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EX-31.2 - EXHIBIT 31.2 - Anchor Bancorpancb10-q20140930exhibit312.htm
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EXCEL - IDEA: XBRL DOCUMENT - Anchor BancorpFinancial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition period from _____ to _____
 
Commission File Number: 001-34965
 
ANCHOR BANCORP
 
(Exact name of registrant as specified in its charter)
 
Washington  
  26-3356075
(State or other jurisdiction of incorporation 
(I.R.S. Employer
or organization) 
I.D. Number)
 
 
601 Woodland Square Loop SE, Lacey, Washington
98503
(Address of principal executive offices) 
(Zip Code)
 
 
Registrant’s telephone number, including area code:
  (360) 491-2250
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [   ]

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of November 6, 2014, there were 2,550,000, shares of common stock, $.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)
 
September 30, 2014
 
June 30, 2014
ASSETS
 (Unaudited)
 
 
Cash and cash equivalents
$
17,797

 
$
14,758

Securities available-for-sale, at fair value, amortized cost of $36,504 and $39,107
36,119

 
38,917

Securities held-to-maturity, at amortized cost, fair value of $8,475 and $8,908
8,391

 
8,765

Loans receivable, net of allowance for loan losses of $3,994 and $4,624
277,102

 
281,526

Bank owned life insurance investment, net of surrender charges
19,566

 
19,428

Accrued interest receivable
1,165

 
1,236

Real estate owned, net ("REO")
6,092

 
5,067

Federal Home Loan Bank  ("FHLB") stock, at cost
5,985

 
6,046

Property, premises, and equipment, at cost, less accumulated depreciation of $14,803 and $14,777
11,405

 
11,313

Deferred tax asset, net
555

 
555

Prepaid expenses and other assets
1,394

 
1,517

Total assets
$
385,571

 
$
389,128

LIABILITIES AND STOCKHOLDERS’ EQUITY 
 

 
 

LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
42,383

 
$
41,149

Interest-bearing
264,963

 
269,885

Total deposits
307,346

 
311,034

 
 
 
 
FHLB advances
17,500

 
17,500

Advance payments by borrowers for taxes and insurance
1,558

 
891

Supplemental Executive Retirement Plan liability
1,712

 
1,715

Accounts payable and other liabilities
3,799

 
4,313

Total liabilities
331,915

 
335,453

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding

 

Common stock, $.01 par value per share, authorized 45,000,000 shares; 2,550,000 issued and 2,475,701 outstanding at September 30, 2014 and 2,550,000 shares issued and 2,473,981 outstanding at June 30, 2014, respectively
25

 
25

Additional paid-in capital
23,338

 
23,293

Retained earnings, substantially restricted
32,027

 
31,914

Unearned Employee Stock Ownership Plan ("ESOP") shares
(779
)
 
(797
)
Accumulated other comprehensive loss, net of tax
(955
)
 
(760
)
Total stockholders’ equity
53,656

 
53,675

Total liabilities and stockholders’ equity
$
385,571

 
$
389,128

 
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 September 30,
 
 
 
2014
 
2013
 
Interest income:
 
 
 
 
Loans receivable, including fees
$
4,053

 
$
4,321

 
Securities
14

 
57

 
Mortgage-backed securities
220

 
259

 
Total interest income
4,287

 
4,637

 
Interest expense:
 

 
 

 
Deposits
699

 
773

 
FHLB advances
160

 
270

 
Total interest expense
859

 
1,043

 
Net interest income before provision for loan losses
3,428

 
3,594

 
Provision for loan losses

 

 
Net interest income after provision for loan losses
3,428

 
3,594

 
Noninterest income
 

 
 

 
Deposit service fees
384

 
377

 
Other deposit fees
189

 
200

 
Gain on sale of investments
47

 

 
   Loan fees
144

 
149

 
Loss on sale of loans
(6
)
 
(17
)
 
Bank owned life insurance ("BOLI") investment
138

 
143

 
Other income
87

 
115

 
Total noninterest income
983

 
967

 
Noninterest expense
 

 
 

 
Compensation and benefits
2,023

 
2,006

 
General and administrative expenses
667

 
798

 
Real estate owned impairment
37

 
360

 
Real estate owned holding costs
154

 
77

 
Federal Deposit Insurance Corporation ("FDIC") insurance premiums
121

 
142

 
Information technology
428

 
428

 
Occupancy and equipment
483

 
464

 
Deposit services
224

 
136

 
Marketing
156

 
162

 
Gain on sale of property, premises and equipment
(1
)
 
(5
)
 
Loss on sale of real estate owned
6

 
5

 
Total noninterest expense
4,298

 
4,573

 
Income (loss) before provision for income taxes
113

 
(12
)
 
Provision for income taxes

 

 
Net income (loss)
$
113

 
$
(12
)
 
Basic earnings per share
$
0.05

 
$
0.00

 
Diluted earnings per share
$
0.05

 
$
0.00


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

2


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Dollars in thousands)(Unaudited)
Three Months Ended September 30,
 
 
 
2014
 
2013
 
NET INCOME (LOSS)
$
113

 
$
(12
)
 
OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
 

 
 
 
Unrealized holding (losses) gains on available-for-sale
securities during the period
(194
)
 
203

 
Adjustment for realized gains included in
net income (loss)
(47
)
 

 
Other comprehensive (loss) income, net of
income tax
(241
)
 
203

 
COMPREHENSIVE (LOSS) INCOME
$
(128
)
 
$
191


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


3


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data) (Unaudited)
Three Months Ended September 30,
 
 
 
2014
 
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income (loss)
$
113

 
$
(12
)
 
Adjustments to reconcile net income (loss) to net cash from operating activities:
 

 
 

 
Depreciation and amortization
164

 
155

 
Net amortization of premiums on securities
151

 
192

 
ESOP expense
63

 
29

 
Real estate owned impairment
37

 
360

 
Income from bank owned life insurance investment
(138
)
 
(143
)
 
Loss on sale of loans
6

 
17

 
Gain on sale of investments
(47
)
 

 
Originations of loans held for sale
(6
)
 
(4,623
)
 
Proceeds from sale of loans held for sale

 
4,827

 
Gain on sale of property, premises, and equipment
(1
)
 
(5
)
 
Loss on sale of real estate owned
6

 
5

 
Change in operating assets and liabilities:
 

 
 

 
Accrued interest receivable
71

 
(6
)
 
Prepaid expenses, other assets, and income tax receivable
123

 
4,077

 
Supplemental Executive Retirement Plan
(3
)
 
(15
)
 
Accounts payable and other liabilities
(514
)
 
312

 
Net cash provided by operating activities
25

 
5,170

 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
Proceeds from maturities and calls of available-for-sale securities
702

 

 
Principal repayments on available-for-sale securities
1,797

 
3,090

 
Principal repayments on held-to-maturity securities
360

 
566

 
Loan originations, net of undisbursed loan proceeds and principal repayments
2,675

 
(3,658
)
 
Proceeds from sale of real estate owned
762

 
967

 
Capital improvements on real estate owned
(6
)
 
(363
)
 
Proceeds from sale of property, premises, and equipment, net
1

 
5

 
Purchase of fixed assets
(256
)
 
(130
)
 
Net cash provided by investing activities
6,035

 
477

 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
Net decrease in deposits
(3,688
)
 
(2,608
)
 
Net change in advance payments by borrowers for taxes and insurance
667

 
599

 
Repayment of FHLB advances

 
(47,400
)
 
Net cash used in financing activities
$
(3,021
)
 
$
(49,409
)
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
3,039

 
$
(43,762
)
 
Beginning of period
14,758

 
65,353

 
End of period
$
17,797

 
$
21,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) (Dollars in thousands, except share data) (Unaudited)
Three Months Ended September 30,
 
 
 
2014
 
2013
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 

 
 

 
Noncash investing activities:
 

 
 

 
Net loans transferred to real estate owned
$
1,824

 
$
523

 
Unrealized holding (losses) gains on available-for-sale securities
$
(194
)
 
$
203

 
Cash paid during the period for interest
$
859

 
$
1,095


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

5


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

Note 1 - Nature of Business

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

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 11 full-service bank offices (including two Wal-Mart store locations) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington.  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, 2014 (“2014 Form 10-K”). The results of operations for the three months ended September 30, 2014 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2015. 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.

Note 3 - Conversion and Change in Corporate Form

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

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

Note 4 - Recently Issued Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity, which will allow an alternative fair value measurement approach for consolidated collateralized financing entities (CFEs) to eliminate a practice issue that results in measuring the fair value of a CFE’s financial assets at a different amount from the fair value of its financial liabilities even when the financial liabilities have recourse to only the financial assets. The approach would permit the parent company of a consolidated CFE to measure the CFE’s financial assets and financial liabilities based on the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The effective date will be for fiscal years, and interim periods within those years, beginning after December 15, 2015 for public organizations. an entity can elect either a retrospective or a modified retrospective transition method, and early adoption is permitted as of the

6

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


beginning of an annual period. The adoption of ASU 2014-13 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-14, Receivable-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective of this amendment is to reduce variations in practice related to the classification of foreclosed loans that are either fully or partially guaranteed under government programs. Upon foreclosure of fully or partially guaranteed loans which are guaranteed under government programs the creditor will be required to reclassify the previously existing mortgage loan to a separate other receivable from the guarantor, measured at the amount of the guarantee that it expects to collect. The effective date will be for fiscal years, and interim periods within those years, beginning after December 15, 2014 for public organizations. The adoption of ASU 2014-14 is not expected to have a material impact on the Company's consolidated financial statements.

Note 5 - Supervisory Directive
 
Anchor Bank entered into an Order to Cease and Desist (“Order”) with the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions, Division of Banks (“DFI”) on August 12, 2009. On September 5, 2012, the FDIC and the DFI terminated the Order and it was replaced with a Supervisory Directive.
 
The Order was terminated as a result of the steps Anchor Bank took in complying with the Order and reducing its level of classified assets, augmenting management and improving the overall condition of the Bank.
 
The Supervisory Directive contains provisions concerning (i) the management and directors of Anchor Bank; (ii) restrictions on paying dividends; (iii) reductions of classified assets; (iv) maintaining Tier 1 capital  in an amount equal to or exceeding 10% of Anchor Bank’s total assets;  (v) policies concerning the allowance for loan and lease losses (“ALLL”); and (vi) requirements to furnish a revised three-year business plan to improve Anchor Bank’s profitability and progress reports to the FDIC and DFI.
 
Anchor Bank believes that it is in compliance with the requirements set forth in the Supervisory Directive.

Note 6 - Earnings (Loss) Per Share ("EPS")

Basic earnings per share is computed by dividing income or loss, as applicable, available to common stockholders by the weighted average number of common shares outstanding for the period. As ESOP shares are committed to be released they become outstanding for EPS calculation purposes. ESOP shares not committed to be released are not considered outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. There were no other securities that could convert to common stock as of September 30, 2014 and 2013. The following table presents a reconciliation of the components used to compute basic and diluted earnings (loss) per share:

 
For the Three Months Ended September 30,
 
2014
 
2013
 
(Dollars in thousands, except share data)
Net income (loss)
$
113

 
$
(12
)
Weighted-average common shares outstanding
2,474,841

 
2,465,283

Basic earnings per share
$
0.05

 
$
0.00

Diluted earnings per share
$
0.05

 
$
0.00


There were no antidilutive stock options or other potential shares at or for the three months ended September 30, 2014 and 2013.






7

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


Note 7 - Investments

The amortized cost and estimated fair market values of investment securities as of September 30, 2014 and June 30, 2014, were as follows:
 
September 30, 2014
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
441

 
$
1

 
$

 
$
442

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC (1)
15,455

 
137

 
(213
)
 
15,379

FNMA (2)
19,490

 
68

 
(360
)
 
19,198

GNMA (3)
1,118

 

 
(18
)
 
1,100

 
$
36,504

 
$
206

 
$
(591
)
 
$
36,119

Securities held-to-maturity
 

 
 

 
 

 
 

Municipal bonds
$
125

 
$

 
$

 
$
125

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
3,806

 
112

 
(73
)
 
3,845

FNMA
2,162

 
144

 
(35
)
 
2,271

GNMA
2,298

 

 
(64
)
 
2,234

 
$
8,391

 
$
256

 
$
(172
)
 
$
8,475

(1) Federal Home Loan Mortgage Corporation ("Freddie Mac")
(2) Federal National Mortgage Association ("Fannie Mae")
(3) Government National Mortgage Association ("Ginnie Mae")     
 
June 30, 2014
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
443

 
$
3

 
$

 
$
446

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
16,901

 
242

 
(187
)
 
16,956

FNMA
20,567

 
90

 
(326
)
 
20,331

GNMA
1,196

 

 
(12
)
 
1,184

 
$
39,107

 
$
335

 
$
(525
)
 
$
38,917

Securities held-to-maturity
 

 
 

 
 

 
 

Municipal bonds
$
127

 
$

 
$

 
$
127

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
3,958

 
122

 
(63
)
 
4,017

FNMA
2,268

 
155

 
(29
)
 
2,394

GNMA
2,412

 

 
(42
)
 
2,370

 
$
8,765

 
$
277

 
$
(134
)
 
$
8,908


There were 40 and 38 securities in an unrealized loss position at September 30, 2014 and June 30, 2014, 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

8

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 September 30, 2014 and June 30, 2014, were as follows:

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2014
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
424

 
$
(8
)
 
$
8,578

 
$
(205
)
 
$
9,002

 
$
(213
)
FNMA
1,315

 
(4
)
 
14,886

 
(356
)
 
16,201

 
(360
)
GNMA

 

 
1,100

 
(18
)
 
1,100

 
(18
)
 
$
1,739

 
$
(12
)
 
$
24,564

 
$
(579
)
 
$
26,303

 
$
(591
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2014
(In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
2,540

 
$
(73
)
 
$
2,540

 
$
(73
)
FNMA

 

 
828

 
(35
)
 
828

 
(35
)
GNMA

 

 
2,234

 
(64
)
 
2,234

 
(64
)
 
$

 
$

 
$
5,602

 
$
(172
)
 
$
5,602

 
$
(172
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2014
 (In thousands)
Securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
9,072

 
$
(187
)
 
$
9,072

 
$
(187
)
FNMA

 

 
15,799

 
(326
)
 
15,799

 
(326
)
GNMA

 

 
1,184

 
(12
)
 
1,184

 
(12
)
 
$

 
$

 
$
26,055

 
$
(525
)
 
$
26,055

 
$
(525
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2014
 (In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
2,642

 
$
(63
)
 
$
2,642

 
$
(63
)
FNMA

 

 
862

 
(29
)
 
862

 
(29
)
GNMA

 

 
2,370

 
(42
)
 
2,370

 
(42
)
 
$

 
$

 
$
5,874

 
$
(134
)
 
$
5,874

 
$
(134
)




9

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


Contractual maturities of securities at September 30, 2014 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.
September 30, 2014
Amortized
Cost
 
Fair Value
 
(In thousands)
Securities available-for-sale
 
Municipal bonds:
 
 
 
Due within one year
$

 
$

Due after one to five years
250

 
251

Due after five to ten years

 

Due after ten years
191

 
191

Mortgage-backed securities:
 
 
 
FHLMC
15,455

 
15,379

FNMA
19,490

 
19,198

GNMA
1,118

 
1,100

 
$
36,504

 
$
36,119

Securities held-to-maturity
 
Municipal bonds:
 
 
 
Due after ten years
$
125

 
$
125

Mortgage-backed securities:
 
 
 
FHLMC
3,806

 
3,845

FNMA
2,162

 
2,271

GNMA
2,298

 
2,234

 
$
8,391

 
$
8,475


Sales of securities available-for-sale for the dates indicated are summarized as follows:
 
Three Months Ended September 30,
 
2014
 
2013
 
(In thousands)
Proceeds from sales
$
702

 
$

Gross realized gains
47

 



Pledged securities for the dates indicated are summarized as follows:
 
September 30, 2014
 
June 30, 2014
Pledged to secure:
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
Public deposits
$
14,594

 
$
14,533

 
$
10,081

 
$
10,154

FHLB borrowings
2,095

 
2,160

 
2,223

 
2,301

Federal Reserve borrowings
1,022

 
1,001

 
1,127

 
1,120





10

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


Note 8 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:
 
 
September 30, 2014
 
June 30,
2014
 
(In thousands)
Real estate:
 
 
 
One-to-four family
$
60,703

 
$
63,009

Multi-family
48,864

 
47,507

Commercial
105,031

 
107,828

Construction
20,184

 
19,690

Land
4,298

 
4,126

Total real estate
239,080

 
242,160

Consumer:
 

 
 

Home equity
19,573

 
20,894

Credit cards
3,522

 
3,548

Automobile
984

 
1,073

Other consumer
2,533

 
2,838

Total consumer
26,612

 
28,353

 
 
 
 
Commercial business
16,511

 
16,737

Total loans
282,203

 
287,250

Less:
 

 
 

Deferred loan fees
1,107

 
1,100

Allowance for loan losses
3,994

 
4,624

Loans receivable, net
$
277,102

 
$
281,526

 
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 September 30, 2014:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 09/30/14
 
(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
(186
)
 
13

 
37

 
98

 
1

 
28

 
8

 
1

 

Charge-offs
(94
)
 
(159
)
 
(340
)
 

 

 
(84
)
 
(86
)
 

 
(763
)
Recoveries
11

 

 

 
12

 

 
37

 
73

 

 
133

Ending balance
$
1,281

 
$
83

 
$
379

 
$
300

 
$
75

 
$
568

 
$
1,226

 
$
82

 
$
3,994

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


11

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



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

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 09/30/13
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,393

 
$
156

 
$
671

 
$
356

 
$
531

 
$
817

 
$
1,172

 
$
51

 
$
5,147

Provision (benefit) for loan losses
208

 
50

 
(206
)
 
(158
)
 
(88
)
 
251

 
(57
)
 

 

Charge-offs
(199
)
 

 

 

 

 
(298
)
 
(21
)
 

 
(518
)
Recoveries
52

 

 
209

 
8

 

 
30

 
13

 

 
312

Ending balance
$
1,454

 
$
206

 
$
674

 
$
206

 
$
443

 
$
800

 
$
1,107

 
$
51

 
$
4,941

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

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




12

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



The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
2,696

 
$
3,047

 
$

Multi-family

 

 

Commercial real estate

 

 

Land
322

 
335

 

Home equity
66

 
68

 

Commercial business
64

 
126

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
7,907

 
$
7,922

 
$
662

Multi-family

 

 

Commercial real estate

 

 

Land
417

 
417

 
11

Home equity
295

 
297

 
61

Commercial business
157

 
157

 
3

Total
 

 
 

 
 

One-to-four family
$
10,603

 
$
10,969

 
$
662

Multi-family

 

 

Commercial real estate

 

 

Land
739

 
752

 
11

Home equity
361

 
365

 
61

Commercial business
221

 
283

 
3

Total
$
11,924

 
$
12,369

 
$
737


13

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, 2014:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
2,213

 
$
2,653

 
$

Multi-family

 

 

Commercial real estate
219

 
219

 

Land
307

 
321

 

Home equity
145

 
147

 

Commercial business
64

 
126

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
8,475

 
$
8,486

 
$
780

Multi-family
158

 
158

 
158

Commercial real estate
1,850

 
1,850

 
340

Land
508

 
508

 
28

Home equity
223

 
223

 
43

Commercial business
393

 
393

 
90

Total
 

 
 

 
 

One-to-four family
$
10,688

 
$
11,139

 
$
780

Multi-family
158

 
158

 
158

Commercial real estate
2,069

 
2,069

 
340

Land
815

 
829

 
28

Home equity
368

 
370

 
43

Commercial business
457

 
519

 
90

Total
$
14,555

 
$
15,084

 
$
1,439



14

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



The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended September 30, 2014:

 
Three Months Ended September 30, 2014
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
One-to-four family
$
2,630

 
$
6

Multi-family

 

Commercial real estate
110

 

Land
321

 
1

Home equity
107

 

Commercial business
95

 
1

With an allowance recorded
 

 
 

One-to-four family
$
8,199

 
$
28

Multi-family
79

 

Commercial real estate
925

 

Land
463

 
2

Home equity
260

 
1

Commercial business
275

 
1

Total
 

 
 

One-to-four family
$
10,829

 
$
34

Multi-family
79

 

Commercial real estate
1,035

 

Land
784

 
3

Home equity
367

 
1

Commercial business
370

 
2

Total
$
13,464

 
$
40



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 months ended September 30, 2013:

 
Three Months Ended September 30, 2013
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
One-to-four family
$
6,192

 
$
31

Multi-family
2,336

 
31

Commercial real estate
1,960

 
20

Land
394

 
6

Home equity
230

 
2

Commercial business
887

 
8

With an allowance recorded
 

 
 

One-to-four family
$
8,437

 
$
97

Land
1,122

 
7

Home equity
375

 
2

Commercial business
66

 
2

Total
 

 
 

One-to-four family
$
14,629

 
$
128

Multi-family
2,336

 
31

Commercial real estate
1,960

 
20

Land
1,516

 
13

Home equity
605

 
4

Commercial business
953

 
10

Total
$
21,999

 
$
206






16

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



The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2014:
 
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
$
1,281

 
$
83

 
$
379

 
$
300

 
$
75

 
$
568

 
$
1,226

 
$
82

 
$
3,994

Ending balance: individually evaluated for impairment
662

 

 

 

 
11

 
61

 
3

 

 
737

Ending balance: collectively evaluated for impairment
$
619

 
$
83

 
$
379

 
$
300

 
$
64

 
$
507

 
$
1,223

 
$
82

 
$
3,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
60,703

 
$
48,864

 
$
105,031

 
$
20,184

 
$
4,298

 
$
26,612

 
$
16,511

 
$

 
$
282,203

Ending balance: individually evaluated for impairment
10,603

 

 

 

 
739

 
361

 
221

 

 
11,924

Ending balance: collectively evaluated for impairment
$
50,100

 
$
48,864

 
$
105,031

 
$
20,184

 
$
3,559

 
$
26,251

 
$
16,290

 
$

 
$
270,279

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

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 June 30, 2014:
 
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
$
1,550

 
$
229

 
$
682

 
$
190

 
$
74

 
$
587

 
$
1,231

 
$
81

 
$
4,624

Ending balance: individually evaluated for impairment
780

 
158

 
340

 

 
28

 
43

 
90

 

 
1,439

Ending balance: collectively evaluated for impairment
$
770

 
$
71

 
$
342

 
$
190

 
$
46

 
$
544

 
$
1,141

 
$
81

 
$
3,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
63,009

 
$
47,507

 
$
107,828

 
$
19,690

 
$
4,126

 
$
28,353

 
$
16,737

 
$

 
$
287,250

Ending balance: individually evaluated for impairment
10,688

 
158

 
2,069

 

 
815

 
368

 
457

 

 
14,555

Ending balance: collectively evaluated for impairment
$
52,321

 
$
47,349

 
$
105,759

 
$
19,690

 
$
3,311

 
$
27,985

 
$
16,280

 
$

 
$
272,695

(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:
 
September 30, 2014
 
June 30, 2014
 
(In thousands)
One-to-four family
$
2,303

 
$
2,101

Multi-family

 
158

Commercial

 
2,070

Land
107

 
150

Home equity
76

 

Credit cards
18

 

Commercial business

 
235

Total
$
2,504

 
$
4,714

 


18

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



The following table presents past due loans, net of partial loan charge-offs, by class, as of September 30, 2014:

 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total Loans
 
(In thousands)
One-to-four family
$
1,488

 
$
298

 
$
2,303

 
$
4,089

 
$
56,614

 
$
60,703

Multi-family
373

 

 

 
373

 
48,491

 
48,864

Commercial real estate

 

 

 

 
105,031

 
105,031

Construction

 

 

 

 
20,184

 
20,184

Land
202

 
70

 
107

 
379

 
3,919

 
4,298

Home equity
248

 
29

 
76

 
353

 
19,220

 
19,573

Credit cards
17

 
7

 
18

 
42

 
3,480

 
3,522

Automobile
28

 
1

 

 
29

 
955

 
984

Other consumer
60

 
32

 

 
92

 
2,441

 
2,533

Commercial business
146

 

 

 
146

 
16,365

 
16,511

Total
$
2,562

 
$
437

 
$
2,504

 
$
5,503

 
$
276,700

 
$
282,203

(1) Includes loans on nonaccrual status and loans that may be less than 90 days past due. At September 30, 2014, there were $18 in loans 90 days past due and still accruing interest.
   
The following table presents past due loans, net of partial loan charge-offs, by class as of June 30, 2014:
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days Or
More Past Due (1)
 
Total Past
Due
 
Current
 
Total
Loans
 
(In thousands)
One-to-four family
$
1,384

 
$
819

 
$
2,101

 
$
4,304

 
$
58,705

 
$
63,009

Multi-family
32

 

 
158

 
190

 
47,317

 
47,507

Commercial real estate

 

 
2,070

 
2,070

 
105,758

 
107,828

Construction

 

 

 

 
19,690

 
19,690

Land

 

 
150

 
150

 
3,976

 
4,126

Home equity
239

 
108

 

 
347

 
20,547

 
20,894

Credit cards
32

 
27

 

 
59

 
3,489

 
3,548

Automobile
14

 

 

 
14

 
1,059

 
1,073

Other consumer
43

 

 

 
43

 
2,795

 
2,838

Commercial business
64

 

 
235

 
299

 
16,438

 
16,737

Total
$
1,808

 
$
954

 
$
4,714

 
$
7,476

 
$
279,774

 
$
287,250

(1) Includes loans on nonaccrual status and loans that may be less than 90 days past due. At June 30, 2014, there were no loans 90 days past due and still accruing interest.

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.

19

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.

20

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 represents the internally assigned grade as of September 30, 2014, 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
$
47,218

 
$
48,491

 
$
100,360

 
$
20,184

 
$
3,268

 
$
17,776

 
$
3,480

 
$
887

 
$
2,385

 
$
13,175

 
$
257,224

Watch
4,894

 
373

 
1,002

 

 
202

 
1,268

 
24

 
96

 
116

 
893

 
8,868

Special Mention
5,362

 

 
3,669

 

 
304

 
403

 

 
1

 
32

 
1,837

 
11,608

Substandard
3,229

 

 

 

 
524

 
126

 
18

 

 

 
606

 
4,503

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
60,703

 
$
48,864

 
$
105,031

 
$
20,184

 
$
4,298

 
$
19,573

 
$
3,522

 
$
984

 
$
2,533

 
$
16,511

 
$
282,203


The following table represents the credit risk profile based on payment activity as of September 30, 2014, 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
$
58,400

 
$
48,864

 
$
105,031

 
$
20,184

 
$
4,191

 
$
19,497

 
$
3,504

 
$
984

 
$
2,533

 
$
16,511

 
$
279,699

Nonperforming (1)
2,303

 

 

 

 
107

 
76

 
18

 

 

 

 
2,504

Total
$
60,703

 
$
48,864

 
$
105,031

 
$
20,184

 
$
4,298

 
$
19,573

 
$
3,522

 
$
984

 
$
2,533

 
$
16,511

 
$
282,203

(1) Loans that are more than 90 days past due and still accruing interest and nonaccrual loans are considered nonperforming. At September 30, 2014, there were $18 in loans 90 days past due and still accruing interest.

The following table represents the internally assigned grade as of June 30, 2014, 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
$
49,504

 
$
47,317

 
$
102,216

 
$
19,690

 
$
3,248

 
$
18,925

 
$
3,489

 
$
976

 
$
2,732

 
$
13,040

 
$
261,137

Watch
4,505

 
32

 
449

 

 

 
1,434

 
59

 
97

 
106

 
1,005

 
7,687

Special Mention
6,171

 

 
3,093

 

 
307

 
406

 

 

 

 
1,841

 
11,818

Substandard
2,829

 
158

 
2,070

 

 
571

 
129

 

 

 

 
851

 
6,608

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
63,009

 
$
47,507

 
$
107,828

 
$
19,690

 
$
4,126

 
$
20,894

 
$
3,548

 
$
1,073

 
$
2,838

 
$
16,737

 
$
287,250



21

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


The following table represents the credit risk profile based on payment activity as of June 30, 2014, 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
$
60,908

 
$
47,349

 
$
105,758

 
$
19,690

 
$
3,976

 
$
20,894

 
$
3,548

 
$
1,073

 
$
2,838

 
$
16,502

 
$
282,536

Nonperforming (1)
2,101

 
158

 
2,070

 

 
150

 

 

 

 

 
235

 
4,714

Total
$
63,009

 
$
47,507

 
$
107,828

 
$
19,690

 
$
4,126

 
$
20,894

 
$
3,548

 
$
1,073

 
$
2,838

 
$
16,737

 
$
287,250

(1) 
Loans that are more than 90 days past due and still accruing interest and nonaccrual loans are considered nonperforming. At June 30, 2014, there were no loans 90 days past due and still accruing interest.

Troubled Debt Restructures. At September 30, 2014 and June 30, 2014, troubled debt restructured loans (“TDRs”), included in impaired loans above, totaled $11.0 million with $1.5 million in nonaccrual and $11.3 million with $1.4 million in nonaccrual, respectively. Restructured loans are an option that the Bank uses to minimize risk of loss and are a concession granted to a borrower experiencing financial difficulties that it would not otherwise consider. The modifications have included items such as lowering the interest rate on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank's best interest. At September 30, 2014, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.
The following table represents TDRs by accrual versus nonaccrual status and by loan class as of September 30, 2014:

 
September 30, 2014
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
8,300

 
$
1,431

 
$
9,731

Land
651

 

 
651

Home equity
286

 
76

 
362

Commercial business
221

 

 
221

Total
$
9,458

 
$
1,507

 
$
10,965



The following table represents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2014:
 
 
June 30, 2014
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
8,590

 
$
1,355

 
$
9,945

Land
727

 

 
727

Home equity
367

 

 
367

Commercial business
222

 

 
222

Total
$
9,906

 
$
1,355

 
$
11,261



22

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



The following tables represent TDRs and their recorded investment prior to the modification and after the modification for TDR transactions that originated during the three months ended September 30, 2014 and 2013:

 
Three Months Ended September 30, 2014
 
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

 
 
Three Months Ended September 30, 2013
 
Number of
Contracts
 
Pre-TDR Recorded Investment
 
Post-TDR Recorded Investment
 
(Dollars in thousands)
One-to-four family
3

 
$
481

 
$
501

Total
3

 
$
481

 
$
501


The following tables represent TDRs modified within the previous 12 months for which there was a payment default and the total of payment defaults within 12 months of their restructure for the dates indicated:

 
 
 
Three Months Ended September 30, 2014
 
Number of Contracts
 
 
 
 
(Dollars in thousands)
One-to-four family
6

 
$
1,605

Home equity
2

 
161

Commercial business
1

 
64

Total
9

 
$
1,830



 
 
 
Three Months Ended September 30, 2013
 
Number of Contracts
 
 
 
 
(Dollars in thousands)
One-to-four family
2

 
$
372

Total
2

 
$
372




23

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


Note 9 - Real Estate Owned, net
 
The following table is a summary of real estate owned for the three months ended September 30, 2014 and 2013:

 
Three Months Ended September 30,
 
 
2014
 
2013
 
(In thousands)
Balance at the beginning of the period
$
5,067

 
$
6,212

Net loans transferred to real estate owned
1,824

 
523

Capitalized improvements
6

 
363

Sales
(768
)
 
(972
)
Impairments
(37
)
 
(360
)
Balance at the end of the period
$
6,092

 
$
5,766


Note 10 - Employee Benefit Plans

     Employee Stock Ownership Plan

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

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

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

Compensation expense related to the ESOP for the three months ended September 30, 2014 and 2013 was $62,039 and $28,747, respectively.

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

 
September 30, 2014
 
June 30,
2014
 
(Dollars in thousands)
Allocated shares
27,701

 
25,981

Unallocated shares
74,299

 
76,019

Total ESOP shares
102,000

 
102,000

Fair value of unallocated shares
$
1,530

 
$
1,451



24

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


Note 11 - Fair Value Measurements

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

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

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

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

There were no transfers between Level 1, Level 2, or Level 3 during the three months ended September 30, 2014. The following table shows the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
442

 
$

 
$
442

Mortgage-backed securities:
 
 
 
 
 
 


FHLMC

 
15,379

 

 
15,379

FNMA

 
19,198

 

 
19,198

GNMA

 
1,100

 

 
1,100


 
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
446

 
$

 
$
446

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC

 
16,956

 

 
16,956

FNMA

 
20,331

 

 
20,331

GNMA

 
1,184

 

 
1,184


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







25

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


The following table presents the Company's assets measured at fair value that management has evaluated for specific reserve on a nonrecurring basis at September 30, 2014:
 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:


 


 


 


Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
1,102

 
$
1,102

Multi-family

 

 

 

Commercial

 

 

 

Land

 

 
739

 
739

Home equity

 

 
362

 
362

Commercial business

 

 
221

 
221

Total impaired loans 

 

 
2,424

 
2,424

 
 
 
 
 
 
 
 
Real estate owned:


 


 


 


One-to-four family
$

 
$

 
$
108

 
$
108

Land

 

 
38

 
38

Total real estate owned

 

 
146

 
146

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
2,570

 
$
2,570

The following table presents the Company's assets measured at fair value that management has evaluated for specific reserve on a nonrecurring basis at June 30, 2014:
 
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
2,488

 
$
2,488

Commercial

 

 
1,850

 
1,850

Land

 

 
88

 
88

Commercial business

 

 
392

 
392

Total impaired loans

 

 
4,818

 
4,818

 
 
 
 
 
 
 
 
Real estate owned:
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
364

 
$
364

Commercial

 

 
3,539

 
3,539

Land

 

 
18

 
18

Total real estate owned 

 

 
3,921

 
3,921

 
 
 
 
 
 
 
 
Total
$

 
$

 
$
8,739

 
$
8,739





26

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




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 table presents quantitative information about Level 3 fair value measurements:
 
 
September 30, 2014
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Average Discount
 
(Dollars in thousands)
Impaired loans (1)
$
11,924

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (6%)
Real estate owned (1)
$
6,092

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (1%)
(1) Includes all impaired loans and all real estate owned.

 
June 30, 2014
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Average Discount
 
(Dollars in thousands)
Impaired loans (1)
$
14,555

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (4%)
Real estate owned (1)
$
5,067

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 100% (18%)
(1) Includes all impaired loans and real estate owned.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of September 30, 2014 and June 30, 2014

27

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


 
September 30, 2014
 
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
$
17,797

 
$
17,797

 
$
17,797

 
$

 
$

Securities available-for-sale
36,119

 
36,119

 

 
36,119

 

Securities held-to-maturity
8,391

 
8,475

 

 
8,475

 

FHLB stock
5,985

 
5,985

 

 
5,985

 

Loans receivable, net
277,102

 
274,414

 

 

 
274,414

Bank owned life insurance investment, net of surrender charges
19,566

 
19,566

 

 
19,566

 

Accrued interest receivable
1,165

 
1,165

 

 
1,165

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
173,917

 
$
173,917

 
$
173,917

 
$

 
$

Certificates of deposit
133,429

 
133,182

 

 
133,182

 

FHLB advances
17,500

 
17,563

 

 
17,563

 

 
June 30, 2014
 
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
$
14,758

 
$
14,758

 
$
14,758

 
$

 
$

Securities available-for-sale
38,917

 
38,917

 

 
38,917

 

Securities held-to-maturity
8,765

 
8,908

 

 
8,908

 

FHLB stock
6,046

 
6,046

 

 
6,046

 

Loans receivable, net
281,526

 
278,800

 

 

 
278,800

Bank owned life insurance investment, net of surrender charges
19,428

 
19,428

 

 
19,428

 

Accrued interest receivable
1,236

 
1,236

 

 
1,236

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
173,223

 
173,223

 
173,223

 

 

Certificates of deposit
137,811

 
137,627

 

 
137,627

 

FHLB advances
17,500

 
17,661

 

 
17,661

 

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.

28

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


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 receivable, net - The fair value of loans is estimated by using comparable market statistics. The loan portfolio was segregated into various categories and a weighted average valuation discount that approximated similar loan sales was applied to each category.
Bank owned life insurance investment, net of surrender charges - The carrying amount is a reasonable estimate of its fair value.
Accrued interest receivable - The carrying value has been determined to be a reasonable estimate of their 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. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.
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.


29


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 compliance with regulatory enforcement actions, including the requirements and restrictions of the Supervisory Directive the Bank entered into with the DFI and the possibility that the Bank will be unable to fully comply with this enforcement action which could result in the imposition of additional requirements or restrictions;
our ability to attract and retain deposits;
increases in premiums for deposit insurance;
management's assumptions in determining the adequacy of the allowance for loan losses;
our ability to control operating costs and expenses;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
computer systems on which we depend could fail or experience a security breach;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to manage loan delinquency rates;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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.

30


Some of these and other factors are discussed in our 2014 Form10-K under Item 1A. “Risk Factors.” Such developments could have an adverse impact on our financial position and results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Because of these and other uncertainties, our actual results for fiscal year 2014 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity, 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 11 full-service banking offices (including two Wal-Mart store locations) 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. We also originate consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington. Lending activities also include the origination of residential construction loans, and prior to fiscal 2010, a significant amount of originations through brokers, in particular within the Portland, Oregon metropolitan area. As of September 30, 2014, none of these broker originated construction loans remained outstanding.

Historically, we used wholesale sources to fund wholesale loan growth - typically FHLB advances or brokered certificates of deposit depending on the relative cost of each and our interest rate position. Our current strategy is to utilize FHLB advances consistent with our asset liability objectives. We currently do not utilize brokered certificates of deposit as we are limiting loan growth consistent with our regulatory and capital objectives.

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

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

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

31


Additional information regarding the Supervisory Directive is included in Note 5 to the Selected Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q and Item 1A. “Risk Factors - Compliance with Regulatory Restrictions” in the 2014 Form10-K.
Correcting the problems identified in the Order has had a resulting impact on our financial condition and results of operations. We have reduced our asset size and sold relatively high yielding performing fixed rate single family loans. Also, because of the reduced demand for commercial real estate loans, we have sold these loans at a discount. Although the reduction in asset size and loan sales have helped us preserve our capital and maximize our regulatory capital ratios, these actions have also negatively impacted our operating results, including reducing our net interest income in recent periods.
Critical Accounting Estimates and Related Accounting Policies

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

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Chief Lending Officer assesses the allowance for loan and lease losses on a monthly basis and reports to the Board of Directors no less than quarterly. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, the bankruptcies and vacancy rates of business and residential properties.

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

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, including current period earnings, a valuation allowance of $8.5 million at September 30, 2014 was considered appropriate. Management

32


is evaluating the timing of a release of our deferred tax assets based on our return to profitability and our projections for future taxable income. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from REO, deferred loan fees and costs, and loan loss reserves. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

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

Comparison of Financial Condition at September 30, 2014 and June 30, 2014

General. Total assets decreased by $3.5 million, or 0.9%, to $385.6 million at September 30, 2014 from $389.1 million at June 30, 2014. The decrease in assets during this period was primarily a result loans receivable, net decreasing by $4.4 million or 1.6% to $277.1 million at September 30, 2014 from $281.5 million at June 30, 2014. Total liabilities decreased $3.5 million or 1.1% to $331.9 million at September 30, 2014 compared to $335.5 million at June 30, 2014 primarily due to the decline in deposits. Total deposits decreased $3.7 million, or 1.2%, to $307.3 million at September 30, 2014 from $311.0 million at June 30, 2014 primarily as a result of decreases in certificates of deposit.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2014 to September 30, 2014:
  
 
Balance at September 30, 2014
 
Balance at June 30, 2014
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Cash and cash equivalents
$
17,797

 
$
14,758

 
$
3,039

 
20.6
 %
Mortgage-backed securities, available-for-sale
35,677

 
38,471

 
(2,794
)
 
(7.3
)
Mortgage-backed securities, held-to-maturity
8,266

 
8,638

 
(372
)
 
(4.3
)
Loans receivable, net of allowance for loan losses
277,102

 
281,526

 
(4,424
)
 
(1.6
)
Real estate owned, net
6,092

 
5,067

 
1,025

 
20.2


Mortgage-backed securities available-for-sale decreased $2.8 million, or 7.3%, to $35.7 million at September 30, 2014 from $38.5 million at June 30, 2014. Mortgage-backed securities held-to-maturity decreased $372,000 or 4.3%, to $8.3 million at September 30, 2014 from $8.6 million at June 30, 2014. The decreases in these portfolios were primarily the result of contractual principal repayments and the sale of three available-for-sale securities totaling $702,000.

Loans receivable, net, decreased $4.4 million or 1.6% to $277.1 million at September 30, 2014 from $281.5 million at June 30, 2014 as a result of principal reductions exceeding new loan production. Multi-family loans increased $1.4 million or 2.9% to $48.9 million at September 30, 2014 from $47.5 million at June 30, 2014. Construction and land loans increased $666,000 or 2.8% to $24.5 million at September 30, 2014 from $23.8 million at June 30, 2014. Commercial real estate loans decreased $2.8 million or 2.6% to $105.0 million at September 30, 2014 from $107.8 million at June 30, 2014 and one-to-four family loans decreased $2.3 million or 3.7% to $60.7 million from $63.0 million at June 30, 2014. Commercial business loans decreased $226,000 or 1.4% to $16.5 million at September 30, 2014 from $16.7 million at June 30, 2014. Consumer loans decreased $1.7 million or 6.1% to $26.6 million at September 30, 2014 from $28.3 million at June 30, 2014 as consumers continue to reduce their debt. The demand for loans in our market area has been modest during the current economic recovery.




33


As of September 30, 2014, the Company had 18 REO properties with an aggregate book value of $6.1 million compared to 20 properties with an aggregate book value of $5.1 million at June 30, 2014, and 17 properties with an aggregate book value of $5.8 million at September 30, 2013.  The decrease in number of properties during the quarter ended September 30, 2014 was primarily attributable to ongoing sales of residential properties. During the quarter ended September 30, 2014, the Company sold six residential real estate properties for $636,000, two commercial real estate properties for $178,000, and one parcel for $37,000 resulting in an aggregate loss on sale of $6,000. During the quarter, we had a commercial real estate property in Pierce County transfer to REO with a book value of $1.5 million. At September 30, 2014, the largest of the REO properties was a commercial real estate property of $3.4 million located in Pierce County, Washington.

The following is a summary as of September 30, 2014 of our REO properties listed by property type and county location:
 
County
 
 
 
Number of properties
 
Percent of Total REO
 
Grays Harbor
 
Thurston
 
Pierce
 
All Other
 
Total
 
 
 
(Dollars in thousands)
 
 
 
 
REO:
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
391

 
$
166

 
$

 
$
237

 
$
794

 
6

 
13.0
%
Commercial
124

 

 
4,924

 

 
5,048

 
3

 
82.9

Land
49

 
88

 
11

 
102

 
250

 
9

 
4.1

Total
$
564

 
$
254

 
$
4,935

 
$
339

 
$
6,092

 
18

 
100.0
%

Liabilities. Total liabilities decreased $3.5 million between June 30, 2014 and September 30, 2014, primarily as the result of a $3.7 million or 1.2% decline in deposits and, in particular, a $4.4 million, or 3.2% decline in certificates of deposit which is related to a shift in customers preference for more liquid deposits. The decrease in certificates of deposit was partially offset by an increase of $986,000, or 2.4%, in our savings portfolio.

Deposits decreased $3.7 million, or 1.2%, to $307.3 million at September 30, 2014 from $311.0 million at June 30, 2014. Our core deposits, which consist of all deposits other than certificates of deposit, increased by $694,000 or 0.4% to $173.9 million from $173.2 million at June 30, 2014. Certificates of deposit decreased $4.4 million or 3.2% to $133.4 million at September 30, 2014 from $137.8 million at June 30, 2014, which is related to a shift in customer's preference for more liquid deposits.

The following table details the changes in deposit accounts at the dates indicated:
 
Balance at September 30, 2014
 
Balance at June 30, 2014
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
42,383

 
$
41,149

 
$
1,234

 
3.0
 %
Interest-bearing demand deposits
21,375

 
22,771

 
(1,396
)
 
(6.1
)
Money market accounts
69,479

 
69,610

 
(131
)
 
(0.2
)
Savings deposits
40,680

 
39,693

 
987

 
2.5

Certificates of deposit
133,429

 
137,811

 
(4,382
)
 
(3.2
)
Total deposit accounts
$
307,346

 
$
311,034

 
$
(3,688
)
 
(1.2
)%

Stockholders' Equity. Total stockholders' equity remained virtually unchanged from June 30, 2014 at $53.7 million. The slight decrease of $19,000 or 0.04% was due primarily to an increase in accumulated other comprehensive loss of $195,000 or 25.7% which represents unrealized losses on our available-for-sale securities, partially offset by our net income of $113,000 during the three months ended September 30, 2014.

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

General. Net income for the three months ended September 30, 2014 was $113,000 or $0.05 per diluted share compared to net loss of $12,000 or $0.00 per diluted share for the three months ended September 30, 2013.


34


Net Interest Income. Net interest income before the provision for loan losses decreased $166,000, or 4.6%, to $3.4 million for the quarter ended September 30, 2014 from $3.6 million for the quarter ended September 30, 2013 as a result of declines in our loan and securities portfolios.

The Company's net interest margin increased 33 basis points to 3.94% for the quarter ended September 30, 2014 from 3.61% for the comparable period in 2013 as the average yield on interest-earning assets increased 28 basis points to 4.93% for the quarter ended September 30, 2014 compared to 4.65% for the same period in 2013. The improvement in our net interest margin compared to the same quarter last year reflects a significant reduction in nonperforming assets and reductions in the cost of deposits and the reduction of FHLB advances. The average cost of interest-bearing liabilities decreased three basis points to 1.21% for the quarter ended September 30, 2014 compared to 1.24% for the same period in the prior year as the cost of our liabilities continued to decline, due to the reduction in balance of certificates of deposit and, to a lesser extent, the renewal of certificates of deposit at currently low interest rates.

The following table sets forth the changes to our net interest income for the three months ended September 30, 2014 compared to the same period in 2013. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

 
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
(231
)
 
$
(37
)
 
$
(268
)
Mortgage-backed securities
4

 
(43
)
 
(39
)
Investment securities, FHLB stock and cash and cash equivalents
(4
)
 
(39
)
 
(43
)
Total net change in income on interest-earning assets
$
(231
)
 
$
(119
)
 
$
(350
)
Interest-bearing liabilities:
 

 
 

 


Savings deposits
$

 
$
1

 
$
1

Interest-bearing demand deposits

 

 

Money market accounts
(1
)
 
(4
)
 
(5
)
Certificates of deposit
(11
)
 
(59
)
 
(70
)
FHLB advances
68

 
(178
)
 
(110
)
Total net change in expense on interest-bearing liabilities
56

 
(240
)
 
(184
)
Net change in net interest income
$
(287
)
 
$
121

 
$
(166
)

Interest Income. Total interest income for the three months ended September 30, 2014 decreased $350,000 or 7.5%, to $4.3 million from $4.6 million for the three months ended September 30, 2013. The decrease during the period was primarily attributable to the declines in the average balance and, to a lesser extent, the yield of loans receivable, net. Average loans receivable, net, declined $2.4 million during the quarter ended September 30, 2014 compared to the same quarter last year. The average yield on loans receivable, net, decreased 32 basis points to 5.71% for the three months ended September 30, 2014 compared to 6.03% for the same period in the prior year. The average yield on mortgage-backed securities increased three basis points to 1.91% for the three months ended September 30, 2014 compared to 1.88% for the same period in the prior year. Average interest-earning assets decreased $50.7 million or 12.7% to $348.1 million for the three months ended September 30, 2014 compared to $398.8 million for the same period in 2013.

35



The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2014 and 2013:
 
Three Months Ended September 30,
 
2014
 
2013
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2013
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
284,031

 
5.71
%
 
$
286,452

 
6.03
%
 
$
(268
)
Mortgage-backed securities
45,972

 
1.91

 
55,100

 
1.88

 
(39
)
Investment securities
570

 
4.91

 
1,588

 
5.04

 
(13
)
FHLB stock
6,030

 
0.07

 
6,268

 
0.13

 
(1
)
Cash and cash equivalents
11,512

 
0.21

 
49,359

 
0.28

 
(29
)
Total interest-earning assets
$
348,115

 
4.93
%
 
$
398,767

 
4.65
%
 
$
(350
)
(1) 
Nonaccruing loans have been included in the table as loans carrying a zero yield for the period that they have been on nonaccrual, calculated net of deferred loan fees and loans in process.

Interest Expense. Interest expense decreased $184,000 or 17.6%, to $859,000 for the three months ended September 30, 2014 from $1.0 million for the three months ended September 30, 2013. The decrease during the period was primarily attributable to the reduction of the average balances of FHLB advances and certificates of deposit. Average FHLB advances declined $33.8 million during the quarter ended September 30, 2014 compared to the same quarter last year while the average rate paid on theses advances increased 1.55%. All of our current FHLB advances mature this fiscal year. The average balance of certificates of deposit declined $11.9 million or 8.1% to $136.0 million for the current quarter while the average cost of these deposits decreased four basis points to 1.93% for the three months ended September 30, 2014 compared to 1.97% for the same period of the prior year. Average interest-bearing liabilities decreased $53.2 million or 15.8% to $284.0 million for the three months ended September 30, 2014 compared to $337.2 million for the same period in 2013.

The following table details average balances, cost of funds and the change in interest expense for the three months ended September 30, 2014 and 2013:

 
Three Months Ended September 30,
 
2014
 
2013
 
Increase/(Decrease) in
Interest Expense from
2013
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
40,127

 
0.15
%
 
$
37,430

 
0.15
%
 
$
1

Interest-bearing demand deposits
19,467

 
0.04

 
17,844

 
0.04

 

Money market deposits
71,002

 
0.14

 
82,751

 
0.15

 
(5
)
Certificates of deposit
135,913

 
1.93

 
147,899

 
1.97

 
(70
)
FHLB advances
17,500

 
3.66

 
51,281

 
2.11

 
(110
)
Total interest-bearing liabilities
$
284,009

 
1.21
%
 
$
337,205

 
1.24
%
 
$
(184
)

Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that no provision for loan losses was required for both the three months ended September 30, 2014 and 2013. No provision was required during these periods due to the stabilization of the general economy and real estate market, the decline in the level of nonperforming and classified loans, and the decrease in the average balance of the loan portfolio during these periods. Net loan charge-offs were $630,000 during the three months ended September 30, 2014 as compared to $206,000 for the same fiscal quarter last year. Charge-offs increased during the quarter ended September 30, 2014 primarily due to a $340,000 impairment of one

36


commercial real estate loan that had uncertainty as to its value as a result of the ongoing bankruptcy process. The increase in the charge-off total for the period did not result in an increase in the provision as the affected asset was the subject of a special reserve previously included in the total allowance of the Bank. Nonperforming loans, those loans which are 90 days past due or on nonaccrual status, were $2.5 million, at September 30, 2014 compared to $4.7 million at June 30, 2014. There were $18,000 in loans 90 days or more past due and still accruing interest at September 30, 2014 as compared to no loans 90 days or more past due and still accruing interest at June 30, 2014. The ratio of nonperforming loans to total loans was 0.9% at September 30, 2014 compared to 1.6% at June 30, 2014. Total classified loans decreased $2.1 million or 31.8% to $4.5 million at September 30, 2014 from $6.6 million at June 30, 2014.

Management considers the allowance for loan losses at September 30, 2014 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 September 30, 2014 and 2013:

 
At or For the Three Months Ended September 30,
 
 
2014
 
2013
 
(Dollars in thousands)
Provision for loan losses
$

 
$

Net charge-offs
630

 
206

Allowance for loan losses
3,994

 
4,941

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.4
%
 
1.7
%
Nonaccrual
$
2,504

 
$
6,177

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
159.5
%
 
80.0
%
Nonaccrual loans as a percentage of loans receivable at the end of the period
0.9
%
 
2.2
%
Total loans
$
282,203

 
$
286,683


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 September 30, 2014 and September 30, 2013 there were 44 and 49 loans, respectively, with aggregate net principal balances of $11.0 million, and $17.0 million respectively, that we have identified as TDRs. At September 30, 2014 and September 30, 2013 there were $1.5 million and $3.7 million, respectively, of TDRs included in nonaccrual loans.















37


Noninterest Income. Noninterest income of $983,000 for the three months ended September 30, 2014 was virtually unchanged compared to $967,000 for the same quarter in 2013. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended September 30, 2014 compared to the same period in 2013:

 
Three Months Ended September 30,
 
Increase (decrease)
 
 
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit services fees
$
384

 
$
377

 
$
7

 
1.9
 %
Other deposit fees
189

 
200

 
(11
)
 
(5.5
)
Gain on sale of investments
47

 

 
47

 

Loan fees
144

 
149

 
(5
)
 
(3.4
)
Loss on sale of loans
(6
)
 
(17
)
 
11

 
(64.7
)
Bank owned life insurance investment
138

 
143

 
(5
)
 
(3.5
)
Other income
87

 
115

 
(28
)
 
(24.3
)
Total noninterest income
$
983

 
$
967

 
$
16

 
1.7
 %

The slight increase in noninterest income was attributable to the gain on sale of investments of $47,000 for the quarter ended September 30, 2014 compared to no gain on sale of investments for quarter ended September 30, 2013. The increase was partially offset by a decrease of $28,000 in other income for the quarter ended September 30, 2014 compared to $115,000 for the same quarter in 2013 primarily due to a decrease in office rental income.

Noninterest Expense. For the three months ended September 30, 2014, noninterest expense decreased $275,000 or 6.0%, to $4.3 million from $4.6 million for the three months ended September 30, 2013. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended September 30, 2014 and 2013:

 
Three Months Ended September 30,
 
Increase (decrease)
 
 
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
2,023

 
$
2,006

 
$
17

 
0.8
 %
General and administrative expenses
667

 
798

 
(131
)
 
(16.4
)
Real estate owned impairment
37

 
360

 
(323
)
 
(89.7
)
Real estate holding costs
154

 
77

 
77

 
100.0

FDIC Insurance premium
121

 
142

 
(21
)
 
(14.8
)
Information technology
428

 
428

 

 

Occupancy and equipment
483

 
464

 
19

 
4.1

Deposit services
224

 
136

 
88

 
64.7

Marketing
156

 
162

 
(6
)
 
(3.7
)
Gain on sale of property, premises and equipment
(1
)
 
(5
)
 
4

 
(80.0
)
Loss on sale of real estate owned
6

 
5

 
1

 
20.0

Total noninterest expense
$
4,298

 
$
4,573

 
$
(275
)
 
(6.0
)%

The decrease in noninterest expense was primarily due to REO impairment expense decreasing $323,000 or 89.7% to $37,000 from $360,000 during the quarter reflecting the stabilization in the real estate market. Also contributing to the decrease was a decline in general and administrative expenses which decreased $131,000 to $667,000 for the quarter ended September 30, 2014 compared to $798,000 for the same quarter in 2013 which was primarily a result of decreasing legal expenses attributable to nonperforming loans litigation. There was an increase of $88,000 for the expense for deposit services from $136,000 to $224,000 or 64.7% for the quarter ended September 30, 2014 which is directly related to the restructure of our deposit products.
 

38


Provision (benefit) for Income Tax. As a result of uncertainties surrounding our realization of additional deferred tax assets, we did not record a tax benefit or expense for the three months ended September 30, 2014 and 2013.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available information, including the current period earnings, a valuation allowance of $8.5 million at September 30, 2014 and $8.7 million at September 30, 2013 was considered appropriate. Management is evaluating the timing of a release of our deferred tax assets based on our return to profitability and our projections for future taxable income.

Liquidity, Commitments and Capital Resources

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

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

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At September 30, 2014, the total approved loan origination commitments outstanding amounted to $185,000. At the same date, unused lines of credit were $35.8 million.

For purposes of determining our liquidity position, we use a concept of basic surplus, which is derived from the total of available-for-sale securities, as well as other liquid assets, less short-term liabilities. Our Board of Directors has established a target range for basic surplus of 5% to 7%. For the three months ended September 30, 2014, our average basic surplus was 5.3%, which indicates we met the liquidity standard set by our Board.

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

Certificates of deposit scheduled to mature in one year or less at September 30, 2014 totaled $47.8 million. We had no brokered deposits at September 30, 2014. 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 $79.8 million from the FHLB of Seattle. We also have a line of credit with the Federal Reserve Bank 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 Seattle, wholesale funding, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term

39


alternatives. Alternatively, we may also liquidate assets to meet our funding needs. On a monthly basis, we estimate our liquidity sources and needs for the coming three-month, nine-month, and one-year time periods. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset Liability Management Committee in forecasting funding needs and investing opportunities.

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

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.

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of September 30, 2014:
 
 
Amount of Commitment
Expiration Per Period
 
Total Amounts
Committed (2)
 
Due in
One Year
 
(In thousands)
Commitments to originate loans (1)
$
185

 
$
185

Lines of credit
 
 
 

Fixed rate (3)
5,045

 
1,068

Adjustable rate
30,719

 
3,125

Undisbursed balance of lines of credit
$
35,764

 
$
4,193

(1) 
Interest rates on fixed rate loans range from 4.25% to 15.25%. 
(2) 
At September 30, 2014 there were $82 in reserves for unfunded commitments. 
(3) 
Includes standby letters of credit. 

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

40


Year Ended June 30,
 
 
 
Amount
 
 
(In thousands)
2015
 
$
60

2016
 
$
56

2017
 
$
56

2018
 
$
51

Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. As of September 30, 2014, the Bank exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios of 13.8%, 17.0%, and 18.3% respectively. As of June 30, 2014 these ratios were 13.6%, 16.8%, and 18.0%, respectively.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.0%, 17.3%, and 18.6%, respectively, as of September 30, 2014. As of June 30, 2014, these ratios were 14.0%, 17.1% and 18.3%, respectively.

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

The Bank's actual capital amounts and ratios at September 30, 2014 are presented in the following table:

Anchor Bank
 
 
 
 
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
 
 
 
Minimum Capital Requirement
 
 
Actual
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital
(to risk-weighted assets)
$
57,549

 
18.3
%
 
$
25,174

 
8.0
%
 
$
31,468

 
10.0
%
Tier I capital
(to risk-weighted assets)
$
53,615

 
17.0
%
 
$
12,587

 
4.0
%
 
$
18,881

 
6.0
%
Tier I leverage capital
(to average assets)
$
53,615

 
13.8
%
 
$
15,560

 
4.0
%
 
$
19,451

 
5.0
%
 
The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of September 30, 2014, were as follows:

Anchor Bancorp
Actual
 
Amount
 
Ratio
 
(Dollars in thousands)
September 30, 2014
 
 
 
Total capital
(to risk-weighted assets)
$
58,512

 
18.6
%
Tier I capital
(to risk-weighted assets)
$
54,578

 
17.3
%
Tier I leverage capital
(to average assets)
$
54,578

 
14.0
%


41


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

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

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

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

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

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

we have increased our originations of shorter term loans and particularly, home equity loans (limited recent originations) and commercial business loans;
we have structured certain borrowings with maturities that match fund our loan portfolios; and
we have securitized our single family loans to available-for-sale investments which generates cash flow as well as allows the flexibility of managing interest rate risk as well as selling the investment when appropriate.

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

42


very rate sensitive (generally, lower balance tiers) are separated from deposits that are rate sensitive (generally, higher balance tiers).

We generally have found that a number of our deposit accounts are less rate sensitive than others. Thus, when interest rates increase, the interest rates paid on these deposit accounts do not require a proportionate increase in order for us to retain them. These assumptions are based upon an analysis of our customer base, competitive factors and historical experience. The following table shows the change in our net portfolio value at September 30, 2014 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
 
$
54,630

 
$
(4,276
)
 
(7.26
)%
 
15.07
%
 
(0.22
)%
 
$
362,398

200
 
56,955

 
(1,951
)
 
(3.31
)
 
15.37

 
0.08

 
370,648

100
 
58,523

 
(383
)
 
(0.65
)
 
15.47

 
0.18

 
378,421

Base
 
58,906

 

 

 
15.29

 

 
385,302

(100)
 
60,919

 
2,013

 
3.42

 
15.55

 
0.26

 
391,676

___________
(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 September 30, 2014, 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
 
$
13,993

 
$
1,057

 
8.2
 %
200
 
13,803

 
867

 
6.7

100
 
13,490

 
554

 
4.3

Base
 
12,936

 

 

(100)
 
12,124

 
(812
)
 
(6.3
)

(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.


43


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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer, and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2014, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2014, 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, 2014.


44


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

During the three months ended September 30, 2014, we did not sell any securities that were not registered under the Securities Act of 1933. We did not execute any open market repurchases of our common stock from July 1, 2014 through September 30, 2014.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1
Articles of Incorporation of the Registrant (1)
3.2
Amended and Restated Bylaws of the Registrant (2)
10.1
Form of Anchor Bank Employee Severance Compensation Plan (1)
10.2
Anchor Mutual Savings Bank Phantom Stock Plan (1)
10.3
Form of 401(k) Retirement Plan (1)
10.4
Form of Employment Agreement between Anchor Bank and Jerald L. Shaw and Terri L. Degner (3)
10.5
Form of Change in Control Severance Agreement between Anchor Bank and Gregory H. Schultz (3)
14
Code of Ethics (4)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, 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 *





*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1)
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-154734)
(2)
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2011.
(3)
Filed as an exhibit to the Company's Current Report on Form 8-K dated May 19, 2014.
(4)
The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.anchornetbank.com.

45


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ANCHOR BANCORP
 
 
Date: November 6, 2014
/s/Jerald L. Shaw                                           
 
Jerald L. Shaw 
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Date: November 6, 2014
/s/Terri L. Degner                                        
 
Terri L. Degner
 
Executive Vice President and 
 
Chief Financial Officer 
 
(Principal Financial and Accounting Officer)

46



EXHIBIT INDEX

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, 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 *
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

47