offering will thereafter be able to buy or sell such shares at the same price paid in the subscription offering.


	Sincerely,

	RP ^® FINANCIAL, LC.




Washington Headquarters
Rosslyn Center	Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210	Fax No.: (703) 528-1788
Arlington, VA 22209	Toll-Free No.: (866) 723-0594
www.rpfinancial.com	E-Mail: mail@rpfinancial.com

Exhibit 10.1

FORM OF
EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this ___ day of _____________, 2008, by and between Anchor Bancorp (the “Company”), and its wholly owned subsidiary, Anchor Bank (the “Bank”), and ______________________ (the “Employee”).

WHEREAS, the Employee is currently serving as the __________________________ of the Bank;

WHEREAS, the Employee has made and will continue to make a major contribution to the success of the Company and the Bank in the position of __________________________;

WHEREAS, the board of directors of the Company and the board of directors of the Bank (collectively, the “Board of Directors”) recognize that the possibility of a change in control of the Bank or the Company may occur and that such possibility, and the uncertainty and questions which may arise among management, may result in the departure or distraction of key management to the detriment of the Company, the Bank and their respective stockholders;

WHEREAS, the Board of Directors believes that it is in the best interests of the Company and the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Company and its subsidiaries; and

WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee;

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:

1. Definitions .

(a) The term “Change in Control” means (1) an offeror other than the Company purchases shares of stock of the Company or the Bank pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or the Bank within the meaning of the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841 (or any successor statute or regulation) or requires the filing of a change of control notice with the Federal Deposit Insurance Corporation (“FDIC”) under 12 U.S.C. Section 1817(j) (or any successor statute or regulation); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company’s or the Bank’s outstanding securities; (4) individuals who are members of the board of directors of the Company immediately following the Effective Date or who are members of the board of directors of the Bank immediately following the Effective Date (in each case, the “Incumbent Board”) cease

for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s or the Bank’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar transaction in which the Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company.

(b) The term “Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the “Code”), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company.

(c) The term “Date of Termination” means the date upon which the Employee experiences a Separation from the Company or the Bank or both, as specified in a notice of termination pursuant to Section 8 of this Agreement or the date a succession becomes effective under Section 10.

(d) The term “Effective Date” means the date of this Agreement.

(e) The term “Involuntary Termination” means the Employee’s termination of employment (i) by either the Company or the Bank or both without the Employee’s express written consent; or (ii) by the Employee by reason of a material diminution of or interference with his/her duties, responsibilities or benefits, including (without limitation) any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Lacey, Washington, or within a radius of 35 miles from the location of the Company’s administrative offices as of the Effective Date, except for reasonable travel on Company or Bank business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Employee, other than as part of a Bank- or Company-wide reduction in staff; (4) a reduction in the Employee’s salary or a material adverse change in the Employee’s perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank or the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee; or (6) the failure of the board of directors of the Company (or a board of directors of a successor of the Company) to elect him/her as ___________________________ of the Company (or a successor of the Company) or any action by the board of directors of the Company (or a board of directors of a successor of the Company) removing him/her from such office, or the failure of the board of directors of the Bank (or any successor of the Bank) to elect him/her as ______________________________ of the Bank (or any successor of the Bank) or any action by such board (or a board of a successor of the Bank) removing

him/her from such office. The term “Involuntary Termination” does not include Termination for Cause, termination of employment due to death or permanent disability pursuant to Section 7(f) of this Agreement, retirement or suspension or temporary or permanent prohibition from participation in the conduct of the Bank’s affairs under Section 8 of the Federal Deposit Insurance Act (“FDIA”).

(f) The term “Section 409A” shall mean Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.

(g) The term “Separation from Service” shall have the same meaning as in Section 409A, taking into account all rules and presumptions provided for in the final Section 409A regulations.

(h) The terms “Termination for Cause” and “Terminated For Cause” mean Employee’s termination of employment with either the Company or the Bank, as the case may be, because of the Employee’s personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that his/her action or failure to act was in the best interest of the Company or the Bank. The Employee shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee’s counsel, to be heard before the Board), stating that in the good faith opinion of the Board of Directors the Employee has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail.

2. Term . The term of this Agreement shall be a period of three years commencing on the Effective Date, subject to earlier termination as provided herein. Beginning on the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that (i) neither the Employee nor the Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further; and (ii) prior to such anniversary, the Board of Directors, or a committee of the Board of Directors which has been delegated authority to act on such matters by the Board of Directors (“Committee”), explicitly reviews and approves the extension. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

3. Employment . The Employee shall be employed as the ____________________________ of the Company and as the _____________________________ of the Bank. As such, the Employee shall render all services and possess the powers as are customarily performed by persons situated in

similar executive capacities, and shall have such other powers and duties as the Board of Directors may prescribe from time to time. The Employee shall also render services to any subsidiary or subsidiaries of the Company or the Bank as requested by the Company or the Bank from time to time consistent with his/her executive position. The Employee shall devote his/her best efforts and reasonable time and attention to the business and affairs of the Company and the Bank to the extent necessary to discharge his/her responsibilities hereunder. The Employee may (i) serve on charitable or civic boards or committees and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors or a Committee, which approval shall not be withheld unreasonably, and (ii) manage personal investments, so long as such activities do not interfere materially with performance of his/her responsibilities hereunder or give rise to violations of applicable securities laws.

4. Cash Compensation .

(a) Salary . The Company and the Bank jointly agree to pay the Employee during the term of this Agreement a base salary (the “Salary”) the annualized amount of which in any year shall be not less than the annualized aggregate amount of the Employee’s base salary from the Company and any Consolidated Subsidiaries in effect at the Effective Date; provided that any amounts of salary actually paid to the Employee by any Consolidated Subsidiaries shall reduce the amount to be paid by the Company and the Bank to the Employee. The Salary shall be paid no less frequently than monthly and shall be subject to customary tax withholding. The amount of the Employee’s Salary shall be increased (but shall not be decreased) from time to time in accordance with the amounts of salary approved by the Board of Directors or the Committee or the board of directors or the appropriate committee of any of the Consolidated Subsidiaries after the Effective Date. The amount of the Salary shall be reviewed by the Board of Directors or the Committee at least annually during the term of this Agreement.

(b) Bonuses . The Employee shall be entitled to participate in an equitable manner with all other executive officers of the Company and the Bank in such performance-based and discretionary bonuses, if any, as are authorized and declared by the Board of Directors or the Committee for executive officers. Any such bonus shall be paid no later than 2½ months after the end of the calendar year in which the Employee obtains a nonforfeitable right to the bonus.

(c) Expenses . The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and the Bank, provided that the Employee accounts for such expenses as required under such policies and procedures.

5. Benefits .

(a) Participation in Benefit Plans . The Employee shall be entitled to participate, to the same extent as executive officers of the Company and the Bank generally, in all plans of the

Company and the Bank relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof. In addition, the Employee shall be entitled to be considered for benefits under all of the stock, stock option, and equity-based plans in which the Company’s or the Bank’s executive officers are eligible or become eligible to participate.

(b) Fringe Benefits . The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company’s or the Bank’s executive officers, including but not limited to supplemental retirement, deferred compensation program, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services.

6. Vacations; Leave . The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors or the Committee for executive officers, and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors or the Committee may determine in its discretion.

7. Termination of Employment .

(a) Involuntary Termination . The Board of Directors may terminate the Employee’s employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Employee’s right to compensation or other benefits under this Agreement. In the event of Involuntary Termination other than after a Change in Control which occurs during the term of this Agreement, the Company and the Bank jointly shall (i) pay to the Employee during the remaining term of this Agreement the Salary at the rate in effect immediately prior to the Date of Termination, including the pro rata portion of any incentive award, payable in such manner and at such times as the Salary would have been payable to the Employee under Section 4(a) if the Employee had continued to be employed by the Company and the Bank, and (ii) provide to the Employee during the remaining term of this Agreement substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and his/her dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him, as if he/she had not suffered Involuntary Termination. Notwithstanding the foregoing, if (but for this sentence) (i) the taxable payments under this Section 7(a) would either extend over a long enough period, or have a sufficient cumulative value, to cause a portion of the payments to not to be considered severance payments under Section 409A (so that the excess portion would be considered deferred compensation for purposes of Section 409A), then the first payments made under this Section 7(a) shall be considered as made pursuant to a separation pay program to the extent permitted under Section 409A, with the balance of the payments (the

“Excess Separation Payments”) being considered deferred compensation, (ii) the manner in which the Excess Severance Payments are paid shall be modified if and to the minimum extent necessary to cause those payments to comply with Section 409A, and (iii) if at the time of the Employee’s Separation from Service he/she is a “specified employee” within the meaning of Section 409A, then no portion of the Excess Separation Payment shall be paid earlier than six months after the Employee’s Separation from Service (with any payments delayed on account of this requirement paid with the first payment that is not so limited).

(b) Termination for Cause . In the event of Termination for Cause, the Company and the Bank shall pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, and shall have no further obligation to the Employee under this Agreement.

(c) Voluntary Termination . The Employee’s employment may be voluntarily terminated by the Employee at any time upon at least 90 days’ written notice to the Company and the Bank or such shorter period as may be agreed upon between the Employee and the Board of Directors. In the event of such voluntary termination, the Company and the Bank shall be obligated jointly to continue to pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, at the time such payments are due, and shall have no further obligation to the Employee under this Agreement.

(d) Change in Control . In the event of Employee’s Involuntary Termination after a Change in Control, the Company and the Bank jointly shall (i) pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination an amount equal to 299% of the Employee’s “base amount” as defined in Section 280G of the Code; and (ii) provide to the Employee during the remaining term of this Agreement substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and his/her dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him, as if he/she had not suffered an Involuntary Termination.

(e) Death . In the event of the death of the Employee while employed under this Agreement and prior to any termination of employment, the Company and the Bank jointly shall pay to the Employee’s estate, or such person as the Employee may have previously designated in writing, the Salary which was not previously paid to the Employee and which he/she would have earned if he/she had continued to be employed under this Agreement through the last day of the calendar month in which the Employee died, together with the benefits provided hereunder through such date.

(f) Disability . If the Employee becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Company or the Bank (the “Disability Plan”) or becomes otherwise unable to fulfill his/her duties under this Agreement, he/she shall be entitled to receive such group and other disability benefits, if any, as are then provided by the Company or the

Bank for executive employees. In the event of such disability, this Agreement shall not be suspended, except that (i) the obligation to pay the Salary to the Employee shall be reduced in accordance with the amount of disability income benefits received by the Employee, if any, pursuant to this paragraph such that, on an after-tax basis, the Employee shall realize from the sum of disability income benefits and the Salary the same amount as he/she would realize on an after-tax basis from the Salary if the obligation to pay the Salary were not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted by a majority of the disinterested members of the Board of Directors or the Committee, the Company and the Bank may discontinue payment of the Salary beginning six months following a determination that the Employee has become entitled to benefits under the Disability Plan or otherwise unable to fulfill his/her duties under this Agreement. If the Employee’s disability does not constitute a disability within the meaning of Section 409A, then payments under this Section 7(f) shall not commence until the earlier of the Employee’s death or the sixth month anniversary of the Employee’s Separation from Service, with any delayed payments being made with the first permissible payment.

(g) Temporary Suspension or Prohibition . If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), or pursuant to Section 32.16.090 of the Revised Code of Washington (“R.C.W.”), the Bank’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended.

(h) Permanent Suspension or Prohibition . If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and (g)(1), or pursuant to R.C.W. Section 32.16.090, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(i) Default of the Bank . If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties.

(j) Termination by Regulators . All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (1) at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (2) by the FDIC, at the time the agency approves a supervisory merger to resolve problems related to operation of the Bank or Company, respectively. Any rights of the parties that have already vested, however, shall not be affected by any such action.

(k) Reductions of Benefits . Notwithstanding any other provision of this Agreement, if payments and the value of benefits received or to be received under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee, would cause any amount to be nondeductible by the Company or any of the Consolidated Subsidiaries for federal income tax purposes pursuant to or by reason of Section 280G of the Code, then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize amounts and the value of benefits to be received by the Employee without causing any amount to become nondeductible pursuant to or by reason of Section 280G of the Code. The Employee shall determine the allocation of such reduction among payments and benefits to the Employee.

(l) Further Reductions . Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

8. Notice of Termination . In the event that the Company or the Bank, or both, desire to terminate the employment of the Employee during the term of this Agreement, the Company or the Bank, or both, shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, except in the case of Termination for Cause. In the event that the Employee determines in good faith that he/she has experienced an Involuntary Termination of his/her employment, he/she shall send a written notice to the Company and the Bank stating the circumstances that constitute such Involuntary Termination and the date upon which his/her employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, he/she shall deliver a written notice to the Company and the Bank, stating the date upon which employment shall terminate, which date shall be at least 90 days after the date upon which the notice is delivered, unless the parties agree to a date sooner.

9. Attorneys’ Fees . The Company and the Bank jointly shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of (i) the Employee’s contesting or disputing any termination of employment, or (ii) the Employee’s seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company or the Bank (or a successor) or the Consolidated Subsidiaries under which the Employee is or may be entitled to receive benefits; provided that the Company’s and the Bank’s obligation to pay such fees and expenses is subject to the Employee’s prevailing with respect to the matters in dispute in any action initiated by the Employee or the Employee’s having been determined to have acted reasonably and in good faith with respect to any action initiated by the Company or the Bank.

10. No Assignments .

(a) This Agreement is personal to each of the parties hereto, and no party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other parties; provided, however, that the Company and the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and/or the Bank would be required to perform it, if no such succession or assignment had taken place. Failure to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Company and the Bank in the same amount and on the same terms as the compensation pursuant to Section 7(d) of this Agreement. For purposes of implementing the provisions of this Section 10(a), the date on which any such succession becomes effective shall be deemed the Date of Termination.

11. Notice . For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and Bank at their home offices, to the attention of the Board of Directors with a copy to the Secretary of the Company and the Secretary of the Bank, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company or the Bank.

12. Amendments . No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.

13. Headings . The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

14. Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

15. Governing Law . This Agreement shall be governed by the laws of the State of Washington.

16. Arbitration . Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any

court having jurisdiction. Notwithstanding the foregoing, the Company, the Bank, or both may resort to the Superior Court of Grays Harbor County, Washington for injunctive and such other relief as may be available in the event that the Employee engages in conduct, after termination of the Agreement that amounts to a violation of the Washington Trade Secrets Act or amounts to unlawful interference with the business expectancies of the Company or the Bank.

17. Deferral of Non-Deductible Compensation . In the event that the Employee’s aggregate compensation (including compensatory benefits which are deemed remuneration for purposes of Section 162(m) of the Code) from the Company and the Consolidated Subsidiaries for any calendar year exceeds the maximum amount of compensation deductible by the Company or any of the Consolidated Subsidiaries in any calendar year under Section 162(m) of the Code (the “maximum allowable amount”), then any such amount in excess of the maximum allowable amount shall be mandatorily deferred with interest thereon at 8% per annum to a calendar year such that the amount to be paid to the Employee in such calendar year, including deferred amounts and interest thereon, does not exceed the maximum allowable amount. Subject to the foregoing, deferred amounts including interest thereon shall be payable at the earliest time permissible, and in no event later than required by Section 409A.

18. Knowing and Voluntary Agreement . Employee represents and agrees that he/she has read this Agreement, understands its terms, and that he/she has the right to consult counsel of choice and has either done so or knowingly waives the right to do so. Employee also represents that he/she has had ample time to read and understand the Agreement before executing it and that he/she enters into this Agreement without duress or coercion from any source.

* * * * *

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.


Attest:	ANCHOR BANCORP


Cheryl L. Dill, Secretary	By:

	Its:	Director

Attest:	ANCHOR BANK


Cheryl L. Dill, Secretary	By:

	Its:	Director

	EMPLOYEE

Exhibit 10.2

FORM OF
CHANGE IN CONTROL SEVERANCE AGREEMENT

THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the “Agreement”) is made and entered into as of this ____ day of ___________, 2008, (the “Commencement Date”), by and between ANCHOR BANK (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 5(a) hereof or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the “Bank”), and _______________ (the “Employee”).

WHEREAS, the Employee is currently serving as _______________________________; and

WHEREAS, the board of directors of the Bank (the “Board”) recognizes that the possibility of a change in control of the Bank or of its holding company, Anchor Bancorp (the “Company”), may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management to the detriment of the Bank, the Company and its stockholders; and

WHEREAS, the Board believes it is in the best interests of the Bank to enter into this Agreement with the Employee in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Employee to the Employee’s assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Company and/or the Bank, although no such change is now contemplated; and

WHEREAS, the Board has approved and authorized the execution of this Agreement with the Employee;

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:

1. Certain Definitions .

(a) The term “Change in Control” means (1) an offeror other than the Company purchases shares of stock of the Company or the Bank pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or the Bank within the meaning of the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841 (or any successor statute or regulation) or requires the filing of a notice with the Federal Deposit Insurance Corporation (“FDIC”) under 12 U.S.C. Section 1817(j) (or any successor statute or regulation); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company’s or the Bank’s outstanding

securities; (4) individuals who are members of the board of directors of the Company immediately following the Commencement Date or who are members of the Board immediately following the Commencement Date (in each case, the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Commencement Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board or whose nomination for election by the Company’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar transaction in which the Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company.

(b) The term “Commencement Date” means the date of this Agreement.

(c) The term “Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the “Code”), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company.

(d) The term “Date of Termination” means the date upon which the Employee ceases to serve as an employee of the Bank.

(e) The term “Involuntary Termination” means the termination of the employment of Employee (i) by the Bank, without his/her express written consent; or (ii) by the Employee by reason of a material diminution of or interference with his/her duties, responsibilities or benefits, including (without limitation) any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Lacey, Washington, or within a radius of 35 miles from the location of the Bank’s administrative offices as of the Commencement Date, except for reasonable travel on Company or Bank business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Employee, other than as part of a Bank- or Company-wide reduction in staff; (4) a reduction in the Employee’s salary or a material adverse change in the Employee’s perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank; (5) a material permanent increase in the required hours of work or the workload of the Employee; or (6) any purported termination of the Employee’s employment, except for Termination for Cause (and, if applicable, the requirements of Section 1(g) hereof), which purported termination shall not be effective for purposes of this Agreement. The term “Involuntary Termination” does not include Termination for Cause, retirement or suspension or temporary or permanent prohibition from participation in the conduct of the Bank’s affairs under Section 8 of the Federal Deposit Insurance Act.

(f) The term “Section 409A” means Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.

(g) The terms “Termination for Cause” and “Terminated for Cause” mean termination of the employment of the Employee because of the Employee’s personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that his/her action or failure to act was in the best interest of the Company or the Bank. The Employee shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the board of directors at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee’s counsel, to be heard before the Board), stating that in the good faith opinion of the board of directors the Employee has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail.

2. Term . The term of this Agreement shall be a period of three years beginning on the Commencement Date, subject to earlier termination as provided herein. Beginning on the first anniversary of the Commencement Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that prior to such anniversary, the board of directors explicitly reviews and approves the extension. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

3. Severance Benefits .

(a) If after a Change in Control, the Bank shall terminate the Employee’s employment other than for Termination for Cause, or employment is terminated in the event of Involuntary Termination by the Employee, each within 12 months following a Change in Control, the Bank shall (i) pay the Employee his/her salary, including the pro rata portion of any incentive award, through the Date of Termination; (ii) continue to pay, for the remaining term of this Agreement, for the life, health and disability coverage that is in effect with respect to the Employee and his/her eligible dependents; and (iii) pay to the Employee in a lump sum in cash, within 25 days after the later of the date of such Change in Control or the Date of Termination, an amount equal to 299% of the Employee’s “base amount” as determined under Section 280G of the Code.

Notwithstanding any other provision of this Agreement, if payments and the value of benefits received or to be received under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee, would cause any amount to be nondeductible by the Company or any of the Consolidated Subsidiaries for federal income tax purposes pursuant

to or by reason of Section 280G of the Code, then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize amounts and the value of benefits to be received by the Employee without causing any amount to become nondeductible pursuant to or by reason of Section 280G of the Code. The Employee shall determine the allocation of such reduction among payments and benefits to the Employee.

(b) The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits after the Date of Termination or otherwise. This Agreement does not constitute a contract of employment or impose on the Company or the Bank any obligation to retain the Employee, to change the status of the Employee’s employment, or to change the Company’s or the Bank’s policies regarding termination of employment.


	(i) shall be payable only if the Employee’s termination of employment also constitutes a “separation from service” within the meaning of Section 409A, taking into account the relevant rules and presumptions in the final Section 409A regulations;

	(ii) shall be considered made under a “separation pay plan” (within the meaning of Section 409A) to the extent such payment may be treated as made under a separation pay plan. Any additional amounts due the Employee under Section 3(a)(iii) shall be (A) considered deferred compensation for purposes of Section 409A, and (B) subject to subparagraph (iii) below.

	(iii) that are considered to be deferred compensation under Section 409A shall not be paid earlier than six months after the Employee’s separation from service (as defined in Section 3(c)(i) above), if the Employee is a “specified employee” (within the meaning of Section 409A). Payment(s) delayed on account of the preceding sentence shall be paid on the earlier of the 185 ^th day following the Employee’s separation from service (as herein defined) or his/her death.

The purpose of this paragraph 3(c) is to cause the Agreement to comply with Section 409A, and these provisions (and the Agreement) shall be administered and interpreted accordingly.

4. Attorneys’ Fees . If the Employee is purportedly Terminated for Cause and the Bank denies payments and/or benefits under Section 3(a) of this Agreement on the basis that the Employee experienced Termination for Cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 12 that “cause” as contemplated by Section 1(g) of this Agreement did not exist for termination of the Employee’s employment, or if in any event it is determined by

any such court or arbitrator that the Bank has failed to make timely payment of any amounts or provision of any benefits owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys’ fees, incurred in challenging such termination of employment or collecting such amounts or benefits. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement.

5. No Assignments .

(a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however , that the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Bank in the same amount and on the same terms that Employee would be entitled to hereunder if an event of Involuntary Termination occurred, in addition to any payments and benefits to which the Employee is entitled under Section 3 hereof. For purposes of implementing the provisions of this Section 5(a), the date on which any such succession becomes effective shall be deemed the Date of Termination.

(b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Employee, unless otherwise provided herein, all amounts payable hereunder shall be paid to the Employee’s devisee, legatee, or other designee or, if there be no such designee, to the Employee’s estate.

6. Deferred Payments . If following a termination of the Employee, the aggregate payments to be made by the Bank under this Agreement and all other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries would exceed the limitation on deductible compensation contained in Section 162(m) of the Code in any calendar year, any such amounts in excess of such limitation shall be mandatorily deferred with interest thereon at 8.0% per annum to a calendar year such that the amount to be paid to the Employee in such calendar year, including deferred amounts, does not exceed such limitation, provided, however , that such deferral shall not extend past when the deferred amount must be paid pursuant to Section 409A.

7. Delivery of Notices . For the purposes of this Agreement, all notices and other communications to any party hereto shall be in writing and shall be deemed to have been duly given

when delivered or sent by certified mail, return receipt requested, postage prepaid, addressed as follows:


	If to the Employee:

		At the address last appearing on the personnel records of the Employee

	If to the Bank:	Anchor Bank 120 N. Broadway Aberdeen, Washington 98520 Attention: Secretary

or to such other address as such party may have furnished to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt.

8. Amendments . No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.

9. Headings . The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.

10. Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

11. Governing Law . This Agreement shall be governed by the laws of the State of Washington to the extent that federal law does not govern.

12. Arbitration . Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators in a location selected by the Employee within 100 miles of such Employee’s job location with the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators’ award in any court having jurisdiction.

* * * * *

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.


Attest:		ANCHOR BANK


Cheryl L. Dill, Secretary		By: Jerald L. Shaw
		Its: President and Chief Executive Officer

		EMPLOYEE

Exhibit 10.3

FORM OF
ANCHOR BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN

PLAN PURPOSE

The purpose of the Anchor Bank Employee Severance Compensation Plan (the “Plan”) is to assure for Anchor Bank (the “Bank”) the services of the Employees in the event of a Change in Control of Anchor Bancorp (the “Holding Company”) or the Bank. The benefits contemplated by the Plan recognize the value to the Bank of the services and contributions of the eligible Employees and the effect upon the Bank resulting from uncertainties relating to continued employment, reduced employee benefits, management changes and employee relations that may arise if a Change in Control occurs or is threatened. The Bank’s and the Holding Company’s Boards of Directors believe that it is in the best interests of the Bank and the Holding Company to provide eligible Employees with such benefits in order to defray the costs and changes in employee status that could follow a Change in Control. The Boards of Directors believe that the Plan will also aid the Bank in attracting and retaining highly qualified individuals who are essential to its success and that the Plan’s assurance of fair treatment of the Bank’s employees will reduce the distractions and other adverse effects on Employees’ performance if a Change in Control occurs or is threatened.

ARTICLE I
ESTABLISHMENT OF PLAN

1.1 Establishment of Plan

As of the Effective Date, the Bank hereby establishes a severance compensation plan to be known as the “Anchor Bank Employee Severance Compensation Plan.” The purposes of the Plan are as set forth above.

1.2 Applicability of Plan

The benefits provided by this Plan shall be available to all Employees, who, at or after the Effective Date, meet the eligibility requirements of Article III. The Plan shall not apply to any Employee whose employment was terminated prior to the Effective Date.

1.3 Contractual Right to Benefits

This Plan establishes and vests in each Participant a contractual right to the benefits to which each Participant is entitled hereunder, enforceable by the Participant against the Employer.

ARTICLE II
DEFINITIONS AND CONSTRUCTION

2.1 Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below.

(a) “Annual Compensation” of a Participant means and includes all wages, salary, bonus, and incentive compensation (other than stock based compensation), paid (including accrued amounts) by the Employer as consideration for the Participant’s services during the twelve (12) complete months ending on the date as of which Annual Compensation is to be determined, which are or would (but for an election by the Participant to defer compensation) be includable in the gross income of the Participant receiving the same for federal income tax purposes.

(b) “Bank” means Anchor Bank or any successor as provided for in Article VII hereof.

(c) “Change in Control” means (1) an offeror other than the Holding Company purchases shares of stock of the Holding Company or the Bank pursuant to a tender or exchange offer for such shares (2) an event of a nature that results in the acquisition of control of the Holding Company or the Bank within the meaning of the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841 (or any successor statute or regulation) or requires the filing of a notice with the Federal Deposit Insurance Corporation (“FDIC”) under 12 U.S.C. Section 1817(j) (or any successor statute or regulation); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (“Exchange Act”)) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Holding Company or the Bank representing 25% or more of the combined voting power of the Holding Company’s or the Bank’s outstanding securities; (4) individuals who are members of the board of directors of the Holding Company immediately following the Effective Date or who are members of the board of directors of the Bank immediately following the Effective Date (in each case, the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company’s or the Bank’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Holding Company or a similar transaction in which the Holding Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of the Bank or the Holding Company.

(d) “Continuous Employment” means the absence of any interruption or termination of service as an Employee of the Bank or an affiliate. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank or in the case

of transfers between payroll locations of the Bank or between the Bank, its Parent, its Subsidiary or its successor.

(e) “Effective Date,” as to Employees of an Employer, means the date the Plan is approved by the Board of Directors of the Bank, or such other date as the Board shall designate in its resolution approving the Plan.

(f) “Employee” means an individual employed by the Employer on a full-time basis, excluding any executive officer of the Employer who is covered by an employment contract or a change in control severance agreement with the Employer.

(g) “Employer” means the Bank or a Subsidiary or a Parent which has adopted the Plan pursuant to Article VI hereof.

(h) “Expiration Date” means the date fifteen (15) years from the Effective Date unless earlier terminated pursuant to Section 8.2 or extended pursuant to Section 8.1.

(i) “Holding Company” means Anchor Bancorp, the Parent of the Bank.

(j) “Just Cause,” with respect to termination of employment, means an act or acts of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. In determining incompetence, acts or omissions shall be measured against standards generally prevailing in the financial services industry.

(k) “Parent” means any corporation which holds a majority of the voting power of the outstanding shares of the Bank’s common stock.

(l) “Participant” means an Employee who meets the eligibility requirements of Article III.

(m) “Payment” means the payment of severance compensation as provided in Article IV hereof.

(n) “Plan” means the Anchor Bank Employee Severance Compensation Plan.

(o) “Subsidiary” means any corporation in which the Bank, directly or indirectly, holds a majority of the voting power of its outstanding shares of capital stock.

2.2 Applicable Law

To the extent not preempted by the laws of the United States as now or hereafter in effect, the laws of the State of Washington shall be the controlling law in all matters relating to the Plan.

The Plan neither requires nor establishes an ongoing administrative system for its effect or operation. Payments under the Plan are precipitated by a single event, a Change in Control, which event is the sole focus of the Plan. Consequently, it is intended that the Plan shall not be covered by or be subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

2.3 Severability

If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

ARTICLE III
ELIGIBILITY

3.1 Participation

Each Employee who has completed at least one (1) year of Continuous Employment as of the Effective Date shall become a Participant on the Effective Date. Thereafter, each Employee shall become a Participant on the day on which he or she completes one (1) year of Continuous Employment. Notwithstanding the foregoing, persons who have entered into and continue to be covered by an employment or change in control severance agreement with the Employer shall not be entitled to participate in the Plan.

3.2 Duration of Participation

A Participant shall cease to be a Participant in the Plan when the Participant ceases to be an Employee of the Employer unless such Participant is entitled to a Payment as provided in the Plan. Furthermore, an Employee shall cease to be a Participant upon entering into an employment or change in control severance agreement with the Employer. A Participant entitled to receipt of a Payment shall remain a Participant in this Plan until the full amount of such Payment has been paid to the Participant.

ARTICLE IV
PAYMENTS

4.1 Right to Payment

A Participant shall be entitled to receive from his or her respective Employer a Payment in the amount provided in Section 4.3 if there has been a Change in Control of the Bank or the Holding Company and if, within one (1) year thereafter, the Participant’s employment by an Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Payment if termination occurs by reason of death, voluntary retirement, voluntary termination other than for reasons specified in Section 4.2, total and permanent disability, or for Just Cause.

4.2 Reasons for Termination

Following a Change in Control, a Participant shall be entitled to a Payment if his or her employment with an Employer is terminated, voluntarily or involuntarily, within one (1) year following such Change in Control, for any one or more of the following reasons:

(a) The Employer reduces the Participant’s base salary or rate of compensation as in effect immediately prior to the Change in Control, or as the same may have been increased thereafter.

(b) The Employer requires the Participant to change the location of the Participant’s job or office, so that such Participant will be based at a location more than thirty-five (35) miles from the location of the Participant’s job or office immediately prior to the Change in Control, provided that such new location is not closer to Participant’s home.

(c) The Employer materially reduces the benefits and perquisites, taken as a whole, available to the Participant immediately prior to the Change in Control; provided, however, that a material reduction or change on a nondiscriminatory basis in the benefits and perquisites generally provided to all employees of the Bank that does not reduce a Participant’s taxable Annual Compensation shall not trigger a Payment.

(d) A successor bank or company fails or refuses to assume the Bank’s obligations under this Plan, as required by Article VII.

(e) The Bank or any successor company breaches any other provisions of the Plan.

(f) The Employer terminates the employment of a Participant at or after a Change in Control other than for Just Cause.

4.3 Amount of Payment

(a) Each Participant entitled to a Payment under this Plan shall receive from the Employer a lump sum cash payment equal to:


Participant’s Years of Continuous Employment		Amount of Monthly Compensation Payment to be Paid to the Participant


	0 to 1 year of service		0
	Over 1 year to 2 years		3 months
	Over 2 years to 3 years		6 months
	Over 3 years		6 months plus one month for each year of Continuous Employment over three years

For purposes of this Section 4.3(a): (i) the Participant’s years of service (including partial years rounded up to the nearest full month) are computed from the Employee’s date of hire through the date of termination and (ii) “Monthly Compensation” of a Participant means such Participant’s Annual Compensation (determined on the date of his or her termination of employment) divided by twelve (12).

Notwithstanding anything herein to the contrary, the following rules shall apply to the determination of any Payment due a Participant under this Plan: (i) a Participant entitled to a Payment under this Plan who was a vice president and above of the Bank immediately prior to the effective date of a Change in Control shall receive a minimum Payment equal to one (1) times the Participant’s Annual Compensation; (ii) a Participant entitled to a Payment under this Plan who was an assistant vice president immediately prior to the effective date of a Change in Control shall receive a minimum Payment equal to one-half (½) the Participant’s Annual Compensation; and (iii) the maximum Payment to any Participant under the Plan shall not exceed one and one-half (1-1/2) times the Participant’s Annual Compensation.

(b) Notwithstanding the provisions of (a) above, if a Payment to a Participant who is a “disqualified individual” shall be of an amount which includes an “excess parachute payment,” the payment hereunder to that Participant shall be reduced to the maximum amount which does not include an “excess parachute payment.” The terms “disqualified individual” and “excess parachute payment” shall have the same meaning as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successor section of similar import.

(c) The Participant shall not be required to mitigate damages on the amount of the Payment by seeking other employment or otherwise, nor shall the amount of such Payment be reduced by any compensation earned by the Participant as a result of employment after termination of employment with an Employer.

(d) Notwithstanding the foregoing, payments under Section 4.3(a):


		(1) shall be considered made under a “separation pay plan” (within the meaning of Section 409A of the Internal Revenue Code and the regulations thereunder (“Section 409A”) to the extent permitted by Section 409A. Any additional amounts due the Employee under Section 4.3(a) shall be considered deferred compensation for purposes of Section 409A, and subject to Section 4.3(d)(2) below.

		(2) that are considered to be deferred compensation under Section 409A shall not be paid earlier than six months after the Employee’s separation from service (as defined in Section 409A, taking into account all rules and presumptions under the Section 409A regulations), if the Employee is a “specified employee” (within the meaning of Section 409A). Payment(s) delayed on account of the preceding sentence shall be paid on the 185 ^th day following the Employee’s separation from service (as herein defined) or his or her death, if earlier.

The purpose of this Section 4.3(d) is to cause this Plan to comply with Section 409A, and these provisions (and the Plan) shall be administered and interpreted accordingly.

4.4 Time of Payment

The Payment to which a Participant is entitled shall be paid to the Participant by the Employer or the successor to the Employer, in cash and in full, not later than twenty-five (25) business days after the termination of the Participant’s employment. If any Participant should die after termination of employment but before all amounts have been paid, such unpaid amounts shall be paid to the Participant’s surviving spouse, or if none, to the Participant’s named beneficiary, if living, otherwise to the personal representative on behalf of or for the benefit of the Participant’s estate.

ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED

5.1 Other Benefits

Neither the provisions of the Plan nor the Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant’s rights as an Employee of the Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock ownership or any employment agreement or other plan or arrangement.

5.2 Employment Status

This Plan does not constitute a contract of employment or impose on the Participant or the Participant’s Employer any obligation to retain the Participant as an Employee, to change the status

of the Participant’s employment, or to change the Employer’s policies regarding termination of employment.

ARTICLE VI
PARTICIPATING EMPLOYERS

Upon approval by the Board of Directors of the Bank, this Plan may be adopted by any Subsidiary or Parent of the Bank. Upon such adoption, the Subsidiary or Parent shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary or Parent.

ARTICLE VII
SUCCESSOR TO THE BANK

The Bank shall require any successor to or assignee of, whether direct or indirect, by purchase, merger, consolidation or otherwise, all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank’s obligations under the Plan.

ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION

8.1 Duration

If a Change in Control has not occurred, the Plan shall expire fifteen (15) years from the Effective Date, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of Directors of the Bank.

Notwithstanding the foregoing, if a Change in Control occurs, the Plan shall continue in full force and effect, and shall not terminate or expire until such date as all Participants who become entitled to Payments hereunder shall have received such Payments in full.

8.2 Amendment and Termination

The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board of Directors of the Bank, unless (i) a Change in Control has previously occurred, (ii) the Bank shall have in the previous year received a bona fide written offer, which was not subsequently withdrawn, from a third party to engage in a transaction which would involve a Change in Control or (iii) a third party shall have disclosed in a filing with the Securities and Exchange Commission (“SEC”) its intent to engage in a transaction which would result in a Change in Control and has not subsequently indicated in another SEC filing that it no longer had such intention. For so long as any of the events listed in paragraphs (i), (ii) and (iii) persist, the Plan shall not be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever

unless any acquiror of the Bank shall agree in writing to provide benefits to covered employees which are at least as substantial as those set forth herein if such employees are terminated without cause within one year of a Change in Control of the Bank.

8.3 Form of Amendment

The form of any proper amendment or termination of the Plan shall be a written instrument signed by the duly authorized officer or officers of the Bank, certifying that the amendment or termination has been approved by the Board of Directors. A proper amendment of the Plan automatically shall effect a corresponding amendment to all Participant’s rights hereunder, regardless of whether the Participants receive notice of such action. A proper termination of the Plan automatically shall effect a termination of all Participants’ rights and benefits hereunder, regardless of whether the Participants receive notice of such action.

ARTICLE IX
LEGAL FEES AND EXPENSES

9.1 Subject to the notice provision in Section 9.2 hereof, the Bank shall pay all reasonable legal fees, costs of litigation, and other expenses incurred by each Participant as a result of the Bank’s refusal to make the Payment to which the Participant becomes entitled under this Plan as a result of a final determination by a court or pursuant to arbitration, or as a result of the Bank’s unsuccessfully contesting the validity, enforceability or interpretation of the Plan.

9.2 A Participant must provide the Bank with thirty (30) days notice of a complaint of entitlement under the Plan, and provide adequate documentation of the requested reimbursements, before the Bank shall be liable for the payment of any legal fees, costs of litigation or other expenses referred to in Section 9.1 hereof.

ARTICLE X
ARBITRATION

10.1 Any dispute or controversy arising under or in connection with the Plan shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of the Bank, in accordance with rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction.

*******

Having been adopted by its Board of Directors on _______ __, 2008, the Plan is executed by its duly authorized officers as of the ______ day of _______________, 2008.


Attest	ANCHOR BANCORP

	By

Cheryl L. Dill		Jerald L. Shaw
Secretary		President and Chief Executive Officer

Having been adopted by its Board of Directors on ____________ __, 2008, the Plan is executed by its duly authorized officers this _______ day of __________________, 2008.

Attest	ANCHOR BANK

	By

Cheryl L. Dill		Jerald L. Shaw
Secretary		President and Chief Executive Officer

Exhibit 10.4

ANCHOR MUTUAL SAVINGS BANK
PHANTOM STOCK PLAN

Originally Effective July 1, 2002
Amended and Restated Effective January 1, 2005
Including Amendments Through June 30, 2006

1. Purpose of Plan . The Anchor Mutual Savings Bank Phantom Stock Plan (the “Plan”) is intended to provide incentives to Participants to perform their duties in a manner that enhances the value of the Bank. This in turn will provide Participants with the opportunity to earn significant benefits commensurate with such performance and value creation. While the Participants are employed (or provide services, in the case of the Bank’s trustees), the value of their Phantom Stock will adjust to reflect changes in the Bank’s value. After separation from service, there will not be an adjustment in the value of a Participant’s Phantom Stock. Under the retirement portion of the Plan, when the Participant attains his Retirement Age, the value of his Phantom Stock will be the basis for an annual Plan benefit paid over a specified number of years. Under the option portion of the Plan, after a specified period of time, the Participant will be entitled to a distribution of that option benefit. The option benefit may be kept in the Plan for future distribution.

The Plan is amended and restated effective January 1, 2005, except where otherwise provided herein or required by applicable law. The Plan also is intended to comply with the applicable requirements of Section 409A of the Code, and shall be administered and interpreted accordingly.

The rights of any person who terminates employment on or before any amendment to this Plan shall be determined solely under the terms of the Plan in effect as of the date of his termination of employment, unless such person again becomes a Participant hereunder, or unless otherwise required by Section 409A of the Code or other applicable law.

2. Definitions . The following definitions are applicable to the Plan:

Affiliate shall mean an entity required to be treated as a single employer with the Bank pursuant to Section 414(b) or 414(c) of the Code.

Agreement shall mean the written agreement entered into between the Bank, on the one hand, and a Participant, on the other hand, with respect to the grant of an Award or an entitlement to receive an Award. A separate Agreement may be entered into with respect to each Award or an Agreement may be entered into with respect to multiple Awards (including current grants and grants to be earned in the future).

Award shall mean the grant of Phantom Stock to a Participant. An Award may be either a Phantom Stock Retirement Award, a Phantom Stock Option Award or both.

Bank shall mean Anchor Mutual Savings Bank, and any successor to all or substantially all of the Bank’s assets or business.

Beneficiary shall mean one or more persons, estates or other entities, designated in accordance with Paragraph 19 that are entitled to receive benefits under this Plan upon the death of a Participant.

Board shall mean the board of trustees of the Bank.

Change in Control shall mean the occurrence of any one of the following events:


(a)	When the Bank is in the “mutual” form of organization, a “Change in Control” shall be deemed to have occurred if:

	(i)	as a result of, or in connection with, any merger or other business combination, sale of assets, or any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee Trustees before such transaction cease to constitute a majority of the Board or the board of directors of any successor to the Bank; or

	(ii)	the Bank transfers substantially all of its assets to another Bank or entity which is not an affiliate or a wholly-owned subsidiary of the Bank.

(b)	A “Change in Control” shall be deemed to have occurred if:

	(i)	the Bank reorganizes into a mutual holding company structure and the mutual holding company issues shares to the general public, or the Bank converts from the mutual to the stock form of organization and the stock organization issues shares to the general public;

	(ii)	as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were trustees before such transaction cease to constitute a majority of the Board or the board of directors of any successor to the Bank;

	(iii)	the Bank transfers substantially all of its assets to another bank which is not a wholly-owned subsidiary of the Bank;

	(iv)	any “person” including a “group” is or becomes the “beneficial owner,” directly or indirectly, of securities of the Bank representing ten percent (10%) or more of the combined voting power of the Bank’s outstanding securities (with the terms in quotation marks having the meaning set forth under the federal securities laws); or


	(v)	the Bank is merged or consolidated with another bank and, as a result of the merger or consolidation, less than fifty-one percent (51%) of the outstanding voting securities of the surviving or resulting bank is owned in the aggregate by the former stockholders of the Bank.

The term “Change in Control” does not include an acquisition of securities by an employee benefit plan of the Bank or an acquisition of securities of the Bank in consideration for a contribution of capital to the Bank.

Effective January 1, 2005, no event shall be considered a Change in Control unless there occurs a “change in the ownership of the Bank”, a “change in the effective control of the Bank”, or a “change in the ownership of a substantial portion of the Bank’s assets”, all within the meaning of Section 409A. The preceding sentence shall be applied using the least restrictive interpretation of each applicable Change in Control event under Section 409A.

Code shall mean the Internal Revenue Code of 1986, as amended.

Committee shall mean the Board or such Committee as the Board shall appoint to administer the Plan.

Continuous Service shall mean the absence of any interruption or termination of service as an Executive. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank. The determination of the length of a Participant’s Continuous Service shall be determined by the Committee in its sole discretion and shall be binding on all persons.

Disability shall mean a disability for which a Participant qualifies for permanent disability benefits under the Participant’s long-term disability plan sponsored by the Bank, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for permanent disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. Effective January 1, 2005, the term “Disability” shall mean the Participant is unable to engage in any substantial activity by reason of any physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months. The determination of whether a Participant is Disabled shall be determined by the Committee in its sole discretion, but subject to Section 409A.

Executive shall mean a person who is designated as a Senior Management Employee by the Board.

Fifth Anniversary shall mean, with respect to any grant of a Phantom Stock Option Award, the fifth anniversary of the Grant Date of that Award.

Grant Date shall mean the date on which an Award is granted to the Participant by the Committee.

Monthly Benefit shall be the monthly amount payable over the number of months required by the appropriate provision of this Plan. A Participant’s Monthly Benefit shall be determined by the Committee in its sole discretion.

Net Worth shall mean the consolidated net worth of the Bank and its subsidiaries as stated in its audited financial statements. Unaudited financial statements may be used to determine Net Worth if determined to be necessary or appropriate by the Committee. Net Worth shall be determined by excluding any extraordinary or nonrecurring items as the Committee determines to be appropriate.

Net Worth Appreciation or Depreciation shall mean the increase or decrease in Net Worth.

Participant shall mean an Executive or a Trustee who is selected by the Committee to participate in the Plan and with whom the Bank enters into an Agreement.

Phantom Stock shall mean the hypothetical shares or other measurement units awarded under the Plan that form the basis of determining the Participant’s Phantom Stock Benefit.

Phantom Stock Account shall mean the account(s) established and maintained for the Participant pursuant to Section 7 hereof.

Phantom Stock Benefit shall mean at any time the excess of the hypothetical value of a Participant’s Phantom Stock Account as of the most recent Valuation Date over the hypothetical value of his Phantom Stock Account as of the Grant Date. The Phantom Stock Benefit may be determined separately with respect to each separate Award that is granted under the Plan.

Phantom Stock Retirement Award shall mean an Award that provides the Phantom Stock Benefit described in Section 12.

Phantom Stock Option Award shall mean an Award that provides the Phantom Stock Benefit described in Section 13.

Plan shall mean this Anchor Mutual Savings Bank Phantom Stock Plan, as in effect from time to time.

Retirement Age shall mean with respect to each Participant the age set forth in the Participant’s Agreement.

Section 409A shall mean Section 409A of the Code and any regulations or other guidance of general applicability issued thereunder.

Termination for Cause shall mean a Separation From Service on account of “cause”, as that term (or a similar term) is defined in the Participant’s employment contract with the Bank. If no such employment contract is in effect, or the Participant is a Trustee, “cause” shall mean (1) gross negligence in the performance of duties or gross neglect of duties; (2) commission of a misdemeanor involving moral turpitude or a felony; (3) fraud, disloyalty or willful violation of any law or significant policy of the Bank committed in connection with the Participant’s employment and resulting in an adverse effect on the Bank; or (4) while in the employment of the Bank, accepting additional employment with or providing services to or becoming a director or trustee of a competing entity.

Separation From Service shall mean, in the case of an Executive, the severing of employment with the Bank or an Affiliate, voluntarily or involuntarily, for any reason other than a Termination for Cause. In the case of a Trustee, the term “Separation From Service” shall mean the ceasing of providing services to the Board, voluntarily or involuntarily, for any reason. Whether a Separation of Service takes place is determined based on the facts and circumstances surrounding the termination of the Participant’s employment or service and whether the Bank and the Participant intended for the Participant to provide significant services for the Bank or an Affiliate following such termination. A Separation From Service will not be considered to have occurred if:


	(a) the Participant continues to provide services as an employee of the Bank at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or

	(b) the Participant continues to provide services to the Bank in a capacity other than as an employee of the Bank at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period).

Notwithstanding anything herein to the contrary, no Participant shall be considered to have experienced a Termination of Service unless his termination of employment or service with the Bank would constitute a “separation from service” within the meaning of Section 409A.

Trustee shall mean a person serving in the capacity of a member of the Board after the effective date of the Plan. The person may be either an “Inside Trustee” or an “Outside Trustee”, as determined by the Committee in its sole discretion.

Valuation Date shall mean each March 31, and the last day of the calendar month immediately preceding a Change in Control.

Vested Interest shall mean the portion of the Participant’s Phantom Stock Benefit in each Award that is vested at any time.

Year of Service shall mean a 12-month period of Continuous Service with the Bank or an affiliated entity. For purposes of determining a Participant’s Vested Interest in a Phantom Stock Award, only Continuous Service after the Grant Date of that Award shall be taken into account. For all other purposes under the Plan, all Continuous Service shall be taken into account. If a Participant has a period of Continuous Service that is less than twelve months (a “Partial Year Period”), then a full Year of Service shall be credited for that Partial Year Period if such Partial Year Period exceeds six months. Also, solely for purposes of determining a Participant’s share of an Award granted under Section 6, a Participant that simultaneously performs Continuous Service as both an Executive and a Trustee shall be credited with double Continuous Service for the period of time that such simultaneous service as an Executive and a Trustee is performed (with Partial Year Periods being determined separately with respect to employment while an Executive and service performed as a Trustee). For example, if a Participant performs simultaneous service as both an Executive and a Trustee for 10 years and 8 months, then that Participant shall be credited with respect to that period with twenty-two Years of Service (ten complete years, plus one Partial Year Period of more than six months, totaling eleven Years of Service, times two). For purposes of determining an Outside Trustee’s Vested Interest in Awards granted to him with respect to his status as an Outside Trustee, the Outside Trustee shall be credited with his Years of Service as an Inside Trustee.

3. Administration . The Plan shall be administered by the Committee. The members of the Committee shall be appointed, removed and/or substituted from time to time by the Board. Except as limited by the express provisions of the Plan, the Committee shall have sole and complete authority and discretion to (a) select Participants; (b) determine the individual Awards granted under the Plan; (c) determine the terms and conditions upon which Awards shall be granted under the Plan; (d) prescribe the form and terms of the Agreements; (e) determine the hypothetical value of Phantom Stock units, Phantom Stock Accounts and of Phantom Stock Benefits; (f) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of the Plan, and (g) decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be acts of the Committee. Members of the Committee may participate under the Plan. Any individual serving on the Committee who is a Participant in the Plan shall not vote or act on any matter relating solely to himself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by the Bank, a Participant, the Board, or a professional advisor to the Bank or the Board. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

In the administration of the Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with legal counsel who may be legal counsel to the Bank. The Plan shall be administered and interpreted in accordance with Section 409A.

4. Aggregate Shares of Phantom Stock . The maximum number of Phantom Stock units that may be awarded under the Plan shall not exceed four hundred and fifty thousand (450,000). If any Phantom Stock awarded under the Plan shall be forfeited or canceled, such Phantom Stock may again be awarded under the Plan. Phantom Stock shall be granted at such times and shall be subject to such terms and conditions as set forth in the Agreements.

5. Participation . The Committee may select Executives and Trustees from time to time to become Participants in the Plan. As a condition of participation, the Participant shall enter into an Agreement with the Bank relating to the grant of an Award to the Participant or the Participant’s entitlement to earn Awards under the Plan, which Agreement shall comply with Section 409A, if applicable. Executives and Trustees approved for participation will be notified of their selection as soon after approval as practicable.

6. Phantom Stock Awards .


	(a)	The number of Phantom Stock units to be awarded to a Participant and the hypothetical unit value of such Phantom Stock units shall be determined by the Committee as of the applicable Grant Date, and shall be set forth in the Participant’s Agreement. More than one Award or type of Award may be made to a Participant. Phantom Stock, when granted, shall evidence the right of a Participant to receive the Phantom Stock Benefit, subject to the terms and conditions of the Plan and the Participant’s Agreement.

	(b)	Unless the Committee determines to allocate Awards in a different manner, Awards shall be granted as provided for in Sections 6(b) through 6(f): Eighty-six percent (86%) of any grant of Phantom Stock Awards shall be made on behalf of Executives (referred to in this Section 6 as “Executive Awards”). Seventy-five percent (75%) of such Executive Awards shall be Phantom Stock Retirement Awards, to be allocated as provided for in Section 6(d). The other twenty-five percent (25%) of such Executive Awards shall be Phantom Stock Option Awards, to be allocated as provided for in Section 6(e). The remaining fourteen percent (14%) of any grant of Phantom Stock Awards shall be made on behalf of Trustees (referred to in this Section 6 as “Trustee Awards”), to be allocated as provided for in Section 6(f). This allocation shall not apply to Phantom Stock Retirement Awards granted pursuant to Section 6(c).

	(c)	In the event an Executive attains his Retirement Age and is or thereafter becomes a Trustee, an additional Phantom Stock Retirement Award may be granted to that


		Executive. The aggregate value of this additional Phantom Stock Retirement Award shall be determined by the Committee. If more than one Executive is eligible for an Award under this Section 6(c), then the aggregate Award shall be divided equally among the number of Executives entitled to share in this Award, unless the Committee determines that the Award shall be determined in a different manner.

	(d)	A grant of Phantom Stock Retirement Awards to selected Executives pursuant to Section 6(b) shall be allocated among those Executives by multiplying the aggregate number of the Phantom Stock Retirement Awards granted to those Executives by each Executive’s most recent normal bonus percentage (disregarding for this purpose any Executive who receives a bonus but is not being awarded a portion of such Phantom Stock Retirement Award).

	(e)	Each Phantom Stock Option Award granted to selected Employees pursuant to Section 6(b) shall be allocated among those Employees in such manner as determined by the Committee, taking into account such performance criteria the Committee considers appropriate, which may vary from year to year and from Executive to Executive.

	(f)	Unless the Committee determines to allocate Trustee Awards in a different manner, Trustee Awards shall be allocated as follows: A grant of Phantom Stock Retirement Awards to selected Trustees shall be allocated among those Trustees as follows: (1) One-half of such Phantom Stock Retirement Awards shall be allocated among the selected Trustees on a per capita basis. (2) The remaining one-half of such Phantom Stock Retirement Awards shall be allocated among the selected Trustees proportionately based on each of the Trustee’s full years of Continuous Service (as of the Grant Date), compared to the total full years of Continuous Service (as of the Grant Date) for all Trustees who have then been selected to receive an Award.

	(g)	Effective January 1, 2006, Phantom Stock awarded to Trustees shall be at a price at least equal to the value of the Phantom Stock on the date of the Award.

	(h)	All Awards granted under this Plan shall be made in compliance with Section 409A.

7. Phantom Stock Accounts . Phantom Stock granted to a Participant shall be credited to a Phantom Stock Account established and maintained for the Participant. The Phantom Stock Account shall be the record of Phantom Stock granted to a Participant for accounting purposes only, and shall not constitute a segregation of assets of the Bank. The Phantom Stock Account of a Participant shall be valued by the Committee, in the manner provided for herein, as of the Grant Date and on each Valuation Date thereafter to reflect changes in the hypothetical value of the Phantom Stock Account, additional Awards, and subsequent distributions to the Participant. Separate Phantom Stock Accounts shall be established for each Participant’s Phantom Stock Retirement Awards and

Phantom Stock Option Awards, and as otherwise determined by the Committee to be necessary or appropriate.

8. Adjustments in Phantom Stock Accounts . As soon as practicable after each Valuation Date, the Committee shall review the independently audited consolidated financial statements of the Bank and its Affiliates for such year (or the unaudited consolidated balance sheet of the Bank and its affiliates as of the last day of the calendar month next preceding a Change in Control) to determine the Net Worth Appreciation or Depreciation since the last Valuation Date. A Participant’s Phantom Stock Account then shall be adjusted by multiplying the hypothetical value of the Participant’s Phantom Stock Account since the last Valuation Date by a factor equal to one (1) plus or minus the percentage Net Worth Appreciation or Depreciation since the last Valuation Date. Notwithstanding the foregoing, except in the case of a Change in Control, the hypothetical value of a Participant’s Phantom Stock Account as of the Valuation Date coincident with or next preceding the Participant’s Retirement Age shall be no less than ninety percent (90%), nor more than one hundred and twenty percent (120%), of the hypothetical value of the Participant’s Phantom Stock Account as of the immediately preceding Valuation Date. Effective for Plan Years commencing on or after January 1, 2003, except in the case of a Change in Control, a Participant’s Phantom Stock Account as of any Valuation Date shall be valued at no less than ninety percent (90%), nor more than one hundred and twenty-five percent (125%), of the Participant’s Phantom Stock Account as of the next preceding Valuation Date. No Net Worth Appreciation or Depreciation shall be credited or debited to a Participant’s Phantom Stock Account after his Separation From Service, or, after the last Valuation Date prior to a Change in Control if the Participant is employed immediately prior to such Change in Control.

9. Vested Interest in Phantom Stock Benefit; Forfeitures . A Participant’s Vested Interest in his Phantom Stock Benefit relating to an Award shall be determined by multiplying the Phantom Stock Benefit pertaining to such Award by the applicable percentage determined by reference to the Participant’s complete Years of Service relating thereto:


Complete Years of Service		Vested Interest

	1	20%
	2	40%
	3	60%
	4	80%
	5 or more	100%

Notwithstanding the foregoing, with respect to Awards granted prior to January 1, 2006, a Participant who is a Trustee shall always have a one hundred percent (100%) Vested Interest in his Phantom Stock Benefit. Effective January 1, 2006, Awards granted to a Participant who is a Trustee shall be subject to the vesting schedule set out above, unless otherwise provided herein.

In addition, a Participant shall have a one hundred percent (100%) Vested Interest in his Phantom Stock Benefit attributable to all Awards under the following circumstances:


	(1)	the Participant’s Agreement provides for full vesting in his Phantom Stock Benefit;

	(2)	in the case of an Executive, the Participant’s Separation From Service occurs on or after his attainment of age 65;

	(3)	in the case of an Executive, the Participant dies or experiences a Disability prior to his Separation From Service,

	(4)	there is a Change in Control prior to or simultaneously with the Participant’s Separation From Service; or

	(5)	there occurs such other circumstances as described in the Participant’s Agreement that would give rise to full vesting.

In the event a Participant experiences a Separation From Service for any reason, except as otherwise provided herein, the unvested portion of a Participant’s Phantom Stock Benefit and the associated Phantom Stock shall be forfeited.

10. Forfeiture Upon Termination for Cause . If a Participant’s service as an Executive is Terminated for Cause prior to a Change in Control, his Phantom Stock Benefit and associated Phantom Stock shall be forfeited. If the Participant or his Beneficiary has received any Phantom Stock Benefits and it is subsequently determined that the Participant was Terminated for Cause prior to a Change in Control, then the amount of Phantom Stock Benefits previously paid shall be returned by the Participant or his Beneficiary to the Bank, and no further Phantom Stock Benefits shall be payable to the Participant or his Beneficiary.

11. Regulatory Restrictions . The obligations of the Bank to a Participant under the Plan are subject to the following restrictions:


	(a)	Temporary Suspension or Prohibition. If the Participant is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (“FDIA”), 12 U.S.C. §1818(e)(3) and (g)(1), the Bank’s obligations to such Participant under the Plan shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion reinstate in whole or in part any of its obligations which were suspended.

	(b)	Permanent Suspension or Prohibition . If the Participant is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. § 1818(e)(4) and (g)(1), all obligations of the Bank to such Participant under the Plan shall terminate


		as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

	(c)	Default . If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations of the Bank to Participants and their Beneficiaries under the Plan shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties.

	(d)	Termination by Regulators . All obligations of the Bank to Participants and their Beneficiaries under the Plan shall be terminated, except to the extent determined that continuation of the Plan is necessary for the continued operation of the Bank: (i) at the time the Federal Deposit Insurance Corporation (“FDIC”) enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (ii) by the FDIC at the time it approves a supervisory merger to resolve problems related to operation of the Bank. Any rights of the parties that have already vested, however, shall not be affected by any such action.

	(e)	Other Regulatory Restrictions on Payment . Notwithstanding anything herein to the contrary, (1) any payments made by the Bank under the Plan shall be subject to and conditioned upon compliance with 12 U.S.C. § 1828(k) and any regulations promulgated thereunder and (2) payments contemplated to be made by the Bank under the Plan shall not be immediately payable to the extent such payments barred or prohibited by an action or order issued by the Director of Banks of the Washington Department of Financial Institutions, or the FDIC.

	(f)	Section 409A Payment Date . Any benefit payment delayed in accordance with this Section 11 shall be paid at the earliest date at which the Bank reasonably anticipates that such payment would be permissible.

	12.	Phantom Stock Benefits Attributable to Phantom Stock Retirement Awards .

	(a)	Except as provided in Section 12(b), the Participant shall be entitled to receive his Monthly Benefit commencing on the June 30 ^th or December 31 ^st coincident with or next following the Participant’s Retirement Age. The Monthly Benefit shall be paid over the number of months set forth in the Participant’s Agreement. The Monthly Benefit shall be determined by reference to the Vested Interest in his Phantom Stock Benefit attributable to his Phantom Stock Retirement Awards, and the period of time over which the Phantom Stock Benefit is to be paid.

	(b)	The Monthly Benefit payable with respect to Phantom Stock Retirements Awards granted pursuant to Section 6(c), shall commence on the June 30 ^th or December 31 ^st coinciding with or next following the tenth anniversary of his Retirement Age (for


		Trustees who came onto the Board prior to September 1, 1990: for other Trustees it will be their fifth anniversary). The Monthly Benefits shall continue for one hundred and twenty (120) months. The Monthly Benefit shall be based on the Phantom Stock Benefit attributable to his Phantom Stock Retirement Awards granted pursuant to Section 6(c).

	(c)	If the Participant dies prior to the commencement of the Monthly Benefits due him under his Agreement, no benefit shall be paid under this Section 12. In lieu thereof, the Participant’s Beneficiary shall receive a lump sum death benefit from a life insurance contract maintained by the Bank on the Participant’s behalf, equal to the present value of the Monthly Benefit Payments that would have been payable to the Participant had he terminated employment with the Bank on the day preceding the date of his death, had a 100 percent Vested Interest in his Monthly Benefit, and such Monthly Benefit commenced at the Participant’s Retirement Age. If the Participant dies after his Monthly Benefits have commenced but prior to payment of all monthly payments due him under his Agreement, no further benefit shall be paid under this Section 12. In lieu thereof, the Participant’s Beneficiary shall receive a lump sum death benefit from a life insurance contract maintained by the Bank on the Participant’s behalf, equal to the present value of the remaining Monthly Benefit payments that would have been paid to the Participant had he lived. Present values under this Section 12(c) shall be determined using an interest rate factor of 6 percent per annum, and such other equivalency factors as the Committee determines appropriate. Life insurance contract payments under this Section 12(c) shall be paid as soon as practicable after the Participant’s death.

	(d)	A Participant will not be credited with earnings on the value of his Phantom Stock Benefit attributable to his Phantom Stock Retirement Award after the earlier of his Separation From Service or his Retirement Age.

	13.	Phantom Stock Benefits Attributable to Phantom Stock Option Awards .

	(a)	Except as provided in Section 13(b), with respect to each Phantom Stock Option Award, if before the Fifth Anniversary the Participant either has not experienced a Separation From Service, dies, becomes Disabled while providing services to the Bank, or attains his Retirement Age, then on the Fifth Anniversary the Participant shall receive in full settlement of that Phantom Stock Option Award a cash lump sum equal to the value of his Phantom Stock Benefit attributable to that Phantom Stock Option Award.

	(b)	If the Participant elects in his Agreement to defer the receipt of the Phantom Stock Benefit attributable to that Phantom Stock Option Award until his Retirement Age, then (1) after the Fifth Anniversary the value of such Phantom Stock Benefit shall no longer be adjusted in accordance with Section 8, (2) such Phantom Stock Benefit


		shall be credited, as of each succeeding Valuation Date until the earlier of the date the Participant attains his Retirement Age or dies, with an interest factor, and (3) the Phantom Stock Benefit shall be paid to him in a cash lump sum on his Retirement Age. If the Participant dies prior to receiving the payment due him under this Section 13, then no further benefit shall be paid under this Section 13. In lieu thereof, the Participant’s Beneficiary shall receive a lump sum death benefit from a life insurance contract maintained by the Bank on the Participant’s behalf, equal to the value of his unpaid Phantom Stock Benefits attributable to the Participant’s Phantom Stock Option Award(s), determined on the date of the Participant’s death.

	(c)	Except as provided for herein, if the Participant experiences a Separation From Service prior to the Fifth Anniversary of the date of his Phantom Stock Option Award, then no benefits shall be paid with respect to that Award.

	(d)	Regardless of when benefits commence under this Section 13, the Phantom Stock units that formed the basis of a Participant’s Phantom Stock Option Award shall be considered canceled (and again made available for subsequent Awards) on the earlier of the Participant’s Separation From Service or the Fifth Anniversary.

14. Effect of Change in Control . In the event of a Change in Control, (i) each Participant employed by the Bank immediately preceding the date of such Change in Control shall have a one hundred percent (100%) Vested Interest in his Phantom Stock Benefit, and (ii) no later than 60 days following the date of such Change in Control, each such Participant shall receive a cash lump sum equal to the value of his entire Phantom Stock Benefit.

15. Assignments and Transfers . No right or interest of any Participant in the Plan will be assignable or transferable or subject to any lien or encumbrance, whether directly or indirectly, by operation of law or otherwise, including, without limitation, execution, levy, garnishment, attachment, pledge, or bankruptcy except, in the event of the death of a Participant, to his Beneficiary.

16. Rights Under the Plan . No Executive or Trustee shall have a right to be selected as a Participant, and no Executive, Trustee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Bank. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ of the Bank.

17. Withholding Tax . The Bank shall have the right to deduct from all amounts paid under the Plan any taxes required by law to be withheld with respect to such payments.

18. Amendment or Termination . The Bank shall have the right to modify, amend or terminate the Plan by action of the Board. However, no modification, amendment or termination shall adversely affect the then Vested Interest of any Participant in Phantom Stock units previously

granted and the corresponding Phantom Stock Benefit relating thereto, unless the Participant agrees in writing. No amendment shall be effective which causes the Plan to violate Section 409A.

The ability of the Bank to terminate this Plan, and the timing and manner of distributing benefits in connection with the Plan termination, shall in all respects comply with Section 409A. Accordingly, unless Section 409A permits otherwise, the Plan may be terminated only if: (a) all arrangements sponsored by the Bank that are required to be aggregated with this Plan under Section 409A are terminated; (b) no payments other than payments that would be payable under the terms of the Plan or an aggregated plan if the termination had not occurred are made within 12 months of the termination of the arrangements; (c) all payments are made within 24 months of the termination of the Plan and related arrangements; and (d) the Bank does not adopt a new arrangement that would be required to be aggregated with this Plan under Section 409A if the same Participant participated in both arrangements, within five years of the termination of the Plan.

19. Beneficiary . Each Participant shall have the right, at any time, to designate Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the beneficiary designated under any other plan of the Bank in which the Participant participates. A Participant shall designate his Beneficiary by completing and signing a beneficiary designation form and returning it to the Committee. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the beneficiary designation form and the Committee’s rules and procedures, as in effect from time to time. Upon the acceptance by the Committee of a new beneficiary designation form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last beneficiary designation form filed by the Participant and accepted by the Committee prior to his death. In the event of the death of a Participant without a designated Beneficiary, any benefits remaining to be paid under the Plan to such Participant shall be paid to the Participant’s estate in the same manner as such payments would have been paid to the Participant.

20. No Funding. Nothing contained in the Plan and no action taken hereunder will create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and any Participant or any other person. Amounts due under the Plan at any time and from time to time will be paid from the general funds of the Bank. To the extent that any person acquires a right to receive payments hereunder, such right shall be that of an unsecured general creditor of the Bank.

21. Indemnification of Committee. No member of the Committee shall be liable for any act, omission, or determination taken or made in good faith with respect to the Plan or any Awards made hereunder; and the members of the Committee shall be entitled to indemnification and reimbursement by the Bank in respect of any claim, loss, damage, or expenses (including counsel fees) arising therefrom to the full extent permitted by law or regulation, and under any directors’ and officers’ liability or similar insurance coverage that may be in effect from time to time.

22. Binding Effect . The Plan shall inure to the benefit of the Participants hereunder and their respective estates and legal representatives, and it shall be binding on the successors of the Bank.

23. Expenses of the Plan . The expenses of administering the Plan will be borne by the Bank.

24. Governing Law . The Plan will be construed in accordance with and governed by the laws of the State of Washington, except to the extent that such laws are preempted by Federal law.

25. Terms . Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

The Bank has signed the Plan as of _________, __, 2006, but effective for all purposes as of January 1, 2005.


	ANCHOR MUTUAL SAVINGS BANK


	By:


	Title:

Exhibit 10.5

CERIDIAN RETIREMENT PLAN SERVICES
DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST

SPONSORED BY

CERIDIAN RETIREMENT PLAN SERVICES

BASIC PLAN DOCUMENT #01

December, 2001

TABLE OF CONTENTS


ARTICLE 1 PLAN ELIGIBILITY AND PARTICIPATION

1.1	Eligibility for Plan Participation		1
1.2	Excluded Employees		1
	(a)	Independent contractors	1
	(b)	Leased Employees	1
1.3	Employees of Related Employers		2
	(a)	Nonstandardized Agreement	2
	(b)	Standardized Agreement	2
1.4	Minimum Age and Service Conditions		2
	(a)	Maximum permissible age and service conditions	2
	(b)	Year of Service	2
	(c)	Eligibility Computation Periods	2
	(d)	Application of eligibility rules	3
	(e)	Amendment of age and service requirements	3
1.5	Entry Dates		3
	(a)	Entry Date requirements	3
	(b)	Single annual Entry Date	3
1.6	Eligibility Break in Service Rules		4
	(a)	Rule of Parity Break in Service	4
	(b)	One-year Break in Service rule for Plans using a two Years of Service eligibility condition	4
	(c)	One-year holdout Break in Service rule	4
1.7	Eligibility upon Reemployment		5
1.8	Operating Rules for Employees Excluded by Class		5
	(a)	Eligible Participant becomes part of an excluded class of Employees	5
	(b)	Excluded Employee becomes part of an eligible class of Employee	5
1.9	Relationship to Accrual of Benefits		5
1.10	Waiver of Participation		5

ARTICLE 2 EMPLOYER CONTRIBUTIONS AND ALLOCATIONS

2.1	Amount of Employer Contributions		6
	(a)	Limitation on Employer Contributions	6
	(b)	Limitation on Included Compensation	6
	(c)	Contribution of property	6
	(d)	Frozen Plan	6
2.2	Profit Sharing Plan Contribution and Allocations		6
	(a)	Amount of Employer Contribution	6
	(b)	Allocation formula for Employer Contributions	7
	(c)	Special rules for determining Included Compensation	9
2.3	401(k) Plan Contributions and Allocations		10
	(a)	Section 401(k) Deferrals	10
	(b)	Employer Matching Contributions	11
	(c)	Qualified Matching Contributions (QMACs)	11



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	(d)	Employer Nonelective Contributions	12
	(e)	Qualified Nonelective Contributions (QNECs)	12
	(f)	Safe Harbor Contributions	12
	(g)	Prior SIMPLE 401(k) plan	13
2.4	Money Purchase Plan Contribution and Allocations		13
	(a)	Employer Contributions	13
	(b)	Uniform percentage or uniform dollar amount	13
	(c)	Permitted Disparity Method	13
	(d)	Contribution based on service	14
	(e)	Davis-Bacon Contribution Formula	14
	(f)	Applicable period for determining Included Compensation	15
	(g)	Special rules for determining Included Compensation	15
	(h)	Limit on contribution where Employer maintains another plan in addition to a money purchase plan	15
2.5	Target Benefit Plan Contribution		15
	(a)	Stated Benefit	15
	(b)	Employer Contribution	16
	(c)	Benefit formula	16
	(d)	Definitions	21
2.6	Allocation Conditions		23
	(a)	Safe harbor allocation condition	24
	(b) Application of last day of employment rule for money purchase and target benefit Plans in year of termination		24
	(c)	Elapsed Time Method	24
	(d) Special allocation condition for Employer Matching Contributions under Nonstandardized 401(k) Agreement.		24
	(e)	Application to designated period	25
2.7	Fail-Safe Coverage Provision		26
	(a)	Top-Heavy Plans	27
	(b) Category 1 Employees - Otherwise Eligible Participants (who are Nonhighly Compensated Employees) who are still employed by the Employer on the last day of the Plan Year but who failed to satisfy the Plan’s Hours of Service condition		27
	(c) Category 2 Employees - Otherwise Eligible Participants (who are Nonhighly Compensated Employees) who terminated employment during the Plan Year with more than 500 Hours of Service		27
	(d)	Special Fail-Safe Coverage Provision	27
2.8	Deductible Employee Contributions		27

ARTICLE 3 EMPLOYEE AFTER-TAX CONTRIBUTIONS, ROLLOVER CONTRIBUTIONS AND TRANSFERS

3.1	Employee After-Tax Contributions		28
3.2	Rollover Contributions		28
3.3	Transfer of Assets		28
	(a)	Protection of Protected Benefits	29
	(b)	Transferee plan	29
	(c)	Transfers from a Defined Benefit Plan, money purchase plan or 401(k) plan	29
	(d)	Qualified Transfer	29
	(e)	Trustee’s right to refuse transfer	31



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ARTICLE 4 PARTICIPANT VESTING

4.1	In General		32
	(a)	Attainment of Normal Retirement Age	32
	(b)	Vesting upon death, becoming Disabled, or attainment of Early Retirement Age	32
	(c)	Addition of Employer Nonelective Contribution or Employer Matching Contribution	32
	(d)	Vesting upon merger, consolidation or transfer	32
4.2	Vesting Schedules		32
	(a)	Full and immediate vesting schedule	32
	(b)	7-year graded vesting schedule	33
	(c)	6-year graded vesting schedule	33
	(d)	5-year cliff vesting schedule	33
	(e)	3-year cliff vesting schedule	33
	(f)	Modified vesting schedule	33
4.3	Shift to/from Top-Heavy Vesting Schedule		33
4.4	Vesting Computation Period		33
	(a)	Anniversary Years	33
	(b)	Measurement on same Vesting Computation Period	33
4.5	Crediting Years of Service for Vesting Purposes		33
	(a)	Calculating Hours of Service	33
	(b)	Excluded service	34
4.6	Vesting Break in Service Rules		34
	(a)	One-year holdout Break in Service	34
	(b)	Five-Year Forfeiture Break in Service	34
	(c)	Rule of Parity Break in Service	34
4.7	Amendment of Vesting Schedule		35
4.8	Special Vesting Rule - In-Service Distribution When Account Balance Less than 100% Vested		35

ARTICLE 5 FORFEITURES

5.1	In General		36
5.2	Timing of forfeiture		36
	(a)	Cash-Out Distribution	36
	(b)	Five-Year Forfeiture Break in Service	36
	(c)	Lost Participant or Beneficiary	36
	(d)	Forfeiture of Employer Matching Contributions	36
5.3	Forfeiture Events		36
	(a)	Cash-Out Distribution	36
	(b)	Five-Year Forfeiture Break in Service	38
	(c)	Lost Participant or Beneficiary	39
	(d)	Forfeiture of Employer Matching Contributions	39
5.4	Timing of Forfeiture Allocation		39
5.5	Method of Allocating Forfeitures		39
	(a)	Reallocation of forfeitures	39
	(b)	Reduction of contributions	39
	(c)	Payment of Plan expenses	39



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ARTICLE 6 SPECIAL SERVICE CREDITING PROVISIONS

6.1	Year of Service - Eligibility		40
	(a)	Selection of Hours of Service	40
	(b)	Use of Equivalency Method	40
	(c)	Use of Elapsed Time Method	40
6.2	Eligibility Computation Period		40
6.3	Year of Service - Vesting		40
	(a)	Selection of Hours of Service	40
	(b)	Equivalency Method	40
	(c)	Elapsed Time Method	41
6.4	Vesting Computation Period		41
6.5	Definitions		41
	(a)	Equivalency Method	41
	(b)	Elapsed Time Method	41
6.6	Switching Crediting Methods		41
	(a)	Shift from crediting Hours of Service to Elapsed Time Method	41
	(b)	Shift from Elapsed Time Method to an Hours of Service method	42
6.7	Service with Predecessor Employers		42

ARTICLE 7 LIMITATION ON PARTICIPANT ALLOCATIONS

7.1	Annual Additions Limitation - No Other Plan Participation		43
	(a)	Annual Additions Limitation	43
	(b)	Using estimated Total Compensation	43
	(c)	Disposition of Excess Amount	43
7.2	Annual Additions Limitation - Participation in Another Plan		44
	(a)	In general	44
	(b)	This Plan’s Annual Addition Limitation	44
	(c)	Annual Additions reduction	44
	(d)	No Annual Additions permitted	44
	(e)	Using estimated Total Compensation	44
	(f)	Excess Amounts	45
	(g)	Disposition of Excess Amounts	45
7.3	Modification of Correction Procedures		45
7.4	Definitions Relating to the Annual Additions Limitation		45
	(a)	Annual Additions	45
	(b)	Defined Contribution Dollar Limitation	46
	(c)	Employer	46
	(d)	Excess Amount	46
	(e)	Limitation Year	46
	(f)	Maximum Permissible Amount	46
	(g)	Total Compensation	46
7.5	Participation in a Defined Benefit Plan		47
	(a)	Repeal of rule	47



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	(b)	Special definitions relating to Section 7.5	47

ARTICLE 8 PLAN DISTRIBUTIONS

8.1	Distribution Options		49
8.2	Amount Eligible for Distribution		49
8.3	Distributions After Termination of Employment		49
	(a)	Account Balance exceeding $5,000	49
	(b)	Account Balance not exceeding $5,000	50
	(c)	Permissible distribution events under a 401(k) plan	50
	(d)	Disabled Participant	50
	(e)	Determining whether vested Account Balance exceeds $5,000	50
	(f)	Effective date of $5,000 vested Account Balance rule	51
8.4	Distribution upon the Death of the Participant		51
	(a)	Post-retirement death benefit	51
	(b)	Pre-retirement death benefit	51
	(c)	Determining a Participant’s Beneficiary	52
8.5	Distributions Prior to Termination of Employment		53
	(a)	Employee After-Tax Contributions, Rollover Contributions, and transfers	53
	(b)	Employer Contributions	53
	(c) Section 401(k) Deferrals, Qualified Nonelective Contributions, Qualified Matching Contributions, and Safe Harbor Contributions		53
	(d)	Corrective distributions	54
8.6	Hardship Distribution		54
	(a)	Safe harbor Hardship distribution	54
	(b)	Non-safe harbor Hardship distribution	55
	(c)	Amount available for distribution	55
8.7	Participant Consent		55
	(a)	Participant notice	55
	(b)	Special rules	55
8.8	Direct Rollovers		56
	(a)	Eligible Rollover Distribution	56
	(b)	Eligible Retirement Plan	56
	(c)	Direct Rollover	56
	(d)	Direct Rollover notice	57
	(e)	Special rules for Hardship withdrawals of Section 401(k) Deferrals	57
8.9	Sources of Distribution		57
	(a)	Exception for Hardship withdrawals	57
	(b)	In-kind distributions	57

ARTICLE 9 JOINT AND SURVIVOR ANNUITY REQUIREMENTS

9.1	Applicability		58
	(a)	Election to have requirements apply	58
	(b)	Election to have requirements not apply	58
	(c)	Accumulated deductible employee contributions	58



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9.2	Qualified Joint and Survivor Annuity (QJSA)		58
9.3	Qualified Preretirement Survivor Annuity (QPSA)		58
9.4	Definitions		59
	(a)	Qualified Joint and Survivor Annuity (QJSA)	59
	(b)	Qualified Preretirement Survivor Annuity (QPSA)	59
	(c)	Distribution Commencement Date	59
	(d)	Qualified Election	59
	(e)	QPSA Election Period	59
	(f)	Pre-Age 35 Waiver	60
9.5	Notice Requirements		60
	(a)	QJSA	60
	(b)	QPSA	60
9.6	Exception to the Joint and Survivor Annuity Requirements		60
9.7	Transitional Rules		60
	(a)	Automatic joint and survivor annuity	61
	(b)	Election of early survivor annuity	61
	(c)	Qualified Early Retirement Age	61

ARTICLE 10 REQUIRED DISTRIBUTIONS

10.1	Required Distributions Before Death		62
	(a)	Deferred distributions	62
	(b)	Required minimum distributions	62
10.2	Required Distributions After Death		62
	(a)	Distribution beginning before death	62
	(b)	Distribution beginning after death	62
	(c)	Treatment of trust beneficiaries as Designated Beneficiaries	63
	(d)	Trust beneficiary qualifying for marital deduction	63
10.3	Definitions		64
	(a)	Required Beginning Date	64
	(b)	Five-Percent Owner	64
	(c)	Designated Beneficiary	64
	(d)	Applicable Life Expectancy	64
	(e)	Life Expectancy	65
	(f)	Distribution Calendar Year	65
	(g)	Participant’s Benefit	65
10.4	GUST Elections		65
	(a)	Distributions under Old-Law Required Beginning Date rules	65
	(b)	Option to postpone distributions	65
	(c)	Election to stop minimum required distributions	66
10.5	Transitional Rule		67

ARTICLE 11 PLAN ADMINISTRATION AND SPECIAL OPERATING RULES

11.1	Plan Administrator		68
	(a)	Acceptance of responsibility by designated Plan Administrator	68



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	(b)	Resignation of designated Plan Administrator	68
	(c)	Named Fiduciary	68
11.2	Duties and Powers of the Plan Administrator		68
	(a)	Delegation of duties and powers	68
	(b)	Specific duties and powers	68
11.3	Employer Responsibilities		69
11.4	Plan Administration Expenses		69
11.5	Qualified Domestic Relations Orders (QDROs)		69
	(a)	In general	69
	(b)	Qualified Domestic Relations Order (QDRO)	69
	(c)	Recognition as a QDRO	69
	(d)	Contents of QDRO	70
	(e)	Impermissible QDRO provisions	70
	(f)	Immediate distribution to Alternate Payee	70
	(g)	No fee for QDRO determination	70
	(h)	Default QDRO procedure	70
11.6	Claims Procedure		71
	(a)	Filing a claim	71
	(b)	Notification of Plan Administrator’s decision	72
	(c)	Review procedure	72
	(d)	Decision on review	72
	(e)	Default claims procedure	72
11.7	Operational Rules for Short Plan Years		72
11.8	Operational Rules for Related Employer Groups		73

ARTICLE 12 TRUST PROVISIONS

12.1	Creation of Trust		74
12.2	Trustee		74
	(a)	Discretionary Trustee	74
	(b)	Directed Trustee	74
12.3	Trustee’s Responsibilities Regarding Administration of Trust		74
12.4	Trustee’s Responsibility Regarding Investment of Plan Assets		75
12.5	More than One Person as Trustee		76
12.6	Annual Valuation		76
12.7	Reporting to Plan Administrator and Employer		76
12.8	Reasonable Compensation		76
12.9	Resignation and Removal of Trustee		77
12.10	Indemnification of Trustee		77
12.11	Appointment of Custodian		77

ARTICLE 13 PLAN ACCOUNTING AND INVESTMENTS

13.1	Participant Accounts		78
13.2	Value of Participant Accounts		78
	(a)	Periodic valuation	78



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	(b)	Daily valuation	78
13.3	Adjustments to Participant Accounts		78
	(a)	Distributions and forfeitures from a Participant’s Account	78
	(b)	Life insurance premiums and dividends	78
	(c)	Contributions and forfeitures allocated to a Participant’s Account	78
	(d)	Net income or loss	78
13.4	Procedures for Determining Net Income or Loss		78
	(a)	Net income or loss attributable to General Trust Account	78
	(b)	Net income or loss attributable to a Directed Account	79
	(c)	Share or unit accounting	79
	(d)	Suspense accounts	79
13.5	Investments under the Plan		80
	(a)	Investment options	80
	(b) Limitations on the investment in Qualifying Employer Securities and Qualifying Employer Real Property		80
	(c)	Participant direction of investments	81

ARTICLE 14 PARTICIPANT LOANS

14.1	Default Loan Policy		83
14.2	Administration of Loan Program		83
14.3	Availability of Participant Loans		83
14.4	Reasonable Interest Rate		83
14.5	Adequate Security		83
14.6	Periodic Repayment		84
	(a)	Unpaid leave of absence	84
	(b)	Military leave	84
14.7	Loan Limitations		84
14.8	Segregated Investment		85
14.9	Spousal Consent		85
14.10	Procedures for Loan Default		85
14.11	Termination of Employment		86
	(a)	Offset of outstanding loan	86
	(b)	Direct Rollover	86
	(c)	Modified loan policy	86

ARTICLE 15 INVESTMENT IN LIFE INSURANCE

15.1	Investment in Life Insurance		87
15.2	Incidental Life Insurance Rules		87
	(a)	Ordinary life insurance policies	87
	(b)	Life insurance policies other than ordinary life	87
	(c)	Combination of ordinary and other life insurance policies	87
	(d)	Exception for certain profit sharing and 401(k) plans	87
	(e)	Exception for Employee After-Tax Contributions and Rollover Contributions	87
15.3	Ownership of Life Insurance Policies		87
15.4	Evidence of Insurability		87



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15.5	Distribution of Insurance Policies		87
15.6	Discontinuance of Insurance Policies		88
15.7	Protection of Insurer		88
15.8	No Responsibility for Act of Insurer		88

ARTICLE 16 TOP-HEAVY PLAN REQUIREMENTS

16.1	In General		89
16.2	Top-Heavy Plan Consequences		89
	(a)	Minimum allocation for Non-Key Employees	89
	(b)	Special Top-Heavy Vesting Rules	91
16.3	Top-Heavy Definitions		91
	(a)	Determination Date	91
	(b)	Determination Period	91
	(c)	Key Employee	91
	(d)	Permissive Aggregation Group	91
	(e)	Present Value	91
	(f)	Required Aggregation Group	92
	(g)	Top-Heavy Plan	92
	(h)	Top-Heavy Ratio	92
	(i)	Total Compensation	93
	(j)	Valuation Date	93

ARTICLE 17 401(k) PLAN PROVISIONS

17.1	Limitation on the Amount of Section 401(k) Deferrals		94
	(a)	In general	94
	(b)	Maximum deferral limitation	94
	(c)	Correction of Code §402(g) violation	94
17.2	Nondiscrimination Testing of Section 401(k) Deferrals - ADP Test		95
	(a)	ADP Test testing methods	95
	(b)	Special rule for first Plan Year	96
	(c)	Use of QMACs and QNECs under the ADP Test	96
	(d)	Correction of Excess Contributions	96
	(e)	Adjustment of deferral rate for Highly Compensated Employees	98
17.3	Nondiscrimination Testing of Employer Matching Contributions and Employee After-Tax Contributions - ACP Test		98
	(a)	ACP Test testing methods	98
	(b)	Special rule for first Plan Year	99
	(c)	Use of Section 401(k) Deferrals and QNECs under the ACP Test	99
	(d)	Correction of Excess Aggregate Contributions	99
	(e)	Adjustment of contribution rate for Highly Compensated Employees	101
17.4	Multiple Use Test		101
	(a)	Aggregate Limit	101
	(b)	Correction of the Multiple Use Test	101
17.5	Special Testing Rules		102



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	(a)	Special rule for determining ADP and ACP of Highly Compensated Employee Group	102
	(b)	Aggregation of plans	102
	(c)	Disaggregation of plans	102
	(d)	Special rules for the Prior Year Testing Method	103
17.6	Safe Harbor 401(k) Plan Provisions		103
	(a)	Safe harbor conditions	103
	(b)	Deemed compliance with ADP Test	107
	(c)	Deemed compliance with ACP Test	107
	(d)	Rules for applying the ACP Test	108
	(e)	Aggregated plans	108
	(f)	First year of plan	108
17.7	Definitions		108
	(a)	ACP - Average Contribution Percentage	108
	(b)	ADP - Average Deferral Percentage	108
	(c)	Excess Aggregate Contributions	108
	(d)	Excess Contributions	109
	(e)	Highly Compensated Employee Group	109
	(f)	Nonhighly Compensated Employee Group	109
	(g)	QMACs - Qualified Matching Contribution	109
	(h)	QNECs - Qualified Nonelective Contributions	109
	(i)	Testing Compensation	109

ARTICLE 18 PLAN AMENDMENTS AND TERMINATION

18.1	Plan Amendments		110
	(a)	Amendment by the Prototype Sponsor	110
	(b)	Amendment by the Employer	110
	(c)	Protected Benefits	111
18.2	Plan Termination		111
	(a)	Full and immediate vesting	111
	(b)	Distribution procedures	111
	(c)	Termination upon merger, liquidation or dissolution of the Employer	112
18.3	Merger or Consolidation		112

ARTICLE 19 MISCELLANEOUS

19.1	Exclusive Benefit		113
19.2	Return of Employer Contributions		113
	(a)	Mistake of fact	113
	(b)	Disallowance of deduction	113
	(c)	Failure to initially qualify	113
19.3	Alienation or Assignment		113
19.4	Participants’ Rights		113
19.5	Military Service		113
19.6	Paired Plans		113
19.7	Annuity Contract		114



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19.8	Use of IRS compliance programs		114
19.9	Loss of Prototype Status		114
19.10	Governing Law		114
19.11	Waiver of Notice		114
19.12	Use of Electronic Media		114
19.13	Severability of Provisions		114
19.14	Binding Effect		114

ARTICLE 20 GUST ELECTIONS AND EFFECTIVE DATES

20.1	GUST Effective Dates		115
20.2	Highly Compensated Employee Definition		115
	(a)	Top-Paid Group Test	115
	(b)	Calendar Year Election	115
	(c)	Old-Law Calendar Year Election	115
20.3	Required Minimum Distributions		116
20.4	$5,000 Involuntary Distribution Threshold		116
20.5	Repeal of Family Aggregation for Allocation Purposes		116
20.6	ADP/ACP Testing Methods		116
20.7	Safe Harbor 401(k) Plan		116

ARTICLE 21 PARTICIPATION BY RELATED EMPLOYERS (CO-SPONSORS)

21.1	Co-Sponsor Adoption Page		117
21.2	Participation by Employees of Co-Sponsor		117
21.3	Allocation of Contributions and Forfeitures		117
21.4	Co-Sponsor No Longer a Related Employer		117
	(a)	Manner of discontinuing participation	117
	(b)	Multiple employer plan	117
21.5	Special Rules for Standardized Agreements		117
	(a)	New Related Employer	118
	(b)	Former Related Employer	118

ARTICLE 22 PLAN DEFINITIONS

22.1	Account		119
22.2	Account Balance		119
22.3	Accrued Benefit		119
22.4	ACP — Average Contribution Percentage		119
22.5	ACP Test — Actual Contribution Percentage Test		119
22.6	Actual Hours Crediting Method		119
22.7	Adoption Agreement		119
22.8	ADP — Average Deferral Percentage		119
22.9	ADP Test — Actual Deferral Percentage Test		119
22.10	Agreement		119
22.11	Aggregate Limit		119
22.12	Alternate Payee		119



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22.13	Anniversary Year Method	119
22.14	Anniversary Years	119
22.15	Annual Additions	120
22.16	Annual Additions Limitation	120
22.17	Annuity Starting Date	120
22.18	Applicable Life Expectancy	120
22.19	Applicable Percentage	120
22.20	Average Compensation	120
22.21	Averaging Period	120
22.22	Balance Forward Method	120
22.23	Basic Plan Document	120
22.24	Beneficiary	120
22.25	BPD	120
22.26	Break-in-Service - Eligibility	120
22.27	Break-in-Service - Vesting	120
22.28	Calendar Year Election	120
22.29	Cash-Out Distribution	120
22.30	Code	120
22.31	Code §415 Safe Harbor Compensation	121
22.32	Compensation Dollar Limitation	121
22.33	Co-Sponsor	121
22.34	Co-Sponsor Adoption Page	121
22.35	Covered Compensation	121
22.36	Cumulative Disparity Limit	121
22.37	Current Year Testing Method	121
22.38	Custodian	121
22.39	Davis-Bacon Act Service	121
22.40	Davis-Bacon Contribution Formula	121
22.41	Defined Benefit Plan	121
22.42	Defined Benefit Plan Fraction	122
22.43	Defined Contribution Plan	122
22.44	Defined Contribution Plan Dollar Limitation	122
22.45	Defined Contribution Plan Fraction	122
22.46	Designated Beneficiary	122
22.47	Determination Date	122
22.48	Determination Period	122
22.49	Determination Year	122
22.50	Directed Account	122
22.51	Directed Trustee	122
22.52	Direct Rollover	122
22.53	Disabled	122
22.54	Discretionary Trustee	122
22.55	Distribution Calendar Year	122
22.56	Distribution Commencement Date	122



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22.57	Early Retirement Age		122
22.58	Earned Income		122
22.59	Effective Date		123
22.60	Elapsed Time Method		123
22.61	Elective Deferrals		123
22.62	Eligibility Computation Period		123
22.63	Eligible Participant		123
22.64	Eligible Rollover Distribution		123
22.65	Eligible Retirement Plan		123
22.66	Employee		123
22.67	Employee After-Tax Contribution Account		124
22.68	Employee After-Tax Contributions		124
22.69	Employer		124
22.70	Employer Contribution Account		124
22.71	Employer Contributions		124
22.72	Employer Matching Contribution Account		124
22.73	Employer Matching Contributions		124
22.74	Employer Nonelective Contributions		124
22.75	Employment Commencement Date		124
22.76	Employment Period		124
22.77	Entry Date		124
22.78	Equivalency Method		124
22.79	ERISA		124
22.80	Excess Aggregate Contributions		124
22.81	Excess Amount		124
22.82	Excess Compensation		124
22.83	Excess Contributions		125
22.84	Excess Deferrals		125
22.85	Excluded Employee		125
22.86	Fail-Safe Coverage Provision		125
22.87	Favorable IRS Letter		125
22.88	Five-Percent Owner		125
22.89	Five-Year Forfeiture Break in Service		125
22.90	Flat Benefit		125
22.91	Flat Excess Benefit		125
22.92	Flat Offset Benefit		125
22.93	Former Related Employer		125
22.94	Four-Step Formula		125
22.95	General Trust Account		125
22.96	GUST Legislation		125
22.97	Hardship		125
22.98	Highest Average Compensation		125
22.99	Highly Compensated Employee		125
	(a)	Definition	125



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	(b)	Other Definitions	126
	(c)	Application of Highly Compensated Employee definition	126
22.100	Highly Compensated Employee Group		126
22.101	Hour of Service		126
	(a)	Performance of duties	126
	(b)	Nonperformance of duties	126
	(c)	Back pay award	127
	(d)	Related Employers/Leased Employees	127
	(e)	Maternity/paternity leave	127
22.102	Included Compensation		127
22.103	Insurer		128
22.104	Integrated Benefit Formula		128
22.105	Integration Level		128
22.106	Investment Manager		128
22.107	Key Employee		128
22.108	Leased Employee		128
22.109	Life Expectancy		128
22.110	Limitation Year		128
22.111	Lookback Year		128
22.112	Maximum Disparity Percentage		128
22.113	Maximum Offset Percentage		128
22.114	Maximum Permissible Amount		128
22.115	Measuring Period		128
22.116	Multiple Use Test		128
22.117	Named Fiduciary		128
22.118	Net Profits		128
22.119	New Related Employer		128
22.120	Nonhighly Compensated Employee		129
22.121	Nonhighly Compensated Employee Group		129
22.122	Nonintegrated Benefit Formula		129
22.123	Non-Key Employee		129
22.124	Nonresident Alien Employees		129
22.125	Nonstandardized Agreement		129
22.126	Normal Retirement Age		129
22.127	Offset Compensation		129
22.128	Offset Benefit Formula		129
22.129	Old-Law Calendar Year Election		129
22.130	Old-Law Required Beginning Date		129
22.131	Owner-Employee		129
22.132	Paired Plans		129
22.133	Participant		129
22.134	Period of Severance		129
22.135	Permissive Aggregation Group		129
22.136	Permitted Disparity Method		129



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22.137	Plan	129
22.138	Plan Administrator	130
22.139	Plan Year	130
22.140	Pre-Age 35 Waiver	130
22.141	Predecessor Employer	130
22.142	Predecessor Plan	130
22.143	Present Value	130
22.144	Present Value Stated Benefit	130
22.145	Prior Year Testing Method	130
22.146	Pro Rata Allocation Method	130
22.147	Projected Annual Benefit	130
22.148	Protected Benefit	130
22.149	Prototype Plan	130
22.150	Prototype Sponsor	130
22.151	QDRO — Qualified Domestic Relations Order	130
22.152	QJSA — Qualified Joint and Survivor Annuity	130
22.153	QMAC Account	130
22.154	QMACs — Qualified Matching Contribution	130
22.155	QNEC Account	131
22.156	QNECs — Qualified Nonelective Contributions	131
22.157	QPSA — Qualified Preretirement Survivor Annuity	131
22.158	QPSA Election Period	131
22.159	Qualified Election	131
22.160	Qualified Transfer	131
22.161	Qualifying Employer Real Property	131
22.162	Qualifying Employer Securities	131
22.163	Reemployment Commencement Date	131
22.164	Related Employer	131
22.165	Required Aggregation Group	131
22.166	Required Beginning Date	131
22.167	Reverse QNEC Method	131
22.168	Rollover Contribution Account	131
22.169	Rollover Contribution	131
22.170	Rule of Parity Break in Service	131
22.171	Safe Harbor 401(k) Plan	131
22.172	Safe Harbor Contribution	131
22.173	Safe Harbor Matching Contribution Account	131
22.174	Safe Harbor Matching Contributions	132
22.175	Safe Harbor Nonelective Contribution Account	132
22.176	Safe Harbor Nonelective Contributions	132
22.177	Salary Reduction Agreement	132
22.178	Section 401(k) Deferral Account	132
22.179	Section 401(k) Deferrals	132
22.180	Self-Employed Individual	132



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22.181	Shareholder-Employee		132
22.182	Shift-to-Plan- Year Method		132
22.183	Short Plan Year		132
22.184	Social Security Retirement Age		132
22.185	Standardized Agreement		132
22.186	Stated Benefit		132
22.187	Straight Life Annuity		132
22.188	Successor Plan		133
22.189	Taxable Wage Base		133
22.190	Testing Compensation		133
22.191	Theoretical Reserve		133
22.192	Three Percent Method		133
22.193	Top-Paid Group		133
22.194	Top-Paid Group Test		133
22.195	Top-Heavy Plan		133
22.196	Top-Heavy Ratio		133
22.197	Total Compensation		133
	(a)	W-2 Wages	133
	(b)	Withholding Wages	133
	(c)	Code §415 Safe Harbor Compensation	133
22.198	Transfer Account		134
22.199	Trust		134
22.200	Trustee		134
22.201	Two-Step Formula		134
22.202	Union Employee		134
22.203	Unit Benefit		134
22.204	Unit Excess Benefit		134
22.205	Unit Offset Benefit		134
22.206	Valuation Date		134
22.207	Vesting Computation Period		134
22.208	W-2 Wages		135
22.209	Withholding Wages		135
22.210	Year of Participation		135
22.211	Year of Service		135



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

xvi

A RTICLE I
PLAN ELlGlBlLlTY AND PARTICIPATION


This Article contains the rules for determining when an Employee becomes eligible to participate in the Plan. Part 1 and Part 2 of the Agreement contain specific elections for applying these Plan eligibility and participation rules. Article 6 of this BPD and Part 7 of the Agreement contain special service crediting elections to override the default provisions under this Article.

1.1	E ligibility for Plan Participation. An Employee who satisfies the Plan’s minimum age and service conditions (as elected in Part 1, #5 of the Agreement) is eligible to participate in the Plan beginning on the Entry Date selected in Part 2 of the Agreement, unless he/she is specifically excluded from participation under Part 1, #4 of the Agreement. An Employee who has satisfied the Plan’s minimum age and service conditions and is employed on his/her Entry Date is referred to as an Eligible Participant. (See Section 1.7 below for the rules regarding an Employee who terminates employment prior to his/her Entry Date.) An Employee who is excluded from participation under Part 1, #4 of the Agreement is referred to as an Excluded Employee.

1.2	E xcluded Employees. Unless specifically excluded under Part 1, #4 of the Agreement, all Employees of the Employer are entitled to participate under the Plan upon becoming an Eligible Participant. Any Employee who is excluded under Part 1, #4 of the Agreement may not participate under the Plan, unless such Excluded Employee subsequently becomes a member of an eligible class of Employees. (See Section 1.8(b) of this Article for rules regarding an Excluded Employee’s entry into the Plan if he/she subsequently becomes a member of an eligible class of Employees.)

	The Employer may elect under Part 1, #4 of the 401(k) Agreement to exclude different groups of Employees for Section 401(k) Deferrals, Employer Matching Contributions, and Employer Nonelective Contributions. Unless provided otherwise under Part 1, #4.f. of the Nonstandardized 401(k) Agreement, for purposes of determining the Excluded Employees, any selection made with respect to Section 401(k) Deferrals also will apply to any Employee After-Tax Contributions and any Safe Harbor Contributions; any selections made with respect to Employer Matching Contributions also will apply to any Qualified Matching Contributions (QMACs); and any selections made with respect to Employer Nonelective Contributions also will apply to any Qualified Nonelective Contributions (QNECs).

	(a)	I ndependent contractors. Any individual who is an independent contractor, or who performs services with the Employer under an agreement that identifies the individual as an independent contractor, is specifically excluded from the Nonstandardized Plan. In the event the Internal Revenue Service (IRS) retroactively reclassifies such an individual as an Employee, the reclassified Employee will become an Eligible Participant on the date the IRS issues a final determination regarding his/her employment status (or the individual’s Entry Date, if later), unless the individual is otherwise excluded from participation under Part 1, #4 of the Nonstandardized Agreement. For periods prior to the date of such final determination, the reclassified Employee will not have any rights to accrued benefits under the Plan, except as agreed to by the Employer and the IRS, or as set forth in an amendment adopted by the Employer.

	(b)	L eased Employees. If an individual is a Leased Employee, such individual is treated as an Employee of the Employer and may participate under the Plan upon satisfying the Plan’s minimum age and service conditions, unless the Employer elects to exclude Leased Employees from participation under Part 1, #4.d. of the Nonstandardized Agreement.

		(1)	Definition of Leased Employee. Effective for Plan Years beginning after December 31, 1996, a Leased Employee, as defined in Code §414(n), is an individual who performs services for the Employer on a substantially full time basis for a period of at least one year pursuant to an agreement between the Employer and a leasing organization, provided such services are performed under the primary direction or control of the recipient Employer. For Plan Years beginning before January 1, 1997, the definition of Leased Employee is as defined under Code §414(n), as in effect for such years.

		(2)	Credit for benefits. If a Leased Employee receives contributions or benefits under a plan maintained by the leasing organization that are attributable to services performed for the Employer, such contributions or benefits shall be treated as provided by the Employer.

		(3)	Safe harbor plan. A Leased Employee will not be considered an Employee of the Employer if such Leased Employee is covered by a money purchase plan of the leasing organization which provides: (i) a nonintegrated employer contribution of at least 10% of compensation, (ii) immediate participation, and (iii) full and immediate vesting. For this paragraph to apply, Leased Employees must not constitute more than 20% of the total Nonhighly Compensated Employees of the Employer.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


1.3	E mployees of Related Employers. Employees of the Employer that executes the Signature Page of the Agreement and Employees of any Related Employer that executes a Co-Sponsor Adoption Page under the Agreement are eligible to participate in this Plan.

	(a)	N onstandardized Agreement. In a Nonstandardized Agreement, a Related Employer is not required to execute a Co-Sponsor Adoption Page. However, Employees of a Related Employer that does not execute a Co-Sponsor Adoption Page are not eligible to participate in the Plan.

	(b)	S tandardized Agreement. In a Standardized Agreement, Employees of all Related Employers are eligible to participate under the Plan upon satisfying any required minimum age and/or service conditions (unless otherwise excluded under Part 1, #4 of the Agreement). All Related Employers (who have Employees who may be eligible under the Plan) must execute a Co-Sponsor Adoption Page under the Agreement, so the Employees of such Related Employers are eligible to become Participants in the Plan. (See Article 21 for applicable rules if a Related Employer does not sign the Co-Sponsor Adoption Page and the effect of an acquisition or disposition transaction that is described in Code §410(b)(6)(C).)

1.4	M inimum Age and Service Conditions. Part 1, #5 of the Agreement contains specific elections as to the minimum age and service conditions which an Employee must satisfy prior to becoming eligible to participate under the Plan. An Employee may be required to attain a specific age or to complete a certain amount of service with the Employer prior to commencing participation under the Plan. If no minimum age or service conditions apply to a particular contribution (i.e., the Employer elects “None” under Part 1, #5.a. of the Agreement), an Employee is treated as satisfying the Plan’s eligibility requirements on the individual’s Employment Commencement Date.

	Different age and service conditions may be selected under Part 1, #5 of the 401(k) Agreement for Section 401(k) Deferrals, Employer Matching Contributions, and Employer Nonelective Contributions. For purposes of applying the eligibility conditions under Part 1, #5, any selection made with respect to Section 401(k) Deferrals also will apply to any Employee After-Tax Contributions; any selections made with respect to Employer Matching Contributions also will apply to any Qualified Matching Contributions (QMACs); and any selections made with respect to Employer Nonelective Contributions also will apply to any Qualified Nonelective Contributions (QNECs), unless otherwise provided under Part 1, #5.f. of the Nonstandardized 401(k) Agreement. In addition, any eligibility conditions selected with respect to Section 401(k) Deferrals also will apply to any Safe Harbor Contributions designated under Part 4E of the 401(k) Agreement, unless otherwise provided under Part 4E, #30.d. of the 401(k) Agreement. If different conditions apply for different contributions, the rules in this Article for determining when an Employee is an Eligible Participant are applied separately with respect to each set of eligibility conditions.

	(a)	M aximum permissible age and service conditions. Code §410(a) provides limits on the maximum permissible age and service conditions that may be required prior to Plan participation. The Employer may not require an Employee, as a condition of Plan participation, to attain an age older than age 21. The Employer also may not require an Employee to complete more than one Year of Service, unless the Employer elects full and immediate vesting under Part 6 of the Agreement, in which case the Employer may require an Employee to complete up to two Years of Service. (The Employer may not require an Employee to complete more than one Year of Service to be eligible to make Section 401(k) Deferrals under the 401(k) Agreement.)

	(b)	Y ear of Service. Unless the Employer elects otherwise under Part 7, #23 of the Agreement [Part 7, #41 of the 401(k) Agreement], an Employee will earn one Year of Service for purposes of applying the eligibility rules under this Article if the Employee completes at least 1,000 Hours of Service with the Employer during an Eligibility Computation Period (as defined in subsection (c) below). An Employee will receive credit for a Year of Service, as of the end of the Eligibility Computation Period, if the Employee completes the required Hours of Service during such period, even if the Employee is not employed for the entire period. In calculating an Employee’s Hours of Service for purposes of applying the eligibility rules under this Article, the Employer will use the Actual Hours Crediting Method, unless elected otherwise under Part 7 of the Agreement. (See Article 6 of this BPD for a description of alternative service crediting methods.)

	(c)	E ligibility Computation Periods. For purposes of determining Years of Service under this Article, an Employee’s initial Eligibility Computation Period is the 12-month period beginning on the Employee’s Employment Commencement Date. If one Year of Service is required for eligibility, and the Employee is not credited with a Year of Service for the first Eligibility Computation Period, subsequent Eligibility Computation Periods are calculated under the Shift-to-Plan-Year Method, unless the Employer elects under Part 7, #24.a. of the Agreement [Part 7, #42.a. of the 401(k) Agreement] to use the Anniversary Year Method. If two Years of Service are required for eligibility, subsequent Eligibility Computation Periods are measured on the Anniversary Year Method, unless the Employer elects under Part 7, #24.b. of the Agreement [Part 7, #42.b. of the 401(k) Agreement] to use the Shift-to-Plan-Year Method. In the case of a 401(k) Agreement in which a two Years of Service eligibility condition is used for either Employer Matching Contributions or Employer Nonelective Contributions, the method used to determine Eligibility Computation Periods for the two Years of Service condition also will apply to any one Year of Service eligibility condition used with respect to any other contributions under the Plan.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(1)	Shift-to-Plan-Year Method. Under the Shift-to-Plan-Year Method, after the initial Eligibility Computation Period, subsequent Eligibility Computation Periods are measured using the Plan Year. In applying the Shift-to-Plan-Year Method, the first Eligibility Computation Period following the shift to the Plan Year is the first Plan Year that commences after the Employee’s Employment Commencement Date. See Section 11.7 for rules that apply if there is a short Plan Year.

		(2)	Anniversary Year Method. Under the Anniversary Year Method, after the initial Eligibility Computation Period, each subsequent Eligibility Computation Period is the 12-month period commencing with the anniversary of the Employee’s Employment Commencement Date.

	(d)	A pplication of eligibility rules.

		(1)	General rule - Effective Date. All Employees who have satisfied the conditions for being an Eligible Participant (and have reached their Entry Date (as determined under Part 2 of the Agreement)) as of the Effective Date of the Plan are eligible to participate in the Plan as of the Effective Date (provided the Employee is employed on such date and is not otherwise excluded from participation under Part 1, #4 of the Agreement). If an Employee has satisfied all the conditions for being an Eligible Participant as of the Effective Date of the Plan, except the Employee has not yet reached his/her Entry Date, the Employee will become an Eligible Participant on the appropriate Entry Date in accordance with this Article.

		(2)	Dual eligibility provision. The Employer may modify the rule described in subsection (1) above by electing under Part 1, #6.a. of the Nonstandardized Agreement [Part 1, #6 of the Standardized Agreement] to treat all Employees employed on the Effective Date of the Plan as Eligible Participants as of such date. Alternatively, the Employer may elect under Part 1, #6.b. of the Nonstandardized Agreement to apply the dual eligibility provision as of a specified date. Any Employee employed as of a date designated under Part 1, #6 will be deemed to be an Eligible Participant as of the later of such date or the Effective Date of this Plan, whether or not the Employee has otherwise satisfied the eligibility conditions designated under Part 1, #5 and whether or not the Employee has otherwise reached his/her Entry Date (as designated under Part 2 of the Agreement). Thus, all eligible Employees employed on the date designated under Part 1, #6 will commence participating under the Plan as of the appropriate date.

	(e)	A mendment of age and service requirements. If the Plan’s minimum age and service conditions are amended, an Employee who is an Eligible Participant immediately prior to the effective date of the amendment is deemed to satisfy the amended requirements. This provision may be modified under the special Effective Date provisions under Appendix A of the Agreement.

1.5	E ntry Dates. Part 2 of the Agreement contains specific elections regarding the Entry Dates under the Plan. An Employee’s Entry Date is the date as of which he/she is first considered an Eligible Participant. Depending on the elections in Part 2 of the Agreement, the Entry Date may be the exact date on which an Employee completes the Plan’s age and service conditions, or it might be some date that occurs before or after such conditions are satisfied. If an Employee is excluded from participation under Part 1, #4 of the Agreement, see the rules under Section 1.8 of this Article.

	The Employer may elect under Part 2 of the 401(k) Agreement to apply different Entry Dates for Section 401(k) Deferrals, Employer Matching Contributions, and Employer Nonelective Contributions. Unless provided otherwise in Part 2, #8.f. of the Nonstandardized 401(k) Agreement, the Entry Date chosen for Section 401(k) Deferrals also applies to any Employee After-Tax Contributions and to any Safe Harbor Contributions designated under Part 4E of the Agreement; the Entry Date chosen for Employer Matching Contributions also applies to any Qualified Matching Contributions (QMACs); and the Entry Date chosen for Employer Nonelective Contributions also applies to any Qualified Nonelective Contributions (QNECs).

	(a)	E ntry Date requirements. Except as provided under Section 1.4(d)(2) above, an Employee (other than an Excluded Employee) commences participation under the Plan (i.e., becomes an Eligible Participant) as of the Entry Date selected in Part 2 of the Agreement, provided the individual is employed by the Employer on that Entry Date. (See Section 1.7 below for the rules applicable to Employees who are not employed on the Entry Date.) In no event may an Eligible Participant’s Entry Date be later than: (1) the first day of the Plan Year beginning after the date on which the Eligible Participant satisfies the maximum permissible minimum age and service conditions described in Section 1.4, or (2) six months after the date the Eligible Participant satisfies such age and service conditions.

	(b)	S ingle annual Entry Date. If the Employer elects a single annual Entry Date under Part 2, #8 of the Agreement, the maximum permissible age and service conditions described in Section 1.4 above are reduced by one-half (1/2) year, unless: (1) the Employer elects under Part 2, #7.c. of the Agreement to use the Entry



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		Date nearest the date the Employee satisfies the Plan’s minimum age and service conditions and the Entry Date is the first day of the Plan Year or (2) the Employer elects under Part 2, #7.d. of the Agreement to use the Entry Date preceding the date the Employee satisfies the Plan’s minimum age and service conditions.

1.6	E ligibility Break in Service Rules. For purposes of eligibility to participate, an Employee is credited with all Years of Service earned with the Employer, except as provided under the following Break in Service rules. In applying these Break in Service rules, Years of Service and Breaks in Service (as defined in Section 22.26) are measured on the same Eligibility Computation Period as defined in Section 1.4(c) above.

	(a)	R ule of Parity Break in Service. This Break in Service rule applies only to Participants who are totally nonvested (i.e., 0% vested) in their Employer Contribution Account and Employer Matching Contribution Account, as applicable. Under this Break in Service rule, if a nonvested Participant incurs a period of consecutive one-year Breaks in Service which equals or exceeds the greater of five (5) or the Participant’s aggregate number of Years of Service with the Employer, all service earned prior to the consecutive Break in Service period will be disregarded and the Participant will be treated as a new Employee for purposes of determining eligibility under the Plan. The Employer may elect under Part 7, #27 of the Agreement [Part 7, #45 of the 401(k) Agreement] not to apply the Rule of parity Break in Service rule.

		(1)	Previous application of the Rule of Parity Break in Service rule. In determining a Participant’s aggregate Years of Service for purposes of applying the Rule of Parity Break in Service, any Years of Service otherwise disregarded under a previous application of this rule are disregarded.

		(2)	Application to the 401(k) Agreement. The Rule of Parity Break in Service rule applies only to determine the individual’s right to resume as an Eligible Participant with respect to his/her Employer Contribution Account and/or Employer Matching Contribution Account. In determining whether a Participant is totally nonvested for purposes of applying the Rule of Parity Break in Service rule, the Participant’s Section 401(k) Deferral Account, Employee After-Tax Contribution Account, QMAC Account, QNEC Account, Safe Harbor Nonelective Contribution Account, Safe Harbor Matching Contribution Account, and Rollover Contribution Account are disregarded.

	(b)	O ne-year Break in Service rule for Plans using a two Years of Service eligibility condition. If the Employer elects to use the two Years of Service eligibility condition under Part 1, #5.e. of the Agreement, any Employee who incurs a one-year Break in Service before satisfying the two Years of Service eligibility condition will not be credited with service earned before such one-year Break in Service.

	(c)	O ne-year holdout Break in Service rule. The one-year holdout Break in Service rule will not apply unless the Employer specifically elects in Part 7, #27.b. of the Nonstandardized Agreement [Part 7, #45.b. of the Nonstandardized 401(k) Agreement] to have it apply. If the one-year holdout Break in Service rule is elected, an Employee who has a one-year Break in Service will not be credited for eligibility purposes with any Years of Service earned before such one-year Break in Service until the Employee has completed a Year of Service after the one-year Break in Service. (The one-year holdout Break in Service rule does not apply under the Standardized Agreements.)

		(1)	Operating rules. An Employee who is precluded from receiving Employer Contributions (other than Section 401(k) Deferrals) as a result of the one-year holdout Break in Service rule, and who completes a Year of Service following the Break in Service, is reinstated as an Eligible Participant as of the first day of the 12-month measuring period (determined under subsection (2) or (3) below) during which the Employee completes the Year of Service. Unless otherwise selected under Part 7, #45.b.(1)(b) of the Nonstandardized 401(k) Agreement, the one-year holdout Break in Service rule does not apply to preclude an otherwise Eligible Participant from making Section 401(k) Deferrals to the Plan. If the Employer elects under Part 7, #45.b.(1)(b) of the Nonstandardized 401(k) Agreement to have the one-year holdout Break in Service rule apply to Section 401(k) Deferrals, an Employee who is precluded from making Section 401(k) Deferrals as a result of this Break in Service rule is re-eligible to make Section 401(k) Deferrals immediately upon completing 1,000 Hours of Service with the Employer during a subsequent measuring period (as determined under subsection (2) or (3) below). No corrective action need be taken by the Employer as a result of the failure to retroactively permit the Employee to make Section 401(k) Deferrals.

		(2)	Plans using the Shift-to-Plan- Year Method. If the Plan uses the Shift-to- Plan-Year Method (as defined in Section 1.4(c)(1)) for measuring Years of Service, the period for determining whether an Employee completes a Year of Service following the one-year Break in Service is the 12-month period commencing on the Employee’s Reemployment Commencement Date and, if necessary, subsequent Plan Years beginning with the Plan Year which includes the first anniversary of the Employee’s Reemployment Commencement Date.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(3)	Plans using Anniversary Year Method. If the Plan uses the Anniversary Year Method (as defined in Section 1.4(c)(2)) for measuring Years of Service, the period for determining whether an Employee completes a Year of Service following the one-year Break in Service is the 12-month period which commences on the Employee’s Reemployment Commencement Date and, if necessary, subsequent 12-month periods beginning on anniversaries of the Employee’s Reemployment Commencement Date.

1.7	E ligibility upon Reemployment. Subject to the Break in Service rules under Section 1.6, a former Employee is reinstated as an Eligible Participant immediately upon rehire if the Employee had satisfied the Plan’s minimum age and service conditions prior to termination of employment, regardless of whether the Employee was actually employed on his/her Entry Date, unless the Employee is an Excluded Employee upon his/her return to employment. This requirement is deemed satisfied if a rehired Employee is permitted to commence making Section 401(k) Deferrals as of the beginning of the first payroll period commencing after the Employee’s Reemployment Commencement Date.

	If an Employee is reemployed prior to his/her Entry Date, the Employee does not become an Eligible Participant under the Plan until such Entry Date. A rehired Employee who had not satisfied the Plan’s minimum age and service conditions prior to termination of employment is eligible to participate in the Plan on the appropriate Entry Date following satisfaction of the eligibility requirements under this Article.

1.8	O perating Rules for Employees Excluded by Class.

	(a)	E ligible Participant becomes part of an excluded class of Employees. If an Eligible Participant becomes part of an excluded class of Employees, his/her status as an Eligible Participant ceases immediately. As provided in subsection (b) below, such Employee’s status as an Eligible Participant will resume immediately upon his/her returning to an eligible class of Employees, regardless of whether such date is a normal Entry Date under the Plan, subject to the application of any Break in Service rules under Section 1.6 and the special rule for Section 401(k) Deferrals under subsection (b) below.

	(b)	E xcluded Employee becomes part of an eligible class of Employee. If an Excluded Employee becomes part of an eligible class of Employees, the following rules apply. If the Entry Date that otherwise would have applied to such Employee following his/her completion of the Plan’s minimum age and service conditions has already passed, then the Employee becomes an Eligible Participant on the date he/she becomes part of the eligible class of Employees, regardless of whether such date is a normal Entry Date under the Plan. This requirement is deemed satisfied if the Employee is permitted to commence making Section 401(k) Deferrals as of the beginning of the first payroll period commencing after the Employee becomes part of an eligible class of Employees. If the Entry Date that would have applied to such Employee has not passed, then the Employee becomes an Eligible Participant on such Entry Date. If the Employee has not satisfied the Plan’s minimum age and service conditions, the Employee will become an Eligible Participant on the appropriate Entry Date following satisfaction of the eligibility requirements under this Article.

1.9	R elationship to Accrual of Benefits. An Eligible Participant is entitled to accrue benefits in the Plan but will not necessarily do so in every Plan Year that he/she is an Eligible Participant. Whether an Eligible Participant’s Account receives an allocation of Employer Contributions depends on the requirements set forth in Part 4 of the Agreement. If an Employee is an Eligible Participant for purposes of making Section 401(k) Deferrals under the 401(k) Agreement, such Employee is treated as an Eligible Participant under the Plan regardless of whether he/she actually elects to make Section 401(k) Deferrals.

1.10	W aiver of Participation. Unless the Employer elects otherwise under Part 13, #57 of the Nonstandardized Agreement [Part 13, #75 of the Nonstandardized 401(k) Agreement], an Eligible Participant may not waive participation under the Plan. For this purpose, a failure to make Section 401(k) Deferrals or Employee After-Tax Contributions under a 401(k) plan is not a waiver of participation. The Employer may elect under Part 13, #57 of the Nonstandardized Agreement [Part 13, #75 of the Nonstandardized 401(k) Agreement] to permit Employees to make a one-time irrevocable election to not participate under the Plan. Such election must be made upon inception of the Plan or at any time prior to the time the Employee first becomes eligible to participate under any plan maintained by the Employer. An Employee who makes a one-time irrevocable election not to participate may not subsequently elect to participate under the Plan. An Employee may not waive participation under a Standardized Agreement.

	An Employee who elects not to participate under this Section 1.10 is treated as a nonbenefiting Employee for purposes of the minimum coverage requirements under Code §410(b). However, an Employee who makes a one-time irrevocable election not to participate, as described in the preceding paragraph, is not an Eligible Participant for purposes of applying the ADP Test or ACP Test under the 401(k) Agreement See Section 17.7(e) and (f). A waiver of participation must be filed in the manner, time and on the form required by the Plan Administrator.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 2
EMPLOYER CONTRIBUTIONS AND ALLOCATIONS

This Article describes how Employer Contributions are made to and allocated under the Plan. The type of Employer Contributions that may be made under the Plan and the method for allocating such contributions will depend on the type of Plan involved. Section 2.2 of this BPD provides specific rules regarding contributions and allocations under a profit sharing plan; Section 2.3 provides the rules for a 401(k) plan; Section 2.4 provides the rules for a money purchase plan; and Section 2.5 provides the rules for a target benefit plan. Part 4 of the Agreement contains the elective provisions for the Employer to specify the amount and type of Employer Contributions it will make under the Plan and to designate any limits on the amount it will contribute to the Plan each year. Employee After-Tax Contributions, Rollover Contributions and transfers to the Plan are discussed in Article 3 and the allocation of forfeitures is discussed in Article 5. Part 3 of the Agreement contains elective provisions for determining an Employee’s Included Compensation for allocation purposes.


2.1	A mount of Employer Contributions. The Employer shall make Employer Contributions to the Trust as determined under the contribution formula elected in Part 4 of the Agreement. If this Plan is a 401(k) plan, Employer Contributions include Section 401(k) Deferrals, Employer Nonelective Contributions, Employer Matching Contributions, QNECs, QMACs, and Safe Harbor Contributions, to the extent such contributions are elected under the 401(k) Agreement. The Employer has the responsibility for determining the amount and timing of Employer Contributions under the terms of the Plan.

	(a)	L imitation on Employer Contributions. Employer Contributions are subject to the Annual Additions Limitation described in Article 7 of this BPD. If allocations to a Participant exceed (or will exceed) such limitation, the excess will be corrected in accordance with the rules under Article 7. In addition, the Employer must comply with the special contribution and allocation rules for Top-Heavy Plans under Article 16.

	(b)	L imitation on Included Compensation. For purposes of determining a Participant’s allocation of Employer Contributions under this Article, the Included Compensation taken into account for any Participant for a Plan Year may not exceed the Compensation Dollar Limitation under Section 22.32.

	(c)	C ontribution of property. Subject to the consent of the Trustee, the Employer may make its contribution to the Plan in the form of property, provided such contribution does not constitute a prohibited transaction under the Code or ERISA. The decision to make a contribution of property is subject to the general fiduciary rules under ERISA.

	(d)	F rozen Plan. The Employer may designate under Part 4, #12 of the Agreement [#3 of the 401(k) Agreement] that the Plan is a frozen Plan. As a frozen Plan, the Employer will not make any Employer Contributions with respect to Included Compensation earned after the date identified in the Agreement, and if the Plan is a 401(k) Plan, no Participant will be permitted to make Section 401(k) Deferrals or Employee After-Tax Contributions to the Plan for any period following the effective date identified in the Agreement.

2.2	P rofit Sharing Plan Contribution and Allocations. This Section 2.2 sets forth rules for determining the amount of any Employer Contributions under the profit sharing plan Agreement. This Section 2.2 also applies for purposes of determining any Employer Nonelective Contributions under the 401(k) plan Agreement. In applying this Section 2.2 to the 401(k) Agreement, the term Employer Contribution refers solely to Employer Nonelective Contributions. Any reference to the Agreement under this Section 2.2 is a reference to the profit sharing plan Agreement or 401(k) plan Agreement (as applicable).

	(a)	A mount of Employer Contribution. The Employer must designate under Part 4, #12 of the profit sharing plan Agreement the amount it will contribute as an Employer Contribution under the Plan. If the Employer adopts the 401(k) plan Agreement and elects to make Employer Nonelective Contributions under Part 4C of the Agreement, the Employer must complete Part 4C, #20 of the Agreement, unless the only Employer Nonelective Contribution authorized under the Plan is a QNEC under Part 4C, #22. An Employer Contribution authorized under this Section may be totally within the Employer’s discretion or may be a fixed amount determined as a uniform percentage of each Eligible Participant’s Included Compensation or as a fixed dollar amount for each Eligible Participant. An Employer Contribution under this Section will be allocated to the Eligible Participants’ Employer Contribution Account in accordance with the allocation formula selected under Part 4, #13 of the Agreement [Part 4C, #21 of the 401(k) Agreement].

		(1)	Davis-Bacon Contribution Formula. The Employer may elect a Davis-Bacon Contribution Formula under Part 4, #12.d. of the Nonstandardized Agreement [Part 4C, #20.d. of the Nonstandardized 401(k) Agreement]. Under the Davis-Bacon Contribution Formula, the Employer will provide an Employer Contribution for each Eligible Participant who performs Davis-Bacon Act Service. For this purpose, Davis-Bacon Act Service is any service performed by an Employee under a public contract subject to the Davis-Bacon Act or to any other federal, state or municipal prevailing wage law. Each such Eligible Participant will receive a contribution based on the hourly



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		contribution rate for the Participant’s employment classification, as designated on Schedule A of the Agreement. Schedule A is incorporated as part of the Agreement.

		In applying the Davis-Bacon Contribution Formula under this subsection (1), the following default rules will apply. The Employer may modify these default rules under Part 4, #12.d.(2) of the Nonstandardized Agreement [Part 4C, #20. d. (2) of the Nonstandardized 401(k) Agreement].

		(i)	Eligible Employees. Highly Compensated Employees are Excluded Employees for purposes of receiving an Employer Contribution under the Davis-Bacon Contribution Formula.

		(ii)	Minimum age and service conditions. No minimum age or service conditions will apply for purposes of determining an Employee’s eligibility under the Davis-Bacon Contribution Formula.

		(iii)	Entry Date. For purposes of applying the Davis-Bacon Contribution Formula, an Employee becomes an Eligible Participant on his/her Employment Commencement Date.

		(iv)	Allocation conditions. No allocation conditions (as described in Section 2.6) will apply for purposes of determining an Eligible Participant’s allocation under the Davis-Bacon Contribution Formula.

		(v)	Vesting. Employer Contributions made pursuant to the Davis-Bacon Contribution Formula are always 100% vested.

		(vi)	Offset of other Employer Contributions. The contributions under the Davis Bacon Contribution Formula will not offset any other Employer Contributions under the Plan. However, the Employer may elect under Part 4, #12.d.(1) of the Nonstandardized Agreement [Part 4C, #20.d.(1) of the Nonstandardized 401(k) Agreement] to offset any other Employer Contributions made under the Plan by the contributions a Participant receives under the Davis-Bacon Contribution Formula. Under the Nonstandardized 401(k) plan Agreement, the Employer may elect under Part 4C, #20.d.(1) to apply the offset under this subsection to Employer Nonelective Contributions, Employer Matching Contributions, or both.

	(2)	Net Profits. The Employer may elect under Part 4, #12 of the Agreement [Part 4B, #16 and Part 4C, #20 of the 401(k) Agreement], to limit any Employer Contribution under the Plan to Net Profits. Unless modified in the Agreement, Net Profits means the Employer’s net income or profits determined in accordance with generally accepted accounting principles, without any reduction for taxes based upon income, or the contributions made by the Employer under this Plan or any other qualified plan. Unless specifically elected otherwise under Part 4, #12.e.(2) of the Nonstandardized Agreement [Part 4C, #20.e.(2) of the Nonstandardized 401(k) Agreement], this limit will not apply to any Employer Contributions made under a Davis-Bacon Contribution Formula.

	(3)	Multiple formulas. If the Employer elects more than one Employer Contribution formula, each formula is applied separately. The Employer’s aggregate Employer Contribution for a Plan Year will be the sum of the Employer Contributions under all such formulas.

(b)	A llocation formula for Employer Contributions. The Employer must elect a definite allocation formula under Part 4, #13 of the profit sharing plan Agreement that determines how much of the Employer Contribution is allocated to each Eligible Participant. If the Employer adopts the 401(k) plan Agreement and elects to make an Employer Nonelective Contribution (other than a QNEC) under Part 4C, #20 of the Agreement, Part 4C, #21 also must be completed designating the allocation formula under the Plan. An Eligible Participant is only entitled to an allocation if such Participant satisfies the allocation conditions described in Part 4, #15 of the Agreement [Part 4C, #24 of the 401(k) Agreement]. See Section 2.6.

	(1)	Pro Rata Allocation Method. If the Employer elects the Pro Rata Allocation Method, a pro rata share of the Employer Contribution is allocated to each Eligible Participant’s Employer Contribution Account. A Participant’s pro rata share is determined based on the ratio such Participant’s Included Compensation bears to the total of all Eligible Participants’ Included Compensation. However, if the Employer elects under Part 4, #12.c. of the Agreement [Part 4C, #20.c. of the 401(k) Agreement] to contribute a uniform dollar amount for each Eligible Participant, the pro rata allocation method allocates that uniform dollar amount to each Eligible Participant. If the Employer elects a Davis-Bacon Contribution Formula under Part 4, #12.d. of the Nonstandardized Agreement [Part 4C, #20.d. of the Nonstandardized 401(k) Agreement], the Employer Contributions made pursuant to such formula will be allocated to each Eligible



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	Participant based on his/her Davis-Bacon Act Service in accordance with the employment classifications identified under Schedule A of the Agreement.

(2)	Permitted Disparity Method. If the Employer elects the Permitted Disparity Method, the Employer Contribution is allocated to Eligible Participants under the Two-Step Formula or the Four-Step Formula (as elected under the Agreement). The Permitted Disparity Method only may apply if the Employer elects under the Agreement to make a discretionary contribution. The Employer may not elect the Permitted Disparity Method under the Plan if another qualified plan of the Employer, which covers any of the same Employees, uses permitted disparity in determining the allocation of contributions or the accrual of benefits under the plan.

	For purposes of applying the Permitted Disparity Method, Excess Compensation is the portion of an Eligible Participant’s Included Compensation that exceeds the Integration Level. The Integration Level is the Taxable Wage Base, unless the Employer designates a different amount under Part 4, #14.b.(2) of the Agreement [Part 4C, #23.b.(2) of the 401(k) Agreement].

	(i)	Two-Step Formula. If the Employer elects the Two-Step Formula, the following allocation method applies. However, the Employer may elect under Part 4, #14.b.(1) of the Agreement [Part 4C, #23.b.(1) of the 401(k) Agreement] to have the Four-Step Method, as described in subsection (ii) below, automatically apply for any Plan Year in which the Plan is a Top-Heavy Plan.

		(A)	Step One. The Employer Contribution is allocated to each Eligible Participant’s Account in the ratio that each Eligible Participant’s Included Compensation plus Excess Compensation for the Plan Year bears to the total Included Compensation plus Excess Compensation of all Eligible Participants for the Plan Year. The allocation under this Step One, as a percentage of each Eligible Participant’s Included Compensation plus Excess Compensation, may not exceed the Applicable Percentage under the following table:


Integration Level (as a % of the Taxable Wage Base)	Applicable Percentage


100%	5.7	%

More than 80% but less than 100%	5.4	%

More than 20% and not more than 80%	4.3	%

20% or less	5.7	%


	(B)	Step Two. Any Employer Contribution remaining after Step One will be allocated in the ratio that each Eligible Participant’s Included Compensation for the Plan Year bears to the total Included Compensation of all Eligible Participants for the Plan Year.

(ii)	Four-Step Formula. If the Employer elects the Four-Step Formula, or if the Plan is a Top-Heavy Plan and the Employer elects under the Agreement to have the Four-Step Formula apply for any Plan Year that the Plan is a Top-Heavy Plan, the following allocation method applies. The allocation under this Four-Step Formula may be modified if the Employer maintains a Defined Benefit Plan and elects under Part 13, #54.b. of the Agreement [Part 13, #72.b. of the 401(k) Agreement] to provide a greater top-heavy minimum contribution. See Section 16.2(a)(5)(ii).

	(A)	Step One. The Employer Contribution is allocated to each Eligible Participant’s Account in the ratio that each Eligible Participant’s Total Compensation for the Plan Year bears to all Eligible Participants’ Total Compensation for the Plan Year, but not in excess of 3% of each Eligible Participant’s Total Compensation.

		For any Plan Year for which the Plan is a Top- Heavy Plan, an allocation will be made under this subsection (A) to any Non-Key Employee who is an Eligible Participant (and is not an Excluded Employee) if such individual is employed as of the last day of the Plan Year, even if such individual fails to satisfy any minimum Hours of Service allocation condition under Part 4, #15 of the Agreement [Part 4C, #24 of the 401(k) Agreement]. If the Plan is a Top-Heavy 401(k) Plan, an allocation also will be made under this subsection (A) to any



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


					Employee who is an Eligible Participant for purposes of making Section 401(k) Deferrals under the Plan, even if the individual has not satisfied the minimum age and service conditions under Part 1, #5 of the Agreement applicable to any other contribution types.

				(B)	Step Two. Any Employer Contribution remaining after the allocation in Step One will be allocated to each Eligible Participant’s Account in the ratio that each Eligible Participant’s Excess Compensation for the Plan Year bears to the Excess Compensation of all Eligible Participants for the Plan Year, but not in excess of 3% of each Eligible Participant’s Included Compensation.

				(C)	Step Three. Any Employer Contribution remaining after the allocation in Step Two will be allocated to each Eligible Participant’s Account in the ratio that the sum of each Eligible Participant’s Included Compensation and Excess Compensation bears to the sum of all Eligible Participants’ Included Compensation and Excess Compensation. The allocation under this Step Three, as a percentage of each Eligible Participant’s Included Compensation plus Excess Compensation, may not exceed the Applicable Percentage under the following table:


Integration Level (as a % of the Taxable Wage Base)	Applicable Percentage


100%	2.7	%

More than 80% but less than 100%	2.4	%

More than 20% and not more than 80%	1.3	%

20% or less	2.7	%


			(D)	Step Four. Any remaining Employer Contribution will be allocated to each Eligible Participant’s Account in the ratio that each Eligible Participant’s Included Compensation for the Plan Year bears to all Eligible Participants’ Included Compensation for that Plan Year.

	(3)	Uniform points allocation. The Employer may elect under Part 4, #13.c. of the Nonstandardized Agreement [Part 4C, #21.c. of the Nonstandardized 401(k) Agreement] to allocate the Employer Contribution under a uniform points allocation formula. Under this formula, the allocation for each Eligible Participant is determined based on the Eligible Participant’s total points for the Plan Year, as determined under the Nonstandardized Agreement. An Eligible Participant’s allocation of the Employer Contribution is determined by multiplying the Employer Contribution by a fraction, the numerator of which is the Eligible Participant’s total points for the Plan Year and the denominator of which is the sum of the points for all Eligible Participants for the Plan Year.

		An Eligible Participant will receive points for each year(s) of age and/or each Year(s) of Service designated under Part 4, #13.c. of the Nonstandardized Agreement [Part 4C, #21.c. of the Nonstandardized 401(k) Agreement]. In addition, an Eligible Participant also may receive points based on his/her Included Compensation, if the Employer so elects under the Nonstandardized Agreement. Each Eligible Participant will receive the same number of points for each designated year of age and/or service and the same number of points for each designated level of Included Compensation. An Eligible Participant must receive points for either age or service, or may receive points for both age and service. If the Employer also provides points based on Included Compensation, an Eligible Participant will receive points for each level of Included Compensation designated under Part 4, #13.c.(3) of the Nonstandardized Agreement [Part 4C, #21.c.(3) of the Nonstandardized 401(k) Agreement]. For this purpose, the Employer may not designate a level of Included Compensation that exceeds $200.

		To satisfy the nondiscrimination safe harbor under Treas. Reg. §1.401(a)(4)-2, the average of the allocation rates for Highly Compensated Employees in the Plan must not exceed the average of the allocation rates for the Nonhighly Compensated Employees in the Plan. For this purpose, the average allocation rates are determined in accordance with Treas. Reg. § 1.401(a)(4)-2(b)(3)(B).

(c)	S pecial rules for determining Included Compensation.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(1)	Applicable period for determining Included Compensation. In determining an Eligible Participant’s allocation under Part 4, #13 of the Agreement [Part 4C, #21 of the 401(k) Agreement], the Participant’s Included Compensation is determined separately for each period designated under Part 4, #14.a.(1) of the Agreement [Part 4C, #23.a.(1) of the 401(k) Agreement]. If the Employer elects the Permitted Disparity Method under Part 4, #13.b. of the Agreement [Part 4C, #21.b. of the 401(k) Agreement], the period designated must be the Plan Year. If the Employer elects the Pro Rata Allocation Method or the uniform points allocation formula, and elects a period other than the Plan Year, a Participant’s allocation of Employer Contributions will be determined separately for each period based solely on Included Compensation for such period. The Employer need not actually make the Employer Contribution during the designated period, provided the total Employer Contribution for the Plan Year is allocated based on the proper Included Compensation.

		(2)	Partial period of participation. If an Employee is an Eligible Participant for only part of a Plan Year, the Employer Contribution formula(s) will be applied based on such Employee’s Included Compensation for the period he/she is an Eligible Participant. However, the Employer may elect under Part 4, #14.a.(2) of the Agreement [Part 4C, #23.a.(2) of the 401(k) Agreement] to base the Employer Contribution formula(s) on the Employee’s Included Compensation for the entire Plan Year, including the portion of the Plan Year during which the Employee is not an Eligible Participant. In applying this subsection (2) to the 401(k) Agreement, an Employee’s status as an Eligible Participant is determined solely with respect to the Employer Nonelective Contribution under Part 4C of the Agreement.

		(3)	Measurement period. Except as provided in subsection (2) above, for purposes of determining an Eligible Participant’s allocation of Employer Contributions, Included Compensation is measured on the Plan Year, unless the Employer elects under Part 4, #14.a.(3) of the Nonstandardized Agreement [Part 3, #11.b. of the Nonstandardized 401(k) Agreement] to measure Included Compensation on the calendar year ending in the Plan Year or on the basis of any other 12-month period ending in the Plan Year. If the Employer elects to measure Included Compensation on the calendar year or other 12-month period ending in the Plan Year, the Included Compensation of any Employee whose Employment Commencement Date is less than 12 months before the end of such period must be measured on the Plan Year or such Employee’s period of participation, as determined under subsection (2) above. If the Employer adopts the Nonstandardized 401(k) Agreement, any election under Part 3, #11.b. of the Agreement applies for purposes of all contributions permitted under the Agreement.

2.3	4 01(k) Plan Contributions and Allocations. This Section 2.3 applies if the Employer has adopted the 401(k) plan Agreement. The 401(k) Agreement is a profit sharing plan with a 401(k) feature. Any reference to the Agreement under this Section 2.3 is a reference to the 401(k) Agreement. The Employer must designate under Part 4 of the Agreement the amount and type of Employer Contributions it will make under the Plan. Employer Contributions under a 401(k) plan are generally subject to special limits and nondiscrimination rules. (See Article 17 for a discussion of the special rules that apply to the Employer Contributions under a 401(k) plan.) The Employer may make any (or all) of the following contributions under the 401(k) Agreement.

	(a)	S ection 401(k) Deferrals. If so elected under Part 4A of the Agreement, an Eligible Participant may enter into a Salary Reduction Agreement with the Employer authorizing the Employer to withhold a specific dollar amount or a specific percentage from the Participant’s Included Compensation and to deposit such amount into the Participant’s Section 401(k) Deferral Account under the Plan. An Eligible Participant may defer with respect to Included Compensation that exceeds the Compensation Dollar Limitation, provided the deferrals otherwise satisfy the limitations under Code §402(g) and any other limitations under the Plan. A Salary Reduction Agreement may only relate to Included Compensation that is not currently available at the time the Salary Reduction Agreement is completed. An Employer may elect under Part 4A, #15 of the Agreement to provide a special effective date solely for Section 401(k) Deferrals under the Plan.

		An Employee’s Section 401(k) Deferrals are treated as Employer Contributions for all purposes under this Plan, except as otherwise provided under the Code or Treasury regulations. If the Employer adopts the Nonstandardized 401(k) Agreement and does not elect to allow Section 401(k) Deferrals under Part 4A of the Agreement, the only contributions an Eligible Participant may make to the Plan are Employee After-Tax Contributions as authorized under Article 3 of this BPD and Part 4D of the Nonstandardized Agreement. In either case, an Eligible Participant may also receive Employer Nonelective Contributions and/or Employer Matching Contributions under the Plan, to the extent authorized under the Agreement. (The Employee may not make Employee After-Tax Contributions under the Standardized 401(k) Agreement.)

		(1)	Change in deferral election. At least once a year, an Eligible Participant may enter into a new Salary Reduction Agreement, or may change his/her elections under an existing Salary Reduction Agreement, at the time and in the manner prescribed by the Plan Administrator on the Salary



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		Reduction Agreement form (or other written procedures). The Salary Reduction Agreement may also provide elections as to the investment funds into which the Section 401(k) Deferrals will be contributed and the time and manner a Participant may change such elections.

	(2)	Automatic deferral election. If elected under Part 4A, #14 of the Agreement, the Employer will automatically withhold the amount designated under Part 4A, #14 from Eligible Participants’ Included Compensation for payroll periods starting with such Participants’ Entry Date, unless the Eligible Participant completes a Salary Reduction Agreement electing a different deferral amount (including a zero deferral amount). The Employer must designate in Part 4A, #14 of the Agreement the date as of which an Employee’s deferral election will be taken into account to override the automatic deferral election under this subparagraph (2). This automatic deferral election does not apply to any Eligible Participant who has elected to defer an amount equal to or greater than the automatic deferral amount designated in Part 4A, #14 of the Agreement. The Employer may elect under Part 4A, #14.b. of the Agreement to apply the automatic deferral election only to Employees who become Eligible Participants after a specified date. The Plan Administrator will deposit all amounts withheld pursuant to this automatic deferral election into the appropriate Participant’s Section 401(k) Deferral Account.

		Prior to the time an automatic deferral election first goes into effect, an Eligible Participant must receive written notice concerning the effect of the automatic deferral election and his/her right to elect a different level of deferral under the Plan, including the right to elect not to defer. After receiving the notice, an Eligible Participant must have a reasonable time to enter into a new Salary Reduction Agreement before any automatic deferral election goes into effect.

(b)	E mployer Matching Contributions. If so elected under Part 4B of the Agreement, the Employer will make an Employer Matching Contribution, in accordance with the matching contribution formula(s) selected in Part 4B, #16, to Eligible Participants who satisfy the allocation conditions under Part 4B, #19 of the Agreement. See Section 2.6. Any Employer Matching Contribution determined under Part 4B, #16 will be allocated to the Eligible Participant’s Employer Matching Contribution Account.

	(1)	Applicable contributions. The Employer must elect under the Nonstandardized Agreement whether the matching contribution formula(s) applies to Section 401(k) Deferrals, Employee After Tax Contributions, or both. Under the Standardized Agreement, Employer Matching Contributions apply only to Section 401(k) Deferrals. The contributions eligible for an Employer Matching Contribution are referred to under this Section as “applicable contributions.” If a matching formula applies to both Section 401(k) Deferrals and Employee After-Tax Contributions, such contributions are aggregated to determine the Employer Matching Contribution allocated under the formula.

	(2)	Multiple formulas. If the Employer elects more than one matching contribution formula under Part 4B, #16 of the Agreement, each formula is applied separately. An Eligible Participant’s aggregate Employer Matching Contributions for a Plan Year will be the sum of the Employer Matching Contributions the Participant is entitled to under all such formulas.

	(3)	Applicable contributions taken into account under the matching contribution formula. The Employer must elect under Part 4B, #17.a. of the Agreement the period for which the applicable contributions are taken into account in applying the matching contribution formula(s) and in applying any limits on the amount of such contributions that may be taken into account under the formula(s). In applying the matching contribution formula(s), applicable contributions (and Included Compensation) are determined separately for each designated period and any limits on the amount of applicable contributions taken into account under the matching contribution formula(s) are applied separately for each designated period.

	(4)	Partial period of participation. In applying the matching contribution formula(s) under the Plan to an Employee who is an Eligible Participant for only part of the Plan Year, the Employer may elect under Part 4B, #17.b. of the Agreement to take into account Included Compensation for the entire Plan Year or only for the portion of the Plan Year during which the Employee is an Eligible Participant. Alternatively, the Employer may elect under Part 4B, #17.b.(3) of the Agreement to take into account Included Compensation only for the period that the Employee actually makes applicable contributions under the Plan. In applying this subsection (4), an Employee’s status as an Eligible Participant is determined solely with respect to the Employer Matching Contribution under Part 4B of the Agreement.

(c)	Q ualified Matching Contributions (QMACs). If so elected under Part 4B, #18 of the Agreement, the Employer may treat all (or a portion) of its Employer Matching Contributions as QMACs. If an Employer Matching Contribution is designated as a QMAC, it must satisfy the requirements for a QMAC (as described in Section 17.7(g)) at the time the contribution is made to the Plan and must be allocated to the Participant’s



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	QMAC Account. To the extent an Employer Matching Contribution is treated as a QMAC under Part 4B, #18, such contribution will be 100% vested, regardless of any inconsistent elections under Part 6 of the Agreement relating to Employer Matching Contributions. (See Sections 17.2(d)(2) and 17.3(d)(2) for the ability to make QMACs to correct an ADP or ACP failure without regard to any election under Part 4B, #18 of the Agreement.)

	Under Part 4B, #18, the Employer may designate all Employer Matching Contributions as QMACs or may designate only those Employer Matching Contributions under specific matching contribution formula(s) to be QMACs. Alternatively, the Employer may authorize a discretionary QMAC, in addition to the Employer Matching Contributions designated under Part 4B, #16, to be allocated uniformly as a percentage of Section 401(k) Deferrals made during the Plan Year. The Employer may elect under the Agreement to allocate the discretionary QMAC only to Eligible Participants who are Nonhighly Compensated Employees or to all Eligible Participants. If the Employer elects both a discretionary Employer Matching Contribution formula and a discretionary QMAC formula, the Employer must designate, in writing, the extent to which any matching contribution is intended to be an Employer Matching Contribution or a QMAC.

(d)	E mployer Nonelective Contributions. If so elected under Part 4C of the Agreement, the Employer may make Employer Nonelective Contributions on behalf of each Eligible Participant under the Plan who has satisfied the allocation conditions described in Part 4C, #24 of the Agreement. See Section 2.6. The Employer must designate under Part 4C, #20 of the Agreement the amount of any Employer Nonelective Contributions it wishes to make under the Plan. The amount of any Employer Nonelective Contributions authorized under the Plan and the method of allocating such contributions is described in Section 2.2 of this Article.

(e)	Q ualified Nonelective Contributions (QNECs). The Employer may elect under Part 4C, #22 of the Agreement to permit discretionary QNECs under the Plan. A QNEC must satisfy the requirements for a QNEC (as described in Section 17.7(h)) at the time the contribution is made to the Plan and must be allocated to the Participant’s QNEC Account. If the Plan authorizes the Employer to make both a discretionary Employer Nonelective Contribution and a discretionary QNEC, the Employer must designate, in writing, the extent to which any contribution is intended to be an Employer Nonelective Contribution or a QNEC. To the extent an Employer Nonelective Contribution is treated as a QNEC under Part 4C, #22, such contribution will be 100% vested, regardless of any inconsistent elections under Part 6 of the Agreement relating to Employer Nonelective Contributions. (See Sections 17.2( d)(2) and 17.3(d)(2) for the ability to make QNECs to correct an ADP or ACP failure without regard to any election under Part 4C, #22 of the Agreement.)

	If the Employer makes a QNEC for the Plan Year, it will be allocated to Participants’ QNEC Account based on the allocation method selected by the Employer under Part 4C, #22 of the Agreement. An Eligible Participant will receive a QNEC allocation even if he/she has not satisfied any allocation conditions designated under Part 4C, #24 of the Agreement, unless the Employer elects otherwise under the Part 4C, #22.c. of the Agreement.

	(1)	Pro Rata Allocation Method. If the Employer elects the Pro Rata Allocation Method under Part 4C, #22.a. of the Agreement, any Employer Nonelective Contribution properly designated as a QNEC will be allocated as a uniform percentage of Included Compensation to all Eligible Participants who are Nonhighly Compensated Employees or to all Eligible Participants, as specified under Part 4C, #22.a.

	(2)	Bottom-up QNEC method. If the Employer elects the Bottom-up QNEC method under Part 4C, #22.b. of the Agreement, any Employer Nonelective Contribution properly designated as a QNEC will be first allocated to the Eligible Participant with the lowest Included Compensation for the Plan Year for which the QNEC is being allocated. To receive an allocation of the QNEC under this subsection (2), the Eligible Participant must be a Nonhighly Compensated Employee for the Plan Year for which the QNEC is being allocated.

		The QNEC will be allocated to the Eligible Participant with the lowest Included Compensation until all of the QNEC has been allocated or until the Eligible Participant has reached his/her Annual Additions Limitation, as described in Article 7. For this purpose, if two or more Eligible Participants have the same Included Compensation, the QNEC will be allocated equally to each Eligible Participant until all of the QNEC has been allocated, or until each Eligible Participant has reached his/her Annual Additions Limitation. If any QNEC remains unallocated, this process is repeated for the Eligible Participant(s) with the next lowest level of Included Compensation in accordance with the provisions under this subsection (2), until all of the QNEC is allocated.

(f)	S afe Harbor Contributions. If so elected under Part 4E of the 401(k) Agreement, the Employer may elect to treat this Plan as a Safe Harbor 401(k) Plan. To qualify as a Safe Harbor 401(k) Plan, the Employer must make a Safe Harbor Nonelective Contribution or a Safe Harbor Matching Contribution under the Plan. Such contributions are subject to special vesting and distribution restrictions and must be allocated to the Eligible



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		Participants’ Safe Harbor Nonelective Contribution Account or Safe Harbor Matching Contribution Account, as applicable. Section 17.6 describes the requirements that must be met to qualify as a Safe Harbor 401(k) Plan and the method for calculating the amount of the Safe Harbor Contribution that must be made under the Plan.

	(g)	P rior SIMPLE 401(k) plan. If this Agreement is being used to amend or restate a 401(k) plan which complied with the SIMPLE 401(k) plan provisions under Code §401(k)(11), any provision in this Agreement which is inconsistent with the SIMPLE 401(k) plan provisions is not effective for any Plan Year during which the plan complied with the SIMPLE 401(k) plan provisions.

2.4	M oney Purchase Plan Contribution and Allocations. This Section 2.4 applies if the Employer has adopted the money purchase plan Agreement. Any reference to the Agreement under this Section 2.4 is a reference to the money purchase plan Agreement.

	(a)	E mployer Contributions. The Employer must elect under Part 4 of the Nonstandardized Agreement to make Employer Contributions under one or more of the following methods:

		(1)	as a uniform percentage of each Eligible Participant’s Included Compensation;

		(2)	as a uniform dollar amount for each Eligible Participant;

		(3)	under the Permitted Disparity Method (using either the individual method or group method);

		(4)	under a formula based on service with the Employer; or

		(5)	under a Davis-Bacon Contribution Formula.

		Under the Standardized Agreement, the Employer may only elect to make an Employer Contribution as a uniform percentage of Included Compensation, a uniform dollar amount, or under the Permitted Disparity Method.

		An Eligible Participant is only entitled to share in the Employer Contribution if such Participant satisfies the allocation conditions described under Part 4, #15 of the Agreement. See Section 2.6.

		If the Employer elects more than one Employer Contribution formula under Part 4, #12 of the Agreement, each formula is applied separately. An Eligible Participant’s aggregate Employer Contributions for a Plan Year will be the sum of the Employer Contributions the Participant is entitled to under all such formulas.

	(b)	U niform percentage or uniform dollar amount. The contribution made by the Employer must be allocated to Eligible Participants in a definitely determinable manner. If the Employer elects to make an Employer Contribution as a uniform percentage of Included Compensation under Part 4, #12.a. of the Agreement or as a uniform dollar amount under Part 4, #12.b. of the Agreement, each Eligible Participant’s allocation of the Employer Contribution will equal the amount determined under the contribution formula elected under the Agreement.

	(c)	P ermitted Disparity Method. The Employer may elect under Part 4, #12.c. of the Agreement to use the Permitted Disparity Method using either the individual method or the group method. An Employer may not elect a Permitted Disparity Method under the Plan if another qualified plan of the Employer, which covers any of the same Employees, uses permitted disparity in determining the allocation of contributions or accrual of benefits under the plan.

		For purposes of applying the Permitted Disparity Method, Excess Compensation is the portion of an Eligible Participant’s Included Compensation that exceeds the Integration Level. The Integration Level is the Taxable Wage Base, unless the Employer designates a different amount under Part 4, #14.b. of the Agreement.

		(1)	Individual method. If the Employer elects the Permitted Disparity Method using the individual method, each Eligible Participant will receive an allocation of the Employer Contribution equal to the amount determined under the contribution formula under Part 4, #12.c.(1) of the Agreement. Under the individual Permitted Disparity Method, the Employer will contribute (i) a fixed percentage of each Eligible Participant’s Included Compensation for the Plan Year plus (ii) a fixed percentage of each Eligible Participant’s Excess Compensation. The percentage of each Eligible Participant’s Excess Compensation under (ii) may not exceed the lesser of the percentage of total Included Compensation contributed under (i) or the Applicable Percentage under the following table:



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Integration Level (As a percentage of the Taxable Wage Base)	Applicable Percentage


100%	5.7	%

More than 80% but less than 100%	5.4	%

More than 20% and not more than 80%	4.3	%

20% or less	5.7	%


	(2)	Group method. If the Employer elects the Permitted Disparity Method using the group method under Part 4, #12.c.(2) of the Agreement, the Employer will contribute a fixed percentage (as designated in the Agreement) of the total Included Compensation for the Plan Year of all Eligible Participants. The total Employer Contribution is then allocated among the Eligible Participants under either the Two-Step Formula or the Four-Step Formula described below.

		(i)	Two-Step Formula. If the Employer elects the Two-Step Formula, the Employer Contribution will be allocated in the same manner as under Section 2.2(b)(2)(i) above. However, the Employer may elect to have the Four-Step Formula automatically apply for any Plan Year in which the Plan is a Top-Heavy Plan.

		(ii)	Four-Step Formula. If the Employer elects the Four-Step Formula or if the Plan is a Top-Heavy Plan and the Employer elects to have the Four-Step Formula apply for Plan Years when the Plan is a Top-Heavy Plan, the Employer Contribution will be allocated to Eligible Participants in the same manner as under Section 2.2(b)(2)(ii) above.

(d)	C ontribution based on service. The Employer may elect under Part 4, #12.d. of the Nonstandardized Agreement to provide an Employer Contribution for each Eligible Participant based on the service performed by such Eligible Participant during the Plan Year (or other period designated under Part 4, #13.a. of the Agreement). The Employer may provide a fixed dollar amount of a fixed percentage of Included Compensation for each Hour of Service, each week of employment or any other measuring period selected under Part 4, #12.d. of the Nonstandardized Agreement. If the Employer elects to make a contribution based on service, each Eligible Participant will receive an allocation of the Employer Contribution equal to the amount determined under the contribution formula under Part 4, #12.d. of the Nonstandardized Agreement.

(e)	D avis-Bacon Contribution Formula. The Employer may elect under Part 4, #12.e. of the Nonstandardized Agreement to provide an Employer Contribution for each Eligible Participant who performs Davis-Bacon Act Service. For this purpose, Davis-Bacon Act Service is any service performed by an Employee under a public contract subject to the Davis-Bacon Act or to any other federal, state or municipal prevailing wage law. Each such Eligible Participant will receive a contribution based on the hourly contribution rate for the Participant’s employment classification, as designated on Schedule A of the Agreement. Schedule A is incorporated as part of the Agreement. In applying the Davis-Bacon Contribution Formula under this subsection (e), the following default rules will apply. The Employer may modify these default rules under Part 4, #12.e.(2) of the Nonstandardized Agreement

	(1)	Eligible Employees. Highly Compensated Employees are Excluded Employees for purposes of receiving an Employer Contribution under the Davis-Bacon Contribution Formula.

	(2)	Minimum age and service conditions. No minimum age or service conditions will apply for purposes of determining an Employee’s eligibility under the Davis-Bacon Contribution Formula.

	(3)	Entry Date. For purposes of applying the Davis-Bacon Contribution Formula, an Employee becomes an Eligible Participant on his/her Employment Commencement Date.

	(4)	Allocation conditions. No allocation conditions (as described in Section 2.6) will apply for purposes of determining an Eligible Participant’s allocation under the Davis-Bacon Contribution Formula.

	(5)	Vesting. Employer Contributions made pursuant to the Davis-Bacon Contribution Formula are always 100% vested.

	(6)	Offset of other Employer Contributions. The contributions under the Davis Bacon Contribution Formula will not offset any other Employer Contributions under the Plan. However, the Employer may elect under Part 4, #12.e.(1) of the Nonstandardized Agreement to offset any other Employer



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			Contributions made under the Plan by the Employer Contributions a Participant receives under the Davis-Bacon Contribution Formula.

	(f)	Applicable period for determining Included Compensation. In determining the amount of Employer Contribution to be allocated to an Eligible Participant, Included Compensation is determined separately for each period designated under Part 4, #13.a. of the Agreement. If the Employer elects the Permitted Disparity Method under Part 4, #12.c. of the Agreement, the period designated under Part 4, #13.a. must be the Plan Year. If the Employer elects an Employer Contribution formula under Part 4, #12 of the Agreement other than the Permitted Disparity Method, and elects a period under Part 4, #13.a. other than the Plan Year, a Participant’s allocation of Employer Contributions will be determined separately for each period based solely on Included Compensation for such period. If the Employer elects the service formula under Part 4, #12.d. of the Nonstandardized Agreement, the Employer Contribution also will be determined separately for each period designated under Part 4, #13.a. of the Agreement based on service performed during such period. The Employer need not actually make the Employer Contribution during the designated period, provided the total Employer Contribution for the Plan Year is allocated based on the proper Included Compensation.

	(g)	Special rules for determining Included Compensation. The same rules as discussed under Section 2.2(c)(2) apply to permit the Employer to elect under Part 4, #13.b. of the Agreement to take into account an Employee’s Included Compensation for the entire Plan Year, even if the Employee is an Eligible Participant for only part of the Plan Year. If no election is made under Part 4, #13.b., only Included Compensation for the portion of the Plan Year while an Employee is an Eligible Participant will be taken into account in determining an Employee’s Employer Contribution under the Plan. The Employer also may elect under Part 4, #13.c. of the Agreement to take into account Included Compensation for the calendar year ending in the Plan Year or other 12-month period, as provided in Section 2.2(c)(3).

	(h)	Limit on contribution where Employer maintains another plan in addition to a money purchase plan. If the Employer adopts the money purchase plan Agreement and also maintains another qualified retirement plan, the contribution to be made under the money purchase plan Agreement (as designated in Part 4 of the Agreement) will not exceed the maximum amount that is deductible under Code §404(a)(7), taking into account all contributions that have been made to the plans prior to the date a contribution is made under the money purchase plan Agreement.

2.5	Target Benefit Plan Co ntribution . This Section 2.5 applies if the Employer has adopted the target benefit plan Agreement. Any reference to the Agreement under this Section 2.5 is a reference to the target benefit plan Agreement.

	(a)	Stated Benefit. A Participant’s Stated Benefit, as of any Plan Year, is the amount determined in accordance with the benefit formula selected under Part 4 of the Agreement, payable annually in the form of a Straight Life Annuity commencing upon the Participant’s Normal Retirement Age (as defined in Part 5 of the Agreement) or current age (if later). In applying the benefit formula under Part 4, all projected Years of Participation (as defined in subsection (d)(10) below) are counted beginning with the first Plan Year and projecting through the last day of the Plan Year in which the Participant attains Normal Retirement Age (or the current Plan Year, if later), assuming all relevant factors remain constant for future Plan Years. For this purpose, the first Plan Year is the latest of:

		(1)	the first Plan Year in which the Participant becomes an Eligible Participant;

		(2)	the first Plan Year immediately following a Plan Year in which the Plan did not satisfy the target benefit plan safe harbor under Treas. Reg. §1.401(a)(4)-8(b)(3); or

		(3)	the first Plan Year taken into account under the Plan’s benefit formula, as designated in Part 4, #13.c. of the Agreement. If Part 4, #13.c. is not completed, the first Plan Year taken into account under this subsection (3) will be the original Effective Date of this Plan, as designated under #59.a. or #59.b.(2) of the Agreement, as applicable.

		If this Plan is a “prior safe harbor plan” then, solely for purposes of determining projected Years of Participation, the Plan is deemed to satisfy the target benefit plan safe harbor under Treas. Reg. §1.401(a)(4)-8(b)(3) and the Participant is treated as an Eligible Participant under the Plan for any Plan Year beginning prior to January 1, 1994. This Plan is a prior safe harbor plan if it was originally in effect on September 19, 1991, and on that date the Plan contained a stated benefit formula that took into account service prior to that date, and the Plan satisfied the applicable nondiscrimination requirements for target benefit plans for those prior years. For purposes of determining whether a plan satisfies the applicable nondiscrimination requirements for target benefit plans for Plan Years beginning before January 1, 1994, no amendments after September 19, 1991, other than amendments necessary to satisfy §401(1) of the Code, will be taken into account.



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(b)	Employer Contribution . Each Plan Year, the Employer will contribute to the Plan on behalf of each Eligible Participant who has satisfied the allocation conditions under Part 4, #15 of the Agreement, an amount necessary to fund the Participant’s Stated Benefit, determined in accordance with the benefit formula selected under Part 4, #13 of the Agreement. The Employer’s required contribution may be reduced by forfeitures in accordance with the provisions of Section 5.5(b).

	(1)	Participant has not reached Normal Retirement Age . If a Participant has not reached Normal Retirement Age by the last day of the Plan Year, the Employer Contribution for such Plan Year with respect to that Participant is the excess, if any, of the Present Value Stated Benefit (as defined in subsection (3) below) over the Theoretical Reserve (as defined in subsection (4) below), multiplied by the appropriate Amortization Factor from Table II under Exhibit A of the Agreement. The factors under Table II are determined based on the applicable interest rate assumptions selected under Part 4, #14.b.(1) of the Agreement.

	(2)	Participant has reached Normal Retirement Age . If a Participant has reached Normal Retirement Age by the last day of the Plan Year, the Employer Contribution for such Plan Year with respect to that Participant is the excess, if any, of the Present Value Stated Benefit (as defined in subsection (3) below) over the Theoretical Reserve (as defined in subsection (4) below).

	(3)	Present Value Stated Benefit . For purposes of determining the Employer Contribution under the Plan, a Participant’s Present Value Stated Benefit is the Participant’s Stated Benefit multiplied by the appropriate present value factor under Table I or Table IA, as appropriate (if the Participant has not attained Normal Retirement Age) or Table IV (if the Participant has attained Normal Retirement Age). The Present Value Stated Benefit must be further adjusted by the factors under Table III if the Normal Retirement Age under the Plan is other than age 65. (See Exhibit A under the Agreement for the applicable factors. The applicable factors are determined based on the applicable interest rate assumptions selected under Part 4, #14.b.(1) of the Agreement and assuming a UP-1984 mortality table. If the Employer elects a different applicable mortality table under Part 4, #14.b.(2), appropriate factors must be attached to the Agreement.)

	(4)	Theoretical Reserve . Except as provided in the following paragraph, for the first Plan Year for which the Stated Benefit is determined (see subsection (a) above), a Participant’s Theoretical Reserve is zero. For each subsequent Plan Year, the Theoretical Reserve is the sum of the Theoretical Reserve for the prior Plan Year plus the Employer Contribution required for such prior Plan Year. The sum is then adjusted for interest (using the Plan’s interest assumptions for the prior Plan Year) through the last day of the current Plan Year. For any Plan Year following the Plan Year in which the Participant attains Normal Retirement Age, no interest adjustment is required. For purposes of determining a Participant’s Theoretical Reserve, minimum contributions required solely to comply with the Top-Heavy Plan rules under Article 16 are not included.

		If this Plan was a prior safe harbor plan (see the definition of prior safe harbor plan under subsection (a) above), with a benefit formula that takes into account Plan Years prior to the first Plan Year this Plan satisfies the target benefit plan safe harbor under Treas. Reg. §1.401(a)(4)-8(b)(3)(c), the Theoretical Reserve for the first Plan Year is determined by subtracting the result in subsection (ii) from the result in subsection (i).

		(i)	Determine the present value of the Stated Benefit as of the last day of the Plan Year immediately preceding the first Plan Year this Plan satisfies the target benefit plan safe harbor under Treas. Reg. §1.401(a)(4)-8(b)(3)(c), using the actuarial assumptions, the provisions of the Plan, and the Participant’s compensation as of such date. For a Participant who has attained Normal Retirement Age, the Stated Benefit will be determined using the actuarial assumptions, the provisions of the Plan, and the Participant’s compensation as of such date, using a straight life annuity factor for a Participant whose attained age is the Normal Retirement Age under the Plan.

		(ii)	Determine the present value of future Employer Contributions (i.e., the Employer Contributions due each Plan Year using the actuarial assumptions, the provisions of the Plan (disregarding those provisions of the Plan providing for the limitations of §415 of the Code or the minimum contributions under §416 of the Code)), and the Participant’s compensation as of such date, beginning with the first Plan Year through the end of the Plan Year in which the Participant attains Normal Retirement Age.

(c)	Benefit formula . The Employer may elect under Part 4 of the Agreement to apply a Nonintegrated Benefit Formula or an Integrated Benefit Formula. The benefit formula selected under Part 4 of the Agreement must comply with the target benefit plan safe harbor rules under Treas. Reg. §1.401(a)(4)-8(b)(3).



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(1)	Nonintegrated Benefit Formula . Under a Nonintegrated Benefit Formula, benefits provided under Social Security are not taken into account when determining an Eligible Participant’s Stated Benefit. A Nonintegrated Benefit Formula may provide for a Flat Benefit or a Unit Benefit.

	(i)	Flat Benefit. The Employer may elect under Part 4, #13.a.(1) of the Agreement to apply a Flat Benefit formula that provides a Stated Benefit equal to a specified percentage of Average Compensation. A Participant’s Stated Benefit determined under the Flat Benefit formula will be reduced pro rata if the Participant’s projected Years of Participation are less than 25 Years of Participation. For a Participant with less than 25 projected Years of Participation, the base percentage and the excess percentage are reduced by multiplying such percentages by a fraction, the numerator of which is the Participant’s projected Years of Participation, and the denominator of which is 25.

	(ii)	Unit Benefit. The Employer may elect under Part 4, #13.a.(2) of the Agreement or under Part 4, #13.a.(3) of the Nonstandardized Agreement to apply a Unit Benefit formula that provides a Stated Benefit equal to a specified percentage of Average Compensation multiplied by the Participant’s Years of Participation with the Employer. The Employer may elect to limit the Years of Participation taken into account under a Unit Benefit formula, however, the Plan must take into account all Years of Participation up to at least 25 years.

		If the Employer elects a tiered formula under Part 4, #13.a.(3) of the Nonstandardized Agreement, the highest benefit percentage for any Participant with less than 33 Years of Participation cannot be more than one-third larger than the lowest benefit percentage for any Participant with less than 33 Years of Participation. This requirement is satisfied if the percentage under Part 4, #13.a.(3)(a) applies to all Years of Participation up to at least 33. If the percentage under Part 4, #13.a.(3)(a) applies to Years of Participation less than 33, this paragraph will be satisfied if the total Years of Participation taken into account under Part 4, #13.a.(3)(b) and Part 4, #13.a.(3)(d) is not less than 33 and the percentage designated in Part 4, #13.a.(3)(c) is not less than P1(25-Y)/(33-Y) and is not greater than Pl(44-Y)/(33-Y), where P1 is the percentage under Part 4, #13.a.(3)(a) and Y is the number of Years of Participation to which the percentage under Part 4, #13.a.(3)(a) applies. If the total Years of Participation taken into account under Part 4, #13.a.(3)(b) and Part 4, #13.a.(3)(d) is less than 33, a similar calculation applies to any percentage designated in Part 4, #13.a.(3)(e).

(2)	Integrated Benefit Formula. An Integrated Benefit Formula is designed to provide a greater benefit to certain Participants to make up for benefits not provided under Social Security. An Integrated Benefit Formula may provide for a Flat Excess Benefit, a Unit Excess Benefit, a Flat Offset Benefit, or a Unit Offset Benefit. An Employer may not elect an Integrated Benefit Formula under the Plan if another qualified plan of the Employer, which covers any of the same Employees, uses permitted disparity (or imputes permitted disparity) in determining the allocation of contributions or accrual of benefits under the plan.

	(i)	Flat Excess Benefit . The Employer may elect under Part 4, #13.b.(1) of the Agreement to apply a Flat Excess Benefit formula that provides a Stated Benefit equal to a specified percentage of Average Compensation (“base percentage”) plus a specified percentage of Excess Compensation (“excess percentage”).

		(A)	Maximum permitted disparity . In completing a Flat Excess Benefit formula under Part 4, #13.b.(1) of the Agreement, the excess percentage under Part 4, #13.b.(1)(b) may not exceed the Maximum Disparity Percentage identified under subsection (3)(i) below. The excess percentage may be further reduced under the Cumulative Disparity Limit under subsection (3)(iv) below.

		(B)	Limitation on Years of Participation . The Participant’s base percentage and excess percentage under the Flat Excess Benefit formula are reduced pro rata if the Participant’s projected Years of Participation are less than 35 years. For a Participant with less than 35 projected Years of Participation, the base percentage and the excess percentage are reduced by multiplying such percentages by a fraction, the numerator of which is the Participant’s projected Years of Participation, and the denominator of which is 35.

	(ii)	Unit Excess Benefit . The Employer may elect under Part 4, #13.b.(2) of the Agreement or under Part 4, #13.b.(3) of the Nonstandardized Agreement to apply a Unit Excess Benefit formula which provides a Stated Benefit equal to a specified percentage of



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	Average Compensation (“base percentage”) plus a specified percentage of Excess Compensation (“excess percentage”) multiplied by the Participant’s Years of Participation with the Employer.

	(A)	Maximum permitted disparity . In completing a Unit Excess Benefit formula under Part 4, #13.b. of the Agreement, the excess percentage under the formula may not exceed the Maximum Disparity Percentage identified under subsection (3)(i) below. In addition, if the Employer elects a tiered formula under Part 4, #13.b.(3) of the Nonstandardized Agreement, the percentage designated under Part 4, #13.b.(3)(d) and/or Part 4, #13.b.(3)(f), as applicable, may not exceed the sum of the base percentage under Part 4, #13.b.(3)(a) and the excess percentage under Part 4, #13.b.(3)(b).

	(B)	Limitation on Years of Participation . The Employer must identify under Part 4, #13.b. the Years of Participation that will be taken into account under the Unit Excess Benefit formula. If the Employer elects a uniform formula under Part 4, #13.b.(2) of the Agreement, the Plan must take into account all Years of Participation up to at least 25. In addition, a Participant may not be required to complete more than 35 Years of Participation to earn his/her full Stated Benefit. (See the Cumulative Disparity Limit under subsection (3)(iv) below for additional restrictions that may limit a Participant’s Years of Participation that may be taken into account under the Plan.)

		If the Employer elects a tiered formula under Part 4, #13.b.(3) of the Nonstandardized Agreement and the Years of Participation specified under Part 4, #13.b.(3)(c) is less than 35, the percentage under Part 4, #13.b.(3)(d) must equal the sum of the base percentage under Part 4, #13.b.(3)(a) and the excess percentage under Part 4, #13.b.(3)(b) and any Years of Participation required under Part 4, #13.b.(3)(e) may not be less than 35 minus the Years of Participation designated under Part 4, #13.b.(3)(c). (See the Cumulative Disparity Limit under subsection (3)(iv) below for additional restrictions that may limit a Participant’s Years of Participation that may be taken into account under the Plan.) If the number of Years of Participation specified under Part 4, #13.b.(3)(c) is less than 35, and Part 4, #13.b.(3)(d) is not checked, the percentage specified under Part 4, #13.b.(3)(f) must equal the sum of the base percentage under Part 4, #13.b.(3)(a) and the excess percentage under Part 4, #13.b.(3)(b).

(iii)	Flat Offset Benefit . The Employer may elect under Part 4, #13.b.(4) of the Nonstandardized Agreement or Part 4, #13.b.(3) of the Standardized Agreement to apply a Flat Offset Benefit formula that provides a Stated Benefit equal to a specified percentage of Average Compensation (“gross percentage”) offset by a specified percentage of Offset Compensation (“offset percentage”).

	(A)	Maximum permitted disparity. In applying a Flat Offset Benefit formula, the offset percentage for any Participant may not exceed the Maximum Offset Percentage identified under subsection (3)(ii) below. The offset percentage may be further reduced under the Cumulative Disparity Limit under subsection (3)(iv) below.

	(B)	Limitation on Years of Participation . The Participant’s gross percentage and offset percentage under the Flat Offset Benefit formula are reduced pro rata if the Participant’s projected Years of Participation are less than 35 years. For a Participant with less than 35 projected Years of Participation, the gross percentage and the offset percentage are reduced by multiplying such percentages by a fraction, the numerator of which is the Participant’s projected Years of Participation, and the denominator of which is 35.

(iv)	Unit Offset Benefit . The Employer may elect under Part 4, #13.b.(5) and Part 4, #13.b.(6) of the Agreement or under Part 4, #13.b.(4) of the Standardized Agreement to apply a Unit Offset Benefit formula which provides a Stated Benefit equal to a specified percentage of Average Compensation (“gross percentage”) offset by a specified percentage of Offset Compensation (“offset percentage”) multiplied by the Participant’s Years of Participation with the Employer.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(A)	Maximum permitted offset . In applying a Unit Offset Benefit formula, the offset percentage for any Participant may not exceed the Maximum Offset Percentage identified under subsection (3)(ii) below. In addition, if the Employer elects a tiered formula under Part 4, #13.b.(6) of the Nonstandardized Agreement, the percentage designated under Part 4, #13.b.(6)(d) and/or Part 4, #13.b.(6)(f), as applicable, may not exceed the gross percentage under Part 4, #13.b.(6)(a).

		(B)	Limitation on Years of Participation . The Employer must identify under Part 4, #13.b. the Years of Participation that will be taken into account under the Unit Offset Benefit formula. If the Employer elects a uniform offset formula under Part 4, #13.b.(5) of the Nonstandardized Agreement or Part 4, #13.b.(4) of the Standardized Agreement, the Plan must take into account all Years of Participation up to at least 25. In addition, a Participant may not be required to complete more than 35 Years of Participation to earn his/her full Stated Benefit. (See the Cumulative Disparity Limit under subsection (3)(iv) below for additional restrictions that may limit a Participant’s Years of Participation that may be taken into account under the Plan.)

			If the Employer elects a tiered offset formula under Part 4, #13.b.(6) of the Nonstandardized Agreement and the Years of Participation specified under Part 4, #13.b.(6)(c) is less than 35, any percentage under Part 4, #13.b.(6)(d) must equal the gross percentage under Part 4, #13.d.(6)(a) and any Years of Participation required under Part 4, #13.b.(6)(e) may not be less than 35 minus the Years of Participation designated under Part 4, #13.b.(6)(c). (See the Cumulative Disparity Limit under subsection (3)(iv) below for additional restrictions that may limit a Participant’s Years of Participation that may be taken into account under the Plan.) If the number of Years of Participation specified under Part 4, #13.b.(6)(c) is less than 35, and Part 4, #13.b.(6)(d) is not checked, the percentage specified under Part 4, #13.b.(6)(f) must equal the gross percentage under Part 4, #13.b.(6)(a).

(3)	Special rules for applying Integrated Benefit Formulas under Part 4, #13.b. of the Agreement.

	(i)	Maximum Disparity Percentage. In applying the Flat Excess Benefit formula described in subsection (2)(i) above or the Unit Excess Benefit formula described in subsection (2)(ii) above, the excess percentage under the formula may not exceed the Maximum Disparity Percentage. Under a Flat Excess Benefit formula, the Maximum Disparity Percentage is the lesser of the base percentage specified under the Agreement or the appropriate factor described under the Simplified Table below multiplied by 35. Under a Unit Excess Benefit formula, the Maximum Disparity Percentage is the lesser of the base percentage specified under the Agreement or the appropriate factor described under the Simplified Table below.

		In applying the Simplified Table below, NRA is a Participant’s Normal Retirement Age under the Plan. If a Participant’s Normal Retirement Age is prior to age 55, the applicable factors under the Simplified Table must be further reduced to a factor that is the Actuarial Equivalent of the factor at age 55. (See (iii) below for possible adjustments to the Simplified Table if an Integration Level other than Covered Compensation is selected under Part 4, #14.d.(1) of the Agreement.)


Simplified Table

NRA	Maximum Disparity Percentage	NRA	Maximum Disparity Percentage


70	0.838	62	0.416
69	0.760	61	0.382
68	0.690	60	0.346
67	0.627	59	0.330
66	0.571	58	0.312
65	0.520	57	0.294
64	0.486	56	0.278
63	0.450	55	0.260



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			(ii)	Maximum Offset Percentage . In applying the Flat Offset Benefit formula described in subsection (2)(iii) above or the Unit Offset Benefit formula described in subsection (2)(iv) above, the offset percentage under the formula may not exceed the Maximum Offset Percentage. Under a Flat Offset Benefit formula, the Maximum Offset Percentage is the lesser of 50% of the gross percentage specified under the Agreement or the appropriate factor described under the Simplified Table above, multiplied by 35. Under a Unit Offset Benefit formula, the Maximum Offset Percentage is the lesser of 50% of the gross percentage specified under the Agreement or the appropriate factor described under the Simplified Table above.

				In applying the Simplified Table above, NRA is a Participant’s Normal Retirement Age under the Plan. If a Participant’s Normal Retirement Age is prior to age 55, the applicable factors under the Simplified Table must be further reduced to a factor that is the Actuarial Equivalent of the factor at age 55. (See (iii) below for possible adjustments to the Simplified Table if an Integration Level other than Covered Compensation is selected under Part 4, #14.d.(1) of the Agreement.)

			(iii)	Adjustments to the Maximum Disparity Percentage / Maximum Offset Percentage for Integration Level other than Covered Compensation . The factors under the Simplified Table under subsection (i) above are based on an Integration Level equal to Covered Compensation. If the Employer elects under Part 4, #14.d.(1)(b) – (e) of the Agreement to use an Integration Level other than Covered Compensation, the factors under the Simplified Table may have to be modified. If the Employer elects to modify the Integration Level under Part 4, #14.d.(1)(b) or Part 4, #14.d.(1)(c) of the Agreement, no modification to the Simplified Table is required. If the Employer elects to modify the Integration Level under Part 4, #14.d.(1)(d) or Part 4, #14.d.(1)(e), the factors under the Modified Table below must be used instead of the factors under the Simplified Table.


Modified Table – Factors for Integration Level other than Covered Compensation

NRA	Maximum Disparity Percentage	NRA	Maximum Disparity Percentage


70	0.670	62	0.331
69	0.608	61	0.305
68	0.552	60	0.277
67	0.627	59	0.264
66	0.502	58	0.250
65	0.416	57	0.234
64	0.388	56	0.222
63	0.360	55	0.208


(iv)	Cumulative Disparity Limit. The Cumulative Disparity Limit applies to further limit the permitted disparity under the Plan. If the Cumulative Disparity Limit applies, the following adjustment will be made to the Participant’s Stated Benefit, depending on the type of formula selected under the Agreement.

	(A)	Flat Excess Benefit. In applying a Flat Excess Benefit formula, if a Participant’s cumulative disparity years exceed 35, the excess percentage under the formula will be reduced as provided below. For this purpose, a Participant’s cumulative disparity years consist of: (I) the Participant’s projected Years of Participation (up to 35); (II) any years the Participant benefited (or is treated as having benefited) under this Plan prior to the Participant’s first Year of Participation; and (III) any years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer (other than years counted in (I) or (II) above). For purposes of determining the Participant’s cumulative disparity years, all years ending in the same calendar year are treated as the same year.

		If the Cumulative Disparity Limit applies, the excess percentage under the formula will be reduced by multiplying the excess percentage (as adjusted under this subsection (3)) by a fraction (not less than zero), the numerator of which is 35 minus the sum of the years in (II) and (III) above, and the denominator of which is 35.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			(B)	Unit Excess Benefit. In applying a Unit Excess Benefit formula, the projected Years of Participation taken into account under the formula may not exceed the Participant’s cumulative disparity years. For this purpose, the Participant’s cumulative disparity years equal 35 minus: (I) the years the Participant benefited or is treated as having benefited under this Plan prior to the Participant’s first Year of Participation, and (II) the years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer other than years counted in (I) above or counted toward a Participant’s projected Years of Participation. For purposes of determining the Participant’s cumulative disparity years, all years ending in the same calendar year are treated as the same year.

			(C)	Flat Offset Benefit. In applying a Flat Offset Benefit formula, if a Participant’s cumulative disparity years exceed 35, the gross percentage and offset percentage under the formula will be reduced as provided below. For this purpose, a Participant’s cumulative disparity years consist of: (I) the Participant’s projected Years of Participation (up to 35); (II) any years the Participant benefited (or is treated as having benefited) under this Plan prior to the Participant’s first Year of Participation; and (III) any years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer (other than years counted in (I) or (II) above). For purposes of determining the Participant’s cumulative disparity years, all years ending in the same calendar year are treated as the same year.

				If the Cumulative Disparity Limit applies, the offset percentage will be reduced by multiplying such percentage by a fraction (not less than 0), the numerator of which is 35 minus the sum of the years in (II) and (III) above, and the denominator of which is 35. The gross benefit percentage will be reduced by the number of percentage points by which the offset percentage is reduced.

			(D)	Unit Offset Benefit . In applying a Unit Offset Benefit formula, the Years of Participation taken into account under the formula may not exceed the Participant’s cumulative disparity years. For this purpose, the Participant’s cumulative disparity years equal 35 minus: (I) the years the Participant benefited or is treated as having benefited under this Plan prior to the Participant’s first Year of Participation, and (II) the years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer other than years counted in (I) above or counted toward a Participant’s projected Years of Service. For purposes of determining the Participant’s cumulative disparity years, all years ending in the same calendar year are treated as the same year.

(d)	Definitions. The following definitions apply for purposes of applying the benefit formulas described under this Section 2.5.

	(1)	Average Compensation. The average of a Participant’s annual Included Compensation during the Averaging Period, as designated in Part 3, #11 of the Agreement. If no modifications are made to the definition of Average Compensation under Part 3, #11, Average Compensation is the average of the Participant’s annual Included Compensation for the three (3) consecutive Plan Years during the Participant’s entire employment history which produce the highest average.

		(i)	Averaging Period. Unless the Employer elects otherwise under Part 3, #11.a. of the Agreement, the Averaging Period for determining a Participant’s Average Compensation is made up of the three (3) consecutive Measuring Periods during the Participant’s Employment Period which results in the highest Average Compensation. The Employer may elect under Part 3, #11.a. to apply an alternative Averaging Period which is greater than three (3) consecutive Measuring Periods, may elect to take into account the highest Average Compensation over a period of nonconsecutive Measuring Periods, or may elect to take into account all Measuring Periods during the Participant’s Employment Period.

		(ii)	Measuring Period. Unless the Employer elects otherwise under Part 3, #11.b. of the Agreement, the Measuring Period for determining Average Compensation is the Plan Year. (If the Plan has a short Plan Year, Average Compensation is based on Included



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		Compensation earned during the 12-month period ending on the last day of the short Plan Year.) The Employer may elect under Part 3, #11.b. to apply an alternative Measuring Period for determining Average Compensation based on the calendar year or any other designated 12-month period. Alternatively, the Employer may elect to use calendar months as the Measuring Periods. If monthly Measuring Periods are selected under Part 3, #11.b., the Averaging Period designated under Part 3, #11.a. must be at least 36 months.

	(iii)	Employment Period . Unless the Employer elects otherwise under Part 3, #11.c. of the Agreement, the Employment Period used to determine Average Compensation is the Participant’s entire employment period with the Employer. Instead of measuring Average Compensation over a Participant’s entire period of employment, the Employer may elect under Part 3, #11.c. to use Averaging Periods only during the period following the Participant’s original Entry Date (as determined under Part 2 of the Agreement) or any other specified period. If the Employer elects an alternative Employment Period under Part 3, #11.c., such Employment Period must end in the current Plan Year and may not be shorter than the Averaging Period selected in Part 3, #11.a. (or the Participant’s entire period of employment, if shorter).

	(iv)	Drop-out years . Unless elected otherwise under Part 3, #11.d. of the Agreement, all Measuring Periods within a Participant’s Employment Period are included for purposes of determining Average Compensation. The Employer may elect under Part 3, #11.d. to exclude the Measuring Period in which the Participant terminates employment or any Measuring Period during which a Participant does not complete a designated number of Hours of Service. If the Employer elects to apply an Hour of Service requirement under Part 3, #11.d.(2), the designated Hours of Service required for any particular Participant may not exceed 75% of the Hours of Service that an Employee working full-time in the same job category as the Participant would earn during the Measuring Period.

		In determining whether the Measuring Periods within an Averaging Period are consecutive (see subsection (i) above), any Measuring Period excluded under this subsection (iv) will be disregarded.

(2)	Covered Compensation. For purposes of applying an Integrated Benefit Formula, a Participant’s Covered Compensation for the Plan Year is the average of the Taxable Wage Bases in effect for each calendar year during the 35-year period ending on the last day of the calendar year in which the Participant attains (or will attain) his/her Social Security Retirement Age. In determining a Participant’s Covered Compensation, the Taxable Wage Base in effect as of the beginning of the Plan Year is assumed to remain constant for all future years. If a Participant is 35 or more years away from his/her Social Security Retirement Age, the Participant’s Covered Compensation is the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant’s Covered Compensation remains constant for Plan Years beginning after the calendar year in which the Participant attains Social Security Retirement Age.

	Unless elected otherwise under Part 4, #14.d.(2) of the Agreement, a Participant’s Covered Compensation must be adjusted every Plan Year to reflect the Taxable Wage Base in effect for such year. The Employer may designate under Part 4, #14.d.(2)(a) to use Covered Compensation for a Plan Year earlier than the current Plan Year. Such earlier Plan Year may not be more than 5 years before the current Plan Year. For the sixth Plan Year following the Plan Year used to calculate Covered Compensation (as determined under this sentence), Covered Compensation will be adjusted using Covered Compensation for the prior Plan Year. Covered Compensation will not be adjusted for Plan Years prior to the sixth Plan Year following the Plan Year used to calculate Covered Compensation.

	In determining a Participant’s Covered Compensation, the Employer may elect under Part 4, #14.d.(2)(b) to apply the rounded Covered Compensation tables issued by the IRS instead of using the applicable Taxable Wage Bases of the Participant.

(3)	Excess Compensation. Excess Compensation is used for purposes of determining a Participant’s Normal Retirement Benefit under an Excess Benefit Formula. A Participant’s Excess Compensation is the excess (if any) of the Participant’s Average Compensation over the Integration Level.

(4)	Integration Level. The Integration Level under the Plan is used for determining the Excess Compensation or Offset Compensation used to determine a Participant’s Stated Benefit under the Plan. The Employer may elect under Part 4, #14.d.(1)(a) of the Agreement to use a Participant’s Covered Compensation for the Plan Year as the Integration Level. Alternatively, the Employer may



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			elect under Parts 4, #14.d.(1)(b) – (e) to apply an alternative Integration Level under the Plan. (See subsection (c)(3)(iii) above for special rules that apply if the Employer elects an alternative Integration Level.)

		(5)	Offset Compensation. A Participant’s Offset Compensation is used to determine a Participant’s Stated Benefit under an Offset Benefit formula. Unless modified under Part 3, #12 of the Agreement, Offset Compensation is the average of a Participant’s annual Included Compensation over the three (3) consecutive Plan Years ending with the current Plan Year. A Participant’s Offset Compensation is taken into account only to the extent it does not exceed the Integration Level under the Plan. For purposes of determining a Participant’s Offset Compensation, Included Compensation which exceeds the Taxable Wage Base in effect for the beginning of a Measuring Period will not be taken into account.

			( i)	Measuring Period . Unless elected otherwise under Part 3, #12.a. of the Agreement, Offset Compensation is determined based on Included Compensation earned during the Plan Year (or the 12-month period ending on the last day of the Plan Year for a short Plan Year). Instead of using Plan Years, the Employer may elect under Part 3, #12.a. to determine Offset Compensation over the 3-year period ending with or within the current Plan Year based on calendar years or any other designated 12-month period.

			(ii)	Drop-out years. Unless elected otherwise under Part 3, #12.b. of the Agreement, Offset Compensation is determined based on the three consecutive Measuring Periods ending with or within the current Plan Year. The Employer may elect under Part 3, #12.b. to disregard the Measuring Period in which a Participant terminates employment for purposes of determining Offset Compensation.

		(6)	Social Security Retirement Age. An Employee’s retirement age as determined under Section 230 of the Social Security Retirement Act. For a Participant who attains age 62 before January 1, 2000 (i.e., born before January 1, 1938), the Participant’s Social Security Retirement Age is 65. For a Participant who attains age 62 after December 31, 1999, and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), the Participant’s Social Security Retirement Age is 66. For a Participant attaining age 62 after December 31, 2016 (i.e., born after December 31, 1954), the Participant’s Social Security Retirement Age is 67.

		(7)	Stated Benefit. The amount determined in accordance with the benefit formula selected in Part 4 of the Agreement, payable annually as a Straight Life Annuity commencing at Normal Retirement Age (or current age, if later). (See subsection (a) above.)

		(8)	Straight Life Annuity. An annuity payable in equal installments for the life of the Participant that terminates upon the Participant’s death.

		(9)	Taxable Wage Base . Taxable Wage Base is the contribution and benefit base under Section 230 of the Social Security Retirement Act at the beginning of the Plan Year.

		(10)	Year of Participation. For purposes of determining a Participant’s Stated Benefit under the Plan, a Participant’s Years of Participation are defined under Part 4, #14.a. of the Agreement. (See subsection (a) above for rules regarding the determination of a Participant’s projected Years of Participation.)

			The Employer may elect under Part 4, #14.a.(1) to define an Employee’s Years of Participation as each Plan Year during which the Employee satisfies the allocation conditions designated under Part 4, #15 of the Agreement (see Section 2.6 below), including Plan Years prior to the Employee’s becoming an Eligible Participant under the Plan. Alternatively, the Employer may elect under Part 4, #14.a.(2) of the Agreement to define an Employee’s Years of Participation as each Plan Year during which the Employee satisfies the allocation conditions designated under Part 4, #15 of the Agreement (see Section 2.6 below), taking into account only Plan Years during which the Employee is an Eligible Participant. The Employer may elect under Part 4, #14.a.(3) to disregard any Year of Participation completed prior to a date designated under the Agreement.

2.6	Allocation Conditions. In order to receive an allocation of Employer Contributions (other than Section 401(k) Deferrals and Safe Harbor Contributions), an Eligible Participant must satisfy any allocation conditions designated under Part 4, #15 of the Agreement with respect to such contributions. (Similar allocation conditions apply under Part 4B, #19 of the 401(k) Agreement for Employer Matching Contributions and Part 4C, #24 of the 401(k) Agreement for Employer Nonelective Contributions.) Under the Nonstandardized Agreements, the imposition of an allocation condition may cause the Plan to fail the minimum coverage requirements under Code §410(b), unless the only allocation condition under the Plan is a safe harbor allocation condition. (Under the Standardized Agreements, the only



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


allocation condition permitted is a safe harbor allocation condition. But see (b) below for a special rule upon plan termination.)

(a)	Safe harbor allocation condition. Under the safe harbor allocation condition under Part 4, #15.b. of the Nonstandardized Agreement [Part 4B, #19.b. and Part 4C, #24.b. of the Nonstandardized 401(k) Agreement], the Employer may elect to require an Eligible Participant to be employed on the last day of the Plan Year or to complete more than a specified number of Hours of Service (not to exceed 500) during the Plan Year to receive an allocation of Employer Contributions (other than Section 401(k) Deferrals or Safe Harbor Contributions) under the Plan. Under this safe harbor allocation condition, an Eligible Participant whose employment terminates before he/she completes the designated Hours of Service is not entitled to an allocation of Employer Contributions subject to such allocation condition. However, if an Eligible Participant completes at least the designated Hours of Service during a Plan Year, the Participant is eligible for an allocation of such Employer Contributions, even if the Participant’s employment terminates during the Plan Year.

	The imposition of the safe harbor allocation condition will not cause the Plan to fail the minimum coverage requirements under Code §410(b) because Participants who are excluded from participation solely as a result of the safe harbor allocation condition are excluded from the coverage test. Except as provided under subsection (b) below, the safe harbor allocation condition is the only allocation condition that may be used under the Standardized Agreement.

(b)	Application of last day of employment rule for money purchase and target benefit Plans in year of termination. The Employer may elect under Part 4, #15.c. of the money purchase or target benefit plan Nonstandardized Agreement to require an Eligible Participant to be employed on the last day of the Plan Year to receive an Employer Contribution under the Plan. Regardless of whether the Employer elects to apply a last day of employment condition under the money purchase or target benefit plan Agreement, in any Plan Year during which a money purchase or target benefit Plan is terminated, the last day of employment condition applies. Any unallocated forfeitures under the Plan will be allocated in accordance with the contribution formula designated under Part 4 of the Agreement to each Eligible Participant who completes at least one Hour of Service during the Plan Year.

( c)	Elapsed Time Method . The Employer may elect under Part 4, #15.e. of the Nonstandardized Agreement [Part 4B, #19.e. and Part 4C, #24.e. of the Nonstandardized 401(k) Agreement] to apply the allocation conditions using the Elapsed Time Method. Under the Elapsed Time Method, instead of requiring the completion of a specified number of Hours of Service, the Employer may require an Employee to be employed with the Employer for a specified number of consecutive days.

	(1)	Safe harbor allocation condition. The Employer may elect under Part 4, #15.e.(1) of the Agreement [Part 4B, #19.e.(1) and/or Part 4C, #24.e.(1) of the Nonstandardized 401(k) Agreement] to apply the safe harbor allocation condition (as described in subsection (a) above) using the Elapsed Time Method. Under the safe harbor Elapsed Time Method, a Participant who terminates employment with less than a specified number of consecutive days of employment (not more than 91 days) during the Plan Year will not be entitled to an allocation of the designated Employer Contributions. The use of the safe harbor allocation condition under the Elapsed Time Method provides the same protection from coverage as described in subsection (a) above.

	(2)	Service condition . Alternatively, the Employer may elect under Part 4, #15.e.(2) of the Nonstandardized Agreement [Part 4B, #19.e.(2) and/or Part 4C, #24.e.(2) of the Nonstandardized 401(k) Agreement] to require an Employee to complete a specified number of consecutive days of employment (not exceeding 182) to receive an allocation of the designated Employer Contributions.

(d)	Special allocation condition for Employer Matching Contributions under Nonstandardized 401(k) Agreement. The Employer may elect under Part 4B, #19.f. of the Nonstandardized 401(k) Agreement to require as a condition for receiving an Employer Matching Contribution that a Participant not withdraw the underlying applicable contributions being matched prior to the end of the period for which the Employer Matching Contribution is being made. Thus, for example, if the Employer elects under Part 4B, #17.a. of the Nonstandardized 401(k) Agreement to apply the matching contribution formula on the basis of the Plan Year quarter, a Participant would not be entitled to an Employer Matching Contribution with respect to any applicable contributions contributed during a Plan Year quarter to the extent such applicable contributions are withdrawn prior to the end of the Plan Year quarter during which they are contributed. A Participant could take a distribution of applicable contributions that were contributed for a prior period without losing eligibility for a current Employer Matching Contribution. This subsection (d) will not prevent a Participant from receiving an Employer Matching Contribution merely because the Participant takes a loan (as permitted under Article 14) from matched contributions.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


(e)	Application to designated period . The Employer may elect under Part 4, #15.f. of the Nonstandardized Agreement [Part 4B, #19.g. and Part 4C, #24.f. of the Nonstandardized 401(k) Agreement] to apply any allocation condition(s) selected under the Agreement on the basis of the period designated under Part 4, #14.a.(1) of the Nonstandardized Agreement [Part 4B, #17.a. or Part 4C, #23.a.(1) of the Nonstandardized 401(k) Agreement]. If this subsection (e) applies to any allocation condition(s) under the Plan, the following procedural rules apply. (This subsection (e) does not apply to the target benefit plan Agreement. See subsection (3) for rules applicable to the Standardized Agreements.)

	(1)	Last day of employment requirement. If the Employer elects under Part 4, #15.f. of the Nonstandardized Agreement [Part 4B, #19.g. or Part 4C, #24.f. of the Nonstandardized 401(k) Agreement] to apply the allocation conditions on the basis of designated periods and the Employer elects to apply a last day of employment condition under Part 4, #15.c. of the Nonstandardized Agreement [Part 4B, #19.c. or Part 4C, #24.c. of the Nonstandardized 401(k) Agreement], an Eligible Participant will be entitled to receive an allocation of Employer Contributions for the period designated under Part 4, #14.a.(1) of the Nonstandardized Agreement [Part 4B, #17.a. or Part 4C, #23.a.(1) of the Nonstandardized 401(k) Agreement] only if the Eligible Participant is employed with the Employer on the last day of such period. If an Eligible Participant terminates employment prior to end of the designated period, no Employer Contribution will be allocated to that Eligible Participant for such period. Nothing in this subsection (1) will cause an Eligible Participant to lose Employer Contributions that were allocated for a period prior to the period in which the individual terminates employment.

	(2)	Hours of Service condition. If the Employer elects to apply the allocation conditions on the basis of specified periods under Part 4, #15.f. of the Agreement [Part 4B, #19.g. or Part 4C, #24.f. of the Nonstandardized 401(k) Agreement], and elects to apply an Hours of Service condition under Part 4, #15.d. of the Nonstandardized Agreement [Part 4B, #19.d. or Part 4C, #24.d. of the Nonstandardized 401(k) Agreement], an Eligible Participant will be entitled to receive an allocation of Employer Contributions for the period designated under Part 4, #14.a.(1) of the Nonstandardized Agreement [Part 4B, #17.a. or Part 4C, #23.a.(1) of the Nonstandardized 401(k) Agreement] only if the Eligible Participant completes the required Hours of Service before the last day of such period. In applying the fractional method under subsection (i) or the period-by-period method under subsection (ii), an Eligible Participant who completes a sufficient number of Hours of Service for the Plan Year to earn a Year of Service under the Plan will be entitled to a full contribution for the Plan Year, as if the Eligible Participant satisfied the Hours of Service condition for each designated period. A catch-up contribution may be required for such Participants.

		(i)	Fractional method. The Employer may elect under Part 4, #15.f.(1) of the Nonstandardized Agreement [Part 4B, #19.g.(1) or Part 4C, #24.f.(1) of the Nonstandardized 401(k) Agreement] to apply the Hours of Service condition on the basis of specified period using the fractional method. Under the fractional method, the required Hours of Service for any period are determined by multiplying the Hours of Service required under Part 4, #15.d. of the Nonstandardized Agreement [Part 4B, #19.d. or Part 4C, #24.d. of the Nonstandardized 401(k) Agreement] by a fraction, the numerator of which is the total number of periods completed during the Plan Year (including the current period) and the denominator of which is the total number of periods during the Plan Year. Thus, for example, if the Employer applies a 1,000 Hours of Service condition to receive an Employer Matching Contribution and elects to apply such condition on the basis of Plan Year quarters, an Eligible Participant would have to complete 250 Hours of Service by the end of the first Plan Year quarter [1/4 x 1,000], 500 Hours of Service by the end of the second Plan Year quarter [2/4 x 1,000], 750 Hours of Service by the end of the third Plan Year quarter [3/4 x 1,000] and 1,000 Hours of Service by the end of the Plan Year [4/4 x 1,000] to receive an allocation of the Employer Matching Contribution for such period. If an Eligible Participant does not complete the required Hours of Service for any period during the Plan Year, no Employer Contribution will be allocated to that Eligible Participant for such period. However, if an Eligible Participant completes the required Hours of Service under Part 4, #15.d. for the Plan Year, such Participant will receive a full contribution for the Plan Year as if the Participant satisfied the Hours of Service conditions for each period during the year. Nothing in this subsection (i) will cause an Eligible Participant to lose Employer Contributions that were allocated for a period during which the Eligible Participant completed the required Hours of Service for such period.

		(ii)	Period-by-period method . The Employer may elect under Part 4, #15.f.(2) of the Nonstandardized Agreement [Part 4B, #19.g.(2) or Part 4C, #24.f.(2) of the Nonstandardized 401(k) Agreement] to apply the Hours of Service condition on the basis of specified period using the period-by-period method. Under the period-by-period



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


				method, the required Hours of Service for any period are determined separately for such period. The Hours of Service required for any specific period are determined by multiplying the Hours of Service required under Part 4, #15.d. of the Nonstandardized Agreement [Part 4B, #19.d. or Part 4C, #24.d. of the Nonstandardized 401(k) Agreement] by a fraction, the numerator of which is one (1) and the denominator of which is the total number of periods during the Plan Year. Thus, for example, if the Employer applies a 1,000 Hours of Service condition to receive an Employer Matching Contribution and elects to apply such condition on the basis of Plan Year quarters, an Eligible Participant would have to complete 250 Hours of Service in each Plan Year quarter [1/4 x 1,000] to receive an allocation of the Employer Matching Contribution for such period. If an Eligible Participant does not complete the required Hours of Service for any period during the Plan Year, no Employer Contribution will be allocated to that Eligible Participant for such period. However, if an Eligible Participant completes the required Hours of Service under Part 4, #15.d. for the Plan Year, such Participant will receive a full contribution for the Plan Year as if the Participant satisfied the Hours of Service conditions for each period during the year. Nothing in this subsection (ii) will cause an Eligible Participant to lose Employer Contributions that were allocated for a period during which the Eligible Participant completed the required Hours of Service for such period.

		(3)	Safe harbor allocation condition. If the Employer elects to apply the allocation conditions on the basis of specified periods under Part 4, #15.f. of the Nonstandardized Agreement [Part 4B, #19.g. or Part 4C, #24.f of the Nonstandardized 401(k) Agreement] and elects to apply the safe harbor allocation condition under Part 4, #15.b. of the Nonstandardized Agreement [Part 4B, #19.b. or Part 4C, #24.b. of the Nonstandardized 401(k) Agreement], the rules under subsection (1) above will apply, without regard to the rules under subsection (2) above. Thus, an Eligible Employee who terminates during a period designated under Part 4, #14.a.(1) of the Nonstandardized Agreement [Part 4B, #17.a. or Part 4C, #23.a.(1) of the Nonstandardized 401(k) Agreement] will not receive an allocation of Employer Contributions for such period if the Eligible Participant has not completed the Hours of Service designated under Part 4, #15.b. of the Nonstandardized Agreement [Part 4B, #19.b. or Part 4C, #24.b. of the Nonstandardized 401(k) Agreement]. Nothing in this subsection (3) will cause an Eligible Participant to lose Employer Contributions that were allocated for a period prior to the period in which the individual terminates employment. (This subsection (3) also applies if the Employer elects to apply the safe harbor allocation condition on the basis of specified periods under Part 4, #15.c. of the Standardized Agreement [Part 4B, #19.c. or Part 4C, #22.c. of the Standardized 401(k) Agreement].)

		(4)	Elapsed Time Method. The election to apply the allocation conditions on the basis of specified periods does not apply to the extent the Elapsed Time Method applies under Part 4, #15.e. of the Nonstandardized Agreement [Part 4B, #19.e. or Part 4C, #24.e. of the Nonstandardized 401(k) Agreement]. If an Employer elects to apply the allocation conditions on the basis of specified periods and elects to apply the Elapsed Time Method, an Eligible Employee will be entitled to an allocation of Employer Contributions if such Eligible Participant is employed as of the last day of such period, without regard to the number of consecutive days in such period. Thus, in effect, the Elapsed Time Method will only apply to prevent an allocation of Employer Contributions for the last designated period in the Plan Year, if the Eligible Participant has not completed the consecutive days required under Part 4, #15.e. of the Nonstandardized Agreement [Part 4B, #19.e. or Part 4C, #24.e. of the Nonstandardized 401(k) Agreement] by the end of the Plan Year. The last day of employment rules subsection (1) above still may apply (to the extent applicable) for periods during which the Eligible Participant terminates employment.

2.7	Fail-Safe Coverage Provision. If the Employer has elected to apply a last day of the Plan Year allocation condition and/or an Hours of Service allocation condition under a Nonstandardized Agreement, the Employer may elect under Part 13, #56 of the Nonstandardized Agreement [Part 13, #74 of the Nonstandardized 401(k) Agreement] to apply the Fail-Safe Coverage Provision. Under the Fail-Safe Coverage Provision, if the Plan fails to satisfy the ratio percentage coverage requirements under Code §410(b) for a Plan Year due to the application of a last day of the Plan Year allocation condition and/or an Hours of Service allocation condition, such allocation condition(s) will be automatically eliminated for the Plan Year for certain otherwise Eligible Participants, under the process described in subsections (a) through (d) below, until enough Eligible Participants are benefiting under the Plan so that the ratio percentage test of Treasury Regulation §1.410(b)-2(b)(2) is satisfied.

	If the Employer elects to have the Fail-Safe Coverage Provision apply, such provision automatically applies for any Plan Year for which the Plan does not satisfy the ratio percentage coverage test under Code §410(b). (Except as provided in the following paragraph, the Plan may not use the average benefits test to comply with the minimum coverage requirements if the Fail-Safe Coverage Provision is elected.) The Plan satisfies the ratio percentage test if the percentage of the Nonhighly Compensated Employees under the Plan is at least 70% of the percentage of the Highly



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	Compensated Employees who benefit under the Plan. An Employee is benefiting for this purpose only if he/she actually receives an allocation of Employer Contributions or forfeitures or, if testing coverage of a 401(m) arrangement (i.e., a Plan that provides for Employer Matching Contributions and/or Employee After-Tax Contributions), the Employee would receive an allocation of Employer Matching Contributions by making the necessary contributions or the Employee is eligible to make Employee After-Tax Contributions. To determine the percentage of Nonhighly Compensated Employees or Highly Compensated Employees who are benefiting, the following Employees are excluded for purposes of applying the ratio percentage test: (i) Employees who have not satisfied the Plan’s minimum age and service conditions under Section 1.4; (ii) Nonresident Alien Employees; (iii) Union Employees; and (iv) Employees who terminate employment during the Plan Year with less than 501 Hours of Service and do not benefit under the Plan.

	Under the Fail-Safe Coverage Provision, certain otherwise Eligible Participants who are not benefiting for the Plan Year as a result of a last day of the Plan Year allocation condition or an Hours of Service allocation condition will participate under the Plan based on whether such Participants are Category 1 Employees or Category 2 Employees. Alternatively, the Employer may elect under Part 13, #56.b.(2) of the Nonstandardized Agreement [Part 13, #74.b.(2) of the Nonstandardized 401(k) Agreement] to apply the special Fail-Safe Coverage Provision described in (d) below which eliminates the allocation conditions for otherwise Eligible Participants with the lowest Included Compensation. If after applying the Fail-Safe Coverage Provision, the Plan does not satisfy the ratio percentage coverage test, the FailSafe Coverage Provision does not apply, and the Plan may use any other available method (including the average benefit test) to satisfy the minimum coverage requirements under Code §410(b).

	(a)	Top-Heavy Plans. Unless provided otherwise under Part 13, #56.b.(1) of the Nonstandardized Agreement [Part 13, #74.b.(1) of the Nonstandardized 401(k) Agreement], if the Plan is a Top-Heavy Plan, the Hours of Service allocation condition will be eliminated for all Non-Key Employees who are Nonhighly Compensated Employees, prior to applying the Fail-Safe Coverage Provisions under subsections (b) and (c) or (d) below.

	(b)	Category 1 Employees - Otherwise Eligible Participants (who are Nonhighly Compensated Employees) who are still employed by the Employer on the last day of the Plan Year but who failed to satisfy the Plan’s Hours of Service condition. The Hours of Service allocation condition will be eliminated for Category 1 Employees (who did not receive an allocation under the Plan due to the Hours of Service allocation condition) beginning with the Category 1 Employee(s) credited with the most Hours of Service for the Plan Year and continuing with the Category 1 Employee(s) with the next most Hours of Service until the ratio percentage test is satisfied. If two or more Category 1 Employees have the same number of Hours of Service, the allocation condition will be eliminated for those Category 1 Employees starting with the Category 1 Employee(s) with the lowest Included Compensation. If the Plan still fails to satisfy the ratio percentage test after all Category 1 Employees receive an allocation, the Plan proceeds to Category 2 Employees.

	(c)	Category 2 Employees - Otherwise Eligible Participants (who are Nonhighly Compensated Employees) who terminated employment during the Plan Year with more than 500 Hours of Service. The last day of the Plan Year allocation condition will then be eliminated for Category 2 Employees (who did not receive an allocation under the Plan due to the last day of the Plan Year allocation condition) beginning with the Category 2 Employee(s) who terminated employment closest to the last day of the Plan Year and continuing with the Category 2 Employee(s) with a termination of employment date that is next closest to the last day of the Plan Year until the ratio percentage test is satisfied. If two or more Category 2 Employees terminate employment on the same day, the allocation condition will be eliminated for those Category 2 Employees starting with the Category 2 Employee(s) with the lowest Included Compensation.

	(d)	Special Fail-Safe Coverage Provision . Instead of applying the Fail-Safe Coverage Provision based on Category I and Category 2 Employees, the Employer may elect under Part 13, #56.b.(2) of the Nonstandardized Agreement [Part 13, #74.b.(2) of the Nonstandardized 401(k) Agreement] to eliminate the allocation conditions beginning with the otherwise Eligible Participant(s) (who are Nonhighly Compensated Employees and who did not terminate employment during the Plan Year with 500 Hours of Service or less) with the lowest Included Compensation and continuing with such otherwise Eligible Participants with the next lowest Included Compensation until the ratio percentage test is satisfied. If two or more otherwise Eligible Participants have the same Included Compensation, the allocation conditions will be eliminated for all such individuals.

2.8	Deductible Employee Contributions . The Plan Administrator will not accept deductible employee contributions that are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate Account which will be nonforfeitable at all times. The Account will share in the gains and losses under the Plan in the same manner as described in Section 13.4. No part of the deductible voluntary contribution Account will be used to purchase life insurance. Subject to the Joint and Survivor Annuity requirements under Article 9 (if applicable), the Participant may withdraw any part of the deductible voluntary contribution Account by making a written application to the Plan Administrator.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

ARTICLE 3
EMPLOYEE AFTER-TAX CONTRIBUTIONS, ROLLOVER CONTRIBUTIONS AND TRANSFERS

This Article provides the rules regarding Employee After-Tax Contributions, Rollover Contributions and transfers that may be made under this Plan. The Trustee has the authority under Article 12 to accept Rollover Contributions under this Plan and to enter into transfer agreements concerning the transfer of assets from another qualified retirement plan to this Plan, if so directed by the Plan Administrator.


3.1	Employee Afte r-Tax Contributions. The Employer may elect under Part 4D of the Nonstandardized 401(k) Agreement to allow Eligible Participants to make Employee After-Tax Contributions under the Plan. Employee After-Tax Contributions may only be made under the Nonstandardized 401(k) Agreement. Any Employee After-Tax Contributions made under this Plan are subject to the ACP Test outlined in Section 17.3. (Nothing under this Section precludes the holding of Employee After-Tax Contributions under a profit sharing plan or money purchase plan that were made prior to the adoption of this Prototype Plan.)

	The Employer may elect under Part 4D, #25 of the Nonstandardized 401(k) Agreement to impose a limit on the maximum amount of Included Compensation an Eligible Participant may contribute as an Employee After-Tax Contribution. The Employer may also elect under Part 4D, #26 of the Nonstandardized 401(k) Agreement to impose a minimum amount that an Eligible Participant may contribute to the Plan during any payroll period.

	Employee After-Tax Contributions must be held in the Participant’s Employee After-Tax Contribution Account, which is always 100% vested. A Participant may withdraw amounts from his/her Employee After-Tax Contribution Account at any time, in accordance with the distribution rules under Section 8.5(a), except as prohibited under Part 10 of the Agreement. No forfeitures will occur solely as a result of an Employee’s withdrawal of Employee After-Tax Contributions.

3.2	Rollover Contributions. An Employee may make a Rollover Contribution to this Plan from another “qualified retirement plan” or from a “conduit IRA,” if the acceptance of rollovers is permitted under Part 12 of the Agreement or if the Plan Administrator adopts administrative procedures regarding the acceptance of Rollover Contributions. Any Rollover Contribution an Employee makes to this Plan will be held in the Employee’s Rollover Contribution Account, which is always 100% vested. A Participant may withdraw amounts from his/her Rollover Contribution Account at any time, in accordance with the distribution rules under Section 8.5(a), except as prohibited under Part 10 of the Agreement.

	For purposes of this Section 3.2, a “qualified retirement plan” is any tax qualified retirement plan under Code §401(a) or any other plan from which distributions are eligible to be rolled over into this Plan pursuant to the Code, regulations, or other IRS guidance. A “conduit IRA” is an IRA that holds only assets that have been properly rolled over to that IRA from a qualified retirement plan under Code §401(a). To qualify as a Rollover Contribution under this Section, the Rollover Contribution must be transferred directly from the qualified retirement plan or conduit IRA in a Direct Rollover or must be transferred to the Plan by the Employee within sixty (60) days following receipt of the amounts from the qualified plan or conduit IRA.

	If Rollover Contributions are permitted, an Employee may make a Rollover Contribution to the Plan even if the Employee is not an Eligible Participant with respect to any or all other contributions under the Plan, unless otherwise prohibited under separate administrative procedures adopted by the Plan Administrator. An Employee who makes a Rollover Contribution to this Plan prior to becoming an Eligible Participant shall be treated as a Participant only with respect to such Rollover Contribution Account, but shall not be treated as an Eligible Participant until he/she otherwise satisfies the eligibility conditions under the Plan.

	The Plan Administrator may refuse to accept a Rollover Contribution if the Plan Administrator reasonably believes the Rollover Contribution (a) is not being made from a proper plan or conduit IRA; (b) is not being made within sixty (60) days from receipt of the amounts from a qualified retirement plan or conduit IRA; (c) could jeopardize the tax-exempt status of the Plan; or (d) could create adverse tax consequences for the Plan or the Employer. Prior to accepting a Rollover Contribution, the Plan Administrator may require the Employee to provide satisfactory evidence establishing that the Rollover Contribution meets the requirements of this Section.

	The Plan Administrator may apply different conditions for accepting Rollover Contributions from qualified retirement plans and conduit IRAs. Any conditions on Rollover Contributions must be applied uniformly to all Employees under the Plan.

3.3	Transfer of Assets. The Plan Administrator may direct the Trustee to accept a transfer of assets from another qualified retirement plan on behalf of any Employee, even if such Employee is not eligible to receive other contributions under the Plan. If a transfer of assets is made on behalf of an Employee prior to the Employee’s becoming an Eligible Participant, the Employee shall be treated as a Participant for all purposes with respect to such transferred amount. Any assets transferred to this Plan from another plan must be accompanied by written instructions designating the name of



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


each Employee for whose benefit such amounts are being transferred, the current value of such assets, and the sources from which such amounts are derived. The Plan Administrator will deposit any transferred assets in the appropriate Participant’s Transfer Account. The Transfer Account will contain any sub-Accounts necessary to separately track the sources of the transferred assets. Each sub-Account will be treated in the same manner as the corresponding Plan Account.

The Plan Administrator may direct the Trustee to accept a transfer of assets from another qualified plan of the Employer in order to comply with the qualified replacement plan requirements under Code §4980(d) (relating to the excise tax on reversions from a qualified plan) without affecting the status of this Plan as a Prototype Plan. A transfer made pursuant to Code §4980(d) will be allocated as Employer Contributions either in the Plan Year in which the transfer occurs, or over a period of Plan Years (not exceeding the maximum period permitted under Code §4980(d)), as provided in the applicable transfer agreement. To the extent a transfer described in this paragraph is not totally allocable in the Plan Year in which the transfer occurs, the portion which is not allocable will be credited to a suspense account until allocated in accordance with the transfer agreement.

The Plan Administrator may refuse to accept a transfer of assets if the Plan Administrator reasonably believes the transfer (a) is not being made from a proper qualified plan; (b) could jeopardize the tax-exempt status of the Plan; or (c) could create adverse tax consequences for the Plan or the Employer. Prior to accepting a transfer of assets, the Plan Administrator may require evidence documenting that the transfer of assets meets the requirements of this Section. The Trustee will have no responsibility to determine whether the transfer of assets meets the requirements of this Section; to verify the correctness of the amount and type of assets being transferred to the Plan; or to perform any due diligence review with respect to such transfer.

(a)	Protection of Protected Benefits. Except in the case of a Qualified Transfer (as defined in subsection (d) below), a transfer of assets is initiated at the Plan level and does not require Participant or spousal consent. If the Plan Administrator directs the Trustee to accept a transfer of assets to this Plan, the Participant on whose behalf the transfer is made retains all Protected Benefits that applied to such transferred assets under the transferor plan.

(b)	Transferee plan. Except in the case of a Qualified Transfer (as defined in subsection (d)), if the Plan Administrator directs the Trustee to accept a transfer of assets from another plan which is subject to the Joint and Survivor Annuity requirements under Code §401(a)(11), the amounts so transferred continue to be subject to such requirements, as provided in Article 9. If this Plan is not otherwise subject to the Qualified Joint and Survivor Annuity requirements (as determined under Part 11, #41.a. of the Agreement [Part 11, #59.a. of the 401(k) Agreement]), the Qualified Joint and Survivor Annuity requirements apply only to the amounts under the Transfer Account which are attributable to the amounts which were subject to the Qualified Joint and Survivor Annuity requirements under the transferor plan. The Employer may override this default rule by checking Part 11, #41.b. of the Agreement [Part 11, #59.b. of the 401(k) Agreement] thereby subjecting the entire Plan to the Qualified Joint and Survivor Annuity Requirements.

(c)	Transfers from a Defined Benefit Plan, money purchase plan or 401(k) plan.

	(1)	Defined Benefit Plan. The Plan Administrator will not direct the Trustee to accept a transfer of assets from a Defined Benefit Plan unless such transfer qualifies as a Qualified Transfer (as defined in subsection (d) below) or the assets transferred from the Defined Benefit Plan are in the form of paid-up annuity contracts which protect all the Participant’s Protected Benefits under the Defined Benefit Plan. (However, see the special rule under the second paragraph of Section 3.3 above regarding transfers authorized under Code §4980(d).)

	(2)	Money purchase plan. If this Plan is a profit sharing plan or a 401(k) plan and the Plan Administrator directs the Trustee to accept a transfer of assets from a money purchase plan (other than as a Qualified Transfer as defined in subsection (d) below), the amounts transferred (and any gains attributable to such transferred amounts) continue to be subject to the distribution restrictions applicable to money purchase plan assets under the transferor plan. Such amounts may not be distributed for reasons other than death, disability, attainment of Normal Retirement Age, or termination of employment, regardless of any distribution provisions under this Plan that would otherwise permit a distribution prior to such events.

	(3)	401(k) Plan. If the Plan Administrator directs the Trustee to accept a transfer of Section 401(k) Deferrals, QMACs, QNECs, or Safe Harbor Contributions from a 401(k) plan, such amounts retain their character under this Plan and such amounts (including any allocable gains or losses) remain subject to the distribution restrictions applicable to such amounts under the Code.

(d)	Qualified Transfer. The Plan may eliminate certain Protected Benefits (as provided under subsection (3) below) related to plan assets that are received in a Qualified Transfer from another plan. A Qualified Transfer



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


is a plan-to-plan transfer of a Participant’s benefits that meets the requirements under subsection (1) or (2) below.

(1)	Elective transfer. A plan-to-plan transfer of a Participant’s benefits from another qualified plans is a Qualified Transfer if such transfer satisfies the following requirements.

	(i)	The Participant must have the right to receive an immediate distribution of his/her benefits under the transferor plan at the time of the Qualified Transfer. For transfers that occur on or after January 1, 2002, the Participant must not be eligible at the time of the Qualified Transfer to take an immediate distribution of his/her entire benefit in a form that would be entirely eligible for a Direct Rollover.

	(ii)	The Participant on whose behalf benefits are being transferred must make a voluntary, fully informed election to transfer his/her benefits to this Plan.

	(iii)	The Participant must be provided an opportunity to retain the Protected Benefits under the transferor plan. This requirement is satisfied if the Participant is given the option to receive an annuity that protects all Protected Benefits under the transferor plan or the option of leaving his/her benefits in the transferor plan.

	(iv)	The Participant’s spouse must consent to the Qualified Transfer if the transferor plan is subject to the Joint and Survivor Annuity requirements under Article 9. The spouse’s consent must satisfy the requirements for a Qualified Election under Section 9.4(d).

	(v)	The amount transferred (along with any contemporaneous Direct Rollover) must not be less than the value of the Participant’s vested benefit under the transferor plan.

	(vi)	The Participant must be fully vested in the transferred benefit.

(2)	Transfer upon specified events. For transfers that occur on or after September 6, 2000, a plan-to-plan transfer of a Participant’s entire benefit (other than amounts the Plan accepts as a Direct Rollover) from another Defined Contribution Plan that is made in connection with an asset or stock acquisition, merger, or other similar transaction involving a change in the Employer or is made in connection with a Participant’s change in employment status that causes the Participant to become ineligible for additional allocations under the transferor plan, is a Qualified Transfer if such transfer satisfies the following requirements:

	(i)	The Participant need not be eligible for an immediate distribution of his/her benefits under the transferor plan.

	(ii)	The Participant on whose behalf benefits are being transferred must make a voluntary, fully informed election to transfer his/her benefits to this Plan.

	(iii)	The Participant must be provided an opportunity to retain the Protected Benefits under the transferor plan. This requirement is satisfied if the Participant is given the option to receive an annuity that protects all Protected Benefits under the transferor plan or the option of leaving his/her benefits in the transferor plan.

	(iv)	The benefits must be transferred between plans of the same type. To satisfy this requirement, the transfer must satisfy the following requirements.

		(A)	To accept a Qualified Transfer under this subsection (2) from a money purchase plan, this Plan also must be a money purchase plan.

		(B)	To accept a Qualified Transfer under this subsection (2) from a 401(k) plan, this Plan also must be a 401(k) plan.

		(C)	To accept a Qualified Transfer under this subsection (2) from a profit sharing plan, this Plan may be any type of Defined Contribution Plan.



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	(3)	Treatment of Qualified Transfer.

		(i)	Rollover Contribution Account. If the Plan Administrator directs the Trustee to accept on behalf of a Participant a transfer of assets that qualifies as a Qualified Transfer, the Plan Administrator will treat such amounts as a Rollover Contribution and will deposit such amounts in the Participant’s Rollover Contribution Account. A Qualified Transfer may include benefits derived from Employee After-Tax Contributions.

		(ii)	Elimination of Protected Benefits. If the Plan accepts a Qualified Transfer, the Plan does not have to protect any Protected Benefits derived from the transferor plan. However, if the Plan accepts a Qualified Transfer that meets the requirements for a transfer under subsection (2) above, the Plan must continue to protect the QJSA benefit if the transferor plan is subject to the QJSA requirements.


(e)	Trustee’s right to refuse transfer. If the assets to be transferred to the Plan under this Section 3.3 are not susceptible to proper valuation and identification or are of such a nature that their valuation is incompatible with other Plan assets, the Trustee may refuse to accept the transfer of all or any specific asset, or may condition acceptance of the assets on the sale or disposition of any specific asset.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

ARTICLE 4
PARTICIPANT VESTING

This Article contains the rules for determining the vested (nonforfeitable) amount of a Participant’s Account Balance under the Plan. Part 6 of the Agreement contains specific elections for applying these vesting rules. Part 7 of the Agreement contains special service crediting elections to override the default provisions under this Article.


4.1	In General. A Participant’s vested interest in his/her Employer Contribution Account and Employer Matching Contribution Account is determined based on the vesting schedule elected in Part 6 of the Agreement. A Participant is always fully vested in his/her Section 401(k) Deferral Account, Employee After-Tax Contribution Account, QNEC Account, QMAC Account, Safe Harbor Nonelective Contribution Account, Safe Harbor Matching Contribution Account, and Rollover Contribution Account.

	(a)	Attainment of Normal Retirement Age. Regardless of the Plan’s vesting schedule, a Participant’s right to his/her Account Balance is fully vested upon the date he/she attains Normal Retirement Age, provided the Participant is an Employee on or after such date.

	(b)	Vesting upon death, becoming Disabled, or attainment of Early Retirement Age. If elected by the Employer in Part 6, #21 of the Agreement [Part 6, #39 of the 401(k) Agreement], a Participant will become fully vested in his/her Account Balance if the Participant dies, becomes Disabled, or attains Early Retirement Age while employed by the Employer.

	(c)	Addition of Employer Nonelective Contribution or Employer Matching Contribution. If the Plan is a Safe Harbor 401(k) Plan as defined in Section 17.6, all amounts allocated to the Participant’s Safe Harbor Nonelective Contribution Account and/or Safe Harbor Matching Contribution Account are always 100% vested. If a Safe Harbor 401(k) Plan is amended to add a regular Employer Nonelective Contribution or Employer Matching Contribution, a Participant’s vested interest in such amounts is determined in accordance with the vesting schedule selected under Part 6 of the Agreement. The addition of a vesting schedule under Part 6 for such contributions is not considered an amendment of the vesting schedule under Section 4.7 below merely because the Participant was fully vested in his/her Safe Harbor Nonelective Contribution Account or Safe Harbor Matching Contribution Account.

	(d)	Vesting upon merger, consolidation or transfer. No accelerated vesting will be required solely because a Defined Contribution Plan is merged with another Defined Contribution Plan, or because assets are transferred from a Defined Contribution Plan to another Defined Contribution Plan. Thus, for example, Participants will not automatically become 100% vested in their Employer Contribution Account(s) solely on account of a merger of a money purchase plan with a profit sharing or 401(k) Plan or a transfer of assets between such Plans. (See Section 18.3 for the benefits that must be protected as a result of a merger, consolidation or transfer.)

4.2	Vesting Schedules. The Plan’s vesting schedule will determine an Employee’s vested percentage in his/her Employer Contribution Account and/or Employer Matching Contribution Account. The vested portion of a Participant’s Employer Contribution Account and/or Employer Matching Contribution Account is determined by multiplying the Participant’s vesting percentage determined under the applicable vesting schedule by the total amount under the applicable Account.

	The Employer must elect a normal vesting schedule and a Top-Heavy Plan vesting schedule under Part 6 of the Agreement. The Top-Heavy Plan vesting schedule will apply for any Plan Year in which the plan is a Top-Heavy Plan. If this Plan is a 401(k) plan, the Employer must elect a normal and Top-Heavy Plan vesting schedule for both Employer Nonelective Contributions and Employer Matching Contributions, but only to the extent such contributions are authorized under Part 4B and/or Part 4C of the 401(k) Agreement.

	The Employer may choose any of the following vesting schedules as the normal vesting schedule under Part 6 of the Agreement. For the Top-Heavy Plan vesting, the Employer may only choose the full and immediate, 6-year graded, 3-year cliff, or modified vesting schedule, as described below.

	(a)	Full and immediate vestin g schedule. Under the full and immediate vesting schedule, the Participant is always 100% vested in his/her Account Balance.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	(b)	7-year graded vesting schedule. Under the 7-year graded vesting schedule, an Employee vests in his/her Employer Contribution Account and/or Employer Matching Contribution Account in the following manner:

		After 3 Years of Service – 20% vesting
		After 4 Years of Service – 40% vesting
		After 5 Years of Service – 60% vesting
		After 6 Years of Service – 80% vesting
		After 7 Years of Service – 100% vesting

	(c)	6-year graded vesting schedule. Under the 6-year graded vesting schedule, an Employee vests in his/her Employer Contribution Account and/or Employer Matching Contribution Account in the following manner:

		After 2 Years of Service – 20% vesting
		After 3 Years of Service – 40% vesting
		After 4 Years of Service – 60% vesting
		After 5 Years of Service – 80% vesting
		After 6 Years of Service – 100% vesting

	(d)	5-year cliff vesting schedule. Under the 5-year cliff vesting schedule, an Employee is 100% vested after 5 Years of Service. Prior to the fifth Year of Service, the vesting percentage is zero.

	(e)	3-year cliff vesting schedule. Under the 3-year cliff vesting schedule, an Employee is 100% vested after 3 Years of Service. Prior to the third Year of Service, the vesting percentage is zero.

	(f)	Modified vesting schedule. For the normal vesting schedule, the Employer may elect a modified vesting schedule under which the vesting percentage for each Year of Service is not less than the percentage that would be required for each Year of Service under the 7-year graded vesting schedule, unless 100% vesting occurs after no more than 5 Years of Service. For the Top-Heavy Plan vesting schedule, the Employer may elect a modified vesting schedule under which the vesting percentage for each Year of Service is not less than the percentage that would be required for each Year of Service under the 6-year graded vesting schedule, unless 100% vesting occurs after no more than 3 Years of Service.

4.3	Shift to/from Top-Heavy Vesting Schedule. For a Plan Year in which the Plan is a Top-Heavy Plan, the Plan automatically shifts to the Top-Heavy Plan vesting schedule. Once a Plan uses a Top-Heavy Plan vesting schedule, that schedule will continue to apply for all subsequent Plan Years. The Employer may override this default provision under Part 6, #22 of the Nonstandardized Agreement [Part 6, #40 of the Nonstandardized 401(k) Agreement]. The rules under Section 4.7 will apply when a Plan shifts to or from a Top-Heavy Plan vesting schedule.

4.4	Vesting Computation Period. For purposes of computing a Participant’s vested interest in his/her Employer Contribution Account and/or Employer Matching Contribution Account, an Employee’s Vesting Computation Period is the 12-month period measured on a Plan Year basis, unless the Employer elects under Part 7, #26 of the Agreement [Part 7, #44 of the 401(k) Agreement] to measure Vesting Computation Periods using Anniversary Years. The Employer may designate an alternative 12-month period under Part 7, #26.b. of the Nonstandardized Agreement [Part 7, #44.b. of the Nonstandardized 401(k) Agreement]. Any Vesting Computation Period designated under Part 7, #26.b. or #44.1., as applicable, must be a 12-consecutive month period and must apply uniformly to all Participants.

	(a)	Anniversary Years. If the Employer elects to measure Vesting Computation Periods using Anniversary Years, the Vesting Computation Period is the 12-month period commencing on the Employee’s Employment Commencement Date (or Reemployment Commencement Date) and each subsequent 12-month period commencing on the anniversary of such date.

	(b)	Measurement on same Vesting Computation Period. The Plan will measure Years of Service and Breaks in Service (if applicable) for purposes of vesting on the same Vesting Computation Period.

4.5	Crediting Years of Service for Vesting Purposes. Unless the Employer elects otherwise under Part 7, #25 of the Agreement [Part 7, #43 of the 401(k) Agreement], an Employee will earn one Year of Service for purposes of applying the vesting rules if the Employee completes 1,000 Hours of Service with the Employer during a Vesting Computation Period. An Employee will receive credit for a Year of Service as of the end of the Vesting Computation Period, if the Employee completes the required Hours of Service during such period, even if the Employee is not employed for the entire period.

	(a)	Calculating Hours of Service. In calculating an Employee’s Hours of Service for purposes of applying the vesting rules under this Article, the Employer will use the Actual Hours Crediting Method, unless the Employer elects otherwise under Part 7, #25 of the Agreement [Part 7, #43 of the 401(k) Agreement]. (See Article 6 of this Plan for a description of the alternative service crediting methods.)



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	(b)	Excluded service. Unless the Employer elects to exclude certain service with the Employer under Part 6, #20 of the Agreement [Part 6, #38 of the 401(k) Agreement], all service with the Employer is counted for vesting purposes.

		(1)	Service before the Effective Date of the Plan. Under Part 6, #20.a. of the Agreement [Part 6, #38.a. of the 401(k) Agreement], the Employer may elect to exclude service during any period for which the Employer did not maintain the Plan or a Predecessor Plan. For this purpose, a Predecessor Plan is a qualified plan maintained by the Employer that is terminated within the 5-year period immediately preceding or following the establishment of this Plan. A Participant’s service under a Predecessor Plan must be counted for purposes of determining the Participant’s vested percentage under this Plan.

		(2)	Service before a certain age. Under Part 6, #20.b. of the Agreement [Part 6, #38.b.of the 401(k) Agreement], the Employer may elect to exclude service before an Employee attains a certain age. For this purpose, the Employer may not designate an age greater than 18. An Employee will be credited with a Year of Service for the Vesting Computation Period during which the Employee attains the requisite age, provided the Employee satisfies all other conditions required for a Year of Service.

4.6	Vesting Break in Service Rules. Except as provided under Section 4.5(b), in determining a Participant’s vested percentage, a Participant is credited with all Years of Service earned with the Employer, subject to the following Break in Service rules. In applying these Break in Service rules, Years of Service and Breaks in Service (as defined in Section 22.27) are measured on the same Vesting Computation Period as defined in Section 4.4 above.

	(a)	One-year holdout Break in Service. The one-year holdout Break in Service rule will not apply unless the Employer specifically elects in Part 7, #27.b. of the Nonstandardized Agreement [Part 7, #45.b. of the Nonstandardized 401(k) Agreement] to have it apply. If the one-year holdout Break in Service rule is elected, an Employee who has a one-year Break in Service will not be credited for vesting purposes with any Years of Service earned before such one-year Break in Service until the Employee has completed a Year of Service after the one-year Break in Service. The one-year holdout rule does not apply under the Standardized Agreement.

	(b)	Five-Year Forf eiture Break in Service. In the case of a Participant who has five (5) consecutive one-year Breaks in Service, all Years of Service after such Breaks in Service will be disregarded for the purpose of vesting in the portion of the Participant’s Employer Contribution Account and/or Employer Matching Contribution Account that accrued before such Breaks in Service, but both pre-break and post-break service will count for purposes of vesting in the portion of such Accounts that accrues after such breaks. The Participant will forfeit the nonvested portion of his/her Employer Contribution Account and/or Employer Matching Contribution Account accrued prior to incurring five consecutive Breaks in Service, in accordance with Section 5.3(b).

		In the case of a Participant who does not have five consecutive one-year Breaks in Service, all Years of Service will count in vesting both the pre-break and post-break Account Balance derived from Employer Contributions.

	(c)	Rule of Parity Break in Service. This Break in Service rule applies only to Participants who are totally nonvested (i.e., 0% vested) in their Employer Contribution Account and Employer Matching Contribution Account. If an Employee is vested in any portion of his/her Employer Contribution Account or Employer Matching Contribution Account, the Rule of Parity does not apply. Under this Break in Service rule, if a nonvested Participant incurs a period of consecutive one-year Breaks in Service which equals or exceeds the greater of five (5) or the Participant’s aggregate number of Years of Service with the Employer, all service earned prior to the consecutive Break in Service period will be disregarded and the Participant will be treated as a new Employee for purposes of determining vesting under the Plan. The Employer may elect under Part 7, #27.a. of the Agreement [Part 7, #45.a. of the 401(k) Agreement] not to apply the Rule of parity Break in Service rule.

		(1)	Previous application of the Rule of Parity Break in Service rule. In determining a Participant’s aggregate Years of Service for purposes of applying the Rule of Parity Break in Service rule, any Years of Service otherwise disregarded under a previous application of this rule are not counted.

		(2)	Application to the 401(k) Agreement. The Rule of Parity Break in Service rule applies only to determine the individual’s vesting rights with respect to his/her Employer Contribution Account and Employer Matching Contribution Account. In determining whether a Participant is totally nonvested for purposes of applying the Rule of Parity Break in Service rule, the Participant’s Section 401(k) Deferral Account, Employee After-Tax Contribution Account, QMAC Account,



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			QNEC Account, Safe Harbor Nonelective Contribution Account, Safe Harbor Matching Contribution Account, and Rollover Contribution Account are disregarded.

4.7	Amendment of Vesting Schedule. If the Plan’s vesting schedule is amended (or is deemed amended by an automatic change to or from a Top-Heavy Plan vesting schedule), each Participant with at least three (3) Years of Service with the Employer, as of the end of the election period described in the following paragraph, may elect to have his/her vested interest computed under the Plan without regard to such amendment or change. For this purpose, a Plan amendment, which in any way directly or indirectly affects the computation of the Participant’s vested interest, is considered an amendment to the vesting schedule. However, the new vesting schedule will apply automatically to an Employee, and no election will be provided, if the new vesting schedule is at least as favorable to such Employee, in all circumstances, as the prior vesting schedule.

	The period during which the election may be made shall commence with the date the amendment is adopted or is deemed to be made and shall end on the latest of:

	(a)	60 days after the amendment is adopted;

	(b)	60 days after the amendment becomes effective; or

	(c)	60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator.

	Furthermore, if the vesting schedule of the Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or effective, the vested percentage of such Employee’s Account Balance derived from Employer Contributions (determined as of such date) will not be less than the percentage computed under the Plan without regard to such amendment.

4.8	Special Vesting Rule - In-Service Distribution When Account Balance Less than 100% Vested. If amounts are distributed from a Participant’s Employer Contribution Account or Employer Matching Contribution account at a time when the Participant’s vested percentage in such amounts is less than 100% and the Participant may increase the vested percentage in the Account Balance:

	(a)	A separate Account will be established for the Participant’s interest in the Plan as of the time of the distribution, and

	(b)	At any relevant time the Participant’s vested portion of the separate Account will be equal to an amount (“X”) determined by the formula:

		X = P (AB + D) - D

		Where:

			P is the vested percentage at the relevant time;

			AB is the Account Balance at the relevant time; and

			D is the amount of the distribution.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 5
FORFEITURES

This Article contains the rules relating to the timing and disposition of forfeitures of the nonvested portion of a Participant’s Account Balance. Part 8 of the Agreement provides elections on the allocation of forfeitures. The rules for determining the vested portion of a Participant’s Account Balance are contained in Article 4 of this BPD.


5.1	I n General . The Plan Administrator has the responsibility to determine the amount of a Participant’s forfeiture based on the application of the vesting provisions of Article 4. Until an amount is forfeited pursuant to this Article, nonvested amounts will be held in the Account of the Participant and will share in gains and losses of the Trust (as determined under Article 13).

5.2	T iming of forfeiture. The forfeiture of all or a portion of a Participant’s nonvested Account Balance occurs upon any of the events listed below:

	(a)	C ash-Out Distribution. The date the Participant receives a total Cash-Out Distribution as defined in Section 5.3(a).

	(b)	F ive-Year Forfeiture Break in Service. The last day of the Vesting Computation Period in which the Participant incurs a Five-Year Forfeiture Break in Service as defined in Section 5.3(b).

	(c)	L ost Participant or Beneficiary. The date the Plan Administrator determines that a Participant or Beneficiary cannot be located to receive a distribution from the Plan. See Section 5.3(c).

	(d)	F orfeiture of Employer Matching Contributions. With respect to Employer Matching Contributions under a 401(k) plan, the date a distribution is made as described in Section 5.3(d).

5.3	F orfeiture Events.

	(a)	C ash-Out Distribution. If a Participant receives a total distribution upon termination of his/her participation in the Plan (a “Cash-Out Distribution”), the nonvested portion (if any) of the Participant’s Account Balance is forfeited in accordance with the provisions of this Article. If a Participant has his/her nonvested Account Balance forfeited as a result of a Cash-Out Distribution, such Participant must be given the right to “buy-back” the forfeited benefit, as provided in subsection (2) below. (See Article 8 for the rules regarding the availability and timing of Plan distributions and the consent requirements applicable to such distributions.)

		(1)	Amount of forfeiture. The Cash-Out Distribution rules under this subsection (a) apply only if the Participant is less than 100% vested in his/her Employer Contribution Account and/or Employer Matching Contribution Account. If the Participant is 100% vested in his/her entire Account Balance, no forfeiture of benefits will occur solely as a result of the Cash-Out Distribution.

			(i)	Total Cash-Out Distribution. If a Participant receives a Cash-Out Distribution of his/her entire vested Account Balance, the Participant will immediately forfeit the entire nonvested portion of his/her Account Balance, as of the date of the distribution (as determined under subsection (A) or (B) below, whichever applies). The forfeited amounts will be used in the manner designated under Part 8 of the Agreement.

				(A)	No further allocations. If the terminated Participant is not entitled to any further allocations under the Plan for the Plan Year in which the Participant terminates employment, the Cash-Out Distribution occurs on the day the Participant receives a distribution of his/her entire vested Account Balance. The Participant’s nonvested benefit is immediately forfeited on such date, in accordance with the provisions under Section 5.5.

				(B)	Additional allocations. If the terminated Participant is entitled to an additional allocation under the Plan for the Plan Year in which the Participant terminates employment, a Cash-Out Distribution is deemed to occur when the Participant receives a distribution of his/her entire vested Account Balance, including any amounts that are still to be allocated under the Plan. Thus, a Participant who is entitled to an additional allocation under the Plan will not have a total Cash-Out Distribution until such additional amounts are distributed, regardless of whether the Participant takes a complete distribution of his/her vested Account Balance before receiving the additional allocation.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(C)	Modification of default cash-out rules. The Employer may override the default cash-out rules under subsections (A) and (B) above by electing under Part 8, #32 of the Agreement [Part 8, #50 of the 401(k) Agreement] to have the Cash-Out Distribution and related forfeiture occur immediately upon a distribution of the terminated Participant’s entire vested Account Balance, without regard to whether the Participant is entitled to an additional allocation under the Plan.

	(ii)	Deemed Cash-Out Distribution. If a Participant terminates employment with the Employer with a vested Account Balance of zero in his/her Employer Contribution Account and/or Employer Matching Contribution Account, the Participant is treated as receiving a “deemed” Cash-Out Distribution from the Plan. Upon a deemed Cash-Out, the nonvested portion of the Participant’s Account Balance will be forfeited in accordance with subsection (A) or (B) below.

		(A)	No further allocations. If the Participant is not entitled to any further allocations under the Plan for the Plan Year in which the Participant terminates employment, the deemed Cash-Out Distribution is deemed to occur on the day the employment terminates. The Participant’s nonvested benefit is immediately forfeited on such date, in accordance with the provisions under Section 5.5.

		(B)	Additional allocations. If the Participant is entitled to an additional allocation under the Plan for the Plan Year in which the Participant terminates employment, the deemed Cash-Out Distribution is deemed to occur on the first day of the Plan Year following the Plan Year in which the termination occurs.

		(C)	Modification of default cash-out rules. The Employer may override the default cash-out rules under subsections (A) and (B) above by electing under Part 8, #32 of the Agreement [Part 8, #50 of the 401(k) Agreement] to have the deemed Cash-Out Distribution and related forfeiture occur immediately upon a distribution of the terminated Participant’s entire vested Account Balance, without regard to whether the Participant is entitled to an additional allocation under the Plan.

	(iii)	Other distributions. If the Participant receives a distribution of less than the entire vested portion of his/her Employer Contribution Account and Employer Matching Contribution Account (including any additional amounts to be allocated under subsection (i)(B) above), the total Cash-Out Distribution rule under subsection (i) above does not apply until the Participant receives a distribution of the remainder of the vested portion of his/her Account Balance. Until the Participant receives a distribution of the remainder of the vested portion of his/her Account Balance, the special vesting rule described in Section 4.8 applies to determine the vested percentage of the Participant’s Employer Contribution Account and Employer Matching Account (as applicable). The nonvested portion of such accounts will not be forfeited until the earlier of: (A) the occurrence of a Five-Year Forfeiture Break in Service described in Section 5.3(b) or (B) the date the Participant receives a total Cash-Out Distribution of the remaining vested portion of his/her Account Balance.

(2)	Buy-back/restoration. If a Participant receives (or is deemed to receive) a Cash-Out Distribution that results in a forfeiture under subsection (1) above, and the Participant subsequently resumes employment covered under this Plan, the Participant may “buy-back” the forfeited portion of his/her Account(s) by repaying to the Plan the full amount of the Cash-Out Distribution from such Account(s).

	(i)	Buy-back opportunity. A Participant may buy-back the portion of his/her benefit that is forfeited as a result of a Cash-Out Distribution (or a deemed Cash-Out Distribution) by repaying the amount of such Cash-Out Distribution to the Plan before the earlier of:

		(A)	five (5) years after the first date on which the Participant is subsequently re-employed by the Employer, or

		(B)	the date a Five-Year Forfeiture Break in Service occurs (as defined in Section 5.3(b)).

		If a Participant receives a deemed Cash-Out Distribution pursuant to subsection (1)(ii) above, and the Participant resumes employment covered under this Plan before the date



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			the Participant incurs a Five-Year Forfeiture Break in Service, the Participant is deemed to have repaid the Cash-Out Distribution immediately upon his/her reemployment.

			To receive a restoration of the forfeited portion of his/her Employer Contribution Account and/or Employer Matching Contribution Account, a Participant must repay the entire Cash-Out Distribution that was made from the Participant’s Employer Contribution Account and Employer Matching Contribution Account, unadjusted for any interest that might have accrued on such amounts after the distribution date. For this purpose, the Cash-Out Distribution is the total value of the Participant’s vested Employer Contribution Account and Employer Matching Contribution Account that is distributed at any time following the Participant’s termination of employment. If a Participant also received a distribution from other Accounts, the Participant need not repay such amounts to have the forfeited portion of his/her Employer Contribution Account and/or Employer Matching Contribution Account restored.

		(ii)	Restoration of forfeited benefit. Upon a Participant’s proper repayment of a Cash-Out Distribution in accordance with subsection (i) above, the forfeited portion of the Participant’s Employer Contribution Account and Employer Matching Contribution Account (as applicable) will be restored, unadjusted for any gains or losses on such amount. For this purpose, a Participant who received a deemed Cash-Out Distribution is automatically treated as having made a proper repayment and his/her forfeited benefit will be restored in accordance with this subsection (ii) if the Participant returns to employment with the Employer prior to incurring a Five-Year Forfeiture Break in Service. A Participant is not entitled to restoration under this subsection (ii) if the Participant returns to employment after incurring a Five-Year Forfeiture Break in Service.

			The forfeited portion of the Participant’s Account(s) will be restored no later than the end of the Plan Year following the Plan Year in which the Participant repays the Cash-Out Distribution in accordance with subsection (i) above. Although the Plan Administrator may permit a Participant to make a partial repayment of a Cash-Out Distribution, no portion of the Participant’s forfeited benefit will be restored until the Participant repays the entire Cash-Out Distribution in accordance with subsection (i) above. If a Participant received a deemed Cash-Out Distribution, the Participant’s forfeited benefit will be restored no later than the end of the Plan Year following the Plan Year in which the Participant returns to employment with the Employer.

			If a Participant’s forfeited benefit is required to be restored under this subsection (ii), the restoration of such benefit will occur from the following sources. If the following sources are not sufficient to completely restore the Participant’s benefit, the Employer must make an additional contribution to the Plan.

			(A)	Any forfeitures that have not been allocated to Participants’ Accounts for the Plan Year in which the Employer is restoring the Participant’s benefit in accordance with this subsection (ii).

			(B)	If Participants are not permitted to self-direct investments under the Plan, any Trust earnings which have not been allocated to Participants’ Accounts for the Plan Year in which the Employer is restoring the Participant’s benefit in accordance with this subsection (ii).

			(C)	If the Employer makes a discretionary contribution to the Plan, it may designate all or any part of such discretionary contribution as a restoration contribution under this subsection (ii).

(b)	F ive-Year Forfeiture Break in Service. In the case of a Participant who has five (5) consecutive one-year Breaks in Service, the nonvested portion of the Participant’s Account Balance will be forfeited as of the end of the Vesting Computation Period in which the Participant incurs his/her fifth consecutive Break in Service. See Section 4.6(b) for more information on the Five-Year Forfeiture Break in Service.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	(c)	L ost Participant or Beneficiary.

		(1)	Inability to locate Participant or Beneficiary. If the Plan Administrator, after a reasonable effort and time, is unable to locate a Participant or a Beneficiary in order to make a distribution otherwise required by the Plan, the distributable amount may be forfeited, as permitted under applicable laws and regulations. In determining what is a reasonable effort and time, the Plan Administrator may follow any applicable guidance provided under statute, regulation, or other IRS or DOL guidance of general applicability.

		(2)	Restoration of forfeited amounts. If, after the distributable amount is forfeited, the Participant or Beneficiary is located, the Plan will restore the forfeited amount (unadjusted for gains or losses) to such Participant or Beneficiary within a reasonable time. The method of restoring a forfeited benefit under subsection (a)(2)(ii) above applies to any restoration required under this subsection (2).

	(d)	F orfeiture of Employer Matching Contributions. This subsection (d) only applies if the Plan is a 401(k) Plan.

		(1)	Correction of ACP Test. If a Participant receives a corrective distribution of Excess Aggregate Contributions to correct the ACP Test, the portion of such corrective distribution which relates to nonvested Employer Matching Contributions, including any allocable income or loss, will be forfeited (as permitted under Section 17.3(d)(1)) in the Plan Year in which the corrective distribution is made from the Plan.

		(2)	Excess Deferrals, Excess Contributions, and Excess Aggregate Contributions. If a Participant receives a distribution of Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions, the Employer will forfeit the portion of his/her Employer Matching Contribution Account (whether vested or not) which is attributable to such distributed amounts (except to the extent such amount has been distributed as Excess Contributions or Excess Aggregate Contributions, pursuant to Article 17). A forfeiture of Employer Matching Contributions under this subsection (2) occurs in the Plan Year in which the Participant receives the distribution of Excess Deferrals, Excess Contributions, and/or Excess Aggregate Contributions.

5.4	T iming of Forfeiture Allocation. Pursuant to the elections under Part 8 of the Agreement, forfeitures are allocated in either the same Plan Year in which the forfeitures occur or in the Plan Year following the Plan Year in which the forfeitures occur.

5.5	M ethod of Allocating Forfeitures. Forfeitures will be allocated in accordance with the method chosen by the Employer under Part 8 of the Agreement. In no event, however, will a Participant receive an allocation of forfeitures arising from his/her own Account. If no method of allocation is selected under Part 8 of the Agreement, any forfeitures will be used to reduce the Employer’s contributions for the Plan Year following the Plan Year in which the forfeiture occurs as described under (b) below.

	(a)	R eallocation of forfeitures. If the Employer elects to reallocate forfeitures as additional contributions, the forfeitures will be added to other contributions made by the Employer (as designated under Part 8 of the Agreement) for the Plan Year designated under Part 8, #29 of the Agreement [Part 8, #47 of the 401(k) Agreement], and such amounts will be allocated to Eligible Participants under the allocation method chosen under Part 4 of the Agreement with respect to such contributions. Reallocation of forfeitures is not available under the target benefit plan Agreement.

	(b)	R eduction of contributions. If the Employer elects under Part 8 of the Agreement to use forfeitures to reduce its contributions under the Plan, the Employer may adjust its contribution deposits in any manner, provided the total Employer Contributions made for the Plan Year properly take into account the forfeitures that are to be used to reduce such contributions for that Plan Year. If the contributions are allocated over multiple allocation periods, the Employer may reduce its contribution for any allocation periods within the Plan Year in which the forfeitures are to be allocated so that the total amount allocated for the Plan Year is proper.

	(c)	P ayment of Plan expenses. If the Employer elects under Part 8, #31 of the Agreement [Part 8, #49 of the 401(k) Agreement], forfeitures will first be used to pay Plan expenses for the Plan Year in which the forfeitures would otherwise be allocated. This subsection (c) applies only if the Plan otherwise would pay such expenses as authorized under Section 11.4. If any forfeitures remain after the payment of Plan expenses under this subsection, the remaining forfeitures will be allocated as selected under Part 8 of the Agreement.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 6
SPECIAL SERVICE CREDITING PROVISIONS

This Article contains special service crediting rules that apply for purposes of determining an Employee’s eligibility to participate and the vested percentage in his/her Account Balance under the Plan. This Article 6 and Part 7 of the Agreement permit the Employer to override the general service crediting rules under Articles 1 and 4 with respect to eligibility and vesting and to apply special service crediting rules, such as the Equivalency Method and the Elapsed Time Method for crediting service. Section 6.7 of this Article and Part 13, #53 of the Agreement [Part 13, #71 of the 401(k) Agreement] contain special rules for crediting service with Predecessor Employers.


6.1	Y ear of Service - Eligibility. Section 1.4(b) defines a Year of Service for eligibility purposes. Generally, an Employee earns a Year of Service for eligibility purposes upon the completion of 1,000 Hours of Service during an Eligibility Computation Period. For this purpose, Hours of Service are calculated using the Actual Hours Crediting Method. Part 7, #23 of the Agreement [Part 7, #41 of the 401(k) Agreement] permits the Employer to modify these default provisions for determining a Year of Service for eligibility purposes.

	(a)	S election of Hours of Service. The Employer may elect to modify the requirement that an Employee complete 1,000 Hours of Service during an Eligibility Computation Period to earn a Year of Service. Under Part 7, #23.a. of the Agreement [Part 7, #41.a. of the 401(k) Agreement], the Employer may designate a specific number of Hours of Service (which cannot exceed 1,000) that an Employee must complete during the Eligibility Computation Period to earn a Year of Service. Any Hours of Service designated in accordance with this subsection (a) will be determined using the Actual Hours Crediting Method, unless the Employer elects to use the Equivalency Method under Part 7, #23.b. of the Agreement [Part 7, #41.b. of the 401(k) Agreement].

	(b)	U se of Equivalency Method. The Employer may elect under Part 7, #23.b. of the Agreement [Part 7, #41.b. of the 401(k) Agreement] to use the Equivalency Method (as defined in Section 6.5(a)) instead of the Actual Hours Crediting Method in determining whether an Employee has completed the required Hours of Service to earn a Year of Service.

	(c)	U se of Elapsed Time Method. The Employer may elect under Part 7, #23.c. of the Agreement [Part 7, #41.c. of the 401(k) Agreement] to use the Elapsed Time Method (as defined in Section 6.5(b)) instead of counting Hours of Service in applying the eligibility conditions under Article 1. The Elapsed Time Method may not be selected if the Employer elects to apply a designated Hours of Service requirement under Part 7, #23.a. of the Agreement [Part 7, #41.a. of the 401(k) Agreement].

6.2	E ligibility Computation Period. Section 1.4(c) defines the Eligibility Computation Period used to determine whether an Employee has earned a Year of Service for eligibility purposes. Generally, if one Year of Service is required for eligibility, the Eligibility Computation Period is determined using the Shift-to-Plan-Year Method (as defined in Section 1.4(c)(1)). Part 7, #24 of the Agreement [Part 7, #42 of the 401(k) Agreement] permits the Employer to use the Anniversary Year Method (as defined in Section 1.4(c)(2)) for determining Eligibility Computation Periods under the Plan. If the Employer selects two Years of Service eligibility condition (under Part 1, #5.e. of the Agreement), the Anniversary Year Method applies, unless the Employer elects to use the Shift-to-Plan-Year Method. In the case of a 401(k) plan in which a two Years of Service eligibility condition is used for either Employer Matching Contributions or Employer Nonelective Contributions, the method used to determine Eligibility Computation Periods for the two Years of Service condition also will apply to anyone Year of Service eligibility condition used with respect to any other contributions.

6.3	Y ear of Service - Vesting. Section 4.5 defines a Year of Service for vesting purposes. Generally, an Employee earns a Year of Service for vesting purposes upon the completion of 1,000 Hours of Service during a Vesting Computation Period. For this purpose, Hours of Service are calculated using the Actual Hours Crediting Method. Part 7, #25 of the Agreement [Part 7, #43 of the 401(k) Agreement] permits the Employer to modify these default provisions for determining a Year of Service for vesting purposes.

	(a)	S election of Hours of Service. The Employer may elect to modify the requirement that an Employee complete 1,000 Hours of Service during a Vesting Computation Period to earn a Year of Service. Under Part 7, #25.a. of the Agreement [Part 7, #43.a. of the 401(k) Agreement], the Employer may designate a specific number of Hours of Service (which cannot exceed 1,000) that an Employee must complete during the Vesting Computation Period to earn a Year of Service. Any Hours of Service designated in accordance with this subsection (a) will be determined using the Actual Hours Crediting Method, unless the Employer elects to use the Equivalency Method under Part 7, #25.b. of the Agreement [Part 7, #43.b. of the 401(k) Agreement].

	(b)	E quivalency Method. The Employer may elect under Part 7, #25.b. of the Agreement [Part 7, #43.b. of the 401(k) Agreement] to use the Equivalency Method (as defined in Section 6.5(a)) instead of the Actual Hours



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		Crediting Method in determining whether an Employee has completed the required Hours of Service to earn a Year of Service.

	(c)	E lapsed Time Method. The Employer may elect under Part 7, #25.c. of the Agreement [Part 7, #43.c. of the 401(k) Agreement] to use the Elapsed Time Method (as defined in Section 6.5(b)) instead of counting Hours of Service in applying the vesting provisions under Article 4. The Elapsed Time Method may not be selected if the Employer elects to apply a designated Hours of Service requirement under Part 7, #25.a. of the Agreement [Part 7, #43.a. of the 401(k) Agreement].

6.4	V esting Computation Period. Section 4.4 defines the Vesting Computation Period used to determine whether an Employee has earned a Year of Service for vesting purposes. Generally, the Vesting Computation Period is the Plan Year. Part 7, #26 of the Agreement [Part 7, #44 of the 401(k) Agreement] permits the Employer to elect to use Anniversary Years (see Section 4.4(a)) or, under the Nonstandardized Agreement, any other 12-consecutive month period as the Vesting Computation Period.

6.5	D efinitions.

	(a)	E quivalency Method. Under the Equivalency Method, an Employee is credited with 190 Hours of Service for each calendar month during the Eligibility Computation Period or Vesting Computation Period, as applicable, for which the Employee completes at least one Hour of Service. Instead of applying the Equivalency Method on the basis of months worked, the Employer may elect to apply different equivalencies under Part 7, #28 of the Agreement [Part 7, #46 of the 401(k) Agreement]. The Employer may credit Employees with 10 Hours of Service for each day worked, 45 Hours of Service for each week worked, or 95 Hours of Service for each semi-monthly payroll period worked during the Eligibility Computation Period or Vesting Computation Period, as applicable. For this purpose, an Employee will receive credit for the appropriate Hours of Service if the Employer completes at least one Hour of Service during the applicable period.

	(b)	E lapsed Time Method. Under the Elapsed Time Method, an Employee receives credit for the aggregate of all periods of service commencing with the Employee’s Employment Commencement Date (or Reemployment Commencement Date) and ending on the date the Employee begins a Period of Severance (as defined in subsection (2) below) which lasts at least 12 consecutive months. In calculating an Employee’s aggregate period of service, an Employee receives credit for any Period of Severance that lasts less than 12 consecutive months. If an Employee’s aggregate period of service includes fractional years, such fractional years are expressed as days.

		(1)	Year of Service. For purposes of determining whether an Employee has earned a Year of Service under the Elapsed Time Method, an Employee is credited with a Year of Service for each 12-month period of service the Employee completes under the above paragraph, whether or not such period of service is consecutive.

		(2)	Period of Severance. For purposes of applying the Elapsed Time Method, a Period of Severance is any continuous period of time during which the Employee is not employed by the Employer. A Period of Severance begins on the date the Employee retires, quits or is discharged, or if earlier, the 12-month anniversary of the date on which the Employee is first absent from service for a reason other than retirement, quit or discharge.

			In the case of an Employee who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a Period of Severance. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee, or (iv) for purposes of caring for a child of the Employee for a period beginning immediately following the birth or placement of such child.

		(3)	Break in Service rules. The Break in Service rules described in Sections 1.6 and 4.6 also apply under the Elapsed Time Method. For purposes of applying the Break in Service rules under the Elapsed Time Method, a Break in Service is any Period of Severance of at least 12 consecutive months.

6.6	S witching Crediting Methods. The following rules apply if the service crediting method is changed in a manner described below.

	(a)	S hift from crediting Hours of Service to Elapsed Time Method. If the service crediting method under the Plan is changed from a method that uses Hours of Service to a method using Elapsed Time, each Employee’s



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		period of service under the Elapsed Time Method is the sum of the amounts under subsections (1) and (2) below.

		(1)	The number of Years of Service credited under the Hours of Service method for the period ending immediately before the computation period during which the change to the Elapsed Time Method occurs.

		(2)	For the computation period in which the change occurs, the Plan Administrator will determine the greater of: (i) the period of service that would be credited under the Elapsed Time Method for the Employee’s service from the first day of that computation period through the date of the change, or (ii) the service that would be taken into account under the Hours of Service method for that computation period through the date of the change. If (i) is greater, then Years of Service are credited under the Elapsed Time Method beginning with the first day of the computation period during which the change to the Elapsed Time Method occurs. If (ii) is greater, then Years of Service are credited under the Hours of Service method for the computation period during which the change to the Elapsed Time Method occurs and under the Elapsed Time Method beginning with the first day of the computation period that follows the computation period in which the change occurs. If the change occurs as of the first day of a computation period, treat subsection (1) as applicable for purposes of applying the rule in this paragraph.

	(b)	S hift from Elapsed Time Method to an Hours of Service method. If the service crediting method changes from the Elapsed Time Method to an Hours of Service method, each Employee’s Years of Service under the Hours of Service method is the sum of the amounts under subsections (1) and (2) below.

		(1)	The number of Years of Service credited under the Elapsed Time Method as of the date of the change.

		(2)	For the computation period in which the change to the Hours of Service method occurs, the portion of that computation period in which the Elapsed Time Method was in effect is converted into an equivalent number of Hours of Service, using the Equivalency Method described in Section 6.5(a). For the remainder of the computation period, actual Hours of Service are counted, unless the Equivalency Method has been elected in Part 7 of the Agreement. The Hours of Service deemed credited for the portion of the computation period in which the Elapsed Time Method was in effect are added to the actual Hours of Service credited for the remaining portion of the computation period to determine if the Employee has a Year of Service for that computation period. If the change to the Hours of Service method occurs as of the first day of a computation period, then the determination as to whether an Employee has completed a Year of Service for the first computation period that the change is in effect is based solely on the Hours of Service method.

6.7	S ervice with Predecessor Employers. If the Employer maintains the plan of a Predecessor Employer, any service with such Predecessor Employer is treated as service with the Employer for purposes of applying the provisions of this Plan. If the Employer maintains the Plan of a Predecessor Employer, the Employer may complete Part 13, #53 of the Agreement [Part 13, #71 of the 401(k) Agreement] to identify the Predecessor Employer and to specify that service with such Predecessor Employer will be credited for all purposes under the Plan. The failure to complete Part 13, #53 of the Agreement [Part 13, #71 of the 401(k) Agreement] with respect to service of a Predecessor Employer where the Employer is maintaining a Plan of such Predecessor Employer will not override the requirement that such predecessor service be counted for all purposes under the Plan.

	If the Employer does not maintain the plan of a Predecessor Employer, service with such Predecessor Employer does not Count under this Plan, unless the Employer specifically designates under Part 13, #53 of the Agreement [Part 13, #71 of the 401(k) Agreement] to include service with such Predecessor Employer. If the Employer elects to credit service with a Predecessor Employer under this paragraph, the Employer must designate the purpose for which it is crediting Predecessor Employer service. If the Employer will treat service with multiple Predecessor Employers differently, the Employer should complete an additional election for each Predecessor Employer for which service is being credited differently. If the Employer is not crediting service with any Predecessor Employers, Part 13, #53 of the Agreement [Part 13, #71 of the 401(k) Agreement] need not be completed.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 7
LIMITATION ON PARTICIPANT ALLOCATIONS

This Article provides limitations on the amount a Participant may receive as an allocation under the Plan for a Limitation Year. The limitation on allocations (referred to herein as the Annual Additions Limitation) applies in the aggregate to all plans maintained by the Employer. Part 13, #54.c. of the Agreement [Part 13, #72.c. of the 401(k) Agreement] permits the Employer to specify how the Plan will comply with the Annual Additions Limitation where the Employer maintains a plan (or plans) in addition to this Plan.


7.1	A nnual Additions Limitation - No Other Plan Participation.

	(a)	A nnual Additions Limitation. If the Participant does not participate in, and has never participated in another qualified retirement plan, a welfare benefit fund (as defined under Code §419(e)), an individual medical account (as defined under Code §415(1)(2)), or a SEP (as defined under Code §408(k)) maintained by the Employer, then the amount of Annual Additions which may be credited to the Participant’s Account for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan.

		Generally, if an Employer Contribution that would otherwise be contributed or allocated to a Participant’s Account will cause that Participant’s Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount to be contributed or allocated to such Participant will be reduced so that the Annual Additions allocated to such Participant’s Account for the Limitation Year will equal the Maximum Permissible Amount. However, if a contribution or allocation to a Participant’s Account will exceed the Maximum Permissible Amount due to a correctable event described in subsection (c) below, the Excess Amount may be contributed or allocated to such Participant and corrected in accordance with the correction procedures outlined in subsection (c).

	(b)	U sing estimated Total Compensation. Prior to determining the Participant’s actual Total Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant’s Total Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.

		As soon as administratively feasible after the end of the Limitation Year, the Employer will determine the Maximum Permissible Amount for the Limitation Year on the basis of the Participant’s actual Total Compensation for the Limitation Year.

	(c)	D isposition of Excess Amount. If, as a result of the use of estimated Total Compensation, the allocation of forfeitures, a reasonable error in determining the amount of Section 401(k) Deferrals that may be made under this Article 7, or other reasonable error in applying the Annual Additions Limitation, an Excess Amount arises, the excess will be disposed of as follows:

		(1)	Any Employee After-Tax Contributions (plus attributable earnings), to the extent such contributions would reduce the Excess Amount, will be returned to the Participant. The Employer may elect not to apply this subsection (1) if the ACP Test (as defined in Section 17.3) has already been performed and the distribution of Employee After-Tax Contributions to correct the Excess Amount will cause the ACP Test to fail or will change the amount of corrective distributions required under Section 17.3(d)(1) of this BPD.

			If Employer Matching Contributions were allocated with respect to Employee After-Tax Contributions for the Limitation Year, the Employee After-Tax Contributions and Employer Matching Contributions will be corrected together. Employee After-Tax Contributions will be distributed under this subsection (1) only to the extent the Employee After-Tax Contributions, plus the Employer Matching Contributions allocated with respect to such Employee After-Tax Contributions, reduce the Excess Amount. Thus, after correction under this subsection (1), each Participant should have the same level of Employer Matching Contribution with respect to the remaining Employee After-Tax Contributions as provided under Part 4B of the Agreement. Any Employer Matching Contributions identified under this subsection (1) will be treated as an Excess Amount correctable under subsections (3) and (4) below. If Employer Matching Contributions are allocated to both Employee After-Tax Contributions and to Section 401(k) Deferrals, this subsection (1) is applied by treating Employer Matching Contributions as allocated first to Section 401(k) Deferrals.

		(2)	If, after the application of subsection (1), an Excess Amount still exists, any Section 401(k) Deferrals (plus attributable earnings), to the extent such deferrals would reduce the Excess Amount, will be distributed to the Participant. The Employer may elect not to apply this subsection (2) if the



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			ADP Test (as defined in Section 17.2) has already been performed and the distribution of Section 401(k) Deferrals to correct the Excess Amount will cause the ADP Test to fail or will change the amount of corrective distributions required under Section 17.2(d)(1) of this BPD.

			If Employer Matching Contributions were allocated with respect to Section 401(k) Deferrals for the Limitation Year, the Section 401(k) Deferrals and Employer Matching Contributions will be corrected together. Section 401(k) Deferrals will be distributed under this subsection (2) only to the extent the Section 401(k) Deferrals, plus Employer Matching Contributions allocated with respect to such Section 401(k) Deferrals, reduce the Excess Amount. Thus, after correction under this subsection (2), each Participant should have the same level of Employer Matching Contribution with respect to the remaining Section 401(k) Deferrals as provided under Part 4B of the Agreement. Any Employer Matching Contributions identified under this subsection (2) will be treated as an Excess Amount correctable under subsection (3) or (4) below.

		(3)	If, after the application of subsection (2), an Excess Amount still exists, the Excess Amount is allocated to a suspense account and is used in the next Limitation Year (and succeeding Limitation Years, if necessary) to reduce Employer Contributions for all Participants under the Plan. The Excess Amounts are treated as Annual Additions for the Limitation Year in which such amounts are allocated from the suspense account.

		(4)	If a suspense account is in existence at any time during a Limitation Year pursuant to this Article 7, such suspense account will not participate in the allocation of investment gains and losses, unless otherwise provided in uniform valuation procedures established by the Plan Administrator. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated to Participants’ Accounts before the Employer makes any Employer Contributions, or any Employee After-Tax Contributions are made, for that Limitation Year.

7.2	A nnual Additions Limitation - Participation in Another Plan.

	(a)	I n general. This Section 7.2 applies if, in addition to this Plan, the Participant receives an Annual Addition during any Limitation Year from another Defined Contribution Plan, a welfare benefit fund (as defined under Code §419(e)), an individual medical account (as defined under Code §415(1)(2)), or a SEP (as defined under Code §408(k)) maintained by the Employer. If the Employer maintains, or at any time maintained, a Defined Benefit Plan (other than a Paired Plan) covering any Participant in this Plan, see Section 7.5.

	(b)	T his Plan’s Annual Addition Limitation. The Annual Additions that may be credited to a Participant’s Account under this Plan for any Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant’s Account under any other Defined Contribution Plan, welfare benefit fund, individual medical account, or SEP maintained by the Employer for the same Limitation Year.

	(c)	A nnual Additions reduction. If the Annual Additions with respect to the Participant under any other Defined Contribution Plan, welfare benefit fund, individual medical account, or SEP maintained by the Employer are less than the Maximum Permissible Amount and the Annual Additions that would otherwise be contributed or allocated to the Participant’s Account under this Plan would exceed the Annual Additions Limitation for the Limitation Year, the amount contributed or allocated will be reduced so that the Annual Additions under all such Plans and funds for the Limitation Year will equal the Maximum Permissible Amount. However, if a contribution or allocation to a Participant’s Account will exceed the Maximum Permissible Amount due to a correctable event described in Section 7.1(c), the Excess Amount may be contributed or allocated to such Participant and corrected in accordance with the correction procedures outlined in Section 7.1(c).

	(d)	N o Annual Additions permitted. If the Annual Additions with respect to the Participant under such other Defined Contribution Planes), welfare benefit fund(s), individual medical account(s), or SEP(s) in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant’s Account under this Plan for the Limitation Year. However, if a contribution or allocation to a Participant’s Account will exceed the Maximum Permissible Amount due to a correctable event described in Section 7.1(c), the Excess Amount may be contributed or allocated to such Participant and corrected in accordance with the correction procedures outlined in Section 7.1 (c).

	(e)	U sing estimated Total Compensation. Prior to determining the Participant’s actual Total Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant in the manner described in Section 7.1(b). As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant’s actual Total Compensation for the Limitation Year.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	(f)	E xcess Amounts. If, as a result of the use of estimated Total Compensation, an allocation of forfeitures, a reasonable error in determining the amount of Section 401(k) Deferrals that may be made under this Article 7, or other reasonable error in applying the Annual Additions Limitation, a Participant’s Annual Additions under this Plan and such other plans or funds would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a SEP will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date.

		(1)	Same allocation date. If an Excess Amount is allocated to a Participant on an allocation date of this Plan that coincides with an allocation date of another plan, such Excess Amount will be attributed to the following types of plan(s) in the order listed, until the entire Excess Amount is allocated.

			(i)	First, to any 401(k) plan(s) maintained by the Employer.

			(ii)	Then, to any profit sharing plan(s) maintained by the Employer.

			(iii)	Then, to any money purchase plan(s) maintained by the Employer.

			(iv)	Finally, to any target benefit plan(s) maintained by the Employer.

			If an amount is allocated to the same type of Plan on the same allocation date, the Excess Amount will be allocated to each plan in accordance with the pro rata allocation method outlined in the following paragraph.

		(2)	Alternative methods. The Employer may elect under Part 13, #54.c. of the Agreement [Part 13, #72.c. of the 401(k) Agreement] to modify the default rules under this subsection (f). For example, the Employer may elect to attribute any Excess Amount which is allocated on the same date to this Plan and to another plan maintained by the Employer by designating the specific plan to which the Excess Amount is allocated or by using a pro rata allocation method. Under the pro rata allocation method, the Excess Amount attributed to this Plan is the product of:

			(i)	the total Excess Amount allocated as of such date, times

			(ii)	the ratio of (A) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (B) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all other Defined Contribution Plans.

	(g)	D isposition of Excess Amounts. Any Excess Amount attributed to this Plan will be disposed in the manner described in Section 7.1(c).

7.3	M odification of Correction Procedures. The Employer may elect under Part 13, #51.c. of the Agreement [Part 13, #69.c. of the 401(k) Agreement] to modify any of the corrective provisions under Section 7.1 of this BPD. The provisions in Section 7.2 may be modified under Part 13, #54.c. of the Agreement [Part 13, #72.c. of the 401(k) Agreement].

7.4	D efinitions Relating to the Annual Additions Limitation.

	(a)	A nnual Additions: The sum of the following amounts credited to a Participant’s Account for the Limitation Year:

		(1)	Employer Contributions, including Section 401(k) Deferrals;

		(2)	Employee After-Tax Contributions;

		(3)	forfeitures;

		(4)	amounts allocated to an individual medical account (as defined in Code §415(1)(2)), which is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a Defined Contribution Plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code §419A(d)(3)) under a welfare benefit fund (as defined in Code §419(e)) maintained by the Employer are treated as Annual Additions to a Defined Contribution Plan; and



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	(5)	allocations under a SEP (as defined in Code §408(k)).

	For this purpose, any Excess Amount applied under Sections 7.1(c) or 7.2(f) in the Limitation Year to reduce Employer Contributions will be considered Annual Additions for such Limitation Year.

	An Annual Addition is credited to a Participant’s Account for a particular Limitation Year if such amount is allocated to the Participant’s Account as of any date within that Limitation Year. An Annual Addition will not be deemed credited to a Participant’s Account for a particular Limitation Year unless such amount is actually contributed to the Plan no later than 30 days after the time prescribed by law for filing the Employer’s income tax return (including extensions) for the taxable year with or within which the Limitation Year ends. In the case of Employee After-Tax Contributions, such amount shall not be deemed credited to a Participant’s Account for a particular Limitation Year unless the contributions are actually contributed to the Plan no later than 30 days after the close of that Limitation Year.

(b)	D efined Contribution Dollar Limitation: $30,000, as adjusted under Code §415(d).

(c)	E mployer. For purposes of this Article 7, Employer shall mean the Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in §414(b) of the Code as modified by §415(h)), all commonly controlled trades or businesses (as defined in §414(c) of the Code as modified by §415(h)) or affiliated service groups (as defined in §414(m)) of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under §414(o) of the Code.

(d)	E xcess Amount: The excess of the Participant’s Annual Additions for the Limitation Year over the Maximum Permissible Amount.

(e)	L imitation Year: The Plan Year, unless the Employer elects another 12-consecutive month period under Part 13, #51.a. of the Agreement [Part 13, #69.a. of the 401(k) Agreement]. All qualified retirement plans under Code §401(a) maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. If the Plan has an initial Plan Year that is less than 12 months, the Limitation Year for such first Plan Year is the 12-month period ending on the last day of that Plan Year, unless otherwise specified in Part 13, #51.c. of the Agreement [Part 13, #69.c. of the 401(k) Agreement].

(f)	M aximum Permissible Amount: The maximum Annual Additions that may be contributed or allocated to a Participant’s Account under the Plan for any Limitation Year shall not exceed the lesser of:

	(1)	the Defined Contribution Dollar Limitation, or

	(2)	25 percent of the Participant’s Total Compensation for the Limitation Year.

	The Total Compensation limitation referred to in (2) shall not apply to any contribution for medical benefits (within the meaning of Code §401(h) or §419A(f)(2)) which is otherwise treated as an Annual Addition under Code §415(1)(1) or §419A(d)(2).

	If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction:

	Number of months in the short Limitation Year

	12

	If a short Limitation Year is created because the Plan has an initial Plan Year that is less than 12 months, no proration of the Defined Contribution Dollar Limitation is required, unless provided otherwise under Part 13, #51.c. of the Agreement [Part 13, #69.c. of the 401(k) Agreement]. (See subsection (e) above for the rule allowing the use of a full 12-month Limitation Year for the first year of the Plan, thereby avoiding the need to prorate the Defined Contribution Dollar Limitation.)

(g)	T otal Compensation: The amount of compensation as defined under Section 22.197, subject to the Employer’s election under Part 3, #9 of the Agreement.

	(1)	Self-Employed Individuals. For a Self-Employed Individual, Total Compensation is such individual’s Earned Income.

	(2)	Total Compensation actually paid or made available. For purposes of applying the limitations of this Article 7, Total Compensation for a Limitation Year is the Total Compensation actually paid or



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


			made available to an Employee during such Limitation Year. However, the Employer may include in Total Compensation for a Limitation Year amounts earned but not paid in the Limitation Year because of the timing of pay periods and pay days, but only if these amounts are paid during the first few weeks of the next Limitation Year, such amounts are included on a uniform and consistent basis with respect to all similarly-situated Employees, and no amounts are included in Total Compensation in more than one Limitation Year. The Employer need not make any formal election to include accrued Total Compensation described in the preceding sentence.

		(3)	Disabled Participants. Total Compensation does not include any imputed compensation for the period a Participant is Disabled. However, the Employer may elect under Part 13, #51.b. of the Agreement [Part 13, #69.b. of the 401(k) Agreement], to include under the definition of Total Compensation, the amount a terminated Participant who is permanently and totally Disabled (as defined in Section 22.53) would have received for the Limitation Year if the Participant had been paid at the rate of Total Compensation paid immediately before becoming permanently and totally Disabled. If the Employer elects under Part 13, #51.b. of the Agreement [Part 13, #69.b. of the 401(k) Agreement] to include imputed compensation for a Disabled Participant, a Disabled Participant will receive an allocation of any Employer Contribution the Employer makes to the Plan based on the Employee’s imputed compensation for the Plan Year. Any Employer Contributions made to a Disabled Participant under this subsection (3) are fully vested when made. For Limitation Years beginning before January 1, 1997, imputed compensation for a Disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee for such Plan Year.

		(4)	Special rule for Limitation Years beginning before January 1, 1998. For Limitation Years beginning before January 1, 1998, for purposes of applying the limitations of this Article 7 and for determining the minimum top-heavy contribution required under Section 16.2(a), Total Compensation paid or made available during such Limitation Year shall not include any Elective Deferrals, or any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code §125 or §457.

7.5	P articipation in a Defined Benefit Plan. If the Employer maintains, or at any time maintained, a Defined Benefit Plan (other than a Paired Plan) covering any Participant in this Plan, the sum of the Participant’s Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. If the sum of the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction exceeds 1.0 in any Limitation Year, the Plan will satisfy the 1.0 limitation by reducing a Participant’s Projected Annual Benefit under the Defined Benefit Plan.

	(a)	R epeal of rule. The limitations under this Section 7.5 do not apply for Limitation Years beginning on or after January 1, 2000. However, the Employer may have continued to apply rules consistent with this Section 7.5 for Plan Years beginning after December 31, 1999 and before the Employer first adopted a plan to comply with the GUST Legislation. If the Employer is adopting this Plan as a restatement of a prior plan to comply with the GUST Legislation, the provisions of the prior plan control for purposes of applying the combined limitation rules under Code §415(e) for Limitation Years beginning before the Effective Date of this Plan. For Limitation Years beginning on or after the Effective Date of this Plan, the provisions of this Section 7.5 apply. If for any Limitation Year beginning prior to the date this Plan is adopted as a GUST restatement, the Employer did not comply in operation with the provisions under this Section 7.5 or the provisions of the prior plan, as applicable, the Employer may document under Appendix B-4 of the Agreement how the Plan was operated to comply with the combined limitation rules under Code §415(e).

	(b)	S pecial definitions relating to Section 7.5.

		(1)	Defined Benefit Plan Fraction: A fraction, the numerator of which is the sum of the Participant’s Projected Annual Benefit under all the Defined Benefit Plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code §§415(b) and (d) or 140 percent of the Participant’s Highest Average Compensation, including any adjustments under Code §415(b).

			Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more Defined Benefit Plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plans after May 5, 1986. The preceding sentence applies only if the Defined Benefit Plans individually and in the aggregate satisfied the requirements of Code §415 for all Limitation Years beginning before January 1, 1987.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


	If the Plan is a Top-Heavy Plan for any Plan Year, 100% will be substituted for 125% in the prior paragraph, unless in Part 13, #54.b. of the Agreement [Part 13, #72.b. of the 401(k) Agreement], the Employer provides an extra minimum top-heavy allocation or benefit in accordance with Code §416(h) and the regulations thereunder. In any event, if the Top-Heavy Ratio exceeds 90%, then 100% will always be substituted for 125% in the prior paragraph.

(2)	Defined Contribution Plan Fraction: A fraction, the numerator of which is the sum of the Annual Additions to the Participant’s Account under all the Defined Contribution Plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant’s Employee After-Tax Contributions to all Defined Benefit Plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds (as defined under Code §419(e)), individual medical accounts (as defined under Code §415(1)(2)), and SEPs (as defined under Code §408(k)) maintained by the Employer, and the denominator of which is the sum of the maximum aggregate amount for the current and all prior Limitation Years during which the Participant performed service with the Employer (regardless of whether a Defined Contribution Plan was maintained by the Employer during such years). The maximum aggregate amount in any Limitation Year is the lesser of: (i) 125 percent of the Defined Contribution Dollar Limitation in effect under Code §415(c)(1)(A) (as determined under Code §§415(b) and (d)) for such Limitation Year or (ii) 35 percent of the Participant’s Total Compensation for such Limitation Year.

	If the Plan is a Top-Heavy Plan for any Plan Year, 100% will be substituted for 125% unless in Part 13, #54.b. of the Agreement [Part 13, #72.b. of the 401(k) Agreement], the Employer provides an extra minimum top-heavy allocation or benefit in accordance with Code §416(h) and the regulations thereunder. In any event, if the Top-Heavy Ratio exceeds 90%, then 100% will always be substituted for 125%.

	If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more Defined Contribution Plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Plan Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code §415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987.

	The Annual Additions for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all Employee After-Tax Contributions as Annual Additions.

(3)	Highest Average Compensation: The average Total Compensation for the three consecutive years of service with the Employer that produces the highest average.

(4)	Projected Annual Benefit: The annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the Plan assuming:

	(i)	the Participant will continue employment until Normal Retirement Age under the Plan (or current age, if later), and

	(ii)	the Participant’s Total Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years.



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PLAN DISTRIBUTIONS

Except as provided under Article 9 (Joint and Survivor Annuity Requirements), this Article 8 governs all distributions to Participants under the Plan. Sections 8.1 and 8.2 set forth the available distribution options under the Plan and the amount available for distribution. Section 8.3 sets forth the Participants’ distribution options following termination of employment, Section 8.4 discusses the distribution options upon a Participant’s death, and Sections 8.5 and 8.6 set forth the in-service distribution options under the Plan, including the conditions for receiving a Hardship distribution. Parts 9 and 10 of the Agreement contain the elective provisions for the Employer to identify the timing of distributions and the permitted distribution events under the Plan.


8.1	D istribution Options. A Participant who terminates employment with the Employer may receive a distribution of his/her vested Account Balance at the time and in the manner designated under Part 9 of the Agreement. A Participant may receive an in-service distribution prior to his/her termination of employment with the Employer only to the extent permitted under Part 10 of the Agreement.

	Distributions from the Plan will be made in the form of a lump sum of the Participant’s entire vested Account Balance, a single sum distribution of a portion of the Participant’s vested Account Balance, installments, annuity payments, or other form as selected under Part 11 of the Agreement. Unless provided otherwise under Part 11 of the Agreement, a Participant may select any combination of the available distribution forms.

	If the Employer elects to permit a single sum distribution of a portion of the Participant’s vested Account Balance, the Employer may limit the availability or frequency of subsequent withdrawals under Part 11, #40.f. of the Nonstandardized Agreement [Part 11, #58.f. of the Nonstandardized 401(k) Agreement]. If the Employer elects under Part 11 of the Agreement to permit installment payments as an optional form of distribution, the Participant (and spouse, if applicable) may elect to receive installments in monthly, quarterly, semi-annual, or annual payments over a period not exceeding the Life Expectancy of the Participant and his/her Designated Beneficiary. The Participant may elect at any time to accelerate the payment of all, or any portion, of an installment distribution. If the Employer elects under Part 11 of the Agreement to permit annuity payments, such annuity payments may not be in a form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and his/her designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and his/her designated Beneficiary). The Employer may restrict the availability of installment payments or annuity payments under Part 11, #40.f. of the Nonstandardized Agreement [Part 11, #58.f. of the Nonstandardized 401(k) Agreement].

	If the Plan is subject to the Joint and Survivor Annuity requirements under Article 9, the Plan must make distribution in the form of a QJSA (as defined in Section 9.4(a)) unless the Participant (and spouse, if the Participant is married) elects an alternative distribution form in accordance with Section 9.4(d). (See Section 9.1 for the rules regarding the application of the Joint and Survivor Annuity requirements.)

8.2	A mount Eligible for Distribution. For purposes of determining the amount a Participant may receive as a distribution from the Plan, a Participant’s Account Balance is determined as of the Valuation Date (as specified in Part 12 of the Agreement) which immediately precedes the date the Participant receives his/her distribution from the Plan. For this purpose, the Participant’s Account Balance must be increased for any contributions allocated to the Participant’s Account since the most recent Valuation Date and must be reduced for any distributions the Participant received from the Plan since the most recent Valuation Date. A Participant does not share in any allocation of gains or losses attributable to the period between the Valuation Date and the date of the distribution under the Plan, unless provided otherwise under Part 12 of the Agreement or under uniform funding and valuation procedures established by the Plan Administrator. In the case of a Participant-directed Account, the determination of the value of the Participant’s Account for distribution purposes is subject to the funding and valuation procedures applicable to such directed Account.

8.3	D istributions After Termination of Employment. Subject to the required minimum distribution provisions under Article 10, a Participant whose employment with the Employer is terminated for any reason, other than death, is entitled to receive a distribution of his/her vested Account Balance in accordance with this Section 8.3 as of the date selected in Part 9 of the Agreement. If a Participant dies while employed by the Employer, or dies before distribution of his/her vested Account Balance is completed, distribution will be made in accordance with Section 8.4.


	(a)	Account Balance excee ding $5,000. If a Participant’s entire vested Account Balance exceeds $5,000 at the time of distribution, the Participant may elect to receive a distribution of his/her vested Account Balance in any form permitted under Part 11 of the Agreement at the time indicated under Part 9, #33 of the Agreement [Part 9, #51 of the 401(k) Agreement]. The Participant must receive proper notice and must consent in writing, in accordance with Section 8.7, prior to receiving a distribution from the Plan. If the Participant does not consent to a distribution upon terminating employment with the Employer, distribution will be made in accordance with Article 10. (Also see Section 8.8 for additional notice requirements.)



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	(b)	A ccount Balance not exceeding $5,000. If a Participant’s entire vested Account Balance does not exceed $5,000 at the time of distribution, the Plan Administrator will distribute the Participant’s entire vested Account Balance in a single lump sum at the time indicated under Part 9, #34 of the Agreement [Part 9, #52 of the 401(k) Agreement]. Although the Participant need not consent to receive a distribution under this subsection (b), the Participant must receive the notice described in Section 8.8 (if applicable) prior to receiving the distribution from the Plan. The Employer may modify the rule under this subsection (b) by electing under Part 9, #37.a. of the Agreement [Part 9, #55.a. of the 401(k) Agreement] to require Participant consent prior to a distribution from the Plan, without regard to whether the Participant’s vested Account Balance exceeds $5,000 at the time of distribution.

	(c)	P ermissible distribution events under a 401(k) plan. A Participant may not receive a distribution of Section 401(k) Deferrals, QNECs, QMACs and Safe Harbor Contributions under this Section 8.3 unless the Participant satisfies one of the following conditions:


	(1)	The Participant has a “separation from service” with the Employer. For this purpose, a separation from service occurs when an Employee terminates employment with the Employer. If a Participant changes jobs as a result of the Employer’s liquidation, merger, consolidation, or other similar transaction, a distribution may be made to the Participant if the Plan Administrator determines the Participant has incurred a separation from service in accordance with rules promulgated under the Code or regulations, or by reason of a ruling or other published guidance from the IRS. A Participant may not receive a distribution by reason of separation from service, or continue to receive an installment distribution based on separation from service, if prior to the time the distribution is made from the Plan, the Participant returns to employment with the Employer.

	(2)	The Employer is a corporation and the Employer sells substantially all of the assets of a trade or business (within the meaning of §409(d)(2) of the Code) to an unrelated corporation, provided the purchaser does not continue to maintain the Plan with respect to the Participant after the sale and the Participant becomes employed by the unrelated corporation as a result of the sale and the distribution is made by the end of the second calendar year after the year of the sale. For this purpose, an Employer is deemed to have sold substantially all of the assets of a trade or business if it sells 85% or more of the total assets of such trade or business.

	(3)	The Employer is a corporation and the Employer sells a subsidiary to an unrelated corporation, provided the purchaser does not continue to maintain the Plan with respect to the Participant after the sale and the Participant continues to be employed by the unrelated corporation after the sale and the distribution is made by the end of the second calendar year after the year of the sale.

(d)	D isabled Participant. A terminated Employee who is Disabled at the time of termination, or who becomes Disabled after terminating employment with the Employer, generally is entitled to a distribution in the time and manner specified in Part 9 of the Agreement. However, if so elected in Part 9, #35 of the Agreement [Part 9, #53 of the 401(k) Agreement], a terminated Employee who is Disabled at the time of termination, or who becomes Disabled after terminating employment with the Employer, is entitled to a distribution in the time and manner specified in Part 9, #35 of the Agreement [Part 9, #53 of the 401(k) Agreement], to the extent such election will result in an earlier distribution than would otherwise be available under Part 9 of the Agreement.

(e)	D etermining whether vested Account Balance exceeds $5,000. For distributions made on or after October 17, 2000, the determination of whether a Participant’s vested Account Balance exceeds $5,000 is based on the value of the Participant’s Account as of the most recent Valuation Date. In determining the value of a Participant’s Account for distributions made before October 17, 2000, the “lookback rule” may apply. If the lookback rule applies, the Participant’s vested Account Balance is deemed to exceed $5,000 for purposes of applying the provisions under this Article 8 and Article 9.

	For distribution made after March 21, 1999 and before October 17, 2000, the “lookback rule” is applicable to a distribution to a Participant if the Participant previously received a distribution when his/her vested Account Balance exceeded $5,000, and either subsection (1) or (2) applies.

	(1)	The distribution is subject to the Joint and Survivor Annuity requirements of Article 9.

	(2)	The distribution is not subject to the Joint and Survivor Annuity requirements of Article 9, but a periodic distribution method (e.g., an installment distribution) is currently in effect with respect to the Participant’s vested Account Balance, at least one scheduled payment still remains, and when the first periodic payment was made under such election, the vested Account Balance exceeded $5,000.



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		For distributions made before March 21, 1999, the lookback rule applies to all distributions, without regard to subsections (1) and (2) above. However, the Plan does not fail to satisfy the requirements of this subsection (e) if, prior to the adoption of this Plan, the lookback rule was applied to all distributions (without regard to the limitations described in subsections (1) and (2) above), or if the limitations described in subsections (1) and (2) above were applied to distributions made before March 22, 1999 but in a Plan Year beginning after August 5, 1997.

	(f)	E ffective date of $5,000 vested Account Balance rule. The provisions under this Article 8 and Article 9 which refer to a $5,000 vested Account Balance are effective for Plan Years beginning after August 5,1997, unless a later effective date is specified in the GUST provisions under Appendix B-3.a. of the Agreement. For plan years beginning prior to August 6, 1997 (or any later effective date specified in Appendix B-3.a. of the Agreement) any reference under this Article 8 or Article 9 to a $5,000 vested Account Balance should be applied by replacing $5,000 with $3,500.

8.4	D istribution upon the Death of the Participant. The death benefit payable with respect to a deceased Participant depends on whether the Participant dies after distribution of his Account Balance has commenced (see subsection (a) below) or before distribution commences (see subsection (b) below).

	(a)	P ost-retirement death benefit. If a Participant dies after commencing distribution of his/her benefit under the Plan, the death benefit is the benefit payable under the form of payment that has commenced. If a Participant commences distribution prior to death only with respect to a portion of his/her Account Balance, then the rules in subsection (b) apply to the rest of the Account Balance.

	(b)	P re-retirement death benefit. If a Participant dies before commencing distribution of his/her benefit under the Plan, the death benefit that is payable depends on whether the value of the death benefit exceeds $5,000 and whether the Joint and Survivor Annuity requirements of Article 9 apply. If there is both a QPSA death benefit and a non-QPSA death benefit, each death benefit is valued separately to determine whether it exceeds $5,000. For death benefits distributed before the $5,000 rule described in Section 8.3(f) is effective, substitute $3,500 for $5,000.

		(1)	Death benefit not exceeding $5,000. If the value of the pre-retirement death benefit does not exceed $5,000, it shall be paid in a single sum as soon as administratively feasible after the Participant’s death.

		(2)	Death benefit that exceeds $5,000. If the value of the pre-retirement death benefit exceeds $5,000, the payment of the death benefit will depend on whether the Joint and Survivor Annuity requirements apply.

			(i)	If the Joint and Survivor Annuity requirements do not apply. In this case, the entire death benefit is payable in the form and at the time described below in subsection (ii)(B).

			(ii)	If the Joint and Survivor Annuity requirements apply. In this case, the death benefit consists of a QPSA death benefit (see Section 9.3) and, if the QPSA is defined to be less than 100% of the Participant’s vested Account Balance, a non-QPSA death benefit. The QPSA death benefit is payable in accordance with subsection (A) below, unless the Participant has waived such death benefit under the waiver procedures described in Section 9.4(d). In the event there is a proper waiver of the QPSA death benefit, then such portion of the death benefit is payable in the same manner as the non-QPSA death benefit. The non-QPSA death benefit is payable in the form and at the time described below in subsection (B).

				(A)	QPSA death benefit. If the pre-retirement death benefit is payable in the QPSA form, then it shall be paid in accordance with Article 9. If the QPSA death benefit has not been waived, but the surviving spouse elects a different form of payment, then distribution of the QPSA death benefit is made in accordance with the form of payment elected by the spouse, provided such form of payment is available under Section 8.1. The surviving spouse may request the payment of the QPSA death benefit (in the QPSA form or in the form elected by the surviving spouse) as soon as administratively feasible after the death of the Participant. However, payment of the death benefit will not commence without the consent of the surviving spouse prior to the date the Participant would have reached Normal Retirement Age (or age 62, if later). If the QPSA death benefit has been waived, in accordance with the procedures in Article 9, then the portion of the Participant’s vested Account Balance that would have been payable as a QPSA death benefit in the absence of such a waiver is treated as a death benefit payable under subsection (B).



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			(B)	Non-QPSA death benefits. Any pre-retirement death benefit not described in subsection (A) is payable under this paragraph. Such death benefit is payable in lump sum as soon as administratively feasible after the Participant’s death. However, the death benefit may be payable in a different form if prescribed by the Participant’s Beneficiary designation, or if the Beneficiary, before a lump sum payment of the benefit is made, requests an election as to the form of payment. An alternative form of payment must be one that is available under Section 8.1.

	(3)	Minimum distribution requirements. In no event will any death benefit be paid in a manner that is inconsistent with the minimum distribution requirements of Section 10.2. In addition, the Beneficiary of any pre-retirement death benefit described above in subsection (2) may postpone the Commencement of the death benefit to a date that is not later than the latest Commencement date permitted under Section 10.2, unless such election is prohibited in Part 9, #37.b. of the Agreement [Part 9, #55.b. of the 401(k) Agreement].

(c)	D etermining a Participant’s Beneficiary. A Participant may designate a Beneficiary to receive the death benefits described in this Section 8.4. Any Beneficiary designation is subject to the rules under subsections (1) - (4) below. A Participant may change or revoke a Beneficiary designation at any time by filing a new designation with the Plan Administrator. Any new Beneficiary designation is subject to the spousal consent rules described below, unless the spouse specifically waives such right under a general consent as authorized under Section 9.4(d). Unless specified otherwise in the Participant’s designated beneficiary election form, if a Beneficiary does not predecease the Participant but dies before distribution of the death benefit is made to the Beneficiary, the death benefit will be paid to the Beneficiary’s estate.

	The Plan Administrator may request proper proof of the Participant’s death and may require the Beneficiary to provide evidence of his/her right to receive a distribution from the Plan in any form or manner the Plan Administrator may deem appropriate. The Plan Administrator’s determination of the Participant’s death and of the right of a Beneficiary to receive payment under the Plan shall be conclusive. If a distribution is to be made to a minor or incompetent Beneficiary, payments may be made to the person’s legal guardian, conservator, or custodian in accordance with the Uniform Gifts to Minors Act or similar law as permitted under the laws of the state where the Beneficiary resides. The Plan Administrator or Trustee will not be liable for any payments made in accordance with this subsection (c) and are not required to make any inquiries with respect to the competence of any person entitled to benefits under the Plan.

	If a Participant designates his/her spouse as Beneficiary and subsequent to such Beneficiary designation, the Participant and spouse are divorced or legally separated, the designation of the spouse as Beneficiary under the Plan is automatically rescinded unless specifically provided otherwise under a divorce decree or QDRO, or unless the Participant enters into a new Beneficiary designation naming the prior spouse as Beneficiary.

	(1)	Spousal consent to Beneficiary designation: post-retirement death benefit. If a Participant is married at the time distribution commences to the Participant, the Beneficiary of any post-retirement death benefit is the Participant’s surviving spouse, regardless of whether the Joint and Survivor Annuity requirements under Article 9 apply, unless there is no surviving spouse or the spouse has consented to the Beneficiary designation in a manner that is consistent with the requirements for a Qualified Election under Section 9.4(d), or makes a valid disclaimer of the benefit. If the Joint and Survivor Annuity requirements apply, the spouse is determined as of the Distribution Commencement Date for purposes of this spousal consent requirement. If the Joint and Survivor Annuity requirements do not apply, the spouse is determined as of the Participant’s date of death for purposes of this spousal consent requirement.

	(2)	Spousal consent to Beneficiary designation: pre-retirement death benefit. The rules for spousal consent depend on whether the Joint and Survivor Annuity requirements in Article 9 apply.

		(i)	If the Joint and Survivor Annuity requirements apply. In this case, the QPSA death benefit will be payable in accordance with Section 9.3. The QPSA death benefit may be payable to a non-spouse Beneficiary only if the spouse consents to the Beneficiary designation, pursuant to the Qualified Election requirements under Section 9.4(d), or makes a valid disclaimer. The non-QPSA death benefit, if any, is payable to the person named in the Beneficiary designation, without regard to whether spousal consent is obtained for such designation. If a spouse does not properly consent to a Beneficiary designation, the QPSA waiver is invalid, and the QPSA death benefit is still payable to the spouse, but the Beneficiary designation remains valid with respect to any non-QPSA death benefit.



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			(ii)	If the Joint and Survivor Annuity requirements do not apply. In this case, the surviving spouse (determined at the time of the Participant’s death), if any, must be treated as the sole Beneficiary, regardless of any contrary Beneficiary designation, unless there is no surviving spouse, or the spouse has consented to the Beneficiary designation in a manner that is consistent with the requirements for a Qualified Election under Section 9.4(d) or makes a valid disclaimer.

		(3)	Default beneficiaries. To the extent a Beneficiary has not been named by the Participant (subject to the spousal consent rules discussed above) and is not designated under the terms of this Plan to receive all or any portion of the deceased Participant’s death benefit, such amount shall be distributed to the Participant’s surviving spouse (if the Participant was married at the time of death). If the Participant does not have a surviving spouse at the time of death, distribution will be made to the Participant’s surviving children, in equal shares. If the Participant has no surviving children, distribution will be made to the Participant’s estate. The Employer may modify the default beneficiary rules described in this subparagraph by addition attaching appropriate language as an addendum to the Agreement.

		(4)	One-year marriage rule. The Employer may elect under Part 11, #41.c. of the Agreement [Part 11, #59.c. of the 401(k) Agreement], for purposes of applying the provisions of this Section 8.4, that an individual will not be considered the surviving spouse of the Participant if the Participant and the surviving spouse have not been married for the entire one-year period ending on the date of the Participant’s death.

8.5	D istributions Prior to Termination of Employment.

	(a)	E mployee After-Tax Contributions, Rollover Contributions, and transfers. A Participant may withdraw at any time, upon written request, all or any portion of his/her Account Balance attributable to Employee After-Tax Contributions or Rollover Contributions. Any amounts transferred to the Plan pursuant to a Qualified Transfer (as defined in Section 3.3(d)) also may be withdrawn at any time pursuant to a written request. No forfeiture will occur solely as a result of an Employer’s withdrawal of Employee After-Tax Contributions. The Employer may elect in Part 10, #39.d. of the Nonstandardized Agreement [Part 10, #57.d. of the Nonstandardized 401(k) Agreement] to modify the availability of in-service withdrawals of Employee After-Tax Contributions, Rollover Contributions, or Qualified Transfers.

		With respect to transfers (other than Qualified Transfers) and subject to the restrictions on distributions of transferred assets under Section 3.3, a Participant may request a distribution of all or any portion of his/her Transfer Account only as permitted under this Article with respect to contributions of the same type as are being withdrawn.

	(b)	E mployer Contributions. Except as provided in Section 14.10 dealing with defaulted Participant loans, a Participant may receive a distribution of all or any portion of his/her vested Account Balance attributable to Employer Contributions prior to termination of employment only as permitted under Part 10 of the Agreement. If the Joint and Survivor Annuity requirements under Article 9 apply to the Participant, the Participant’s spouse (if the Participant is married at the time of distribution) must consent to a distribution in accordance with Section 9.2.

		The Employer may elect under the profit sharing or 401(k) plan Agreement to permit in-service distributions of Employer Contributions (other than Section 401(k) Deferrals, QMACs, QNECs, and Safe Harbor Contributions) upon the occurrence of a specified event or upon the completion of a certain number of years. In no case, however, may a distribution that is made solely on account of the completion of a designated number of years be made with respect to Employer Contributions that have been accumulated in the Plan for less than 2 years. This rule does not apply if the Participant has been an Eligible Participant in the Plan for at least 5 years. An in-service distribution may be made on account of a specified event (other than the completion of a designated number of years) at any time, if authorized under Part 10 of the Agreement.

		If a Participant with a partially vested benefit receives an in-service distribution under the Plan, the special vesting schedule under Section 4.8 must be applied to determine the Participant’s vested percentage in his/her remaining Account Balance. This special vesting schedule will not apply if the Employer limits the availability of in-service distributions under Part 10 of the Agreement to Participants who are 100% vested.

	(c)	S ection 401(k) Deferrals, Qualified Nonelective Contributions, Qualified Matching Contributions, and Safe Harbor Contributions. If the Employer has adopted the 401(k) Agreement, a Participant may receive an in-service distribution of all or any portion of his/her Section 401(k) Deferral Account, QMAC Account, QNEC Account, Safe Harbor Matching Contribution Account and Safe Harbor Nonelective Contribution Account only as permitted under Part 10 of the Agreement. No provision in this Plan or in Part 10 of the



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		Agreement may be interpreted to permit a Participant to receive a distribution of such amounts prior to the occurrence of one of the following events:

		(1)	the Participant becoming Disabled;

		(2)	the Participant’s attainment of age 59½;

		(3)	the Participant’s Hardship (as defined in Section 8.6).

	(d)	C orrective distributions. Nothing in this Article 8 precludes the Plan Administrator from making a distribution to a Participant, to the extent such distribution is made to correct a qualification defect in accordance with the corrective procedures under the IRS’ voluntary compliance programs. Thus, for example, nothing in this Article 8 would preclude the Plan from making a corrective distribution to an Employee who received contributions under the Plan prior to becoming an Eligible Participant. Any such distribution must be made in accordance with the correction procedures applicable under the IRS’ voluntary correction programs.

8.6	H ardship Distribution. To the extent permitted under Part 10 of the Agreement, a Participant may receive an in-service distribution on account of a Hardship. The Employer may elect under Part 10, #38.c. of the Agreement [Part 10, #56.c. of the 401(k) Agreement] to permit a Hardship distribution only if the Participant satisfies the safe harbor Hardship requirements under subsection (a) below. Alternatively, the Employer may elect under Part 10, #38.d. of the Agreement [Part 10, #56.d. of the 401(k) Agreement] to permit a Hardship distribution of Employer Contributions (other than Section 401(k) Deferrals) in accordance with the requirements of subsection (b) below. A Hardship distribution of Section 401(k) Deferrals must meet the requirements of a safe harbor Hardship as described under subsection (a) below. A Hardship distribution under this Section 8.6 is not available for QNECs, QMACs or Safe Harbor Contributions.

	(a)	S afe harbor Hardship distribution. To qualify for a safe harbor Hardship, a Participant must demonstrate an immediate and heavy financial need, as described in subsection (1), and must satisfy the conditions described in subsection (2).

		(1)	Immediate and heavy financial need. To be considered an immediate and heavy financial need, the Hardship distribution must be made on account of one of the following events:

			(i)	the incurrence of medical expenses (as described in §213(d) of the Code), of the Participant, the Participant’s spouse or dependents;

			(ii)	the purchase (excluding mortgage payments) of a principal residence for the Participant;

			(iii)	payment of tuition and related educational fees (including room and board) for the next 12 months of post-secondary education for the Participant, the Participant’s spouse, children or dependents;

			(iv)	to prevent the eviction of the Participant from, or a foreclosure on the mortgage of, the Participant’s principal residence; or

			(v)	any other event that the IRS recognizes as a safe harbor Hardship distribution event under ruling, notice or other guidance of general applicability.

			A Participant must provide the Plan Administrator with a written request for a Hardship distribution. The Plan Administrator may require written documentation, as it deems necessary, to sufficiently document the existence of a proper Hardship event.

		(2)	Conditions for taking a safe harbor Hardship withdrawal. A Participant may receive a safe harbor Hardship withdrawal only if all of the following conditions are satisfied.

			(i)	The Participant has obtained all available distributions, other than Hardship distributions, and all nontaxable loans under the Plan and all other qualified plans maintained by the Employer.

			(ii)	The Participant is suspended from making any Section 401(k) Deferrals (and any Employee After-Tax Contributions) under the Plan or any other plans (other than welfare benefit plans) maintained by the Employer for 12 months after the receipt of the Hardship distribution.



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			(iii)	The distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution).

			(iv)	The limitation on Elective Deferrals under Code §402(g) for the Participant for the taxable year immediately following the taxable year of the Hardship distribution is reduced by the amount of any Elective Deferrals the Participant made during the taxable year of the Hardship distribution.

	(b)	N on-safe harbor Hardship distribution. The Employer may elect under Part 10, #38.d. of the Agreement [Part 10, #56.d. of the 401(k) Agreement] to permit a Hardship distribution of Employer Contributions (other than Section 401(k) Deferrals) on account of an immediate and heavy financial need (as described in subsection (a)(1) above), but without regard to the requirements of subsection (a)(2) above. Solely for the purpose of applying this subsection (b), a Hardship distribution will be on account of an immediate and heavy financial need if such Hardship distribution is made to pay for funeral expenses for a family member of the Participant or upon the Participant’s Disability. The Employer may add other permitted Hardship events under Part 10, #39.d. of the Nonstandardized Agreement [Part 10, #57.d. of the Nonstandardized 401(k) Agreement]. A non-safe harbor Hardship distribution is not available for Section 401(k) Deferrals, QNECs, QMACs, or Safe Harbor Contributions.

	(c)	A mount available for distribution. A Participant may receive a Hardship distribution of any portion of his/her vested Employer Contribution Account or Employer Matching Contribution Account (including earnings thereon), as permitted under Part 10 of the Agreement. A Participant may receive a Hardship distribution of any portion of his/her Section 401(k) Deferral Account, if permitted under Part 10 of the Agreement, provided such distribution, when added to other Hardship distributions from Section 401(k) Deferrals, does not exceed the total Section 401(k) Deferrals the Participant has made to the Plan (increased by income allocable to such Section 401(k) Deferrals that was credited by the later of December 31, 1988 or the end of the last Plan Year ending before July 1, 1989). A Participant may not receive a Hardship distribution from his/her QNEC Account, QMAC Account, Safe Harbor Nonelective Contribution Account or Safe Harbor Matching Contribution Account.

8.7	P articipant Consent. If the value of a Participant’s entire vested Account Balance exceeds $5,000 (as determined in accordance with Section 8.3(e)), the Participant must consent to any distribution of such Account Balance prior to his/her Required Beginning Date (as defined in Section 10.3(a)). The Employer may modify this provision under Part 9, #37.b. of the Agreement [Part 9, #55.b. of the 401(k) Agreement] to provide for automatic distribution to a terminated Participant (or Beneficiary) as of the date the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62. A Participant must consent in writing to a distribution under this Section 8.7 within the 90-day period ending on the Distribution Commencement Date (as defined in Section 22.56). If the Participant is subject to the Joint and Survivor Annuity requirements under Article 9 of this Plan, the Participant’s spouse (if the Participant is married at the time of the distribution) also must consent to the distribution in accordance with Section 9.2. If the distribution is an Eligible Rollover Distribution, the Participant must also direct the Plan Administrator as to whether he/she wants a Direct Rollover and if so, the name of the Eligible Retirement Plan to which the distribution will be made. (See Section 8.8 for more information regarding the Direct Rollover rules.)

	(a)	P articipant notice. Prior to receiving a distribution from the Plan, the Participant must be notified of his/her right to defer any distribution from the Plan in accordance with the provisions under Article 10 of this BPD. The notification shall include a general description of the material features and the relative values of the optional forms of benefit available under the Plan (consistent with the requirements under Code §417(a)(3)). The notice must be provided no less than 30 days and no more than 90 days prior to the Participant’s Distribution Commencement Date. However, distribution may commence less than 30 days after the notice is given, if the Participant is clearly informed of his/her right to take 30 days after receiving the notice to decide whether or not to elect a distribution (and, if applicable, a particular distribution option), and the Participant, after receiving the notice, affirmatively elects to receive the distribution prior to the expiration of the 30-day minimum period. (But see Section 9.5(a) for the rules regarding the timing of distributions when the Joint and Survivor Annuity requirements apply.) The notice requirements described in this paragraph may be satisfied by providing a summary of the required information, so long as the conditions described in applicable regulations for the provision of such a summary are satisfied, and the full notice is also provided (without regard to the 90-day period described in this subsection).

	(b)	S pecial rules. The consent rules under this Section 8.7 apply to distributions made after the Participant’s termination of employment and to distributions made prior to the Participant’s termination of employment. However, the consent of the Participant (and the Participant’s spouse, if applicable) shall not be required to the extent that a distribution is made:

		(1)	to satisfy the required minimum distribution rules under Article 10;



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		(2)	to satisfy the requirements of Code §415, as described in Article 7;

		(3)	to correct Excess Deferrals, Excess Contributions or Excess Aggregate Contributions, as described in Article 17.

		In addition, if distributions are being made on account of the termination of the Plan, and an annuity option is not available under the Plan, the Participant’s Account Balance will, without the Participant’s consent, be distributed to the Participant, without regard to the value of the Participant’s vested Account Balance, unless the Employer (or any Related Employer) maintains another Defined Contribution Plan (other than an employee stock ownership plan as defined in Code §4975(e)(7)). If the Employer or any Related Employer maintains another Defined Contribution Plan (other than an employee stock ownership plan), then the Participant’s Account Balance will be transferred, without the Participant’s consent, to the other plan, if the Participant does not consent to an immediate distribution (to the extent consent to an immediate distribution is otherwise required under this Section 8.7).

8.8	D irect Rollovers. This Section 8.8 applies to distributions made on or after January 1, 1993. Notwithstanding any provision in the Plan to the contrary, a Participant may elect to have all or any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan in a Direct Rollover. If a Participant elects a Direct Rollover of only a portion of an Eligible Rollover Distribution, the Plan Administrator may require that the amount being rolled over equals at least $500.

	For purposes of this Section 8.8, a Participant includes a Participant or former Participant. In addition, this Section applies to any distribution from the Plan made to a Participant’s surviving spouse or to a Participant’s spouse or former spouse who is the Alternate Payee under a QDRO, as defined in Section 22.151.

	If it is reasonable to expect (at the time of the distribution) that the total amount the Participant will receive as a distribution during the calendar year will total less than $200, the Employer need not offer the Participant a Direct Rollover option with respect to such distribution.

	(a)	E ligible Rollover Distribution. An Eligible Rollover Distribution is any distribution of all or any portion of a Participant’s Account Balance, except for the following distributions:

		(1)	any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or Life Expectancy) of the Participant or the joint lives (or joint Life Expectancies) of the Participant and the Participant’s Beneficiary, or for a specified period of ten years or more;

		(2)	any distribution to the extent such distribution is a required minimum distribution under Article 10;

		(3)	the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities);

		(4)	an in-service Hardship withdrawal of Section 401(k) Deferrals, as described in subsection (e) below; and

		(5)	a distribution made to satisfy the requirements of Code §415, as described in Article 7, or a distribution to correct Excess Deferrals, Excess Contributions or Excess Aggregate Contributions, as described in Article 17.

	(b)	E ligible Retirement Plan. An Eligible Retirement Plan is:

		(1)	an individual retirement account described in §408(a) of the Code;

		(2)	an individual retirement annuity described in §408(b) of the Code;

		(3)	an annuity plan described in §403(a) of the Code; or

		(4)	a qualified plan described in §401(a) of the Code.

		However, in the case of an Eligible Rollover Distribution to a surviving spouse, an Eligible Retirement Plan is only an individual retirement account or individual retirement annuity.

	(c)	D irect Rollover. A Direct Rollover is a payment made directly from the Plan to the Eligible Retirement Plan specified by the Participant. The Plan Administrator may develop reasonable procedures for accommodating Direct Rollover requests.



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	(d)	D irect Rollover notice. A Participant entitled to an Eligible Rollover Distribution must receive a written explanation of his/her right to a Direct Rollover, the tax consequences of not making a Direct Rollover, and, if applicable, any available special income tax elections. The notice must be provided within the same 30 – 90 day timeframe applicable to the Participant consent notice under Section 8.7(a). The Direct Rollover notice must be provided to all Participants, unless the total amount the Participant will receive as a distribution during the calendar year is expected to be less than $200.

		If a Participant terminates employment with a total vested Account Balance of $5,000 or less (as determined under Section 8.3(e)) and the Participant does not respond to the Direct Rollover notice indicating whether a Direct Rollover is desired and the name of the Eligible Retirement Plan to which the Direct Rollover is to be made, the Plan Administrator will distribute the Participant’s entire vested Account Balance (in accordance with Section 8.3(b)) no earlier than 30 days and no later than 90 days following the provision of the notice under Section 8.7. The notice will describe the procedures for making a default distribution under this paragraph, including any rules for making a default Direct Rollover to an IRA. Any default provisions described under the notice must be applied uniformly and in a nondiscriminatory manner. If the notice provides for a default Direct Rollover, the default distribution will be made as a Direct Rollover to the IRA designated under the notice. The notice must contain pertinent information regarding the Direct Rollover, including the name, address, and telephone number of the IRA trustee and information regarding IRA maintenance and withdrawal fees and how the IRA funds will be invested. The notice will describe the timing of the Direct Rollover and the Participant’s ability to affirmatively opt out of the Direct Rollover. The selection of an IRA trustee, custodian or issuer and the selection of IRA investments for purposes of a default Direct Rollover constitutes a fiduciary act subject to the general fiduciary standards and prohibited transaction provisions of ERISA.

	(e)	S pecial rules for Hardship withdrawals of Section 401(k) Deferrals. A Hardship withdrawal of Section 401(k) Deferrals (as described in Code §401(k)(2)(B)(i)(IV)) is not an Eligible Rollover Distribution to the extent such withdrawal is made after December 31, 1998 or, if later, the first day (but not later than January 1, 2000) that the Plan Administrator begins to treat such Hardship withdrawals as ineligible for rollover. Subject to any contrary pronouncement under statute, regulation or IRS guidance, the Employer may treat a Hardship withdrawal of Section 401(k) Deferrals as an Eligible Rollover Distribution if the Participant otherwise satisfies a non-Hardship distribution event described in Code §401(k)(2) or (10) at the time of the withdrawal, regardless of whether the Plan’s procedures characterizes such distribution as a Hardship withdrawal.

8.9	S ources of Distribution. Unless provided otherwise in separate administrative provisions adopted by the Plan Administrator, in applying the distribution provisions under this Article 8, distributions will be made on a pro rata basis from all Accounts from which a distribution is permitted under this Article. Alternatively, the Plan Administrator may permit Participants to direct the Plan Administrator as to which Account the distribution is to be made. Regardless of a Participant’s direction as to the source of any distribution, the tax effect of such a distribution will be governed by Code §72 and the regulations thereunder.

	(a)	E xception for Hardship withdrawals. If the Plan permits a Hardship withdrawal from both Section 401(k) Deferrals and Employer Contributions, a Hardship distribution will first be treated as having been made from a Participant’s Employer Contribution Account and then from the Employer’s Matching Contribution Account, to the extent such Hardship distribution is available with respect to such Accounts. Only when all available amounts have been exhausted under the Participant’s Employer Contribution Account and/or Employer Matching Contribution Account will a Hardship distribution be made from a Participant’s Section 401(k) Deferral Account. The Plan Administrator may modify this provision in separate administrative procedures.

	(b)	I n-kind distributions. Nothing in this Article precludes the Plan Administrator from making a distribution in the form of property, or other in-kind distribution



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A RTICLE 9
JOINT AND SURVIVOR ANNUITY REQUIREMENTS


This Article provides rules concerning the application of the Joint and Survivor Annuity requirements under this Plan. If the Plan is a profit sharing plan or a 401(k) plan, Part 11, #41.b. of the Agreement [Part 11, #59.b. of the 401(k) Agreement] permits the Employer to apply the Joint and Survivor Annuity requirements to all Participants under the Plan. If the Employer does not elect to apply the Joint and Survivor Annuity requirements to all Participants, the Plan is only subject to the Joint and Survivor Annuity requirements to the extent required under Section 9.1(b) of this Article.

9.1	A pplicability. Except as provided in Section 9.6 below, this Article 9 applies to any distribution received by a Participant under the money purchase plan Agreement or the target benefit plan Agreement. For a profit sharing plan or 401(k) plan, the following rules apply.

	(a)	E lection to have requirements apply. If this Plan is a profit sharing plan or a 401(k) plan, and the Employer elects under Part 11, #41.b. of the profit sharing plan Agreement or Part 11, #59.b. of the 401(k) Agreement to apply the Joint and Survivor Annuity requirements, then this Article 9 applies in the same manner as it does to a money purchase plan or a target benefit plan.

	(b)	E lection to have requirements not apply. If this Plan is a profit sharing plan or a 401(k) plan, and the Employer elects under Part 11, #41.a. of the profit sharing plan Agreement or Part 11, #59.a. of the 401(k) Agreement not to apply the Joint and Survivor Annuity requirements, this Article 9 generally will not apply to distributions from the Plan. However, the rules of this Article 9 will apply to a Participant under the following conditions:

		(1)	the Participant elects to receive his/her benefit in the form of a life annuity (if a life annuity is a permissible distribution option under Part 11 of the Agreement); or

		(2)	the Participant has received a direct or indirect transfer of benefits (other than a Qualified Transfer as defined in Section 3.3(d)) from any plan which was subject to the Joint and Survivor Annuity requirements at the time of the transfer (but only to such transferred benefits); or

		(3)	the Participant’s benefits under the Plan are used to offset the benefits under another plan of the Employer that is subject to the Joint and Survivor Annuity requirements.

		Nothing in this subsection (b) prohibits a Plan Administrator from developing administrative procedures that apply the spousal consent requirements outlined in this Article 9 to a Plan that is not otherwise subject to the Joint and Survivor Annuity requirements. For example, the Plan Administrator may require under separate administrative procedures to require spousal consent to Participant distributions or may in a separate loan procedure require spousal consent prior to granting a Participant loan, without subjecting the Plan to the Joint and Survivor Annuity requirements.

	(c)	A ccumulated deductible employee contributions. For purposes of applying the rules under this Section 9.1, any distribution from a separate Account under a money purchase plan or a target benefit plan which is attributable solely to accumulated deductible employee contributions, as defined in Code §72(o)(5)(B), is treated as a distribution from a profit sharing plan or 401(k) plan for which the rules under subsection (b) above apply.

9.2	Q ualified Joint and Survivor Annuity (QJSA). If the Joint and Survivor Annuity requirements apply to a Participant, any distribution from the Plan to that Participant must be in the form of a QJSA (as defined in Section 9.4(a)), unless the Participant (and the Participant’s spouse, if the Participant is married) elects to receive the distribution in an alternative form, as authorized under Part 11 of the Agreement. Any election of an alternative form of distribution must be pursuant to a Qualified Election. Only the Participant needs consent (pursuant to Section 8.7) to the commencement of a distribution in the form of a QJSA.

9.3	Q ualified Preretirement Survivor Annuity (QPSA). If the Joint and Survivor Annuity requirements apply to a Participant who dies before the Distribution Commencement Date, the spouse of that Participant is entitled to receive a QPSA (as defined in Section 9.4(b)), unless the Participant and spouse have waived the QPSA pursuant to a Qualified Election. The Employer may elect under Part 11, #41.c. of the Agreement [Part 11, #59.c. of the 401(k) Agreement] that a surviving spouse is not entitled to a QPSA benefit if the Participant and surviving spouse were not married throughout the one year period ending on the date of the Participant’s death. Any portion of a Participant’s vested Account Balance that is not payable to the surviving spouse as a QPSA (or other form elected by the surviving spouse) constitutes a non-QPSA death benefit and is payable under the rules described in Section 8.4.



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9.4	D efinitions.

	(a)	Q ualified Joint and Survivor Annuity (QJSA). A QJSA is an immediate annuity payable over the life of the Participant with a survivor annuity payable over the life of the spouse. If the Participant is not married as of the Distribution Commencement Date, the QJSA is an immediate annuity payable over the life of the Participant. The survivor annuity must provide for payments to the surviving spouse equal to 50% of the payments that the Participant is entitled under the annuity during the joint lives of the Participant and the spouse. The Employer may elect under Part 11, #41.b. of the Agreement [Part 11, #59.b. of the 401(k) Agreement] to make payments to the surviving spouse equal to 100%, 75% or 66-2/3% (instead of 50%) of the payments the Participant is entitled to under the annuity.

	(b)	Q ualified Preretirement Survivor Annuity (QPSA). A QPSA is an annuity payable over the life of the surviving spouse that is purchased using 50% of the Participant’s vested Account Balance as of the date of death. The Employer may elect under Part 11, #41.b. of the Agreement [Part 11, #59.b. of the 401(k) Agreement] to provide a QPSA equal to 100% (instead of 50%) of the Participant’s vested Account Balance. The remaining vested Account Balance will be distributed in accordance with the death distribution provisions under Section 8.4. To the extent the Participant’s vested Account Balance is derived from Employee After-Tax Contributions, the QPSA will share in the Employee After-Tax Contributions in the same proportion as the Employee After-Tax Contributions bear to the total vested Account Balance of the Participant.

		The surviving spouse may elect to have the QPSA distributed at any time following the Participant’s death (subject to the required minimum distribution rules under Article 10) and may elect to receive distribution in any form permitted under Section 8.1 of the Plan. If the surviving spouse fails to elect distribution upon the Participant’s death, the QPSA benefit will be distributed in accordance with Section 8.4.

	(c)	D istribution Commencement Date. The Distribution Commencement Date is the date an Employee commences distributions from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made.

	(d)	Q ualified Election. A Participant (and the Participant’s spouse) may waive the QJSA or QPSA pursuant to a Qualified Election. If it is established to the satisfaction of a plan representative that there is no spouse or that the spouse cannot be located, any waiver signed by the Participant is deemed to be a Qualified Election. For this purpose, a Participant will be deemed to not have a spouse if the Participant is legally separated or has been abandoned and the Participant has a court order to such effect. However, a former spouse of the Participant will be treated as the spouse or surviving spouse and any current spouse will not be treated as the spouse or surviving spouse to the extent provided under a QDRO.

		A Qualified Election is a written election signed by both the Participant and the Participant’s spouse (if applicable) that specifically acknowledges the effect of the election. The spouse’s consent must be witnessed by a plan representative or notary public. In the case of a waiver of the QJSA, the election must designate an alternative form of benefit payment that may not be changed without spousal consent (unless the spouse enters into a general consent agreement expressly permitting the Participant to change the form of payment without any further spousal consent). In the case of a waiver of the QPSA, the election must be made within the QPSA Election Period and the election must designate a specific alternate Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent (unless the spouse enters into a general consent agreement expressly permitting the Participant to change the Beneficiary designation without any further spousal consent).

		Any consent by a spouse under a Qualified Election (or a determination that the consent of a spouse is not required) shall be effective only with respect to such spouse. If the Qualified Election permits the Participant to change a payment form or Beneficiary designation without any further consent by the spouse, the Qualified Election must acknowledge that the spouse has the right to limit consent to a specific form of benefit or a specific Beneficiary, as applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A Participant or spouse may revoke a prior waiver of the QPSA benefit at any time before the Commencement of benefits. Spousal consent is not required for a Participant to revoke a prior QPSA waiver. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Section 9.5 below.

	(e)	Q PSA Election Period. A Participant (and the Participant’s spouse) may waive the QPSA at any time during the QPSA Election Period. The QPSA Election Period is the period beginning on the first day of the Plan Year in which the Participant attains age 35 and ending on the date of the Participant’s death. If a Participant separates from service prior to the first day of the Plan Year in which age 35 is attained, with respect to the Account Balance as of the date of separation, the QPSA Election Period begins on the date of separation.



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	(f)	P re-Age 35 Waiver. A Participant who has not yet attained age 35 as of the end of a Plan Year may make a special Qualified Election to waive, with spousal consent, the QPSA for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such election is not valid unless the Participant receives the proper notice required under Section 9.5 below. QPSA coverage is automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after such date must satisfy all the requirements for a Qualified Election.

9.5	N otice Requirements.

	(a)	Q JSA. In the case of a QJSA, the Plan Administrator shall provide each Participant with a written explanation of: (1) the terms and conditions of the QJSA; (2) the Participant’s right to make and the effect of an election to waive the QJSA form of benefit; (3) the rights of the Participant’s spouse; and (4) the right to make, and the effect of, a revocation of a previous election to waive the QJSA. The notice must be provided to each Participant under the Plan no less than 30 days and no more than 90 days prior to the Distribution Commencement Date.

		A Participant may commence receiving a distribution in a form other than a QJSA less than 30 days after receipt of the written explanation described in the preceding paragraph provided: (1) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the QJSA and elect (with spousal consent) a form of distribution other than a QJSA; (2) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the QJSA is provided to the Participant; and (3) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period.

	(b)	Q PSA. In the case of a QPSA, the Plan Administrator shall provide each Participant within the applicable period for such Participant a written explanation of the QPSA in such terms and in such manner as would be comparable to the explanation provided for the QJSA in subsection (a) above. The applicable period for a Participant is whichever of the following periods ends last: (1) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (2) a reasonable period ending after the individual becomes a Participant; or (3) a reasonable period ending after the joint and survivor annuity requirements first apply to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from service in the case of a Participant who separates from service before attaining age 35.

		For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (2) and (3) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. In the case of a Participant who separates from service before the Plan Year in which age 35 is attained, notice shall be provided within the two-year period beginning one year prior to separation and ending one year after separation. If such a Participant thereafter returns to employment with the employer, the applicable period for such Participant shall be redetermined.

9.6	E xception to the Joint and Survivor Annuity Requirements. Except as provided in Section 9.7, this Article 9 does not apply to any Participant who has not earned an Hour of Service with the Employer on or after August 23, 1984. In addition, if, as of the Distribution Commencement Date, the Participant’s vested Account Balance (for pre-death distributions) or the value of the QPSA death benefit (for post-death distributions) does not exceed $5,000, the Participant or surviving spouse, as applicable, will receive a lump sum distribution pursuant to Section 8.4(b)(1), in lieu of any QJSA or QPSA benefits. (See Section 8.3(e) for special rules for calculating the value of a Participant’s vested Account Balance.)

9.7	T ransitional Rules. Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed under this Article 9 must be given the opportunity to elect to have the preceding provisions of this Article 9 apply if such Participant is credited with at least one Hour of Service under this Plan or a predecessor plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least 10 years of vesting service when he or she separated from service. The Participant must be given the opportunity to elect to have this Article 9 apply during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to such Participant. A Participant described in this paragraph who has not elected to have this Article 9 apply is subject to the rules in this Section 9.7 instead. Also, a Participant who does not qualify to elect to have this Article 9 apply because such Participant does not have at least 10 Years of Service for vesting purposes is subject to the rules of this Section 9.7.



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Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his/her benefits paid in accordance with the following paragraph. The Participant must be given the opportunity to elect to have this Section 9.7 apply (other than the first paragraph of this Section) during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to such Participant.

If, under either of the preceding two paragraphs, a Participant is subject to this Section 9.7, the following rules apply.

(a)	A utomatic joint and survivor annuity. If benefits in the form of a life annuity become payable to a married Participant who:

	(1)	begins to receive payments under the Plan on or after Normal Retirement Age;

	(2)	dies on or after Normal Retirement Age while still working for the Employer;

	(3)	begins to receive payments on or after the Qualified Early Retirement Age; or

	(4)	separates from service on or after attaining Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the plan and thereafter dies before beginning to receive such benefits;

	then such benefits will be received under this plan in the form of a QJSA, unless the Participant has elected otherwise during the election period. For this purpose, the election period must begin at least 6 months before the participant attains Qualified Early Retirement Age and end not more than 90 days before the Commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant at any time.

(b)	E lection of early survivor annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the election period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments that would have been made to the spouse under the QJSA if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant at any time. For this purpose, the election period begins on the later of (1) the 90th day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment.

(c)	Q ualified Early Retirement Age. The Qualified Early Retirement Age is the latest of:

	(1)	the earliest date, under the plan, on which the Participant may elect to receive retirement benefits,

	(2)	the first day of the 120th month beginning before the Participant reaches Normal Retirement Age, or

	(3)	the date the Participant begins participation under the Plan.



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A RTICLE 10
REQUlRED DlSTRlBUTIONS


This Article provides for the required commencement of distributions upon certain events. In addition, this Article places limitations on the period over which distributions may be made to a Participant or Beneficiary. To the extent the distribution provisions of this Plan, particularly Articles 8 and 9, are inconsistent with the provisions of this Article 10, the provisions of this Article control. Part 13 of the Agreement contains specific elections for applying the rules under this Article 10.

10.1	R equired Distributions Before Death.

	(a)	D eferred distributions. A Participant must be permitted to receive a distribution from the Plan no later than the 60th day after the latest of the close of the Plan Year in which:

		(1)	the Participant attains age 65 (or Normal Retirement Age, if earlier);

		(2)	occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or,

		(3)	the Participant terminates service with the Employer.

	(b)	R equired minimum distributions. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant’s Required Beginning Date (as defined in Section 10.3(a)) over one of the following periods (or a combination thereof):

		(1)	the life of the Participant,

		(2)	the life of the Participant and a Designated Beneficiary,

		(3)	a period certain not extending beyond the Life Expectancy of the Participant, or

		(4)	a period certain not extending beyond the joint and last survivor Life Expectancy of the Participant and a Designated Beneficiary.

		If the Participant’s interest is to be distributed over a period designated under subsection (3) or (4) above, the amount required to be distributed for each calendar year must at least equal the quotient obtained by dividing the Participant’s Benefit (as determined under Section 10.3(g)) by the lesser of (i) the Applicable Life Expectancy or (ii) if the Participant’s Designated Beneficiary is not his/her spouse, the minimum distribution incidental benefit factor set forth in Q&A-4 of Prop. Treas. Reg. §401 (a)(9)-2. Distributions after the death of the Participant shall be determined using the Applicable Life Expectancy as the relevant divisor regardless of the Participant’s Designated Beneficiary.

		The minimum distribution required for the Participant’s first Distribution Calendar Year must be made on or before the Participant’s Required Beginning Date. The minimum distribution for other Distribution Calendar Years, including the minimum distribution for the Distribution Calendar Year in which the Participant’s Required Beginning Date occurs, must be made on or before December 31 of that Distribution Calendar Year.

		If a Participant receives a distribution in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Code §401(a)(9) and the regulations thereunder. For calendar years beginning before January 1,1989, if the Participant’s spouse is not the Designated Beneficiary, the method of distribution selected must ensure that at least 50% of the Present Value of the amount available for distribution is paid within the life expectancy of the Participant.

10.2	R equired Distributions After Death.

	(a)	D istribution beginning before death. If the Participant dies after he/she has begun receiving distributions under Section 10.1(b), the remaining portion of the Participant’s vested Account Balance shall continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant’s death.

	(b)	D istribution beginning after death. Subject to the rules under Section 8.4(b), if the Participant dies before receiving distributions under Section 10.1(b), distribution of the Participant’s entire vested Account Balance shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death, except to the extent an election is made to receive distributions in accordance with subsection (1) or (2) below.



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	(1)	To the extent any portion of the Participant’s vested Account Balance is payable to a Designated Beneficiary, distributions may be made over the life of the Designated Beneficiary or over a period certain not greater than the Life Expectancy of the Designated Beneficiary, provided such distributions begin on or before December 31 of the calendar year immediately following the calendar year in which the Participant died.

	(2)	If the Designated Beneficiary is the Participant’s surviving spouse, he/she may delay the distribution under subsection (1) until December 31 of the calendar year in which the Participant would have attained age 70-1/2, if such date is later than the date described in subsection (1).

	If the Participant has not made an election pursuant to this subsection (b) by the time of his/her death, the Participant’s Designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this subsection (b), or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant’s entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

	For purposes of this subsection (b), if the surviving spouse dies after the Participant, but before payments to such spouse begin, the provisions of this subsection (b), with the exception of subsection (2) above, shall be applied as if the surviving spouse were the Participant.

(c)	T reatment of trust beneficiaries as Designated Beneficiaries. If a trust is properly named as a Beneficiary under the Plan, the beneficiaries of the trust will be treated as the Designated Beneficiaries of the Participant solely for purposes of determining the distribution period under this Article 10 with respect to the trust’s interests in the Participant’s vested Account Balance. The beneficiaries of a trust will be treated as Designated Beneficiaries for this purpose only if, as of the later of the date the trust is named as a Beneficiary of the Participant or the Participant’s Required Beginning Date (and as of all subsequent periods during which the trust is named as a Beneficiary of the Participant), the following requirements are met:

	(1)	the trust is a valid trust under state law, or would be but for the fact there is no corpus;

	(2)	the trust is irrevocable or will, by its terms, become irrevocable upon the death of the Participant;

	(3)	the beneficiaries of the trust who are beneficiaries with respect to the trust’s interests in the Participant’s vested Account Balance are identifiable from the trust instrument; and

	(4)	the Plan Administrator receives the documentation described in Question D-7 of Proposed Treas. Reg. §1.401(a)(9)-1, as subsequently amended or finally adopted.

	If the foregoing requirements are satisfied and the Plan Administrator receives such additional information as it may request, the Plan Administrator may treat such beneficiaries of the trust as Designated Beneficiaries.

(d)	T rust beneficiary qualifying for marital deduction. If a Beneficiary is a trust (other than an estate marital trust) that is intended to qualify for the federal estate tax marital deduction under Code §2056 (“marital trust”), then:

	(1)	in no event will the annual amount distributed from the Plan to the marital trust be less than the greater of:

		(i)	all fiduciary accounting income with respect to such Beneficiary’s interest in the Plan, as determined by the trustee of the marital trust, or

		(ii)	the minimum distribution required under this Article 10;

	(2)	the trustee of the marital trust (or the trustee’s legal representative) shall be responsible for calculating the amount to be distributed under subsection (1) above and shall instruct the Plan Administrator in writing to distribute such amount to the marital trust;

	(3)	the trustee of the marital trust may from time to time notify the Plan Administrator in writing to accelerate payment of all or any part of the portion of such Beneficiary’s interest that remains to be distributed, and may also notify the Plan Administrator to change the frequency of distributions (but not less often than annually); and

	(4)	the trustee of the marital trust shall be responsible for characterizing the amounts so distributed form the Plan as income or principle under applicable state laws.



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10.3	D efinitions.

	(a)	R equired Beginning Date. A Participant’s Required Beginning Date is the date designated under subsection (1)(i) or (ii) below, as applicable, unless the Employer elects under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement] to apply the Old-Law Required Beginning Date, as described in subsection (2) below. If the Employer does not select the Old-Law Required Beginning Date under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement], the Required Beginning Date rules under subsection (1) below apply. (But see Section 10.4 for special rules dealing with operational compliance with the GUST Legislation.)

		(1)	“New-law” Required Beginning Date. If the Employer does not elect to apply the Old-Law Required Beginning Date under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement], a Participant’s Required Beginning Date under the Plan is:

			(i)	For Five-Percent Owners. April 1 that follows the end of the calendar year in which the Participant attains age 70-1/2.

			(ii)	For Participants other than Five-Percent Owners. April 1 that follows the end of the calendar year in which the later of the following two events occurs:

				(A)	the Participant attains age 70-1/2 or

				(B)	the Participant retires.

			If a Participant is not a Five-Percent Owner for the Plan Year that ends with or within the calendar year in which the Participant attains age 70-1/2, and the Participant has not retired by the end of such calendar year, his/her Required Beginning Date is April 1 that follows the end of the first subsequent calendar year in which the Participant becomes a Five-Percent Owner or retires.

			A Participant may begin in-service distributions prior to his/her Required Beginning Date only to the extent authorized under Article 10 and Part 9 of the Agreement. However, if this Plan were amended to add the Required Beginning Date rules under this subsection (1), a Participant who attained age 70-1/2 prior to January 1, 1999 (or, if later, January 1 following the date the Plan is first amended to contain the Required Beginning Date rules under this subsection (1)) may receive in-service minimum distributions in accordance with the terms of the Plan in existence prior to such amendment.

		(2)	Old-Law Required Beginning Date. If the Old-Law Required Beginning Date is elected under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement], the Required Beginning Date for all Participants will be determined under subsection (1)(i) above, without regard to the rule in subsection (1)(ii). The Required Beginning Date for all Participants under the Plan will be April 1 of the calendar year following attainment of age 70-1/2.

	(b)	F ive-Percent Owner. A Participant is a Five-Percent Owner for purposes of this Section if such Participant is a Five-Percent Owner (as defined in Section 22.88) at any time during the Plan Year ending with or within the calendar year in which the Participant attains age 70-1/2. Once distributions have begun to a Five-Percent Owner under this Article, they must continue to be distributed, even if the Participant ceases to be a Five-Percent Owner in a subsequent year.

	(c)	D esignated Beneficiary. A Beneficiary designated by the Participant (or the Plan), whose Life Expectancy may be taken into account to calculate minimum distributions, pursuant to Code §401(a)(9) and the regulations thereunder.

	(d)	A pplicable Life Expectancy. The determination of the Applicable Life Expectancy depends on whether the term certain method or the recalculation method is being use to adjust the Life Expectancy in each Distribution Calendar Year. The recalculation method may only be used to determine the Life Expectancy of the Participant and/or the Participant’s spouse. The recalculation method is not available with respect to a nonspousal Designated Beneficiary.

		If the Designated Beneficiary is the Participant’s spouse, or if the Participant’s (or surviving spouse’s) single life expectancy is the Applicable Life Expectancy, the term certain method is used unless the recalculation method is elected by the Participant (or by the surviving spouse). If the Designated Beneficiary is not the Participant’s spouse, the term certain method is used to determine the Life Expectancy of both the Participant and the Designated Beneficiary, unless the recalculation method is elected by the Participant with respect to his/her Life Expectancy. The term certain method will always apply for purposes of determining the



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		Applicable Life Expectancy of a nonspousal Designated Beneficiary. An election to recalculate Life Expectancy (or the failure to elect recalculation) shall be irrevocable as of the Participant’s Required Beginning Date as to the Participant (or spouse) and shall apply to all subsequent years.

		If the term certain method is being used, the Life Expectancy determined for the first Distribution Calendar Year is reduced by one for each subsequent Distribution Year. If the recalculation method is used, the following rules apply:

		(1)	If the Life Expectancy is the Participant’s (or surviving spouse’s) single Life Expectancy, the Applicable Life Expectancy is redetermined for each Distribution Year based on the Participant’s (or surviving spouse’s) age on his/her birthday which falls in such year.

		(2)	If the Life Expectancy is a joint and last survivor Life Expectancy based on the ages of the Participant and the Participant’s spouse, and the recalculation method is elected with respect to both the Participant and his/her spouse, the Applicable Life Expectancy is redetermined for each Distribution Year based on the ages of the individuals on their birthdays that fall in such year.

		(3)	If the Life Expectancy is a joint and last survivor Life Expectancy based on the ages of the Participant and the Participant’s spouse, and the recalculation method is elected with respect to only one such individual, or if the Life Expectancy is a joint and last survivor Life Expectancy based on the ages of the Participant and a nonspousal Designated Beneficiary, and the recalculation method is elected with respect to the Participant, the Applicable Life Expectancy is determined in accordance with the procedures outlined in Prop. Treas. Reg. §1.401(a)(9)-1, E-8(b), or other applicable guidance.

	(e)	L ife Expectancy. For purposes of determining a Participant’s required minimum distribution amount, Life Expectancy and joint and last survivor Life Expectancy are computed using the expected return multiples in Tables V and VI of §1.72-9 of the Income Tax Regulations.

	(f)	D istribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year that contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 10.2.

	(g)	P articipant’s Benefit. For purposes of determining a Participant’s required minimum distribution, the Participant’s Benefit is determined based on his/her Account Balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year increased by the amount of any contributions or forfeitures allocated to the Account Balance as of dates in the Distribution Calendar Year after the Valuation Date and decreased by distributions made in the Distribution Calendar Year after the Valuation Date.

		If any portion of the minimum distribution for the first Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year.

10.4	G UST Elections. If this Plan is being restated to comply with the GUST Legislation (as defined in Section 22.96), Appendix B-2 of the Agreement permits the Employer to designate how it operated this Plan in compliance with the required minimum distribution rules for years prior to the date the Plan is adopted.

	(a)	D istributions under Old-Law Required Beginning Date rules. Unless the Employer specifically elects to apply the Old-Law Required Beginning Date rule under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement], the Required Beginning Date rules (as described in Section 10.3(a)(1)) apply. However, if prior to the adoption of this Prototype Plan, the terms of the Plan reflected the Old-Law Required Beginning Date rules, minimum distributions for such years are required to be calculated in accordance with that Old-Law Required Beginning Date, except to the extent any operational elections described in subsection (b) or (c) below applied.

	(b)	O ption to postpone distributions. For calendar years beginning after December 31, 1996 and prior to the restatement of this Plan to comply with the GUST changes, the Plan may have permitted Participants (other than Five-Percent Owners) who would otherwise have begun receiving minimum distributions under the terms of the Plan in effect for such years to postpone receiving their minimum distributions until the Required Beginning Date under Section 10.3(a)(1), even though the terms of the Plan (prior to the restatement) did not permit such an election. Appendix B-2.a. of the Agreement permits the Employer to specify the years during which Participants were permitted to postpone receiving minimum distributions under the Plan. Appendix B-2 need not be completed if Participants were not provided the option to postpone



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	receiving minimum distributions, either because the Plan used the “Old-Law” Required Beginning Date rules or because the Plan made distributions under the “New-Law” Required Beginning Date rules and contained other optional forms of benefit under its general elective distribution provisions that preserved the optional forms of benefit under the “Old Law Required Beginning Date” rules.

(c)	E lection to stop minimum required distributions. A Participant (other than a Five-Percent Owner) who began receiving minimum distributions in accordance with the Old-Law Required Beginning Date rules under the Plan prior to the date the Plan was amended to comply with the GUST changes generally must continue to receive such minimum distributions, even if the Participant is still employed with the Employer. However, prior to the restatement of this Plan to comply with the GUST changes, the Plan may have permitted Participants to stop minimum distributions if they had not reached the Required Beginning Date described in Section 10.3(a)(1), even though the terms of the Plan did not permit such an election. Under Appendix B-2.b. of the Agreement, the Employer may designate the year in which Participants were permitted to stop receiving minimum distributions in accordance with this subsection (c). A Participant must recommence minimum distributions as required under the Required Beginning Date rules applicable under this restated Plan.

	A Participant’s election to stop and recommence distributions is subject to the spousal consent requirements under Article 9 (if the Plan is otherwise subject to the Joint and Survivor Annuity requirements) and is subject to the terms of any applicable QDRO. The manner in which the Plan must comply with the spousal consent requirements depends on whether or not the Employer elects under Appendix B-2.c. of the Agreement to have the recommencement of benefits constitute a new Distribution Commencement Date. If the Plan is not otherwise subject to the Joint and Survivor Annuity requirements, Appendix B-2.c. need not be completed.

	(1)	New Distribution Commencement Date. If the Employer elects under Appendix B-2.c.(1) of the Agreement that recommencement of benefits will create a new Distribution Commencement Date, no spousal consent is required for a Participant to elect to stop distributions, except where such distributions are being paid in the form of a QJSA. Where such distributions are being paid in the form of a QJSA, in order to comply with this subsection (1), the person who was the Participant’s spouse on the original Distribution Commencement Date must consent to the election to stop distributions and the spouse’s consent must acknowledge the effect of the election. Because there is a new Distribution Commencement Date upon recommencement of benefits, the Plan, in order to satisfy this subsection (1), must comply with all of the requirements of Article 9 upon such recommencement, including payment of a QPSA (as defined in Section 9.4(b)) if the Participant dies before the new Distribution Commencement Date.

	(2)	No new Distribution Commencement Date. If the Employer elects under Appendix B-2.c.(2) of the Agreement that recommencement of benefits will not create a new Distribution Commencement Date, no spousal consent is required for the Participant to elect to stop required minimum distributions prior to retirement. In addition, no spousal consent is required when payments recommence to the Participant if:

		(i)	payments recommence to the Participant with the same Beneficiary and in a form of benefit that is the same but for the cessation of distributions;

		(ii)	the individual who was the Participant’s spouse on the Distribution Commencement Date executed a general consent within the meaning of §1.401(a)-20, A-31 of the regulations; or

		(iii)	the individual who was the Participant’s spouse on the Distribution Commencement Date executed a specific consent to waive a QJSA within the meaning of §1.401(a)-20, A-31, and the Participant is not married to that individual when benefits recommence.

		To qualify under this subsection (2), consent of the individual who was the Participant’s spouse on the Distribution Commencement Date is required prior to recommencement of distributions if the Participant chooses to recommence benefits in a different form than the form in which benefits were being distributed prior to the cessation of distributions or with a different Beneficiary. Consent of the Participant’s spouse is also required if the original form of distribution was a QJSA (as defined in Section 9.4(a)) or the spouse originally executed a specific consent to waive the QJSA within the meaning of §1.401(a)-20, A-31, of the regulations, and the Participant is still married to that individual when benefits recommence.



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10.5	T ransitional Rule. The minimum distribution requirements in Section 10.2 do not apply if distribution of the Participant’s Account Balance is subject to a TEFRA §242(b)(2) election. A TEFRA §242(b) election overrides the required minimum distribution rules only if the following requirements are satisfied.

	(a)	The distribution by the Plan is one that would not have disqualified the Plan under §401(a)(9) of the Code as in effect prior to amendment by the Deficit Reduction Act of 1984.

	(b)	The distribution is in accordance with a method of distribution designated by the Participant whose interest in the Plan is being distributed or, if the Participant is deceased, by a Beneficiary of such Participant.

	(c)	Such designation was in writing, was signed by the Participant or the Beneficiary, and was made before January 1, 1984.

	(d)	The Participant had accrued a benefit under the Plan as of December 31, 1983.

	(e)	The method of distribution designated by the Participant or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Participant’s death, the Beneficiaries of the Participant listed in order of priority.

A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Participant.

For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Participant, or the Beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in subsections (a) and (e) above.

If a designation is revoked any subsequent distribution must satisfy the requirements of Code §401(a)(9) and the proposed regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Plan must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code §401(a)(9) and the proposed regulations thereunder, but for the TEFRA §242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in §1.401(a)(9)-2 of the proposed regulations (or other applicable regulations). Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Questions J-2 and J-3 of §1.401 (a)(9)-1 of the proposed regulations (or other applicable regulations) shall apply.



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ARTICLE 11
PLAN ADMINISTRATION AND SPECIAL OPERATING RULES

This Article describes the duties and responsibilities of the Plan Administrator. In addition, this Article sets forth default QDRO procedures and benefit claims procedures, as well as special operating rules when an Employer is a member of a Related Employer group and when there is a Short Plan Year. Provisions related to Plan accounting and investments are contained in Article 13.


11.1	Plan Administrator. The Employer is the Plan Administrator, unless the Employer designates in writing another person or persons as the Plan Administrator. The Employer may designate the Plan Administrator by name, by reference to the person or group of persons holding a certain position, by reference to a procedure under which the Plan Administrator is designated, or by reference to a person or group of persons charged with the specific responsibilities of Plan Administrator. If any Related Employer has executed a Co-Sponsor Adoption Page, the Employer referred to in this Section is the Employer that executes the Signature Page of the Agreement.

	(a)	Acceptance of responsibility by designated Plan Administrator. If the Employer designates a Plan Administrator other than itself, the designated Plan Administrator must accept its responsibilities in writing. The designated Plan Administrator will serve in a manner and for the time period as agreed upon with the Employer. If more than one person has the responsibility of Plan Administrator, the group shall act by majority vote, but may designate specific persons to act on the Plan Administrator’s behalf.

	(b)	Resignation of designated Plan Administrator. A designated Plan Administrator may resign by delivering a written resignation to the Employer. The Employer may remove a designated Plan Administrator by delivering a written notice of removal. If a designated Plan Administrator resigns or is removed, and no new Plan Administrator is designated, the Employer is the Plan Administrator.

	(c)	Named F iduciary. The Plan Administrator is the Plan’s Named Fiduciary, unless the Plan Administrator specifically names another person as Named Fiduciary and the designated person accepts its responsibilities as Named Fiduciary in writing.

11.2	Duties and Powers of the Plan Administrator. The Plan Administrator will administer the Plan for the exclusive benefit of the Plan Participants and Beneficiaries, and in accordance with the terms of the Plan. To the extent the terms of the Plan are unclear, the Plan Administrator may interpret the Plan, provided such interpretation is consistent with the rules of ERISA and Code §401 and is performed in a uniform and nondiscriminatory manner. This right to interpret the Plan is an express grant of discretionary authority to resolve ambiguities in the Plan document and to make discretionary decisions regarding the interpretation of the Plan’s terms, including who is eligible to participate under the Plan, and the benefit rights of a Participant or Beneficiary. The Plan Administrator will not be held liable for any interpretation of the Plan terms or decision regarding the application of a Plan provision provided such interpretation or decision is not arbitrary or capricious.

	(a)	Delegation of duties and powers. To the extent provided for in an agreement with the Employer, the Plan Administrator may delegate its duties and powers to one or more persons. Such delegation must be in writing and accepted by the person or persons receiving the delegation.

	(b)	Spe cific duties and powers. The Plan Administrator has the general responsibility to control and manage the operation of the Plan. This responsibility includes, but is not limited to, the following:

		(1)	To construe and enforce the terms of the Plan, including those related to Plan eligibility, vesting and benefits;

		(2)	To develop separate procedures, consistent with the terms of the Plan, to assist in the administration of the Plan, including the adoption of separate or modified loan policy procedures (see Article 14), procedures for direction of investment by Participants (see Section 13.5(c)), procedures for determining whether domestic relations orders are QDROs (see Section 11.5), and procedures for the proper determination of investment earnings to be allocated to Participants’ Accounts (see Section 13.4);

		(3)	To communicate with the Trustee and other responsible persons with respect to the crediting of Plan contributions, the disbursement of Plan distributions and other relevant matters;

		(4)	To maintain all necessary records which may be required for tax and other administration purposes;

		(5)	To furnish and to file all appropriate notices, reports and other information to Participants, Beneficiaries, the Employer, the Trustee and government agencies (as necessary);



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		(6)	To answer questions Participants and Beneficiaries may have relating to the Plan and their benefits;

		(7)	To review and decide on claims for benefits under the Plan;

		(8)	To retain the services of other persons, including Investment Managers, attorneys, consultants, advisers and others, to assist in the administration of the plan;

		(9)	To correct any defect or error in the administration of the Plan;

		(10)	To establish a “funding policy and method” for the Plan for purposes of ensuring the Plan is satisfying its financial objectives and is able to meet its liquidity needs; and

		(11)	To suspend contributions, including Section 401(k) Deferrals and/or Employee After-Tax Contributions, on behalf of any or all Highly Compensated Employees, if the Plan Administrator reasonably believes that such contributions will cause the Plan to discriminate in favor of Highly Compensated Employees. See Sections 17.2(e) and 17.3(e).


11.3	Employer Responsibilities. The Employer will provide in a timely manner all appropriate information necessary for the Plan Administrator to perform its duties. This information includes, but is not limited to, Participant compensation data, Employee employment, service and termination information, and other information the Plan Administrator may require. The Plan Administrator may rely on the accuracy of any information and data provided by the Employer.

	The Employer will provide to the Trustee written notification of the appointment of any person or persons as Plan Administrator, Investment Manager, or other Plan fiduciary, and the names, titles and authorities of any individuals who are authorized to act on behalf of such persons. The Trustee shall be entitled to rely upon such information until it receives written notice of a change in such appointments or authorizations.

11.4	Plan Adminis tration Expenses. All reasonable expenses related to plan administration will be paid from Plan assets, except to the extent the expenses are paid (or reimbursed) by the Employer. For this purpose, Plan expenses include all reasonable costs, charges and expenses incurred by the Trustee in connection with the administration of the Trust (including such reasonable compensation to the Trustee as may be agreed upon from time to time between the Employer or Plan Administrator and the Trustee and any fees for legal services rendered to the Trustee). All reasonable additional administrative expenses incurred to effect investment elections made by Participants and Beneficiaries under Section 13.5(c) shall be paid from the Trust and, as elected by the Plan Administrator, shall either be charged (in accordance with such reasonable nondiscriminatory rules as the Plan Administrator deems appropriate under the circumstances) to the Account of the individual making such election or treated as a general expense of the Trust. All transaction-related expenses incurred to effect a specific investment for an individually-directed Account (such as brokerage commissions and other transfer expenses) shall, as elected by the Plan Administrator, either be paid from or otherwise charged directly to the Account of the individual providing such direction or treated as a general Trust expense. In addition, unless specifically prohibited under statute, regulation or other guidance of general applicability, the Plan Administrator may charge to the Account of an individual Participant a reasonable charge to offset the cost of making a distribution to the Participant, Beneficiary, or Alternate Payee. If liquid assets of the Trust are insufficient to cover the fees of the Trustee or the Plan Administrator, then Trust assets shall be liquidated to the extent necessary for such fees. In the event any part of the Trust becomes subject to tax, all taxes incurred will be paid from the Trust.

11.5	Qualified Domestic Relations Orders (QDROs).

	(a)	In general. The Plan Administrator must develop written procedures for determining whether a domestic relations order is a QDRO and for administering distributions under a QDRO. For this purpose, the Plan Administrator may use the default QDRO procedures set forth in subsection (h) below or may develop separate QDRO procedures.

	(b)	Qualified Domestic Relations Order (QDRO). A QDRO is a domestic relations order that creates or recognizes the existence of an Alternate Payee’s right to receive, or assigns to an Alternate Payee the right to receive, all or a portion of the benefits payable with respect to a Participant under the Plan. (See Code §414(p).) The QDRO must contain certain information and meet other requirements described in this Section 11.5.

	(c)	Recognition as a QDRO. To be recognized as a QDRO, an order must be a “domestic relations order” that relates to the provision of child support, alimony payments, or marital property rights for the benefit of an Alternate Payee. The Plan Administrator is not required to determine whether the court or agency issuing the domestic relations order had jurisdiction to issue an order, whether state law is correctly applied in the order, whether service was properly made on the parties, or whether an individual identified in an order as an Alternate Payee is a proper Alternate Payee under state law.



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	(1)	Domestic relations order. A domestic relations order is a judgment, decree, or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property law).

	(2)	Alternate Payee. An Alternate Payee must be a spouse, former spouse, child, or other dependent of a Participant.

(d)	Contents of QDRO. A QDRO must contain the following information:

	(1)	the name and last known mailing address of the Participant and each Alternate Payee;

	(2)	the name of each plan to which the order applies;

	(3)	the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the Alternate Payee; and

	(4)	the number of payments or time period to which the order applies.

(e)	Impermissible QDRO provisions.

	(1)	The order must not require the Plan to provide an Alternate Payee or Participant with any type or form of benefit, or any option, not otherwise provided under the Plan;

	(2)	The order must not require the Plan to provide for increased benefits (determined on the basis of actuarial value);

	(3)	The order must not require the Plan to pay benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a QDRO; and

	(4)	The order must not require the Plan to pay benefits to an Alternate Payee in the form of a Qualified Joint and Survivor Annuity for the lives of the Alternate Payee and his or her subsequent spouse.

(f)	Immediate distribution to Alternate Payee. Even if a Participant is not eligible to receive an immediate distribution from the Plan, an Alternate Payee may receive a QDRO benefit immediately in a lump sum, provided such distribution is consistent with the QDRO provisions.

(g)	No fee for QDRO determination. The Plan Administrator shall not condition the making of a QDRO determination on the payment of a fee by a Participant or an Alternate Payee (either directly or as a charge against the Participant’s Account).

(h)	Default QDRO procedure. If the Plan Administrator chooses this default QDRO procedure or if the Plan Administrator does not establish a separate QDRO procedure, this Section 11.5(h) will apply as the procedure the Plan Administrator will use to determine whether a domestic relations order is a QDRO. This default QDRO procedure incorporates the requirements set forth under Sections 11.5 (a) through (g).

	(1)	Access to information. The Plan Administrator will provide access to Plan and Participant benefit information sufficient for a prospective Alternate Payee to prepare a QDRO. Such information might include the summary plan description, other relevant plan documents, and a statement of the Participant’s benefit entitlements. The disclosure of this information is conditioned on the prospective Alternate Payee providing to the Plan Administrator information sufficient to reasonably establish that the disclosure request is being made in connection with a domestic relations order.

	(2)	Notifications to Participant and Alternate Payee. The Plan Administrator will promptly notify the affected Participant and each Alternate Payee named in the domestic relations order of the receipt of the order. The Plan Administrator will send the notification to the address included in the domestic relations order. Along with the notification, the Plan Administrator will provide a copy of the Plan’s procedures for determining whether a domestic relations order is a QDRO.

	(3)	Alternate Payee representative. The prospective Alternate Payee may designate a representative to receive copies of notices and Plan information that are sent to the Alternate Payee with respect to the domestic relations order.

	(4)	Evaluation of domestic relations order. Within a reasonable period of time, the Plan Administrator will evaluate the domestic relations order to determine whether it is a QDRO. A reasonable period will depend on the specific circumstances. The domestic relations order must



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			contain the information described in Section 11.5(c). If the order is only deficient in a minor respect, the Plan Administrator may supplement information in the order from information within the Plan Administrator’s control or through communication with the prospective Alternate Payee.

			(i)	Separate accounting. Upon receipt of a domestic relations order, the Plan Administrator will separately account for and preserve the amounts that would be payable to an Alternate Payee until a determination is made with respect to the status of the order. During the period in which the status of the order is being determined, the Plan Administrator will take whatever steps are necessary to ensure that amounts that would be payable to the Alternate Payee, if the order were a QDRO, are not distributed to the Participant or any other person. The separate accounting requirement may be satisfied, at the Plan Administrator’s discretion, by a segregation of the assets that are subject to separate accounting.

			(ii)	Separate accounting until the end of “18 month period.” The Plan Administrator will continue to separately account for amounts that are payable under the QDRO until the end of an “18-month period.” The “18-month period” will begin on the first date following the Plan’s receipt of the order upon which a payment would be required to be made to an Alternate Payee under the order. If, within the “18-month period,” the Plan Administrator determines that the order is a QDRO, the Plan Administrator must pay the Alternate Payee in accordance with the terms of the QDRO. If, however, the Plan Administrator determines within the “18-month period” that the order is not a QDRO, or if the status of the order is not resolved by the end of the “18-month period,” the Plan Administrator may payout the amounts otherwise payable under the order to the person or persons who would have been entitled to such amounts if there had been no order. If the order is later determined to be a QDRO, the order will apply only prospectively; that is, the Alternate Payee will be entitled only to amounts payable under the order after the subsequent determination.

			(iii)	Preliminary review. The Plan Administrator will perform a preliminary review of the domestic relations order to determine if it is a QDRO. If this preliminary review indicates the order is deficient in some manner, the Plan Administrator will allow the parties to attempt to correct any deficiency before issuing a final decision on the domestic relations order. The ability to correct is limited to a reasonable period of time.

			(iv)	Notification of determination. The Plan Administrator will notify in writing the Participant and each Alternate Payee of the Plan Administrator’s decision as to whether a domestic relations order is a QDRO. In the case of a determination that an order is not a QDRO, the written notice will contain the following information:

				(A)	references to the Plan provisions on which the Plan Administrator based its decision;

				(B)	an explanation of any time limits that apply to rights available to the parties under the Plan (such as the duration of any protective actions the Plan Administrator will take); and

				(C)	a description of any additional material, information, or modifications necessary for the order to be a QDRO and an explanation of why such material, information, or modifications are necessary.

			(v)	Treatment of Alternate Payee. If an order is accepted as a QDRO, the Plan Administrator will act in accordance with the terms of the QDRO as if it were a part of the Plan. An Alternate Payee will be considered a Beneficiary under the Plan and be afforded the same rights as a Beneficiary. The Plan Administrator will provide any appropriate disclosure information relating to the Plan to the Alternate Payee.

11.6	Claims Procedure. Unless the Plan uses the default claims procedure under subsection (e) below, the Plan Administrator shall establish a procedure for benefit claims consistent with the requirements of ERISA Reg. §2560.503-1. The Plan Administrator is authorized to conduct an examination of the relevant facts to determine the merits of a Participant’s or Beneficiary’s claim for Plan benefits. The claims procedure must incorporate the following guidelines:

	(a)	Filing a claim. The claims procedure will set forth a reasonable means for a Participant or Beneficiary to file a claim for benefits under the Plan.



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	(b)	Notification of Plan Administrator’s decision. The Plan Administrator must provide a claimant with written notification of the Plan Administrator’s decision relating to a claim within a reasonable period of time (not more than 90 days unless special circumstances require an extension to process the claim) after the claim was filed. If the claim is denied, the notification must set forth the reasons for the denial, specific reference to pertinent Plan provisions on which the denial is based, a description of any additional information necessary for the claimant to perfect the claim, and the steps the claimant must take to submit the claim for review.

	(c)	Review procedure. The claims procedure will provide a claimant a reasonable opportunity to have a full and fair review of a denied claim. Such procedure shall allow a review upon a written application, for the claimant to review pertinent documents, and to allow the claimant to submit written comments to the Plan Administrator. The procedure may establish a limited period (not less than 60 days after the claimant receives written notification of the denial of the claim) for the claimant to request a review of the claim denial.

	(d)	Decision on review. If a claimant requests a review, the Plan Administrator must respond promptly to the request. Unless special circumstances exist (such as the need for a hearing), the Plan Administrator must respond in writing within 60 days of the date the claimant submitted the review application. The response must explain the Plan Administrator’s decision on review.

	(e)	Default claims procedure. If the Plan Administrator chooses this default claims procedure or if the Plan Administrator does not establish a separate claims procedure, the following will apply.

		(1)	A person may submit to the Plan Administrator a written claim for benefits under the Plan. The claim shall be submitted on a form provided by the Plan Administrator.

		(2)	The Plan Administrator will evaluate the claim to determine if benefits are payable to the Participant or Beneficiary under the terms of the Plan. The Plan Administrator may solicit additional information from the claimant if necessary to evaluate the claim.

		(3)	If the Plan Administrator determines the claim is valid, the Participant or Beneficiary will receive in writing from the Plan Administrator a statement describing the amount of benefit, the method or methods of payment, the timing of distributions and other information relevant to the payment of the benefit.

		(4)	If the Plan Administrator denies all or any portion of the claim, the claimant will receive, within 90 days after receipt of the claim form, a written explanation setting forth the reasons for the denial, specific reference to pertinent Plan provisions on which the denial is based, a description of any additional information necessary for the claimant to perfect the claim, and the steps the claimant must take to submit the claim for review.

		(5)	The claimant has 60 days from the date the claimant received the denial of claim to appeal the adverse decision of the Plan Administrator. The claimant may review pertinent documents and submit written comments to the Plan Administrator. The Plan Administrator will submit all relevant documentation to the Employer. The Employer may hold a hearing or seek additional information from the claimant and the Plan Administrator.

		(6)	Within 60 days (or such longer period due to the circumstances) of the request for review, the Employer will render a written decision on the claimant’s appeal. The Employer shall explain the decision, in terms that are understandable to the claimant and by specific references to the Plan document provisions.

11.7	Operational Rules for Short Plan Years. The following operational rules apply if the Plan has a Short Plan Year. A Short Plan Year is any Plan Year that is less than a 12-month period, either because of the amendment of the Plan Year, or because the Effective Date of a new Plan is less than 12 months prior to the end of the first Plan Year.

	(a)	If the Plan is amended to create a Short Plan Year, and an Eligibility Computation Period or Vesting Computation Period is based on the Plan Year, the applicable computation period begins on the first day of the Short Plan Year, but such period ends on the day which is 12 months from the first day of such Short Plan Year. Thus, the computation period that begins on the first day of the Short Plan Year overlaps with the computation period that starts on the first day of the next Plan Year. This rule applies only to an Employee who has at least one Hour of Service during the Short Plan Year.

		If a Plan has an initial Short Plan Year, the rule in the above paragraph applies only for purposes of determining an Employee’s Vesting Computation Period and only if the Employer elects under Part 6, #20.a. of the Agreement [Part 6, #38.a. of the 401(k) Agreement] to exclude service earned prior to the adoption of the Plan. For eligibility and vesting (where service prior to the adoption of the Plan is not ignored), if the Eligibility Computation Period or Vesting Computation Period is based on the Plan Year, the applicable



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		computation period will be determined on the basis of the Plan’s normal Plan Year, without regard to the initial short Plan Year.

	(b)	If Employer Contributions are allocated for a Short Plan Year, any allocation condition under Part 4 of the Agreement that requires an Eligible Participant to complete a specified number of Hours of Service to receive an allocation of such Employer Contributions will not be prorated as a result of such Short Plan Year unless otherwise specified in Part 4 of the Agreement.

	(c)	If the Permitted Disparity Method is used to allocate any Employer Contributions made for a Short Plan Year, the Integration Level will be prorated to reflect the number of months (or partial months) included in the Short Plan Year.

	(d)	The Compensation Dollar Limitation, as defined in Section 22.32, will be prorated to reflect the number of months (or partial months) included in the Short Plan Year unless the compensation used for such Short Plan Year is a period of 12 months.

	In all other respects, the Plan shall be operated for the Short Plan Year in the same manner as for a 12-month Plan Year, unless the context requires otherwise. If the terms of the Plan are ambiguous with respect to the operation of the Plan for a Short Plan Year, the Plan Administrator has the authority to make a final determination on the proper interpretation of the Plan.

11.8	Operational Rules for Related Employer Groups. If an Employer has one or more Related Employers, the Employer and such Related Employer(s) constitute a Related Employer group. In such case, the following rules apply to the operation of the Plan.

	(a)	If the term “Employer” is used in the context of administrative functions necessary to the operation, establishment, maintenance, or termination of the Plan, only the Employer executing the Signature Page of the Agreement, and any Co-Sponsor of the Plan, is treated as the Employer.

	(b)	Hours of Service are determined by treating all members of the Related Employer group as the Employer.

	(c)	The term Excluded Employee is determined by treating all members of the Related Employer group as the Employer, except as specifically provided in the Plan.

	(d)	Compensation is determined by treating all members of the Related Employer group as the Employer, except as specifically provided in the Plan.

	(e)	An Employee is not treated as separated from service or terminated from employment if the Employee is employed by any member of the Related Employer group.

	(f)	The Annual Additions Limitation described in Article 7 and the Top-Heavy Plan rules described in Article 16 are applied by treating all members of the Related Employer group as the Employer.

	In all other contexts, the term “Employer” generally means a reference to all members of the Related Employer group, unless the context requires otherwise. If the terms of the Plan are ambiguous with respect to the treatment of the Related Employer group as the Employer, the Plan Administrator has the authority to make a final determination on the proper interpretation of the Plan.



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ARTICLE 12
TRUST PROVISlONS

This Article sets forth the creation of the Plan’s Trust (or, in the case of an amendment of the Plan, the amended terms of the Trust) and the duties and responsibilities of the Trustee under the Plan. By executing the Trustee Declaration under the Agreement, the Trustee agrees to be bound by the duties, responsibilities and liabilities imposed on the Trustee under the Plan and to act in accordance with the terms of this Plan. The Employer may act as Trustee under the Plan by executing the Trustee Declaration.


12.1	Creation of Trust. By adopting this Plan, the Employer creates a Trust to hold the assets of the Plan (or, in the event that this Plan document represents an amendment of the Plan, the Employer hereby amends the terms of the Trust maintained in connection with the Plan). The Trustee is the owner of the Plan assets held by the Trust. The Trustee is to hold the Plan assets for the exclusive benefit of Plan Participants and Beneficiaries. Plan Participants and Beneficiaries do not have ownership interests in the assets held by the Trust.

12.2	Trustee. The Trustee identified in the Trustee Declaration under the Agreement shall act either as a Discretionary Trustee or as a Directed Trustee, as identified under the Agreement.

	(a)	Discretionary Trustee. A Trustee is a Discretionary Trustee to the extent the Trustee has exclusive authority and discretion with respect to the investment, management or control of Plan assets. Notwithstanding a Trustee’s designation as a Discretionary Trustee, a Trustee’s discretion is limited, and the Trustee shall be considered a Directed Trustee, to the extent the Trustee is subject to the direction of the Plan Administrator, the Employer, a properly appointed Investment Manager, or a Named Fiduciary under an agreement between the Plan Administrator and the Trustee. A Trustee also is considered a Directed Trustee to the extent the Trustee is subject to investment direction of Plan Participants. (See Section 13.5(c) for a discussion of the Trustee’s responsibilities with regard to Participant-directed investments.)

	(b)	Directed Trustee. A Trustee is a Directed Trustee with respect to the investment of Plan assets to the extent the Trustee is subject to the direction of the Plan Administrator, the Employer, a properly appointed Investment Manager, a Named Fiduciary, or Plan Participant. To the extent the Trustee is a Directed Trustee, the Trustee does not have any discretionary authority with respect to the investment of Plan assets. In addition, the Trustee is not responsible for the propriety of any directed investment made pursuant to this Section and shall not be required to consult or advise the Employer regarding the investment quality of any directed investment held under the Plan.

		The Trustee shall be advised in writing regarding the retention of investment powers by the Employer or the appointment of an Investment Manager or other Named Fiduciary with power to direct the investment of Plan assets. Any such delegation of investment powers will remain in force until such delegation is revoked or amended in writing. The Employer is deemed to have retained investment powers under this subsection to the extent the Employer directs the investment of Participant Accounts for which affirmative investment direction has not been received pursuant to Section 13.5(c).

		The Employer is a Named Fiduciary for investment purposes if the Employer directs investments pursuant to this subsection. Any investment direction shall be made in writing by the Employer, Investment Manager, or Named Fiduciary, as applicable. A Directed Trustee must act solely in accordance with the direction of the Plan Administrator, the Employer, any employees or agents of the Employer, a properly appointed Investment Manager or other fiduciary of the Plan, a Named Fiduciary, or Plan Participants. (See Section 13.5(c) for a discussion of the Trustee’s responsibilities with regard to Participant directed investments.)

		The Employer may direct the Trustee to invest in any media in which the Trustee may invest, as described in Section 12.4. However, the Employer may not borrow from the Trust or pledge any of the assets of the Trust as security for a loan to itself; buy property or assets from or sell property or assets to the Trust; charge any fee for services rendered to the Trust; or receive any services from the Trust on a preferential basis.

12.3	Trustee’s Responsibilities Reg arding Administration of Trust. This Section outlines the Trustee’s powers, rights and duties under the Plan with respect to the administration of the investments held in the Plan. The Trustee’s administrative duties are limited to those described in this Section 12.3; the Employer is responsible for any other administrative duties required under the Plan or by applicable law.

	(a)	The Trustee will receive all contributions made under the terms of the Plan. The Trustee is not obligated in any manner to ensure that such contributions are correct in amount or that such contributions comply with the terms of the Plan, the Code or ERISA. In addition, the Trustee is under no obligation to request that the Employer make contributions to the Plan. The Trustee is not liable for the manner in which such amounts are deposited or the allocation between Participant’s Accounts, to the extent the Trustee follows the written direction of the Plan Administrator or Employer.



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	(b)	The Trustee will make distributions from the Trust in accordance with the written directions of the Plan Administrator or other authorized representative. To the extent the Trustee follows such written direction, the Trustee is not obligated in any manner to ensure a distribution complies with the terms of the Plan, that a Participant or Beneficiary is entitled to such a distribution, or that the amount distributed is proper under the terms of the Plan. If there is a dispute as to a payment from the Trust, the Trustee may decline to make payment of such amounts until the proper payment of such amounts is determined by a court of competent jurisdiction, or the Trustee has been indemnified to its satisfaction.

	(c)	The Trustee may employ agents, attorneys, accountants and other third parties to provide counsel on behalf of the Plan, where the Trustee deems advisable. The Trustee may reimburse such persons from the Trust for reasonable expenses and compensation incurred as a result of such employment. The Trustee shall not be liable for the actions of such persons, provided the Trustee acted prudently in the employment and retention of such persons. In addition, the Trustee will not be liable for any actions taken as a result of good faith reliance on the advice of such persons.

12.4	Trustee’s Responsibility Regarding Investment of Plan Assets. In addition to the powers, rights and duties enumerated under this Section, the Trustee has whatever powers are necessary to carry out its duties in a prudent manner. The Trustee’s powers, rights and duties may be supplemented or limited by a separate trust agreement, investment policy, funding agreement, or other binding document entered into between the Trustee and the Plan Administrator which designates the Trustee’s responsibilities with respect to the Plan. A separate trust agreement must be consistent with the terms of this Plan and must comply with all qualification requirements under the Code and regulations. To the extent the exercise of any power, right or duty is subject to discretion, such exercise by a Directed Trustee must be made at the direction of the Plan Administrator, the Employer, an Investment Manager, a Named Fiduciary, or Plan Participant.

	(a)	The Trustee shall be responsible for the safekeeping of the assets of the Trust in accordance with the provisions of this Plan.

	(b)	The Trustee may invest, manage and control the Plan assets in a manner that is consistent with the Plan’s funding policy and investment objectives. The Trustee may invest in any investment, as authorized under Section 13.5, which the Trustee deems advisable and prudent, subject to the proper written direction of the Plan Administrator, the Employer, a properly appointed Investment Manager, a Named Fiduciary or a Plan Participant. The Trustee is not liable for the investment of Plan assets to the extent the Trustee is following the proper direction of the Plan Administrator, the Employer, a Participant, an Investment Manager, or other person or persons duly appointed by the Employer to provide investment direction. In addition, the Trustee does not guarantee the Trust in any manner against investment loss or depreciation in asset value, or guarantee the adequacy of the Trust to meet and discharge any or all liabilities of the Plan.

	(c)	The Trustee may retain such portion of the Plan assets in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon.

	(d)	The Trustee may collect and receive any and all moneys and other property due the Plan and to settle, compromise, or submit to arbitration any claims, debts, or damages with respect to the Plan, and to commence or defend on behalf of the Plan any lawsuit, or other legal or administrative proceedings.

	(e)	The Trustee may hold any securities or other property in the name of the Trustee or in the name of the Trustee’s nominee, and may hold any investments in bearer form, provided the books and records of the Trustee at all times show such investment to be part of the Trust.

	(f)	The Trustee may exercise any of the powers of an individual owner with respect to stocks, bonds, securities or other property, including the right to vote upon such stocks, bonds or securities; to give general or special proxies or powers of attorney; to exercise or sell any conversion privileges, subscription rights, or other options; to participate in corporate reorganizations, mergers, consolidations, or other changes affecting corporate securities (including those in which it or its affiliates are interested as Trustee); and to make any incidental payments in connection with such stocks, bonds, securities or other property. Unless specifically agreed upon in writing between the Trustee and the Employer, the Trustee shall not have the power or responsibility to vote proxies with respect to any securities of the Employer or a Related Employer or with respect to any Plan assets that are subject to the investment direction of the Employer or for which the power to manage, acquire, or dispose of such Plan assets has been delegated by the Employer to one or more Investment Managers or Named Fiduciaries in accordance with ERISA §403. With respect to the voting of Employer securities, or in the event of any tender or other offer with respect to shares of Employer securities held in the Trust, the Trustee will follow the direction of the Employer or other responsible fiduciary or, to the extent voting and similar rights have been passed through to Participants, of each Participant with respect to shares allocated to his/her Account.



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	(g)	The Trustee may borrow or raise money on behalf of the Plan in such amount, and upon such terms and conditions, as the Trustee deems advisable. The Trustee may issue a promissory note as Trustee to secure the repayment of such amounts and may pledge all, or any part, of the Trust as security.

	(h)	The Trustee, upon the written direction of the Plan Administrator, is authorized to enter into a transfer agreement with the Trustee of another qualified retirement plan and to accept a transfer of assets from such retirement plan on behalf of any Employee of the Employer. The Trustee is also authorized, upon the written direction of the Plan Administrator, to transfer some or all of a Participant’s vested Account Balance to another qualified retirement plan on behalf of such Participant. A transfer agreement entered into by the Trustee does not affect the Plan’s status as a Prototype Plan.

	(i)	The Trustee is authorized to execute, acknowledge and deliver all documents of transfer and conveyance, receipts, releases, and any other instruments that the Trustee deems necessary or appropriate to carry out its powers, rights and duties hereunder.

	(j)	If the Employer maintains more than one Plan, the assets of such Plans may be comingled for investment purposes. The Trustee must separately account for the assets of each Plan. A comingling of assets, as described in this paragraph, does not cause the Trusts maintained with respect to the Employer’s Plans to be treated as a single Trust, except as provided in a separate document authorized in the first paragraph of this Section 12.4.

	(k)	The Trustee is authorized to invest Plan assets in a common/collective trust fund, or in a group trust fund that satisfies the requirements of IRS Revenue Ruling 81-100. All of the terms and provisions of any such common/collective trust fund or group trust into which Plan assets are invested are incorporated by reference into the provisions of the Trust for this Plan.

	(l)	If the Trustee is a bank or similar financial institution, the Trustee is authorized to invest in any type of deposit of the Trustee (including its own money market fund) at a reasonable rate of interest.

	(m)	The Trustee must be bonded as required by applicable law. The bonding requirements shall not apply to a bank, insurance company, or similar financial institution that satisfies the requirements of §412(a)(2) of ERISA.

12.5	More than One Person as Trustee. If the Plan has more than one person acting as Trustee, the Trustees may allocate the Trustee responsibilities by mutual agreement and Trustee decisions will be made by a majority vote (unless otherwise agreed to by the Trustees) or as otherwise provided in a separate trust agreement or other binding document.

12.6	Annual Valuation. The Plan assets will be valued at least on an annual basis. The Employer may designate more frequent valuation dates under Part 12, #45.b.(2) of the Agreement [Part 12, #63.b.(2) of the 401(k) Agreement]. Notwithstanding any election under Part 12, #45.b.(2) of the Agreement [Part 12, #63.b.(2) of the 401(k) Agreement], the Trustee and Plan Administrator may agree to value the Trust on a more frequent basis, and/or to perform an interim valuation of the Trust pursuant to Section 13.2(a).

12.7	Repor ting to Plan Administrator and Employer. Within ninety (90) days following the end of each Plan Year, and within ninety (90) days following its removal or resignation, the Trustee will file with the Employer an accounting of its administration of the Trust from the date of its last accounting. The accounting will include a statement of cash receipts, disbursements and other transactions effected by the Trustee since the date of its last accounting, and such further information as the Trustee and/or Employer deems appropriate. Upon receipt of such information, the Employer must promptly notify the Trustee of its approval or disapproval of the information. If the Employer does not provide a written disapproval within ninety (90) days following the receipt of the information, including a written description of the items in question, the Trustee is forever released and discharged from any liability with respect to all matters reflected in such information. The Trustee shall have sixty (60) days following its receipt of a written disapproval from the Employer to provide the Employer with a written explanation of the terms in question. If the Employer again disapproves of the accounting, the Trustee may file its accounting with a court of competent jurisdiction for audit and adjudication.

	All assets contained in the Trust accounting will be shown at their fair market value as of the end of the Plan Year or as of the date of resignation or removal. The value of marketable investments shall be determined using the most recent price quoted on a national securities exchange or over-the-counter market. The value of non-marketable securities shall, except as provided otherwise herein, be determined in the sole judgment of the Trustee, which determination shall be binding and conclusive. The value of investments in securities or obligations of the Employer in which there is no market will be determined by an independent appraiser at least once annually and the Trustee shall have no responsibility with respect to the valuation of such assets.

12.8	Reasonable Compensation. The Trustee shall be paid reasonable compensation in an amount agreed upon by the Plan Administrator and Trustee. The Trustee also will be reimbursed for any reasonable expenses or fees incurred in its



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	function as Trustee. An individual Trustee who is already receiving full-time pay as an Employee of the Employer may not receive any additional compensation for services as Trustee. The Plan will pay the reasonable compensation and expenses incurred by the Trustee, pursuant to Section 11.4, unless the Employer pays such compensation and expenses. Any compensation or expense paid directly by the Employer to the Trustee is not an Employer Contribution to the Plan.

12.9	Resignation and Removal of Trustee. The Trustee may resign at any time by delivering to the Employer a written notice of resignation at least thirty (30) days prior to the effective date of such resignation, unless the Employer consents in writing to a shorter notice period. The Employer may remove the Trustee at any time, with or without cause, by delivering written notice to the Trustee at least 30 days prior to the effective date of such removal. The Employer may remove the Trustee upon a shorter written notice period if the Employer reasonably determines such shorter period is necessary to protect Plan assets. Upon the resignation, removal, death or incapacity of a Trustee, the Employer may appoint a successor Trustee which, upon accepting such appointment, will have all the powers, rights and duties conferred upon the preceding Trustee. In the event there is a period of time following the effective date of a Trustee’s removal or resignation before a successor Trustee is appointed, the Employer is deemed to be the Trustee. During such period, the Trust continues to be in existence and legally enforceable, and the assets of the Plan shall continue to be protected by the provisions of the Trust.

12.10	Indemnification of Trustee. Except to the extent that it is judicially determined that the Trustee has acted with gross negligence or willful misconduct, the Employer shall indemnify the Trustee (whether or not the Trustee has resigned or been removed) against any liabilities, losses, damages, and expenses, including attorney, accountant, and other advisory fees, incurred as a result of:

	(a)	any action of the Trustee taken in good faith in accordance with any information, instruction, direction, or opinion given to the Trustee by the Employer, the Plan Administrator, Investment Manager, Named Fiduciary or legal counsel of the Employer, or any person or entity appointed by any of them and authorized to give any information, instruction, direction, or opinion to the Trustee;

	(b)	the failure of the Employer, the Plan Administrator, Investment Manager, Named Fiduciary or any person or entity appointed by any of them to make timely disclosure to the Trustee of information which any of them or any appointee knows or should know if it acted in a reasonably prudent manner; or

	(c)	any breach of fiduciary duty by the Employer, the Plan Administrator, Investment Manager, Named Fiduciary or any person or entity appointed by any of them, other than such a breach which is caused by any failure of the Trustee to perform its duties under this Trust.

	The duties and obligations of the Trustee shall be limited to those expressly imposed upon it by this instrument or subsequently agreed upon by the parties. Responsibility for administrative duties required under the Plan or applicable law not expressly imposed upon or agreed to by the Trustee shall rest solely with the Employer.

	The Employer agrees that the Trustee shall have no liability with regard to the investment or management of illiquid Plan assets transferred from a prior Trustee, and shall have no responsibility for investments made before the transfer of Plan assets to it, or for the viability or prudence of any investment made by a prior Trustee, including those represented by assets now transferred to the custody of the Trustee, or for any dealings whatsoever with respect to Plan assets before the transfer of such assets to the Trustee. The Employer shall indemnify and hold the Trustee harmless for any and all claims, actions or causes of action for loss or damage, or any liability whatsoever relating to the assets of the Plan transferred to the Trustee by any prior Trustee of the Plan, including any liability arising out of or related to any act or event, including prohibited transactions, occurring prior to the date the Trustee accepts such assets, including all claims, actions, causes of action, loss, damage, or any liability whatsoever arising out of or related to that act or event, although that claim, action, cause of action, loss, damage, or liability may not be asserted, may not have accrued, or may not have been made known until after the date the Trustee accepts the Plan assets. Such indemnification shall extend to all applicable periods, including periods for which the Plan is retroactively restated to comply with any tax law or regulation.

12.11	Appointment of Custodian. The Plan Administrator may appoint a Custodian to hold all or any portion of the Plan assets. A Custodian has the same powers, rights and duties as a Directed Trustee. The Custodian will be protected from any liability with respect to actions taken pursuant to the direction of the Trustee, Plan Administrator, the Employer, an Investment Manager, a Named Fiduciary or other third party with authority to provide direction to the Custodian.



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ARTICLE 13
PLAN ACCOUNTING AND INVESTMENTS

This Article contains the procedures for valuing Participant Accounts and allocating net income and loss to such Accounts. Part 12 of the Agreement permits the Employer to document its administrative procedures with respect to the valuation of Participant Accounts. Alternatively, the Plan Administrator may adopt separate investment procedures regarding the valuation and investment of Participant Accounts.


13.1	Participant Accounts. The Plan Administrator will establish and maintain a separate Account for each Participant to reflect the Participant’s entire interest under the Plan. To the extent applicable, the Plan Administrator may establish and maintain for a Participant any (or all) of the following separate sub-Accounts: Employer Contribution Account, Section 401(k) Deferral Account, Employer Matching Contribution Account, QMAC Account, QNEC Account, Employee After-Tax Contribution Account, Safe Harbor Matching Contribution Account, Safe Harbor Nonelective Contribution Account, Rollover Contribution Account, and Transfer Account. The Plan Administrator also may establish and maintain other sub-Accounts as it deems appropriate.

13.2	Value of Participant Accounts. The value of a Participant’s Account consists of the fair market value of the Participant’s share of the Trust assets. A Participant’s share of the Trust assets is determined as of each Valuation Date under the Plan.

	(a)	Periodic valuation. The Trustee must value Plan assets at least annually. The Employer may elect under Part 12, #45.b.(2) of the Agreement [Part 12, #63.b.(2) of the 401(k) Agreement] or may elect operationally to value assets more frequently than annually. The Plan Administrator may request the Trustee to perform interim valuations, provided such valuations do not result in discrimination in favor of Highly Compensated Employees.

	(b)	Daily valuation. If the Employer elects daily valuation under Part 12, #44 of the Agreement [Part 12, #62 of the 401(k) Agreement] or, if in operation, the Employer elects to have the Plan daily valued, the Plan Administrator may adopt reasonable procedures for performing such valuations. Unless otherwise set forth in the written procedures, a daily valued Plan will have its assets valued at the end of each business day during which the New York Stock Exchange is open. The Plan Administrator has authority to interpret the provisions of this Plan in the context of a daily valuation procedure. This includes, but is not limited to, the determination of the value of the Participant’s Account for purposes of Participant loans, distribution and consent rights, and corrective distributions under Article 17.

13.3	Adjustments to Participant Accounts. As of each Valuation Date under the Plan, each Participant’s Account is adjusted in the following manner.

	(a)	Distributions and forfeitures from a Participant’s Account. A Participant’s Account will be reduced by any distributions and forfeitures from the Account since the previous Valuation Date.

	(b)	Life insurance premiums and dividends. A Participant’s Account will be reduced by the amount of any life insurance premium payments made for the benefit of the Participant since the previous Valuation Date. The Account will be credited with any dividends or credits paid on any life insurance policy held by the Trust for the benefit of the Participant.

	(c)	Contributions and forfeitures allocated to a Participant’s Account. A Participant’s Account will be credited with any contribution or forfeiture allocated to the Participant since the previous Valuation Date.

	(d)	Net income or loss. A Participant’s Account will be adjusted for any net income or loss in accordance with the provisions under Section 13.4.

13.4	Procedures fo r Determining Net Income or Loss. The Plan Administrator may establish any reasonable procedures for determining net income or loss under Section 13.3(d). Such procedures may be reflected in a funding agreement governing the applicable investments under the Plan.

	(a)	Net income or loss attributable to General Trust Account. To the extent a Participant’s Account is invested as part of a General Trust Account, such Account is adjusted for its allocable share of net income or loss experienced by the General Trust Account using the Balance Forward Method. Under the Balance Forward Method, the net income or loss of the General Trust Account is allocated to the Participant Accounts that are invested in the General Trust Account, in the ratio that each Participant’s Account bears to all Accounts, based on the value of each Participant’s Account as of the prior Valuation Date, reduced for the adjustments described in Section 13.3(a) and 13.3(b) above.



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(1)	Inclusion of certain contributions. In applying the Balance Forward Method for allocating net income or loss, the Employer may elect under Part 12, #45.b.(3) of the Agreement [Part 12, #63.b.(3) of the 401(k) Agreement] or under separate administrative procedures to adjust each Participant’s Account Balance (as of the prior Valuation Date) for the following contributions made since the prior Valuation Date (the “valuation period”) which were not reflected in the Participant’s Account on such prior Valuation Date: (1) Section 401(k) Deferrals and Employee After-Tax Contributions that are contributed during the valuation period pursuant to the Participant’s contribution election, (2) Employer Contributions (including Employer Matching Contributions) that are contributed during the valuation period and allocated to a Participant’s Account during the valuation period, and (3) Rollover Contributions.

(2)	Methods of valuing contributions made during valuation period. In determining Participants’ Account Balances as of the prior Valuation Date, the Employer may elect to apply a weighted average method that credits each Participant’s Account with a portion of the contributions based on the portion of the valuation period for which such contributions were invested, or an adjusted percentage method, that increases each Participant’s Account by a specified percentage of such contributions. The Employer may designate under Part 12, #45.b.(3)(c) of the Agreement [Part 12, #63.b.(3)(c) of the 401(k) Agreement] to apply the special allocation rules to only particular types of contributions or may designate any other reasonable method for allocating net income and loss under the Plan.

	(i)	Weighted average method. The Employer may elect under Part 12, #45.b.(3)(a) of the Agreement [Part 12, #63.b.(3)(a) of the 401(k) Agreement] or under separate administrative procedures to apply a weighted average method in determining net income or loss. Under the weighted average method, a Participant’s Account Balance as of the prior Valuation Date is adjusted to take into account a portion of the contributions made during the valuation period so that the Participant may receive an allocation of net income or loss for the portion of the valuation period during which such contributions were invested under the Plan. The amount of the adjustment to a Participant’s Account Balance is determined by multiplying the contributions made to the Participant’s Account during the valuation period by a fraction, the numerator of which is the number of months during the valuation period that such contributions were invested under the Plan and the denominator is the total number of months in the valuation period. The Plan’s investment procedures may designate the specific type(s) of contributions eligible for a weighted allocation of net income or loss and may designate alternative methods for determining the weighted allocation, including the use of a uniform weighting period other than months.

	(ii)	Adjusted percentage method. The Employer may elect under Part 12, #45.b.(3)(b) of the Agreement [Part 12, #63.b.(3)(b) of the 401(k) Agreement] or under separate investment procedures to apply an adjusted percentage method of allocating net income or loss. Under the adjusted percentage method, a Participant’s Account Balance as of the prior Valuation Date is increased by a percentage of the contributions made to the Participant’s Account during the valuation period. The Plan’s investment procedures may designate the specific type(s) of contributions eligible for an adjusted percentage allocation and may designate alternative procedures for determining the amount of the adjusted percentage allocation.


(b)	Net income or loss attributable to a Directed Acco unt. If the Participant (or Beneficiary) is entitled to direct the investment of all or part of his/her Account (see Section 13.5(c)), the Account (or the portion of the Account which is subject to such direction) will be maintained as a Directed Account, which reflects the value of the directed investments as of any Valuation Date. The assets held in a Directed Account may be (but are not required to be) segregated from the other investments held in the Trust. Net income or loss attributable to the investments made by a Directed Account is allocated to such Account in a manner that reasonably reflects the investment experience of such Directed Account. Where a Directed Account reflects segregated investments, the manner of allocating net income or loss shall not result in a Participant (or Beneficiary) being entitled to distribution from the Directed Account that exceeds the value of such Account as of the date of distribution.

(c)	Share or unit accounting. The Plan’s investment procedures may provide for share or unit accounting to reflect the value of Accounts, if such method is appropriate for the investments allocable to such Accounts.

(d)	Suspense accounts. The Plan’s investment procedures also may provide for special valuation procedures for suspense accounts that are properly established under the Plan.



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13.5	Investments under the Plan.

	(a)	Investment options. The Trustee or other person(s) responsible for the investment of Plan assets is authorized to invest Plan assets in any prudent investment consistent with the funding policy of the Plan and the requirements of ERISA. Investment options include, but are not limited to, the following: common and preferred stock or other equity securities (including stock bought and sold on margin); Qualifying Employer Securities and Qualifying Employer Real Property (to the extent permitted under subsection (b) below), corporate bonds; open-end or closed-end mutual funds (including funds for which the Prototype Sponsor, Trustee, or their affiliates serve as investment advisor or in any other capacity); money market accounts; certificates of deposit; debentures; commercial paper; put and call options; limited partnerships; mortgages; U.S. Government obligations, including U.S. Treasury notes and bonds; real and personal property having a ready market; life insurance or annuity policies; commodities; savings accounts; notes; and securities issued by the Trustee and/or its affiliates, as permitted by law. Plan assets may also be invested in a common/collective trust fund, or in a group trust fund that satisfies the requirements of IRS Revenue Ruling 81-100. All of the terms and provisions of any such common/collective trust fund or group trust into which Plan assets are invested are incorporated by reference into the provisions of the Trust for this Plan. No portion of any voluntary, tax deductible Employee contributions being held under the Plan (or any earnings thereon) may be invested in life insurance contracts or, as with any Participant-directed investment, in tangible personal property characterized by the IRS as a collectible.

	(b)	Limitations on the investment in Qualifying Employer Securiti es and Qualifying Employer Real Property. The Trustee may invest in Qualifying Employer Securities and Qualifying Employer Real Property up to certain limits. Any such investment shall only be made upon written direction of the Employer who shall be solely responsible for the propriety of such investment. Additional directives regarding the purchase, sale, retention or valuing of such securities may be addressed in a funding policy, statement of investment policy, or other separate procedures or documents governing the investment of Plan assets. In any conflicts between the Plan document and a separate investment trust agreement, the Plan document shall prevail.

		(1)	Money purchase plan. In the case of a money purchase plan, no more than 10% of the fair market value of Plan assets may be invested in Qualifying Employer Securities and Qualifying Employer Real Property.

		(2)	Profit sharing plan other than a 401(k) plan. In the case of a profit sharing plan other than a 401(k) plan, no limit applies to the percentage of Plan assets invested in Qualifying Employer Securities and Qualifying Employer Real Property, except as provided in a funding policy, statement of investment policy, or other separate procedures or documents governing the investment of Plan assets.

		(3)	401(k) plan. For Plan Years beginning after December 31, 1998, with respect to the portion of the Plan consisting of amounts attributable to Section 401(k) Deferrals, no more than 10% of the fair market value of Plan assets attributable to Section 401(k) Deferrals may be invested in Qualifying Employer Securities and Qualifying Employer Real Property if the Employer, the Trustee, or a person other than the Participant requires any portion of the Section 401(k) Deferrals and attributable earnings to be invested in Qualifying Employer Securities or Qualifying Employer Real Property.

			(i)	Exceptions to Limitation. The limitation in this subsection (3) shall not apply if any one of the conditions in subsections (A), (B) or (C) applies.

				(A)	Investment of Section 401(k) Deferrals in Qualifying Employer Securities or Qualifying Real Property is solely at the discretion of the Participant.

				(B)	As of the last day of the preceding Plan Year, the fair market value of assets of all profit sharing plans and 401(k) plans of the Employer was not more than 10% of the fair market value of all assets under plans maintained by the Employer.

				(C)	The portion of a Participant’s Section 401(k) Deferrals required to be invested in Qualifying Employer Securities and Qualifying Employer Real Property for the Plan Year does not exceed 1% of such Participant’s Included Compensation.

			(ii)	Plan Years Beginning Prior to January 1, 1999. For Plan Years beginning before January 1, 1999, the limitations in this subsection (3) do not apply and a 401(k) plan is treated like any other profit sharing plan.



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		(iii)	No application to other contributions. The limitation in this subsection (3) has no application to Employer Matching Contributions or Employer Nonelective Contributions. Instead, the rules under subsection (2) above apply for such contributions.

(c)	Participant direction of investments. If the Plan (by election in Part 12, #43 of the Agreement [Part 12, #61 of the 401(k) Agreement] or by the Plan Administrator’s administrative election) permits Participant direction of investments, the Plan Administrator must adopt investment procedures for such direction. The investment procedures should set forth the permissible investment options available for Participant direction, the timing and frequency of investment changes, and any other procedures or limitations applicable to Participant direction of investment. In no case may Participants direct that investments be made in collectibles, other than U.S. Government or State issued gold and silver coins. The investment procedures adopted by the Plan Administrator are incorporated by reference into the Plan. If Participant investment direction is limited to specific investment options (such as designated mutual funds or common or collective trust funds), it shall be the sole and exclusive responsibility of the Employer or Plan Administrator to select the investment options, and the Trustee shall not be responsible for selecting or monitoring such investment options, unless the Trustee has otherwise agreed in writing.

	The Employer may elect under Part 12, #43.b.(1) of the Agreement [Part 12, #61.b.(1) of the 401(k) Agreement] or under the separate investment procedures to limit Participant direction of investment to specific types of contributions. The investment procedures adopted by the Plan Administrator may (but need not) allow Beneficiaries under the Plan to direct investments. (See Section 13.4(b) for rules regarding allocation of net income or loss to a Directed Account.)

	If Participant direction of investments is permitted, the Employer will designate how accounts will be invested in the absence of proper affirmative direction from the Participant. Except as otherwise provided in this Plan, neither the Trustee, the Employer, nor any other fiduciary of the Plan will be liable to the Participant or Beneficiary for any loss resulting from action taken at the direction of the Participant.

	(1)	Trustee to follow Participant direction. To the extent the Plan allows Participant direction of investment, the Trustee is authorized to follow the Participant’s written direction (or other form of direction deemed acceptable by the Trustee). A Directed Account will be established for the portion of the Participant’s Account that is subject to Participant direction of investment. The Trustee may decline to follow a Participant’s investment direction to the extent such direction would: (i) result in a prohibited transaction; (ii) cause the assets of the Plan to be maintained outside the jurisdiction of the U.S. courts; (iii) jeopardize the Plan’s tax qualification; (iv) be contrary to the Plan’s governing documents; (v) cause the assets to be invested in collectibles within the meaning of Code §408(m); (vi) generate unrelated business taxable income; or (vii) result (or could result) in a loss exceeding the value of the Participant’s Account. The Trustee will not be responsible for any loss or expense resulting from a failure to follow a Participant’s direction in accordance with the requirements of this paragraph.

		Participant directions will be processed as soon as administratively practicable following receipt of such directions by the Trustee. The Trustee, Plan Administrator, or Employer will not be liable for a delay in the processing of a Participant direction that is caused by a legitimate business reason (including, but not limited to, a failure of computer systems or programs, failure in the means of data transmission, the failure to timely receive values or prices, or other unforeseen problems outside of the control of the Trustee, Plan Administrator, or Employer).

	(2)	ERISA §404(c) protection. If the Plan (by Employer election under Part 12, #43.b.(2) of the Agreement [Part 12, #61.b.(2) of the 401(k) Agreement] or pursuant to the Plan’s investment procedures) is intended to comply with ERISA §404(c), the Participant investment direction program adopted by the Plan Administrator should comply with applicable Department of Labor regulations. Compliance with ERISA §404(c) is not required for plan qualification purposes. The following information is provided solely as guidance to assist the Plan Administrator in meeting the requirements of ERISA §404(c). Failure to meet any of the following safe harbor requirements does not impose any liability on the Plan Administrator (or any other fiduciary under the Plan) for investment decisions made by Participants, nor does it mean that the Plan does not comply with ERISA §404(c). Nothing in this Plan shall impose any greater duties upon the Trustee with respect to the implementation of ERISA §404(c) than those duties expressly provided for in procedures adopted by the Employer and agreed to by the Trustee.

		(i)	Disclosure requirements. The Plan Administrator (or other Plan fiduciary who has agreed to perform this activity) shall provide, or shall cause a person designated to act on his behalf to provide, the following information to Participants:



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	(A)	Mandatory disclosures. To satisfy the requirements of ERISA §404(c), the Participants must receive certain mandatory disclosures, including (I) an explanation that the Plan is intended to be an ERISA §404(c) plan; (II) a description of the investment options under the Plan; (III) the identity of any designated Investment Managers that may be selected by the Participant; (IV) any restrictions on investment selection or transfers among investment vehicles; (V) an explanation of the fees and expenses that may be charged in collection with the investment transactions; (VI) the materials relating to voting rights or other rights incidental to the holding of an investment; (VII) the most recent prospectus for an investment option which is subject to the Securities Act of 1933.

	(B)	Disclosures upon request. In addition, a Participant must be able to receive upon request (I) the current value of the Participant’s interest in an investment option; (II) the value and investment performance of investment alternatives available under the Plan; (III) the annual operating expenses of a designated investment alternative; and (IV) copies of any prospectuses, or other material, relating to available investment options.

(ii)	Diversified investment options. The investment procedure must provide at least three diversified investment options that offer a broad range of investment opportunity. Each of the investment opportunities must have materially different risk and return characteristics. The procedure may allow investment under a segregated brokerage account.

(iii)	Frequency of investment instructions. The investment procedure must provide the Participant with the opportunity to give investment instructions as frequently as is appropriate to the volatility of the investment. For each investment option, the frequency can be no less than quarterly.



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ARTICLE 14
PARTICIPANT LOANS

This Article contains rules for providing loans to Participants under the Plan. This Article applies if: (1) the Employer elects under Part 12 of the Agreement to provide loans to Participants or (2) if Part 12 does not specify whether Participant loans are available, the Plan Administrator decides to implement a Participant loan program. Any Participant loans will be made pursuant to the default loan policy prescribed by this Article 14 unless the Plan Administrator adopts a separate written loan policy or modifies the default loan policy in this Article 14 by adopting modified loan provisions. If the Employer adopts a separate written loan policy or written modifications to the default loan program in this Article, the terms of such loan policy or written modifications will control over the terms of this Plan with respect to the administration of any Participant loans.


14.1	Default Loan Policy. Loans are available under this Article only if such loans:

	(a)	are available to Participants on a reasonably equivalent basis (see Section 14.3);

	(b)	are not available to Highly Compensated Employees in an amount greater than the amount that is available to other Participants;

	(c)	bear a reasonable rate of interest (as determined under Section 14.4) and are adequately secured (as determined under Section 14.5);

	(d)	provide for periodic repayment within a specified period of time (as determined under Section 14.6); and

	(e)	do not exceed, for any Participant, the amount designated under Section 14.7.

	A separate written loan policy may not modify the requirements under subsections (a) through (e) above, except as permitted in the referenced Sections of this Article.

14.2	Administration of Loan Program. A Participant loan is available under this Article only if the Participant makes a request for such a loan in accordance with the provisions of this Article or in accordance with a separate written loan policy. To receive a Participant loan, a Participant must sign a promissory note along with a pledge or assignment of the portion of the Account Balance used for security on the loan. Except as provided in a separate loan policy or in a written modification to the default loan policy in this Article, any reference under this Article 14 to a Participant means a Participant or Beneficiary who is a party in interest (as defined in ERISA §3(14)).

	In the case of a restated Plan, if any provision of this Article 14 is more restrictive than the terms of the Plan (or a separate written loan policy) in effect prior to the adoption of this Prototype Plan, such provision shall apply only to loans finalized after the adoption of this Prototype Plan, even if the restated Effective Date indicated in the Agreement predates the adoption of the Plan.

14.3	Availability of Participant Loan s. Participant loans must be made available to Participants in a reasonably equivalent manner. The Plan Administrator may refuse to make a loan to any Participant who is determined to be not creditworthy. For this purpose, a Participant is not creditworthy if, based on the facts and circumstances, it is reasonable to believe that the Participant will not repay the loan. A Participant who has defaulted on a previous loan from the Plan and has not repaid such loan (with accrued interest) at the time of any subsequent loan will not be treated as creditworthy until such time as the Participant repays the defaulted loan (with accrued interest). A separate written loan policy or written modification to this loan policy may prescribe different rules for determining creditworthiness and to what extent creditworthiness must be determined.

	No Participant loan will be made to any Shareholder-Employee or Owner-Employee unless a prohibited transaction exemption for such loan is obtained from the Department of Labor or the prohibition against loans to such individuals is formally withdrawn by statute or by action of the Treasury or the Department of Labor. The prohibition against loans to Shareholder-Employees and Owner-Employees outlined in this paragraph may not be modified by a separate written loan policy.

14.4	Reasonable Interest Rate. A Participant must be charged a reasonable rate of interest for any loan he/she receives. For this purpose, the interest rate charged on a Participant loan must be commensurate with the interest rates charged by persons in the business of lending money for loans under similar circumstances. The Plan Administrator will determine a reasonable rate of interest by reviewing the interest rates charged by a sample of third party lenders in the same geographical region as the Employer. The Plan Administrator must periodically review its interest rate assumptions to ensure the interest rate charged on Participant loans is reasonable. A separate written loan policy or written modifications to this loan policy may prescribe an alternative means of establishing a reasonable interest rate.

14.5	Adequate Security. All Participant loans must be adequately secured. The Participant’s vested Account Balance shall be used as security for a Participant loan provided the outstanding balance of all Participant loans made to such



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	Participant does not exceed 50% of the Participant’s vested Account Balance, determined immediately after the origination of each loan, and if applicable, the spousal consent requirements described in Section 14.9 have been satisfied. The Plan Administrator (with the consent of the Trustee) may require a Participant to provide additional collateral to receive a Participant loan if the Plan Administrator determines such additional collateral is required to protect the interests of Plan Participants. A separate loan policy or written modifications to this loan policy may prescribe alternative rules for obtaining adequate security. However, the 50% rule in this paragraph may not be replaced with a greater percentage.

14.6	Periodic Repayment. A Participant loan must provide for level amortization with payments to be made not less frequently than quarterly. A Participant loan must be payable within a period not exceeding five (5) years from the date the Participant receives the loan from the Plan, unless the loan is for the purchase of the Participant’s principal residence, in which case the loan must be payable within a reasonable time commensurate with the repayment period permitted by commercial lenders for similar loans. Loan repayments must be made through payroll withholding, except to the extent the Plan Administrator determines payroll withholding is not practical given the level of a Participant’s wages, the frequency with which the Participant is paid, or other circumstances.

	(a)	Unpaid leave of absence. A Participant with an outstanding Participant loan may suspend loan payments to the Plan for up to 12 months for any period during which the Participant is on an unpaid leave of absence. Upon the Participant’s return to employment (or after the end of the 12-month period, if earlier), the Participant’s outstanding loan will be reamortized over the remaining period of such loan to make up for the missed payments. The reamortized loan may extend beyond the original loan term so long as the loan is paid in full by whichever of the following dates comes first: (1) the date which is five (5) years from the original date of the loan (or the end of the suspension, if sooner), or (2) the original loan repayment deadline (or the end of the suspension period, if later) plus the length of the suspension period.

	(b)	Milita ry leave. A Participant with an outstanding Participant loan also may suspend loan payments for any period such Participant is on military leave, in accordance with Code §414(u)(4). Upon the Participant’s return from military leave (or the expiration of five years from the date the Participant began his/her military leave, if earlier), loan payments will recommence under the amortization schedule in effect prior to the Participant’s military leave, without regard to the five-year maximum loan repayment period. Alternatively, the loan may be reamortized to require a different level of loan payment, as long as the amount and frequency of such payments are not less than the amount and frequency under the amortization schedule in effect prior to the Participant’s military leave.

	A separate loan policy or written modification to this loan policy may (1) modify the time period for repaying Participant loans, provided Participant loans are required to be repaid over a period that is not longer than the periods described in this Section; (2) specify the frequency of Participant loan repayments, provided the payments are required at least quarterly; (3) modify the requirement that loans be repaid through payroll withholding; or (4) modify or eliminate the leave of absence and/or military leave rules under this Section.

14.7	Loan Limitations. A Participant loan may not be made to the extent such loan (when added to the outstanding balance of all other loans made to the Participant) exceeds the lesser of:

	(a)	$50,000 (reduced by the excess, if any, of the Participant’s highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which such loan is made, over the Participant’s outstanding balance of loans from the Plan as of the date such loan is made) or

	(b)	one-half (½) of the Participant’s vested Account Balance, determined as of the Valuation Date coinciding with or immediately preceding such loan, adjusted for any contributions or distributions made since such Valuation Date.

	A Participant may not receive a Participant loan of less than $1,000 nor may a Participant have more than one Participant loan outstanding at any time. A Participant may renegotiate a loan without violating the one outstanding loan requirement to the extent such renegotiated loan is a new loan (i.e., the renegotiated loan separately satisfies the reasonable interest rate requirement under Section 14.4, the adequate security requirement under Section 14.5, and the periodic repayment requirement under Section 14.6). and the renegotiated loan does not exceed the limitations under (a) or (b) above, treating both the replaced loan and the renegotiated loan as outstanding at the same time. However, if the term of the renegotiated loan does not end later than the original term of the replaced loan, the replaced loan may be ignored in applying the limitations under (a) and (b) above.

	In applying the limitations under this Section, all plans maintained by the Employer are aggregated and treated as a single plan. In addition, any assignment or pledge of any portion of the Participant’s interest in the Plan and any loan, pledge, or assignment with respect to any insurance contract purchased under the Plan will be treated as loan under this Section.



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	A separate written loan policy or written modifications to this loan policy may (1) modify the limitations on the amount of a Participant loan; (2) modify or eliminate the minimum loan amount requirement; (3) permit a Participant to have more than one loan outstanding at a time; (4) prescribe limitations on the purposes for which loans may be required; or (5) prescribe rules for reamortization, consolidation, renegotiation, or refinancing of loans.

14.8	Segregated Investment. A Participant loan is treated as a segregated investment on behalf of the individual Participant for whom the loan is made. The Plan Administrator may adopt separate administrative procedures for determining which type or types of contributions (and the amount of each type of contribution) may be used to provide the Participant loan. If the Plan Administrator does not adopt procedures designating the type of contributions from which the Participant loan will be made, such loan is deemed to be made on a proportionate basis from each type of contribution.

	Unless requested otherwise on the Participant’s loan application, a Participant loan will be made equally from all investment funds in which the applicable contributions are held. A Participant or Beneficiary may direct the Trustee, on his/her loan application, to withdraw the Participant loan amounts from a specific investment fund or funds. A Participant loan will not violate the requirements of this default loan policy merely because the Plan Administrator does not permit the Participant to designate the contributions or funds from which the Participant loan will be made. Each payment of principal and interest paid by a Participant on his/her Participant loan shall be credited proportionately to such Participant’s Account(s) and to the investment funds within such Account(s).

	A separate loan policy or written modifications to this loan policy may modify the rules of this Section without limitation, including prescribing different rules for determining the source of a loan with respect to contribution types and investment funds.

14.9	Spousal Consent. If this Plan is subject to the Joint and Survivor Annuity requirements under Article 9, a Participant may not use his/her Account Balance as security for a Participant loan unless the Participant’s spouse, if any, consents to the use of such Account Balance as security for the loan. The spousal consent must be made within the 90-day period ending on the date the Participant’s Account Balance is to be used as security for the loan. Spousal consent is not required, however, if the value of the Participant’s total vested Account Balance (as determined under Section 8.3(e)) does not exceed $5,000 ($3,500 for loans made before the time the $5,000 rules becomes effective under Section 8.3). If the Plan is not subject to the Joint and Survivor Annuity requirements under Article 9, a spouse’s consent is not required to use a Participant’s Account Balance as security for a Participant loan, regardless of the value of the Participant’s Account Balance.

	Any spousal consent required under this Section must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Any such consent to use the Participant’s Account Balance as security for a Participant loan is binding with respect to the consenting spouse and with respect to any subsequent spouse as it applies to such loan. A new spousal consent will be required if the Account Balance is subsequently used as security for a renegotiation, extension, renewal, or other revision of the loan. A new spousal consent also will be required only if any portion of the Participant’s Account Balance will be used as security for a subsequent Participant loan.

	A separate loan policy or written modifications to this loan policy may not eliminate the spousal consent requirement where it would be required under this Section, but may impose spousal consent requirements that are not prescribed by this Section.

14.10	Procedures for Loan Default. A Participant will be considered to be in default with respect to a loan if any scheduled repayment with respect to such loan is not made by the end of the calendar quarter following the calendar quarter in which the missed payment was due.

	If a Participant defaults on a Participant loan, the Plan may not offset the Participant’s Account Balance until the Participant is otherwise entitled to an immediate distribution of the portion of the Account Balance which will be offset and such amount being offset is available as security on the loan, pursuant to Section 14.5. For this purpose, a loan default is treated as an immediate distribution event to the extent the law does not prohibit an actual distribution of the type of contributions which would be offset as a result of the loan default (determined without regard to the consent requirements under Articles 8 and 9, so long as spousal consent was properly obtained at the time of the loan, if required under Section 14.9). The Participant may repay the outstanding balance of a defaulted loan (including accrued interest through the date of repayment) at any time.

	Pending the offset of a Participant’s Account Balance following a defaulted loan, the following rules apply to the amount in default.

	(a)	Interest continues to accrue on the amount in default until the time of the loan offset or, if earlier, the date the loan repayments are made current or the amount is satisfied with other collateral.



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	(b)	A subsequent offset of the amount in default is not reported as a taxable distribution, except to the extent the taxable portion of the default amount was not previously reported by the Plan as a taxable distribution.

	(c)	The post-default accrued interest included in the loan offset is not reported as a taxable distribution at the time of the offset.

	A separate loan policy or written modifications to this loan policy may modify the procedures for determining a loan default.

14.11	Termination of Employment.

	(a)	Offset of outstanding loan. A Participant loan becomes due and payable in full immediately upon the Participant’s termination of employment. Upon a Participant’s termination, the Participant may repay the entire outstanding balance of the loan (including any accrued interest) within a reasonable period following termination of employment. If the Participant does not repay the entire outstanding loan balance, the Participant’s vested Account Balance will be reduced by the remaining outstanding balance of the loan (without regard to the consent requirements under Articles 8 and 9, so long as spousal consent was properly obtained at the time of the loan, if required under Section 14.9), to the extent such Account Balance is available as security on the loan, pursuant to Section 14.5, and the remaining vested Account Balance will be distributed in accordance with the distribution provisions under Article 8. If the outstanding loan balance of a deceased Participant is not repaid, the outstanding loan balance shall be treated as a distribution to the Participant and shall reduce the death benefit amount payable to the Beneficiary under Section 8.4.

	(b)	Direct Rollover. Upon termination of employment, a Participant may request a Direct Rollover of the loan note (provided the distribution is an Eligible Rollover Distribution as defined in Section 8.8(a)) to another qualified plan which agrees to accept a Direct Rollover of the loan note. A Participant may not engage in a Direct Rollover of a loan to the extent the Participant has already received a deemed distribution with respect to such loan. (See the rules regarding deemed distributions upon a loan default under Section 14.10.)

	(c)	Modified loan policy. A separate loan policy or written modifications to this loan policy may modify this Section 14.11, including, but not limited to: (1) a provision to permit loan repayments to continue beyond termination of employment; (2) to prohibit the Direct Rollover of a loan note; and (3) to provide for other events that may accelerate the Participant’s repayment obligation under the loan.



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A RTICLE 15
INVESTMENT IN LIFE INSURANCE

This Article provides special rules for Plans that permit investment in life insurance on the life of the Participant, the Participant’s spouse, or other family members. The Employer may elect in Part 12 of the Agreement to permit life insurance investments in the Plan, or life insurance investments may be permitted, prohibited, or restricted under the Plan through separate investment procedures or a separate funding policy. If the Plan prohibits investments in life insurance, this Article does not apply.


15.1	I nvestment in Life Insurance. A group or individual life insurance policy purchased by the Plan may be issued on the life of a Participant, a Participant’s spouse, a Participant’s child or children, a family member of the Participant, or any other individual with an insurable interest. If this Plan is a money purchase plan, a life insurance policy may only be issued on the life of the Participant. A life insurance policy includes any type of policy, including a second-to-die policy, provided that the holding of a particular type of policy is not prohibited under rules applicable to qualified plans.

	Any premiums on life insurance held for the benefit of a Participant will be charged against such Participant’s vested Account Balance. Unless directed otherwise, the Plan Administrator will reduce each of the Participant’s Accounts under the Plan equally to pay premiums on life insurance held for such Participant’s benefit. Any premiums paid for life insurance policies must satisfy the incidental life insurance rules under Section 15.2.

15.2	I ncidental Life Insurance Rules. Any life insurance purchased under the Plan must meet the following requirements:

	(a)	O rdinary life insurance policies. The aggregate premiums paid for ordinary life insurance policies (i.e., policies with both nondecreasing death benefits and nonincreasing premiums) for the benefit of a Participant shall not at any time exceed 49% of the aggregate amount of Employer Contributions (including Section 401 (k) Deferrals) and forfeitures that have been allocated to the Account of such Participant.

	(b)	L ife insurance policies other than ordinary life. The aggregate premiums paid for term, universal or other life insurance policies (other than ordinary life insurance policies) for the benefit of a Participant shall not at any time exceed 25% of the aggregate amount of Employer Contributions (including Section 401(k) Deferrals) and forfeitures that have been allocated to the Account of such Participant.

	(c)	C ombination of ordinary and other life insurance policies. The Sum of one-half (1/2) of the aggregate premiums paid for ordinary life insurance policies plus all the aggregate premiums paid for any other life insurance policies for the benefit of a Participant shall not at any time exceed 25% of the aggregate amount of Employer Contributions (including Section 401(k) Deferrals) and forfeitures which have been allocated to the Account of such Participant.

	(d)	E xception for certain profit sharing and 401(k) plans. If the Plan is a profit sharing plan or a 401(k) plan, the limitations in this Section do not apply to the extent life insurance premiums are paid only with Employer Contributions and forfeitures that have been accumulated in the Participant’s Account for at least two years or are paid with respect to a Participant who has been an Eligible Participant for at least five years. For purposes of applying this special limitation, Employer Contributions do not include any Section 401(k) Deferrals, QMACs, QNECs or Safe- Harbor Contributions under a 401(k) plan.

	(e)	E xception for Employee After-Tax Contributions and Rollover Contributions. The Plan Administrator also may invest, with the Participant’s consent, any portion of the Participant’s Employee After-Tax Contribution Account or Rollover Contribution Account in a group or individual life insurance policy for the benefit of such Participant, without regard to the incidental life insurance rules under this Section.

15.3	O wnership of Life Insurance Policies. The Trustee is the owner of any life insurance policies purchased under the Plan in accordance with the provisions of this Article 15. Any life insurance policy purchased under the Plan must designate the Trustee as owner and beneficiary under the policy. The Trustee will pay all proceeds of any life insurance policies to the Beneficiary of the Participant for whom such policy is held in accordance with the distribution provisions under Article 8 and the Joint and Survivor Annuity requirements under Article 9. In no event shall the Trustee retain any part of the proceeds from any life insurance policies for the benefit of the Plan.

15.4	E vidence of Insurability. Prior to purchasing a life insurance policy, the Plan Administrator may require the individual whose life is being insured to provide evidence of insurability, such as a physical examination, as may be required by the Insurer.

15.5	D istribution of Insurance Policies. Life insurance policies under the Plan, which are held on behalf of a Participant, must be distributed to the Participant or converted to cash upon the later of the Participant’s Distribution Commencement Date (as defined in Section 22.56) or termination of employment. Any life insurance policies that are held on behalf of a terminated Participant must continue to satisfy the incidental life insurance rules under Section 15.2.



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	If a life insurance policy is purchased on behalf of an individual other than the Participant, and such individual dies, the Participant may withdraw any or all life insurance proceeds from the Plan, to the extent such proceeds exceed the cash value of the life insurance policy determined immediately before the death of the insured individual.

15.6	D iscontinuance of Insurance Policies. Investments in life insurance may be discontinued at any time, either at the direction of the Trustee or other fiduciary responsible for making investment decisions. If the Plan provides for Participant direction of investments, life insurance as an investment option may be eliminated at any time by the Plan Administrator. Where life insurance investment options are being discontinued, the Plan Administrator, in its sole discretion, may offer the sale of the insurance policies to the Participant, or to another person, provided that the prohibited transaction exemption requirements prescribed by the Department of Labor are satisfied.

15.7	P rotection of Insurer. An Insurer that issues a life insurance policy under the terms of this Article, shall not be responsible for the validity of this Plan and shall be protected and held harmless for any actions taken or not taken by the Trustee or any actions taken in accordance with written directions from the Trustee or the Employer (or any duly authorized representatives of the Trustee or Employer). An Insurer shall have no obligation to determine the propriety of any premium payments or to guarantee the proper application of any payments made by the insurance company to the Trustee.

	The Insurer is not and shall not be considered a party to this Agreement and is not a fiduciary with respect to the Plan solely as a result of the issuance of life insurance policies under this Article 15.

15.8	N o Responsibility for Act of Insurer. Neither the Employer, the Plan Administrator nor the Trustee shall be responsible for the validity of the provisions under a life insurance policy issued under this Article 15 or for the failure or refusal by the Insurer to provide benefits under such policy. The Employer, the Plan Administrator and the Trustee are also not responsible for any action or failure to act by the Insurer or any other person which results in the delay of a payment under the life insurance policy or which renders the policy invalid or unenforceable in whole or in part.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 16
TOP-HEAVY PLAN REQUlREMENTS


This Article contains the rules for determining whether the Plan is a Top-Heavy Plan and the consequences of having a Top-Heavy Plan. Part 6 of the Agreement provides for elections relating to the vesting schedule for a Top-Heavy Plan. Part 13 of the Agreement allows the Employer to elect to satisfy the Top-Heavy Plan allocation requirements under another plan.

16.1	In General. If the Plan is or becomes a Top-Heavy Plan in any Plan Year, the provisions of this Article 16 will supersede any conflicting provisions in the Plan or Agreement. However, this Article 16 will no longer apply if Code §416 is repealed.

16.2	T op-Heavy Plan Consequences.

	(a)	Minimum allocation for Non-Key Employees. If the Plan is a Top-Heavy Plan for any Plan Year, except as otherwise provided in subsections (4) and (5) below, the Employer Contributions and forfeitures allocated for the Plan Year on behalf of any Eligible Participant who is a Non-Key Employee must not be less than a minimum percentage of the Participant’s Total Compensation (as defined in Section 16.3(i)). If any Non-Key Employee who is entitled to receive a top-heavy minimum contribution pursuant to this Section 16.2(a) fails to receive an appropriate allocation, the Employer will make an additional contribution on behalf of such Non-Key Employee to satisfy the requirements of this Section. The Employer may elect under Part 4 of the Agreement [Part 4C of the 401(k) Agreement] to make the top-heavy contribution to all Eligible Participants. If the Employer elects under the Agreement to provide the top-heavy minimum contribution to all Eligible Participants, the Employer also will make an additional contribution on behalf of any Key Employee who is an Eligible Participant and who did not receive an allocation equal to the top-heavy minimum contribution.

		(1)	Determining the minimum percentage. The minimum percentage that must be allocated under subsection (a) above is the lesser of: (i) three (3) percent of Total Compensation for the Plan Year or (ii) the highest contribution rate for any Key Employee for the Plan Year. The highest contribution rate for a Key Employee is determined by taking into account the total Employer Contributions and forfeitures allocated to each Key Employee for the Plan Year, as a percentage of the Key Employee’s Total Compensation. A Key Employee’s contribution rate includes Section 401(k) Deferrals made by the Key Employee for the Plan Year (except as provided by regulation or statute). If this Plan is aggregated with a Defined Benefit Plan to satisfy the requirements of Code §401(a)(4) or Code §410(b), the minimum percentage is three (3) percent, without regard to the highest Key Employee contribution rate. See subsection (5) below if the Employer maintains more than one plan.

		(2)	Determining whether the Non-Key Employee’s allocation satisfies the minimum percentage. To determine if a Non-Key Employee’s allocation of Employer Contributions and forfeitures is at least equal to the minimum percentage, the Employee’s Section 401(k) Deferrals for the Plan Year are disregarded. In addition, Matching Contributions allocated to the Employee’s Account for the Plan Year are disregarded, unless: (i) the Plan Administrator elects to take all or a portion of the Matching Contributions into account, or (ii) Matching Contributions are taken into account by statute or regulation. The rule in (i) does not apply unless the Matching Contributions so taken into account could satisfy the nondiscrimination testing requirements under Code §401(a)(4) if tested separately. Any Employer Matching Contributions used to satisfy the Top-Heavy Plan minimum allocation may not be used in the ACP Test (as defined in Section 17.3), except to the extent permitted under statute, regulation or other guidance of general applicability.

		(3)	Certain allocation conditions inapplicable. The Top-Heavy Plan minimum allocation shall be made even though, under other Plan provisions, the Non-Key Employee would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Plan Year because of:

			(i)	the Participant’s failure to complete 1,000 Hours of Service (or any equivalent provided in the Plan),

			(ii)	the Participant’s failure to make Employee After-Tax Contributions to the Plan, or

			(iii)	Total Compensation is less than a stated amount.

			The minimum allocation also is determined without regard to any Social Security contribution or whether an Eligible Participant fails to make Section 401(k) Deferrals for a Plan Year in which the Plan includes a 401(k) feature.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


(4)	Participants not employed on the last day of the Plan Year. The minimum allocation requirement described in this subsection (a) does not apply to an Eligible Participant who was not employed by the Employer on the last day of the applicable Plan Year.

(5)	Participation in more than one Top-heavy Plan. The minimum allocation requirement described in this subsection (a) does not apply to an Eligible Participant who is covered under another plan maintained by the Employer if, pursuant to Part 13, #54 of the Agreement [Part 13, #72 of the 401(k) Agreement], the other Plan will satisfy the minimum allocation requirement.

	(i)	More than one Defined Contribution Plans. If the Employer maintains more than one top-heavy Defined Contribution Plan (including Paired Plans), the Employer may designate in Part 13, #54.a. of the Agreement [Part 13, #72.a. of the 401(k) Agreement] which plan will provide the top-heavy minimum contribution to Non-Key Employees. Alternatively, under Part 13, #54.a.(3) of the Agreement [Part 13, #72.a.(3) of the 401(k) Agreement], the Employer may designate another means of complying with the top-heavy requirements. If Part 13, #54 of the Agreement [Part 13, #72 of the 401(k) Agreement] is not completed and the Employer maintains more than one Defined Contribution Plan, the Employer will be deemed to have selected this Plan under Part 13, #54.a. of the Agreement [Part 13, #72.a. of the 401(k) Agreement] as the Plan under which the top-heavy minimum contribution will be provided.

		If an Employee is entitled to a top-heavy minimum contribution but has not satisfied the minimum age and/or service requirements under the Plan designated to provide the top-heavy minimum contribution, the Employee may receive a top-heavy minimum contribution under the designated Plan. Thus, for example, if the Employer maintains both a 401(k) plan and a non-401(k) plan, a Non-Key Employee who has not satisfied the minimum age and service conditions under Part 1, #5 of the non-401(k) plan Agreement is eligible for a top-heavy minimum allocation under the non-401(k) plan (if so provided under Part 13, #54.a. of the Agreement [Part 13, #72.a. of the 401(k) Agreement]) if such Employee has satisfied the eligibility conditions for making Section 401(k) Deferrals under the 401(k) plan. The provision of a top-heavy minimum contribution under this paragraph will not cause the Plan to fail the minimum coverage or nondiscrimination rules. The Employer may designate an alternative method of providing the top-heavy minimum contribution to such Employees under Part 13, #54.a.(3) of the Agreement [Part 13, #72.a.(3) of the 401(k) Agreement].

	(ii)	Defined Contribution Plan and a Defined Benefit Plan. If the Employer maintains both a top-heavy Defined Contribution Plan (under this BPD) and a top-heavy Defined Benefit Plan, the Employer must designate the manner in which the plans will comply with the Top-Heavy Plan requirements. Under Part 13, #54.b. of the Agreement [Part 13, #72.b. of the 401(k) Agreement], the Employer may elect to provide the top-heavy minimum benefit to Non-Key Employees who participate in both Plans (A) in the Defined Benefit Plan; (B) in the Defined Contribution Plan (but increasing the minimum allocation from 3% to 5%); or (C) under any other acceptable method of compliance. If a Non-Key Employee participates only under the Defined Benefit Plan, the top-heavy minimum benefit will be provided under the Defined Benefit Plan. If a Non-Key Employee participates only under the Defined Contribution Plan, the top-heavy minimum benefit will be provided under the Defined Contribution Plan (without regard to this subsection (ii)). If Part 13, #54.b. of the Agreement [Part 13, #72.b. of the 401(k) Agreement] is not completed and the Employer maintains a Defined Benefit Plan, the Employer will be deemed to have selected this Plan under Part 13, #54.b.(1) of the Agreement [Part 13, #72.b.(1) of the 401(k) Agreement] as the plan under which the top-heavy minimum contribution will be provided.

		If the Employer maintains more than one Defined Contribution Plan in addition to a Defined Benefit Plan, the Employer may use Part 13, #54.b.(3) of the Agreement [Part 13, #72.b.(3) of the 401(k) Agreement] to designate which Defined Contribution Plan will provide the top-heavy minimum contribution.

		If the Employer is using the Four-Step Permitted Disparity Method (as described in Section 2.2(b)(ii)) and elects under Part 13, #54.b.(1) of the Agreement [Part 13, #72.b.(1) of the 401(k) Agreement] to provide a 5% top-heavy minimum contribution, the 3% minimum allocation under Step One is increased to 5%. The 3% allocation under Step Two will also be increased to the lesser of (A) 5% or (B) the amount determined under Step Three (increased by 3 percentage points). If an additional allocation is to be



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


				made under Step Three, the Applicable Percentage under Section 2.2(b)(ii)(C) must be reduced by 2 percentage points (but not below zero).

		(6)	No forfeiture for certain events. The minimum top-heavy allocation (to the extent required to be nonforfeitable under Code §416(b)) may not be forfeited under the suspension of benefit rules of Code §411 (a)(3)(B) or the withdrawal of mandatory contribution rules of Code §411 (a)(3)(D).

	(b)	S pecial Top-Heavy Vesting Rules.

		(1)	Minimum vesting schedules. For any Plan Year in which this Plan is a Top-Heavy Plan, the Top- Heavy Plan vesting schedule elected in Part 6, #19 of the Agreement [Part 6, #37 of the 401(k) Agreement] will automatically apply to the Plan. The Top-Heavy Plan vesting schedule will apply to all benefits within the meaning of Code §411(a)(7) except those attributable to Employee After-Tax Contributions, including benefits accrued before the effective date of Code §416 and benefits accrued before the Plan became a Top-Heavy Plan. No decrease in a Participant’s nonforfeitable percentage may occur in the event the Plan’s status as a Top-Heavy Plan changes for any Plan Year. However, this subsection does not apply to the Account Balance of any Employee who does not have an Hour of Service after a Top-Heavy Plan vesting schedule becomes effective.

		(2)	Shifting Top-Heavy Plan status. If the vesting schedule under the Plan shifts in or out of the Top-Heavy Plan vesting schedule for any Plan Year because of a change in Top-Heavy Plan status, such shift is an amendment to the vesting schedule and the election in Section 4.7 of the Plan applies.

16.3	T op-Heavy Definitions.

	(a)	D etermination Date: For any Plan Year subsequent to the first Plan Year, the Determination Date is the last day of the preceding Plan Year. For the first Plan Year of the Plan, the Determination Date is the last day of that first Plan Year.

	(b)	D etermination Period: The Plan Year containing the Determination Date and the four (4) preceding Plan Years.

	(c)	K ey Employee: Any Employee or former Employee (and the Beneficiaries of such Employee) is a Key Employee for a Plan Year if, at any time during the Determination Period, the individual was:

		(1)	an officer of the Employer with annual Total Compensation in excess of 50 percent of the dollar limitation under Code §415(b)(1)(A),

		(2)	an owner (or considered an owner under Code §318) of one of the ten largest interests in the Employer with annual Total Compensation in excess of 100 percent of the dollar limitation under Code §415(c)(1)(A);

		(3)	a Five-Percent Owner (as defined in Section 22.88),

		(4)	a more than 1-percent owner of the Employer with an annual Total Compensation of more than $150,000.

		The Key Employee determination will be made in accordance with Code §416(i)(1) and the regulations thereunder.

	(d)	P ermissive Aggregation Group: The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code §§401(a)(4) and 410.

	(e)	P resent Value: The present value based on the interest and mortality rates specified in the relevant Defined Benefit Plan. In the event that more than one Defined Benefit Plan is included in a Required Aggregation Group or Permissive Aggregation Group, a uniform set of actuarial assumptions must be applied to determine present value. The Employer may specify in Part 13, #54.b.(3) of the Agreement [Part 13, #72.b.(3) of the 401(k) Agreement] the actuarial assumptions that will apply if the Defined Benefit Plans do not specify a uniform set of actuarial assumptions to be used to determine if the plans are Top-Heavy.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


(f)	R equired Aggregation Group:

	(1)	Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the Determination Period (regardless of whether the plan has terminated), and

	(2)	any other qualified plan of the Employer that enables a plan described in (1) to meet the coverage or nondiscrimination requirements of Code §§410(b) or 401(a)( 4).

(g)	T op-Heavy Plan: For any Plan Year, this Plan is a Top-Heavy Plan if any of the following conditions exist:

	(1)	The Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans, and the Top-Heavy Ratio for the Plan exceeds 60 percent.

	(2)	The Plan is part of a Required Aggregation Group of plans, but not part of a Permissive Aggregation Group, and the Top-Heavy Ratio for the Required Aggregation Group of plans exceeds 60 percent.

	(3)	The Plan is part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans, and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60 percent.

(h)	T op-Heavy Ratio:

	(1)	Defined Contribution Plans only. This paragraph applies if the Employer maintains one or more Defined Contribution Plans (including any SEP described under Code §408(k)) and the Employer has not maintained any Defined Benefit Plan that during the Determination Period has or has had Accrued Benefits. The Top-Heavy Ratio for this Plan alone, or for the Required Aggregation Group or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the Account Balances of all Key Employees as of the Determination Date(s) and the denominator of which is the sum of all Account Balances, both computed in accordance with Code §416 and the regulations thereunder.

	(2)	Defined Contribution Plan and Defined Benefit Plan. This paragraph applies if the Employer maintains one or more Defined Contribution Plans (including a SEP described under Code §408(k)) and the Employer maintains or has maintained one or more Defined Benefit Plans which during the Determination Period has or has had any Accrued Benefits. The Top-Heavy Ratio for any Required Aggregation Group or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of Account Balances under the aggregated Defined Contribution Plan(s) for all Key Employees, and the Present Value of Accrued Benefits under the aggregated Defined Benefit Plan(s) for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the Account Balances under the aggregated Defined Contribution Plan(s) for all Participants and the Present Value of Accrued Benefits under the Defined Benefit Plan(s) for all Participants as of the Determination Date(s), all determined in accordance with Code §416 and the regulations thereunder. The accrued benefits under a Defined Benefit Plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distributions of an accrued benefit made in the five-year period ending on the Determination Date.

	(3)	Applicable Valuation Dates. For purposes of subsections (1) and (2) above, the value of Account Balances and the Present Value of Accrued Benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code §416 and the regulations thereunder for the first and second Plan Years of a Defined Benefit Plan. When aggregating plans, the value of Account Balances and Accrued Benefits will be calculated with reference to the Determination Dates that fall within the same calendar year.

	(4)	Valuation of benefits. Determining a Participant’s Account Balance or Accrued Benefit. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code §416 and the regulations thereunder. For purposes of subsections (1) and (2) above, the Account Balance and/or Accrued Benefit of each Participant is adjusted as provided under subsections (i) and (ii) below.

		(i)	Increase for prior distributions. In applying the Top-Heavy Ratio, a Participant’s Account Balance and/or Accrued Benefit is increased for any distributions made from the Plan during the Determination Period.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(ii)	Increase for future contributions. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution to a Defined Contribution Plan not actually made as of the Determination Date, but which is required to be taken into account on that date under Code §416 and the regulations thereunder.

		(iii)	Exclusion of certain benefits. The Account Balance and/or Accrued Benefit of a Participant (and any distribution during the Determination Period with respect to such Participant’s Account Balance or Accrued Benefit) is disregarded from the Top-Heavy Ratio if: (A) the Participant is a Non-Key Employee who was a Key Employee in a prior year, or (B) the Participant has not been credited with at least one Hour of Service during the Determination Period. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code §416 and the regulations thereunder.

		(iv)	Calculation of Accrued Benefit. The Accrued Benefit of a Participant other than a Key Employee shall be determined under: (A) the method, if any, that uniformly applies for accrual purposes under all Defined Benefit Plans maintained by the Employer; or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code §411(b)(1)(C).

(i)	T otal Compensation. For purposes of determining the minimum top-heavy contribution under 16.2(a), Total Compensation is determined using the definition under Section 7.4(f), including the special rule under Section 7.4(f)(4) for years beginning before January 1, 1998. For this purpose, Total Compensation is subject to the Compensation Dollar Limitation as defined in Section 22.32.

(j)	V aluation Date: The date as of which Account Balances are valued for purposes of calculating the Top-Heavy Ratio.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document

A RTICLE 17
401(k) PLAN PROVISIONS

This Article sets forth the special testing rules applicable to Section 401(k) Deferrals, Employer Matching Contributions, and Employee After-Tax Contributions that may be made under the 401(k) Agreement and the requirements to qualify as a Safe Harbor 401(k) Plan. Section 17.1 provides limits on the amount of Elective Deferrals an Employee may defer into the Plan during a calendar year. Sections 17.2 and 17.3 set forth the rules for running the ADP Test and ACP Test with respect to contributions under the 401(k) plan and Section 17.4 discusses the requirements for applying the Multiple Use Test. Section 17.5 prescribes special testing rules for performing the ADP Test and the ACP Test. Section 17.6 sets forth the requirements that must be met to qualify as a Safe Harbor 401(k) Plan. Unless otherwise stated, any reference to the Agreement under this Article 17 is a reference to the 401(k) Agreement.


1 7.1	Limitation on the Amount of Section 401(k) Deferrals.

	( a)	In general. An Eligible Participant’s total Section 401(k) Deferrals under this Plan, or any other qualified plan of the Employer, for any calendar year may not exceed the lesser of:

		(1)	the percentage of Included Compensation designated under Part 4A, #12 of the Agreement;

		(2)	the dollar limitation under Code §402(g); or

		(3)	the amount permitted under the Annual Additions Limitation described in Article 7.

	( b)	Maximum deferral limitation. If the Employer elects to impose a maximum deferral limitation under Part 4A, #12 of the Agreement, it must designate under Part 4A, #12.a. the period for which such limitation applies. Regardless of any limitation designated under Part 4A, #12 of the Agreement, the Employer may provide for alternative limitations in the Salary Reduction Agreement with respect to designated types of Included Compensation, such as bonus payments. If no maximum percentage is designated under Part 4A, #12 of the Agreement, the only limit on a Participant’s Section 401(k) Deferrals under this Plan is the dollar limitation under Code §402(g) and the Annual Additions Limitation.

	( c)	Correction of Code §402(g) violation. A Participant may not make Section 401(k) Deferrals that exceed the dollar limitation under Code §402(g). The dollar limitation under Code §402(g) applicable to a Participant’s Section 401(k) Deferrals under this Plan is reduced by any Elective Deferrals the Participant makes under any other plan maintained by the Employer. If a Participant makes Section 401(k) Deferrals that exceed the Code §402(g) limit, the Employer may correct the Code §402(g) violation in the following manner.

		(1)	Suspension of Section 401(k) Deferrals. The Employer may suspend a Participant’s Section 401(k) Deferrals under the Plan for the remainder of the calendar year when the Participant’s Section 401(k) Deferrals under this Plan, in combination with any Elective Deferrals the Participant makes during the calendar year under any other plan maintained by the Employer, equal or exceed the dollar limitation under Code §402(g).

		(2)	Distribution of Excess Deferrals. If a Participant makes Section 401(k) Deferrals under this Plan during a calendar year which exceed the dollar limitation under Code §402(g), the Participant will receive a corrective distribution from the Plan of the Excess Deferrals (plus allocable income) no later than April 15 of the following calendar year. The amount which must be distributed as a correction of Excess Deferrals for a calendar year equals the amount of Elective Deferrals the Participant contributes in excess of the dollar limitation under Code §402(g) during the calendar year to this Plan, and any other plan maintained by the Employer, reduced by any corrective distribution of Excess Deferrals the Participant receives during the calendar year from this Plan or other plan(s) maintained by the Employer. Excess Deferrals that are distributed after April 15 are includible in the Participant’s gross income in both the taxable year in which deferred and the taxable year in which distributed.

			(i)	Allocable gain or loss. A corrective distribution of Excess Deferrals must include any allocable gain or loss for the calendar year in which the Excess Deferrals are made. For this purpose, allocable gain or loss on Excess Deferrals may be determined in any reasonable manner, provided the manner used to determine allocable gain or loss is applied uniformly and in a manner that is reasonably reflective of the method used by the Plan for allocating income to Participants’ Accounts.

			(ii)	Coordination with other provisions. A corrective distribution of Excess Deferrals made by April 15 of the following calendar year may be made without consent of the Participant or the Participant’s spouse, and without regard to any distribution restrictions



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


				applicable under Article 8 or Article 9. A corrective distribution of Excess Deferrals made by the appropriate April 15 also is not treated as a distribution for purposes of applying the required minimum distribution rules under Article 10.

			(iii)	Coordination with corrective distribution of Excess Contributions. If a Participant for whom a corrective distribution of Excess Deferrals is being made received a previous corrective distribution of Excess Contributions to correct the ADP Test for the Plan Year beginning with or within the calendar year for which the Participant made the Excess Deferrals, the previous corrective distribution of Excess Contributions is treated first as a corrective distribution of Excess Deferrals to the extent necessary to eliminate the Excess Deferral violation. The amount of the corrective distribution of Excess Contributions which is required to correct the ADP Test failure is reduced by the amount treated as a corrective distribution of Excess Deferrals.

		(3)	Correction of Excess Deferrals under plans not maintained by the Employer. The correction provisions under subsections (1) and (2) above apply only if a Participant makes Excess Deferrals under plans maintained by the Employer. However, if a Participant has Excess Deferrals because the total Elective Deferrals for a calendar year under all plans in which he/she participates, including plans that are not maintained by the Employer, exceed the dollar limitation under Code §402(g), the Participant may assign to this Plan any portion of the Excess Deferrals made during the calendar year. The Participant must notify the Plan Administrator in writing on or before March 1 of the following calendar year of the amount of the Excess Deferrals to be assigned to this Plan. Upon receipt of a timely notification, the Excess Deferrals assigned to this Plan will be distributed (along with any allocable income or loss) to the Participant in accordance with the corrective distribution provisions under subsection (2) above. A Participant is deemed to notify the Plan Administrator of Excess Deferrals to the extent such Excess Deferrals arise only under this Plan and any other plan maintained by the Employer.

1 7.2	Nondiscrimination Testing of Section 401(k) Deferrals - ADP Test. Except as provided under Section 17.6 for Safe Harbor 401(k) Plans, the Section 401(k) Deferrals made by Highly Compensated Employees must satisfy the Actual Deferral Percentage Test (“ADP Test”) for each Plan Year. The Plan Administrator shall maintain records sufficient to demonstrate satisfaction of the ADP Test, including the amount of any QNECs or QMACs included in such test, pursuant to subsection (c) below. If the Plan fails the ADP Test for any Plan Year, the corrective provisions under subsection (d) below will apply.

	( a)	ADP Test testing methods. For Plan Years beginning on or after January 1, 1997, the ADP Test will be performed using the Prior Year Testing Method or Current Year Testing Method, as selected under Part 4F, #31 of the Agreement. If the Employer does not select a testing method under Part 4F, #31 of the Agreement, the Plan will use the Current Year Testing Method. Unless specifically precluded under statute, regulations or other IRS guidance, the Employer may amend the testing method designated under Part 4F for a particular Plan Year (subject to the requirements under subsection (2) below) at any time through the end of the 12-month period following the Plan Year for which the amendment is effective. (For Plan Years beginning before January 1, 1997, the Current Year Testing Method is deemed to have been in effect.)

		(1)	Prior Year Testing Method. Under the Prior Year Testing Method, the Average Deferral Percentage (“ADP”) of the Highly Compensated Employee Group (as defined in Section 17.7(e)) for the current Plan Year is compared with the ADP of the Nonhighly Compensated Employee Group (as defined in Section 17.7(f)) for the prior Plan Year. If the Employer elects to use the Prior Year Testing Method under Part 4F of the Agreement, the Plan must satisfy one of the following tests for each Plan Year:

			(i)	The ADP of the Highly Compensated Employee Group for the current Plan Year shall not exceed 1.25 times the ADP of the Nonhighly Compensated Employee Group for the prior Plan Year.

			(ii)	The ADP of the Highly Compensated Employee Group for the current Plan Year shall not exceed the percentage (whichever is less) determined by (A) adding 2 percentage points to the ADP of the Nonhighly Compensated Employee Group for the prior Plan Year or (B) multiplying the ADP of the Nonhighly Compensated Employee Group for the prior Plan Year by 2.

		(2)	Current Year Testing Method. Under the Current Year Testing Method, the ADP of the Highly Compensated Employee Group for the current Plan Year is compared to the ADP of the Nonhighly Compensated Employee Group for the current Plan Year. If the Employer elects to use the Current Year Testing Method under Part 4F of the Agreement, the Plan must satisfy the ADP Test, as described in subsection (1) above, for each Plan Year, but using the ADP of the Nonhighly



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		Compensated Employee Group for the current Plan Year instead of for the prior Plan Year. If the Employer elects to use the Current Year Testing Method, it may switch to the Prior Year Testing Method only if the Plan satisfies the requirements for changing to the Prior Year Testing Method as set forth in IRS Notice 98-1 (or superseding guidance).

( b)	Special rule for first Plan Year. For the first Plan Year that the Plan permits Section 401(k) Deferrals, the Employer may elect under Part 4F, #32.a. of the Agreement to apply the ADP Test using the Prior Year Testing Method, by assuming the ADP for the Nonhighly Compensated Employee Group is 3%. Alternatively, the Employer may elect in Part 4F, #32.b. of the Agreement to use the Current Year Testing Method using the actual data for the Nonhighly Compensated Employee Group in the first Plan Year. This first Plan Year rule does not apply if this Plan is a successor to a plan (as described in IRS Notice 98-1 or subsequent guidance) that included a 401(k) arrangement or the Plan is aggregated for purposes of applying the ADP Test with another plan that included a 401(k) arrangement in the prior Plan Year. For subsequent Plan Years, the testing method selected under Part 4F, #31 will apply.

( c)	Use of QMACs and QNECs under the ADP Test. The Plan Administrator may take into account all or any portion of QMACs and QNECs (see Sections 17.7(g) and (h)) for purposes of applying the ADP Test. QMACs and QNECs may not be included in the ADP Test to the extent such amounts are included in the ACP Test for such Plan Year. QMACs and QNECs made to another qualified plan maintained by the Employer may also be taken into account, so long as the other plan has the same Plan Year as this Plan. To include QNECs under the ADP Test, all Employer Nonelective Contributions, including the QNECs, must satisfy Code §401(a)(4). In addition, the Employer Nonelective Contributions, excluding any QNECs used in the ADP Test or ACP Test, must also satisfy Code §401(a)(4).

	(1)	Timing of contributions. In order to be used in the ADP Test for a given Plan Year, QNECs and QMACs must be made before the end of the 12-month period immediately following the Plan Year for which they are allocated. If the Employer is using the Prior Year Testing Method (as described in subsection (a)(1) above), QMACs and QNECs taken into account for the Nonhighly Compensated Employee Group must be allocated for the prior Plan Year, and must be made no later than the end of the 12-month period immediately following the end of such prior Plan Year. (See Section 7.4(a) for rules regarding the appropriate Limitation Year for which such contributions will be applied for purposes of the Annual Additions Limitation under Code §415.)

	(2)	Double-counting limits. This paragraph applies if, in any Plan Year beginning after December 31, 1998, the Prior Year Testing Method is used to run the ADP Test and, in the prior Plan Year, the Current Year Testing Method was used to run the ADP Test. If this paragraph applies, the following contributions are disregarded in calculating the ADP of the Nonhighly Compensated Employee Group for the prior Plan Year:

		(i)	All QNECs that were included in either the ADP Test or ACP Test for the prior Plan Year.

		(ii)	All QMACs, regardless of how used for testing purposes in the prior Plan Year.

		(iii)	Any Section 401(k) Deferrals that were included in the ACP Test for the prior Plan Year.

		For purposes of applying the double-counting limits, if actual data of the Nonhighly Compensated Employee Group is used for a first Plan Year described in subsection (b) above, the Plan is still considered to be using the Prior Year Testing Method for that first Plan Year. Thus, the double-counting limits do not apply if the Prior Year Testing Method is used for the next Plan Year.

	(3)	Testing flexibility. The Plan Administrator is expressly granted the full flexibility permitted by applicable Treasury regulations to determine the amount of QMACs and QNECs used in the ADP Test. QMACs and QNECs taken into account under the ADP Test do not have to be uniformly determined for each Eligible Participant, and may represent all or any portion of the QMACs and QNECs allocated to each Eligible Participant, provided the conditions described above are satisfied.

( d)	Correction of Excess Contributions. If the Plan fails the ADP Test for a Plan Year, the Plan Administrator may use any combination of the correction methods under this Section to correct the Excess Contributions under the Plan. (See Section 17.7(d) for the definition of Excess Contributions.)

	(1)	Corrective distribution of Excess Contributions. If the Plan fails the ADP Test for a Plan Year, the Plan Administrator may, in its discretion, distribute Excess Contributions (including any allocable income or loss) no later than the last day of the following Plan Year to correct the ADP



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	Test violation. If the Excess Contributions are distributed more than 2½ months after the last day of the Plan Year in which such excess amounts arose, a 10-percent excise tax will be imposed on the Employer with respect to such amounts.

	(i)	Amount to be distributed. In determining the amount of Excess Contributions to be distributed to a Highly Compensated Employee under this Section, Excess Contributions are first allocated equally to the Highly Compensated Employee(s) with the largest dollar amount of contributions taken into account under the ADP Test for the Plan Year in which the excess occurs. The Excess Contributions allocated to such Highly Compensated Employee(s) reduce the dollar amount of the contributions taken into account under the ADP Test for such Highly Compensated Employee(s) until all of the Excess Contributions are allocated or until the dollar amount of such contributions for the Highly Compensated Employee(s) is reduced to the next highest dollar amount of such contributions for any other Highly Compensated Employee(s). If there are Excess Contributions remaining, the Excess Contributions continue to be allocated in this manner until all of the Excess Contributions are allocated.

	(ii)	Allocable gain or loss. A corrective distribution of Excess Contributions must include any allocable gain or loss for the Plan Year in which the excess occurs. For this purpose, allocable gain or loss on Excess Contributions may be determined in any reasonable manner, provided the manner used is applied uniformly and in a manner that is reasonably reflective of the method used by the Plan for allocating income to Participants’ Accounts.

	(iii)	Coordination with other provisions. A corrective distribution of Excess Contributions made by the end of the Plan Year following the Plan Year in which the excess occurs may be made without consent of the Participant or the Participant’s spouse, and without regard to any distribution restrictions applicable under Article 8 or Article 9. Excess Contributions are treated as Annual Additions for purposes of Code §415 even if distributed from the Plan. A corrective distribution of Excess Contributions is not treated as a distribution for purposes of applying the required minimum distribution rules under Article 10.

		If a Participant has Excess Deferrals for the calendar year ending with or within the Plan Year for which the Participant receives a corrective distribution of Excess Contributions, the corrective distribution of Excess Contributions is treated first as a corrective distribution of Excess Deferrals. The amount of the corrective distribution of Excess Contributions that must be distributed to correct an ADP Test failure for a Plan Year is reduced by any amount distributed as a corrective distribution of Excess Deferrals for the calendar year ending with or within such Plan Year.

	(iv)	Accounting for Excess Contributions. Excess Contributions are distributed from the following sources and in the following priority:

		(A)	Section 401(k) Deferrals that are not matched;

		(B)	proportionately from Section 401(k) Deferrals not distributed under (A) and related QMACs that are included in the ADP Test;

		(C)	QMACs included in the ADP Test that are not distributed under (B); and

		(D)	QNECs included in the ADP Test.

(2)	Making QMACs or QNECs. Regardless of any elections under Part 4B, #18 or Part 4C, #22 of the Agreement, the Employer may make additional QMACs or QNECs to the Plan on behalf of the Nonhighly Compensated Employees in order to correct an ADP Test violation. QMACs or QNECs may only be used to correct an ADP Test violation if the Current Year Testing Method is selected under Part 4F, #31.b. of the 401(k) Agreement. Any QMACs contributed under this subsection (2) which are not specifically authorized under Part 4B, #18 of the Agreement will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Section 401(k) Deferrals made during the Plan Year. Any QNECs contributed under this subsection (2) which are not specifically authorized under Part 4C, #22 of the Agreement will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Included Compensation. See Sections 2.3(c) and (e), as applicable.



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		(3)	Recharacterization. If Employee After-Tax Contributions are permitted under Part 4D of the Agreement, the Plan Administrator, in its sole discretion, may permit a Participant to treat any Excess Contributions that are allocated to that Participant as if he/she received the Excess Contributions as a distribution from the Plan and then contributed such amounts to the Plan as Employee After-Tax Contributions. Any amounts recharacterized under this subsection (3) will be 100% vested at all times. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount in combination with other Employee After-Tax Contributions made by that Participant would exceed any limit on Employee After-Tax Contributions under Part 4D of the Agreement.

			Recharacterization must occur no later than 2½ months after the last day of the Plan Year in which such Excess Contributions arise and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant’s taxable year in which the Participant would have received such amounts in cash had he/she not deferred such amounts into the Plan.

	( e)	Adjustment of deferral rate for Highly Compensated Employees. The Employer may suspend (or automatically reduce the rate of) Section 401(k) Deferrals for the Highly Compensated Employee Group, to the extent necessary to satisfy the ADP Test or to reduce the margin of failure. A suspension or reduction shall not affect Section 401(k) Deferrals already contributed by the Highly Compensated Employees for the Plan Year. As of the first day of the subsequent Plan Year, Section 401(k) Deferrals shall resume at the levels stated in the Salary Reduction Agreements of the Highly Compensated Employees.

1 7.3	Nondiscrimination Testing of Employer Matching Contributions and Employee After-Tax Contributions - ACP Test. Except as provided under Section 17.6 for Safe Harbor 401(k) Plans, if the Employer elects to provide Employer Matching Contributions under Part 4B of the Agreement or to permit Employee After-Tax Contributions under Part 4D of the Agreement, the Employer Matching Contributions (including QMACs that are not included in the ADP Test) and/or Employee After-Tax Contributions made for Highly Compensated Employees must satisfy the Actual Contribution Percentage Test (“ACP Test”) for each Plan Year. The Plan Administrator shall maintain records sufficient to demonstrate satisfaction of the ACP Test, including the amount of any Section 401(k) Deferrals or QNECs included in such test, pursuant to subsection (c) below. If the Plan fails the ACP Test for any Plan Year, the correction provisions under subsection (d) below will apply.

	( a)	ACP Test testing methods. For Plan Years beginning on or after January 1, 1997, the ACP Test will be performed using the Prior Year Testing Method or the Current Year Testing Method, as selected under Part 4F, #31 of the Agreement. If the Employer does not select a testing method under Part 4F, #31 of the Agreement, the Plan will be deemed to use the Current Year Testing Method. For Plan Years beginning before January 1, 1997, the Current Year Testing Method is deemed to have been in effect. If the Plan is a Safe Harbor 401(k) Plan, as designated under Part 4E of the Agreement, the Current Year Testing Method must be selected.

		(1)	Prior Year Testing Method. Under the Prior Year Testing Method, the Average Contribution Percentage (“ACP”) of the Highly Compensated Employee Group (as defined in Section 17.7(e)) for the current Plan Year is compared with the ACP of the Nonhighly Compensated Employee Group (as defined in Section 17.7(f)) for the prior Plan Year. If the Employer elects to use the Prior Year Testing Method under Part 4F of the Agreement, the Plan must satisfy one of the following tests for each Plan Year:

			(i)	The ACP of the Highly Compensated Employee Group for the current Plan Year shall not exceed 1.25 times the ACP of the Nonhighly Compensated Employee Group for the prior Plan Year.

			(ii)	The ACP of the Highly Compensated Employee Group for the current Plan Year shall not exceed the percentage (whichever is less) determined by (A) adding 2 percentage points to the ACP of the Nonhighly Compensated Employee Group for the prior Plan Year or (B) multiplying the ACP of the Nonhighly Compensated Employee Group for the prior Plan Year by 2.

		(2)	Current Year Testing Method. Under the Current Year Testing Method, the ACP of the Highly Compensated Employee Group for the current Plan Year is compared to the ACP of the Nonhighly Compensated Employee Group for the current Plan Year. If the Employer elects to use the Current Year Testing Method under Part 4F of the Agreement, the Plan must satisfy the ACP Test, as described in subsection (1) above, for each Plan Year, but using the ACP of the Nonhighly Compensated Employee Group for the current Plan Year instead of for the prior Plan Year. If the Employer elects to use the Current Year Testing Method, it may switch to the Prior Year Testing



© Copyright 2001 Ceridian Retirement Plan Services	Basic Plan Document


		Method only if the Plan satisfies the requirements for changing to the Prior Year Testing Method as set forth in IRS Notice 98-1 (or superseding guidance).

( b)	Special rule for first Plan Year. For the first Plan Year that the Plan includes either an Employer Matching Contribution formula or permits Employee After-Tax Contributions, the Employer may elect under Part 4F, #33.a. of the Agreement to apply the ACP Test using the Prior Year Testing Method, by assuming the ACP for the Nonhighly Compensated Employee Group is 3%. Alternatively, the Employer may elect in Part 4F, #33.b. of the Agreement to use the Current Year Testing Method using the actual data for the Nonhighly Compensated Employee Group in the first Plan Year. This first Plan Year rule does not apply if this Plan is a successor to a plan that was subject to the ACP Test or if the Plan is aggregated for purposes of applying the ACP Test with another plan that was subject to the ACP test in the prior Plan Year. For subsequent Plan Years, the testing method selected under Part 4F, #31 will apply.

( c)	Use of Section 401(k) Deferrals and QNECs under the ACP Test. The Plan Administrator may take into account all or any portion of Section 401(k) Deferrals and QNECs (see Section 17.7(h)) made to this Plan, or to another qualified plan maintained by the Employer, for purposes of applying the ACP Test. QNECs may not be included in the ACP Test to the extent such amounts are included in the ADP Test for such Plan Year. Section 401(k) Deferrals and QNECs made to another qualified plan maintained by the Employer may also be taken into account, so long as the other plan has the same Plan Year as this Plan. To include Section 401(k) Deferrals under the ACP Test, the Plan must satisfy the ADP Test taking into account all Section 401(k) Deferrals, including those used under the ACP Test, and taking into account only those Section 401(k) Deferrals not included in the ACP Test. To include QNECs under the ACP Test, all Employer Nonelective Contributions, including the QNECs, must satisfy Code §401(a)(4). In addition, the Employer Nonelective Contributions, excluding any QNECs used in the ADP Test or ACP Test, must also satisfy Code §401(a)(4). QNECs may only be used to correct an ACP Test violation if the Current Year Testing Method is selected under Part 4F, #31.b. of the 401(k) Agreement

	(1)	Timing of contributions. In order to be used in the ACP Test for a given Plan Year, QNECs must be made before the end of the 12-month period immediately following the Plan Year for which they are allocated. If the Employer is using the Prior Year Testing Method (as described in subsection (a)(1) above), QNECs taken into account for the Nonhighly Compensated Employee Group must be allocated for the prior Plan Year, and must be made no later than the end of the 12-month period immediately following such Plan Year. (See Section 7.4(a) for rules regarding the appropriate Limitation Year for which such contributions will be applied for purposes of the Annual Additions Limitation under Code §415.)

	(2)	Double-counting limits. This paragraph applies if, in any Plan Year beginning after December 31, 1998, the Prior Year Testing Method is used to run the ACP Test and, in the prior Plan Year, the Current Year Testing Method was used to run the ACP Test. If this paragraph applies, the following contributions are disregarded in calculating the ACP of the Nonhighly Compensated Employee Group for the prior Plan Year:

		(i)	All QNECs that were included in either the ADP Test or ACP Test for the prior Plan Year.

		(ii)	All Section 401(k) Deferrals, regardless of how used for testing purposes in the prior Plan Year.

		(iii)	Any QMACs that were included in the ADP Test for the prior Plan Year.

		For purposes of applying the double-counting limits, if actual data of the Nonhighly Compensated Employee Group is used for a first Plan Year described in subsection (b) above, the Plan is still considered to be using the Prior Year Testing Method for that first Plan Year. Thus, the double-counting limits do not apply if the Prior Year Testing Method is used for the next Plan Year.

	(3)	Testing flexibility. The Plan Administrator is expressly granted the full flexibility permitted by applicable Treasury regulations to determine the amount of Section 401(k) Deferrals and QNECs used in the ACP Test. Section 401(k) Deferrals and QNECs taken into account under the ACP Test do not have to be uniformly determined for each Eligible Participant, and may represent all or any portion of the Section 401(k) Deferrals and QNECs allocated to each Eligible Participant, provided the conditions described above are satisfied. For Plan Years beginning after the first Plan Year.

( d)	Correction of Excess Aggregate Contributions. If the Plan fails the ACP Test for a Plan Year, the Plan Administrator may use any combination of the correction methods under this Section to correct the Excess



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Aggregate Contributions under the Plan. (See Section 17.7(c) for the definition of Excess Aggregate Contributions.)

(1)	Corrective distribution of Excess Aggregate Contributions. If the Plan fails the ACP Test for a Plan Year, the Plan Administrator may, in its discretion, distribute Excess Aggregate Contributions (including any allocable income or loss) no later than the last day of the following Plan Year to correct the ACP Test violation. Excess Aggregate Contributions will be distributed only to the extent they are vested under Article 4, determined as of the last day of the Plan Year for which the contributions are made to the Plan. To the extent Excess Aggregate Contributions are not vested, the Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited in accordance with Section 5.3(d)(1). If the Excess Aggregate Contributions are distributed more than 2½ months after the last day of the Plan Year in which such excess amounts arose, a 10-percent excise tax will be imposed on the Employer with respect to such amounts.

	(i)	Amount to be distributed. In determining the amount of Excess Aggregate Contributions to be distributed to a Highly Compensated Employee under this Section, Excess Aggregate Contributions are first allocated equally to the Highly Compensated Employee(s) with the largest dollar amount of contributions taken into account under the ACP Test for the Plan Year in which the excess occurs. The Excess Aggregate Contributions allocated to such Highly Compensated Employee(s) reduce the dollar amount of the contributions taken into account under the ACP Test for such Highly Compensated Employee(s) until all of the Excess Aggregate Contributions are allocated or until the dollar amount of such contributions for the Highly Compensated Employee(s) is reduced to the next highest dollar amount of such contributions for any other Highly Compensated Employee(s). If there are Excess Aggregate Contributions remaining, the Excess Aggregate Contributions continue to be allocated in this manner until all of the Excess Aggregate Contributions are allocated.

	(ii)	Allocable gain or loss. A corrective distribution of Excess Aggregate Contributions must include any allocable gain or loss for the Plan Year in which the excess occurs. For this purpose, allocable gain or loss on Excess Aggregate Contributions may be determined in any reasonable manner, provided the manner used is applied uniformly and in a manner that is reasonably reflective of the method used by the Plan for allocating income to Participants’ Accounts.

	(iii)	Coordination with other provisions. A corrective distribution of Excess Aggregate Contributions made by the end of the Plan Year following the Plan Year in which the excess occurs may be made without consent of the Participant or the Participant’s spouse, and without regard to any distribution restrictions applicable under Article 8 or Article 9. Excess Aggregate Contributions are treated as Annual Additions for purposes of Code §415 even if distributed from the Plan. A corrective distribution of Excess Aggregate Contributions is not treated as a distribution for purposes of applying the required minimum distribution rules under Article 10.

	(iv)	Accounting for Excess Aggregate Contributions. Excess Aggregate Contributions are distributed from the following sources and in the following priority:

		(A)	Employee After-Tax Contributions that are not matched;

		(B)	proportionately from Employee After-Tax Contributions not distributed under (A) and related Employer Matching Contributions that are included in the ACP Test;

		(C)	Employer Matching Contributions included in the ACP Test that are not distributed under (B);

		(D)	Section 401(k) Deferrals included in the ACP Test that are not matched;

		(E)	proportionately from Section 401(k) Deferrals included in the ACP Test that are not distributed under (D) and related Employer Matching Contributions that are included in the ACP Test and not distributed under (B) or (C); and

		(F)	QNECs included in the ACP Test.

(2)	Making QMACs or QNECs. Regardless of any elections under Part 4B, #18 or Part 4C, #22 of the Agreement, the Employer may make additional QMACs and/or QNECs to the Plan on behalf of



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			the Nonhighly Compensated Employees in order to correct an ACP Test violation to the extent such amounts are not used in the ADP Test. Any QMACs contributed under this subsection (2) which are not specifically authorized under Part 4B, #18 of the Agreement will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Section 401(k) Deferrals made during the Plan Year. Any QNECs contributed under this subsection (2) which are not specifically authorized under Part 4C, #22 of the Agreement will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Included Compensation. See Sections 2.3(c) and (e), as applicable.

	( e)	Adjustment of contribution rate for Highly Compensated Employees. The Employer may suspend (or automatically reduce the rate of) Employee After-Tax Contributions for the Highly Compensated Employee Group, to the extent necessary to satisfy the ACP Test or to reduce the margin of failure. A suspension or reduction shall not affect Employee After-Tax Contributions already contributed by the Highly Compensated Employees for the Plan Year. As of the first day of the subsequent Plan Year, Employee After-Tax Contributions shall resume at the levels elected by the Highly Compensated Employees.

1 7.4	Multiple Use Test. If both an ADP Test and an ACP Test are run for the Plan Year, and the Plan does not pass the 1.25 test under either the ADP Test or the ACP Test, the Plan must satisfy a special Multiple Use Test, unless such Multiple Use Test is repealed or modified by statute, or other IRS guidance.

	( a)	Aggregate Limit. Under the Multiple Use Test, the sum of the ADP and the ACP for the Highly Compensated Employee Group may not exceed the Plan’s Aggregate Limit. For this purpose, the ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such tests for the Plan Year. In applying the Multiple Use Test, the Plan’s Aggregate Limit is the sum of (1) and (2):

		(1)	1.25 times the greater of: (i) the ADP of the Nonhighly Compensated Employee Group or (ii) the ACP of the Nonhighly Compensated Employee Group; and

		(2)	the lesser of 2 times or 2 plus the lesser of: (i) the ADP of the Nonhighly Compensated Employee Group or (ii) the ACP of the Nonhighly Compensated Employee Group.

		Alternatively, if it results in a larger amount, the Aggregate Limit is the sum of (3) and (4):

		(3)	1.25 times the lesser of: (i) the ADP of the Nonhighly Compensated Employee Group or (ii) the ACP of the Nonhighly Compensated Employee Group; and

		(4)	the lesser of 2 times or 2 plus the greater of: (i) the ADP of the Nonhighly Compensated Employee Group or (ii) the ACP of the Nonhighly Compensated Employee Group.

		The Aggregate Limit is calculated using the ADP and ACP of the Nonhighly Compensated Employee Group that is used in performing the ADP Test and ACP Test for the Plan Year. Thus, if the Prior Year Testing Method is being used, the Aggregate Limit is calculated by using the applicable percentage of the Nonhighly Compensated Employee Group for the prior Plan Year. If the Current Year Testing Method is being used, the Aggregate Limit is calculated by using the applicable percentage of the Nonhighly Compensated Employee Group for the current Plan Year.

	( b)	Correction of the Multiple Use Test. If the Multiple Use Test is not passed, the following corrective action will be taken.

		(1)	Corrective distributions. The Plan will make corrective distributions (or additional corrective distributions, if corrective distributions are already being made to correct a violation of the ADP Test or ACP Test), to the extent other corrective action is not taken or such other action is not sufficient to completely eliminate the Multiple Use Test violation. Such corrective distributions may be determined as if they were being made to correct a violation of the ADP Test or a violation of the ACP Test, or a combination of both, as determined by the Plan Administrator. Any corrective distribution that is treated as if it were correcting a violation of the ADP Test will be determined under the rules described in Section 17.2(d). Any corrective distribution that is treated as if it were correcting a violation of the ACP Test will be determined under the rules described in Section 17.3(d).

		(2)	Making QMACs or QNECs. Regardless of any elections under Part 4B, #18 or Part 4C, #22 of the Agreement, the Employer may make additional QMACs or QNECs, so that the resulting ADP and/or ACP of the Nonhighly Compensated Employee Group is increased to the extent necessary to satisfy the Multiple Use Test. Any QMACs contributed under this subsection (2) which are not specifically authorized under Part 4B, #18 of the Agreement will be allocated to all Eligible



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			Participants who are Nonhighly Compensated Employees as a uniform percentage of Section 401(k) Deferrals made during the Plan Year. Any QNECs contributed under this subsection (2) which are not specifically authorized under Part 4C, #22 of the Agreement will be allocated to all Eligible Participants who are Nonhighly Compensated Employees as a uniform percentage of Included Compensation. See Sections 2.3(c) and (e), as applicable.

1 7.5	Special Testing Rules. This Section describes special testing rules that apply to the ADP Test or the ACP Test. In some cases, the special testing rule is optional, in which case, the election to use such rule is solely within the discretion of the Plan Administrator.

	( a)	Special rule for determining ADP and ACP of Highly Compensated Employee Group. When calculating the ADP or ACP of the Highly Compensated Employee Group for any Plan Year, a Highly Compensated Employee’s Section 401(k) Deferrals, Employee After-Tax Contributions, and Employer Matching Contributions under all qualified plans maintained by the Employer are taken into account as if such contributions were made to a single plan. If the plans have different Plan Years, the contributions made in all Plan Years that end in the same calendar year are aggregated under this paragraph. This aggregation rule does not apply to plans that are required to be disaggregated under Code §410(b).

	( b)	Aggregation of plans. When calculating the ADP Test and the ACP Test, plans that are permissively aggregated for coverage and nondiscrimination testing purposes are treated as a single plan. This aggregation rule applies to determine the ADP or ACP of both the Highly Compensated Employee Group and the Nonhighly Compensated Employee Group. Any adjustments to the ADP of the Nonhighly Compensated Employee Group for the prior year will be made in accordance with Notice 98-1 and any superseding guidance, unless the Employer has elected in Part 4F, #31.b. of the 401(k) Agreement to use the Current Year Testing Method. Aggregation described in this paragraph is not permitted unless all plans being aggregated have the same Plan Year and use the same testing method for the applicable test.

	( c)	Disaggregation of plans.

		(1)	Plans covering Union Employees and non-Union Employees. If the Plan covers Union Employees and non-Union Employees, the Plan is mandatorily disaggregated for purposes of applying the ADP Test and the ACP Test into two separate plans, one covering the Union Employees and one covering the non-Union Employees. A separate ADP Test must be applied for each disaggregated portion of the Plan in accordance with applicable Treasury regulations. A separate ACP Test must be applied to the disaggregated portion of the Plan that covers the non-Union Employees. The disaggregated portion of the Plan that includes the Union Employees is deemed to pass the ACP Test.

		(2)	Otherwise excludable Employees. If the minimum coverage test under Code §410(b) is performed by disaggregating “otherwise excludable Employees” (i.e., Employees who have not satisfied the maximum age 21 and one Year of Service eligibility conditions permitted under Code §410(a)), then the Plan is treated as two separate plans, one benefiting the otherwise excludable Employees and the other benefiting Employees who have satisfied the maximum age and service eligibility conditions. If such disaggregation applies, the following operating rules apply to the ADP Test and the ACP Test.

			(i)	For Plan Years beginning before January 1, 1999, the ADP Test and the ACP Test are applied separately for each disaggregated plan. If there are no Highly Compensated Employees benefiting under a disaggregated plan, then no ADP Test or ACP Test is required for such plan.

			(ii)	For Plan Years beginning after December 31, 1998, instead of the rule under subsection (i), only the disaggregated plan that benefits the Employees who have satisfied the maximum age and service eligibility conditions permitted under Code §410(a) is subject to the ADP Test and the ACP Test. However, any Highly Compensated Employee who is benefiting under the disaggregated plan that includes the otherwise excludable Employees is taken into account in such tests. The Employer may elect to apply the rule in subsection (i) instead.

		(3)	Corrective action for disaggregated plans. Any corrective action authorized by this Article may be determined separately with respect to each disaggregated portion of the Plan. A corrective action taken with respect to a disaggregated portion of the Plan need not be consistent with the method of correction (if any) used for another disaggregated portion of the Plan. In the case of a Nonstandardized Agreement, to the extent the Agreement authorizes the Employer to make discretionary QNECs or discretionary QMACs, the Employer is expressly permitted to designate



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			such QNECs or QMACs as allocable only to Eligible Participants in a particular disaggregated portion of the Plan.

	( d)	Special rules for the Prior Year Testing Method. If the Plan uses the Prior Year Testing Method, and an election made under subsection (b) or (c) above is inconsistent with the election made in the prior Plan Year, the plan coverage change rules described in IRS Notice 98-1 (or other successor guidance) will apply in determining the ADP and ACP for the Nonhighly Compensated Employee Group.

1 7.6	Safe Harbor 401(k) Plan Provisions. For Plan Years beginning after December 31, 1998, the ADP Test described in Section 17.2 is deemed to be satisfied for any Plan Year in which the Plan qualifies as a Safe Harbor 401(k) Plan. In addition, if Employer Matching Contributions are made for such Plan Year, the ACP Test is deemed satisfied with respect to such contributions if the conditions of subsection (c) below are satisfied. To qualify as a Safe Harbor 401(k) Plan, the requirements under this Section 17.6 must be satisfied for the entire Plan Year. This Section contains the rules that must be met for the Plan to qualify as a Safe Harbor 401(k) Plan.

	Part 4E of the Agreement allows the Employer to designate the manner in which it will comply with the safe harbor requirements. If the Employer wishes to designate the Plan as a Safe Harbor 401(k) Plan, it should complete Part 4E of the Agreement. The safe harbor provisions described in this Section are not applicable unless the Plan is identified as a Safe Harbor 401(k) Plan under Part 4E. The election under Part 4E to be a Safe Harbor 401(k) Plan is effective for all Plan Years beginning with the Effective Date of the Plan (or January 1, 1999, if later) unless the Employer elects otherwise under Appendix B-5.b. of the Agreement. In addition, to qualify as a Safe Harbor 401(k) Plan, the Current Year Testing Method (as described in Section 17.3(a)(2)) must be elected under Part 4F, #31 of the Agreement (See Section 20.7 for rules regarding the application of the Safe Harbor 401(k) Plan provisions for Plan Years beginning before the date this Plan is adopted.)

	( a)	Safe harbor conditions. To qualify as a Safe Harbor 401(k) Plan, the Plan must satisfy the requirements under subsections (1), (2), (3) and (4) below.

		(1)	Safe Harbor Contribution. The Employer must provide a Safe Harbor Matching Contribution or a Safe Harbor Nonelective Contribution under the Plan. The Employer must designate the type and amount of the Safe Harbor Contribution under Part 4E of the Agreement. The Safe Harbor Contribution must be made to the Plan no later than 12 months following the close of the Plan Year for which it is being used to qualify the Plan as a Safe Harbor 401(k) Plan.

			The Employer may elect under Part 4E, #30 of the Agreement to provide the Safe Harbor Contribution to all Eligible Participants or only to Eligible Participants who are Nonhighly Compensated Employees. Alternatively, the Employer may elect under Part 4E, #30.c. to provide the Safe Harbor Contribution to all Nonhighly Compensated Employees who are Eligible Participants and all Highly Compensated Employees who are Eligible Participants but who are not Key Employees. This permits a Plan providing the Safe Harbor Nonelective Contribution to use such amounts to satisfy the top-heavy minimum contribution requirements under Article 16.

			In determining who is an Eligible Participant for purposes of the Safe Harbor Contribution, the eligibility conditions applicable to Section 401(k) Deferrals under Part 1, #5 of the Agreement apply. However, the Employer may elect under Part 4E, #30.d. to apply a one Year of Service (as defined in Section 1.4(b)) and an age 21 eligibility condition for the Safe Harbor Contribution, regardless of the eligibility conditions selected for Section 401(k) Deferrals under Part 1, #5 of the Agreement. Unless elected otherwise under Part 2, #8.f., column (1) of the Nonstandardized Agreement, the special eligibility rule under Part 4E, #30.d. will be applied as if the Employer elected under Part 2, #7.a., column (1) and Part 2, #8.a., column (1) of the Agreement to use semi-annual Entry Dates following completion of the minimum age and service conditions. If different eligibility conditions are selected for the Safe Harbor Contribution, additional testing requirements may apply in accordance with IRS Notice 2000-3.

			(i)	Safe Harbor Matching Contribution. The Employer may elect under Part 4E, #27 of the Agreement to make the Safe Harbor Matching Contribution with respect to each Eligible Participant’s applicable contributions. For this purpose, an Eligible Participant’s applicable contributions are the total Section 401(k) Deferrals and Employee After-Tax Contributions the Eligible Participant makes under the Plan. However, the Employer may elect under Part 4E, #27.d. to exclude Employee After-Tax Contributions from the definition of applicable contributions for purposes of applying the Safe Harbor Matching Contribution formula.

				The Safe Harbor Matching Contribution may be made under a basic formula or an enhanced formula. The basic formula under Part 4E, #27.a. provides an Employer Matching Contribution that equals:



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	(A)	100% of the amount of a Participant’s applicable contributions that do not exceed 3% of the Participant’s Included Compensation, plus

	(B)	50% of the amount of a Participant’s applicable contributions that exceed 3%, but do not exceed 5%, of the Participant’s Included Compensation.

	The enhanced formula under Part 4E, #27.b. provides an Employer Matching Contribution that is not less, at each level of applicable contributions, than the amount required under the basic formula. Under the enhanced formula, the rate of Employer Matching Contributions may not increase as an Employee’s rate of applicable contributions increase.

	The Plan will not fail to be a Safe Harbor 401(k) Plan merely because Highly Compensated Employees also receive a contribution under the Plan. However, an Employer Matching Contribution will not satisfy this Section if any Highly Compensated Employee is eligible for a higher rate of Employer Matching Contribution than is provided for any Nonhighly Compensated Employee who has the same rate of applicable contributions.

	In applying the Safe Harbor Matching Contribution formula under Part 4E, #27 of the Agreement, the Employer may elect under Part 4E, #27.c.(1) to determine the Safe Harbor Matching Contribution on the basis of all applicable contributions a Participant makes during the Plan Year. Alternatively, the Employer may elect under Part 4E, #27.c.(2) – (4) to determine the Safe Harbor Matching Contribution on a payroll, monthly, or quarterly basis. If the Employer elects to use a period other than the Plan Year, the Safe Harbor Matching Contribution with respect to a payroll period must be deposited into the Plan by the last day of the Plan Year quarter following the Plan Year quarter for which the applicable contributions are made.

	In addition to the Safe Harbor Matching Contribution, an Employer may elect under Part 4B of the Agreement to make Employer Matching Contributions that are subject to the normal vesting schedule and distribution rules applicable to Employer Matching Contributions. See subsection (c) below for a discussion of the effect of such additional Employer Matching Contributions on the ACP Test.

	The Employer may amend the Plan during the Plan Year to reduce or eliminate the Safe Harbor Matching Contribution elected under Part 4E, #27 of the Agreement, provided a supplemental notice is given to all Eligible Participants explaining the consequences and effective date of the amendment, and that such Eligible Participants have a reasonable opportunity (including a reasonable period) to change their Section 401(k) Deferral and/or Employee After-Tax Contribution elections, as applicable. The amendment reducing or eliminating the Safe Harbor Matching Contribution must be effective no earlier than the later of: (A) 30 days after Eligible Participants are given the supplemental notice or (B) the date the amendment is adopted. Eligible Participants must be given a reasonable opportunity (and reasonable period) prior to the reduction or elimination of the Safe Harbor Matching Contribution to change their Section 401(k) Deferral or Employee After-Tax Contribution elections, as applicable. If the Employer amends the Plan to reduce or eliminate the Safe Harbor Matching Contribution, the Plan is subject to the ADP Test and ACP Test for the entire Plan Year.

(ii)	Safe Harbor Nonelective Contribution. The Employer may elect under Part 4E, #28 of the Agreement to make a Safe Harbor Nonelective Contribution of at least 3% of Included Compensation. The Employer may elect under Part 4E, #28.b. to retain discretion to increase the amount of the Safe Harbor Nonelective Contribution in excess of the percentage designated under Part 4E, #28. In addition, the Employer may provide for additional discretionary Employer Nonelective Contributions under Part 4C of the Agreement (in addition to the Safe Harbor Contribution under this Section) which are subject to the normal vesting schedule and distribution rules applicable to Employer Nonelective Contributions.

	(A)	Supplemental notice. The Employer may elect under Part 4E, #28.a. of the Agreement to provide the Safe Harbor Nonelective Contribution authorized under Part 4E, #28 only if the Employer provides a supplemental notice to Participants indicating its intention to provide such Safe Harbor Nonelective Contribution. If Part 4E, #28.a. is selected, to qualify as a Safe Harbor 401(k)



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	Plan under Part 4E, the Employer must notify its Eligible Employees in the annual notice described in subsection (4) below that the Employer may provide the Safe Harbor Nonelective Contribution authorized under Part 4E, #28 of the Agreement and that a supplemental notice will be provided at least 30 days prior to the last day of the Plan Year if the Employer decides to make the Safe Harbor Nonelective Contribution. The supplemental notice indicating the Employer’s intention to make the Safe Harbor Nonelective Contribution must be provided no later than 30 days prior to the last day of the Plan Year for the Plan to qualify as a Safe Harbor 401(k) Plan. If the Employer selects Part 4E, #28.a. of the Agreement but does not provide the supplemental notice in accordance with this paragraph, the Employer is not obligated to make such contribution and the Plan does not qualify as a Safe Harbor 401(k) Plan. The Plan will qualify as a Safe Harbor 401(k) Plan for subsequent Plan Years if the appropriate notices are provided for such years.

(B)	Separate Plan. The Employer may elect under Part 4E, #28.c. of the Agreement to provide the Employer Nonelective Contribution under another Defined Contribution Plan maintained by the Employer. The Employer Nonelective Contribution under such other plan must satisfy the conditions under this Section 17.6 for this Plan to qualify as a Safe Harbor 401(k) Plan. Under the Standardized Agreement, the other plan designated under Part 4E, #28.c. must be a Paired Plan as defined in Section 22.132.

	(I)	Profit sharing plan Agreement. If the Plan designated under Part 4E, #28.c. is a profit sharing plan Agreement under this Prototype Plan, the Employer must select Part 4, #12.f. under the profit sharing plan Nonstandardized Agreement or Part 4, #12.e. under the profit sharing plan Standardized Agreement, as applicable. The Employer may elect to provide other Employer Contributions under Part 4, #12 of the profit sharing plan Agreement, however, the first amounts allocated under the profit sharing plan Agreement will be the Safe Harbor Nonelective Contribution required under the 401(k) plan Agreement. Any Employer Contributions designated under Part 4, #12 of the profit sharing plan Agreement are in addition to the Safe Harbor Contribution required under the 401(k) plan Agreement. (If the only Employer Contribution to be made under the profit sharing plan Agreement is the Safe Harbor Nonelective Contribution, no other selection need be completed under Part 4 of the profit sharing plan Agreement (other than Part 4, #12.f of the Nonstandardized Agreement or Part 4, #12.e. of the Standardized Agreement, as applicable).)

		If the Employer elects to provide the Safe Harbor Nonelective Contribution under the profit sharing plan Agreement, the Employer must select either the Pro Rata Allocation Method under Part 4, #13.a. or the Permitted Disparity Method under Part 4, #13.b. of the profit sharing plan Agreement. If the Employer elects the Pro Rata Allocation Method, the first amounts allocated under the Pro Rata Allocation Method will be deemed to be the Safe Harbor Nonelective Contribution as required under the 401(k) plan Agreement. To the extent required under the 401(k) plan Agreement, such amounts are subject to the conditions for Safe Harbor Nonelective Contributions described in subsections (2) – (4) below, without regard to any contrary elections under the Agreement.

		If the Employer elects the Permitted Disparity Method, the Safe Harbor Nonelective Contribution required under the 401(k) plan Agreement will be allocated before applying the Permitted Disparity Method of allocation. To the extent required under the 401(k) plan Agreement, such amounts are subject to the conditions for Safe Harbor Nonelective Contributions described in subsections (2) – (4) below without regard to any contrary elections under the Agreement. If additional amounts are contributed under the profit sharing plan Agreement, such amounts will be allocated under the Permitted Disparity Method. The Safe Harbor Nonelective Contribution may



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				not be taken into account in applying the Permitted Disparity Method of allocation.

			(II)	Money purchase plan Agreement. If the Plan designated under Part 4E, #28.c. is a money purchase plan Agreement under this Prototype Plan, the Employer must select Part 4, #12.f. under the money purchase plan Nonstandardized Agreement or Part 4, #12.d. under the money purchase plan Standardized Agreement, as applicable. The Employer may elect to provide other Employer Contributions under Part 4, #12 of the money purchase plan Agreement, however, the first amounts allocated under the money purchase plan Agreement will be the Safe Harbor Nonelective Contribution required under the 401(k) plan Agreement. Any Employer Contributions designated under Part 4, #12 of the money purchase plan Agreement are in addition to the Safe Harbor Contribution. (If the only Employer Contribution to be made under the money purchase plan Agreement is the Safe Harbor Nonelective Contribution, no other need be completed under Part 4 of the money purchase plan Agreement (other than Part 4, #12.f. of the Nonstandardized Agreement or Part 4, #12.d. of the Standardized Agreement, as applicable).)

				If the Employer elects to make a Safe Harbor Contribution under the money purchase plan Agreement, the first amounts allocated under the Plan will be deemed to be the Safe Harbor Nonelective Contribution as required under the 401(k) plan Agreement. Such amounts will be allocated equally to all Eligible Participants as defined under the 401(k) plan Agreement. To the extent required under the 401(k) plan Agreement, such amounts are subject to the conditions for Safe Harbor Nonelective Contributions described in subsections (2) – (4) below, without regard to any contrary elections under the Agreement. If the Employer elects the Permitted Disparity Method of contribution, the Safe Harbor Nonelective Contribution required under the 401(k) plan Agreement will be allocated before applying the Permitted Disparity Method. The Safe Harbor Nonelective Contribution may not be taken into account in applying the Permitted Disparity Method of contribution.

		(C)	Elimination of Safe Harbor Nonelective Contribution. The Employer may amend the Plan during the Plan Year to reduce or eliminate the Safe Harbor Nonelective Contribution elected under Part 4E of the Agreement. The Employer must notify all Eligible Participants of the amendment and must provide each Eligible Participants with a reasonable opportunity (including a reasonable period) to change their Section 401(k) Deferral and/or Employee After-Tax Contribution elections, as applicable. The amendment reducing or eliminating the Safe Harbor Nonelective Contribution must be effective no earlier than the later of: (A) 30 days after Eligible Participants are notified of the amendment or (B) the date the amendment is adopted. If the Employer reduces or eliminates the Safe Harbor Nonelective Contribution during the Plan Year, the Plan is subject to the ADP Test (and ACP Test, if applicable) for the entire Plan Year.

(2)	Full and immediate vesting. The Safe Harbor Contribution under subsection (1) above must be 100% vested, regardless of the Employee’s length of service, at the time the contribution is made to the Plan. Any additional amounts contributed under the Plan may be subject to a vesting schedule.

(3)	Distribution restrictions. Distributions of the Safe Harbor Contribution under subsection (1) must be restricted in the same manner as Section 401(k) Deferrals under Article 8, except that such contributions may not be distributed upon Hardship. See Section 8.6(c).

(4)	Annual notice. Each Eligible Participant under the Plan must receive a written notice describing the Participant’s rights and obligations under the Plan, including a description of: (i) the Safe Harbor Contribution formula being used under the Plan; (ii) any other contributions under the Plan; (iii) the plan to which the Safe Harbor Contributions will be made (if different from this Plan); (iv) the type and amount of Included Compensation that may be deferred under the Plan; (v) the administrative requirements for making and changing Section 401(k) Deferral elections; and (vi) the withdrawal and vesting provisions under the Plan. For any Plan Year that began in 1999, the



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		notice requirements described in this paragraph are deemed satisfied if the notice provided satisfied a reasonable, good faith interpretation of the notice requirements under Code §401(k)(12). (See subsection (1)(ii) above for a special supplemental notice that may need to be provided to qualify as a Safe Harbor 401(k) Plan.)

		Each Eligible Participant must receive the annual notice within a reasonable period before the beginning of the Plan Year (or within a reasonable period before an Employee becomes an Eligible Participant, if later). For this purpose, an Employee will be deemed to have received the notice in a timely manner if the Employee receives such notice at least 30 days and no more than 90 days before the beginning of the Plan Year. For an Employee who becomes an Eligible Participant during a Plan Year, the notice will be deemed timely if it is provided no more than 90 days prior to the date the Employee becomes an Eligible Participant. For Plan Years that began on or before April 1, 1999, the notice requirement under this subsection will be satisfied if the notice was provided by March 1, 1999. If an Employer first designates the Plan as a Safe Harbor 401(k) Plan for a Plan Year that begins on or after January 1, 2000 and on or before June 1, 2000, the notice requirement under this subsection will be satisfied if the notice was provided by May 1, 2000.

( b)	Deemed compliance with ADP Test. If the Plan satisfies all the conditions under subsection (a) above to qualify as a Safe Harbor 401(k) Plan, the Plan is deemed to satisfy the ADP Test for the Plan Year. This Plan will not be deemed to satisfy the ADP Test for a Plan Year if an Eligible Participant is covered under another Safe Harbor 401(k) Plan maintained by the Employer which uses the provisions under this Section to comply with the ADP Test.

( c)	Deemed compliance with ACP Test. If the Plan satisfies all the conditions under subsection (a) above to qualify as a Safe Harbor 401(k) Plan, the Plan is deemed to satisfy the ACP Test for the Plan Year with respect to Employer Matching Contributions (including Employer Matching Contributions that are not used to qualify as a Safe Harbor 401(k) Plan), provided the following conditions are satisfied. If the Plan does not satisfy the requirements under this subsection (c) for a Plan Year, the Plan must satisfy the ACP Test for such Plan Year in accordance with subsection (d) below.

	(1)	Only Employer Matching Contributions are Safe Harbor Matching Contributions under basic formula. If the only Employer Matching Contribution formula provided under the Plan is a basic safe harbor formula under Part 4E, #27.a. of the Agreement, the Plan is deemed to satisfy the ACP Test, without regard to the conditions under subsections (2) – (5) below.

	(2)	Limit on contributions eligible for Employer Matching Contributions. If Employer Matching Contributions are provided (other than just Employer Matching Contributions under a basic safe harbor formula) the total Employer Matching Contributions provided under the Plan (whether or not such Employer Matching Contributions are provided under a Safe Harbor Matching Contribution formula) must not apply to any Section 401(k) Deferrals or Employee After-Tax Contributions that exceed 6% of Included Compensation. If an Employer Matching Contribution formula applies to both Section 401(k) Deferrals and Employee After-Tax Contributions, then the Sum of such contributions that exceed 6% of Included Compensation must be disregarded under the formula.

	(3)	Limit on discretionary Employer Matching Contributions. For Plan Years beginning after December 31, 1999, the Plan will not satisfy the ACP Safe Harbor if the Employer elects to provide discretionary Employer Matching Contributions in addition to the Safe Harbor Matching Contribution, unless the Employer limits the aggregate amount of such discretionary Employer Matching Contributions under Part 4B, #16.b. to no more than 4 percent of the Employee’s Included Compensation.

	(4)	Rate of Employer Matching Contribution may not increase. The Employer Matching Contribution formula may not provide a higher rate of match at higher levels of Section 401(k) Deferrals or Employee After-Tax Contributions.

	(5)	Limit on Employer Matching Contributions for Highly Compensated Employees. The Employer Matching Contributions made for any Highly Compensated Employee at any rate of Section 401(k) Deferrals and/or Employee After-Tax Contributions cannot be greater than the Employer Matching Contributions provided for any Nonhighly Compensated Employee at the same rate of Section 401(k) Deferrals and/or Employee After-Tax Contributions.

	(6)	Employee After-Tax Contributions. If the Plan permits Employee After-Tax Contributions, such contributions must satisfy the ACP Test, regardless of whether the Employer Matching Contributions under Plan are deemed to satisfy the ACP Test under this subsection (c). The ACP Test must be performed in accordance with subsection (d) below.



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	( d)	Rules for applying the ACP Test. If the ACP Test must be performed under a Safe Harbor 401(k) Plan, either because there are Employee After-Tax Contributions, or because the Employer Matching Contributions do not satisfy the conditions described in subsection (c) above, the Current Year Testing Method must be used to perform such test, even if the Agreement specifies that the Prior Year Testing Method applies. In addition, the testing rules provided in IRS Notice 98-52 (or any successor guidance) are applicable in applying the ACP Test

	( e)	Aggregated plan. If the Plan is aggregated with another plan under Section 17.5(a) or (b), then the Plan is not a Safe Harbor 401(k) Plan unless the conditions of this Section are satisfied on an aggregated basis.

	( f)	First year of plan. To qualify as a Safe Harbor 401(k) Plan, the Plan Year must be a 12-month period, except for the first year of the Plan, in which case the Plan may have a short Plan Year. In no case may the Plan have a short Plan Year of less than 3 months.

		If the Plan has an initial Plan Year that is less than 12 months, for purposes of applying the Annual Additions Limitation under Article 7, the Limitation Year will be the 12-month period ending on the last day of the short Plan Year. Thus, no proration of the Defined Contribution Dollar Limitation will be required. (See Section 7.4(e).) In addition, the Employer’s Included Compensation will be determined for the 12-month period ending on the last day of the short Plan Year.

1 7.7	Definitions. The following definitions apply for purposes of applying the provisions of this Article 17.

	( a)	ACP - Average Contribution Percentage. The ACP for a group is the average of the contribution percentages calculated separately for each Eligible Participant in the group. An Eligible Participant’s contribution percentage is the ratio of the contributions made on behalf of the Participant that are included under the ACP Test, expressed as a percentage of the Participant’s Testing Compensation for the Plan Year. For this purpose, the contributions included under the ACP Test are the Sum of the Employee After-Tax Contributions, Employer Matching Contributions, and QMACs (to the extent not taken into account for purposes of the ADP test) made under the Plan on behalf of the Participant for the Plan Year. The ACP may also include other contributions as provided in Section 17.3(c), if applicable.

	( b)	ADP - Average Deferral Percentage. The ADP for a group is the average of the deferral percentages calculated separately for each Eligible Participant in the group. A Participant’s deferral percentage is the ratio of the Participant’s deferral contributions expressed as a percentage of the Participant’s Testing Compensation for the Plan Year. For this purpose, a Participant’s deferral contributions include any Section 401(k) Deferrals made pursuant to the Participant’s deferral election, including Excess Deferrals of Highly Compensated Employees (but excluding Excess Deferrals of Nonhighly Compensated Employees). The ADP may also include other contributions as provided in Section 17.2(c), if applicable.

		In determining a Participant’s deferral percentage for the Plan Year, a deferral contribution may be taken into account only if such contribution is allocated to the Participant’s Account as of a date within the Plan Year. For this purpose, a deferral contribution may only be allocated to a Participant’s Account within a particular Plan Year if the deferral contribution is actually paid to the Trust no later than the end of the 12-month period immediately following that Plan Year and the deferral contribution relates to Included Compensation that (1) would otherwise have been received by the Participant in that Plan Year or (2) is attributable to services performed in that Plan Year and would otherwise have been received by the Participant within 2½ months after the close of that Plan Year. No formal election need be made by the Employer to use the 2½-month rule described in the preceding sentence. However, deferral contributions may only be taken into account for a single Plan Year.

	( c)	Excess Aggregate Contributions. Excess Aggregate Contributions for a Plan Year are the amounts contributed on behalf of the Highly Compensated Employees that exceed the maximum amount permitted under the ACP Test for such Plan Year. The total dollar amount of Excess Aggregate Contributions for a Plan Year is determined by calculating the amount that would have to be distributed to the Highly Compensated Employees if the distributions were made first to the Highly Compensated Employee(s) with the highest contribution percentage until either:

		(1)	the adjusted ACP for the Highly Compensated Employee Group would reach a percentage that satisfies the ACP Test, or

		(2)	the contribution percentage of the Highly Compensated Employee(s) with the next highest contribution percentage would be reached.

		This process is repeated until the adjusted ACP for the Highly Compensated Employee Group would satisfy the ACP Test. The total dollar amount so determined is then divided among the Highly Compensated



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	Employee Group in the manner described in Section 17.3(d)(1) to determine the actual corrective distributions to be made.

( d)	Excess Contributions. Excess Contributions for a Plan Year are the amounts taken into account in computing the ADP of the Highly Compensated Employees that exceed the maximum amount permitted under the ADP Test for such Plan Year. The total dollar amount of Excess Contributions for a Plan Year is determined by calculating the amount that would have to be distributed to the Highly Compensated Employees if the distributions were made first to the Highly Compensated Employee(s) with the highest deferral percentage until either:

	(1)	the adjusted ADP for the Highly Compensated Employee Group would reach a percentage that satisfies the ADP Test, or

	(2)	the deferral percentage of the Highly Compensated Employee(s) with the next highest deferral percentage would be reached.

	This process is repeated until the adjusted ADP for the Highly Compensated Employee Group would satisfy the ADP test. The total dollar amount so determined is then divided among the Highly Compensated Employee Group in the manner described in Section 17.2(d)(1) to determine the actual corrective distributions to be made.

( e)	Highly Compensated Employee Group. The Highly Compensated Employee Group is the group of Eligible Participants who are Highly Compensated Employees for the current Plan Year. An Employee who makes a one-time irrevocable election not to participate in accordance with Section 1.10 (if authorized under Part 13, #75 of the Nonstandardized Agreement) will not be treated as an Eligible Participant.

( f)	Nonhighly Compensated Employee Group. The Nonhighly Compensated Employee Group is the group of Eligible Participants who are Nonhighly Compensated Employees for the applicable Plan Year. If the Prior Year Testing Method is selected under Part 4F of the Agreement, the Nonhighly Compensated Employee Group is the group of Eligible Participants in the prior Plan Year who were Nonhighly Compensated Employees for that year. If the Current Year Testing Method is selected under Part 4F of the Agreement, the Nonhighly Compensated Employee Group is the group of Eligible Participants who are Nonhighly Compensated Employees for the current Plan Year. An Employee who makes a one-time irrevocable election not to participate in accordance with Section 1.10 (if authorized under Part 13, #75 of the Nonstandardized Agreement) will not be treated as an Eligible Participant.

( g)	QMACs - Qualified Matching Contribution. To the extent authorized under Part 4B, #18 of the Agreement, QMACs are Employer Matching Contributions which are 100% vested when contributed to the Plan and are subject to the distribution restrictions applicable to Section 401(k) Deferrals under Article 8, except that no portion of a Participant’s QMAC Account may be distributed from the Plan on account of Hardship. See Section 8.6(c).

( h)	QNECs - Qualified Nonelective Contributions. To the extent authorized under Part 4C, #22 of the Agreement, QNECs are Employer Nonelective Contributions which are 100% vested when contributed to the Plan and are subject to the distribution restrictions applicable to Section 401(k) Deferrals under Article 8, except that no portion of a Participant’s QNEC Account may be distributed from the Plan on account of Hardship. See Section 8.6(c).

( i)	Testing Compensation. In determining the Testing Compensation used for purposes of applying the ADP Test, the ACP Test, and the Multiple Use Test, the Plan Administrator is not bound by any elections made under Part 3 of the Agreement with respect to Total Compensation or Included Compensation under the Plan. The Plan Administrator may determine on an annual basis (and within its discretion) the components of Testing Compensation for purposes of applying the ADP Test, the ACP Test and the Multiple Use Test. Testing Compensation must qualify as a nondiscriminatory definition of compensation under Code §414(s) and the regulations thereunder and must be applied consistently to all Participants. Testing Compensation may be determined over the Plan Year for which the applicable test is being performed or the calendar year ending within such Plan Year. In determining Testing Compensation, the Plan Administrator may take into consideration only the compensation received while the Employee is an Eligible Participant under the component of the Plan being tested. In no event may Testing Compensation for any Participant exceed the Compensation Dollar Limitation defined in Section 22.32. In determining Testing Compensation, the Plan Administrator may exclude amounts paid to an individual as severance pay to the extent such amounts are paid after the common-law employment relationship between the individual and the Employer has terminated, provided such amounts also are excluded in determining Total Compensation under 22.197.



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ARTICLE 18
PLAN AMENDMENTS AND TERMINATION

This Article contains the rules regarding the ability of the Prototype Sponsor or Employer to make Plan amendments and the effect of such amendments on the Plan. This Article also contains the rules for administering the Plan upon termination and the effect of Plan termination on Participants’ benefits and distribution rights.


18.1	P lan Amendments.

	(a)	Amendment by the Prototype Sponsor. The Prototype Sponsor may amend the Prototype Plan on behalf of each adopting Employer who is maintaining the Plan at the time of the amendment. An amendment by the Prototype Sponsor to the Basic Plan Document does not require consent of the adopting Employers, nor does an adopting Employer have to reexecute its Agreement with respect to such an amendment. The Prototype Sponsor will provide each adopting Employer a copy of the amended Basic Plan Document (either by providing substitute or additional pages, or by providing a restated Basic Plan Document). An amendment by the Prototype Sponsor to any Agreement offered under the Prototype Plan is not effective with respect to an Employer’s Plan unless the Employer reexecutes the amended Agreement.

		If the Prototype Plan is amended by the mass submitter, the mass submitter is treated as the agent of the Prototype Sponsor. If the Prototype Sponsor does not adopt any amendments made by the mass submitter, the Prototype Plan will no longer be identical to or a minor modifier of the mass submitter Prototype Plan.

	(b)	Amendment by the Employer. The Employer shall have the right at any time to amend the Agreement in the following manner without affecting the Plan’s status as a Prototype Plan. (The ability to amend the Plan as authorized under this Section applies only to the Employer that executes the Signature Page of the Agreement. Any amendment to the Plan by the Employer under this Section also applies to any Related Employer that participates under the Plan as a Co-Sponsor.)

		(1)	The Employer may change any optional selections under the Agreement.

		(2)	The Employer may add additional language where authorized under the Agreement, including language necessary to satisfy Code §415 or Code §416 due to the aggregation of multiple plans.

		(3)	The Employer may change the administrative selections under Part 12 of the Agreement by replacing the appropriate page(s) within the Agreement. Such amendment does not require reexecution of the Signature Page of the Agreement.

		(4)	The Employer may add any model amendments published by the IRS which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan.

		(5)	The Employer may adopt any amendments that it deems necessary to satisfy the requirements for resolving qualification failures under the IRS’ compliance resolution programs.

		(6)	The Employer may adopt an amendment to cure a coverage or nondiscrimination testing failure, as permitted under applicable Treasury regulations.

		The Employer may amend the Plan at any time for any other reason, including a waiver of the minimum funding requirement under Code §412(d). However, such an amendment will cause the Plan to lose its status as a Prototype Plan and become an individually designed plan.

		The Employer’s amendment of the Plan from one type of Defined Contribution Plan (e.g., a money purchase plan) into another type of Defined Contribution Plan (e.g., a profit sharing plan) will not result in a partial termination or any other event that would require full vesting of some or all Plan Participants.

		Any amendment that affects the rights, duties or responsibilities of the Trustee or Plan Administrator may only be made with the Trustee’s or Plan Administrator’s written consent. Any amendment to the Plan must be in writing and a copy of the resolution (or similar instrument) setting forth such amendment (with the applicable effective date of such amendment) must be delivered to the Trustee.

		No amendment may authorize or permit any portion of the assets held under the Plan to be used for or diverted to a purpose other than the exclusive benefit of Participants or their Beneficiaries, except to the extent such assets are used to pay taxes or administrative expenses of the Plan. An amendment also may not cause or permit any portion of the assets held under the Plan to revert to or become property of the Employer.



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	(c)	Protected Benefits. Except as permitted under statute (such as Code §412(c)(8)), regulations (such as Treas. Reg. §1.411(d)-4), or other IRS guidance of general applicability, no Plan amendment (or other transaction having the effect of a Plan amendment, such as a merger, acquisition, plan transfer, or similar transaction) may reduce a Participant’s Account Balance or eliminate or reduce a Protected Benefit to the extent such Protected Benefit relates to amounts accrued prior to the adoption date (or effective date, if later) of the Plan amendment. For this purpose, Protected Benefits include any early retirement benefits, retirement-type subsidies, and optional forms of benefit (as defined under the regulations). If the adoption of this Plan will result in the elimination of a Protected Benefit, the Employer may preserve such Protected Benefit by identifying the Protected Benefit in accordance with Part 13, #58 of the Agreement [Part 13, #76 of the 401(k) Agreement]. Failure to identify Protected Benefits under the Agreement will not override the requirement that such Protected Benefits be preserved under this Plan. The availability of each optional form of benefit under the Plan must not be subject to Employer discretion.

		Effective for amendments adopted and effective on or after September 6, 2000, if the Plan is a profit sharing plan or a 401(k) Plan, the Employer may eliminate all annuity and installment forms of distribution (including the QJSA form of benefit to the extent the Plan is not required to offer such form of benefit under Article 9), provided the Plan offers a single-sum distribution option that is available at the same time as the annuity or installment options that are being eliminated. If the Plan is a money purchase plan or a target benefit plan, the Employer may not eliminate the QJSA form of benefit. However, the Employer may eliminate all other annuity and installment forms of distribution, provided the Plan offers a single-sum distribution option that is available at the same time as the annuity or installment options that are being eliminated. Any amendment eliminating an annuity or installment form of distribution may not be effective until the earlier of: (1) the date which is the 90 ^th day following the date a summary of the amendment is furnished to the Participant which satisfies the requirements under DOL Reg. §2520.104b-3 or (2) the first day of the second Plan Year following the Plan Year in which the amendment is adopted.

18.2	Plan Termination. The Employer may terminate this Plan at any time by delivering to the Trustee and Plan Administrator written notice of such termination.

	(a)	Full and immediate vesting. Upon a full or partial termination of the Plan (or in the case of a profit sharing plan, the complete discontinuance of contributions), all amounts credited to an affected Participant’s Account become 100% vested, regardless of the Participant’s vested percentage determined under Article 4. The Plan Administrator has discretion to determine whether a partial termination has occurred.

	(b)	Distribution procedures. Upon the termination of the Plan, the Plan Administrator shall direct the distribution of Plan assets to Participants in accordance with the provisions under Article 8. For this purpose, distribution shall be made to Participants with vested Account Balances of $5,000 or less in lump sum as soon as administratively feasible following the Plan termination, regardless of any contrary election under Part 9, #34 of the Agreement [Part 9, #52 of the 401(k) Agreement]. For Participants with vested Account Balances in excess of $5,000, distribution will be made through the purchase of deferred annuity contracts which protect all Protected Benefits under the Plan, unless a Participant elects to receive an immediate distribution in any form of payment permitted under the Plan. If an immediate distribution is elected in a form other than a lump sum, the distribution will be satisfied through the purchase of an immediate annuity contract. Distributions will be made as soon as administratively feasible following the Plan termination, regardless of any contrary election under Part 9, #33 of the Agreement [Part 9, #51 of the 401(k) Agreement]. The references in this paragraph to $5,000 shall be deemed to mean $3,500, prior to the time the $5,000 threshold becomes effective under the Plan (as determined in Section 8.3(f)).

		For purposes of applying the provisions of this subsection (b), distribution may be delayed until the Employer receives a favorable determination letter from the IRS as to the qualified status of the Plan upon termination, provided the determination letter request is made within a reasonable period following the termination of the Plan.

		(1)	Special rule for certain profit sharing plans. If this Plan is a profit sharing plan, distribution will be made to all Participants, without consent, as soon as administratively feasible following the termination of the Plan, without regard to the value of the Participants’ vested Account Balance. This special rule applies only if the Plan does not provide for an annuity option under Part 11 of the Agreement and the Employer does not maintain any other Defined Contribution Plan (other than an ESOP) at any time between the termination of the Plan and the distribution.

		(2)	Special rule for 401(k) plans. Section 401(k) Deferrals, QMACs, QNECs, Safe Harbor Matching Contributions and Safe Harbor Nonelective Contributions under a 401(k) plan (as well as transferred assets (see Section 3.3(c)(3)) which are subject to the distribution restrictions applicable to Section 401(k) Deferrals) may be distributed in a lump sum upon Plan termination only if the Employer does not maintain a Successor Plan at any time during the period beginning on the date of termination and ending 12 months after the final distribution of all Plan assets. For this purpose,



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			a Successor Plan is any Defined Contribution Plan, other than an ESOP (as defined in Code §4975(e)(7)), a SEP (as defined in Code §408(k)), or a SIMPLE IRA (as defined in Code §408(p)). A plan will not be considered a Successor Plan, if at all times during the 24-month period beginning 12 months before the Plan termination, fewer than 2% of the Eligible Participants under the 401(k) plan are eligible under such plan. A distribution of these contributions may be made to the extent another distribution event permits distribution of such amounts.

		(3)	Plan termination not distribution event if assets are transferred to another Plan. If, pursuant to the termination of the Plan, the Employer enters into a transfer agreement to transfer the assets of the terminated Plan to another plan maintained by the Employer (or by a successor employer in a transaction involving the acquisition of the Employer’s stock or assets, or other similar transaction), the termination of the Plan is not a distribution event and the distribution procedures above do not apply. Prior to the transfer of the assets, distribution of a Participant’s Account Balance may be made from the terminated Plan only to a Participant (or Beneficiary, if applicable) who is otherwise eligible for distribution without regard to the Plan’s termination. Otherwise, benefits will be distributed from the transferee plan in accordance with the terms of that plan (subject to the protection of any Protected Benefits that must be continued with respect to the transferred assets).

	(c)	Termination upon merger, liquidation or dissolution of the Employer. The Plan shall terminate upon the liquidation or dissolution of the Employer or the death of the Employer (if the Employer is a sole proprietor) provided however, that in any such event, arrangements may be made for the Plan to be continued by any successor to the Employer.

18.3	Merger or Consolidation. In the event the Plan is merged or consolidated with another plan each Participant must be entitled to a benefit immediately after such merger or consolidation that is at least equal to the benefit the Participant would have been entitled to had the Plan terminated immediately before such merger or consolidation. (See Section 4.1(d) for rules regarding vesting following a merger or consolidation.) The Employer may authorize the Trustee to enter into a merger agreement with the Trustee of another plan to effect such merger or consolidation. A merger agreement entered into by the Trustee is not part of this Plan and does not affect the Plan’s status as a Prototype Plan. (See Section 3.3 for the applicable rules where amounts are transferred to this Plan from another plan.)



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ARTICLE 19
MISCELLANEOUS

This Article contains miscellaneous provisions concerning the Employer’s and Participants’ rights and responsibilities under the Plan.


19.1	Exclusive Benefit. Except as provided under Section 19.2, no part of the Plan assets (including any corpus or income of the Trust) may revert to the Employer prior to the satisfaction of all liabilities under the Plan nor will such Plan assets be used for, or diverted to, a purpose other than the exclusive benefit of Participants or their Beneficiaries.

19.2	Return of Employer Contributions. Upon written request by the Employer, the Trustee must return any Employer Contributions provided that the circumstances and the time frames described below are satisfied. The Trustee may request the Employer to provide additional information to ensure the amounts may be properly returned. Any amounts returned shall not include earnings, but must be reduced by any losses.

	(a)	Mistake of fact. Any Employer Contributions made because of a mistake of fact must be returned to the Employer within one year of the contribution.

	(b)	Disallo wance of deduction. Employer Contributions to the Trust are made with the understanding that they are deductible. In the event the deduction of an Employer Contribution is disallowed by the IRS, such contribution (to the extent disallowed) must be returned to the Employer within one year of the disallowance of the deduction.

	(c)	Failure to initially qualify. Employer Contributions to the Plan are made with the understanding, in the case of a new Plan, that the Plan satisfies the qualification requirements of Code §401(a) as of the Plan’s Effective Date. In the event that the Internal Revenue Service determines that the Plan is not initially qualified under the Code, any Employer Contributions (and allocable earnings) made incident to that initial qualification must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the employer’s return for the taxable year in which the plan is adopted, or such later date as the Secretary of the Treasury may prescribe.

19.3	Alienation or Assignment. Except as permitted under applicable statute or regulation, a Participant or Beneficiary may not assign, alienate, transfer or sell any right or claim to a benefit or distribution from the Plan, and any attempt to assign, alienate, transfer or sell such a right or claim shall be void, except as permitted by statute or regulation. Any such right or claim under the Plan shall not be subject to attachment, execution, garnishment, sequestration, or other legal or equitable process. This prohibition against alienation or assignment also applies to the creation, assignment, or recognition of a right to a benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a QDRO pursuant to Section 11.5, or any domestic relations order entered before January 1,1985.

19.4	Participants’ Rights. The adoption of this Plan by the Employer does not give any Participant, Beneficiary, or Employee a right to continued employment with the Employer and does not affect the Employer’s right to discharge an Employee or Participant at any time. This Plan also does not create any legal or equitable rights in favor of any Participant, Beneficiary, or Employee against the Employer, Plan Administrator or Trustee. Unless the context indicates otherwise, any amendment to this Plan is not applicable to determine the benefits accrued (and the extent to which such benefits are vested) by a Participant or former Employee whose employment terminated before the effective date of such amendment, except where application of such amendment to the terminated Participant or former Employee is required by statute, regulation or other guidance of general applicability. Where the provisions of the Plan are ambiguous as to the application of an amendment to a terminated Participant or former Employee, the Plan Administrator has the authority to make a final determination on the proper interpretation of the Plan.

19.5	Military Service. To the extent required under Code §414(u), an Employee who returns to employment with the Employer following a period of qualified military service will receive any contributions, benefits and service credit required under Code §414(u), provided the Employee satisfies all applicable requirements under the Code and regulations.

19.6	Paired Plans. If the Employer adopts more than one Standardized Agreement, each of the Standardized Agreements are considered to be Paired Plans, provided the Employer completes Part 13, #54 of the Agreement [Part 13, #72 of the 401(k) Agreement] in a manner which ensures the plans together comply with the Annual Additions Limitation, as described in Article 7, and the Top-Heavy Plan rules, as described in Article 16. If the Employer adopts Paired Plans, each Plan must have the same Plan Year.



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19.7	Annuity Co ntract. Any annuity contract distributed under the Plan must be nontransferable. In addition, the terms of any annuity contract purchased and distributed to a Participant or to a Participant’s spouse must comply with all requirements under this Plan.

19.8	Use of IRS compliance programs. Nothing in this Plan document should be construed to limit the availability of the IRS’ voluntary compliance programs, including the IRS Administrative Policy Regarding Self-Correction (APRSC) program. An Employer may take whatever corrective actions are permitted under the IRS voluntary compliance programs, as is deemed appropriate by the Plan Administrator or Employer.

19.9	Loss of Prototype Status. If the Plan as adopted by the Employer fails to attain or retain qualification, such Plan will no longer qualify as a Prototype Plan and will be considered an individually-designed plan.

19.10	Governing Law. The provisions of this Plan shall be construed, administered, and enforced in accordance with the provisions of applicable Federal Law and, to the extent applicable, the laws of the state in which the Trustee has its principal place of business. The foregoing provisions of this Section shall not preclude the Employer and the Trustee from agreeing to a different state law with respect to the construction, administration and enforcement of the Plan.

19.11	Waiver of Notice. Any person entitled to a notice under the Plan may waive the right to receive such notice, to the extent such a waiver is not prohibited by law, regulation or other pronouncement.

19.12	Use of Electronic Media. The Plan Administrator may use telephonic or electronic media to satisfy any notice requirements required by this Plan, to the extent permissible under regulations (or other generally applicable guidance). In addition, a Participant’s consent to immediate distribution, as required by Article 8, may be provided through telephonic or electronic means, to the extent permissible under regulations (or other generally applicable guidance). The Plan Administrator also may use telephonic or electronic media to conduct plan transactions such as enrolling participants, making (and changing) salary reduction elections, electing (and changing) investment allocations, applying for Plan loans, and other transactions, to the extent permissible under regulations (or other generally applicable guidance).

19.13	Severability of Provisions. In the event that any provision of this Plan shall be held to be illegal, invalid or unenforceable for any reason, the remaining provisions under the Plan shall be construed as if the illegal, invalid or unenforceable provisions had never been included in the Plan.

19.14	Binding Effect. The Plan, and all actions and decisions made thereunder, shall be binding upon all applicable parties, and their heirs, executors, administrators, successors and assigns.



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ARTICLE 20
GUST ELECTIONS AND EFFECTIVE DATES

The provisions of this Plan are generally effective as of the Effective Date designated on the Signature Page of the Agreement. Appendix A of the Agreement also allows for special effective dates for specified provisions of the Plan, which override the general Effective Date under the Agreement. Section 22.96 refers to a series of laws that have been enacted since 1994 as the GUST Legislation, for which extended time (known as the remedial amendment period) was provided to Employers to conform their plan documents to such laws. This Article prescribes special effective date rules for conforming plans to the GUST Legislation.


20.1	GUST Effective Dates. If the Agreement is adopted within the remedial amendment period for the GUST Legislation, and the Plan has not previously been restated to comply with the GUST Legislation, then special effective dates apply to certain provisions. These special effective dates apply to the appropriate provisions of the Plan, even if such special effective dates are earlier than the Effective Date identified on the Signature Page of the Agreement. The Employer may specify in elections provided in Appendix B of the Agreement, how the Plan was operated to comply with the GUST Legislation. Appendix B need only be completed if the Employer operated this Plan in a manner that is different from the default provisions contained in this Plan or the elective choices made under the Agreement. If the Employer did not operate the Plan in a manner that is different from the default provisions or elective provisions of the Plan or, if the Plan is not being restated for the first time to comply with the GUST Legislation, and prior amendments or restatements of the Plan satisfied the requirement to amend timely to comply with the GUST Legislation, Appendix B need not be completed and may be removed from the Agreement.

	If one or more qualified retirement plans have been merged into this Plan, the provisions of the merging planes) will remain in full force and effect until the Effective Date of the plan merger(s), unless provided otherwise under Appendix A-12 of the Agreement [Appendix A-16 of the 401(k) Agreement]. If the merging plan(s) have not been amended to comply with the changes required under the GUST Legislation, the merging planes) will be deemed amended retroactively for such required changes by operation of this Agreement. The provisions required by the GUST Legislation (as provided under this BPD and related Agreements) will be effective for purposes of the merging plan(s) as of the same effective date that is specified for that GUST provision in this BPD and Appendix B of the Agreement (even if that date precedes the general Effective Date specified in the Agreement).

20.2	Highly Compensated Employee Definition. The definition of Highly Compensated Employee under Section 22.99 is modified effective for Plan Years beginning after December 31, 1996. Under the current definition of Highly Compensated Employee, the Employer must designate under the Plan whether it is using the Top-Paid Group Test and whether it is using the Calendar Year Election or, for the 1997 Plan Year, whether it used the Old-Law Calendar Year Election.

	(a)	Top-Paid Group Test. In determining whether an Employee is a Highly Compensated Employee, the Top-Paid Group Test under Section 22.99(b)(4) does not apply unless the Employer specifically elects under Part 13, #50.a. of the Agreement [Part 13, #68.a. of the 401(k) Agreement] to have the Top-Paid Group Test apply. The Employer’s election to use or not use the Top-Paid Group Test generally applies for all years beginning with the Effective Date of the Plan (or the first Plan Year beginning after December 31, 1996, if later). However, because the Employer may not have operated the Plan consistent with this Top-Paid Group Test election for all years prior to the date this Plan restatement is adopted, Appendix B-1.a. of the Agreement also permits the Employer to override the Top-Paid Group Test election under this Plan for specified Plan Years beginning after December 31, 1996, and before the date this Plan restatement is adopted.

	(b)	Calendar Year Election. In determining whether an Employee is a Highly Compensated Employee, the Calendar Year Election under Section 22.99(b)(5) does not apply unless the Employer specifically elects under Part 13, #50.b. of the Agreement [Part 13, #68.b. of the 401(k) Agreement] to have the Calendar Year Election apply. The Employer’s election to use or not use the Calendar Year Election is generally effective for all years beginning with the Effective Date of this Plan (or the first Plan Year beginning after December 31, 1996, if later). However, because the Employer may not have operated the Plan consistent with this Calendar Year Election for all years prior to the date this Plan restatement is adopted, Appendix B-1.b. of the Agreement permits the Employer to override the Calendar Year Election under this Plan for specified Plan Years beginning after December 31, 1996, and before the date this Plan restatement is adopted.

	(c)	Old-Law Calendar Year Election. In determining whether an Employee was a Highly Compensated Employee for the Plan Year beginning in 1997, a special Old-Law Calendar Year Election was available. (See Section 22.99(b)(6) for the definition of the Old-Law Calendar Year Election.) Appendix B-1.c. of the Agreement permits the Employer to designate whether it used the Old-Law Calendar Year Election for the 1997 Plan Year. If the Employer did not use the Old-Law Calendar Year Election, the election in Appendix B-1.c. need not be completed.



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20.3	Required Minimum Distributions. Appendix B-2 of the Agreement permits the Employer to designate how it complied with the GUST Legislation changes to the required minimum distribution rules. Section 10.4 describes the application of the GUST Legislation changes to the required minimum distribution rules.

20.4	$5,000 Involuntary Distribution Threshold. For Plan Years beginning on or after August 5, 1997, a Participant (and spouse, if the Joint and Survivor Annuity rules apply under Article 9) must consent to a distribution from the Plan if the Participant’s vested Account Balance exceeds $5,000. (See Section 8.3(e) for the applicable rules for determining the value of a Participant’s vested Account Balance.) For Plan Years beginning before August 5, 1997, the consent threshold was $3,500 instead of $5,000.

	The increase in the consent threshold to $5,000 is generally effective for Plan Years beginning on or after August 5, 1997. However, because the Employer may not have operated the Plan consistent with the $5,000 threshold for all years prior to the date this Plan restatement was adopted, Appendix B-3.a. of the Agreement permits the Employer to designate the Plan Year during which it began applying the higher $5,000 consent threshold. If the Employer began applying the $5,000 consent threshold for Plan Years beginning on or after August 5, 1997, Appendix B-3.a. need not be completed. If the Employer did not begin using the $5,000 consent threshold until some later date, the Employer must designate the appropriate date in Appendix B-3.a.

20.5	Repeal of Family Aggregation for Allocation Purposes. For Plan Years beginning on or after January 1, 1997, the family aggregation rules were repealed. For Plan Years beginning before January 1, 1997, the family aggregation rules required that family members of a Five-Percent Owner or one of the 10 Employees with the highest ownership interest in the Employer were aggregated as a single Highly Compensated Employee for purposes of determining such individuals’ share of any contributions under the Plan. In determining the allocation for such aggregated individuals, the Compensation Dollar Limitation (as defined in Section 22.32) was applied on an aggregated basis with respect to the Five-Percent Owner or top-10 owner, his/her spouse, and his/her minor children (under the age of 19).

	The family aggregation rules were repealed effective for Plan Years beginning on or after January 1, 1997. However, because the Employer may not have operated the Plan consistent with the repeal of family aggregation for all years prior to the date this Plan restatement is adopted, Appendix B-3.b. of the Agreement permits the Employer to designate the Plan Year during which it repealed family aggregation for allocation purposes. If the Employer implemented the repeal of family aggregation for Plan Years beginning on or after January 1, 1997, Appendix B-3.b. need not be completed. If the Employer did not implement the repeal of family aggregation until some later date, the Employer must designate the appropriate date in Appendix B-3.b.

20.6	ADP/ACP Testing Methods. The GUST Legislation modified the nondiscrimination testing rules for Section 401(k) Deferrals, Employer Matching Contributions, and Employee After-Tax Contributions, effective for Plan Years beginning after December 31, 1996. For purposes of applying the ADP Test and ACP Test under the 401(k) Agreement, the Employer must designate the testing methodology used for each Plan Year. (See Article 17 for the definition of the ADP Test and the ACP Test and the applicable testing methodology.)

	Part 4F of the 401(k) Agreement contains elective provisions for the Employer to designate the testing methodology it will use in performing the ADP Test and the ACP Test. Appendix B-5.a. of the 401(k) Agreement contains elective provisions for the Employer to designate the testing methodology it used for Plan Years that began before the adoption of the Agreement.

20.7	Safe Harbor 401(k) Plan. Effective for Plan Years beginning after December 31, 1998, the Employer may elect under Part 4E of the 401(k) Agreement to apply the Safe Harbor 401(k) Plan provisions. To qualify as a Safe Harbor 401(k) Plan for a Plan Year, the Plan must be identified as a Safe Harbor 401(k) Plan for such year.

	If the Employer elects under Part 4E to apply the Safe Harbor 401(k) Plan provisions, the Plan generally will be considered a Safe Harbor Plan for all Plan Years beginning with the Effective Date of the Plan (or January 1, 1999, if later). Likewise, if the Employer does not elect to apply the Safe Harbor 401(k) provisions, the Plan generally will not be considered a Safe Harbor Plan for such year. However, because the Employer may have operated the Plan as a Safe Harbor 401(k) Plan for Plan Years prior to the Effective Date of this Plan or may not have operated the Plan consistent with its election under Part 4E to apply (or to not apply) the Safe Harbor 401(k) Plan provisions for all years prior to the date this Plan restatement is adopted, Appendix B-5.b. of the 401(k) Agreement permits the Employer to designate any Plan Year in which the Plan was (or was not) a Safe Harbor 401(k) Plan. Appendix B-5.b. should only be completed if the Employer operated this Plan prior to date it was actually adopted in a manner that is inconsistent with the election made under Part 4E of the Agreement.

	If the Employer elects under Appendix B-5.b. of the Agreement to apply the Safe Harbor 401(k) Plan provisions for any Plan Year beginning prior to the date this Plan is adopted, the Plan must have complied with the requirements under Section 17.6 for such year. The type and amount of the Safe Harbor Contribution for such Plan Year(s) is the type and amount of contribution described in the Participant notice issued pursuant to Section 17.6(a)(4) for such Plan Year.



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ARTICLE 21
PARTICIPATION BY RELATED EMPLOYERS (CO-SPONSORS)


21.1	Co-Sponsor Adoption Page. A Related Employer may elect to participate under this Plan by executing a Co-Sponsor Adoption Page under the Agreement. By executing a Co-Sponsor Adoption Page, the Co-Sponsor adopts all the provisions of the Plan, including the elective choices made by the Employer under the Agreement. The Co-Sponsor is also bound by any amendments made to the Plan in accordance with Article 18. The Co-Sponsor agrees to use the same Trustee as is designated on the Trustee Declaration under the Agreement, except as provided in a separate trust agreement authorized under Article 12.

21.2	Participation by Employees of Co-Sponsor. A Related Employer may not contribute to this Plan unless it executes the Co-Sponsor Adoption Page. (See Section 1.3 for a discussion of the eligibility rules as they apply to Employees of Related Employers who do not execute a Co-Sponsor Adoption Page.) However, in applying the provisions of this Plan, Total Compensation (as defined in Section 22.197) includes amounts earned with a Related Employer, regardless of whether such Related Employer executes a Co-Sponsor Adoption Page. The Employer may elect under Part 3, #10.b.(7) of the Nonstandardized Agreement [Part 3, #10.i. of the Nonstandardized 401(k) Agreement] to exclude amounts earned with a Related Employer that does not execute a Co-Sponsor Page for purposes of determining an Employee’s Included Compensation under the Plan.

21.3	Allocation of Contributions and Forfeitures. Unless selected otherwise under the Co-Sponsor Adoption Page, any contributions made by a Co-Sponsor (and any forfeitures relating to such contributions) will be allocated to all Eligible Participants employed by the Employer and Co-Sponsors in accordance with the provisions under this Plan. Under a Nonstandardized Agreement, a Co-Sponsor may elect under the Co-Sponsor Page to allocate its contributions (and forfeitures relating to such contributions) only to the Eligible Participants employed by the Co-Sponsor making such contributions. If so elected, Employees of the Co-Sponsor will not share in an allocation of contributions (or forfeitures relating to such contributions) made by any other Related Employer (except in such individual’s capacity as an Employee of that other Related Employer). Where contributions are allocated only to the Employees of a contributing Co-Sponsor, the Plan Administrator will maintain a separate accounting of an Employee’s Account Balance attributable to the contributions of a particular Co-Sponsor. This separate accounting is necessary only for contributions that are not 100% vested, so that the allocation of forfeitures attributable to such contributions can be allocated for the benefit of the appropriate Employees. An election to allocate contributions and forfeitures only to the Eligible Participants employed by the Co-Sponsor making such contributions will preclude the Plan from satisfying the nondiscrimination safe harbor rules under Treas. Reg. §1.401(a)(4)-2 and may require additional nondiscrimination testing.

21.4	Co-Sponsor No Longer a Related Employer. If a Co-Sponsor becomes a Former Related Employer because of an acquisition or disposition of stock or assets, a merger, or similar transaction, the Co-Sponsor will cease to participate in the Plan as soon as administratively feasible. If the transition rule under Code §410(b)(6)(C) applies, the Co-Sponsor will cease to participate in the Plan as soon as administratively feasible after the end of the transition period described in Code §410(b)(6)(C). If a Co-Sponsor ceases to be a Related Employer under this Section 21.4, the following procedures may be followed to discontinue the Co-Sponsor’s participation in the Plan.

	(a)	Manner of discontinuing participation. To document the cessation of participation by a Former Related Employer, the Former Related Employer may discontinue its participation as follows: (1) the Former Related Employer adopts a resolution that formally terminates active participation in the Plan as of a specified date, (2) the Employer that has executed the Signature Page of the Agreement reexecutes such page, indicating an amendment by page substitution through the deletion of the Co-Sponsor Adoption Page executed by the Former Related Employer, and (3) the Former Related Employer provides any notices to its Employees that are required by law. Discontinuance of participation means that no further benefits accrue after the effective date of such discontinuance with respect to employment with the Former Related Employer. The portion of the Plan attributable to the Former Related Employer may continue as a separate plan, under which benefits may continue to accrue, through the adoption by the Former Related Employer of a successor plan (which may be created through the execution of a separate Agreement by the Former Related Employer) or by spin-off of that portion of the Plan followed by a merger or transfer into another existing plan, as specified in a merger or transfer agreement.

	(b)	Multiple employer plan. If, after a Co-Sponsor becomes a Former Related Employer, its Employees continue to accrue benefits under this Plan, the Plan will be treated as a multiple employer plan to the extent required by law. So long as the discontinuance procedures of this Section are satisfied, such treatment as a multiple employer plan will not affect reliance on the favorable IRS letter issued to the Prototype Sponsor or any determination letter issued on the Plan.

21.5	Special Rules for Standardized Agreements. As stated in Section 1.3(b) of this BPD, under a Standardized Agreement each Related Employer (who has Employees who may be eligible to participate in the Plan) is required to execute a Co-Sponsor Adoption Page. If a Related Employer fails to execute a Co-Sponsor Adoption Page, the Plan will be treated as an individually-designed plan, except as provided in subsections (a) and (b) below. Nothing in this



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	Plan shall be construed to treat a Related Employer as participating in the Plan in the absence of a Co-Sponsor Adoption Page executed by that Related Employer.

	(a)	New Related Employer. If an organization becomes a New Related Employer after the Effective Date of the Agreement by reason of an acquisition or disposition of stock or assets, a merger, or similar transaction, the New Related Employer must execute a Co-Sponsor Page no later than the end of the transition period described in Code §410(b)(6)(C). Participation of the New Related Employer must be effective no later than the first day of the Plan Year that begins after such transition period ends. If the transition period in Code §410(b)(6)(C) is not applicable, the effective date of the New Related Employer’s participation in the Plan must be no later than the date it became a Related Employer.

	(b)	Former Related Employer. If an organization ceases to be a Related Employer (Former Related Employer), the provisions of Section 21.4, relating to discontinuance of participation, apply.

		Under the Standardized Agreement, if the rules of subsections (a) or (b) are followed, the Employer may continue to rely on the favorable IRS letter issued to the Prototype Sponsor during any period in which a New Related Employer is not participating in the Plan or a Former Related Employer continues to participate in the Plan. If the rules of subsections (a) or (b) are not followed, the Plan is treated as an individually-designed plan for any period of such noncompliance.



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A RTICLE 22
PLAN DEFINITIONS


This Article contains definitions for common terms that are used throughout the Plan. All capitalized terms under the Plan are defined in this Article. Where applicable, this Article will refer to other Sections of the Plan where the term is defined.

2 2.1	Account. The separate Account maintained for each Participant under the Plan. To the extent applicable, a Participant may have any (or all) of the following separate sub-Accounts within his/her Account: Employer Contribution Account, Section 401(k) Deferral Account, Employer Matching Contribution Account, QMAC Account, QNEC Account, Employee After-Tax Contribution Account, Safe Harbor Matching Contribution Account, Safe Harbor Nonelective Contribution Account, Rollover Contribution Account, and Transfer Account. The Transfer Account also may have any (or all) of the sub-Accounts listed above. The Plan Administrator may maintain other sub-Accounts, if necessary, for proper administration of the Plan.

2 2.2	Account Balance. A Participant’s Account Balance is the total value of all Accounts (whether vested or not) maintained for the Participant. A Participant’s vested Account Balance includes only those amounts for which the Participant has a vested interest in accordance with the provisions under Article 4 and Part 6 of the Agreement. A Participant’s Section 401(k) Deferral Account, QMAC Account, QNEC Account, Employee After-Tax Contribution Account, Safe Harbor Matching Contribution Account, Safe Harbor Nonelective Contribution Account, and Rollover Contribution Account are always 100% vested.

2 2.3	Accrued Benefit. If referred to in the context of a Defined Contribution Plan, the Accrued Benefit is the Account Balance. If referred to in the context of a Defined Benefit Plan, the Accrued Benefit is the benefit accrued under the benefit formula prescribed by the Defined Benefit Plan.

2 2.4	ACP — Average Contribution Percentage. The average of the contribution percentages for the Highly Compensated Employee Group and the Nonhighly Compensated Employee Group, which are tested for nondiscrimination under the ACP Test. See Section 17.7(a).

2 2.5	ACP Test — Actual Contribution Percentage Test. The special nondiscrimination test that applies to Employer Matching Contributions and/or Employee After-Tax Contributions under the 401(k) Agreement. See Section 17.3.

2 2.6	Actual Hours Crediting Method. The Actual Hours Crediting Method is a method for counting service for purposes of Plan eligibility and vesting. Under the Actual Hours Crediting Method, an Employee is credited with the actual Hours of Service the Employee completes with the Employer or the number of Hours of Service for which the Employee is paid (or entitled to payment).

2 2.7	Adoption Agreement. See the definition for Agreement.

2 2.8	ADP — Average Deferral Percentage. The average of the deferral percentages for the Highly Compensated Employee Group and the Nonhighly Compensated Employee Group, which are tested for nondiscrimination under the ADP Test. See Section 17.7(b).

2 2.9	ADP Test — Actual Deferral Percentage Test. The special nondiscrimination test that applies to Section 401(k) Deferrals under the 401(k) Agreement. See Section 17.2.

2 2.10	Agreement. The Agreement (sometimes referred to as the “Adoption Agreement”) contains the elective provisions under the Plan that an Employer completes to supplement or modify the provisions under the BPD. Each Employer that adopts this Plan must complete and execute the appropriate Agreement. An Employer may adopt more than one Agreement under this Prototype Plan. Each executed Agreement is treated as a separate Plan and Trust. For example, if an Employer executes a profit sharing plan Agreement and a money purchase plan Agreement, the Employer is treated as maintaining two separate Plans under this Prototype Plan document. An Agreement is treated as a single Plan, even if there is one or more executed Co-Sponsor Adoption Pages associated with the Agreement.

2 2.11	Aggregate Limit. The limit imposed under the Multiple Use Test on amounts subject to both the ADP Test and the ACP Test. See Section 17.4(a).

2 2.12	Alternate Payee. A person designated to receive all or a portion of the Participant’s benefit pursuant to a QDRO. See Section 11.5.

2 2.13	Anniversary Year Method. A method for determining Eligibility Computation Periods after an Employee’s initial Eligibility Computation Period. See Section 1.4(c)(2) for more detailed discussion of the Anniversary Year Method.

2 2.14	Anniversary Years. An alternative period for measuring Vesting Computation Periods. See Section 4.4.



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2 2.15	Annual Additions. The amounts taken into account under a Defined Contribution Plan for purposes of applying the limitation on allocations under Code §415. See Section 7.4(a) for the definition of Annual Additions.

2 2.16	Annual Additions Limitation. The limit on the amount of Annual Additions a Participant may receive under the Plan during a Limitation Year. See Article 7.

2 2.17	Annuity Starting Date. This Plan does not use the term Annuity Starting Date. To determine whether the notice and consent requirements in Articles 8 and 9 are satisfied, the Distribution Commencement Date (see Section 22.56) is used, even for a distribution that is made in the form of an annuity. However, the payment made on the Distribution Commencement Date under an annuity form of payment may reflect annuity payments that are calculated with reference to an “annuity starting date” that occurs prior to the Distribution Commencement Date (e.g., the first day of the month in which the Distribution Commencement Date falls).

2 2.18	Applicable Life Expectancy. The Life Expectancy used to determine a Participant’s required minimum distribution under Article 10. See Section 10.3(d).

2 2.19	Applicable Percentage. The maximum percentage of Excess Compensation that may be allocated to Eligible Participants under the Permitted Disparity Method. See Article 2.

2 2.20	Average Compensation. The average of a Participant’s annual Included Compensation during the Averaging Period designated under Part 3, #11 of the target benefit plan Agreement. See Section 2.5(d)(1) for a complete definition of Average Compensation.

2 2.21	Averaging Period. The period used for determining an Employee’s Average Compensation. Unless modified under Part 3, #11.a. of the target benefit plan Agreement, the Averaging Period is the three (3) consecutive Measuring Periods during the Participant’s Employment Period which produces the highest Average Compensation.

2 2.22	Balance Forward Method. A method for allocating net income or loss to Participants’ Accounts based on the Account Balance as of the most recent Valuation Date under the Plan. See Section 13.4(a).

2 2.23	Basic Plan Document. See the definition for BPD.

2 2.24	Beneficiary. A person designated by the Participant (or by the terms of the Plan) to receive a benefit under the Plan upon the death of the Participant. See Section 8.4(c) for the applicable rules for determining a Participant’s Beneficiaries under the Plan.

2 2.25	BPD. The BPD (sometimes referred to as the “Basic Plan Document”) is the portion of the Plan that contains the non-elective provisions. The provisions under the BPD may be supplemented or modified by elections the Employer makes under the Agreement or by separate governing documents that are expressly authorized by the BPD.

2 2.26	Break-in-Service - Eligibility. Generally, an Employee incurs a Break-in-Service for eligibility purposes for each Eligibility Computation Period during which the Employee does not complete more than 500 Hours of Service with the Employer. However, if the Employer elects under Part 7 of the Agreement to require less than 1,000 Hours of Service to earn a Year of Service for eligibility purposes, a Break in Service will occur for any Eligibility Computation Period during which the Employee does not complete more than one-half (½) of the Hours of Service required to earn a Year of Service. (See Section 1.6 for a discussion of the eligibility Break-in-Service rules. Also see Section 6.5(b) for rules applicable to the determination of a Break in Service when the Elapsed Time Method is used.)

2 2.27	Break-in-Service - Vesting. Generally, an Employee incurs a Break-in-Service for vesting purposes for each Vesting Computation Period during which the Employee does not complete more than 500 Hours of Service with the Employer. However, if the Employer elects under Part 7 of the Agreement to require less than 1,000 Hours of Service to earn a Year of Service for vesting purposes, a Break in Service will occur for any Vesting Computation Period during which the Employee does not complete more than one-half (½) of the Hours of Service required to earn a Year of Service. (See Section 4.6 for a discussion of the vesting Break-in-Service rules. Also see Section 6.5(b) for rules applicable to the determination of a Break in Service when the Elapsed Time Method is used.)

2 2.28	Calendar Year Election. A special election used for determining the Lookback Year in applying the Highly Compensated Employee test under Section 22.99.

2 2.29	Cash-Out Distribution. A total distribution made to a partially vested Participant upon termination of participation under the Plan. See Section 5.3(a) for the rules regarding the forfeiture of nonvested benefits upon a Cash-Out Distribution from the Plan.

2 2.30	Code. The Internal Revenue Code of 1986, as amended.



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2 2.31	Code §415 Safe Harbor Compensation. An optional definition of compensation used to determine Total Compensation. This definition may be selected under Part 3, #9.c. of the Agreement. See Section 22.197(c) for the definition of Code §415 Safe Harbor Compensation.

2 2.32	Compensation Dollar Limitation. The maximum amount of compensation that can be taken into account for any Plan Year for purposes of determining a Participant’s Included Compensation (see Section 22.102) or Testing Compensation (see Section 22.190). For Plan Years beginning on or after January 1, 1994, the Compensation Dollar Limitation is $150,000, as adjusted for increases in the cost-of-living in accordance with Code §401(a)(17)(B).

	In determining the Compensation Dollar Limitation for any applicable period for which Included Compensation or Testing Compensation is being determined (the “determination period”), the cost-of-living adjustment in effect for a calendar year applies to any determination period beginning with or within such calendar year. If a determination period consists of fewer than 12 months, the Compensation Dollar Limitation for such period is an amount equal to the otherwise applicable Compensation Dollar Limitation multiplied by a fraction, the numerator of which is the number of months in the short determination period, and the denominator of which is 12. A determination period will not be considered to be less than 12 months merely because compensation is taken into account only for the period the Employee is an Eligible Participant. If Section 401(k) Deferrals, Employer Matching Contributions, or Employee After-Tax Contributions are separately determined for each pay period, no proration of the Compensation Dollar Limitation is required with respect to such pay periods.

	For Plan Years beginning on or after January 1, 1989, and before January 1, 1994, the Compensation Dollar Limitation taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Code §415(d), except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990.

	If compensation for any prior determination period is taken into account in determining a Participant’s allocations for the current Plan Year, the compensation for such prior determination period is subject to the applicable Compensation Dollar Limitation in effect for that prior period. For this purpose, in determining allocations in Plan Years beginning on or after January 1, 1989, the Compensation Dollar Limitation in effect for determination periods beginning before that date is $200,000. In addition, in determining allocations in Plan Years beginning on or after January 1, 1994, the Compensation Dollar Limitation in effect for determination periods beginning before that date is $150,000.

2 2.33	Co-Sponsor. A Related Employer that adopts this Plan by executing the Co-Sponsor Adoption Page under the Agreement. See Article 21 for the rules applicable to contributions and deductions for contributions made by a Co-Sponsor.

2 2.34	Co-Sponsor Adoption Page. The execution page under the Agreement that permits a Related Employer to adopt this Plan as a Co-Sponsor. See Article 21.

2 2.35	Covered Compensation. The average (without indexing) of the Taxable Wage Bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains (or will attain) Social Security Retirement Age. See Section 2.5(d)(2).

2 2.36	Cumulative Disparity Limit. A limit on the amount of permitted disparity that may be provided under the target benefit plan Agreement. See Section 2.5(c)(3)(iv).

2 2.37	Current Year Testing Method. A method for applying the ADP Test and/or the ACP Test. See Section 17.2(a)(2) for a discussion of the Current Year Testing Method under the ADP Test and 17.3(a)(2) for a discussion of the Current Year Testing Method under the ACP Test.

2 2.38	Custodian. An organization that has custody of all or any portion of the Plan assets. See Section 12.11.

2 2.39	Davis-Bacon Act Service. A Participant’s service used to apply the Davis-Bacon Contribution Formula under Part 4 of the Nonstandardized Agreement [Part 4C of the Nonstandardized 401(k) Agreement]. For this purpose, Davis-Bacon Act Service is any service performed by an Employee under a public contract subject to the Davis-Bacon Act or to any other federal, state or municipal prevailing wage law. See Section 2.2(a)(1).

2 2.40	Davis-Bacon Contribution Formula. The Employer may elect under Part 4 of the Nonstandardized Agreement [Part 4C of the Nonstandardized 401(k) Agreement] to provide an Employer Contribution for each Eligible Participant who performs Davis-Bacon Act Service. (See Section 2.2(a)(1) (profit sharing plan and 401(k) plan) and Section 2.4(e) (money purchase plan) for special rules regarding the application of the Davis-Bacon Contribution Formula.)

2 2.41	Defined Benefit Plan. A plan under which a Participant’s benefit is based solely on the Plan’s benefit formula without the establishment of separate Accounts for Participants.



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2 2.42	Defined Benefit Plan Fraction. A component of the combined limitation test under Code §415(e) for Employers that maintain or ever maintained both a Defined Contribution and a Defined Benefit Plan. See Section 7.5 (b)(1).

2 2.43	Defined Contribution Plan. A plan that provides for individual Accounts for each Participant to which all contributions, forfeitures, income, expenses, gains and losses under the Plan are credited or deducted. A Participant’s benefit under a Defined Contribution Plan is based solely on the fair market value of his/her vested Account Balance.

2 2.44	Defined Contribution Plan Dollar Limitation. The maximum dollar amount of Annual Additions an Employee may receive under the Plan. See Section 7.4(b).

2 2.45	Defined Contribution Plan Fraction. A component of the combined limitation test under Code §415(e) for Employers that maintain or ever maintained both a Defined Contribution and a Defined Benefit Plan. See Section 7.5(b)(2).

2 2.46	Designated Beneficiary. A Beneficiary who is designated by the Participant (or by the terms of the Plan) and whose Life Expectancy is taken into account in determining minimum distributions under Code §401(a)(9). See Article 10.

2 2.47	Determination Date. The date as of which the Plan is tested to determine whether it is a Top-Heavy Plan. See Section 16.3(a).

2 2.48	Determination Period. The period during which contributions to the Plan are tested to determine if the Plan is a Top-Heavy Plan. See Section 16.3(b).

2 2.49	Determination Year. The Plan Year for which an Employee’s status as a Highly Compensated Employee is being determined. See Section 22.99(b)(1).

2 2.50	Directed Account. The Plan assets under a Trust which are held for the benefit of a specific Participant. See Section 13.4(b).

2 2.51	Directed Trustee. A Trustee is a Directed Trustee to the extent that the Trustee’s investment powers are subject to the direction of another person. See Section 12.2(b).

2 2.52	Direct Rollover. A rollover, at the Participant’s direction, of all or a portion of the Participant’s vested Account Balance directly to an Eligible Retirement Plan. See Section 8.8.

2 2.53	Disabled. Except as modified under Part 13, #55 of the Agreement [Part 13, #73 of the 401(k) Agreement], an individual is considered Disabled for purposes of applying the provisions of this Plan if the individual is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of such impairment shall be supported by medical evidence.

2 2.54	Discretionary Trustee. A Trustee is a Discretionary Trustee to the extent the Trustee has exclusive authority and discretion to invest, manage or control the Plan assets without direction from any other person. See Section 12.2(a).

2 2.55	Distribution Calendar Year. A calendar year for which a minimum distribution is required. See Section 10.3(f).

2 2.56	Distribution Commencement Date. The date an Employee commences distribution from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date may be treated as the first day of the first period for which annuity payments are made.

2 2.57	Early Retirement Age. The age and/or Years of Service requirement prescribed by Part 5, #17 of the Agreement [Part 5, #35 of the 401(k) Agreement]. Early Retirement Age may be used to determine distribution rights and/or vesting rights. The Plan is not required to have an Early Retirement Age.

2 2.58	Earned Income. Earned Income is the net earnings from self-employment in the trade or business with respect to which the Plan is established, and for which personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the Employer to a qualified plan to the extent deductible under Code §404. Net earnings shall be determined after the deduction allowed to the taxpayer by Code §164(f). If Included Compensation is defined to exclude any items of Compensation (other than Elective Deferrals), then for purposes of determining the Included Compensation of a Self-Employed Individual, Earned Income shall be adjusted by multiplying Earned Income by the percentage of Total Compensation that is included for the Eligible Participants who are Nonhighly Compensated Employees. The percentage is determined by calculating the percentage of each Nonhighly Compensated Eligible Participant’s Total Compensation that is included in the definition of Included Compensation and averaging those percentages.



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2 2.59	Effective Date. The date this Plan, including any restatement or amendment of this Plan, is effective. Where the Plan is restated or amended, a reference to Effective Date is the effective date of the restatement or amendment, except where the context indicates a reference to an earlier Effective Date. If this Plan is retroactively effective, the provisions of this Plan generally control. However, if the provisions of this Plan are different from the provisions of the Employer’s prior plan and, after the retroactive Effective Date of this Plan, the Employer operated in compliance with the provisions of the prior plan, the provisions of such prior plan are incorporated into this Plan for purposes of determining whether the Employer operated the Plan in compliance with its terms, provided operation in compliance with the terms of the prior plan do not violate any qualification requirements under the Code, regulations, or other IRS guidance.

	The Employer may designate special effective dates for individual provisions under the Plan where provided in the Agreement or under Appendix A of the Agreement. If one or more qualified retirement plans have been merged into this Plan, the provisions of the merging plan(s) will remain in full force and effect until the Effective Date of the plan merger(s), unless provided otherwise under Appendix A-12 of the Agreement [Appendix A-16 of the 401(k) Agreement]. See Section 20.1 for special effective date provisions relating to the changes required under the GUST Legislation.

2 2.60	Elapsed Time Method. The Elapsed Time Method is a special method for crediting service for eligibility, vesting or for applying the allocation conditions under Part 4 of the Agreement. To apply the Elapsed Time Method for eligibility or vesting, the Employer must elect the Elapsed Time Method under Part 7 of the Agreement. To apply the Elapsed Time Method to determine an Employee’s eligibility for an allocation under the Plan, the Employer must elect the Elapsed Time Method under Part 4, #15.e. of the Nonstandardized Agreement [Part 4B, #19.e. and/or Part 4C, #24.e. of the Nonstandardized 401(k) Agreement]. (See Section 6.5(b) for more information on the Elapsed Time Method of crediting service for eligibility and vesting and Section 2.6(c) for information on the Elapsed Time Method for allocation conditions.)

2 2.61	Elective Deferrals. Section 401(k) Deferrals, salary reduction contributions to a SEP described in Code §§408(k)(6) and 402(h)(1)(B) (sometimes referred to as a SARSEP), contributions made pursuant to a Salary Reduction Agreement to a contract, custodial account or other arrangement described in Code §403(b), and elective contributions made to a SIMPLE-IRA plan, as described in Code §408(p). Elective Deferrals shall not include any amounts properly distributed as an Excess Amount under §415 of the Code.

2 2.62	Eligibility Computation Period. The 12-consecutive month period used for measuring whether an Employee completes a Year of Service for eligibility purposes. An Employee’s initial Eligibility Computation Period always begins on the Employee’s Employment Commencement Date. Subsequent Eligibility Computation Periods are measured under the Shift-to-Plan-Year Method or the Anniversary Year Method. See Section 1.4(c).

2 2.63	Eligible Participant. Except as provided under Part 1, #6 of the Agreement, an Employee (other than an Excluded Employee) becomes an Eligible Participant on the appropriate Entry Date (as selected under Part 2 of the Agreement) following satisfaction of the Plan’s minimum age and service conditions (as designated in Part 1 of the Agreement). See Article 1 for the rules regarding participation under the Plan.

	For purposes of the 401(k) Agreement, an Eligible Participant is any Employee (other than an Excluded Employee) who has satisfied the Plan’s minimum age and service conditions designated in Part 1 of the Agreement with respect to a particular contribution. With respect to Section 401(k) Deferrals or Employee After-Tax Contributions, an Employee who has satisfied the eligibility conditions under Part 1 of the Agreement for making Section 401(k) Deferrals or Employee After-Tax Contribution is an Eligible Participant with respect to such contributions, even if the Employee chooses not to actually make any such contributions. With respect to Employer Matching Contributions, an Employee who has satisfied the eligibility conditions under Part 1 of the Agreement for receiving such contributions is an Eligible Participant with respect to such contributions, even if the Employee does not receive an Employer Matching Contribution (including forfeitures) because of the Employee’s failure to make Section 401(k) Deferrals or Employee After-Tax Contributions, as applicable.

2 2.64	Eligible Rollover Distribution. An amount distributed from the Plan that is eligible for rollover to an Eligible Retirement Plan. See Section 8.8(a).

2 2.65	Eligible Retirement Plan. A qualified retirement plan or IRA that may receive a rollover contribution. See Section 8.8(b).

2 2.66	Employee. An Employee is any individual employed by the Employer (including any Related Employers). An independent contractor is not an Employee. An Employee is not eligible to participate under the Plan if the individual is an Excluded Employee under Section 1.2. (See Section 1.3 for rules regarding coverage of Employees of Related Employers.) For purposes of applying the provisions under this Plan, a Self-Employed Individual (including a partner in a partnership) is treated as an Employee. A Leased Employee is also treated as an Employee of the recipient organization, as provided in Section 1.2(b).



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22.67	Employee After-Tax Contribution Account. The portion of the Participant’s Account attributable to Employee After-Tax Contributions.

22.68	Employee After-Tax Contributions. Employee After-Tax Contributions are contributions made to the Plan by or on behalf of a Participant that is included in the Participant’s gross income in the year in which made and that is maintained under a separate Employee After-Tax Contribution Account to which earnings and losses are allocated. Employee After-Tax Contributions may only be made under the Nonstandardized 401(k) Agreement. See Section 3.1.

22.69	Employer. Except as otherwise provided, Employer means the Employer (including a Co-Sponsor) that adopts this Plan and any Related Employer. (See Section 1.3 for rules regarding coverage of Employees of Related Employers. Also see Section 11.8 for operating rules when the Employer is a member of a Related Employer group, and Article 21 for rules that apply to Related Employers that execute a Co-Sponsor Adoption Page under the Agreement.)

22.70	Employer Contribution Account. If this Plan is a profit sharing plan (other than a 401(k) plan), a money purchase plan, or a target benefit plan, the Employer Contribution Account is the portion of the Participant’s Account attributable to contributions made by the Employer. If this is a 401(k) plan, the Employer Contribution Account is the portion of the Participant’s Account attributable to Employer Nonelective Contributions, other than QNECs or Safe Harbor Nonelective Contributions.

22.71	Employer Contributions. If this Plan is a profit sharing plan (other than a 401(k) plan), a money purchase plan, or a target benefit plan, Employer Contributions are any contributions the Employer makes pursuant to Part 4 of to the Agreement. If this Plan is a 401(k) plan, Employer Contributions include Employer Nonelective Contributions and Employer Matching Contributions, including QNECs, QMACs and Safe Harbor Contributions that the Employer makes under the Plan. Employer Contributions also include any Section 401(k) Deferrals an Employee makes under the Plan, unless the Plan expressly provides for different treatment of Section 401(k) Deferrals.

22.72	Employer Matching Contribution Account. The portion of the Participant’s Account attributable to Employer Matching Contributions, other than QMACs or Safe Harbor Matching Contributions.

22.73	Employer Matching Contributions. Employer Matching Contributions are contributions made by the Employer on behalf of a Participant on account of Section 401(k) Deferrals or Employee After-Tax Contributions made by such Participant, as designated under Parts 4B(b) of the 401(k) Agreement. Employer Matching Contributions may only be made under the 401(k) Agreement. Employer Matching Contributions also include any QMACs the Employer makes pursuant to Part 4B, #18 of the 401(k) Agreement and any Safe Harbor Matching Contributions the Employer makes pursuant to Part 4E of the 401(k) Agreement See Section 2.3(b).

22.74	Employer Nonelective Contributions. Employer Nonelective Contributions are contributions made by the Employer on behalf of Eligible Participants under the 401(k) Plan, as designated under Part 4C of the 401(k) Agreement Employer Nonelective Contributions also include any QNECs the Employer makes pursuant to Part 4C, #22 of the 401(k) Agreement and any Safe Harbor Nonelective Contributions the Employer makes pursuant to Part 4E of the 401(k) Agreement See Section 2.3(d).

22.75	Employment Commencement Date. The date the Employee first performs an Hour of Service for the Employer. For purposes of applying the Elapsed Time rules under Section 6.5(b), an Hour of Service is limited to an Hour of Service as described in Section 22.101 (a).

22.76	Employment Period. The period as defined in Part 3, #11.c. of the target benefit plan Agreement used to determine an Employee’s Average Compensation. See Section 2.5(d)(1)(iii).

22.77	Entry Date. The date on which an Employee becomes an Eligible Participant upon satisfying the Plan’s minimum age and service conditions. See Section 1.5.

22.78	Equivalency Method. An alternative method for crediting Hours of Service for purposes of eligibility and vesting. To apply, the Employer must elect the Equivalency Method under Part 7 of the Agreement. See Section 6.5(a) for a more detailed discussion of the Equivalency Method.

22.79	ERISA. The Employee Retirement Income Security Act of 1974, as amended.

22.80	Excess Aggregate Contributions. Amounts which are distributed to correct the ACP Test. See Section 17.7(c).

22.81	Excess Amount. Amounts which exceed the Annual Additions Limitation. See Section 7.4(c).

22.82	Excess Compensation. The amount of Included Compensation which exceeds the Integration Level. Excess Compensation is used for purposes of applying the Permitted Disparity allocation formula under the profit sharing or 401(k) plan Agreement (see Section 2.2(b)(2)) or under the money purchase plan Agreement (see Section 2.4(c)) or for applying the Integration Formulas under the target benefit plan Agreement (see Section 2.5(d)(3)).



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22.83	Excess Contributions. Amounts which are distributed to correct the ADP Test. See Section 17.7(d).

22.84	Excess Deferrals. Elective Deferrals that are includible in a Participant’s gross income because they exceed the dollar limitation under Code §402(g). Excess Deferrals made to this Plan shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant’s taxable year for which the Excess Deferrals are made. See Section 17.1.

22.85	Excluded Employee. An Employee who is excluded under Part 1, #4 of the Agreement. See Section 1.2.

22.86	Fail-Safe Coverage Provision. A correction provision that permits the Plan to automatically correct a coverage violation resulting from the application of a last day of employment or Hours of Service allocation condition. See Section 2.7.

22.87	Favorable IRS Letter. A notification letter or opinion letter issued by the IRS to a Prototype Sponsor as to the qualified status of a Prototype Plan. A separate Favorable IRS Letter is issued with respect to each Agreement offered under the Prototype Plan. If the term is used to refer to a letter issued to an Employer with respect to its adoption of this Prototype Plan, such letter is a determination letter issued by the IRS.

22.88	Five-Percent Owner. An individual who owns (or is considered as owning within the meaning of Code §318) more than 5 percent of the outstanding stock of the Employer or stock possessing more than 5 percent of the total combined voting power of all stock of the Employer. If the Employer is not a corporation, a Five- Percent Owner is an individual who owns more than 5 percent of the capital or profits interest of the Employer.

22.89	Five- Year Forfeiture Break in Service. A Break in Service rule under which a Participant’s nonvested benefit may be forfeited. See Section 4.6(b).

22.90	Flat Benefit. A Nonintegrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation. See Section 2.5(c)(1)(i).

22.91	Flat Excess Benefit. An Integrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation plus a specified percentage of Excess Compensation. See Section 2.5(c)(2)(i).

22.92	Flat Offset Benefit. An Integrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation which is offset by a specified percentage of Offset Compensation. See Section 2.5(c)(2)(iii).

22.93	Former Related Employer. A Related Employer (as defined in Section 22.164) that ceases to be a Related Employer because of an acquisition or disposition of stock or assets, a merger, or similar transaction. See Section 21.4 for the effect when a Co-Sponsor becomes a Former Related Employer.

22.94	Four-Step Formula. A method for allocating certain Employer Contributions under the Permitted Disparity Method. See Section 2.2(b)(2)(ii).

22.95	General Trust Account. The Plan assets under a Trust which are held for the benefit of all Plan Participants as a pooled investment. See Section 13.4(a).

22.96	GUST Legislation. GUST Legislation refers to the Uruguay Round Agreements Act (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) the Small Business Job Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA ‘97), and the Internal Revenue Service Restructuring and Reform Act of 1998. See Article 20 for special rules for demonstrating compliance with the qualification changes under the GUST Legislation.

22.97	Hardship. A heavy and immediate financial need which meets the requirements of Section 8.6.

22.98	Highest Average Compensation. A term used to apply the combined plan limit under Code §415(e). See Section 7.5(b)(3).

22.99	Highly Compensated Employee. The definition of Highly Compensated Employee under this Section is effective for Plan Years beginning after December 31, 1996. For Plan Years beginning before January 1, 1997, Highly Compensated Employees are determined under Code §414(q) as in effect at that time.


	(a)	Definition. An Employee is a Highly Compensated Employee for a Plan Year if he/she:



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		(1)	is a Five-Percent Owner (as defined in Section 22.88) at any time during the Determination Year or the Lookback Year; or

		(2)	has Total Compensation from the Employer for the Lookback Year in excess of $80,000 (as adjusted) and, if elected under Part 13, #50.a. of the Agreement [Part 13, #68.a. of the 401(k) Agreement], is in the Top-Paid Group for the Lookback Year. If the Employer does not specifically elect to apply the Top-Paid Group Test, the Highly Compensated Employee definition will be applied without regard to whether an Employee is in the Top-Paid Group. The $80,000 amount is adjusted at the same time and in the same manner as under Code §415(d), except that the base period is the calendar quarter ending September 30, 1996.

	(b)	Other Definitions. The following definitions apply for purposes of determining Highly Compensated Employee status under this Section 22.99.

		(1)	Determination Year. The Determination Year is the Plan Year for which the Highly Compensated Employee determination is being made.

		(2)	Lookback Year. Unless the Calendar Year Election (or Old-Law Calendar Year Election) applies, the Lookback Year is the 12-month period immediately preceding the Determination Year.

		(3)	Total Compensation. Total Compensation as defined under Section 22.197.

		(4)	Top-Paid Group. An Employee is in the Top-Paid Group for purposes of applying the Top-Paid Group Test if the Employee is one of the top 20% of Employees ranked by Total Compensation. In determining the Top-Paid Group, any reasonable method of rounding or tie-breaking is permitted. For purposes of determining the number of Employees in the Top-Paid Group for any year, Employees described in Code §414(q)(5) or applicable regulations may be excluded.

		(5)	Calendar Year Election. If the Plan Year elected under the Agreement is not the calendar year, for purposes of applying the Highly Compensated Employee test under subsection (a)(2) above, the Employer may elect under Part 13, #50.b. of the Agreement [Part 13, #68.b. of the 401(k) Agreement] to substitute for the Lookback Year the calendar year that begins in the Lookback Year. The Calendar Year Election does not apply for purposes of applying the Five-Percent Owner test under subsection (a)(1) above. If the Employer does not specifically elect to apply the Calendar Year Election, the Calendar Year Election does not apply. The Calendar Year Election should not be selected if the Plan is using a calendar Plan Year.

		(6)	Old-Law Calendar Year Election. A special election available under section 1.414(q)-1T of the temporary Income Tax Regulations and provided for in Notice 97-45 for the Plan Year beginning in 1997 which permitted the Employer to substitute the calendar year beginning with or within the Plan Year for the Lookback Year in applying subsections (a)(1) and (a)(2) above. If the 1997 Plan Year was a calendar year, the effect of the Old-Law Calendar Year Election was to treat the Determination Year and the Lookback Year as the same 12-month period. The Employer may elect to apply the Old-Law Calendar Year Election under Appendix B-1.c. of the Agreement. See Section 20.2(c).

	(c)	Application of Highly Compensated Employee definition. In determining whether an Employee is a Highly Compensated Employee for years beginning in 1997, the amendments to Code §414(q) as described above are treated as having been in effect for years beginning in 1996. In determining an Employee’s status as a highly compensated former employee, the rules for the applicable Determination Year apply in accordance with section 1.414(q)-1T, A-4 of the temporary Income Tax Regulations and Notice 97-45.

22.100	Highly Compensated Employee Group. The group of Highly Compensated Employees who are included in the ADP Test and/or the ACP Test. See Section 17.7(e).

22.101	Hour of Service. Each Employee will receive credit for each Hour of Service as defined in this Section 22.101. An Employee will not receive credit for the same Hour of Service under more than one category listed below.

	(a)	Performance of duties. Hours of Service include each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours will be credited to the Employee for the computation period in which the duties are performed.

	(b)	Nonperformance of duties. Hours of Service include each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 hours of service



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		will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph will be calculated and credited pursuant to §2530.200b-2 of the Department of Labor Regulations which is incorporated herein by this reference.

	(c)	Back pay award. Hours of Service include each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service will not be credited both under subsection (a) or subsection (b), as the case may be, and under this subsection (c). These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made.

	(d)	Related Employers/Leased Employees. For purposes of crediting Hours of Service, all Related Employers are treated as a single Employer. Hours of Service will be credited for employment with any Related Employer. Hours of Service also include hours credited as a Leased Employee for a recipient organization.

	(e)	Maternity/paternity leave. Solely for purposes of determining whether a Break in Service has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons will receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph will be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or (2) in all other cases, in the following computation period.


22.102	Included Compensation. Included Compensation is Total Compensation, as modified under Part 3, #10 of the Agreement, used to determine allocations of contributions and forfeitures. Under the Nonstandardized Agreement, Included Compensation generally includes amounts an Employee earns with a Related Employer that has not executed a Co-Sponsor Adoption Page under the Agreement. However, the Employer may elect under Part 3, #10.b.(7) of the Nonstandardized Agreement [Part 3, #10.i. of the Nonstandardized 401(k) Agreement] to exclude all amounts earned with a Related Employer that has not executed a Co-Sponsor Adoption Page. Under the Standardized Agreement, Included Compensation always includes all compensation earned with all Related Employers, without regard to whether the Related Employer executes the Co-Sponsor Adoption Page. (See Section 21.5.) In no case may Included Compensation for any Participant exceed the Compensation Dollar Limitation as defined in Section 22.32. Included Compensation does not include any amounts earned while an individual is an Excluded Employee (as defined in Section 1.2 of this BPD).

	The Employer may select under Part 3, #10 of the 401(k) Agreement to provide a different definition of Included Compensation for determining Section 401(k) Deferrals, Employer Matching Contributions, and Employer Nonelective Contributions. Unless otherwise provided in Part 3, #10.j. of the Nonstandardized 401(k) Agreement, the definition of Included Compensation chosen for Section 401(k) Deferrals also applies to any Employee After-Tax Contributions and to any Safe Harbor Contributions designated under Part 4E of the Agreement; the definition of Included Compensation chosen for Employer Matching Contributions also applies to any QMACs; and the definition of Included Compensation chosen for Employer Nonelective Contributions also applies to any QNECs.

	The Employer may elect to exclude from the definition of Included Compensation any of the amounts permitted under Part 3, #10 of the Agreement. However, to use the same definition of compensation for purposes of nondiscrimination testing, the definition of Included Compensation must satisfy the nondiscrimination requirements of Code §414(s). The definition of Included Compensation will be deemed to be nondiscriminatory under Code §414(s) if the only amounts excluded are amounts under Part 3, #10.b.(1) - (3) of the Nonstandardized Agreement [Part 3, #10.c. - e. of the Nonstandardized 401(k) Agreement]. Any other exclusions could cause the definition of Included Compensation to fail to satisfy the nondiscrimination requirements of Code §414(s). If the definition of Included Compensation fails to satisfy the nondiscrimination requirements of Code §414(s), additional nondiscrimination testing may have to be performed to demonstrate compliance with the nondiscrimination requirements. The definition of Included Compensation under the Standardized Agreements must satisfy the nondiscrimination requirements under Code §414(s).

	If the Plan uses a Permitted Disparity Method under Part 4 of the Agreement or if the Plan is a Safe Harbor 401(k) Plan, the definition of Included Compensation must satisfy the nondiscrimination requirements under Code §414(s). Therefore, any exclusions from Included Compensation under Part 3, #10.b.(4) – (8) of the Nonstandardized Agreement [Part 3, #10.f – j. of the Nonstandardized 401(k) Agreement] will apply only to Highly Compensated Employees, unless specifically provided otherwise under Part 3, #10.b.(8). of the Nonstandardized Agreement [Part 3, #10.j. of the Nonstandardized 401(k) Agreement].



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	The Employer may elect under Part 3, #10.b.(1) of the Agreement [Part 3, #10.c. of the 401(k) Agreement] to exclude Elective Deferrals, pre-tax contributions to a cafeteria plan or a Code §457 plan, and qualified transportation fringes under Code§ 132(f)(4). Generally, the exclusion of qualified transportation fringes is effective for Plan Years beginning on or after January 1, 2001. However, the Employer may elect an earlier effective date under Appendix B-3.c. of the Agreement.

22 .103	Insurer. An insurance company that issues a life insurance policy on behalf of a Participant under the Plan in accordance with the requirements under Article 15.

22.104	Integrated Benefit Formula. A benefit formula under Part 4 of the target benefit plan Agreement that takes into account an Employee’s Social Security benefits. See Section 2.5(c)(2).

22.105	Integration Level. The amount used for purposes of applying the Permitted Disparity Method allocation formula (or the Integrated Benefit Formulas under the target benefit plan Agreement). The Integration Level is the Taxable Wage Base, unless the Employer designates a different amount under Part 4 of the Agreement.

22.106	Investment Manager. A person (other than the Trustee) who (a) has the power to manage, acquire, or dispose of Plan assets (b) is an investment adviser, a bank, or an insurance company as described in §3(38)(B) of ERISA, and (c) acknowledges fiduciary responsibility to the Plan in writing.

22.107	Key Employee. Employees who are taken into account for purposes of determining whether the Plan is a Top-Heavy Plan. See Section 16.3(c).

22.108	Leased Employee. An individual who performs services for the Employer pursuant to an agreement between the Employer and a leasing organization, and who satisfies the definition of a Leased Employee under Code §414(n). See Section 1.2(b) for rules regarding the treatment of a Leased Employee as an Employee of the Employer.

22.109	Life Expectancy. A Participant’s and/or Designated Beneficiary’s life expectancy used for purposes of determining required minimum distributions under the Plan. See Section 10.3(e).

22.110	Limitation Year. The measuring period for determining whether the Plan satisfies the Annual Additions Limitation under Section 7.4(d).

22.111	Lookback Year. The 12-month period immediately preceding the current Plan Year during which an Employee’s status as Highly Compensated Employee is determined. See Section 22.99(b)(2).

22.112	Maximum Disparity Percentage. The maximum amount by which the designated percentage of Excess Compensation under an Excess Benefit formula under Part 4 of the target benefit plan Agreement may exceed the designated percentage of Average Compensation. See Section 2.5(c)(3)(i).

22.113	Maximum Offset Percentage. The maximum amount that may be designated as the offset percentage under an Offset Benefit formula under Part 4 of the target benefit plan Agreement. See Section 2.5(c)(3)(ii).

22.114	Maximum Permissible Amount. The maximum amount that may be allocated to a Participant’s Account within the Annual Additions Limitation. See Section 7.4(e).

22.115	Measuring Period. The period for which Average Compensation or Offset Compensation is measured under the target benefit plan Agreement. Unless elected otherwise under Part 3, #11.b. or Part 3, #12.a. of the target benefit plan Agreement, as applicable, the Measuring Period is the Plan Year (or the 12-month period ending on the last day of the Plan Year for a short Plan Year). See Sections 2.5(d)(1)(ii) and 2.5(d)(5)(i).

22.116	Multiple Use Test. A special nondiscrimination test that applies when the Plan must perform both the ADP Test and the ACP Test in the same Plan Year. See Section 17.4.

22.117	Named Fiduciary. The Plan Administrator or other fiduciary named by the Plan Administrator to control and manage the operation and administration of the Plan. To the extent authorized by the Plan Administrator, a Named Fiduciary may delegate its responsibilities to a third party or parties. The Employer shall also be a Named Fiduciary.

22.118	Net Profits. The Employer’s net income or profits that may be used to limit the amount of Employer Contributions made under the Plan. See Section 2.2(a)(2).

22.119	New Related Employer. An organization that becomes a Related Employer (as defined in Section 22.164) with the Employer by reason of an acquisition or disposition of stock or assets, a merger, or similar transaction. See Section 21.5 for special procedures under a Standardized Agreement when there is a New Related Employer.



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22.120	Nonhighly Compensated Employee . Any Employee who is not a Highly Compensated Employee. See Section 22.99 for the definition of Highly Compensated Employee.

22.121	Nonhighly Compensated Employee Group . The group of Nonhighly Compensated Employees included in the ADP Test and/or the ACP Test. See Section 17.7(f).

22.122	Nonintegrated Benefit Formula. A benefit formula under Part 4 of the target benefit plan Agreement that does not take into account an Employee’s Social Security benefits. See Section 2.5(c)(1).

22.123	Non-Key Employee. Any Employee who is not a Key Employee. (See Section 16.3(c).)

22.124	Nonresident Alien Employees. An Employee who is neither a citizen of the United States nor a resident of the United States for U.S. tax purposes (as defined in Code §7701(b)), and who does not have any earned income (as defined in Code §911) for the Employer that constitutes U.S. source income (within the meaning of Code §861). If a Nonresident Alien Employee has U.S. source income, he/she is treated as satisfying this definition if all of his/her U.S. source income from the Employer is exempt from U.S. income tax under an applicable income tax treaty.

22.125	Nonstandardized Agreement . An Agreement under this Prototype Plan under which an adopting Employer may not rely on a Favorable IRS Letter issued to the Prototype Sponsor. In order to have reliance from the IRS that the form of the Plan as adopted by the Employer is qualified, the Employer must request a determination letter on the Plan.

22.126	Normal Retirement Age . The age selected under Part 5 of the Agreement. If a Participant’s Normal Retirement Age is determined wholly or partly with reference to an anniversary of the date the Participant commenced participation in the Plan and/or the Participant’s Years of Service, Normal Retirement Age is the Participant’s age when such requirements are satisfied. If the Employer enforces a mandatory retirement age, the Normal Retirement Age is the lesser of that mandatory age or the age specified in the Agreement.

22.127	Offset Compensation. The average of a Participant’s annual Included Compensation during the three (3) consecutive Measuring Periods designated under Part 3, #12 of the target benefit plan Agreement. See Section 2.5(d)(5) for a complete definition of Offset Compensation.

22.128	Offset Benefit Formula. A Flat Offset Benefit formula or a Unit Offset Benefit formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit based on a percentage of Average Compensation offset by a percentage of Offset Compensation. See Section 2.5(c)(2)(iii) and (iv).

22.129	Old-Law Calendar Year Election . A special election for determining the Lookback Year under the Highly Compensated Employee test that was available only for the 1997 Plan Year. See Section 22.99(b)(6).

22.130	Old-Law Required Beginning Date. If so elected under Part 13, #52 of the Agreement [Part 13, #70 of the 401(k) Agreement], the date by which minimum distributions must commence under the Plan, as determined under Section 10.3(a)(2).

22.131	Owner-Employee. A Self-Employed Individual (as defined in Section 22.180) who is a sole proprietor, or who is a partner owning more than 10 percent of either the capital or profits interest of the partnership.

22.132	Paired Plans. Two or more Standardized Agreements that are designated as Paired Plans. See Section 19.6.

22.133	Participant. A Participant is an Employee or former Employee who has satisfied the conditions for participating under the Plan. A Participant also includes any Employee or former Employee who has an Account Balance under the Plan, including an Account Balance derived from a rollover or transfer from another qualified plan or IRA. A Participant is entitled to share in an allocation of contributions or forfeitures under the Plan for a given year only if the Participant is an Eligible Participant as defined in Section 1.1, and satisfies the allocation conditions set forth in Section 2.6 and Part 4 of the Agreement.

22.134	Period of Severance . A continuous period of time during which the Employee is not employed by the Employer and which is used to determine an Employee’s Participation under the Elapsed Time Method. See Section 6.5(b)(2).

22.135	Permissive Aggregation Group . Plans that are not required to be aggregated to determine whether the Plan is a Top-Heavy Plan. See Section 16.3(d).

22.136	Permitted Disparity Method . A method for allocating certain Employer Contributions to Eligible Participants as designated under Part 4 of the Agreement. See Article 2.

22.137	Plan. The Plan is the retirement plan established or continued by the Employer for the benefit of its Employees under this Prototype Plan document. The Plan consists of the BPD and the elections made under the Agreement. If the



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	Employer adopts more than one Agreement offered under this Prototype Plan, then each executed Agreement represents a separate Plan, unless the Agreement restates a previously executed Agreement.

22.138	Plan Administrator. The Plan Administrator is the person designated to be responsible for the administration and operation of the Plan. Unless otherwise designated by the Employer, the Plan Administrator is the Employer. If any Related Employer has executed a Co-Sponsor Adoption Page, the Employer referred to in this Section is the Employer that executes the Signature Page of the Agreement.

22.139	Plan Year . The 12-consecutive month period for administering the Plan, on which the records of the Plan are maintained. The Employer must designate the Plan Year applicable to the Plan under the Agreement. If the Plan Year is amended, a Plan Year of less than 12 months may be created. If this is a new Plan, the first Plan Year begins on the Effective Date of the Plan. If the amendment of the Plan Year or the Effective Date of a new Plan creates a Plan Year that is less than 12 months long, there is a Short Plan Year. The existence of a Short Plan Year may be documented under the Plan Year definition on page 1 of the Agreement. See Section 11.7 for operating rules that apply to Short Plan Years.

22.140	Pre-Age 35 Waiver. A waiver of the QPSA before a Participant reaches age 35. See Section 9.4(f).

22.141	Predecessor Employer. An employer that previously employed the Employees of the Employer. See Section 6.7 for the rules regarding the crediting of service with a Predecessor Employer.

22.142	Predecessor Plan. A Predecessor Plan is a qualified plan maintained by the Employer that is terminated within the 5-year period immediately preceding or following the establishment of this Plan. A Participant’s service under a Predecessor Plan must be counted for purposes of determining the Participant’s vested percentage under the Plan. See Section 4.5(b)(1).

22.143	Present Value. The current single-sum value of an Accrued Benefit under a Defined Benefit Plan.

22.144	Present Value Stated Benefit. An amount used to determine the Employer Contribution under the target benefit plan Agreement. See Section 2.5(b)(3).

22.145	Prior Year Testing Method. A method for applying the ADP Test and/or the ACP Test. See Section 17.2(a)(1) for a discussion of the Prior Year Testing Method under the ADP Test and Section 17.3(a)(1) for a discussion of the Prior Year Testing Method under the ACP Test.

22.146	Pro Rata Allocation Method . A method for allocating certain Employer Contributions to Eligible Participants under the Plan. See Article 2.

22.147	Projected Annual Benefit. An amount used in the numerator of the Defined Benefit Plan Fraction. See Section 7.5(b)(4).

22.148	Protected Benefit. A Participant’s benefits which may not be eliminated by Plan amendment. Protected Benefits include early retirement benefits, retirement-type subsidies, and optional forms of benefit (as defined under the regulations). See Section 18.1(c).

22.149	Prototype Plan. A plan sponsored by a Prototype Sponsor the form of which is the subject of a Favorable IRS Letter from the Internal Revenue Service which is made up of a Basic Plan Document and an Adoption Agreement. An Employer may establish or continue a plan by executing an Adoption Agreement under this Prototype Plan.

22.150	Prototype Sponsor . The Prototype Sponsor is the entity that maintains the Prototype Plan for adoption by Employers. See Section 18.1(a) for the ability of the Prototype Sponsor to amend this Plan.

22.151	QDRO — Qualified Domestic Relations Order. A domestic relations order that provides for the payment of all or a portion of the Participant’s benefits to an Alternate Payee and satisfies the requirements under Code §414(p). See Section 11.5.

22.152	QJSA — Qualified Joint and Survivor Annuity. A QJSA is an immediate annuity payable over the life of the Participant with a survivor annuity payable over the life of the spouse. If the Participant is not married as of the Distribution Commencement Date, the QJSA is an immediate annuity payable over the life of the Participant. See Section 9.2.

22.153	QMAC Account. The portion of a Participant’s Account attributable to QMACs.

22.154	QMACs — Qualified Matching Contributions. An Employer Matching Contribution made by the Employer that satisfies the requirements under Section 17.7(g).



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22.155	QNEC Account. The portion of a Participant’s Account attributable to QNECs.

22.156	QNECs — Qualified Nonelective Contributions . An Employer Nonelective Contribution made by the Employer that satisfies the requirements under Section 17.7(h).

22.157	QPSA — Qualified Preretirement Survivor Annuity . A QPSA is an annuity payable over the life of the surviving spouse that is purchased using 50% of the Participant’s vested Account Balance as of the date of death. The Employer may modify the 50% QPSA level under Part 11, #41.b. of the Agreement [Part 11, #59.b. of the 401(k) Agreement]. See Section 9.3.

2 2.158	QPSA Election Period . The period during which a Participant (and the Participant’s spouse) may waive the QPSA under the Plan. See Section 9.4(e).

22.159	Qualified Election. An election to waive the QJSA or QPSA under the Plan. See Section 9.4(d).

22.160	Qualified Transfer. A plan-to-plan transfer which meets the requirements under Section 3.3(d).

22.161	Qualifying Employer Real Property. Real property of the Employer which meets the requirements under ERISA §407(d)(4). See Section 13.5(b) for limitations on the ability of the Plan to invest in Qualifying Employer Real Property.

22.162	Qualifying Employer Securities . An Employer security which is stock, a marketable obligation, or interest in a publicly traded partnership as described in ERISA §407(d)(5). See Section 13.5(b) for limitations on the ability of the Plan to invest in Qualifying Employer Securities.

22.163	Reemployment Commencement Date. The first date upon which an Employee is credited with an Hour of Service following a Break in Service (or Period of Severance, if the Plan is using the Elapsed Time Method of crediting service). For purposes of applying the Elapsed Time rules under Section 6.5(b), an Hour of Service is limited to an Hour of Service as described in Section 22.101(a).

22.164	Related Employer. A Related Employer includes all members of a controlled group of corporations (as defined in Code §414(b))‚ all commonly controlled trades or businesses (as defined in Code §414(c)) or affiliated service groups (as defined in Code §414(m)) of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under Code §414(o). For purposes of applying the provisions under this Plan, the Employer and any Related Employers are treated as a single Employer, unless specifically stated otherwise. See Section 11.8 for operating rules that apply when the Employer is a member of a Related Employer group.

22.165	Required Aggregation Group. Plans which must be aggregated for purposes of determining whether the Plan is a Top-Heavy Plan. See Section 16.3(f).

22.166	Required Beginning Date . The date by which minimum distributions must commence under the Plan. See Section 10.3(a).

22.167	Reverse QNEC Method. A method for allocating QNECs under the Plan. See Section 2.3(e)(2).

22.168	Rollover Contribution Account. The portion of the Participant’s Account attributable to a Rollover Contribution from another qualified plan or IRA.

22.169	Rollover Contribution . A contribution made by an Employee to the Plan attributable to an Eligible Rollover Distribution from another qualified plan or IRA. See Section 8.8(a) for the definition of an Eligible Rollover Distribution.

22.170	Rule of Parity Break in Service. A Break in Service rule used to determine an Employee’s Participation under the Plan. See Section 1.6(a) for the effect of the Rule of Parity Break in Service on eligibility to participate under the Plan and see Section 4.6(c) for the application for the effect of the Rule of Parity Break in Service Rule on vesting.

22.171	Safe Harbor 401(k) Plan. A 401(k) plan that satisfies the conditions under Section 17.6.

22.172	Safe Harbor Contribution . A contribution authorized under Part 4E of the 401(k) Agreement that allows the Plan to qualify as a Safe Harbor 401(k) Plan. A Safe Harbor Contribution may be a Safe Harbor Matching Contribution or a Safe Harbor Nonelective Contribution.

22.173	Safe Harbor Matching Contribution Account. The portion of a Participant’s Account attributable to Safe Harbor Matching Contributions.



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22.174	Safe Harbor Matching Contributions . An Employer Matching Contribution that satisfies the requirements under Section 17.6(a)(1)(i).

22.175	Safe Harbor Nonelective Contribution Account. The portion of a Participant’s Account attributable to Safe Harbor Nonelective Contributions.

22.176	Safe Harbor Nonelective Contributions . An Employer Nonelective Contribution that satisfies the requirements under Section 17.6(a)(1)(ii).

22.177	Salary Reduction Agreement . A Salary Reduction Agreement is a written agreement between an Eligible Participant and the Employer, whereby the Eligible Participant elects to reduce his/her Included Compensation by a specific dollar amount or percentage and the Employer agrees to contribute such amount into the 401(k) Plan. A Salary Reduction Agreement may require that an election be stated in specific percentage increments (not greater than 1% increments) or in specific dollar amount increments (not greater than dollar increments that could exceed 1% of Included Compensation).

	A Salary Reduction Agreement may not be effective prior to the later of: (a) the date the Employee becomes an Eligible Participant; (b) the date the Eligible Participant executes the Salary Reduction Agreement; or (c) the date the 401(k) plan is adopted or effective. A Salary Reduction Agreement is valid even though it is executed by an Employee before he/she actually has qualified as an Eligible Participant, so long as the Salary Reduction Agreement is not effective before the date the Employee is an Eligible Participant. A Salary Reduction Agreement may only apply to Included Compensation that becomes currently available to the Employee after the effective date of the Salary Reduction Agreement.

	A Salary Reduction Agreement (or other written procedures) must designate a uniform period during which an Employee may change or terminate his/her deferral election under the Salary Reduction Agreement. An Eligible Participant’s right to change or terminate a Salary Reduction Agreement may not be available on a less frequent basis than once per Plan Year.

22.178	Section 401(k) Deferral Account . The portion of a Participant’s Account attributable to Section 401(k) Deferrals.

22.179	Section 401(k) Deferrals. Amounts contributed to the 401(k) Plan at the election of the Participant, in lieu of cash compensation, which are made pursuant to a Salary Reduction Agreement or other deferral mechanism, and which are not includible in the gross income of the Employee pursuant to Code §402(e)(3). Section 401(k) Deferrals do not include any deferrals properly distributed as excess Annual Additions pursuant to Section 7.1(c)(2).

22.180	Self-Employed Individual. An individual who has Earned Income (as defined in Section 22.58) for the taxable year from the trade or business for which the Plan is established, or an individual who would have had Earned Income but for the fact that the trade or business had no Net Profits for the taxable year.

22.181	Shareholder-Employee. A Shareholder-Employee means an Employee or officer of a subchapter S corporation who owns (or is considered as owning within the meaning of Code §318(a)(1)), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation.

22.182	Shift-to-Plan-Year Method . The Shift-to-Plan-Year Method is a method for determining Eligibility Computation Periods, after an Employee’s initial computation period. See Section 1.4(c)(1).

22.183	Short Plan Year . Any Plan Year that is less than 12 months long, either because of the amendment of the Plan Year, or because the Effective Date of a new Plan is less than 12 months prior to the end of the first Plan Year. See Section 11.7 for the operational rules that apply if the Plan has a Short Plan Year.

22.184	Social Security Retirement Age. An Employee’s retirement age as determined under Section 230 of the Social Security Retirement Act See Section 2.5(d)(6).

22.185	Standardized Agreement. An Agreement under this Prototype Plan that permits the adopting Employer to rely under certain circumstances on the Favorable IRS Letter issued to the Prototype Sponsor without the need for the Employer to obtain a determination letter.

22.186	Stated Benefit. The amount determined in accordance with the benefit formula selected in Part 4 of the target benefit plan Agreement, payable annually as a Straight Life Annuity commencing at Normal Retirement Age (or current age, if later). See Section 2.5(a).

22.187	Straight Life Annuity. An annuity payable in equal installments for the life of the Participant that terminates upon the Participant’s death.



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2 2.188	Successor Plan. A Successor Plan is any Defined Contribution Plan, other than an ESOP, SEP, or SIMPLE-IRA plan, maintained by the Employer which prevents the Employer from making a distribution to Participants upon the termination of a 401(k) plan. See Section 18.2(b)(2).

2 2.189	Taxable Wage Base. The maximum amount of wages that are considered for Social Security purposes. The Taxable Wage Base is used to determine the Integration Level for purposes of applying the Permitted Disparity Method allocation formula under the profit sharing or 401(k) plan Agreement (see Section 2.2(b)(2)) or under the money purchase plan Agreement (see Section 2.4(c)) or for applying the Integrated Benefit Formulas under the target benefit plan Agreement (see Section 2.5(d)(9)).

2 2.190	Testing Compensation. The compensation used for purposes of the ADP Test, the ACP Test, and the Multiple Use Test See Section 17.7(i).

2 2.191	Theoretical Reserve . An amount used to determine the Employer Contribution under the target benefit plan Agreement See Section 2.5(b)(4).

2 2.192	Three Percent Method . A method for applying the ADP Test or the ACP Test for a new 401(k) Plan. See Section 17.2(b) for a discussion of the ADP Test for new plans and Section 17.3(b) for a discussion of the ACP Test for new plans.

2 2.193	Top-Paid Group. The top 20% of Employees ranked by Total Compensation for purposes of applying the Top-Paid Group Test See Section 22.99(b)(4).

2 2.194	Top-Paid Group Test. An optional test the Employer may apply when determining its Highly Compensated Employees. See Section 22.99(a)(2).

2 2.195	Top-Heavy Plan. A Plan that satisfies the conditions under Section 16.3(g). A Top-Heavy Plan must provide special accelerated vesting and minimum benefits to Non-Key Employees. See Section 16.2.

2 2.196	Top-Heavy Ratio. The ratio used to determine whether the Plan is a Top-Heavy Plan. See Section 16.3(h).

2 2.197	Total Compensation . Total Compensation is used to apply the Annual Additions Limitation under Section 7.1 and to determine the top-heavy minimum contribution under Section 16.2 (a). Total Compensation is either W-2 Wages, Withholding Wages, or Code §415 Safe Harbor Compensation, as designated under Part 3 of the Agreement. For a Self-Employed Individual, each definition of Total Compensation means Earned Income. Except as otherwise provided under Sections 7.4(g)(4) and 16.3(i), each definition of Total Compensation (including Earned Income for Self-Employed Individuals) is increased to include Elective Deferrals (as defined in Section 22.61) and elective contributions to a cafeteria plan under Code §125 or to an eligible deferred compensation plan under Code §457. For years beginning on or after January 1, 2001, each definition of Total Compensation also is increased to include elective contributions that are not includible in an Employee’s gross income as a qualified transportation fringe under Code§ 132(f)(4). The Employer may elect an earlier effective date under Appendix B-3.c. of the Agreement.

	Unless modified under the Agreement, Total Compensation does not include amounts paid to an individual as severance pay to the extent such amounts are paid after the common-law employment relationship between the individual and the Employer has terminated. The Employer may modify the definition of Total Compensation under Part 13, #51.b. or c. of the Agreement [Part 13, #69.b. or c. of the 401(k) Agreement]. The Employer may elect under #51.b. or #69.b., as applicable, to modify the definition of Total Compensation to include imputed compensation of Disabled Employees as permitted under Section 7.4(g)(3) of this BPD. Additional modifications may be made under #51.c. or #69.c., as applicable. Any modification to the definition of Total Compensation must be consistent with the definition of compensation under Treas. Reg. §1.415-2(d).


	(a )	W-2 Wages. Wages within the meaning of Code §3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer’s trade or business) for which the Employer is required to furnish the Employee a written statement under Code §6041(d), 6051(a)(3), and 6052, determined without regard to any rules under Code §3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed.

	(b )	Withholding Wages. Wages within the meaning of Code §3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed.

	(c )	Code §415 Safe Harbor Compensation. A Participant’s wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of employment with the Employer (without regard to whether or not such amounts are paid in cash) to the extent that the amounts are includible in gross income. Such amounts include, but are not limited to, commissions, compensation for services on the basis of a percentage of profits, tips, bonuses, fringe benefits, and reimbursements or other



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		expense allowances under a nonaccountable plan (as described in Treas. Reg. §1.62-2(c)), and excluding the following:

		(1)	Employer contributions to a plan of deferred compensation which are not includible in the Employee’s gross income for the taxable year in which contributed, or Employer contributions (other than Elective Deferrals) under a SEP (as described in Code §408(k)), or any distributions from a plan of deferred compensation. For this purpose, Employer contributions to a plan of deferred compensation do not include Elective Deferrals (as defined in Section 22.61), elective contributions to a cafeteria plan under Code §125 or a deferred compensation plan under Code §457 and, for years beginning on or after January 1, 2001, qualified transportation fringes under Code §132(f)(4). The Employer may elect an earlier effective date for qualified transportation fringes under Appendix B-3.c. of the Agreement.

		(2)	Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture.

		(3)	Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option.

		(4)	Other amounts which received special tax benefits, or contributions made by the Employer (other than Elective Deferrals) towards the purchase of an annuity contract described in Code §403(b) (whether or not the contributions are actually excludable from the gross income of the Employee).

2 2.198	Transfer Account. The portion of a Participant’s Account attributable to a direct transfer of assets or liabilities from another qualified retirement plan. See Section 3.3 for the rules regarding the acceptance of a transfer of assets under this Plan.

2 2.199	Trust. The Trust is the separate funding vehicle under the Plan.

2 2.200	Trustee. The Trustee is the person or persons (or any successor to such person or persons) named in the Trustee Declaration under the Agreement. The Trustee may be a Discretionary Trustee or a Directed Trustee. See Article 12 for the rights and duties of a Trustee under this Plan.

2 2.201	Two-Step Formula. A method of allocating certain Employer Contributions under the Permitted Disparity Method. See Section 2.2(b)(2)(i).

2 2.202	Union Employee. An Employee who is included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee representatives and whose retirement benefits are subject to good faith bargaining. For this purpose, an Employee will not be considered a Union Employee for a Plan Year if more than two percent of the Employees who are covered pursuant to the collective bargaining agreement are professionals as defined in section 1.410(b)-9 of the regulations. For this purpose, the term “Employee representatives” does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer.

2 2.203	Unit Benefit. A Nonintegrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation multiplied by the Participant’s projected Years of Participation with the Employer. See Section 2.5(c)(1)(ii).

2 2.204	Unit Excess Benefit . An Integrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation plus a specified percentage of Excess Compensation multiplied by the Participant’s projected Years of Participation. See Section 2.5(c)(2)(ii).

2 2.205	Unit Offset Benefit. An Integrated Benefit Formula under Part 4 of the target benefit plan Agreement that provides for a Stated Benefit equal to a specified percentage of Average Compensation offset by a specified percentage of Offset Compensation multiplied by the Participant’s projected Years of Participation. See Section 2.5(c)(2)(iv).

2 2.206	Valuation Date . The date or dates selected under Part 12 of the Agreement upon which Plan assets are valued. If the Employer does not select a Valuation Date under Part 12, Plan assets will be valued as of the last day of each Plan Year. Notwithstanding any election under Part 12 of the Agreement, the Trustee and Plan Administrator may agree to value the Trust on a more frequent basis, and/or to perform an interim valuation of the Trust. See Sections 12.6 and 13.2.

2 2.207	Vesting Computation Period. The 12-consecutive month period used for measuring whether an Employee completes a Year of Service for vesting purposes. See Section 4.4.



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2 2.208	W-2 Wages. An optional definition of Total Compensation which the Employer may select under Part 3, #9.a. of the Agreement. See Section 22. 197(a) for the definition of W-2 Wages.

2 2.209	Withholding Wages. An optional definition of Total Compensation which the Employer may select under Part 3, #9.b. of the Agreement. See Section 22.197(b) for the definition of Withholding Wages.

2 2.210	Year of Participation. Years of Participation are used to determine a Participant’s Stated Benefit under the target benefit plan Agreement. See Section 2.5(d)(10).

2 2.211	Year of Service. An Employee’s Years of Service are used to apply the eligibility and vesting rules under the Plan. Unless elected otherwise under Part 7 of the Agreement, an Employee will earn a Year of Service for purposes of applying the eligibility rules if the Employee completes 1,000 Hours of Service with the Employer during an Eligibility Computation Period. (See Section 1.4(b).) Unless elected otherwise under Part 7 of the Agreement, an Employee will earn a Year of Service for purposes of applying the vesting rules if the Employee completes 1,000 Hours of Service with the Employer during a Vesting Computation Period. (See Section 4.5.)



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AMENDMENT TO
DEFINED CONTRIBUTION PLAN AND TRUST

The following amendments are effective with respect to Employers adopting this prototype plan on or after July 1, 2002:


1.	The first paragraph of Section 12.4 is amended in its entirety to read as follows:

	12.4	Trustee’s Responsibility Regarding Investment of Plan Assets . In addition to the powers, rights and duties enumerated under this Section, the Trustee has whatever powers are necessary to carry out its duties in a prudent manner. The Trustee’s powers, rights and duties may be supplemented or limited by a separate trust agreement, investment policy, funding agreement, or other binding document entered into between the Trustee and the Plan Administrator which designates the Trustee’s responsibilities with respect to the Plan. A separate trust agreement must be approved by the Internal Revenue Service for use with this Plan, must be consistent with the terms of this Plan and must comply with all qualification requirements under the Code and regulations. To the extent the exercise of any power, right or duty is subject to discretion, such exercise by a Directed Trustee must be made at the direction of the Plan Administrator, the Employer, an Investment Manager, a Named Fiduciary, or Plan Participant.

2.	Section 12.5 is amended in its entirety to read as follows:

	12.5	More than One Person as Trustee. If the Plan has more than one person acting as Trustee, the Trustees may allocate the Trustee responsibilities by mutual agreement and Trustee decisions will be made by a majority vote (unless otherwise agreed to by the Trustees) or as otherwise provided in a separate trust agreement (that has been approved by the Internal Revenue Service for use with this Plan) or other binding document.

Pursuant to Section 18.1(a) of the Plan, the mass submitter of the Prototype Plan has made this amendment (as evidenced by the submission of the amendment to the Internal Revenue Service for inclusion with the mass submitter Prototype Plan) on behalf of minor modifier Prototype Sponsors that received opinion letters prior to March 1, 2002, and all identical Prototype Sponsors of the mass submitter Prototype Plan.

Exhibit 21

Subsidiaries of the Registrant

Parent

Anchor Bancorp


Subsidiaries	Percentage of Ownership	Jurisdiction or State of Incorporation


Anchor Mutual Savings Bank	100%	Washington

Anchor Financial Services, Inc. (1)	100%	Washington



(1)	Wholly-owned subsidiary of Anchor Mutual Savings Bank.

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated October 23, 2008, with respect to the consolidated statement of financial condition of Anchor Mutual Savings Bank and Subsidiary as of June 30, 2008 and 2007, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended June 30, 2008, which is included in the Registration Statement (Form S-1) of Anchor Bancorp and related Prospectus for the registration of between 3,825,000 and 5,951,250 shares of common stock.

-S- MOSS ADAMS LLP

Spokane, Washington
October 24, 2008

Exhibit 23.5


RP ^® FINANCIAL, LC.

Financial Services Industry Consultants

	October 24, 2008

Board of Directors
Anchor Mutual Savings Bank
120 North Broadway
Aberdeen, Washington 98520

Members of the Board of Directors:

We hereby consent to the use of our firm’s name in the Application for Approval of Conversion, and any amendments thereto to be filed with the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation, in the Registration Statement on Form S-1, and any amendments thereto to be filed with the Securities and Exchange Commission. We also hereby consent to the inclusion of, summary of and references to our Pro Forma Valuation Report and any Valuation Report Updates in such filings including the prospectus of Anchor Bancorp and to the reference to our firm under the heading “Experts” in the prospectus.


	Sincerely,

	RP ^® FINANCIAL, LC.




Washington Headquarters
Rosslyn Center	Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210	Fax No.: (703) 528-1788
Arlington, VA 22209	Toll-Free No.: (866) 723-0594

Exhibit 99.1

COMPANY
LOGO


(1) Number of Shares	Price Per Share	(2) Total Amount Due
	x $10.00 =		$	.00
Minimum Number of Shares: 25 ($250). Maximum Number of Shares: 50,000 ($500,000). See instructions on Reverse Side


(3a) Method of Payment- Check or Money Order
Enclosed is a personal check, bank check or money order made payable to Anchor Bancorp.	$	.00

SEND OVERNIGHT PACKAGES TO:
Attn: Stock Information Center
120 North Broadway
Aberdeen, WA 98520
(360) XXX-XXXX

ORDER DEADLINE: The Subscription Offering ends at _____, Pacific time, on __ ___, 2008. Your original Stock Order and Certification Form, properly executed and with the correct payment, must be received (not postmarked) at the address on the top of this form by the deadline, or it will be considered void. Faxes or copies of this form will not be accepted. Anchor Bancorp reserves the right to accept or reject improper order forms.

(3b) Method of Payment- Deposit Account Withdrawl




Anchor Bank Deposit Account Number(s)			Withdrawal Amount(s)

MARK THE	Savings	o
ACCOUNT
TYPE	CD	o	$	.00

MARK THE	Savings	o
ACCOUNT
TYPE	CD	o	$	.00

MARK THE	Savings	o
ACCOUNT
TYPE	CD	o	$	.00


		Total Withdrawal	$	.00


(4) Purchaser Information (check one)

a.	o	Eligible Account Holder - Check here if you were a depositor with at least $50 on deposit with Anchor Bank as of June 30, 2007. Enter information in Section 9 for all deposit accounts that you had at Anchor Bank on June 30, 2007.

b.	o	Supplemental Eligible Account Holder - Check here if you were a depositor with at least $50 on deposit with Anchor Bank as of ___ __, 2008 but not an Eligible Account Holder. Enter information in Section 9 for all deposit accounts that you had at Anchor Bank as of ___ __, 2008.

c.	o	Other Members - Check here if you were a depositor of Anchor Bank as of ______ __, 2008, who were not able to subscribe for shares under the Eligible or Supplemental Account Holders Categories.

d.	o	Local Community – People or trusts for the benefit of people who are residents of Lewis, King, Grays Harbor, Thurston, Kitsap, Pierce, Mason and Clark Counties, Washington.

e.	o	General Public

(5) Check if you (or a household family member) are a: o Director or Officer of Anchor Bank or Anchor Bancorp o Employee of Anchor Bank or Anchor Bancorp

(6) Maximum Purchaser Identification: o Check here if you, individually or together with others (see section 7), are subscribing for the maximum purchase allowed and are interested in purchasing more shares if the two maximum purchase limitations are increased. See Section 1 of the Stock Order Form Instructions on the reverse side.

(7) Associates/Acting in Concert: o Check here if you, or any associates or persons acting in concert with you, have submitted other orders for shares. If you check this box, list below all other orders submitted by you or your associates or by persons acting in concert with you.



Name(s) listed in Section 8 on other Order Forms	Number of Shares Ordered	Name(s) listed in Section 8 on other Order Forms	Number of Shares Ordered

(8) Stock Registration - Please Print Legibly and Fill Out Completely: (Note: The stock certificate and all correspondence related to this stock order will be mailed to the address provided below.)


o	Individual	o	Individual Retirement Account	o	Corporation
o	Joint Tenants	o	Uniform Transfer to Minors Act	o	Partnership
o	Tenants in Common	o	Uniform Gift to Minors Act	o	Trust - Under Agreement Dated ____________


Name				SS# or Tax ID


Name				SS# or Tax ID


Address				Daytime Telephone #


City	State	Zip Code	County	Evening Telephone #

(9) Qualifying Accounts: You should list any accounts that you may have or had with Anchor Bank in the box below. SEE THE STOCK ORDER FORM INSTRUCTION GUIDE ON THE REVERSE SIDE OF THE ORDER FORM FOR FURTHER DETAILS. All subscription orders are subject to the provisions of the stock offering.


*NAMES ON ACCOUNTS*	*ACCOUNT NUMBER*







Please Note: Failure to list all of your accounts may result in the loss of part or all of your subscription rights.

(10) Acknowledgment and Signature: I understand that this Order Form, with full payment and properly executed, must be received by Anchor Bancorp no later than _____, Pacific time, on _____ __, 2008, otherwise, this Order Form will be voidable. I agree that after receipt by Anchor Bancorp, this Order Form may not be modified or cancelled without Anchor Bancorp’s consent, and that if withdrawal from a deposit account has been authorized above, the amount will not otherwise be available for withdrawal by me. Under penalty of perjury, I certify that (1) the Social Security or Tax ID information and all other information provided hereon are true, correct and complete, (2) I am purchasing solely for my own account, and there is no agreement or understanding regarding the sale or transfer of the shares, or my right to subscribe for shares, and (3) I am not subject to backup withholding tax [cross out (3) if you have been notified by the IRS that you are subject to to backup withholding.] I acknowledge that this security is not a deposit or savings account, is not federally insured, and is not guaranteed by Anchor Bancorp, Anchor Bank, or by the federal government. If anyone asserts that the shares of common stock are federally insured or guaranteed, or are as safe as an insured deposit, I should call Thomas A. Barnes at the Office of Thrift Supervision’s Central Regional Office at (312) 917-5000. I further certify that, before purchasing the common stock of Anchor Bancorp, that I received the Prospectus dated _______ __, 2008.
The Prospectus that I received, dated _______ __, 2008 contains disclosure concerning the nature of the common stock being offered by Anchor Bancorp and describes, in the Risk Factors section beginning on page 1 of the Prospectus, the risks involved in the investment in this common stock, including, but not limited to, the following:


	1.	Recent negative developments in the financial industry and credit markets may continue to adversely impact our financial condition and results of operations.
	2.	Our business is subject to general economic risks that could adversely impact our results of operations and financial condition.
	3.	Our loan portfolio is concentrated in loans with a higher risk of loss.
	4.	We have originated a large amount of construction loans through a broker and a significant amount of these loans are past due and delinquent.
	5.	Our loan portfolio possesses increased risk as the result of subprime loans.
	6.	Our concentration in non-owner occupied real estate loans may expose us to increased credit risk.
	7.	The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
	8.	The U.S. government’s plan to purchase large amounts of illiquid, mortgage-backed and other securities from financial institutions may not be effective and/or it may not be available to us.
	9.	We may, elect or be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations
	10.	If our allowance for loan losses is not sufficient to cover actual loan losses or if we are required to increase our provision for loan losses, our results of operations and financial condition could be materially adversely affected.
	11.	Our funding sources may prove insufficient to replace deposits at maturity and support our future growth and may jeopardize our financial condition


	12.	The maturity and repricing characteristics of our assets and liabilities are mismatched and subject us to interest rate risk which could adversely affect our results of operations and financial condition.
	13.	Our business strategy includes the relocation of our administrative operations and significant growth plans, which could negatively affect our financial condition and results of operations if we fail to grow or fail to manage our relocation and growth effectively.
	14.	We have had a number of changes in our personnel and we need to add an additional executive officer and integrate the new officers into our current operations.
	15.	Strong competition within our market areas may limit our growth and adversely affect our operating results.
	16.	Decreases in noninterest income could adversely affect our profitability and if we cannot generate and increase our income our stock price may be adversely affected
	17.	We are subject to extensive government regulation and supervision.
	18.	Our information systems may experience an interruption or breach in security.
	19.	Earthquakes in our primary market area may result in material losses because of damage to collateral properties and our borrowers’ inability to repay loans.
	20.	After this offering, our compensation expenses will increase and our return on equity will be low compared to other companies. These factors could negatively impact the price of our stock.


21.	The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
22.	Your subscription funds could be held for an extended time period and will be unavailable to you for other investments if completion of the conversion is delayed.
23.	Management and the board of directors have significant discretion over the investment of the offering proceeds and may not be able to achieve acceptable returns on the proceeds from the offering.
24.	Holders of Anchor Bancorp common stock may not be able to sell their shares when desired if a liquid trading market does not develop, or for $10.00 or more per share even if a liquid trading market develops.
25.	The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Anchor Bancorp.
26.	We intend to grant stock options and restricted stock to the board of directors and certain employees following the conversion which will likely reduce your ownership interest.
27.	The contribution to the Anchor Bancorp Foundation, Inc. will hurt our profits for fiscal year 2009 and dilute your ownership interest.
28.	Our contribution to the Anchor Bancorp Foundation, Inc. may not be tax deductible, which could hurt our profits.


	YOUR ORDER IS NOT VALID UNLESS SIGNED
IF SIGNING AS A CUSTODIAN, CORPORATE OFFICER, ETC., PLEASE INCLUDE YOUR FULL TITLE


Signature (title, if applicable) __________________________(Date)________ Signature (title, if applicable) _________________________(Date)_________

FOR INTERNAL USE ONLY

REC’D ___ / ___ CHECK# ____________ $_____________ CHECK#____________ $________ BATCH # ________ ORDER # _______ CATEGORY ___

Anchor Bancorp
Order Form Instructions

Item 1 and 2 - Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares ordered by the subscription price of $10.00 per share. The minimum purchase is 25 shares. Generally, the maximum purchase for any person is 50,000 shares (50,000 shares x $10.00 per share = $500,000). No person, together with “associates”, as defined in the prospectus, and persons “acting in concert”, as defined in the prospectus, may purchase more than 50,000 shares (50,000 shares x $10.00 per share = $500,000) of the common stock offered in the stock offering. For additional information, see “The Conversion - Limitations on Stock Purchases” in the prospectus.

Item 3a - Payment for shares may be made in cash (only if delivered by you in person, although we request you to exchange the cash for a check with any of the tellers at our Anchor Bank branch) or by check, bank draft or money order payable to Anchor Bancorp. DO NOT MAIL CASH. Your funds will earn interest at Anchor Bank’s passbook savings annual percentage yield until the stock offering is completed.

Item 3b - To pay by withdrawal from a deposit account or certificate of deposit at Anchor Bank insert the account number(s) and the amount(s) you wish to withdraw from each account. If more than one signature is required for a withdrawal, all signatories must sign in the signature box on the front of the Stock Order form. To withdraw from an account with checking privileges, please write a check. Anchor Bank will waive any applicable penalties for early withdrawal from certificate of deposit accounts (CDs). A hold will be placed on the account(s) for the amount(s) you indicate to be withdrawn. Payments will remain in account(s) until the Stock Offering closes and earn their respective rate of interest.

Item 4 - Please check the appropriate box to tell us the earliest of the three dates that applies to you.

Item 5 - Please check one of these boxes if you are a director, officer or employee of Anchor Bank or Anchor Bancorp, or a member of such person’s household.

Item 6 - Please check the box, if applicable. If you check the box but have not subscribed for the maximum amount and did not complete Item 7, you may not be eligible to purchase more shares.

Item 7 - Check the box, if applicable, and provide the requested information. Attach a separate page, if necessary. In the Prospectus dated _____ __, 2008, please see the section entitled “The Conversion - Limitations on Purchases of Shares” for more information regarding the definition of “associate” and “acting in concert”

Item 8 - The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of Anchor Bancorp’s common stock. Please complete this section as fully and accurately as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening phone numbers. We will need to call you if we cannot execute your order as given. If you have any questions regarding the registration of your stock, please consult your legal advisor or contact the Stock Information Center at (360) XXX-XXXX. Subscription rights are not transferable. If you are an eligible or supplemental eligible account holder or other depositor, to protect your priority over other purchasers as described in the prospectus, you must take ownership in at least one of the account holder’s names.

Individual - The stock is to be registered in an individual’s name only. You may not list beneficiaries for this ownership.

Joint Tenants - Joint tenants with rights of survivorship identifies two or more owners. When stock is held by joint tenants with rights of survivorship, ownership automatically passes to the surviving joint tenant(s) upon the death of any joint tenant. You may not list beneficiaries for this ownership.

Tenants in Common - Tenants in common may also identify two or more owners. When stock is to be held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to the transfer or sale of shares held by tenants in common. You may not list beneficiaries for this ownership.

Individual Retirement Account - Individual Retirement Account (“IRA”) holders may only make stock purchases from their existing IRA if it is a self-directed IRA or through a prearranged “trustee-to-trustee” transfer if their IRA is currently at Anchor Bank. The stock cannot be held in your Anchor Bank account. Please contact your broker or self-directed IRA account provider as quickly as possible to explore this option, as it may take several days to complete a trustee-to-trustee transfer.


Registration for IRA’s:	On Name Line 1 - list the name of the broker or trust department followed by CUST or TRUSTEE.
	On Name Line 2 - FBO (for benefit of) YOUR NAME [IRA a/c #______].
	Address will be that of the broker / trust department to where the stock certificate will be sent.
	The Social Security / Tax I.D. number(s) will be either yours or your trustee’s, as the trustee directs.
	Please list your phone numbers.

Uniform Transfers To Minors Act - For residents of Washington and most states, stock may be held in the name of a custodian for the benefit of a minor under the Uniform Transfers to Minors Act . For residents of South Carolina and Vermont, stock may be held in a similar type of ownership under the Uniform Gifts to Minors Act of the individual state. For either ownership, the minor is the actual owner of the stock with the adult custodian being responsible for the investment until the child reaches legal age. Only one custodian and one minor may be designated.


Registration for UTMA:	On Name Line 1 – print the name of the custodian followed by the abbreviation “CUST”
	On Name Line 2 – FBO (for benefit of) followed by the name of the minor, followed by UTMA-WA
	(or your state’s abbreviation) or UGMA-VT (or your state’s abbreviation)
	List only the minor’s social security number on the form.

Corporation/Partnership – Corporations/Partnerships may purchase stock. Please provide the Corporation/Partnership’s legal name and Tax I.D. To have priority subscription rights, the Corporation/Partnership must have an account in the legal name. Please contact the Stock Information Center to verify subscription rights and purchase limitations.

Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates, Guardianships, etc.) are established under a form of trust agreement or a court order. Without a legal document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity.

Instructions: On the first name line, print the first name, middle initial and last name of the fiduciary if the fiduciary is an individual. If the fiduciary is a corporation, list the corporate title on the first name line. Following the name, print the fiduciary title, such as trustee, executor, personal representative, etc. On the second name line, print the name of the maker, donor or testator or the name of the beneficiary. Following the name, indicate the type of legal document establishing the fiduciary relationship (agreement, court order, etc.). In the blank after “Under Agreement Dated,” fill in the date of the document governing the relationship. The date of the document need not be provided for a trust created by a will.

Item 9 – You should list any qualifying accounts that you have or may have had with Anchor Bank in the box located under the heading “Qualifying Accounts”. For example, if you are ordering stock in just your name, you should list all of your account numbers as of the earliest of the three dates that you were a depositor. Similarly, if you are ordering stock jointly with another depositor, you should list all account numbers under which either of you are owners, i.e. individual accounts, joint accounts, etc. If you are ordering stock in your minor child’s or grandchild’s name under the Uniform Transfers to Minors Act , the minor must have had an account number on one of the three dates and you should list only their account number(s). If you are ordering stock corporately, you need to list just that corporation’s account number, as your individual account number(s) do not qualify. Failure to list all of your qualifying deposit account numbers may result in the loss of part or all of your subscription rights.

Item 10 - Sign and date the form where indicated. Before you sign please read carefully and review the information which you have provided and read the acknowledgement. Only one signature is required, unless any account listed in section 3b of this form requires more than one signature to authorize a withdrawal. Please review the Prospectus dated _______ __, 2008 carefully before making and investment decision.

Should you have any questions, please call our Stock Information Center at (360) XXX-XXXX, Monday through Friday, from 9:00 a.m. to
5:00 p.m., Pacific time, except bank holidays


Anchor Mutual Savings Bank	REVOCABLE PROXY

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF ANCHOR MUTUAL SAVINGS BANK FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD ON __________ __, 2008, AND ANY ADJOURNMENTS OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU TO VOTE “FOR” THE APPROVAL OF THE PLAN OF CONVERSION.

The undersigned, being a member of Anchor Mutual Savings Bank, hereby authorizes the Board of Directors of Anchor Mutual Savings Bank or any successors in their respective positions, as proxy, with full powers of substitution, to represent the undersigned at the Special Meeting of Members of Anchor Mutual Savings Bank to be held at ___________________________, on __________ __, 2008 at ______. Pacific time, and at any adjournment of said meeting, to act with respect to all votes that the undersigned would be entitled to cast, if then personally present, as set forth below:


(1)	To consider and vote upon a plan to convert Anchor Mutual Savings Bank from a state chartered mutual savings bank to a state chartered stock savings bank, including the adoption of amended and restated articles of incorporation and bylaws, with the concurrent sale of all of its capital stock to Anchor Bancorp, a Washington corporation, and the sale by Anchor Bancorp of its shares of common stock.
		o FOR	o AGAINST

(2)	The contribution to the Anchor Bancorp Foundation of 150,000 shares of Anchor Bancorp common stock and $500,000 cash.
		o FOR	o AGAINST

(3)	To vote, in its discretion, upon such other business as may properly come before the Special Meeting or any adjournment thereof. Management is not aware of any other such business that may come before the Special Meeting.
		o FOR	o AGAINST

This proxy, if properly executed, will be voted in accordance with your instructions. If no instructions are given, this proxy, properly signed and dated, will be voted “FOR” adoption of the plan of conversion and if necessary, for adjournment of the Special Meeting. Please date and sign this proxy on the reverse side and return it in the enclosed envelope.


Anchor Mutual Savings Bank	REVOCABLE PROXY

Any member giving a proxy may revoke it at any time before it is voted by delivering to the Secretary of Anchor Mutual Savings Bank either a written revocation of the proxy, a duly executed proxy bearing a later date, or by voting in person at the Special Meeting.

The undersigned hereby acknowledges receipt of a Notice of Special Meeting of Members to be held on the __th day of _________, 2008 and a Proxy Statement for the Special Meeting prior to signing this proxy.


	Signature:___________________________________ Date:___________

	Signature:___________________________________ Date:___________

	NOTE: Please sign exactly as your name(s) appear(s) on this Proxy. Only one signature is required in the case of a joint account. When signing in a representative capacity, please give title.

IMPORTANT: Please Detach, Sign and Return ALL proxies from ALL packets received in the enclosed postage paid envelope.
FAILURE TO VOTE HAS THE SAME EFFECT AS A VOTE AGAINST THE PLAN.

Exhibit 99.2

_______ __, 2008

Dear Friend:

We are pleased to announce that Anchor Bank is converting from the mutual to the stock form of ownership. Anchor Bank will be the wholly-owned subsidiary of a newly formed stock holding company to be known as Anchor Bancorp. In connection with the conversion, Auburn Bancorp is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion.

Because we believe you may be interested in learning more about an investment in the common stock of Anchor Bancorp, we are sending you the following materials which describe the offering.


	PROSPECTUS : This document provides detailed information about Anchor Bank’s operations and the proposed offering of Anchor Bancorp common stock.

	STOCK ORDER AND CERTIFICATION FORM : This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is ________, Pacific time, on __________ __, 2008.

As a friend of Anchor Bank, you will have the opportunity to buy common stock directly from Anchor Bancorp in the offering without paying a commission or fee. If you have additional questions regarding the conversion and stock offering, please call us at (360) XXX-XXXX, Monday through Friday from 9:00 a.m. to 5:00 p.m., Pacific Time, or stop by our Stock Information Center located at our main office, 120 North Broadway Aberdeen, Washington.

We are pleased to offer you this opportunity to become a shareholder of Anchor Bancorp.

Sincerely,

Jerald L. Shaw
Chief Executive Officer

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

_______ __, 2008

Dear Member:

We are pleased to announce that Anchor Bank is converting from the mutual to the stock form of ownership. Anchor Bank will be the wholly-owned subsidiary of a newly formed stock holding company to be known as Anchor Bancorp. In connection with the conversion, Anchor Bancorp is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion.

To accomplish the conversion, we need your participation in an important vote. Enclosed is a proxy statement describing the Plan of Conversion and your voting and subscription rights. YOUR VOTE IS VERY IMPORTANT .

Enclosed, as part of the proxy materials, is your proxy card, the detachable section on top of the order form bearing your name and address. This proxy card should be signed, dated and returned to us prior to the Special Meeting of Members to be held on ________ __, 2008. Please take a moment now to sign and date the enclosed proxy card and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION.

The Board of Directors believes the conversion will offer a number of advantages, such as an opportunity for depositors of Anchor Bank to become shareholders of Anchor Bancorp. Please remember:


	Ø	Your deposit accounts will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation (“FDIC”).

	Ø	There will be no change in the balance, interest rate or maturity of any deposit account or loan because of the conversion.

	Ø	Members have a right, but not an obligation, to buy Anchor Bancorp common stock and may do so without the payment of a commission or fee before it is offered to the general public.

	Ø	Like all stock, shares of Anchor Bancorp’s common stock issued in this offering will not be insured by the FDIC.

Enclosed is a prospectus containing a complete discussion of the stock offering. We urge you to read this material carefully. If you are interested in purchasing the common stock of Anchor Bancorp, you must submit your Stock Order and Certification Form and payment prior to ______, Pacific time, on __________ __, 2008.

If you have additional questions regarding the offering, please call us at (360) XXX-XXXX, Monday through Friday, 9:00 a.m. to 5:00 p.m., or stop by our Stock Information Center located at 120 North Broadway, Aberdeen, Washington.

Sincerely,

Jerald L. Shaw
Chief Executive Officer

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

______ __, 2008

Dear Prospective Investor:

We are pleased to announce that Anchor Bank is converting from the mutual to the stock form of ownership. Anchor Bank will be the wholly-owned subsidiary of a newly formed stock holding company to be known as Anchor Bancorp. In connection with the conversion, Anchor Bancorp is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion.

We have enclosed the following materials that will help you learn more about an investment in the common stock of Anchor Bancorp. Please read and review the materials carefully.


	PROSPECTUS : This document provides detailed information about the operations at Anchor Bank and a complete discussion on the proposed stock offering.

	STOCK ORDER AND CERTIFICATION FORM : This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is ______, Pacific time, on ___________ __, 2008.

We invite you and other local community members to become shareholders of Anchor Bancorp. Through this offering, you have the opportunity to buy stock directly from Anchor Bancorp without paying a commission or a fee.

If you have additional questions regarding the conversion, please call us at (360) XXX-XXXX, Monday through Friday, 9:00 a.m. to 5:00 p.m., or stop by our Stock Information Center located at 120 North Broadway, Aberdeen, Washington.

Sincerely,

Jerald L. Shaw
Chief Executive Officer

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.


	KEEFE, BRUYETTE & WOODS, INC.

_____ __, 2008

To Members and Friends
Of Anchor Bank

Keefe, Bruyette & Woods, Inc., a member of the Financial Industry Regulatory Authority, is assisting Anchor Bank, in converting from the mutual to the stock form of ownership. Upon completion of the conversion, Anchor Bank will be a wholly-owned subsidiary of the newly formed stock holding company, Anchor Bancorp. In connection with the conversion, Anchor Bancorp is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion.

At the request of Anchor Bancorp, we are enclosing materials explaining this process and your options, including an opportunity to invest in the shares of Anchor Bancorp common stock being offered to customers of Anchor Bank and various other persons until _________, Pacific time, on _________ __, 2008. Please read the enclosed prospectus carefully for a complete description of the stock offering. Anchor Bancorp has asked us to forward the prospectus and accompanying documents to you in view of certain requirements of the securities laws in your state.

Very truly yours,

Keefe, Bruyette & Woods, Inc.

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

Anchor Bank Website Message:

Plan of Conversion
and
Stock Offering
Information

Anchor Bank is pleased to announce that materials were mailed on _________, 2008 regarding its Plan of Conversion, including the stock offering by Anchor Bancorp. If you were a depositor as of June 30, 2007 or ____ __, 2008, you should be receiving a packet of materials soon. We encourage you to read the information carefully.

If you were a Depositor of Anchor Bank as of the Voting Record Date, _________, 2008, a proxy card(s) is included. We encourage you to sign, date and return ALL proxy cards as promptly as possible… and THANK YOU!

Information, including a prospectus, regarding Anchor Bancorp’s stock offering was also enclosed. The subscription offering has commenced and continues until ________, Pacific time, on _________, 2008, at which time your order must be received if you want to subscribe for stock.

Depending upon the outcome of the Subscription Offering expiring on _________, 2008, our best estimate at this time for trading of the Anchor Bancorp stock on the NASDAQ Global Select Market is late ___________. As described in the prospectus, it could be later. The stock will trade under the ticker symbol “ANCB”. We will keep you as informed as possible on this site.

Our telephone number at the Stock Information Center number is (360) XXX-XXXX.

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

We recently sent you a proxy statement and related materials regarding a proposal to convert Anchor
Bank from a mutual to a stock form of ownership.

Your vote on the Plan of Conversion has not yet been received .

Voting for the Conversion does not obligate you to purchase stock and will not
affect your accounts or FDIC Insurance Coverage.

Not Returning Your Proxy Cards has the Same Effect as Voting
“Against” the Conversion…and

Your Board of Directors Unanimously Recommends a Vote “FOR” the Conversion.

Your Vote Is Important To Us!

Please sign and date the enclosed proxy card and return it in the postage-paid envelope
provided TODAY ! If you received more than one proxy card, please be sure to sign,
date and return all cards you received.

Thank you,

Jerald L. Shaw

Chief Executive Officer

Anchor Bank

Aberdeen, Washington

If you have already mailed your proxy card(s), please accept our thanks and disregard this notice.

For further information call (360) XXX-XXXX.

The shares of common stock being offered are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

PROXY GRAM

PLEASE VOTE TODAY...

We recently sent you a proxy statement and related materials regarding a proposal to convert
Anchor Bank from a mutual to a stock form of ownership.

Your vote on the Plan of Conversion has not yet been received .

Voting for the Conversion does not obligate you to purchase stock and will not
affect your accounts or FDIC Insurance Coverage.

Not Returning Your Proxy Cards has the Same Effect as Voting
“Against” the Conversion…and

Your Board of Directors Unanimously Recommends a Vote “FOR” the Conversion.

Our Reasons for the Corporate Change

As a Stock Institution we will be able to :

- Increase the capital of Anchor Bank to support future lending and operation growth.

- Enhance profitability and earnings through reinvesting and leveraging the proceeds, primarily through traditional
funding and lending activities.

- Support future branching activities and/or the acquisition of financial services companies.

- Implement equity compensation plans to retain and attract qualified directors, officers and staff to enhance
current incentive-based compensation programs.

- Increase our philanthropic endeavors to the community we serve through the formation and funding of the
Anchor Bancorp Foundation.

Your Vote Is Important To Us!

Thank you,

Jerald L. Shaw

Chief Executive Officer

Anchor Bank

Aberdeen, Washington

If you have already mailed your proxy card(s), please accept our thanks and disregard this notice.

For further information call (360) XXX-XXXX.

The shares of common stock being offered are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

PROXY GRAM II

PLEASE VOTE TODAY...

{logo} Anchor Bank

__________, 2008

Dear Valued Anchor Bank Member:

We recently forwarded you a proxy statement and related materials regarding a proposal to convert Anchor Bank from the mutual to the stock form of ownership. This conversion will allow us to operate in essentially the same manner as we currently operate, but provide us with the flexibility to add capital, continue to grow and expand our operations by adding new products and services and increasing our lending capability.

As of today, your vote on our Plan of Conversion has not yet been received. Your Board of Directors unanimously recommends a vote “FOR” the Plan of Conversion. If you mailed your proxy, please accept our thanks and disregard this request.

We would sincerely appreciate you signing and dating the enclosed proxy card and returning it promptly in the enclosed postage-paid envelope or dropping it off at your Anchor Bank office. Our meeting on _________ __ ^th is fast approaching and we’d like to receive your vote as soon as possible.

Voting FOR the conversion does not affect the terms or insurance on your accounts. For further information, call our Stock Information Center at (360) XXX-XXXX.

Best regards and thank you,

Jerald L. Shaw
Chief Executive Officer

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

End of Offering Anchor Bank Website Message

Stock Issuance Information

The Anchor Bancorp stock offering closed on _________ __, 2008. The results of the offering are as follows:

________________________________________________.

Interest and refund checks [if applicable] will be mailed on ________, 2008 by regular mail. No special mailing instructions will be accepted.

Allocations will be made available beginning at ____ on ____________, 2008. [If applicable] You can view your allocation online by visiting https://allocations.kbw.com and typing in your order number and the last four digits of your social security number.

Notice to Subscribers not receiving all shares: Please be aware that while we believe this to be a final allocation, we reserve the right to amend this amount up to the time of trading and recommend you verify the number of shares you received on the face of the certificate you will receive prior to trading your shares. [if applicable]

The transfer agent for Anchor Bancorp will be _______________________ and the phone number for their Investor Relations Department is (800) ___-____.

We anticipate trading to begin on ____________, 2008 on the Nasdaq Global Select Market under the symbol “ANCB.”

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

F ACTS A BOUT C ONVERSION

The Board of Directors of Anchor Mutual Savings Bank (“Anchor Bank”) unanimously adopted a Plan of Conversion (the “Plan”) to convert from the mutual to the stock form of ownership.

This brochure answers some of the most frequently asked questions about the conversion and about your opportunity to invest in the common stock of Anchor Bancorp, a newly-formed corporation that will become the holding company for Anchor Bank following the conversion.

Investment in the common stock of Anchor Bancorp involves certain risks. For a discussion of these risks and other factors, including a complete description of the offering, investors are urged to read the accompanying prospectus , especially the discussion under the heading “Risk Factors.”

W HY IS A NCHOR B ANK CONVERTING TO STOCK FORM ?

The conversion to stock form will enable Anchor Bank to access additional capital through the sale of common stock. This additional capital will support future lending and operational growth, enhance profitability and earnings through reinvesting and leveraging the proceeds, support future expansion of operations through the establishment or acquisition of banking offices or other financial service providers and implement equity compensation plans to retain and attract qualified directors and employees.

W HAT EFFECT WILL THE CONVERSION HAVE ON EXISTING DEPOSIT AND LOAN ACCOUNTS AND CUSTOMER RELATIONSHIPS ?

The conversion will have no effect on existing deposit or loan accounts and customer relationships. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation to the maximum legal limit. Interest rates and existing terms and conditions on deposit accounts will remain the same upon completion of the conversion. Contractual obligations of borrowers of Anchor Bank will not change and there will be no change in the amount, interest rate, maturity, security or any other condition relating to the respective loans of customers.

A RE A NCHOR B ANK’S DEPOSITORS REQUIRED TO PURCHASE STOCK IN THE CONVERSION ?

No depositor or other person is required to purchase stock. However, depositors and other eligible persons will be provided the opportunity to purchase stock consistent with the established priority of subscription rights, should they so desire. The decision to purchase stock will be exclusively that of each person. Whether an individual decides to purchase stock or not will have no positive or negative impact on his or her standing as a customer of Anchor Bank. The conversion will allow depositors of Anchor Bank an opportunity to buy common stock and become shareholders of Anchor Bancorp.

W HO IS ELIGIBLE TO PURCHASE COMMON SHARES IN THE SUBSCRIPTION OFFERING ?

Certain past and present depositors of Anchor Bank are eligible to purchase common stock in the subscription offering.

H OW MANY COMMON SHARES ARE BEING OFFERED AND AT WHAT PRICE ?

Anchor Bancorp is offering up to 5,175,000 shares of common stock, subject to adjustment as described in the prospectus, at a price of $10.00 per share, through the prospectus.

W HAT IS A CHARITABLE FOUNDATION AND WHY IS A NCHOR B ANK CONSIDERING INCLUDING THIS IN ITS CONVERSION ?

In its Plan, Anchor Bank has indicated its intent to establish a charitable foundation with 150,000 shares of common stock and $500,000 cash. We anticipate the establishment of the foundation will enable us to increase our annual charitable donation to the communities we serve. This foundation will provide financial support that is consistent with Anchor Bank’s values, is a reflection of Anchor Bank’s heritage as a community-based enterprise, and is a tangible expression of Anchor Bank’s commitment to its community.

H OW MANY SHARES MAY I BUY ?

The minimum order is 25 shares. The maximum individual purchase is 50,000 shares. No person, together with associates of, and persons acting in concert with such person, may purchase more than 5% of the shares issued in the conversion, as further discussed in the prospectus.

W ILL THE COMMON STOCK BE INSURED ?

No. Like any other common stock, Anchor Bancorp’s common stock will not be insured.

H OW DO I ORDER THE COMMON STOCK ?

You must complete the enclosed Stock Order and Certification Form. Instructions for completing your Stock Order and Certification Form are contained on the back of the stock order form. Your order must be received by ______, Pacific time, on _________ __, 2008.

H OW MAY I PAY FOR MY COMMON STOCK ?

First, you may pay for common stock by check or money order made payable to Anchor Bancorp. Interest will be paid by Anchor Bancorp on these funds at Anchor Bank’s passbook savings rate from the day the funds are received until the completion or termination of the conversion. Second, you may authorize us to withdraw funds from your deposit account or certificate of deposit at Anchor Bank for the amount of funds you specify for payment. You will not have access to these funds from the day we receive your order until completion or termination of the conversion. There is no penalty for early withdrawal from a certificate of deposit.

C AN I PURCHASE STOCK USING FUNDS IN MY A NCHOR B ANK IRA ACCOUNT ?

To do so, you must establish a self-directed IRA account at an unaffiliated brokerage firm or trust department to which you can transfer a portion or all of your IRA account at Anchor Bank. Please contact your broker or

self-directed IRA provider as soon as possible if you want to explore this option, as such transactions take time.

W ILL DIVIDENDS BE PAID ON THE COMMON STOCK ?

Following the offering, Anchor Bancorp’s board of directors will consider a policy of paying regular cash dividends. However, the timing and amount of such dividends is currently undetermined.

H OW WILL THE COMMON STOCK BE TRADED ?

Anchor Bancorp’s stock is expected to trade on the Nasdaq Global Select Market under the ticker symbol “ANCB.” However, no assurance can be given that an active and liquid market will develop.

A RE EXECUTIVE OFFICERS AND DIRECTORS OF A NCHOR B ANK PLANNING TO PURCHASE STOCK ?

Yes! The executive officers and directors of Anchor Bank plan to purchase, in the aggregate, $1.2 million worth of stock or approximately 2.31% of the common stock offered at the maximum of the offering range.

M UST I PAY A COMMISSION ?

No. You will not be charged a commission or fee on the purchase of common stock in the conversion.

S HOULD I VOTE TO APPROVE THE P LAN OF C ONVERSION ?

Your Board of Directors unanimously recommends a vote “FOR” the Plan of Conversion. Your “YES” vote is very important!

PLEASE VOTE, SIGN, DATE AND RETURN ALL PROXY CARDS!

W HY DID I GET SEVERAL PROXY CARDS ?

If you have more than one account, you could receive more than one proxy card, depending on the ownership structure of your accounts. Please vote all of the proxy cards you receive.

H OW MANY VOTES DO I HAVE ?

Every depositor is entitled to cast one vote for each $100, or fraction thereof, on deposit as of the voting record date, up to 1,000 votes.

M AY I VOTE IN PERSON AT THE SPECIAL MEETING ?

Yes, but we would still like you to sign, date and mail your proxy today. If you decide to revoke your proxy, you may do so at any time before such proxy is exercised by executing and delivering a later dated proxy or by giving notice of revocation in writing or by voting in person at the special meeting. Attendance at the special meeting will not, of itself, revoke a proxy.

For additional information you may visit or call our stock information center Monday through Friday, 9:00 a.m. to 5:00 p.m., located in Anchor Bank’s main office at 120 North Broadway, Aberdeen, Washington.

STOCK INFORMATION CENTER

(360) XXX-XXXX

Anchor Bank
120 North Broadway
Aberdeen, Washington 98520

QUESTIONS

AND

ANSWERS

{ Holding Company Logo }

Holding Company for

Anchor Bank

The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.

Exhibit 99.3


RP ^® FINANCIAL, LC.

*Celebrating 20 Years of Financial Advisory Services*



April 21, 2008

Mr. Jerald L. Shaw
President & Chief Executive Officer
Anchor Mutual Savings Bank
100 West First Street
Aberdeen, Washington 98520

Dear Mr. Shaw:

This letter sets forth the agreement between Anchor Mutual Savings Bank, Aberdeen, Washington (the “Bank”), and RP ^® Financial, LC. (“RP Financial”), whereby the Bank has engaged RP Financial to prepare the regulatory business plan and financial projections to be adopted by the Board of Directors in conjunction with the mutual to stock conversion transaction. These services are described in greater detail below.

Description of Proposed Services

RP Financial’s business planning services will include the following areas: (1) evaluating the Bank’s current financial and operating condition, business strategies and anticipated strategies in the future; (2) analyzing and quantifying the impact of business strategies, incorporating the use of net offering proceeds both in the short and long term; (3) preparing detailed financial projections on a quarterly basis for a period of at least three fiscal years to reflect the impact of Board approved business strategies and use of proceeds; (4) preparing the written business plan document which conforms with applicable regulatory guidelines including a description of the use of proceeds and how the convenience and needs of the community will be addressed; and (5) preparing the detailed schedules of the capitalization of the Bank and holding company and related cash flows.

Contents of the business plan will include: Executive Summary; Description of Business; Marketing Plan; Management Plan; Records, Systems and Controls; Financial Management Plan; Monitoring and Revising the Plan; and Alternative Business Strategy.

RP Financial agrees to prepare the business plan and accompanying financial projections in writing such that the business plan can be filed with the appropriate regulatory agencies prior to filing the appropriate applications.

Fee Structure and Payment Schedule

The Bank agrees to compensate RP Financial for preparation of the business plan on a fixed fee basis of $35,000. Payment of the professional fees shall be made upon delivery of the completed business plan.




Washington Headquarters
1700 North Moore Street, Suite 2210	Direct: (703) 647-6543
Arlington, VA 22209	Telephone: (703) 528-1700
www.rpfinancial.com	Fax No.: (703) 528-1788
E-Mail: rriggins@rpfinancial.com	Toll-Free No.: (866) 723-0594

Mr. Jerald L. Shaw
April 21, 2008
Page 2

The Bank also agrees to reimburse RP Financial for those direct out-of-pocket expenses necessary and incidental to providing the business planning services. Reimbursable expenses will likely include travel, shipping, copying/printing, computer and data services, and shall be paid to RP Financial as incurred and billed. RP Financial will agree to limit reimbursable expenses to $10,000 in conjunction with this engagement, and the concurrent appraisal engagement, subject to written authorization from the Bank to exceed such level.

In the event the business plan is required by the Bank to be substantially amended, to reflect changes in the structure of the mutual-to-stock conversion transaction or the nature of the principal lending or deposit strategies, the announcement of an acquisition transaction (branches, another institution or other companies), a delay in the implementation of the overall plan or other similar matters, the Bank will compensate RP Financial $5,000 for each required update plus reimbursable expenses.

In the event the Bank shall, for any reason, discontinue this planning engagement prior to delivery of the completed business plan and payment of the progress payment fee, the Bank agrees to compensate RP Financial according to RP Financial’s standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the fixed fee described above, plus reimbursable expenses incurred. RP Financial’s standard billing rates range from $75 per hour for research associates to $350 per hour for managing directors.

If during the course of the planning engagement, unforeseen events occur so as to materially change the nature or the work content of the business planning services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank and RP Financial. Such unforeseen events may include changes in regulatory requirements as it specifically relates to the Bank or potential transactions that will dramatically impact the Bank such as a pending acquisition or branch transaction.

* * * * * * * * * * *

Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter.


	Sincerely,

	Ronald S. Riggins
	President and Managing Director


Agreed To and Accepted By:	Jerald L. Shaw

	President & Chief Executive Officer

Upon Authorization by the Board of Directors For:		Anchor Mutual Savings Bank
		Aberdeen, Washington


Date Executed:	May 20, 2008


RP ^® FINANCIAL, LC.

*Celebrating 20 Years of Financial Advisory Services*



April 21, 2008

Mr. Jerald L. Shaw
President & Chief Executive Officer
Anchor Mutual Savings Bank
100 West First Street
Aberdeen, Washington 98520

Dear Mr. Shaw:

This letter sets forth the agreement between Anchor Mutual Savings Bank, Aberdeen, Washington (the “Bank”), and RP ^® Financial, LC (“RP Financial”) for independent appraisal services in connection with the stock to be issued concurrent with the mutual to stock conversion transaction. The specific appraisal services to be rendered by RP Financial are described below.

Description of Appraisal Services

Prior to preparing the valuation report, RP Financial will conduct a financial due diligence, including on-site interviews of senior management and reviews of financial and other documents and records, to gain insight into the Bank’s operations, financial condition, profitability, market area, risks and various internal and external factors which impact the pro forma value of the Bank.

RP Financial will prepare a written detailed valuation report of the Bank that will be fully consistent with applicable regulatory guidelines and standard pro forma valuation practices. In this regard, the applicable regulatory guidelines are those set forth in the Office of Thrift Supervision’s (“OTS”) October 21, 1994 “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization,” which have been endorsed by the Federal Deposit Insurance Corporation (“FDIC”) and various state banking agencies.

The appraisal report will include an in-depth analysis of the Bank’s financial condition and operating results, as well as an assessment of the Bank’s interest rate risk, credit risk and liquidity risk. The appraisal report will describe the Bank’s business strategies, market area, prospects for the future and the intended use of proceeds both in the short term and over the longer term. A peer group analysis relative to publicly-traded savings institutions will be conducted for the purpose of determining appropriate valuation adjustments relative to the group.




Washington Headquarters
1700 North Moore Street, Suite 2210	Direct: (703) 647-6543
Arlington, VA 22209	Telephone: (703) 528-1700
www.rpfinancial.com	Fax No.: (703) 528-1788
E-Mail: rriggins@rpfinancial.com	Toll-Free No.: (866) 723-0594

Mr. Jerald L. Shaw
April 21, 2008
Page 2

We will review pertinent sections of the applications and offering documents to obtain necessary data and information for the appraisal, including the impact of key deal elements on the appraised value, such as dividend policy, use of proceeds and reinvestment rate, tax rate, offering expenses, characteristics of stock plans and charitable foundation contribution (if applicable). The appraisal report will conclude with a midpoint pro forma market value that will establish the range of value, and reflect the offering price per share determined by the Bank’s Board of Directors. The appraisal report may be periodically updated prior to the commencement of the offering and the appraisal is required to be updated just prior to the closing of the offering.

RP Financial agrees to deliver the valuation appraisal and subsequent updates, in writing, to the Bank at the above address in conjunction with the filing of the regulatory application. Subsequent updates will be filed promptly as certain events occur which would warrant the preparation and filing of such valuation updates. Further, RP Financial agrees to perform such other services as are necessary or required in connection with the regulatory review of the appraisal and respond to the regulatory comments, if any, regarding the valuation appraisal and subsequent updates. RP Financial will also prepare the pro forma presentations for inclusion in the prospectus, reflecting the original appraisal and subsequent updates, as appropriate.

Fee Structure and Payment Schedule

The Bank agrees to pay RP Financial a fixed fee of $60,000 for preparation and delivery of the original appraisal report, plus reimbursable expenses. Payment of these fees shall be made according to the following schedule:


	•	$5,000 upon execution of the letter of agreement engaging RP Financial’s appraisal services;

	•	$55,000 upon delivery of the completed original appraisal report; and

	•	$5,000 for each valuation update that may be required in the normal course. In the event the transaction is delayed for reasons described below, the Bank and RP Financial will agree on a fee reflected the scope of such an update to the appraisal.

The Bank will reimburse RP Financial for out-of-pocket expenses incurred in preparation of the valuation. Such out-of-pocket expenses will likely include travel, printing, shipping, computer and data services. RP Financial will agree to limit reimbursable expenses to $10,000 in connection with this engagement, and the concurrent business planning engagement subject to written authorization from the Bank to exceed such level.

In the event the Bank shall, for any reason, discontinue the proposed stock offering prior to delivery of the completed documents set forth above and payment of the respective progress payment fees, the Bank agrees to compensate RP Financial according to RP Financial’s standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted above, after giving full credit to the initial retainer fee. RP Financial’s standard billing rates range from $75 per hour for research associates to $350 per hour for managing directors.

Mr. Jerald L. Shaw
April 21, 2008
Page 3

If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank and RP Financial. Such unforeseen events shall include, but not be limited to, major changes in the conversion regulations, appraisal guidelines or processing procedures as they relate to appraisals, major changes in management or procedures, operating policies or philosophies, and excessive delays or suspension of processing of applications by the regulators such that completion of the transaction requires the preparation by RP Financial of a new appraisal.

Representations and Warranties

The Bank and RP Financial agree to the following:

1. The Bank agrees to make available or to supply to RP Financial such information with respect to its business and financial condition as RP Financial may reasonably request in order to provide the aforesaid valuation. Such information heretofore or hereafter supplied or made available to RP Financial shall include: annual financial statements, periodic regulatory filings and material agreements, debt instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and records. All information provided by the Bank to RP Financial shall remain strictly confidential (unless such information is otherwise made available to the public), and if the stock offering is not consummated or the services of RP Financial are terminated hereunder, RP Financial shall upon request promptly return to the Bank the original and any copies of such information.

2. The Bank hereby represents and warrants to RP Financial that any information provided to RP Financial does not and will not, to the best of the Bank’s knowledge, at the times it is provided to RP Financial, contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.

3. (a) The Bank agrees that it will indemnify and hold harmless RP Financial, any affiliates of RP Financial, the respective directors, officers, agents and employees of RP Financial or their successors and assigns who act for or on behalf of RP Financial in connection with the services called for under this agreement (hereinafter referred to as “RP Financial”), from and against any and all losses, claims, damages and liabilities (including, but not limited to, all losses and expenses in connection with claims under the federal securities laws) attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information furnished or otherwise provided by the Bank to RP Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact from the financial statements or other information furnished or otherwise made available by the Bank to RP Financial; or (iii) any action or omission to act by the Bank, or the Bank’s respective officers, Directors, employees or agents which action or omission is willful or negligent. The Bank will be under no obligation to indemnify RP Financial hereunder if a court determines that RP Financial was negligent or acted in bad faith with respect to any actions or omissions of RP Financial related to a matter for which indemnification is sought hereunder. Any time devoted by employees of RP Financial to situations for which indemnification is provided hereunder, shall be an indemnifiable cost payable by the Bank at the normal hourly professional rate chargeable by such employee.

Mr. Jerald L. Shaw
April 21, 2008
Page 4

(b) RP Financial shall give written notice to the Bank of such claim or facts within thirty days of the assertion of any claim or discovery of material facts upon which RP Financial intends to base a claim for indemnification hereunder. In the event the Bank elects, within ten business days of the receipt of the original notice thereof, to contest such claim by written notice to RP Financial, RP Financial will be entitled to be paid any amounts payable by the Bank hereunder within five days after the final determination of such contest either by written acknowledgement of the Bank or a final judgment (including all appeals therefrom) of a court of competent jurisdiction. If the Bank does not so elect, RP Financial shall be paid promptly and in any event within thirty days after receipt by the Bank of the notice of the claim.

(c) The Bank shall pay for or reimburse the reasonable expenses, including attorneys’ fees, incurred by RP Financial in advance of the final disposition of any proceeding within thirty days of the receipt of such request if RP Financial furnishes the Bank: (1) a written statement of RP Financial’s good faith belief that it is entitled to indemnification hereunder; and (2) a written undertaking to repay the advance if it ultimately is determined in a final adjudication of such proceeding that it or he is not entitled to such indemnification. The Bank may assume the defense of any claim (as to which notice is given in accordance with 3(b)) with counsel reasonably satisfactory to RP Financial, and after notice from the Bank to RP Financial of its election to assume the defense thereof, the Bank will not be liable to RP Financial for any legal or other expenses subsequently incurred by RP Financial (other than reasonable costs of investigation and assistance in discovery and document production matters). Notwithstanding the foregoing, RP Financial shall have the right to employ their own counsel in any action or proceeding if RP Financial shall have concluded that a conflict of interest exists between the Bank and RP Financial which would materially impact the effective representation of RP Financial. In the event that RP Financial concludes that a conflict of interest exists, RP Financial shall have the right to select counsel reasonably satisfactory to the Bank which will represent RP Financial in any such action or proceeding and the Bank shall reimburse RP Financial for the reasonable legal fees and expenses of such counsel and other expenses reasonably incurred by RP Financial. In no event shall the Bank be liable for the fees and expenses of more than one counsel, separate from its own counsel, for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same allegations or circumstances. The Bank will not be liable under the foregoing indemnification provision in respect of any compromise or settlement of any action or proceeding made without its consent, which consent shall not be unreasonably withheld.

(d) In the event the Bank does not pay any indemnified loss or make advance reimbursements of expenses in accordance with the terms of this agreement, RP Financial shall have all remedies available at law or in equity to enforce such obligation.

It is understood that, in connection with RP Financial’s above-mentioned engagement, RP Financial may also be engaged to act for the Bank in one or more additional capacities, and that the terms of the original engagement may be incorporated by reference in one or more separate agreements. The provisions of Paragraph 3 herein shall apply to the original engagement, any such additional engagement, any modification of the original engagement or such additional engagement and shall remain in full force and effect following the completion or termination of RP Financial’s engagement(s). This agreement constitutes the entire understanding of the Bank and RP Financial concerning the subject matter addressed herein, and such contract shall be governed and construed in accordance with the laws of the Commonwealth of Virginia. This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.

Mr. Jerald L. Shaw
April 21, 2008
Page 5

The Bank and RP Financial are not affiliated, and neither the Bank nor RP Financial has an economic interest in, or is held in common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other.

* * * * * * * * * * *

Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter, together with the initial retainer fee of $5,000.


	Sincerely,

	Ronald S. Riggins
	President and Managing Director


Agreed To and Accepted By:	Jerald L. Shaw

	President & Chief Executive Officer

Upon Authorization by the Board of Directors For:		Anchor Mutual Savings Bank
		Aberdeen, Washington


Date Executed:	May 20, 2008

Exhibit 99.4

PRO FORMA VALUATION REPORT

ANCHOR BANCORP
Aberdeen, Washington

PROPOSED HOLDING COMPANY FOR:
ANCHOR BANK
Aberdeen, Washington

Dated As Of:
October 10, 2008

Prepared By:

RP ^® Financial, LC.

1700 North Moore Street

Suite 2210

Arlington, Virginia 22209

RP ^® FINANCIAL, LC.

Financial Services Industry Consultants

October 10, 2008

Board of Directors
Anchor Mutual Savings Bank
120 North Broadway
Aberdeen, Washington 98520

Members of the Board of Directors:

At your request, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market value of the common stock which is to be offered in connection with the plan of conversion described below. This Appraisal is furnished pursuant to the conversion regulations promulgated by the Office of Thrift Supervision (“OTS”), which are relied upon by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington Department of Financial Institutions in the absence of separate written valuation guidelines. Specifically, this Appraisal has been prepared in accordance with the “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization” as set forth by the OTS, and applicable regulatory interpretations thereof.

Description of Plan of Conversion

The Board of Directors of Anchor Mutual Savings Bank (“Anchor” or the “Bank”) adopted a plan of conversion on July 15, 2008. Pursuant to the plan of conversion, the Bank will convert from the mutual savings bank form of organization to a stock savings bank form and become a wholly owned subsidiary of Anchor Bancorp (“Anchor Bancorp” or the “Company”) a newly formed Washington corporation. The Company will own all of the outstanding shares of the Bank, which will be renamed “Anchor Bank.” Anchor Bancorp will offer shares of common stock to eligible depositors of Anchor, to certain newly-formed stock benefit plans for officers, directors and employees and others. Following the completion of the offering, Anchor Bancorp will be a bank holding company, and its primary regulator will be the Federal Reserve.

Pursuant to the plan of conversion, the Company will offer its stock in a subscription offering to Eligible Account Holders of the Bank, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, and Other Members. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale in a direct or syndicated community offering.



Washington Headquarters
Rosslyn Center	Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210	Fax No.: (703) 528-1788
Arlington, VA 22209	Toll-Free No.: (866) 723-0594
www.rpfinancial.com	E-Mail: mail@rpfinancial.com

Board of Directors
October 10, 2008
Page 2

The plan of conversion and reorganization provides for the establishment of The Anchor Bancorp Foundation (the “Foundation”). The Foundation will be funded with cash in an amount of $500,000 and common stock contributed by Anchor Bancorp in an amount equal to $1,500,000. The Foundation will be dedicated to assist the communities within Anchor’s market area beyond community development and lending and will enhance the Bank’s current activities under the Community Reinvestment Act.

At this time, no other activities are contemplated for Anchor Bancorp other than the ownership of the Bank, a loan to the newly-formed ESOP and reinvestment of the proceeds that are retained by the Company. In the future, Anchor Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends to shareholders and/or repurchase its stock, although there are no specific plans to undertake such activities at the present time.

RP ^® Financial, LC.

RP ^® Financial, LC. (“RP Financial”) is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. For its appraisal services, RP Financial is being compensated on a fixed fee basis for the original appraisal and for any subsequent updates, and such fees are payable regardless of the valuation conclusion or the completion of the conversion offering transaction. We believe that we are independent of the Company, the Bank, and the other parties engaged by the Bank or the Company to assist in the stock conversion process.

Valuation Methodology

In preparing the Appraisal, we have reviewed Anchor Bancorp’s and the Bank’s regulatory applications, including the prospectus as filed with the Washington Department of Financial Institutions and the Securities and Exchange Commission (“SEC”). We have conducted a financial analysis of the Bank, that has included due diligence related discussions with Anchor’s management; Moss Adams LLP, the Bank’s independent auditor; Breyer and Associates, P.C., Anchor’s conversion counsel; and Keefe Bruyette & Woods, Inc., which has been retained as the financial and marketing advisor in connection with the stock offering. All conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.

We have investigated the competitive environment within which Anchor operates and have assessed the Bank’s relative strengths and weaknesses. We have monitored

Board of Directors
October 10, 2008
Page 3

all material regulatory and legislative actions affecting financial institutions, generally, and analyzed the potential impact of such developments on Anchor and the industry as a whole; to the extent we were aware of such matters. We have analyzed the potential effects of the stock conversion on the Bank’s operating characteristics and financial performance as they relate to the pro forma market value of Anchor Bancorp. We have reviewed the economy and demographic characteristics of the primary market area in which the Bank currently operates. We have compared Anchor’s financial performance and condition with publicly-traded thrift institutions evaluated and selected in accordance with the Valuation Guidelines, as well as all publicly-traded thrifts and thrift holding companies. We have reviewed conditions in the securities markets in general and the market for thrifts and thrift holding companies, including the market for new issues. We have excluded from such analyses thrifts subject to announced or rumored acquisition, and/or institutions that exhibit other unusual characteristics.

The Appraisal is based on Anchor’s representation that the information contained in the regulatory applications and additional information furnished to us by the Bank and its independent auditors, legal counsel, investment bankers and other authorized agents are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Bank, or its independent auditors, legal counsel, investment bankers and other authorized agents nor did we independently value the assets or liabilities of the Bank. The valuation considers Anchor only as a going concern and should not be considered as an indication of the Bank’s liquidation or control value.

Our appraised value is predicated on a continuation of the current operating environment for the Bank and the Company and for all thrifts and their holding companies. Changes in the local, state and national economy, the federal and state legislative and regulatory environments for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of thrift stocks as a whole or the Bank’s value alone. It is our understanding that Anchor intends to remain an independent institution and there are no current plans for selling control as a converted institution. To the extent that such factors can be foreseen, they have been factored into our analysis.

The estimated pro forma market value is defined as the price at which the Company’s stock, immediately upon completion of the offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Valuation Conclusion

It is our opinion that, as of October 10, 2008, the aggregate market value of Anchor Bancorp’s common stock to be outstanding at the midpoint of the valuation range, assuming a full conversion offering and inclusive of shares to be issued to the

Board of Directors
October 10, 2008
Page 4

Foundation is $46,500,000. The shares will be issued at a price of $10.00 per share. Pursuant to conversion guidelines, the offering and reorganization will thus incorporate the following range of value of stock issuance.


				Total Shares By Category

	Total Shares			Sold in the Offering			Foundation Shares

Shares (1)
Supermaximum		6,101,250			5,951,250			150,000
Maximum		5,325,000			5,175,000			150,000
Midpoint		4,650,000			4,500,000			150,000
Minimum		3,975,000			3,825,000			150,000

Distribution of Shares (2)
Supermaximum		100.00	%		97.54	%		2.46	%
Maximum		100.00	%		97.18	%		2.82	%
Midpoint		100.00	%		96.77	%		3.23	%
Minimum		100.00	%		96.23	%		3.77	%

Aggregate Market Value
Supermaximum	$	61,012,500		$	59,512,500		$	1,500,000
Maximum	$	53,250,000		$	51,750,000		$	1,500,000
Midpoint	$	46,500,000		$	45,000,000		$	1,500,000
Minimum	$	39,750,000		$	38,250,000		$	1,500,000


(1)	Based on offering price of $10.00 per share.

Limiting Factors and Considerations

The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is determined in accordance with applicable regulatory guidelines and is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the estimated pro forma market value thereof. The appraisal reflects only a valuation range as of this date for the pro forma market value of Anchor Bancorp immediately upon issuance of the stock and does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following the completion of the public stock offering.

Board of Directors
October 10, 2008
Page 5

The valuation prepared by RP Financial in accordance with applicable regulatory guidelines was based on the consolidated financial condition and operations of Anchor Bancorp as of or for the periods ended June 30, 2008, the date of the financial data included in the prospectus.

RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits RP Financial, its principals or employees from purchasing stock of its financial institution clients.

The valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the financial performance and condition of Anchor Bancorp, management policies, and current conditions in the equity markets for thrift stocks, both existing issues and new issues. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the federal and state legislative and regulatory environments for financial institutions, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update.


	Respectfully submitted,
	RP ^® FINANCIAL, LC.


	Ronald S. Riggins
	President and Managing Director


	James J. Oren
	Director

RP ^® Financial, LC.

TABLE OF CONTENTS
ANCHOR BANK
Aberdeen, Washington


DESCRIPTION		PAGE NUMBER


CHAPTER ONE	OVERVIEW AND FINANCIAL ANALYSIS

Introduction			1.1
Plan of Conversion			1.1
Strategic Overview			1.2
Balance Sheet Trends			1.4
Income and Expense Trends			1.9
Interest Rate Risk Management			1.12
Lending Activities and Strategy			1.14
Asset Quality			1.18
Funding Composition and Strategy			1.19
Legal Proceedings			1.20

CHAPTER TWO	MARKET AREA

Introduction			2.1
National Economic Factors			2.2
Market Area Demographics			2.6
Summary of Local Economy			2.10
Market Area Employment Sectors			2.13
Unemployment Data and Trends			2.14
Market Area Deposit Characteristics/Competition			2.15
Summary			2.19

CHAPTER THREE	PEER GROUP ANALYSIS

Peer Group Selection			3.1
Financial Condition			3.6
Income and Expense Components			3.10
Loan Composition			3.13
Credit Risk			3.15
Interest Rate Risk			3.15
Summary			3.18

RP ^® Financial, LC.

TABLE OF CONTENTS
ANCHOR BANK
Aberdeen, Washington
(continued)


DESCRIPTION				PAGE NUMBER


CHAPTER FOUR			VALUATION ANALYSIS

Introduction					4.1
Appraisal Guidelines					4.1
RP Financial Approach to the Valuation					4.1
Valuation Analysis					4.2
	1.	Financial Condition			4.3
	2.	Profitability, Growth and Viability of Earnings			4.4
	3.	Asset Growth			4.7
	4.	Primary Market Area			4.7
	5.	Dividends			4.9
	6.	Liquidity of the Shares			4.9
	7.	Marketing of the Issue			4.10
		A.	The Public Market		4.10
		B.	The New Issue Market		4.18
		C.	The Acquisition Market		4.22
	8.	Management			4.22
	9.	Effect of Government Regulation and Regulatory Reform			4.23
Summary of Adjustments					4.23
Valuation Approaches					4.24
	1.	Price-to-Earnings (“P/E”)			4.25
	2.	Price-to-Book (“P/B”)			4.26
	3.	Price-to-Assets (“P/A”)			4.28
Comparison to Recent Offerings					4.28
Valuation Conclusion					4.29

RP ^® Financial, LC.

LIST OF TABLES
ANCHOR BANK
Aberdeen, Washington


TABLE NUMBER	DESCRIPTION	PAGE


1.1	Historical Balance Sheets		1.5
1.2	Historical Income Statements		1.10

2.1	Summary Demographic Data		2.7
2.2	Major Private Employers in Washington		2.13
2.3	Primary Market Area Employment Sectors		2.14
2.4	Market Area Unemployment Trends		2.15
2.5	Deposit Summary		2.16
2.6	Market Area Counties Deposit Competitors		2.18

3.1	Peer Group of Publicly-Traded Thrifts		3.3
3.2	Balance Sheet Composition and Growth Rates		3.7
3.3	Inc as a % of Average Assets and Yields, Costs, Spreads		3.11
3.4	Loan Portfolio Composition and Related Information		3.14
3.5	Credit Risk Measures and Related Information		3.16
3.6	Interest Rate Risk Measures and Net Interest Income Volatility		3.17

4.1	Market Area Unemployment Rates		4.8
4.2	Pricing Characteristics and After-Market Trends		4.20
4.3	Market Price Comparatives		4.21
4.4	Valuation Adjustments		4.23
4.5	Public Market Pricing		4.27


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.1*

I. OVERVIEW AND FINANCIAL ANALYSIS

Introduction

Anchor is a Washington-chartered mutual savings bank headquartered in Aberdeen, Grays Harbor County, Washington. The Bank serves the western area of Washington State, including the Seattle-Tacoma-Bellevue metropolitan statistical area through its main office in Aberdeen and 19 branch offices, six that are located in the headquarters market area of Grays Harbor County, and nine that are located in the greater Seattle–Olympia region. Four other branches are located in outlying areas from the Seattle-Olympia region, and on the Washington state portion of the Portland, Oregon metropolitan area to the south. The Bank’s offices are located in eight different counties, as shown in a map of the Bank’s branch offices provided in Exhibit I-1. Anchor is a member of the Federal Home Loan Bank (“FHLB”) system, and its deposits are insured up to the regulatory maximums by the Federal Deposit Insurance Corporation (“FDIC”). At June 30, 2008, Anchor had $626.4 million in assets, $389.9 million in deposits and total equity of $62.4 million, equal to 10.0% of total assets. Anchor’s audited financial statements are included by reference as Exhibit I-2.

Plan of Conversion

On July 15, 2008, the Board of Directors of the Bank adopted a plan of conversion, incorporated herein by reference, in which the Bank will convert from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank and become a wholly-owned subsidiary of Anchor Bancorp, a newly formed Washington corporation. Anchor Bancorp will offer 100% of its common stock to qualifying depositors of Anchor in a subscription offering and, if necessary, to members of the general public through a community offering and/or a syndicated community offering. Going forward, Anchor Bancorp will own 100% of the Bank’s stock, and the Bank will initially be Anchor’s sole subsidiary. A portion of the net proceeds received from the sale of common stock will be used to purchase all of the then to be issued and


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.2*

outstanding capital stock of the Bank and the balance of the net proceeds will be retained by the Company.

At this time, no other activities are contemplated for the Company other than the ownership of the Bank, extending a loan to the newly-formed employee stock ownership plan (the “ESOP”) and reinvestment of the proceeds that are retained by the Company. In the future, Anchor Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends or repurchase its stock, although there are no specific plans to undertake such activities at the present time.

The plan of reorganization provides for the establishment of The Anchor Bancorp Foundation (the “Foundation), which will be funded with $500,000 of cash and 150,000 shares of common stock. The Foundation’s charitable giving is intended to complement the Bank’s existing community reinvestment activities, and will be dedicated to help fund local projects and to support certain civic, charitable and cultural organizations within the communities served by the Bank. The Company believes the Foundation will enhance the Bank’s already strong reputation for community service. The Foundation’s ownership of the Company’s stock will enable the local community served to share in the potential increase in market value and dividends over time.

Strategic Overview

Anchor has been serving the western Washington State area since its founding in 1907. Following a long history of serving the Aberdeen/Grays Harbor County area, the Bank began expanding the market area served, initially into the Thurston County/Olympia region. By 1994, the Bank operated a total of six offices, with three offices in rural Grays Harbor County and three offices in the Olympia, Washington area. Further expansion has resulted in the current 20 branch office network, located in eight Washington counties, with nine of these offices in supermarket locations. In the most recent decades, the Bank has diversified the lending operations beyond residential first mortgage lending to include construction/land, commercial real estate/multi-family, commercial business, and consumer loans, including home equity loans. As will be discussed later, recent construction/land lending in the Portland, Oregon metropolitan area have resulted in elevated levels of delinquent credits, reducing income and


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.3*

causing certain expenses in the form of additional allowances for loan losses and workout expenses. Currently, funding for operations is provided by both retail and wholesale deposits and borrowings. The Bank’s general business strategies for the future include continuing to grow the franchise and remaining competitive through offering a full line of consumer retail and business loan and deposit products, emphasizing high levels of customer service through an expanded branch office network. Efforts are planned to attract additional lower cost core deposits to manage funding costs, continue to expand and diversify the loan portfolio, maintain high asset quality, leverage the increased capital base and improve earnings.

Anchor’s earnings are largely dependent upon net interest income, non-interest income and control of operating expenses. Management of interest rate risk is pursued through sales into the secondary market or securitization of long-term fixed residential loans, along with a focus on loan originations of short-term or adjustable rate loans such as construction, land, commercial and consumer loans. To strengthen the net interest margin the Bank has sought to increase the loans/assets ratio. Management of credit risk is pursued through adequate policies and procedures in the loan origination, loan monitoring and workout areas, although due to the recent increases in problem assets noted above, the Bank is currently acting to improve the overall credit risk management process.

The equity from the stock offering will increase liquidity, leverage and growth capacity and the overall financial strength. Anchor’s higher capital position resulting from the infusion of stock proceeds is anticipated to reduce interest rate risk through enhancing the interest-earning assets to interest-bearing liabilities (“IEA/IBL”) ratio. The increased equity is expected to reduce funding costs. Additionally, the higher pro forma equity ratio should better position the Bank to take advantage of prospective expansion opportunities, including the establishment or acquisition of additional banking offices in current or nearby markets that would provide for further penetration in the markets currently served by the Bank or nearby surrounding markets. The Bank will also be better positioned to pursue growth and revenue diversification. The projected use of proceeds is highlighted below.


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.4*


	•	The Company. The Company is expected to retain up to 50% of the net conversion proceeds. At present, funds at the holding company level are expected to be initially invested primarily into short-term investment grade securities or a deposit at the Bank. Over time, the funds may be utilized for various corporate purposes, which may include acquisitions, infusing additional equity into the Bank, repurchases of common stock, and the payment of regular and/or special cash dividends.

	•	The Bank. A minimum of 50% of the net conversion proceeds will be infused into the Bank as capital. Cash proceeds (i.e., net proceeds less deposits withdrawn to fund stock purchases) infused into the Bank will initially be utilized to pay off a portion of borrowed funds, and over time become part of general funds, pending deployment into loans and investment securities.

Balance Sheet Trends

Table 1.1 shows the Bank’s historical balance sheet data for the most recent five fiscal years. During this period, Anchor’s balance sheet has expanded at a 7.3% annual rate, with loans receivable, representing a majority of the asset base, increasing at a faster 12.1% annual rate. The asset growth was funded with increasing levels of deposits, borrowings and retained earnings, with deposits decreasing as a percent of total funding liabilities. Equity increased steadily, reflecting net profits during this period. A summary of Anchor’s key operating ratios for the past five years is presented in Exhibit I-3.

The Bank’s loan portfolio totaled $491.7 million, or 78.5% of assets, at June 30, 2008. From fiscal 2004 through 2008, Anchor’s loans/assets ratio increased from 65.9% to 78.5%, reflecting a greater emphasis on lending operations. Increasing dependence on borrowed funds for funding since fiscal 2004 resulted in the loan/deposit ratio increasing from a low of 92.6% at June 30, 2004 to a high of 126.1% at June 30, 2008. The Bank’s loan portfolio is a result of a relatively diversified lending program, with notable balances of construction/land, commercial real estate/multi-family, 1-4 family residential, consumer and commercial business loans. While 1-4 family residential lending has been a business strategy since the founding of Anchor in 1907, the Bank has been active in construction/land and commercial real estate/multi-family lending for many years. Originations of home equity loans have also increased

RP ^® Financial, LC.

Page 1.5

Table 1.1

Anchor Mutual Savings Bank

Historical Balance Sheet Data


																										6/30/04- 6/30/08 Annual. Growth Rate

	As of June 30,

	2004					2005					2006					2007					2008

	Amount		Pct(1)			Amount		Pct(1)			Amount		Pct(1)			Amount		Pct(1)			Amount		Pct(1)			Pct

	($000)		(%)			($000)		(%)			($000)		(%)			($000)		(%)			($000)		(%)			(%)

Total Amount of:
Assets	$	473,177		100.00	%	$	490,533		100.00	%	$	565,295		100.00	%	$	608,696		100.00	%	$	626,445		100.00	%		7.27	%
Loans Receivable (net)		311,862		65.91	%		359,320		73.25	%		441,659		78.13	%		478,140		78.55	%		491,686		78.49	%		12.06	%
Cash and Equivalents		8,903		1.88	%		9,212		1.88	%		7,892		1.40	%		10,916		1.79	%		11,003		1.76	%		5.44	%
Investment Securities		110,042		23.26	%		80,138		16.34	%		74,198		13.13	%		75,987		12.48	%		77,666		12.40	%		-8.34	%
FHLB Stock		5,433		1.15	%		5,503		1.12	%		5,503		0.97	%		5,503		0.90	%		6,123		0.98	%		3.03	%
Fixed Assets		14,257		3.01	%		14,496		2.96	%		14,750		2.61	%		15,258		2.51	%		15,530		2.48	%		2.16	%
Other Real Estate Owned		7,039		1.49	%		3,997		0.81	%		1,794		0.32	%		2,087		0.34	%		1,524		0.24	%		-31.79	%
Mortgage Servicing Rights		899		0.19	%		723		0.15	%		704		0.12	%		572		0.09	%		652		0.10	%		-7.72	%
BOLI		11,766		2.49	%		12,592		2.57	%		14,307		2.53	%		14,919		2.45	%		15,537		2.48	%		7.20	%
Other Assets		2,976		0.63	%		4,552		0.93	%		4,489		0.79	%		5,315		0.87	%		6,724		1.07	%		22.60	%

Deposits	$	336,661		71.15	%	$	356,154		72.61	%	$	399,084		70.60	%	$	443,354		72.84	%	$	389,949		62.25	%		3.74	%
FHLB Advances, Other Borrowed Funds		80,690		17.05	%		72,800		14.84	%		99,943		17.68	%		96,665		15.88	%		165,165		26.37	%		19.61	%
Other Liabilities		6,801		1.44	%		7,708		1.57	%		10,043		1.78	%		8,157		1.34	%		8,969		1.43	%		7.16	%

Equity	$	49,025		10.36	%	$	53,871		10.98	%	$	56,224		9.95	%	$	60,520		9.94	%	$	62,362		9.95	%		6.20	%

Loans/Deposits				92.63	%				100.89	%				110.67	%				107.85	%				126.09	%

Offices Open		14					15					17					20					20

(1) Ratios are as a percent of ending assets.

Source: Audited and unaudited financial statements; RP Financial calculations.


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.6*

substantially. At June 30, 2008, 22.2% and 23.0% of total loans consisted of construction/land and 1-4 family residential loans; at June 30, 2004 in contrast, such loans represented 17.3% and 17.1%, respectively. Over the same time period, consumer loans, including home equity loans, increased from 8.8% to 15.7% of total loans. Total commercial loans (real estate and non-real estate) decreased from 38.2% to 27.2% of total loans from fiscal 2004 to fiscal 2008. Multi-family residential loans also decreased from fiscal 2004 to fiscal 2008 from 18.6% to 11.8% of total loans.

The residential mortgage loan portfolio consists of both fixed and adjustable rate loans as the Company’s attempts to generally sell longer term fixed rate loans into the secondary market, or alternatively, securitizes small pools of fixed rate loans into Freddie Mac issued mortgage-backed securities (“MBS”) which are then held in the investment portfolio. The majority of the Company’s 1-4 family residential mortgage loans conform to standards set by Freddie Mac. Anchor typically retains servicing on loans that are sold into the secondary market. The mortgage servicing rights (“MSRs”), which are capitalized, totaled $652,000 as of June 30, 2008, reflecting a portfolio of loans serviced for others of $99.8 million as of June 30, 2008. In addition, Anchor sold $8.0 million in commercial real estate loan participations during fiscal 2008.

The intent of the Bank’s investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting Anchor’s overall credit and interest rate risk objectives. The ratio of cash, equivalents and investments to assets has declined in aggregate and as a percent of assets since the end of fiscal 2004 as the loan portfolio has grown. As of June 30, 2008, the Bank’s portfolio of cash and cash equivalents totaled $11.0 million, equal to 1.8% of assets, with these funds utilized for daily operations and cash flow needs. The investment securities portfolio, which includes MBS, U.S. government agency obligations and municipal bonds, reached a high of $110.0 million, or 23.3% of assets at year end 2004. The investment portfolio declined to $77.7 million at June 30, 2008, or 12.4% of assets.

At June 30, 2008, investment securities include MBS held as available for sale (“AFS”), $38.1 million, and held-to-maturity (“HTM”) $13.6 million (see Exhibit I-4 for the investment portfolio composition). All MBS are backed by fixed rate loans originated by


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.7*

Anchor and then pooled into Freddie Mac MBS. High quality short-to-intermediate term U.S. agency securities (with effective durations of less than 10 years) comprise another segment of the investment portfolio, totaling $21.4 million at June 30, 2008. Beyond these investments, the Bank held $4.6 million of municipal bonds (essentially all classified as AFS) that provide tax advantaged income, and $6.1 million of FHLB stock. No major changes to the composition and practices with respect to the management of the investment portfolio are anticipated over the near term. The level of cash and investments is anticipated to increase initially following conversion, pending gradual redeployment into higher yielding loans.

As of June 30, 2008, Anchor held a balance of bank owned life insurance (“BOLI”) totaled $15.5 million, which reflects growth since the end of fiscal 2004 owing to increases in the cash surrender value of the policies. The balance of the BOLI reflects the value of life insurance contracts on selected members of the Bank’s management and has been purchased with the intent to offset various benefit program expenses on a tax advantaged basis. The increase in the cash surrender value of the BOLI is recognized as an addition to other non-interest income on an annual basis.

The Bank’s 20 office locations (the headquarters office and 19 full-service depository branch locations), include seven owned offices and 13 leased offices. A full-service branch office (leased) is currently under construction to replace a Wal-Mart branch which will be closed concurrently with the opening of the new branch, which has a scheduled opening date in the fourth quarter of 2008. The administrative office in Aberdeen is a 7,410 square foot with a net book value of approximately $2.8 million at June 30, 2008. There are no retail deposit services at this location. This office, along with investment in the other branch offices (including land, buildings, and furniture, fixtures and equipment), totaled $15.5 million, or 2.48% of assets as of June 30, 2008. This investment in fixed assets reduces the level of interest earning assets on the balance sheet.

Over the past five years, Anchor’s funding needs have been supported with both retail and wholesale (brokered) deposits, with an increasing trend of supplemental funding provided by borrowings, and retained earnings. From year end 2004 through


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.8*

June 30, 2008, the Bank’s deposits increased at an annual rate of 3.7%, which is net of a decline of $53.4 million, or 12.1% during fiscal 2008. This recent decline in deposits was primarily due to the withdrawal of brokered certificates of deposit (“CDs”), which were allowed to leave the Bank upon maturity; these funds were generally replaced with borrowings. Deposits as a percent of assets ranged from a high of 72.8% at year end 2007 to a low of 62.3% at year end 2008. As of June 30, 2008, the Bank’s deposits totaled $389.9 million, of which $35.0 million were brokered deposits. The Bank maintains a concentration of deposits in core transaction and savings account deposits, which comprised 35.1% of deposits at June 30, 2008, versus 29.9% of total deposits at year end 2007. The rollout of higher cost brokered CDs in the most recent period facilitated the increase in the concentration of core deposits comprising total deposits since year end 2007.

Over the past five years, Anchor has utilized funding with borrowings to an increasing extent to support asset size, fund lending operations, and to manage funding costs and interest rate risk. Borrowings totaled $165.2 million, or 26.4% of assets, at June 30, 2008, with most of the borrowings having maturities of less than 30 months. The Bank’s utilization of borrowings has been generally limited to fixed rate, fixed maturity characteristics and short-term overnight FHLB advances.

Since year end 2004, retention of earnings and the adjustment for accumulated other comprehensive income translated into an annual equity growth rate of 6.2%. Despite this increase in equity, the equity-to-assets ratio declined from 10.4% at year end 2004 to 10.0% at June 30, 2008, as the increase in assets over that same time period exceeded the impact of increases to retained earnings. All of the Bank’s equity is tangible, and the Bank maintained surpluses relative to all of its regulatory capital requirements at June 30, 2008. The addition of stock proceeds will serve to strengthen the Bank’s equity position, as well as support growth opportunities. The pro forma return on equity (“ROE”) is expected to initially decline given the increased equity position.


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.9*

Income and Expense Trends

Table 1.2 presents the Bank’s income and expense trends over the past five years. Earnings and profitability have declined over this period, from a high of $4.4 million, or 0.96% of average assets for fiscal 2004 to $0.8 million, or 0.13% of average assets for year ended June 30, 2008. Income in 2005 was supported by a $1.3 million gain on the sale of real estate owned (“REO”), while net gains and losses have been relatively minor in other periods. Net interest income and operating expenses represent the primary components of the Bank’s income statement. Other revenues for the Bank largely are derived from customer service fees and charges on the deposit base and lending operations. While a higher level of loan loss provisions was incurred in fiscal 2008 due to recent asset quality issues, the general reason for lower profitability has been a downward trending net interest income ratio.

The Bank’s net interest income to average assets ratio declined from 3.51% during 2004 to 3.06% during 2007 and then further decreased to 2.81% for the 12 months ended June 30, 2008, with this ratio supported by the higher yield loan portfolio (which has a significant balance of higher yielding construction, commercial and consumer loans). The decline in the net interest income ratio since fiscal 2004 reflected the higher cost of funding with an increasing level of borrowings over the 2004-2008 time period, the use of brokered deposits in recent periods which are more costly than retail deposits, and the unfavorable yield curve in 2006 and 2007, which narrowed the yield-cost spread. The Bank’s interest rate spreads and yields and costs for the past three years are set forth in Exhibits I-3 and I-5.

Non-interest operating income (“other income”) increased notably in 2006 as the Bank changed the various deposit, loan and other banking services fee structures to reflect the competitive environment. The non-interest operating income ratio is dependent upon the level of banking activities, with fees and charges on transaction deposit accounts and loans constituting the primary source of non-interest income for the Bank. Anchor also receives a material level of income from the BOLI investment. Since fiscal 2006, the level of other income has continued to increase at a rate faster

RP ^® Financial, LC.

Page 1.10

Table 1.2

Anchor Mutual Savings Bank

Historical Income Statements


	For the Fiscal Year Ended June 30,

	2004						2005						2006						2007						2008

	Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)

	($000)			(%)			($000)			(%)			($000)			(%)			($000)			(%)			($000)			(%)

Interest Income	$	27,627			5.99	%	$	29,408			5.96	%	$	33,710			6.17	%	$	40,872			6.71	%	$	40,131			6.46	%
Interest Expense		(11,441	)		-2.48	%		(12,341	)		-2.50	%		(15,574	)		-2.85	%		(22,203	)		-3.64	%		(22,665	)		-3.65	%

Net Interest Income	$	16,186			3.51	%	$	17,067			3.46	%	$	18,136			3.32	%	$	18,669			3.06	%	$	17,466			2.81	%
Provision for Loan Losses		(240	)		-0.05	%		(615	)		-0.12	%		(546	)		-0.10	%		(720	)		-0.12	%		(3,545	)		-0.57	%

Net Interest Income after Provisions	$	15,946			3.46	%	$	16,452			3.34	%	$	17,590			3.22	%	$	17,949			2.95	%	$	13,921			2.24	%

Other Income	$	3,899			0.84	%	$	3,780			0.77	%	$	5,235			0.96	%	$	5,861			0.96	%	$	6,215			1.00	%
Operating Expense		(13,986	)		-3.03	%		(15,329	)		-3.11	%		(17,258	)		-3.16	%		(18,379	)		-3.02	%		(19,217	)		-3.09	%

Net Operating Income	$	5,859			1.27	%	$	4,903			0.99	%	$	5,567			1.02	%	$	5,431			0.89	%	$	919			0.15	%

Gain(Loss) on Sale of REO	$	22			0.00	%	$	1,255			0.25	%	$	0			0.00	%	$	0			0.00	%	$	0			0.00	%
Gain(Loss) on Sale of Loans		(112	)		-0.02	%		(27	)		-0.01	%		(68	)		-0.01	%		(48	)		-0.01	%		(135	)		-0.02	%
Gain(Loss) on Sale of Investments		480			0.10	%		38			0.01	%		(46	)		-0.01	%		0			0.00	%		0			0.00	%
Gain(Loss) on Sale of Other Assets		15			0.00	%		(8	)		0.00	%		0			0.00	%		0			0.00	%		0			0.00	%

Total Non-Operating Income/(Expense)		405			0.09	%		1,258			0.26	%		(114	)		-0.02	%		(48	)		-0.01	%		(135	)		-0.02	%

Net Income Before Tax	$	6,264			1.36	%	$	6,161			1.25	%	$	5,453			1.00	%	$	5,383			0.88	%	$	784			0.13	%
Income Tax Provision (Benefit)		(1,834	)		-0.40	%		(1,822	)		-0.37	%		(1,573	)		-0.29	%		(1,544	)		-0.25	%		2			0.00	%

Net Income (Loss)	$	4,430			0.96	%	$	4,339			0.88	%	$	3,880			0.71	%	$	3,839			0.63	%	$	786			0.13	%

Adjusted Earnings
Net Income	$	4,430			0.96	%	$	4,339			0.88	%	$	3,880			0.71	%	$	3,839			0.63	%	$	786			0.13	%
Add(Deduct): Net Gain/(Loss) on Sale		(405	)		-0.09	%		(1,258	)		-0.26	%		114			0.02	%		48			0.01	%		135			0.02	%
Tax Effect (2)		138			0.03	%		428			0.09	%		(39	)		-0.01	%		(16	)		0.00	%		(46	)		-0.01	%

Adjusted Earnings	$	4,163			0.90	%	$	3,509			0.71	%	$	3,955			0.72	%	$	3,871			0.64	%	$	875			0.14	%

Expense Coverage Ratio (3)		115.7	%					111.3	%					105.1	%					101.6	%					90.9	%
Efficiency Ratio (4)		69.6	%					73.5	%					73.8	%					74.9	%					81.1	%
Effective Tax Rate (Benefit) (5)		29.3	%					-29.6	%					28.8	%					-28.7	%					0.3	%


(1)	Ratios are as a percent of average assets

(2)	Assumes a 34% effective tax rate.

(3)	Expense coverage ratio calculated as net interest income before provisions for loan losses divided by operating expenses

(4)	Efficiency ratio calculated as operating expenses divided by the sum of net interest income before provisions for loan losses plus other income (excluding net gains)

(5)	Based on reported financial statements

Source: Audited & unaudited financial statements & RP Financial calculations


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.11*

than the asset base, and totaled $6.2 million, or 1.00% of average assets for the 12 months ended June 30, 2008.

Operating expenses represent the other major component of the Bank’s income statement, ranging from a low of 3.02% of average assets during 2007 to a high of 3.16% of average assets during fiscal 2006. Since 2004, operating expenses have generally increased in line with assets, and totaled $19.2 million, or 3.09% of average assets for the 12 months ended June 30, 2008. The increase in the dollar amount of operating expenses since 2004 reflects the overall increase in the asset and liability base, including the opening of new offices and expansion of the various operating departments of the Bank, such as the loan department. The Bank’s level of operating expenses is indicative of the higher staffing needs associated with the branch office network, and the diversified lending operations, which require a significant number of employees to support. Likewise, the higher staffing needs associated with generating and servicing transaction and saving account deposits, which comprise a relatively high percentage of the Bank’s deposit composition, have also been a factor. Upward pressure will be placed on the Bank’s expense ratio following the stock offering, due to expenses associated with operating as a publicly-traded company, including expenses related to the stock benefit plans. At the same time, the increase in capital realized from the stock offering will increase the Bank’s capacity to leverage operating expenses through pursuing a more aggressive growth strategy.

The decreasing trend in the net interest income ratio since fiscal 2004 has caused the expense coverage ratio (net interest income divided by operating expenses) to gradually decline such that the ratio was 90.9% for the last 12 months compared to 115.7% for fiscal 2004. The relatively strong other income has partially mitigated this decline in the expense coverage ratio. Similarly, Anchor’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of net interest income and other operating income) of 81.1% during the 12 months ended June 30, 2008 was less favorable than the 69.6% efficiency ratio maintained for fiscal 2004. Going forward, the Bank believes the efficiency ratio should improve with continued efforts to control operating expenses and reinvestment of the offering proceeds.


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.12*

As noted earlier, loan loss provisions have historically been modest reflecting relatively good asset quality. In fiscal 2008, Anchor began to be impacted by the general slowdown of the housing market and the increase in foreclosure activities, in particular related to the construction/land lending program. During fiscal 2008, the Bank incurred a provision of $3.5 million primarily in relation to the construction loan/land portfolio and a rise in delinquencies and problem assets. As of June 30, 2008, Anchor maintained allowance for loan losses of $7,485,000, equal to 101.18% of non-accruing loans, 29.94% of non-performing assets, and 1.52% of net loans receivable. Exhibit I-6 sets forth the Bank’s allowance for loan loss activity during the past two and one-half years.

Non-operating items have had a modest impact on the Bank’s income statement in recent years and have consisted primarily of losses on the sale of loans into the secondary market or upon securitization into MBS. With the exception of a $1.3 million gain on the sale of REO in fiscal 2005, and a $0.5 million gain on the sale of investment securities in fiscal 2004, other gains or losses have been minor.

The Bank’s tax situation has been impacted by the varying levels of income recorded over the past five years, and by the investment in BOLI and municipal bonds. For fiscal years 2004 through 2007, Anchor recorded a tax liability of approximately 29% of pre-tax net income, while for fiscal 2008, the effective tax rate was 0.3% due to the above mentioned factors and the loan loss provisions booked. The Bank’s marginal effective statutory tax rate approximates 34%, and this is the rate utilized to calculate the net reinvestment benefit from the offering proceeds.

Interest Rate Risk Management

The Bank’s balance sheet is liability-sensitive in the shorter-term and, thus, the net interest margin will typically be adversely affected during periods of rising and higher interest rates, as well as in the interest rate environment that prevailed during 2006 and the first half of 2007 in which the yield curve was inverted due to short-term interest rates increasing to levels that exceeded the yields earned on longer-term Treasury bonds. Anchor primarily measures its interest rate risk exposure by modeling the potential changes to its net interest income (“NII”) for a twelve month period under rising


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.13*

and falling interest rate scenarios as well as by assessing the impact to its net portfolio value (“NPV”). As of June 30, 2008 the Net Portfolio Value (“NPV”) analysis, which measures interest rate risk over the longer term by estimating the market value of assets net of the market value of liabilities pursuant to a given change in interest rates, indicated that a 2.0% instantaneous and sustained increase in interest rates would result in a 26.7% decline in the Bank’s NPV (see Exhibit I-7). Alternatively, projected net interest income is projected to increase by a modest 1.6% over the first year assuming a positive 200 basis point instantaneous and permanent reduction in interest rate levels.

The Bank pursues a number of strategies to manage interest rate risk, particularly with respect to seeking to limit the repricing mismatch between interest rate sensitive assets and liabilities. The Bank manages interest rate risk from the asset side of the balance sheet through underwriting residential mortgages that will allow for their sale to the secondary market or securitization when such a strategy is appropriate and diversifying into other types of lending beyond 1-4 family permanent mortgage loans which consist primarily of shorter term and adjustable rate loans. As of June 30, 2008, of the Bank’s total loans due after June 30, 2009, ARM loans comprised 15.1% of those loans (see Exhibit I-8). On the liability side of the balance sheet, management of interest rate risk has been pursued through maintaining a concentration of deposits in lower cost and less interest rate sensitive transaction and savings accounts. Transaction and savings accounts comprised 35.1% of the Bank’s deposits at June 30, 2008. The infusion of stock proceeds will serve to further limit the Bank’s interest rate risk exposure, as most of the net proceeds will be redeployed into interest-earning assets and the increase in the Bank’s capital will lessen the proportion of interest rate sensitive liabilities funding assets.

There are numerous limitations inherent in interest rate risk analyses such as the credit risk of Bank’s loans pursuant to changing interest rates. Additionally, such analyses do not measure the impact of changing spread relationships, as interest rates among various asset and liability accounts rarely move in tandem, as the shape of the


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.14*

yield curve for various types of assets and liabilities is constantly changing in response to investor perceptions and economic events and circumstances.

Lending Activities and Strategy

The Bank’s loan portfolio reflects a relatively diversified lending program, with notable balances of construction/land, commercial real estate/multi-family, 1-4 family residential, consumer and commercial business loans. While 1-4 family residential lending has been a business strategy since the founding of Anchor in 1907, the Bank has been active in construction/land and commercial real estate/multi-family lending for many years. Originations of home equity loans have also increased substantially in recent years. Details of the Bank’s loan portfolio composition are shown in Exhibit I-9, while Exhibit I-10 provides details of the Bank’s loan portfolio by contractual maturity date.

Commercial Real Estate/Multi-Family Lending

The largest segment of the loan portfolio consists of commercial real estate/multi-family loans, which are attractive credits given the higher yields, larger balances, shorter duration and prospective relationship potential of these types of loans. As of June 30, 2008, commercial real estate/multi-family loans totaled $176.6 million, or 35.4% of the total loan portfolio. These loans are generally priced at a higher rate of interest, have larger balances and involve a greater risk profile than 1-4 residential mortgage loans. Often the payments on commercial real estate loans are dependent on successful operations and management of the property. The Bank will generally require and obtain loan guarantees from financially capable borrowers.

The average loan size of these loan types is approximately $0.8 million, with the Bank’s typical customer consisting of small- to mid-sized businesses located in the market area served. Both fixed and adjustable rate mortgage loans are offered, secured by a wide variety of commercial properties located primarily across the Puget Sound region, including hotels, office space, warehouses, retail centers and office buildings. The variable rate loans are originated with rates that generally adjust after an initial period of three to ten years, with amortization periods of up to 30 years. These


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.15*

loans are usually indexed to a Federal Home Loan Bank borrowing rate plus an acceptable margin. Fixed rate commercial real estate loans are also originated with terms to maturity up to 10 years with up to 30 year amortization periods. Commercial real estate loans are originated at loan-to-value ratios (“LTV”) generally not above 80% and financial statements are required to be submitted annually. A minimum debt service coverage ratio of 1.2 times is generally required, and In addition, personal guarantees are obtained from the primary borrowers on most credits.

Construction/Land Loans

The Bank originates residential and, to a lesser extent, commercial construction/land loans, with such loans totaling $110.9 million, or 22.2% of loans outstanding, at June 30, 2008. These types of loans shorten the average duration of the loan portfolio and also support asset yields. The Bank makes loans to individuals for the construction of their own residences (pre-sold properties), which are typically structured as construction/permanent loans. Anchor also originates loans to speculative homebuilders for the construction of single-family residences and residential development projects (speculative properties). The maximum loan-to-value ratio on both pre-sold and speculative loans is generally up to 80% of the appraised value or the sales price. Construction loans on pre-sold properties usually have terms of up to 12 months, while loans on residential subdivision projects usually have terms of no more than 18 months. Essentially all of the construction loans have rates based on the prime rate of interest, with interest only payments during the construction phase.

While the Bank has originated construction loans in most areas of the market area served by branch offices, a substantial portion of the construction loan portfolio is secured by properties located in the Portland, Oregon metropolitan statistical area. This lending operation was most active prior to 2008, and the loans were obtained through a loan broker relationship. Due to a downturn in the housing market and weaknesses with the builders, delinquencies and problem loans in this portfolio have increased substantially in recent months, and Portland, Oregon-located construction loans currently make up a majority of non-performing assets (“NPAs”). The workout period and amount of losses that may be incurred in this portion of the loan portfolio is


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.16*

uncertain, but represents a significant weakness in the Bank’s loan portfolio and asset quality situation.

Anchor also originates construction loans on commercial properties, including loans for multi-family, retail space, warehouses and office buildings. These loans generally convert to permanent financing upon completion of construction. The maximum LTV for these loans is usually 80% of the appraised value. Land development loans are also originated to contractors and developers for holding land for future development. These loans are generally limited to LTV’s of 65%, with two year terms at a fixed rate of interest based on the prime rate.

Commercial Business Lending

Another segment of the commercial lending activities of Anchor include loans on non-real estate commercial business assets such as business lines of credit, term loans and letters of credit. The Bank originates commercial business loans to small- and mid-sized businesses located regionally, including loans to provide working capital and secured by accounts receivable, inventory or property, plant and equipment. As of June 30, 2008, the Bank had $18.5 million of commercial business loans in portfolio, equal to 3.7% of total loans. These loans usually have shorter terms and higher interest rates than real estate loans, and are usually variable-rate, indexed to the prime rate of interest plus a margin. Loan-to-value ratios for these types of loans are generally limited to 80%. The typical business loan customer is similar to the loan customers for commercial real estate loans.

Residential Real Estate Lending

Anchor has historically engaged in the origination of first mortgage loans secured by traditional 1-4 family residential owner-occupied property, with such loans both retained in portfolio and selectively sold into the secondary market, generally on a servicing retained basis. Past originations and portfolio balances of adjustable rate residential loans have been modest due to customer preferences and competitive factors. As of June 30, 2008, residential mortgage loans equaled $114.7 million, or


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.17*

23.0% of total loans, with adjustable rate loans totaling $20.2 million, or 17.6% of total residential first mortgage loans.

Anchor offers both fixed rate and adjustable rate 1-4 family permanent mortgage loans. Loans are underwritten to secondary market guidelines, primarily Freddie Mac, with most of the 1-4 family mortgage loans secured by residences in the local markets surrounding the branch office locations. ARM loans offered by the Bank have initial repricing terms of three, five or seven years. After the initial repricing period, ARM loans convert to a one-year ARM loan for the balance of the mortgage term. Fixed rate loans are offered for terms of 15 to 40 years, and loan pricing is established by using Freddie Mac secondary market pricing. Residential loans are generated through Bank’s in-house lending staff. As a result of past loan sales, the Bank maintained a balance of loans serviced for others of approximately $99.8 million as of June 30, 2008. In accordance with Freddie Mac loan underwriting guidelines, most of the Bank’s 1-4 family loans are originated with LTV ratios of up to 80%, with private mortgage insurance (“PMI”) being required for loans in excess of an 80% LTV ratio.

Home Equity/2 ^nd Mortgage Loans

Anchor has been active in home equity lending, with the focus of such lending conducted in the geographic footprint served by the branches. The Bank originates home equity loans, consisting of loans with adjustable rates tied to the prime rate of interest with terms of up to 20 years and maximum combined LTV ratios of up to 100%, including any underlying first mortgage. 2 ^nd mortgage loans are typically fixed rate, amortizing loans with terms of up to 20 years. Historically the Bank has priced these loans competitively in the local market area. Total 2 ^nd mortgage/home equity loans equaled $46.8 million, or 9.4% of the loan portfolio, as of June 30, 2008.

Consumer Lending

As a full-service community bank, Anchor also originates a variety of consumer loans, including loans secured by automobiles, recreational vehicles, boats, credit cards and personal loans. As of June 30, 2008, consumer loans totaled $31.8 million, or 6.3% of total loans. The Bank offers such loans since they tend to have shorter maturities


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.18*

and higher interest rates than mortgage loans. These loans are underwritten and originated by in-house personnel with rates and terms set by the Bank’s internal loan policies and competitive factors.

Automobile loans totaled $18.1 million at June 30, 2008 and are extended for up to seven years with fixed rates of interest. Effective management of the higher credit risk of such lending is achieved through proper underwriting policies and procedures. The remaining portion of the consumer loan portfolio includes smaller balances of recreational vehicle loans, personal loans, boat loans, and other miscellaneous loans. The Bank intends to continue offering these types of loans as a service to retail customers.

Exhibit I-11 provides a summary of the Bank’s lending activities over the past three years. Lending volumes have fluctuated over this time period, with total loans originated reaching a high of $220.6 million during the 12 months ended June 30, 2006, decreasing to $176.8 million during fiscal 2008. Within the loan categories, construction/land and 1-4 family residential originations totaled $102.0 million, or 57.7% of total originations in fiscal 2008. Home equity loans comprised 19.4% of originations. Loan purchases have been modest since 2006, and consisted primarily of commercial real estate/multifamily loans. Loan sales, consisting of 1-4 family fixed rate loans and certain commercial real estate participation loans, totaled $26.7 million for fiscal 2008 and $8.0 million for fiscal years 2006 and 2007.

Asset Quality

Anchor’s diversified lending operations include originations of construction/land, commercial real estate/multi-family, commercial business and consumer loans, all of which carry a higher risk profile than traditional 1-4 family mortgage lending. Recently, the Bank has experienced a decline in asset quality, particularly in the construction/land loan portfolio. The ratio of non-performing assets (“NPAs”), inclusive of accruing loans past due 90 days or more, real estate owned (“REO”) and repossessed assets, increased notably for fiscal 2008, and totaled $25.0 million, or 4.0% of assets at June 30, 2008. As of June 30, 2008, as shown in Exhibit I-12, non-performing assets at June


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.19*

30, 2008 included $7.4 million of non-accruing loans (91% of which were construction/land loans), and $16.0 million of loans greater than 90 days delinquent and still accruing (96% of which were construction/land loans). A majority of these NPAs were construction/land loans secured by properties in the Portland metropolitan statistical area.

To track the Bank’s asset quality and the adequacy of valuation allowances, Anchor has established detailed asset classification policies and procedures which are consistent with regulatory guidelines. Detailed asset classifications are reviewed quarterly by senior management and the Board. Pursuant to these procedures, when needed, the Bank establishes additional valuation allowances to cover anticipated losses in classified or non-classified assets. As of June 30, 2008, the Bank maintained valuation allowances of $7,485,000, equal to 1.52% of net loans receivable and 101.2% of non-accruing loans.

Funding Composition and Strategy

Deposits have consistently accounted for the major portion of the Bank’s IBL, although over the past five years borrowed funds have steadily increased as the Bank has relied on borrowed funds to a greater extent to fund asset growth objectives. At June 30, 2008 deposits equaled $389.9 million, or 70% of total deposits and borrowings, down from 81% at June 30, 2004. Exhibit I-13 sets forth the Bank’s deposit composition for the past three years and Exhibit I-14 provides the interest rate and maturity composition of the certificate of deposit (“CD”) portfolio at June 30, 2008. CDs constitute the largest portion of the Bank’s deposit base. In 2008, transaction and savings accounts increased as a proportion of total deposits as certain higher cost CDs (brokered deposits) were allowed to be withdrawn upon maturity. Transaction and savings account deposits equaled $136.7 million, or 35.1% of total deposits, at June 30, 2008, versus $122.4 million, or 30.7% of total deposits, at June 30, 2006. The largest portion of the core deposit base consists of money market accounts, which totaled $58.7 million, or 15.1% of total deposits at June 30, 2008.


*RP ^® Financial, LC.*	*OVERVIEW AND FINANCIAL ANALYSIS*
	*I.20*

The balance of the Bank’s deposits consists of CDs, with Anchor’s current CD composition reflecting a higher concentration of short-term CDs (maturities of one year or less). As of June 30, 2008, the CD portfolio totaled $253.3 million, or 65.0% of total deposits, and 70.7% of the CDs were scheduled to mature in one year or less. As of June 30, 2008, jumbo CDs (balances exceeding $100,000) amounted to $132.6 million, or 52.4% of total CDs. The Bank maintained approximately $35 million of brokered CDs as of June 30, 2008. As noted above, the balances of CDs in recent years has been affected by offering rates, which increases the attractiveness of those deposits relative to lower yielding transaction and savings account deposits.

Borrowings have served as an alternative funding source for the Bank to facilitate asset growth, management of funding costs and interest rate risk. Anchor maintained $165.2 million of FHLB advances at June 30, 2008 with a weighted average rate of 5.00%, which included either short-term overnight advances or advances that had fixed interest rates with maturity dates primarily through 2010. Exhibit I-15 provides further detail of the Bank’s borrowings activities during the past three years.

Legal Proceedings

The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Bank.


RP ^® Financial, LC.	*MARKET AREA*
	*II.1*

II. MARKET AREA

Introduction

Anchor conducts operations out of the main office and 19 branches in the Puget Sound region of Washington. The main office is located in Aberdeen, in Grays Harbor County, Washington. Aberdeen is located approximately 110 miles southwest of Seattle and 145 miles northwest of Portland, Oregon. The branches extend to King, Kitsap, and Mason Counties to the northeast, Thurston and Pierce Counties to the east, and Lewis and Clark Counties to the southeast. Exhibit II-1 provides details regarding the Bank’s investment in office facilities.

The market environment in the areas served by Anchor’s branches is highly diverse. Throughout much of the Bank’s history, Anchor’s operations were centered in Aberdeen and Grays Harbor County. Grays Harbor County is a relatively rural market along the central Washington coast where the traditional industries were logging and fishing. The relatively small size of the market coupled with limited growth and a relatively volatile economy based on natural resources led Anchor to expand into the Puget Sound region, including the Seattle-Tacoma-Bellevue, WA Metropolitan Statistical Area (the “Seattle MSA”), then eventually into the Portland-Vancouver, Oregon-Washington Metropolitan Statistical Area (the “Portland-Vancouver MSA”).

The region has long experienced a relatively steady economy, not experiencing boom and bust time periods as has been common in other areas of the country. The regional economy has had a historical dependence on the aerospace industry which has had periods of strong growth and alternatively, reductions in activity. Over the past few years, growth rates have been steady and long-term growth trends are favorable as the market area continues to maintain a highly educated and motivated workforce, and the Puget Sound region remains a desirable place to live. In the most recent periods, the Puget Sound region has begun to experience the national issues related to home value declines, foreclosure rates, or other real estate related problems that are prevalent across most of the country.


RP ^® Financial, LC.	*MARKET AREA*
	*II.2*

Future growth opportunities for Anchor depend on the growth and stability of the regional economy, demographic growth trends, and the nature and intensity of the competitive environment. These factors have been briefly examined in the following pages to help determine the growth potential that exists for the Bank and the relative economic health of Anchor’s market area. The growth potential and the stability provided by the market area have a direct bearing on the market value of the Bank, and will be factored into our valuation analysis accordingly.

National Economic Factors

The future success of Anchor’s operations is partially dependent upon various recent national and local economic trends. In assessing economic trends over past few quarters, signs of the economy slipping into a recession continued to emerge in early-2008. January 2008 employment data showed a drop in payrolls for the first time since 2003, although the January unemployment rate dipped to 4.9% as the civilian labor force shrank slightly. January economic data also showed retailers continuing to experience a decline in sales. New home sales fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years. Due to the ongoing housing slump, the Federal Reserve cut its economic growth forecast for 2008. Consumer confidence dropped sharply in February amid growing concerns of a forthcoming recession. Other data that indicated the economy was heading towards a recession included a decline in February manufacturing activity to a five-year low, and the number of homes entering foreclosure hit a record in the fourth quarter of 2007. February employment data showed a loss of jobs, although the unemployment rate dipped to 4.8%. Falling home prices spurred an increase in February existing home sales, although new home sales continued to decline in February. The weak housing market was further evidenced by a decrease in residential construction activity during February, which pushed the mark for decreased residential construction activity to a record 24 consecutive months. Manufacturing activity edged up slightly in March 2008, although the March reading still signaled that the manufacturing sector was still in contraction. March employment data showed a third straight month of job losses, with the unemployment rate increasing from 4.8% to 5.1%. The prolonged housing slump


RP ^® Financial, LC.	*MARKET AREA*
	*II.3*

continued into March, with sales of new homes plunging to the slowest pace in over 16 years despite sharply lower prices. Sales and prices of existing homes were also down in March. Orders for durable goods dropped for the third consecutive month in March, providing further evidence that the economy was sliding into recession. Overall, the economy expanded at a 0.6% annual rate in the first quarter.

The economy lost jobs in April 2008, which was the fourth month in a row that the labor force shrank. However, employers cut far fewer jobs in April than in recent months and the unemployment rate dropped to 5.0% compared to 5.1% in March. Led by a decline in auto sales, retail sales dropped 0.2% in April which was a less significant decline than anticipated. Comparatively, the manufacturing sector struggled in April, as evidenced by a 0.7% decline in industrial output. Housing starts were higher in April compared to March, with the surprising increase supported by a sharp rise in multi-family construction. Existing home sales dropped for a ninth straight month in April, although new home sales unexpectedly showed a modest increase in April. Record foreclosures and delinquencies in the first quarter served to further depress home prices, with every major metropolitan area experiencing double digit declines in home prices from April 2007 to April 2008. The nation’s unemployment rate jumped from 5.0% in April to 5.5% in May, the biggest monthly rise since 1986 with job losses totaling 49,000 in May. Comparatively, retail sales rose more than expected in May, reflecting the benefit of consumers spending their economic-stimulus checks. However, the outlook for retailers was less favorable, as consumer confidence for June tumbled to a 16-year low. First quarter GDP growth of 1% was slightly above the previous estimate, while existing home sales rose 2% in May.

At the start of the third quarter of 2008, June employment data showed that employers cut jobs for a sixth straight month in June and the June national unemployment rate held steady at 5.5%. Helped by tax-rebate sales, retailers, generally beat forecasts for June sales. Weakness in the economy continued to be reflected by a 2.6% decline in existing home sales from May to June and the Federal Reserve’s “beige book” released in late-July showed that economic activity was weak across most of the U.S. July unemployment rose to a four-year high of 5.7%, as


RP ^® Financial, LC.	*MARKET AREA*
	*II.4*

employers cut 51,000 jobs. The reduction in jobs was less than projected. Manufacturing activity was flat in July, as higher prices weighed on growth. Retail sales dropped 0.1% in July, the first decline in five months, as data reflected a sharp drop in auto sales. Existing home sales rose 3.1% in July from June, while housing starts fell 11% in July as inventories of unsold homes continued to increase. Personal income fell in July by the largest amount in three years and consumer spending slowed in July in light of the waning impact of the economic stimulus payments. August data generally showed a weakening economy, as a slowdown in consumer spending filtered into the broader economy. Job losses continued for an eighth consecutive month in August, with the August unemployment rate reaching a four and one-half year high of 6.1%. Housing starts and new home sales slumped to 17-year lows in August, while the average price of a new home sold in August dropped by 11.8% which was the largest one month drop on record. The slow down in the economy was further evidenced by a larger than expected decline in August durable-goods orders and second quarter GDP growth was revised downward from 3.3% to a 2.8% annual growth rate. More signs of the economy moving into a recession emerged in September, as manufacturing contracted in September and job losses continued to mount. Employers slashed jobs at the fastest rate in five years in September, marking the ninth consecutive month of job losses. The September unemployment rate held steady at 6.1%.

In terms of interest rates trends in recent quarters, a downward trend in long-term Treasury yields prevailed in early-2008 as economic data generally pointed towards an economy growing weaker. Interest rates declined further on news of a surprise 0.75% rate cut by the Federal Reserve a week before its scheduled rate meeting at the end of January, with the yield on the 10-year Treasury note dipping below 3.50%. Treasury yields edged slightly higher in the week before the Federal Reserve meeting. The Federal Reserve meeting at the end of January concluded with a second rate cut over a nine day period, as the target rate was cut by 0.5% to 3.0%. Interest rates stabilized during the first half of February, with more economic data pointing towards a recession, and then edged higher going into late-February on inflation worries fueled by a 0.4% jump in January consumer prices. More signs of a softening U.S. economy and renewed worries of the deepening credit crisis, which was highlighted by the collapse of


RP ^® Financial, LC.	*MARKET AREA*
	*II.5*

investment banking firm Bear Stearns, pushed bond yields lower at the end of February and the first half of March. The yield on the 10-year Treasury dipped below 3.5% in mid-March. The Federal Reserve cut its target rate by 0.75% to 2.25% at its mid-March meeting, which along with renewed worries about the economy pushed Treasury yields lower heading into the second half of March. Treasury yields edged higher at the end of the first quarter, with the 10-year Treasury yield stabilizing around 3.5%.

Interest rates were fairly stable during the first half of April 2008, as economic data pointed towards the U.S. economy going into recession. Most notably, March employment data showed job losses for a third consecutive month and April consumer confidence dropped to a new low for the fourth month in a row. Economic data showing higher wholesale and consumer prices in March, along with an unexpected drop in weekly unemployment claims in late–April, pushed long-term Treasury yields higher in the second half of April. At the end of April, the Federal Reserve lowered its target rate by a quarter point to 2%. The rate cut was the seventh in eight months, although the Federal Reserve signaled that it may be ready for a pause with respect to further interest rate cuts. Long-term Treasury yields stabilized through most of May, as economic data provided mixed signals on the likelihood of the national economy going into recession. Inflation worries fueled by the steep decline in the dollar pushed interest rates higher in mid-June, with the yield on the 10-year Treasury note moving above 4% to 4.25%. Interest rates eased lower ahead of the late-June meeting of the Federal Reserve. The Federal Reserve kept its key short-term rate at 2% and suggested that its next move was likely to be a rate increase, which supported a further easing of long-term interest rates through the end of the second quarter.

The downward trend in long-term Treasury yields continued during the first half of July 2008, with the 10-year Treasury yield dipping to 3.84% in mid-July. A jump in June consumer prices pushed the 10-year Treasury yield back above 4.0 % during the second half of July, which was followed by a decline in long-term Treasury yields in late-July and early-August on weak economic data. Interest rates stabilized through mid-August, as the Federal Reserve held rates steady and suggested it would continue to balance the risk of rising prices and slower growth. Bonds rallied heading into late-


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	*II.6*

August on more concerns about the credit crunch hurting the financial sector and expectations of slower economic growth in the second half of the year.

Long-term Treasury yields stabilized during the first couple of week of September 2008 and then declined sharply as investors turned to the safety of Treasury bonds amid the turmoil on Wall Street. The yield on the 10-year Treasury note declined to a mid-September low of 3.41%. The mid-September meeting of the Federal Reserve concluded with keeping the short-term target rate at 2.0%, but hinted it was not ruling out future rate cuts amid the financial turmoil. With the announcement of the U.S. government’s rescue plan to stabilize the nation’s financial markets, bond prices dropped as investors moved back into stocks. Treasury bonds surged on news that the House of Representatives defeated the proposed rescue plan, as investors sought their relative safety. In late-September the yield on the 10-year Treasury note was in the 3.75% to 3.85% range. On September 29, 2008, the yield on the 10-year Treasury note declined from 3.83% to 3.63%. Comparatively, investors moved out of bonds in favor of stocks at the close of the third quarter, with the yield on the 10-year Treasury note moving back up to 3.85%. Weak economic data and growing fears of a recession pushed Treasury yields lower in early-October 2008. Following the emergency 0.5% rate cut by the Federal Reserve, long-term Treasury yields increased heading into mid-October. As of October 10, 2008, the bond equivalent yields for U.S. Treasury bonds with terms of one and ten years equaled 1.08% and 3.89%, respectively, versus comparable year ago yields of 4.23% and 3.89%. Exhibit II-2 provides historical interest rate trends.

Market Area Demographics

Table 2.1 presents information regarding the demographic and economic trends for the Bank’s market area from 2000 to 2008 and projected through 2013, with additional data shown in Exhibit II-1. Data for the nation, the state of Washington, the Seattle MSA, and the Portland-Vancouver MSA is included for comparative purposes. The size and scope of the market area is evidenced by the demographic data, which shows that as of 2008 the total population of the market area counties was 3.8 million, approximately 58% of the state population.


RP ^® Financial, LC.	*MARKET AREA*
	*II.7*

Table 2.1
Anchor Bank
Summary Demographic Data


	Year						Annual Growth Rate

	2000		2008		2013		2000-2008			2008-2013

Population (000 )
United States		281,422		309,299		328,771		1.2	%		1.2	%
Washington		5,894		6,628		7,157		1.5	%		1.5	%
Seattle-Tacoma-Bellevue MSA		3,044		3,389		3,634		1.4	%		1.4	%
Portland-Vancouver MSA		1,928		2,207		2,410		1.7	%		1.8	%
Grays Harbor County		67		72		75		0.9	%		0.8	%
Clark County		345		431		492		2.8	%		2.7	%
King County		1,737		1,884		1,987		1.0	%		1.1	%
Kitsap County		232		248		257		0.8	%		0.7	%
Lewis County		69		76		81		1.2	%		1.5	%
Pierce County		701		804		876		1.7	%		1.7	%
Thurston County		207		247		276		2.2	%		2.2	%
Mason County		49		58		64		1.9	%		2.2	%

Households (000 )
United States		105,480		116,385		123,933		1.2	%		1.3	%
Washington		2,271		2,566		2,774		1.5	%		1.6	%
Seattle-Tacoma-Bellevue MSA		1,197		1,343		1,444		1.5	%		1.5	%
Portland-Vancouver MSA		746		847		923		1.6	%		1.7	%
Grays Harbor County		27		28		29		0.7	%		0.8	%
Clark County		127		157		179		2.6	%		2.7	%
King County		711		779		823		1.1	%		1.1	%
Kitsap County		86		94		98		1.1	%		0.8	%
Lewis County		26		29		31		1.1	%		1.5	%
Pierce County		261		299		327		1.7	%		1.8	%
Thurston County		82		97		108		2.1	%		2.3	%
Mason County		19		22		25		2.0	%		2.4	%

Median Household Income ($ )
United States	$	42,164	$	54,749	$	64,042		3.3	%		3.2	%
Washington		45,770		60,823		70,528		3.6	%		3.0	%
Seattle-Tacoma-Bellevue MSA		51,488		69,612		82,255		3.8	%		3.4	%
Portland-Vancouver MSA		47,038		62,191		72,459		3.6	%		3.1	%
Grays Harbor County		34,161		43,145		50,401		3.0	%		3.2	%
Clark County		48,296		64,039		74,218		3.6	%		3.0	%
King County		53,383		75,634		88,393		4.5	%		3.2	%
Kitsap County		46,848		60,161		66,517		3.2	%		2.0	%
Lewis County		35,477		44,694		51,431		2.9	%		2.8	%
Pierce County		45,197		57,938		71,821		3.2	%		4.4	%
Thurston County		46,877		60,384		66,613		3.2	%		2.0	%
Mason County		39,586		49,309		56,397		2.8	%		2.7	%


RP ^® Financial, LC.	*MARKET AREA*
	*II.8*

Table 2.1 (continued)
Anchor Bank
Summary Demographic Data


	Year						Annual Growth Rate

	2000		2008		2013		2000-2008			2008-2013

Per Capita Income ($)
United States	$	21,587	$	28,151	$	33,519		3.4	%		3.6	%
Washington		22,973		30,235		36,338		3.5	%		3.7	%
Seattle-Tacoma-Bellevue MSA		26,332		35,894		44,369		3.9	%		4.3	%
Portland-Vancouver MSA		23,293		30,398		36,719		3.4	%		3.9	%
Grays Harbor County		16,799		20,920		23,813		2.8	%		2.6	%
Clark County		21,448		27,873		32,948		3.3	%		3.4	%
King County		29,521		41,365		51,731		4.3	%		4.6	%
Kitsap County		22,317		27,978		32,335		2.9	%		2.9	%
Lewis County		17,082		20,697		23,483		2.4	%		2.6	%
Pierce County		20,948		26,431		32,725		2.9	%		4.4	%
Thurston County		22,415		27,861		31,988		2.8	%		2.8	%
Mason County		18,056		22,948		26,055		3.0	%		2.6	%


2008 HH Net Income Dist. (%)	$0 to $25,000			$25,000- $50,000			$50,000- $100,000			$100,000+

United States		21.08	%		24.44	%		34.84	%		19.63	%
Washington		16.95	%		23.31	%		38.29	%		21.45	%
Seattle-Tacoma-Bellevue MSA		13.39	%		19.79	%		39.09	%		27.73	%
Portland-Vancouver MSA		15.34	%		22.82	%		39.30	%		22.53	%
Grays Harbor County		27.41	%		30.02	%		34.64	%		7.93	%
Clark County		13.85	%		21.64	%		42.19	%		22.32	%
King County		12.79	%		17.90	%		38.11	%		31.21	%
Kitsap County		15.70	%		24.37	%		39.66	%		20.28	%
Lewis County		25.25	%		30.82	%		36.11	%		7.82	%
Pierce County		16.90	%		25.26	%		39.11	%		18.73	%
Thurston County		15.84	%		24.35	%		40.79	%		19.02	%
Mason County		21.21	%		29.51	%		39.11	%		10.16	%


2008 Age Distribution(%)	0-14 Yrs.			15-34 Yrs.			35-54 Yrs.			55-69 Yrs.			70+ Yrs.

United States		20.1	%		27.4	%		28.8	%		14.7	%		9.1	%
Washington		19.5	%		27.7	%		29.4	%		15.0	%		8.3	%
Seattle-Tacoma-Bellevue MSA		19.1	%		28.2	%		31.0	%		14.3	%		7.5	%
Portland-Vancouver MSA		20.1	%		27.9	%		29.9	%		14.6	%		7.5	%
Grays Harbor County		18.1	%		25.1	%		27.9	%		18.3	%		10.6	%
Clark County		22.4	%		27.0	%		29.3	%		14.4	%		6.8	%
King County		17.8	%		28.3	%		31.7	%		14.5	%		7.8	%
Kitsap County		19.4	%		27.3	%		29.1	%		16.2	%		8.1	%
Lewis County		19.0	%		24.9	%		26.9	%		17.7	%		11.4	%
Pierce County		20.4	%		28.8	%		29.2	%		14.1	%		7.6	%
Thurston County		18.6	%		27.1	%		29.5	%		16.3	%		8.5	%
Mason County		16.3	%		23.2	%		28.1	%		20.3	%		12.2	%

Source: SNL Financial, LC.


*RP ^® Financial, LC.*	MARKET AREA II.9

The Bank’s traditional markets in Grays Harbor County, where the Bank has its highest concentration of branches and amount of deposits, remain rural in character and population and household growth rates have trended below the average size for the state of Washington and below the national average. In view of the small size and limited growth trends of its traditional markets in Grays Harbor County, the Bank expanded into the larger more dynamic markets in the southern Puget Sound area and Clark County, Washington to take advantage of the economic benefits of the Seattle MSA and the Portland-Vancouver MSA. These areas have benefited from a number of market and economic factors including the growth of the aerospace and technology-oriented industries, as well as the number of highly educated residents.

The relatively small size and rural character of Grays Harbor County is displayed in Table 2.1. Grays Harbor County population was equal to 72,000 as of 2008, which reflects a 0.9 percent annual rate of growth since the beginning of the decade, while total households were estimated to equal 28,000, which reflects a 0.7% annual growth rate over the corresponding time frame. By comparison, Anchor’s southern Puget Sound markets are urban in character with a combined population estimated at 3.3 million as of 2008 and annualized growth rates for the period from 2000 to 2008 range from 0.8 percent for Kitsap County to 2.2 percent for Thurston County. Farther south from the other markets is Clark County, where Anchor opened a branch to take advantage of the thriving economy and growth of the Portland-Vancouver MSA. Clark County had a population of 431,000 in 2008 and the highest reported annual growth of the Bank’s markets at 2.8% from 2000 to 2008, which exceeds the national and state averages.

Income levels in Grays Harbor County reflect the rural nature of the market and the relatively heavy reliance on the timber, fishing, and tourism industries for income. Specifically, per capita income equaled $20,920 in Grays Harbor County which is very low compared to most of the other markets. Per capita income levels ranged from $20,697 in Lewis County to $41,365 in King County. Likewise median household income reported for Grays Harbor County is the lowest of the markets, reported at $43,145, while King County reported the highest median household income of $75,634,


*RP ^® Financial, LC.*	MARKET AREA II.10

which was above the national and state aggregates. Household income distribution patterns provide further support regarding the nature of the Bank’s market as approximately 43% of Grays Harbor County households had income levels in excess of $50,000 annually in 2008, while the ratio was 60% for the state of Washington and 55% for the national average. Anchor’s markets in the southern Puget Sound region and Clark County have comparatively higher income levels as a result of the abundance of white collar and technical jobs as compared to the blue collar job market which prevails in Grays Harbor County.

In 2005, the city of Seattle was ranked as the most well educated city in the country, with the largest concentration of residents that hold college degrees. Seattle’s relatively high income coupled with high education levels for a major city, results in King County placing among the 100 wealthiest counties in the United States, which will favorably influence demand for the products and services offered by financial services providers operating in the market.

Summary of Local Economy

Historically, the economy of Anchor’s markets has been based on timber, fishing and other natural resources. Logging and ancillary industries have traditionally provided a substantial portion of earnings with the area’s renowned forests providing a large supply of relatively inexpensive and accessible wood. Likewise, Grays Harbor is an excellent natural harbor, which coupled with the areas proximity to fishing grounds in coastal Washington, led to the development of the fisheries industry. Over the last several decades, the economy has become somewhat more diversified and in particular, tourism has come to play a much more important role in the Grays Harbor County market. Two of the largest employers in Grays Harbor County are West Port Boat Shipyard (594 employees) and Weyerhaeuser Forestry (540 employees).

The Puget Sound region is the largest business center in both the state of Washington and the Pacific Northwest. Currently, key elements of the economy are aerospace, military bases, clean technology, biotechnology, education, information technology, logistics, international trade and tourism. The region is well known for the


*RP ^® Financial, LC.*	MARKET AREA II.11

long presence of The Boeing Corporation and Microsoft, two major industry leaders, and for its leadership in technology. The workforce in general is well-educated and strong in technology. Washington State’s location with regard to the Pacific Rim, along with a deepwater port has made international trade a significant part of the regional economy (one in three jobs in Washington is tied to foreign exports). The Washington state ports handle 6% of all U. S. exports and 7% of all U.S. imports, and the top five trading partners with Washington State include Japan, Canada, China, Korea and Ireland. Tourism has also developed into a major industry for the area, due to the scenic beauty, temperate climate and easy accessibility.

King County, the location of the city of Seattle, has the largest employment base and overall level of economic activity. King County’s largest employers include The Boeing Company, Microsoft Corporation, and the University of Washington. Companies that are headquartered in King County include Alaska Airlines, Amazon.com, Attachmate, Costco, Starbucks and Microsoft. Pierce County’s economy is also well diversified with the presence of military related government employment (Fort Lewis Army Base, 39,000 employees, and McChord Air Force Base, 11,000 employees); along with health care (the Franciscan Health System, 3,900 employees and the Multicare Health System, 3,200 employees). In addition, there is a large employment base in the economic sectors of shipping (the Port of Tacoma) and aerospace employment (Boeing).

The state government plays a large role in the Thurston County market economy owing to its role as the state capitol. In this regard, growth occurring in Thurston County has been facilitated by the centralization of state functions in Olympia since the 1960s. Furthermore, Fort Lewis and McChord Air Force Base have continued to play an important role in the local economy as a result of the large number of military personnel living off base and as a result of a significant number of civilian jobs which have been created.

Lewis County has historically been a resource-based economy, focused in forestry, mining, and agriculture. The county also has a growing tourism and retail trade sector. The county’s largest employers include Providence Centrailia Hospital (800


*RP ^® Financial, LC.*	MARKET AREA II.12

employees), Fred Meyer Distribution (400 employees), Wal-Mart (380 employees), and Hampton Affiliates Wood Products (350 employees).

The United States Navy is a key element for Kitsap County’s stable economy with a growing number of companies in the technology, marine and manufacturing clusters contributing to continued economic growth. The United States Navy is of great importance to the county because it is the largest employer in the county, with installations at Puget Sound Naval Shipyard, Naval Undersea Warfare Center Keyport, and Naval Base Kitsap (which comprises former NSB Bangor, and NS Bremerton). The largest private employers in the county are the Harrison Medical Center (657 full-time and 974 part-time), Wal-Mart (718 full-time and 289 part-time), and Port Madison Enterprises (698 full-time and 84 part-time).

The state of Washington’s largest private employers, including the number of employees, is provided in Table 2.2. Eight of the largest employers in the state are headquartered in King County.


*RP ^® Financial, LC.*	MARKET AREA II.13

Table 2.2
Anchor Bank
Major Private Employers in Washington


	Employer			Employees


	The Boeing Company			59,219
	Microsoft Corporation*			28,007
	University of Washington*			21,358
	The Kroger Company			17,300
	Alaska Airlines*			9,936
	Starbucks Corporation*			8,806
	Providence Health			8,499
	Group Health Corporation			8,422
	Washington Mutual, Inc.*			7,968
	Weyerhaeuser Corporation*			7,700
	Costco Wholesale Corporation*			6,526
	Multicare Health Systems			5,500
	Nordstroms Inc.*			5,349
	Macy’s Northwest			4,905
	Safeway, Inc.			4,881
	Haggen, Inc.			4,000
	Safeco Corporation (To be Acquired by Liberty Mutual)			3,700
	Swedish Health			3,583
	Evergreen Healthcare			2,700

	*Headquartered in King County

	Sources: Puget Sound Business Journal Supplement.

Market Area Employment Sectors

Employment data, presented in Table 2.3 on the next page, indicates that similar to many larger, developed areas of the country, services are the most prominent sector for the state of Washington and the eight market area counties, comprising approximately 37.5% for the state and an average of 34.5% of total employment for the Bank’s market area. The next largest component of the economy of the market area is government, at 20.9%, reflecting the military bases throughout the Bank’s market area. Wholesale and retail trade, at 14.4%, was another large component of the market area, reflecting the trade employment in the ports of the Puget Sound region. Government employment was highest in Kitsap, Mason, Pierce, and Thurston Counties, reflecting the impact of state government, as well as the military bases previously mentioned, with


*RP ^® Financial, LC.*	MARKET AREA II.14

such employment related to the presence of Boeing. Manufacturing employment is highest in Grays Harbor County, as the county’s largest employers are both manufacturing-related, while information-related employment is highest in King County, due to the impact of Microsoft and other information technology employers. King County’s levels of employment in the different sectors resembled that of the economy of Washington, which was provided for comparative purposes. This data indicates that Bank’s market area has a relatively diversified economic base, such that a downturn in any one industry will likely not have a large impact on the entire market area. This diversification provides a level of stability that is a positive factor for financial institutions such as Anchor.

Table 2.3
Anchor Bank
2006 Primary Market Area Employment Sectors
(Percent of Labor Force)


Employ. Sectors	Washington		Clark		Grays Harbor		King		Kitsap		Lewis		Mason		Pierce		Thurston		Average

Services	37.5	%	39.5	%	29.1	%	41.1	%	35.7	%	31.1	%	27.6	%	36.4	%	36.0	%	34.5	%
Wholesale/Retail Td	14.4		14.4		14.6		14.1		14.0		15.6		14.4		14.3		13.9		14.4
Government	15.6		13.1		19.6		11.3		31.1		14.2		24.5		22.3		28.8		20.6
Finance/Ins./RE	8.5		8.9		5.9		10.2		7.6		4.7		8.0		7.9		6.8		7.5
Manufacturing	7.8		7.6		13.0		8.0		1.7		10.7		10.5		5.4		2.6		7.4
Construction	6.9		9.7		6.3		6.0		6.4		6.0		7.4		8.1		6.2		7.0
Information	2.9		2.1		0.9		5.2		1.6		1.0		0.8		1.2		1.2		1.7
Transportation/Util.	3.0		3.2		2.8		3.6		1.2		5.3		1.7		3.6		2.1		2.9
Farming	2.0		0.9		2.0		0.1		0.4		4.4		2.2		0.5		1.2		1.5
Other	1.5		0.7		5.8		0.4		0.5		7.1		3.0		0.5		1.2		2.5

	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Source: REIS DataSource.

Unemployment Data and Trends

Table 2.4, provides unemployment data which shows that the unemployment rates in Anchor’s markets have increased over the past 12 months, paralleling the unemployment rate for all of the state of Washington, as well as the national aggregate, which also increased. King, Kitsap, and Thurston Counties reported unemployment rates lower than the state and national averages, while the unemployment rate for Washington was slightly lower than the national unemployment rate. The lower


*RP ^® Financial, LC.*	MARKET AREA II.15

unemployment rate in King, Kitsap, and Thurston Counties is reflective of the underlying strength of the local economy. Clark and Grays Harbor Counties reported the highest unemployment rates, although for Grays Harbor County it is possible that some of those counted as unemployed in these areas are able to earn income on a contract or day basis in logging or from other sources.

Table 2.4
Anchor Bank
Market Area Unemployment Trends


Region	August 2007 Unemployment		August 2008 Unemployment


United States	4.7	%	6.1	%
Washington	4.5	%	6.0	%

Clark County	6.4	%	8.3	%
Grays Harbor County	6.3	%	8.3	%
King County	3.3	%	4.4	%
Kitsap County	4.3	%	5.7	%
Lewis County	6.3	%	8.7	%
Mason County	5.6	%	7.8	%
Pierce County	4.7	%	6.4	%
Thurston County	4.3	%	5.7	%

Source: U.S. Bureau of Labor Statistics.

Market Area Deposit Characteristics/Competition

Table 2.5 displays deposit market trends and deposit market share, respectively, for commercial banks and savings institutions in the market area from June 30, 2005 to June 30, 2008. Deposit growth trends are important indicators of a market area’s current and future prospect’s for growth. The table indicates that overall deposit growth rates in the Bank’s market range from a low of negative 1.5% annually in Mason County over the past three years, compared to 10.0% annually in Thurston County, 7.5% in King County, 5.6% in Lewis County, 5.5% in Clark County, 4.2% in Pierce County, 3.5% in Kitsap County, and 3.4% in Grays Harbor County. The state of Washington deposits increased at a rate of 7.1% annually, with savings and loan associations declining in overall deposits, although part of this decline was due to a charter conversion by


*RP ^® Financial, LC.*	MARKET AREA II.16

Table 2.5
Anchor Bank
Deposit Summary


	As of June 30,														Deposit Growth Rate 2005-2008

	2005							2008

	Deposits		Market Share			Number of Branches		Deposits		Market Share			No. of Branches

	($000)							($000)							(%)

Washington	$	91,469,300		100.0	%		1,832	$	112,330,698		100.0	%		1,925		7.1	%
Commercial Banks		66,454,329		72.7	%		1,373		89,017,902		79.2	%		1,539		10.2	%
Savings Institutions		25,014,971		27.3	%		459		23,312,796		20.8	%		386		-2.3	%

Institution Total
Anchor Bank	$	358,183		0.6	%		15	$	392,431		0.5	%		20		3.1	%

Grays Harbor County	$	949,452		100.0	%		29	$	1,049,433		100.0	%		29		3.4	%
Commercial Banks		292,681		30.8	%		10		476,113		45.4	%		16		17.6	%
Savings Institutions		656,771		69.2	%		19		573,320		54.6	%		13		-4.4	%
Anchor Bank		249,807		26.3	%		6		279,621		26.6	%		6		3.8	%

Clark County	$	3,498,684		100.0	%		92	$	4,102,763		100.0	%		102		5.5	%
Commercial Banks		2,075,249		59.3	%		66		2,643,750		64.4	%		74		8.4	%
Savings Institutions		1,423,435		40.7	%		26		1,459,013		35.6	%		28		0.8	%
Anchor Bank		0		0.0	%		0		3,736		0.1	%		1		NA

King County	$	43,562,788		100.0	%		515	$	54,066,920		100.0	%		535		7.5	%
Commercial Banks		32,673,506		75.0	%		372		42,757,071		79.1	%		400		9.4	%
Savings Institutions		10,889,282		25.0	%		143		11,309,849		20.9	%		135		1.3	%
Anchor Bank		975		0.0	%		1		3,682		0.0	%		1		55.7	%

Kitsap County	$	2,120,429		100.0	%		70	$	2,349,062		100.0	%		76		3.5	%
Commercial Banks		1,626,273		76.7	%		57		1,890,779		80.5	%		63		5.2	%
Savings Institutions		494,156		23.3	%		13		458,283		19.5	%		13		-2.5	%
Anchor Bank		0		0.0	%		0		2,452		0.1	%		1		NA

Lewis County	$	795,832		100.0	%		28	$	936,985		100.0	%		29		5.6	%
Commercial Banks		491,261		61.7	%		18		768,850		82.1	%		22		16.1	%
Savings Institutions		304,571		38.3	%		10		168,135		17.9	%		7		-18.0	%
Anchor Bank		26,042		3.3	%		2		24,733		2.6	%		2		-1.7	%

Mason County	$	377,753		100.0	%		12	$	361,027		100.0	%		12		-1.5	%
Commercial Banks		320,554		84.9	%		9		300,759		83.3	%		9		-2.1	%
Savings Institutions		57,199		15.1	%		3		60,268		16.7	%		3		1.8	%
Anchor Bank		4,134		1.1	%		1		8,946		2.5	%		1		29.3	%

Pierce County	$	7,639,980		100.0	%		194	$	8,635,856		100.0	%		207		4.2	%
Commercial Banks		6,084,198		79.6	%		149		7,032,832		81.4	%		162		4.9	%
Savings Institutions		1,555,782		20.4	%		45		1,603,024		18.6	%		45		1.0	%
Anchor Bank		5,873		0.1	%		1		4,689		0.1	%		3		-7.2	%

Thurston County	$	2,312,907		100.0	%		64	$	3,080,791		100.0	%		72		10.0	%
Commercial Banks		1,508,112		65.2	%		39		2,313,003		75.1	%		49		15.3	%
Savings Institutions		804,795		34.8	%		25		767,788		24.9	%		23		-1.6	%
Anchor Bank		71,352		3.1	%		4		64,572		2.1	%		5		-3.3	%

Source: FDIC.


*RP ^® Financial, LC.*	MARKET AREA II.17

Sterling Savings Bank, of Spokane, to a commercial bank. Future growth will be facilitated by the large size of the market overall, the competitive environment and the ability of the Bank to attract deposits to one of its 20 locations.

As of June 30, 2008, Anchor maintained relatively small deposit market shares in the counties closest to Seattle and Vancouver, representative of the overall large size of the deposit base and indicating that future deposit gains and market share gains are possible. The Bank’s market share ranged from a low of 0.01% in King County to 26.6% in Grays Harbor County. Since June 30, 2005, Anchor has recorded an annualized increase in deposits of 3.1%. There were increases of the Bank’s deposits in most of the market area counties, except in Lewis, Pierce, and Thurston Counties, where deposits decreased by 1.7%, 7.2%, and 3.3% annually over the three year period. These deposit trends have encouraged management to consider de novo branching in other markets, particularly along the I-5 corridor, where the Bank has been successful. There are currently 9 in-store branches at Wal-Mart locations which were opened to pursue various new markets on a test basis, setting the stage for traditional branches in these areas. Future branch expansion includes fill-in locations and potential relocation of in-store locations to stand alone locations. The Bank is currently in the process of building a stand alone location, which will be a relocation of an in-store location. The Bank plans on opening the stand alone branch in the fourth quarter of 2008.

As detailed in the data showing competitor deposits (see Table 2.6), significant competitors for the Bank consist of large nationwide and superregional banks, including Bank of America, JP Morgan Chase and Key Bank, NA, all of which maintain a strong presence in the regional market. This factor, however, allows Anchor to position itself as a community bank, locally owned and managed.


*RP ^® Financial, LC.*	MARKET AREA II.18

Table 2.6
Anchor Bank
Market Area Counties Deposit Competitors


Location	Name


Grays Harbor County, WA	Anchor Bank (26.6%)
	Timberland Bank (23.4%)
	Bank of the Pacific (23.3%)
	Sterling Savings Bank (10.8%)

Clark County, WA	Washington Mutual Bank (23.1%)
	First Independent Bank (15.6%)
	Bank of America, NA (11.9%)
	Anchor Bank (0.1%)

King County, WA	Bank of America NA (36.7%)
	US Bank (12.3%)
	Washington Mutual Bank (11.6%)
	Anchor Bank (0.0%)

Kitsap County, WA	Kitsap Bank (18.6%)
	Bank of America, NA (17.3%)
	Washington Mutual Bank (15.5%)
	Anchor Bank (0.1%)

Lewis County, WA	Security State Bank (30.3%)
	Sterling Savings Bank (18.4%)
	West Coast Bank (10.3%)
	Anchor Bank (2.6%)

Mason County, WA	KeyBank NA (26.3%)
	Bank of America NA (15.6%)
	West Coast Bank (15.4%)
	Anchor Bank (2.5%)

Pierce County, WA	Columbia State Bank (17.3%)
	KeyBank NA (15.8%)
	Bank of America NA (13.2%)
	Anchor Bank (0.1%)

Thurston County, WA	Venture Bank (21.1%)
	Heritage Bank (11.6%)
	Olympia FS&LA (10.2%)
	Anchor Bank (2.1%)

Source: FDIC.


*RP ^® Financial, LC.*	MARKET AREA II.19

Summary

The overall condition of the primary market area can be characterized as positive, with growth potential in areas along the I-5 corridor and the counties of the Seattle and Portland-Vancouver MSAs based on regional population and economic projections. The overall total population base within the Bank’s market area provides the potential for additional banking customers. In addition, income levels are relatively high in some areas and growing in line with national averages, indicating an increasing amount of personal wealth for residents. Going forward, in view of the local demographic and economic trends and the numbers and types of competitors in the market area, the competition for deposits is expected to remain substantial, which will result in Anchor having to pay competitive deposit rates, provide high quality service and continue to provide electronic banking capabilities to increase local market share.


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.1*

I II. PEER GROUP ANALYSIS

This chapter presents an analysis of Anchor’s operations versus a group of comparable savings institutions (the “Peer Group”) selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines. The basis of the pro forma market valuation of Anchor is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments for key differences in relation to the Peer Group. Since no Peer Group can be exactly comparable to Anchor, key areas examined for differences are: financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and effect of government regulations and regulatory reform.

P eer Group Selection

The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is comprised of only those publicly-traded savings institutions whose common stock is either listed on a national exchange (NYSE or AMEX), or is NASDAQ listed, since their stock trading activity is regularly reported and generally more frequent than non-publicly traded and closely-held institutions. Institutions that are not listed on a national exchange or NASDAQ are inappropriate, since the trading activity for thinly-traded or closely-held stocks is typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value. We have also excluded from the Peer Group those companies with unusual operating strategies, such as internet banking, those under acquisition or subject to rumored acquisition, mutual holding companies and recent conversions, since their pricing ratios are subject to unusual distortion and/or have limited trading history. A recent listing of the universe of all publicly-traded savings institutions is included as Exhibit III-1.

Ideally, the Peer Group, which must have at least 10 members to comply with the regulatory valuation guidelines, should be comprised of locally- or regionally-based


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.2*

institutions with comparable resources, strategies and financial characteristics. There are approximately 165 publicly-traded institutions nationally and, thus, it is typically the case that the Peer Group will be comprised of institutions with relatively comparable characteristics. To the extent that differences exist between the converting institution and the Peer Group, valuation adjustments will be applied to account for the differences. Since Anchor will be a fully public company upon completion of the offering, we considered only fully public companies to be viable candidates for inclusion in the Peer Group. From the universe of publicly-traded thrifts, we selected ten institutions with characteristics similar to those of Anchor. In the selection process, we applied five “screens” to the universe of all public companies that were eligible for consideration:


	o	Screen #1 Washington institutions with assets less than $2 billion (In-state Peers). Four companies met the criteria for Screen #1 and all were included in the Peer Group.

	o	Screen #2 California institutions with assets between $500 million and $1.5 billion (Regional Peers). Two companies met the criteria for Screen #2 and both were included in the Peer Group.

	o	Screen #3 Western States institutions (Regional Peers). One company met the criteria for Screen #3 and was included in the Peer Group.

	o	Screen #4 Central Midwest institutions with assets between $500 and $1.25 billion (Regional, Asset Size Peers). Two companies met the criteria for Screen #4 and both were included in the Peer Group.

	o	Screen #5 Southeast institutions with assets between $500 and $1.0 billion and ROE below 10% (Regional, Asset Size Peers). One company met the criteria for Screen #5 and was included in the Peer Group.

Exhibit III-1 provides financial and public market pricing characteristics of all publicly-traded thrifts, while Exhibit III-2 provides financial and public market pricing characteristics of the Peer Group selection screens. Table 3.1 shows the general characteristics of each of the 10 Peer Group companies and Exhibit III-3 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies. While there are expectedly some differences between the Peer Group companies and Anchor, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments. The following sections present a comparison of Anchor’s financial

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*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.4*

condition, income and expense trends, loan composition, credit risk and interest rate risk versus the Peer Group as of the most recent publicly available date.

A summary description of the key comparable characteristics of each of the Peer Group companies relative to Anchor’s characteristics is detailed below.


o	United Western Bancorp, Inc. of CO . Operating in the western state of Colorado, United Western reported a relatively low loans/assets ratio with higher investment securities on the balance sheet and the lowest equity/assets ratio of all Peer Group members. United Western’s profitability was close to the Peer Group average with net interest income higher than the Peer Group offset by higher operating expenses. United Western holds a considerable investment in mortgage-backed securities and commercial real estate/multi-family loans. Asset quality figures were generally more favorable than the Peer Group averages.

o	Harrington West Financial Group of CA . Harrington, the second largest Peer Group member, maintains a lower than average loans/assets ratio and a funding composition similar to the Peer Group average, along with a leveraged capital base. The income statement included a lower level of net interest income compared to the Peer Group average, along with lower operating expenses. Assets included a large percentage of investments, including MBS, and loan portfolio diversification into commercial real estate/multifamily loans. Asset quality ratios were more favorable than the Peer Group overall.

o	First Financial NW, Inc. of WA . First Financial is a recently fully-converted Washington thrift that maintained the highest equity/assets ratio of all Peer Group members, and low use of borrowings. First Financial’s profitability for the most recent 12 months was affected by establishment of a foundation at conversion, and reserves taken for asset quality issues. Profitability is supported by a low level of core operating expenses. The loan portfolio is diversified into construction and commercial real estate/multi-family loans. Asset quality ratios were less favorable than the Peer Group averages, although loan chargeoffs were lower.

o	HMN Financial, Inc. of MN . HMN with a similar branch office network size, maintains a strong loans/assets ratio and relies less on borrowings to fund operations. Reporting a decline in assets during the most recent 12 months, HMN had a leveraged tangible equity position. Profitability was in line with the Peer Group, and was due to lower levels of operating expenses. The loan portfolio was concentrated into commercial real estate/multifamily loans and commercial business loans. Asset quality ratios were less favorable than the Peer Group overall.

o	Riverview Bancorp, Inc. of WA . Riverview reported a high level of loans/assets and a high level of deposit funding, along with the highest level of intangible assets of all Peer Group members. Riverview’s profitability exceeded the Peer Group average due to higher asset yields and higher non-interest income. Riverview reported the lowest investment in 1-4 family mortgage loans, with


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.5*


	loans concentrated in construction, commercial real estate/multi-family and commercial business loans, resulting in the highest risk-weighted assets-to-assets ratio. Riverview’s asset quality ratios on balance were somewhat less favorable than the Peer Group averages.

o	Rainier Pacific Financial Group, Inc. of WA . Rainier Pacific maintains a greater wholesale leveraging strategy than the other Peer Group members (using borrowings to fund investments). Reporting an equity/assets ratio below 9%, Rainier Pacific’s ROA was similar to the Peer Group median as higher than average operating expenses were offset by higher non-interest income. Lending diversification into commercial real estate/multi-family loans was the second highest of all Peer Group companies resulting in a higher than average risk-weighted assets-to-assets ratio despite the high level of investments. Rainier Pacific also maintained a relatively large loan servicing portfolio. Asset quality ratios were in line with Peer Group averages.

o	First PacTrust Bancorp, Inc. of CA . First PacTrust reported the highest loans/assets ratio of the Peer Group and its funding mix was in line with Peer Group averages. First PacTrust’s modest profitability was due to lower yields on earning assets and higher costs of funds, along with lower non-interest income despite lower operating expenses. First PacTrust’s lending operations were concentrated in residential lending, with some diversification into commercial real estate/multi-family loans. Asset quality ratios were less favorable than Peer Group averages.

o	First Federal Bancshares, Inc. of AR. First Federal reported a modestly higher level of loans in the earning asset portfolio, and maintains an equity/assets ratio of approximately 9%. Reporting stable assets over the last 12 months, First Federal recorded profitability in line with the Peer Group median, with profits supported by higher non-interest income and modestly lower operating expenses. Loan diversification included commercial real estate/multi-family lending and commercial business lending. Asset quality ratios were less favorable than Peer Group averages.

o	Meta Financial Group of IA . The second smallest Peer Group member with a similar asset size and resources as Anchor, Meta reported a high level of investment in cash and investment securities and average use of borrowings. Net income was lower than the Peer Group average, due in part to higher than average operating expenses. Investment in MBS was higher than Peer averages, with some diversification into commercial real estate/multi-family and commercial business loans. Meta also reported asset quality ratios that were generally more favorable than the Peer Group overall.

o	Timberland Bancorp, Inc. of Hoquiam, WA . Timberland maintained an equity/assets ratio above 11% and recorded relatively strong investment in loans receivable, funded to a greater extent with deposits in comparison to the Peer Group. Reporting profitability above the Peer Group average, Timberland’s ROA was enhanced through a lower interest expense ratio and higher levels of non-interest income. The loan portfolio showed diversification in construction loans


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.6*


	and commercial real estate/multi-family loans. Timberland reported a relatively large loans serviced for others portfolio and mortgage servicing rights asset. Credit quality measures were on balance similar to the Peer Group with a lower level of loan chargeoffs.

In aggregate, the Peer Group companies maintained a lower level of capital as the industry average (8.94% of assets versus 9.55% for all public companies), generated similar earnings as a percent of average assets (0.41% ROAA versus 0.46% for all public companies), and earned a higher ROE (5.08% ROE versus 3.82% for all public companies). Overall, the Peer Group’s average P/B ratio and average P/E multiple were below the respective averages for all publicly-traded thrifts.


	All Fully-Conv. Publicly-Traded			Peer Group

Financial Characteristics (Medians)
Assets ($Mil)	$	871		$	878
Market capitalization ($Mil)	$	54		$	38
Equity/assets (%)		9.55	%		8.94	%
Return on average assets (%)		0.46	%		0.41	%
Return on average equity (%)		3.82	%		5.08	%

Pricing Ratios (Medians) (1)
Price/earnings (x)		12.58	x		8.09	x
Price/book (%)		68.40	%		52.09	%
Price/assets (%)		6.56	%		3.93	%


	(1)	Based on market prices as of October 10, 2008.

Ideally, the Peer Group companies would be comparable to Anchor in terms of all of the selection criteria, but the universe of publicly-traded thrifts does not provide for an appropriate number of such companies. However, in general, the companies selected for the Peer Group were fairly comparable to Anchor, as will be highlighted in the following comparative analysis.

F inancial Condition

Table 3.2 shows comparative balance sheet measures for Anchor and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above. The Bank’s and the Peer Group’s ratios reflect balances as

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*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.8*

of June 30, 2008, unless indicated otherwise for the Peer Group companies. Anchor’s equity-to-assets ratio of 10.0% was very close to the Peer Group’s average net worth ratio of 9.9%. The Bank’s pro forma capital position will increase with the addition of stock proceeds, providing the Bank with an equity-to-assets ratio that will further the Peer Group’s ratio. Tangible equity-to-assets ratios for the Bank and the Peer Group equaled 10.0% and 9.3%, respectively. The increase in Anchor’s pro forma capital position will be favorable from a risk perspective and in terms of future earnings potential that could be realized through leverage and lower funding costs. At the same time, the Bank’s higher pro forma capitalization will initially depress return on equity. Both Anchor’s and the Peer Group’s capital ratios reflected capital surpluses with respect to the regulatory capital requirements, with the Bank’s ratios currently exceeding the Peer Group’s ratios. On a pro forma basis, the Bank’s regulatory surpluses will become more significant.

The interest-earning asset compositions for the Bank and the Peer Group were somewhat similar, with loans constituting the bulk of interest-earning assets for both. The Bank’s loans-to-assets ratio of 78.5% was above the comparable Peer Group ratio of 75.7%. Comparatively, the Bank’s cash and investments-to-assets ratio of 15.2% was below the comparable ratio for the Peer Group of 17.9%. Anchor reported investment in BOLI of 2.5% of assets, more than the 1.3% of assets investment for the Peer Group. Overall, Anchor’s earning assets amounted to 96.2% of assets, which was higher than the comparable Peer Group ratio of 94.9%.

Anchor’s funding liabilities reflected a funding strategy that was somewhat similar to that of the Peer Group’s funding composition. The Bank’s deposits equaled 62.3% of assets, which was modestly below the Peer Group’s ratio of 69.5%. Comparatively, the Bank maintained a higher level of borrowings than the Peer Group, as indicated by borrowings-to-assets ratios of 26.4% and 19.6% for Anchor and the Peer Group, respectively. Total interest-bearing liabilities maintained by the Bank and the Peer Group, as a percent of assets, equaled 88.7% and 89.1%, respectively. Following the increase in capital provided by the net proceeds of the stock offering, the Bank’s ratio of


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.9*

interest-bearing liabilities as a percent of assets will continue to be less than the Peer Group’s ratio.

A key measure of balance sheet strength for a thrift institution is its IEA/IBL ratio. Presently, the Bank’s IEA/IBL ratio is similar to the Peer Group’s ratio, based on IEA/IBL ratios of 108.5% and 106.5%, respectively. The additional capital realized from stock proceeds should serve to provide Anchor with an IEA/IBL ratio that continues to exceed the Peer Group ratio, as the increase in capital provided by the infusion of stock proceeds will serve to lower the level of interest-bearing liabilities funding assets and will be primarily deployed into interest-earning assets.

The growth rate section of Table 3.2 shows annual growth rates for key balance sheet items. Anchor’s and the Peer Group’s growth rates are based on annual growth rates for the twelve months ended June 30, 2008 or the most recent period available. Anchor recorded asset growth of 2.9%, which was lower than the Peer Group’s asset growth rate of 5.1%. The modest growth for Anchor was caused by the runoff of deposits that were replaced by borrowings. The asset growth for the Peer Group resulted in a 9.3% increase in loans, which was in part funded by a 16.7% reduction in cash and investments and a 28.8% increase in borrowed funds. The Peer Group’s deposits declined at a rate of 2.5% over the period examined, while Anchor’s deposits declined at an annual rate of 12.1%.

Reflecting the recent modest profitability, the Bank’s equity increased at a 3.0% annual rate, versus a 7.6% decrease in equity balances for the Peer Group. The Peer Group’s equity reduction was furthered by dividend payments as well as stock repurchases, while the Bank’s equity was only affected by net income and changes to the other comprehensive income account. The increase in equity realized from stock proceeds will likely depress the Bank’s equity growth rate initially following the stock offering. Dividend payments and stock repurchases, pursuant to regulatory limitations and guidelines could also potentially slow the Bank’s equity growth rate in the longer term following the stock offering.


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.10*

I ncome and Expense Components

Table 3.3 displays statements of operations for the Bank and the Peer Group, with the income ratios based on earnings for the twelve months ended June 30, 2008, unless otherwise indicated for the Peer Group companies. Anchor reported net income of 0.13% of average assets for the 12 months ended June 30, 2008, compared to median net income to average assets of 0.41% for the Peer Group. A lower level of net interest income and higher loan loss provisions largely accounted for the Bank’s lower reported results, as non-interest income and operating expenses were relatively similar.

The Bank’s lower net interest income ratio was due to a higher level of interest expense, offset by higher interest income. Anchor’s interest income ratio was supported by greater loan diversification that provided for a higher overall yield earned on interest-earning assets (6.83% versus 4.34% for the Peer Group). The Bank’s higher interest expense ratio was due to a higher cost of funds (4.05% versus 3.39% for the Peer Group), which was evidence of the Bank’s less favorable funding composition in terms of maintaining a higher concentration of borrowed funds and notable balances of brokered certificates of deposit relative to the Peer Group’s measures. Overall, Anchor and the Peer Group reported net interest income to average assets ratios of 2.81% and 3.14%, respectively.

In another key area of core earnings strength, the Bank maintained a slightly lower level of operating expenses than the Peer Group. For the period covered in Table 3.3, the Bank and the Peer Group reported operating expense to average assets ratios of 3.09% and 3.21%, respectively. In contrast to the Bank’s lower operating expense ratio, Anchor maintained a comparatively higher number of employees relative to its asset size. Assets per full time equivalent employee equaled $3.5 million for the Bank, versus a comparable measure of $5.7 million for the Peer Group. The Bank’s comparatively larger employee base relative to its asset size was viewed to be in part attributable to the Bank’s branch office network, the diversified lending operations which requires more staffing to maintain. On a post-offering basis, the Bank’s operating expenses can be expected to increase with the addition of stock benefit plans and certain expenses that result from being a publicly-traded company, with such expenses

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*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.12*

already impacting the Peer Group’s operating expenses. At the same time, Anchor’s capacity to leverage operating expenses will be greater than the Peer Group’s leverage capacity following the increase in capital realized from the infusion of net stock proceeds.

When viewed together, net interest income and operating expenses provide considerable insight into a thrift’s earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, as measured by their expense coverage ratios (net interest income divided by operating expenses), the Bank’s earnings were less favorable than the Peer Group’s, based on respective expense coverage ratios of 0.91x for Anchor and 0.98x for the Peer Group. A ratio less than 1.00x indicates that an institution depends on non-interest operating income to achieve profitable operations.

Sources of non-interest operating income provided a similar contribution to the Bank’s and Peer Group’s earnings. Non-interest operating income equaled 1.00% and 1.02% of Anchor’s and the Peer Group’s average assets, respectively. Taking non-interest operating income into account in comparing the Bank’s and the Peer Group’s earnings, Anchor’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of non-interest operating income and net interest income) of 81.1% was less favorable than the Group’s efficiency ratio of 77.2%.

Loan loss provisions had a larger impact on the Bank’s earnings, with loan loss provisions established by the Bank and the Peer Group equaling 0.57% and 0.39% of average assets, respectively. The impact of loan loss provisions on the Bank’s and the Peer Group’s earnings, particularly when taking into consideration the prevailing credit market environment for mortgage based lenders, were indicative of asset quality factors facing the overall thrift industry in the current operating environment.

For the 12 months ended June 30, 2008, the Bank reported net non-operating losses equal to 0.02% of average assets, while the Peer Group reported, on average, 0.04% of average assets of net non-operating losses. Expenses for the Bank reflect the minor level of losses on the sale of loans in the most recent 12 months, while the Peer


*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.13*

Group has also had minimal levels of non-operating items. Typically, gains and losses generated from non-operating items are viewed as non-recurring in nature, particularly to the extent that such gains and losses result from the sale of investments or other assets that are not considered to be part of an institution’s core operations. Comparatively, to the extent that gains have been derived through selling fixed rate loans into the secondary market, such gains may be considered to be an ongoing activity for an institution and, therefore, warrant some consideration as a core earnings factor for an institution. However, loan sale gains are still viewed as a more volatile source of income than income generated through the net interest margin and non-interest operating income. Extraordinary items were not a factor in either the Bank’s or the Peer Group’s earnings.

Reporting profitable operations, the Peer Group reported an average effective tax rate of 42.1%, while Anchor’s effective tax rate was essentially zero due to tax advantaged income from BOLI, municipal investments and the level of loan loss provisions taken in fiscal 2008. As indicated in the prospectus, the Bank’s effective marginal tax rate is assumed to equal 34.0% when calculating the after tax return on conversion proceeds.

L oan Composition

Table 3.4 presents data related to the Bank’s and the Peer Group’s loan portfolio compositions (including the investment in MBS). The Bank’s loan portfolio composition reflected a lower concentration of 1-4 family permanent mortgage loans and MBS than maintained by the Peer Group (26.6% of assets versus 36.1% for the Peer Group). The Peer Group reported higher ratios of both MBS and 1-4 family loans than the Bank. Loans serviced for others equaled 15.9% and 10.3% of the Bank’s and the Peer Group’s assets, respectively, thereby indicating a greater influence of loan servicing income on the Bank’s earnings. Anchor maintained a relatively higher balance of servicing intangibles.

Diversification into higher risk and higher yielding types of lending was greater for the Bank in comparison to the Peer Group companies on average, as Anchor reported total loans other than 1-4 family and MBS of 61.4% of assets, versus 49.4% for the Peer

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*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.15*

Group. Commercial real estate/multi-family and construction/land loans represented the most significant area of lending diversification for the Bank (a total of 45.9% of assets), followed by consumer loans (12.6% of assets) and commercial business loans (3.0% of assets). The Peer Group’s lending diversification consisted primarily of commercial real estate/multi-family loans (25.4% of assets), followed by construction/land loans (16.2% of assets) and commercial business loans (6.3% of assets). Anchor’s higher concentration of assets in loans and greater diversification into higher risk types of loans translated into a higher risk weighted assets-to-assets ratio for the Bank (77.01% versus 75.45% for the Peer Group).

C redit Risk

Overall, based on a comparison of credit quality measures, the Bank’s credit risk exposure was considered to be somewhat more significant than the Peer Group’s. As shown in Table 3.5, the Bank’s non-performing assets/assets and non-performing loans/loans ratios equaled 3.99% and 1.50%, respectively, versus comparable measures of 2.48% and 2.54% for the Peer Group. The Bank’s lower non-performing loans/loans ratio reflects Anchor’s higher balance of loans that are more than 90 days delinquent and still accruing (approximately $16.0 million), which are not included in the non-performing loans/loans ratio. The Bank’s and Peer Group’s loss reserves as a percent of total NPAs equaled 29.94% and 60.92%, respectively. Loss reserves maintained as percent of net loans receivable equaled 1.52% for the Bank, versus 1.20% for the Peer Group. Net loan charge-offs were similar for both, based on ratios of 0.14% and 0.20% of net loans receivable, respectively. As noted in the Loan Composition discussion, the Bank’s higher concentration of loans and greater diversification into higher risk types of loans translated into a higher risk weighted assets-to-assets ratio in comparison to the Bank’s ratio.

I nterest Rate Risk

Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure of the Bank versus the Peer Group. In terms of balance sheet composition, Anchor’s interest rate risk characteristics were considered to be similar to the Peer

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*RP ^® Financial, LC.*	*PEER GROUP ANALYSIS*
	*III.18*

Group. The Bank’s equity-to-assets ratio was somewhat higher than the Peer Group, while the IEA/IBL ratios were similar, thereby implying a similar dependence on the yield-cost spread to sustain the net interest margin for the Bank. The Bank and the Peer Group also reported similar levels of non-interest earning assets, which provides an indication of the earnings capabilities and interest rate risk of the balance sheet. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with more favorable balance sheet interest rate risk characteristics than currently maintained by the Peer Group, particularly with respect to the increases that will be realized in the Bank’s equity-to-assets and IEA/IBL ratios.

To analyze interest rate risk associated with the net interest margin, we reviewed quarterly changes in net interest income as a percent of average assets for Anchor and the Peer Group. In general, the relative fluctuations in the Bank’s net interest income to average assets ratio were considered to be higher than the Peer Group and, thus, based on the interest rate environment that prevailed during the period analyzed in Table 3.6, Anchor was viewed as maintaining a higher degree of interest rate risk exposure in the net interest margin. The stability of the Bank’s net interest margin should be enhanced by the infusion of stock proceeds, as the increase in capital will reduce the level of interest rate sensitive liabilities funding Anchor’s assets.

S ummary

Based on the above analysis, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of the Bank. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist will be addressed in the form of valuation adjustments to the extent necessary.


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.1*

IV. VALUATION ANALYSIS

Introduction

This chapter presents the valuation analysis and methodology, prepared pursuant to the regulatory valuation guidelines, and valuation adjustments and assumptions used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the Bank’s conversion transaction.

Appraisal Guidelines

The OTS written appraisal guidelines specify the market value methodology for estimating the pro forma market value of an institution pursuant to a mutual-to-stock conversion. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) a valuation analysis in which the pro forma market value of the subject company is determined based on the market pricing of the peer group as of the date of valuation, incorporating valuation adjustments for key differences. In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered.

RP Financial Approach to the Valuation

The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes “fundamental analysis” techniques. Additionally, the valuation incorporates a “technical analysis” of recently completed stock conversions, including closing pricing and aftermarket trading of such offerings. It should be noted that these valuation analyses cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a particular stock on a given day.

The pro forma market value determined herein is a preliminary value for the Company’s to-be-issued stock. Throughout the conversion process, RP Financial will:


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.2*

(1) review changes in Anchor’s operations and financial condition; (2) monitor Anchor’s operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending conversion offerings (including those in the offering phase), both regionally and nationally. If material changes should occur during the conversion process, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.

The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including Anchor’s value, or Anchor’s value alone. To the extent a change in factors impacting the Bank’s value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into the analysis.

Valuation Analysis

A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.3*

stocks, in particular new issues, to assess the impact on value of the Bank coming to market at this time.


1.	Financial Condition

The financial condition of an institution is an important determinant in pro forma market value because investors typically look to such factors as liquidity, equity, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Bank’s and the Peer Groups’ financial strengths are noted as follows:


	§	Overall A/L Composition . Loans funded by retail deposits were the primary components of both Anchor’s and the Peer Group’s balance sheets. The Peer Group’s interest-earning asset composition exhibited a lower concentration of loans with a lower degree of diversification into higher risk and higher yielding types of loans. Overall, in comparison to the Peer Group, the Bank’s interest-earning asset composition provided for a higher yield earned on interest-earning assets and a higher risk weighted assets-to-assets ratio. Anchor’s funding composition reflected a lower level of deposits and a higher level of borrowings than the comparable Peer Group ratios, which translated into a higher cost of funds for the Bank (the Bank also had a notable level of wholesale funds in the form of brokered deposits). As a percent of assets, the Bank maintained a higher level of interest-earning assets and lower level of interest-bearing liabilities compared to the Peer Group’s ratios, which resulted in a higher IEA/IBL ratio for the Bank compared to the Peer Group. After factoring in the impact of the net stock proceeds, the Bank’s IEA/IBL ratio will exceed the Peer Group’s ratio. On balance, RP Financial concluded that asset/liability composition was a neutral factor in our adjustment for financial condition.

	§	Credit Quality. The Bank’s ratios of NPAs and loss reserves as a percent of total NPAs were less favorable than the comparable Peer Group ratios. Loss reserves as a percent loans were higher for Anchor. Net loan charge-offs were a similar factor for both, while the Bank’s risk weighted assets-to-assets ratio was higher than the Peer Group’s. The perceived credit risk in Anchor’s loan portfolio was higher due to much greater diversification into commercial real estate, construction, commercial business and consumer loans. Overall, RP Financial concluded that credit quality was a moderately negative factor in our adjustment for financial condition.

	§	Balance Sheet Liquidity . Anchor operated with a lower level of cash and investment securities relative to the Peer Group (15.2% of assets versus 17.9% for the Peer Group). Following the infusion of stock proceeds, the Bank’s cash and investments ratio is expected to increase as the proceeds will be initially deployed into investments. The Bank’s future borrowing


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	*IV.4*


		capacity was considered to be lower than the Peer Group’s, given the higher level of borrowings currently maintained. Overall, RP Financial concluded that balance sheet liquidity was a neutral factor in our adjustment for financial condition.

	§	Funding Liabilities . Anchor’s interest-bearing funding composition reflected a lower concentration of deposits and a higher concentration of borrowings relative to the comparable Peer Group ratios, which translated into a higher cost of funds for Anchor. In addition, Anchor depended upon a relatively high level of wholesale deposit funds, in the form of brokered CDs to fund operations. Total interest-bearing liabilities as a percent of assets were slightly lower for the Bank compared to the Peer Group’s ratio, which was attributable to Anchor’s higher equity position. Following the stock offering, the increase in the Bank’s equity position should provide Anchor with an even lower level of interest-bearing liabilities than maintained by the Peer Group, although the funding base which includes higher borrowings will remain. Overall, RP Financial concluded that funding liabilities were a slightly negative factor in our adjustment for financial condition.

	§	Equity . The Peer Group currently operates with a lower equity-to-assets ratio than the Bank. Following the stock offering, Anchor’s pro forma equity position will further exceed the Peer Group’s equity-to-assets ratio. The increase in the Bank’s pro forma capital position will result in greater leverage potential and reduce the level of interest-bearing liabilities utilized to fund assets. At the same time, the Bank’s more significant capital surplus will likely result in a lower ROE. On balance, RP Financial concluded that capital strength was a slightly positive factor in our adjustment for financial condition.

On balance, Anchor’s balance sheet strength was modestly less favorable than the Peer Group’s and, thus, a slight downward adjustment was applied for the Bank’s financial condition.


2.	Profitability, Growth and V iability of Earnings

Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institution’s earnings stream and the prospects and ability to generate future earnings heavily influence the multiple that the investment community will pay for earnings. The major factors considered in the valuation are described below.


	§	Reported Earnings . For the 12 months ended June 30, 2008, Anchor reported net income of 0.13% of average assets, versus average and median net income of 0.30% and 0.41% of average assets for the Peer Group. The Bank’s lower profitability was largely due to a lower level of net interest


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	*IV.5*


		income and higher loan loss provisions in the most recent period. A key difference between the Bank and the Peer Group is Anchor’s higher funding costs, which resulted in a yield/cost spread that was lower than the Peer Group’s. The Peer Group recorded a similar level of non-interest operating income and a modestly higher level of operating expenses. Reinvestment and leveraging of stock proceeds into interest-earning assets will serve to increase the Bank’s bottom line income, with the benefit of reinvesting proceeds expected to be somewhat offset by higher operating expenses associated with operating as a publicly-traded company and the implementation of stock benefit plans. The Bank’s higher level of NPAs, which impacted the income statement in the most recent period through higher loan loss provisions, will remain as a potential negative factor in future earnings as additional loan loss reserves may be incurred. On balance, RP Financial concluded that the Bank’s reported earnings were a moderately negative factor in our adjustment for profitability, growth and viability of earnings.

	§	Core Earnings . As noted above, Anchor’s income statement was not materially impacted by non-operating items, with the only items consisting of losses on the sale of loans. The losses, as part of ongoing operations of the Bank, were considered to be part of recurring earnings. Thus, adjusted net income, for valuation purposes, was assumed to be equal to reported earnings. In comparison, the Peer Group’s earnings were also derived largely from recurring sources, including net interest income, operating expenses, and non-interest operating income. In these measures, the Bank operated with a lower net interest income ratio, a lower yield/cost spread, a lower operating expense ratio and a similar level of non-interest operating income. The Bank’s ratios for net interest income and operating expenses translated into an expense coverage ratio that was less favorable than the Peer Group’s ratio (equal to 0.91x for the Bank and 0.98x for the Peer Group). Similarly, the Bank’s efficiency ratio of 81.1% was less favorable than the Peer Group’s efficiency ratio of 77.2%. Total loss provisions had a larger impact on the Bank’s income statement, and as noted above, the Bank’s higher level of NPAs will remain as a potential negative factor in future earnings as additional loan loss reserves may be incurred.

		Overall, these measures, as well as the expected earnings benefits the Bank should realize from the redeployment of stock proceeds into interest-earning assets, which will be somewhat negated by expenses associated with the stock benefit plans and operations as a publicly-traded company, indicate a continued disadvantage for the Bank’s pro forma core earnings relative to the Peer Group’s core earnings. Therefore, RP Financial concluded that this was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.

	§	Interest Rate Risk . Quarterly changes in the Bank’s and the Peer Group’s net interest income to average assets ratios indicated that a higher degree of volatility was associated with the Bank’s net interest income ratios. Other


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	*IV.6*


		measures of interest rate risk, such as capital and IEA/IBL ratios were similar for both the Bank and the Peer Group thereby indicating a similar dependence on the yield-cost spread to sustain net interest income. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with equity-to-assets and IEA/ILB ratios that will be above the Peer Group ratios, as well as enhance the stability of the Bank’s net interest income ratio through the reinvestment of stock proceeds into interest-earning assets. On balance, RP Financial concluded that interest rate risk was a neutral factor in our adjustment for profitability, growth and viability of earnings.

	§	Credit Risk . Loan loss provisions were a larger factor in the Bank’s most recent 12 month earnings stream (0.57% of average assets versus 0.39% of average assets for the Peer Group). In terms of future exposure to credit quality related losses, the Peer Group maintained a lower concentration of assets in loans, and lending diversification into higher risk types of loans was more significant for the Bank which translated into a higher risk weighed assets-to-assets ratio for Anchor. All credit quality measures examined were less favorable for the Bank, in particular the level of NPAs to total assets and total loan loss reserves to total NPAs. Overall, RP Financial concluded that credit risk was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.

	§	Earnings Growth Potential . The Bank maintained a less favorable interest rate spread than the Peer Group, which would tend to limit the net interest income ratio going forward. The infusion of stock proceeds will provide Anchor with more significant growth potential through leverage than currently maintained by the Peer Group. The Bank’s lower operating expense ratio implies greater earnings growth potential and sustainability of earnings during periods when net interest income ratios come under pressure as the result of adverse changes in interest rates. After taking into account the impact of the conversion offering, the Bank’s earnings are projected to remain substantially lower than the Peer Group. Overall, earnings growth potential was considered to be a neutral factor in our adjustment for profitability, growth and viability of earnings.

	§	Return on Equity . Currently, the Bank’s ROE on either a reported or core basis is below the Peer Group’s ROE due to the lower level of net income recorded. Following the increase in capital that will be realized from the infusion of net stock proceeds into the Bank’s equity, the Bank’s pro forma ROE on a core earnings basis will continue to be less than the Peer Group’s ROE. Accordingly, this was a moderately negative factor in the adjustment for profitability, growth and viability of earnings.

On balance, Anchor’s pro forma earnings strength was considered to be less favorable than the Peer Group’s and, thus, a significant downward adjustment was


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	*IV.7*

applied for profitability, growth and viability of earnings.


3.	Asset Growth

Anchor’s assets increased by 2.9% during the most recent 12 month period, while the Peer Group’s assets increased by 5.1%. The Bank’s limited growth was due to an intentional runoff of higher cost wholesale deposit funds (brokered deposits), with these funds replaced with borrowings. Asset growth for the Peer Group was sustained by loan growth, as cash and investments declined. On a pro forma basis, the Bank’s tangible equity-to-assets ratio will exceed the Peer Group’s tangible equity-to-assets ratio, indicating greater leverage capacity for the Bank. However, the ability of Anchor to expand the asset base in a cost efficient manner and in a reasonable time period remains uncertain, and on balance, we concluded that no valuation adjustment was warranted for asset growth.


4.	Primary Market Area

The general condition of an institution’s market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local markets served. Anchor serves the western and southern Washington State region through 20 office locations in eight counties. One section of the Bank’s market area, the more metropolitan areas of the Puget Sound region which includes the cities of Olympia, Tacoma and Seattle, has exhibited favorable demographic and economic growth trends in recent years, with an economy that has not experienced boom or bust periods as has been common in other areas of the country. These areas provide a larger population base and economy for banking business opportunities. However, the more rural market area of Gray’s Harbor County, the Bank’s original market area, has a substantially lower population and economic base, and less favorable growth characteristics, which reduces the Bank’s overall future prospects. The demographic characteristics of the Bank’s market areas have also fostered a highly competitive banking environment, in which the Bank competes against other community banks as well as institutions with a regional or national presence.


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	*IV.8*

The Peer Group companies operate in a mix of suburban and rural markets, with the markets served by the Peer Group companies having comparable or larger populations compared to Grays Harbor County. Four of the ten Peer Group companies are located in the state of Washington, and three others are located in the western region of the United States. The markets served by the Peer Group companies reflected similar historical population growth and higher per capita income compared to Grays Harbor County. The average and median deposit market shares maintained by the Peer Group companies were below the Bank’s market share of deposits in Grays Harbor County. Overall, the degree of competition faced by the Peer Group companies was viewed to be similar to that faced by Anchor, while the growth potential in the markets served by the Peer Group companies was also viewed to be similar, given the Bank’s expanded market area beyond Grays Harbor County. Summary demographic and deposit market share data for the Bank and the Peer Group companies is provided in Exhibit III-3. As shown in Table 4.1, August 2008 unemployment rates for all of the markets served by the Peer Group companies were the same or lower than the comparable unemployment rate for Grays Harbor. On balance, we concluded that no adjustment was appropriate for the Bank’s market area.

Table 4.1
Market Area Unemployment Rates
Anchor and the Peer Group Companies(1)


	County	August 2008 Unemployment

Anchor - WA	Grays Harbor	8.3	%

Peer Group Average		5.9	%
First Fed. Bancshares, Inc. - AR	Boone	4.6	%
First Financial NW, Inc. - WA	King	4.4
First PacTrust Bancorp – CA	San Diego	6.4
Harrington West Fin. Corp. - CA	Santa Barbara	5.5
HMN Financial, Inc. – MN	Olmsted	4.6
Meta Financial Corp. - IA	Buena Vista	4.1
Rainier Pacific Bancorp - WA	Pierce	6.4
Riverview Bancorp - WA	Clark	8.3
Timberland Bancorp – WA	Gray’s Harbor	8.3
United Western Bancorp - CO	Denver	5.9


	(1) Unemployment rates are not seasonally adjusted.

	Source: U.S. Bureau of Labor Statistics.


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	IV.9


5.	D ividends

At this time the Bank has not established a dividend policy. Future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.

Nine of the ten Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 2.38% to 11.11%. The average dividend yield on the stocks of the Peer Group institutions equaled 5.70% as of October 10, 2008. As of October 10, 2008, approximately 76% of all publicly-traded thrifts had adopted cash dividend policies (see Exhibit IV-1), exhibiting an average yield of 4.06%. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.

While the Bank has not established a definitive dividend policy prior to converting, the Bank will have the capacity to pay a dividend comparable to the Peer Group’s average dividend yield based on pro forma capitalization. On balance, we concluded that no adjustment was warranted for this factor.


6.	L iquidity of the Shares

The Peer Group is by definition composed of companies that are traded in the public markets. All ten of the Peer Group members trade on the NASDAQ Global Select Market. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $21.7 million to $224.6 million as of October 10, 2008, with average and median market values of $57.8 million and $38.3 million, respectively. The shares issued and outstanding to the public shareholders of the Peer Group members ranged from 2.6 million to 22.9 million, with average and median shares outstanding of 7.6 million and 6.2 million, respectively. The Bank’s stock offering is expected to have a pro forma market value that will be less than the average but more than the median market values indicated for the Peer Group,


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	IV.10

while shares outstanding for the Bank will be in the middle portion of the range of shares outstanding indicated for Peer Group companies. Like the large majority of the Peer Group companies, the Bank’s stock will be quoted on the NASDAQ Global Market following the stock offering. Overall, we anticipate that the Bank’s public stock will have a comparable trading market as the Peer Group companies on average and, therefore, concluded no adjustment was necessary for this factor.


7.	M arketing of the Issue

We believe that three separate markets exist for thrift stocks, including those coming to market such as Anchor (1) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (2) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a fully-converted publicly-held company and stock trading history; and (3) the acquisition market for thrift franchises in Washington. All three of these markets were considered in the valuation of the Bank’s to-be-issued stock.


	A.	T he Public Market

The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only.

In terms of assessing general stock market conditions, the performance of the overall stock market has been mixed in recent quarters. Stocks pulled back heading into the second half of November 2007, reflecting concerns that the weak housing


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	IV.11

market would depress consumer spending and expectations of more write-downs to be taken on risky debt. Stocks rebounded in late-November and early-December, amid growing expectations that the Federal Reserve would cut rates at its mid-December meeting. News of a 0.25% rate cut by the Federal Reserve sent stocks sharply lower in mid-December 2007, as some investors had hoped for a more significant rate cut. Credit worries and downgrades of several bellwether stocks also contributed to the mid-December pullback in the broader stock market. Weak economic data and expectations that fourth quarter earnings would reflect more large write-downs of subprime mortgage debt by some of the world’s largest banks weighed on stocks in year end trading.

The downward trend in stocks continued at the start of 2008, as mounting concerns about the economy, higher oil prices and news of more large write-downs taken on subprime mortgages and debt all contributed to the negative sentiment in the stock market. IBM’s strong earnings report for the fourth provided a boost to the stock market in mid-January. Stocks tumbled sharply lower heading into the second half of January on investors’ fears of more damage to come from the subprime mortgage crisis following huge fourth quarter losses reported by Citigroup and Merrill Lynch. A surprise 0.75% rate cut by the Federal Reserve on January 22, 2008 helped to limit damage from the prior day’s sell-off in the global markets, which was spurred by fears that a U.S. recession would slow economic growth in the foreign markets as well. News of a possible bond-insurance bailout triggered a sharp mid-day rebound in the Dow Jones Industrial Average (the “DJIA”) the day following the rate cut, as the DJIA recovered almost 600 points from morning lows and closed up almost 300 points for the day. Following three consecutive sessions of gains, stocks closed lower at the end of the week on profit taking. Some positive economic data and a second rate cut by the Federal Reserve in nine days helped the broader stock market to close out January on an upbeat note.

Recession fears, fueled by a decline in January service-sector activity, triggered a broad based sell-off in the stock market in early-February 2008. A favorable retail sales report for January helped stocks to rebound in mid-January, which was followed by a downward trend heading into late-February amid higher oil prices, more


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	IV.12

weak economic data and signs of stagflation. Following a brief rally, stocks plunged at the end of February on concerns about the ongoing credit crisis and rising oil prices. Escalating problems in the bond market and weak economic data, which included job losses in the February employment report and a record number of homes entering foreclosure in the fourth quarter, extended the downturn in the broader stock market during the first part of March. Stocks soared higher heading into mid-March after the Federal Reserve said it would lend Wall Street $200 billion in a move aimed at taking difficult to trade securities temporarily out of circulation. The stock market experienced heightened volatility in mid-March, with the DJIA swinging significantly higher or lower on a daily basis. Stocks declined sharply on news of Bear Stearns’ collapse, which was followed by a more than 400 point increase in the DJIA. The surge in stocks was supported by the Federal Reserve cutting its target rate by 0.75% to 2.25% and Goldman Sachs and Lehman Brothers reporting better than expected earnings. Stocks tumbled the following day, with the DJIA declining by almost 300 points on renewed worries about the economy. Led by financial stocks, the stock market rebounded strongly heading into late-March. Major contributors to the rally in financial stocks were Fannie Mae and Freddie Mac, which rebounded on easing of regulatory constraints, and J.P. Morgan’s increased bid for Bear Stearns from $2 a share to $10 a share. Concerns about the broader economy pressured stocks lower at the close of the first quarter. Overall, the first quarter of 2008 was the worst quarter for the DJIA in five and one-half years, as a 7.6% decline was recorded in the DJIA for the first quarter.

Stocks surged higher at the start of the second quarter of 2008, with the DJIA posting a gain of almost 400 points on news that two major financial firms with significant credit risk issues took steps to shore up their capital. Uncertainty over first quarter earnings reports provided for a narrow trading range heading in mid-April, which was followed by a downturn in the broader stock market. Stocks retreated after a disappointing first quarter earnings report from General Electric stoked concerns about the health of both corporate profits and the economy in general. Some better-than-expected first quarter earnings reports provided a boost to stocks in mid-April, which was followed by a narrow trading range through the end of April amid mixed earnings reports and the Federal Reserve’s decision to cut its target rate by 0.25% as expected.


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The broader stock market started May on a positive note, but then led by a sell-off in financial stocks reversed course heading into mid-May. Higher oil prices and ongoing concerns of eroding credit quality contributed to the decline in financial stocks. The broader stock market showed a positive trend heading into mid-May, which was supported by a slight decline in oil prices and encouraging inflation numbers reflected in the April data for consumer prices. Soaring oil prices and growing concerns about inflation triggered a sell-off in the broader stock heading into the second half of May. A downward trend in the broader stock market prevailed in the second half of May and into early-June, amid concerns about more credit-related losses forecasted for the financial sector and soaring oil prices. Following a one day rebound on surprisingly strong retail sales data for May, a spike in the May unemployment rate accelerated the early-June slide in stocks. Led by a decline in financial shares, the downward trend in stocks prevailed through most of June. The DJIA hit a 2008 low in late-June, as stocks plunged following downgrades of brokerage and automotive stocks and a jump in oil prices.

Selling pressure in the broader market continued into the first half of July 2008, as financial stocks led the downturn on worries about earnings and the economy. For the first time in two years, the DJIA closed below 11000 in mid-July as bank stocks led the market lower following the takeover of IndyMac Bancorp by the FDIC. Led by a rally in financial stocks, stocks rebounded heading into the second half of July. Better-than-expected earnings by some of the major banks and a drop in oil prices below a $130 a barrel were noteworthy contributors to the rally. Led by a sell-off in financial shares, stocks tumbled in late-July on more bad news about the housing market. Stocks rallied at the end of July as investors moved into beaten up financial stocks on hopes that the credit crisis was nearing an end. Lower oil prices and reassuring signals coming out of the Federal Reserve meeting provided a boost to stocks in early-August. Volatility in financial stocks prevailed on the broader stock market in mid-August, as concerns about more write-downs plagued the financial sector. Mixed economic data and ongoing concerns of the credit crunch continuing to haunt the financial sector provided for a choppy performance in the broader stock market during the second half of August.


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	IV.14

The uneven performance of the broader stock market became more pronounced during the first half of September 2008, with turmoil in the financial sector translating into significant fluctuations in the overall stock market. Stocks dropped sharply in early-September on downbeat employment figures and disappointing retail sales data, which was followed by a sharp one day rally as the U.S. government’s seizure of Fannie Mae and Freddie Mac gave a boost to financial stocks. The one day rebound was followed by another sharp sell-off as Lehman Brothers efforts to raise capital faltered. The DJIA plummeted over 500 points on September 15, 2008 to its lowest close in over two years, as events over the preceding weekend evolved into a crisis on Wall Street. In particular, investors were rattled by the bankruptcy filing of Lehman Brothers, American International Group was facing a severe cash crunch forcing the insurer to raise $14.5 billion to cover its obligations and Merrill Lynch agreed to be acquired by Bank of America in a rushed deal negotiated over the weekend. Stocks ended higher the day after one of the worst sell-off in years, as the Federal Reserve pumped another $70 billion into the nation’s financial system to help ease credit stresses and gave reassurance that it expected its policy moves to foster moderate economic growth over time. Stocks plummeted following the one day rebound, as financial stocks sold off on new of the U.S. government’s bailout of AIG. The announcement of the U.S. government’s rescue plan to restore stability to the financial system sent stocks soaring, with DJIA gaining 779 points over two days (September 18 ^th and 19 ^th ). Stocks reversed course in late-September, with the sell-off culminating in a one day decline of 778 points in the DJIA when the House of Representatives defeated the proposed rescue plan. Overall, the DJIA closed down 4.4% in the third quarter.

The sell-off in the broader stock market turned into a stock market crash during the first half of October 2008, despite the passage of the $700 billion rescue plan and an emergency half point rate cut by the Federal Reserve. Stocks fells for eight consecutive trading days from October 1 through October 10, for a total decline of 22.1% in the DJIA. The stock market crash was driven by deepening fears about the banking system and the spillover effects it may have on the rest of the economy. On October 10, 2008, the DJIA closed at 8451.19, a decrease of 40.0% from one year ago


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	IV.15

and a decrease of 36.3% year-to-date, and the NASDAQ closed at 1649.51, a decrease of 41.2% from one year ago and a decrease of 37.8% year-to-date. The Standard & Poor’s 500 Index closed at 899.22 on October 10, 2008, a decrease of 42.2% from one year ago and a decrease of 38.8% year-to-date.

The market for thrift stocks has generally been in a downward trend over the past few quarters, with the downturn in the broader market being led by a sell-off in financial stocks. Thrift stocks traded lower heading in to the second half of November 2007, based on worries over further deterioration in the subprime market and the depressed housing market. Freddie Mac’s significantly larger-than-expected loss for the third quarter prompted further selling in thrift stocks heading into late-November. Hopes for a rate cut at the next Federal Reserve meeting boosted the thrift sector in late-November. Thrift stocks traded in narrow range in the first week of December, as investors awaited the outcome of the forthcoming Federal Reserve meeting. The mid-December downturn in the broader market following the Federal Reserve’s decision to lower rates a quarter point was evidenced in the thrift sector as well. In contrast to the broader stock market, thrift stocks continued to trade lower the day following the rate cut. The weak housing market, as reflected by a sharp drop in home prices and a drop-off in mortgage application volume, along with inflation worries and predictions of massive write-downs that would be recorded in the fourth quarter were noted factors that depressed thrift stocks through the end of December.

The downward spiral in thrift stocks continued at the beginning of 2008, particularly the stocks of those institutions with significant exposure to the subprime mortgage market such as Countrywide and Washington Mutual. Thrift stocks in general were also hurt by weak housing data and the growing prospects that the housing slump would continue throughout 2008. News of a rise in mortgage delinquencies at Countrywide and rumors of Countrywide going into bankruptcy further contributed to the slide in thrift stocks heading into mid-January. The announced acquisition of Countrywide by Bank of America had little impact on thrift stocks in general. Earnings related worries depressed thrift stocks heading into the second half of January, reflecting expectations that more significant credit quality related losses would be a


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	IV.16

widespread factor in the fourth quarter earnings reports for thrift institutions in general. Thrift stocks moved higher on the surprise rate cut by the Federal and then spiked higher along with the broader stock market the day following the rate cut. Consistent with the broader stock market, thrift stocks traded lower at the end of the week. For the balance of January and through most of February, thrift stocks generally paralleled trends in the broader market. Financial stocks led the broader market lower at the end of February and into the first part of March, as worries about the health of key financial companies escalated. Shares of thrift stocks were among the hardest hit, as investors dumped thrift stocks in conjunction with a sharp sell-off in the stocks of Fannie Mae and Freddie Mac amid fears that defaults would force them to raise more capital. News of the Federal Reserve’s $200 billion liquidity program sent thrift stocks sharply higher heading into mid-March. Thrift stocks participated in the day-to-day swings experienced in the broader stock market during mid-March, as investors assessed the outlook for mortgage lenders in a slumping market for housing and the possibility of the economy going into recession. The rebound in the stocks of Fannie Mae and Freddie Mac provided a healthy boost to thrift stocks heading into late-March, while troubling economic data and warnings of further write downs pulled thrift stocks lower along with the broader stock market at the close of the first quarter.

Thrift stocks surged higher in conjunction with the broader stock market at the start of the second quarter of 2008, as UBS and Lehman Brothers announced plans to bolster their capital to offset huge losses recorded from writing down troubled investments. A weaker-than-expected employment report for March depressed thrift stocks in early-April, although thrift stocks bounced back on news that Washington Mutual was in discussions to raise $5 billion from private equity-led investors. Thrift stocks drifted lower heading into mid-April in anticipation of first quarter earnings remaining depressed by more write downs on mortgages and mortgage-related securities. Bargain hunting and some positive first quarter earnings events provided a modest boost to thrift stocks in late-April, while thrift stocks edged lower on news of the Federal Reserve rate cut at the end of April. Calmer credit markets and a better-than-expected employment report for April were somewhat offset by a cut in Countrywide’s credit rating, as thrift stocks traded unevenly at the beginning of May. Higher oil prices


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and more negative news reported by financial institutions pressured thrift stocks lower going into mid-May. Thrift stocks edged higher along with the broader stock market heading into mid-May and then reversed course on inflation worries, higher oil prices and more weak data coming from the housing sector. In late-May 2008 and early-June, thrift shares settled into a narrow trading range and then sold off along with the broader stock market on news of the spike in the May unemployment rate. Thrift prices deteriorated further heading into mid-June on concerns of mounting credit-related losses as mortgage delinquencies and foreclosures continued to surpass record levels. Following a mild rebound in mid-June, thrift shares tumbled lower at the end of the second quarter as financial shares were pummeled by downgrades by Wall Street analysts and second quarter profit worries.

The downturn in thrift stocks continued at the start of the third quarter of 2008, with projected second quarter losses becoming more widespread among thrift stocks. Fannie Mae and Freddie Mac dropped to their lowest levels in more than 14 years, as concerns grew about their capital positions. Thrift stocks rallied strongly on comments by the Federal Reserve Chairman that outlined measures to shore up mortgage lending and help markets operate smoothly, but the one-day rally was quickly wiped out by fears about bank stability and the future of the mortgage market heading into mid-July. Most notably, the sell-off in thrift shares was fueled by the failure of IndyMac Bancorp and growing concerns about the solvency of Fannie Mae and Freddie Mac. The sell-off was followed by a sharp rebound in thrift stocks, as some major banks posted better-than-expected earnings and Freddie Mac considered a major stock sale that would have the potential to avoid implementation of a government rescue plan. Weak data for June existing home sales re-ignited fears about the credit crunch and sent thrift stocks sharply lower in late-July. Thrift stocks rebounded along with the broader financial sector at the end of July, with the upward momentum sustained into early-August as investors responded favorably to the outcome of the Federal Reserve meeting and its decision to hold the target rate steady. Concerns of falling home prices resulting in more write-downs pushed thrift stocks lower in mid-August. The downturn in thrift stocks sharpened during the second half of August on spreading credit quality problems in financial stocks and growing concerns that Fannie Mae and Freddie Mac


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	IV.18

would not be able to avoid a government bailout. Thrift stocks rebounded in late-August on news that second quarter GDP growth was revised up from the initial estimate.

In early-September 2008 thrift stocks showed a positive trend, which was capped off by the takeover of Fannie Mae and Freddie Mac by the U.S. government. The mid-September shock wave that hit Wall Street filtered into thrift stocks as well, as thrift stocks traded lower on the widening financial crisis. News of a sharp drop in August housing construction added to the mid-September downturn in thrift issues. Thrift stocks participated in the broader stock market rally spurred by the announcement of the U.S. government’s rescue plan, with the SNL index posting a two day gain of 113 points or 13.2% during the September 18 and 19 ^th trading sessions. Following the two day rebound, thrift stocks declined sharply on doubts about the government’s rescue plan getting approved by Congress and the takeover of Washington Mutual by federal regulators. Thrift stocks plunged along with the broader market when the House of Representatives defeated the proposed rescue plan voted and then partially recovered some of their losses to close out the third quarter. Overall, the SNL Index for all publicly-traded thrifts declined 7.6% during the third quarter, versus a 4.4% decline in the DJIA.

Thrift stocks eased lower at the start of the fourth quarter of 2008 and then plummeted along with the broader market in the second week of October, as concerns mounted on the health of the financial sector. On October 10, 2008, the SNL Index for all publicly-traded thrifts closed at 654.8, a decrease of 56.9% from one year ago and a decrease of 38.1% year-to-date.


	B.	T he New Issue Market

In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank’s pro forma market value. The new issue market is separate and distinct from the market for seasoned thrift stocks in that the pricing ratios for converting issues are computed on a pro forma basis, specifically: (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions


RP ^® Financial, LC.	VALUATION ANALYSIS
	IV.19

regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials. The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/book (“P/B”) ratio in that the P/B ratio of a converting thrift will typically result in a discount to book value whereas in the current market for existing thrifts the P/B ratio often reflects a premium to book value. Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket.

The marketing for converting thrift issues continued to be affected by the overall weak market for thrift stocks, with a number of the recent offerings being undersubscribed and typically reflecting only modest price appreciation or, in some cases, trading below their IPO prices in initial after market trading activity. As shown in Table 4.2, two standard conversions and one mutual holding company offering were completed during the past three months. The standard conversion offerings are considered to be more relevant for purposes of our analysis. First Savings Financial Group of Indiana (“First Savings”) and Home Bancorp, Inc. of Louisiana (“Home Bancorp”) completed standard conversion offerings on October 7, 2008 and October 3, 2008, respectively. First Savings’ $24.3 million offering was slightly above the minimum of the valuation range with a pro forma price/tangible book ratio of 51.2% at closing. Home Bancorp’s $89.3 million offering was at the top of the superrange with a pro forma price/tangible book ratio of 70.1%. First Savings and Home Bancorp closed 6.0% below and 2.5% above their respective IPO prices after their first week of trading. As of October 10, 2008, First Saving closed 6.0% below its IPO price and Home Bancorp closed 2.5% above its IPO price.

Shown in Table 4.3 are the current pricing ratios for First Savings and Home Bancorp. Based on their closing stock prices as of October 10, 2008, First Savings and Home Bancorp were trading at P/TB ratios of 48.08% and 71.88%, respectively.

RP ^® Financial, LC.

Table 4.2
Pricing Characteristics and After-Market Trends
Recent Conversions Completed (Last Three Months)


			Pre-Conversion Data																			Insider Purchases

Institutional Information			Financial Info.				Asset Quality				Offering Information								Contribution to Charitable Found.			% Off Incl. Fdn.

																						Benefit Plans

Institution	Conver. Date	Ticker	Assets		Equity/ Assets		NPAs/ Assets		Res. Cov.		Gross Proc.		% Offered		% of Mid.		Exp./ Proc.		Form	% of Offering		ESOP		Recog. Plans		Stk Option		Mgmt.& Dirs.

			($Mil)		(%)		(%)		(%)		($Mil.)		(%)		(%)		(%)			(%)		(%)		(%)		(%)		(%)(2)


*Standard Conversions*
First Savings Fin. Group, Inc., IN*	10/7/08	FSFG-NASDAQ	$	215	13.62	%	1.73	%	117	%	$	24.3	100	%	87	%	5.1	%	C/S	100K/4.5	%	8.0	%	4.0	%	10.0	%	7.9	%
Home Bancorp, Inc., LA*	10/3/08	HBCP-NASDAQ	$	448	11.29	%	0.19	%	302	%	$	89.3	100	%	132	%	2.1	%	N.A.	N.A.		8.0	%	4.0	%	10.0	%	7.6	%

Averages - Standard Conversions:			$	332	12.46	%	0.96	%	NM		$	56.8	100	%	110	%	3.6	%	N.A.	N.A.		8.0	%	4.0	%	10.0	%	7.7	%
Medians - Standard Conversions:			$	332	12.46	%	0.96	%	NM		$	56.8	100	%	110	%	3.6	%	N.A.	N.A.		8.0	%	4.0	%	10.0	%	7.7	%

*Second Step Conversions*

Averages - Second Step Conversions:
Medians - Second Step Conversions:

*Mutual Holding Company Conversions*
Auburn Bancorp, Inc., ME	8/18/08	ABBB-OTCBB	$	65	6.92	%	0.19	%	376	%	$	2.3	45	%	85	%	29.6	%	N.A.	N.A.		7.6	%	3.3	%	10.9	%	6.6	%

Averages - Mutual Holding Company Conversions:			$	65	6.92	%	0.19	%	376	%	$	2.3	45	%	85	%	29.6	%	NA	NA		7.6	%	3.3	%	10.9	%	6.6	%
Medians - Mutual Holding Company Conversions:			$	65	6.92	%	0.19	%	376	%	$	2.3	45	%	85	%	29.6	%	NA	NA		7.6	%	3.3	%	10.9	%	6.6	%

Averages - All Conversions:			$	140	10.27	%	0.96	%	247	%	$	13.3	73	%	86	%	17.3	%	NA	NA		7.8	%	3.6	%	10.4	%	7.3	%
Medians - All Conversions:			$	140	10.27	%	0.96	%	247	%	$	13.3	73	%	86	%	17.3	%	NA	NA		7.8	%	3.6	%	10.4	%	7.3	%


					Pro Forma Data													Post-IPO Pricing Trends

Institutional Information					Pricing Ratios(3)					Financial Charac.								Closing Price:

Institution	Conver. Date	Ticker	Initial Dividend Yield		P/TB		Core P/E	P/A		Core ROA		TE/A		Core ROE		IPO Price		First Trading Day		% Change		After First Week(4)		% Change		After First Month(5)		% Change		Thru 10/10/08		% Change

			(%)		(%)		(x)	(%)		(%)		(%)		(%)		($)		($)		(%)		($)		(%)		($)		(%)		($)		(%)


*Standard Conversions*
First Savings Fin. Group, Inc., IN*	10/7/08	FSFG-NASDAQ	0.00	%	51.2	%	NM	10.8	%	-0.1	%	21.1	%	-0.5	%	$	10.00	$	9.90	-1.0	%	$	9.40	-6.0	%	$	9.40	-6.0	%	$	9.40	-6.0	%
Home Bancorp, Inc., LA*	10/3/08	HBCP-NASDAQ	0.00	%	70.1	%	26.0x	17.0	%	0.7	%	24.3	%	2.7	%	$	10.00	$	11.49	14.9	%	$	10.25	2.5	%	$	10.25	2.5	%	$	10.25	2.5	%

Averages - Standard Conversions:			0.00	%	60.6	%	26.0x	13.9	%	0.3	%	22.7	%	1.1	%	$	10.00	$	10.70	7.0	%	$	9.83	-1.8	%	$	9.83	-1.8	%	$	9.83	-1.8	%
Medians - Standard Conversions:			0.00	%	60.6	%	26.0x	13.9	%	0.3	%	22.7	%	1.1	%	$	10.00	$	10.70	7.0	%	$	9.83	-1.8	%	$	9.83	-1.8	%	$	9.83	-1.8	%

*Second Step Conversions*

Averages - Second Step Conversions:
Medians - Second Step Conversions:

*Mutual Holding Company Conversions*
Auburn Bancorp, Inc., ME	8/18/08	ABBB-OTCBB	0.00	%	61.5	%	26.1x	7.3	%	0.3	%	8.8	%	3.4	%	$	10.00	$	10.50	5.0	%	$	9.50	-5.0	%	$	9.50	-5.0	%	$	9.70	-3.0	%

Averages - Mutual Holding Company Conversions:			0.00	%	61.5	%	26.1x	7.3	%	0.3	%	8.8	%	3.4	%	$	10.00	$	10.50	5.0	%	$	9.50	-5.0	%	$	9.50	-5.0	%	$	9.70	-3.0	%
Medians - Mutual Holding Company Conversions:			0.00	%	61.5	%	26.1x	7.3	%	0.3	%	8.8	%	3.4	%	$	10.00	$	10.50	5.0	%	$	9.50	-5.0	%	$	9.50	-5.0	%	$	9.70	-3.0	%

Averages - All Conversions:			0.00	%	56.3	%	26.1x	9.0	%	0.1	%	14.9	%	1.5	%	$	10.00	$	10.20	2.0	%	$	9.45	-5.5	%	$	9.45	-5.5	%	$	9.55	-4.5	%
Medians - All Conversions:			0.00	%	56.3	%	26.1x	9.0	%	0.1	%	14.9	%	1.5	%	$	10.00	$	10.20	2.0	%	$	9.45	-5.5	%	$	9.45	-5.5	%	$	9.55	-4.5	%

Note: * - Appraisal performed by RP Financial; BOLD =RP Financial did the Conversion Business Plan. “NT” - Not Traded; “NA” - Not Applicable, Not Available; C/S-Cash/Stock.


(1)	Non-OTS regulated thrift.

(2)	As a percent of MHC offering for MHC transactions.

(3)	Does not take into account the adoption of SOP 93-6.

(4)	Latest price if offering is less than one week old.

(5)	Latest price if offering is more than one week but less than one month old.

(6)	Mutual holding company pro forma data on full conversion basis.

(7)	Simultaneously completed acquisition of another financial institution.

(8)	Simultaneously converted to a commercial bank charter.

(9)	Former credit union.

October 10, 2008

[PAGE OMITTED. THIS PAGE IS FILED AS PART OF A PAPER FILING.]


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.22*


	C.	T he Acquisition Market

Also considered in the valuation was the potential impact on Anchor’s stock price of recently completed and pending acquisitions of other thrift institutions operating in Washington. As shown in Exhibit IV-4, there were five Washington thrift acquisitions completed from the beginning of 2000 through October 10, 2008, and there are currently no acquisitions pending of a Washington savings institution. The recent acquisition activity involving Washington savings institutions may imply a certain degree of acquisition speculation for the Bank’s stock. To the extent that acquisition speculation may impact the Bank’s offering, we have largely taken this into account in selecting companies for the Peer Group which operate in markets that have experienced a comparable level of acquisition activity as the Bank’s market and, thus, are subject to the same type of acquisition speculation that may influence Anchor’s stock. However, since converting thrifts are subject to a three-year regulatory moratorium from being acquired, acquisition speculation in Anchor’s stock would tend to be less compared to the stocks of the Peer Group companies.

* * * * * * * * * * *

In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall thrift market, the new issue market including the new issue market for thrift conversions and the local acquisition market for thrift stocks. Taking these factors and trends into account, RP Financial concluded that a moderate downward adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.


8.	M anagement

The Bank’s management team appears to have experience and expertise in all of the key areas of the Bank’s operations. Exhibit IV-5 provides summary resumes of the Bank’s Board of Directors and senior management. The financial characteristics of the Bank suggest that the Board and senior management have been effective in implementing an operating strategy that can be well managed by the Bank’s present


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.23*

organizational structure. The Bank currently does not have any senior management positions that are vacant.

Similarly, the returns, equity positions and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.


9.	E ffect of Government Regulation and Regulatory Reform

In summary, as a fully-converted Washington state regulated institution, Anchor will operate in substantially the same regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 reflects the Bank’s pro forma regulatory capital ratios. On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.

S ummary of Adjustments

Overall, based on the factors discussed above, we concluded that the Bank’s pro forma market value should reflect the following valuation adjustments relative to the Peer Group:

T able 4.4
Valuation Adjustments
Anchor Bank of Washington and the Peer Group Companies


	Key Valuation Parameters:		Valuation Adjustment

	Financial Condition		Slight Downward
	Profitability, Growth and Viability of Earnings		Significant Downward
	Asset Growth		No Adjustment
	Primary Market Area		No Adjustment
	Dividends		No Adjustment
	Liquidity of the Shares		No Adjustment
	Marketing of the Issue		Moderate Downward
	Management		No Adjustment
	Effect of Govt. Regulations and Regulatory Reform		No Adjustment


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.24*

V aluation Approaches

In applying the accepted valuation methodology promulgated by the OTS and adopted by the FDIC, i.e., the pro forma market value approach, including the fully-converted analysis described above, we considered the three key pricing ratios in valuing the Bank’s to-be-issued stock -- price/earnings (“P/E”), price/book (“P/B”), and price/assets (“P/A”) approaches -- all performed on a pro forma basis including the effects of the stock proceeds. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in the Bank’s prospectus for reinvestment rate, effective tax rate, stock benefit plan assumptions, the Foundation and expenses (summarized in Exhibits IV-7 and IV-8).

In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and recent conversion offerings.

RP Financial’s valuation placed an emphasis on the following:


	•	P/E Approach . The P/E approach is generally the best indicator of long-term value for a stock. Given the similarities between the Bank’s and the Peer Group’s earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation. At the same time, recognizing that (1) the earnings multiples will be evaluated on a pro forma basis for the Bank; and (2) the Peer Group on average has had the opportunity to realize the benefit of reinvesting and leveraging the offering proceeds, we also gave weight to the other valuation approaches.

	•	P/B Approach . P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of an initial public offering, as the earnings approach involves assumptions regarding the use of proceeds. RP Financial considered the P/B approach to be a valuable indicator of pro forma value, taking into account the pricing ratios under the P/E and P/A approaches. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or “P/TB”), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.

	•	P/A Approach . P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.25*


	value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community’s willingness to pay market multiples for earnings or book value when ROE is expected to be low.

The Bank will adopt Statement of Position (“SOP”) 93-6, which will cause earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of the adoption of SOP 93-6 in the valuation.

Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, and taking into account the dilutive impact of the cash and stock contribution to the Foundation, RP Financial concluded that as of October 10, 2008, the pro forma market value of the Bank’s full conversion offering equaled $46,500,000 at the midpoint, equal to 4,650,000 shares at $10.00 per share.

1. P rice-to-Earnings (“P/E”) . The application of the P/E valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/E multiple to the pro forma earnings base. In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank reported net income of $786,000 for the fiscal year ended June 30, 2008, and the only non-operating gains or losses consisted of $135,000 of net losses on the sale of loans. Given that the sale of loans is an ongoing operating strategy of the Bank, we included this item in the Bank’s core earnings estimate for valuation purposes. Thus, the Bank’s core earnings were assumed to equal reported earnings for the year ended June 30, 2008. (Note: see Exhibit IV-9 for the adjustments applied to the Peer Group’s earnings in the calculation of core earnings).


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.26*

Based on Anchor’s reported and estimated core earnings and incorporating the impact of the pro forma assumptions discussed previously, the Bank’s pro forma reported and core P/E multiples at the $46.5 million midpoint value both equaled 92.65 times, which provided for premiums of 1,029.9% and 1,097.0% relative to the Peer Group’s average reported and core P/E multiples of 8.20 times and 7.74 times, respectively (see Table 4.5). In comparison to the Peer Group’s median reported and core earnings multiples of 8.09 times and 7.52 times, respectively, the Bank’s pro forma reported and core P/E multiples at the midpoint value indicated premiums of 1,045.2% and 1,132.0%, respectively. At the top of the super range, the Bank’s reported and core P/E multiples both equaled 143.68 times. In comparison to the Peer Group’s average reported and core P/E multiples, the Bank’ P/E multiples at the top of the super range reflected premiums of 1,652.2% and 1,756.3%, respectively. In comparison to the Peer Group’s median reported and core P/E multiples, the Bank’ P/E multiples at the top of the super range reflected premiums of 1,676.0% and 1,810.6%, respectively.

2. P rice-to-Book (“P/B”) . The application of the P/B valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/B ratio, as derived from the Peer Group’s P/B ratio, to the Bank’s pro forma book value. Based on the $46.5 million midpoint valuation, the Bank’s pro forma P/B and P/TB ratios both equaled 46.17% (see Table 4.5 below). In comparison to the average P/B and P/TB ratios for the Peer Group of 52.84% and 57.27%, the Bank’s ratios reflected a discount of 12.6% on a P/B basis and a discount of 19.4% on a P/TB basis. In comparison to the Peer Group’s median P/B and P/TB ratios of 52.09% and 54.66%, respectively, the Bank’s pro forma P/B and P/TB ratios at the midpoint value reflected discounts of 11.4% and 15.5%, respectively. At the top of the super range, the Bank’s P/B and P/TB ratios both equaled 53.82%. In comparison to the Peer Group’s average P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected a premium of 1.9% and a discount of 6.0%, respectively. In comparison to the Peer Group’s median P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflect a premium of 3.3% and a discount of 1.5%, respectively. RP Financial considered the resulting premiums or discounts under the P/B approach to be reasonable, given the

[P AGE OMITTED. THIS PAGE IS FILED AS PART OF A PAPER FILING.]


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.28*

nature of the calculation of the P/B ratio and resulting premiums pursuant to the price to earnings method.

3. P rice-to-Assets (“P/A”) . The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank’s pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the $46.5 million midpoint of the valuation range, the Bank’s value equaled 7.16% of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio of 5.50%, which implies a premium of 30.2% has been applied to the Bank’s pro forma P/A ratio. In comparison to the Peer Group’s median P/A ratio of 3.93%, the Bank’s pro forma P/A ratio at the midpoint value reflects a premium of 82.2%.

C omparison to Recent Offerings

As indicated at the beginning of this chapter, RP Financial’s analysis of recent conversion offering pricing characteristics at closing and in the aftermarket has been limited to a “technical” analysis and, thus, the pricing characteristics of recent conversion offerings can not be a primary determinate of value. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). As discussed previously, Home Bancorp and First Savings were the most recent standard conversion offerings completed. In comparison to Home Bancorp’s and First Savings’ average pro closing forma P/TB ratio of 60.6%, the Bank’s P/TB ratio of 46.2% at the midpoint value reflects an implied discount of 23.8%. At the top of the superrange, the Bank’s P/TB ratio of 53.8% reflects an implied discount of 11.2% relative to Home Bancorp’s and First Savings’ average closing P/TB ratio. Home Bancorp’s and First Savings’ current average P/TB ratio, based on closing stock prices as of October 10, 2008, equaled 60.0%. In comparison to Home Bancorp’s and First Savings’ current average P/TB ratio, the Bank’s P/TB ratio at the midpoint value reflects


*RP ^® Financial, LC.*	*VALUATION ANALYSIS*
	*IV.29*

an implied discount of 23.0% and at the top of the superrange the discount narrows to 10.3%.

V aluation Conclusion

Based on the foregoing, it is our opinion that, as of October 10, 2008, the estimated aggregate pro forma market value of the shares to be issued immediately following the conversion, inclusive of the Foundation shares, equaled $46,500,000 at the midpoint, equal to 4,650,000 shares offered at a per share value of $10.00. Pursuant to conversion guidelines, the 15% valuation range indicates a minimum value of $39,750,000 and a maximum value of $53,250,000. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to total shares outstanding of 3,975,000 at the minimum and 5,325,000 at the maximum. In the event the appraised value is subject to an increase, the aggregate pro forma market value may be increased up to a supermaximum value of $61,012,500 without a resolicitation. Based on the $10.00 per share offering price, the supermaximum value would result in total shares outstanding of 6,101,250. The pro forma valuation calculations relative to the Peer Group are shown in Table 4.5 and are detailed in Exhibit IV-7 and Exhibit IV-8.