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EX-32 - EXHIBIT 32 - Anchor Bancorpex3293012.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorpex31293012.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorpex31193012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
or
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____
 
Commission File Number: 001-34965
 
ANCHOR BANCORP

(Exact name of registrant as specified in its charter)
 
Washington     26-3356075
 (State or other jurisdiction of incorporation   (I.R.S. Employer
 or organization)   I.D. Number)
   
601 Woodland Square Loop SE, Lacey, Washington
 98503
(Address of principal executive offices)   (Zip Code)
   
 Registrant’s telephone number, including area code:   (360) 491-2250
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
  Large accelerated filer  [   ]  Accelerated filer  [   ] 
  Non-accelerated filer  [   ]  Smaller reporting company   [X] 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 5, 2012, there were 2,550,000, shares of common stock, $.01 par value per share, outstanding.


 
 

 

ANCHOR BANCORP
FORM 10-Q
TABLE OF CONTENTS
 
PART 1 - FINANCIAL INFORMATION
 
   Page
Item 1 - Financial Statements   1
   
Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations 
 31
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk  44 
   
Item 4 - Controls and Procedures  44 
   
PART II - OTHER INFORMATION
 
   
Item 1 - Legal Proceedings  45 
   
Item 1A - Risk Factors   45 
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds  45 
   
Item 3 – Defaults Upon Senior Securities  45 
   
Item 4 – Mine Safety Disclosures   45 
   
Item 5 - Other Information  45 
   
Item 6 - Exhibits  45 
   
SIGNATURES 46 
                                                                                                                            
                                                                                                                        
As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to Anchor Bancorp and its consolidated subsidiaries, unless the context indicates otherwise.  When we refer to “Anchor Bank” or the “Bank” in this report, we are referring to Anchor Bank, a wholly owned subsidiary of Anchor Bancorp.

 
 

 

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) (Unaudited)
 
 
September 30, 2012
   
June 30, 2012
 
ASSETS
           
Cash and due from banks
  $ 73,785     $ 78,673  
Securities available for sale, at fair value, amortized cost of $49,758 and
              $48,170
    50,498       48,717  
Securities held-to-maturity, at amortized cost, fair value of $8,441 and
              $7,690
    7,928       7,179  
Loans held for sale
    387       312  
Loans receivable, net of allowance for loan losses of  $6,680 and $7,057
    287,500       287,755  
Life insurance investment, net of surrender charges
    18,421       18,257  
Accrued interest receivable
    1,710       1,532  
Real estate owned, net
    5,482       6,708  
Federal Home Loan Bank  (FHLB) stock, at cost
    6,452       6,510  
Property, premises, and equipment, at cost, less accumulated depreciation
             of $15,667 and $15,460
    11,993       12,213  
Deferred tax asset, net
    489       555  
Prepaid expenses and other assets
    1,487       2,404  
Total assets
  $ 466,132     $ 470,815  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
  $ 38,184     $ 37,941  
Interest-bearing
    299,385       307,857  
    Total deposits
    337,569       345,798  
                 
FHLB advances
    64,900       64,900  
Advance payments by borrowers for taxes and insurance
    1,130       562  
Supplemental Executive Retirement Plan liability
    1,723       1,764  
Accounts payable and other liabilities
    6,360       3,767  
Total liabilities
    411,682       416,791  
                 
Commitments and Contingencies
               
                 
STOCKHOLDERS’ EQUITY
 
        Preferred stock, $.01 par value per share authorized
            5,000,000 shares; no shares issued or outstanding
    -       -  
       Common stock, $.01 par value per share, authorized 45,000,000
               
          shares; 2,550,000 issued and 2,459,333 outstanding at
               
          September 30, 2012 and 2,550,000 shares issued and 2,457,633
          outstanding at June 30, 2012, respectively
    25       25  
      Additional paid-in capital
    23,205       23,202  
      Retained earnings, substantially restricted
    32,024       31,746  
      Unearned Employee Stock Ownership Plan (ESOP) shares
    (907 )     (924 )
      Accumulated other comprehensive income (loss), net of tax
    103       (25 )
Total stockholders’ equity
    54,450       54,024  
Total liabilities and stockholders’ equity
  $ 466,132     $ 470,815  


 
 
See accompanying notes to consolidated financial statements.

1
 


ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED INCOME STATEMENT
(Dollars in thousands, except share data) (Unaudited)
 
Three Months Ended
September 30,
 
   
2012
   
2011
 
Interest income:
           
Loans receivable, including fees
  $ 4,745     $ 5,247  
Securities
    61       94  
Mortgage-backed securities
    474       463  
Total interest income
    5,280       5,804  
Interest expense:
               
Deposits
    990       1,267  
FHLB advances
    313       357  
Total interest expense
    1,303       1,624  
Net interest income before provision for loan losses
    3,977       4,180  
Provision for loan losses
    300       525  
Net interest income after provision for loan losses
    3,677       3,655  
Noninterest income
               
Deposit service fees
    391       529  
Other deposit fees
    189       217  
Gain on sale of investments
    -       193  
    Loan fees
    185       229  
Gain (loss) on sale of loans
    177       (12 )
Gain on sale of property, premises and equipment
    -       51  
Other income
    430       293  
Total noninterest income
    1,372       1,500  
Noninterest expense
               
Compensation and benefits
    2,135       2,128  
General and administrative expenses
    819       1,108  
Real estate owned impairment
    235       1,119  
Real estate owned holding costs
    185       258  
Federal Deposit Insurance Corporation (FDIC) insurance premiums
    162       250  
Information technology
    360       1,280  
Occupancy and equipment
    539       527  
Deposit services
    189       107  
Marketing
    127       152  
Loss (gain) on sale of real estate owned
    20       (59 )
Total noninterest expense
    4,771       6,870  
Income (loss) before provision for income tax
    278       (1,715 )
Provision  for  income tax
    -       -  
Net income (loss)
  $ 278     $ (1,715 )
Basic earnings (loss) per share
  $ 0.11     $ (.70 )
Diluted earnings (loss) per share
  $ 0.11     $ (.70 )
 
               
                 

 
 
See accompanying notes to consolidated financial statements.

2
 



ANCHOR BANCORP AND SUBSIDIARY
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share data) (Unaudited)
 
Three Months Ended
September 30,
 
   
2012
   
2011
 
             
NET INCOME (LOSS)
   278      $  (1,715 )
                 
OTHER COMPREHENSIVE INCOME, net of
               
income tax
               
Unrealized holding gains on available-for-sale
               
securities during the period, net of income tax
               
expense of $66 and  $64,  respectively
    128         124  
                   
 Adjustment for realized gains included in
                 
Net income (loss), net of income tax  expense
                 
of  $49
    -         (145 )
                   
Other comprehensive income (loss), net of
                 
    income tax
    128         (21 )
                   
COMPREHENSIVE INCOME (LOSS)
  $ 406       $ (1,736 )
                   



 
See accompanying notes to consolidated financial statements.

3
 

 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except share data) (Unaudited)
 
Three Months Ended
September 30,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ 278     $ (1,715 )
Adjustments to reconcile net income (loss) to net cash from operating activities
               
        Depreciation and amortization
    243       240  
        Net amortization of premiums on securities
    3       20  
        Provision for loan losses
    300       525  
        ESOP expense
    20       14  
        Real estate owned impairment
    235       1,119  
        Deferred income taxes, net of valuation allowance
    66       (11 )
        Income from life insurance investment
    (164 )     (180 )
        (Gain) loss on sale of loans
    (177 )     12  
        Gain on sale of investments
    -       (193 )
        Originations of loans held for sale
    (7,326 )     (3,574 )
        Proceeds from sale of loans held for sale
    6,357       2,777  
        Gain on sale of property, premises, and equipment
    -       (51 )
        Loss (gain) on sale of real estate owned
    20       (59 )
        (Decrease) Increase in operating assets and liabilities:
               
                Accrued interest receivable
    (178 )     31  
                Prepaid expenses, other assets, and income tax receivable
    917       246  
                Supplemental Executive Retirement Plan
    (41 )     (40 )
                Accounts payable and other liabilities
    2,593       382  
                 
                        Net cash provided by (used by) operating activities
    3,146       (457 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
        Proceeds from sales and maturities of available-for-sale securities
    -       3,235  
        Purchases of available-for-sale investments
    (4,513 )     -  
        Purchase of held-to-maturity investments
    (1,352 )     -  
        Principal repayments on mortgage-backed securities available-for-sale
    3,967       1,202  
        Principal repayments on mortgage-backed securities held-to-maturity
    600       485  
        Loan originations, net of undisbursed loan proceeds and principal repayments
    (699 )     6,589  
        Proceeds from sale of real estate owned
    1,677       2,790  
        Capital  improvements on real estate owned
    (30 )     (46 )
        Proceeds from sale of property, premises, and equipment
    -       143  
        Purchase of fixed assets
    (23 )     21  
                 
                        Net cash provided by (used by) investing activities
    (373 )     14,419  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (decrease) increase in deposits
    (8,229 )     12,138  
Net change in advance payments by borrowers for taxes and insurance
    568       808  
Repayment on FHLB advances
    -       (11,000 )
                 
                        Net cash provided (used by) from financing activities
  $ (7,661 )   $ 1,946  
                 
                 
                 
(Continued)


See accompanying notes to consolidated financial statements.
 

 
 

4
 

ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF
CASH FLOWS (Continued)
(Dollars in thousands, except share data) (Unaudited)
 
Three Months Ended
September 30,
 
   
2012
   
2011
 
             
NET CHANGE IN CASH AND DUE FROM BANKS
  $ (4,888 )   $ 15,908  
                 
Beginning of period
    78,673       63,757  
                 
End of period
  $ 73,785     $ 79,665  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Noncash investing activities
               
Net loans transferred to real estate owned
  $ 676     $ 2,441  
                 
Loans securitized into mortgage-backed securities
  $ 1,069     $ -  
                 
Originations of mortgage servicing rights
  $ 66     $ 3  
                 
Cash paid during the period for
               
interest
  $ 1,305     $ 1,647  
 
 

 
 
 

5
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 - Nature of Business

Anchor Bancorp (the “Company”), a Washington corporation, was formed in connection with the conversion of Anchor Mutual Savings Bank (the “Bank”) from the mutual to the stock form of organization. On January 25, 2011, the Bank completed its conversion from mutual to stock form, changed its name to “Anchor Bank” and became the wholly-owned subsidiary of the Company.

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 13 full-service bank offices (including three Wal-Mart store locations) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington.   In addition we have one loan production office located in Grays Harbor County.  Anchor Bank’s business consists of attracting deposits from the public and utilizing those deposits to originate loans.
 
Note 2 - Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012 (“2012 Form 10-K”).  The results of operations for the three months ended September 30, 2012 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2013. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported net income (loss) or equity.

Note 3 - Conversion and Change in Corporate Form

On January 25, 2011, in accordance with a Plan of Conversion (“Plan”) adopted by its Board of Directors and as approved by its depositors and borrowers, Anchor Mutual Savings Bank (i) converted from a mutual savings bank to a stock savings bank, (ii) changed its name to “Anchor Bank”, and (iii) became the wholly-owned subsidiary of Anchor Bancorp, a bank holding company registered with the Board of Governors of the Federal Reserve System. In connection with the conversion, the Company issued an aggregate of 2,550,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $25.5 million. The cost of conversion and the issuance of capital stock was approximately $2.3 million, which was deducted from the proceeds of the offering.

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



 
 

6
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 4 - Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. With the ASU, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
 
In September 2012, the FASB issued ASU No. 2012-03, Technical Amendments and Corrections to SEC SectionsAmendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22.   This ASU amends various SEC paragraphs: (a) pursuant to the issuance of Staff Accounting Bulletin No. 114; (b) pursuant to the issuance of the SEC’s Final Rule, “Technical Amendments to Commission Rules and Forms Related to the FASB’s Accounting Standards Codification,” Release Nos. 33-9250, 34-65052, and IC-29748 August 8, 2011; and (c) related to ASU 2010-22, Accounting for Various Topics.   The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
 
Note 5 -Regulatory Order, Economic Environment, and Management’s Plans
 
Anchor Bank entered into an Order to Cease and Desist (“Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions, Division of Banks (“DFI”) on August 12, 2009. On September 5, 2012 the FDIC and the DFI terminated the Order and it was replaced with a Supervisory Directive.
 
The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank.
 
The Supervisory Directive contains provisions concerning (i) the management and directors of Anchor Bank; (ii) restrictions on paying dividends; (iii) reductions of classified assets; (iv) maintaining Tier 1 capital  in an amount equal to or exceeding 10% of Anchor Bank’s total assets;  (v) policies concerning the allowance for loan and lease losses (“ALLL”) ; and (vi) requirements to furnish a revised three-year business plan to improve Anchor Bank’s profitability and progress reports to the FDIC and DFI.
 
Anchor Bank believes that it is in compliance with the requirements set forth in the Supervisory Directive.
 
Anchor Bank has also been notified that it must notify the FDIC and DFI in writing at least 30 days prior to certain management changes. These changes include the addition or replacement of a board member, or the employment or change in responsibilities of anyone who is, who will become, or who performs the duties of a senior executive officer. In addition prior to entering into any agreement to pay and prior to making any golden parachute payment or excess nondiscriminatory severance plan payment to any institution-affiliated party, Anchor Bank must file an application to obtain the consent of the FDIC.



 
 

7
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 6 - Earnings (Loss) Per Share

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

   
For the quarter
ended
September 30, 2012
   
For the quarter ended
September 30, 2011
 
   
(Dollars in thousands, except share data)
 
             
Net income (loss)
  $ 278     $ (1,715 )
                 
Weighted-average common shares outstanding
    2,458,483       2,451,683  
                 
Basic earnings (loss) per share
  $ 0.11     $ (0.70 )
                 
Diluted earnings (loss) per share
  $ 0.11     $ (0.70 )

There were no dilutive or antidilutive options at or for the period ended September 30, 2012 and 2011.

Note 7 - Investments

The amortized cost and estimated fair market values of investment securities as of September 30, 2012 and June 30, 2012, were as follows:
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
September 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Securities available-for-sale
                       
Municipal bonds
  $ 1,621     $ 27     $ -     $ 1,648  
Freddie Mac (“FHLMC”)
                               
mortgage-backed securities
    48,137       899       (186 )     48,850  
    $ 49,758     $ 926     $ (186 )   $ 50,498  
                                 
Securities held-to-maturity
                               
Municipal bonds
  $ 140     $ -     $ -     $ 140  
FHLMC mortgage-backed securities
    7,788       513       -       8,301  
    $ 7,928     $ 513     $ -     $ 8,441  

 
 
 

8
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
June 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Securities available-for-sale
                       
                         
Municipal bonds
  $ 1,623     $ 33     $ -     $ 1,656  
FHLMC mortgage-backed securities
    46,547       701       (187 )     47,061  
    $ 48,170     $ 734     $ (187 )   $ 48,717  
                                 
Securities held-to-maturity
                               
Municipal bonds
  $ 142     $ -     $ -     $ 142  
FHLMC mortgage-backed securities
    7,037       511       -       7,548  
    $ 7,179     $ 511     $ -     $ 7,690  

 
At September 30, 2012 there were 22 securities in an unrealized loss position. At June 30, 2012, there were 20 securities in an unrealized loss position.  The unrealized losses on investments in debt securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities’ purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities.  We do expect to recover the entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of September 30, 2012 and June 30, 2012, were as follows:

   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
September 30, 2012
 
(In thousands)
 
Securities available-for-sale
                                   
   FHLMC mortgage-backed
   securities
  $ 23,735     $ (186 )   $ -     $ -     $ 23,735     $ (186 )
                                                 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
June 30, 2012
     
Securities available-for-sale
                                               
   FHLMC mortgage-backed
   securities
  $ 23,168     $ (187 )   $ -     $ -     $ 23,168     $ (187 )
                                                 


 
 

9
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Contractual maturities of securities at September 30, 2012 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.
 
September 30, 2012
 
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Securities available-for-sale
     
         Due within one year
  $ 170     $ 171  
         Due after one to five years
    600       619  
         Due after five to ten years
    -       -  
         Due after ten years
    851       858  
                 
    FHLMC mortgage-backed securities
    48,137       48,850  
    $ 49,758     $ 50,498  
                 
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Securities held-to-maturity
     
      Due after ten years
  $ 140     $ 140  
                 
FHLMC mortgage-backed securities
    7,788       8,301  
    $ 7,928     $ 8,441  

 
Sales, maturities, and calls for the dates indicated are summarized as follows:
 
   
For The Three Months Ended
 
   
September 30, 2012
   
September 30, 2011
 
 
(Dollars in thousands)
 
Proceeds from sales
  $ -     $ 3,235  
Proceeds from maturities and calls
    -       -  
Gross realized gains
    -       193  
Gross realized losses
    -       -  

 
At September 30, 2012 and June 30, 2012, respectively, securities with total book values of $6.5 million and $3.8 million, and total fair values of $6.8 million and $4.2 million were pledged to secure certain public deposits. At September 30, 2012 and June 30, 2012, securities with total book values of $1.0 million and $1.2 million and total fair values of $1.1 million and $1.2 million, respectively, were pledged to secure certificates of deposit in excess of FDIC-insured limits. At September 30, 2012 and June 30, 2012, securities with total book values of $4.2 million and $4.6 million and total fair values of $4.3 million and $4.7 million, respectively, were pledged to secure FHLB borrowings.
 

 
 

10
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:
 
   
September 30,
   
June 30,
 
    2012     2012   
             
   
(In thousands)
 
Real estate
           
One-to-four family
  $ 79,976     $ 82,709  
Multi-family
    41,800       42,032  
Commercial real estate
    102,228       97,306  
Construction
    8,115       6,696  
        Land
    6,063       7,062  
Total real estate
    238,182       235,805  
                 
Consumer
               
Home equity
    29,517       31,504  
Credit cards
    5,184       5,180  
Automobile
    2,769       3,342  
Other consumer loans
    2,960       2,968  
Total consumer
    40,430       42,994  
                 
Commercial business
    16,370       16,618  
Total loans
    294,982       295,417  
                 
Less
               
Deferred loan fees and unamortized
               
discount on purchased loans
    802       605  
Allowance for loan losses
    6,680       7,057  
    $ 287,500     $ 287,755  

 
Allowance for Loan Losses.  The allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.
 
 
 
 
11
 
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

   
One-to- four family
   
Multi-
family
   
Commercial
real estate
   
Construction
   
Land
   
Consumer
(1)
   
Commercial
business
   
2012
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                               
Beginning balance
  $ 1,659     $ 238     $ 578     $ 148     $ 368     $ 1,508     $ 2,558     $ 7,057  
Provision for loan losses
    (160 )     7       14       68       (40 )     182       229       300  
Charge-offs
    (95 )     -       -       -       -       (499 )     (181 )     (775 )
Recoveries
    21       -       4       18       -       52       3       98  
                                                                 
Ending balance
  $ 1,425     $ 245     $ 596     $ 234     $ 328     $ 1,243     $ 2,609     $ 6,680  
(1)  
Consumer loans include home equity, credit cards, auto, and other consumer loans.
 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2011:

   
One-to- four family
   
Multi-
family
   
Commercial
real estate
   
Construction
   
Land
   
Consumer
(1)
   
Commercial
business
   
2011
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                               
Beginning balance
  $ 1,980     $ 88     $ 173     $ 1,163     $ 191     $ 2,135     $ 1,509     $ 7,239  
Provision for loan losses
    800       131       357       (756 )     (40 )     504       (471 )     525  
Charge-offs
    (398 )     -       (59 )     (154 )     -       (301 )     -       (912 )
Recoveries
    253       -       2       136       -       38       85       514  
                                                                 
Ending balance
  $ 2,635     $ 219     $ 473     $ 389     $ 151     $ 2,376     $ 1,123     $ 7,366  
(1)  
Consumer loans include home equity, credit cards, auto, and other consumer loans.

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



 
 

12
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2012:
   
 
 
Recorded Investments
   
Unpaid Principal Balance
   
Related Allowance
 
   
(In thousands)
 
With no allowance recorded
                 
One-to-four family
  $ 10,281     $ 11,127     $ -  
Multi-family
    2,365       2,509       -  
Commercial real estate
    8,257       8,257       -  
Construction
    4,118       4,118        -  
Land
    462       476       -  
Home equity
    209       213       -  
Commercial business
    2,211       2,476       -  
                         
With an allowance recorded
                       
One-to-four family
  $ 1,781     $ 1,783     $ 219  
Home equity
    100       103       19  
Commercial business
    2,311       2,316       1,672  
                         
Total
                       
One-to-four family
  $ 12,062     $ 12,910     $ 219  
Multi-family
    2,365       2,509       -  
Commercial real estate
    8,257       8,257       -  
Construction
    4,118       4,118       -  
Land
    462       476       -  
Home equity
    309       316       19  
Commercial business
    4,522       4,792       1,672  
Total
  $ 32,095     $ 33,378     $ 1,910  




 
 

13
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012:

   
Recorded Investments
   
Unpaid Principal Balance
   
Related Allowance
 
   
(In thousands)
 
With no allowance recorded
                 
One-to-four family
  $ 10,510     $ 11,769     $ -  
Multi-family
    2,263       2,408       -  
Commercial real estate
    2,745       2,757       -  
Construction
    4,044       4,044        -  
Land
    686       745       -  
Home Equity
    276       278       -  
Commercial business
    2,069       2,170       -  
                         
With an allowance recorded
                       
One-to-four family
  $ 880     $ 880     $ 105  
Commercial business
    2,670       2,678       1,780  
                         
Total
                       
One-to-four family
  $ 11,390     $ 12,649     $ 105  
Multi-family
    2,263       2,408       -  
Commercial real state
    2,745       2,757       -  
Construction
    4,044       4,044       -  
Land
    686       745       -  
Home Equity
    276       278       -  
Commercial Business
    4,739       4,848       1,780  
Total
  $ 26,143     $ 27,729     $ 1,885  




 
 

14
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

   
Three Months Ended September 30, 2012
 
   
Average Recorded Investment
   
Interest Income
Recognized
 
   
(In thousands)
 
With no allowance recorded
           
One-to-four family
  $ 10,396     $ 104  
Multi-family
    2,314       20  
Commercial real estate
    5,501       64  
Construction
    4,081       19  
Land
    574       7  
Home equity
    243       2  
Commercial business
    2,140       25  
                 
With an allowance recorded
               
One-to-four family
  $ 1,331     $ 23  
Home equity
    50       -  
Commercial business
    2,491       -  
                 
Total
               
One-to-four family
  $ 11,726     $ 127  
Multi-family
    2,314       20  
Commercial real estate
    5,501       64  
Construction
    4,081       19  
Land
    574       7  
Home equity
    293       2  
Commercial business
    4,631       25  
Total
  $ 29,119     $ 264  



 
 

15
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the quarter ended September 30, 2011:

   
Three Months Ended September 30, 2011
 
   
Average Recorded Investment
   
Interest Income
Recognized
 
   
(In thousands)
 
With no Allowance recorded
           
One-to-four family
  $ 14,177     $ 130  
Multi-family
    1,646       7  
Commercial Real Estate
    7,741       69  
Construction
    4,654       15  
Land
    108       2  
Home Equity
    467       3  
Commercial business
    3,751       21  
                 
With an Allowance recorded
               
One-to-four family
  $ 1,210     $ 13  
Commercial Real Estate
    324       2  
Construction
    3,100       -  
Home Equity
    41       1  
Commercial business
    246       1  
                 
Total
               
One-to-four family
  $ 15,387     $ 143  
Multi-family
    1,646       7  
Commercial Real Estate
    8,065       71  
Construction
    7,754       15  
Land
    108       2  
Home Equity
    508       4  
Commercial Business
    3,997       22  
Total
  $ 37,465     $ 264  




 
 

16
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2012:

 
One-to-four
family
Multi-
family
Commercial
real estate
Construction
Land
Consumer(1)
Commercial
business
Total
 
(In thousands)
Allowance for loan losses:
               
Ending balance
 $   1,425
 $    245
 $          596
 $       234
 $   328
 $  1,243
 $    2,609
 $  6,680
Ending balance: individually
   evaluated for impairment
219
-
-
-
-
19
1,672
1,910
Ending balance: collectively
   evaluated for impairment
$   1,206
  $    245
$          596
$        234
$   328
$   1,224
$      937
$  4,770
                 
Loans receivable:                
Ending balance
 $ 79,976
 $41,800
 $  102,228
 $    8,115
$ 6,063
 $  40,430
 $ 16,370
 $ 294,982
Ending balance: individually
   evaluated for impairment
12,062
2,365
8,257
4,118
462
309
4,522
32,095
Ending balance: collectively
   evaluated for impairment
$ 67,914
$39,435
$    93,971
$    3,997
$ 5,601
$ 40,121
$ 11,840
$ 262,887
 
(1)  
 
Consumer loans include home equity, credit cards, auto and other loans.
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2012:

 
One-to-four
family
Multi-
family
Commercial
real estate
Construction
Land
Consumer(1)
Commercial
business
Total
 
(In thousands)
Allowance for loan losses:
               
Ending balance
$    1,659
$       238
$        578
$       148
$     368
$    1,508
$      2,558
$    7,057
Ending balance: individually
   evaluated for impairment
105
-
-
-
-
-
1,780
1,885
Ending balance: collectively
   evaluated for impairment
$    1,554
$       238
$        578
$       148
$     368
$    1,508
$          778
$    5,172
                 
Loans receivable:                
Ending balance
$  82,709
$  42,032
$   97,306
$   6,696
$  7,062
 $  42,994
 $    16,618
$  295,417
Ending balance: individually
   evaluated for impairment
11,390
2,263
2,745
4,044
686
276
4,739
26,143
Ending balance: collectively
   evaluated for impairment
$  71,319
$  39,769
$   94,561
$   2,652
$  6,376
$  42,718
$    11,879
$  269,274
 
(1)  
 
Consumer loans include home equity, credit cards, auto, and other consumer loans.

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


 
 

17
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

   
September 30,
   
June 30,
 
   
2012
   
2012
 
   
(In thousands)
 
       
One-to-four family
  $ 1,684     $ 1,878  
Multi-family
    102       -  
Commercial real estate
    -       -  
Construction
    3,444       3,369  
Land loans
    71       109  
Home equity
    260       159  
Automobile
    68       66  
Credit cards
    19       16  
Other
    12       1  
Commercial business
    2,865       3,124  
   Total
  $ 8,525     $ 8,722  

The table above includes $8.5 million in non-accrual and $57,000 in past due 90 days or more and still accruing, net of partial loan charge-offs at September 30, 2012. There were $8.7 million in non-accrual and $55,000 in past due 90 days or more and still accruing at June 30, 2012.

The following table presents past due loans, net of partial loan charge-offs, by class, as of September 30, 2012:
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due
 
Total Past
Due
 
Current
 
Total Loans
 
(In thousands)
 
One-to-four family
 $    2,133
 
 $     983
 
 $  1,684
 
 $  4,800
 
 $    75,176
 
 $  79,976
Multi-family
-
 
-
 
102
 
102
 
41,698
 
41,800
Commercial real estate
510
 
5,516
 
-
 
6,026
 
96,202
 
102,228
Construction
-
 
-
 
3,444
 
3,444
 
4,671
 
8,115
Land
37
 
-
 
71
 
108
 
5,955
 
6,063
Home equity
774
 
227
 
260
 
1,261
 
28,256
 
29,517
Automobile
26
 
-
 
68
 
94
 
2,675
 
2,769
Credit cards
27
 
14
 
19
 
60
 
5,124
 
5,184
Other
27
 
-
 
12
 
39
 
2,921
 
2,960
Commercial business
191
 
-
 
2,865
 
3,056
 
13,314
 
16,370
                       
   Total
 $  3,725
 
 $  6,740
 
 $  8,525
 
 $ 18,990
 
 $  275,992
 
$  294,982



 
 

18
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents past due loans, net of partial loan charge-offs, by type as of June 30, 2012:
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More  Past Due
 
Total Past
Due
 
Current
 
Total
Loans
 
(In thousands)
 
 
 
 
 
 
 
 
       
One-to-four family
$      1,787
 
$       1,668
 
$             1,878
 
$       5,333
 
$    77,376
 
$     82,709
Multi-family
-
 
101
 
-
 
101
 
41,931
 
42,032
Commercial real estate
170
 
-
 
-
 
170
 
97,136
 
97,306
Construction
-
 
-
 
3,369
 
3,369
 
3,327
 
6,696
Land
149
 
-
 
109
 
258
 
6,804
 
7,062
Home equity
558
 
358
 
159
 
1,075
 
30,429
 
31,504
Credit cards
40
 
39
 
16
 
95
 
5,085
 
5,180
Automobile
70
 
-
 
66
 
136
 
3,206
 
3,342
Other
68
 
-
 
1
 
69
 
2,899
 
2,968
Commercial business
343
 
142
 
3,124
 
3,609
 
13,009
 
16,618
                       
   Total
$      3,185
 
$        2,308
 
 $            8,722
 
 $    14,215
 
$   281,202
 
$   295,417

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

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

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

A loan classified as Watch may have the following characteristics:

·  
Acceptable asset quality, but requiring increased monitoring. Strained liquidity and less than anticipated performance. The loan may be fully leveraged.
·  
Apparent management weakness, perhaps demonstrated by an irregular flow of adequate and/or timely performance information required to support the credit.
·  
The borrower has a plausible plan to correct problem(s) in the near future that is devoid of material uncertainties.
·  
Lacks reserve capacity, so the risk rating will improve or decline in relatively short time (results of corrective actions should be apparent within six months or less).
·  
A seasoned loan with a Debt Service Coverage Ratio (“DSCR”) of greater than 1.09 but less than 1.20 and above is the minimum acceptable level for a “Pass Credit”.   Particular attention should be paid to coverage
 
 
 
 

19
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
  
trend analysis as a declining trend may warrant an elevated risk grade regardless of current coverage at or above the threshold
 
Credits classified as other assets especially mentioned are risk rated 7.  These credits have potential weaknesses that deserve management’s close attention.   If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset.   Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

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

·  
Performance is poor or significantly less than expected. A debt service deficiency either exists or cannot be ruled out.
·  
Generally an undesirable business credit. Assets in this category are protected, but are potentially weak. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard.   Special mention assets have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.
·  
Assets which might be detailed in this category include credits that the lending officer may be unable to supervise properly because of lack of expertise, an inadequate loan agreement, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices.
·  
An adverse trend in the borrower's operations or an imbalanced position in the balance sheet which does not jeopardize liquidation may best be handled by this classification.
·  
A Special Mention classification should not be used as a compromise between a pass and substandard rating. Assets in which actual, not potential, weaknesses are evident and significant, and should be considered for more serious criticism.
·  
A seasoned loan with a DSCR of greater than 0.99 but less than 1.10 and above is the minimum acceptable level for a “Pass Credit”.  Particular attention should be paid to coverage trend analysis as a declining trend may warrant an elevated risk grade regardless of current coverage at or above the threshold
 
Assets classified as Substandard are rated 8.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  An asset is considered Substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

A loan classified as Substandard may have the following characteristics:
 
·  
Unacceptable business credit. The asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.
·  
Though no loss is envisioned, the outlook is sufficiently uncertain to preclude ruling out the possibility. Some liquidation of assets will likely be necessary as a corrective measure.
·  
Assets in this category may demonstrate performance problems such as debt servicing deficiencies with no immediate relief. Borrowers have an inability to adjust to prolonged and unfavorable industry or economic trends. Management's character and/or effectiveness have become suspect.
·  
A seasoned loan with a DSCR greater than 1.00 is the minimum acceptable level for a “Pass Credit”. Particular attention should be paid to coverage trend analysis as a declining trend may warrant an elevated risk grade regardless of current coverage at or above the threshold.
 
An asset classified as Doubtful is risk rated 9 and has all the inherent weaknesses as those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable is improbable.
 
A loan classified as Doubtful has the following characteristics:
 
 
 

20
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

·  
The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
·  
Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
 
Risk Rate 10 is a loan for which a total loss is expected.
 
A loan classified as a Loss has the following characteristics:
 
·  
An un-collectible asset or one of such little value that it does not warrant classification as an active, earning asset. Such an asset may, however, have recovery or salvageable value, but not to the point of deferring full write off, even though some recovery may occur in the future.
·  
The Bank will charge off such assets as a loss during the accounting period in which they were identified.
·  
Loan to be eliminated from the active loan reporting system via charge off.
 
The following table represents the internally assigned grade as of September 30, 2012, by class of loans:
   
 
One-to- four
family
Multi-
family
Commercial
real estate
Construction
Land
Home equity
Credit cards
Automobile
Other
consumer
Commercial business
Total
 
(In thousands)
Grade:
                     
                       
Pass
 $  62,975
 $ 26,999
 $   73,823
 $  1,791
 $ 5,493
 $  27,035
 $  5,124
 $  2,604
 $  2,861
 $   8,553
      $   217,258
Watch
2,771
3,167
16,853
-
37
1,477
41
94
38
644
     25,122
Special Mention
2,150
9,269
7,369
1,897
-
307
-
3
50
249
     21,294
Substandard
12,080
2,365
4,183
4,427
533
698
19
68
11
6,924
     31,308
Doubtful
-
-
-
-
-
-
-
-
-
-
          -
                       
   Total
 $ 79,976
 $ 41,800
 $ 102,228
 $  8,115
 $ 6,063
 $ 29,517
 $  5,184
 $  2,769
 $  2,960
 $ 16,370
   $  294,982


The following table represents the credit risk profile based on payment activity as of September 30, 2012, by class of loans:
 
  One-to- four
family
Multi-family
Commercial
real estate
Construction
Land
Home equity
Credit cards
Automobile
Other
consumer
Commercial business
Total
 
(In thousands)
                       
Performing
 $   78,292
 $41,698
 $  102,228
 $  4,671
 $  5,992
 $  29,257
 $   5,165
 $   2,701
 $   2,948
 $   13,505
$ 286,457
Nonperforming(1)
1,684
102
-
3,444
71
260
19
68
12
2,865
8,525
                       
   Total
 $   79,976
$ 41,800
 $ 102,228
 $  8,115
 $  6,063
 $  29,517
 $  5,184
 $  2,769
 $  2,960
 $  16,370
 $ 294,982

(1)  
Loans that are more than 90 days past due and non-accrual loans are considered non-performing.


 
 

21
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table represents the internally assigned grade as of June 30, 2012, by class of loans:
   
 
One-to- four family
Multi-family
Commercial
real estate
Construction
Land
Home equity
Credit cards
Automobile
Other
consumer
Commercial business
Total
 
(In thousands)
Grade:
                     
                       
Pass
$     65,706
$  28,122
$    71,660
 $     1,064
 $    6,159
$   29,234
 $     5,085
 $     3,177
 $    2,840
 $      8,405
$    221,452
Watch
2,932
2,243
10,326
-
149
1,160
79
95
76
552
17,612
Special Mention
2,738
9,404
9,088
1,280
-
509
-
4
51
492
23,566
Substandard
11,333
2,263
6,232
4,352
754
601
16
66
1
4,853
30,471
Doubtful
-
-
-
-
-
-
-
-
-
2,316
2,316
                       
   Total
 $    82,709
$ 42,032
$   97,306
     $    6,696
$    7,062
$   31,504
$    5,180
$    3,342
 $   2,968
 $    16,618
   $    295,417
                       

The following table represents the credit risk profile based on payment activity as of June 30, 2012, by class of loans:
 
 
One-to- four
family
Multi-family
Commercial
real estate
Construction
Land
Home equity
Credit cards
Automobile
Other
consumer
Commercial business
Total
 
(In thousands)
Performing
$   80,831
$ 42,032
$   97,306
$     3,327
$  6,953
$   31,345
$   5,164
$   3,276
 $   2,967
$   13,494
$    286,695
Nonperforming(1)
1,878
-
-
3,369
109
159
16
66
1
3,124
8,722
                       
   Total
$   82,709
$ 42,032
$   97,306
$     6,696
$  7,062
$   31,504
$   5,180
$   3,342
$   2,968
$   16,618
$    295,417

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

Troubled Debt Restructure. At September 30, 2012, troubled debt restructured loans (“TDRs”), included in impaired loans above, totaled $15.4 million with $695,000 currently in non-accrual.  Restructured loans are an option that the Bank uses to minimize risk of loss and are a concession granted to a borrower experiencing financial difficulties that it would not otherwise consider. The modifications have included items such as lowering the interest on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank’s best interest. At September 30, 2012, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.
 
The Bank has utilized a combination of rate and term modifications for its TDRs.

 
 

22
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table represents TDR loans by accrual versus nonaccrual status and by loan class as of September 30, 2012:

   
September 30, 2012
 
   
Accrual
Status
   
Nonaccrual
Status
   
Total
Modifications
 
   
(In thousands)
 
One-to-four family
  $ 10,496     $ 695     $ 11,191  
Multi-family
    2,263       -       2,263  
Construction
    389       -       389  
Land
    73       -       73  
Home equity
    150       -       150  
Commercial business
    1,347       -       1,347  
Total
  $ 14,718     $ 695     $ 15,413  

The following table represents TDR loans by accrual versus nonaccrual status and by loan class as of June 30, 2012:
 

 
   
June 30, 2012
 
   
Accrual
Status
   
Nonaccrual
Status
   
Total
Modifications
 
   
(In thousands)
 
One-to-four family
  $ 9,552     $ 1,201     $ 10,753  
Multi-family
    2,263       -       2,263  
Construction
    571       -       571  
Land
    74       -       74  
Home equity
    151       -       151  
Commercial business
    1,300       -       1,300  
Total
  $ 13,911     $ 1,201     $ 15,112  


 
 

23
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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

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

 
 
Post-TDR
recorded
investment
Number of
Contracts
 
Rate
Modifications
 
Term
Modifications
 
Payment
Modifications
 
Combination
Modifications
 
Total
Modifications
 
(Dollars in thousands)
One-to-four
   family
5
 
$                   -
 
$                    -
 
$                     -
 
$           1,287
 
$             1,287
Commercial
   business
-
 
-
 
-
 
-
 
-
 
-
Total
5
 
$                   -
 
$                    -
 
$                     -
 
$          1,287
 
$            1,287
 
Following table presents new TDR loans by type of modification that occurred during the three months ended September 30, 2011:
 
Pre-TDR recorded
investment
Number of
Contracts
 
Rate
Modifications
 
Term
Modifications
 
Payment
Modifications
 
Combination
Modifications
 
Total
Modifications
 
(Dollars in thousands)
One-to-four
   family
1
 
$                   -
 
$                    -
 
$                     -
 
$              207
 
$               207
Commercial
   business
1
 
-
 
-
 
-
 
102
 
102
Total
2
 
$                   -
 
$                    -
 
$                     -
 
$              309
 
$               309

Post-TDR
recorded
investment
Number of
Contracts
 
Rate
Modifications
 
Term
Modifications
 
Payment
Modifications
 
Combination
Modifications
 
Total
Modifications
 
(Dollars in thousands)
One-to-four
   family
1
 
$                   -
 
$                    -
 
$                     -
 
$            153
 
$               153
Commercial
   business
1
 
-
 
-
 
-
 
102
 
102
Total
 2
 
$                   -
 
$                    -
 
$                     -
 
$            255
 
$               255


 
 

24
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table below represents loans modified as troubled debt restructuring within the previous 12 months for which there was a payment default during the quarters presented:

    Three Months Ended September 30,  
    2012     2011  
    (In thousands)  
 Post- TDR investment            
             
One-to-four family
  $ 684     $ 953  
Commercial real estate
    -       294  
Total
  $ 684     $ 1,247  


Note 9 - Real Estate Owned, net
 
The following table is a summary of real estate owned for the quarters ended September 30, 2012 and 2011:

   
Three Months Ended September 30,
 
   
2012
   
2011
 
   
(In thousands)
 
Balance at the beginning of the
 period
  $ 6,708     $ 12,597  
    Loans transferred to real estate owned
    676       2,441  
    Capitalized improvements
    30       46  
    Sales
    (1,697 )     (2,731 )
    Impairments
    (235 )     (1,119 )
Balance at the end of the period
  $ 5,482     $ 11,234  


Note 10 - Employee Benefit Plans

     Employee Stock Ownership Plan

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

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

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


 
 

25
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Compensation expense related to the ESOP for the three months ended September 30, 2012 and 2011 was $19,833 and $13,800, respectively.

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

   
September 30,
2012
   
June 30,
2012
 
   
(dollars in thousands)
 
Allocated shares
    11,333       9,633  
Unallocated shares
    90,667       92,367  
         Total ESOP shares
    102,000       102,000  
                 
Fair value of unallocated shares
  $ 1,056     $ 955  


Note 11 - Fair Value Measurements

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

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

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

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

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended September 30, 2012.The following table shows the Company’s assets and liabilities at the dates indicated measured at fair value on a recurring basis:

   
September 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
                         
Municipal bonds
  $ -     $ 1,648     $ -     $ 1,648  
Mortgage-backed securities
    -       48,850       -       48,850  

 
   
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
                         
Municipal bonds
  $ -     $ 1,656     $ -     $ 1,656  
Mortgage-backed securities
    -       47,061       -       47,061  

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

26
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
recorded at the lower of cost or fair value. The following table presents the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:
 
   
September 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Total Gains
(Losses)
 
   
(In thousands)
 
                               
Impaired loans (1)
  $ -     $ -     $ 28,983     $ 28,983     $ (3,112 )
Real estate owned
  $ -     $ -     $ 5,482     $ 5,482     $ (4,950 )
Loans held for sale (2)
  $ 387     $ -     $ -     $ 387     $ -  

(1) The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at September 30, 2012.
(2) The fair value is based on quoted market prices obtained from FHLMC or from direct sales to other third parties. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.
 

   
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Total Gains
(Losses)
 
   
(In thousands)
 
                               
Impaired loans (1)
  $ -     $ -     $ 22,733     $ 22,733     $ (3,410 )
Real estate owned
  $ -     $ -     $ 6,708     $ 6,708     $ (5,381 )
Loans held for sale (2)
  $ 312     $ -     $ -     $ 312     $ -  

 (1) The balance disclosed for impaired loans represents the impaired loans where fair value is less than unpaid principal prior to impairment at June 30, 2012.
  (2) The fair value is based on quoted market prices obtained from FHLMC or from direct sales to other third parties. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

The fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis.  Inputs used in the collateral value method include appraisal values, estimates of certain completion costs and closing and selling costs.   Some of these inputs may not be observable in the marketplace.
 
The fair value of real estate owned properties are measured at the lower of their carrying amount of fair value, less costs to sell.   Fair values are generally based on third party appraisal of the property, resulting in Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
 

 
 
 

27
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents quantitative information about Level 3 fair value instruments measured at fair value on a recurring basis.
 
                 
 
September 30, 2012
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Average Discount
   
(Dollars in thousands)
Impaired Loans
$
32,095
 
Market approach
 
Adjusted for
differences between
comparable sales
 
4%
Real estate owned
$
5,482
 
Market approach
 
Adjusted for
differences between
comparable sales
 
4%
                 
                 
 
June 30, 2012
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Average Discount
   
(Dollars in thousands)
Impaired Loans
$
26,143
 
Market approach
 
Adjusted for
differences between
comparable sales
 
6%
Real estate owned
$
6,708
 
Market approach
 
Adjusted for
differences between
comparable sales
 
20%

The estimated fair values of financial instruments at the dates indicated are as follows:

   
September 30, 2012
   
June 30, 2012
 
   
Carrying
Amount
   
Estimated Fair
Value
   
Carrying
Amount
   
Estimated Fair
Value
 
                         
   
(In thousands)
 
Assets
                       
Cash and due from banks
  $ 73,785     $ 73,785     $ 78,673     $ 78,673  
Securities available-for-sale, at fair value
    50,498       50,498       48,717       48,717  
Securities held-to-maturity
    7,928       8,441       7,179       7,690  
Loans held for sale
    387       387       312       312  
Loans receivable, net of allowance for loan losses
    287,500       274,539       287,755       273,122  
Life insurance investment, net of surrender charges
    18,421       18,421       18,257       18,257  
Accrued interest receivable
    1,710       1,710       1,532       1,532  
FHLB stock, at cost
    6,452       6,452       6,510       6,510  
                                 
Liabilities
                               
Demand deposits, savings and money market
    173,223       173,223       174,600       174,600  
Certificates of deposit
    164,346       161,317       171,198       168,467  
FHLB advances
    64,900       66,312       64,900       66,465  
Advance payments by borrowers for taxes and insurance
    1,130       1,130       562       562  
SERP
    1,723       1,723       1,764       1,764  
 
 
 
 

28
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2012 and June 30, 2012.  This table excludes financial instruments for which the carrying amount approximates fair value.  For short-term financial assets such as cash and due from banks, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For financial liabilities such as demand deposits, savings, and money market, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
 
               
Fair Value Measurements
 
   
Carrying Amount
   
Fair Value
   
Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities 
(Level 1)
   
Significant
Other
Observable
Inputs 
(Level 2)
   
Significant Unobservable
 Inputs 
(Level 3)
 
   
(In thousands)
 
September 30. 2012
                             
Financial Instruments-Assets
                             
Securities held-to-maturity
  $ 7,928     $ 8,441     $ -     $ 8,441     $ -  
Loans receivable, net of allowance
for loan losses
  $ 287,500     $ 274,539     $ -     $ -     $ 274,539  
                                         
Financial Instruments-Liabilities
                                       
Certificates of deposit
  $ 164,346     $ 161,317     $ -     $ 161,317     $ -  
FHLB advances
  $ 64,900     $ 66,312     $ -     $ 66,312     $ -  
                                         
June 30. 2012
                                       
Financial Instruments-Assets
                                       
Securities held-to-maturity
  $ 7,179     $ 7,690     $ -     $ 7,690     $ -  
Loans receivable, net of allowance
for loan losses
  $ 287,755     $ 273,122     $ -     $ -     $ 273,122  
                                         
Financial Instruments-Liabilities
                                       
Certificates of deposit
  $ 171,198     $ 168,467     $ -     $ 168,467     $ -  
FHLB advances
  $ 64,900     $ 66,465     $ -     $ 66,465     $ -  

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
 
Cash and due from banks - For cash, the carrying amount is a reasonable estimate of fair value.
 
Securities - The estimated fair values of securities are based on quoted market prices of similar securities.
 
Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. The FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.
 
 
 
 

29
 
ANCHOR BANCORP AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Loans receivable, net - The fair value of loans is estimated by using comparable market statistics. The loan portfolio was segregated into various categories and a weighted average valuation discount that approximated similar loan sales was applied to each category.
 
Life insurance investment - The carrying amount is a reasonable estimate of its fair value.
 
FHLB stock - FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the member institutions, and can only be purchased and redeemed at par.
 
Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank’s demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.
 
FHLB advances - The fair value of the Bank’s FHLB advances was calculated using the discounted cash flow method. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.
 
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.
 
SERP-The carrying amount is a reasonable estimate of its fair value.
 

 


 
 

30
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which are not statements of historical fact and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:


 
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
 
changes in general economic conditions, either nationally or in our market areas;
 
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
 
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;
 
secondary market conditions for loans and our ability to sell loans in the secondary market;
 
results of examinations of us by the FDIC, DFI or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
 
our compliance with the Supervisory Directive or other regulatory enforcement actions and the possibility that we will be unable to fully comply with the Directive which could result in the imposition of additional requirements or restrictions;
 
legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Act, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;
 
our ability to attract and retain deposits;
 
increases in premiums for deposit insurance;
 
management’s assumptions in determining the adequacy of the allowance for loan losses;
 
our ability to control operating costs and expenses;
 
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
 
difficulties in reducing risks associated with the loans on our balance sheet;
 
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
 
computer systems on which we depend could fail or experience a security breach;
 
our ability to retain key members of our senior management team;
 
costs and effects of litigation, including settlements and judgments;
 
our ability to manage loan delinquency rates;
 
increased competitive pressures among financial services companies;
 
changes in consumer spending, borrowing and savings habits;
 
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
 
our ability to pay dividends on our common stock;
 
adverse changes in the securities markets;
 
inability of key third-party providers to perform their obligations to us;
 
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance
 
 
 
 

31
 
 
 
 
and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and
 
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this
 
Form 10-Q.

Some of these and other factors are discussed in our 2012 Form10-K under Item 1A. “Risk Factors.”  Such developments could have an adverse impact on our financial position and results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  Because of these and other uncertainties, our actual results for fiscal year 2013 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity and operating and stock price performance.

Background and Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank.  Anchor Bank is a community-based savings bank primarily serving Western Washington through our 13 full-service banking offices (including three Wal-Mart store locations) and one loan production office located within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, lending activities have been primarily directed toward the origination of one-to-four family construction, commercial real estate and consumer loans.  Since 1990, we have also offered commercial real estate loans and multi-family loans primarily in Western Washington. To an increasing extent in recent years, lending activities have also included the origination of residential construction loans through brokers, in particular within the Portland, Oregon metropolitan area and increased reliance on non-deposit sources of funds.

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

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

Our operating expenses consist primarily of compensation and benefits, general and administrative, information technology, occupancy and equipment, deposit services and marketing expenses. Compensation and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee
 
 
 
 

32
 
 
benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities.

Anchor Bank entered into an Order to Cease and Desist (“Order”) with the FDIC and the Washington DFI on August 12, 2009. Anchor Bank became subject to the Order primarily because of its increased level of non-performing assets, reduced capital position and pre-tax operating losses in 2010 and 2009. On September 5, 2012, Anchor Bank’s regulators, the FDIC and the DFI terminated the Order and the Bank became subject to a Supervisory Directive.  The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank.   The Bank believes that it is in compliance with the requirements set forth in the Supervisory Directive.
 
Additional information regarding Supervisory Directive is included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q and Item 1A. “Risk Factors – Compliance with Regulatory Restrictions” in the 2012 Form10-K.
 
Critical Accounting Estimates and Related Accounting Policies

We use estimates and assumptions in our consolidated financial statements in accordance with generally accepted accounting principles. Management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the determination of the allowance for loan losses and the associated provision for loan losses, deferred income taxes and the associated income tax expense, as well as valuation of real estate owned. Management reviews the allowance for loan losses for adequacy on a monthly basis and establishes a provision for loan losses that it believes is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio. The carrying value of real estate owned is assessed on a quarterly basis. Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management’s understanding of our effective tax rate and the tax code.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Board of Directors and management assess the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, the bankruptcies and vacancy rates of business and residential properties.
 
We believe that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about future losses on loans. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

Our methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits that meet the definition of impaired and a general allowance amount. The specific allowance component is determined when management believes that the collectability of a specifically identified large loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been realized. The general allowance is determined by applying an expected loss percentage to various classes of loans with similar characteristics and classified loans that are not analyzed specifically for impairment. Because of the imprecision in calculating inherent and potential losses, the national and local economic conditions are also assessed to determine if the general allowance is adequate to cover losses. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying
 
 
 
 

33
 
 
amounts and tax basis of existing assets and liabilities are expected to be reported in an institution’s income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried a valuation allowance of $7.8 million at September 30, 2012. The deferred tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available for sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from deferred loan fees and costs, mortgage servicing rights, loan loss reserves and dividends received from the FHLB of Seattle. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at fair value and subsequently carried at the lower of cost or market. Costs associated with real estate owned for maintenance, repair, property tax, etc., are expensed during the period incurred. Assets held in real estate owned are reviewed monthly for potential impairment. When impairment is indicated the impairment is charged against current period operating results and netted against the real estate owned to reflect a net book value. At disposition any residual difference is either charged to current period earnings as a loss on sale or reflected as income in a gain on sale.

Comparison of Financial Condition at September 30, 2012 and June 30, 2012

General. Total assets decreased by $4.7 million, or 1.0%, to $466.1 million at September 30, 2012, from $470.8 million at June 30, 2012.  The decrease in assets during this period was primarily a result of cash and due from banks decreasing $4.9 million or 6.2% and total real estate owned decreasing $1.2 million, or 18.3%, partially offset by an increase in securities available for sale of $1.8 million, or 3.7%.  Total liabilities decreased $5.1 million or 1.2% to $411.7 million at September 30, 2012 compared to $416.8 million at June 30, 2012.  Total deposits decreased $8.2 million, or 2.4%, to $337.6 million at September 30, 2012 from $345.8 million at June 30, 2012 primarily as a result of decreases in money market deposits and certificate of deposits.

Assets. Total assets decreased $4.7 million or 1.0% at September 30, 2012 from June 30, 2012. The following table details the increases and decreases in the composition of the Bank’s assets from June 30, 2012 to September 30, 2012:
 
 
         
Increase/(Decrease)
 
                         
   
Balance at
September 30,
 2012
   
Balance at 
June 30,
2012
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Cash and due from banks
  $ 73,785     $ 78,673     $ (4,888 )     (6.2 )%
Mortgage-backed securities, available-for-
    sale
    48,850       47,061       1,789       3.8  
Mortgage-backed securities, held to
    maturity
    7,778       7,037       741       10.5  
Loans receivable, net of allowance for loan
    losses
    287,500       287,755       (255 )     (0.1 )
Real estate owned , net
    5,482       6,708       (1,226 )     (18.3 )

 
 
 
 

34
 
 
Cash and due from banks decreased $4.9 million or 6.2% at September 30, 2012 from June 30, 2012.  We used $5.6 million to purchase FHLMC mortgage- backed securities during the quarter.

Mortgage-backed securities available-for-sale increased $1.8 million, or 3.8%, to $48.9 million at September 30, 2012 from $47.1 million at June 30, 2012. The increase in this portfolio was primarily the result of purchases of five FHLMC mortgage- backed securities totaling $5.6 million, contractual payments of $4.0 million, and $200,000 increase for mark-to-market.
 
Loans receivable, net, decreased $255,000 or 0.1% to $287.5 million at September 30, 2012 from $287.8 million at June 30, 2012.  Commercial real estate loans increased $4.9 million or 5.1% to $102.2 million from $97.3 million at June 30, 2012 and one-to-four family residential loans decreased $2.7 million or 3.3% to $80.0 million from $82.7 million at June 30, 2012.

Deposits. Deposits decreased $8.2 million, or 2.4%, to $337.6 million at September 30, 2012 from $345.8 million at June 30, 2012.

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

         
Increase/(Decrease)
 
                         
   
Balance at
 September 30,
2012
   
Balance at 
June 30,
2012
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Noninterest-bearing demand deposits
  $ 38,184     $ 37,941     $ 243       0.6 %
Interest-bearing demand deposits
    17,199       16,434       765       4.7  
Money market accounts
    81,476       83,750       (2,274 )     (2.7 )
Savings deposits
    36,364       36,475       (111 )     (0.3 )
Certificates of deposit
                               
    Retail certificates
    164,346       171,198       (6,852 )     (4.0 )
    Brokered certificates
    -       -       -       -  
Total deposit accounts
  $ 337,569     $ 345,798     $ $ (8,229 )     (2.4 )%

Borrowings.  FHLB advances remained at $64.9 million at September 30, 2012 and June 30, 2012.

Stockholders’ Equity. Total stockholders’ equity increased $426,000 or 0.8% to $54.5 million at September 30, 2012 from $54.0 million at June 30, 2012. The increase was primarily due to the $278,000 net income during the three months ended September 30, 2012.  Accumulated other comprehensive income increased $128,000 to $103,000 at September 30, 2012 from a loss of $(25,000) at June 30, 2012.

Comparison of Operating Results for the Three Months ended September 30, 2012 and 2011

General. Net income for the three months ended September 30, 2012 was $278,000 compared to a net loss of $1.7 million for the three months ended September 30, 2011.

Net Interest Income. Net interest income before the provision for loan losses decreased $203,000, or 4.9%, to $4.0 million for the quarter ended September 30, 2012 from $4.2 million for the quarter ended September 30, 2011.

The Company’s net interest margin decreased one basis point to 3.68% for the quarter ended September 30, 2012, from 3.69% for the comparable period in 2011. The average yield on interest-earning assets decreased 24 basis points to 4.89% for the quarter ended September 30, 2012 compared to 5.13% for the same period in the prior year.  The decline in the yield of interest-earning assets was primarily attributable to the downward repricing of investment securities, and a higher level of liquidity.

The average cost of interest-bearing liabilities decreased 25 basis points to 1.41% for the quarter ended September 30, 2012 compared to 1.66% for the same period in the prior year.
 
 
 
 
 

35
 
 
 
This decline in the average cost of interest-bearing liabilities was primarily due to a 45 basis point decrease in the average cost of money market accounts and a 19 basis point decrease in certificates of deposit.

The following table sets forth the changes to our net interest income for the three months ended September 30, 2012 compared to the same period in 2011. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

   
Three Months Ended September 30, 2012
Compared to Three Months Ended 
September 30, 2011
 
   
Increase (Decrease) Due to
       
   
Rate
   
Volume
   
Total
 
   
(In thousands)
 
Interest-earning assets:
                 
Loans receivable, including fees
  $ 111     $ (613 )   $ (502 )
Mortgage-backed securities
    (160 )     171       11  
Investment securities, FHLB stock
   and cash and due from banks
    (37 )     4       (33 )
Total net change in income on interest-earning assets
  $ (86 )   $ (438 )   $ (524 )
Interest-bearing liabilities:
                       
Savings deposits
  $ (32 )   $ 5     $ (27 )
Interest-bearing demand deposits
    (4 )     (2 )     (6 )
Money market accounts
    (93 )     8       (85 )
Certificates of deposit
    (80 )     (77 )     (157 )
FHLB advances
    10       (56 )     (46 )
                         
Total net change in expense on interest-bearing liabilities
    (199 )     (122 )     (321 )
 Total increase (decrease) in net interest income
  $ 113     $ (316 )   $ (203 )

Interest Income. Total interest income for the three months ended September 30, 2012 decreased $524,000, or 9.0%, to $5.3 million, from $5.8 million for the three months ended September 30, 2011. The decrease during the period was attributable to the decline in net loans receivable. Average loans receivable declined $39.2 million during the quarter ended September 30, 2012, compared to the same quarter last year.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2012 and 2011:

   
Three Months Ended September 30,
 
   
2012
   
2011
   
Increase/
 
   
Average
Balance
   
Yield
   
Average
Balance
   
Yield
   
(Decrease) in
Interest and
Dividend
Income from
2011
 
   
(Dollars in thousands)
 
                               
Loans receivable, net (1)
  $ 296,466       6.40 %   $ 335,698       6.25 %   $ (502 )
Mortgage-backed securities
    53,735       3.53       39,216       4.72       11  
Investment securities
    1,795       4.90       5,583       4.44       (40 )
FHLB stock
    6,505       -       6,510       -       -  
Cash and due from banks
    73,264       0.21       65,866       0.19       7  
Total interest-earning assets
  $ 431,765       4.89 %   $ 452,873       5.13 %   $ (524 )
 
 
 
 
36
 

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

Interest Expense. Interest expense decreased $321,000 or 19.8%, to $1.3 million for the three months ended September 30, 2012, from $1.6 million for the three months ended September 30, 2011. The decrease during the period was primarily attributable to the reduction of both the average balance and average rate paid for most interest-bearing liabilities over that time period, especially certificates of deposit. The average cost of interest-bearing liabilities decreased 25 basis points to 1.41% for the three months ended September 30, 2012 compared to 1.66% for the same period of the prior year. This decrease was primarily due to a 19 basis point decline in our average cost of certificates of deposit and a 45 basis point decline in the average cost of money market accounts.

The following table details average balances cost of funds and the change in interest expense for the three months ended September 30, 2012 and 2011:

   
Three Months Ended September 30,
 
   
2012
   
2011
   
Increase/
 
   
Average
Balance
   
Cost
   
Average
Balance
   
Cost
   
(Decrease) in
Interest
Expense from
2011
 
   
(Dollars in thousands)
 
                               
Savings deposits
  $ 36,323       0.31 %   $ 33,369       0.66 %   $ (27 )
Interest-bearing demand deposits
    16,747       0.14       19,299       0.25       (6 )
Money market deposits
    82,808       0.38       78,819       0.83       (85 )
Certificates of deposit
    168,358       2.09       181,875       2.28       (157 )
FHLB advances
    64,900       1.92       76,889       1.86       (46 )
Total interest-bearing liabilities
  $ 369,136       1.41 %   $ 390,251       1.66 %   $ (321 )

Provision for Loan Losses. The provision for loan losses is impacted by the historical performance and current risk factors associated with each loan type in our portfolio.  As we increase the loan portfolio, we anticipate an increase in the provision for loan losses based upon both portfolio growth and the risk characteristics associated with the respective portfolio type.

In connection with its analysis of the loan portfolio at September 30, 2012, management determined that a provision for loan losses of $300,000 was required for the three months ended September 30, 2012, compared to the $525,000 provision for loan losses established for the three months ended September 30, 2011. The provision reflects some stabilization in the general economy and real estate market and reflects the decline in non-performing loans during the current fiscal quarter as well as net charge-offs of  $677,000 during the three months ended September 30, 2012. Net charge-offs for the three months ended September 30, 2011 totaled $398,000.  Non-performing loans, those loans which are 90 days past due or on non- accrual status,  were $8.5 million, or 1.9% of total assets, at September 30, 2012, compared to $8.7 million, or 1.9% of total assets, at June 30, 2012.

Management considers the allowance for loan losses at September 30, 2012 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by our regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.
 
 
 
 

37
 

The provision for loan losses is impacted by the historical performance and current risk factors associated with each loan type in our portfolio.  As we increase the loan portfolio, we anticipate an increase in the allowance for loan losses based upon both portfolio growth and the risk characteristics associated with the respective portfolio type. 

The following table details activity and information related to the allowance for loan losses at and for the three months ended September 30, 2012 and 2011:

   
At or For the Three Months
Ended
September 30,
 
   
2012
   
2011
 
   
(In thousands)
 
             
Provision for loan losses
  $ 300     $ 525  
Net charge-offs
  $ 677     $ 398  
Allowance for loan losses
  $ 6,680     $ 7,366  
Allowance for loan losses as a percentage of gross loans receivable at the end
   of the period
    2.3 %     2.3 %
Non-accrual and 90 days or more past due loans
  $ 8,525     $ 11,224  
Allowance for loan losses as a percentage of non-performing loans at the end
   of the period
    78.4 %     65.6 %
Non-accrual and 90 days or more past due loans as a percentage of loans
   receivable at the end of the period
    2.9 %     3.5 %
Total loans
  $ 294,982     $ 323,340  

Noninterest Income. Noninterest income decreased $128,000, or 8.5%, to $1.4 million for the three months ended September 30, 2012 from $1.5 million for the same quarter in 2011. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended September 30, 2012 compared to the same period in 2011:

   
Three Months Ended
September 30,
   
Increase (decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Deposit services fees
  $ 391     $ 529     $ (138 )     (26.1 )%
Other deposit fees
    189       217       ( 28 )     (12.9 )
Gain on sale of investments
    -       193       (193 )     (100.0 )
Loan fees
    185       229       (44 )     (19.2 )
Gain (loss) on sale of loans
    177       (12 )     189       1,575.0  
Gain on sale of property
    -       51       (51 )     (100.0 )
Other income
    430       293       137       46.8  
Total noninterest income
  $ 1,372     $ 1,500     $ (128 )     (8.5 )%
                                 

The decrease in noninterest income was primarily attributable to no gain on sale of investments for the quarter ended September 30, 2012 as compared to $193,000 for quarter ended September 30, 2011 and deposit service fees declined $138,000 during this period.  These decreases were partially offset by an increase of $189,000 for gain on sale of loans for the quarter ended September 30, 2012.  The increase in the amount of gain on sale of loans and other income was the result of a greater volume of loans sold into the secondary market during the three months ended September 30, 2012 compared to the three months ended September 30, 2011, which was attributable to increased demand for one-to-four family loans as a result of refinancing activity reflecting the very low interest rate environment.


 
 

38
 


Noninterest Expense.  For the three months ended September 30, 2012, noninterest expense decreased $2.1 million or 30.6%, to $4.8 million from $6.9 million for the three months ended September 30, 2011. The following tables provide an analysis of the changes in the components of noninterest expense for the three months ended September 30, 2012 and 2011:

   
Three Months Ended
September 30,
   
Increase (decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Compensation and benefits
  $ 2,135     $ 2,128     $ 7       0.3 %
General and administrative
    expenses
    819       1,108       (289 )     (26.1 )
Real estate owned impairment
    235       1,119       (884 )     (79.0 )
Real estate holding costs
    185       258       (73 )     (28.3 )
FDIC Insurance premium
    162       250       (88 )     (35.2 )
Information technology
    360       1,280       (920 )     (71.9 )
Occupancy and equipment
    539       527       12       2.3  
Deposit services
    189       107       82       76.6  
Marketing
    127       152       (25 )     (16.4 )
Gain on sale of real estate
    owned
    20       (59 )     79       (133.9 )
Total noninterest expense
  $ 4,771     $ 6,870     $ (2,099 )     (30.6 )%

Noninterest expense decreased primarily due to declines for information technology and real estate owned related expenses.   The expense for information technology decreased $920,000 as a conversion of our core systems occurred during this period. Real estate owned impairment decreased $884,000 or 79.0% to $235,000 from $1.1 million and real estate holding costs declined $73,000 or 28.3% from $258,000 due to valuation declines in properties held as real estate owned during the comparative periods.  Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 89.2% for the three months ended September 30, 2012 compared to 121.1% for the three months ended September 30, 2011.

Provision (benefit) for Income Tax.  As a result of uncertainties surrounding our realization of additional deferred tax assets, we did not record a tax benefit or expense for the three months ended September 30, 2012.   As a result of uncertainties surrounding our realization of additional deferred tax assets, we did not record a tax benefit or expense for the three months ended September 30, 2011.

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

Liquidity, Commitments and Capital Resources

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

39
 

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

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At September 30, 2012, the total approved loan origination commitments outstanding amounted to $1.9 million.  At the same date, unused lines of credit were $27.4 million.

For purposes of determining our liquidity position, we use a concept of basic surplus, which is derived from the total of available for sale securities, as well as other liquid assets, less short-term liabilities. Our Board of Directors has established a target range for basic surplus of 5% to 7%. For the three months ended September 30, 2012, our average basic surplus was 20.2%, which indicates we exceeded the liquidity standard set by our Board.  The relatively high level of liquidity is consistent with our strategy to mitigate liquidity risk during the current economic uncertainty and difficult banking environment as well as for potential lending opportunities in the future.

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

Certificates of deposit scheduled to mature in one year or less at September 30, 2012 totaled $61.2 million. We had no brokered deposits at September 30, 2012. Management’s policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with us. In addition, we had the ability to borrow an additional $34.6 million from the FHLB of Seattle.

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

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

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



 
 

40
 



Commitments and Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of our customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is not required to support commitments.

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

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

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of September 30, 2012:
 
   
Amount of Commitment
Expiration Per Period
 
   
Total
Amounts
Committed (2)
   
Due in
One Year
 
 
 
(In thousands)
 
             
Commitments to originate loans (1)
  $ 1,855     $ 1,855  
Lines of  Credit
               
Fixed rate (3)
    4,069       1,471  
Adjustable rate
    23,351       4,243  
Undisbursed balance of lines of credit
  $ 27,420     $ 5,741  
 
(1)  Interest rates on fixed rate loans range from 2.75% to 3.75%. 
(2)  At September 30, 2012 there were no reserves for unfunded commitments. 
(3)  Includes standby letters of credit. 
 

Operating lease commitment - The Bank leases space for branches and operations located in Olympia, Hoquiam, Shelton, Chehalis, and Puyallup, Washington. These leases run for periods ranging from three to five years. All leases require the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitments for the next three years are as follows:
 
Year Ended
 
June 30,
Amount
 
(In thousands)
2013
 $ 150
2014
 $   66
2015
 $   36

 

 
 
 

41
 

 
Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards and the Order. As of September 30, 2012 the Bank exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios of 11.3%, 17.1%, and 18.4% respectively. As of June 30, 2012 these ratios were 10.9%, 17.0%, and 18.2%, respectively. The Bank was “well capitalized” at September 30, 2012, based on financial statements prepared in accordance with generally accepted accounting principles in the United States and the general percentages in the regulatory guidelines, however, we are not regarded as “well capitalized” for federal regulatory purposes as a result of the Supervisory Directive.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 11.7%, 17.7%, and 18.9%, respectively, as of September 30, 2012.

 
 

42
 


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

The Bank’s actual capital accounts and ratios are also presented in the following table:

Anchor Bank
                   
Minimum to be Well
 
               
Minimum
   
Capitalized Under Prompt
 
   
Actual
   
Capital Requirement
   
Corrective Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
                                     
As of September 30, 2012
                                   
Total capital
                                   
(to risk-weighted
                                   
    assets)
  $ 56,422       18.4 %   $ 24,564       8.0 %   $ 30,706       10.0 %
Tier I capital
                                               
(to risk-weighted
                                               
    assets)
  $ 52,644       17.1 %   $ 12,282       4.0 %   $ 18,423       6.0 %
Tier I leverage capital
                                               
(to average assets)
  $ 52,644       11.3 %   $ 18,593       4.0 %   $ 23,241       5.0 %
 
 
Anchor Bancorp exceeded all regulatory capital requirements as of September 30, 2012.  The actual regulatory capital ratios calculated for Anchor Bancorp as of September 30, 2012, were as follows:


Anchor Bancorp
           
             
   
Actual
 
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
             
As of September 30, 2012
           
Total capital
           
(to risk-weighted
           
    assets)
  $ 58,141       18.9 %
Tier I capital
               
(to risk-weighted
               
    assets)
  $ 54,294       17.7 %
Tier I leverage capital
               
(to average assets)
  $ 54,294       11.7 %


 
 

43
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer, and other members of the Company’s management team as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2012, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company’s internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. A number of internal control procedures were, however, modified during the quarter in conjunction with the Bank’s internal control testing. The Company also continued to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.

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

 
 

44
 

PART II - OTHER INFORMATION


Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.

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

During the three months ended September 30, 2012, we did not sell any securities that were not registered under the Securities Act of 1933. We did not execute any open market repurchases of our common stock from July 1, 2012 through September 30, 2012.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

Item 6. Exhibits

  3.1
Articles of Incorporation of the Registrant (1)
  3.2
Amended and Restated Bylaws of the Registrant (2)
10.1
Form of Anchor Bank Employee Severance Compensation Plan (1)
10.2
Anchor Mutual Savings Bank Phantom Stock Plan (1)
10.3
Form of 401(k) Retirement Plan (1)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32    
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101  
The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter   ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Balance Sheets; (2) Condensed Consolidated Statement of Operations; (3) Condensed Consolidated Statement of Stockholders’ Equity; (4) Condensed Consolidated Statement of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements.*

 
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1)  
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-154734)
(2)  
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2011.

 
 

45
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ANCHOR BANCORP
   
Date: November 5, 2012 /s/Jerald L. Shaw                                           
  Jerald L. Shaw 
 
President and Chief Executive Officer
 
(Principal Executive Officer)
   
   
Date: November 5, 2012  /s/Terri L. Degner                                        
 
Terri L. Degner
  Executive Vice President and 
  Chief Financial Officer 
 
(Principal Financial and Accounting Officer)
 



 
 

46
 
 
 
EXHIBIT INDEX

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Balance Sheets; (2) Condensed Consolidated Statement of Operations; (3) Condensed Consolidated Statement of Stockholders’ Equity; (4) Condensed Consolidated Statement of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements *


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

47