Anchor Bancorp 10-Q 2016 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2015

 or

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

For the transition period from _____ to _____

Commission File Number: 001-34965

ANCHOR BANCORP

(Exact name of registrant as specified in its charter)

Washington	26-3356075
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	I.D. Number)
601 Woodland Square Loop SE, Lacey, Washington	98503
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:	(360) 491-2250

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

Yes [X] No [   ]

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

Yes [X] No [   ]

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

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

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

Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of February 8, 2016, there were 2,521,334 shares of common stock, $0.01 par value per share, outstanding.

ANCHOR BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION
	Page
Item 1 - Financial Statements	1
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	48
Item 4 - Controls and Procedures	50
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings	50
Item 1A - Risk Factors	50
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3 – Defaults Upon Senior Securities	51
Item 4 – Mine Safety Disclosures	51
Item 5 - Other Information	51
Item 6 - Exhibits	52
SIGNATURES	53

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to Anchor Bancorp and its consolidated subsidiary, unless the context indicates otherwise.  When we refer to “Anchor Bank” or the “Bank” in this report, we are referring to Anchor Bank, the wholly owned subsidiary of Anchor Bancorp.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)	December 31, 2015			June 30, 2015
ASSETS
Cash and cash equivalents	$	12,572		$	14,450
Securities available-for-sale, at fair value, amortized cost of $26,103 and $29,696	25,870			29,565
Securities held-to-maturity, at amortized cost, fair value of $6,785 and $7,692	6,739			7,617
Loans held for sale	—			505
Loans receivable, net of allowance for loan losses of $3,879 and $3,721	311,519			283,444
Bank owned life insurance investment, net of surrender charges	19,265			19,001
Accrued interest receivable	1,010			1,069
Real estate owned, net ("REO")	662			797
Federal Home Loan Bank  ("FHLB") stock, at cost	1,553			853
Property, premises, and equipment, at cost, less accumulated depreciation of $11,284                            and $13,482	10,115			10,370
Deferred tax asset, net	8,977			8,867
Prepaid expenses and other assets	1,139			2,692
Total assets	$	399,421		$	379,230
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	48,880		$	44,719
Interest-bearing	253,850			255,093
Total deposits	302,730			299,812
FHLB advances	27,500			10,000
Advance payments by borrowers for taxes and insurance	1,113			1,002
Supplemental Executive Retirement Plan liability	1,758			1,814
Accounts payable and other liabilities	3,035			2,879
Total liabilities	336,136			315,507
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding	—			—
Common stock, $0.01 par value per share, authorized 45,000,000 shares; 2,521,334 issued and 2,447,314 outstanding at December 31, 2015 and 2,550,000 issued and 2,480,865 outstanding at June 30, 2015, respectively	26			25
Additional paid-in capital	22,940			23,404
Retained earnings	41,798			41,741
Unearned Employee Stock Ownership Plan ("ESOP") shares	(701		)	(736		)
Accumulated other comprehensive loss, net of tax	(778		)	(711		)
Total stockholders’ equity	63,285			63,723
Total liabilities and stockholders’ equity	$	399,421		$	379,230

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

1

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015		2014
Interest income:
Loans receivable, including fees	$	4,024		$	4,052		$	8,042	$	8,105
Securities	21			15			37		30
Mortgage-backed securities	164			206			345		426
Total interest income	4,209			4,273			8,424		8,561
Interest expense:
Deposits	671			689			1,341		1,388
FHLB advances	32			131			62		292
Total interest expense	703			820			1,403		1,680
Net interest income before provision for loan losses	3,506			3,453			7,021		6,881
Provision for loan losses	70			—			90		—
Net interest income after provision for loan losses	3,436			3,453			6,931		6,881
Noninterest income:
Deposit service fees	331			347			703		731
Other deposit fees	180			175			358		364
Gain on sale of investments	—			—			—		47
Other loan fees	184			144			328		288
Gain (loss) on sale of loans	67			(5		)	128		(11		)
Bank owned life insurance investment	132			133			289		272
Other income	269			231			401		317
Total noninterest income	1,163			1,025			2,207		2,008
Noninterest expense:
Compensation and benefits	2,815			1,945			4,835		3,968
General and administrative expenses	994			701			1,728		1,369
Real estate owned impairment	5			93			43		130
Real estate owned holding costs	11			62			22		216
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	64			125			133		246
Information technology	415			439			857		868
Occupancy and equipment	449			463			939		945
Deposit services	122			158			235		383
Marketing	130			154			255		309
Loss (gain) on sale of property, premises and equipment	1			—			4		(2		)
(Gain) loss on sale of real estate owned	(4		)	(114		)	4		(108		)
Total noninterest expense	5,002			4,026			9,055		8,324
(Loss) income before provision for income taxes	(403		)	452			83		565
(Benefit) provision for income taxes	(117		)	(8,333		)	24		(8,333		)
Net (loss) income	$	(286	)	$	8,785		$	59	$	8,898
Basic (loss) earnings per share	$	(0.12	)	$	3.55		$	0.02	$	3.59
Diluted (loss) earnings per share	$	(0.12	)	$	3.55		$	0.02	$	3.59
Weighted average number of basic shares outstanding	2,436,650			2,476,562			2,454,097		2,475,702
Weighted average number of diluted shares outstanding	2,436,650			2,476,562			2,454,097		2,475,702

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

2

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands) (Unaudited)	Three Months Ended December 31,					Six Months Ended December 31,
	2015			2014		2015			2014
NET (LOSS) INCOME	$	(286	)	$	8,785	$	59		$	8,898
OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
Unrealized holding (loss) gain on available-for-sale securities during the period, net of income tax benefit of $66, $0, $34 and $0 respectively,	(194		)	226		(102		)	32
Adjustment for realized gains included in net income	—			—		—			47
Other comprehensive (loss) income, net of income tax	(194		)	226		(102		)	79
COMPREHENSIVE (LOSS) INCOME	$	(480	)	$	9,011	$	(43	)	$	8,977

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

3

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except share data) (Unaudited)	Six Months Ended December 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	59		$	8,898
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	314			329
Net amortization of premiums on securities	227			314
Provision for loan losses	90			—
ESOP expense	80			98
Real estate owned impairment	43			130
Deferred federal income taxes	24			(8,333		)
Stock compensation expense	800			—
Increase in cash surrender value of life insurance investment	(264		)	(272		)
(Gain) loss on sale of loans	(128		)	11
Gain on sale of investments	—			(47		)
Originations of loans held for sale	(7,009		)	(11		)
Proceeds from sale of loans held for sale	7,642			—
Loss (gain) on sale of property, premises, and equipment	4			(2		)
Loss (gain) on sale of real estate owned	4			(108		)
Change in operating assets and liabilities:
Accrued interest receivable	59			172
Prepaid expenses and other assets	1,553			367
Deferred income tax asset	(100		)	—
Supplemental Executive Retirement Plan	(56		)	(6		)
Accounts payable and other liabilities	156			(1,120		)
Net cash provided by operating activities	3,498			420
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, maturities and calls of available-for-sale securities	250			2,335
Principal repayments on available-for-sale securities	3,150			3,547
Principal repayments on held-to-maturity securities	846			616
Loan originations, net of undisbursed loan proceeds and principal repayments	(28,557		)	3,314
Proceeds from sale of real estate owned	480			6,297
Capital improvements on real estate owned	—			(28		)
Proceeds from sale of property, premises, and equipment, net	—			1
Purchase of fixed assets, net	(63		)	(323		)
Purchase of FHLB stock	(700		)	—
Net cash provided by investing activities	(24,594		)	15,759
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	2,918			(12,262		)
Net change in advance payments by borrowers for taxes and insurance	111			137
Proceeds from FHLB advances	22,500			15,100
Repayment of FHLB advances	(5,000		)	(22,550		)
Repurchase and retirement of common stock	(1,095		)	—
Stock award net settlement	(216		)	—
Net cash used in financing activities	$	19,218		$	(19,575	)

4

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except share data) (Unaudited)	Six Months Ended December 31,
	2015			2014
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(1,878	)	$	(3,396	)
Beginning of period	14,450			14,758
End of period	$	12,572		$	11,362
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash investing activities:
Net loans transferred to real estate owned	$	392		$	1,824
Unrealized holding (loss) gain on available-for-sale securities	$	(102	)	$	32
Cash paid during the period for interest	$	1,403		$	1,709

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

5

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Nature of Business

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

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

Note 2 - Basis of Presentation

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

Note 3 - Recently Issued Accounting Pronouncements

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

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

6

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

7

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	For the Three Months Ended December 31,					For the Six Months Ended December 31,
	2015			2014		2015		2014
	(Dollars in thousands, except share data)
Net (loss) income	$	(286	)	$	8,785	$	59	$	8,898
Less: Earnings allocated to participating securities	—			—		—		—
Earnings allocated to common shareholders	$	(286	)	$	8,785	$	59	$	8,898
Basic weighted-average common shares outstanding	2,436,650			2,476,562		2,454,097		2,475,702
Potentially dilutive incremental shares	—			—		—		—
Diluted weighted-average common shares outstanding	2,436,650			2,476,562		2,454,097		2,475,702
Basic (loss) earnings per share	$	(0.12	)	$	3.55	$	0.02	$	3.59
Diluted (loss) earnings per share	$	(0.12	)	$	3.55	$	0.02	$	3.59

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

8

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Investments

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

December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	180	$	—	$	—		$	180
Mortgage-backed securities:
FHLMC (1)	10,389		98		(127		)	10,360
FNMA (2)	14,691		24		(205		)	14,510
GNMA (3)	843		—		(23		)	820
	$	26,103	$	122	$	(355	)	$	25,870
Securities held-to-maturity
Municipal bonds	$	—	$	—	$	—		$	—
Mortgage-backed securities:
FHLMC	3,060		74		(62		)	3,072
FNMA	1,665		105		(23		)	1,747
GNMA	2,014		—		(48		)	1,966
	$	6,739	$	179	$	(133	)	$	6,785

⁽¹⁾ Federal Home Loan Mortgage Corporation ("Freddie Mac")

⁽²⁾ Federal National Mortgage Association ("Fannie Mae")

⁽³⁾ Government National Mortgage Association ("Ginnie Mae")

June 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	434	$	1	$	—		$	435
Mortgage-backed securities:
FHLMC	11,780		134		(123		)	11,791
FNMA	16,534		70		(196		)	16,408
GNMA	948		—		(17		)	931
	$	29,696	$	205	$	(336	)	$	29,565
Securities held-to-maturity
Municipal bonds	$	119	$	—	$	—		$	119
Mortgage-backed securities:
FHLMC	3,367		95		(56		)	3,406
FNMA	1,858		124		(22		)	1,960
GNMA	2,273		—		(66		)	2,207
	$	7,617	$	219	$	(144	)	$	7,692

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

9

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of December 31, 2015 and June 30, 2015, were as follows:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	1,111	$	(5	)	$	4,835	$	(122	)	$	5,946	$	(127	)
FNMA	3,578		(59		)	6,023		(146		)	9,601		(205		)
GNMA	—		—			820		(23		)	820		(23		)
	$	4,689	$	(64	)	$	11,678	$	(291	)	$	16,367	$	(355	)

	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—	$	2,101	$	(62	)	$	2,101	$	(62	)
FNMA	—		—		713		(23		)	713		(23		)
GNMA	—		—		1,966		(48		)	1,966		(48		)
	$	—	$	—	$	4,780	$	(133	)	$	4,780	$	(133	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2015	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	747	$	(1	)	$	5,404	$	(122	)	$	6,151	$	(123	)
FNMA	3,105		(45		)	6,898		(151		)	10,003		(196		)
GNMA	—		—			931		(17		)	931		(17		)
	$	3,852	$	(46	)	$	13,233	$	(290	)	$	17,085	$	(336	)

	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2015	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—	$	2,299	$	(56	)	$	2,299	$	(56	)
FNMA	—		—		772		(22		)	772		(22		)
GNMA	—		—		2,207		(66		)	2,207		(66		)
	$	—	$	—	$	5,278	$	(144	)	$	5,278	$	(144	)

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual maturities of securities at December 31, 2015 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.

December 31, 2015	Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds:
Due after ten years	$	180	$	180
Mortgage-backed securities:
FHLMC	10,389		10,360
FNMA	14,691		14,510
GNMA	843		820
	$	26,103	$	25,870

Securities held-to-maturity
Municipal bonds:	$	—	$	—
Mortgage-backed securities:
FHLMC	3,060		3,072
FNMA	1,665		1,747
GNMA	2,014		1,966
	$	6,739	$	6,785

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

	Three Months Ended December 31,					Six Months Ended December 31,
	2015		2014			2015		2014
	(In thousands)
Proceeds from sales	$	—	$	1,653		$	—	$	2,355
Proceeds from maturities and calls	250		—			250		—
Gross realized gains	—		18			—		65
Gross realized losses	—		(18		)	—		(18		)

Pledged securities at the dates indicated are summarized as follows:

	December 31, 2015				June 30, 2015
Pledged to secure:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Public deposits	$	11,820	$	11,784	$	12,184	$	12,189
FHLB borrowings	1,478		1,534		1,727		1,788
Federal Reserve borrowing line	989		982		1,001		990

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:

	December 31, 2015		June 30, 2015
	(In thousands)
Real estate:
One-to-four family	$	63,479	$	57,944
Multi-family	54,996		43,249
Commercial	131,271		128,306
Construction	11,111		11,731
Land	5,087		4,069
Total real estate	265,944		245,299
Consumer:
Home equity	17,147		17,604
Credit cards	3,059		3,289
Automobile	589		686
Other consumer	2,204		2,347
Total consumer	22,999		23,926
Commercial business	27,675		18,987
Total loans	316,618		288,212
Less:
Deferred loan fees	1,220		1,047
Allowance for loan losses	3,879		3,721
Loans receivable, net	$	311,519	$	283,444

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

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

	One-to- four family			Multi- family		Commercial real estate		Construction			Land		Consumer (1)			Commercial business			Unallocated		Three months ended 12/31/15
	(In thousands)
Allowance for loan losses:
Beginning balance	$	962		$	106	$	680	$	115		$	39	$	466		$	1,319		$	—	$	3,687
Provision (benefit) for loan losses	76			405		572		(90		)	12		(53		)	(852		)	—		70
Charge-offs	(17		)	—		—		—			—		(21		)	(6		)	—		(44		)
Recoveries	47			—		—		81			—		37			1			—		166
Ending balance	$	1,068		$	511	$	1,252	$	106		$	51	$	429		$	462		$	—	$	3,879

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

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	One-to- four family			Multi- family		Commercial real estate		Construction			Land			Consumer (1)			Commercial business			Unallocated			Six months ended 12/31/15
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,113		$	95	$	262	$	247		$	75		$	445		$	1,405		$	79		$	3,721
Provision (benefit) for loan losses	(55		)	416		989		(230		)	(24		)	(32		)	(895		)	(79		)	90
Charge-offs	(163		)	—		—		—			—			(52		)	(50		)	—			(265		)
Recoveries	173			—		1		89			—			68			2			—			333
Ending balance	$	1,068		$	511	$	1,252	$	106		$	51		$	429		$	462		$	—		$	3,879

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

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

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

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

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

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

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

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	1,785	$	2,139	$	—
Land	178		192		—
Home equity	78		80		—
Commercial business	79		190		—
With an allowance recorded
One-to-four family	$	7,761	$	7,809	$	463
Land	321		321		2
Home equity	377		377		101
Other consumer	29		33		10
Commercial business	696		723		198
Total
One-to-four family	$	9,546	$	9,948	$	463
Land	499		513		2
Home equity	455		457		101
Other consumer	29		33		10
Commercial business	775		913		198
Total	$	11,304	$	11,864	$	774

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	1,557	$	1,860	$	—
Land	231		245		—
Home equity	64		65		—
Other consumer	31		32		—
Commercial business	64		126		—
With an allowance recorded
One-to-four family	$	7,716	$	7,743	$	500
Land	408		408		3
Home equity	212		212		26
Commercial business	868		868		211
Total
One-to-four family	$	9,273	$	9,603	$	500
Land	639		653		3
Home equity	276		277		26
Other consumer	31		32		—
Commercial business	932		994		211
Total	$	11,151	$	11,559	$	740

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended December 31, 2015				Six Months Ended December 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	1,987	$	8	$	1,848	$	25
Land	186		2		212		5
Home equity	72		1		72		2
Other consumer	—		—		16		—
Commercial business	194		2		127		5
With an allowance recorded
One-to-four family	$	7,744	$	50	$	7,763	$	151
Land	322		7		365		12
Home equity	304		3		295		9
Other consumer	32		—		17		—
Commercial business	746		—		796		1
Total
One-to-four family	$	9,731	$	58	$	9,611	$	176
Land	508		9		577		17
Home equity	376		4		367		11
Other consumer	32		—		33		—
Commercial business	940		2		923		6
Total	$	11,587	$	73	$	11,511	$	210

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	1,068	$	511	$	1,252	$	106	$	51	$	429	$	462	$	—	$	3,879
Ending balance: individually evaluated for impairment	463		—		—		—		2		111		198		—		774
Ending balance: collectively evaluated for impairment	$	605	$	511	$	1,252	$	106	$	49	$	318	$	264	$	—	$	3,105
Loans receivable:
Ending balance	$	63,479	$	54,996	$	131,271	$	11,111	$	5,087	$	22,999	$	27,675	$	—	$	316,618
Ending balance: individually evaluated for impairment	9,546		—		—		—		499		484		775		—		11,304
Ending balance: collectively evaluated for impairment	$	53,933	$	54,996	$	131,271	$	11,111	$	4,588	$	22,515	$	26,900	$	—	$	305,314

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

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2015:

	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	1,113	$	95	$	262	$	247	$	75	$	445	$	1,405	$	79	$	3,721
Ending balance: individually evaluated for impairment	500		—		—		—		3		26		211		—		740
Ending balance: collectively evaluated for impairment	$	613	$	95	$	262	$	247	$	72	$	419	$	1,194	$	79	$	2,981
Loans receivable:
Ending balance	$	57,944	$	43,249	$	128,306	$	11,731	$	4,069	$	23,926	$	18,987	$	—	$	288,212
Ending balance: individually evaluated for impairment	9,273		—		—		—		639		307		932		—		11,151
Ending balance: collectively evaluated for impairment	$	48,671	$	43,249	$	128,306	$	11,731	$	3,430	$	23,619	$	18,055	$	—	$	277,061

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

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

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

	December 31, 2015		June 30, 2015
	(In thousands)
One-to-four family	$	1,965	$	1,263
Home equity	16		—
Credit cards	18		6
Other consumer	29		31
Commercial business	681		711
Total	$	2,709	$	2,011

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due (1)		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	2,297	$	481	$	1,965	$	4,743	$	58,736	$	63,479
Multi-family	—		—		—		—		54,996		54,996
Commercial real estate	748		—		—		748		130,523		131,271
Construction	—		—		—		—		11,111		11,111
Land	36		—		—		36		5,051		5,087
Home equity	125		—		16		141		17,006		17,147
Credit cards	25		26		18		69		2,990		3,059
Automobile	6		—		—		6		583		589
Other consumer	25		42		29		96		2,108		2,204
Commercial business	47		—		681		728		26,947		27,675
Total	$	3,309	$	549	$	2,709	$	6,567	$	310,051	$	316,618

⁽¹⁾ Includes loans on nonaccrual status.

The following table presents past due loans, net of partial loan charge-offs, by class as of June 30, 2015:

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due (1)		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	616	$	552	$	1,263	$	2,431	$	55,513	$	57,944
Multi-family	—		—		—		—		43,249		43,249
Commercial real estate	—		—		—		—		128,306		128,306
Construction	—		—		—		—		11,731		11,731
Land	—		—		—		—		4,069		4,069
Home equity	15		16		—		31		17,573		17,604
Credit cards	8		26		6		40		3,249		3,289
Automobile	9		—		—		9		677		686
Other consumer	16		—		31		47		2,300		2,347
Commercial business	64		273		711		1,048		17,939		18,987
Total	$	728	$	867	$	2,011	$	3,606	$	284,606	$	288,212

⁽¹⁾ Includes loans on nonaccrual status.

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

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

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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.

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ANCHOR BANCORP AND SUBSIDIARY

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(Unaudited)

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

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

A loan classified as a Loss has the following characteristics:

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

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

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

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

	One-to- four family		Multi- family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Grade:
Pass	$	54,371	$	53,887	$	128,954	$	11,111	$	4,588	$	16,155	$	2,990	$	525	$	2,060	$	25,916	$	300,557
Watch	5,247		1,109		1,110		—		321		580		51		64		92		953		9,527
Special Mention	1,529		—		1,207		—		178		215		—		—		23		61		3,213
Substandard	2,332		—		—		—		—		197		18		—		29		745		3,321
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	63,479	$	54,996	$	131,271	$	11,111	$	5,087	$	17,147	$	3,059	$	589	$	2,204	$	27,675	$	316,618

The following table presents the credit risk profile based on payment activity as of December 31, 2015, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Performing	$	61,514	$	54,996	$	131,271	$	11,111	$	5,087	$	17,131	$	3,041	$	589	$	2,175	$	26,994	$	313,909
Nonperforming (1)	1,965		—		—		—		—		16		18		—		29		681		2,709
Total	$	63,479	$	54,996	$	131,271	$	11,111	$	5,087	$	17,147	$	3,059	$	589	$	2,204	$	27,675	$	316,618

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

The following table presents the internally assigned grade as of June 30, 2015, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Grade:
Pass	$	49,119	$	42,884	$	125,586	$	11,731	$	3,430	$	16,585	$	3,249	$	615	$	2,214	$	16,981	$	272,394
Watch	2,151		—		2,044		—		—		697		34		71		102		915		6,014
Special Mention	4,755		—		676		—		231		301		—		—		—		159		6,122
Substandard	1,919		365		—		—		408		21		6		—		31		932		3,682
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	57,944	$	43,249	$	128,306	$	11,731	$	4,069	$	17,604	$	3,289	$	686	$	2,347	$	18,987	$	288,212

22

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the credit risk profile based on payment activity as of June 30, 2015, by class of loans:

	One-to- four family		Multi-family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Performing	$	56,681	$	43,249	$	128,306	$	11,731	$	4,069	$	17,604	$	3,283	$	686	$	2,316	$	18,276	$	286,201
Nonperforming (1)	1,263		—		—		—		—		—		6		—		31		711		2,011
Total	$	57,944	$	43,249	$	128,306	$	11,731	$	4,069	$	17,604	$	3,289	$	686	$	2,347	$	18,987	$	288,212

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

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

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of December 31, 2015:

	December 31, 2015
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	7,582	$	654	$	8,236
Land	499		—		499
Home equity	289		—		289
Commercial business	93		—		93
Total	$	8,463	$	654	$	9,117

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2015:

	June 30, 2015
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	8,010	$	681	$	8,691
Land	639		—		639
Home equity	276		—		276
Commercial business	221		—		221
Total	$	9,146	$	681	$	9,827

23

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended December 31, 2015					Six Months Ended December 31, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment		Number of Contracts	Pre-TDR Recorded Investment		Post-TDR Recorded Investment
	(Dollars in thousands)
One-to-four family	1	$	273	$	243	1	$	273	$	243
Total	1	$	273	$	243	1	$	273	$	243

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

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

Note 7 - Real Estate Owned, net

The following table is a summary of REO activity for the three and six months ended December 31, 2015 and 2014:

	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
	(In thousands)
Balance at the beginning of the period	$	302		$	6,092		$	797		$	5,067
Net loans transferred to real estate owned	392			—			392			1,824
Capitalized improvements	—			22			—			28
Sales	(28		)	(5,421		)	(484		)	(6,189		)
Impairments	(4		)	(93		)	(43		)	(130		)
Balance at the end of the period	$	662		$	600		$	662		$	600

Note 8 - Employee Benefit Plans

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

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

24

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

	December 31, 2015		June 30, 2015
	(Dollars in thousands)
Allocated shares	36,305		32,865
Unallocated shares	65,695		69,135
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,701	$	1,555

Note 9 - Fair Value Measurements

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

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

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

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

There were no transfers between Level 1, Level 2, or Level 3 during the six months ended December 31, 2015. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	180	$	—	$	180
Mortgage-backed securities:
FHLMC	—		10,360		—		10,360
FNMA	—		14,510		—		14,510
GNMA	—		820		—		820

25

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	June 30, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	435	$	—	$	435
Mortgage-backed securities:
FHLMC	—		11,791		—		11,791
FNMA	—		16,408		—		16,408
GNMA	—		931		—		931

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

The following table presents the balances of assets measured at fair value on a nonrecurring basis at December 31, 2015:

	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	4,392	$	4,392
Land	—		—		321		321
Home equity	—		—		377		377
Commercial business	—		—		153		153
Total impaired loans	—		—		5,243		5,243
Real estate owned:
Land	$	—	$	—	$	19	$	19
Total real estate owned	—		—		19		19
Total	$	—	$	—	$	5,262	$	5,262

26

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	June 30, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	4,172	$	4,172
Commercial	—		—		408		408
Land	—		—		212		212
Commercial business	—		—		868		868
Total impaired loans	—		—		5,660		5,660
Real estate owned:
One-to-four family	$	—	$	—	$	188	$	188
Land	—		—		418		418
Total real estate owned	—		—		606		606
Total	$	—	$	—	$	6,266	$	6,266

The fair values of impaired loans and real estate owned properties are generally based on third party appraisal of the properties, resulting in Level 3 classification.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2015 and June 30, 2015:

	December 31, 2015
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	5,243	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (5%)
Real estate owned	$	19	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (5%)

	June 30, 2015
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	5,660	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (4%)
Real estate owned	$	606	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (1%)

27

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of December 31, 2015 and June 30, 2015: 

	December 31, 2015
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	12,572	$	12,572	$	12,572	$	—	$	—
Securities available-for-sale	25,870		26,103		—		25,870		—
Securities held-to-maturity	6,739		6,785		—		6,785		—
FHLB stock	1,553		1,553		—		1,553		—
Loans receivable	315,398		313,990		—				313,990
Bank owned life insurance investment, net of surrender charges	19,265		19,265		—		19,265		—
Accrued interest receivable	1,010		1,010		—		1,010		—
Financial Instruments-Liabilities
Demand deposits, savings and money market	$	179,469	$	179,469	$	179,469	$	—	$	—
Certificates of deposit	123,261		122,856		—		122,856		—
FHLB advances	27,500		27,346		—		27,346		—
Advance payments by borrowers for taxes and insurance	1,113		1,113		1,113		—		—

28

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	June 30, 2015
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	14,450	$	14,450	$	14,450	$	—	$	—
Securities available-for-sale	29,565		29,565		—		29,565		—
Securities held-to-maturity	7,617		7,692		—		7,692		—
FHLB stock	853		853		—		853		—
Loans held for sale	505		505		—		—		—
Loans receivable	287,165		288,424		—		—		288,424
Bank owned life insurance investment, net of surrender charges	19,001		19,001		—		19,001		—
Accrued interest receivable	1,069		1,069		—		1,069		—
Financial Instruments-Liabilities
Demand deposits, savings and money market	$	173,482	$	173,482	$	173,482	$	—	$	—
Certificates of deposit	126,330		125,942		—		125,942		—
FHLB advances	10,000		9,882		—		9,882		—
Advance payments by borrowers for taxes and insurance	1,002		1,002		1,002		—		—

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

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

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

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

Loans held for sale - The fair value of loans held-for-sale is based on quoted market prices from FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Loans receivable - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.

Bank owned life insurance investment, net of surrender charges - The carrying amount is a reasonable estimate of its fair value.

Demand deposits, savings, money market, and certificates of deposit - The fair value of the Bank's demand deposits, savings, and money market accounts is the amount payable on demand. The fair value of fixed-maturity certificates is estimated using a discounted cash flow analysis using current rates offered for deposits of similar remaining maturities.

FHLB advances - The fair value of the Bank's FHLB advances was calculated using the discounted cash flow method.

29

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.

Accrued interest receivable and advance payments by borrowers for taxes and insurance - The carrying value has been determined to be a reasonable estimate of their fair value.

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

Note 10 - Stock-Based Compensation

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

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

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

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

	For the Three and Six Months Ended December 31, 2015
		Weighted-Average Grant Date Fair Value
	Shares
Non-vested at October 1, 2015	—	—
Granted	104,778	$	25.75
Vested	21,334	25.75
Forfeited	—	—
Non-vested at December 31, 2015	83,444	—

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

Note 11 - Federal Income Taxes

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

30

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

$14.6 million, which will begin to expire in 2031.

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

31

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

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

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

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

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

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

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

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

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

• our ability to attract and retain deposits;

• increases in premiums for deposit insurance;

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

• our ability to control operating costs and expenses;

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

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

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

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

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

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

• our ability to manage loan delinquency rates;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

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

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

• our ability to pay dividends on our common stock;

• adverse changes in the securities markets;

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

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

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

32

Some of these and other factors are discussed in our 2015 Form10-K under Item 1A. “Risk Factors.” Such developments could have an adverse impact on our financial position and results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Because of these and other uncertainties, our actual results for fiscal year 2016 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity, operating results and stock price performance.

Background and Overview

Anchor Bancorp is a bank holding company which primarily engages in the business activity of its subsidiary, Anchor Bank. Anchor Bank is a community-based savings bank primarily serving Western Washington through our 10 full-service banking offices (including one Wal-Mart in-store location) within Grays Harbor, Thurston, Lewis, Pierce, and Mason counties, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been aggressively offering commercial real estate loans and multi-family loans primarily in Western Washington.

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

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

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Critical Accounting Estimates and Related Accounting Policies

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

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

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

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

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

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

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

Real Estate Owned. Real estate acquired through foreclosure is transferred to the real estate owned asset classification at fair value and subsequently carried at the lower of cost or market. Costs associated with real estate owned for maintenance, repair,

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

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

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

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2015 to December 31, 2015:

	Balance at December 31, 2015		Balance at June 30, 2015		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	12,572	$	14,450	$	(1,878	)	(13.0	)%
Mortgage-backed securities, available-for-sale	25,690		29,130		(3,440		)	(11.8	)
Mortgage-backed securities, held-to-maturity	6,739		7,498		(759		)	(10.1	)
Loans receivable, net of allowance for loan losses	311,519		283,444		28,075			9.9
Real estate owned, net	662		797		(135		)	(16.9	)

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

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

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

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

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

	Balance at December 31, 2015		Balance at June 30, 2015		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	48,880	$	44,719	$	4,161		9.3	%
Interest-bearing demand deposits	25,184		22,448		2,736			12.2
Money market accounts	60,732		63,916		(3,184		)	(5.0	)
Savings deposits	44,673		42,399		2,274			5.4
Certificates of deposit	123,261		126,330		(3,069		)	(2.4	)
Total deposit accounts	$	302,730	$	299,812	$	2,918		1.0	%

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

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

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

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

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

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The following table sets forth the changes to our net interest income for the three months ended December 31, 2015 compared to the same period in 2014. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

	Three Months Ended December 31, 2015 Compared to Three Months Ended December 31, 2014
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(163	)	$	135		$	(28	)
Mortgage-backed securities	(1		)	(41		)	(42		)
Investment securities, FHLB stock and cash and cash equivalents	4			2			6
Total net change in income on interest-earning assets	$	(160	)	$	96		$	(64	)
Interest-bearing liabilities:
Savings deposits	$	—		$	1		$	1
Interest-bearing demand deposits	(1		)	1			—
Money market accounts	6			(2		)	4
Certificates of deposit	12			(35		)	(23		)
FHLB advances	(70		)	(29		)	(99		)
Total net change in expense on interest-bearing liabilities	(53		)	(64		)	(117		)
Net change in net interest income	$	(107	)	$	160		$	53

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

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

	Six Months Ended December 31, 2015 Compared to Six Months Ended December 31, 2014
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(244	)	$	181		$	(63	)
Mortgage-backed securities	10			(90		)	(80		)
Investment securities, FHLB stock and cash and cash equivalents	5			1			6
Total net change in income on interest-earning assets	$	(229	)	$	92		(137		)
Interest-bearing liabilities:
Savings deposits	$	—		$	2		$	2
Interest-bearing demand deposits	(2		)	2			—
Money market accounts	10			(5		)	5
Certificates of deposit	32			(85		)	(53		)
FHLB advances	(134		)	(97		)	(231		)
Total net change in expense on interest-bearing liabilities	(94		)	(183		)	(277		)
Net change in net interest income	$	(135	)	$	275		$	140

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

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

	Three Months Ended December 31,
	2015				2014				Increase/(Decrease) in Interest and Dividend Income from 2014
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net (1)	$	290,016	5.55	%	$	280,637	5.78	%	$	(28	)
Mortgage-backed securities	33,861		1.94		42,348		1.95		(42		)
Investment securities	363		4.41		564		4.96		(3		)
FHLB stock	913		1.75		5,969		0.07		3
Cash and cash equivalents	18,452		0.28		10,390		0.27		6
Total interest-earning assets	$	343,605	4.90	%	$	339,908	5.03	%	$	(64	)

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

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

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

	Six Months Ended December 31,
	2015				2014				Increase/(Decrease) in Interest and Dividend Income from 2014
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net (1)	$	288,636	5.57	%	$	282,334	5.74	%	$	(63	)
Mortgage-backed securities	34,807		1.99		44,160		1.93		(80		)
Investment securities	457		4.81		567		5.29		(4		)
FHLB stock	883		1.13		6,000		0.10		2
Cash and cash equivalents	16,594		0.24		10,951		0.22		8
Total interest-earning assets	$	341,377	4.94	%	$	344,012	4.98	%	$	(137	)

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

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

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

	Three Months Ended December 31,
	2015				2014				Increase/(Decrease) in Interest Expense from 2014
	Average Balance		Cost		Average Balance		Cost
	(Dollars in thousands)
Savings deposits	$	43,628	0.16	%	$	40,577	0.16	%	$	1
Interest-bearing demand deposits	28,500		0.03		20,145		0.04		—
Money market deposits	62,751		0.18		69,044		0.14		4
Certificates of deposit	124,381		2.00		131,415		1.97		(23		)
FHLB advances	11,679		1.10		14,937		3.51		(99		)
Total interest-bearing liabilities	$	270,939	1.04	%	$	276,118	1.19	%	$	(117	)

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

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

	Six Months Ended December 31,
	2015				2014				Increase/(Decrease) in Interest Expense from 2014
	Average Balance		Cost		Average Balance		Cost
	(Dollars in thousands)
Savings deposits	$	42,950	0.15	%	$	40,352	0.15	%	$	2
Interest-bearing demand deposits	27,306		0.04		19,806		0.05		—
Money market deposits	63,051		0.17		70,023		0.14		5
Certificates of deposit	124,944		2.00		133,664		1.95		(53		)
FHLB advances	10,840		1.13		16,219		3.60		(231		)
Total interest-bearing liabilities	$	269,091	1.04	%	$	280,064	1.20	%	$	(277	)

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

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

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

	At or For the Three Months Ended December 31,
	2015			2014
	(Dollars in thousands)
Provision for loan losses	$	70		$	—
Net charge-offs	(122		)	(6		)
Allowance for loan losses	3,879			4,000
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.2		%	1.4		%
Nonaccrual and 90 days or more past due and still accruing interest	$	2,709		$	2,802
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	143.2		%	142.8		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.9		%	1.0		%
Total loans	$	316,618		$	281,638

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

	At or For the Six Months Ended December 31,
	2015			2014
	(Dollars in thousands)
Provision for loan losses	$	90		$	—
Net charge-offs	(68		)	624
Allowance for loan losses	3,879			4,000
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.2		%	1.4		%
Nonaccrual and 90 days or more past due and still accruing interest	$	2,709		$	2,802
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	143.2		%	142.8		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.9		%	1.0		%
Total loans	$	316,618		$	281,638

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

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

	Three Months Ended December 31,					Increase (decrease)
	2015		2014			Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	331	$	347		$	(16	)	(4.6	)%
Other deposit fees	180		175			5			2.9
Other loan fees	184		144			40			27.8
Gain (loss) on sale of loans	67		(5		)	72			1,440.0
Bank owned life insurance investment	132		133			(1		)	(0.8	)
Other income	269		231			38			16.5
Total noninterest income	$	1,163	$	1,025		$	138		13.5	%

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

42

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

	Six Months Ended December 31,					Increase (decrease)
	2015		2014			Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	703	$	731		$	(28	)	(3.8	)%
Other deposit fees	358		364			(6		)	(1.6	)
Gain on sale of investments	—		47			(47		)	—
Other loan fees	328		288			40			13.9
Gain (loss) on sale of loans	128		(11		)	139			1,263.6
Bank owned life insurance investment	289		272			17			6.3
Other income	401		317			84			26.5
Total noninterest income	$	2,207	$	2,008		$	199		9.9	%

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

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

	Three Months Ended December 31,						Increase (decrease)
	2015			2014			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	2,815		$	1,945		$	870		44.7	%
General and administrative expenses	994			701			293			41.8
Real estate owned impairment	5			93			(88		)	(94.6	)
Real estate holding costs	11			62			(51		)	(82.3	)
FDIC insurance premiums	64			125			(61		)	(48.8	)
Information technology	415			439			(24		)	(5.5	)
Occupancy and equipment	449			463			(14		)	(3.0	)
Deposit services	122			158			(36		)	(22.8	)
Marketing	130			154			(24		)	(15.6	)
Loss on sale of property, premises and equipment	1			—			1			—
Gain on sale of real estate owned	(4		)	(114		)	110			(96.5	)
Total noninterest expense	$	5,002		$	4,026		$	976		24.2	%

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

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

	Six Months Ended December 31,					Increase (decrease)
	2015		2014			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	4,835	$	3,968		$	867		21.8	%
General and administrative expenses	1,728		1,369			359			26.2
Real estate owned impairment	43		130			(87		)	(66.9	)
Real estate holding costs	22		216			(194		)	(89.8	)
FDIC insurance premiums	133		246			(113		)	(45.9	)
Information technology	857		868			(11		)	(1.3	)
Occupancy and equipment	939		945			(6		)	(0.6	)
Deposit services	235		383			(148		)	(38.6	)
Marketing	255		309			(54		)	(17.5	)
Loss (gain) on sale of property, premises and equipment	4		(2		)	6			(300.0	)
Loss (gain) on sale of real estate owned	4		(108		)	112			(103.7	)
Total noninterest expense	$	9,055	$	8,324		$	731		8.8	%

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

Liquidity, Commitments and Capital Resources

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

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

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At December 31, 2015, the total approved loan origination commitments outstanding were $9.1 million. At the same date, unused lines of credit were $53.2 million.

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

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

44

maturing certificates of deposit and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed securities and investment securities.

Certificates of deposit scheduled to mature in one year or less at December 31, 2015 totaled $42.3 million. We had no brokered deposits at December 31, 2015. Management's policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with us. In addition, we had the ability to borrow an additional $105.8 million from the FHLB of Des Moines. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.0 million which is collateralized with securities and a line of credit for $5.0 million with Pacific Coast Bankers' Bank.

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

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

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the six month period ended December 31, 2015, the Bank paid a $556,000 dividend to the Company. The payment is being used for the Company's general corporate purposes, including supporting the Company's ongoing operations and stock repurchases.

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

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

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

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The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of December 31, 2015:

	Amount of Commitment Expiration Per Period
	Total Amounts Committed (2)		Due in One Year
	(In thousands)
Commitments to originate loans (1)	$	9,118	$	9,118
Lines of credit
Fixed rate (3)	1,479		128
Adjustable rate	51,678		16,636
Undisbursed balance of lines of credit	$	53,157	$	16,764

⁽¹⁾  Interest rates on fixed rate loans are 1.99% to 9.99%. 

⁽²⁾  At December 31, 2015 there were no reserves for unfunded commitments. 

⁽³⁾  Includes standby letters of credit. 

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

Year Ended June 30,
	Amount
	(In thousands)
2016	$55
2017	$117
2018	$124
2019	$84
2020	$36

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

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

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

Anchor Bank									Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
					Minimum Capital Requirement
	Actual
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2015
Total capital (to risk-weighted assets)	$	58,100	17.2	%	$	27,068	8.0	%	$	33,836	10.0	%
Tier I capital (to risk-weighted assets)	$	54,221	16.0	%	$	20,301	6.0	%	$	27,068	8.0	%
Common equity tier 1 capital (to risk-weighted assets)	$	54,221	16.0	%	$	15,226	4.5	%	$	21,993	6.5	%
Tier I leverage capital (to average assets)	$	54,221	14.3	%	$	15,144	4.0	%	$	18,930	5.0	%

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

Anchor Bancorp	Actual
	Amount		Ratio
	(Dollars in thousands)
December 31, 2015
Total capital (to risk-weighted assets)	$	63,830	18.8	%
Tier I capital (to risk-weighted assets)	$	59,951	17.7	%
Common equity tier 1 capital (to risk-weighted assets)	$	59,951	17.7	%
Tier I leverage capital (to average assets)	$	59,951	15.8	%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

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

• economic conditions;

• interest rate outlook;

• asset/liability mix;

• interest rate risk sensitivity;

• change in net interest income;

• current market opportunities to promote specific products;

• historical financial results;

• projected financial results; and

• capital position.

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

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

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

• increased our originations of shorter term loans and particularly, home equity loans (limited recent originations) and commercial business loans;

• structured certain borrowings with maturities that match fund our loan portfolios; and

• sold our fixed rate single family loans to generate noninterest income as well as managing interest rate risk.

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

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

48

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

	Net Portfolio Value							Net Portfolio as % of Portfolio Value of Assets
Basis Point Change in Rates												Market Value of Assets (4)
	Amount		$ Change (1)			% Change		NPV Ratio (2)		% Change (3)
	(Dollars in thousands)
300	$	60,256	$	(627	)	(1.03	)%	16.50	%	0.79	%	$	365,211
200	61,115		232			0.38		16.39		0.68		372,943
100	61,367		484			0.79		16.13		0.42		380,393
Base	60,883		—			—		15.71		—		387,450
(100)	64,520		3,637			5.97		16.34		0.63		394,784

___________

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

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

Basis Point Change in Rates	Net Interest Income
	Amount		$ Change (1)			% Change
	(Dollars in thousands)
300	$	16,640	$	1,319		8.6	%
200	16,231		910			5.9
100	15,777		456			3.0
Base	15,321		—			—
(100)	14,501		(820		)	(5.4	)

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

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

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

49

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer, and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2015, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company inthe reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company also continued to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

(a) Not applicable

(b) Not applicable

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

	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Repurchased
Period
October 1 - October 31, 2015	10,000	$	22.00	10,000	77,500
November 1 - November 30, 2015	—	—		—	77,500
December 1 - December 31, 2015	—	—		—	77,500
	10,000	$	22.00	10,000

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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

51

Item 6. Exhibits

3.1	Articles of Incorporation of the Registrant (1)
3.2	Amended and Restated Bylaws of the Registrant (2)
10.1	Form of Anchor Bank Employee Severance Compensation Plan (1)
10.2	Anchor Mutual Savings Bank Phantom Stock Plan (1)
10.3	Form of 401(k) Retirement Plan (1)
10.4	Form of Employment Agreement between Anchor Bank and Jerald L. Shaw and Terri L. Degner (3)
10.5	Form of Severance Agreement and Release (4)
10.6	Agreement in Connection with Anchor Annual Meeting between Anchor Bancorp and Joel S. Lawson IV dated October 21, 2015 (5)
10.7	Standstill Agreement and Non-Disclosure Agreement by and among Anchor Bancorp, Joel S. Lawson IV and Varonica S. Ragan dated December 8, 2015 (6)
10.8	Form of restricted stock award agreement (7)
10.9	Forms of incentive and non-qualified stock option award agreements (7)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements

(1) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-154734)

(2) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 10, 2015.

(3) Filed as an exhibit to the Company's Current Report on Form 8-K filed May 22, 2014.

(4) Filed as an exhibit to the Company's Current Report on Form 8-K filed January 22, 2015.

(5) Filed as an exhibit to the Company's Current Report on Form 8-K filed October 23, 2015.

(6) Filed as an exhibit to the Company's Current Report on Form 8-K dated December 10, 2015.

(7) Filed as an exhibit to the Company's Registration Statement on Form S-8 dated December 8, 2015.

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SIGNATURES

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

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

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EXHIBIT INDEX

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

54