Attached files

file filename
EX-32 - EXHIBIT 32 - Anchor Bancorpancb10-q20151231exhibit32.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorpancb10-q20151231exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorpancb10-q20151231exhibit312.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 December 31, 2015
 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 February 8, 2016, there were 2,521,334 shares of common stock, $0.01 par value per share, outstanding.




ANCHOR BANCORP
FORM 10-Q
TABLE OF CONTENTS
 
                                                                                                                   
                                                                                                                        
As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to Anchor Bancorp and its consolidated subsidiary, unless the context indicates otherwise.  When we refer to “Anchor Bank” or the “Bank” in this report, we are referring to Anchor Bank, the wholly owned subsidiary of Anchor Bancorp.



PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)
 
December 31, 2015
 
June 30, 2015
ASSETS
 
 
 
Cash and cash equivalents
$
12,572

 
$
14,450

Securities available-for-sale, at fair value, amortized cost of $26,103 and $29,696
25,870

 
29,565

Securities held-to-maturity, at amortized cost, fair value of $6,785 and $7,692
6,739

 
7,617

Loans held for sale

 
505

Loans receivable, net of allowance for loan losses of $3,879 and $3,721
311,519

 
283,444

Bank owned life insurance investment, net of surrender charges
19,265

 
19,001

Accrued interest receivable
1,010

 
1,069

Real estate owned, net ("REO")
662

 
797

Federal Home Loan Bank  ("FHLB") stock, at cost
1,553

 
853

Property, premises, and equipment, at cost, less accumulated depreciation of $11,284                            and $13,482
10,115

 
10,370

Deferred tax asset, net
8,977

 
8,867

Prepaid expenses and other assets
1,139

 
2,692

Total assets
$
399,421

 
$
379,230

LIABILITIES AND STOCKHOLDERS’ EQUITY 
 

 
 

LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
48,880

 
$
44,719

Interest-bearing
253,850

 
255,093

Total deposits
302,730

 
299,812

 
 
 
 
FHLB advances
27,500

 
10,000

Advance payments by borrowers for taxes and insurance
1,113

 
1,002

Supplemental Executive Retirement Plan liability
1,758

 
1,814

Accounts payable and other liabilities
3,035

 
2,879

Total liabilities
336,136

 
315,507

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding

 

Common stock, $0.01 par value per share, authorized 45,000,000 shares; 2,521,334 issued and 2,447,314 outstanding at December 31, 2015 and 2,550,000 issued and 2,480,865 outstanding at June 30, 2015, respectively
26

 
25

Additional paid-in capital
22,940

 
23,404

Retained earnings
41,798

 
41,741

Unearned Employee Stock Ownership Plan ("ESOP") shares
(701
)
 
(736
)
Accumulated other comprehensive loss, net of tax
(778
)
 
(711
)
Total stockholders’ equity
63,285

 
63,723

Total liabilities and stockholders’ equity
$
399,421

 
$
379,230

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

1


ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Loans receivable, including fees
$
4,024

 
$
4,052

 
$
8,042

 
$
8,105

Securities
21

 
15

 
37

 
30

Mortgage-backed securities
164

 
206

 
345

 
426

Total interest income
4,209

 
4,273

 
8,424

 
8,561

Interest expense:
 

 
 

 
 
 
 
Deposits
671

 
689

 
1,341

 
1,388

FHLB advances
32

 
131

 
62

 
292

Total interest expense
703

 
820

 
1,403

 
1,680

Net interest income before provision for loan losses
3,506

 
3,453

 
7,021

 
6,881

Provision for loan losses
70

 

 
90

 

Net interest income after provision for loan losses
3,436

 
3,453

 
6,931

 
6,881

Noninterest income:
 

 
 

 
 
 
 
Deposit service fees
331

 
347

 
703

 
731

Other deposit fees
180

 
175

 
358

 
364

Gain on sale of investments

 

 

 
47

  Other loan fees
184

 
144

 
328

 
288

Gain (loss) on sale of loans
67

 
(5
)
 
128

 
(11
)
Bank owned life insurance investment
132

 
133

 
289

 
272

Other income
269

 
231

 
401

 
317

Total noninterest income
1,163

 
1,025

 
2,207

 
2,008

Noninterest expense:
 

 
 

 
 
 
 
Compensation and benefits
2,815

 
1,945

 
4,835

 
3,968

General and administrative expenses
994

 
701

 
1,728

 
1,369

Real estate owned impairment
5

 
93

 
43

 
130

Real estate owned holding costs
11

 
62

 
22

 
216

Federal Deposit Insurance Corporation ("FDIC") insurance premiums
64

 
125

 
133

 
246

Information technology
415

 
439

 
857

 
868

Occupancy and equipment
449

 
463

 
939

 
945

Deposit services
122

 
158

 
235

 
383

Marketing
130

 
154

 
255

 
309

Loss (gain) on sale of property, premises and equipment
1

 

 
4

 
(2
)
(Gain) loss on sale of real estate owned
(4
)
 
(114
)
 
4

 
(108
)
Total noninterest expense
5,002

 
4,026

 
9,055

 
8,324

(Loss) income before provision for income taxes
(403
)
 
452

 
83

 
565

(Benefit) provision for income taxes
(117
)
 
(8,333
)
 
24

 
(8,333
)
Net (loss) income
$
(286
)
 
$
8,785

 
$
59

 
$
8,898

Basic (loss) earnings per share
$
(0.12
)
 
$
3.55

 
$
0.02

 
$
3.59

Diluted (loss) earnings per share
$
(0.12
)
 
$
3.55

 
$
0.02

 
$
3.59

Weighted average number of basic shares outstanding
2,436,650

 
2,476,562

 
2,454,097

 
2,475,702

Weighted average number of diluted shares outstanding
2,436,650

 
2,476,562

 
2,454,097

 
2,475,702

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

2


ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands) (Unaudited)
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
NET (LOSS) INCOME
$
(286
)
 
$
8,785

 
$
59

 
$
8,898

OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
 

 
 
 
 

 
 

Unrealized holding (loss) gain on available-for-sale
securities during the period, net of income tax benefit of $66, $0, $34 and $0 respectively,
(194
)
 
226

 
(102
)
 
32

Adjustment for realized gains included in
net income

 

 

 
47

Other comprehensive (loss) income, net of income tax
(194
)
 
226

 
(102
)
 
79

COMPREHENSIVE (LOSS) INCOME
$
(480
)
 
$
9,011

 
$
(43
)
 
$
8,977


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


3


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data) (Unaudited)
Six Months Ended December 31,
 
 
 
2015
 
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
$
59

 
$
8,898

 
Adjustments to reconcile net income to net cash from operating activities:
 

 
 

 
Depreciation and amortization
314

 
329

 
Net amortization of premiums on securities
227

 
314

 
Provision for loan losses
90

 

 
ESOP expense
80

 
98

 
Real estate owned impairment
43

 
130

 
Deferred federal income taxes
24

 
(8,333
)
 
Stock compensation expense
800

 

 
Increase in cash surrender value of life insurance investment
(264
)
 
(272
)
 
(Gain) loss on sale of loans
(128
)
 
11

 
Gain on sale of investments

 
(47
)
 
Originations of loans held for sale
(7,009
)
 
(11
)
 
Proceeds from sale of loans held for sale
7,642

 

 
Loss (gain) on sale of property, premises, and equipment
4

 
(2
)
 
Loss (gain) on sale of real estate owned
4

 
(108
)
 
Change in operating assets and liabilities:
 

 
 

 
Accrued interest receivable
59

 
172

 
Prepaid expenses and other assets
1,553

 
367

 
Deferred income tax asset
(100
)
 

 
Supplemental Executive Retirement Plan
(56
)
 
(6
)
 
Accounts payable and other liabilities
156

 
(1,120
)
 
Net cash provided by operating activities
3,498

 
420

 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
Proceeds from sales, maturities and calls of available-for-sale securities
250

 
2,335

 
Principal repayments on available-for-sale securities
3,150

 
3,547

 
Principal repayments on held-to-maturity securities
846

 
616

 
Loan originations, net of undisbursed loan proceeds and principal repayments
(28,557
)
 
3,314

 
Proceeds from sale of real estate owned
480

 
6,297

 
Capital improvements on real estate owned

 
(28
)
 
Proceeds from sale of property, premises, and equipment, net

 
1

 
Purchase of fixed assets, net
(63
)
 
(323
)
 
Purchase of FHLB stock
(700
)
 

 
Net cash provided by investing activities
(24,594
)
 
15,759

 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
Net increase (decrease) in deposits
2,918

 
(12,262
)
 
Net change in advance payments by borrowers for taxes and insurance
111

 
137

 
Proceeds from FHLB advances
22,500

 
15,100

 
Repayment of FHLB advances
(5,000
)
 
(22,550
)
 
Repurchase and retirement of common stock
(1,095
)
 

 
Stock award net settlement
(216
)
 

 
Net cash used in financing activities
$
19,218

 
$
(19,575
)
 
 
 
 
 

4


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands, except share data) (Unaudited)
Six Months Ended December 31,
 
 
 
2015
 
2014
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(1,878
)
 
$
(3,396
)
 
Beginning of period
14,450

 
14,758

 
End of period
$
12,572

 
$
11,362

 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 

 
 

 
Noncash investing activities:
 

 
 

 
Net loans transferred to real estate owned
$
392

 
$
1,824

 
Unrealized holding (loss) gain on available-for-sale securities
$
(102
)
 
$
32

 
Cash paid during the period for interest
$
1,403

 
$
1,709


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

5


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

Note 1 - Nature of Business

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

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 10 full-service bank offices (including one Wal-Mart in-store location) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington.  Anchor Bank’s business consists of attracting deposits from the public and utilizing those deposits to originate loans.
 
Note 2 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. 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, 2015 (“2015 Form 10-K”). The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2016. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported consolidated net income (loss) or equity. The Company has evaluated events and transactions subsequent to December 31, 2015 for potential recognition or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2015-05 did not have a material impact on the Company's consolidated financial statements.

In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. On November 10, 2010 FASB added a standing project that will facilitate the FASB Accounting Standards Codification ("Codification") updates for technical corrections, clarifications, and improvements. These amendments are referred to as Technical Corrections and Improvements. Maintenance updates include non-substantive corrections to the Codification, such as editorial corrections, various link-related changes, and changes to source fragment information. This ASU contains amendments that will affect a wide variety of Topics in the Codification. The amendments in this ASU will apply to all reporting entities within the scope of the affected accounting guidance and generally fall into one of four categories: amendments related to differences between original guidance and the Codification, guidance clarification and reference corrections, simplification, and minor improvements. In summary, the amendments in this ASU represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that require transition guidance are effective for fiscal years and interim reporting periods after December 15, 2015. Early adoption is permitted including adoption in an interim period. All other amendments are effective upon the issuance of this ASU. ASU 2015-10 did not have a material impact on the Company's consolidated financial statements.


6

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


In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, deferring the effective date of the new revenue standard by one year. The standard also allows entities to choose to adopt the standard as of the original effective date. The FASB decided, based on its outreach to various stakeholders and the forthcoming amendments to the new revenue standard, that a deferral is necessary to provide adequate time to effectively implement the new revenue standard.

In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The ASU provides guidance not previously included in ASU 2015-03 regarding debt issuance related to line-of-credit arrangements. The amendment allows an entity to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless if there are any outstanding borrowings on the line-of-credit arrangement. The amendment is effective for fiscal years beginning after December 15, 2015. The adoption of ASU No. 2015-15 is not expected to have a material impact on the Company's consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). The ASU simplifies the accounting for measurement period adjustments. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period when the adjustment amounts are determined. The acquirer is required to record in the same period's financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must present separately on the income statement, or disclose in the notes, the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the provisional amount had been recognized at the acquisition date. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The adoption of ASU No. 2015-16 is not expected to have a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU is part of the FASB simplification initiative aimed at reducing complexity in accounting standards. the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. Importantly, the guidance does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. This ASU is effective for annual periods beginning after December 31, 2016 and interim periods within those annual periods. The adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured as fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 is being reviewed for any material impact there may be on the Company's consolidated financial statements.


7

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


Note 4 - Earnings (Loss) Per Share ("EPS")

Basic earnings (loss) per share is computed by dividing income or loss, as applicable, available to common shareholders by the weighted average number of common shares outstanding for the period. As ESOP shares are committed to be released they become outstanding for EPS calculation purposes. ESOP shares not committed to be released are not considered outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. There were no other securities that could convert to common stock during the following periods. The following table presents a reconciliation of the components used to compute basic and diluted earnings per share:

 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except share data)
Net (loss) income
$
(286
)
 
$
8,785

 
$
59

 
$
8,898

Less: Earnings allocated to participating securities

 

 

 

Earnings allocated to common shareholders
$
(286
)
 
$
8,785

 
$
59

 
$
8,898

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
2,436,650

 
2,476,562

 
2,454,097

 
2,475,702

Potentially dilutive incremental shares

 

 

 

Diluted weighted-average common shares outstanding
2,436,650

 
2,476,562

 
2,454,097

 
2,475,702

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
$
(0.12
)
 
$
3.55

 
$
0.02

 
$
3.59

Diluted (loss) earnings per share
$
(0.12
)
 
$
3.55

 
$
0.02

 
$
3.59


Potential dilutive shares are excluded from the computation of earnings (loss) per share if their effect is anti-dilutive. For the three and six months ended December 31, 2015 an additional 83,460 incremental shares were not included in the computation of diluted (loss) earnings per share because the incremental shares under the treasury stock method of calculation resulted in them being anti-dilutive.


8

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


Note 5 - Investments

The amortized cost and estimated fair market values of investment securities as of December 31, 2015 and June 30, 2015, were as follows:

December 31, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
180

 
$

 
$

 
$
180

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC (1)
10,389

 
98

 
(127
)
 
10,360

FNMA (2)
14,691

 
24

 
(205
)
 
14,510

GNMA (3)
843

 

 
(23
)
 
820

 
$
26,103

 
$
122

 
$
(355
)
 
$
25,870

Securities held-to-maturity
 

 
 

 
 

 
 

Municipal bonds
$

 
$

 
$

 
$

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
3,060

 
74

 
(62
)
 
3,072

FNMA
1,665

 
105

 
(23
)
 
1,747

GNMA
2,014

 

 
(48
)
 
1,966

 
$
6,739

 
$
179

 
$
(133
)
 
$
6,785

(1) Federal Home Loan Mortgage Corporation ("Freddie Mac")
(2) Federal National Mortgage Association ("Fannie Mae")
(3) Government National Mortgage Association ("Ginnie Mae")     
 
June 30, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
434

 
$
1

 
$

 
$
435

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
11,780

 
134

 
(123
)
 
11,791

FNMA
16,534

 
70

 
(196
)
 
16,408

GNMA
948

 

 
(17
)
 
931

 
$
29,696

 
$
205

 
$
(336
)
 
$
29,565

Securities held-to-maturity
 

 
 

 
 

 
 

Municipal bonds
$
119

 
$

 
$

 
$
119

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
3,367

 
95

 
(56
)
 
3,406

FNMA
1,858

 
124

 
(22
)
 
1,960

GNMA
2,273

 

 
(66
)
 
2,207

 
$
7,617

 
$
219

 
$
(144
)
 
$
7,692


There were 33 and 30 securities in an unrealized loss position at December 31, 2015 and June 30, 2015, respectively. The unrealized losses on investments in mortgage-backed securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities prior to their maturity. We do expect to recover the

9

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


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 December 31, 2015 and June 30, 2015, were as follows:

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2015
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
1,111

 
$
(5
)
 
$
4,835

 
$
(122
)
 
$
5,946

 
$
(127
)
FNMA
3,578

 
(59
)
 
6,023

 
(146
)
 
9,601

 
(205
)
GNMA

 

 
820

 
(23
)
 
820

 
(23
)
 
$
4,689

 
$
(64
)
 
$
11,678

 
$
(291
)
 
$
16,367

 
$
(355
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2015
(In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
2,101

 
$
(62
)
 
$
2,101

 
$
(62
)
FNMA

 

 
713

 
(23
)
 
713

 
(23
)
GNMA

 

 
1,966

 
(48
)
 
1,966

 
(48
)
 
$

 
$

 
$
4,780

 
$
(133
)
 
$
4,780

 
$
(133
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2015
 (In thousands)
Securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
747

 
$
(1
)
 
$
5,404

 
$
(122
)
 
$
6,151

 
$
(123
)
FNMA
3,105

 
(45
)
 
6,898

 
(151
)
 
10,003

 
(196
)
GNMA

 

 
931

 
(17
)
 
931

 
(17
)
 
$
3,852

 
$
(46
)
 
$
13,233

 
$
(290
)
 
$
17,085

 
$
(336
)
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2015
 (In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
2,299

 
$
(56
)
 
$
2,299

 
$
(56
)
FNMA

 

 
772

 
(22
)
 
772

 
(22
)
GNMA

 

 
2,207

 
(66
)
 
2,207

 
(66
)
 
$

 
$

 
$
5,278

 
$
(144
)
 
$
5,278

 
$
(144
)



10

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


Contractual maturities of securities at December 31, 2015 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.
December 31, 2015
Amortized
Cost
 
Fair Value
 
(In thousands)
Securities available-for-sale
 
Municipal bonds:
 
 
 
Due after ten years
$
180

 
$
180

Mortgage-backed securities:
 
 
 
FHLMC
10,389

 
10,360

FNMA
14,691

 
14,510

GNMA
843

 
820

 
$
26,103

 
$
25,870

Securities held-to-maturity
 
Municipal bonds:
$

 
$

Mortgage-backed securities:
 
 
 
FHLMC
3,060

 
3,072

FNMA
1,665

 
1,747

GNMA
2,014

 
1,966

 
$
6,739

 
$
6,785


Sales of securities available-for-sale for the dates indicated are summarized as follows:

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Proceeds from sales
$

 
$
1,653

 
$

 
$
2,355

Proceeds from maturities and calls
250

 

 
250

 

Gross realized gains

 
18

 

 
65

Gross realized losses

 
(18
)
 

 
(18
)

Pledged securities at the dates indicated are summarized as follows:

 
December 31, 2015
 
June 30, 2015
Pledged to secure:
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
Public deposits
$
11,820

 
$
11,784

 
$
12,184

 
$
12,189

FHLB borrowings
1,478

 
1,534

 
1,727

 
1,788

Federal Reserve borrowing line
989

 
982

 
1,001

 
990



11

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


Note 6 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:
 
 
December 31, 2015
 
June 30,
2015
 
(In thousands)
Real estate:
 
 
 
One-to-four family
$
63,479

 
$
57,944

Multi-family
54,996

 
43,249

Commercial
131,271

 
128,306

Construction
11,111

 
11,731

Land
5,087

 
4,069

Total real estate
265,944

 
245,299

Consumer:
 

 
 

Home equity
17,147

 
17,604

Credit cards
3,059

 
3,289

Automobile
589

 
686

Other consumer
2,204

 
2,347

Total consumer
22,999

 
23,926

 
 
 
 
Commercial business
27,675

 
18,987

Total loans
316,618

 
288,212

Less:
 

 
 

Deferred loan fees
1,220

 
1,047

Allowance for loan losses
3,879

 
3,721

Loans receivable, net
$
311,519

 
$
283,444

 
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.
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2015:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 12/31/15
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
962

 
$
106

 
$
680

 
$
115

 
$
39

 
$
466

 
$
1,319

 
$

 
$
3,687

Provision (benefit) for loan losses
76

 
405

 
572

 
(90
)
 
12

 
(53
)
 
(852
)
 

 
70

Charge-offs
(17
)
 

 

 

 

 
(21
)
 
(6
)
 

 
(44
)
Recoveries
47

 

 

 
81

 

 
37

 
1

 

 
166

Ending balance
$
1,068

 
$
511

 
$
1,252

 
$
106

 
$
51

 
$
429

 
$
462

 
$

 
$
3,879

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


12

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


The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2015:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Six months ended 12/31/15
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,113

 
$
95

 
$
262

 
$
247

 
$
75

 
$
445

 
$
1,405

 
$
79

 
$
3,721

Provision (benefit) for loan losses
(55
)
 
416

 
989

 
(230
)
 
(24
)
 
(32
)
 
(895
)
 
(79
)
 
90

Charge-offs
(163
)
 

 

 

 

 
(52
)
 
(50
)
 

 
(265
)
Recoveries
173

 

 
1

 
89

 

 
68

 
2

 

 
333

Ending balance
$
1,068

 
$
511

 
$
1,252

 
$
106

 
$
51

 
$
429

 
$
462

 
$

 
$
3,879

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2014:
 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 12/31/14
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,281

 
$
83

 
$
379

 
$
300

 
$
75

 
$
568

 
$
1,226

 
$
82

 
$
3,994

Provision (benefit) for loan losses
114

 
(19
)
 
(35
)
 
12

 
19

 
(19
)
 
(55
)
 
(17
)
 

Charge-offs
(121
)
 

 

 

 

 
(60
)
 

 

 
(181
)
Recoveries
14

 

 

 
109

 

 
44

 
20

 

 
187

Ending balance
$
1,288

 
$
64

 
$
344

 
$
421

 
$
94

 
$
533

 
$
1,191

 
$
65

 
$
4,000

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2014:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Six months ended 12/31/14
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,550

 
$
229

 
$
682

 
$
190

 
$
74

 
$
587

 
$
1,231

 
$
81

 
$
4,624

Provision (benefit) for loan losses
(73
)
 
(5
)
 
2

 
110

 
20

 
7

 
(45
)
 
(16
)
 

Charge-offs
(214
)
 
(160
)
 
(340
)
 

 

 
(141
)
 
(88
)
 

 
(943
)
Recoveries
25

 

 

 
121

 

 
80

 
93

 

 
319

Ending balance
$
1,288

 
$
64

 
$
344

 
$
421

 
$
94

 
$
533

 
$
1,191

 
$
65

 
$
4,000

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




13

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


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.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
1,785

 
$
2,139

 
$

Land
178

 
192

 

Home equity
78

 
80

 

Commercial business
79

 
190

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
7,761

 
$
7,809

 
$
463

Land
321

 
321

 
2

Home equity
377

 
377

 
101

Other consumer
29

 
33

 
10

Commercial business
696

 
723

 
198

Total
 

 
 

 
 

One-to-four family
$
9,546

 
$
9,948

 
$
463

Land
499

 
513

 
2

Home equity
455

 
457

 
101

Other consumer
29

 
33

 
10

Commercial business
775

 
913

 
198

Total
$
11,304

 
$
11,864

 
$
774


14

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



The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2015:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
1,557

 
$
1,860

 
$

Land
231

 
245

 

Home equity
64

 
65

 

Other consumer
31

 
32

 

Commercial business
64

 
126

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
7,716

 
$
7,743

 
$
500

Land
408

 
408

 
3

Home equity
212

 
212

 
26

Commercial business
868

 
868

 
211

Total
 

 
 

 
 

One-to-four family
$
9,273

 
$
9,603

 
$
500

Land
639

 
653

 
3

Home equity
276

 
277

 
26

Other consumer
31

 
32

 

Commercial business
932

 
994

 
211

Total
$
11,151

 
$
11,559

 
$
740



15

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



The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and six months ended December 31, 2015:

 
Three Months Ended December 31, 2015
 
Six Months Ended December 31, 2015
 
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
 
 
 
 
One-to-four family
$
1,987

 
$
8

 
$
1,848

 
$
25

Land
186

 
2

 
212

 
5

Home equity
72

 
1

 
72

 
2

Other consumer

 

 
16

 

Commercial business
194

 
2

 
127

 
5

With an allowance recorded
 

 
 

 
 
 
 
One-to-four family
$
7,744

 
$
50

 
$
7,763

 
$
151

Land
322

 
7

 
365

 
12

Home equity
304

 
3

 
295

 
9

Other consumer
32

 

 
17

 

Commercial business
746

 

 
796

 
1

Total
 

 
 

 
 
 
 
One-to-four family
$
9,731

 
$
58

 
$
9,611

 
$
176

Land
508

 
9

 
577

 
17

Home equity
376

 
4

 
367

 
11

Other consumer
32

 

 
33

 

Commercial business
940

 
2

 
923

 
6

Total
$
11,587

 
$
73

 
$
11,511

 
$
210




16

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


The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and six months ended December 31, 2014:

 
Three Months Ended December 31, 2014
 
Six Months Ended December 31, 2014
 
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
 
 
 
 
One-to-four family
$
3,037

 
$
16

 
$
2,620

 
$
49

Multi-family
187

 
2

 
373

 
5

Commercial real estate

 

 
110

 

Land
291

 
2

 
277

 
6

Home equity
68

 
1

 
106

 
2

Commercial business
187

 
2

 
156

 
6

With an allowance recorded
 

 
 

 
 
 
 
One-to-four family
$
8,117

 
$
57

 
$
8,393

 
$
171

Multi-family

 

 
79

 

Commercial real estate

 

 
925

 

Land
451

 
4

 
496

 
13

Home equity
297

 
2

 
260

 
6

Commercial business
157

 
1

 
275

 
4

Total
 

 
 

 
 
 
 
One-to-four family
$
11,154

 
$
73

 
$
11,013

 
$
220

Multi-family
187

 
2

 
452

 
5

Commercial real estate

 

 
1,035

 

Land
742

 
6

 
773

 
19

Home equity
365

 
3

 
366

 
8

Commercial business
344

 
3

 
431

 
10

Total
$
12,792

 
$
87

 
$
14,070

 
$
262



17

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


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2015:

 
One-to-four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer(1)
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
1,068

 
$
511

 
$
1,252

 
$
106

 
$
51

 
$
429

 
$
462

 
$

 
$
3,879

Ending balance: individually evaluated for impairment
463

 

 

 

 
2

 
111

 
198

 

 
774

Ending balance: collectively evaluated for impairment
$
605

 
$
511

 
$
1,252

 
$
106

 
$
49

 
$
318

 
$
264

 
$

 
$
3,105

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
63,479

 
$
54,996

 
$
131,271

 
$
11,111

 
$
5,087

 
$
22,999

 
$
27,675

 
$

 
$
316,618

Ending balance: individually evaluated for impairment
9,546

 

 

 

 
499

 
484

 
775

 

 
11,304

Ending balance: collectively evaluated for impairment
$
53,933

 
$
54,996

 
$
131,271

 
$
11,111

 
$
4,588

 
$
22,515

 
$
26,900

 
$

 
$
305,314

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

18

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



The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2015:
 
One-to-four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer(1)
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
1,113

 
$
95

 
$
262

 
$
247

 
$
75

 
$
445

 
$
1,405

 
$
79

 
$
3,721

Ending balance: individually evaluated for impairment
500

 

 

 

 
3

 
26

 
211

 

 
740

Ending balance: collectively evaluated for impairment
$
613

 
$
95

 
$
262

 
$
247

 
$
72

 
$
419

 
$
1,194

 
$
79

 
$
2,981

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
57,944

 
$
43,249

 
$
128,306

 
$
11,731

 
$
4,069

 
$
23,926

 
$
18,987

 
$

 
$
288,212

Ending balance: individually evaluated for impairment
9,273

 

 

 

 
639

 
307

 
932

 

 
11,151

Ending balance: collectively evaluated for impairment
$
48,671

 
$
43,249

 
$
128,306

 
$
11,731

 
$
3,430

 
$
23,619

 
$
18,055

 
$

 
$
277,061

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

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

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

 
December 31, 2015
 
June 30, 2015
 
(In thousands)
One-to-four family
$
1,965

 
$
1,263

Home equity
16

 

Credit cards
18

 
6

Other consumer
29

 
31

Commercial business
681

 
711

Total
$
2,709

 
$
2,011

 

19

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


The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, 2015:

 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total Loans
 
(In thousands)
One-to-four family
$
2,297

 
$
481

 
$
1,965

 
$
4,743

 
$
58,736

 
$
63,479

Multi-family

 

 

 

 
54,996

 
54,996

Commercial real estate
748

 

 

 
748

 
130,523

 
131,271

Construction

 

 

 

 
11,111

 
11,111

Land
36

 

 

 
36

 
5,051

 
5,087

Home equity
125

 

 
16

 
141

 
17,006

 
17,147

Credit cards
25

 
26

 
18

 
69

 
2,990

 
3,059

Automobile
6

 

 

 
6

 
583

 
589

Other consumer
25

 
42

 
29

 
96

 
2,108

 
2,204

Commercial business
47

 

 
681

 
728

 
26,947

 
27,675

Total
$
3,309

 
$
549

 
$
2,709

 
$
6,567

 
$
310,051

 
$
316,618

(1) Includes loans on nonaccrual status.


The following table presents past due loans, net of partial loan charge-offs, by class as of June 30, 2015:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total
Loans
 
(In thousands)
One-to-four family
$
616

 
$
552

 
$
1,263

 
$
2,431

 
$
55,513

 
$
57,944

Multi-family

 

 

 

 
43,249

 
43,249

Commercial real estate

 

 

 

 
128,306

 
128,306

Construction

 

 

 

 
11,731

 
11,731

Land

 

 

 

 
4,069

 
4,069

Home equity
15

 
16

 

 
31

 
17,573

 
17,604

Credit cards
8

 
26

 
6

 
40

 
3,249

 
3,289

Automobile
9

 

 

 
9

 
677

 
686

Other consumer
16

 

 
31

 
47

 
2,300

 
2,347

Commercial business
64

 
273

 
711

 
1,048

 
17,939

 
18,987

Total
$
728

 
$
867

 
$
2,011

 
$
3,606

 
$
284,606

 
$
288,212

(1) Includes loans on nonaccrual status.

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. A seasoned loan with a Debt Service Coverage Ratio ("DSCR") of greater than 1.00 is the minimum acceptable level for a " Pass Credit". Particular attention is paid to the coverage trend analysis as any loan with a declining DSCR trend may warrant a higher risk grade even if the current coverage is at or above the 1.00 threshold.


20

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


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).

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

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

Performance is poor or significantly less than expected. A debt service deficiency either exists or cannot be ruled out.
Generally an undesirable business credit. Assets in this category are protected, but are potentially weak. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard. Special Mention assets have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.
Assets which might be detailed in this category include credits that the lending officer may be unable to supervise properly because of lack of expertise, an inadequate loan agreement, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices.
An adverse trend in the borrower's operations or an imbalanced position in the balance sheet which does not jeopardize liquidation may best be handled by this classification.
A Special Mention classification should not be used as a compromise between a pass and substandard rating. Assets in which actual, not potential, weaknesses are evident and significant, and should be considered for more serious criticism.

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

A loan classified as Substandard may have the following characteristics:

Unacceptable business credit. The asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.
Though no loss is envisioned, the outlook is sufficiently uncertain to preclude ruling out the possibility. Some liquidation of assets will likely be necessary as a corrective measure.
Assets in this category may demonstrate performance problems such as debt servicing deficiencies with no immediate relief, including having a DSCR of less than 1.00. Borrowers have an inability to adjust to prolonged and unfavorable industry or economic trends. Management's character and/or effectiveness have become suspect.
A loan classified as Doubtful is risk rated 9 and has all the inherent weaknesses as those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable is improbable.
A loan classified as Doubtful is risk rated 9 and has the following characteristics:
The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

21

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


Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
A loan risk rated 10 is a loan for which a total loss is expected.
A loan classified as a Loss has the following characteristics:
An uncollectible asset or one of such little value that it does not warrant classification as an active, earning asset. Such an asset may, however, have recovery or salvageable value, but not to the point of deferring full write off, even though some recovery may occur in the future.
The Bank will charge off such assets as a loss during the accounting period in which they were identified.
Loan to be eliminated from the active loan reporting system via charge off.

The following table presents the internally assigned grade as of December 31, 2015, by class of loans:

 
One-to- four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Home equity
 
Credit cards
 
Automobile
 
Other
consumer
 
Commercial business
 
Total
 
(In thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
54,371

 
$
53,887

 
$
128,954

 
$
11,111

 
$
4,588

 
$
16,155

 
$
2,990

 
$
525

 
$
2,060

 
$
25,916

 
$
300,557

Watch
5,247

 
1,109

 
1,110

 

 
321

 
580

 
51

 
64

 
92

 
953

 
9,527

Special Mention
1,529

 

 
1,207

 

 
178

 
215

 

 

 
23

 
61

 
3,213

Substandard
2,332

 

 

 

 

 
197

 
18

 

 
29

 
745

 
3,321

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
63,479

 
$
54,996

 
$
131,271

 
$
11,111

 
$
5,087

 
$
17,147

 
$
3,059

 
$
589

 
$
2,204

 
$
27,675

 
$
316,618


The following table presents the credit risk profile based on payment activity as of December 31, 2015, 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
$
61,514

 
$
54,996

 
$
131,271

 
$
11,111

 
$
5,087

 
$
17,131

 
$
3,041

 
$
589

 
$
2,175

 
$
26,994

 
$
313,909

Nonperforming (1)
1,965

 

 

 

 

 
16

 
18

 

 
29

 
681

 
2,709

Total
$
63,479

 
$
54,996

 
$
131,271

 
$
11,111

 
$
5,087

 
$
17,147

 
$
3,059

 
$
589

 
$
2,204

 
$
27,675

 
$
316,618

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

The following table presents the internally assigned grade as of June 30, 2015, 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
$
49,119

 
$
42,884

 
$
125,586

 
$
11,731

 
$
3,430

 
$
16,585

 
$
3,249

 
$
615

 
$
2,214

 
$
16,981

 
$
272,394

Watch
2,151

 

 
2,044

 

 

 
697

 
34

 
71

 
102

 
915

 
6,014

Special Mention
4,755

 

 
676

 

 
231

 
301

 

 

 

 
159

 
6,122

Substandard
1,919

 
365

 

 

 
408

 
21

 
6

 

 
31

 
932

 
3,682

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
57,944

 
$
43,249

 
$
128,306

 
$
11,731

 
$
4,069

 
$
17,604

 
$
3,289

 
$
686

 
$
2,347

 
$
18,987

 
$
288,212



22

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


The following table presents the credit risk profile based on payment activity as of June 30, 2015, 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
$
56,681

 
$
43,249

 
$
128,306

 
$
11,731

 
$
4,069

 
$
17,604

 
$
3,283

 
$
686

 
$
2,316

 
$
18,276

 
$
286,201

Nonperforming (1)
1,263

 

 

 

 

 

 
6

 

 
31

 
711

 
2,011

Total
$
57,944

 
$
43,249

 
$
128,306

 
$
11,731

 
$
4,069

 
$
17,604

 
$
3,289

 
$
686

 
$
2,347

 
$
18,987

 
$
288,212

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

Troubled Debt Restructures. A troubled debt restructure ("TDR") is a loan where the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider so that the borrower can continue to make payments while minimizing the Company's potential loss. The modifications have included items such as lowering the interest rate on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank's best interest. At December 31, 2015, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.
The following table presents TDRs by accrual versus nonaccrual status and by loan class as of December 31, 2015:

 
December 31, 2015
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
7,582

 
$
654

 
$
8,236

Land
499

 

 
499

Home equity
289

 

 
289

Commercial business
93

 

 
93

Total
$
8,463

 
$
654

 
$
9,117



The following table presents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2015:
 
 
June 30, 2015
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
8,010

 
$
681

 
$
8,691

Land
639

 

 
639

Home equity
276

 

 
276

Commercial business
221

 

 
221

Total
$
9,146

 
$
681

 
$
9,827



23

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



The following tables present TDRs and their recorded investment prior to the modification and after the modification for TDR transactions that originated during the three and six months ended December 31, 2015 and 2014:

 
Three Months Ended December 31, 2015
 
Six Months Ended December 31, 2015
 
Number of
Contracts
 
Pre-TDR Recorded Investment
 
Post-TDR Recorded Investment
 
Number of
Contracts
 
Pre-TDR Recorded Investment
 
Post-TDR Recorded Investment
 
(Dollars in thousands)
One-to-four family
1

 
$
273

 
$
243

 
1

 
$
273

 
$
243

Total
1

 
$
273

 
$
243

 
1

 
$
273

 
$
243


 
 
Three Months Ended December 31, 2014
 
Six Months Ended December 31, 2014
 
Number of
Contracts
 
Pre-TDR Recorded Investment
 
Post-TDR Recorded Investment
 
Number of
Contracts
 
Pre-TDR Recorded Investment
 
Post-TDR Recorded Investment
 
(Dollars in thousands)
One-to-four family

 
$

 
$

 
1

 
$
197

 
$
196

Total

 
$

 
$

 
1

 
$
197

 
$
196


For both the three and six months ended December 31, 2015 and 2014, there were no TDRs for which there was a payment default within 12 months of their restructure.

Note 7 - Real Estate Owned, net
 
The following table is a summary of REO activity for the three and six months ended December 31, 2015 and 2014:

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Balance at the beginning of the period
$
302

 
$
6,092

 
$
797

 
$
5,067

Net loans transferred to real estate owned
392

 

 
392

 
1,824

Capitalized improvements

 
22

 

 
28

Sales
(28
)
 
(5,421
)
 
(484
)
 
(6,189
)
Impairments
(4
)
 
(93
)
 
(43
)
 
(130
)
Balance at the end of the period
$
662

 
$
600

 
$
662

 
$
600


Note 8 - Employee Benefit Plans

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.


24

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


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

Compensation expense related to the ESOP for the three months ended December 31, 2015 and 2014 was $42,000 and $35,000, respectively. For the six months ended December 31, 2015 and 2014 compensation expense related to the ESOP was $80,000 and $97,000, respectively.

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

 
December 31, 2015
 
June 30,
2015
 
(Dollars in thousands)
Allocated shares
36,305

 
32,865

Unallocated shares
65,695

 
69,135

Total ESOP shares
102,000

 
102,000

Fair value of unallocated shares
$
1,701

 
$
1,555


Note 9 - 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 six months ended December 31, 2015. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
180

 
$

 
$
180

Mortgage-backed securities:
 
 
 
 
 
 


FHLMC

 
10,360

 

 
10,360

FNMA

 
14,510

 

 
14,510

GNMA

 
820

 

 
820



25

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


 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
435

 
$

 
$
435

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC

 
11,791

 

 
11,791

FNMA

 
16,408

 

 
16,408

GNMA

 
931

 

 
931


Assets and liabilities measured at fair value on a nonrecurring basis - Assets and liabilities are considered to be reflected at fair value on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, a nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.
The following table presents the balances of assets measured at fair value on a nonrecurring basis at December 31, 2015:
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:


 


 


 


Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
4,392

 
$
4,392

Land

 

 
321

 
321

Home equity

 

 
377

 
377

Commercial business

 

 
153

 
153

Total impaired loans 

 

 
5,243

 
5,243

 
 
 
 
 
 
 
 
Real estate owned:


 


 


 


Land
$

 
$

 
$
19

 
$
19

Total real estate owned

 

 
19

 
19

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
5,262

 
$
5,262




















26

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


The following table presents the balances of assets measured at fair value on a nonrecurring basis at June 30, 2015:

 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
4,172

 
$
4,172

Commercial

 

 
408

 
408

Land

 

 
212

 
212

Commercial business

 

 
868

 
868

Total impaired loans

 

 
5,660

 
5,660

 
 
 
 
 
 
 
 
Real estate owned:
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
188

 
$
188

Land

 

 
418

 
418

Total real estate owned 

 

 
606

 
606

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
6,266

 
$
6,266


The fair values of impaired loans and real estate owned properties are generally based on third party appraisal of the properties, resulting in Level 3 classification.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2015 and June 30, 2015:
 
 
December 31, 2015
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
5,243

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (5%)
Real estate owned
$
19

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (5%)
    
 
June 30, 2015
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
5,660

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (4%)
Real estate owned
$
606

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (1%)




27

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


The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of December 31, 2015 and June 30, 2015
 
December 31, 2015
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Financial Instruments-Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
12,572

 
$
12,572

 
$
12,572

 
$

 
$

Securities available-for-sale
25,870

 
26,103

 

 
25,870

 

Securities held-to-maturity
6,739

 
6,785

 

 
6,785

 

FHLB stock
1,553

 
1,553

 

 
1,553

 

Loans receivable
315,398

 
313,990

 

 

 
313,990

Bank owned life insurance investment, net of surrender charges
19,265

 
19,265

 

 
19,265

 

Accrued interest receivable
1,010

 
1,010

 

 
1,010

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
179,469

 
$
179,469

 
$
179,469

 
$

 
$

Certificates of deposit
123,261

 
122,856

 

 
122,856

 

FHLB advances
27,500

 
27,346

 

 
27,346

 

Advance payments by borrowers for taxes and insurance
1,113

 
1,113

 
1,113

 

 


28

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


 
June 30, 2015
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(In thousands)
Financial Instruments-Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,450

 
$
14,450

 
$
14,450

 
$

 
$

Securities available-for-sale
29,565

 
29,565

 

 
29,565

 

Securities held-to-maturity
7,617

 
7,692

 

 
7,692

 

FHLB stock
853

 
853

 

 
853

 

Loans held for sale
505

 
505

 

 

 

Loans receivable
287,165

 
288,424

 

 

 
288,424

Bank owned life insurance investment, net of surrender charges
19,001

 
19,001

 

 
19,001

 

Accrued interest receivable
1,069

 
1,069

 

 
1,069

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
173,482

 
$
173,482

 
$
173,482

 
$

 
$

Certificates of deposit
126,330

 
125,942

 

 
125,942

 

FHLB advances
10,000

 
9,882

 

 
9,882

 

Advance payments by borrowers for taxes and insurance
1,002

 
1,002

 
1,002

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents - For cash, the carrying amount is a reasonable estimate of fair value.
Securities - The estimated fair values of securities are based on quoted market prices of similar securities.
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.
Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.
Loans receivable - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.
Bank owned life insurance investment, net of surrender charges - The carrying amount is a reasonable estimate of its fair value.
Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank's demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.
FHLB advances - The fair value of the Bank's FHLB advances was calculated using the discounted cash flow method.

29

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


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.
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.
Note 10 - Stock-Based Compensation

On October 21, 2015, the Company’s stockholders approved the Anchor Bancorp 2015 Equity Incentive Plan ("Plan"), which provides for awards of restricted stock, restricted stock units, and stock options to directors, advisory directors, directors emeriti, officers and employees. The cost of awards under the Plan generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the Plan is 193,800. Shares of common stock issued under the Plan may be authorized but unissued shares or repurchased shares.

During the three months ended December 31, 2015, 104,778 shares of restricted stock were awarded and no stock options were granted. Awarded shares of restricted stock typically vest over various periods as long as the director, advisory director, directors emeriti, officer or employee remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For both the three and six months ended December 31, 2015 total compensation expense for the Plan was $800,000 and the related income tax benefit was $240,000.

The following tables provide a summary of changes in non-vested restricted stock awards for the three and six months ended December 31, 2015:

 
 
For the Three and Six Months Ended December 31, 2015
 
 
 
 
 
 
Weighted-Average Grant Date Fair Value
 
 
Shares
 
Non-vested at October 1, 2015
 

 

Granted
 
104,778

 
$
25.75

Vested
 
21,334

 
25.75

Forfeited
 

 

Non-vested at December 31, 2015
 
83,444

 


As of December 31, 2015, there was $1.9 million of total unrecognized compensation costs related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately two years.

Note 11 - Federal Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.


30

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


As of December 31, 2015, the Condensed Consolidated Statement of Financial Condition included a net deferred tax asset of $9.0 million. Our primary deferred tax assets relate to our ALLL and our net operating loss carryforward, in the amount of
$14.6 million, which will begin to expire in 2031.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. Our policy is to evaluate our deferred tax assets on a quarterly basis and record a valuation allowance for our deferred tax asset if we do not have sufficient positive evidence indicating that it is more likely than not that some or all of the deferred tax asset will be realized. Each quarter, we consider positive evidence, which may include taxes paid in carryback years, reversing timing differences, available tax planning strategies, and projected taxable income and weigh it against negative evidence, which may include cumulative losses in the most recent three year period and uncertainty regarding short-term future earnings, among other items. At December 31, 2014, management determined that no valuation allowance on the deferred tax asset was required. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income.



31


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 Federal Deposit Insurance Corporation ("FDIC"), the Washington Department of Financial Institutions, Division of Banks ("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 ability to attract and retain deposits;
increases in premiums for deposit insurance;
management's assumptions in determining the adequacy of the allowance for loan losses;
our ability to control operating costs and expenses;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
computer systems on which we depend could fail or experience a security breach;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to manage loan delinquency rates;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock;
adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q.



32


Some of these and other factors are discussed in our 2015 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 2016 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, operating results 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 10 full-service banking offices (including one Wal-Mart in-store location) 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, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington.

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

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


33


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. 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. These factors are used by the Chief Credit Officer who assesses the allowance for loan and lease losses on a monthly basis and reports to the Board of Directors no less than quarterly.

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

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability.

During the quarter ended December 31, 2014, management determined based on the available evidence that a valuation allowance was no longer appropriate and reversed the full deferred tax asset ("DTA") valuation allowance of $8.3 million. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income. The ultimate utilization of deferred tax assets, however, is dependent upon the existence, or generation of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.

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,

34


property tax, etc., are expensed during the period incurred. Assets held in real estate owned are reviewed quarterly for potential impairment. When impairment is indicated the impairment is charged against current period operating results and netted against the real estate owned to reflect a net book value. At disposition any residual difference is either charged to current period earnings as a loss on sale or reflected as income in a gain on sale.

Comparison of Financial Condition at December 31, 2015 and June 30, 2015

General. Total assets increased by $20.2 million, or 5.3%, to $399.4 million at December 31, 2015 from $379.2 million at June 30, 2015. The increase in assets during this period was primarily a result of a $28.1 million, or 9.9% increase in loan receivable, net, to $311.5 million at December 31, 2015 from $283.4 million at June 30, 2015. Partially offsetting this increase was a $3.7 million, or 12.5%, decline in securities available-for-sale comprised almost entirely of mortgage-backed securities, and a $1.5 million, or 57.7%, decline in prepaid expenses and other assets at December 31, 2015 from June 30, 2015. Total liabilities increased $20.6 million, or 6.5%, to $336.1 million at December 31, 2015 compared to $315.5 million at June 30, 2015, primarily due to a $17.5 million increase in Federal Home Loan Bank advances. Total deposits increased $2.9 million, or 1.0%, to $302.7 million at December 31, 2015 compared to June 30, 2015 primarily as a result of a $4.2 million, or 9.3% increase in noninterest bearing deposits to $48.9 million at December 31, 2015 from June 30, 2015.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2015 to December 31, 2015:
  
 
Balance at December 31, 2015
 
Balance at June 30, 2015
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Cash and cash equivalents
$
12,572

 
$
14,450

 
$
(1,878
)
 
(13.0
)%
Mortgage-backed securities, available-for-sale
25,690

 
29,130

 
(3,440
)
 
(11.8
)
Mortgage-backed securities, held-to-maturity
6,739

 
7,498

 
(759
)
 
(10.1
)
Loans receivable, net of allowance for loan losses
311,519

 
283,444

 
28,075

 
9.9

Real estate owned, net
662

 
797

 
(135
)
 
(16.9
)

Mortgage-backed securities available-for-sale decreased $3.4 million, or 11.8%, to $25.7 million at December 31, 2015 from $29.1 million at June 30, 2015. Mortgage-backed securities held-to-maturity decreased $759,000, or 10.1%, to $6.7 million at December 31, 2015 from $7.5 million at June 30, 2015. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, increased $28.1 million, or 9.9%, to $311.5 million at December 31, 2015 from $283.4 million at June 30, 2015 as new loan production, including loan purchases, exceeded principal reductions. Multi-family loans increased $11.7 million, or 27.2%, to $54.9 million at December 31, 2015 from $43.2 million at June 30, 2015, primarily due to the purchase of $22.8 million in multi-family loans, partially offset by the reclassification of $14.4 million multi-family loans to the one-to-four family loan portfolio. The loan purchase consisted of 12 multi-family projects in King and Pierce counties. All properties met our underwriting standards and each property was independently visited and re-underwritten. Commercial business loans increased $8.7 million, or 45.8%, to $27.7 million from $19.0 million at June 30, 2015. One-to-four family loans increased $5.5 million, or 9.6%, to $63.4 million from $57.9 million at June 30, 2015, due primarily to the reclassification discussed above. Commercial real estate loans increased $3.0 million, or 2.3%, to $131.3 million from $128.3 million. Land loans increased $1.0 million, or 25.0%, to $5.0 million at December 31, 2015 from $4.0 million at June 30, 2015. Construction loans decreased $620,000, or 5.3%, to $11.1 million from $11.7 million during the same period. Consumer loans decreased $927,000, or 3.9%, to $23.0 million at December 31, 2015 from $23.9 million at June 30, 2015.

As of December 31, 2015, the Company had seven real estate owned ("REO") properties with an aggregate book value of $662,000 compared to eight properties with an aggregate book value of $797,000 at June 30, 2015, and 10 properties with an aggregate book value of $600,000 at December 31, 2014.  The increase in the aggregate book value of REO properties during the quarter ended December 31, 2015 from the prior quarter was primarily attributable to three one-to-four family homes becoming REO for a net total of $389,000. At December 31, 2015, the largest REO property was a one-to-four family home in Cowlitz County, Washington with a carrying value of $197,000.


35



Liabilities. Total liabilities increased $20.6 million between June 30, 2015 and December 31, 2015, primarily as a result of a $17.5 million increase in FHLB advances. In addition, deposits increased $2.9 million, or 1.0%, to $302.7 million at December 31, 2015 from $299.8 million at June 30, 2015. Our core deposits, which consist of all deposits other than certificates of deposit, increased by $6.0 million, or 3.5%, to $179.5 million at December 31, 2015 from $173.5 million at June 30, 2015. Certificates of deposit decreased $3.0 million, or 2.4%, to $123.3 million at December 31, 2015 from $126.3 million at June 30, 2015. The decrease in certificates of deposit was offset by $4.2 million, or 9.3%, increase in noninterest-bearing demand deposits to $48.9 million at December 31, 2015 from $44.7 million at June 30, 2015.

The following table details the changes in deposit accounts at the dates indicated:
 
Balance at December 31, 2015
 
Balance at June 30, 2015
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
48,880

 
$
44,719

 
$
4,161

 
9.3
 %
Interest-bearing demand deposits
25,184

 
22,448

 
2,736

 
12.2

Money market accounts
60,732

 
63,916

 
(3,184
)
 
(5.0
)
Savings deposits
44,673

 
42,399

 
2,274

 
5.4

Certificates of deposit
123,261

 
126,330

 
(3,069
)
 
(2.4
)
Total deposit accounts
$
302,730

 
$
299,812

 
$
2,918

 
1.0
 %

Stockholders' Equity. Total stockholders' equity decreased $438,000, or 0.69%, to $63.3 million at December 31, 2015 from $63.7 million at June 30, 2015. The decrease was primarily a result of a $1.1 million decline in additional paid in capital due to the repurchase of 50,000 shares of our common stock during the six month period ended December 31, 2015, under our current share repurchase plan announced in July, 2015/effective in August 2015, at an average price of $21.89 per share. As of December 31, 2015, there were 77,500 shares available for future purchases under the current share repurchase plan. This decrease was partially offset by stock-based compensation of $584,000 and net income of $59,000 for the six months ended December 31, 2015. On October 21, 2015, shareholders approved the Anchor Bancorp 2015 Equity Incentive Plan (the "Plan"). Accumulated other comprehensive loss increased $67,000 to $778,000 as a result of unrealized valuation losses on investments available-for-sale.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2015 and 2014

General. Net loss for the three months ended December 31, 2015 was $286,000 or $0.12 per diluted share compared to a net income of $8.8 million or $3.55 per diluted share for the three months ended December 31, 2014, which included an $8.3 million tax benefit related to the reversal of the valuation allowance on deferred tax assets ("DTA"). For the six months ended December 31, 2015 the net income was $59,000 or $0.02 per diluted share compared to net income of $8.9 million or $3.59 per diluted share for the same period last year.

Net Interest Income. Net interest income before the provision for loan losses increased $53,000, or 1.5%, to $3.5 million for the quarter ended December 31, 2015 compared to the same period last year primarily as a result of the $99,000, or 75.6% decrease in the cost of FHLB advances partially offset by a decrease of $42,000, or 20.4% to $164,000 from $206,000 of mortgage-backed security income. For the six months ended December 31, 2015 net interest income before the provision for loan losses increased $140,000, or 2.0%, to $7.0 million from $6.9 million for the same period in 2014 primarily as a result of the $230,000, or 78.8% decrease in the cost of FHLB advances.

The Company's net interest margin increased two basis points to 4.08% for the quarter ended December 31, 2015 from 4.06% for the comparable period in 2014 despite a 13 basis point decrease in the average yield on interest-earning assets to 4.90% for the quarter ended December 31, 2015 compared to 5.03% for the same period in 2014. The improvement in our net interest margin compared to the same quarter last year reflects reductions in nonperforming assets since December 31, 2014 and in the weighted average cost of FHLB advances to 1.10% for the quarter ended December 31, 2015, compared to 3.51% for the same period in 2014. The weighted average cost of interest-bearing liabilities decreased 15 basis points to 1.04% for the quarter ended December 31, 2015 compared to 1.19% for the same period in the prior year.



36



The following table sets forth the changes to our net interest income for the three months ended December 31, 2015 compared to the same period in 2014. 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 December 31, 2015 Compared to Three Months Ended December 31, 2014
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
(163
)
 
$
135

 
$
(28
)
Mortgage-backed securities
(1
)
 
(41
)
 
(42
)
Investment securities, FHLB stock and cash and cash equivalents
4

 
2

 
6

Total net change in income on interest-earning assets
$
(160
)
 
$
96

 
$
(64
)
Interest-bearing liabilities:
 

 
 

 


Savings deposits
$

 
$
1

 
$
1

Interest-bearing demand deposits
(1
)
 
1

 

Money market accounts
6

 
(2
)
 
4

Certificates of deposit
12

 
(35
)
 
(23
)
FHLB advances
(70
)
 
(29
)
 
(99
)
Total net change in expense on interest-bearing liabilities
(53
)
 
(64
)
 
(117
)
Net change in net interest income
$
(107
)
 
$
160

 
$
53


For the six months ended December 31, 2015, the Company's net interest margin increased 11 basis points to 4.11% compared to 4.00% for the same period in 2014, reflecting the decline in our average interest-bearing liabilities. The average yield on interest-bearing assets decreased four basis points to 4.94% for the six months ended December 31, 2015 compared to 4.98% for the same period in the prior year. The decrease in the average yield on interest earning assets was the result of the amortization of premiums on securities during the six months ended December 31, 2015. The average cost of interest-bearing liabilities decreased 16 basis points to 1.04% for the six months ended December 31, 2015 compared to 1.20% for the same period of the prior year as the cost of our liabilities continue to decline, due to the reduction in the average balances of certificates of deposit and FHLB advances, and a 247 basis point decline in the average rate paid on FHLB advances.




















37



The following table sets forth the changes to our net interest income for the six months ended December 31, 2015 compared to the same period in 2014:

 
Six Months Ended December 31, 2015 Compared to Six Months Ended December 31, 2014
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
(244
)
 
$
181

 
$
(63
)
Mortgage-backed securities
10

 
(90
)
 
(80
)
Investment securities, FHLB stock and cash and cash equivalents
5

 
1

 
6

Total net change in income on interest-earning assets
$
(229
)
 
$
92

 
(137
)
Interest-bearing liabilities:
 
 
 
 
 
Savings deposits
$

 
$
2

 
$
2

Interest-bearing demand deposits
(2
)
 
2

 

Money market accounts
10

 
(5
)
 
5

Certificates of deposit
32

 
(85
)
 
(53
)
FHLB advances
(134
)
 
(97
)
 
(231
)
Total net change in expense on interest-bearing liabilities
(94
)
 
(183
)
 
(277
)
Net change in net interest income
$
(135
)
 
$
275

 
$
140


Interest Income. Total interest income for the three months ended December 31, 2015 decreased $64,000, or 1.5%, to $4.2 million from $4.3 million for the three months ended December 31, 2014. The decrease during the period was primarily attributable to the decline in the average yield on loans receivable and in the average balance of mortgage-backed securities. The average yield on loans receivable, net, decreased 23 basis points to 5.55% for the three months ended December 31, 2015 compared to 5.78% for the same period in the prior year. Average loans receivable, net, increased $9.4 million during the quarter ended December 31, 2015 compared to the same quarter last year. Average mortgage-backed securities declined $8.5 million during the three months ended December 31, 2015 compared to the same period in the prior year. The average yield on mortgage-backed securities decreased one basis point to 1.94% for the three months ended December 31, 2015 compared to 1.95% for the same period in the prior year. Average interest-earning assets decreased $3.7 million, or 1.1%, to $343.6 million for the three months ended December 31, 2015 compared to $339.9 million for the same period in 2014.


38



The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended December 31, 2015 and 2014:
 
Three Months Ended December 31,
 
2015
 
2014
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2014
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
290,016

 
5.55
%
 
$
280,637

 
5.78
%
 
$
(28
)
Mortgage-backed securities
33,861

 
1.94

 
42,348

 
1.95

 
(42
)
Investment securities
363

 
4.41

 
564

 
4.96

 
(3
)
FHLB stock
913

 
1.75

 
5,969

 
0.07

 
3

Cash and cash equivalents
18,452

 
0.28

 
10,390

 
0.27

 
6

Total interest-earning assets
$
343,605

 
4.90
%
 
$
339,908

 
5.03
%
 
$
(64
)
(1) 
Nonaccruing loans have been included in the table as loans carrying a zero yield for the period that they have been on nonaccrual, calculated net of deferred loan fees and loans in process.

For the six months ended December 31, 2015, total interest income decreased $137,000, or 1.6%, to $8.4 million from $8.6 million for the six months ended December 31, 2014. The decrease during the period was primarily attributable to the declines in the average yield on loans receivable, net, and in the average balance of mortgage-backed securities. The average yield on loans receivable, net, decreased 17 basis points to 5.57% for the six months ended December 31, 2015 compared to 5.74% for the same period in the prior year. Average loans receivable, net, increased $6.3 million during the six months ended December 31, 2015 compared to the same period in the prior year. Average mortgage-backed securities declined $9.4 million during the six months ended December 31, 2015 compared to the same period in the prior year. The average yield on mortgage-backed securities increased six basis points to 1.99% for the six months ended December 31, 2015 compared 1.93% for the same period in the prior year. Average interest-earning assets decreased $2.6 million, or 0.8%, to $341.4 million for the six months ended December 31, 2015 compared to $344.0 million for the same period in 2014.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended December 31, 2015 and 2014:

 
Six Months Ended December 31,
 
2015
 
2014
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2014
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
288,636

 
5.57
%
 
$
282,334

 
5.74
%
 
$
(63
)
Mortgage-backed securities
34,807

 
1.99

 
44,160

 
1.93

 
(80
)
Investment securities
457

 
4.81

 
567

 
5.29

 
(4
)
FHLB stock
883

 
1.13

 
6,000

 
0.10

 
2

Cash and cash equivalents
16,594

 
0.24

 
10,951

 
0.22

 
8

Total interest-earning assets
$
341,377

 
4.94
%
 
$
344,012

 
4.98
%
 
$
(137
)
(1) 
Nonaccruing loans have been included in the table as loans carrying a zero yield for the period that they have been on nonaccrual, calculated net of deferred loan fees and loans in process.





39



Interest Expense. Interest expense decreased $117,000, or 14.3%, to $703,000 for the three months ended December 31, 2015 from $820,000 for the three months ended December 31, 2014. The decrease during the period was primarily attributable to reductions in the average rate and balance of FHLB advances and in the average balances of certificates of deposit. The average balance of certificates of deposit declined $7.0 million, or 5.3%, to $124.4 million for the quarter ended December 31, 2015 while the average cost of these deposits increased three basis points to 2.00% for the three months ended December 31, 2015 compared to 1.97% for the same period of the prior year. The average balance of FHLB advances declined $3.3 million, or 21.8%, to $11.7 million during the quarter ended December 31, 2015 compared to $14.9 million for the same quarter last year. The average cost of FHLB advances decreased 241 basis points to 1.10% for the three months ended December 31, 2015 compared to 3.51% for the same period of the prior year. Average interest-bearing liabilities decreased $5.2 million, or 1.9%, to $270.9 million for the three months ended December 31, 2015 compared to $276.1 million for the same period in 2014.

The following table details average balances, cost of funds and the change in interest expense for the three months ended December 31, 2015 and 2014:

 
Three Months Ended December 31,
 
2015
 
2014
 
Increase/(Decrease) in
Interest Expense from
2014
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
43,628

 
0.16
%
 
$
40,577

 
0.16
%
 
$
1

Interest-bearing demand deposits
28,500

 
0.03

 
20,145

 
0.04

 

Money market deposits
62,751

 
0.18

 
69,044

 
0.14

 
4

Certificates of deposit
124,381

 
2.00

 
131,415

 
1.97

 
(23
)
FHLB advances
11,679

 
1.10

 
14,937

 
3.51

 
(99
)
Total interest-bearing liabilities
$
270,939

 
1.04
%
 
$
276,118

 
1.19
%
 
$
(117
)

For the six months ended December 31, 2015 interest expense decreased $277,000, or 16.5%, to $1.4 million from $1.7 million for the six months ended December 31, 2014. The decrease during the period was primarily attributable to reductions in the average rate and balances of FHLB advances and in the average balance of certificates of deposit. The average cost of certificates of deposit increased five basis point to 2.00% for the six months ended December 31, 2015 compared to 1.95% for the same period of the prior year. The average balance of the deposits declined $8.7 million, or 6.5%, to $124.9 million for the six months ended December 31, 2015 compared to the same period last year. Average FHLB advances declined $5.4 million during the six months ended December 31, 2015 compared to the same period last year. The average cost of FHLB advances decreased 247 basis points to 1.13% for the six months ended December 31, 2015 compared to 3.60% for the same period of the prior year. Average interest-bearing liabilities decreased $11.0 million, or 3.9%, to $269.1 million for the six months ended December 31, 2015 compared to $280.1 million for the same period in 2014.

















40



The following table details average balances, cost of funds and the change in interest expense for the six months December 31, 2015 and 2014:

 
Six Months Ended December 31,
 
2015
 
2014
 
Increase/(Decrease) in
Interest Expense from
2014
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
42,950

 
0.15
%
 
$
40,352

 
0.15
%
 
$
2

Interest-bearing demand deposits
27,306

 
0.04

 
19,806

 
0.05

 

Money market deposits
63,051

 
0.17

 
70,023

 
0.14

 
5

Certificates of deposit
124,944

 
2.00

 
133,664

 
1.95

 
(53
)
FHLB advances
10,840

 
1.13

 
16,219

 
3.60

 
(231
)
Total interest-bearing liabilities
$
269,091

 
1.04
%
 
$
280,064

 
1.20
%
 
$
(277
)

Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a $70,000 provision for loan losses was required for the three months ended December 31, 2015 compared to no provision for the three months ended December 31, 2014, reflecting loan growth. Nonperforming loans, those loans which were accruing loans 90 days or more past due or on nonaccrual status, totaled $2.7 million, at December 31, 2015 compared to $2.8 million at December 31, 2014. The ratio of nonperforming loans to total loans was 0.9% at December 31, 2015 compared to 1.0% at December 31, 2014. Total classified loans decreased $2.0 million, or 37.6%, to $3.3 million at December 31, 2015 from $5.3 million at December 31, 2014.

Management considers the allowance for loan losses at December 31, 2015 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by our regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

The following table details activity and information related to the allowance for loan losses at and for the three months ended December 31, 2015 and 2014:

 
At or For the Three Months Ended December 31,
 
 
2015
 
2014
 
(Dollars in thousands)
Provision for loan losses
$
70

 
$

Net charge-offs
(122
)
 
(6
)
Allowance for loan losses
3,879

 
4,000

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.2
%
 
1.4
%
Nonaccrual and 90 days or more past due and still accruing interest
$
2,709

 
$
2,802

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
143.2
%
 
142.8
%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period
0.9
%
 
1.0
%
Total loans
$
316,618

 
$
281,638


41



The following table details activity and information related to the allowance for loan losses at and for the six months ended December 31, 2015 and 2014:

 
At or For the Six Months Ended December 31,
 
 
2015
 
2014
 
(Dollars in thousands)
Provision for loan losses
$
90

 
$

Net charge-offs
(68
)
 
624

Allowance for loan losses
3,879

 
4,000

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.2
%
 
1.4
%
Nonaccrual and 90 days or more past due and still accruing interest
$
2,709

 
$
2,802

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
143.2
%
 
142.8
%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period
0.9
%
 
1.0
%
Total loans
$
316,618

 
$
281,638


We continue to restructure our delinquent loans, when appropriate, so our borrowers can continue to make payments while minimizing the Company's potential loss. As of December 31, 2015 and December 31, 2014 there were 39 and 43 loans, respectively, with aggregate net principal balances of $9.1 million and $10.8 million, respectively, that we have identified as TDRs. At December 31, 2015 and December 31, 2014 there were $1.5 million and $1.2 million, respectively, of TDRs included in nonperforming loans.

Noninterest Income. Noninterest income increased $138,000, or 13.5%, to $1.2 million for the quarter ended December 31, 2015 compared to $1.0 million for the same quarter a year ago. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended December 31, 2015 compared to the same period in 2014:

 
Three Months Ended December 31,
 
Increase (decrease)
 
 
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit services fees
$
331

 
$
347

 
$
(16
)
 
(4.6
)%
Other deposit fees
180

 
175

 
5

 
2.9

Other loan fees
184

 
144

 
40

 
27.8

Gain (loss) on sale of loans
67

 
(5
)
 
72

 
1,440.0

Bank owned life insurance investment
132

 
133

 
(1
)
 
(0.8
)
Other income
269

 
231

 
38

 
16.5

Total noninterest income
$
1,163

 
$
1,025

 
$
138

 
13.5
 %

The increase in noninterest income was primarily due to gain on sale of loans increasing to $67,000 for the quarter ended December 31, 2015 compared to a $5,000 loss on sale of loans for the same quarter a year ago. Also contributing to the increase, loan fees increased $40,000 primarily due to increased loan production and other income increased $38,000 primarily due to higher paper statement charges compared to the same quarter a year ago.








42



The following table provides a detailed analysis of the changes in the components of noninterest income for the six months ended December 31, 2015 compared to the same period in 2014:

 
Six Months Ended December 31,
 
Increase (decrease)
 
 
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit services fees
$
703

 
$
731

 
$
(28
)
 
(3.8
)%
Other deposit fees
358

 
364

 
(6
)
 
(1.6
)
Gain on sale of investments

 
47

 
(47
)
 

Other loan fees
328

 
288

 
40

 
13.9

Gain (loss) on sale of loans
128

 
(11
)
 
139

 
1,263.6

Bank owned life insurance investment
289

 
272

 
17

 
6.3

Other income
401

 
317

 
84

 
26.5

Total noninterest income
$
2,207

 
$
2,008

 
$
199

 
9.9
 %

Noninterest income increased $199,000, or 9.9%, to $2.2 million during the six months ended December 31, 2015 compared to $2.0 million for the same period in 2014 primarily due to an increase in gain on sale of loans of $139,000 to $128,000 compared to a loss of $11,000 for the same period in 2014. Also contributing to the increase was other income increasing $84,000, or 26.5%, to $401,000 compared to $317,000 for the same period in 2014 primarily due to higher paper statement charges compared to the same period a year ago.

Noninterest Expense. For the three months ended December 31, 2015, noninterest expense increased $976,000, or 24.2%, to $5.0 million from $4.0 million for the three months ended December 31, 2014. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended December 31, 2015 and 2014:

 
Three Months Ended December 31,
 
Increase (decrease)
 
 
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
2,815

 
$
1,945

 
$
870

 
44.7
 %
General and administrative expenses
994

 
701

 
293

 
41.8

Real estate owned impairment
5

 
93

 
(88
)
 
(94.6
)
Real estate holding costs
11

 
62

 
(51
)
 
(82.3
)
FDIC insurance premiums
64

 
125

 
(61
)
 
(48.8
)
Information technology
415

 
439

 
(24
)
 
(5.5
)
Occupancy and equipment
449

 
463

 
(14
)
 
(3.0
)
Deposit services
122

 
158

 
(36
)
 
(22.8
)
Marketing
130

 
154

 
(24
)
 
(15.6
)
Loss on sale of property, premises and equipment
1

 

 
1

 

Gain on sale of real estate owned
(4
)
 
(114
)
 
110

 
(96.5
)
Total noninterest expense
$
5,002

 
$
4,026

 
$
976

 
24.2
 %

The increase in noninterest expense was primarily due to an $870,000 increase in compensation benefits primarily due to $800,000 of stock-based compensation under the Plan during the quarter ended December 31, 2015. General and administrative expenses increased $293,000 to $994,000 for the three months ended December 31, 2015 from $701,000 for the three months ended December 31, 2014 primarily due to $195,000 in proxy contest expense and a $55,000 commission fee in connection with the purchase of multi-family loans.


43



The following table provides an analysis of the changes in the components of noninterest expense for the six months ended December 31, 2015 and 2014:

 
Six Months Ended December 31,
 
Increase (decrease)
 
 
 
2015
 
2014
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
4,835

 
$
3,968

 
$
867

 
21.8
 %
General and administrative expenses
1,728

 
1,369

 
359

 
26.2

Real estate owned impairment
43

 
130

 
(87
)
 
(66.9
)
Real estate holding costs
22

 
216

 
(194
)
 
(89.8
)
FDIC insurance premiums
133

 
246

 
(113
)
 
(45.9
)
Information technology
857

 
868

 
(11
)
 
(1.3
)
Occupancy and equipment
939

 
945

 
(6
)
 
(0.6
)
Deposit services
235

 
383

 
(148
)
 
(38.6
)
Marketing
255

 
309

 
(54
)
 
(17.5
)
Loss (gain) on sale of property, premises and equipment
4

 
(2
)
 
6

 
(300.0
)
Loss (gain) on sale of real estate owned
4

 
(108
)
 
112

 
(103.7
)
Total noninterest expense
$
9,055

 
$
8,324

 
$
731

 
8.8
 %

Noninterest expense increased $731,000, or 8.8%, to $9.1 million in the six months ended December 31, 2015 compared to $8.3 million for the six months ended December 31, 2014. The increase was primarily due to an $867,000 increase in compensation and benefits primarily due to $800,000 of stock-based compensation awarded under the Plan during the six months ended December 31, 2015. General and administrative expenses increased $359,000 to $1.7 million for the six months ended December 31, 2015 compared to $1.4 million for the six months ended December 31, 2014 primarily due to $195,000 in proxy contest expense and a $55,000 commission fee in connection with the purchase of multi-family loans.

Liquidity, Commitments and Capital Resources

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

Our primary sources of funds are from customer deposits, loan repayments, loan sales, investment payments, maturing investment securities and advances from the FHLB of Des Moines. 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 December 31, 2015, the total approved loan origination commitments outstanding were $9.1 million. At the same date, unused lines of credit were $53.2 million.

For purposes of determining our liquidity position, we use a concept of basic surplus, which is derived from the total of available-for-sale securities, as well as other liquid assets, less short-term liabilities. Our Board of Directors has established a target range for basic surplus of 5% to 7%. For the three months ended December 31, 2015, our average basic surplus was 4.5%, which indicates we are below the liquidity standard set by our Board. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

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

44


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 December 31, 2015 totaled $42.3 million. We had no brokered deposits at December 31, 2015. 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 $105.8 million from the FHLB of Des Moines. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.0 million which is collateralized with securities and a line of credit for $5.0 million with Pacific Coast Bankers' Bank.

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 Des Moines, 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 dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the six month period ended December 31, 2015, the Bank paid a $556,000 dividend to the Company. The payment is being used for the Company's general corporate purposes, including supporting the Company's ongoing operations and stock repurchases.

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 in making commitments as we do for on-balance sheet instruments. Collateral is not required to support commitments.

Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed 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.

45



The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of December 31, 2015:
 
 
Amount of Commitment
Expiration Per Period
 
Total Amounts
Committed (2)
 
Due in
One Year
 
(In thousands)
Commitments to originate loans (1)
$
9,118

 
$
9,118

 
 
 
 
Lines of credit
 
 
 

Fixed rate (3)
1,479

 
128

Adjustable rate
51,678

 
16,636

Undisbursed balance of lines of credit
$
53,157

 
$
16,764


(1) 
Interest rates on fixed rate loans are 1.99% to 9.99%. 
(2) 
At December 31, 2015 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 Shelton and Puyallup, Washington. These leases run for periods ranging from three to five years. All leases require the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitments for the next five years are as follows:
Year Ended June 30,
 
 
 
Amount
 
 
(In thousands)
2016
 
$55
2017
 
$117
2018
 
$124
2019
 
$84
2020
 
$36

Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. As of December 31, 2015, the Bank exceeded all regulatory capital requirements with, Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital (CET1), Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios of 14.3%, 16.0%, 16.0%, and 17.2%, respectively. As of June 30, 2015 these ratios were 14.3%, 16.2%, 16.2%, and 17.4%, respectively. The CET1 ratio is a new required regulatory capital ratio that began for the quarter ended March 31, 2015. At December 31, 2015, the Bank met the requirements to be deemed "well-capitalized" under applicable regulatory guidelines.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, CET1, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 15.8%, 17.7%, 17.7%, and 18.8%, respectively, as of December 31, 2015. As of June 30, 2015, these ratios were 16.6%, 19.0%, 19.0% and 20.1%, respectively.






46




The Bank's actual capital amounts and ratios at December 31, 2015 are presented in the following table:

Anchor Bank
 
 
 
 
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
 
 
 
Minimum Capital Requirement
 
 
Actual
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total capital
(to risk-weighted assets)
$
58,100

 
17.2
%
 
$
27,068

 
8.0
%
 
$
33,836

 
10.0
%
Tier I capital
(to risk-weighted assets)
$
54,221

 
16.0
%
 
$
20,301

 
6.0
%
 
$
27,068

 
8.0
%
Common equity tier 1 capital (to risk-weighted assets)
$
54,221

 
16.0
%
 
$
15,226

 
4.5
%
 
$
21,993

 
6.5
%
Tier I leverage capital
(to average assets)
$
54,221

 
14.3
%
 
$
15,144

 
4.0
%
 
$
18,930

 
5.0
%
 

The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of December 31, 2015, were as follows:

Anchor Bancorp
Actual
 
Amount
 
Ratio
 
(Dollars in thousands)
December 31, 2015
 
 
 
Total capital
(to risk-weighted assets)
$
63,830

 
18.8
%
Tier I capital
(to risk-weighted assets)
$
59,951

 
17.7
%
Common equity tier 1 capital (to risk-weighted assets)
$
59,951

 
17.7
%
Tier I leverage capital
(to average assets)
$
59,951

 
15.8
%


47


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

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

economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
change in net interest income;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
capital position.

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

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

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

increased our originations of shorter term loans and particularly, home equity loans (limited recent originations) and commercial business loans;
structured certain borrowings with maturities that match fund our loan portfolios; and
sold our fixed rate single family loans to generate noninterest income as well as managing interest rate risk.

How We Measure the Risk of Interest Rate Changes. We measure our interest rate sensitivity on a quarterly basis utilizing an internal model. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual experience differs from such assumptions. The assumptions we use are based upon proprietary and market data and reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. An independent service was used to provide market rates of interest and certain interest rate assumptions to determine prepayments and maturities of loans, investments and borrowings and decay rates on deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We assumed that non-maturity deposits can be maintained with rate adjustments not directly proportionate to the change in market interest rates.

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

48



We generally have found that a number of our deposit accounts are less rate sensitive than others. Thus, when interest rates increase, the interest rates paid on these deposit accounts do not require a proportionate increase in order for us to retain them. These assumptions are based upon an analysis of our customer base, competitive factors and historical experience. The following table shows the change in our net portfolio value at December 31, 2015 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
 
 
Net Portfolio Value
 
Net Portfolio as % of Portfolio Value of Assets
 
 
Basis Point Change in Rates
 
 
 
Market Value of Assets (4)
 
Amount
 
$ Change (1)
 
% Change
 
NPV Ratio (2)
 
% Change (3)
 
 
 
(Dollars in thousands)
300
 
$
60,256

 
$
(627
)
 
(1.03
)%
 
16.50
%
 
0.79
%
 
$
365,211

200
 
61,115

 
232

 
0.38

 
16.39

 
0.68

 
372,943

100
 
61,367

 
484

 
0.79

 
16.13

 
0.42

 
380,393

Base
 
60,883

 

 

 
15.71

 

 
387,450

(100)
 
64,520

 
3,637

 
5.97

 
16.34

 
0.63

 
394,784

___________
(1) 
Represents the increase (decrease) in the estimated net portfolio value at the indicated change in interest rates compared to the net portfolio value assuming no change in interest rates.
(2) 
Calculated as the net portfolio value divided by the market value of assets (“net portfolio value ratio”).
(3) 
Calculated as the increase (decrease) in the net portfolio value ratio assuming the indicated change in interest rates over the estimated net portfolio value ratio assuming no change in interest rates.
(4) 
Calculated based on the present value of the discounted cash flows from assets. The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity of those assets to interest rate changes.

The following table illustrates the change in net interest income that would occur in the event of an immediate change in interest rates at December 31, 2015, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.

Basis Point Change in Rates
 
Net Interest Income
 
Amount
 
$ Change (1)
 
% Change
 
 
(Dollars in thousands)
300
 
$
16,640

 
$
1,319

 
8.6
 %
200
 
16,231

 
910

 
5.9

100
 
15,777

 
456

 
3.0

Base
 
15,321

 

 

(100)
 
14,501

 
(820
)
 
(5.4
)

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

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

As with any method of measuring interest rate risk, shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in the market interest rates. Also, the interest rates on certain types of assets and liabilities may

49


fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

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 December 31, 2015, 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 December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company also continued to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.


50


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

(a) Not applicable

(b) Not applicable

(c) The following table summarizes Anchor Bancorp's common stock repurchases during the quarter ended December 31, 2015:

 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Repurchased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
 
 
 
 
 
 
 
October 1 - October 31, 2015
 
10,000

 
$
22.00

 
10,000

 
77,500

November 1 - November 30, 2015
 

 

 

 
77,500

December 1 - December 31, 2015
 

 

 

 
77,500

 
 
10,000

 
$
22.00

 
10,000

 
 

In July 2015, the Board of Directors of Anchor Bancorp approved the repurchase of up to 127,500 shares of the Company's common stock, or five percent of the Company's outstanding shares. The stock repurchase plan became effective August 28, 2015.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.


51


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)
10.4
Form of Employment Agreement between Anchor Bank and Jerald L. Shaw and Terri L. Degner (3)
10.5
Form of Severance Agreement and Release (4)
10.6
Agreement in Connection with Anchor Annual Meeting between Anchor Bancorp and Joel S. Lawson IV dated October 21, 2015 (5)
10.7
Standstill Agreement and Non-Disclosure Agreement by and among Anchor Bancorp, Joel S. Lawson IV and Varonica S. Ragan dated December 8, 2015 (6)
10.8
Form of restricted stock award agreement (7)
10.9
Forms of incentive and non-qualified stock option award agreements (7)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements



(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 10, 2015.
(3)
Filed as an exhibit to the Company's Current Report on Form 8-K filed May 22, 2014.
(4)
Filed as an exhibit to the Company's Current Report on Form 8-K filed January 22, 2015.
(5)
Filed as an exhibit to the Company's Current Report on Form 8-K filed October 23, 2015.
(6)
Filed as an exhibit to the Company's Current Report on Form 8-K dated December 10, 2015.
(7)
Filed as an exhibit to the Company's Registration Statement on Form S-8 dated December 8, 2015.


52


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: February 8, 2016
/s/Jerald L. Shaw                                           
 
Jerald L. Shaw 
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Date: February 8, 2016
/s/Terri L. Degner                                        
 
Terri L. Degner
 
Executive Vice President and 
 
Chief Financial Officer 
 
(Principal Financial and Accounting Officer)

53



EXHIBIT INDEX

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements


54