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EX-32 - EXHIBIT 32 - Anchor Bancorpancb10-q20171231exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorpancb10-q20171231exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorpancb10-q20171231exhibit311.htm

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

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2017
 or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition period from _____ to _____
 
Commission File Number: 001-34965
 
ANCHOR BANCORP
 
(Exact name of registrant as specified in its charter)
 
Washington  
  26-3356075
(State or other jurisdiction of incorporation 
(I.R.S. Employer
or organization) 
I.D. Number)
 
 
601 Woodland Square Loop SE, Lacey, Washington
98503
(Address of principal executive offices) 
(Zip Code)
 
 
Registrant’s telephone number, including area code:
  (360) 491-2250
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [   ]

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

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

Large accelerated filer ☐ Accelerated filer ☐    Non-accelerated filer ☐ Smaller reporting company ☒  Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
  
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 5, 2018, there were 2,484,030 shares of common stock, $0.01 par value per share, outstanding.




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



PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)
 
December 31, 2017
 
June 30, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
7,418

 
$
14,194

Securities available-for-sale, at fair value, amortized cost of $20,133 and $21,391
19,829

 
21,170

Securities held-to-maturity, at amortized cost, fair value of $4,185 and $4,954
4,200

 
4,949

Loans held for sale

 
1,551

Loans receivable, net of allowance for loan losses of $4,128 and $4,106
398,225

 
377,908

Bank owned life insurance investment, net of surrender charges
20,288

 
20,030

Accrued interest receivable
1,453

 
1,332

Real estate owned ("REO"), net
3,346

 
867

Federal Home Loan Bank ("FHLB") stock, at cost
3,048

 
2,348

Property, premises, and equipment, at cost, less accumulated depreciation of $12,282 and $11,971
8,887

 
9,360

Deferred tax asset, net
4,869

 
8,011

Prepaid expenses and other assets
1,229

 
805

Total assets
$
472,792

 
$
462,525

LIABILITIES AND STOCKHOLDERS’ EQUITY 
 

 
 

LIABILITIES
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
50,285

 
$
52,606

Interest-bearing
288,167

 
292,581

Total deposits
338,452

 
345,187

 
 
 
 
FHLB advances
63,000

 
45,500

Advance payments by borrowers for taxes and insurance
1,199

 
1,195

Supplemental Executive Retirement Plan liability
1,724

 
1,709

Accounts payable and other liabilities
3,220

 
3,083

Total liabilities
407,595

 
396,674

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

 

Common stock, $0.01 par value per share, authorized 45,000,000 shares; 2,489,030 issued and outstanding at December 31, 2017 and 2,504,740 issued and outstanding at June 30, 2017, respectively
25

 
25

Additional paid-in capital
22,344

 
22,619

Retained earnings
44,226

 
44,585

Unearned Employee Stock Ownership Plan ("ESOP") shares
(573
)
 
(607
)
Accumulated other comprehensive loss, net of tax
(825
)
 
(771
)
Total stockholders’ equity
65,197

 
65,851

Total liabilities and stockholders’ equity
$
472,792

 
$
462,525

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

1



ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Loans receivable, including fees
$
5,371

 
$
4,742

 
$
10,504

 
$
9,394

Securities
25

 
30

 
59

 
53

Mortgage-backed securities
128

 
140

 
257

 
307

Total interest income
5,524

 
4,912

 
10,820

 
9,754

Interest expense:
 

 
 

 
 
 
 
Deposits
843

 
659

 
1,686

 
1,279

FHLB advances
132

 
135

 
240

 
285

Total interest expense
975

 
794

 
1,926

 
1,564

Net interest income before provision for loan losses
4,549

 
4,118

 
8,894

 
8,190

Provision for loan losses
105

 
75

 
180

 
150

Net interest income after provision for loan losses
4,444

 
4,043

 
8,714

 
8,040

Noninterest income:
 

 
 

 
 
 
 
Deposit service fees
277

 
348

 
590

 
696

Other deposit fees
187

 
179

 
387

 
373

  Other loan fees
172

 
207

 
400

 
442

Gain (loss) on sale of loans
47

 
(1
)
 
157

 
100

Bank owned life insurance investment
129

 
130

 
258

 
262

Other income
179

 
123

 
372

 
270

Total noninterest income
991

 
986

 
2,164

 
2,143

Noninterest expense:
 

 
 

 
 
 
 
Compensation and benefits
2,220

 
2,296

 
4,305

 
4,606

General and administrative expenses
572

 
833

 
1,145

 
1,569

Merger expenses

 

 
34

 

Real estate owned holding costs
36

 
19

 
66

 
37

Federal Deposit Insurance Corporation ("FDIC") insurance premiums
41

 
24

 
77

 
92

Information technology
490

 
540

 
1,027

 
1,025

Occupancy and equipment
435

 
441

 
868

 
948

Deposit services
101

 
128

 
205

 
240

Marketing
84

 
167

 
175

 
267

Loss on sale of property, premises and equipment

 

 
5

 

Loss (gain) on sale of real estate owned
15

 
(27
)
 
15

 
(40
)
Total noninterest expense
3,994

 
4,421

 
7,922

 
8,744

Income before provision for income taxes
1,441

 
608

 
2,956

 
1,439

Provision for income taxes
2,844

 
188

 
3,315

 
446

Net (loss) income
$
(1,403
)
 
$
420

 
$
(359
)
 
$
993

Basic (loss) earnings per share
$
(0.58
)
 
$
0.17

 
$
(0.15
)
 
$
0.41

Diluted (loss) earnings per share
$
(0.58
)
 
$
0.17

 
$
(0.15
)
 
$
0.41

Weighted average number of basic shares outstanding
2,429,352

 
2,404,292

 
2,425,200

 
2,396,421

Weighted average number of diluted shares outstanding
2,429,352

 
2,424,976

 
2,425,200

 
2,417,617


2


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

3


ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited)
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
NET (LOSS) INCOME
$
(1,403
)
 
$
420

 
$
(359
)
 
$
993

OTHER COMPREHENSIVE LOSS, net of income tax
 

 
 
 
 

 
 

Unrealized holding losses on available-for-sale securities during the period, net of income tax benefit of $47, $152, $29, and $145 respectively
(90
)
 
(295
)
 
(54
)
 
(280
)
Other comprehensive loss, net of income tax
(90
)
 
(295
)
 
(54
)
 
(280
)
COMPREHENSIVE (LOSS) INCOME
$
(1,493
)
 
$
125

 
$
(413
)
 
$
713


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


4


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data) (Unaudited)
Six Months Ended December 31,
 
 
 
2017
 
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net (loss) income
$
(359
)
 
$
993

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

 
 

 
Depreciation and amortization
317

 
353

 
Net amortization of premiums on securities
127

 
159

 
Provision for loan losses
180

 
150

 
ESOP expense
86

 
87

 
Deferred federal income taxes
3,315

 
395

 
Stock compensation expense
66

 
371

 
Increase in cash surrender value of life insurance investment
(258
)
 
(262
)
 
Gain on sale of loans
(157
)
 
(100
)
 
Originations of loans held for sale
(5,732
)
 
(10,236
)
 
Proceeds from sale of loans held for sale
6,335

 
8,102

 
Loss on sale of property, premises, and equipment
5

 

 
Loss (gain) on sale of real estate owned
15

 
(40
)
 
Change in operating assets and liabilities:
 

 
 

 
Accrued interest receivable
(121
)
 
(58
)
 
Prepaid expenses and other assets
(424
)
 
234

 
Supplemental Executive Retirement Plan ("SERP")
15

 
6

 
Accounts payable and other liabilities
137

 
1,198

 
Net cash provided by operating activities
3,547

 
1,352

 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

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

 
852

 
Principal repayments on mortgage-backed available-for-sale securities
2,264

 
2,487

 
Principal repayments on mortgage-backed held-to-maturity securities
709

 
666

 
Loan originations, net of undisbursed loan proceeds and principal repayments
(22,415
)
 
(7,094
)
 
Proceeds from sale of real estate owned
115

 
478

 
Capital improvements on real estate owned
(823
)
 

 
Proceeds from sale of property, premises, and equipment, net
160

 

 
Purchase of property, premises, and equipment, net
(9
)
 
(57
)
 
Redemption of FHLB stock
(700
)
 
780

 
Net cash provided by investing activities
(20,699
)
 
(1,888
)
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
Net change in deposits
(6,735
)
 
26,702

 
Net change in advance payments by borrowers for taxes and insurance
4

 
115

 
Proceeds from FHLB advances
72,700

 
34,200

 
Repayment of FHLB advances
(55,200
)
 
(53,700
)
 
Repurchase and retirement of common stock
(124
)
 

 
Net share settlement of stock awards
(269
)
 
(285
)
 
Net cash used in financing activities
$
10,376

 
$
7,032

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5


 
ANCHOR BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands, except share data) (Unaudited)
Six Months Ended December 31,
 
 
 
2017
 
2016
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(6,776
)
 
$
6,496

 
Beginning of period
14,194

 
8,320

 
End of period
$
7,418

 
$
14,816

 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 

 
 

 
Cash paid during the period for:
 
 
 
 
Interest
$
1,926

 
$
1,572

 
Income taxes
$
145

 
$
65

 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
 
 
 
 
Noncash investing activities:
 

 
 

 
Net loans transferred to real estate owned
$
1,786

 
$
168

 
Unrealized holding loss on available-for-sale securities, net of tax
$
(54
)
 
$
(280
)
 
Loans securitized into mortgage-backed securities
$
1,105

 
$
2,107


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

6


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

Note 1 - Nature of Business

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

Anchor Bank is a community-based savings bank primarily serving Western Washington through its 10 full-service bank offices (including one Wal-Mart in-store location) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, and one loan production office located in King County, 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, 2017 (“2017 Form 10-K”). The results of operations for the three and six months ended December 31, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2018. 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 or equity. The Company has evaluated events and transactions subsequent to December 31, 2017 for potential recognition or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. The standard allows for full retrospective adoption for all periods presented or modified retrospective adoption to only the most current period presented in the financial statements. The cumulative effect of initially applying the standard is recognized at the date of the initial application. Our primary source of revenue is interest income, which is recognized as it is earned and is deemed to be in compliance with this ASU. With respect to noninterest income, the Company is in its preliminary stages of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company is expecting to begin developing processes and procedures during 2018 to ensure it is fully compliant with these amendments at the date of adoption. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. Accordingly, the Company does not expect implementation of this standard to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured as fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning

7

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


after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The effect of the adoption will depend on leases at time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The ASU was effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard effective January 1, 2017. The adoption of ASU No. 2016-09 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will not be known.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The ASU amends the required statement of cash flow disclosures to include the change in amounts generally described as restricted cash. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of ASU No. 2016-18 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). This ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC staff view is that a registrant should evaluate ASU updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the ASU on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an ASU, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new

8

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


standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASU amendments to Topic 326, Financial Instruments - Credit Losses; Topic 842, Leases; and Topic 606, Revenue from Contracts with Customers; although, the amendments apply to any subsequent amendments to guidance in the ASU. The Company has adopted the amendments in this ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity on the guidance related to stock compensation when there has been changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting under ASC 718. The ASU provides the three following criteria must be met in order to not account for the effect of the modification of terms or conditions: the fair value, the vesting conditions and the classification as an equity or liability instrument of the modified award is the same as the original award immediately before the original award is modified. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.




9

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


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

Basic earnings (loss) per common share is the amount of earnings available to each share of common stock outstanding during the reporting period and is equal to net income divided by the weighted average number of shares outstanding during the period, without considering any dilutive items. Unvested share-based awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the period adjusted to include the effect of potentially dilutive common shares that may be issued upon the vesting of restricted stock awards. Therefore, under the two-class method, the difference in EPS is not significant since the Company did not pay dividends. The following table details the calculation of basic and diluted earnings per share:

 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except share data)
Net (loss) income
$
(1,403
)
 
$
420

 
$
(359
)
 
$
993

Earnings allocated to common shareholders
$
(1,403
)
 
$
420

 
$
(359
)
 
$
993

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
2,429,352

 
2,404,292

 
2,425,200

 
2,396,421

Potentially dilutive incremental shares

 
20,684

 

 
21,196

Diluted weighted-average common shares outstanding
2,429,352

 
2,424,976

 
2,425,200

 
2,417,617

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
$
(0.58
)
 
$
0.17

 
$
(0.15
)
 
$
0.41

Diluted (loss) earnings per share
$
(0.58
)
 
$
0.17

 
$
(0.15
)
 
$
0.41


Shares owned by the Company's ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted EPS. As of December 31, 2017 and December 31, 2016 there were 51,929 and 58,812 shares, respectively, which had not been allocated under the Company's ESOP.

Potential dilutive shares are excluded from the computation of earnings (loss) per share if their effect is anti-dilutive. For both the three and six months ended December 31, 2017 and 2016, there were no anti-dilutive shares included in the computation of diluted (loss) earnings per share.


10

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


Note 5 - Investments

The amortized cost and estimated fair market values of investment securities as of December 31, 2017 and June 30, 2017, were as follows:

December 31, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
160

 
$

 
$

 
$
160

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC (1)
11,029

 
76

 
(158
)
 
10,947

FNMA (2)
8,464

 

 
(205
)
 
8,259

GNMA (3)
480

 

 
(17
)
 
463

 
$
20,133

 
$
76

 
$
(380
)
 
$
19,829

Securities held-to-maturity
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
$
1,994

 
$
44

 
$
(57
)
 
$
1,981

FNMA
1,082

 
58

 
(20
)
 
1,120

GNMA
1,124

 

 
(40
)
 
1,084

 
$
4,200

 
$
102

 
$
(117
)
 
$
4,185

(1) Federal Home Loan Mortgage Corporation ("Freddie Mac")
(2) Federal National Mortgage Association ("Fannie Mae")
(3) Government National Mortgage Association ("Ginnie Mae")     

June 30, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
Municipal bonds
$
165

 
$

 
$

 
$
165

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC 
11,140

 
88

 
(125
)
 
11,103

FNMA
9,532

 

 
(169
)
 
9,363

GNMA 
554

 

 
(15
)
 
539

 
$
21,391

 
$
88

 
$
(309
)
 
$
21,170

Securities held-to-maturity
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC
$
2,212

 
53

 
(52
)
 
$
2,213

FNMA
1,209

 
71

 
(23
)
 
1,257

GNMA
1,528

 

 
(44
)
 
1,484

 
$
4,949

 
$
124

 
$
(119
)
 
$
4,954


There were 51 and 47 securities in an unrealized loss position at December 31, 2017 and June 30, 2017, 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 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 the dates indicated, were as follows:

11

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



 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2017
(In thousands)
Securities available-for-sale
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
1,935

 
$
(18
)
 
$
4,183

 
$
(140
)
 
$
6,118

 
$
(158
)
FNMA
2,632

 
(27
)
 
5,626

 
(178
)
 
8,258

 
(205
)
GNMA

 

 
463

 
(17
)
 
463

 
(17
)
 
$
4,567

 
$
(45
)
 
$
10,272

 
$
(335
)
 
$
14,839

 
$
(380
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2017
(In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
1,378

 
$
(57
)
 
$
1,378

 
$
(57
)
FNMA

 

 
478

 
(20
)
 
478

 
(20
)
GNMA

 

 
1,084

 
(40
)
 
1,084

 
(40
)
 
$

 
$

 
$
2,940

 
$
(117
)
 
$
2,940

 
$
(117
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2017
 (In thousands)
Securities available-for-sale
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
2,626

 
$
(25
)
 
$
3,185

 
$
(100
)
 
$
5,811

 
$
(125
)
FNMA
4,578

 
(29
)
 
4,563

 
(140
)
 
9,141

 
(169
)
GNMA

 

 
539

 
(15
)
 
539

 
(15
)
 
$
7,204

 
$
(54
)
 
$
8,287

 
$
(255
)
 
$
15,491

 
$
(309
)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2017
 (In thousands)
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$

 
$

 
$
1,548

 
$
(52
)
 
$
1,548

 
$
(52
)
FNMA

 

 
539

 
(23
)
 
539

 
(23
)
GNMA
840

 
(13
)
 
645

 
(31
)
 
1,485

 
(44
)
 
$
840

 
$
(13
)
 
$
2,732

 
$
(106
)
 
$
3,572

 
$
(119
)



12

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


Contractual maturities of securities at December 31, 2017 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, 2017
Amortized
Cost
 
Fair Value
 
(In thousands)
Securities available-for-sale
 
Municipal bonds:
 
 
 
Due after ten years
$
160

 
$
160

Mortgage-backed securities:
 
 
 
FHLMC
11,029

 
10,947

FNMA
8,464

 
8,259

GNMA
480

 
463

 
$
20,133

 
$
19,829

Securities held-to-maturity
 
Mortgage-backed securities:
 
 
 
FHLMC
$
1,994

 
$
1,981

FNMA
1,082

 
1,120

GNMA
1,124

 
1,084

 
$
4,200

 
$
4,185


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

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Proceeds from sales
$

 
$

 
$

 
$

Proceeds from maturities, sales and calls

 

 

 
852

Gross realized gains

 

 

 

Gross realized losses

 

 

 



Pledged securities at the dates indicated are summarized as follows:

 
December 31, 2017
 
June 30, 2017
Pledged to secure:
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
Public deposits
$
4,855

 
$
4,827

 
$
5,143

 
$
5,172

FHLB borrowings
854

 
884

 
977

 
1,009

Federal Reserve borrowing line
1,576

 
1,559

 
852

 
840







13

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


Note 6 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:
 
 
December 31, 2017
 
June 30,
2017
 
(In thousands)
Real estate:
 
 
 
One-to-four family
$
64,893

 
$
59,735

Multi-family
59,921

 
60,500

Commercial
145,749

 
155,525

Construction
77,136

 
49,151

Land
6,581

 
8,054

Total real estate
354,280

 
332,965

Consumer:
 

 
 

Home equity
14,013

 
13,991

Credit cards
2,405

 
2,596

Automobile
497

 
627

Other consumer
1,439

 
1,524

Total consumer
18,354

 
18,738

 
 
 
 
Business:
 
 
 
Commercial business
30,905

 
31,603

Total loans
403,539

 
383,306

Less:
 

 
 

Deferred loan fees and loan premiums, net
1,186

 
1,292

Allowance for loan losses
4,128

 
4,106

Loans receivable, net
$
398,225

 
$
377,908

 
Allowance for Loan Losses. The allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. The assessment includes analysis of several different factors, including delinquency, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2017:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 12/31/17
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
302

 
$
590

 
$
1,534

 
$
821

 
$
119

 
$
354

 
$
297

 
$

 
$
4,017

Provision (benefit) for loan losses
39

 
(29
)
 
(192
)
 
263

 
(23
)
 
(78
)
 
125

 

 
105

Charge-offs

 

 

 

 

 
(14
)
 

 

 
(14
)
Recoveries
14

 

 

 
1

 

 
5

 

 

 
20

Ending balance
$
355

 
$
561

 
$
1,342

 
$
1,085

 
$
96

 
$
267

 
$
422

 
$

 
$
4,128

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

14

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, 2017:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Six months ended 12/31/17
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
495

 
$
580

 
$
1,566

 
$
651

 
$
120

 
$
378

 
$
316

 
$

 
$
4,106

Provision (benefit) for loan losses
(169
)
 
(19
)
 
(24
)
 
432

 
(24
)
 
(117
)
 
101

 

 
180

Charge-offs

 

 
(200
)
 

 

 
(15
)
 

 

 
(215
)
Recoveries
29

 

 

 
2

 

 
21

 
5

 

 
57

Ending balance
$
355

 
$
561

 
$
1,342

 
$
1,085

 
$
96

 
$
267

 
$
422

 
$

 
$
4,128

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


The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2016:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Three months ended 12/31/16
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
717

 
$
463

 
$
1,309

 
$
381

 
$
110

 
$
513

 
$
331

 
$

 
$
3,824

Provision (benefit) for loan losses
(25
)
 
(33
)
 
69

 
64

 
(7
)
 
45

 
(38
)
 

 
75

Charge-offs

 

 
(110
)
 

 

 
(65
)
 

 

 
(175
)
Recoveries
76

 

 

 
35

 

 
24

 
2

 

 
137

Ending balance
$
768

 
$
430

 
$
1,268

 
$
480

 
$
103

 
$
517

 
$
295

 
$

 
$
3,861

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2016:

 
One-to- four family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Consumer
(1)
 
Commercial
business
 
Unallocated
 
Six months ended 12/31/16
 
(In thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
798

 
$
454

 
$
1,333

 
$
271

 
$
75

 
$
516

 
$
332

 
$

 
$
3,779

Provision (benefit) for loan losses
(116
)
 
(24
)
 
45

 
172

 
28

 
88

 
(43
)
 

 
150

Charge-offs

 

 
(110
)
 

 

 
(120
)
 

 

 
(230
)
Recoveries
86

 

 

 
37

 

 
33

 
6

 

 
162

Ending balance
$
768

 
$
430

 
$
1,268

 
$
480

 
$
103

 
$
517

 
$
295

 
$

 
$
3,861

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

15

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



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

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
1,349

 
$
1,547

 
$

Home equity
278

 
286

 

Commercial business
63

 
125

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
2,426

 
$
2,436

 
$
107

Land
305

 
305

 
17

Home equity
74

 
74

 
1

Other consumer
16

 
16

 
16

Commercial business
285

 
296

 
80

Total
 

 
 

 
 

One-to-four family
$
3,775

 
$
3,983

 
$
107

Land
305

 
305

 
17

Home equity
352

 
360

 
1

Other consumer
16

 
16

 
16

Commercial business
348

 
421

 
80

Total
$
4,796

 
$
5,085

 
$
221


16

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, 2017:

 
Recorded Investments
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded
 
 
 
 
 
One-to-four family
$
1,818

 
$
1,991

 
$

Commercial real estate
1,992

 
1,992

 

Home equity
299

 
303

 

Commercial business
606

 
668

 

With an allowance recorded
 

 
 

 
 

One-to-four family
$
3,210

 
$
3,220

 
$
143

Land
311

 
311

 
22

Home equity
262

 
262

 
32

Commercial business
23

 
23

 
1

Total
 

 
 

 
 

One-to-four family
$
5,028

 
$
5,211

 
$
143

Commercial real estate
1,992

 
1,992

 

Land
311

 
311

 
22

Home equity
561

 
565

 
32

Commercial business
629

 
691

 
1

Total
$
8,521

 
$
8,770

 
$
198



17

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, 2017:

 
Three Months Ended December 31, 2017
 
Six Months Ended December 31, 2017
 
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
 
 
 
 
One-to-four family
$
2,156

 
$
3

 
$
1,584

 
$
10

Commercial real estate

 

 
996

 

Home equity
271

 
1

 
289

 
3

Commercial business
208

 
1

 
335

 
4

With an allowance recorded
 

 
 

 
 
 
 
One-to-four family
$
2,692

 
$
18

 
$
2,818

 
$
53

Land
307

 
7

 
308

 
9

Home equity
167

 
1

 
168

 
2

Other consumer
8

 

 
8

 

Commercial business

 

 
154

 

Total
 

 
 

 
 
 
 
One-to-four family
$
4,848

 
$
21

 
$
4,402

 
$
63

Commercial real estate

 

 
996

 

Land
307

 
7

 
308

 
9

Home equity
438

 
2

 
457

 
5

Other consumer
8

 

 
8

 

Commercial business
208

 

 
489

 
4

Total
$
5,809

 
$
30

 
$
6,660

 
$
81





18

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, 2016:

 
Three Months Ended December 31, 2016
 
Six Months Ended December 31, 2016
 
 
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(In thousands)
With no allowance recorded
 
 
 
 
 
 
 
One-to-four family
$
3,090

 
$
10

 
$
2,078

 
$
30

Commercial real estate
431

 

 
433

 

Land
179

 
2

 
179

 
5

Home equity
74

 

 
64

 
1

Commercial business
108

 
1

 
95

 
3

With an allowance recorded
 

 
 

 
 
 
 
One-to-four family
$
4,977

 
$
30

 
$
6,272

 
$
91

Land
318

 
7

 
316

 
10

Home equity
385

 
3

 
387

 
9

Commercial business
115

 

 
129

 
1

Total
 

 
 

 
 
 
 
One-to-four family
$
8,067

 
$
40

 
$
8,350

 
$
121

Commercial real estate
431

 

 
433

 

Land
497

 
9

 
495

 
15

Home equity
459

 
3

 
451

 
10

Commercial business
223

 
1

 
224

 
4

Total
$
9,677

 
$
53

 
$
9,953

 
$
150




19

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, 2017:

 
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
$
355

 
$
561

 
$
1,342

 
$
1,085

 
$
96

 
$
267

 
$
422

 
$

 
$
4,128

Ending balance: individually evaluated for impairment
107

 

 

 

 
17

 
17

 
80

 

 
221

Ending balance: collectively evaluated for impairment
$
248

 
$
561

 
$
1,342

 
$
1,085

 
$
79

 
$
250

 
$
342

 
$

 
$
3,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
64,893

 
$
59,921

 
$
145,749

 
$
77,136

 
$
6,581

 
$
18,354

 
$
30,905

 
$

 
$
403,539

Ending balance: individually evaluated for impairment
3,775

 

 

 

 
305

 
368

 
348

 

 
4,796

Ending balance: collectively evaluated for impairment
$
61,118

 
$
59,921

 
$
145,749

 
$
77,136

 
$
6,276

 
$
17,986

 
$
30,557

 
$

 
$
398,743

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

20

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, 2017:
 
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
$
495

 
$
580

 
$
1,566

 
$
651

 
$
120

 
$
378

 
$
316

 
$

 
$
4,106

Ending balance: individually evaluated for impairment
143

 

 

 

 
22

 
32

 
1

 

 
198

Ending balance: collectively evaluated for impairment
$
352

 
$
580

 
$
1,566

 
$
651

 
$
98

 
$
346

 
$
315

 
$

 
$
3,908

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Ending balance
$
59,735

 
$
60,500

 
$
155,525

 
$
49,151

 
$
8,054

 
$
18,738

 
$
31,603

 
$

 
$
383,306

Ending balance: individually evaluated for impairment
5,028

 

 
1,992

 

 
311

 
561

 
629

 

 
8,521

Ending balance: collectively evaluated for impairment
$
54,707

 
$
60,500

 
$
153,533

 
$
49,151

 
$
7,743

 
$
18,177

 
$
30,974

 
$

 
$
374,785

(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 loans by type of loans as of the dates indicated:

 
December 31, 2017
 
June 30, 2017
 
(In thousands)
One-to-four family
$
949

 
$
1,170

Commercial

 
1,992

Home equity
223

 
242

Commercial business
285

 
300

Total
$
1,457

 
$
3,704


There were no loans past due 90 days or more and still accruing interest at December 31, 2017 and June 30, 2017.
 

21

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 of loan, as of December 31, 2017:

 
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
$
535

 
$
116

 
$
949

 
$
1,600

 
$
63,293

 
$
64,893

Multi-family

 

 

 

 
59,921

 
59,921

Commercial real estate
125

 

 

 
125

 
145,624

 
145,749

Construction

 

 

 

 
77,136

 
77,136

Land

 

 

 

 
6,581

 
6,581

Home equity

 

 
223

 
223

 
13,790

 
14,013

Credit cards

 

 

 

 
2,405

 
2,405

Automobile

 

 

 

 
497

 
497

Other consumer
9

 
6

 

 
15

 
1,424

 
1,439

Commercial business

 

 
285

 
285

 
30,620

 
30,905

Total
$
669

 
$
122

 
$
1,457

 
$
2,248

 
$
401,291

 
$
403,539

(1) Includes loans on nonaccrual status.


The following table presents past due loans, net of partial loan charge-offs, by class of loan as of June 30, 2017:
 
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
$
15

 
$

 
$
1,170

 
$
1,185

 
$
58,550

 
$
59,735

Multi-family

 

 

 

 
60,500

 
60,500

Commercial real estate
187

 

 
1,992

 
2,179

 
153,346

 
155,525

Construction

 

 

 

 
49,151

 
49,151

Land

 

 

 

 
8,054

 
8,054

Home equity
16

 
4

 
242

 
262

 
13,729

 
13,991

Credit cards
13

 

 

 
13

 
2,583

 
2,596

Automobile

 

 

 

 
627

 
627

Other consumer

 
8

 

 
8

 
1,516

 
1,524

Commercial business
107

 

 
300

 
407

 
31,196

 
31,603

Total
$
338

 
$
12

 
$
3,704

 
$
4,054

 
$
379,252

 
$
383,306

(1) Includes loans on nonaccrual status.

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

Credits risk rated 1 through 7 are considered to be “pass” credits. Pass credits can be assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on our watch and special mention lists, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower's financial capacity and threaten their ability to fulfill debt obligations in the future. A seasoned loan with a Debt Service Coverage Ratio ("DSCR") of greater than 1.00 is the minimum acceptable level for a "Pass Credit". Particular attention is paid to the coverage trend analysis as any loan with a declining DSCR trend may warrant a higher risk grade even if the current coverage is at or above the 1.00 threshold.


22

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.

23

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, 2017, by class of loans:

 
One-to- four
family
 
Multi-
family
 
Commercial
real estate
 
Construction
 
Land
 
Home equity
 
Credit cards
 
Automobile
 
Other
consumer
 
Commercial business
 
Total
 
(In thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
62,830

 
$
59,401

 
$
144,044

 
$
77,136

 
$
6,581

 
$
13,323

 
$
2,405

 
$
497

 
$
1,424

 
$
30,036

 
$
397,677

Watch
825

 
520

 
1,580

 

 

 
317

 

 

 
9

 
576

 
3,827

Special Mention
303

 

 
125

 

 

 
150

 

 

 

 
8

 
586

Substandard
935

 

 

 

 

 
223

 

 

 
6

 
285

 
1,449

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
64,893

 
$
59,921

 
$
145,749

 
$
77,136

 
$
6,581

 
$
14,013

 
$
2,405

 
$
497

 
$
1,439

 
$
30,905

 
$
403,539



The following table presents the internally assigned grade as of June 30, 2017, 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
$
57,075

 
$
59,973

 
$
150,762

 
$
49,151

 
$
7,743

 
$
13,202

 
$
2,583

 
$
627

 
$
1,510

 
$
29,972

 
$
372,598

Watch
984

 
527

 
2,771

 

 
311

 
361

 
13

 

 
6

 
1,224

 
6,197

Special Mention
646

 

 

 

 

 
36

 

 

 
1

 
107

 
790

Substandard
1,030

 

 
1,992

 

 

 
392

 

 

 
7

 
300

 
3,721

Doubtful

 

 

 

 

 

 

 

 

 

 

Total
$
59,735

 
$
60,500

 
$
155,525

 
$
49,151

 
$
8,054

 
$
13,991

 
$
2,596

 
$
627

 
$
1,524

 
$
31,603

 
$
383,306


Troubled Debt Restructures. A troubled debt restructure ("TDR") is a loan where the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider so that the borrower can continue to make payments while minimizing the Company's potential loss. The modifications have included items such as lowering the interest rate on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank's best interest. At December 31, 2017, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

24

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


The following table presents TDRs by accrual versus nonaccrual status and by loan class as of December 31, 2017:

 
December 31, 2017
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
2,826

 
$
117

 
$
2,943

Land
305

 

 
305

Home equity
129

 

 
129

Other consumer
16

 

 
16

Commercial business
63

 

 
63

Total
$
3,339

 
$
117

 
$
3,456



The following table presents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2017:
 
 
June 30, 2017
 
Accrual
Status
 
Nonaccrual
Status
 
Total
Modifications
 
(In thousands)
One-to-four family
$
3,622

 
$
131

 
$
3,753

Land
311

 

 
311

Home equity
169

 

 
169

Commercial business
87

 

 
87

Total
$
4,189

 
$
131

 
$
4,320



There were no new TDR loans, or renewals or modifications of existing TDR loans during the three and six months ended December 31, 2017.

For both the three and six months ended December 31, 2017 and 2016, there were no TDRs for which there was a payment default within 12 months of their restructure.


25

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


Note 7 - Real Estate Owned, net
 
The following table is a summary of REO activity for the three and six months ended December 31, 2017 and 2016:

 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Balance at the beginning of the period
$
2,653

 
$
271

 
$
867

 
$
373

Net loans transferred to real estate owned

 

 
1,786

 
168

Capitalized improvements
823

 

 
823

 

Sales
(115
)
 
(195
)
 
(115
)
 
(478
)
Gain on sale of REO
(15
)
 
27

 
(15
)
 
40

Balance at the end of the period
$
3,346

 
$
103

 
$
3,346

 
$
103


At December 31, 2017, there was one loan for $268,000 secured by residential real estate properties for which formal foreclosure proceedings were in process.

Note 8 - Employee Benefit Plans

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

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on June 30th, 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, 2017 and 2016 was $43,000 and $44,000, respectively. For the six months ended December 31, 2017 and 2016 compensation expense related to the ESOP was $86,000 and $87,000, respectively.

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

 
December 31, 2017
 
June 30, 2017
 
(Dollars in thousands)
Allocated shares
50,071

 
46,631

Unallocated shares
51,929

 
55,369

Total ESOP shares
102,000

 
102,000

Fair value of unallocated shares
$
1,288

 
$
1,387







26

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



Note 9 - Fair Value Measurements

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

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

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

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

There were no transfers between Level 1, Level 2, or Level 3 during the six months ended December 31, 2017. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
160

 
$

 
$
160

Mortgage-backed securities:
 
 
 
 
 
 


FHLMC

 
10,947

 

 
10,947

FNMA

 
8,259

 

 
8,259

GNMA

 
463

 

 
463


 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Municipal bonds
$

 
$
165

 
$

 
$
165

Mortgage-backed securities:
 
 
 
 
 
 
 
FHLMC

 
11,103

 

 
11,103

FNMA

 
9,363

 

 
9,363

GNMA

 
539

 

 
539


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.






27

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


The following table presents the balances of assets measured at fair value on a nonrecurring basis at December 31, 2017:
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:


 


 


 


Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
3,180

 
$
3,180

Land

 

 
305

 
305

Home equity

 

 
74

 
74

Other consumer

 

 
8

 
8

Commercial business

 

 
285

 
285

Total impaired loans 

 

 
3,852

 
3,852

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$

 
$

 
$
3,852

 
$
3,852


The following table presents the balances of assets measured at fair value on a nonrecurring basis at June 30, 2017:

 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans:
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
One-to-four family
$

 
$

 
$
4,227

 
$
4,227

Construction

 

 
262

 
262

Land

 

 
311

 
311

Commercial business

 

 
23

 
23

Total impaired loans

 

 
4,823

 
4,823

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$

 
$

 
$
4,823

 
$
4,823










28

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 for financial instruments measured at fair value on a nonrecurring basis at December 31, 2017 and June 30, 2017:
 
 
December 31, 2017
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
3,852

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
   0% - 10% (5%)
    
 
June 30, 2017
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Average Discount)
 
(Dollars in thousands)
Impaired loans
$
4,823

 
Fair value of underlying collateral
 
Discount applied to the obtained appraisal
 
0% - 10% (3%)

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, 2017 and June 30, 2017
 
December 31, 2017
 
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
$
7,418

 
$
7,418

 
$
7,418

 
$

 
$

Securities available-for-sale
19,829

 
19,829

 

 
19,829

 

Securities held-to-maturity
4,200

 
4,185

 

 
4,185

 

FHLB stock
3,048

 
3,048

 

 
3,048

 

Loans held for sale

 

 

 

 

Loans receivable
402,353

 
393,659

 

 

 
393,659

Bank owned life insurance investment
20,288

 
20,288

 

 
20,288

 

Accrued interest receivable
1,453

 
1,453

 

 
1,453

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
190,330

 
$
190,330

 
$
190,330

 
$

 
$

Certificates of deposit
148,122

 
148,279

 

 
148,279

 

FHLB advances
63,000

 
62,749

 

 
62,749

 

Advance payments by borrowers for taxes and insurance
1,199

 
1,199

 
1,199

 

 


29

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


 
June 30, 2017
 
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
$
14,194

 
$
14,194

 
$
14,194

 
$

 
$

Securities available-for-sale
21,170

 
21,170

 

 
21,170

 

Securities held-to-maturity
4,949

 
4,954

 

 
4,954

 

FHLB stock
2,348

 
2,348

 

 
2,348

 

Loans held for sale
1,551

 
1,551

 
1,551

 

 

Loans receivable
382,014

 
374,599

 

 

 
374,599

Accrued interest receivable
1,332

 
1,332

 

 
1,332

 

 
 
 
 
 
 
 
 
 
 
Financial Instruments-Liabilities
 
 
 
 
 
 
 
 
 
Demand deposits, savings and money market
$
200,678

 
$
200,678

 
$
200,678

 
$

 
$

Certificates of deposit
144,509

 
144,854

 

 
144,854

 

FHLB advances
45,500

 
45,226

 

 
45,226

 

Advance payments by borrowers for taxes and insurance
1,195

 
1,195

 
1,195

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents, accrued interest receivable and advance payments by borrowers for taxes and insurance -The carrying amount is a reasonable estimate of fair value.
Securities - The estimated fair values of securities are based on quoted market prices of similar securities.
FHLB stock - FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the member institutions, and can only be purchased and redeemed at par.
Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.
Loans receivable - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.
Bank owned life insurance investment, net of surrender charges - The carrying amount is a reasonable estimate of its fair value.
Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank's demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.
FHLB advances - The fair value of the Bank's FHLB advances was calculated using the discounted cash flow method. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.

30

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


Commitments to extend credit represent the principal categories of off-balance-sheet financial instruments - The fair values of these commitments are not material since they are for a short period of time and are subject to customary credit terms.
Note 10 - Stock-Based Compensation

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

As of December 31, 2017, awards for restricted stock totaling 87,572 were outstanding and no stock options were granted. Awarded shares of restricted stock typically vest over various periods as long as the director, advisory director, directors emeriti, officer or employee remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For the three and six months ended December 31, 2017 total compensation expense for the Plan was $19,000 and $66,000, respectively, and the related income tax benefit was $5,000 and $18,000, respectively.

The following tables provide a summary of changes in non-vested restricted stock awards for the three and six months ended December 31, 2017:

 
 
For the Three Months Ended December 31, 2017
 
 
 
 
 
 
Weighted-Average Grant Date Fair Value
 
 
Shares
 
Non-vested at October 1, 2017
 
17,092

 
$
25.75

Granted
 

 

Vested
 
(8,726
)
 
25.75

Forfeited and canceled
 
(910
)
 
24.85

Non-vested at December 31, 2017
 
7,456

 
25.75



 
 
For the Six Months Ended December 31, 2017
 
 
 
 
 
 
Weighted-Average Grant Date Fair Value
 
 
Shares
 
Non-vested at July 1, 2017
 
38,424

 
$
25.75

Granted
 

 

Vested
 
(20,258
)
 
25.75

Forfeited and canceled
 
(10,710
)
 
25.03

Non-vested at December 31, 2017
 
7,456

 
25.75


As of December 31, 2017, there was $88,000 of total unrecognized compensation costs related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately three years.


31

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


Note 11 - Federal Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. Because the Company has a fiscal year end of June 30, the reduced corporate tax rate will result in the application of a blended federal statutory tax rate for its fiscal year 2018 and then a flat 21% thereafter.

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, 2017, the Condensed Consolidated Statements of Financial Condition included a net deferred tax asset of $4.9 million. The Company's primary deferred tax assets relate to the allowance for loan losses. The Company has prepared federal tax returns through June 30, 2017. At June 30, 2017 the net operating loss carryforward was $9.2 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 short-term future earnings, among other items. At December 31, 2017, management determined that no valuation allowance on the deferred tax asset was required. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income.

Note 12 - Agreement and Plan of Merger

On April 11, 2017, Washington Federal, Inc., a Washington corporation ("Washington Federal"), entered into an Agreement and Plan of Merger, with the Company, which was amended on September 27, 2017 ("Amendment No. 1", and collectively with the Agreement and Plan of Merger, the "Merger Agreement"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Washington Federal (the "Merger"), with Washington Federal as the surviving corporation in the Merger. Immediately after the effective time of the Merger (the "Effective Time"), Washington Federal intends to merge Anchor Bank, a wholly-owned subsidiary of the Company, with and into Washington Federal, National Association, a wholly-owned subsidiary of Washington Federal (the "Bank Merger"), with Washington Federal, National Association as the surviving institution in the Bank Merger.

Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each share of the common stock of the Company outstanding immediately prior to the Effective Time will be converted into the right to receive a fraction of a share of the common stock of Washington Federal equal to the quotient of 100.7% of the Company's tangible book value price per share (adjusted to include the outstanding balance of its ESOP loan) as of the end of the quarter immediately preceding the closing date divided by the average of the volume-weighted price of Washington Federal common stock for the twenty (20) trading days ending on the fifth trading day immediately preceding the closing date. On April 11, 2017, the Washington Federal shares to be issued pursuant to the Merger Agreement would have had an aggregate value of approximately $63.9 million and each share of Company common stock would have been valued at $25.75. Because the exchange ratio is not fixed and is not subject to a cap or collar, it is not possible until the completion of the Merger to determine the exact amount of Washington Federal common stock that a share of Company stock will be converted into the right to receive and the value of each share of Company common stock. All unvested restricted stock awards of the Company outstanding immediately prior to the Effective

32

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


Time will become fully vested and will be converted into a right to receive the merger consideration described immediately above, as provided in the Merger Agreement.

The Merger Agreement contains customary representations and warranties from both Washington Federal and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, including, in the case of the Company, specific forbearances with respect to its business activities, (2) the Company's obligation to call a meeting of its shareholders to approve the Merger Agreement, and, subject to certain exceptions, that its board of directors recommend that the Company’s shareholders vote to approve the Merger Agreement, and (3) the Company's non-solicitation obligations regarding alternative acquisition proposals. The Merger Agreement provides certain termination rights for both Washington Federal and the Company and further provides that a termination fee of 1.5% of the aggregate Merger consideration will be payable by Anchor upon termination of the Merger Agreement under certain circumstances.

The need for the Amendment No. 1 was due to the identification of certain issues with respect to procedures, systems and processes of Washington Federal's bank subsidiary, Washington Federal, National Association, relating to its Bank Secrecy Act ("BSA") program. In addition, Amendment No. 1 also clarifies that a "burdensome condition" (i.e., a condition to regulatory approval of the merger that would be a basis for Washington Federal not to complete the merger) does not include any condition imposed on Washington Federal, or its subsidiary Washington Federal, National Association, related to its BSA program and that Washington Federal’s registration statement on Form S-4 will not go effective, and the Company’s special meeting of shareholders to vote on the Merger Agreement will not be called until the receipt of all regulatory approvals for the Merger. To provide Washington Federal additional time to complete its remediation efforts and obtain regulatory approvals, Amendment No. 1 extends from December 31, 2017 to June 30, 2018 the date after which either party can elect to terminate the Merger Agreement if the Merger has not yet been completed and provides for up to three additional six month extensions of the Merger Agreement beyond June 30, 2018. In light of the extension, the Company is now permitted to pay a dividend on its common stock or repurchase its common stock as long as it does not reduce its tangible common equity to assets ratio below 12% and, to provide greater flexibility in retaining employees through the closing of the Merger, may pay retention incentives and hire replacements for terminated executive officers at increased salaries.

The completion of the Merger is subject to customary conditions, including approval of the Merger Agreement by the Company's shareholders, by the holders of at least two thirds of the outstanding shares of the Company's common stock, and the receipt of all required regulatory approvals.


33


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 Merger Agreement with Washington Federal, Inc. may be terminated in accordance with its terms, and the Merger may not be completed;
termination of the Merger Agreement could negatively impact us;
we will be subject to business uncertainties and contractual restrictions while the Merger is pending;
the Merger Agreement limits our ability to pursue an alternative acquisition proposal and requires us to pay a termination fee under limited circumstances relating to alternative acquisition proposals;
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 and liabilities, which estimates may prove to be incorrect and result in significant changes 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;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;
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

34


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.

Some of these and other factors are discussed in our 2017 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 2018 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity, operating results and stock price performance.

Background and Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank. Anchor Bank is a community-based savings bank primarily serving Western Washington through our 10 full-service banking offices (including one Wal-Mart in-store location) located within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, and one loan production office located in King County, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Recently, we have been aggressively offering commercial real estate, multi-family, and construction loans primarily in Western Washington.

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

Our operating expenses consist primarily of compensation and benefits, general and administrative, real estate owned expenses, FDIC insurance premiums, information technology, occupancy and equipment, deposit services and marketing expenses. Compensation and benefits expense consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities. Also included in noninterest expense are changes to the Company’s unfunded commitment reserve which are reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.

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

35


adequacy on a monthly basis and establishes a provision for loan losses that it believes is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio. The carrying value of real estate owned is assessed on a quarterly basis. Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management's understanding of our effective tax rate and the tax code.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Board of Directors and management assess the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, number of bankruptcies and vacancy rates of business and residential properties.

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

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried no valuation allowance at December 31, 2017. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from REO, deferred loan fees and costs, and loan loss reserves.

Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at fair value estimated fair market value less estimated costs of disposal and subsequently carried at the lower of cost or market. Any impairment on the initial transfer is charged to the allowance for loan losses. 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.



36


Comparison of Financial Condition at December 31, 2017 and June 30, 2017

General. Total assets increased by $10.3 million, or 2.2%, to $472.8 million at December 31, 2017 from $462.5 million at June 30, 2017. The increase in assets during this period was primarily a result of a $20.3 million, or 5.4% increase in loan receivable, net, to $398.2 million at December 31, 2017 from $377.9 million at June 30, 2017. REO increased $2.5 million, or 285.9% to $3.3 million at December 31, 2017 from $867,000 at June 30, 2017. The increase resulted primarily from one commercial property reclassified to REO during the period. Partially offsetting these increases was a $6.8 million, or 47.7%, decrease in cash equivalents to $7.4 million at December 31, 2017 from $14.2 million at June 30, 2017 as we redeployed excess cash to fund our loan growth. In addition, our deferred tax asset, net decreased $3.1 million, or 39.2%, to $4.9 million at December 31, 2017 from $8.0 million at June 30, 2017 primarily due to a one-time revaluation adjustment of $2.4 million to our deferred tax assets and tax liabilities to account for future corporate tax rates resulting from the Tax Act. Further, loans held for sale decreased to none at December 31, 2017 from $1.5 million at June 30, 2017. Total liabilities increased $10.9 million, or 2.8%, to $407.6 million at December 31, 2017 compared to $396.7 million at June 30, 2017 primarily as the result of an increase in FHLB advances partially offset by a decrease in deposits. FHLB advances increased $17.5 million, or 38.5%, to $63.0 million at December 31, 2017 from $45.5 million at June 30, 2017 to fund our loan growth. Total deposits decreased $6.7 million, or 2.0%, to $338.5 million at December 31, 2017 compared to $345.2 million at June 30, 2017 primarily due to a $4.4 million, or 1.51% decrease in interest bearing deposits to $288.2 million at December 31, 2017 from $292.6 million at June 30, 2017.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2017 to December 31, 2017:
  
 
Balance at December 31, 2017
 
Balance at June 30, 2017
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Cash and cash equivalents
$
7,418

 
$
14,194

 
$
(6,776
)
 
(47.7
)%
Securities, available-for-sale
19,829

 
21,170

 
(1,341
)
 
(6.3
)
Securities, held-to-maturity
4,200

 
4,949

 
(749
)
 
(15.1
)
Loans receivable, net of allowance for loan losses
398,225

 
377,908

 
20,317

 
5.4

Real estate owned, net
3,346

 
867

 
2,479

 
285.9


Cash and cash equivalents decreased by $6.8 million, or 47.7%, to $7.4 million at December 31, 2017, from $14.2 million at June 30, 2017 due to an increase in loan funding.

Securities available-for-sale decreased $1.3 million, or 6.3%, to $19.8 million at December 31, 2017 from $21.2 million at June 30, 2017. Securities held-to-maturity decreased $749,000, or 15.1%, to $4.2 million at December 31, 2017 from $4.9 million at June 30, 2017. Our securities portfolios are almost entirely comprised of mortgage-backed securities. The decreases in these portfolios were primarily the result of contractual principal repayments partially offset by the purchase of one additional investment security for $1.1 million.

Loans receivable, net, increased $20.3 million, or 5.4%, to $398.2 million at December 31, 2017 from $377.9 million at June 30, 2017 due to increases in construction and one-to-four family loans. Construction loans increased $27.9 million, or 56.9%, to $77.1 million at December 31, 2017 from $49.2 million at June 30, 2017. There was $43.0 million in undisbursed construction loan commitments at December 31, 2017. Our construction loans are primarily for the construction of multi-family properties and to a lesser extent, loans for the construction of single family and commercial properties. One-to-four family loans increased $5.2 million, or 8.6%, to $64.9 million at December 31, 2017 from $59.7 million at June 30, 2017. All other loan categories decreased. Commercial real estate loans decreased $9.8 million, or 6.3%, to $145.7 million at December 31, 2017 from $155.5 million at June 30, 2017. This decrease was primarily due to the repayments of a $3.2 million commercial real estate loan secured by a self-storage facility, a $3.2 million loan for two industrial properties and a $1.0 million loan secured by a professional office property. We also reclassified a $2.0 million multi-tenant commercial real estate loan to REO and recorded during the six months ended December 31, 2017 a $200,000 charge upon transfer to reflect its fair market value. Land loans decreased $1.5 million, or 18.3%, to $6.6 million at December 31, 2017 from $8.1 million at June 30, 2017. Multi-family loans decreased $579,000, or 1.0%, to $59.9 million at December 31, 2017 from $60.5 million at June 30, 2017. Consumer loans decreased $384,000, or 2.0%, to $18.4 million at December 31, 2017 from $18.7 million at June 30, 2017.

37


Commercial business loans decreased $698,000, or 2.2%, to $30.9 million at December 31, 2017 from $31.6 million at June 30, 2017.

Total delinquent loans (past due 30 days or more), decreased $1.9 million to $2.2 million at December 31, 2017 from $4.1 million at June 30, 2017 primarily due to the transfer of the $2.0 million commercial real estate loan discussed above to REO at a fair market value of $1.8 million. Nonperforming loans, consisting solely of nonaccrual loans and primarily of one-to-four family loans, totaled $1.5 million at December 31, 2017 as compared to $3.7 million at June 30, 2017. Total classified loans consisting solely of substandard loans decreased $2.3 million, or 61.1%, to $1.4 million at December 31, 2017 from $3.7 million at June 30, 2017. The percentage of nonperforming loans, to total loans decreased to 0.4% at December 31, 2017 from 1.0% at June 30, 2017.

As of December 31, 2017, the Company had three REO properties with an aggregate book value of $3.3 million compared to three properties with an aggregate book value of $867,000 at June 30, 2017. The increase in the aggregate book value of REO properties during the quarter ended December 31, 2017 from June 30, 2017 was primarily attributable to the reclassification of the commercial real estate loan discussed above and capital improvements incurred subsequent to its transfer to REO. The increase was partially offset by a sale of a one-to-four family property for $115,000 resulting in a loss of $15,000.

Liabilities. Total liabilities increased $10.9 million between June 30, 2017 and December 31, 2017. Deposits decreased $6.7 million, or 2.0%, to $338.5 million at December 31, 2017 from $345.2 million at June 30, 2017, primarily due to a $4.4 million, or 1.5%, decrease in interest bearing deposits. Our core deposits, which consist of all deposits other than certificates of deposit, decreased by $10.3 million, or 5.1%, to $190.3 million at December 31, 2017 from $200.7 million at June 30, 2017. Certificates of deposit increased $3.6 million, or 2.5%, to $148.1 million at December 31, 2017 from $144.5 million at June 30, 2017. The decrease in deposits was offset by the $17.5 million increase in FHLB advances.

The following table details the changes in deposit accounts at the dates indicated:
 
Balance at December 31, 2017
 
Balance at June 30, 2017
 
Increase/(Decrease)
 
 
 
Amount
 
Percent
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
50,285

 
$
52,606

 
$
(2,321
)
 
(4.4
)%
Interest-bearing demand deposits
32,875

 
31,464

 
1,411

 
4.5

Money market accounts
62,036

 
73,154

 
(11,118
)
 
(15.2
)
Savings deposits
45,134

 
43,454

 
1,680

 
3.9

Certificates of deposit
148,122

 
144,509

 
3,613

 
2.5

Total deposit accounts
$
338,452

 
$
345,187

 
$
(6,735
)
 
(2.0
)%

Stockholders' Equity. Total stockholders' equity decreased $654,000, or 1.0%, to $65.2 million at December 31, 2017 from $65.9 million at June 30, 2017 due to the net loss of $359,000 attributed to the $2.4 million one-time adjustment to our deferred tax assets and the $124,000 repurchase of 5,000 shares of stock at a price of $24.85 per share.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2017 and 2016

General. Net loss for the three months ended December 31, 2017 was $1.4 million or $0.58 per diluted share compared to net income of $420,000 or $0.17 per diluted share for the three months ended December 31, 2016. The revaluation of the Company's deferred tax asset due to the Tax Act resulted in a $2.4 million decrease in the Company's income tax expense and a $0.96 reduction in net income per diluted share for the second fiscal quarter. For the six months ended December 31, 2017 the net loss was $359,000 or $0.15 per diluted share compared to net income of $993,000 per $0.41 per diluted share for the same period last year.

Net Interest Income. Net interest income before the provision for loan losses increased $431,000, or 10.5%, to $4.5 million for the quarter ended December 31, 2017 compared to $4.1 million for the same period last year primarily due to the increase in average loans receivable, net. Average loans receivable, net, for the quarter ended December 31, 2017 increased $37.4 million, or 10.4%, to $396.4 million compared to $359.0 million for the quarter ended December 31, 2016. For the six months ended December 31, 2017 net interest income before the provision for loan losses increased $704,000, or 8.6%, to $8.9 million from $8.2 million for the same period in 2016 primarily due to the increase in average loans receivable, net.

38



The Company's net interest margin increased 11 basis points to 4.27% for the quarter ended December 31, 2017 compared to 4.16% for the quarter ended December 31, 2016. The average yield on loans receivable, net, increased 14 basis points to 5.42% for the quarter ended December 31, 2017 compared to 5.28% for the same period of the prior year, reflecting the increase in higher yielding construction loan and the repricing of variable rate loans to higher interest rates. The average yield on average mortgage-backed securities during the three months ended December 31, 2017 increased to 2.14% from 1.98% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. The average yield on interest-earning assets increased 22 basis points to 5.18% from 4.96% for the quarters ended December 31, 2017 and 2016, respectively. The average cost of total deposits increased 13 basis points to 1.12% for the quarter ended December 31, 2017 compared to 0.99% for the same period in the prior year. The average cost of interest-bearing liabilities increased 14 basis points to 1.14% for the quarter ended December 31, 2017 compared to 1.00% for the same period in the prior year, reflecting the increases in interest rates over the last year.

The following table sets forth the changes to our net interest income for the three months ended December 31, 2017 compared to the same period in 2016. 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, 2017 Compared to Three Months Ended December 31, 2016
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
134

 
$
495

 
$
629

Mortgage-backed securities
10

 
(22
)
 
(12
)
Investment securities, FHLB stock and cash and cash equivalents
4

 
(9
)
 
(5
)
Total net change in income on interest-earning assets
$
148

 
$
464

 
$
612

Interest-bearing liabilities:
 

 
 

 


Savings deposits
$
1

 
$

 
$
1

Interest-bearing demand deposits

 
1

 
1

Money market accounts
21

 
(7
)
 
14

Certificates of deposit
14

 
154

 
168

FHLB advances
12

 
(15
)
 
(3
)
Total net change in expense on interest-bearing liabilities
48

 
133

 
181

Net change in net interest income
$
100

 
$
331

 
$
431


For the six months ended December 31, 2017, the Company's net interest margin increased four basis points to 4.20% compared to 4.16% for the same period in 2016, reflecting the increase in the average balance of loans receivable, net. The average yield on loans receivable, net, increased 10 basis points to 5.36% for the six months ended December 31, 2017 compared to 5.26% for the same period of the prior year, reflecting the increase in higher yielding construction loan and the repricing of variable rate loans to higher interest rates. The average yield on average mortgage-backed securities during the six months ended December 31, 2017 decreased to 2.09% from 2.11% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. The average yield on interest-bearing assets increased 17 basis point to 5.12% for the six months ended December 31, 2017 compared to 4.95% for the same period in the prior year. The average cost of interest-bearing liabilities increased 14 basis points to 1.14% for the six months ended December 31, 2017 compared to 1.00% for the same period of the prior year, reflecting the increases in interest rates over the last year.




39


The following table sets forth the changes to our net interest income for the six months ended December 31, 2017 compared to the same period in 2016:


 
Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016
 
Increase (Decrease) Due to
 
 
 
Rate
 
Volume
 
Total
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable, including fees
$
197

 
$
913

 
$
1,110

Mortgage-backed securities
(3
)
 
(47
)
 
(50
)
Investment securities, FHLB stock and cash and cash equivalents
14

 
(8
)
 
6

Total net change in income on interest-earning assets
$
208

 
$
858

 
$
1,066

Interest-bearing liabilities:
 
 
 
 
 
Savings deposits
$
1

 
$

 
$
1

Interest-bearing demand deposits

 
1

 
1

Money market accounts
74

 
5

 
79

Certificates of deposit
31

 
295

 
326

FHLB advances
33

 
(78
)
 
(45
)
Total net change in expense on interest-bearing liabilities
139

 
223

 
362

Net change in net interest income
$
69

 
$
635

 
$
704



Interest Income. Total interest income for the three months ended December 31, 2017 increased $612,000, or 12.5%, to $5.5 million from $4.9 million for the three months ended December 31, 2016. The increase during the period was primarily attributable to the increase in the average balance of loans receivable, net. Average loans receivable, net, increased $37.4 million during the quarter ended December 31, 2017 compared to the same quarter last year. The average yield on loans receivable, net, increased 14 basis points to 5.42% during the three months ended December 31, 2017 compared to 5.28% for the same period in the prior year primarily due to the increase in construction loans and the repricing of variable rate loans to higher interest rates. Average mortgage-backed securities declined $4.4 million during the three months ended December 31, 2017 compared to the same period in the prior year. The average yield on mortgage-backed securities increased 16 basis points to 2.14% for the three months ended December 31, 2017 compared to 1.98% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. Average interest-earning assets increased $30.3 million, or 7.6%, to $426.5 million for the three months ended December 31, 2017 compared to $396.2 million for the same period in 2016.


40


The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended December 31, 2017 and 2016:

 
Three Months Ended December 31,
 
2017
 
2016
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2016
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
396,465

 
5.42
%
 
$
359,021

 
5.28
%
 
$
629

Mortgage-backed securities
23,892

 
2.14

 
28,292

 
1.98

 
(12
)
Investment securities
161

 
4.97

 
172

 
6.98

 
(1
)
FHLB stock
2,283

 
2.98

 
2,455

 
3.58

 
(5
)
Cash and cash equivalents
3,664

 
0.66

 
6,253

 
0.32

 
1

Total interest-earning assets
$
426,465

 
5.18
%
 
$
396,193

 
4.96
%
 
$
612

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

For the six months ended December 31, 2017, total interest income increased $1.1 million, or 10.9%, to $10.8 million from $9.7 million for the six months ended December 31, 2016. The increase during the period was primarily attributable to the increase in the average balance on loans receivable, net. The average yield on loans receivable, net, increased 10 basis points to 5.36% for the six months ended December 31, 2017 compared to 5.26% for the same period in the prior year primarily due to the increase in construction loans and the repricing of variable rate loans to higher interest rates. Average loans receivable, net, increased $34.7 million during the six months ended December 31, 2017 compared to the same period in the prior year. Average mortgage-backed securities declined $4.4 million during the six months ended December 31, 2017 compared to the same period in the prior year. The average yield on mortgage-backed securities decreased two basis points to 2.09% for the six months ended December 31, 2017 compared to 2.11% for the same period in the prior year. Average interest-earning assets increased $29.1 million, or 7.4%, to $423.1 million for the six months ended December 31, 2017 compared to $394.0 million for the same period in 2016.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended December 31, 2017 and 2016:


 
Six Months Ended December 31,
 
2017
 
2016
 
Increase/(Decrease) in
Interest and
Dividend
Income from
2016
 
Average
Balance
 
Yield
 
Average
Balance
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net (1)
$
391,747

 
5.36
%
 
$
357,036

 
5.26
%
 
$
1,110

Mortgage-backed securities
24,635

 
2.09

 
29,044

 
2.11

 
(50
)
Investment securities
163

 
6.13

 
172

 
5.81

 

FHLB stock
2,123

 
3.39

 
2,668

 
3.00

 
(4
)
Cash and cash equivalents
4,385

 
0.82

 
5,043

 
0.32

 
10

Total interest-earning assets
$
423,053

 
5.12
%
 
$
393,963

 
4.95
%
 
$
1,066

(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.

41



Interest Expense. Interest expense increased $181,000, or 22.8% to $975,000 for the three months ended December 31, 2017 as compared to $794,000 for the three months ended December 31, 2016. The increase during the period was primarily attributable to the increase in the average balance of certificates of deposit, and to a lesser extent, the average cost of money market accounts. The average balance of certificates of deposit increased $31.7 million, or 27.4%, to $147.2 million during the quarter ended December 31, 2017 compared to $115.5 million for the same quarter last year. The average balance of FHLB advances decreased $5.5 million, or 11.2%, to $43.9 million for the three months ended December 31, 2017 compared to $49.4 million for the same period of the prior year. Average interest-bearing liabilities increased $27.5 million, or 8.7%, to $343.6 million for the three months ended December 31, 2017 compared to $316.1 million for the same period in 2016 primarily to fund our loan growth.

The following table details average balances, cost of funds and the change in interest expense for the three months ended December 31, 2017 and 2016:

 
Three Months Ended December 31,
 
2017
 
2016
 
Increase/(Decrease) in
Interest Expense from
2016
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
44,955

 
0.15
%
 
$
43,617

 
0.15
%
 
$
1

Interest-bearing demand deposits
36,402

 
0.04

 
29,458

 
0.04

 
1

Money market deposits
71,158

 
0.52

 
78,051

 
0.40

 
14

Certificates of deposit
147,226

 
1.98

 
115,541

 
1.94

 
168

FHLB advances
43,867

 
1.20

 
49,395

 
1.09

 
(3
)
Total interest-bearing liabilities
$
343,608

 
1.14
%
 
$
316,062

 
1.00
%
 
$
181


For the six months ended December 31, 2017 interest expense increased $362,000, or 23.1%, to $1.9 million from $1.6 million for the six months ended December 31, 2016. The increase during the period was primarily attributable to the increase in the average balance of certificates of deposit, and to a lesser extent, the average cost of money market deposits. The average balance of certificates of deposit increased $30.2 million, or 25.9%, to $146.9 million for the six months ended December 31, 2017 compared to $116.7 million for the same period in 2016. The average cost of money market deposits increased 20 basis points to 0.50% for the six months ended December 31, 2017 compared to 0.30% for the same period of the prior year. The average balance of money market deposits increased $3.4 million, or 4.9%, to $72.5 million for the six months ended December 31, 2017 compared to the same period last year. Average interest-bearing liabilities increased $25.7 million, or 8.2%, to $338.6 million for the six months ended December 31, 2017 compared to $312.9 million for the same period in 2016.


42


The following table details average balances, cost of funds and the change in interest expense for the six months ended December 31, 2017 and 2016:

 
Six Months Ended December 31,
 
2017
 
2016
 
Increase/(Decrease) in
Interest Expense from
2016
 
Average
Balance
 
Cost
 
Average
Balance
 
Cost
 
 
(Dollars in thousands)
Savings deposits
$
44,566

 
0.15
%
 
$
44,058

 
0.15
%
 
$
1

Interest-bearing demand deposits
34,690

 
0.04

 
28,300

 
0.04

 
1

Money market deposits
72,540

 
0.50

 
69,124

 
0.30

 
79

Certificates of deposit
146,952

 
1.99

 
116,700

 
1.95

 
326

FHLB advances
39,819

 
1.21

 
54,719

 
1.04

 
(45
)
Total interest-bearing liabilities
$
338,567

 
1.14
%
 
$
312,901

 
1.00
%
 
$
362



Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a $105,000 provision for loan losses was required for the three months ended December 31, 2017 compared to $75,000 for the same period last year, primarily reflecting our recent loan growth. The provision for loan losses for the six months ended December 31, 2017 was $180,000 compared to $150,000 for the same period last year.

Nonperforming loans decreased to $1.5 million at December 31, 2017, a decrease of $1.3 million from $2.8 million at December 31, 2016. The ratio of nonperforming loans to total loans was 0.4% at December 31, 2017 compared to 0.8% at December 31, 2016. Total classified loans decreased $1.7 million, or 53.5%, to $1.4 million at December 31, 2017 from $3.1 million at December 31, 2016. The allowance for loan losses of $4.1 million at December 31, 2017 represented 1.0% of total loans receivable and 283.3% of nonperforming loans. This compares to an allowance for loan losses of $4.1 million at June 30, 2017, representing 1.1% of total loans receivable and 110.8% of nonperforming loans.

Management considers the allowance for loan losses at December 31, 2017 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.

















43


The following table details activity and information related to the allowance for loan losses at and for the three months ended December 31, 2017 and 2016:

 
At or For the Three Months Ended December 31,
 
 
2017
 
2016
 
(Dollars in thousands)
Provision for loan losses
$
105

 
$
75

Net (recoveries) charge-offs
(6
)
 
38

Allowance for loan losses
4,128

 
3,861

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.0
%
 
1.1
%
Nonaccrual and 90 days or more past due and still accruing interest
$
1,457

 
$
2,775

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
283.3
%
 
139.1
%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period
0.4
%
 
0.8
%
Total loans
$
403,539

 
$
359,214



The following table details activity and information related to the allowance for loan losses at and for the six months ended December 31, 2017 and 2016:

 
At or For the Six Months Ended December 31,
 
 
2017
 
2016
 
(Dollars in thousands)
Provision for loan losses
$
180

 
$
150

Net charge-offs
158

 
68

Allowance for loan losses
4,128

 
3,861

Allowance for loan losses as a percentage of gross loans receivable at the end of the period
1.0
%
 
1.1
%
Nonaccrual and 90 days or more past due and still accruing interest
$
1,457

 
$
2,775

Allowance for loan losses as a percentage of nonperforming loans at the end of the period
283.3
%
 
139.1
%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period
0.4
%
 
0.8
%
Total loans
$
403,539

 
$
359,214



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, 2017 and December 31, 2016, we have identified 24 and 34 loans, respectively, with aggregate net principal balances of $3.5 million and $5.9 million, respectively, as TDRs. At December 31, 2017 and December 31, 2016, there were $233,000 and $862,000, respectively, of TDRs included in nonperforming loans. At December 31, 2017 the Company had REO with a book value of $3.3 million compared to $867,000 at June 30, 2017.










44


Noninterest Income. Noninterest income remained relatively the same at $1.0 million for both the quarters ended December 31, 2017 and 2016. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended December 31, 2017 compared to the same period in 2016:

 
Three Months Ended December 31,
 
Increase (decrease)
 
 
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit service fees
$
277

 
$
348

 
$
(71
)
 
(20.4
)%
Other deposit fees
187

 
179

 
8

 
4.5

Other loan fees
172

 
207

 
(35
)
 
(16.9
)
Gain (loss) on sale of loans
47

 
(1
)
 
48

 
(4,800.0
)
Bank owned life insurance investment
129

 
130

 
(1
)
 
(0.8
)
Other income
179

 
123

 
56

 
45.5

Total noninterest income
$
991

 
$
986

 
$
5

 
0.5
 %

The slight increase in noninterest income was primarily attributable to an increase in commercial real estate loan prepayment penalties of $61,000 from $8,000 for the same period in the previous year and a $48,000 increase on gain on sale of loans. Partially offsetting these increases was a decrease of $71,000 in deposit service fees to $277,000 from $348,000 as consumers reduced their deposit account overdrafts.

The following table provides a detailed analysis of the changes in the components of noninterest income for the six months ended December 31, 2017 compared to the same period in 2016:

 
Six Months Ended December 31,
 
Increase (decrease)
 
 
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in thousands)
Deposit service fees
$
590

 
$
696

 
$
(106
)
 
(15.2
)%
Other deposit fees
387

 
373

 
14

 
3.8

Other loan fees
400

 
442

 
(42
)
 
(9.5
)
Gain on sale of loans
157

 
100

 
57

 
(57.0
)
Bank owned life insurance investment
258

 
262

 
(4
)
 
(1.5
)
Other income
372

 
270

 
102

 
37.8

Total noninterest income
$
2,164

 
$
2,143

 
$
21

 
1.0
 %


Noninterest income remained relatively the same at $2.2 million during both the six months ended December 31, 2017 compared to $2.1 million during the six months ended December 31, 2016. Other income increased $102,000, or 37.8% to $372,000 for the six months ended December 31, 2017 compared to $270,000 for the same period in 2016, primarily due to an increase in commercial real estate loan prepayment penalties of $129,000 from $26,000 for the same period in the previous year. In addition gain on loan sales increased $57,000 primarily due to an increase in the amount of loans sold. Partially offsetting these increases was a decrease of $106,000 in deposit service fees to $590,000 during the six months ended December 31, 2017 from $696,000 during the same period for the prior year as consumers reduced their deposit account overdrafts.






45



Noninterest Expense. For the three months ended December 31, 2017, noninterest expense decreased $427,000, or 9.7%, to $4.0 million from $4.4 million for the three months ended December 31, 2016. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended December 31, 2017 and 2016:

 
Three Months Ended December 31,
 
Increase (decrease)
 
 
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
2,220

 
$
2,296

 
$
(76
)
 
(3.3
)%
General and administrative expenses
572

 
833

 
(261
)
 
(31.3
)
Real estate holding costs
36

 
19

 
17

 
89.5

FDIC insurance premiums
41

 
24

 
17

 
70.8

Information technology
490

 
540

 
(50
)
 
(9.3
)
Occupancy and equipment
435

 
441

 
(6
)
 
(1.4
)
Deposit services
101

 
128

 
(27
)
 
(21.1
)
Marketing
84

 
167

 
(83
)
 
(49.7
)
Loss (gain) on sale of real estate owned
15

 
(27
)
 
42

 
(155.6
)
Total noninterest expense
$
3,994

 
$
4,421

 
$
(427
)
 
(9.7
)%

The decrease in noninterest expense was primarily due to a $261,000, or 31.3% decrease in general and administrative expenses to $572,000 for the three months ended December 31, 2017 compared to $833,000 for the same period in 2016. This decrease was partially due to no unfunded loan reserve commitment expense during the current quarter compared to a $75,000 unfunded loan reserve commitment expense in the quarter ended December 31, 2016, a $46,000 reduction in legal fees, a $31,000 decrease in contribution expense and a $31,000 decrease in direct loan expense between the periods. Marketing decreased $83,000 to $84,000 for the quarter ended December 31, 2017 from $167,000 for the same period last year. Compensation and benefits expense decreased $76,000 or 3.3%, to $2.2 million for the quarter ended December 31, 2017 from $2.3 million for the same period in the previous year. The decrease was primarily due to a reduction in stock-based compensation expense related to the Anchor Bancorp 2015 Equity Plan to $19,000 for the quarter ended December 31, 2017 from $147,000 for the same quarter last year and incentive loan commission decreasing $105,000 to $75,000 from $180,000 for the same quarter last year. These decreases were partially offset by $245,000 for retention bonuses paid this quarter associated with the pending merger with Washington Federal, Inc.























46



The following table provides an analysis of the changes in the components of noninterest expense for the six months ended December 31, 2017 and 2016:

 
Six Months Ended December 31,
 
Increase (decrease)
 
 
 
2017
 
2016
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
4,305

 
$
4,606

 
$
(301
)
 
(6.5
)%
General and administrative expenses
1,145

 
1,569

 
(424
)
 
(27.0
)
Merger expenses
34

 

 
34

 

Real estate holding costs
66

 
37

 
29

 
78.4

FDIC insurance premiums
77

 
92

 
(15
)
 
(16.3
)
Information technology
1,027

 
1,025

 
2

 
0.2

Occupancy and equipment
868

 
948

 
(80
)
 
(8.4
)
Deposit services
205

 
240

 
(35
)
 
(14.6
)
Marketing
175

 
267

 
(92
)
 
(34.5
)
Loss on sale of property, premises and equipment
5

 

 
5

 

Loss (gain) on sale of real estate owned
15

 
(40
)
 
55

 
(137.5
)
Total noninterest expense
$
7,922

 
$
8,744

 
$
(822
)
 
(9.4
)%

Noninterest expense decreased $822,000, or 9.4%, to $7.9 million in the six months ended December 31, 2017 compared to $8.7 million for the six months ended December 31, 2016. The decrease was primarily due to a $424,000 decrease in general and administrative expenses. This decrease was partially due to a $60,000 decline in unfunded loan commitment reserve expense, a $52,000 decline in consulting services, a $50,000 decrease in direct loan expense, a $47,000 reduction in legal fees, a $33,000 decrease in stationery supplies, and a $28,000 decrease in credit card expenses due to the efficiencies realized from our new credit card program. Compensation and benefits decreased $301,000, or 6.5%, to $4.3 million in the six months ended December 31, 2017 compared to $4.6 million in the six months ended December 31, 2016. The decrease was primarily due to a decrease of $178,000 in employee compensation from $2.7 million to $2.5 million due to a decline in full-time employees. In addition incentive loan commission decreased $65,000 to $190,000 from $255,000 for the same period last year. Also a factor for the reduction is $305,000 decrease in stock-based compensation related to the Anchor Bancorp 2015 Equity Plan during the six months ended December 31, 2017 partially offset by an increase in performance compensation of $245,000 for retention bonuses associated with the pending merger with Washington Federal, Inc. that had no related expense for the same period in 2016. For the six months ended December 31, 2017 we expensed $34,000 associated with the pending merger with Washington Federal, Inc. compared to none for the same period ended December 31, 2016.

Income Taxes. The provision for income taxes was $2.8 million and $3.3 million for the three and six months ended December 31, 2017, respectively, compared to $188,000 and $446,000 for the three and six months ended December 31, 2016, respectively. The effective tax rate was 197% and 112% for the three and six months ended December 31, 2017, respectively, compared to 31% and 31% for the three and six months ended December 31, 2016, respectively. The provision for income taxes and the effective tax rate was higher for the three and six months ended December 31, 2017 compared to the same prior year periods primarily due to a one-time charge to the provision for income taxes of $2.4 million. This one-time charge to the provision for income taxes was the result of the enactment of the Tax Cuts and Jobs Act, signed into law on December 22, 2017, which resulted in the Company revaluing its deferred tax assets and liabilities based upon the lower enacted corporate income tax rate. As a result of the Tax Act, the Company will utilize a blended federal tax rate of 28.0% on its tax return for its fiscal year ending June 30, 2018, and 21% thereafter. At December 31, 2017, the Company had a net deferred tax asset of $4.9 million compared to $8.0 million at June 30, 2017. As of December 31, 2017, management deemed that a net deferred tax asset valuation allowance related to the Company’s deferred tax asset was not necessary.






47


Liquidity, Commitments and Capital Resources

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

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

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At December 31, 2017, the total approved loan origination commitments outstanding were $8.4 million and undisbursed construction loan commitments totaled $43.0 million. At the same date, unused lines of credit were $65.2 million.

For purposes of determining our liquidity position, we use the liquidity ratio, a regulatory measure of liquidity calculated as the total of net cash, short-term, and marketable assets divided by net deposits and short-term liabilities. Our Board of Directors has established a liquidity ratio target of 10%. For the three months ended December 31, 2017, our average liquidity ratio was 6.2%, which indicates we are below the liquidity standard set by our Board. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or mortgage-backed securities. On a longer-term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay 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, 2017 totaled $98.4 million. We had no brokered deposits at December 31, 2017. Management's policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with us. In addition, we had the ability to borrow an additional $91.9 million from the FHLB of Des Moines. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.5 million which is collateralized with securities and a line of credit for $5.0 million with Pacific Coast Bankers' Bank.

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

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

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the three month period ended December 31, 2017, the Bank paid a $560,000 dividend to the Company. The payment is being used for the Company's general corporate purposes, including supporting the Company's ongoing operations and stock repurchases. At December 31, 2017, the Company (on an unconsolidated basis) had liquid assets of $3.4 million.

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

48


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, 2017:
 
 
Amount of Commitment
Expiration Per Period
 
Total Amounts
Committed (2)
 
Due in
One Year
 
(In thousands)
Commitments to originate loans (1)
$
8,438

 
$
8,438

Undisbursed portion of construction loans
42,980

 
13,915

Total loan commitments
$
51,418

 
$
22,353

 
 
 
 
Lines of credit
 
 
 

Fixed rate (3)
$
21,690

 
$
5,847

Adjustable rate
43,530

 
17,137

Undisbursed balance of lines of credit
$
65,220

 
$
22,984


(1) 
Interest rates on fixed rate loans are 3.75% to 17.99%. 
(2) 
At December 31, 2017 there was $301 in reserves for unfunded commitments. 
(3) 
Includes standby letters of credit. 


Operating lease commitment - The Bank leases space for branches and operations located in Shelton, Puyallup, and Seattle Washington. These leases run for periods ranging from three to five years with all current leases expiring in 2020. All leases require the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitments for the next three years are as follows:
Year Ended June 30,
 
 
 
Amount
 
 
(In thousands)
2018
 
$70
2019
 
$90
2020
 
$36



49


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, 2017, the Bank exceeded all regulatory capital requirements with, Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital (CET1), Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios of 13.0%, 14.1%, 14.1%, and 15.1%, respectively. As of June 30, 2017 these ratios were 13.0%, 14.1%, 14.1%, and 15.1%, respectively. At December 31, 2017, the Bank met the requirements to be deemed "well-capitalized" under applicable regulatory guidelines.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of December 31, 2017, the conservation buffer was 1.25%.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, CET1, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.0%, 15.2%, 15.2%, and 16.1%, respectively, as of December 31, 2017. As of June 30, 2017, these ratios were 14.0%, 15.2%, 15.2% and 16.2%, respectively.

The Bank's actual capital amounts and ratios at December 31, 2017 are presented in the following table:

Anchor Bank
 
 
 
 
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
 
 
 
Minimum Capital Requirement
 
 
Actual
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital
(to risk-weighted assets)
$
64,142

 
15.1
%
 
$
34,083

 
8.0
%
 
$
42,603

 
10.0
%
Tier I capital
(to risk-weighted assets)
$
60,014

 
14.1
%
 
$
25,562

 
6.0
%
 
$
34,083

 
8.0
%
Common equity tier 1 capital (to risk-weighted assets)
$
60,014

 
14.1
%
 
$
19,172

 
4.5
%
 
$
27,692

 
6.5
%
Tier I leverage capital
(to average assets)
$
60,014

 
13.0
%
 
$
18,538

 
4.0
%
 
$
23,173

 
5.0
%
 

The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of December 31, 2017, were as follows:

Anchor Bancorp
Actual
 
Amount
 
Ratio
 
(Dollars in thousands)
December 31, 2017
 
 
 
Total capital
(to risk-weighted assets)
$
68,872

 
16.1
%
Tier I capital
(to risk-weighted assets)
$
64,744

 
15.2
%
Common equity tier 1 capital (to risk-weighted assets)
$
64,744

 
15.2
%
Tier I leverage capital
(to average assets)
$
64,744

 
14.0
%


50


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;
structured certain borrowings with maturities that match fund our loan portfolios; and
sold our fixed rate single family loans to generate noninterest income as well as managing interest rate risk.

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

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

51



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, 2017 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
 
 
Net Portfolio Value
 
Net Portfolio as % of Portfolio Value of Assets
 
 
Basis Point Change in Rates
 
 
 
Market Value of Assets (4)
 
Amount
 
$ Change (1)
 
% Change
 
NPV Ratio (2)
 
% Change (3)
 
 
 
(Dollars in thousands)
300
 
$
64,733

 
$
(1,020
)
 
(1.55
)%
 
14.75
%
 
0.48
 %
 
$
439,003

200
 
66,690

 
937

 
1.43

 
14.93

 
0.66

 
446,573

100
 
66,191

 
438

 
0.67

 
14.58

 
0.31

 
453,990

Base
 
65,753

 

 

 
14.27

 

 
460,788

(100)
 
64,463

 
(1,290
)
 
(1.96
)
 
13.80

 
(0.47
)
 
467,059

___________
(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, 2017, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.

Basis Point Change in Rates
 
Net Interest Income
 
Amount
 
$ Change (1)
 
% Change
 
 
(Dollars in thousands)
300
 
$
22,278

 
$
2,559

 
13.0
 %
200
 
21,487

 
1,768

 
9.0

100
 
20,651

 
932

 
4.7

Base
 
19,719

 

 

(100)
 
18,534

 
(1,185
)
 
(6.0
)

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

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

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

52


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, 2017, 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, 2017, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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, 2017.


53


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

(a) Not applicable

(b) Not applicable

(c) The table below represents the Company’s purchases of its equity securities for the second quarter of fiscal 2018.
 
 
 
 
 
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet be Repurchased (1)
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
 
 
 
 
 
 
Period
 
 
 
 
 
 
 
 
 
 
 
 
 
October 1 - October 31, 2017
 

 
$

 

 

November 1 - November 30, 2017
 

 

 

 
40,000

December 1 - December 31, 2017
 
5,000

 
24.85

 
5,000

 
35,000

 
 
5,000

 
$
24.85

 
5,000

 
 

(1) 
Represents the remaining shares available for future purchases under the stock repurchase plan.

During the quarter ended December 31, 2017, the Company purchased 5,000 shares of the Company’s common stock at an cost of $24.85 per share of the 40,000 shares authorized in the November stock repurchase plan, leaving 35,000 shares available for future purchases.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.


54


Item 6. Exhibits
2.1
2.2
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, 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; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements



(1)
Filed as an exhibit to the Company's Current Report on Form 8-K filed April 13, 2017.
(2)
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-154734)
(3)
Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 10, 2015.
(4)
Filed as an exhibit to the Company's Current Report on Form 8-K filed May 22, 2014.
(5)
Filed as an exhibit to the Company's Current Report on Form 8-K filed January 22, 2015.
(6)
Filed as an exhibit to the Company's Current Report on Form 8-K filed October 23, 2015.
(7)
Filed as an exhibit to the Company's Current Report on Form 8-K dated December 10, 2015.
(8)
Filed as an exhibit to the Company's Registration Statement on Form S-8 dated December 8, 2015.
(9)
Filed as an exhibit to the Company's Current Report on Form 8-K dated September 27, 2017.


55


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 5, 2018
/s/Jerald L. Shaw                                           
 
Jerald L. Shaw 
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Date: February 5, 2018
/s/Terri L. Degner                                        
 
Terri L. Degner
 
Executive Vice President and 
 
Chief Financial Officer 
 
(Principal Financial and Accounting Officer)

56



EXHIBIT INDEX

101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, 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; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements


57