Anchor Bancorp 10-Q 2017 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, 2016

 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 6, 2017, there were 2,504,740 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	49
Item 4 - Controls and Procedures	51
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings	51
Item 1A - Risk Factors	51
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3 – Defaults Upon Senior Securities	52
Item 4 – Mine Safety Disclosures	52
Item 5 - Other Information	52
Item 6 - Exhibits	53
SIGNATURES	54

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, 2016			June 30, 2016
ASSETS
Cash and cash equivalents	$	14,816		$	8,320
Securities available-for-sale, at fair value, amortized cost of $22,173 and $23,550	21,863			23,665
Securities held-to-maturity, at amortized cost, fair value of $5,599 and $6,425	5,597			6,291
Loans held for sale	1,991			1,864
Loans receivable, net of allowance for loan losses of $3,861 and $3,779	354,127			347,351
Bank owned life insurance investment, net of surrender charges	19,777			19,515
Accrued interest receivable	1,240			1,182
Real estate owned, net ("REO")	103			373
Federal Home Loan Bank  ("FHLB") stock, at cost	2,179			2,959
Property, premises, and equipment, at cost, less accumulated depreciation of $11,663 and $11,382	9,705			10,001
Deferred tax asset, net	8,634			8,870
Prepaid expenses and other assets	879			1,113
Total assets	$	440,911		$	431,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	50,546		$	50,781
Interest-bearing	277,050			250,113
Total deposits	327,596			300,894
FHLB advances	42,500			62,000
Advance payments by borrowers for taxes and insurance	1,229			1,114
Supplemental Executive Retirement Plan liability	1,697			1,691
Accounts payable and other liabilities	3,807			2,609
Total liabilities	376,829			368,308
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; 2,504,740 issued and outstanding at December 31, 2016 and 2,515,803 issued and outstanding at June 30, 2016, respectively	25			25
Additional paid-in capital	22,298			22,157
Retained earnings	43,228			42,235
Unearned Employee Stock Ownership Plan ("ESOP") shares	(640		)	(672		)
Accumulated other comprehensive loss, net of tax	(829		)	(549		)
Total stockholders’ equity	64,082			63,196
Total liabilities and stockholders’ equity	$	440,911		$	431,504

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

1

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Dollars in thousands, except share data) (Unaudited)	Three Months Ended December 31,						Six Months Ended December 31,
	2016			2015			2016			2015
Interest income:
Loans receivable, including fees	$	4,742		$	4,024		$	9,394		$	8,042
Securities	30			21			53			37
Mortgage-backed securities	140			164			307			345
Total interest income	4,912			4,209			9,754			8,424
Interest expense:
Deposits	659			671			1,279			1,341
FHLB advances	135			32			285			62
Total interest expense	794			703			1,564			1,403
Net interest income before provision for loan losses	4,118			3,506			8,190			7,021
Provision for loan losses	75			70			150			90
Net interest income after provision for loan losses	4,043			3,436			8,040			6,931
Noninterest income:
Deposit service fees	348			331			696			703
Other deposit fees	179			180			373			358
Other loan fees	207			184			442			328
(Loss) gain on sale of loans	(1		)	67			100			128
Bank owned life insurance investment	130			132			262			289
Other income	123			269			270			401
Total noninterest income	986			1,163			2,143			2,207
Noninterest expense:
Compensation and benefits	2,296			2,815			4,606			4,835
General and administrative expenses	833			994			1,569			1,728
Real estate owned holding costs	19			16			37			65
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	24			64			92			133
Information technology	540			415			1,025			857
Occupancy and equipment	441			449			948			939
Deposit services	128			122			240			235
Marketing	167			130			267			255
Loss on sale of property, premises and equipment	—			1			—			4
(Gain) loss on sale of real estate owned	(27		)	(4		)	(40		)	4
Total noninterest expense	4,421			5,002			8,744			9,055
Income before provision for income taxes	608			(403		)	1,439			83
Provision for income taxes	188			(117		)	446			24
Net income (loss)	$	420		$	(286	)	$	993		$	59
Basic earnings (loss) per share	$	0.17		$	(0.12	)	$	0.41		$	0.02
Diluted earnings (loss) per share	$	0.17		$	(0.12	)	$	0.41		$	0.02
Weighted average number of basic shares outstanding	2,404,292			2,436,650			2,396,421			2,454,097
Weighted average number of diluted shares outstanding	2,424,976			2,436,650			2,417,617			2,455,176

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,
	2016			2015			2016			2015
NET INCOME (LOSS)	$	420		$	(286	)	$	993		$	59
OTHER COMPREHENSIVE LOSS, net of income tax
Unrealized holding losses on available-for-sale securities during the period, net of income tax benefit of $152, $66, $145, and $34 respectively	(295		)	(194		)	(280		)	(102		)
Other comprehensive loss, net of income tax	(295		)	(194		)	(280		)	(102		)
COMPREHENSIVE INCOME (LOSS)	$	125		$	(480	)	$	713		$	(43	)

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,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	993		$	59
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	353			314
Net amortization of premiums on securities	159			227
Provision for loan losses	150			90
ESOP expense	87			80
Real estate owned impairment	—			43
Deferred federal income taxes	395			24
Stock compensation expense	371			800
Increase in cash surrender value of life insurance investment	(262		)	(264		)
Gain on sale of loans	(100		)	(128		)
Originations of loans held for sale	(10,236		)	(7,009		)
Proceeds from sale of loans held for sale	8,102			7,642
Loss on sale of property, premises, and equipment	—			4
(Gain) loss on sale of real estate owned	(40		)	4
Change in operating assets and liabilities:
Accrued interest receivable	(58		)	59
Prepaid expenses and other assets	234			1,553
Change in deferred tax asset reserve	—			(100		)
Supplemental Executive Retirement Plan ("SERP")	6			(56		)
Accounts payable and other liabilities	1,198			156
Net cash provided by operating activities	1,352			3,498
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale securities	852			250
Principal repayments on mortgage-backed available-for-sale securities	2,487			3,150
Principal repayments on mortgage-backed held-to-maturity securities	666			846
Loan originations, net of undisbursed loan proceeds and principal repayments	(7,094		)	(28,557		)
Proceeds from sale of real estate owned	478			480
Purchase of property, premises, and equipment, net	(57		)	(63		)
Redemption of FHLB stock	780			(700		)
Net cash provided by investing activities	(1,888		)	(24,594		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	26,702			2,918
Net change in advance payments by borrowers for taxes and insurance	115			111
Proceeds from FHLB advances	34,200			22,500
Repayment of FHLB advances	(53,700		)	(5,000		)
Repurchase and retirement of common stock	—			(1,095		)
Net share settlement of stock awards	(285		)	(216		)
Net cash used in financing activities	$	7,032		$	19,218

4

ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except share data) (Unaudited)	Six Months Ended December 31,
	2016			2015
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	6,496		$	(1,878	)
Beginning of period	8,320			14,450
End of period	$	14,816		$	12,572
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	1,572		$	1,403
Income taxes	$	65		$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Noncash investing activities:
Net loans transferred to real estate owned	$	168		$	392
Unrealized holding loss on available-for-sale securities, net of tax	$	(280	)	$	(102	)
Loans securitized into mortgage-backed securities	$	2,107		$	—

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, and one loan production office located in King County, Washington.  Anchor Bank’s business consists of attracting deposits from the public and utilizing those deposits to originate loans.

Note 2 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2016 (“2016 Form 10-K”). The results of operations for the three and six months ended December 31, 2016 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2017. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported consolidated net income or equity. The Company has evaluated events and transactions subsequent to December 31, 2016 for potential recognition or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board ("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.

In February 2016, the FASB issued ASU No. 2016-02, Leases(Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance

6

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of ASU No. 2016-02 to determine any material impact the new standard will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this ASU require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU No. 2016-08 to determine any material impact there may be on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The ASU is effective for annual and interim periods beginning after December 15, 2016. The adoption of ASU 2016-09 is being reviewed for any material impact there may be on the Company's consolidated financial statements.

In May 2016, FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations. The amendments in this ASU provide more detailed guidance on the revenue recognition standard including additional implementation guidance and examples of identifying performance obligations and licenses of intellectual property. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that year. The Company is currently evaluating the provisions of ASU No. 2016-10 to determine any material impact there may be on the Company's consolidated financial statements.

In May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this ASU clarified several key areas of the revenue recognition standard including accessing collectability, presenting sales taxes and other similar taxes collected from customers, noncash consideration, contract modification at transitions, completed contracts at transition, and disclosing the accounting change in the period of adoption.The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that year. The Company is currently evaluating the provisions of ASU No. 2016-12 to determine any material impact there may be on the Company's consolidated financial statements.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2016-13 is being reviewed for any material impact there may be on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of ASU No. 2016-15 is being reviewed for any material impact there may be on the Company's consolidated financial statements.

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

7

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In January 2017, the FASB issued ASU No. 2017-03 which amended Accounting Changes and Error Corrections (Topic 250) to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment.

Note 4 - Earnings Per Share ("EPS")

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

	For the Three Months Ended December 31,					For the Six Months Ended December 31,
	2016		2015			2016		2015
	(Dollars in thousands, except share data)
Net income (loss)	$	420	$	(286	)	$	993	$	59
Earnings allocated to common shareholders	$	420	$	(286	)	$	993	$	59
Basic weighted-average common shares outstanding	2,404,292		2,436,650			2,396,421		2,454,097
Potentially dilutive incremental shares	20,684		—			21,196		1,079
Diluted weighted-average common shares outstanding	2,424,976		2,436,650			2,417,617		2,455,176
Basic earnings (loss) per share	$	0.17	$	(0.12	)	$	0.41	$	0.02
Diluted earnings (loss) per share	$	0.17	$	(0.12	)	$	0.41	$	0.02

Shares owned by the Company's ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted EPS. As of December 31, 2016 and June 30, 2016 there were 58,812 and 62,252 shares, respectively, which had not been allocated under the Company's ESOP.

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three and six months ended December 31, 2016, there were no incremental shares that were not included in the computation of diluted earnings per share because those shares under the treasury stock method of calculation would have 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, 2016 and June 30, 2016, were as follows:

December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	170	$	—	$	—		$	170
Mortgage-backed securities:
FHLMC (1)	10,575		71		(171		)	10,475
FNMA (2)	10,802		2		(199		)	10,605
GNMA (3)	626		—		(13		)	613
	$	22,173	$	73	$	(383	)	$	21,863
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	2,468	$	60	$	(74	)	$	2,454
FNMA	1,344		81		(27		)	1,398
GNMA	1,785		—		(38		)	1,747
	$	5,597	$	141	$	(139	)	$	5,599

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

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

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

June 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	175	$	—	$	—		$	175
Mortgage-backed securities:
FHLMC	9,442		161		(44		)	9,559
FNMA	13,199		67		(62		)	13,204
GNMA	734		—		(7		)	727
	$	23,550	$	228	$	(113	)	$	23,665
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	2,793		72		(20		)	2,845
FNMA	1,513		103		(3		)	1,613
GNMA	1,985		5		(23		)	1,967
	$	6,291	$	180	$	(46	)	$	6,425

There were 43 and 24 securities in an unrealized loss position at December 31, 2016 and June 30, 2016, respectively. The unrealized losses on investments in mortgage-backed securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities prior to their maturity. We do expect to recover the entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of the dates indicated, were as follows:

9

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2016	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	3,949	$	(38	)	$	3,479	$	(133	)	$	7,428	$	(171	)
FNMA	3,800		(32		)	5,107		(167		)	8,907		(199		)
GNMA	—		—			613		(13		)	613		(13		)
	$	7,749	$	(70	)	$	9,199	$	(313	)	$	16,948	$	(383	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2016	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—		$	1,709	$	(74	)	$	1,709	$	(74	)
FNMA	—		—			584		(27		)	584		(27		)
GNMA	959		(3		)	788		(35		)	1,747		(38		)
	$	959	$	(3	)	$	3,081	$	(136	)	$	4,040	$	(139	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	710	$	(5	)	$	4,031	$	(39	)	$	4,741	$	(44	)
FNMA	855		(1		)	5,900		(61		)	6,755		(62		)
GNMA	—		—			727		(7		)	727		(7		)
	$	1,565	$	(6	)	$	10,658	$	(107	)	$	12,223	$	(113	)

	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—	$	1,973	$	(20	)	$	1,973	$	(20	)
FNMA	—		—		684		(3		)	684		(3		)
GNMA	—		—		989		(23		)	989		(23		)
	$	—	$	—	$	3,646	$	(46	)	$	3,646	$	(46	)

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual maturities of securities at December 31, 2016 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, 2016	Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds:
Due after ten years	$	170	$	170
Mortgage-backed securities:
FHLMC	10,575		10,475
FNMA	10,802		10,605
GNMA	626		613
	$	22,173	$	21,863

Securities held-to-maturity
Mortgage-backed securities:
FHLMC	2,468		2,454
FNMA	1,344		1,398
GNMA	1,785		1,747
	$	5,597	$	5,599

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2016		2015		2016		2015
	(In thousands)
Proceeds from sales	$	—	$	—	$	—	$	—
Proceeds from maturities and calls	—		250		852		250
Gross realized gains	—		—		—		—
Gross realized losses	—		—		—		—

Pledged securities at the dates indicated are summarized as follows:

	December 31, 2016				June 30, 2016
Pledged to secure:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Public deposits	$	5,142	$	5,118	$	12,575	$	12,719
FHLB borrowings	1,131		1,168		1,302		1,358
Federal Reserve borrowing line	962		959		973		978

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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, 2016		June 30, 2016
	(In thousands)
Real estate:
One-to-four family	$	60,191	$	61,230
Multi-family	52,099		53,742
Commercial	139,529		149,527
Construction	44,057		21,793
Land	7,367		6,839
Total real estate	303,243		293,131
Consumer:
Home equity	15,949		16,599
Credit cards	2,731		2,969
Automobile	650		597
Other consumer	1,791		1,933
Total consumer	21,121		22,098
Business:
Commercial business	34,850		36,848
Total loans	359,214		352,077
Less:
Deferred loan fees and loan premiums, net	1,226		947
Allowance for loan losses	3,861		3,779
Loans receivable, net	$	354,127	$	347,351

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, 2016:

	One-to- four family			Multi- family			Commercial real estate			Construction		Land			Consumer (1)			Commercial business			Unallocated		Three months ended 12/31/16
	(In thousands)
Allowance for loan losses:
Beginning balance	$	717		$	463		$	1,309		$	381	$	110		$	513		$	331		$	—	$	3,824
Provision (benefit) for loan losses	(25		)	(33		)	69			64		(7		)	45			(38		)	—		75
Charge-offs	—			—			(110		)	—		—			(65		)	—			—		(175		)
Recoveries	76			—			—			35		—			24			2			—		137
Ending balance	$	768		$	430		$	1,268		$	480	$	103		$	517		$	295		$	—	$	3,861

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

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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, 2016:

	One-to- four family			Multi- family			Commercial real estate			Construction		Land		Consumer (1)			Commercial business			Unallocated		Six months ended 12/31/16
	(In thousands)
Allowance for loan losses:
Beginning balance	$	798		$	454		$	1,333		$	271	$	75	$	516		$	332		$	—	$	3,779
Provision (benefit) for loan losses	(116		)	(24		)	45			172		28		88			(43		)	—		150
Charge-offs	—			—			(110		)	—		—		(120		)	—			—		(230		)
Recoveries	86			—			—			37		—		33			6			—		162
Ending balance	$	768		$	430		$	1,268		$	480	$	103	$	517		$	295		$	—	$	3,861

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

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.

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.

13

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	1,908	$	2,106	$	—
Commercial real estate	202		547		—
Land	170		184		—
Home equity	66		68		—
Commercial business	64		126		—
With an allowance recorded
One-to-four family	$	5,273	$	5,309	$	397
Land	316		316		27
Home equity	405		406		163
Commercial business	111		133		7
Total
One-to-four family	$	7,181	$	7,415	$	397
Commercial real estate	202		547		—
Land	486		500		27
Home equity	471		474		163
Commercial business	175		259		7
Total	$	8,515	$	9,195	$	594

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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, 2016:

	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	2,049	$	2,269	$	—
Commercial real estate	319		547		—
Land	174		188		—
Home equity	60		62		—
Commercial business	64		125		—
With an allowance recorded
One-to-four family	$	7,234	$	7,284	$	419
Land	316		316		4
Home equity	367		367		145
Commercial business	124		138		22
Total
One-to-four family	$	9,283	$	9,553	$	419
Commercial real estate	319		547		—
Land	490		504		4
Home equity	427		429		145
Commercial business	188		263		22
Total	$	10,707	$	11,296	$	590

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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, 2016:

	Three Months Ended December 31, 2016				Six Months Ended December 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	3,090	$	10	$	2,078	$	30
Commercial real estate	431		—		433		—
Land	179		2		179		5
Home equity	74		—		64		1
Commercial business	108		1		95		3
With an allowance recorded
One-to-four family	$	4,977	$	30	$	6,272	$	91
Land	318		7		316		10
Home equity	385		3		387		9
Commercial business	115		—		129		1
Total
One-to-four family	$	8,067	$	40	$	8,350	$	121
Commercial real estate	431		—		433		—
Land	497		9		495		15
Home equity	459		3		451		10
Commercial business	223		1		224		4
Total	$	9,677	$	53	$	9,953	$	150

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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

17

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016:

	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	$	768	$	430	$	1,268	$	480	$	103	$	517	$	295	$	—	$	3,861
Ending balance: individually evaluated for impairment	397		—		—		—		27		163		7		—		594
Ending balance: collectively evaluated for impairment	$	371	$	430	$	1,268	$	480	$	76	$	354	$	288	$	—	$	3,267
Loans receivable:
Ending balance	$	60,191	$	52,099	$	139,529	$	44,057	$	7,367	$	21,121	$	34,850	$	—	$	359,214
Ending balance: individually evaluated for impairment	7,181		—		202		—		486		471		175		—		8,515
Ending balance: collectively evaluated for impairment	$	53,010	$	52,099	$	139,327	$	44,057	$	6,881	$	20,650	$	34,675	$	—	$	350,699

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

18

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016:

	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	$	798	$	454	$	1,333	$	271	$	75	$	516	$	332	$	—	$	3,779
Ending balance: individually evaluated for impairment	419		—		—		—		4		145		22		—		590
Ending balance: collectively evaluated for impairment	$	379	$	454	$	1,333	$	271	$	71	$	371	$	310	$	—	$	3,189
Loans receivable:
Ending balance	$	61,230	$	53,742	$	149,527	$	21,793	$	6,839	$	22,098	$	36,848	$	—	$	352,077
Ending balance: individually evaluated for impairment	9,283		—		319		—		490		427		188		—		10,707
Ending balance: collectively evaluated for impairment	$	51,947	$	53,742	$	149,208	$	21,793	$	6,349	$	21,671	$	36,660	$	—	$	341,370

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

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

The following table presents the recorded investment in nonaccrual loans by type of loans as of the dates indicated:

	December 31, 2016		June 30, 2016
	(In thousands)
One-to-four family	$	2,421	$	1,539
Commercial	201		319
Home equity	68		16
Other consumer	—		1
Commercial business	85		97
Total	$	2,775	$	1,972

There were no loans past due 90 days or more and still accruing interest at December 31, 2016 and June 30, 2016.

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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 of loan, as of December 31, 2016:

	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	$	451	$	259	$	2,421	$	3,131	$	57,060	$	60,191
Multi-family	—		—		—		—		52,099		52,099
Commercial real estate	—		—		201		201		139,328		139,529
Construction	—		—		—		—		44,057		44,057
Land	—		—		—		—		7,367		7,367
Home equity	146		6		68		220		15,729		15,949
Credit cards	61		7		—		68		2,663		2,731
Automobile	—		—		—		—		650		650
Other consumer	12		—		—		12		1,779		1,791
Commercial business	—		—		85		85		34,765		34,850
Total	$	670	$	272	$	2,775	$	3,717	$	355,497	$	359,214

⁽¹⁾ Includes loans on nonaccrual status.

The following table presents past due loans, net of partial loan charge-offs, by class of loan as of June 30, 2016:

	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	$	566	$	623	$	1,539	$	2,728	$	58,502	$	61,230
Multi-family	—		—		—		—		53,742		53,742
Commercial real estate	—		—		319		319		149,208		149,527
Construction	—		—		—		—		21,793		21,793
Land	—		—		—		—		6,839		6,839
Home equity	14		8		16		38		16,561		16,599
Credit cards	77		—		—		77		2,892		2,969
Automobile	1		—		—		1		596		597
Other consumer	12		—		1		13		1,920		1,933
Commercial business	—		—		97		97		36,751		36,848
Total	$	670	$	631	$	1,972	$	3,273	$	348,804	$	352,077

⁽¹⁾ Includes loans on nonaccrual status.

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

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

20

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credits classified as Watch are risk rated 6 and possess weaknesses that deserve management's close attention. These assets do not expose the Bank to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. We use this rating when a material documentation deficiency exists but correction is anticipated within an acceptable time frame.

A loan classified as Watch may have the following characteristics:

• Acceptable asset quality, but requiring increased monitoring. Strained liquidity and less than anticipated performance. The loan may be fully leveraged.

• Apparent management weakness, perhaps demonstrated by an irregular flow of adequate and/or timely performance information required to support the credit.

• The borrower has a plausible plan to correct problem(s) in the near future that is devoid of material uncertainties.

• Lacks reserve capacity, so the risk rating will improve or decline in relatively short time (results of corrective actions should be apparent within six months or less).

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

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

• Performance is poor or significantly less than expected. A debt service deficiency either exists or cannot be ruled out.

• Generally an undesirable business credit. Assets in this category are protected, but are potentially weak. These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of Substandard. Special Mention assets have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.

• Assets which might be detailed in this category include credits that the lending officer may be unable to supervise properly because of lack of expertise, an inadequate loan agreement, the condition of and control over collateral, failure to obtain proper documentation, or any other deviations from prudent lending practices.

• An adverse trend in the borrower's operations or an imbalanced position in the balance sheet which does not jeopardize liquidation may best be handled by this classification.

• A Special Mention classification should not be used as a compromise between a pass and substandard rating. Assets in which actual, not potential, weaknesses are evident and significant, and should be considered for more serious criticism.

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

A loan classified as Substandard may have the following characteristics:

• Unacceptable business credit. The asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.

• Though no loss is envisioned, the outlook is sufficiently uncertain to preclude ruling out the possibility. Some liquidation of assets will likely be necessary as a corrective measure.

• Assets in this category may demonstrate performance problems such as debt servicing deficiencies with no immediate relief, including having a DSCR of less than 1.00. Borrowers have an inability to adjust to prolonged and unfavorable industry or economic trends. Management's character and/or effectiveness have become suspect.

A loan classified as Doubtful is risk rated 9 and has all the inherent weaknesses as those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable is improbable.

A loan classified as Doubtful is risk rated 9 and has the following characteristics:

• The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

A loan classified as a Loss has the following characteristics:

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

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

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

The following table presents the internally assigned grade as of December 31, 2016, 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	$	55,184	$	51,369	$	135,825	$	44,057	$	6,881	$	15,439	$	2,663	$	650	$	1,775	$	33,248	$	347,091
Watch	1,621		730		3,503		—		316		256		68		—		16		1,491		8,001
Special Mention	811		—		—		—		170		—		—		—		—		26		1,007
Substandard	2,575		—		201		—		—		254		—		—		—		85		3,115
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	60,191	$	52,099	$	139,529	$	44,057	$	7,367	$	15,949	$	2,731	$	650	$	1,791	$	34,850	$	359,214

The following table presents the internally assigned grade as of June 30, 2016, 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	$	52,438	$	53,002	$	146,587	$	21,793	$	6,349	$	15,377	$	2,892	$	542	$	1,839	$	35,149	$	335,968
Watch	4,875		740		1,978		—		316		836		77		55		94		1,005		9,976
Special Mention	1,789		—		644		—		174		220		—		—		—		533		3,360
Substandard	2,128		—		318		—		—		166		—		—		—		161		2,773
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	61,230	$	53,742	$	149,527	$	21,793	$	6,839	$	16,599	$	2,969	$	597	$	1,933	$	36,848	$	352,077

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, 2016, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

22

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of December 31, 2016:

	December 31, 2016
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	4,350	$	744	$	5,094
Land	486		—		486
Home equity	254		—		254
Commercial business	89		—		89
Total	$	5,179	$	744	$	5,923

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of June 30, 2016:

	June 30, 2016
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	7,503	$	411	$	7,914
Land	490		—		490
Home equity	261		—		261
Commercial business	90		—		90
Total	$	8,344	$	411	$	8,755

There were no TDR loans, or renewals or modifications of existing TDR loans during the three and six months ended December 31, 2016.

The following table presents TDR loans, or renewals or modifications of existing TDR loans during the three and six months ended December 31, 2015:

	Three Months Ended December 31, 2015			Six Months Ended December 31, 2015
	No. of Contracts	Pre-TDR Recorded Investment	Post-TDR Recorded Investment	No. 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

For both the three and six months ended December 31, 2016 and 2015, there were no TDRs for which there was a payment default within 12 months of their restructure.

23

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 - Real Estate Owned, net

The following table is a summary of REO activity for the three and six months ended December 31, 2016 and 2015:

	Three Months Ended December 31,						Six Months Ended December 31,
	2016			2015			2016			2015
	(In thousands)
Balance at the beginning of the period	$	271		$	302		$	373		$	797
Net loans transferred to real estate owned	—			392			168			392
Sales	(195		)	(31		)	(478		)	(480		)
Gain (loss) on sale of REO	27			4			40			(4		)
Impairments	—			(5		)	—			(43		)
Balance at the end of the period	$	103		$	662		$	103		$	662

Note 8 - Employee Benefit Plans

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

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

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

Compensation expense related to the ESOP for the three months ended December 31, 2016 and 2015 was $44,000 and $42,000, respectively. For the six months ended December 31, 2016 and 2015 compensation expense related to the ESOP was $87,000 and $80,000, respectively.

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

	December 31, 2016		June 30, 2016
	(Dollars in thousands)
Allocated shares	43,188		39,748
Unallocated shares	58,812		62,252
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,600	$	1,471

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:

24

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	170	$	—	$	170
Mortgage-backed securities:
FHLMC	—		10,475		—		10,475
FNMA	—		10,605		—		10,605
GNMA	—		613		—		613

	June 30, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	175	$	—	$	175
Mortgage-backed securities:
FHLMC	—		9,559		—		9,559
FNMA	—		13,204		—		13,204
GNMA	—		727		—		727

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.

25

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balances of assets measured at fair value on a nonrecurring basis at December 31, 2016:

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	6,067	$	6,067
Commercial	—		—		201		201
Land	—		—		316		316
Home equity	—		—		405		405
Commercial business	—		—		111		111
Total impaired loans	—		—		7,100		7,100
Real estate owned:	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	7,100	$	7,100

The following table presents the balances of assets measured at fair value on a nonrecurring basis at June 30, 2016:

	June 30, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	8,046	$	8,046
Commercial	—		—		318		318
Land	—		—		316		316
Home equity	—		—		367		367
Commercial business	—		—		124		124
Total impaired loans	—		—		9,171		9,171
Real estate owned:
One-to-four family	$	—	$	—	$	113	$	113
Land	—		—		19		19
Total real estate owned	—		—		132		132
Total	$	—	$	—	$	9,303	$	9,303

26

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2016 and June 30, 2016:

	December 31, 2016
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	7,100	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (7%)
Real estate owned	$	—	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (0%)

	June 30, 2016
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	9,171	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (5%)
Real estate owned	$	132	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (12%)

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, 2016 and June 30, 2016: 

	December 31, 2016
	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	$	14,816	$	14,816	$	14,816	$	—	$	—
Securities available-for-sale	21,863		21,863		—		21,863		—
Securities held-to-maturity	5,597		5,599		—		5,599		—
FHLB stock	2,179		2,179		—		2,179		—
Loans held for sale	1,991		1,991		1,991				—
Loans receivable	357,988		354,241		—		—		354,241
Accrued interest receivable	1,240		1,240		—		1,240		—
Financial Instruments-Liabilities
Demand deposits, savings and money market	$	213,910	$	213,910	$	213,910	$	—	$	—
Certificates of deposit	113,686		113,257		—		113,257		—
FHLB advances	42,500		42,047		—		42,047		—
Advance payments by borrowers for taxes and insurance	1,229		1,229		1,229		—		—

28

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	June 30, 2016
	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	$	8,320	$	8,320	$	8,320	$	—	$	—
Securities available-for-sale	23,665		23,665		—		23,665		—
Securities held-to-maturity	6,291		6,425		—		6,425		—
FHLB stock	2,959		2,959		—		2,959		—
Loans held for sale	1,864		1,864		1,864		—		—
Loans receivable	351,130		349,244		—		—		349,244
Accrued interest receivable	1,182		1,182		—		1,182		—
Financial Instruments-Liabilities
Demand deposits, savings and money market	$	182,456	$	182,456	$	182,456	$	—	$	—
Certificates of deposit	118,438		118,059		—		118,059		—
FHLB advances	62,000		62,124		—		62,124		—
Advance payments by borrowers for taxes and insurance	1,114		1,114		1,114		—		—

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

Cash and cash equivalents, accrued interest receivable and advance payments by borrowers for taxes and insurance -The carrying amount is a reasonable estimate of fair value.

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

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

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

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

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

FHLB advances - The fair value of the Bank's FHLB advances was calculated using the discounted cash flow method. The discount rate was equal to the current rate offered by the FHLB for advances of similar remaining maturities.

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

29

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

As of December 31, 2016, awards for restricted stock totaling 87,572 were outstanding and no stock options were granted. Awarded shares of restricted stock typically vest over various periods as long as the director, advisory director, directors emeriti, officer or employee remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For the three and six months ended December 31, 2016 total compensation expense for the Plan was $147,000 and $371,000, respectively, and the related income tax benefit was $50,000 and $126,000, respectively.

The following tables provide a summary of changes in non-vested restricted stock awards for the three and six months ended December 31, 2016:

	For the Three Months Ended December 31, 2016
			Weighted-Average Grant Date Fair Value
	Shares
Non-vested at October 1, 2016	49,510		$	25.66
Granted	—		—
Vested	(10,607	)	25.35
Forfeited and canceled	(479	)	26.00
Non-vested at December 31, 2016	38,424		25.75

	For the Six Months Ended December 31, 2016
			Weighted-Average Grant Date Fair Value
	Shares
Non-vested at July 1, 2016	70,844		$	25.69
Granted	—		—
Vested	(21,357	)	25.62
Forfeited and canceled	(11,063	)	24.98
Non-vested at December 31, 2016	38,424		25.75

As of December 31, 2016, there was $419,000 of total unrecognized compensation costs related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 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

30

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

As of December 31, 2016, the Condensed Consolidated Statement of Financial Condition included a net deferred tax asset of $8.6 million. The Company's primary deferred tax assets relate to the allowance for loan losses. The Company has prepared federal tax returns through June 30, 2016. At June 30, 2016 the net operating loss carryforward was $12.7 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, 2016, 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 2016 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 2017 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, and one loan production office located in King County, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Recently, we have been aggressively offering commercial real estate, multi-family, and construction loans primarily in Western Washington.

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

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

Critical Accounting Estimates and Related Accounting Policies

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

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Board of Directors and management assess the allowance for loan losses on a quarterly basis. The Executive Loan Committee analyzes several different factors including delinquency rates, charge-off rates and the changing

33

risk profile of our loan portfolio, as well as local economic conditions such as unemployment rates, the bankruptcies and vacancy rates of business and residential properties.

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

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried no valuation allowance at December 31, 2016. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from REO, deferred loan fees and costs, and loan loss reserves.

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

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

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

General.Total assets increased by $9.4 million, or 2.2%, to $440.9 million at December 31, 2016 from $431.5 million at June 30, 2016. The increase in assets during this period was primarily a result of a $6.5 million, or 78.1% increase in cash and cash equivalents to $14.8 million at December 31, 2016 from $8.3 million at June 30, 2016 due to an increase in deposits. In addition, loans receivable, net, increased $6.8 million, or 2.0%, to $354.1 million at December 31, 2016 from $347.4 million at June 30, 2016. Partially offsetting these increases was a $1.8 million, or 7.6%, decline in securities available-for-sale comprised almost entirely of mortgage-backed securities. Total liabilities increased $8.5 million, or 2.3%, to $376.8 million at December 31, 2016 compared to $368.3 million at June 30, 2016. Total deposits increased $26.7 million, or 8.9%, to $327.6 million at December 31, 2016 compared to $300.9 million at June 30, 2016 primarily as a result of a $27.0 million, or 10.8%

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increase in interest bearing deposits to $277.1 million at December 31, 2016 from $250.1 million at June 30, 2016. In addition, FHLB advances decreased $19.5 million, or 31.4%, to $42.5 million at December 31, 2016 from $62.0 million at June 30, 2016.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2016 to December 31, 2016:

	Balance at December 31, 2016		Balance at June 30, 2016		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	14,816	$	8,320	$	6,496		78.1	%
Securities, available-for-sale	21,863		23,665		(1,802		)	(7.6	)
Securities, held-to-maturity	5,597		6,291		(694		)	(11.0	)
Loans receivable, net of allowance for loan losses	354,127		347,351		6,776			2.0
Real estate owned, net	103		373		(270		)	(72.4	)

Cash and cash equivalents increased by $6.5 million, or 78.1%, to $14.8 million at December 31, 2016, from $8.3 million at June 30, 2016 due to an increase in deposits.

Securities available-for-sale decreased $1.8 million, or 7.6%, to $21.9 million at December 31, 2016 from $23.7 million at June 30, 2016. Securities held-to-maturity decreased $694,000, or 11.0%, to $5.6 million at December 31, 2016 from $6.3 million at June 30, 2016. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, increased $6.8 million, or 2.0%, to $354.1 million at December 31, 2016 from $347.4 million at June 30, 2016 as a result of an increase in construction lending. Construction loans increased $22.3 million, or 102.2%, to $44.1 million at December 31, 2016 from $21.8 million at June 30, 2016. There was $58.2 million in undisbursed construction loan commitments at December 31, 2016. Our construction loans consisted primarily of land development loans and loans for the construction of multi-family and hospitality properties located in our market area. Land loans increased $528,000, or 7.7%, to $7.4 million at December 31, 2016 from $6.8 million at June 30, 2016. Commercial real estate loans decreased $10.0 million, or 6.7%, to $139.5 million at December 31, 2016 from $149.5 million at June 30, 2016. This decrease was partially due to the repayment of a $4.2 million commercial real estate loan secured by a hotel and the sale during the first quarter of a $4.0 million participation interest in a commercial real estate loan which is secured by a parking structure. Commercial business loans decreased $2.0 million, or 5.4%, to $34.8 million at December 31, 2016 from $36.8 million at June 30, 2016. Multi-family loans decreased $1.6 million, or 3.1%, to $52.1 million at December 31, 2016 from $53.7 million at June 30, 2016. One-to-four family loans decreased $1.0 million, or 1.7%, to $60.2 million at December 31, 2016 from $61.2 million at June 30, 2016. Consumer loans decreased $977,000, or 4.4%, to $21.1 million at December 31, 2016 from $22.1 million at June 30, 2016.

Total delinquent loans (past due 30 days or more), increased $444,000 to $3.7 million at December 31, 2016 from $3.3 million at June 30, 2016. Nonperforming loans, consisting solely of nonaccrual loans and primarily of one-to-four family loans, totaled $2.8 million at December 31, 2016 as compared to $2.0 million at June 30, 2016. Total classified loans increased $342,000, or 12.3%, to $3.1 million at December 31, 2016 from $2.8 million at June 30, 2016.

Liabilities. Total liabilities increased $8.5 million between June 30, 2016 and December 31, 2016. Deposits increased $26.7 million, or 8.9%, to $327.6 million at December 31, 2016 from $300.9 million at June 30, 2016, primarily due to a $30.7 million, or 51.8%, increase in money market accounts primarily as a result of the Bank's deposit marketing campaign as well as other deposit gathering activities. Our core deposits, which consist of all deposits other than certificates of deposit, increased by $31.5 million, or 17.2%, to $214.0 million at December 31, 2016 from $182.5 million at June 30, 2016. We have also increased commercial lending which has increased the level of larger deposit customers. Certificates of deposit decreased $4.7 million, or 4.0%, to $113.7 million at December 31, 2016 from $118.4 million at June 30, 2016. The increase in deposits was partially offset by the $19.5 million decrease in FHLB advances.

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

	Balance at December 31, 2016		Balance at June 30, 2016		Increase/(Decrease)
					Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	50,546	$	50,781	$	(235	)	(0.5	)%
Interest-bearing demand deposits	29,505		27,419		2,086			7.6
Money market accounts	89,969		59,270		30,699			51.8
Savings deposits	43,890		44,986		(1,096		)	(2.4	)
Certificates of deposit	113,686		118,438		(4,752		)	(4.0	)
Total deposit accounts	$	327,596	$	300,894	$	26,702		8.9	%

Stockholders'Equity. Total stockholders' equity increased $886,000, or 1.4%, to $64.1 million at December 31, 2016 from $63.2 million at June 30, 2016 primarily due to net income of $993,000. This increase was partially offset as the accumulated other comprehensive loss increased $280,000 to $829,000 as a result of additional unrealized holding losses on available-for-sale securities during the period, net of tax.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2016 and 2015

General. Net income for the three months ended December 31, 2016 was $420,000 or $0.17 per diluted share compared to a net loss of $286,000 or $0.12 per diluted share for the three months ended December 31, 2015. For the six months ended December 31, 2016 the net income was $993,000 or $0.41 per diluted share compared to net income of $59,000 or $0.02 per diluted share for the same period last year.

Net Interest Income. Net interest income before the provision for loan losses increased $612,000, or 17.5%, to $4.1 million for the quarter ended December 31, 2016 compared to $3.5 million for the same period last year primarily due to the increase in average loans receivable, net. Average loans receivable, net, for the quarter ended December 31, 2016 increased $69.0 million, or 23.8%, to $359.0 million compared to $290.0 million for the quarter ended December 31, 2015. For the six months ended December 31, 2016 net interest income before the provision for loan losses increased $1.2 million, or 16.7%, to $8.2 million from $7.0 million for the same period in 2015 primarily due to the increase in average loans receivable, net.

The Company's net interest margin increased eight basis points to 4.16% for the quarter ended December 31, 2016 compared to 4.08% for the quarter ended December 31, 2015. The yield on average loan receivable, net, decreased 27 basis points to 5.28% for the quarter ended December 31, 2016 compared to 5.55% for the same period of the prior year. The yield on average mortgage-backed securities increased to 1.98% from 1.94% for the same period in the prior year. The average yield on interest-earning assets increased six basis points to 4.96% from 4.90% for the quarters ended December 31, 2016 and 2015. The average cost of total deposits decreased five basis points to 0.99% for the quarter ended December 31, 2016 compared to 1.04% for the same period in the prior year. The average cost of interest-bearing liabilities decreased four basis points to 1.00% for the quarter ended December 31, 2016 compared to 1.04% 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, 2016 compared to the same period in 2015. 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, 2016 Compared to Three Months Ended December 31, 2015
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(239	)	$	957		$	718
Mortgage-backed securities	3			(27		)	(24		)
Investment securities, FHLB stock and cash and cash equivalents	21			(12		)	9
Total net change in income on interest-earning assets	$	(215	)	$	918		$	703
Interest-bearing liabilities:
Savings deposits	$	(1	)	$	—		$	(1	)
Interest-bearing demand deposits	1			—			1
Money market accounts	43			7			50
Certificates of deposit	(18		)	(44		)	(62		)
FHLB advances	—			103			103
Total net change in expense on interest-bearing liabilities	25			66			91
Net change in net interest income	$	(240	)	$	852		$	612

For the six months ended December 31, 2016, the Company's net interest margin increased five basis points to 4.16% compared to 4.11% for the same period in 2015, reflecting the increase in the average balance of loans receivable, net. The average yield on interest-bearing assets increased one basis point to 4.95% for the six months ended December 31, 2016 compared to 4.94% for the same period in the prior year. The average cost of interest-bearing liabilities decreased four basis points to 1.00% for the six months ended December 31, 2016 compared to 1.04% for the same period of the prior year as the cost of our liabilities continue to decline, due primarily to the reduction in the average balance of certificates of deposit.

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The following table sets forth the changes to our net interest income for the six months ended December 31, 2016 compared to the same period in 2015:

	Six Months Ended December 31, 2016 Compared to Six Months Ended December 31, 2015
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	(554	)	$	1,906		$	1,352
Mortgage-backed securities	18			(57		)	(39		)
Investment securities, FHLB stock and cash and cash equivalents	37			(20		)	17
Total net change in income on interest-earning assets	$	(499	)	$	1,829		$	1,330
Interest-bearing liabilities:
Savings deposits	$	(1	)	$	1		$	—
Interest-bearing demand deposits	1			—			1
Money market accounts	43			5			48
Certificates of deposit	(30		)	(82		)	(112		)
FHLB advances	(23		)	247			224
Total net change in expense on interest-bearing liabilities	(10		)	171			161
Net change in net interest income	$	(489	)	$	1,658		$	1,169

Interest Income. Total interest income for the three months ended December 31, 2016 increased $703,000, or 16.7%, to $4.9 million from $4.2 million for the three months ended December 31, 2015. The increase during the period was primarily attributable to the increase in the average balance on loans receivable, net. Average loans receivable, net, increased $69.0 million during the quarter ended December 31, 2016 compared to the same quarter last year. The average yield on loans receivable, net, decreased 27 basis points to 5.28% during the three months ended December 31, 2016 compared to 5.55% for the same period in the prior year. Average mortgage-backed securities declined $5.7 million during the three months ended December 31, 2016 compared to the same period in the prior year. The average yield on mortgage-backed securities increased four basis points to 1.98% for the three months ended December 31, 2016 compared to 1.94% for the same period in the prior year. Average interest-earning assets increased $52.6 million, or 15.3%, to $396.2 million for the three months ended December 31, 2016 compared to $343.6 million for the same period in 2015.

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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, 2016 and 2015:

	Three Months Ended December 31,
	2016				2015				Increase/(Decrease) in Interest and Dividend Income from 2015
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net (1)	$	359,021	5.28	%	$	290,016	5.55	%	$	718
Mortgage-backed securities	28,292		1.98		33,861		1.94		(24		)
Investment securities	172		6.98		363		4.41		(1		)
FHLB stock	2,455		3.58		913		1.75		18
Cash and cash equivalents	6,253		0.32		18,452		0.28		(8		)
Total interest-earning assets	$	396,193	4.96	%	$	343,605	4.90	%	$	703

⁽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, 2016, total interest income increased $1.3 million, or 15.8%, to $9.7 million from $8.4 million for the six months ended December 31, 2015. The increase during the period was primarily attributable to the increase in the average balance on loans receivable, net. The average yield on loans receivable, net, decreased 31 basis points to 5.26% for the six months ended December 31, 2016 compared to 5.57% for the same period in the prior year. Average loans receivable, net, increased $68.4 million during the six months ended December 31, 2016 compared to the same period in the prior year. Average mortgage-backed securities declined $5.8 million during the six months ended December 31, 2016 compared to the same period in the prior year. The average yield on mortgage-backed securities increased 12 basis points to 2.11% for the six months ended December 31, 2016 compared to 1.99% for the same period in the prior year. Average interest-earning assets increased $52.6 million, or 15.4%, to $394.0 million for the six months ended December 31, 2016 compared to $341.4 million for the same period in 2015.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended December 31, 2016 and 2015:

	Six Months Ended December 31,
	2016				2015				Increase/(Decrease) in Interest and Dividend Income from 2015
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net (1)	$	357,036	5.26	%	$	288,636	5.57	%	$	1,352
Mortgage-backed securities	29,044		2.11		34,807		1.99		(39		)
Investment securities	172		5.81		457		4.81		(6		)
FHLB stock	2,668		3.00		883		1.13		35
Cash and cash equivalents	5,043		0.32		16,594		0.24		(12		)
Total interest-earning assets	$	393,963	4.95	%	$	341,377	4.94	%	$	1,330

⁽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 increased $91,000, or 12.9% to $794,000 for the three months ended December 31, 2016 as compared to $703,000 for the three months ended December 31, 2015. The increase during the period was primarily attributable to the increase in the average balance of FHLB advances and, to a lesser extent, increases in both the average balance and average cost of money market accounts. The average balance of FHLB advances increased $37.7 million, or 322.9%, to $49.4 million during the quarter ended December 31, 2016 compared to $11.7 million for the same quarter last year as these funds were primarily used to fund our loan growth over the last year. The average cost of FHLB advances decreased one basis point to 1.09% for the three months ended December 31, 2016 compared to 1.10% for the same period of the prior year. The average balance of money market accounts increased $15.3 million or 24.4% and the average cost increased by 0.22% to 0.40% as compared to the same quarter last year. The average balance of certificates of deposit declined $8.8 million, or 7.1%, to $115.5 million for the quarter ended December 31, 2016 compared to $124.4 million for the same period of the prior year reflecting our goal to reduce higher cost deposits. Average interest-bearing liabilities increased $45.1 million, or 16.7%, to $316.1 million for the three months ended December 31, 2016 compared to $270.9 million for the same period in 2015.

The following table details average balances, cost of funds and the change in interest expense for the three months ended December 31, 2016 and 2015:

	Three Months Ended December 31,
	2016				2015				Increase/(Decrease) in Interest Expense from 2015
	Average Balance		Cost		Average Balance		Cost
	(Dollars in thousands)
Savings deposits	$	43,617	0.15	%	$	43,628	0.16	%	$	(1	)
Interest-bearing demand deposits	29,458		0.04		28,500		0.03		1
Money market deposits	78,051		0.40		62,751		0.18		50
Certificates of deposit	115,541		1.94		124,381		2.00		(62		)
FHLB advances	49,395		1.09		11,679		1.10		103
Total interest-bearing liabilities	$	316,062	1.00	%	$	270,939	1.04	%	$	91

For the six months ended December 31, 2016 interest expense increased $161,000, or 11.5%, to $1.6 million from $1.4 million for the six months ended December 31, 2015. The increase during the period was primarily attributable to the increase in the average balance of FHLB advances, and to a lesser extent, the average cost of money market deposits. Average FHLB advances increased $43.9 million during the six months ended December 31, 2016 compared to the same period last year. The average cost of FHLB advances decreased nine basis points to 1.04% for the six months ended December 31, 2016 compared to 1.13% for the same period of the prior year. The average cost of money market deposits increased 13 basis points to 0.30% for the six months ended December 31, 2016 compared to 0.17% for the same period of the prior year. The average balance of money market deposits increased $6.1 million, or 9.6%, to $69.1 million for the six months ended December 31, 2016 compared to the same period last year. Average interest-bearing liabilities decreased $43.8 million, or 16.3%, to $312.9 million for the six months ended December 31, 2016 compared to $269.1 million for the same period in 2015.

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The following table details average balances, cost of funds and the change in interest expense for the six months ended December 31, 2016 and 2015:

	Six Months Ended December 31,
	2016				2015				Increase/(Decrease) in Interest Expense from 2015
	Average Balance		Cost		Average Balance		Cost
	(Dollars in thousands)
Savings deposits	$	44,058	0.15	%	$	42,950	0.15	%	$	—
Interest-bearing demand deposits	28,300		0.04		27,306		0.04		1
Money market deposits	69,124		0.30		63,051		0.17		48
Certificates of deposit	116,700		1.95		124,944		2.00		(112		)
FHLB advances	54,719		1.04		10,840		1.13		224
Total interest-bearing liabilities	$	312,901	1.00	%	$	269,091	1.04	%	$	161

Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a $75,000 provision for loan losses was required for the three months ended December 31, 2016 compared to a $70,000 provision for the three months ended December 31, 2015, primarily reflecting our recent loan growth. The provision for loan losses for the six months ended December 31, 2016 was $150,000 compared to $90,000 for the same period last year.

Nonperforming loans increased to $2.8 million at December 31, 2016, an increase of $66,000 from $2.7 million at December 31, 2015. The ratio of nonperforming loans to total loans was 0.8% at December 31, 2016 compared to 0.9% at December 31, 2015. Total classified loans decreased $206,000, or 6.2%, to $3.1 million at December 31, 2016 from $3.3 million at December 31, 2015. The allowance for loan losses of $3.9 million at December 31, 2016 represented 1.1% of loans receivable and 139.1% of nonperforming loans. This compares to an allowance of $3.8 million at June 30, 2016, representing 1.1% of loans receivable and 191.6% of nonperforming loans.

Management considers the allowance for loan losses at December 31, 2016 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.

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The following table details activity and information related to the allowance for loan losses at and for the three months ended December 31, 2016 and 2015:

	At or For the Three Months Ended December 31,
	2016			2015
	(Dollars in thousands)
Provision for loan losses	$	75		$	70
Net charge-offs (recoveries)	38			(122		)
Allowance for loan losses	3,861			3,879
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.1		%	1.2		%
Nonaccrual and 90 days or more past due and still accruing interest	$	2,775		$	2,709
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	139.1		%	143.2		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.8		%	0.9		%
Total loans	$	359,214		$	316,618

The following table details activity and information related to the allowance for loan losses at and for the six months ended December 31, 2016 and 2015:

	At or For the Six Months Ended December 31,
	2016			2015
	(Dollars in thousands)
Provision for loan losses	$	150		$	90
Net charge-offs (recoveries)	68			(68		)
Allowance for loan losses	3,861			3,879
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.1		%	1.2		%
Nonaccrual and 90 days or more past due and still accruing interest	$	2,775		$	2,709
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	139.1		%	143.2		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.8		%	0.9		%
Total loans	$	359,214		$	316,618

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, 2016 and December 31, 2015, we have identified 34 and 39 loans, respectively, with aggregate net principal balances of $5.9 million and $9.1 million, respectively, as TDRs. At December 31, 2016 and December 31, 2015, there were $862,000 and $1.5 million, respectively, of TDRs included in nonperforming loans. At December 31, 2016 the Company had REO with a book value of $103,000 compared to $373,000 at June 30, 2016.

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Noninterest Income. Noninterest income decreased $177,000, or 15.2%, to $986,000 for the quarter ended December 31, 2016 compared to $1.2 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, 2016 compared to the same period in 2015:

	Three Months Ended December 31,					Increase (decrease)
	2016			2015		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	348		$	331	$	17		5.1	%
Other deposit fees	179			180		(1		)	(0.6	)
Other loan fees	207			184		23			12.5
(Loss) gain on sale of loans	(1		)	67		(68		)	(101.5	)
Bank owned life insurance investment	130			132		(2		)	(1.5	)
Other income	123			269		(146		)	(54.3	)
Total noninterest income	$	986		$	1,163	$	(177	)	(15.2	)%

The decrease in noninterest income was primarily attributable to the $146,000, or 54.3% decrease in other income in the quarter ended December 31, 2016 to $123,000 compared to $269,000 for the same quarter a year ago primarily due to a decrease in prepayment penalties on multi-family loans. In addition, gain on sale of loans decreased $68,000, or 101.5%, to a loss of $1,000 primarily due to a shift in interest rates in the secondary loan market. These decreases were partially offset by an increase of $23,000, or 12.5%, to $207,000 for other loan fees.

The following table provides a detailed analysis of the changes in the components of noninterest income for the six months ended December 31, 2016 compared to the same period in 2015:

	Six Months Ended December 31,				Increase (decrease)
	2016		2015		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	696	$	703	$	(7	)	(1.0	)%
Other deposit fees	373		358		15			4.2
Other loan fees	442		328		114			34.8
Gain on sale of loans	100		128		(28		)	21.9
Bank owned life insurance investment	262		289		(27		)	(9.3	)
Other income	270		401		(131		)	(32.7	)
Total noninterest income	$	2,143	$	2,207	$	(64	)	(2.9	)%

Noninterest income decreased $64,000, or 2.9%, to $2.1 million during the six months ended December 31, 2016 compared to $2.2 million for the same period in 2015. The decrease was primarily due to a $131,000, or 32.7% decrease in other income to $270,000 for the six months ended December 31, 2016 compared to $401,000 for the same period last year, primarily due to a decrease in prepayment penalties on multi-family loans. This decrease was partially offset by an increase of $114,000, or 34.8%, to $442,000 for other loan fees, reflecting our increased loan production during the period.

43

Noninterest Expense. For the three months ended December 31, 2016, noninterest expense decreased $581,000, or 11.6%, to $4.4 million from $5.0 million for the three months ended December 31, 2015. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended December 31, 2016 and 2015:

	Three Months Ended December 31,						Increase (decrease)
	2016			2015			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	2,296		$	2,815		$	(519	)	(18.4	)%
General and administrative expenses	833			994			(161		)	(16.2	)
Real estate holding costs	19			16			3			18.8
FDIC insurance premiums	24			64			(40		)	(62.5	)
Information technology	540			415			125			30.1
Occupancy and equipment	441			449			(8		)	(1.8	)
Deposit services	128			122			6			4.9
Marketing	167			130			37			28.5
Loss on sale of property, premises and equipment	—			1			(1		)	—
Gain on sale of real estate owned	(27		)	(4		)	(23		)	575.0
Total noninterest expense	$	4,421		$	5,002		$	(581	)	(11.6	)%

The decrease in noninterest expense was primarily due to a $519,000, or 18.4%, decrease in compensation and benefits primarily due to a $653,000 decrease in stock-based compensation related to the Anchor Bancorp 2015 Equity Plan. General and administrative expenses decreased $161,000, or 16.2%, to $833,000 from the same period in the previous year primarily resulting from the absence of proxy contest costs of $195,000 for the quarter ended December 31, 2016. These decreases were partially offset by an increase of $125,000, or 30.1%, for information technology expense to $540,000 for the quarter ended December 31, 2016 from $415,000 for the quarter ended December 31, 2015 primarily due to the purchase of new loan production software.

The following table provides an analysis of the changes in the components of noninterest expense for the six months ended December 31, 2016 and 2015:

	Six Months Ended December 31,					Increase (decrease)
	2016			2015		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	4,606		$	4,835	$	(229	)	(4.7	)%
General and administrative expenses	1,569			1,728		(159		)	(9.2	)
Real estate holding costs	37			65		(28		)	(43.1	)
FDIC insurance premiums	92			133		(41		)	(30.8	)
Information technology	1,025			857		168			19.6
Occupancy and equipment	948			939		9			1.0
Deposit services	240			235		5			2.1
Marketing	267			255		12			4.7
Loss on sale of property, premises and equipment	—			4		(4		)	(100.0	)
(Gain) loss on sale of real estate owned	(40		)	4		(44		)	(1,100.0	)
Total noninterest expense	$	8,744		$	9,055	$	(311	)	(3.4	)%

44

Noninterest expense decreased $311,000, or 3.4%, to $8.7 million in the six months ended December 31, 2016 compared to $9.1 million for the six months ended December 31, 2015. The decrease was primarily due to a $229,000 decrease in compensation and benefits primarily due to a $429,000 decrease in stock-based compensation related to the Anchor Bancorp 2015 Equity Plan during the six months ended December 31, 2015. General and administrative expenses decreased $159,000 to $1.6 million for the six months ended December 31, 2016 compared to $1.7 million for the six months ended December 31, 2015 primarily due to no proxy contest expenses during the current six month period. These decreases were partially offset by an increase of $168,000, or 19.6%, for information technology expense to $1.0 million for the six months ended December 31, 2016 from $857,000 for the same period last year primarily due to the purchase of new loan production software.

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, 2016, the total approved loan origination commitments outstanding were $18.5 million. At the same date, unused lines of credit were $87.4 million.

For purposes of determining our liquidity position, we use the liquidity ratio, a regulatory measure of liquidity calculated as the total of net cash, short-term, and marketable assets divided by net deposits and short-term liabilities. Our Board of Directors has established a liquidity ratio target of 10%. For the three months ended December 31, 2016, our average liquidity ratio was 10.0%, which indicates we are at the liquidity standard set by our Board. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

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

Certificates of deposit scheduled to mature in one year or less at December 31, 2016 totaled $42.6 million. We had no brokered deposits at December 31, 2016. 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 $104.1 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.

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The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the three month period ended December 31, 2016, the Bank paid a $337,000 dividend to the Company. The payment is being used for the Company's general corporate purposes, including supporting the Company's ongoing operations and stock repurchases. At December 31, 2016, the Company (on an unconsolidated basis) had liquid assets of $2.7 million.

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

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

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

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of December 31, 2016:

	Amount of Commitment Expiration Per Period
	Total Amounts Committed (2)		Due in One Year
	(In thousands)
Commitments to originate loans (1)	$	18,461	$	18,461
Lines of credit
Fixed rate (3)	15,893		720
Adjustable rate	71,466		13,292
Undisbursed balance of lines of credit	$	87,359	$	14,012

⁽¹⁾  Interest rates on fixed rate loans are 4.25% to 5.25%. 

⁽²⁾  At December 31, 2016 there was $75 in reserves for unfunded commitments. 

⁽³⁾  Includes standby letters of credit. 

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Operating lease commitment - The Bank leases space for branches and operations located in Shelton, Puyallup, and Seattle 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)
2017	$68
2018	$126
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, 2016, the Bank exceeded all regulatory capital requirements with, Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital (CET1), Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios of 13.3%, 14.2%, 14.2%, and 15.2%, respectively. As of June 30, 2016 these ratios were 13.5%, 14.7%, 14.7%, and 15.7%, respectively. At December 31, 2016, the Bank met the requirements to be deemed "well-capitalized" under applicable regulatory guidelines.

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

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, CET1, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.3%, 15.2%, 15.2%, and 16.2%, respectively, as of December 31, 2016. As of June 30, 2016, these ratios were 14.4%, 15.7%, 15.7% and 16.6%, respectively.

The Bank's actual capital amounts and ratios at December 31, 2016 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, 2016
Total capital (to risk-weighted assets)	$	61,162	15.2	%	$	32,212	8.0	%	$	40,265	10.0	%
Tier I capital (to risk-weighted assets)	$	57,301	14.2	%	$	24,159	6.0	%	$	32,212	8.0	%
Common equity tier 1 capital (to risk-weighted assets)	$	57,301	14.2	%	$	18,119	4.5	%	$	26,172	6.5	%
Tier I leverage capital (to average assets)	$	57,301	13.3	%	$	17,236	4.0	%	$	21,545	5.0	%

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The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of December 31, 2016, were as follows:

Anchor Bancorp	Actual
	Amount		Ratio
	(Dollars in thousands)
December 31, 2016
Total capital (to risk-weighted assets)	$	65,288	16.2	%
Tier I capital (to risk-weighted assets)	$	61,427	15.2	%
Common equity tier 1 capital (to risk-weighted assets)	$	61,427	15.2	%
Tier I leverage capital (to average assets)	$	61,427	14.3	%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

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

• economic conditions;

• interest rate outlook;

• asset/liability mix;

• interest rate risk sensitivity;

• change in net interest income;

• current market opportunities to promote specific products;

• historical financial results;

• projected financial results; and

• capital position.

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

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

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

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

• 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).

49

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, 2016 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	$	69,267	$	1,794		2.66	%	16.97	%	1.22	%	$	408,105
200	69,609		2,136			3.17		16.75		1.00		415,486
100	69,015		1,542			2.29		16.34		0.6		422,258
Base	67,473		—			—		15.75		—		428,430
(100)	65,492		(1,981		)	(2.94	)	15.06		(0.69	)	434,778

___________

(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, 2016, 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	$	19,866	$	2,854		16.8	%
200	18,957		1,945			11.4
100	17,995		983			5.8
Base	17,012		—			—
(100)	15,931		(1,081		)	(6.4	)

⁽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

50

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, 2016, 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, 2016, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2016.

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

(a) Not applicable

(b) Not applicable

(c) There were no repurchases of the Company's outstanding shares during the quarter ended December 31, 2016 and at December 31, 2016, no shares were authorized to be purchased under a publicly announced plan.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

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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	Anchor Bancorp, Inc. 2015 Equity Incentive Plan ("Equity Incentive Plan") (7)
10.9	Form of Incentive Stock Option Award Agreement under the Equity Incentive Plan (7)
10.10	Form of Non-Qualified Stock Option Award Agreement under the Equity Incentive Plan (7)
10.11	Form of Restricted Stock Award Agreement under the Equity Incentive Plan (7)
10.12	Form of Restricted Stock Unit Award Agreement under the Equity Incentive Plan (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, 2016, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income (Loss); (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 6, 2017	/s/Jerald L. Shaw
	Jerald L. Shaw
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: February 6, 2017	/s/Terri L. Degner
	Terri L. Degner
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

54

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, 2016, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income (Loss); (3) Condensed Consolidated Statements of Comprehensive Income (Loss); (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements

55