Anchor Bancorp - FORM 10-Q - February 6, 2015

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Anchor Bancorp	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorp	ancb10-q20141231exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorp	ancb10-q20141231exhibit312.htm
EX-32 - EXHIBIT 32 - Anchor Bancorp	ancb10-q20141231exhibit32.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended December 31, 2014



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

For the transition period from _____ to _____

Commission File Number: 001-34965

ANCHOR BANCORP

(Exact name of registrant as specified in its charter)



Washington	26-3356075
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	I.D. Number)

601 Woodland Square Loop SE, Lacey, Washington	98503
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:	(360) 491-2250

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of February 6, 2015, there were 2,550,000, shares of common stock, $.01 par value per share, outstanding.

Table of Contents

ANCHOR BANCORP

FORM 10-Q

TABLE OF CONTENTS



PART 1 - FINANCIAL INFORMATION
	Page
Item 1 - Financial Statements	1

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	48

Item 4 - Controls and Procedures	50

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	50

Item 1A - Risk Factors	50

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3 – Defaults Upon Senior Securities	51

Item 4 – Mine Safety Disclosures	51

Item 5 - Other Information	51

Item 6 - Exhibits	51

SIGNATURES	52

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.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)	December 31, 2014			June 30, 2014
ASSETS
Cash and cash equivalents	$	11,362		$	14,758
Securities available-for-sale, at fair value, amortized cost of $32,965 and $39,107	32,807			38,917
Securities held-to-maturity, at amortized cost, fair value of $8,276 and $8,908	8,122			8,765
Loans receivable, net of allowance for loan losses of $4,000 and $4,624	276,530			281,526
Bank owned life insurance investment, net of surrender charges	19,700			19,428
Accrued interest receivable	1,064			1,236
Real estate owned, net ("REO")	600			5,067
Federal Home Loan Bank ("FHLB") stock, at cost	5,923			6,046
Property, premises, and equipment, at cost, less accumulated depreciation of $14,870 and $14,777	11,308			11,313
Deferred tax asset, net	8,888			555
Prepaid expenses and other assets	1,150			1,517
Total assets	$	377,454		$	389,128
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	41,055		$	41,149
Interest-bearing	257,717			269,885
Total deposits	298,772			311,034

FHLB advances	10,050			17,500
Advance payments by borrowers for taxes and insurance	1,028			891
Supplemental Executive Retirement Plan liability	1,709			1,715
Accounts payable and other liabilities	3,193			4,313
Total liabilities	314,752			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 2,477,422 outstanding at December 31, 2014 and 2,550,000 shares issued and 2,473,981 outstanding at June 30, 2014, respectively	25			25
Additional paid-in capital	23,356			23,293
Retained earnings, substantially restricted	40,812			31,914
Unearned Employee Stock Ownership Plan ("ESOP") shares	(762		)	(797		)
Accumulated other comprehensive loss, net of tax	(729		)	(760		)
Total stockholders’ equity	62,702			53,675
Total liabilities and stockholders’ equity	$	377,454		$	389,128

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

Table of Contents



ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)	Three Months Ended December 31,						Six Months Ended December 31,
	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Interest income:
Loans receivable, including fees	$	4,052		$	4,123		$	8,105		$	8,444
Securities	15			23			30			79
Mortgage-backed securities	206			228			426			488
Total interest income	4,273			4,374			8,561			9,011
Interest expense:
Deposits	689			750			1,388			1,523
FHLB advances	131			160			292			430
Total interest expense	820			910			1,680			1,953
Net interest income before provision for loan losses	3,453			3,464			6,881			7,058
Provision for loan losses	—			—			—			—
Net interest income after provision for loan losses	3,453			3,464			6,881			7,058
Noninterest income
Deposit service fees	347			393			731			770
Other deposit fees	175			199			364			399
Gain on sale of investments	—			—			47			—
Loan fees	144			147			288			297
(Loss) gain on sale of loans	(5		)	3			(11		)	(14		)
Bank owned life insurance ("BOLI") investment	133			135			272			278
Other income	231			160			317			275
Total noninterest income	1,025			1,037			2,008			2,005
Noninterest expense
Compensation and benefits	1,945			2,009			3,968			4,015
General and administrative expenses	701			831			1,369			1,628
Real estate owned impairment	93			463			130			823
Real estate owned holding costs	62			150			216			227
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	125			142			246			285
Information technology	439			440			868			868
Occupancy and equipment	463			454			945			919
Deposit services	158			166			383			302
Marketing	154			131			309			293
Gain on sale of property, premises and equipment	—			(2		)	(2		)	(8		)
Gain on sale of real estate owned	(114		)	(35		)	(108		)	(29		)
Total noninterest expense	4,026			4,749			8,324			9,323
Income (loss) before provision for income taxes	452			(248		)	565			(260		)
Provision (benefit) for income taxes	(8,333		)	—			(8,333		)	—
Net income (loss)	$	8,785		$	(248	)	$	8,898		$	(260	)
Basic earnings (loss) per share	$	3.55		$	(0.10	)	$	3.59		$	(0.11	)
Diluted earnings (loss) per share	$	3.55		$	(0.10	)	$	3.59		$	(0.11	)

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

Table of Contents



ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands)(Unaudited)	Three Months Ended December 31,					Six Months Ended December 31,
	Three Months Ended December 31,					Six Months Ended December 31,
	2014		2013			2014		2013
NET INCOME (LOSS)	$	8,785	$	(248	)	$	8,898	$	(260	)
OTHER COMPREHENSIVE INCOME (LOSS), net of income tax
Unrealized holding gains (losses) on available-for-sale securities during the period	226		(210		)	32		(7		)
Adjustment for realized gains included in net income	—		—			47		—
Other comprehensive income (loss), net of income tax	226		(210		)	79		(7		)
COMPREHENSIVE INCOME (LOSS)	$	9,011	$	(458	)	$	8,977	$	(267	)

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

Table of Contents



ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except share data) (Unaudited)	Six Months Ended December 31,
	Six Months Ended December 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	8,898		$	(260	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization	329			307
Net amortization of premiums on securities	314			392
ESOP expense	98			58
Real estate owned impairment	130			823
Deferred federal income taxes	(8,333		)	—
Income from bank owned life insurance investment	(272		)	(278		)
Loss on sale of loans	11			14
Gain on sale of investments	(47		)	—
Originations of loans held for sale	(11		)	(1,003		)
Proceeds from sale of loans held for sale	—			1,364
Gain on sale of property, premises, and equipment	(2		)	(8		)
Gain on sale of real estate owned	(108		)	(29		)
Change in operating assets and liabilities:
Accrued interest receivable	172			60
Prepaid expenses, other assets, and income tax receivable	367			4,304
Supplemental Executive Retirement Plan	(6		)	(31		)
Accounts payable and other liabilities	(1,120		)	(480		)
Net cash provided by operating activities	420			5,233
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of available-for-sale securities	2,335			995
Principal repayments on available-for-sale securities	3,547			5,067
Principal repayments on held-to-maturity securities	616			899
Loan originations, net of undisbursed loan proceeds and principal repayments	3,314			(121		)
Proceeds from sale of real estate owned	6,297			4,663
Capital improvements on real estate owned	(28		)	(479		)
Proceeds from sale of property, premises, and equipment, net	1			8
Purchase of fixed assets	(323		)	(286		)
Net cash provided by investing activities	15,759			10,746
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits	(12,262		)	(12,786		)
Net change in advance payments by borrowers for taxes and insurance	137			107
Proceeds from FHLB advances	15,100			—
Repayment of FHLB advances	(22,550		)	(47,400		)
Net cash used in financing activities	$	(19,575	)	$	(60,079	)
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(3,396	)	$	(44,100	)
Beginning of period	14,758			65,353
End of period	$	11,362		$	21,253

Table of Contents




ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except share data) (Unaudited)	Six Months Ended December 31,
	Six Months Ended December 31,
	2014		2013
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities:
Net loans transferred to real estate owned	$	1,824	$	3,778
Unrealized holding gains (losses) on available-for-sale securities	$	32	$	(7	)
Cash paid during the period for interest	$	1,709	$	2,004

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

Table of Contents

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 and six months ended December 31, 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

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 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 with the DFI. On November 24, 2014, the Supervisory Directive was terminated; effective on November 20, 2014. The Federal Reserve Bank of San Francisco terminated the Supervisory Directive it had with the Company on January 13, 2015.

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

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



	For the Three Months Ended December 31,					For the Six Months Ended December 31,
	2014		2013			2014		2013
	(Dollars in thousands, except share data)
Net income (loss)	$	8,785	$	(248	)	$	8,898	$	(260	)
Weighted-average common shares outstanding	2,476,562		2,466,983			2,475,702		2,466,133
Basic earnings (loss) per share	$	3.55	$	(0.10	)	$	3.59	$	(0.11	)
Diluted earnings (loss) per share	$	3.55	$	(0.10	)	$	3.59	$	(0.11	)

There were no antidilutive stock options or other potential common shares at or for the three and six months ended December 31, 2014 and 2013.

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 December 31, 2014 and June 30, 2014, were as follows:



December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	438	$	1	$	—		$	439
Mortgage-backed securities:
FHLMC ⁽¹⁾	12,948		172		(118		)	13,002
FNMA ⁽²⁾	18,531		82		(285		)	18,328
GNMA ⁽³⁾	1,048		—		(10		)	1,038
	$	32,965	$	255	$	(413	)	$	32,807
Securities held-to-maturity
Municipal bonds	$	123	$	—	$	—		$	123
Mortgage-backed securities:
FHLMC	3,662		112		(51		)	3,723
FNMA	2,055		142		(20		)	2,177
GNMA	2,282		—		(29		)	2,253
	$	8,122	$	254	$	(100	)	$	8,276

⁽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 33 and 38 securities in an unrealized loss position at December 31, 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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of December 31, 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
December 31, 2014	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	408	$	(3	)	$	6,564	$	(115	)	$	6,972	$	(118	)
FNMA	—		—			13,203		(285		)	13,203		(285		)
GNMA	—		—			1,038		(10		)	1,038		(10		)
	$	408	$	(3	)	$	20,805	$	(410	)	$	21,213	$	(413	)



	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2014	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—	$	2,478	$	(51	)	$	2,478	$	(51	)
FNMA	—		—		821		(20		)	821		(20		)
GNMA	—		—		2,253		(29		)	2,253		(29		)
	$	—	$	—	$	5,552	$	(100	)	$	5,552	$	(100	)



	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	)

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual maturities of securities at December 31, 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.



December 31, 2014	Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds:
Due within one year	$	250	$	251
Due after one to five years	—		—
Due after five to ten years	—		—
Due after ten years	188		188
Mortgage-backed securities:
FHLMC	12,948		13,002
FNMA	18,531		18,328
GNMA	1,048		1,038
	$	32,965	$	32,807



Securities held-to-maturity
Municipal bonds:
Due after ten years	$	123	$	123
Mortgage-backed securities:
FHLMC	3,662		3,723
FNMA	2,055		2,177
GNMA	2,282		2,253
	$	8,122	$	8,276

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



	Three Months Ended December 31,					Six Months Ended December 31,
	2014			2013		2014			2013
	(In thousands)
Proceeds from sales	$	1,653		$	—	$	2,355		$	—
Proceeds from maturities and calls	—			995		—			995
Gross realized gains	18			—		65			—
Gross realized losses	(18		)	—		(18		)	—

Pledged securities at the dates indicated are summarized as follows:



	December 31, 2014				June 30, 2014
Pledged to secure:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Public deposits	$	13,108	$	13,195	$	10,081	$	10,154
FHLB borrowings	1,950		2,024		2,223		2,301
Federal Reserve borrowings	1,013		1,007		1,127		1,120

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:



	December 31, 2014		June 30, 2014
	(In thousands)
Real estate:
One-to-four family	$	60,013	$	63,009
Multi-family	43,978		47,507
Commercial	106,482		107,828
Construction	24,250		19,690
Land	4,154		4,126
Total real estate	238,877		242,160
Consumer:
Home equity	18,971		20,894
Credit cards	3,326		3,548
Automobile	894		1,073
Other consumer	2,356		2,838
Total consumer	25,547		28,353

Commercial business	17,214		16,737
Total loans	281,638		287,250
Less:
Deferred loan fees	1,108		1,100
Allowance for loan losses	4,000		4,624
Loans receivable, net	$	276,530	$	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.

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 December 31, 2014:



	One-to- four family			Multi- family			Commercial real estate			Construction		Land		Consumer (1)			Commercial business			Unallocated			Three months ended 12/31/14
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,281		$	83		$	379		$	300	$	75	$	568		$	1,226		$	82		$	3,994
Provision (benefit) for loan losses	114			(19		)	(35		)	12		19		(19		)	(55		)	(17		)	—
Charge-offs	(121		)	—			—			—		—		(60		)	—			—			(181		)
Recoveries	14			—			—			109		—		44			20			—			187
Ending balance	$	1,288		$	64		$	344		$	421	$	94	$	533		$	1,191		$	65		$	4,000


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

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



	One-to- four family			Multi- family			Commercial real estate			Construction		Land		Consumer (1)			Commercial business			Unallocated			Six months ended 12/31/14
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,550		$	229		$	682		$	190	$	74	$	587		$	1,231		$	81		$	4,624
Provision (benefit) for loan losses	(73		)	(5		)	2			110		20		7			(45		)	(16		)	—
Charge-offs	(214		)	(160		)	(340		)	—		—		(141		)	(88		)	—			(943		)
Recoveries	25			—			—			121		—		80			93			—			319
Ending balance	$	1,288		$	64		$	344		$	421	$	94	$	533		$	1,191		$	65		$	4,000

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2013:



	One-to- four family			Multi- family		Commercial real estate		Construction			Land			Consumer (1)			Commercial business			Unallocated			Three months ended 12/31/13
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,454		$	206	$	674	$	206		$	443		$	800		$	1,107		$	51		$	4,941
Provision (benefit) for loan losses	414			32		103		(89		)	(381		)	99			(157		)	(21		)	—
Charge-offs	(474		)	—		—		—			—			(234		)	(22		)	—			(730		)
Recoveries	4			—		—		10			—			29			19			—			62
Ending balance	$	1,398		$	238	$	777	$	127		$	62		$	694		$	947		$	30		$	4,273


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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2013:



	One-to- four family			Multi- family			Commercial real estate		Construction			Land			Consumer (1)			Commercial business			Unallocated			Six months ended 12/31/13
	(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	621			(127		)	106		(247		)	(469		)	352			(215		)	(21		)	—
Charge-offs	(672		)	—			—		—			—			(533		)	(43		)	—			(1,248		)
Recoveries	56			209			—		18			—			58			33			—			374
Ending balance	$	1,398		$	238		$	777	$	127		$	62		$	694		$	947		$	30		$	4,273

⁽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.

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 December 31, 2014:



	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	2,580	$	3,027	$	—
Multi-family	373		373		—
Land	233		247		—
Home equity	65		67		—
Commercial business	186		248		—
With an allowance recorded
One-to-four family	$	8,301	$	8,311	$	712
Land	484		484		34
Home equity	293		296		70
Commercial business	157		157		2
Total
One-to-four family	$	10,881	$	11,338	$	712
Multi-family	373		373		—
Land	717		731		34
Home equity	358		363		70
Commercial business	343		405		2
Total	$	12,672	$	13,210	$	818

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	$	—
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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended December 31, 2014				Six Months Ended December 31, 2014
	Three Months Ended December 31, 2014				Six Months Ended December 31, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	3,037	$	16	$	2,620	$	49
Multi-family	187		2		373		5
Commercial real estate	—		—		110		—
Land	291		2		277		6
Home equity	68		1		106		2
Commercial business	187		2		156		6
With an allowance recorded
One-to-four family	$	8,117	$	57	$	8,393	$	171
Multi-family	—		—		79		—
Commercial real estate	—		—		925		—
Land	451		4		496		13
Home equity	297		2		260		6
Commercial business	157		1		275		4
Total
One-to-four family	$	11,154	$	73	$	11,013	$	220
Multi-family	187		2		452		5
Commercial real estate	—		—		1,035		—
Land	742		6		773		19
Home equity	365		3		366		8
Commercial business	344		3		431		10
Total	$	12,792	$	87	$	14,070	$	262

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and six months ended December 31, 2013:



	Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
	Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	4,992	$	37	$	4,862	$	74
Multi-family	2,336		31		2,336		61
Commercial real estate	1,948		10		1,957		20
Land	359		6		437		11
Home equity	199		2		207		3
Commercial business	251		3		723		5
With an allowance recorded
One-to-four family	$	8,465	$	92	$	8,276	$	184
Multi-family	79		—		79		—
Commercial real estate	600		14		600		28
Land	773		7		773		13
Home equity	437		7		503		14
Commercial business	140		1		144		2
Total
One-to-four family	$	13,457	$	129	$	13,138	$	258
Multi-family	2,415		31		2,415		61
Commercial real estate	2,548		24		2,557		48
Land	1,132		13		1,210		24
Home equity	636		9		710		17
Commercial business	391		4		867		7
Total	$	20,579	$	210	$	20,897	$	415

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 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	$	1,288	$	64	$	344	$	421	$	94	$	533	$	1,191	$	65	$	4,000
Ending balance: individually evaluated for impairment	712		—		—		—		34		70		2		—		818
Ending balance: collectively evaluated for impairment	$	576	$	64	$	344	$	421	$	60	$	463	$	1,189	$	65	$	3,182

Loans receivable:
Ending balance	$	60,013	$	43,978	$	106,482	$	24,250	$	4,154	$	25,547	$	17,214	$	—	$	281,638
Ending balance: individually evaluated for impairment	10,881		373		—		—		717		358		343		—		12,672
Ending balance: collectively evaluated for impairment	$	49,132	$	43,605	$	106,482	$	24,250	$	3,437	$	25,189	$	16,871	$	—	$	268,966


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

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:



	December 31, 2014		June 30, 2014
	(In thousands)
One-to-four family	$	2,124	$	2,101
Multi-family	374		158
Commercial	—		2,070
Land	70		150
Home equity	75		—
Credit cards	5		—
Other consumer	32		—
Commercial business	122		235
Total	$	2,802	$	4,714

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, 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	$	1,967	$	346	$	2,124	$	4,437	$	55,576	$	60,013
Multi-family	—		—		374		374		43,604		43,978
Commercial real estate	—		—		—		—		106,482		106,482
Construction	—		—		—		—		24,250		24,250
Land	—		—		70		70		4,084		4,154
Home equity	230		15		75		320		18,651		18,971
Credit cards	5		4		5		14		3,312		3,326
Automobile	21		—		—		21		873		894
Other consumer	45		—		32		77		2,279		2,356
Commercial business	181		—		122		303		16,911		17,214
Total	$	2,449	$	365	$	2,802	$	5,616	$	276,022	$	281,638


	⁽¹⁾ Includes loans on nonaccrual status and loans that may be less than 90 days past due. At December 31, 2014, there were $5 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.

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.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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

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

A loan classified as a Loss has the following characteristics:


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


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


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

The following table presents the internally assigned grade as of December 31, 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	$	46,612	$	43,605	$	102,404	$	24,250	$	3,437	$	17,256	$	3,312	$	811	$	2,221	$	13,734	$	257,642
Watch	5,171		—		440		—		—		1,204		9		83		103		1,099		8,109
Special Mention	4,641		—		3,638		—		233		386		—		—		—		1,663		10,561
Substandard	3,589		373		—		—		484		125		5		—		32		718		5,326
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	60,013	$	43,978	$	106,482	$	24,250	$	4,154	$	18,971	$	3,326	$	894	$	2,356	$	17,214	$	281,638

The following table presents the credit risk profile based on payment activity as of December 31, 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	$	57,889	$	43,604	$	106,482	$	24,250	$	4,084	$	18,896	$	3,321	$	894	$	2,324	$	17,092	$	278,836
Nonperforming ⁽¹⁾	2,124		374		—		—		70		75		5		—		32		122		2,802
Total	$	60,013	$	43,978	$	106,482	$	24,250	$	4,154	$	18,971	$	3,326	$	894	$	2,356	$	17,214	$	281,638

⁽¹⁾Loans that are more than 90 days past due and still accruing interest and nonaccrual loans are considered nonperforming. At December 31, 2014, there were $5 in loans 90 days past due and still accruing interest.

The following table presents 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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the credit risk profile based on payment activity as of June 30, 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 December 31, 2014 and June 30, 2014, troubled debt restructured loans (“TDRs”), included in impaired loans above, totaled $10.8 million with $1.3 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 December 31, 2014, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of December 31, 2014:



	December 31, 2014
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	8,306	$	1,236	$	9,542
Land	647		—		647
Home equity	283		73		356
Commercial business	221		—		221
Total	$	9,457	$	1,309	$	10,766

The following table presents 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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present TDRs and their recorded investment prior to the modification and after the modification for TDR transactions that originated during the three and six months ended December 31, 2014 and 2013:



	Three Months Ended December 31, 2014					Six Months Ended December 31, 2014
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
	(Dollars in thousands)
One-to-four family	—	$	—	$	—	1	$	197	$	196
Total	—	$	—	$	—	1	$	197	$	196



	Three Months Ended December 31, 2013					Six Months Ended December 31, 2013
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
	(Dollars in thousands)
One-to-four family	1	$	223	$	226	4	$	704	$	725
Home equity	1	75		69		2	75		69
Commercial business	1	145		160		1	145		160
Total	3	$	443	$	455	7	$	924	$	954

For the three and six months ended December 31, 2014, there were no 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.

The following table presents 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 December 31, 2013			Six Months Ended December 31, 2013
	Number of Contracts			Number of Contracts
	Number of Contracts			Number of Contracts
	(Dollars in thousands)
One-to-four family	1	$	117	1	$	117
Home equity	—	—		1	80
Total	1	$	117	2	$	197

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 activity for the three and six months ended December 31, 2014 and 2013:



	Three Months Ended December 31,						Six Months Ended December 31,
	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
	(In thousands)
Balance at the beginning of the period	$	6,092		$	5,766		$	5,067		$	6,212
Net loans transferred to real estate owned	—			3,255			1,824			3,778
Capitalized improvements	22			116			28			479
Sales	(5,421		)	(3,662		)	(6,189		)	(4,634		)
Impairments	(93		)	(463		)	(130		)	(823		)
Balance at the end of the period	$	600		$	5,012		$	600		$	5,012

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 December 31, 2014 and 2013 was $35,000 and $29,000, respectively. For the six months ended December 31, 2014 and 2013 compensation expense related to the ESOP was $97,000 and $58,000, respectively.

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



	December 31, 2014		June 30, 2014
	(Dollars in thousands)
Allocated shares	29,421		25,981
Unallocated shares	72,579		76,019
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,481	$	1,451

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 and six months ended December 31, 2014. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:



	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	439	$	—	$	439
Mortgage-backed securities:
FHLMC	—		13,002		—		13,002
FNMA	—		18,328		—		18,328
GNMA	—		1,038		—		1,038



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

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 impairment on a nonrecurring basis at December 31, 2014:



	December 31, 2014
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	4,940	$	4,940
Land	—		—		484		484
Commercial business	—		—		156		156
Total impaired loans	—		—		5,580		5,580

Real estate owned:
One-to-four family	$	—	$	—	$	103	$	103
Land	—		—		119		119
Total real estate owned	—		—		222		222

Total	$	—	$	—	$	5,802	$	5,802

The following table presents the Company's assets measured at fair value that management has evaluated for impairment 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

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 tables present quantitative information about Level 3 fair value measurements:



	December 31, 2014
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans ⁽¹⁾	$	12,672	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (4%)
Real estate owned ⁽¹⁾	$	600	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (3%)

⁽¹⁾Includes all impaired loans and all real estate owned.



	June 30, 2014
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (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.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of December 31, 2014 and June 30, 2014:



	December 31, 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	$	11,362	$	11,362	$	11,362	$	—	$	—
Securities available-for-sale	32,807		32,807		—		32,807		—
Securities held-to-maturity	8,122		8,276		—		8,276		—
FHLB stock	5,923		5,923		—		5,923		—
Loans receivable, net	276,530		276,530		—		—		276,530
Bank owned life insurance investment, net of surrender charges	19,700		19,700		—		19,700		—
Accrued interest receivable	1,064		1,064		—		1,064		—

Financial Instruments-Liabilities
Demand deposits, savings and money market	$	169,817	$	169,817	$	169,817	$	—	$	—
Certificates of deposit	128,955		128,672		—		128,672		—
FHLB advances	10,050		10,050		—		10,050		—



	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		—

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Securities - The estimated fair values of securities are based on quoted market prices of similar securities.

FHLB stock - FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the member institutions, and can only be purchased and redeemed at par.

Loans 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. At December 31, 2014 all advances were considered short-term and as such had a fair value equal to book value.

Commitments to extend credit represent the principal categories of off-balance-sheet financial instruments - The fair values of these commitments are not material since they are for a short period of time and are subject to customary credit terms.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 - Federal Income Taxes

The following table reflects the effect of temporary differences that give rise to the components of the net deferred tax assets as of December 31, 2014 and June 30, 2014:



	December 31, 2014		June 30, 2014
	(In thousands)

Deferred tax assets
Allowance for loan losses	$	3,234	$	3,446
AMT credit carryforward	198		198
Deferred compensation - SERP	581		583
Securities impairment charge	340		340
Net operating loss carryforward	5,797		4,943
Real estate owned	167		992
Accumulated depreciation	114		94
Unrealized loss on securities available-for-sale	54		65
Total deferred tax assets	10,485		10,661

Deferred tax liabilities
Deferred loan fees and costs	456		395
FHLB stock dividends	1,036		1,035
Mortgage servicing rights	102		125
Other common, net	3		72
Total deferred tax liability	1,597		1,627

Net deferred tax asset, before valuation allowance	8,888		9,034
Valuation allowance	—		8,479
Net deferred tax asset, after valuation allowance	$	8,888	$	555

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

As of December 31, 2014, the Condensed Consolidated Balance Sheet included deferred tax assets of $8.9 million. Our primary deferred tax assets relate to our ALLL and our net operating loss carryforward, in the amount of $16.2 million, which will begin to expire in 2031.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. Our policy is to evaluate our deferred tax assets on a quarterly basis and record a valuation allowance for our deferred tax asset if we do not have sufficient positive evidence indicating that it is more likely than not that some or all of the deferred tax asset will be realized. Each quarter, we consider positive evidence, which may include taxes paid in carryback years, reversing timing differences, available tax planning strategies, and projected taxable income and weigh it against negative evidence, which may include cumulative losses in the most recent three year period and uncertainty regarding

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

short-term future earnings, among other items. During the quarter ended December 31, 2014, management determined that a release of the entire valuation of $8.5 million was appropriate. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

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


•	the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;


•	changes in general economic conditions, either nationally or in our market areas;


•	changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;


•	fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;


•	secondary market conditions for loans and our ability to sell loans in the secondary market;

•

results of examinations of us by the Federal Deposit Insurance Corporation ("FDIC"), the Washington Department of Financial Institutions, Division of Banks ("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;


•	our ability to attract and retain deposits;


•	increases in premiums for deposit insurance;


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


•	our ability to control operating costs and expenses;


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


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


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


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


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


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


•	our ability to manage loan delinquency rates;


•	increased competitive pressures among financial services companies;


•	changes in consumer spending, borrowing and savings habits;


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


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


•	our ability to pay dividends on our common stock;


•	adverse changes in the securities markets;


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


•	changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and


•	other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q.

Table of Contents

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 2015 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 December 31, 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 on fee income 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 with the DFI. On November 24, 2014, the Supervisory Directive was terminated; effective on November 20, 2014.

Our compliance with these regulatory actions had a resulting negative impact on our financial condition and results of operations during recent periods. Our asset size has steadily declined over the last five years and we have sold loans and securities to generate additional income. Although the reduction in asset size and the asset sales have helped us preserve our

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capital and maximize our regulatory capital ratios, these actions have negatively affected 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. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, the bankruptcies and vacancy rates of business and residential properties. These factors are used by the Chief Lending Officer who assesses the allowance for loan and lease losses on a monthly basis and reports to the Board of Directors no less than quarterly.

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

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

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

During the quarter ended December 31, 2014, management determined based on the available evidence that a valuation allowance was no longer appropriate and reversed the full deferred tax asset ("DTA") valuation allowance of $8.3 million. In reaching this determination, management considered the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, available tax planning strategies, and projected taxable income. As of December 31, 2014, the Company had cumulative earnings over the recent three year period ended December 31, 2014 and positive trends in earnings and asset quality. The ultimate utilization of deferred tax assets, however, is dependent upon the existence, or generation of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.

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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 December 31, 2014 and June 30, 2014

General. Total assets decreased by $11.7 million, or 3.0%, to $377.4 million at December 31, 2014 from $389.1 million at June 30, 2014. The decrease in assets during this period was primarily a result of securities available-for-sale decreasing by $6.1 million or 15.7% to $32.8 million at December 31, 2014 from $38.9 million at June 30, 2014. Cash and cash equivalents also decreased by $3.4 million, or 23.0% to $11.4 million at December 31, 2014, from $14.8 million at June 30, 2014. Total liabilities decreased $20.7 million or 6.2% to $314.8 million at December 31, 2014 compared to $335.5 million at June 30, 2014 primarily due to the decline in deposits. Total deposits decreased $12.3 million, or 3.9%, to $298.8 million at December 31, 2014 from $311.0 million at June 30, 2014 primarily as a result of a decrease 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 December 31, 2014:



	Balance at December 31, 2014		Balance at June 30, 2014		Increase/(Decrease)
	Balance at December 31, 2014		Balance at June 30, 2014		Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	11,362	$	14,758	$	(3,396	)	(23.0	)%
Mortgage-backed securities, available-for-sale	32,368		38,471		(6,103		)	(15.9	)
Mortgage-backed securities, held-to-maturity	7,999		8,638		(639		)	(7.4	)
Loans receivable, net of allowance for loan losses	276,530		281,526		(4,996		)	(1.8	)
Real estate owned, net	600		5,067		(4,467		)	(88.2	)

Mortgage-backed securities available-for-sale decreased $6.1 million, or 15.9%, to $32.4 million at December 31, 2014 from $38.5 million at June 30, 2014. Mortgage-backed securities held-to-maturity decreased $639,000 or 7.4%, to $8.0 million at December 31, 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 five securities totaling $2.4 million.

Loans receivable, net, decreased $5.0 million or 1.8% to $276.5 million at December 31, 2014 from $281.5 million at June 30, 2014 as a result of principal reductions exceeding new loan production. Multi-family loans decreased $3.5 million or 7.4% to $44.0 million at December 31, 2014 from $47.5 million at June 30, 2014. Construction and land loans increased $4.6 million or 19.3% to $28.4 million at December 31, 2014 from $23.8 million at June 30, 2014. Of that increase, $3.6 million was attributable to increases in loans for multi-family construction. Commercial real estate loans decreased $1.3 million or 1.2% to $106.5 million at December 31, 2014 from $107.8 million at June 30, 2014 and one-to-four family loans decreased $3.0 million or 4.8% to $60.0 million from $63.0 million at June 30, 2014. Commercial business loans increased $447,000 or 2.8% to $17.2 million at December 31, 2014 from $16.7 million at June 30, 2014. Consumer loans decreased $2.8 million or 9.9% to $25.5 million at December 31, 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.

As of December 31, 2014, the Company had 10 REO properties with an aggregate book value of $600,000 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 $5.0 million at December 31, 2013. The decrease in the balance of properties during the quarter ended December 31, 2014 was primarily attributable to the sale of three commercial real estate properties. During the quarter ended December 31, 2014, the Company sold three commercial real estate properties for $5.6 million, three one-to-four family properties for $501,000, and

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one parcel for $30,000, resulting in an aggregate gain on sale of $114,000. At December 31, 2014, the largest REO property was a one-to-four family home in Grays Harbor County, Washington with a book value of $209,000.

The following is a summary of our REO properties at December 31, 2014 listed by property type and county location:



	County										Number of properties	Percent of Total REO
	Grays Harbor		Thurston		Pierce		All Other		Total		Number of properties	Percent of Total REO
	(Dollars in thousands)
REO:
One-to-four family	$	409	$	—	$	—	$	—	$	409	3	68.2	%
Land	45		63		11		72		191		7	31.8
Total	$	454	$	63	$	11	$	72	$	600	10	100.0	%

Liabilities. Total liabilities decreased $20.7 million between June 30, 2014 and December 31, 2014, primarily as the result of a $12.3 million or 3.9% decline in deposits and, in particular, an $8.9 million, or 6.4% decline in certificates of deposit. The decrease in certificates of deposit was partially offset by an increase of $1.6 million, or 4.0%, in our savings deposits. Federal Home Loan Bank advances decreased $7.5 million or 42.6% to $10.0 million.

Deposits decreased $12.3 million, or 3.9%, to $298.7 million at December 31, 2014 from $311.0 million at June 30, 2014. Our core deposits, which consist of all deposits other than certificates of deposit, decreased by $3.4 million or 1.9% to $169.8 million from $173.2 million at June 30, 2014. Certificates of deposit decreased $8.9 million or 6.4% to $129.0 million at December 31, 2014 from $137.8 million at June 30, 2014.

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



	Balance at December 31, 2014		Balance at June 30, 2014		Increase/(Decrease)
	Balance at December 31, 2014		Balance at June 30, 2014		Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	41,055	$	41,149	$	(94	)	(0.2	)%
Interest-bearing demand deposits	21,846		22,771		(925		)	(4.1	)
Money market accounts	65,637		69,610		(3,973		)	(5.7	)
Savings deposits	41,279		39,693		1,586			4.0
Certificates of deposit	128,955		137,811		(8,856		)	(6.4	)
Total deposit accounts	$	298,772	$	311,034	$	(12,262	)	(3.9	)%

Stockholders' Equity. Total stockholders' equity increased $9.0 million from $53.7 million at June 30, 2014 to $62.7 million at December 31, 2014. The increase was primarily the result of income of $8.9 million of which $8.3 million was from the reversal of our DTA valuation allowance and $565,000 from operating income during the six months ended December 31, 2014.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2014 and 2013

General. Net income for the three months ended December 31, 2014 was $8.8 million or $3.55 per diluted share, which includes an $8.3 million tax benefit related to the reversal of the DTA valuation allowance, compared to a net loss of $248,000 or $0.10 per diluted share for the three months ended December 31, 2013. For the six months ended December 31, 2014 the net income was $8.9 million or $3.59 per diluted share compared to a net loss of $260,000, or $0.11 per diluted share, for the same period last year.

Net Interest Income. Net interest income before the provision for loan losses remained virtually unchanged at $3.5 million for both the quarters ended December 31, 2014 and 2013. For the six months ended December 31, 2014 net interest income before the provision for loan losses decreased $177,000 or 2.5%, to $6.9 million from $7.1 million for the same period in 2013 as a result of declines in our loan and securities portfolios.

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The Company's net interest margin increased 17 basis points to 4.06% for the quarter ended December 31, 2014 from 3.89% for the comparable period in 2013 as the average yield on interest-earning assets increased 12 basis points to 5.03% for the quarter ended December 31, 2014 compared to 4.91% 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 both deposits and the reduction of FHLB advances. The average cost of interest-bearing liabilities decreased two basis points to 1.19% for the quarter ended December 31, 2014 compared to 1.21% 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 December 31, 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 December 31, 2014 Compared to Three Months Ended December 31, 2013
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(33	)	$	(38	)	$	(71	)
Mortgage-backed securities	20			(43		)	(23		)
Investment securities, FHLB stock and cash and cash equivalents	(3		)	(4		)	(7		)
Total net change in income on interest-earning assets	$	(16	)	$	(85	)	$	(101	)
Interest-bearing liabilities:
Savings deposits	$	1		$	1		$	2
Interest-bearing demand deposits	—			—			—
Money market accounts	—			(4		)	(4		)
Certificates of deposit	5			(64		)	(59		)
FHLB advances	(6		)	(23		)	(29		)
Total net change in expense on interest-bearing liabilities	—			(90		)	(90		)
Net change in net interest income	$	(16	)	$	5		$	(11	)

For the six months ended December 31, 2014, the Company's net interest margin increased 26 basis points to 4.00% compared to 3.74% for the same period in 2013, reflecting the decline in our average interest-bearing liabilities. The average yield on interest-earning assets increased 21 basis points to 4.98% for the six months ended December 31, 2014 compared to 4.77% for the same period in the prior year. The increase in the average yield on interest earning assets was the result of the sale of lower rate mortgage-backed securities during the six months ended December 31, 2014. The average cost of interest-bearing liabilities decreased two basis points to 1.20% for the six months ended December 31, 2014 compared to 1.22% for the same period of the prior year as the cost of our liabilities continue to decline, due to the payoff of FHLB borrowings, the reduction in the balance of certificates of deposit and, to a lesser extent, the renewal of certificates of deposits at currently low interest rates.

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The following table sets forth the changes to our net interest income for the six months ended December 31, 2014 compared to the same period in 2013:



	Six Months Ended December 31, 2014 Compared to Six Months Ended December 31, 2013
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(265	)	$	(74	)	$	(339	)
Mortgage-backed securities	24			(86		)	(62		)
Investment securities, FHLB stock and cash and cash equivalents	(5		)	(44		)	(49		)
Total net change in income on interest-earning assets	$	(246	)	$	(204	)	$	(450	)
Interest-bearing liabilities:
Savings deposits	$	1		$	2		$	3
Interest-bearing demand deposits	—			—			—
Money market accounts	(1		)	(8		)	(9		)
Certificates of deposit	(6		)	(123		)	(129		)
FHLB advances	89			(227		)	(138		)
Total net change in expense on interest-bearing liabilities	83			(356		)	(273		)
Net change in net interest income	$	(329	)	$	152		$	(177	)

Interest Income. Total interest income for the three months ended December 31, 2014 decreased $101,000 or 2.3%, to $4.3 million from $4.4 million for the three months ended December 31, 2013. The decrease during the period was primarily attributable to the declines in the average balance and, to a lesser extent, the average yield of loans receivable, net. Average loans receivable, net, declined $2.6 million during the quarter ended December 31, 2014 compared to the same quarter last year. The average yield on loans receivable, net, decreased four basis points to 5.78% for the three months ended December 31, 2014 compared to 5.82% for the same period in the prior year. Average mortgage-backed securities declined $9.9 million during the three months ended December 31, 2014 compared to the same period in the prior year. The average yield on mortgage-backed securities increased 20 basis points to 1.95% for the three months ended December 31, 2014 compared to 1.75% for the same period in the prior year. Average interest-earning assets decreased $16.5 million or 4.6% to $339.9 million for the three months ended December 31, 2014 compared to $356.4 million for the same period in 2013.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended December 31, 2014 and 2013:



	Three Months Ended December 31,
	2014				2013				Increase/(Decrease) in Interest and Dividend Income from 2013
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	$	280,637	5.78	%	$	283,228	5.82	%	$	(71	)
Mortgage-backed securities	42,348		1.95		52,242		1.75		(23		)
Investment securities	564		4.96		924		4.76		(4		)
FHLB stock	5,969		0.07		6,206		0.13		(1		)
Cash and cash equivalents	10,390		0.27		13,839		0.26		(2		)
Total interest-earning assets	$	339,908	5.03	%	$	356,439	4.91	%	$	(101	)


⁽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.

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For the six months ended December 31, 2014, total interest income decreased $450,000, or 5.0% to $8.6 million from $9.0 million for the six months ended December 31, 2013. The decrease during the period was primarily attributable to the declines in the average yield on loans receivable, net and to a lesser extent declines in the average balances of loans receivable, net, and of mortgage-backed securities. The average yield on loans receivable, net, decreased 19 basis points to 5.74% for the six months ended December 31, 2014 compared to 5.93% for the same period in the prior year. Average loans receivable, net, declined $2.5 million during the six months ended December 31, 2014 compared to the same period in the prior year. Average mortgage-backed securities declined $9.5 million during the six months ended December 31, 2014 compared to the same period in the prior year. The average yield on mortgage-backed securities increased 11 basis points to 1.93% for the six months ended December 31, 2014 compared to 1.82% for the same period in the prior year. Average interest-earning assets decreased $33.6 million or 8.9% to $344.0 million for the six months ended December 31, 2014 compared to $377.6 million for the same period in 2013.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended December 31, 2014 and 2013:



	Six Months Ended December 31,
	2014				2013				Increase/(Decrease) in Interest and Dividend Income from 2013
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	$	282,334	5.74	%	$	284,840	5.93	%	$	(339	)
Mortgage-backed securities	44,160		1.93		53,671		1.82		(62		)
Investment securities	567		5.29		1,256		4.94		(16		)
FHLB stock	6,000		0.10		6,237		0.10		—
Cash and cash equivalents	10,951		0.22		31,599		0.28		(33		)
Total interest-earning assets	$	344,012	4.98	%	$	377,603	4.77	%	$	(450	)


⁽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 $90,000 or 9.9%, to $820,000 for the three months ended December 31, 2014 from $910,000 for the three months ended December 31, 2013. The decrease during the period was primarily attributable to the reduction of the average balances of certificates of deposit and FHLB advances. The average balance of certificates of deposit declined $13.2 million or 9.1% to $131.4 million for the current quarter while the average cost of these deposits increased two basis points to 1.97% for the three months ended December 31, 2014 compared to 1.95% for the same period of the prior year. Average FHLB advances declined $2.6 million during the quarter ended December 31, 2014 compared to the same quarter last year. Our FHLB advances mature this fiscal year. Average interest-bearing liabilities decreased $24.0 million or 8.0% to $276.1 million for the three months ended December 31, 2014 compared to $300.1 million for the same period in 2013.

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The following table details average balances, cost of funds and the change in interest expense for the three months ended December 31, 2014 and 2013:



	Three Months Ended December 31,
	2014				2013				Increase/(Decrease) in Interest Expense from 2013
	Average Balance		Cost		Average Balance		Cost		Increase/(Decrease) in Interest Expense from 2013
	(Dollars in thousands)
Savings deposits	$	40,577	0.16	%	$	37,873	0.15	%	$	2
Interest-bearing demand deposits	20,145		0.04		20,525		0.04		—
Money market deposits	69,044		0.14		79,597		0.15		(4		)
Certificates of deposit	131,415		1.97		144,632		1.95		(59		)
FHLB advances	14,937		3.51		17,500		3.66		(29		)
Total interest-bearing liabilities	$	276,118	1.19	%	$	300,127	1.21	%	$	(90	)

For the six months ended December 31, 2014 interest expense decreased $273,000, or 14.0%, to $1.7 million from $2.0 million for the six months ended December 31, 2013. The decrease during the period was primarily attributable to the reduction of the average balances of certificates of deposit and FHLB advances. The average cost of certificates of deposit decreased one basis point to 1.95% for the six months ended December 31, 2014 compared to 1.96% for the same period of the prior year while the average balance of the deposits declined $12.6 million or 8.6% to $133.7 million during this six month period. Average FHLB advances declined $18.2 million during the six months ended December 31, 2014 compared to the same period last year. Average interest-bearing liabilities decreased $40.1 million or 12.5% to $280.1 million for the six months ended December 31, 2014 compared to $320.2 million for the same period in 2013.

The following table details average balances, cost of funds and the change in interest expense for the six months ended December 31, 2014 and 2013:



	Six Months Ended December 31,
	2014				2013				Increase/(Decrease) in Interest Expense from 2013
	Average Balance		Cost		Average Balance		Cost		Increase/(Decrease) in Interest Expense from 2013
	(Dollars in thousands)
Savings deposits	$	40,352	0.15	%	$	37,651	0.15	%	$	3
Interest-bearing demand deposits	19,806		0.05		20,734		0.05		—
Money market deposits	70,023		0.14		81,174		0.15		(9		)
Certificates of deposit	133,664		1.95		146,266		1.96		(129		)
FHLB advances	16,219		3.60		34,391		2.50		(138		)
Total interest-bearing liabilities	$	280,064	1.20	%	$	320,216	1.22	%	$	(273	)

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 and six months ended December 31, 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. Recoveries were greater than charge-offs during the three months ended December 31, 2014 which resulted in a net recovery of $6,000 as compared to a net charge-off of $668,000 for the same fiscal quarter last year. Nonperforming loans, those loans which are 90 days past due or on nonaccrual status, were $2.8 million, at December 31, 2014 compared to $4.7 million at June 30, 2014. There were $5,000 in loans 90 days or more past due and still accruing interest at December 31, 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

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was 1.0% at December 31, 2014 compared to 1.6% at June 30, 2014. Total classified loans decreased $1.3 million or 19.7% to $5.3 million at December 31, 2014 from $6.6 million at June 30, 2014.

Management considers the allowance for loan losses at December 31, 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 December 31, 2014 and 2013:



	At or For the Three Months Ended December 31,
	At or For the Three Months Ended December 31,
	2014			2013
	(Dollars in thousands)
Provision for loan losses	$	—		$	—
Net charge-offs	(6		)	668
Allowance for loan losses	4,000			4,273
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.4		%	1.5		%
Nonaccrual	$	2,802		$	6,190
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	142.8		%	69.0		%
Nonaccrual loans as a percentage of loans receivable at the end of the period	1.0		%	2.2		%
Total loans	$	281,638		$	279,132

The following table details activity and information related to the allowance for loan losses at and for the six months ended December 31, 2014 and 2013:



	At or For the Six Months Ended December 31,
	At or For the Six Months Ended December 31,
	2014			2013
	(Dollars in thousands)
Provision for loan losses	$	—		$	—
Net charge-offs	624			874
Allowance for loan losses	4,000			668
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.4		%	1.5		%
Nonaccrual	$	2,802		$	6,190
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	142.8		%	69.0		%
Nonaccrual loans as a percentage of loans receivable at the end of the period	1.0		%	2.2		%
Total loans	$	281,638		$	279,132

We continue to restructure our delinquent loans, when appropriate, so our borrowers can continue to make payments while minimizing the Company's potential loss. As of December 31, 2014 and December 31, 2013 there were 43 and 47 loans, respectively, with aggregate net principal balances of $10.8 million, and $13.5 million respectively, that we have identified as TDRs. At December 31, 2014 and December 31, 2013 there were $1.2 million and $377,000, respectively, of TDRs included in nonaccrual loans.

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Noninterest Income. Noninterest income remained virtually unchanged at $1.0 million for both quarters ended December 31, 2014 and 2013. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended December 31, 2014 compared to the same period in 2013:



	Three Months Ended December 31,					Increase (decrease)
	Three Months Ended December 31,					Increase (decrease)
	2014			2013		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	347		$	393	$	(46	)	(11.7	)%
Other deposit fees	175			199		(24		)	(12.1	)
Loan fees	144			147		(3		)	(2.0	)
(Loss) gain on sale of loans	(5		)	3		(8		)	(266.7	)
Bank owned life insurance investment	133			135		(2		)	(1.5	)
Other income	231			160		71			44.4
Total noninterest income	$	1,025		$	1,037	$	(12	)	(1.2	)%

There were minor changes in various categories of noninterest income with the primary difference being an increase in other income of $71,000 which was due to an $85,000 increase in prepayment charges on mortgage loans for the quarter ended December 31, 2014 to $110,000 as compared to $25,000 for the same quarter in 2013. This increase was partially offset by a decrease in deposit fees of $46,000 to $347,000 for the quarter ended December 31, 2014 compared to $393,000 for the same quarter in 2013.

Noninterest income was virtually unchanged at $2.0 million during both the six months ended December 31, 2014 and 2013 as increases in gain on sale of investments and other income substantially offset declines in deposit service fees and other deposit fees.

The following table provides a detailed analysis of the changes in the components of noninterest income for the six months ended December 31, 2014 compared to the same period in 2013:



	Six Months Ended December 31,						Increase (decrease)
	Six Months Ended December 31,						Increase (decrease)
	2014			2013			Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	731		$	770		$	(39	)	(5.1	)%
Other deposit fees	364			399			(35		)	(8.8	)
Gain on sale of investments	47			—			47			—
Loan fees	288			297			(9		)	(3.0	)
Loss on sale of loans	(11		)	(14		)	3			(21.4	)
Bank owned life insurance investment	272			278			(6		)	(2.2	)
Other income	317			275			42			15.3
Total noninterest income	$	2,008		$	2,005		$	3		0.1	%

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Noninterest Expense. For the three months ended December 31, 2014, noninterest expense decreased $723,000 or 15.2%, to $4.0 million from $4.8 million for the three months ended December 31, 2013. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended December 31, 2014 and 2013:



	Three Months Ended December 31,						Increase (decrease)
	Three Months Ended December 31,						Increase (decrease)
	2014			2013			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	1,945		$	2,009		$	(64	)	(3.2	)%
General and administrative expenses	701			831			(130		)	(15.6	)
Real estate owned impairment	93			463			(370		)	(79.9	)
Real estate holding costs	62			150			(88		)	(58.7	)
FDIC Insurance premium	125			142			(17		)	(12.0	)
Information technology	439			440			(1		)	(0.2	)
Occupancy and equipment	463			454			9			2.0
Deposit services	158			166			(8		)	(4.8	)
Marketing	154			131			23			17.6
Gain on sale of property, premises and equipment	—			(2		)	2			(100.0	)
Gain on sale of real estate owned	(114		)	(35		)	(79		)	225.7
Total noninterest expense	$	4,026		$	4,749		$	(723	)	(15.2	)%

The decrease in noninterest expense was primarily due to REO impairment expense decreasing $370,000 or 79.9% to $93,000 from $463,000 during the quarter reflecting the stabilization in the real estate market. REO holding costs declined $88,000 or 59.0% reflecting the decline in the number of our REO properties and we also had an increase in the gain on sale of REO by$79,000 as compared to the same period last year. Also contributing to the decrease was a decline in general and administrative expenses which decreased $130,000 to $701,000 for the quarter ended December 31, 2014 compared to $831,000 for the same quarter in 2013 which was primarily a result of decreasing legal expenses attributable to litigation involving nonperforming loans.

The following table provides an analysis of the changes in the components of noninterest expense for the six months ended December 31, 2014 and 2013:



	Six Months Ended December 31,						Increase (decrease)
	Six Months Ended December 31,						Increase (decrease)
	2014			2013			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	3,968		$	4,015		$	(47	)	(1.2	)%
General and administrative expenses	1,369			1,628			(259		)	(15.9	)
Real estate owned impairment	130			823			(693		)	(84.2	)
Real estate holding costs	216			227			(11		)	(4.8	)
FDIC Insurance premium	246			285			(39		)	(13.7	)
Information technology	868			868			—			—
Occupancy and equipment	945			919			26			2.8
Deposit services	383			302			81			26.8
Marketing	309			293			16			5.5
Gain on sale of property, premises and equipment	(2		)	(8		)	6			(75.0	)
Gain on sale of real estate owned	(108		)	(29		)	(79		)	272.4
Total noninterest expense	$	8,324		$	9,323		$	(999	)	(10.7	)%

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Noninterest expense decreased $999,000 or 10.7% to $8.3 million in the six months ended December 31, 2014 compared to $9.3 million for the six months ended December 31, 2013. The decrease was primarily due to REO impairment expense declining $693,000 or 84.2% to $130,000 from $823,000 and occupancy and equipment general and administrative expense declining $259,000 or 15.9% to $1.4 million from $1.6 million for the same period in 2013, which was primarily a result of decreasing legal expenses attributable to litigation involving nonperforming loans. The decrease was partially offset by an increase to deposit services of $81,000 or 26.8% to $383,000 from $302,000 for the same period in 2013.

Provision (benefit) for Income Tax. There was a federal income tax benefit of $8.3 million for the quarter ended December 31, 2014. This benefit was primarily due to an $8.3 million DTA valuation allowance reversal. 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, management determined that a valuation allowance was no longer appropriate and reversed the full DTA valuation allowance at December 31, 2014 which resulted in an $8.3 million tax benefit for the quarter ended December 31, 2014. In reaching this determination, management considered the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, available tax planning strategies, and projected taxable income. As of December 31, 2014, the Company had cumulative earnings over the recent three year period ended December 31, 2014 and positive trends in earnings and asset quality. The ultimate utilization of deferred tax assets is dependent, however, upon the existence, or generation of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. The net deferred tax asset at December 31, 2014 represents the amount that we determined was more likely than not to be realized.

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 December 31, 2014, the total approved loan origination commitments outstanding were $55,000. At the same date, unused lines of credit were $34.9 million.

For purposes of determining our liquidity position, we use a concept of basic surplus, which is derived from the total of available-for-sale securities, as well as other liquid assets, less short-term liabilities. Our Board of Directors has established a target range for basic surplus of 5% to 7%. For the three months ended December 31, 2014, our average basic surplus was 2.9%, which indicates we are below 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 December 31, 2014 totaled $38.2 million. We had no brokered deposits at December 31, 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

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remain with us. In addition, we had the ability to borrow an additional $83.4 million from the FHLB of Seattle. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.0 million which is collateralized with securities and a line of credit for $5.0 million with Pacific Coast Bankers' Bank.

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

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

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are ESOP loan payments and ESOP loan interest income. On November 20, 2014 the Bank received regulatory approval for the payment of a $350,000 dividend from the Bank to the Company, which was paid subsequently during the quarter. The payment will be used for the Company's general corporate purposes, including supporting the Company's ongoing operations.

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 December 31, 2014:



	Amount of Commitment Expiration Per Period
	Total Amounts Committed ⁽²⁾		Due in One Year
	(In thousands)
Commitments to originate loans ⁽¹⁾	$	55	$	55
Lines of credit
Fixed rate ⁽³⁾	3,437		713
Adjustable rate	31,431		2,210
Undisbursed balance of lines of credit	$	34,868	$	2,923


⁽¹⁾	Interest rates on fixed rate loans are 4.5%.


⁽²⁾	At December 31, 2014 there were $65 in reserves for unfunded commitments.


⁽³⁾	Includes standby letters of credit.

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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 five years are as follows:



Year Ended June 30,
Year Ended June 30,	Amount
	(In thousands)
2015	$	64
2016	$	110
2017	$	117
2018	$	124
2019	$	84
2020	$	37

Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. As of December 31, 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 16.3%, 19.5%, and 20.8% 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 16.7%, 19.9%, and 21.2%, respectively, as of December 31, 2014. As of June 30, 2014, these ratios were 14.0%, 17.1% and 18.3%, respectively.

The Bank's actual capital amounts and ratios at December 31, 2014 are presented in the following table:



Anchor Bank									Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
					Minimum Capital Requirement
	Actual				Minimum Capital Requirement
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2014
Total capital (to risk-weighted assets)	$	66,169	20.8	%	$	25,482	8.0	%	$	31,853	10.0	%
Tier I capital (to risk-weighted assets)	$	62,187	19.5	%	$	12,741	4.0	%	$	19,112	6.0	%
Tier I leverage capital (to average assets)	$	62,187	16.3	%	$	15,226	4.0	%	$	19,032	5.0	%

The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of December 31, 2014, were as follows:



Anchor Bancorp	Actual
	Amount		Ratio
	(Dollars in thousands)
December 31, 2014
Total capital (to risk-weighted assets)	$	67,383	21.2	%
Tier I capital (to risk-weighted assets)	$	63,401	19.9	%
Tier I leverage capital (to average assets)	$	63,401	16.7	%

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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

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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 December 31, 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	Net Portfolio Value							Net Portfolio as % of Portfolio Value of Assets				Market Value of Assets⁽⁴⁾
Basis Point Change in Rates	Amount		$ Change ⁽¹⁾			% Change		NPV Ratio ⁽²⁾		% Change ⁽³⁾		Market Value of Assets⁽⁴⁾
	(Dollars in thousands)
300	$	63,543	$	(3,583	)	(5.34	)%	18.32	%	0.10	%	$	346,872
200	65,603		(1,523		)	(2.27	)	18.50		0.28		354,671
100	66,962		(164		)	(0.24	)	18.50		0.28		362,036
Base	67,126		—			—		18.22		—		368,491
(100)	69,260		2,134			3.18		18.48		0.27		374,733

___________



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

The following table illustrates the change in net interest income that would occur in the event of an immediate change in interest rates at December 31, 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
Basis Point Change in Rates	Amount		$ Change ⁽¹⁾			% Change
	(Dollars in thousands)
300	$	14,769	$	1,462		11.0	%
200	14,449		1,142			8.6
100	13,986		679			5.1
Base	13,307		—			—
(100)	12,314		(993		)	(7.5	)

⁽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.

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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 December 31, 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 December 31, 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.

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

During the six months ended December 31, 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 December 31, 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)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	ANCHOR BANCORP

Date: February 6, 2015	/s/Jerald L. Shaw
	Jerald L. Shaw
	President and Chief Executive Officer
	(Principal Executive Officer)


Date: February 6, 2015	/s/Terri L. Degner
	Terri L. Degner
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX



31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 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.

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