Anchor Bancorp (ANCB) SEC Annual Report (10-K) for 2017

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________

FORM 10-K



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

For the fiscal year ended June 30, 2017 or



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

For the transition period from _____ to _____

Commission File Number: 001-34965



ANCHOR BANCORP
(Exact name of registrant as specified in its charter)

Washington		26-3356075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share		The Nasdaq Stock Market LLC
(Title of Class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:		None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO X

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X

As of September 15, 2017, there were issued and outstanding 2,494,940 shares of the registrant's common stock, which are traded on the NASDAQ Global Market under the symbol "ANCB." The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of December 31, 2016, was $68.1 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

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DOCUMENTS INCORPORATED BY REFERENCE

None

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ANCHOR BANCORP

2017 ANNUAL REPORT ON FORM 10-K

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Forward-Looking Statements	iii
Available Information	v

PART I
Item 1. Business	1
General	1
Market Area	1
Lending Activities	2
Asset Quality	15
Investment Activities	22
Deposit Activities and Other Sources of Funds	26
Subsidiaries and Other Activities	29
Competition	29
Natural Disasters	30
Employees	30
Pending Merger	31
How We Are Regulated	32
Taxation	40
Item 1A. Risk Factors	40
Item 1B. Unresolved Staff Comments	49
Item 2. Properties	50
Item 3. Legal Proceedings	51
Item 4. Mine Safety Disclosures	51
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	52
Item 6. Selected Financial Data	54
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	57
Overview	57
Operating Strategy	57
Critical Accounting Policies	58
Comparison of Financial Condition at June 30, 2017 and June 30, 2016	59
Comparison of Operating Results for the Years Ended June 30, 2017 and June 30, 2016	61
Comparison of Financial Condition at June 30, 2016 and June 30, 2015	65
Comparison of Operating Results for the Years Ended June 30, 2016 and June 30, 2015	67
Average Balances, Interest and Average Yields/Costs	72
Yields Earned and Rates Paid	73
Rate/Volume Analysis	74


(Table of Contents continued on following page)

( i )

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Asset and Liability Management and Market Risk	74
Liquidity	77
Contractual Obligations	78
Commitments and Off-Balance Sheet Arrangements	79
Capital	79
Impact of Inflation	79
Recent Accounting Pronouncements	80
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	82
Item 8. Financial Statements and Supplementary Data	83
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	131
Item 9A. Controls and Procedures	131
Item 9B. Other Information	132
PART III.
Item 10. Directors, Executive Officers and Corporate Governance	133
Item 11. Executive Compensation	136
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	141
Item 13. Certain Relationships and Related Transactions and Director Independence	144
Item 14. Principal Accountant Fees and Services	144
PART IV.
Item 15. Exhibits and Financial Statement Schedules	145
Signatures	147

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.

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Forward-Looking Statements

This Form 10-K, including information included or incorporated by reference, future filings by the Company on Form 10-Q, and Form 8-K, and future oral and written statements by Anchor Bancorp and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements 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." 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 occurrence of any event, change or other circumstance that could give rise to a termination of the merger agreement entered into with Washington Federal, Inc.,("Washington Federal") which provides for a proposed merger of the Company with and into Washington Federal (the "merger");


•	operating costs, customer and employee losses and business disruption related to the merger may be greater than expected;


•	we will be subject to business uncertainties and contractual restrictions while the merger is pending;


•	management time and effort will be diverted to completion of the proposed merger and merger-related matters;


•	termination of the merger agreement could negatively impact us;


•	the merger agreement requires us to pay a termination fee of $2.2 million under limited circumstances relating to alternative acquisition proposals;


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


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


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


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


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

•

results of examinations of us by the Federal Deposit Insurance Corporation ("FDIC"), the Washington State Department of Financial Institution, 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;

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•	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 ("Dodd-Frank 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 existing 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 ("SEC"), including this Form 10-K.

These developments could have an adverse impact on our financial position and our results of operations.

Any forward-looking statements are based upon management's beliefs and assumptions at the time they are made. 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. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements.

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Available Information

The Company provides a link on its investor information page at www.anchornetbank.com to the Securities and Exchange Commission's ("SEC") website ( www.sec.gov ) for purposes of providing copies of its annual report to shareholders, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and press releases. Other than an investor's own internet access charges, these filings are available free of charge and also can be obtained by calling the SEC at 1-800-SEC-0330. The information contained on the Company's website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

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PART I

Item 1. Business

General

Anchor Bancorp, a Washington corporation, was formed for the purpose of becoming the bank holding company for Anchor Bank in connection with the Bank's conversion from mutual to stock form, which was completed on January 25, 2011. In connection with the mutual to stock conversion, the Bank changed its name from "Anchor Mutual Savings Bank" to "Anchor Bank." At June 30, 2017, we had total assets of $462.5 million , total deposits of $345.2 million and total stockholders' equity of $65.9 million . Anchor Bancorp's business activities generally are limited to passive investment activities and oversight of its investment in Anchor Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to Anchor Bank.

Anchor Bancorp is a bank holding company and is subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Anchor Bank is examined and regulated by the Washington State Department of Financial Institutions, Division of Banks ("DFI") and by the Federal Deposit Insurance Corporation ("FDIC"). Anchor Bank is required to have certain reserves set by the Federal Reserve and is a member of the Federal Home Loan Bank of Des Moines ("FHLB" or "FHLB of Des Moines"), which is one of the 11 regional banks in the Federal Home Loan Bank System ("FHLB System").

Anchor Bank is a community-based savings bank primarily serving Western Washington through our 10 full-service banking offices (including one Wal-Mart in-store location) located within Grays Harbor, Thurston, Lewis, Pierce and Mason counties, and one loan production office located in King County, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers, however, at June 30, 2017, 91.8% of our loans were collateralized by real estate and 65.7% of our loans were collateralized by commercial and multi-family real estate. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been actively offering commercial real estate loans and multi-family loans primarily in Western Washington.

On April 11, 2017, Washington Federal entered into the merger agreement with the Company. The merger agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Washington Federal with Washington Federal as the surviving corporation in the merger. Immediately after the effective time of the merger, Washington Federal intends to merge Anchor Bank with and into Washington Federal, National Association (the "bank merger"), a wholly-owned subsidiary of Washington Federal with Washington Federal, National Association as the surviving institution in the bank merger. See "-Pending Merger" below for a description of the terms and conditions of the proposed transaction and "Item 1.A. Risk Factors - Risks Relating to the Pending Merger" for a description of the risks relating to the proposed transaction.

The executive office of the Company is located at 601 Woodland Square Loop SE, Lacey, Washington 98503, and its telephone number is (360) 491-2250.

Market Area

Anchor Bank is a community-based financial institution primarily serving Western Washington including Grays Harbor, Thurston, Lewis, Pierce, and Mason counties. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in our five-county market area was $232,420 a 8.3% increase compared to the quarter ended June 30, 2016. Existing home sales in our five-county primary market area for the quarter ended June 30, 2017 totaled $24.5 million, which reflected a 16.1% increase compared to the quarter ended June 30, 2016. According to the Department of Labor, the unemployment rate in our five-county primary market area averaged 5.8% during June 2017 compared to 7.4% during June 2016. These unemployment rates are higher than the national unemployment rates of 4.4% and 4.7%, as of June 2017 and June 2016, respectively. A continuation of the overall economic weakness in the counties in our market area could negatively impact our lending opportunities and profitability.

Grays Harbor County has a population of 71,628 and a median household income of $43,538 according to the latest 2016 information available from the U.S. Census Bureau. The economic base in Grays Harbor has been historically dependent on the timber and fishing industries. Other industries that support the economic base are tourism, manufacturing, agriculture, shipping, transportation and technology. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in Grays Harbor County was $164,700 compared to $154,800 for the quarter ended June 30, 2016 and represents an increase of 6.4%. In addition, existing home sales in Grays Harbor County for the quarter ended June 30, 2017 increased by 15.5% from the total for the quarter ended June 30, 2016. According to the U.S. Department of Labor, the

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unemployment rate in Grays Harbor County decreased to 6.4% at June 30, 2017 from 8.6% at June 30, 2016. We have five branches (including our home office) located throughout this county.

Thurston County has a population of 275,222 and a median household income of $61,677 according to the latest 2016 information available from the U.S. Census Bureau. Thurston County is home of Washington State's capital (Olympia) and its economic base is largely driven by state government related employment. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in Thurston County was $289,800 compared to $268,000 for the quarter ended June 30, 2016, and represents an 8.1% increase. In addition, existing home sales in Thurston County for the quarter ended June 30, 2017 increased by 21.4% from the quarter ended June 30, 2016. According to the U.S. Department of Labor, the unemployment rate for the Thurston County area decreased to 4.7% at June 30, 2017 from 6.1% at June 30, 2016. We currently have two branches in Thurston County. Thurston County has a stable economic base primarily attributable to the state government presence.

Lewis County has a population of 77,066 and a median household income of $44,100 according to the latest 2016 information available from the U.S. Census Bureau. The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in Lewis County was $190,400 compared to $179,200 for the quarter ended June 30, 2016, and represents a 6.2% increase. In addition, existing home sales in Lewis County for the quarter ended June 30, 2017 increased by 17.1% from the quarter ended June 30, 2016. According to the U.S. Department of Labor, the unemployment rate in Lewis County decreased to 6.1% at June 30, 2017 from 7.8% at June 30, 2016. We have one branch located in Lewis County.

Pierce County is the second most populous county in the state and has a population of 861,312 and a median household income of $59,953 according to the latest 2016 information available from the U.S. Census Bureau. The economy in Pierce County is diversified with the presence of military related government employment (Lewis/McChord JBLM Base), transportation and shipping employment (Port of Tacoma), and aerospace related employment (Boeing). Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in Pierce County was $313,200 compared to $279,400 for the quarter ended June 30, 2016, and represents a 12.1% increase. In addition, existing home sales in Pierce County for the quarter ended June 30, 2017 increased by 14.2% from the quarter ended June 30, 2016. According to the U.S. Department of Labor, the unemployment rate for the Pierce County area decreased to 5.1% at June 30, 2017 from 6.5% at June 30, 2016. We have one branch located in Pierce County.

Mason County has a population of 62,198 and a median household income of $50,406 according to the latest information available from the U.S. Department of Labor. The economic base in Mason County is supported by wood products. Based on information from the Washington Center for Real Estate Research, for the quarter ended June 30, 2017, the median home price in Mason County was $204,000 compared to $191,300 for the quarter ended June 30, 2016, and represents a 6.6% increase. In addition, existing home sales in Mason County for the quarter ended June 30, 2017 increased by 17.9% from the quarter ended June 30, 2016. According to the U.S. Department of Labor, the unemployment rate in Mason County decreased to 6.1% at June 30, 2017 from 7.9% at June 30, 2016. We have one branch located in Mason County.

For a discussion regarding the competition in our primary market area, see "– Competition."

Lending Activities

General. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences and loans for the construction of one-to-four family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. Since 1990, we have been actively offering commercial real estate loans and multi-family loans primarily in Western Washington and beginning in 2014 increased our focus on construction lending. A substantial portion of our loan portfolio is secured by real estate, either as primary or secondary collateral, located in our primary market area. As of June 30, 2017, the net loan portfolio totaled $377.9 million and represented 81.7% of our total assets. As of June 30, 2017, 15.6% of our total loan portfolio was comprised of one-to-four family loans, 3.6% of home equity loans and lines of credit, 40.6% of commercial real estate loans, 15.8% of multi-family real estate loans, 8.2% of commercial business loans, 14.9% of construction and land loans, 1.1% of unsecured consumer loans and 0.2% of automobile loans.

As a state chartered savings bank chartered under Washington law, we are subject to 20% of total risk based capital plus reserves as our statutory lending limit to one borrower or $12.8 million at June 30, 2017. At June 30, 2017, there were no borrowing relationships that were over the legal amount. Our ten largest credit relationships at June 30, 2017 were as follows:


•	Our largest single borrower relationship is one loan for $11.0 million secured by a hotel located in Pierce County, Washington;

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•	The second largest borrower relationship totaled $10.9 million and consisted of four loans secured by congregate care facilities located in Lewis, Pierce and Grays Harbor counties;


•	The third largest borrower relationship totaled $9.8 million and consists of one unsecured credit line and three loans secured by hospitality properties located in King and Pierce counties;


•	The fourth largest borrower relationship is one loan for $9.2 million which is a purchased minority interest in a loan secured by an entertainment, hospitality and dining complex located in Lewis County;


•	The fifth largest borrower relationship is one loan for $9.0 million which is a purchased minority interest in line of credit to provide warehouse lending to a financial services company which is collateralized by an assignment of finance notes receivable on residential housing secured by properties located in Washington, Oregon and Utah;


•	The sixth largest borrower relationship is one loan for $8.1 million secured by an apartment building located in King County;


•	The seventh largest borrower relationship totaled $7.5 million excluding $1.1 million of available credit and consisted of two loans secured by an airport parking lot located in King County;


•	The eighth largest borrower relationship totaled $7.0 million and consisted of two loans secured by 41 single family residential rental homes located in Thurston County;


•	The ninth largest borrower relationship totaled $6.9 million and consisted of four loans secured by one multi-family and six single family residential units, and a fifth loan secured by an additional multi-family residential structure under construction located in Pierce and Thurston counties; and


•	The tenth largest borrower relationship totaled $6.5 million and consisted of two loans secured by non-owner occupied commercial real estate properties located in Pierce and Thurston counties.

All of the properties securing these loans are located in our primary market area in Grays Harbor, Thurston, Lewis, Pierce and Mason counties or our secondary market area in other parts of Washington State. These loans were all performing according to their repayment terms as of June 30, 2017.

Loan Portfolio Analysis. The following table sets forth the composition of Anchor Bank's loan portfolio by type of loan at the dates indicated:

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	At June 30,
	2017				2016				2015				2014				2013
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Real estate:
One-to-four family	$	59,735	15.6	%	$	61,230	17.4	%	$	57,944	20.1	%	$	63,009	21.9	%	$	73,901	26.1	%
Multi-family	60,500		15.8		53,742		15.3		43,249		15.0		47,507		16.5		38,425		13.6
Commercial	155,525		40.6		149,527		42.5		128,306		44.5		107,828		37.6		106,859		37.7
Construction	49,151		12.8		21,793		6.2		11,731		4.1		19,690		6.9		5,641		2.0
Land loans	8,054		2.1		6,839		1.9		4,069		1.4		4,126		1.4		5,330		1.9
Total real estate	$	332,965	86.9	%	$	293,131	83.3	%	$	245,299	85.1	%	$	242,160	84.3	%	$	230,156	81.2	%
Consumer:
Home equity	13,991		3.6		16,599		4.7		17,604		6.1		20,894		7.3		25,835		9.1
Credit cards	2,596		0.7		2,969		0.8		3,289		1.1		3,548		1.2		4,741		1.7
Automobile	627		0.2		597		0.2		686		0.2		1,073		0.4		1,850		0.7
Other	1,524		0.4		1,933		0.5		2,347		0.8		2,838		1.0		2,723		1.0
Total consumer	18,738		4.9		22,098		6.2		23,926		8.3		28,353		9.9		35,149		12.4
Commercial business	31,603		8.2		36,848		10.5		18,987		6.6		16,737		5.8		18,211		6.4
Total loans	383,306		100.0	%	352,077		100.0	%	288,212		100.0	%	287,250		100.0	%	283,516		100.0	%
Less:
Deferred loan fees and loan premiums, net	1,292				947				1,047				1,100				915
Allowance for loan losses	4,106				3,779				3,721				4,624				5,147
Loans receivable, net	$	377,908			$	347,351			$	283,444			$	281,526			$	277,454

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The following table shows the composition of Anchor Bank's loan portfolio by fixed- and adjustable-rate loans at the dates indicated:



	At June 30,
	2017				2016				2015				2014				2013
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
FIXED-RATE LOANS	(Dollars in thousands)
Real estate:
One-to-four family	$	35,566	9.3	%	$	38,107	10.8	%	$	46,686	16.2	%	$	50,778	17.7	%	$	58,639	20.7	%
Multi-family	29,610		7.7		22,666		6.4		23,716		8.2		32,813		11.4		29,603		10.4
Commercial	19,050		5.0		14,555		4.1		25,048		8.7		34,776		12.1		42,128		14.9
Land loans	4,765		1.2		3,731		1.1		2,667		0.9		3,137		1.1		4,316		1.5
Total real estate	88,991		23.2		79,059		22.4		98,117		34.0		121,504		42.3		134,686		47.5
Real estate construction:
One-to-four family	6,604		1.7		2,498		0.7		-		-		312		0.1		-		-
Multi-family	2,309		0.6		-		-		-		-		-		-		2,254		0.8
Commercial	7,759		2.0		1,738		0.5		-		-		6,523		2.3		88		-
Total real estate construction	16,672		4.3		4,236		1.2		-		-		6,835		2.4		2,342		0.8
Consumer:
Home equity	7,301		1.9		8,431		2.4		9,888		3.4		12,042		4.2		15,848		5.6
Automobile	627		0.2		597		0.2		686		0.2		1,073		0.4		1,850		0.7
Other	1,522		0.4		1,931		0.5		2,345		0.8		2,838		1.0		2,723		1.0
Total consumer	9,450		2.5		10,959		3.1		12,919		4.5		15,953		5.6		20,421		7.2
Commercial business	11,221		2.9		13,145		3.7		12,404		4.3		11,717		4.1		11,050		3.9
Total fixed-rate loans	$	126,334	33.0		$	107,399	30.5		$	123,440	42.8		$	156,009	54.4		$	168,499	59.4
ADJUSTABLE-RATE LOANS
Real estate:
One-to-four family	$	24,169	6.3		$	23,123	6.6		$	11,258	3.9		$	12,231	4.3		$	15,262	5.4
Multi-family	30,890		8.1		31,076		8.8		19,533		6.8		14,694		5.1		8,822		3.1
Commercial	136,475		35.6		134,972		38.3		103,258		35.8		73,052		25.4		64,731		22.8
Land loans	3,289		0.9		3,108		0.9		1,402		0.5		989		0.3		1,014		0.4
Total real estate	194,823		50.8		192,279		54.6		135,451		47.0		100,966		35.1		89,829		31.7
Real estate construction:
One-to-four family	10,119		2.6		9,475		2.7		2,119		0.7		2,697		0.9		858		0.3
Multi-family	19,423		5.1		1,083		0.3		9,353		3.2		3,432		1.2		1,270		0.4
Commercial	2,937		0.8		6,999		2.0		259		0.1		6,726		2.3		1,171		0.4
Total real estate construction	32,479		8.5		17,557		5.0		11,731		4.1		12,855		4.4		3,299		1.2

(table continued on following page)

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	At June 30,
	2017				2016				2015				2014				2013
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Consumer:
Home equity	6,690		1.7		8,168		2.3		7,716		2.7		8,852		3.1		9,987		3.5
Automobile	-		-		-		-		-		-		-		-		-		-
Credit cards	2,596		0.7		2,969		0.8		3,289		1.1		3,548		1.2		4,741		1.7
Other	2		-		2		-		2		-		-		-		-		-
Total consumer	9,288		2.4		11,139		3.2		11,007		3.8		12,400		4.3		14,728		5.2
Commercial business	20,382		5.3		23,703		6.7		6,583		2.3		5,020		1.8		7,161		2.5
Total adjustable rate loans	256,972		67.0		244,678		69.5		164,772		57.2		131,241		45.6		115,017		40.6
Total loans	383,306		100.0	%	352,077		100.0	%	288,212		100.0	%	287,250		100.0	%	283,516		100.0	%
Less:
Deferred loan fees and loan premiums, net	1,292				947				1,047				1,100				915
Allowance for loan losses	4,106				3,779				3,721				4,624				5,147
Loans receivable, net	$	377,908			$	347,351			$	283,444			$	281,526			$	277,454

Commercial and Multi-Family Real Estate Lending. As of June 30, 2017, $216.0 million, or 56.4% of our total loan portfolio was secured by commercial and multi-family real estate property located in our market area. Of this amount, $43.9 million was identified as owner occupied commercial real estate, and the remaining $172.1 million, or 44.9% of our total loan portfolio was secured by income producing, or non-owner occupied commercial real estate. Our commercial real estate loans include loans secured by properties classified as office, hospitality, mini storage, mobile home park, congregate care, retail, education/worship, airport parking lot and other non-residential. As of June 30, 2017, commercial real estate loans totaled $155.5 million, or 40.6% of our portfolio. Multi-family real estate totaled $60.5 million, or 15.8% of our portfolio at June 30, 2017.

Commercial real estate and multi-family loans generally are priced at a higher rate of interest than one-to-four family loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one-to-four family loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

The average loan size in our commercial and multi-family real estate portfolio was $920,000 as of June 30, 2017. We target individual commercial and multi-family real estate loans to small and mid-size owner occupants and investors in our market area, between $1.0 million and $6.0 million. At June 30, 2017, the largest commercial real estate loan in our portfolio was a loan of $11.0 million secured by a hotel located in DuPont, Washington. Our largest multi-family loan as of June 30, 2017, was an $8.1 million loan is secured by a 65 unit apartment complex located in Seattle, Washington.

We offer both fixed and adjustable rates on commercial and multi-family real estate loans. Loans originated on a fixed rate basis generally are originated at terms up to ten years, with amortization terms up to 30 years. A substantial amount of our commercial and multi-family real estate loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment. As of June 30, 2017, we had $29.6 million and $30.9 million in fixed and adjustable rate multi-family loans, respectively, and $19.0 million and $136.5 million in fixed and adjustable rate commercial real estate loans, respectively.

Commercial and multi-family real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family and commercial real estate loans are generally priced utilizing the applicable FHLB or U.S. Treasury Term Borrowing Rate plus an acceptable margin. These loans are typically amortized for up to 30 years with a prepayment penalty. The maximum loan-to-value ratio for commercial and multi-family real estate loans is generally 75%. We require appraisals of all properties securing commercial and multi-family real estate loans, performed by independent appraisers designated by us. We require our commercial and multi-family real estate loan borrowers with outstanding balances in excess of $750,000, or a loan-to-value ratio in excess of 60% to submit annual financial statements and rent rolls on the subject property. The

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properties that fit within this profile are also inspected annually, and an inspection report and photograph are included. We generally require a minimum pro forma debt coverage ratio of 1.20 times for loans secured by commercial and multi-family properties.

The following is an analysis of the types of collateral securing our commercial real estate and multi-family loans at June 30, 2017:



Collateral	Amount		Percent of Total
	(Dollars in thousands)
Multi-family	$	60,500	28.0	%
Office	17,632		8.2
Hospitality	31,689		14.7
Mini storage	26,194		12.1
Mobile home park	6,176		2.9
Congregate care	13,739		6.4
Retail	26,697		12.3
Education/Worship	9,968		4.6
Airport parking lot	4,529		2.1
Other non-residential	18,901		8.7
Total	$	216,025	100.0	%

If we foreclose on a multi-family or commercial real estate loan, our holding period for the collateral typically is longer than for one-to-four family mortgage loans because there are fewer potential purchasers of the collateral. Additionally, as a result of our increasing emphasis on this type of lending, a portion of our multi-family and commercial real estate loan portfolio is relatively unseasoned and has not been subjected to unfavorable economic conditions. As a result, we may not have enough payment history with which to judge future collectability or to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Further, our multi-family and commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if we make any errors in judgment in the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. At June 30, 2017 , there was one commercial real estate loan for $2.0 million and no multi-family loans that were on nonaccrual status. Commercial real estate loan charge offs for the years ended June 30, 2017 and 2016 were $110,000 and $225,000, respectively. There were no multi-family loans charged-off for the years ended June 30, 2017 and 2016.

One-to-Four Family Real Estate Lending. As of June 30, 2017, $59.7 million, or 15.6%, of our total loan portfolio consisted of permanent loans secured by one-to-four family residences of which $1.2 million were nonperforming. We originate both fixed rate and adjustable rate loans in our residential lending program and use Federal Home Loan Mortgage Corporation ("Freddie Mac") underwriting guidelines. None of our residential loan products allow for negative amortization of principal. We typically base our decision on whether to sell or retain secondary market quality loans on the rate and fees for each loan, market conditions and liquidity needs. Although we have sold the majority of our residential loans over the last two years, we do not sell all qualified loans on the secondary market as we hold in our portfolio many residential loans that may not meet all of Freddie Mac's guidelines yet meet our investment and liquidity objectives.

At June 30, 2017, $35.6 million of this loan portfolio consisted of fixed rate loans which were 59.5% of our total one-to-four family portfolio and 9.3% of our total loans at that date. Specifically, we offer fixed rate, residential mortgages from 10 to 30 year terms and we use Freddie Mac daily pricing to set our pricing. Borrowers have a variety of buy-down options with each loan and most mortgages have a duration of less than ten years. The average loan duration is a function of several factors, including real estate supply and demand, current interest rates, expected future rates and interest rates payable on outstanding loans.

Additionally, we offer a full range of adjustable rate mortgage products. These loans offer three, five or seven year fixed-rate terms with annual adjustments thereafter. The annual adjustments are limited to increases or decreases of no more than two percent and carry a typical lifetime cap of five percent above the original rate. At this time, we hold these adjustable rate mortgages in our portfolio. Similar to fixed rate loans, borrower demand for adjustable rate mortgage loans is a function of the current rate environment, the expectations of future interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed rate mortgage loans and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

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While adjustable rate mortgages in our loan portfolio help us reduce our exposure to changes in interest rates, it is possible that, during periods of rising interest rates, the risk of default on adjustable rate mortgage loans may increase as a result of annual repricing and the subsequent higher payment to the borrower. In some rate environments, adjustable rate mortgages may be offered at initial rates of interest below a comparable fixed rate and could result in a higher risk of default or delinquency. Another consideration is that although adjustable rate mortgage loans allow us to decrease the sensitivity of our asset base as a result of changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Our historical experience with adjustable rate mortgages has been very favorable. We do not, however, offer adjustable rate mortgages with initial teaser rates. At June 30, 2017, $24.2 million of our permanent one-to-four family mortgage loans were adjustable rate loans which were 40.5% of our total one-to-four family loan portfolio and 6.3% of our total loans at that date.

Regardless of the type of loan, we underwrite our residential loans based on Freddie Mac's Loan Prospector guidelines. This underwriting considers a variety of factors such as credit history, debt to income, property type, loan-to-value, and occupancy, to name a few. Generally, we use the same Freddie Mac criteria for establishing maximum loan-to-values and also consider whether a transaction is a purchase, rate and term refinance, or cash-out refinance. For loans above 80% loan-to-value, we typically require private mortgage insurance in order to reduce our risk exposure should the loan default. Regardless of the loan-to-value, our one-to-four family loans are appraised by independent fee appraisers that have been approved by us and generally carry no prepayment restrictions. We also require title insurance, hazard insurance, and if necessary, flood insurance in an amount not less than the current regulatory requirements.

We also have additional products designed to make home ownership available to qualified low to moderate income borrowers. The underwriting guidelines for these programs are usually more flexible in the areas of credit or work history. For example, some segments of the low to moderate income population have non-traditional credit histories and pay cash for many of their consumer purchases. They may also work in seasonal industries that do not offer a standard work schedule or salary. Loans such as Freddie Mac's "Homestart Program" are designed to meet this market's needs and often require a borrower to show a history of saving and budgeting. These types of programs also provide education on the costs and benefits of homeownership. We plan on continuing to offer these and other programs which reach out to qualifying borrowers in all the markets we serve.

Anchor Bank does not actively engage in subprime lending, either through advertising, marketing, underwriting and/or risk selection, and has no established program to originate or purchase subprime loans to be held in its portfolio. Residential mortgage loans identified as subprime, with FICO scores of less than 660, were originated and managed in the ordinary course of business, and totaled $3.6 million at June 30, 2017, representing 0.9% of total loans, 5.6% of one-to-four family mortgage loans, and 5.6% of Tier 1 Capital. Our weighted average seasoning for these loans (the number of months since the funding date of the loans) was 91 months as of June 30, 2017. Our one-to-four family mortgage loans identified as subprime based on the borrower's FICO score at time the loan was originated do not represent a material part of our lending activity. Accordingly, these loans are identified as "exclusions" as defined pursuant to regulatory guidance issued by the FDIC in Financial Institutions Letter FIL-9-2001 on subprime lending. At June 30, 2017, $1.2 million of one-to-four family loans were in nonaccrual status. One-to-four family loans of $21,000 were charged off during the year ended June 30, 2017 compared to $258,000 of one-to-four family loans that were charged-off during the year ended June 30, 2016.

Mortgage reform rules mandated by the Dodd-Frank Act became effective in January 2014, requiring lenders to make a reasonable, good faith determination of a borrower's ability to repay any consumer closed-end credit transaction secured by a dwelling and to limit prepayment penalties. Increased risks of legal challenge, private right of action and regulatory enforcement are presented by these rules. Anchor Bank does not originate loans that do not meet the regulatory definition of a qualified mortgage.

Construction and Land Loans. We have been an active originator of real estate construction loans in our market area since 1990. At June 30, 2017, our construction loans totaled $49.2 million or 12.8% of the total loan portfolio, an increase of $27.4 million or 125.7% since June 30, 2016. The majority of these loans are for the construction of multi-family and commercial properties.

We generally provide an interest reserve for funds on builder construction loans that have been advanced. Interest reserves are a means by which a lender builds in, as a part of the loan approval and as a component of the cost of the project, the amount of the monthly interest required to service the debt during the construction period of the loan.

At June 30, 2017, our construction loan portfolio contained four loans totaling $4.8 million which had been previously extended or renewed. Our entire construction loan portfolio at June 30, 2017 consisted of 53 loans requiring interest only payments, 34 of which totaled $37.8 million and were relying on the interest reserve to make this payment. At June 30, 2017, no construction loans were delinquent. No construction loans were charged-off during the years ended June 30, 2017 and 2016.

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At the dates indicated, the composition of our construction portfolio was as follows:



	At June 30,
	2017		2016		2015
	(In thousands)
One-to-four family:
Speculative	$	15,416	$	11,220	$	2,119
Permanent	-		-		-
Custom	1,306		753		-
Land acquisition and development loans	3,870		156		-
Multi-family	21,732		1,083		9,353
Commercial real estate:
Construction	6,827		8,581		259
Total construction (1)	$	49,151	$	21,793	$	11,731


(1)	Loans in process for these loans at June 30, 2017, 2016 and 2015 were $61.6 million, $37.9 million and $7.2 million, respectively.

For the year ended June 30, 2017, we originated 27 builder construction loans to fund the construction of one-to-four family properties totaling $26.6 million, as compared to 28 for $25.0 million during the year ended June 30, 2016, and two for $4.2 million during the year ended June 30, 2015. We originate construction and site development loans to experienced contractors and builders in our market area primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $200,000 to $500,000. All builders were qualified using the same standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value limit on both pre-sold and speculative projects is generally up to 75% of the appraised market value or sales price upon completion of the project. Development plans are required from builders prior to making the loan. We also require that builders maintain adequate insurance coverage. Maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally did not exceed 18 months for residential subdivision development loans at the time of origination. Our residential construction loans typically have adjustable rates of interest based on The Wall Street Journal prime rate and during the term of construction, the accumulated interest is added to the principal of the loan through an interest reserve. Construction loan proceeds are disbursed periodically in increments as construction progresses and based on inspections by our approved inspectors. At June 30, 2017, our largest builder relationship consisted of one loan for $6.6 million, including $3.0 million which was undisbursed.

We also make construction loans for commercial development projects. These projects include multi-family, apartment, retail, office/warehouse and office buildings. These loans generally have an interest-only phase during construction, rely on an interest reserve to fund interest payments and generally convert to permanent financing when construction is completed. Disbursement of funds is at our sole discretion and is based on the progress of the construction. The maximum loan-to-value limit applicable to these loans is generally 75% of the appraised post-construction value. Additional analysis and underwriting of these loans typically results in lower loan-to-value ratios based on the debt service coverage analysis, including our interest rate and vacancy stress testing. Our target minimum debt coverage ratio is 1.20 for loans on these projects. At June 30, 2017, our portfolio of construction loans for commercial and multi-family projects included 17 loans totaling $32.4 million, and there was an additional $42.1 million undisbursed. These loan commitments range in size from $659,000 to $8.8 million with an average disbursed balance of $1.9 million. These loans were for the construction of ten multi-family complexes, one office, one industrial facility and four land developments, all of which are located in Washington. Monitoring construction progress and managing advances during construction are risks not present when lending on complete commercial properties. In order to mitigate these risks the Bank requires the use of an approved third-party construction process monitoring firm for inspections, progress reports and construction budget oversight and utilizes construction loan management software to assist in assuring that advances are consistent with the progress that has been confirmed.

Properties which are the subject of a construction loan are monitored for progress through our construction loan administration department, and include monthly site inspections, inspection reports and photographs provided by a qualified staff inspector or a licensed and bonded third party inspection service contracted by and for us. If we make a determination that there is deterioration, or if the loan becomes nonperforming, we halt any disbursement of those funds identified for use in paying interest and bill the borrower directly for interest payments. Construction loans with interest reserves are underwritten similarly to construction loans without interest reserves.

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We also originate land loans which are typically made to individual consumers to buy a lot or parcel of land for the future construction of the buyer's primary residence and are included in "land loans". At June 30, 2017, our land loans totaled $8.1 million or 2.1% of the total loan portfolio, none of which were on nonaccrual status.

Our construction and land acquisition and development loans are based upon estimates of costs in relation to values associated with the completed project. Construction and land acquisition and development lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, no payment from the borrower is generally required since the accumulated interest is added to the principal of the loan through an interest reserve.

Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences because there is the added risk associated with identifying an end-purchaser for the finished project.

Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can be significantly impacted by the supply and demand conditions. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property rather than the ability of the borrower or guarantor themselves to repay principal and interest.

Consumer Lending. We offer a variety of consumer loans, including home equity loans and lines of credit, automobile loans, credit cards and personal lines of credit. At June 30, 2017, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit, which totaled $14.0 million, or 3.6%, of the total loan portfolio. Our home equity loans are risk priced using credit score, loan-to-value and overall credit quality of the applicant. Home equity loans and lines of credit are made for a variety of purposes including improvement of residential properties. The majority of these loans are secured by a second deed of trust on owner-occupied primary single family residential property. Our home equity lines of credit include a maximum total term of 30 years, including an initial period of 10 years with interest-only payments and a variable rate of interest tied to the Prime Rate, plus a margin (the "draw" period), followed by 20 years of principal and interest payments under a level amortization schedule and an interest rate that is fixed for the 20 years at the fully indexed accrual rate as of the time of variable-to-fixed rate conversion. Our home equity loans are closed-end loans with a term of 20 years and have level amortization with regular monthly payments of principal and interest. The interest rate is risk based and reflects both credit and collateral risk. Both our home equity lines and home equity loans are available up to 95% of the combined loan to value ratio as determined by the Bank.

Our credit card portfolio includes both VISA and MasterCard brands, and totaled $2.6 million, or 0.7% of the total loan portfolio at June 30, 2017. We have been offering credit cards for more than 20 years and all of our credit cards have interest rates and credit limits determined by the creditworthiness of the borrower. We use credit bureau scores in addition to other criteria such as income in our underwriting decision process on these loans.

Our automobile loan portfolio totaled $627,000 or 0.2% of the total loan portfolio at June 30, 2017. We offer several options for vehicle purchase or refinance with a maximum term of 84 months for newer vehicles and 72 months for older vehicles. As with home equity loans, our vehicle and recreational vehicle loans are risk priced based on creditworthiness, loan term and loan-to-value. We currently access a Carfax Vehicle Report to ensure that the collateral being loaned against is acceptable and to protect borrowers from a "lemon" or other undesirable histories. Other consumer loans, consisting primarily of unsecured personal lines of credit totaled $1.5 million or 0.4% of our total loan portfolio at June 30, 2017.

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Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. These risks are not as prevalent with respect to our consumer loan portfolio because a large percentage of the portfolio consists of home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one-to-four family mortgage loans. Nevertheless, home equity lines of credit have greater credit risk than one-to-four family mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold and do not have private mortgage insurance coverage. At June 30, 2017, $242,000 of consumer loans were on nonaccrual status. Consumer loans of $193,000 were charged off during the year ended June 30, 2017 compared to $390,000 of consumer loans that were charged-off during the year ended June 30, 2016.

Commercial Business Lending. These loans are primarily originated as conventional loans to business borrowers, which include lines of credit, term loans and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment and general investments. Loan terms vary from one to seven years. The interest rates on such loans are generally floating rates indexed to The Wall Street Journal prime rate. Inherent with our extension of business credit is the business deposit relationship which frequently includes multiple accounts and related services from which we realize low cost deposits plus service and ancillary fee income.

Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market area. Our commercial business lending policy includes credit file documentation and analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans. At June 30, 2017, commercial business loans totaled $31.6 million or 8.2% of our loan portfolio and was comprised of 170 loans in 73 different business classifications as identified by the North American Industrial Classification System. The largest commercial business relationship at June 30, 2017 consisted of one loan for $9.0 million which is a purchased minority interest in a line of credit to provide warehouse lending to a financial services company which is collateralized by an assignment of finance notes receivable on residential housing secured by properties located in Washington, Oregon and Utah. Our total commitment under our minority interest in the line of credit is $10.3 million. The line of credit is repaid when the finance note is sold by the financial services company into the secondary market, with the proceeds from the sale used to pay down our pro rata portion of the outstanding line of credit.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. For the year ended June 30, 2017 there were no commercial business loan charge-offs as compared to $84,000 during the year ended June 30, 2016. At June 30, 2017, there were two commercial business loans totaling $300,000 on nonaccrual status.

Loan Maturity and Repricing . The following table sets forth certain information at June 30, 2017 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

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	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Beyond 10 Years		Total
	(In thousands)
Real estate:
One-to-four family	$	4,057	$	1,924	$	2,716	$	18,160	$	32,878	$	59,735
Multi-family	2,085		4,187		2,303		21,692		30,233		60,500
Commercial	5,562		7,185		6,302		129,177		7,299		155,525
Construction	36,342		12,809		-		-		-		49,151
Land loans	3,993		1,528		1,540		474		519		8,054
Total real estate	52,039		27,633		12,861		169,503		70,929		332,965
Consumer:
Home equity	2,529		2,052		188		3,158		6,064		13,991
Credit cards	2,596		-		-		-		-		2,596
Automobile	3		53		258		313		-		627
Other	179		404		205		264		472		1,524
Total consumer	5,307		2,509		651		3,735		6,536		18,738
Commercial business	8,438		14,866		3,482		4,285		532		31,603
Total	$	65,784	$	45,008	$	16,994	$	177,523	$	77,997	$	383,306

The following table sets forth the dollar amount of all loans due after June 30, 2018, which have fixed interest rates and have floating or adjustable interest rates:



	Fixed Rates		Floating or Adjustable Rates		Total
	(In thousands)
Real estate:
One-to-four family	$	33,551	$	22,127	$	55,678
Multi-family	27,525		30,890		58,415
Commercial	14,777		135,186		149,963
Construction	2,590		10,219		12,809
Land loans	2,605		1,456		4,061
Total real estate	81,048		199,878		280,926

Consumer:
Home equity	7,267		4,195		11,462
Automobile	624		-		624
Other	1,345		-		1,345
Total consumer	9,236		4,195		13,431

Commercial business	9,928		13,237		23,165
Total	$	100,212	$	217,310	$	317,522

Loan Solicitation and Processing. Loan originations are obtained from a variety of sources, including direct mail and telephone solicitation, trade and business organization participation. Our management and staff are also involved in a wide variety of professional, charitable, service and social organizations within the communities in which we operate, and our branch managers, loan representatives and business bankers solicit referrals from existing clients and new prospects. We also originate and cross sell loans and services to our existing customer base as well as our walk-in/call-in/internet traffic as a result of our long standing community presence and broad based advertising efforts. Loan processing and underwriting, closing and funding are determined

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by the type of loan. Consumer loans, including conforming one-to-four family mortgage loans are processed, underwritten, documented and funded through our centralized processing and underwriting center located in Lacey, Washington. Commercial business loans, including commercial and multi-family real estate loans and any non-conforming one-to-four family mortgage loans are processed and underwritten in one of our two Business Banking Center offices located in Lacey and Aberdeen, Washington. Our consumer and residential loan underwriters have specific approval authority, and requests that exceed such authority are referred to the appropriate supervisory level.

Depending upon the size of the loan request and the total borrower credit relationship with us, loan decisions may include the Executive Loan Committee, Senior Loan Committee, and/or Board of Directors. The Executive Loan Committee is currently comprised of the President/Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer, Credit Administrator, Business Banking Manager, Note Department Manager, and Senior Data Manager. The Senior Loan Committee is a Board committee, comprised of three board members. Credit relationships up to $4.0 million may be approved by the Executive Loan Committee. Loans or aggregated credit relationships which exceed $4.0 million must be approved by Senior Loan Committee, with an authority limit of $6.0 million, or by the Board of Directors.

Commercial and multi-family real estate loans can be approved up to $250,000 by the Chief Financial Officer, up to $500,000 by either the Senior Data Manager or Commercial Loan Administrator, and up to $750,000 by the Special Assets/Construction Manager. These loans can be approved up to $1.0 million by either the President/Chief Executive Officer, Chief Lending Officer or Chief Credit Officer, and up to $2.0 million with the combination of both President/Chief Executive Officer, Chief Lending Officer or Chief Credit Officer. Our Executive Loan Committee is authorized to approve loans to one borrower or a group of related borrowers up to $4.0 million. Loans over $4.0 million must be approved by the Senior Loan Committee with a limit of $6.0 million, or the Board of Directors.

Loan Originations, Servicing, Purchases and Sales. During the years ended June 30, 2017 and 2016, our combined total loan originations and purchases were $110.7 million and $141.4 million, respectively.

One-to-four family loans are generally originated in accordance with the guidelines established by Freddie Mac, with the exception of our special community development loans under the Community Reinvestment Act. We utilize the Freddie Mac Loan Prospector, an automated loan system to underwrite the majority of our residential first mortgage loans (excluding community development loans). The remaining loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our Board-approved loan policy.

We actively sell the majority of our residential fixed rate first mortgage loans to the secondary market at the time of origination. During the years ended June 30, 2017 and 2016, we sold $8.9 million and $7.7 million, respectively, in whole loans to the secondary market. Our secondary market relationship is with Freddie Mac. We generally retain the servicing on the loans we sell into the secondary market. Loans are generally sold on a non-recourse basis. As of June 30, 2017 and 2016, our residential loan servicing portfolio was $74.8 million and $76.9 million, respectively.

In order to achieve our loan growth objectives and/or improve earnings, we may purchase loans, either individually, through participations, or in bulk. During the year ended June 30, 2016, we purchased $22.8 million in multi-family loans. The loan purchase consisted of 12 multi-family projects in King and Pierce counties. We have also participated with other lenders on commercial real estate loans located in Washington, whereby we receive a portion of a loan originated by another lender who retains the servicing and customer relationship of the loan and may, depending on the terms of the agreement, retain a portion of the interest as a servicing fee. During 2016 we participated in $9.9 million of commercial real estate loans and $15.8 million of commercial business loans, including the $9.0 million purchased minority interest in a line of credit to provide warehouse lending, discussed above. Purchased loans, loan pools, and participations are underwritten by our credit administration department, evaluated for credit risk, and approved by the appropriate loan committee(s) prior to purchase, according to our lending authority guidelines.

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The following table shows total loans originated, purchased, sold and repaid during the periods indicated:



	Year Ended June 30,
	2017			2016			2015
Loans originated:	(In thousands)
Real estate:
One-to-four family	$	24,060		$	22,280		$	5,050
Multi-family	12,427			3,043			4,946
Commercial	34,645			32,758			34,444
Construction	29,380			19,997			17,977
Land loans	3,224			4,122			776
Total real estate	103,736			82,200			63,193
Consumer:
Home equity	2,291			2,616			651
Credit cards	-			191			-
Automobile	314			432			222
Other	226			-			317
Total consumer	2,831			3,239			1,190

Commercial business	4,173			7,389			8,214
Total loans originated	110,740			92,828			72,597

Participation loans purchased:
Commercial real estate	-			9,889			-
Commercial business	-			15,845			-
	-			25,734			-
Loans purchased:
Multi-family	-			22,840			-
Total loans purchased	-			22,840			-

Loans sold:
One-to-four family	8,867			7,724			1,053
Participation loans	4,000			1,763			-
Total loans sold	12,867			9,487			1,053

Principal repayments	60,308			64,946			70,473
Loans securitized	3,536			-			-
Transfer to real estate owned	954			852			3,188
Increase (decrease) in other items, net	(967		)	(346		)	4,540
Loans held for sale	1,551			1,864			505
Net increase in loans receivable, net	$	30,557		$	63,907		$	1,918

Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate related products. Loan fees generally represent a percentage of the principal amount of the loan that is paid by the borrower. Accounting standards require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or sold are recognized as income at the time of prepayment. We had

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$1.6 million of net deferred loan fees and costs as of June 30, 2017 compared to $1.5 million and $1.0 million at June 30, 2016 and 2015, respectively.

Asset Quality

The objective of our loan review process is to determine risk levels and exposure to loss. The depth of review varies by asset types, depending on the nature of those assets. While certain assets may represent a substantial investment and warrant individual reviews, other assets may have less risk because the asset size is small, the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of individual assets would expand the review process without measurable advantage to risk assessment. Asset types with these characteristics may be reviewed as a total portfolio on the basis of risk indicators such as delinquency (consumer and residential real estate loans) or credit rating. A formal review process is conducted on individual assets that represent greater potential risk. A formal review process is a total re-evaluation of the risks associated with the asset and is documented by completing an asset review report. Certain real estate-related assets must be evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of loss exposure and, consequently, the adequacy of valuation allowances.

We define a loan as being impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Large groups of smaller balance homogeneous loans such as consumer secured loans, residential mortgage loans and consumer unsecured loans are collectively evaluated for potential loss. All other loans are evaluated for impairment on an individual basis.

We generally assess late fees or penalty charges on delinquent loans of five percent of the monthly payment amount due. Substantially all fixed rate and adjustable rate mortgage loan payments are due on the first day of the month; however, the borrower is given a 15-day grace period to make the loan payment. When a mortgage loan borrower fails to make a required payment when it is due, we institute collection procedures. The first notice is mailed to the borrower on the 16th day requesting payment and assessing a late charge. Attempts to contact the borrower by telephone generally begin upon the 30th day of delinquency. If a satisfactory response is not obtained, continual follow-up contacts are attempted until the loan has been brought current. Before the 90th day of delinquency, attempts to interview the borrower are made to establish the cause of the delinquency, whether the cause is temporary, the attitude of the borrower toward the debt and a mutually satisfactory arrangement for curing the default.

When a consumer loan borrower fails to make a required payment on a consumer loan by the payment due date, we institute the same collection procedures as for our mortgage loan borrowers.

The Board of Directors is informed monthly as to the number and dollar amount of mortgage and consumer loans that are delinquent by more than 30 days, and is given information regarding classified assets.

If the borrower is chronically delinquent and all reasonable means of obtaining payments have been exercised, we will seek to recover the collateral securing the loan according to the terms of the security instrument and applicable law. In the event of an unsecured loan, we will either seek legal action against the borrower or refer the loan to an outside collection agency.

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Nonperforming Assets. The following table sets forth information with respect to our nonperforming assets and restructured loans for the periods indicated:



	At June 30,
	2017			2016			2015			2014			2013
Loans accounted for on a nonaccrual basis:	(Dollars in thousands)
Real estate:
One-to-four family	$	1,170		$	1,539		$	1,263		$	2,101		$	4,758
Multi-family	-			-			-			158			-
Commercial	1,992			319			-			2,070			-
Construction	-			-			-			-			-
Land loans	-			-			-			150			734
Total real estate	3,162			1,858			1,263			4,479			5,492
Consumer:
Home equity	242			16			-			-			428
Credit cards	-			-			-			-			-
Automobile	-			-			-			-			2
Other	-			1			31			-			-
Total consumer	242			17			31			-			430
Commercial business	300			97			711			235			219
Total	3,704			1,972			2,005			4,714			6,141
Accruing loans which are contractually past due 90 days or more:
Consumer:
Credit cards	-			-			6			-			18
Total consumer	-			-			6			-			18
Commercial business	-						-			-			-
Total of nonaccrual and 90 days past due loans	3,704			1,972			2,011			4,714			6,159
Real estate owned	867			373			797			5,067			6,212
Repossessed automobiles	-			46			-			59			21
Total nonperforming assets	$	4,571		$	2,391		$	2,808		$	9,840		$	12,392
Troubled debt restructured loans (1)	$	4,320		$	8,755		$	9,827		$	11,261		$	17,469
Allowance for loan loss as a percent of nonperforming loans	110.8		%	191.6		%	185.0		%	98.1		%	83.6		%
Classified assets included in nonperforming assets	$	3,704		$	1,972		$	2,011		$	4,714		$	6,159
Nonaccrual and 90 days or more past due loans as percentage of total loans	1.0		%	0.6		%	0.7		%	1.6		%	2.2		%
Nonaccrual and 90 days or more past due loans as a percentage of total assets	0.8		%	0.5		%	0.5		%	1.2		%	1.4		%
Nonperforming assets as a percentage of total assets	1.0		%	0.6		%	0.7		%	2.5		%	2.7		%
Nonaccrued interest (2)	$	117		$	126		$	140		$	323		$	475

(1) There were $131,000 of restructured loans included in nonperforming assets as of June 30, 2017.

(2) Represents foregone interest on nonaccrual loans.

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Real Estate Owned and Other Repossessed Assets. As of June 30, 2017, the Company had three real estate owned ("REO") properties with an aggregate book value of $867,000 compared to six properties with an aggregate book value of $373,000 at June 30, 2016. At June 30, 2017, the largest of the REO properties was a residential real estate property with an aggregate book value of $647,000 located in Lewis County, Washington.

Restructured Loans. According to generally accepted accounting principles, we are required to account for certain loan modifications or restructurings as "troubled debt restructurings." Our policy is to track and report all loans modified to terms not generally available in the market, except for those outside of the materiality threshold established for such tracking and reporting. In general, the modification or restructuring of a debt is considered a troubled debt restructuring if we, for economic or legal reasons related to a borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. We will modify the loan when upon completion of the residence the home is rented instead of sold, or when the borrower can continue to make interest payments and is unable to repay the loan until the property is sold as a result of current market conditions. In connection with a loan modification, we may lower the interest rate, extend the maturity date and require monthly payments when monthly payments are not otherwise required. We may also require additional collateral. All loans which are extended with rates and/or terms below market are identified as impaired loans and an appropriate allowance is established pursuant to generally accepted accounting principles. Loans which are placed in nonaccrual status and subsequently modified are not returned to accruing status until there has been at least six months of consecutive satisfactory performance. As of June 30, 2017, there were 26 loans with aggregate net principal balances of $4.3 million that we have identified as "troubled debt restructures." In connection with these loans, a valuation allowance in the form of charged-off principal equal to $145,000 has been taken. Of these 26 loans, one loan totaling $131,000 was not performing according to the modified repayment terms at June 30, 2017, and was classified as nonaccrual.

The existence of a guarantor is an important factor that we consider in every deteriorating credit relationship and in our determination as to whether or not to restructure the loan. Additional factors we consider include the cooperation we receive from the borrower and/or guarantor as determined by the timeliness and quality of their direct and indirect communication, including providing us with current financial information; their willingness to develop new, and report on, previously identified risk mitigation strategies; and whether we receive additional collateral. The financial ability of the borrower and/or guarantor is determined through a review and analysis of personal and business financial statements, tax return filings, liquidity verifications, personal and business credit reports, rent rolls, and direct reference checks. The type of financial statements required of a borrower and/or guarantor varies based upon the credit risk and our aggregate credit exposure as it relates to the borrower and any guarantor. Reviewed financial statements are required for commercial business loans greater than $1.5 million and for commercial real estate loans greater than $5.0 million, with the level of outside independent accounting review decreasing as our risk exposure decreases. We conduct reviews of the financial condition of borrowers and guarantors at least annually for credits of $750,000 or more, and for aggregate relationships of $1.5 million or more.

At both the time of loan origination and when considering a restructuring of a loan, we also assess the guarantor's character and reputation. This assessment is made by reviewing the duration of time such guarantor has been providing credit guarantees, the aggregate of the contingent liabilities of such guarantor as it relates to guarantees of additional debt provided to other lenders, and the results of direct reference checks. Cooperative and communicative borrowers and/or guarantors may create opportunities for restructuring a loan, however, this cooperation does not affect the amount of the allowance for loan losses recorded or the timing of charging off the loan.

Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and repayment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent and approved by senior management or the Classified Asset Committee to address the risk specifically or we may allow the loss to be charged-off against the general loan allowance. General loan allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are considered either watch or special

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mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by our regulators, which can order the establishment of additional loss allowances.

In connection with the filing of periodic reports with the FDIC classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. On the basis of our review of our loans, as of June 30, 2017, we had classified loans of $3.7 million. The total amount classified represented 5.6% of equity capital and 0.8% of assets at June 30, 2017.

The aggregate amounts of our classified loans at the date indicated (as determined by management), were as follows:



	At June 30,
	2017		2016
	(In thousands)
Classified Loans:
Substandard	$	3,721	$	2,773
Doubtful	-		-
Loss	-		-
Total	$	3,721	$	2,773

Our $3.7 million of substandard loans at June 30, 2017, consisted primarily of $3.0 million of real estate secured loans and $699,000 of consumer and commercial business loans. Of the $3.0 million of substandard loans which were real estate secured, $1.0 million were one-to-four family, $2.0 million were commercial real estate, $392,000 were home equity loans, and $7,000 was a mobile home loan, secured by property located in Washington.

Potential Problem Loans. Potential problem loans are loans that do not yet meet the criteria for identification as classified assets graded as substandard or doubtful, but where known information about the borrower causes management to have serious concerns about the ability of the borrower to comply with present loan repayment terms and may result in the loan being included as a classified asset for future periods. At June 30, 2017, we had $7.0 million, or 1.8% of our net loans that were identified as potential problem loans compared to $13.3 million or 3.8% of our net loans at June 30, 2016.

The largest problem loan at June 30, 2017 was a term loan of $1.1 million secured by commercial real estate in Washington representing 15.3% of our potential problem loans. The commercial real estate property securing this loan is located in Western Washington and the loan was in compliance with its repayment terms at June 30, 2017. No other potential problem loan had a balance in excess of $1.0 million at June 30, 2017.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our Chief Credit Officer assesses the allowance for loan and lease losses on a monthly basis and reports to the Board of Directors no less than quarterly. The 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.

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 and requires management to make assumptions about probable losses inherent in the loan portfolio. The impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.

Our methodology for analyzing the allowance for loan losses consists of two components: general and specific allowances. The formula allowance is determined by applying an estimated loss percentage to various groups of loans. The loss percentages are generally based on various historical measures such as the amount and type of classified loans, past due ratios and loss experience, which could affect the collectability of the respective loan types.

The specific allowance component is created when management believes that the collectability of a specific large loan, such as a real estate, multi-family or commercial real estate loan, has been impaired and a loss is probable.

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The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the amount of actual loan charge-offs, net of recoveries.

We had a $310,000 provision for loan losses for the year ended June 30, 2017 compared to a $340,000 provision for loan losses at June 30, 2016, primarily reflecting loan growth. The specific risks that are considered in our analysis for determining the provision for loan losses include an automatic elevation in risk grade and corresponding reserve requirement based on loan payment and payment delinquencies, including debt to the borrower and related entities under loans to one borrower guidelines; and a qualitative analysis of the economic and portfolio trends. We also continually monitor the market conditions reported at national, regional, and local levels including those from the FDIC, Case-Shiller, and Realtor Boards.

The calculation of the allowance for loan losses includes an incremental component, a qualitative component, and specific reserve amount as a result of impairment analysis. The total allowance for loan losses was $4.1 million and $3.8 million at June 30, 2017 and 2016, respectively. Of the total allowance at June 30, 2017, specific reserves decreased to $198,000 and general reserves increased to $3.9 million from specific reserves of $590,000 and general reserves of $3.2 million, respectively, at June 30, 2016. The level of the allowance is based on estimates, and the ultimate losses may vary from the estimates. Management will continue to review the adequacy of the allowance for loan losses and make adjustments to the provision for loan losses based on loan growth, economic conditions, charge-offs and portfolio composition.

Levels and trends in delinquencies and nonperforming loans have increased during the year ended June 30, 2017. During the current economic cycle, we have experienced changes in our portfolio with respect to delinquent, nonperforming and impaired loans. At June 30, 2017 and June 30, 2016, our total delinquent loans, including loans 30 or more days past due, were $4.1 million and $3.3 million, respectively, which included nonperforming loans of $3.7 million and $2.0 million at the end of each year. The increase in total delinquent loans was primarily the result of a $2.0 million commercial real estate loan becoming delinquent although the loan was still accruing interest at June 30, 2017. Net (recoveries) charge-offs during the years ended June 30, 2017 and June 30, 2016 were $(17,000) and $282,000, respectively.

Management identifies a loan as impaired when the source of repayment of the loan is recognized as being in jeopardy, such that economic or other changes have affected the borrower to the extent that it may not be able to meet repayment terms, and that resources available to the borrower, including the liquidation of collateral, may be insufficient. Impairment is measured on a loan-by-loan basis for each loan based upon its source or sources of repayment. For collateral dependent loans management utilizes the valuation from an appraisal obtained generally within the last six months in establishing the allowance for loan losses, unless additional information known to management results in management applying a downward adjustment to the valuation. Appraisals are updated subsequent to the time of origination when management identifies a loan as impaired or potentially being impaired, as indicated by the borrower's payment and loan covenant performance, an analysis of the borrower's financial condition, property tax and/or assessment delinquency, increases in deferred maintenance or other information known to management. When the results of the impairment analysis indicate a potential loss, the loan is classified as substandard and a specific reserve is established for such loan in the amount determined. Further, the specific reserve amount is adjusted to reflect any further deterioration in the value of the collateral that may occur prior to liquidation or reinstatement. The impairment analysis takes into consideration the primary, secondary, and tertiary sources of repayment, whether impairment is likely to be temporary in nature or liquidation is anticipated.

A loan is considered impaired when we have determined that we may be unable to collect payments of principal and/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.

As of June 30, 2017 and 2016, we had impaired loans of $8.5 million and $10.7 million, respectively. Included within the impaired loan totals are loans identified as troubled debt restructures.

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The following table summarizes the distribution of the allowance for loan losses by loan category at the dates indicated:



	At June 30,
	2017						2016						2015						2014						2013
	Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans		Loan Balance		Amount by Loan Category		Percent of Loans in Loan Category to total Loans
	(Dollars in thousands)
Real estate:
One-to-four family	$	59,735	$	495	15.6	%	$	61,230	$	798	17.4	%	$	57,944	$	1,113	20.1	%	$	63,009	$	1,550	21.9	%	$	73,901	$	1,393	26.1	%
Multi-family	60,500		580		15.8		53,742		454		15.3		43,249		95		15.0		47,507		229		16.5		38,425		156		13.6
Commercial	155,525		1,566		40.6		149,527		1,333		42.5		128,306		262		44.5		107,828		682		37.6		106,859		671		37.7
Construction	49,151		651		12.8		21,793		271		6.2		11,731		247		4.1		19,690		190		6.9		5,641		356		2.0
Land loans	8,054		120		2.1		6,839		75		1.9		4,069		75		1.4		4,126		74		1.4		5,330		531		1.9
Total real estate	332,965		3,412		86.9		293,131		2,931		83.3		245,299		1,792		85.1		242,160		2,725		84.3		230,156		3,107		81.2
Consumer:
Home equity	13,991		251		3.6		16,599		369		4.7		17,604		189		6.1		20,894		290		7.3		25,835		376		9.1
Credit cards	2,596		101		0.7		2,969		118		0.8		3,289		161		1.1		3,548		167		1.2		4,741		283		1.7
Automobile	627		2		0.2		597		3		0.2		686		39		0.2		1,073		63		0.4		1,850		103		0.7
Other	1,524		24		0.4		1,933		26		0.5		2,347		56		0.8		2,838		67		1.0		2,723		55		1.0
Total consumer	18,738		378		4.9		22,098		516		6.2		23,926		445		8.3		28,353		587		9.9		35,149		817		12.4
Commercial business	31,603		316		8.2		36,848		332		10.5		18,987		1,405		6.6		16,737		1,231		5.8		18,211		1,172		6.4
Unallocated	-		-		-		-		-		-		-		79		-		-		81		-		-		51		-
Total	$	383,306	$	4,106	100.0	%	$	352,077	$	3,779	100.0	%	$	288,212	$	3,721	100.0	%	$	287,250	$	4,624	100.0	%	$	283,516	$	5,147	100.0	%

Management believes that it uses the best information available to determine the allowance for loan losses. However, unforeseen market conditions could result in adjustments to the allowance for loan losses and net income could be significantly affected, if circumstances differ substantially from the assumptions used in determining the allowance.

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The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated:



	Year Ended June 30,
	2017			2016			2015			2014			2013
	(Dollars in thousands)
Allowance at beginning of period	$	3,779		$	3,721		$	4,624		$	5,147		$	7,057
Provision for loan losses	310			340			-			-			750
Recoveries:
Real estate loans:
One-to-four family	212			194			129			389			143
Multi-family	-			6			-			-			-
Commercial	13			1			-			972			201
Construction	53			349			254			374			43
Land loans	-			-			-			-			-
Total real estate	278			550			383			1,735			387
Consumer:
Home equity	25			61			44			37			57
Credit cards	17			43			60			46			51
Automobile	3			5			3			6			23
Other	11			9			8			49			68
Total consumer	56			118			115			138			199
Commercial business	7			7			96			38			37
Total recoveries	341			675			594			1,911			623
Charge-offs:
Real estate loans:
One-to-four family	21			258			561			897			416
Multi-family	-			-			159			-			-
Commercial	110			225			340			403			-
Construction	-			-			-			-			105
Land loans	-			-			-			-			-
Total real estate	131			483			1,060			1,300			521
Consumer:
Home equity	59			180			239			572			356
Credit cards	122			105			72			198			212
Automobile	3			4			-			41			30
Other	9			101			40			65			633
Total consumer	193			390			351			876			1,231
Commercial business	-			84			86			258			1,531
Total charge-offs	324			957			1,497			2,434			3,283
Net (recoveries) charge-offs	(17		)	282			903			523			2,660
Balance at end of period	$	4,106		$	3,779		$	3,721		$	4,624		$	5,147
Allowance for loan losses as a percentage of total loans outstanding at the end of the period	1.1		%	1.1		%	1.3		%	1.6		%	1.8		%
Net (recoveries) charge-offs as a percentage of average total loans outstanding during the period	-		%	0.1		%	0.3		%	0.2		%	0.9		%
Allowance for loan losses as a percentage of nonperforming loans at the end of period	110.8		%	191.6		%	185.0		%	98.1		%	83.6		%

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Our Executive Loan Committee reviews the appropriate level of the allowance for loan losses on a quarterly basis and establishes the provision for loan losses based on the risk composition of our loan portfolio, delinquency levels, loss experience, economic conditions, bank regulatory examination results, seasoning of the loan portfolios and other factors related to the collectability of the loan portfolio as detailed further in this Form 10-K under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Loan Losses" of this Form 10-K. 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.

Management believes that our allowance for loan losses as of June 30, 2017 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. 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 provision 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 bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

The following table provides certain summary information with respect to our allowance for loan losses, including charge-offs, recoveries and selected ratios for the periods indicated:



	Year Ended June 30,
	2017			2016			2015			2014			2013
	(Dollars in thousands)
Provision for loan losses	$	310		$	340		$	-		$	-		$	750
Allowance for loan losses	4,106			3,779			3,721			4,624			5,147
Allowance for loan losses as a percentage of total loans outstanding at the end of the period	1.1		%	1.1		%	1.3		%	1.6		%	1.8		%
Net (recoveries) charge-offs	(17		)	282			903			523			2,660
Total of nonaccrual and 90 days past due loans still accruing interest	3,704			1,972			2,011			4,714			6,159
Allowance for loan losses as a percentage of nonperforming loans at end of period	110.8		%	191.6		%	185.0		%	98.1		%	83.6		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	1.0		%	0.6		%	0.7		%	1.6		%	2.2		%
Total loans	$	383,306		$	352,077		$	288,212		$	287,250		$	283,516

Investment Activities

General. Under Washington law, savings banks are permitted to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker's acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities, and obligations of states and their political sub-divisions.

The Investment Committee has the authority and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate changes to policy and strategies to the Board. On a monthly basis, our management reports to the Board a summary of investment holdings with respective market values, and all purchases and sales of investments. The Chief Financial Officer has the primary responsibility for the management of the investment portfolio. The Chief Financial Officer considers various factors when making decisions regarding proposed investments, including the marketability, maturity and tax consequences. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk.

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At June 30, 2017, our investment portfolio consisted principally of mortgage-backed securities, municipal bonds and mutual funds consisting of mortgage-backed securities. From time to time, investment levels may increase or decrease depending upon yields available on investment opportunities and management's projected demand for funds for loan originations, deposits and other activities.

Mortgage-Backed Securities . The mortgage-backed securities in our investment portfolio were comprised of Freddie Mac, Fannie Mae and Ginnie Mae mortgage-backed securities. At June 30, 2017, the amortized cost of mortgage-backed securities held in the available-for-sale category was $21.4 million with a weighted average yield of 2.75%, while the mortgage-backed securities in the held-to-maturity category was $4.9 million with a weighted average yield of 3.19%.

Municipal Bonds . The tax-exempt and taxable municipal bond portfolios were comprised of general obligation bonds ( i.e. , backed by the general credit of the issuer) and revenue bonds ( i.e. , backed by revenues from the specific project being financed) issued by various municipal corporations. All bonds are rated "A" or better and are from issuers located within the State of Washington. The weighted average yield on the tax exempt bonds (on a tax equivalent basis) was 5.74% at June 30, 2017, and the total amount of amortized cost of our municipal bonds was $165,000 at that date, of which all were categorized as available-for-sale.

Federal Home Loan Bank Stock. As a member of the FHLB of Des Moines, we are required to own capital stock in the FHLB of Des Moines. The amount of stock we hold is based on guidelines specified by the FHLB of Des Moines. The redemption of any excess stock is determined daily based on our membership requirement as well as outstanding borrowings. The carrying value of FHLB stock was $2.3 million at June 30, 2017.

Our investment in FHLB stock is carried at cost, which approximates fair value. As a member of the FHLB System, we are required to maintain a minimum level of investment in FHLB stock based on specific percentages of our outstanding mortgages, total assets, or FHLB advances. At June 30, 2017, our minimum investment requirement was $2.0 million. We were in compliance with the FHLB minimum investment requirement at June 30, 2017. For the year ended June 30, 2017, we received $75,000 of dividends from the FHLB.

Bank-Owned Life Insurance. We purchase bank-owned life insurance policies ("BOLI") to offset future employee benefit costs. At June 30, 2017, we had a $20.0 million investment in life insurance contracts. The purchase of BOLI policies, and its increase in cash surrender value, is classified as "Life insurance investment, net of surrender charges" in our Consolidated Statements of Financial Condition. The income related to the BOLI, which is generated by the increase in the cash surrender value of the policy. See Item 8. "Financial Statements and Supplementary Data" of this Form 10-K for our Consolidated Financial Statements and specifically the Consolidated Statements of Financial Condition and Consolidated Statements of Income regarding BOLI.

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The following table sets forth the composition of our investment portfolio at the dates indicated:



	At June 30,
	2017				2016				2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Available-for-sale:
Securities:
Municipal bonds	$	165	$	165	$	175	$	175	$	434	$	435
Mortgage-backed securities:
FHLMC (1)	11,140		11,103		9,442		9,559		11,780		11,791
FNMA (2)	9,532		9,363		13,199		13,204		16,534		16,408
GNMA (3)	554		539		734		727		948		931
Total available-for-sale	21,391		21,170		23,550		23,665		29,696		29,565
Held-to-maturity:
Securities:
Municipal bonds	-		-		-		-		119		119
Mortgage-backed securities:
FHLMC	2,212		2,213		2,793		2,845		3,367		3,406
FNMA	1,209		1,257		1,513		1,613		1,858		1,960
GNMA	1,528		1,484		1,985		1,967		2,273		2,207
Total held-to-maturity	4,949		4,954		6,291		6,425		7,617		7,692
Total securities	$	26,340	$	26,124	$	29,841	$	30,090	$	37,313	$	37,257

(1) Freddie Mac

(2) Federal National Mortgage Association (Fannie Mae)

(3) Government National Mortgage Association (Ginnie Mae)

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The table below sets forth information regarding the amortized cost, weighted average yields and maturities or call dates of Anchor Bank's investment portfolio at June 30, 2017:



					At June 30, 2017
	At June 30, 2017				One Year or Less				Over One to Five Years				Over Five to Ten Years				Over Ten Years				Mortgage-Backed Securities				Totals
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		MBS Securities Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available-for-sale:
Securities:
Municipal bonds (1)	$	165	5.74	%	$	-	-	%	$	-	-	%	$	-	-	%	$	165	5.74	%	$	-	-	%	$	165	5.74	%
Mortgage-backed securities:
FHLMC	11,140		2.78		-		-		-		-		-		-		-		-		11,140		2.78		11,140		2.78
FNMA	9,532		2.72		-		-		-		-		-		-		-		-		9,532		2.72		9,532		2.72
GNMA	554		2.54		-		-		-		-		-		-		-		-		554		2.54		554		2.54
Total available-for-sale	21,391				-				-				-				165				21,226				21,391
Held-to-maturity:
Securities:
Municipal bonds (1)	-		-		-		-		-		-		-		-		-		-		-		-		-		-
Mortgage-backed securities:
FHLMC	2,212		2.82		-		-		-		-		-		-		-		-		2,212		2.82		2,212		2.82
FNMA	1,209		3.71		-		-		-		-		-		-		-		-		1,209		3.71		1,209		3.71
GNMA	1,528		3.31		-		-		-		-		-		-		-		-		1,528		3.31		1,528		3.31
Total held-to-maturity	4,949				-				-				-				-				4,949				4,949
Total	$	26,340			$	-			$	-			$	-			$	165			$	26,175			$	26,340

(1) Yields on tax exempt obligations are computed on a tax equivalent basis using a federal tax rate of 31.0%.

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Deposit Activities and Other Sources of Funds

General . Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings from the FHLB of Des Moines are used to supplement the availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.

Our deposit composition reflects a mixture with certificates of deposit accounting for approximately one-half of the total deposits and interest and noninterest-bearing checking, savings and money market accounts comprising the balance of total deposits. We rely on marketing activities, convenience, customer service and the availability of a broad range of deposit products and services to attract and retain customer deposits.

Deposits. Substantially all of our depositors are residents of Washington State. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including checking accounts, money market deposit accounts, savings accounts and certificates of deposit with a variety of rates. Deposit account terms vary according to the minimum balance required the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the development of long term profitable customer relationships, current market interest rates, current maturity structure and deposit mix, our customer preferences and the profitability of acquiring customer deposits compared to alternative sources.

At June 30, 2017, we had $85.8 million of jumbo ($100,000 or more) retail certificates of deposit. We also had $9.2 million in public funds, which represented 2.7% of total deposits at June 30, 2017. Anchor Bank had no brokered deposits at June 30, 2017.

In the unlikely event we are liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to Anchor Bancorp, as the sole shareholder of Anchor Bank. For additional information, see Note 1 of the Notes to Consolidated Financial Statements.

Deposit Activities. The following table sets forth our total deposit activities for the periods indicated:



	Year Ended June 30,
	2017		2016			2015
	(In thousands)
Beginning balance	$	300,894	$	299,812		$	311,034
Net deposits (withdrawals) before interest credited	41,536		(1,505		)	(13,952		)
Interest credited	2,757		2,587			2,730
Net increase (decrease) in deposits	44,293		1,082			(11,222		)
Ending balance	$	345,187	$	300,894		$	299,812

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The following table sets forth information concerning our time deposits and other deposits at June 30, 2017:



Weighted Average Interest Rate									Percentage of Total Deposits
						Minimum Balance
	Term	Category	Amount
				(In thousands)
0.15	%	N/A	Savings deposits	$	43,454		$	100	(12.6	)%
0.04		N/A	Demand deposit accounts	84,070			10		(24.3	)
0.40		N/A	Money market accounts	73,154			1,000		(21.2	)

			Certificates of Deposit
0.10		6 month	Fixed-term, fixed rate	1,225			500		(0.3	)
0.34		9-12 month	Fixed-term, fixed rate	5,159			500		(1.5	)
1.22		13-16 month	Fixed-term, fixed rate	553			500		(0.2	)
1.57		18-20 month	Fixed term-fixed or variable rate	46,634			500		(13.5	)
0.27		24 month	Fixed term-fixed or variable rate	3,675			2,000		(1.1	)
0.68		30-36 month	Fixed term-fixed or variable rate	5,133			500		(1.5	)
1.14		48 month	Fixed term-fixed or variable rate	6,763			500		(1.9	)
1.59		60 month	Fixed term-fixed or variable rate	12,388			500		(3.6	)
3.10		96 month	Fixed term-fixed or variable rate	56,148			500		(16.3	)
0.79		Other	Fixed term-fixed or variable rate	6,831			500		(2.0	)
			Total of certificates of deposit	$	144,509				(41.9	)%
			Total of deposits	$	345,187				(100.0	)%

Time Deposits by Rate. The following table sets forth our time deposits classified by rates as of the dates indicated:



	At June 30,
	2017		2016		2015
	(In thousands)
0.00 - 0.99%	$	27,351	$	45,474	$	50,185
1.00 - 1.99	58,793		14,024		9,608
2.00 - 2.99	21,034		15,641		17,813
3.00 - 3.99	37,331		42,929		44,062
4.00 - 4.99	-		370		4,522
5.00 - 5.99	-		-		140
Total	$	144,509	$	118,438	$	126,330

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Time Deposit Certificates. The following table sets forth the amount and maturities of time deposit certificates at June 30, 2017:



	Amount Due
	Within 1 Year		After 1 Year Through 2 Years		After 2 Years Through 3 Years		After 3 Years Through 4 Years		Beyond 4 Years		Total
	(In thousands)
0.00 - 0.99%	$	19,674	$	6,638	$	933	$	58	$	48	$	27,351
1.00 - 1.99	4,255		40,377		6,611		6,096		1,454		58,793
2.00 - 2.99	34		10,838		4,331		129		5,702		21,034
3.00 - 3.99	18,088		19,139		-		-		104		37,331
Total	$	42,051	$	76,992	$	11,875	$	6,283	$	7,308	$	144,509

The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of June 30, 2017. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.



	Time Deposit Certificates
Maturity Period
	(In thousands)

Three months or less	$	7,243
Over three through six months	6,347
Over six through twelve months	10,206
Over twelve months	62,009
Total	$	85,805

Deposits. The following table sets forth the balances of deposits in the various types of accounts we offered at the dates indicated:



	At June 30,
	2017							2016							2015
	Amount		Percent of Total		Increase/ (Decrease)			Amount		Percent of Total		Increase/ (Decrease)			Amount		Percent of Total
	(Dollars in thousands)
Savings deposits	$	43,454	12.6	%	$	(1,532	)	$	44,986	15.0	%	$	2,587		$	42,399	14.1	%
Demand deposit accounts	84,070		24.4		5,870			78,200		26.0		11,033			67,167		22.4
Money market accounts	73,154		21.2		13,884			59,270		19.7		(4,646		)	63,916		21.3
Fixed-rate certificates which mature in the year ending:
Within 1 year	38,471		11.1		(1,110		)	39,581		13.2		2,484			37,097		12.4
After 1 year, but within 2 years	73,921		21.4		48,831			25,090		8.3		6,868			18,222		6.1
After 2 years, but within 5 years	25,463		7.4		(23,071		)	48,534		16.1		(13,310		)	61,844		20.6
Certificates maturing thereafter	-		-		(50		)	50		-		(2,051		)	2,101		0.7
Variable rate certificates	6,654		1.9		1,471			5,183		1.7		(1,883		)	7,066		2.4
Total	$	345,187			$	44,293		$	300,894			$	1,082		$	299,812

Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We do, however, use advances from the FHLB of Des Moines to supplement our supply of lendable funds, to meet short-term deposit withdrawal requirements and also to provide longer term funding to better match the duration of selected loan and investment maturities.

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As one of our capital management strategies, we have used advances from the FHLB of Des Moines to fund loan originations in order to increase our net interest income. Depending upon the retail banking activity and the availability of excess capital, we will consider and undertake additional leverage strategies within applicable regulatory requirements or restrictions. Such borrowings would be expected to primarily consist of FHLB of Des Moines advances.

As a member of the FHLB of Des Moines, we are required to own capital stock in the FHLB of Des Moines and are authorized to apply for advances on the security of that stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. We also maintain a committed credit facility with the FHLB of Des Moines that provides for immediately available advances up to an aggregate of 35% of the prior quarter's total assets of Anchor Bank. At June 30, 2017, outstanding advances to Anchor Bank from the FHLB of Des Moines totaled $45.5 million as compared to $62.0 million at June 30, 2016.

The following tables set forth information regarding FHLB of Des Moines advances by us during and at the end of the periods indicated:



	Year Ended June 30,
	2017			2016			2015
	(Dollars in thousands)
Maximum amount of borrowing outstanding at any month end:
FHLB advances	$	63,000		$	62,000		$	22,500
Approximate average borrowing outstanding:
FHLB advances	51,817			29,875			13,629
Approximate weighted average rate paid on:
FHLB advances	1.09		%	0.94		%	2.65		%



	At June 30,
	2017			2016			2015
	(Dollars in thousands)
Balance outstanding at end of period:
FHLB advances	$	45,500		$	62,000		$	10,000
Weighted average rate paid on:
FHLB advances	1.09		%	0.94		%	1.18		%

Subsidiaries and Other Activities

Anchor Bank. Anchor Bank has one wholly-owned subsidiary, Anchor Financial Services, Inc., that is currently inactive and is in the process of closing the subsidiary. At June 30, 2017, Anchor Bank's equity investment in Anchor Financial Services, Inc. was $303,000.

Competition

Anchor Bank operates in an intensely competitive market for the attraction of deposits (generally its primary source of lendable funds) and in the origination of loans. Historically, its most direct competition for deposits has come from large commercial banks, thrift institutions and credit unions in its primary market area. In times of high interest rates, Anchor Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. Anchor Bank's competition for loans comes principally from mortgage bankers, commercial banks and other thrift institutions. Such competition for deposits and the origination of loans may limit Anchor Bank's future growth and earnings prospects.

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Natural Disasters

Grays Harbor, Thurston, Lewis, Pierce, Mason and King Counties, where substantially all of the real and personal properties securing our loans are located, is an earthquake-prone region. We have not suffered any losses in the last sixteen years from earthquake damage to collateral secured loans, which include the July 1999 and February 2001 major earthquakes in the region. Although we have experienced no losses related to earthquakes, a major earthquake could result in material loss to us in two primary ways. If an earthquake damages real or personal properties collateralizing outstanding loans to the point of insurable loss, material loss would be suffered to the extent that the properties are uninsured or inadequately insured. A substantial number of our borrowers do not have insurance which provides for coverage as a result of losses from earthquakes. Earthquake insurance is generally not required by other lenders in the market area, and as a result in order to remain competitive in the marketplace, we do not require earthquake insurance as a condition of making a loan. Earthquake insurance is also not always available at a reasonable coverage level and cost because of changing insurance underwriting practices in our market area resulting from past earthquake activity and the likelihood of future earthquake activity in the region. In addition, if the collateralized properties are only damaged and not destroyed to the point of total insurable loss, borrowers may suffer sustained job interruptions or job loss, which may materially impair their ability to meet the terms of their loan obligations. While risk of credit loss can be insured against by, for example, job interruption insurance or "umbrella" insurance policies, such forms of insurance often are beyond the financial means of many individuals. Accordingly, for most individuals, sustained job interruption or job loss would likely result in financial hardship that could lead to delinquency in their financial obligations or even bankruptcy. Accordingly, no assurances can be given that a major earthquake in our primary market area will not result in material losses to us.

Employees

At June 30, 2017, we had 103 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

Executive Officers. The following table sets forth information regarding the executive officers of the Company and the Bank:



	Age at June 30, 2017		Position
Name		Company		Bank
Jerald L. Shaw	71		President and Chief Executive Officer		President and Chief Executive Officer
Terri L. Degner	54		Chief Financial Officer		Chief Financial Officer
Gary P. Koch	63		Executive Vice President		Executive Vice President and Chief Lending Officer
Matthew F. Moran	54		Executive Vice President		Executive Vice President and Chief Credit Officer

Biographical Information . The following is a description of the principal occupation and employment of the executive officers of the Company and the Bank during at least the past five years:

Jerald L. Shaw is the President and Chief Executive Officer of Anchor Bank, positions he has held since July 2006. He has also served in those capacities for Anchor Bancorp since its formation is September 2008. Prior to serving as President and Chief Executive Officer, he served as Chief Operating Officer from 2004 to 2006 and Chief Financial Officer from 1988 to 2002. Prior to that, he served Anchor Bank and its predecessor, Aberdeen Federal Savings and Loan Association, in a variety of capacities since 1976. Prior to that time, Mr. Shaw piloted C-130 aircraft for the U.S. Air Force including numerous combat missions during the Vietnam War. Having performed virtually every position at Anchor Bank, he has extensive knowledge of our operations. He is a distinguished graduate of the School for Executive Development of the U.S. League of Savings Institutions at the University of Washington. Mr. Shaw is also a graduate of the Asset Liability Management School of America's Community Bankers, and many other educational programs. He is a past member of the Board of Trustees for the Thurston County Chamber of Commerce, and a member of the South Sound YMCA.

Terri L. Degner is the Executive Vice President, Chief Financial Officer and Treasurer of Anchor Bank, positions she has held since 2004. She has also served in those capacities for Anchor Bancorp since its formation in September 2008. Prior to serving as Executive Vice President, Chief Financial Officer and Treasurer, Ms. Degner has served Anchor Bank in a variety of capacities since 1990, including as Senior Vice President and Controller from 1994 to 2004. Ms. Degner has been in banking since high school. She has worked in multiple lending positions in various size institutions. Since 1990, she has held a variety of positions in the finance area of Anchor Bank. Ms. Degner demonstrated her determination to succeed when she worked full time in Anchor's Accounting Department and commuted 60 miles to evening classes at St. Martin's College where she received her Bachelor's

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Degree in Accounting. At the same time she worked full days and met all expectations for performance. In 2000, she graduated from the Pacific Coast Banking School at the University of Washington in the top 10% of her class and her thesis was published in the University's library. She has become the management expert on issues ranging from information technology to asset-liability management. Ms. Degner also serves on the board of directors and finance committee of NeighborWorks of Grays Harbor, sits on the St. Martins University Accounting Advisory Committee and is on the Executive Committee of the Providence St. Peter Foundation Christmas Forest.

Gary P. Koch is the Executive Vice President and Chief Lending Officer of Anchor Bank, a position he has held since December 2014. In his current capacity, Mr. Koch serves on many Bank committees, including Chairman of the Executive Loan Committee, and as a member of Executive Management, Senior Management, Risk Management, ALCO, IT, Loan Policy, and Problem Asset committees. Mr. Koch has more than 37 years in banking and finance, beginning in 1976 as an investment officer with National Bank of Alaska. From 1983 until 1989 he served as Senior Vice President Investments and Funds Management for Key Bank of Alaska and Chief Investment Officer and a Director of Key Trust Company of Alaska. From 1989 until 2009 he served in a variety of positions, including most recently as Senior Vice President and Team Leader for Business Banking in Southwest Washington. From 2010 until 2014, he was Commercial Banking Officer at Fife Commercial Bank, Fife, Washington. Mr. Koch joined Anchor Bank in April 2014. In October of 2014 he was named Senior Vice President and Senior Commercial Lender. Mr. Koch earned his Bachelor of Science Degree in Economics from Willamette University in Salem, Oregon. Mr. Koch also participates as a volunteer for charitable organizations including Rotary, Relay for Life, and Habitat for Humanity. He has served on the Board of Directors for United Way and Mason General Hospital Foundation.

Matthew F. Moran is the Executive Vice President and Chief Credit Officer responsible for all aspects of our commercial and retail lending activity. Mr. Moran joined Anchor Bank in April 2015. Mr. Moran previously served as Executive Vice President and Chief Credit Officer at Sound Community Bank from May 2007 through October 2014. Prior to that, he was a Senior Examiner and Credit Specialist with the Office of Thrift Supervision (which has since been merged into the Office of the Comptroller of the Currency ("OCC") for one year. From 2004 to 2006, he was Vice President - Commercial Credit for Inland NW Bank. From 2001 to 2004, he was Vice President and Team Leader SE Washington of Community Bancshares, a $350 million community bank where he was responsible for all new credit development in South East Washington. Mr. Moran brings more than 20 years of banking experience to Anchor Bank, including five years with First Financial Bank of Omaha as the Asset/Liability Manager for the consolidated entities under First National Nebraska, Inc. a $10 billion bank holding company. Prior to that, Mr. Moran spent six years as a National Bank Examiner with the OCC, where in addition to his Safety and Soundness responsibilities he also served as a specialist in the Large Bank Capital Markets Examination Program. In 2010, Mr. Moran graduated from the Pacific Coast Banking School, which is affiliated with the Graduate School of Business of the University of Washington.

Pending Merger

On April 11, 2017, Washington Federal entered into the merger agreement with Anchor Bancorp. The merger agreement provides that, subject to its terms and conditions, Anchor Bancorp will merge with and into Washington Federal with Washington Federal as the surviving corporation in the merger. Immediately after the merger, Washington Federal intends to complete the bank merger.

Subject to the terms and conditions of the merger agreement, at the closing of the merger, each share of the common stock of Anchor Bancorp outstanding immediately prior to the closing will be converted into the right to receive a fraction of a share of Washington Federal common stock. The exact number of shares to be issued and the exchange ratio will be determined based on the price of the Washington Federal common stock.

The merger agreement contains customary representations and warranties from both Washington Federal and Anchor Bancorp, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the execution of the merger agreement and the closing, including, in the case of the Anchor Bancorp, specific forbearances with respect to its business activities, (2) Anchor Bancorp's obligation to call a meeting of its shareholders to approve the merger agreement, and, subject to certain exceptions, that its board of directors recommend that the Anchor Bancorp's shareholders vote to approve the merger agreement, and (3) Anchor Bancorp's non-solicitation obligations regarding alternative acquisition proposals. The merger agreement provides certain termination rights for both Washington Federal and Anchor Bancorp and further provides that a termination fee of $2,236,500 will be payable by Anchor Bancorp upon termination of the merger agreement under certain circumstances.

The completion of the merger is subject to customary conditions, including approval of the merger agreement by the Anchor Bancorp's shareholders and the receipt of required regulatory approvals.

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The foregoing description of the merger agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement, attached as Exhibit 2.1 to Anchor Bancorp's Current Report on Form 8-K which was filed with the SEC on April 13, 2017. See "Item 1.A. Risk Factors - Risks Relating to the Pending Merger" for a description of the risks relating to the proposed transaction.

How We Are Regulated

The following is a brief description of certain laws and regulations applicable to Anchor Bancorp and Anchor Bank. Descriptions of laws and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Washington State Legislature that may affect the operations of Anchor Bancorp and Anchor Bank. In addition, the regulations governing us may be amended from time to time by our regulators, the FDIC, DFI, Federal Reserve and the Consumer Financial Protection Bureau ("CFPB"). Any such legislation or regulatory changes in the future by the FDIC, DFI, Federal Reserve and CFPB could adversely affect our operations and financial condition. We cannot predict whether any such changes may occur.

The Dodd-Frank Act which was enacted in July 2010 imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and their holding companies. Among other changes, the Dodd-Frank Act established the CFPB as an independent bureau of the Federal Reserve. The CFPB assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. Anchor Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, we are generally subject to supervision and enforcement by the FDIC and the DFI with respect to our compliance with consumer financial protection laws and CFPB regulations.

Many aspects of the Dodd-Frank Act are subject to rulemaking by the federal banking agencies, which has not been completed and will not take effect for some time, making it difficult to anticipate the overall financial impact of the Dodd-Frank Act on the Company, the Bank and the financial services industry more generally.

Regulation and Supervision of Anchor Bank

General. Anchor Bank, as a state-chartered savings bank, is subject to applicable provisions of Washington law and to regulations and examinations of the DFI. It also is subject to examination and regulation by the FDIC, which insures the deposits of Anchor Bank to the maximum permitted by law. During these state or federal regulatory examinations, the examiners may, among other things, require Anchor Bank to provide for higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of Anchor Bank is intended for the protection of depositors and the Deposit Insurance Fund ("DIF") of the FDIC and not for the purpose of protecting shareholders of Anchor Bank or Anchor Bancorp. Anchor Bank is required to maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to Anchor Bancorp. See "- Capital Requirements" and "- Dividends" below.

Federal and State Enforcement Authority and Actions. As part of its supervisory authority over Washington-chartered savings banks, the DFI may initiate enforcement proceedings to obtain a cease-and-desist order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.

Regulation by the Washington Department of Financial Institutions. State law and regulations govern Anchor Bank's ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. As a state savings bank, Anchor Bank must pay semi-annual assessments, examination costs and certain other charges to the DFI.

Washington law generally provides the same powers for Washington savings banks as federally and other-state chartered savings institutions and banks with branches in Washington, subject to the approval of the DFI. Washington law allows Washington savings banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the DFI may approve applications by Washington savings banks to engage in an otherwise unauthorized activity, if the DFI determines that the activity is closely related to banking, and Anchor Bank is otherwise qualified under the statute. This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks.

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Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in Anchor Bank up to $250,000 per separately insured depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended June 30, 2017, were $145,000.

Under the FDIC's risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution's risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. Assessments are based on an institution's average consolidated total assets minus average tangible equity with an assessment rate schedule ranging from 2.5 to 45 basis points. The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates may be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures, which include risk-based capital measures, Tier 1 and common equity Tier 1 capital measures, a leverage ratio capital measure and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if it has a ratio of total capital to risk-weighted assets of 10.0% or more (the total risk-based capital ratio); a ratio of common equity Tier 1 capital to risk-weighted assets (the Tier 1 risk-based capital ratio) of 8.0% or more; a ratio of Tier 1 common equity capital to risk-weighted assets of 6.5% or more (the common equity Tier 1 capital ratio); a ratio of Tier 1 capital to average consolidated assets (the leverage ratio) of 5.0% or more; and the institution is not subject to a federal order, agreement or directive to meet a specific capital level. An institution is considered adequately capitalized, if it is not well capitalized but it has a total risk-based capital ratio of 8.0% or more; a Tier 1 risk-based capital ratio of 6.0% or more; a common equity Tier 1 capital ratio of 4.5% or more; and a leverage ratio of 4.0% or more. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by an institution to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

At June 30, 2017, Anchor Bank was categorized as "well capitalized". For additional information, see Note 14 of the Notes to Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data" of this Form 10-K.

Capital Requirements. The minimum capital level requirements applicable to Anchor Bank are: (i) a common equity Tier 1 ("CETI") capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6.0%; (iii) a total capital ratio of 8.0%; and (iv) a Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income ("AOCI") unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.

There is also a requirement for a "capital conservation buffer" of 2.5% above these regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and results in the following minimum ratios: (i) a CET1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The capital conservation buffer requirement is implemented in phases beginning in January 2016 at 0.625% of risk-weighted assets and increasing by that amount each year until it is fully implemented in January 2019. A financial institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

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The table below sets forth Anchor Bank's capital position under the prompt corrective action regulations of the FDIC at June 30, 2017 and 2016. The Bank paid a $1.3 million cash dividend to Anchor Bancorp during the year ended June 30, 2017. The dividend will be used to support the Company's operations.



	At June 30,
	2017				2016
	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank equity capital under GAAP	$	65,851			$	63,196

Total risk-based capital	$	63,781	15.1	%	$	59,938	15.7	%
Total risk-based capital requirement	33,742		8.0		30,580		8.0
Excess	$	30,039	7.1	%	$	29,358	7.7	%

Tier 1 risk-based capital	$	59,675	14.1	%	$	56,159	14.7	%
Tier 1 risk-based capital requirement	25,307		6.0		22,935		6.0
Excess	$	34,368	8.1	%	$	33,224	8.7	%

Common equity Tier 1 capital	$	59,675	14.1	%	$	56,159	14.7	%
Common equity Tier 1 capital requirement	18,980		4.5		17,201		4.5
Excess	$	40,695	9.6	%	$	38,958	10.2	%

Tier 1 leverage capital	$	59,675	13.0	%	$	56,159	13.5	%
Tier 1 leverage capital requirement	18,328		4.0		16,620		4.0
Excess	$	41,347	9.0	%	$	39,539	9.5	%

The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of particular risks or circumstances.

Anchor Bank's management believes that, under the current regulations, Anchor Bank will continue to meet its minimum capital requirements in the foreseeable future. For additional information regarding the Bank's required and actual capital levels at June 30, 2017, see Note 14 of the Notes to Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data" of this Form 10-K.

Federal Home Loan Bank System. Anchor Bank is a member of the FHLB of Des Moines. As a member, Anchor Bank is required to purchase and maintain stock in the FHLB. At June 30, 2017, the Bank had $2.3 million in FHLB stock, which was in compliance with this requirement. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See "Business - Deposit Activities and Other Sources of Funds - Borrowings" in this Form 10-K.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of Anchor Bank's FHLB stock may result in a corresponding reduction in its capital.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a

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comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.

Real Estate Lending Standards. FDIC regulations require Anchor Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with safe and sound banking practices, must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. Anchor Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. Anchor Bank's Board of Directors is required to review and approve Anchor Bank's standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate amount of all loans in excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural, multifamily or other non-one-to-four-family properties should not exceed 30% of total capital. Loans in excess of the supervisory loan-to-value ratio limitations must be identified in Anchor Bank's records and reported at least quarterly to Anchor Bank's Board of Directors. Anchor Bank is in compliance with the record and reporting requirements. As of June 30, 2017, Anchor Bank's aggregate loans in excess of the supervisory loan-to-value ratios were 2.27% and Anchor Bank's loans on commercial, agricultural, multifamily or other non-one-to-four-family properties in excess of the supervisory loan-to-value ratios were 1.16%. Based on strong risk management practices, Anchor Bank has consistently operated above the aggregate 100% of capital guideline limit since these standards were imposed.

Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.

Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including Anchor Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Federal Reserve System. The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or noninterest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of June 30, 2017, Anchor Bank's deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be a "covered transaction" under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary's capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

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Community Reinvestment Act and Consumer Protection Laws. Anchor Bank is subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory agency to assess a bank's performance under the CRA in meeting the credit needs of the community served by the bank, including low and moderate income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's CRA performance must be considered in connection with a bank's application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. Anchor Bank received a "satisfactory" rating during its most recent examination.

In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending to various sectors of the economy and population. The CFPB issues regulations and standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its rulemaking authority, the CFPB has promulgated several proposed and final regulations under these laws that will affect our consumer businesses. Among these regulatory initiatives, are final regulations setting "ability to repay" and "qualified mortgage" standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank is evaluating these recent CFPB regulations and proposals and devotes substantial compliance, legal and operational business resources to ensure compliance with these consumer protection standards. In addition, the FDIC has enacted customer privacy regulations that limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

Bank Secrecy Act/Anti-Money Laundering Laws . The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Dividends. The amount of dividends payable by Anchor Bank to Anchor Bancorp depends upon Anchor Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, Anchor Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. Dividends on Anchor Bank's capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of Anchor Bank, without the approval of the Director of the DFI.

The amount of dividends actually paid during any one period is strongly affected by Anchor Bank's policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be "undercapitalized," as defined in the prompt corrective action regulations and the ability to pay dividends can also be limited by the capital conservation buffer requirement. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.

Other Consumer Protection Laws and Regulations. The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While this list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties including, but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

Regulation and Supervision of Anchor Bancorp

General . Anchor Bancorp is a bank holding company registered with the Federal Reserve and the sole shareholder of Anchor Bank. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended ("BHCA"), and the regulations promulgated thereunder. This regulation and oversight is generally

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intended to ensure that Anchor Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of Anchor Bank.

As a bank holding company, Anchor Bancorp is required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and will be subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

The Bank Holding Company Act. Under the BHCA, Anchor Bancorp is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations (or the Dodd-Frank Act) or both.

Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally include, among others, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit related insurance; leasing property on a full payout, non-operating basis; selling money orders, travelers' checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

Acquisitions . The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

Interstate Banking . The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state. Nor may the Federal Reserve approve an application if the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above.

Regulatory Capital Requirements. The Federal Reserve has adopted capital rules pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications under the BHCA. These rules apply on a consolidated basis to bank holding companies with $500 million or more in assets, or with fewer assets but certain risky activities, and on a bank-only basis to other companies. The bank holding company capital adequacy and capital conservation rules are the same as those imposed by the FDIC on the Bank. For a bank holding company with less than $500 million in total consolidated assets, such as the Company, the capital guidelines apply on a bank only basis and the Federal Reserve expects the

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holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations. In July 2013, the Federal Reserve and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. As of June 30, 2017, Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 leverage-based capital, CET1 capital, Tier 1 risk-based capital and total risk-based capital ratios of 14.0%, 15.2%, 15.2% and 16.2%, respectively. For additional information, see the section above entitled "- Regulation and Supervision of Anchor Bank - Capital Requirements" and Note 14 of the Notes to Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data," of this Form 10-K.

Restrictions on Dividends . Anchor Bancorp's ability to declare and pay dividends may depend in part on dividends received from Anchor Bank. The Revised Code of Washington regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if Anchor Bank is in default in payment of any assessment due the FDIC.

Federal Reserve policy limits the payment of a cash dividend by a bank holding company if the holding company's net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A bank holding company not subject to consolidated capital requirements is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. The capital conservation buffer requirements may limit the Company's ability to pay dividends in the future.

Except for a company that meets the well-capitalized standard for bank holding companies, is well managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement. A bank holding company is considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure. Under Washington corporate law, Anchor Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities.

Stock Repurchases . Bank holding companies, except for certain "well-capitalized" and highly rated bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank-Act imposes restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and required new capital regulations that are discussed above under "- Regulation and Supervision of Anchor Bank - New Capital Regulations." In addition, among other changes, the Dodd-Frank Act requires public companies, such as Anchor Bancorp, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a "say on pay" vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

Federal Securities Law. The stock of Anchor Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. As a result, Anchor Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

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Anchor Bancorp stock held by persons who are affiliates of Anchor Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally considered to be officers, directors and principal shareholders. If Anchor Bancorp meets specified current public information requirements, each affiliate of Anchor Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley "), that apply to Anchor Bancorp as a registered company under the Securities Exchange Act of 1934. The stated goals of these Sarbanes-Oxley Act requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley related regulations and policies include very specific additional disclosure requirements and new corporate governance rules. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

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TAXATION

Federal Taxation

General. Anchor Bancorp and Anchor Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Anchor Bancorp or Anchor Bank. The Company files income tax returns in the U.S. federal jurisdiction. With few exceptions, the Company is no longer subject to

U.S. federal or state/local income tax examinations by tax authorities for years before 2014.

Anchor Bancorp files a consolidated federal income tax return with Anchor Bank. Any cash distributions made by Anchor Bancorp to its shareholders would be considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.

Method of Accounting. For federal income tax purposes, Anchor Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on June 30 for filing its federal income tax return.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.

Net Operating Loss Carryovers . A financial institution may carryback net operating Federal losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997.

Corporate Dividends-Received Deduction. Anchor Bancorp may eliminate from its income dividends received from Anchor Bank as a wholly-owned subsidiary of Anchor Bancorp if it elects to file a consolidated return with Anchor Bank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

Washington Taxation

Anchor Bank is subject to a business and occupation tax imposed under Washington law at the rate of 1.5% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties and certain securities are exempt from this tax.

Oregon Taxation

The Company files income tax returns in Oregon State and within local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2014.

Item 1A. Risk Factors.

An investment in our common stock involves various risks which are particular to Anchor Bancorp, our industry, and our market area. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

The current weak economic conditions in the market areas we serve may continue to adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

Substantially all of our loans are to businesses and individuals in the state of Washington. A decline in the national economy or the economies of the five counties in which we operate, which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects. Weak economic conditions and previous

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strains in the financial and housing markets in our market area has resulted in higher levels of loan delinquencies, problem assets and foreclosures and a decline in the values of the collateral securing our loans.

While real estate values and unemployment rates have recently improved, deterioration in economic conditions in our primary market areas could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:


•	loan delinquencies, problem assets and foreclosures may increase;


•	the slowing of sales of foreclosed assets;


•	demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;


•	collateral for loans made may decline further in value, exposing us to increased risk of loss on existing loans, reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans;


•	the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and


•	the amount of our low-cost or noninterest bearing deposits may decrease and the composition of our deposits may be adversely affected.

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have adverse effect on our results of operations.

A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

Our loan portfolio is concentrated in loans with a higher risk of loss.

In addition to residential mortgage loans, we originate construction and land loans, commercial and multi-family mortgage loans, commercial business loans, and consumer loans primarily within our market areas. At June 30, 2017, we had $249.1 million outstanding in non-residential loans. At that date, loans delinquent 30 days or more, including nonperforming loans, were $3.8 million, and delinquent loans represented 1.0% of total loans. Many of these loans are perceived to have greater credit risk than residential real estate loans for a number of reasons, including those described below:

Commercial and Multi-family Mortgage Loans. These loans typically involve higher principal amounts than other types of loans. Repayment is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial and multi-family mortgage loans also expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. At June 30, 2017, we had $216.0 million or 56.4% of total loans in commercial and multi-family mortgage loans, of which $2.0 million or 0.5% were nonperforming.

Construction and Land Loans. During the fiscal years ended June 30, 2017 and 2016, we originated $101.3 million and $65.2 million in construction loans, and $4.3 million and $4.4 million in land loans. From June 30, 2012 through June 30, 2017, our construction and land loans grew 634.0% and 14.0%. At June 30, 2017, we had $57.2 million or 14.9% of total loans in construction and land loans of which $8.1 million were land loans.

Construction and land acquisition and development lending generally involves additional risks when compared with permanent residential lending because funds are advanced upon estimates of costs in relation to values associated with the completed project that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, the market

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value of the completed project, the effects of governmental regulation on real property, and changes in demand, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio, which may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us, and an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the successful outcome of the project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor.

Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project.

At June 30, 2017 $15.4 million of our construction loans were for speculative construction. Loans on land under development or held for future construction as well as lot loans made to individuals for the future construction of a residence also pose additional risk because the length of time from financing to completion of a development project is significantly longer than for a traditional construction loan, which makes them more susceptible to declines in real estate values, declines in overall economic conditions which may delay the development of the land and changes in the political landscape that could affect the permitted and intended use of the land being financed, and the potential illiquid nature of the collateral. In addition, during this long period of time from financing to completion, the collateral often does not generate any cash flow to support the debt service. At June 30, 2017, none of our construction and land loans were nonperforming.

Commercial Business Loans. At June 30, 2017, we had $31.6 million or 8.2% of total loans in commercial business loans, however, we are currently planning on expanding our commercial business lending, subject to market conditions. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower's cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible, inventories may be obsolete or of limited use, and other collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower. At June 30, 2017, none of our commercial business loans were nonperforming.

Consumer Loans. We make secured and unsecured consumer loans. Our secured consumer loans are collateralized with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. At June 30, 2017, we had $18.7 million or 4.9% of total loans in consumer loans of which $43,000 were nonperforming. Of this amount, $14.0 million were in home equity loans, some of which are loans in amounts for up to 100% of collateral value. For more information about the credit risk, we face with respect to these types of loans, see "Our business may be adversely affected by credit risk associated with residential property."

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Our business may be adversely affected by credit risk associated with residential property.

At June 30, 2017, $59.7 million, or 15.6%, of our total loan portfolio, was secured by one-to-four single-family real property. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the Washington housing markets in which we operate may reduce the value of the real estate collateral securing these loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices couples with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. These declines may also have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.

Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas. Residential loans with combined higher loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. Further, a significant amount of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans.

Our loan portfolio possesses increased risk as the result of subprime loans.

As of June 30, 2017, we held in our loan portfolio $3.2 million in one-to-four family mortgage loans ($2.2 million of which were fixed rate), $1.3 million of home equity loans (of which $932,000 were fixed rate) and $160,000 of other types of consumer loans (all of which were fixed rate), which are considered "subprime" by federal banking regulators. The aggregate amount of loans considered subprime at June 30, 2017 was $4.7 million or 1.2% of our total loan portfolio. In exchange for the additional lender risk associated with these loans, these borrowers generally are required to pay a higher interest rate, and depending on the severity of the credit history, a lower loan-to-value ratio may be required than for a conforming loan borrower. At the time of loan origination, our subprime borrowers had an average Fair Isaac and Company, Incorporated, or FICO, credit score of 628 and a weighted average loan-to-value ratio of 54%, which loan-to-value ratio may be significantly understated if current market values are used. A FICO score is a principal measure of credit quality and is one of the significant criteria we rely upon in our underwriting. Generally, a FICO score higher than 660 indicates the borrower has an acceptable credit reputation. At June 30, 2017, $195,000 or 4.2% of our subprime loans were categorized as nonperforming assets. Subprime loans are generally considered to have an increased risk of delinquency and foreclosure than do conforming loans, especially when adjustable rate loans adjust to a higher interest rate. We had not experienced such increased delinquencies or foreclosures at June 30, 2017, however, our subprime loan portfolio will be adversely affected in the event of a further downturn in regional or national economic conditions. In addition, we may not recover funds in an amount equal to any remaining loan balance. Consequently, we could sustain loan losses and potentially incur a higher provision for loan loss expense.

Our concentration in non-owner occupied residential real estate loans may expose us to increased credit risk.

At June 30, 2017, $25.9 million, or 43.4% of our residential mortgage loan portfolio and 6.8% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depends primarily on the tenant's continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner's ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. At June 30, 2017, we had 13 non-owner occupied residential loan relationships, with aggregate outstanding balances of $18.0 million, of which six loan relationships had an aggregate outstanding balance over $500,000. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan. At June 30, 2017, all of our non-owner occupied residential mortgage loans complied with their loan repayment terms, except for one loan which totaled $140,000 at that date.

We have a concentration of large loans outstanding to a limited number of borrowers that increases our risk of loss.

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We have extended significant amounts of credit to a limited number of borrowers, largely in connection with our commercial real estate, non-owner occupied residential real estate loans and construction loans. At June 30, 2017, the aggregate amount of loans to our ten largest borrowers amounted to approximately $86.1 million or 22.5% of total loans. At this date, none of the loans to our ten largest borrowers were nonperforming.

A high concentration of credit to a limited number of borrowers increases the risk of our loan portfolio. In the event that one or more of these borrowers is not able to meet interest payments or pay scheduled amortization on such obligations, the potential loss to us is more likely to have a material adverse impact on our business, financial condition and results of operations.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC, the Federal Reserve and the OCC, have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending, guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have total commercial real estate loans representing 300% or more of the institutions total risk-based capital and the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. Like many community banks, we have a concentration in commercial real estate loans, and have also experienced a 44.2% growth in our commercial real estate portfolio during the past 36 months. Commercial real estate loans represent 243.8% of total risk based capital as of June 30, 2017 compared to 249.5% of total risk based capital at June 30, 2016. In addition, our total of income producing or non-owner occupied commercial real estate loans was $172.1 million or 269.8% of total capital at June 30, 2017 compared to $155.4 million or 259.2% of total capital at June 30, 2016. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms, or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:


•	cash flow of the borrower and/or the project being financed;


•	the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;


•	the duration of the loan;


•	the character and creditworthiness of a particular borrower; and


•	changes in economic and industry conditions.

We maintain an allowance for loan losses, which we believe is an appropriate reserve to provide for probable losses in our loan portfolio. The allowance is funded by provisions for loan losses charged to expense. The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:


•	our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and management's expectations of future events;


•	our specific reserve, based on our evaluation of nonperforming loans and their underlying collateral; and


•	an allocated pool reserve to provide for other credit losses including allocations for secured and unsecured loans.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Additionally, pursuant to our growth strategy, management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Further, the Financial Accounting Standards Board has adopted a new accounting standard that

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will be effective for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.

If our nonperforming assets increase, our earnings will be adversely affected.

At June 30, 2017, our nonperforming assets which consist of nonaccruing loans and real estate owned were $4.6 million, or 1.0% of total assets. Our nonperforming assets adversely affect our net income in various ways:


•	we record interest income only on a cash basis for nonaccrual loans and any nonperforming securities and we do not record interest income for real estate owned;


•	we must provide for probable loan losses through a current period charge to the provision for loan losses;


•	noninterest expense increases when we write down the value of properties in our real estate owned portfolio to reflect changing market values or recognize other-than-temporary impairment on nonperforming securities;


•	there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our real estate owned; and


•	the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property taken in as real estate owned and at certain other times during the asset's holding period. Our net book value ("NBV") in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs ("fair value"). A charge-off is recorded for any excess in the asset's NBV over its fair value. If our valuation process is incorrect, the fair value of the investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our real estate owned and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by the bank regulators, may have a material adverse effect on our financial condition and results of operations.

Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Our securities portfolio is evaluated for other-than-temporary impairment. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

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Fluctuating interest rates can adversely affect our profitability.

Our profitability is dependent to a large extent upon net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. In an attempt to help the overall economy, the Federal Reserve Board has kept interest rates low through its targeted Fed Funds rate. Beginning in December 2016, the Federal Reserve Board has increased the Fed Funds rate by 75 basis points to a range of 1.00% to 1.25% in June 2017 and indicated a likelihood for further increases during 2017 subject to economic conditions. As the Federal Reserve Board increases the Fed Funds rate, interest rates will likely rise, which may negatively impact both the housing markets by reducing refinancing activity and new home purchases and the U.S. economic recovery.

Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect: (1) our ability to originate and/or sell loans; (2) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; (4) the ability of our borrowers to repay adjustable or variable rate loans; and (5) the average duration of our mortgage backed securities portfolio and other interest-earning assets.

If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of short-term certificates of deposit and other deposits yielding no or a relatively low rate of interest. At June 30, 2017, we had $42.1 million in certificates of deposit that mature within one year and $52.6 million in non-interest bearing demand deposits. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, a substantial amount of our mortgage loans and home equity loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment. Further, a prolonged period of exceptionally low market interest rates, such as we are currently experiencing, could have an adverse effect on our results of operations as a result of substantially reduced asset yields.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Further, a prolonged period of exceptionally low market interest rates, such as we are currently experiencing, limits our ability to lower our interest expense, while the average yield on our interest-earning assets may continue to decrease as our loans reprice or are originated at these low market rates. Accordingly, our net interest income may continue to decrease, which may have an adverse effect on our profitability. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. For further discussion of how changes in interest rates could impact us, see Item 7A. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk," of this Form 10-K.

Decreases in noninterest income could adversely affect our ability to remain profitable and, if we cannot generate and increase our income, our stock price may be adversely affected.

Our noninterest expense often exceeds our net interest income before provision for loan losses and we have relied on our noninterest income to record net income. We face significant challenges that will hinder our ability to generate competitive returns. Our most significant challenge has been our low interest rate spread and margin during recent periods. As a result, we have become even more reliant on our noninterest income, including from time to time significant gains on sales of investments in order to increase noninterest income. These gains on sales of investments are subject to market and other risks and cannot be relied upon. During the years ended June 30, 2017 and 2016, net interest income before provision for loan losses was less than noninterest expense by $565,000 and $3.3 million, respectively. While we have identified various strategic initiatives that we will pursue in our efforts to overcome these challenges and improve earnings, our strategic initiatives may not succeed in generating and increasing income. If we are unable to generate or increase income, our stock price may be adversely affected.

In addition, we originate and sell residential mortgage loans. Changes in interest rates affect demand for our residential loan products and the revenue realized on the sale of loans. A decrease in the volume of loans sold can decrease our revenues and net

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income. Further, recent regulatory changes to the rules for overdraft fees for debit transactions and interchange fees have reduced our fee income, resulting in a reduction of our noninterest income.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, and growth prospects.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and advances from the Federal Home Loan Bank of Des Moines ("FHLB") and other borrowings to fund our operations. At June 30, 2017, we had $45.5 million of FHLB advances outstanding with an additional $111.3 million of available borrowing capacity. Additionally we have $5.0 million available with Pacific Coast Bankers Bank and $1.0 million available with the Federal Reserve. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets where our loans are concentrated, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, and could result in significant legal liability and significant damage to our reputation and our business.

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Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

Risks Relating to the Pending Merger

The Company and the Bank will be subject to uncertainties and contractual restrictions while the proposed merger with Washington Federal is pending.

We may have difficulty attracting, retaining and motivating key personnel until the proposed merger is complete, which could cause customers to seek to change their banking relationship with us. Some of our employees may experience uncertainty about their future roles with the combined company following the proposed merger with Washington Federal. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company, our business could be harmed. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course prior to closing of the proposed merger with Washington Federal.

Termination of the merger agreement could negatively impact the Company.

The Company's shareholders will be asked to approve the proposed merger with Washington Federal and if we fail to obtain two-thirds shareholder approval of the proposal, the merger agreement may be terminated. The merger is subject to satisfaction of additional customary closing conditions and if we cannot satisfy such conditions, the merger agreement may also be terminated. If the merger agreement is terminated, there may be various negative consequences to the Company. We may be adversely impacted by the failure to pursue other opportunities due to management's focus on the proposed merger with Washington Federal. We have devoted significant internal resources to the proposed merger, which would be lost if the merger is not completed. Additionally, if the merger agreement is terminated, the market price of the Company's common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, the Company may be required to pay to Washington Federal a termination fee of $2,236,500.

Completion of the merger is subject to regulatory approvals and there is no assurance those will be obtained.

Before the merger and the bank merger may be completed, Washington Federal and Anchor Bancorp must obtain approvals from the OCC and a waiver from the Federal Reserve Board. Other approvals, waivers or consents from regulators may also be required. Regulatory issues could result in an inability to obtain approvals or delay their receipt. The regulators may also impose conditions on the completion of the merger or the bank merger or require changes to the terms of the merger or the bank merger. Such conditions

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or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of Washington Federal following the merger, any of which might have an adverse effect on Washington Federal following the merger. Washington Federal is not obligated to complete the Merger if the regulatory approvals received in connection with the completion of the merger impose any unduly burdensome condition upon Washington Federal following the merger or Washington Federal, National Association following the bank merger.

If the proposed merger with Washington Federal is not completed it may have a negative impact on us.

We have incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement with Washington Federal. If the proposed merger with Washington Federal is not completed, we would have to recognize these expenses without realizing any expected benefits of the proposed merger. In addition, if the merger is not completed and our board of directors seeks another merger or business combination, our shareholders cannot be certain that we will be able to find another party interest in acquiring us or a party willing to offer equivalent or more attractive consideration than the consideration Washington Federal has agreed to provide.

The proposed merger has occupied a significant amount of our time and has had, and will continue to have, an impact on our employees.

Our management and board of directors have devoted and will continue to devote a significant amount of time and attention to the merger. In addition, in connection with the merger, we have incurred and will continue to incur expenses, which may be significant. Washington Federal and Anchor Bancorp have operated and, until the completion of the merger, will continue to operate, independently. Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Anchor Bancorp and consequently on Washington Federal. These uncertainties may impair the Company's ability to attract, retain or motivate key personnel until the merger is consummated, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles with Washington Federal. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Washington Federal, Anchor Bancorp could be harmed if the merger is not completed.

The merger agreement significantly restricts our ability to pursue alternative proposals.

The merger agreement contains non-solicitation provisions that, subject to limited exceptions, limit Anchor Bancorp's ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of Anchor Bancorp. Although our board of directors is permitted to take certain actions in connection with the receipt of a competing acquisition proposal if it determines in good faith that the failure to do so would violate its fiduciary duties, taking such actions could, and other actions (such as withdrawing or modifying its recommendation to Anchor Bancorp shareholders that they vote in favor of approval of the merger agreement) would, entitle Washington Federal to terminate the merger agreement and receive a termination fee of $2,236,500. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Anchor from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share price than that proposed in the merger, or might result in a potential competing acquiror proposing to pay a lower per share price to acquire Anchor Bancorp than it might otherwise have proposed to pay. The payment of the termination fee could also have an adverse impact on Anchor Bancorp's financial condition.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

At June 30, 2017, we had one administrative office, 10 full service banking offices of which eight locations are owned and two locations are leased. At June 30, 2017, the net book value of our investment in premises, equipment and leaseholds was $9.4 million. The net book value of our data processing and computer equipment at June 30, 2017 was $206,000.

The following table provides a list of our main and branch offices and indicates whether the properties are owned or leased:



Location	Leased or Owned	Lease Expiration Date	Square Footage	Net Book Value at June 30, 2017
				(In thousands)
ADMINISTRATIVE OFFICE
100 West First Aberdeen, Washington 98520	Owned	-	7,410	$	1,146

BRANCH OFFICES:

Aberdeen (1) (2) 120 N. Broadway Aberdeen, Washington 98520	Owned	-	17,550	1,027

Centralia (2) 604 S. Tower Centralia, Washington 98531	Owned	-	3,000	570

Elma (2) 216 S. Third Street Elma, Washington 98541	Owned	-	2,252	260

Lacey (2) 601 Woodland Square Loop SE Lacey, Washington 98503	Owned	-	13,505	1,970

Montesano (2) 301 Pioneer Avenue East Montesano, Washington 98563	Owned	-	2,125	2,488

Ocean Shores (2) 795 Pt. Brown Avenue NW Ocean Shores, Washington 98569	Owned	-	2,550	513

Olympia (2) 2610 Harrison Avenue West Olympia, Washington 98502	Owned	-	1,882	419

( table continued on following page )

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Location	Leased or Owned	Lease Expiration Date	Square Footage	Net Book Value at June 30, 2017

Puyallup (2) 10514 156th Street East Bldg B4, Suite 106 Puyallup, Washington 98374	Leased	11/30/2019	3,027	70

Shelton (3) 100 E. Wallace Kneeland Boulevard Shelton, Washington 98584	Leased	5/31/2018	673	18

Westport (2) 915 N. Montesano Westport, Washington 98595	Owned	-	3,850	879

________


(1)	Includes our home branch.


(2)	Drive-up ATM available.


(3)	Wal-Mart location.

Item 3. Legal Proceedings

The Company or Anchor Bank from time to time is involved in various claims and legal actions arising in the ordinary course of business. There are currently no matters that in the opinion of management would have material adverse effect on our consolidated financial position, results of operation, or liquidity.

Item 4. Mine Safety Disclosures

Not applicable

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on The NASDAQ Stock Market LLC's Global Market, under the symbol "ANCB." As of June 30, 2017, there were 2,504,740 shares of common stock issued and outstanding and we had approximately 198 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers. The Company has not paid any dividends to shareholders since its formation.

Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets. The principal source of funds for the Company is dividend payments from the Bank. According to Washington law, Anchor Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. Dividends on Anchor Bank's capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of Anchor Bank, without the approval of the Director of the DFI.

Stock Repurchases. There were no repurchases of the Company's outstanding shares during the quarter ended June 30, 2017.

Equity Compensation Plan Information. The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this Form 10-K is incorporated herein by reference.

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Performance Graph. The following graph compares the cumulative total shareholder return on the Company's Common Stock with the cumulative total return on the NASDAQ Composite Index and a peer group of the SNL All Thrift Index. Total return assumes the reinvestment of all dividends and that the value of Common Stock and each index was $100 on January 26, 2011.



	Period Ending
Index	01/26/11		06/30/13		06/30/14		06/30/15		06/30/16		06/30/17
Anchor Bancorp	$	100.00	$	167.70	$	190.87	$	224.90	$	236.30	$	250.50
NASDAQ Composite	100.00		128.27		168.34		192.20		188.79		242.20
SNL Thrift Index	100.00		116.40		138.49		156.51		157.62		185.56

Source: SNL Financial LC, Charlottesville, VA

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Item 6. Selected Financial Data

The following table sets forth certain information concerning our consolidated financial position and results of operations at and for the dates indicated and have been derived from our audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8., "Financial Statements and Supplementary Data" of this Form 10-K.



	At June 30,
	2017		2016		2015		2014		2013
FINANCIAL CONDITION DATA:	(In thousands)
Total assets	$	462,525	$	431,504	$	379,230	$	389,128	$	452,179
Securities	165		175		554		573		1,591
Mortgage-backed securities	25,954		29,781		36,628		47,109		57,012
Loans receivable, net (1)	377,908		347,351		283,444		281,526		277,454
Deposits	345,187		300,894		299,812		311,034		328,584
FHLB advances	45,500		62,000		10,000		17,500		64,900
Total equity	65,851		63,196		63,722		53,674		52,367

__________________

(1) Net of allowances for loan losses, loans in process and deferred loan fees.



	Year Ended June 30,
OPERATING DATA:	2017		2016		2015			2014		2013
	(In thousands)
Total interest income	$	20,279	$	17,524	$	16,886		$	17,789	$	19,727
Total interest expense	3,321		2,830		3,076			3,681		4,764
Net interest income before provision for loan losses	16,958		14,694		13,810			14,108		14,963
Provision for loan losses	310		340		-			-		750
Net interest income after provision for loan losses	16,648		14,354		13,810			14,108		14,213
Noninterest income	4,264		4,205		4,503			4,075		4,924
Noninterest expense	17,523		18,025		16,807			17,760		19,392
Income (loss) before provision (benefit) for income tax	3,389		534		1,506			423		(255		)
Total provision (benefit) for income tax	1,039		39		(8,321		)	-		-
Net income (loss)	$	2,350	$	495	$	9,827		$	423	$	(255	)



	At June 30,
OTHER DATA:	2017	2016	2015	2014	2013
Number of:
Real estate loans outstanding	1,705	1,840	1,907	1,997	1,733
Deposit accounts	18,805	19,275	20,588	21,834	23,366
Full-service offices	10	10	11	11	11

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	At or For the Year Ended June 30,
KEY FINANCIAL RATIOS:	2017			2016			2015			2014			2013
Performance Ratios:
Return on assets (1)	0.54		%	0.13		%	0.43		%	0.10		%	(0.05		)%
Return on equity (2)	4.00			0.86			3.10			0.83			(0.49		)
Equity to total assets ratio (3)	13.46			14.75			13.87			12.66			11.23
Interest rate spread (4)	3.98			3.91			3.83			3.68			3.35
Net interest margin (5)	4.19			4.12			4.05			3.87			3.53
Average interest-earning assets to average interest-bearing liabilities	125.5			126.8			124.7			119.2			115.9
Efficiency ratio (6)	82.6			95.4			91.8			97.7			97.5
Other operating expenses as a percent of average total assets	4.0			4.6			4.5			4.4			4.2
Book value per common share	$	26.29		$	25.12		$	25.69		$	21.70		$	21.25
Tangible book value per common share (7)	$	26.20		$	25.04		$	25.59		$	21.55		$	21.04

Anchor Bank Capital Ratios:
Tier I leverage	13.0			13.5			14.3			13.6			11.4
Common equity tier I capital (8)	14.1			14.7			16.2			N/A			N/A
Tier I risk-based	14.1			14.7			16.2			16.8			16.7
Total risk-based	15.1			15.7			17.4			18.0			18.8

Asset Quality Ratios:
Nonaccrual and 90 days or more past due loans as a percent of total loans	1.0			0.6			0.7			1.6			2.2
Nonperforming assets as a percent of total assets	1.0			0.6			0.7			2.5			2.7
Allowance for loan losses as a percent of total loans	1.1			1.1			1.3			1.6			1.8
Allowance for loan losses as a percent of nonperforming loans	110.8			191.6			185.0			98.1			83.6
Net charge-offs to average outstanding loans	-			0.1			0.3			0.2			0.9

_______________________


(1)	Net income (loss) divided by average total assets.


(2)	Net income (loss) divided by average equity.


(3)	Average equity divided by average total assets.


(4)	Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities.


(5)	Net interest income as a percentage of average interest-earning assets.


(6)	The efficiency ratio represents the ratio of noninterest expense divided by the sum of net interest income and noninterest income.


(7)	We calculate tangible book value per share, a non-GAAP financial measure, by dividing tangible common equity by the number of common shares outstanding. Reconciliations of the GAAP and non-GAAP financial measures are presented below under Non-GAAP Financial Measures.


(8)	The common equity tier 1 capital ratio was required beginning the quarter ended March 31, 2015.

Non-GAAP Financial Measures

We calculate tangible book value per share, a non-GAAP financial measure, by dividing tangible common equity by the number of common shares outstanding. We calculate tangible common equity by excluding intangible assets from stockholders' equity. The Company believes that this measure is consistent with the capital treatment by our bank regulatory agencies, which excludes intangible assets from the calculation of risk-based capital ratios and presents this measure to facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. This non-GAAP financial measure has inherent limitations, is not required to be uniformly applied and is not audited. Further, the non-GAAP financial measure should not be considered in isolation or as a substitute for book value per share or total stockholders' equity determined

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in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures is presented below:



	June 30, 2017		June 30, 2016
	(In thousands)

Stockholders' equity	$	65,851	$	63,196
Less: intangible assets	232		206
Tangible common stockholders' equity	$	65,619	$	62,990

Total assets	$	462,525	$	431,504
Less: intangible assets	232		206
Tangible assets	$	462,293	$	431,298


Tangible common stockholders' equity	$	65,619	$	62,990
Common shares outstanding at end of period	2,504,740		2,515,803
Common stockholders' equity (book value) per share (GAAP)	$	26.29	$	25.12
Tangible common stockholders' equity (tangible book value) per share (non-GAAP)	$	26.20	$	25.04

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial conditions and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto, which are included in Item 8., "Financial Statements and Supplementary Data" of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of Anchor Bancorp and its subsidiary.

Overview

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

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

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

Operating Strategy

Our focus is on managing our problem assets, increasing our higher-yielding assets (commercial and multi-family real estate), increasing our core deposit balances, reducing expenses, and retaining experienced employees with a commercial lending focus. We seek to achieve these results by focusing on the following objectives:

Origination of commercial real estate loans. We plan to continue our focus on commercial real estate loans; we maintain a diversified portfolio the majority of these loans are secured by commercial income producing properties, including retail centers, warehouses, and office buildings located in our market areas. At June 30, 2017 our commercial real estate portfolio totaled $155.5 million, or 40.6% of our total loan portfolio. We plan to increase our focus of owner-occupied commercial real estate which will bring a relationship that will potentially increase commercial business as well as deposits.

We also are focused on increasing multi-family loans. As of June 30, 2017 our multi-family portfolio totaled $60.5 million or 15.8% of our total loan portfolio. Our multi-family loans are geographically diversified primarily in Western Washington in King County.

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Maintaining our focus on asset quality. We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming loans, and selling foreclosed assets. Nonperforming assets have decreased from $12.4 million at June 30, 2013, to $4.6 million at June 30, 2017. The level of our nonperforming assets has been reduced through write-downs, collections, modifications, and sales of real estate owned and repossessed assets. We have taken proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate. We have also accepted short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. During the latter part of fiscal 2007, as part of management's decision to reduce the risk profile of our loan portfolio, we implemented more stringent underwriting guidelines and procedures. Prior to this time our underwriting emphasis with respect to commercial real estate, multi-family and construction loans focused heavily on the value of the collateral securing the loan, with less emphasis placed on the borrower's debt servicing capacity or other credit factors. Our revised underwriting guidelines place greater emphasis on the borrower's credit, debt service coverage and cash flows as well as on collateral appraisals. Additionally, our policies with respect to loan extensions became more conservative than our previous policies, and now require that a review of all relevant factors, including loan terms, the condition of the security property, market changes and trends that may affect the security property and financial condition of the borrower conform to our revised underwriting guidelines and that the extension be in our best interest.

Improving our Earnings by Expanding Our Product Offerings . We intend, subject to market conditions, to prudently increase the percentage of our assets consisting of higher-yielding commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations. At June 30, 2017, our commercial business loans totaled $31.6 million, or 8.2% of our total loan portfolio. We also intend to selectively add additional products to further diversify revenue sources and to capture more of each customer's banking relationship by cross selling our loan and deposit products and additional services to our customers such as electronic invoicing and payroll services for our business customers.

Attracting Core Deposits and Other Deposit Products. Our strategic focus is to emphasize total relationship banking with our customers to increase core deposits to internally fund our loan growth. The Company has reduced its reliance on other wholesale funding sources, including FHLB advances and brokered deposits, by focusing on customer deposits. We believe that by focusing on customer relationships, our level of core deposits and locally-based retail certificates of deposit will increase.

Continued Expense Control. Management has undertaken several initiatives to reduce noninterest expense and will continue to emphasize the identification of cost savings opportunities throughout all phases of our operations. Our expense control measures have included eliminating Anchor Bank's discretionary matching contribution to its 401(k) plan, reducing most marketing expenses and charitable contributions, cancelling certain projects and capital purchases, and reducing travel and entertainment expenditures. In particular we have also reduced our number of full-time equivalent employees from 194 at September 30, 2008 to 103 at June 30, 2017, primarily by closing six in store Wal-Mart branch offices [four were in fiscal 2009] as a result of their failure to meet our required growth standards. The reduction in personnel, cost savings and the closure of offices resulted in savings of approximately $1.8 million per year from the closure of these six offices. During fiscal 2017, our efforts to further reduce noninterest expense were adversely affected by $406,000 of costs associated with the proposed merger. Noninterest expense decreased by $502,000 or 2.8% to $17.5 million during fiscal 2017 as compared to $18.0 million and $16.8 million during fiscal years 2016 and 2015, respectively.

Retaining Experienced Personnel with a Focus on Relationship Banking. Our ability to continue to retain banking professionals with strong community relationships and significant knowledge of our markets will be a key to our success. We believe that we enhance our market position and add profitable growth opportunities by focusing on retaining experienced bankers who are established in their communities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete with other financial service providers by relying on the strength of our customer service and relationship banking approach.

Critical 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.

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

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

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

The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried no valuation allowance at June 30, 2017. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized 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 June 30, 2017 and June 30, 2016

General. Total assets increased $31.0 million, or 7.2%, to $462.5 million at June 30, 2017 from $431.5 million at June 30, 2016. The increase in assets was primarily a result of a $30.6 million, or 8.8% increase in loans receivable, net, to $377.9 million at June 30, 2017 from $347.4 million at June 30, 2016. In addition, cash and cash equivalent increased $5.9 million, or 70.6%, to $14.2 million at June 30, 2017 from $8.3 million at June 30, 2016. Partially offsetting this increase was a $2.5 million or 10.5% decline in

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securities available-for-sale, comprised almost entirely of mortgage-backed securities, and a $1.3 million, or 21.3% decline in securities held-to-maturity. The decreases in securities were primarily the result of contractual principal repayments.

For the year ended June 30, 2017, total assets increased $31.0 million. The following table details the increases and decreases in the composition of our assets from June 30, 2016 to June 30, 2017:




	Balance at June 30, 2017			Balance at June 30, 2016			Increase/(Decrease)
			Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	14,194		$	8,320		$	5,874		70.6	%
Mortgage-backed securities, available-for-sale	21,005			23,490			(2,485		)	(10.6	)
Mortgage-backed securities, held-to-maturity	4,949			6,291			(1,342		)	(21.3	)
Loans receivable, net of allowance for loan losses	377,908			347,351			30,557			8.8
Real estate owned, net	867			373			494			132.4

Mortgage-backed securities available-for-sale decreased by $2.5 million, or 10.6%, to $21.0 million at June 30, 2017 from $23.5 million at June 30, 2016. Mortgage-backed securities held-to-maturity decreased $1.3 million, or 21.3%, to $4.9 million at June 30, 2017 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 $30.5 million, or 8.8%, to $377.9 million at June 30, 2017 from $347.4 million at June 30, 2016. Construction loans increased $27.4 million, or 125.5%, to $49.2 million at June 30, 2017 from $21.8 million at June 30, 2016. There was $61.6 million in undisbursed construction loan commitments at June 30, 2017. Our construction loans are primarily for the construction of multi-family and commercial properties and to a lesser extent, loans for the construction of one-to-four family residences. Multi-family loans increased $6.8 million, or 12.6%, to $60.5 million at June 30, 2017 from $53.7 million at June 30, 2016. Commercial real estate loans increased $6.0 million, or 4.0%, to $155.5 million at June 30, 2017 from $149.5 million at June 30, 2016. Land loans increased $1.2 million, or 17.8%, to $8.0 million at June 30, 2017 from $6.8 million at June 30, 2016. One-to-four family loans decreased $1.5 million, or 2.4%, to $59.7 million at June 30, 2017 from $61.2 million at June 30, 2016. Consumer loans decreased $3.4 million, or 15.2%, to $18.7 million at June 30, 2017 from $22.1 million at June 30, 2016. Commercial business loans decreased $5.2 million, or 14.2%, to $31.6 million at June 30, 2017 from $36.8 million at June 30, 2016.

Real estate owned, net increased $494,000, or 132.4%, to $867,000 at June 30, 2017 from $373,000 at June 30, 2016. The $494,000 increase was a result of the transfer of loans to REO totaling $945,000 partially offset by REO sales of $510,000.

Liabilities. Total liabilities increased $28.4 million, or 7.7%, to $396.7 million at June 30, 2017 compared to $368.3 million at June 30, 2016 primarily as the result of an increase in deposits of $44.3 million, or 14.7%, to $345.2 million, partially offset by the repayment of $16.5 million of FHLB advances during the year ended June 30, 2017. The increase in deposit accounts was primarily a result of the Bank's deposit marketing campaign, as well as other deposit gathering activities. We have also increased commercial lending which has increased the level of larger deposit customers.

Deposits. Total deposits increased $44.3 million, or 14.7%, to $345.2 million at June 30, 2017 from $300.9 million at June 30, 2016 primarily due to a $26.1 million increase in certificates of deposit and a $13.9 million increase in money market accounts. Partially offsetting this increase, savings deposits decreased $1.5 million, or 3.4%, to $43.5 million at June 30, 2017 from $45.0 million at June 30, 2016. Our core deposits, which consist of all deposits other than certificates of deposit, increased by $18.2 million, or 10.0%, to $200.7 million at June 30, 2017 from $182.5 million at June 30, 2016.

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



	Balance at June 30, 2017			Balance at June 30, 2016			Increase/(Decrease)
			Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	52,606		$	50,781		$	1,825		3.6	%
Interest-bearing demand deposits	31,464			27,419			4,045			14.8
Money market accounts	73,154			59,270			13,884			23.4
Savings deposits	43,454			44,986			(1,532		)	(3.4	)
Certificates of deposit	144,509			118,438			26,071			22.0
Total deposit accounts	$	345,187		$	300,894		$	44,293		14.7	%

Borrowings. FHLB advances decreased $16.5 million, or 26.6%, to $45.5 million at June 30, 2017 from $62.0 million at June 30, 2016, due to the $16.5 million repayment.

Stockholders' Equity. Total stockholders' equity increased $2.7 million, or 4.2%, to $65.9 million at June 30, 2017 from $63.2 million at June 30, 2016 primarily due to net income of $2.4 million.

Comparison of Operating Results for the Years Ended June 30, 2017 and June 30, 2016

General. Net income for the year ended June 30, 2017 was $2.4 million or $0.97 per diluted share compared to net income of $495,000 or $0.20 per diluted share for the year ended June 30, 2016.

Net Interest Income. Net interest income before the provision for loan losses increased $2.3 million, or 15.4%, to $17.0 million for the year ended June 30, 2017, from $14.7 million for the year ended June 30, 2016 due primarily to an increase in average loans receivable.

Our net interest margin increased seven basis points to 4.19% for the year ended June 30, 2017, from 4.12% for the prior fiscal year. The improvement in our net interest margin compared to a year ago primarily reflects the increase in the average balance of loans receivable, in particular construction loans. The average yield on interest-earning assets increased 10 basis points to 5.01% for the year ended June 30, 2017 from 4.91% for the year ended June 30, 2016. The average cost of interest-bearing liabilities increased two basis points to 1.03% during the year ended June 30, 2017 from 1.01% during the year ended June 30, 2016, reflecting the low interest rate environment that persisted throughout the year. The average cost of certificates of deposit remained virtually unchanged at 1.95%, during the year ended June 30, 2017 compared to 1.96% for the same period of the prior year. At June 30, 2017, $42.0 million of our certificates of deposit with a weighted average rate of 1.89% will mature within one year. Our net interest rate spread increased to 3.98% for the year ended June 30, 2017 as compared to 3.91% for the year ended June 30, 2016.

The following table sets forth the results of changes in our balance sheet and in interest rates to our net interest income. 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). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

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	Year Ended June 30, 2017 Compared to June 30, 2016
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(386	)	$	3,187		$	2,801
Mortgage-backed securities	26			(108		)	(82		)
Investment securities, FHLB and cash and cash equivalents	65			(29		)	36
Total net change in income on interest-earning assets	(295		)	3,050			2,755
Interest-bearing liabilities:
Savings deposits	-			-			-
Interest bearing demand deposits	1			1			2
Money market accounts	176			24			200
Certificates of deposit	(13		)	(18		)	(31		)
FHLB advances	78			242			320
Total net change in expense on interest-bearing liabilities	242			249			491
Net change in net interest income	$	(537	)	$	2,801		$	2,264

Interest Income. Total interest income for the year ended June 30, 2017 increased $2.8 million, or 15.7%, to $20.3 million, from $17.5 million for the year ended June 30, 2016. The increase during the year was primarily attributable to the increase in the average balance of loans receivable, net. For the year ended June 30, 2017, average loans receivable, net, increased $59.0 million or 19.0% to $369.7 million from $310.7 million for the year ended June 30, 2016. The average yield on loans receivable, net, decreased ten basis points to 5.30% for the year ended June 30, 2017 compared to 5.40% for the prior year as higher yielding loans continue to be repaid and new loan originations are at lower rates. Average mortgage-backed securities declined $5.3 million during the year ended June 30, 2017 compared to the prior year. The average yield on mortgage-backed securities increased nine basis points to 2.14% for the year ended June 30, 2017 compared to 2.05% for the prior year. Average interest-earning assets increased $48.3 million, or 13.5 %, to $405.1 million for the year ended June 30, 2017 compared to $356.8 million for 2016.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2017 and 2016:



	Year Ended June 30,
	2017				2016				Increase/(Decrease) in Interest and Dividend Income from 2016
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net	$	369,757	5.30	%	$	310,740	5.40	%	$	2,801
Mortgage-backed securities	27,767		2.14		33,035		2.05		(82		)
Investment securities	170		5.88		318		5.35		(7		)
FHLB stock	2,551		2.94		1,491		1.48		53
Cash and cash equivalents	4,869		0.41		11,210		0.27		(10		)
Total interest-earning assets	$	405,114	5.01	%	$	356,794	4.91	%	$	2,755

Interest Expense. Interest expense increased $491,000, or 17.3%, to $3.3 million for the year ended June 30, 2017 from $2.8 million for the year ended June 30, 2016. The increase was primarily attributable to the increase in the average cost of money

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market deposits and the increase in the average balance of FHLB advances. The average balance of money market accounts increased $14.2 million or 22.9% and the average cost increased by 23 basis points to 0.40% as compared to the same period in the prior year. The increase in money market accounts was the result of the Bank's deposit marketing campaign as well as other deposit gathering activities. The average cost of FHLB advances increased 15 basis points to 1.09% for the year ended June 30, 2017 compared to 0.94% for the prior year reflecting recent increases in interest rates. The average balance of FHLB advances increased $25.7 million, or 99.5% to $51.5 million for the year ended June 30, 2017 compared to $25.8 million for last year. The average balance of certificates of deposit declined $914,000, or 0.75%, to $121.6 million for the year ended June 30, 2017 compared to $122.5 million for the for the year ended June 30, 2016. The average cost of certificates of deposit remained virtually unchanged at 1.95% for the year ended June 30, 2017 compared to 1.96% for the year ended June 30, 2016.

The average balance of total interest-bearing liabilities increased $41.4 million, or 14.7%, to $322.7 million for the year ended June 30, 2017 from $281.3 million for the year ended June 30, 2016 primarily as a result of the increase in the average balance of FHLB advances.

The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2017 and 2016:



	Year Ended June 30,
	2017				2016				Increase/(Decrease) in Interest Expense from 2016
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Savings deposits	$	44,202	0.15	%	$	44,160	0.15	%	$	-
Interest-bearing demand deposits	29,207		0.04		26,844		0.04		2
Money market accounts	76,163		0.40		61,949		0.17		200
Certificates of deposit	121,614		1.95		122,528		1.96		(31		)
FHLB advances	51,497		1.09		25,816		0.94		320
Total interest-bearing liabilities	$	322,683	1.03	%	$	281,297	1.01	%	$	491

Provision for Loan Losses. In connection with our analysis of the loan portfolio, management determined that a $310,000 provision for loan losses was required for the year ended June 30, 2017 compared to a $340,000 provision for the year ended June 30, 2016. Loans charge-offs decreased to $324,000 for year ended June 30, 2017 as compared to $957,000 for the last fiscal year. The $324,000 of loans charged off during the fiscal year included $134,000 of direct consumer loans, including credit cards, $110,000 of commercial real estate, $59,000 of home equity loans, and $21,000 of one-to-four family mortgage loans. Nonperforming assets were $4.6 million or 1.0% of total assets at June 30, 2017, compared to $2.4 million, or 0.6% of total assets at June 30, 2016. Total delinquent loans (past due 30 days or more), increased $781,000, or 23.8%, to $4.1 million at June 30, 2017 from $3.3 million at June 30, 2016. The increase was primarily due to a $2.0 million commercial real estate loan becoming delinquent during this quarter although at June 30, 2017 the loan was still accruing interest. Nonperforming loans increased to $3.7 million at June 30, 2017 from $2.0 million at June 30, 2016. The ratio of nonperforming loans, consisting solely of nonaccrual loans, to total loans increased to 1.0% at June 30, 2017 from 0.6% at June 30, 2016. Classified loans increased to $3.7 million at June 30, 2017 from $2.8 million a year ago. The allowance for loan losses of $4.1 million at June 30, 2017 represented 1.1% of loans receivable and 110.8% of nonperforming loans. This compares to an allowance for loan losses 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 June 30, 2017 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank 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 for the year ended June 30, 2017 and 2016:



	At or For the Year Ended June 30,
	2017			2016
	(Dollars in thousands)
Provision for loan losses	$	310		$	340
Net (recoveries) charge-offs	(17		)	282
Allowance for loan losses	4,106			3,779
Allowance for losses as a percentage of total loans receivable at the end of this period	1.1		%	1.1		%
Nonaccrual and 90 days or more past due loans still accruing interest	$	3,704		$	1,972
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	110.8		%	191.6		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	1.0		%	0.6		%
Total loans, gross and excluding loans held for sale	$	383,306		$	352,077

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 June 30, 2017 and June 30, 2016 there were 26 and 37 loans, respectively, with aggregate net principal balances of $4.3 million and $8.8 million, respectively, that we have identified as TDRs. At June 30, 2017 and June 30, 2016 there were $131,000 and $884,000, respectively, of TDRs included in nonperforming loans.

Noninterest Income. Noninterest income increased $59,000, or 1.4%, to $4.3 million for the year ended June 30, 2017 from $4.2 million for the year ended June 30, 2016. The following table provides a detailed analysis of the changes in the components of noninterest income:



	Year Ended June 30,				Increase (Decrease)
	2017		2016		Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	1,330	$	1,347	$	(17	)	(1.3	)%
Other deposit fees	751		721		30			4.2
Other loan fees	832		707		125			17.7
Gain on sale of loans	183		158		25			15.8
Increase in surrender value of life insurance investment	515		540		(25		)	(4.6	)
Other income	653		732		(79		)	(10.8	)
Total noninterest income	$	4,264	$	4,205	$	59		1.4	%

Noninterest income increased during the year ended June 30, 2017, primarily due to a $125,000 or 17.7% increase in other loan fees income during fiscal 2017 reflecting our increased loan production during the year.

Noninterest Expense. Noninterest expense decreased $502,000, or 2.8%, to $17.5 million for the year ended June 30, 2017 from $18.0 million for the year ended June 30, 2016. The following table provides an analysis of the changes in the components of noninterest expense:

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	At or For the Year Ended June 30,						Increase (Decrease)
	2017			2016			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	9,019		$	9,708		$	(689	)	(7.1	)%
General and administrative expenses	2,944			3,175			(231		)	(7.3	)
Merger expense	406			-			406			100.0
Real estate holding cost	48			146			(98		)	(67.1	)
FDIC insurance premium	145			264			(119		)	(45.1	)
Information technology	2,105			1,760			345			19.6
Occupancy and equipment	1,889			1,875			14			0.7
Deposit services	462			477			(15		)	(3.1	)
Marketing	564			674			(110		)	(16.3	)
Loss (gain) on sale of property, premises and equipment	-			4			(4		)	(100.0	)
Gain on sale of REO	(59		)	(58		)	(1		)	1.7
Total noninterest expense	$	17,523		$	18,025		$	(502	)	(2.8	)%

Noninterest expense decreased during the year ended June 30, 2017 primarily due to compensation and benefits decreasing $689,000, or 7.1%, from $9.7 million at June 30, 2016 to $9.0 million for the year ended June 30, 2017. The decrease in compensation and benefits expense was primarily due to a reduction of $1.2 million of stock based compensation awarded under the Plan to $636,000 for the year ended June 30, 2017 from $1.8 million in the previous year. General and administrative costs decreased $231,000, or 7.3% from $3.2 million to $2.9 million for the year ended June 30, 2017 primarily due to cost savings associated with our new credit card core system. Partially offsetting the decrease in compensation and benefits was an increase of $315,000 for employee loan commissions to $505,000 for the year ended June 30, 2017 from $190,000 in the previous year resulting from increased loan production. These decreases were partially offset by a $345,000 increase in information technology expense to $2.1 million for the year ended June 30, 2017 from $1.8 million for the previous year primarily due to increased core processing costs and a software termination cost of $44,000. Merger expenses were $406,000 which are primarily due to legal and professional fees associated with the proposed merger.

Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 82.6% for the year ended June 30, 2017 compared to 95.4% for the year ended June 30, 2016. By definition, a lower efficiency ratio would be an indication that we are more efficiently utilizing resources to generate net interest income and other fee income.

Provision (benefit) for Income Taxes. The Company had a $1.0 million provision for income taxes for the year ended June 30, 2017 generally due to an increase in income before provision for income taxes of $2.9 million compared to a $39,000 provision for income taxes for the year ended June 30, 2016. The effective tax rates were 30.6% and 7.2% for the years ended June 30, 2017 and 2016, respectively. The increase in the effective tax rate is a reflection of the level of tax exempt income, life insurance income, and other tax permanent differences relative to the amount of pretax income.

Comparison of Financial Condition at June 30, 2016 and June 30, 2015

General. Total assets increased $52.3 million, or 13.8%, to $431.5 million at June 30, 2016 from $379.2 million at June 30, 2015. The increase in assets was primarily a result of a $63.9 million, or 22.6% increase in loans receivable, net, to $347.4 million at June 30, 2016 from $283.4 million at June 30, 2015. Partially offsetting this increase was a $6.1 million or 42.4% decline in cash and cash equivalents, a $5.9 million, or 20.0% decline in securities available-for-sale, comprised almost entirely of mortgage-backed securities, and a $1.3 million, or 17.4% decline in securities held-to-maturity. The decreases in securities were primarily the result of contractual principal repayments. In addition, Federal Home Loan Bank ("FHLB") stock increased $2.1 million, or 246.9% to $3.0 million as required to support our increase in FHLB advances which primarily funded our loan growth. Total liabilities increased $52.8 million or 16.7% to $368.3 million at June 30, 2016 compared to $315.5 million at June 30, 2015 primarily as the result of an increase in FHLB advances of $52.0 million or 520.0% to $62.0 million and a $1.1 million increase in deposits.

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Assets. For the year ended June 30, 2016, total assets increased $52.3 million. The following table details the increases and decreases in the composition of our assets from June 30, 2015 to June 30, 2016:



	Balance at June 30, 2016			Balance at June 30, 2015			Increase (Decrease)
			Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	8,320		$	14,450		$	(6,130	)	(42.4	)%
Mortgage-backed securities, available-for-sale	23,490			29,130			(5,640		)	(19.4	)
Mortgage-backed securities, held-to-maturity	6,291			7,498			(1,207		)	(16.1	)
Loans receivable, net of allowance for loan losses	347,351			283,444			63,907			22.5
Real estate owned	373			797			(424		)	(53.2	)

Mortgage-backed securities available-for-sale decreased by $5.6 million or 19.4% to $23.5 million at June 30, 2016 from $29.1 million at June 30, 2015. Mortgage-backed securities held-to-maturity decreased $1.2 million or 16.1% to $6.3 million at June 30, 2016 from $7.5 million at June 30, 2015. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, increased $63.9 million, or 22.5%, to $347.4 million at June 30, 2016 from $283.4 million at June 30, 2015 as a result $141.4 million of new loan production and the purchase of $22.8 million of loans. During the year ended June 30, 2016, commercial real estate loans increased $21.2 million, or 16.5%, to $149.5 million at June 30, 2016 from $128.3 million at June 30, 2015. Commercial business loans increased $17.9 million, or 94.1%, to $36.9 million at June 30, 2016 from $19.0 million at June 30, 2015. The increase was primarily due to two commercial lines of credit. The first is secured by assignments of promissory notes by the underlying deeds of trust located in Washington, Oregon and Utah. The second are also promissory notes of deed of trust on construction loans located in King County. Multi-family loans increased $10.5 million, or 24.3%, to $53.7 million at June 30, 2016 from $43.2 million at June 30, 2015, primarily due to the purchase of $22.8 million in multi-family loans, partially offset by the reclassification of $14.4 million of multi-family loans to one-to-four family loans. The loan purchase consisted of 12 multi-family projects in King and Pierce counties. All properties met our underwriting standards and each property was independently visited and re-underwritten. Construction loans increased $10.1 million, or 85.8%, to $21.8 million at June 30, 2016 from $11.7 million at June 30, 2015. One-to-four family loans increased $3.3 million or 5.7%, to $61.2 million at June 30, 2016 from $57.9 million at June 30, 2015, due primarily to the reclassification discussed above. Land loans increased $2.8 million, or 68.1%, to $6.8 million at June 30, 2016 from $4.1 million at June 30, 2015. Consumer loans decreased $1.8 million, or 7.6%, to $22.1 million at June 30, 2016 from $23.9 million at June 30, 2015.

Real estate owned, net decreased $424,000, or 53.2% to $373,000 at June 30, 2016 from $797,000 at June 30, 2015 as a result of ongoing sales to reduce our nonperforming assets. The $424,000 decline was a result of REO sales of $915,000, net of impairments, and $83,000 of REO valuation write-downs partially offset by the transfer of loans to REO totaling $574,000.

Deposits. Total deposits increased $1.1 million, or 0.4%, to $300.9 million at June 30, 2016 from $299.8 million at June 30, 2015. Our core deposits, which consist of all deposits other than certificates of deposit, increased by $9.0 million, or 5.2%, to $182.5 million at June 30, 2016 from $173.5 million at June 30, 2015. Partially offsetting this increase, certificates of deposit decreased $7.9 million, or 6.2%, to $118.4 million at June 30, 2016 from $126.3 million at June 30, 2015.

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



	Balance at June 30, 2016			Balance at June 30, 2015			Increase (Decrease)
			Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	50,781		$	44,719		$	6,062		13.6	%
Interest-bearing demand deposits	27,419			22,448			4,971			22.1
Money market accounts	59,270			63,916			(4,646		)	(7.3	)
Savings deposits	44,986			42,399			2,587			6.1
Certificates of deposit	118,438			126,330			(7,892		)	(6.2	)
Total deposit accounts	$	300,894		$	299,812		$	1,082		0.4	%

Borrowings. FHLB advances increased $52.0 million, or 520.0%, to $62.0 million at June 30, 2016 from $10.0 million at June 30, 2015, primarily funding our loan growth.

Stockholders' Equity. Total stockholders' equity decreased $527,000, or 0.8%, to $63.2 million at June 30, 2016 from $63.7 million at June 30, 2015 primarily due to stock repurchases of $3.0 million. During the year we repurchased 127,500 shares of common stock at a weighted average price of $23.17 per share. This decrease was partially offset by $1.6 million of stock-based compensation under the Anchor Bancorp 2015 Equity Incentive Plan approved by shareholders on October 21, 2015 (the "Plan") and net income of $495,000. Accumulated other comprehensive loss decreased $162,000 to $549,000 as a result of unrealized valuation changes on investments available-for-sale.

Comparison of Operating Results for the Years Ended June 30, 2016 and June 30, 2015

General. Net income for the year ended June 30, 2016 was $495,000 or $0.20 per diluted share compared to net income of $9.8 million or $3.97 per diluted share for the year ended June 30, 2015, which included an $8.3 million tax benefit related to the reversal of the valuation allowance on deferred tax assets ("DTA").

Net Interest Income. Net interest income before the provision for loan losses increased $884,000, or 6.4%, to $14.7 million for the year ended June 30, 2016, from $13.8 million for the year ended June 30, 2015 due primarily to an increase in average loans receivable.

Our net interest margin increased seven basis points to 4.12% for the year ended June 30, 2016, from 4.05% for the prior fiscal year. The improvement in our net interest margin compared to a year ago primarily reflects the increase in the average balance of loans receivable, net and a decline in our average cost of interest-bearing liabilities, in particular, FHLB advances. The average yield on interest-earning assets decreased five basis points to 4.91% for the year ended June 30, 2016 from 4.96% for the year ended June 30, 2015, primarily the result of the yield on loans receivable, net, decreasing 26 basis points. The average cost of interest-bearing liabilities decreased 12 basis points to 1.01% during the year ended June 30, 2016 from 1.13% during the year ended June 30, 2015. This decrease primarily reflects the 171 basis point decline in the average cost of FHLB advances, a reduction in the average balance of certificates of deposit, as well as the low interest rate environment that persisted throughout the year. We expect further declines in our funding costs as our certificates of deposit mature and reprice to current market rates. The average cost of certificates of deposit remained unchanged at 1.96%, during the year ended June 30, 2016 and for the same period of the prior year. At June 30, 2016, $43.2 million of our certificates of deposit with a weighted average rate of 0.95% will mature within one year. Our net interest rate spread increased to 3.91% for the year ended June 30, 2016 as compared to 3.83% for the year ended June 30, 2015.

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	Year Ended June 30, 2016 Compared to June 30, 2015
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(806	)	$	1,579		$	773
Mortgage-backed securities	21			(168		)	(147		)
Investment securities, FHLB and cash and cash equivalents	24			(12		)	12
Total net change in income on interest-earning assets	(761		)	1,399			638
Interest-bearing liabilities:
Savings deposits	1			4			5
Interest bearing demand deposits	(1		)	3			2
Money market accounts	14			(9		)	5
Certificates of deposit	-			(155		)	(155		)
FHLB advances	(442		)	339			(103		)
Total net change in expense on interest-bearing liabilities	(428		)	182			(246		)
Net change in net interest income	$	(333	)	$	1,217		$	884

Interest Income. Total interest income for the year ended June 30, 2016 increased $638,000, or 3.8%, to $17.5 million, from $16.9 million for the year ended June 30, 2015. The increase during the year was primarily attributable to the increase in the average balance of loans receivable, net. For the year ended June 30, 2016, average loans receivable, net, increased $27.9 million or 9.9% to $310.7 million from $282.8 million for the year ended June 30, 2015. The average yield on loans receivable, net, decreased 26 basis points to 5.40% for the year ended June 30, 2016 compared to 5.66% for the prior year. Average mortgage-backed securities declined $8.5 million during the year ended June 30, 2016 compared to the prior year. The average yield on mortgage-backed securities increased seven basis points to 2.05% for the year ended June 30, 2016 compared to 1.98% for the prior year. Average interest-earning assets increased $16.0 million, or 4.7 %, to $356.8 million for the year ended June 30, 2016 compared to $340.8 million for 2015.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2016 and 2015:



	Year Ended June 30,
	2016				2015				Increase/ (Decrease) in Interest Income from 2015
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net	$	310,740	5.40	%	$	282,841	5.66	%	$	773
Mortgage-backed securities	33,035		2.05		41,493		1.98	%	(147		)
Investment securities	318		5.35		562		4.98	%	(11		)
FHLB stock	1,491		1.48		5,544		0.13	%	15
Cash and cash equivalents	11,210		0.27		10,326		0.21	%	8
Total interest-earning assets	$	356,794	4.91	%	$	340,766	4.96	%	$	638

Interest Expense. Interest expense decreased $246,000, or 8.0%, to $2.8 million for the year ended June 30, 2016 from $3.1 million for the year ended June 30, 2015. The decrease during the year was primarily attributable to reductions in the average cost of FHLB advances and in the average balance of certificates of deposit. The average cost of FHLB advances decreased 171 basis points to 0.94% for the year ended June 30, 2016 compared to 2.65% for the prior year. The average balance of FHLB advances increased $12.8 million, or 97.8% to $25.8 million for the year ended June 30, 2016 compared to $13.1 million for last year. The

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average balance of certificates of deposit declined $7.9 million, or 6.1%, to $122.5 million for the year ended June 30, 2016 compared to $130.4 million for the for the year ended June 30, 2015. The average cost of certificates of deposit remained unchanged at 1.96% for the years ended June 30, 2016 and 2015.

The average balance of total interest-bearing liabilities increased $8.0 million, or 2.9%, to $281.3 million for the year ended June 30, 2016 from $273.3 million for the year ended June 30, 2015 primarily as a result of the increase in the average balance of FHLB advances.

In addition, as a result of the reduction in the average cost of FHLB advances and, to a lesser extent, general market rate decreases, the average cost of funds for total interest-bearing liabilities decreased 12 basis points to 1.01% for the year ended June 30, 2016 compared to 1.13% for the year ended June 30, 2015.

The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2016 and 2015:



	Year Ended June 30,
	2016				2015				Increase/(Decrease) in Interest Expense from 2015
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Savings deposits	$	44,160	0.15	%	$	41,220	0.15	%	$	5
Interest-bearing demand deposits	26,844		0.04		20,355		0.04	%	2
Money market accounts	61,949		0.17		68,245		0.15	%	5
Certificates of deposit	122,528		1.96		130,428		1.96	%	(155		)
FHLB advances	25,816		0.94		13,049		2.65		(103		)
Total interest-bearing liabilities	$	281,297	1.01	%	$	273,297	1.13	%	$	(246	)

Provision for Loan Losses. In connection with our analysis of the loan portfolio, management determined that a $340,000 provision for loan losses was required for the year ended June 30, 2016 compared to no provision for the year ended June 30, 2015, primarily reflecting loan growth. Loans charge-offs decreased to $957,000 for year ended June 30, 2016 as compared to $1.5 million for the last fiscal year. The $957,000 of loans charged off during the fiscal year included $258,000 of one-to-four family mortgage loans, $225,000 of commercial real estate loans, $180,000 of home equity loans, $210,000 of direct consumer loans, including credit cards, and $84,000 of commercial business loans. Nonperforming assets were $2.4 million or 0.6% of total assets at June 30, 2016, compared to $2.8 million, or 0.7% of total assets at June 30, 2015. Total delinquent loans (past due 30 days or more), decreased $333,000, or 9.2% to $3.3 million at June 30, 2016 from $3.6 million at June 30, 2015. Nonperforming loans remained unchanged at $2.0 million at both June 30, 2016 and June 30, 2015. The ratio of nonperforming loans, consisting solely of nonaccrual loans, to total loans decreased to 0.6% at June 30, 2016 from 0.7% at June 30, 2015, reflecting the growth in the loan portfolio. Classified loans declined to $2.8 million at June 30, 2016 from $3.7 million a year ago. The allowance for loan losses of $3.8 million at June 30, 2016 represented 1.1% of loans receivable and 191.6% of nonperforming loans.

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The following table details activity and information related to the allowance for loan losses for the year ended June 30, 2016 and 2015:



	At or For the Year Ended June 30,
	2016			2015
	(Dollars in thousands)
Provision for loan losses	$	340		$	-
Net charge-offs	282			903
Allowance for loan losses	3,779			3,721
Allowance for losses as a percentage of total loans receivable at the end of the period	1.1		%	1.3		%
Nonaccrual and 90 days or more past due loans still accruing interest	$	1,972		$	2,011
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	191.6		%	185.0		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.6		%	0.7		%
Total loans	$	352,077		$	288,212

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 June 30, 2016 and June 30, 2015 there were 37 and 39 loans, respectively, with aggregate net principal balances of $8.8 million and $9.8 million, respectively, that we have identified as TDRs. At June 30, 2016 and June 30, 2015 there were $884,000 and $902,000, respectively, of TDRs included in nonperforming loans.

Noninterest Income. Noninterest income decreased $298,000, or 6.6%, to $4.2 million for the year ended June 30, 2016 from $4.5 million for the year ended June 30, 2015. The following table provides a detailed analysis of the changes in the components of noninterest income:



	Year Ended June 30,					Increase (Decrease)
	2016		2015			Amount			Percent
	(Dollars in thousands)
Deposit services fees	$	1,347	$	1,381		$	(34	)	(2.5	)%
Other deposit fees	721		735			(14		)	(1.9	)
Gain on sale of investments	-		47			(47		)	(100.0	)
Other loan fees	707		588			119			20.2
Gain on sale of loans	158		(15		)	173			(1,153.3	)
Increase in surrender value of life insurance investment	514		540			(26		)	(4.8	)
Gain on death benefit of life insurance investment, net	26		479			(453		)	(94.6	)
Other income	732		748			(16		)	(2.1	)
Total noninterest income	$	4,205	$	4,503		$	(298	)	(6.6	)%

Noninterest income decreased during the year ended June 30, 2016, primarily attributable to the receipt last year of $479,000 related to a former Anchor Bank executive's insurance death benefit partially offset by gain on sale of loans increasing to $158,000 due to an increase in loans originated for sale and by other loan fees increasing $119,000 from increased loan production.

Noninterest Expense. Noninterest expense increased $1.2 million, or 7.2%, to $18.0 million for the year ended June 30, 2016 from $16.8 million for the year ended June 30, 2015. The following table provides an analysis of the changes in the components of noninterest expense:

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	At or For the Year Ended June 30,						Increase (Decrease)
	2016			2015			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	9,708		$	8,003		$	1,705		21.3	%
General and administrative expenses	3,175			2,663			512			19.2
Real estate owned reserve	83			32			51			159.4
Real estate holding costs	63			267			(204		)	(76.4	)
FDIC insurance premium	264			342			(78		)	(22.8	)
Information technology	1,760			1,739			21			1.2
Occupancy and equipment	1,875			1,944			(69		)	(3.5	)
Deposit services	477			570			(93		)	(16.3	)
Marketing	674			710			(36		)	(5.1	)
Loss on sale of property, premises and equipment	4			820			(816		)	(99.5	)
Gain on sale of REO	(58		)	(283		)	225			(79.5	)
Total noninterest expense	$	18,025		$	16,807		$	1,218		7.2	%

Noninterest expense increased during the year ended June 30, 2016 primarily due to compensation benefits increasing $1.7 million, or 21.3%, from $8.0 million at June 30, 2015 to $9.7 million for the year ended June 30, 2016. The increase in compensation benefits was primarily due to $1.8 million of stock based compensation awarded under the Plan and general and administrative expenses increasing primarily due to proxy contest expenses of $391,000. Partially offsetting this increase was a decrease in loss on sale of premises and equipment of $816,000 from $820,000 in the previous year to $4,000 in the year ended June 30, 2016 primarily due to the $758,000 loss on sale of our Aberdeen Loan Center locations last year. REO holding costs decreased $204,000, or 76.4%, from $267,000 to $63,000 as compared to the same period in 2015, reflecting the REO portfolio containing more residential REO properties instead of commercial real estate REO properties which historically incur higher holding costs.

Our efficiency ratio, which is the percentage of noninterest expense to net interest income plus noninterest income, was 95.4% for the year ended June 30, 2016 compared to 91.8% for the year ended June 30, 2015. The increase in efficiency ratio was primarily attributable to the increase in noninterest expense and decrease in noninterest income offsetting the increase in net interest income before the provision for loan losses. By definition, a lower efficiency ratio would be an indication that we are more efficiently utilizing resources to generate net interest income and other fee income.

Provision (benefit) for Income Taxes. The Company had a $39,000 provision for income taxes for the year ended June 30, 2016 compared to an $8.3 million (benefit) for income taxes for the year ended June 30, 2015 due to the Bank's valuation allowance. At June 30, 2016, the Company had a DTA of $8.9 million which included $12.7 million for federal net operating loss carryforwards, which will begin to expire in 2031.

DTAs are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the DTA has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the DTA 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. During fiscal 2015, the Company reversed its DTA valuation allowance related to the Company's' deferred tax assets as management deemed that it was no longer appropriate to carry a DTA valuation allowance as a result of changes in the factors considered by management when the Company initially established the valuation allowance. In reaching this determination, management considered, among other factors, the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, available tax planning strategies, the Company's cumulative earnings during the past three years, including the Company's recent financial performance, the improvement in the Company's asset quality and financial condition, as well as projected earnings. As of June 30, 2016 and 2015, management deemed that a deferred tax asset valuation allowance related to the Company's DTA was not necessary as compared to a valuation allowance of $8.5 million at June 30, 2014, respectively. See Note 15 of the Notes to the Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data" of this Form 10-K, for further discussion of the Company's income taxes.

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Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using the average of weekly interest-earning assets and interest-bearing liabilities. Noninterest-earning assets and noninterest-bearing liabilities have been computed on a monthly basis.



	Year Ended June 30,
	2017							2016							2015
	Average Balance (1)		Interest and Dividends		Yield/ Cost			Average Balance (1)		Interest and Dividends		Yield/ Cost			Average Balance (1)		Interest and Dividends		Yield/ Cost
								(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)	$	369,757	$	19,580	5.30		%	$	310,740	$	16,779	5.40		%	$	282,841	$	16,006	5.66		%
Mortgage-backed securities	27,767		594		2.14			33,035		676		2.05			41,493		823		1.98
Investment securities	170		10		5.88			318		17		5.35			562		28		4.98
FHLB stock	2,551		75		2.94			1,491		22		1.48			5,544		7		-
Cash and cash equivalents	4,869		20		0.41			11,210		30		0.27			10,326		22		0.21
Total interest-earning assets	405,114		20,279		5.01			356,794		17,524		4.91			340,766		16,886		4.96
Noninterest earning assets	31,417							31,849							36,521
Total average assets	$	436,531						$	388,643						$	377,287
Interest-bearing liabilities:
Savings deposits	44,202		67		0.15			44,160		67		0.15			41,220		62		0.15
Interest-bearing demand deposits	29,207		13		0.04			26,844		11		0.04			20,355		9		0.04
Money market accounts	76,163		305		0.40			61,949		105		0.17			68,245		100		0.15
Certificates of deposit	121,614		2,373		1.95			122,528		2,404		1.96			130,428		2,559		1.96
Total deposits	271,186		2,758		1.02			255,481		2,587		1.01			260,248		2,730		1.05
FHLB advances	51,497		563		1.09			25,816		243		0.94			13,049		346		2.65
Total interest-bearing liabilities	322,683		3,321		1.03			281,297		2,830		1.01			273,297		3,076		1.13
Noninterest-bearing liabilities	55,088							50,007							51,666
Total average liabilities	377,771							331,304							324,963
Average equity	58,760							57,339							52,324
Total liabilities and equity	$	436,531						$	388,643						$	377,287
Net interest income					$	16,958						$	14,694						$	13,810
Interest rate spread					3.98		%					3.91		%					3.83		%
Net interest margin					4.19		%					4.12		%					4.05		%
Ratio of average interest-earning assets to average interest-bearing liabilities					125.5		%					126.8		%					124.7		%

___________________

(1) Average loans receivable includes nonperforming loans and does not include net deferred loan fees.

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Yields Earned and Rates Paid

The following table sets forth (on a consolidated basis) for the periods and at the dates indicated, the weighted average yields earned on our assets, the weighted average interest rates paid on our liabilities, together with the net yield on interest-earning assets.



	At June 30, 2017		Year Ended June 30,
		2017		2016		2015
Weighted average yield on:
Loans receivable, net	5.13	%	5.30	%	5.40	%	5.66	%
Mortgage-backed securities	2.83		2.14		2.05		1.98
Investment securities	5.74		5.88		5.35		4.98
FHLB stock	3.19		2.94		1.48		0.13
Cash and cash equivalents	0.20		0.41		0.27		0.21
Total interest-earning assets	4.88		5.01		4.91		4.96
Weighted average rate paid on:
Savings accounts	0.15		0.15		0.15		0.15
Interest-bearing demand deposits	0.06		0.04		0.04		0.04
Money market accounts	0.44		0.40		0.17		0.15
Certificates of deposit	1.99		1.95		1.96		1.96
Total average deposits	1.12		1.02		1.01		1.05
FHLB advances	1.03		1.09		0.94		2.65
Total interest-bearing liabilities	0.95		1.03		1.01		1.13

Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities)	3.93		3.98		3.91		3.83

Net interest margin (net interest income (expense) as a percentage of average interest-earning assets)	N/A		4.19		4.12		4.05

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.



	Year Ended June 30, 2017 Compared to June 30, 2016 Increase (Decrease) Due to									Year Ended June 30, 2016 Compared to June 30, 2015 Increase (Decrease) Due to
	Rate			Volume			Total			Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(386	)	$	3,187		$	2,801		$	(806	)	$	1,579		$	773
Mortgage-backed securities	26			(108		)	(82		)	21			(168		)	(147		)
Investment securities, FHLB stock and cash and cash equivalents	65			(29		)	36			24			(12		)	12
Total net change in income on interest-earning assets	$	(295	)	$	3,050		$	2,755		$	(761	)	$	1,399		$	638
Interest-bearing liabilities:
Savings accounts	$	-		$	-		$	-		$	1		$	4		$	5
Interest-bearing demand deposits	1			1			2			(1		)	3			2
Money market accounts	176			24			200			14			(9		)	5
Certificates of deposit	(13		)	(18		)	(31		)	-			(155		)	(155		)
FHLB advances	78			242			320			(442		)	339			(103		)
Total net change in expense on interest-bearing liabilities	$	242		$	249		$	491		$	(428	)	$	182		$	(246	)
Net change in net interest income	$	(537	)	$	2,801		$	2,264		$	(333	)	$	1,217		$	884

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.

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

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


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


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


•	we have 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).

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 June 30, 2017 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams. The current federal funds rate is 1.00 percent making an immediate change of -200 and -300 basis points improbable.



Basis Point Change in Rates		Net Portfolio Value										Net Portfolio as % of Portfolio Value of Assets					Market Value of Assets (4)
	Amount			$ Change (1)				% Change			NPV Ratio (2)			% Change (3)
		(Dollars in thousands)
300		$	64,306		$	(270	)		(0.42	)%		15.14	%		0.70	%	$	424,829
200		65,091			515				0.80			15.04			0.60		432,656
100		65,278			702				1.09			14.83			0.39		440,206
Base		64,576			-				-			14.44			-		447,208
(100)		63,474			(1,102		)		(1.71	)		13.98			(0.46	)	454,135

__________


(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").

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(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 June 30, 2017, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.



Basis Point Change in Rates		Net Interest Income
	Amount			$ Change (1)				% Change
		(Dollars in thousands)
300		$	21,211		$	2,839			15.5	%
200		20,337			1,965				10.7
100		19,396			1,024				5.6
Base		18,372			-				-
(100)		17,130			(1,242		)		(6.8	)


(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 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.

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The following table presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at June 30, 2017. These amounts are based on daily averages.



	Within Six Months			Over Six Months to One Year			Over 1 - 3 Years			Over 3 - 5 Years			Over 5 - 10 Years			Over 10 Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	160,120		$	53,876		$	97,625		$	47,126		$	20,141		$	3,670		$	382,558
Investments and other interest bearing deposits	2,219			2,041			6,759			4,978			9,676			2,065			27,738
Life insurance investment, net	20,030			-			-			-			-			-			20,030
Total rate sensitive assets	182,369			55,917			104,384			52,104			29,817			5,735			430,326
Interest-bearing liabilities:
Deposits	151,288			23,344			108,551			34,700			29,904			-			347,787
Borrowings	13,000			17,500			15,000			-			-			-			45,500
Total rate sensitive liabilities	164,288			40,844			123,551			34,700			29,904			-			393,287

Excess (deficiency) of interest sensitivity assets over interest sensitivity liabilities	18,081			15,073			(19,167		)	17,404			(87		)	5,735			37,039
Cumulative excess (deficiency) of interest sensitivity assets	18,081			33,154			13,987			31,391			31,304			37,039			-
Cumulative gap as a % of earning assets	4.20		%	7.70		%	3.25		%	7.29		%	7.27		%	8.61		%	-

Anchor Bank currently runs an internal model to simulate interest rate risk; the model in use is a Fiserv model which calculates interest-earning assets and liabilities using a monthly average.

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 securities and advances from the FHLB of Des Moines. These funds, together with retained earnings and equity, are used to make loans, acquire 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 June 30, 2017, the total approved loan origination commitments outstanding amounted to $4.5 million and undisbursed construction loan commitments totaled $61.6 million. At the same date, unused lines of credit were $68.3 million. At June 30, 2017, cash and cash equivalents was $14.2 million and securities available for sale totaled $21.2 million. The Bank also maintains advance lines of credit with FHLB Des Moines, Pacific Coast Bankers Bank and the Federal Reserve totaling $111.3 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%. During the year ended June 30, 2017, our average liquidity ratio was 8.69%, which indicates we were below the liquidity standard set by our Board. Our liquidity ratio was 8.97% at June 30, 2017. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

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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.

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 other securities.

Certificates of deposit scheduled to mature in one year or less at June 30, 2017 totaled $42.0 million. We had no brokered deposits at June 30, 2017. Management's policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Recently we have targeted certain deposit rates at a lower level as part of our efforts to reduce higher costing certificates of deposits as part of our overall capital and liquidity strategy. Based on historical experience, we believe that a significant portion of maturing deposits will remain with Anchor Bank. In addition, we had the ability at June 30, 2017 to borrow an additional $111.3 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 our 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 our liabilities to manage effectively our liquidity and funding requirements.

Our primary source of funds is our 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, six-month, and one-year time periods. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset Liability Management Committee in forecasting funding needs and investing opportunities.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the year ended June 30, 2017, the Bank paid a $1.3 million dividend to the Company. The payment is being used for the Company's general corporate purposes, including supporting the Company's ongoing operations. At June 30, 2017, the Company (on an unconsolidated basis) had liquid assets of $2.8 million.

Contractual Obligations

Through the normal course of operations, we have entered into certain contractual obligations. Our obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Lease terms generally cover a five-year period, with options to extend, and are non-cancelable.

At June 30, 2017, our scheduled maturities of contractual obligations were as follows:



	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Balance
	(In thousands)
Certificates of deposit	$	42,051	$	88,867	$	13,591	$	-	$	144,509
FHLB advances	30,500		15,000		-		-		45,500
Operating leases	144,000		126,000		-		-		270,000
Other long-term liabilities (1)	166,219		332,438		324,997		2,204,451		3,028,105
Total contractual obligations	$	382,770	$	562,305	$	338,588	$	2,204,451	$	3,488,114

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(1) Maximum payments related to our employee benefit plan, assuming all future vesting conditions are met. Additional information about the employee benefit plan is provided in Note 11 of the Notes to Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data" of this Form 10-K

Commitments and Off-Balance Sheet Arrangements

We are 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 the amount recognized in the balance sheet. 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 to, home equity, commercial and consumer lines of credit.

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2017:



	Amount of Commitment Expiration - Per Period
	Total Amounts Committed (2)		Due in One Year
	(In thousands)
Commitments to originate loans (1)	$	4,467	$	4,467
Undisbursed portion of construction loans	61,603		61,603
Total loan commitments	$	66,070	$	66,070

Line of Credit
Fixed rate (3)	$	22,847	$	2,316
Adjustable rate	68,331		13,658
Undisbursed balance of loans closed	$	91,178	$	15,974

(1) Interest rates on fixed rate loans range from 2.99% to 7.38%.

(2) At June 30, 2017 there was $136 in reserves for unfunded commitments.

(3) Includes standby letters of credit.

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. Anchor Bank's total regulatory capital was $63.8 million at June 30, 2017, or 13.8%, of total assets on that date. As of June 30, 2017, Anchor Bank exceeded all regulatory capital requirements to be considered well capitalized as of that date. The Bank's regulatory capital ratios at June 30, 2017 were as follows: Tier 1 capital 13.0% ; common equity Tier 1 capital ("CET1") 14.1% , Tier 1 (core) risk-based capital 14.1% ; and total risk-based capital 15.1% . The regulatory capital requirements to be considered well capitalized are 5%, 6.5%, 8% and 10%, respectively. Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage Capital, CET1, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios of 14.0% , 15.2% , 15.2% , and 16.2% , respectively, as of June 30, 2017.

Impact of Inflation

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles generally require the measurement of

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financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. The primary impact of inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in dollar value of the collateral securing loans that we have made. Our management is unable to determine the extent, if any, to which properties securing loans have appreciated in dollar value due to inflation.

Recent Accounting Pronouncements

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

In March 2016, the FASB issued ASU No. 2016-08, 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. Our primary source of revenue is interest income, which is recognized as it is earned and is deemed to be in compliance with this ASU. Accordingly, the adoption of ASU No. 2016-08 is not expected to have a material impact on the Company's consolidated financial statements.

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

In May 2016, the 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 effective date, transition requirements and impact on the Company's consolidated financial statements for this ASU are the same as those described in FASB ASU No. 2016-08 above.

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In May 2016, the 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 effective date, transition requirements and impact on the Company's consolidated financial statements for this ASU are the same as described in FASB ASU No. 2016-08 above.

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

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

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

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). This ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC staff view is that a registrant should evaluate ASU updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the ASU on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an ASU, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASU amendments to Topic 326, Financial Instruments - Credit Losses; Topic 842, Leases; and Topic 606, Revenue from Contracts with Customers; although, the amendments apply to any subsequent amendments to guidance in the ASU. The Company has adopted the amendments in this ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.

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

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

Table of Contents

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, investing, deposit and borrowings activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could have a potential material effect on our financial condition and result of operations. The information contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk" in this Form 10-K is incorporated herein by reference.

Table of Contents

Item 8. Financial Statements and Supplementary Data



Index to Consolidated Financial Statements	Page



Report of Independent Registered Public Accounting Firm	84
Consolidated Statements of Financial Condition, June 30, 2017 and 2016	85
Consolidated Statements of Income For the Years Ended June 30, 2017, 2016 and 2015	86
Consolidated Statements of Comprehensive Income For the Years Ended June 30, 2017, 2016 and 2015	87
Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 2017, 2016 and 2015	88
Consolidated Statements of Cash Flows For the Years Ended June 30, 2017, 2016 and 2015	89
Notes to Consolidated Financial Statements	91

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Anchor Bancorp

We have audited the accompanying consolidated statements of financial condition of Anchor Bancorp (the Company) as of June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the three years in the period ended June 30, 2017. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anchor Bancorp as of June 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Everett, Washington

September 15, 2017

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share data)



	June 30,
	2017			2016
ASSETS
Cash and cash equivalents	$	14,194		$	8,320
Securities available-for-sale, at fair value, amortized cost of $21,391 and $23,550	21,170			23,665
Securities held-to-maturity, at amortized cost, fair value of $4,954 and $6,425	4,949			6,291
Loans held for sale	1,551			1,864
Loans receivable, net of allowance for loan losses of $4,106 and $3,779	377,908			347,351
Life insurance investment, net of surrender charges	20,030			19,515
Accrued interest receivable	1,332			1,182
Real estate owned, net	867			373
Federal Home Loan Bank ("FHLB") stock, at cost	2,348			2,959
Property, premises, and equipment, at cost, less accumulated depreciation of $11,971 and $11,382	9,360			10,001
Deferred tax asset, net	8,011			8,870
Prepaid expenses and other assets	805			1,113
Total assets	$	462,525		$	431,504
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	52,606		$	50,781
Interest-bearing	292,581			250,113
Total deposits	345,187			300,894

FHLB advances	45,500			62,000
Advance payments by borrowers for taxes and insurance	1,195			1,114
Supplemental Executive Retirement Plan liability	1,709			1,691
Accounts payable and other liabilities	3,083			2,609
Total liabilities	396,674			368,308
Commitments and Contingencies (Note 17)
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 June 30, 2017, and 2,550,000 issued and 2,515,803 outstanding at June 30, 2016, respectively	25			25
Additional paid-in capital	22,619			22,157
Retained earnings	44,585			42,235
Unearned Employee Stock Ownership Plan ("ESOP") shares	(607		)	(672		)
Accumulated other comprehensive loss, net of tax	(771		)	(549		)
Total stockholders' equity	65,851			63,196
Total liabilities and stockholders' equity	$	462,525		$	431,504

See accompanying notes to these consolidated financial statements.

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended June 30, 2017, 2016, and 2015

(Dollars in thousands, except per share data)



	Years Ended June 30,
	2017			2016			2015
Interest income:
Loans receivable, including fees	$	19,580		$	16,779		$	16,006
Securities	105			69			57
Mortgage-backed securities	594			676			823
Total interest income	20,279			17,524			16,886
Interest expense:
Deposits	2,758			2,587			2,730
FHLB advances	563			243			346
Total interest expense	3,321			2,830			3,076
Net interest income before provision for loan losses	16,958			14,694			13,810
Provision for loan losses	310			340			-
Net interest income after provision for loan losses	16,648			14,354			13,810
Noninterest income
Deposit service fees	1,330			1,347			1,381
Other deposit fees	751			721			735
Gain on sale of investments	-			-			47
Other loan fees	832			707			588
Gain (loss) on sale of loans	183			158			(15		)
Increase in cash surrender value of life insurance investment	515			540			1,019
Other income	653			732			748
Total noninterest income	4,264			4,205			4,503
Noninterest expense
Compensation and benefits	9,019			9,708			8,003
General and administrative expenses	2,944			3,175			2,663
Merger expenses	406			-			-
Real estate owned holding costs	48			146			299
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	145			264			342
Information technology	2,105			1,760			1,739
Occupancy and equipment	1,889			1,875			1,944
Deposit services	462			477			570
Marketing	564			674			710
Loss on sale of property, premises and equipment	-			4			820
Gain on sale of real estate owned	(59		)	(58		)	(283		)
Total noninterest expense	17,523			18,025			16,807
Income before provision (benefit) for income taxes	3,389			534			1,506
Provision (benefit) for income taxes	1,039			39			(8,321		)
Net income	$	2,350		$	495		$	9,827
Basic earnings per share	$	0.98		$	0.20		$	3.97
Diluted earnings per share	$	0.97		$	0.20		$	3.97

See accompanying notes to these consolidated financial statements.

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended June 30, 2017, 2016, and 2015

(Dollars in thousands, except share data)



	Years Ended June 30,
	2017			2016		2015
NET INCOME	$	2,350		$	495	$	9,827
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized holding (loss) gain on available-for-sale securities during the period, net of tax benefit of $(115), $84, and $9, respectively	(222		)	162		96
Adjustment for realized gains included in net income	-			-		(47		)
Other comprehensive income, net of tax	(222		)	162		49
COMPREHENSIVE INCOME	$	2,128		$	657	$	9,876

See accompanying notes to these consolidated financial statements.

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended June 30, 2017, 2016, and 2015

(Dollars in thousands, except share data)



	Shares		Common Stock		Additional Paid-in Capital			Retained Earnings		Unearned ESOP shares			Accumulated Other Comprehensive Income (Loss), net of tax			Total Stockholders' Equity
Balance at June 30, 2014	2,550,000		$	25	$	23,293		$	31,913	$	(797	)	$	(760	)	$	53,674

Net income	-		-		-			9,827		-			-			9,827
Other comprehensive income net of tax	-		-		-			-		-			49			49
ESOP shares allocated	-		-		111			-		61			-			172

Balance at June 30, 2015	2,550,000		$	25	$	23,404		$	41,740	$	(736	)	$	(711	)	$	63,722

Net income	-		$	-	$	-		$	495	$	-		$	-		$	495
Other comprehensive income net of tax	-		-		-			-		-			162			162
Repurchase and retirement of common stock	(127,500	)	-		(2,952		)	-		-			-			(2,952		)
Compensation related to restricted stock awards	-		-		1,822			-		-			-			1,822
Issuance of new shares related to stock award plan, net	97,903		-		(216		)	-		-			-			(216		)
Restricted stock forfeitures and canceled	(4,600	)	-		-			-		-			-			-
ESOP shares allocated	-		-		99			-		64			-			163

Balance at June 30, 2016	2,515,803		$	25	$	22,157		$	42,235	$	(672	)	$	(549	)	$	63,196

Net income	-		$	-	$	-		$	2,350	$	-		$	-		$	2,350
Other comprehensive income net of tax	-		-		-			-		-			(222		)	(222		)
Compensation related to restricted stock awards	-		-		636			-		-			-			636
Issuance of new shares related to stock award plan, net	-		-		(285		)	-		-			-			(285		)
Restricted stock forfeitures and canceled	(11,063	)	-		-			-		-			-			-
ESOP shares allocated	-		-		111			-		65			-			176

Balance at June 30, 2017	2,504,740		$	25	$	22,619		$	44,585	$	(607	)	$	(771	)	$	65,851

See accompanying notes to these consolidated financial statements.

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended June 30, 2017, 2016, and 2015

(In thousands)



	Year Ended June 30,
	2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,350		$	495		$	9,827
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization	703			650			665
Net amortization of premiums on securities	294			411			576
Provision for loan losses	310			340			-
ESOP expense	176			163			172
Real estate owned impairment	-			83			32
Deferred income taxes provision (benefit)	1,018			(87		)	148
Stock compensation expense	636			1,822			-
Increase in cash surrender value of life insurance investment	(515		)	(540		)	(1,019		)
(Gain) loss on sale of loans	(183		)	(158		)	15
Gain on sale of investments	-			-			(47		)
Originations of loans held for sale	(15,902		)	(8,925		)	(1,572		)
Proceeds from sale of loans held for sale	12,862			7,724			1,053
Loss on sale of property, premises, and equipment	-			4			820
Gain on sale of real estate owned	(59		)	(58		)	(283		)
Changes in operating assets and liabilities:
Accrued interest receivable	(150		)	(113		)	167
Prepaid expenses and other assets	308			1,579			370
Change in deferred tax asset reserve	-			-			(8,469		)
Supplemental Executive Retirement Plan ("SERP")	18			(123		)	99
Accounts payable and other liabilities	474			(271		)	(1,534		)
Net cash provided by operating activities	2,340			2,996			1,020
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale securities	852			250			2,335
Principal repayments on mortgage-backed securities available-for-sale	4,573			5,535			6,549
Principal repayments on mortgage-backed securities held-to-maturity	1,284			1,277			1,137
Loan originations, net of undisbursed loan proceeds and principal repayments	(31,823		)	(64,796		)	(3,392		)
Proceeds from sale of real estate owned	510			973			6,789
Capital improvements on real estate owned	-			-			(27		)
Proceeds from sale of property, premises, and equipment, net	-			2			2
Purchase of fixed assets	(62		)	(287		)	(1,303		)
Redemption (purchase) of FHLB stock	611			(2,106		)	5,193
Net cash provided by investing activities	(24,055		)	(59,152		)	17,283

ANCHOR BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For the Years Ended June 30, 2017, 2016, and 2015

(In thousands)



	Year Ended June 30,
	2017			2016			2015
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	44,293			1,082			(11,222		)
Net change in advance payments by borrowers for taxes and insurance	81			112			111
Proceeds from FHLB advances	90,600			103,000			36,110
Repayment of FHLB advances	(107,100		)	(51,000		)	(43,610		)
Repurchase and retirement of common stock	-			(2,952		)	-
Net share settlement of stock awards	(285		)	(216		)	-
Net cash used for financing activities	$	27,589		$	50,026		$	(18,611	)
NET CHANGE IN CASH AND CASH EQUIVALENTS	5,874			(6,130		)	(308		)
Beginning of period	8,320			14,450			14,758
End of period	$	14,194		$	8,320		$	14,450
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	3,322		$	2,789		$	3,119
Income taxes	$	65		$	126		$	-
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Noncash investing activities:
Net loans transferred to real estate owned	$	945		$	574		$	2,241
Unrealized holding (loss) gain on available-for-sale securities, net of tax	$	(222	)	$	162		$	96
Loans securitized into mortgage-backed securities	$	3,536		$	-		$	-
Transfer of receivable related to proceeds from death benefit to other assets	$	-		$	-		$	1,545

See accompanying notes to these consolidated financial statements.

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Note 1 - Organization and Summary of Significant Accounting Policies

General - Anchor Bancorp is a bank holding company which operates primarily through its subsidiary, Anchor Bank (the Bank) (collectively referred to as the "Company"). Anchor Bank is a community-based savings bank primarily serving Western Washington through its 10 full-service banking offices (including one Wal-Mart in-store location) located within Grays Harbor, Thurston, Lewis, Pierce and Mason counties, and one loan production office located in King County, Washington. Anchor Bank's business consists of attracting deposits from the public and utilizing those deposits to originate loans.

Segment Information - The Bank's operations include commercial banking services, such as lending activities, deposit products, and other cash management services. The performance of the Bank is reviewed by the Board of Directors and Senior Management Committee. The Senior Management Committee, which is the senior decision-making group of the Bank, is composed of four members, including the President and Chief Executive Officer, the Executive Vice President, Chief Financial Officer, and Treasurer, the Executive Vice President and Chief Lending Officer, and the Executive Vice President and Chief Credit Officer. The Company's activities are considered to be a single industry segment for financial reporting purposes.

Financial statement presentation and use of estimates - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as of the date of the consolidated statements of financial condition, and revenues and expenses for the period. Actual results could differ from estimated amounts. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of real estate owned, impaired loans and deferred tax assets.

Principles of consolidation - The consolidated financial statements include the accounts of Anchor Bancorp and its wholly-owned subsidiary, Anchor Bank. All material intercompany accounts have been eliminated in the consolidation.

Subsequent events - The Company has evaluated events and transactions subsequent to June 30, 2017 for potential recognition or disclosure.

Cash and cash equivalents - For purposes of the consolidated statements of cash flows, the Company considers all deposits and funds in interest-bearing accounts with an original term to maturity of three months or less to be cash equivalents. The Bank maintains its cash in bank deposit accounts that, at times, may exceed the federally insured limits. The Bank has not experienced any losses in such accounts and evaluates the credit quality of these banks and financial institutions to mitigate its credit risk.

Restricted assets - Federal Reserve regulations require maintenance of certain minimum reserve balances on deposit with the Federal Reserve Bank of San Francisco ("FRB"). The amount required to be on deposit was $2.0 million and $1.9 million at June 30, 2017 and 2016, respectively. The Bank was in compliance with this requirement at June 30, 2017 and 2016.

Investment securities - Securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to maturity. Securities held-to-maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts to maturity. Securities bought and held principally for the purpose of sale in the near term are classified as trading securities and are carried at fair value. There were no trading securities at June 30, 2017 and 2016. Securities not classified as trading or held-to-maturity are classified as available-for-sale. Unrealized holding gains and losses on securities available-for-sale are excluded from earnings and are reported net of tax as a separate component of equity until realized. These unrealized holding gains and losses, net of tax, are also included as a component of comprehensive income. Realized gains and losses are recorded on the trade date and are determined using the specific identification method. Amortization of premiums and accretion of discounts are recognized into interest income using the effective interest method over the period to maturity.

The Company evaluates securities for other-than-temporary impairment on a periodic basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the Bank has the intent and ability to hold these securities or if it is likely that it will be required to sell the securities before their anticipated recovery. In analyzing an issuer's financial condition, the Bank may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. If the Bank does not intend to sell the security and it is not likely it will be required to sell the security prior to recovery of its cost basis, the credit loss component of impairment is recognized in earnings and impairment associated with non-credit factors, such as

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

market liquidity, is recognized in other comprehensive income, net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security's effective interest rate at the date of acquisition. The cost basis of an other-than-temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value. However, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income. The total other-than-temporary impairment is presented in the consolidated statements of income with a reduction for the amount of other-than-temporary impairment that is recognized in other comprehensive income, if any.

Federal Home Loan Bank stock - The Bank's investment in FHLB stock is carried at cost, which approximates fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At June 30, 2017 and 2016, the Bank's minimum investment requirement was $2.3 million and $3.0 million , respectively. The Bank was in compliance with the FHLB minimum investment requirement at June 30, 2017 and 2016.

Management evaluates FHLB stock for impairment as needed. Management's determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount for the FHLB and the length of time this situation has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, management determined that there was no impairment of FHLB stock at June 30, 2017 and 2016, respectively.

Securitizations - The Bank historically has securitized and services interests in residential home loans. The Bank has securitized these loans through the Federal Home Loan Mortgage Corporation ("FHLMC"). Of the total serviced loan portfolio of $74.8 million and $76.9 million at June 30, 2017 and 2016, $19.6 million and $20.4 million , respectively, represent securitized loans. The loans have been sold without recourse, servicing retained. There were three new securitizations during the year ended June 30, 2017 totaling $3.5 million and no new securitizations for the year ended June 30, 2016. All principal, interest, late fees, and escrow payments are collected and remitted to the investor daily.

Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over the loan term using a method that generally produces a level yield on the unpaid loan balance. Interest is accrued primarily on a simple interest basis.

Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or because such loans have become contractually past due 90 days with respect to principal or interest. When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current-period interest income. All subsequent payments received are first applied to unpaid principal and then to unpaid interest. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loans are considered to be fully collectible.

Loans are considered impaired when the Bank 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.

Troubled debt restructured loans - A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Bank grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include interest rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of six months to demonstrate that the borrower can meet the restructured terms. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Allowance for loan losses - Key elements of the allowance for loan loss methodology include the specific loan loss reserve, the general loan loss reserve, and the unallocated reserve, individually described below.

The specific loan loss reserve is established for individually impaired loans when the discounted cash flow or collateral value of the impaired loan is lower than the carrying value of that loan. Restructured loans are accounted for as impaired loans.

The general loan loss reserve is calculated by applying a specific loss percentage factor to the various groups of loans by loan type, based upon historic loss experience, and adjusted based upon the risk grade attached to any loan or group of loans. This portion of the allowance may be further adjusted for qualitative and environmental conditions such as changes in lending policies and procedures; experience and ability of lending staff; concentrations of credit; national, regional, and local economic conditions; and other factors including levels and trends of delinquency.

The unallocated reserve recognizes the estimation risk associated with the mathematical calculations applied in both specific and general portions of the allowance for loan loss, together with the assumption risk relative to management's assessment of the variables included in the qualitative and environmental factors.

The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current-period operating results and decreased by the amount of charge-offs, net of recoveries. Various regulatory agencies, as part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require management to make adjustments to the allowance using judgments available to them at the time of their examination.

Loans held-for-sale - Loans originated as held-for-sale are carried at the lower of cost or market value on an aggregate basis. Net unrealized losses, if any, are recognized through a valuation allowance by a charge to income. Nonrefundable fees and direct loan origination costs related to loans held-for-sale are deferred and recognized when the loans are sold.

Real estate owned - Real estate owned (REO) and other repossessed items consist of properties or assets acquired through or in lieu of foreclosure in full satisfaction of a loan receivable, and are recorded initially at fair value of the REO properties less estimated costs of disposal with any initial losses charged to the allowance for loan losses. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed. Valuations are periodically performed by management, and a charge to earnings is recorded if the recorded value of a property exceeds its estimated fair value.

Gains or losses at the time the property is sold are charged or credited to noninterest expense in the period in which they are realized. The amounts the Bank will ultimately recover from REO may differ substantially from the carrying value of the assets because of future market factors beyond the control of the Bank or because of changes in the Bank's strategy for recovering its investments.

Life insurance investment - The Bank is the sole beneficiary of life insurance policies that are recorded at their cash surrender value, net of any surrender charges, and cover certain key executives of the Bank.

Transfers of financial assets - Transfers of financial asset, a group of financial assets, or a participating interest in a financial asset are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Mortgage servicing rights - Mortgage servicing rights are recorded as separate assets at fair value when mortgage loans are originated and subsequently sold or securitized (and held as available-for-sale securities) with servicing rights retained. Periodically, the Bank estimates the fair value of its mortgage servicing rights based upon observed market prices.

Mortgage servicing rights are amortized in proportion to, and over, the estimated period that net servicing income will be collected. The carrying value of mortgage servicing rights is periodically evaluated in relation to estimated future cash flows to be received, and such carrying value is adjusted for indicated impairments based on management's best estimate of the remaining cash flows. The Bank has stratified its mortgage servicing rights based on whether the loan was sold or securitized and the interest rate of the underlying loans. The Bank uses the direct write-down method for mortgage servicing rights where the serviced loan has been

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

paid off. The mortgage servicing asset was $232,000 and $206,000 at June 30, 2017 and 2016, respectively, and is included in prepaid expenses and other assets in the consolidated statements of financial condition and is not considered material to the consolidated financial statements.

Property, premises, and equipment - Property, premises, and equipment are stated at cost less accumulated depreciation. The depreciation charged is computed on the straight-line method over estimated useful lives as follows:




Buildings	40 years
Furniture and equipment	5-10 years
Improvements	10 years
Computer equipment	3 years

Income taxes- The provision for income taxes includes current and deferred income tax expense on net income adjusted for permanent and temporary differences such as interest income on state and municipal securities and BOLI. Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities using enacted tax laws and rates. 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. On a quarterly basis, management evaluates deferred tax assets to determine if these tax benefits are expected to be realized in future periods. This determination is based on facts and circumstances, including the Company's current and future tax outlook. To the extent a deferred tax asset is no longer considered "more likely than not" to be realized, a valuation allowance is established.

Marketing costs - The Company expenses marketing costs as they are incurred. Total marketing expenses were $564,000 , $674,000 , and $710,000 for the years ended June 30, 2017, 2016, and 2015, respectively.

Financial instruments - In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Employee Stock Ownership Plan (ESOP) - The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders' equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Earnings Per Share (EPS) - Basic EPS is computed by dividing net income or (loss) by the weighted-average number of common shares outstanding during the period. As ESOP shares are committed to be released they become outstanding for EPS calculation purposes. ESOP shares not committed to be released are not considered outstanding. The basic EPS calculation excludes the dilutive effect of all common stock equivalents. 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 (loss) per share reflects the weighted-average potential dilution that could occur if all potentially dilutive securities or other commitments to issue common stock were exercised or converted into common stock using the treasury stock method.

Comprehensive income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of stockholders' equity.

Fair value - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank's estimates for market assumptions.

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

years, beginning after December 15, 2017. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's consolidated financial statements.

Note 2 - Proposed Merger with Washington Federal

On April 11, 2017, Washington Federal, Inc., a Washington corporation ("Washington Federal"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with the Company. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Washington Federal (the "Merger"), with Washington Federal as the surviving corporation in the Merger. Immediately after the effective time of the Merger (the "Effective Time"), Washington Federal intends to merge Anchor Bank, a wholly-owned subsidiary of the Company, with and into Washington Federal, National Association, a wholly-owned subsidiary of Washington Federal (the "Bank Merger"), with Washington Federal, National Association as the surviving institution in the Bank Merger.

Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each share of the common stock of the Company outstanding immediately prior to the Effective Time will be converted into the right to receive a fraction of a share of the common stock of Washington Federal. The Washington Federal shares issued will have an aggregate value of approximately $63.9 million. Each share of Company common stock was valued at $25.75. The exact number of shares to be issued and the exchange ratio will be determined based upon the average of the volume-weighted price of Washington Federal common stock for the twenty (20) trading days ending on the fifth trading day immediately preceding the closing date, subject to a negotiated collar. All unvested restricted stock awards of the Company outstanding immediately prior to the Effective Time will become fully vested and will be converted into a right to receive the merger consideration described immediately above, as provided in the Merger Agreement.

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The Merger Agreement contains customary representations and warranties from both Washington Federal and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, including, in the case of the Company, specific forbearances with respect to its business activities, (2) the Company's obligation to call a meeting of its shareholders to approve the Merger Agreement, and, subject to certain exceptions, that its board of directors recommend that the Company's shareholders vote to approve the Merger Agreement, and (3) the Company's non-solicitation obligations regarding alternative acquisition proposals. The Merger Agreement provides certain termination rights for both Washington Federal and the Company and further provides that a termination fee of $2,236,500 will be payable by Anchor upon termination of the Merger Agreement under certain circumstances.

The completion of the Merger is subject to customary conditions, including approval of the Merger Agreement by the Company's shareholders, by the holders of at least two thirds of the outstanding shares of the Company's common stock, and the receipt of all required regulatory approvals. The Merger is expected to be completed in the fourth calendar quarter of 2017.

Note 3 - Securities

The amortized cost and estimated fair market values of investment securities were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2017
Securities available-for-sale
Municipal bonds	$	165	$	-	$	-		$	165
Mortgage-backed securities:
FHLMC (1)	11,140		88		(125		)	11,103
FNMA (2)	9,532		-		(169		)	9,363
GNMA (3)	554		-		(15		)	539
	$	21,391	$	88	$	(309	)	$	21,170
Securities held-to-maturity
Mortgage-backed securities:
FHLMC (1)	2,212		53		(52		)	2,213
FNMA (2)	1,209		71		(23		)	1,257
GNMA (3)	1,528		-		(44		)	1,484
	$	4,949	$	124	$	(119	)	$	4,954

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

(2) Federal National Mortgage Association (Fannie Mae)

(3) Government National Mortgage Association (Ginnie Mae)

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2016
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
Municipal bonds	$	-	$	-	$	-		$	-
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 47 and 24 securities in an unrealized loss position at June 30, 2017 and 2016, respectively. The unrealized losses on investments in debt securities relate principally to the general change in interest rates in changing market conditions 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 June 30, 2017 and 2016 were as follows:



	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	2,626	$	(25	)	$	3,185	$	(100	)	$	5,811	$	(125	)
FNMA	4,578		(29		)	4,563		(140		)	9,141		(169		)
GNMA	-		-			539		(15		)	539		(15		)
	$	7,204	$	(54	)	$	8,287	$	(255	)	$	15,491	$	(309	)



	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	-	$	-		$	1,548	$	(52	)	$	1,548	$	(52	)
FNMA	-		-			539		(23		)	539		(23		)
GNMA	840		(13		)	645		(31		)	1,485		(44		)
	$	840	$	(13	)	$	2,732	$	(106	)	$	3,572	$	(119	)

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)



	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016
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
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	)

Contractual maturities of securities at June 30, 2017 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.



	Amortized Cost		Fair Value
June 30, 2017
Securities available-for-sale
Municipal bonds:
Due after ten years	$	165	$	165
Mortgage-backed securities:
FHLMC	11,140		11,103
FNMA	9,532		9,363
GNMA	554		539
	$	21,391	$	21,170

Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	2,212	$	2,213
FNMA	1,209		1,257
GNMA	1,528		1,484
	$	4,949	$	4,954

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Sales, maturities, and calls of securities for the years presented are summarized as follows:



	Year Ended June 30,
	2017		2016		2015
Proceeds from sales	$	-	$	-	$	2,355
Proceeds from maturities and calls	852		250		-
Gross realized gains	-		-		65
Gross realized losses	-		-		(18		)

Pledged securities at the dates indicated are summarized as follows:



	June 30, 2017				June 30, 2016
Pledged to secure:	Book Value		Fair Value		Book Value		Fair Value
Certain public deposits	$	5,143	$	5,172	$	12,575	$	12,719
FHLB borrowings	977		1,009		1,302		1,358
Federal Reserve borrowing line	852		840		973		978

Note 4 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:



	June 30,
	2017		2016
Real estate:
One-to-four family	$	59,735	$	61,230
Multi-family	60,500		53,742
Commercial	155,525		149,527
Construction	49,151		21,793
Land	8,054		6,839
Total real estate	332,965		293,131
Consumer:
Home equity	13,991		16,599
Credit cards	2,596		2,969
Automobile	627		597
Other consumer	1,524		1,933
Total consumer	18,738		22,098

Commercial business	31,603		36,848
Total loans	383,306		352,077
Less:
Deferred loan fees and loan premiums, net	1,292		947
Allowance for loan losses	4,106		3,779
Loans receivable, net	$	377,908	$	347,351

100

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

A summary of activity in the allowance for loan losses follows:



	June 30,
	2017			2016			2015
Beginning balance	$	3,779		$	3,721		$	4,624
Provision for losses	310			340			-
Charge-offs	(324		)	(957		)	(1,497		)
Recoveries	341			675			594
Ending balance	$	4,106		$	3,779		$	3,721

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2017 :



	One-to- four family			Multi- family		Commercial real estate			Construction		Land		Consumer (1)			Commercial business			Unallocated		Total

Allowance for loan losses :
Beginning balance	$	798		$	454	$	1,333		$	271	$	75	$	516		$	332		$	-	$	3,779
Provision (benefit) for loan losses	(494		)	126		330			327		45		(1		)	(23		)	-		310
Charge-offs	(21		)	-		(110		)	-		-		(193		)	-			-		(324		)
Recoveries	212			-		13			53		-		56			7			-		341
Ending balance	$	495		$	580	$	1,566		$	651	$	120	$	378		$	316		$	-	$	4,106


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

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2016 :



	One-to- four family			Multi- family		Commercial real estate			Construction			Land		Consumer (1)			Commercial business			Unallocated			Total

Allowance for loan losses :
Beginning balance	$	1,113		$	95	$	262		$	247		$	75	$	445		$	1,405		$	79		$	3,721
Provision (benefit) for loan losses	(251		)	353		1,295			(325		)	-		343			(996		)	(79		)	340
Charge-offs	(258		)	-		(225		)	-			-		(390		)	(84		)	-			(957		)
Recoveries	194			6		1			349			-		118			7			-			675
Ending balance	$	798		$	454	$	1,333		$	271		$	75	$	516		$	332		$	-		$	3,779


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

101

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended June 30, 2015:



	One-to- four family			Multi- family			Commercial real estate			Construction			Land		Consumer (1)			Commercial business			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	1,550		$	229		$	682		$	190		$	74	$	587		$	1,231		$	81		$	4,624
Provision (benefit) for loan losses	(5		)	25			(80		)	(197		)	1		94			164			(2		)	-
Charge-offs	(561		)	(159		)	(340		)	-			-		(351		)	(86		)	-			(1,497		)
Recoveries	129			-			-			254			-		115			96			-			594
Ending balance	$	1,113		$	95		$	262		$	247		$	75	$	445		$	1,405		$	79		$	3,721


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

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2017 :



	Recorded Investments		Unpaid Principal Balance		Related Allowance
With no allowance recorded
One-to-four family	$	1,818	$	1,991	$	-
Commercial real estate	1,992		1,992		-
Home equity	299		303		-
Commercial business	606		668		-
With an allowance recorded
One-to-four family	3,210		3,220		143
Land	311		311		22
Home equity	262		262		32
Commercial business	23		23		1
Total
One-to-four family	5,028		5,211		143
Commercial real estate	1,992		1,992		-
Land	311		311		22
Home equity	561		565		32
Commercial business	629		691		1
Total	$	8,521	$	8,770	$	198

102

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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
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

103

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the year ended June 30, 2017 :



	Year Ended June 30, 2017

	Average Recorded Investment		Interest Income Recognized
With no allowance recorded
One-to-four family	$	1,934	$	51
Commercial real estate	1,156		93
Land	87		-
Home equity	180		12
Commercial business	335		43
With an allowance recorded
One-to-four family	5,222		147
Land	314		19
Home equity	315		13
Commercial business	74		2
Total
One-to-four family	7,156		198
Commercial real estate	1,156		93
Land	401		19
Home equity	495		25
Commercial business	409		45
Total	$	9,617	$	380

104

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the year ended June 30, 2016 :



	Year Ended June 30, 2016

	Average Recorded Investment		Interest Income Recognized
With no allowance recorded
One-to-four family	$	1,913	$	62
Commercial real estate	-		15
Land	210		11
Home equity	63		3
Other consumer	16		-
Commercial business	95		9
With an allowance recorded
One-to-four family	7,500		310
Land	362		22
Home equity	290		19
Commercial business	503		2
Total
One-to-four family	9,413		372
Commercial real estate	-		15
Land	572		33
Home equity	353		22
Other consumer	16		-
Commercial business	598		11
Total	$	10,952	$	453

105

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the year ended June 30, 2015:



	Year Ended June 30, 2015

	Average Recorded Investment		Interest Income Recognized
With no allowance recorded
One-to-four family	$	3,802	$	67
Multi-family	1,132		-
Commercial real estate	984		-
Land	355		12
Home equity	153		3
Other consumer	-		1
Commercial business	723		8
With an allowance recorded
One-to-four family	7,989		308
Land	765		25
Home equity	325		10
Commercial business	469		36
Total
One-to-four family	11,791		375
Multi-family	1,132		-
Commercial real estate	984		-
Land	1,120		37
Home equity	478		13
Other consumer	-		1
Commercial business	1,192		44
Total	$	16,697	$	470

106

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017 :



	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total

Allowance for loan losses:
Ending balance	$	495	$	580	$	1,566	$	651	$	120	$	378	$	316	$	-	$	4,106
Ending balance: individually evaluated for impairment	143		-		-		-		22		32		1		-		198
Ending balance: collectively evaluated for impairment	$	352	$	580	$	1,566	$	651	$	98	$	346	$	315	$	-	$	3,908

Loans receivable:
Ending balance	$	59,735	$	60,500	$	155,525	$	49,151	$	8,054	$	18,738	$	31,603	$	-	$	383,306
Ending balance: individually evaluated for impairment	5,028		-		1,992		-		311		561		629		-		8,521
Ending balance: collectively evaluated for impairment	$	54,707	$	60,500	$	153,533	$	49,151	$	7,743	$	18,177	$	30,974	$	-	$	374,785


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

107

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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

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.

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



	June 30,
	2017		2016
One-to-four family	$	1,170	$	1,539
Commercial real estate	1,992		319
Home equity	242		16
Other consumer	-		1
Commercial business	300		97
Total	$	3,704	$	1,972

The table above includes $3.7 million in nonaccrual and no loans past due 90 days or more and still accruing interest, net of partial loan charge-offs at June 30, 2017 . There were $2.0 million in nonaccrual and no loans past due 90 days or more and still accruing interest, net of partial loan charge-offs at June 30, 2016 .

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.

108

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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



	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due (1)		Total Past Due		Current		Total Loans

One-to-four family	$	15	$	-	$	1,170	$	1,185	$	58,550	$	59,735
Multi-family	-		-		-		-		60,500		60,500
Commercial real estate	187		-		1,992		2,179		153,346		155,525
Construction	-		-		-		-		49,151		49,151
Land	-		-		-		-		8,054		8,054
Home equity	16		4		242		262		13,729		13,991
Credit cards	13		-		-		13		2,583		2,596
Automobile	-		-		-		-		627		627
Other consumer	-		8		-		8		1,516		1,524
Commercial business	107		-		300		407		31,196		31,603
Total	$	338	$	12	$	3,704	$	4,054	$	379,252	$	383,306

(1) Includes loans on nonaccrual status, that may be less than 90 days contractually past due.

The following table presents past due loans, net of partial loan charge-offs, by class of loans 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

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, that may be less than 90 days contractually past due.

Credit Quality Indicators . The Bank utilizes 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.

109

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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. The Bank uses 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.

110

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)


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

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

A loan classified as a Loss has the following characteristics:


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


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


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

The following table represents the internally assigned grade as of June 30, 2017 , by class of loans:



	One-to- four family		Multi- family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
Grade:
Pass	$	57,075	$	59,973	$	150,762	$	49,151	$	7,743	$	13,202	$	2,583	$	627	$	1,510	$	29,972	$	372,598
Watch	984		527		2,771		-		311		361		13		-		6		1,224		6,197
Special Mention	646		-		-		-		-		36		-		-		1		107		790
Substandard	1,030		-		1,992		-		-		392		-		-		7		300		3,721
Doubtful	-		-		-		-		-		-		-		-		-		-		-
Total	$	59,735	$	60,500	$	155,525	$	49,151	$	8,054	$	13,991	$	2,596	$	627	$	1,524	$	31,603	$	383,306

The following table represents 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
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 Restructured Loans . A troubled debt restructured ("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.

The Bank has utilized a combination of rate and term modifications for its TDRs.

111

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following table represents TDRs by accrual versus nonaccrual status and by class of loans as of June 30, 2017 :



	June 30, 2017
	Accrual Status		Nonaccrual Status		Total Modifications

One-to-four family	$	3,622	$	131	$	3,753
Land	311		-		311
Home equity	169		-		169
Commercial business	87		-		87
Total	$	4,189	$	131	$	4,320

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



	June 30, 2016
	Accrual Status		Nonaccrual Status		Total Modifications

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 new TDR loans, or renewals or modifications of existing TDR loans during the year ended June 30, 2017.

The following tables present TDRs and their recorded investment prior to the modification and after the modification for TDR transactions that originated during the years ended June 30, 2016 and 2015:



	Year Ended June 30, 2016
	Number of Contracts	Pre-TDR Recorded Investment		Post -TDR Recorded Investment

One-to-four family	1	$	273	$	240
Total	1	$	273	$	240



	Year Ended June 30, 2015
	Number of Contracts	Pre-TDR Recorded Investment		Post -TDR Recorded Investment

One-to-four family	1	$	197	$	194
Total	1	$	197	$	194

112

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

There were no TDRs for which there was a payment default within the first 12 months of modification during the years ended June 30, 2017, 2016 and 2015. No additional funds are committed to be advanced in connection with impaired loans at June 30, 2017.

Note 5 - Real Estate Owned, net

The following table is a summary of REO for the years ended June 30, 2017 , 2016 and 2015:



	Year Ended June 30,

	2017			2016			2015

Balance at the beginning of the period	$	373		$	797		$	5,067
Net loans transferred to real estate owned	945			574			2,241
Capitalized improvements	-			-			27
Gross proceeds from sale of REO	(510		)	(973		)	(6,789		)
Gain on sale of REO	59			58			283
Impairments	-			(83		)	(32		)
Balance at the end of the period	$	867		$	373		$	797

At June 30, 2017 and 2016, the Bank had $ 777,000 and $ 251,000 , respectively, of foreclosed residential real estate property in REO. The recorded investment in mortgage loans collateralized by residential real estate in the process of foreclosure totaled $ 251,000 and $ 231,000 for June 30, 2017 and 2016, respectively.

Note 6 - Property, Premises, and Equipment

Property, premises, and equipment owned by the Bank are summarized as follows:



	June 30,
	2017			2016
Land	$	2,192		$	2,192
Building and improvements	14,372			14,372
Furniture and fixtures	3,717			3,778
Automobiles	345			345
Software	705			619
Leasehold improvements	-			77
	21,331			21,383
Less accumulated depreciation and amortization	(11,971		)	(11,382		)
Property, premises, and equipment, net of depreciation and amortization	$	9,360		$	10,001

Depreciation and amortization expense for the years ended June 30, 2017, 2016 and 2015, was $703,000 , $650,000 and $665,000 , respectively.

113

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Note 7 - Deposits

Deposits consist of the following:



	June 30,
	2017				2016
	Amount		Percent		Amount		Percent

Noninterest-bearing demand deposits	$	52,606	15.3	%	$	50,781	16.8	%
Interest-bearing demand deposits, weighted-average rate of 0.04% and 0.04% in fiscal 2017 and fiscal 2016, respectively	31,464		9.1		27,419		9.1
Savings deposits, weighted-average rate of 0.15% in fiscal 2017 and 0.15% in fiscal 2016	43,454		12.6		44,986		15.0
Money market accounts, weighted-average rate of 0.40% and 0.15% in fiscal 2017 and fiscal 2016, respectively	73,154		21.2		59,270		19.7
Certificates of deposit
0.00 to 3.49%	128,880		37.3		97,788		32.5
3.50 to 5.49%	15,629		4.5		20,650		6.9
Total of certificates of deposit	144,509		41.8		118,438		39.4
Total deposits	$	345,187	100.0	%	$	300,894	100.0	%

Certificates of deposit in denominations of $250,000 or more totaled $26.8 million and $17.3 million at June 30, 2017 and 2016, respectively. Included in deposits at June 30, 2017 and 2016, were $9.3 million and $8.7 million , respectively, of public funds. There were no brokered deposits at June 30, 2017 or 2016.

As of June 30, 2017 , certificates of deposit mature as follows:



Year Ended June 30,
	Amount

2018		$	42,051
2019		76,992
2020		11,875
2021		6,283
Thereafter		7,308
		$	144,509

Note 8 - Borrowings

The Bank is a member of the FHLB of Des Moines. Based on eligible collateral, consisting of loans at June 30, 2017 and 2016, the total amount available under this line of credit was $162.8 million and $146.9 million , respectively. The total balance of loans pledged at June 30, 2017 and 2016 was $260.1 million and $236.7 million , respectively. The total balance of advances outstanding was $45.5 million and $62.0 million at June 30, 2017 and 2016. The net remaining amounts available as of June 30, 2017 and 2016 were $111.3 million and $84.9 million , respectively. Borrowings generally provide for interest at the then-current published rates. FHLB advances (at weighted-average interest rates of 1.16% and 0.93% at June 30, 2017 and 2016, respectively) and lines of credit are scheduled to mature as follows:

114

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)



	June 30,
	2017		2016
One year or less	$	30,500	$	24,500
After one year through three years	7,500		30,000
More than three years	7,500		7,500
	$	45,500	$	62,000

Advances from the FHLB are collateralized by all FHLB stock owned by the Bank, deposits with the FHLB, certain investments, and all loans as described in the Advances, Pledge, and Security Agreement with the FHLB. The maximum and average outstanding advances and lines of credit from the FHLB are as follows:



	June 30,
	2017		2016
Highest outstanding advances at month-end for the previous 12 months	$	63,000	$	62,000
Average outstanding	$	51,817	$	29,875

The Bank also maintains a short-term borrowing line with the Federal Reserve with total credit based on eligible collateral. As of June 30, 2017, the Bank had a borrowing capacity of $1.0 million , of which none was outstanding. Additionally the Bank has a $5.0 million borrowing line with Pacific Coast Bankers' Bank of which none was outstanding at June 30, 2017 and 2016.

Note 9 - 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 Anchor Bancorp and used those funds to acquire 102,000 shares of the Anchor Bancorp'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 Anchor Bancorp. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on June 30, the Company's fiscal year end.

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

Compensation expense related to the ESOP for the years ended June 30, 2017 , 2016 and 2015 was $176,000 , $163,000 and $172,000 respectively.

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



	June 30,
	2017		2016

Allocated shares	46,631		39,748
Unallocated shares	55,369		62,252
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,387	$	1,471

115

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Note 10 - Stock-Based Compensation

On October 21, 2015, the Company's shareholders 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 June 30, 2017, awards for restricted stock totaling 87,572 shares were outstanding and no restricted stock units or stock options have been granted under the Plan. 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 year ended June 30, 2017 total compensation expense for the Plan was $636,000 and the related income tax benefit was $216,000 .

The following tables provide a summary of changes in non-vested restricted stock awards for the year ended June 30, 2017:



	For the Year Ended June 30, 2017

			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 June 30, 2017	38,424		25.75

As of June 30, 2017, there was $155,000 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. The total fair value of shares vested during the year ended June 30, 2017 was $788,000 .

Note 11 - Supplemental Executive Retirement Plan (SERP)

On July 1, 2002, the Bank implemented a nonqualified SERP for the benefit of senior officers and directors of the Bank. The SERP entitles these individuals to receive defined benefits upon their retirement or death based on the appreciation in Bank value. The SERP value is based on the Company's stock price and the change from the last trading day of March 31, 2016 to March 31, 2017. On January 1, 2004, the SERP was amended to provide that a participant's SERP unit shall be valued at no less than 90% , and no more than 125% , of the participant's SERP unit as of the preceding valuation date. The value of the participant's SERP unit is based upon the stock value of the Bank. The accrual for the deferred compensation owed under the SERP is based upon the net present value of the vested benefits expected to be paid under the SERP. The Bank recognized $18,000 , $123,000 , and $99,000 in compensation cost related to the SERP for the years ended June 30, 2017 , 2016, and 2015, respectively. The SERP liability totaled $1.7 million at June 30, 2017 and 2016, respectively.

Note 12 - Earnings Per Share

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

116

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

that may be issued upon the vesting of restricted stock awards. At June 30, 2017 and 2016 the difference in EPS under the two-class method was not significant.

The following table details the calculation of basic and diluted earnings per share:



	For the Year Ended June 30,
	2017		2016		2015
Net income	$	2,350	$	495	$	9,827
Less: Earnings allocated to participating securities	-		-		-
Earnings allocated to common shareholders	2,350		495		9,827

Basic weighted-average common shares outstanding	2,402,106		2,452,455		2,477,423
Potentially dilutive incremental shares	23,406		7,071		-
Diluted weighted-average common shares outstanding	2,425,512		2,459,526		2,477,423

Basic earnings per share	$	0.98	$	0.20	$	3.97
Diluted earnings per share	$	0.97	$	0.20	$	3.97

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 June 30, 2017, 2016 and 2015 there were 55,369 , 62,252 and 69,135 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 year ended June 30, 2017, there were no anti-dilutive shares included in the computation of diluted earnings per share because the incremental shares under the treasury stock method of calculation resulted in them being anti-dilutive.

Note 13 - Related Party Transactions

During the normal course of business, the Bank originates loans to directors, committee members, and senior management. Such loans are granted with interest rates, terms, and collateral requirements substantially the same as those for all other customers.

Total deposits from directors, executive officers, and their affiliates for the years ended June 30, 2017, 2016, and 2015 were $1.9 million, $1.8 million, and $1.9 million, respectively.

Total loans to directors, executive officers, and their affiliates are subject to regulatory limitations. Aggregate loans balances are as follows and were within regulatory limitations:



	At June 30,
	2017		2016		2015
Beginning balance	$	222	$	277	$	887
Extensions of credit	-		5		-
Repayments	74		60		610
Ending balance	$	148	$	222	$	277

Note 14 - Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital

117

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier I capital to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined).

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital requirements which created a new required ratio for common equity Tier 1 ("CET1") capital, increased the leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before it may pay dividends, repurchase shares or pay discretionary bonuses.

The minimum requirements are a ratio of common equity Tier 1 capital (CET1 capital) to total risk-weighted assets the ("CET1 risk-based ratio") of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a leverage ratio of 4.0%.

In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to a certain transition period. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments. Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a transition period ending December 31, 2017. CET1 consists of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a transition period ending December 31, 2017. Because of the Bank's asset size, the Bank is not considered an advanced approaches banking organization and has elected to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.

The requirements also included changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional CET1 capital equal 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 was phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of June 30, 2017, the conservation buffer was 1.25%.

Under the new standards, in order to be considered well-capitalized, the Bank must maintain a CET1 risk-based ratio of 6.5% (new), a Tier 1 risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged). As of June 30, 2017, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action.

118

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The Bank's capital accounts and ratios are also presented in the following table:



	Actual				Minimum Capital Requirement				Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2017
Total capital (to risk-weighted assets)	$	63,781	15.1	%	$	33,742	8.0	%	$	42,178	10.0	%
Tier I capital (to risk-weighted assets)	59,675		14.1		25,307		6.0		33,742		8.0
Common equity Tier 1 capital (to risk-weighted assets)	59,675		14.1		18,980		4.5		27,415		6.5
Tier I leverage capital (to average assets)	59,675		13.0		18,328		4.0		22,910		5.0

As of June 30, 2016
Total capital (to risk-weighted assets)	$	59,938	15.7	%	$	30,580	8.0	%	$	38,225	10.0	%
Tier I capital (to risk-weighted assets)	56,159		14.7		22,935		6.0		30,580		8.0
Common equity Tier 1 capital (to risk-weighted assets)	56,159		14.7		17,201		4.5		24,846		6.5
Tier I leverage capital (to average assets)	56,159		13.5		16,620		4.0		20,775		5.0

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.0% , 15.2% , 15.2% and 16.2% , respectively, as of June 30, 2017 . As of June 30, 2016, Anchor Bancorp's Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios were 14.4% , 15.7% , 15.7% and 16.6% , respectively.

119

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Note 15 - Income Taxes

The components of current and deferred tax expense for the years ended June 30, 2017, 2016 and 2015 were as follows:



	Year Ended June 30,
	2017		2016			2015

Current	$	21	$	126		$	-
Deferred	1,018		(87		)	148
Change in valuation allowance	-		-			(8,469		)
Total	$	1,039	$	39		$	(8,321	)

Retained earnings at June 30, 2017 and 2016, included $5.5 million in tax-basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax-basis bad debt reserve is used for purposes other than to absorb bad debts, or if legislation is enacted requiring recapture of all tax-basis bad debt reserves, the Bank will incur a federal tax liability at the then-prevailing corporate tax rate.

A reconciliation of the provision for income taxes based on statutory corporate tax rates on pre-tax income and the provision shown in the accompanying consolidated statements of income at the dates indicated is summarized as follows:



	Amount			Percent of Pre-Tax Income (loss)
June 30, 2017
Income taxes computed at statutory rates	$	1,152		34.0	%
Tax-exempt income	(178		)	(5.3	)
Other, net	65			1.9
Provision for income taxes	$	1,039		30.6	%
June 30, 2016
Income taxes computed at statutory rates	$	182		34.0	%
Tax-exempt income	(189		)	(35.4	)
Deferred tax asset valuation allowance	-			-
Other, net	46			8.6
Provision for income taxes	$	39		7.2	%
June 30, 2015
Income taxes computed at statutory rates	$	511		34.0	%
Tax-exempt income	(193		)	(12.8	)
Deferred tax asset valuation allowance	(8,469		)	(562.5	)
Other, net	(170		)	(11.4	)
Provision for income taxes	$	(8,321	)	(552.7	)%

120

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The components of net deferred tax assets and liabilities at the dates indicated are summarized as follows:



	June 30,
	2017		2016
Deferred tax assets
Allowance for loan losses	$	3,270	$	3,159
AMT credit carryforward	388		352
Deferred compensation - SERP	558		561
Stock awards	299		350
Securities impairment charge	340		340
Net operating loss carryforward	3,139		4,304
Real estate owned	216		155
Accumulated depreciation	56		305
Unrealized loss on securities available-for-sale	76		-
Other, net	294		53
Total deferred tax assets	8,636		9,579
Deferred tax liabilities
Deferred loan fees and costs	499		434
FHLB stock dividends	47		166
Mortgage servicing rights	79		70
Unrealized gain on securities available-for-sale	-		39
Total deferred tax liabilities	625		709

Net deferred tax asset	$	8,011	$	8,870

DTAs are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the DTA has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the DTA 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. During fiscal 2015, the Company reversed its DTA valuation allowance related to the Company's deferred tax assets as management deemed that it was no longer appropriate to carry a DTA valuation allowance as a result of changes in the factors considered by management when the Company initially established the valuation allowance. In reaching this determination, management considered, among other factors, the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, available tax planning strategies, the Company's cumulative earnings during the past three years, including the Company's recent financial performance, the improvement in the Company's asset quality and financial condition, as well as projected earnings. As of June 30, 2017 and 2016, management deemed that a deferred tax asset valuation allowance related to the Company's DTA was not necessary.

As of June 30, 2017 , the Company had a federal net operating loss carryforwards totaling $9.2 million and insignificant Oregon state and local net operating loss carryforwards which can be used to offset future taxable income. The net operating losses begin to expire in 2031 for federal and 2024 for Oregon. The Company's net operating loss carryforwards may be subject to limitations under Internal Revenue Code Section 382.

The Company had no uncertain tax positions at June 30, 2017 , 2016, and 2015. The Company recognizes interest accrued on and penalties related to uncertain tax positions in tax expense. During the years ended June 30, 2017 , 2016, and 2015, the Company recognized no interest and penalties.

121

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The Company files income tax returns in the U.S. federal and Oregon state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2014.

Note 16 – Parent Company Financials

Presented below are the condensed statements of financial condition, statements of income, and statements of cash flows for Anchor Bancorp.

ANCHOR BANCORP STATEMENTS OF FINANCIAL CONDITION



	June 30,
	2017			2016
ASSETS
Cash	$	2,845		$	2,378
ESOP loan	607			672
Investment in bank subsidiary	61,460			59,399
Prepaid and other assets	1,031			747
Total assets	$	65,943		$	63,196
LIABILITIES
Total liabilities	$	92		$	-
STOCKHOLDERS' EQUITY
Common stock	$	25		$	25
Additional paid-in-capital	22,619			22,157
Retained earnings	44,585			42,235
Unearned ESOP shares	(607		)	(672		)
Accumulated other comprehensive loss, net of tax	(771		)	(549		)
Total stockholders' equity	$	65,851		$	63,196
Total liabilities and stockholders' equity	$	65,943		$	63,196

122

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

ANCHOR BANCORP STATEMENTS OF INCOME



	For the Years Ended June 30,
	2017			2016			2015
Operating income
Interest income ESOP loan	$	16		$	24		$	26
Dividends received from subsidiary	1,250			680			5,350
Total operating income	1,266			704			5,376
Operating expenses
Legal expense	482			354			105
Accounting expense	66			49			47
Professional fees	243			116			60
Management fees	72			69			67
General and administrative	39			62			54
Other expense	-			76			-
Total operating expenses	902			726			333
Profit (loss) before income tax	364			(22		)	5,043
Income tax benefit	(301		)	(227		)	(478		)
Income before equity in undistributed income of subsidiary	665			205			5,521
Equity in undistributed income of subsidiary	1,685			290			4,306
Net income	$	2,350		$	495		$	9,827

ANCHOR BANCORP STATEMENTS OF CASH FLOWS



	For the Years Ended June 30,
	2017			2016			2015
Cash flows from operating activities
Net income	$	2,350		$	495		$	9,827
Adjustments to reconcile net loss to net cash from operating activities:
Equity in undistributed income of subsidiary	(1,685		)	(290		)	(4,306		)
Change in deferred tax assets, net	(301		)	(227		)	(478		)
Change in other assets	16			(59		)	(46		)
Net cash used by operating activities	380			(81		)	4,997
Cash flows from financing activities
Repurchase and retirement of common stock	-			(2,952		)	-
ESOP loan repayments	87			87			88
Net cash provided by investing activities	87			(2,865		)	88
Net change in cash and cash equivalents	467			(2,946		)	5,084
Cash and cash equivalents at beginning of period	2,378			5,324			240
Cash and cash equivalents at end of period	$	2,845		$	2,378		$	5,324

123

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Note 17 - Commitments and Contingencies

Credit-related financial instruments - The Bank is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to a varying degree, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The Bank's exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

The following financial instruments were outstanding whose contract amounts represent credit risk at June 30, 2017:



	Amount of Commitment Expiration - Per Period

	Total Amounts Committed (2)		Due in One Year
Commitments to originate loans (1)	$	4,467	$	4,467
Undisbursed portion of construction loans	61,603		61,603
Total loan commitments	$	66,070	$	66,070

Line of credit
Fixed rate (3)	$	22,847	$	2,316
Adjustable rate	68,331		13,658
Undisbursed balance of loans closed	$	91,178	$	15,974

(1) Interest rates on fixed rate loans range from 2.99% to 7.38% .

(2) At June 30, 2017 there was $286 in reserves for unfunded commitments.

(3) Includes standby letters of credit.

The following financial instruments were outstanding whose contract amounts represent credit risk at June 30, 2016:



	Amount of Commitment Expiration - Per Period

	Total Amounts Committed (2)		Due in One Year
Commitments to originate loans (1)	$	14,130	$	14,130
Undisbursed portion of construction loans	37,924		37,924
Total loan commitments	$	52,054	$	52,054

Line of credit
Fixed rate (3)	$	10,160	$	365
Adjustable rate	54,460		13,770
Undisbursed balance of loans closed	$	64,620	$	14,135

(1) Interest rates on fixed rate loans range from 3.88% to 17.99% .

(2) At June 30, 2016 there were no in reserves for unfunded commitments.

(3) Includes standby letters of credit.

124

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon.

Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management's credit evaluation of the borrower.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent that the Bank is committed.

Contingent liabilities for sold loans - In the ordinary course of business, the Bank sells loans without recourse that may have to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults, breach of representation or warranty, and fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Bank may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Bank has no commitment to repurchase the loan. The Bank has recorded no reserve to cover loss exposure related to these guarantees. The principal balance of loans sold without recourse for the years ended June 30, 2017 and 2016, was $84.1 million and $80.6 million , respectively. The Bank repurchased no loans for the years ended June 30, 2017 , 2016 and 2015.

Contingencies - The Company is a defendant in various legal proceedings arising in connection with its business. It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the final outcome of the legal proceedings and that adequate provision has been made in the accompanying consolidated financial statements.

At periodic intervals, the Washington State Department of Financial Institutions, Division of Banks ("DFI") and the FDIC routinely examine the Bank's financial statements as part of their legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings.

Operating lease commitment - The Bank leases space for branches and operations located in Shelton, and Puyallup, Washington. These leases ran for periods ranging from three to five years with all current leases expiring in 2020. All leases require the Bank to pay all taxes, maintenance, and utility costs, as well as maintain certain types of insurance. The annual lease commitments for the next three years are as follows:



Year Ended June 30,	Amount
2018	$144
2019	$90
2020	$36

Rental expense charged to operations was $173,000 , $140,000 and $133,000 for the years ended June 30, 2017 , 2016, and 2015, respectively.

Note 18 - 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.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

125

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:


•	Level 1 - Quoted prices for identical instrument in active markets.


•	Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations whose inputs are observable.


•	Level 3 - Instruments whose significant value drivers are unobservable.

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



	June 30, 2017
	Level 1		Level 2		Level 3		Total

Municipal bonds	$	-	$	165	$	-	$	165
Mortgage-backed securities:
FHLMC	-		11,103		-		11,103
FNMA	-		9,363		-		9,363
GNMA	-		539		-		539



	June 30, 2016
	Level 1		Level 2		Level 3		Total

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

126

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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



	June 30, 2017
	Level 1		Level 2		Level 3		Total

Impaired loans:
Mortgage loans
One-to-four family	$	-	$	-	$	4,227	$	4,227
Construction	-		-		262		262
Land	-		-		311		311
Commercial business	-		-		23		23
Total impaired loans	-		-		4,823		4,823

Total	$	-	$	-	$	4,823	$	4,823

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



	June 30, 2016
	Level 1		Level 2		Level 3		Total
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

The fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. Inputs used in the collateral value method include appraisal values, estimates of certain completion costs and closing and selling costs. Some of these inputs may not be observable in the marketplace.

The fair value of real estate owned properties is measured at the lower of their carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisal of the property, resulting in Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

127

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

The following tables present quantitative information about Level 3 fair value measurements at June 30, 2017 and 2016:



	June 30, 2017
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Average Discount

Impaired loans	$	4,823	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 100% (3%)



	June 30, 2016
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Average Discount

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 collateral	Discount applied to the obtained appraisal	0% - 100% (12%)

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of June 30, 2017 and June 30, 2016 . For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as demand deposits, savings, and money market, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

128

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)



	June 30, 2017
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial Instruments-Assets
Cash and cash equivalents	$	14,194	$	14,194	$	14,194	$	-	$	-
Securities available-for-sale	21,170		21,170		-		21,170		-
Securities held-to-maturity	4,949		4,954		-		4,954		-
FHLB stock	2,348		2,348		-		2,348		-
Loans held for sale	1,551		1,551		1,551		-		-
Loans receivable	382,014		374,599		-		-		374,599
Accrued interest receivable	1,332		1,332		-		1,332		-

Financial Instruments-Liabilities
Demand deposits, savings and money market	$	200,678	$	200,678	$	200,678	$	-	$	-
Certificates of deposit	144,509		144,854		-		144,854		-
FHLB advances	45,500		45,226		-		45,226		-
Advance payments by borrowers taxes and insurance	1,195		1,195		1,195		-		-



	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)

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 taxes and insurance	1,114		1,114		1,114		-		-

129

ANCHOR BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except share data)

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.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures : An evaluation of the Company's disclosure controls and procedures (as defined in Section 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of June 30, 2016 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act was (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 SEC's rules and forms.

(b) Report of Management on Internal Control over Financial Reporting : The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2017, utilizing the framework established in Internal Control – Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company's internal control over financial reporting as of June 30, 2017 was effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements are prevented or timely detected.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(c) Changes in Internal Controls : There have been no changes in the Company's internal control over financial reporting during the year ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company intends to continually review and evaluates 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

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deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our Board of Directors consists of seven members and is divided into three classes. Approximately one-third of the directors are elected annually to serve for a three-year period or until their respective successors are elected and qualified. The table below sets forth information regarding each director of the Company.



	Age as of June 30, 2017	Year First Elected or Appointed Director (1)	Term to Expire
Name
Robert D. Ruecker	68	1984	2017
Jerald L. Shaw	71	1990	2017
Douglas A. Kay	61	1991	2018
George W. Donovan	62	1998	2018
Terri L. Degner	54	2007	2018
Reid A. Bates	57	2013	2019
Gordon Stephenson	51	2016	2019
_________________
(1) For years prior to 2011, includes prior service on the Board of Trustees of the Bank

Set forth below is the principal occupation of each director. All directors have held their present positions for at least five years unless otherwise indicated.

Robert D. Ruecker retired as Human Resources Coordinator for Westport Shipyard, a position he held from August 2008 until July 2012. Prior to that, he served as the Human Resources Director for Grays Harbor Paper, L.P., a business papers manufacturer, from September 2000 until June 2007. He worked for many years in his family's hardware business, and ran the business upon his parents' retirement. Subsequent to that time, he became a regional sales manager for Verizon Wireless where he oversaw the capture of number one industry market share for his region. He provides insight into current and proposed legislation. Mr. Ruecker brings nearly 40 years' worth of multi-level management experience to our Board. Currently, he volunteers for Relay for Life and the Thurston County Chamber of Commerce/Olympia Yacht Club Military Appreciation Day. He is also the past President of the Grays Harbor Chamber of Commerce and the Grays Harbor YMCA.

Jerald L. Shaw is the President and Chief Executive Officer of the Bank, positions he has held since July 2006. He has also served in those capacities for the Company since its formation in September 2008. Prior to serving as President and Chief Executive Officer, he served as Chief Operating Officer from 2004 to 2006 and as Chief Financial Officer from 1988 to 2002. Prior to that, he served the Bank and its predecessor, Aberdeen Federal Savings and Loan Association, in a variety of capacities since 1976. Prior to that time, Mr. Shaw piloted C-130 aircraft for the U.S. Air Force, including numerous combat missions during the Vietnam War. Having performed virtually every position at the Bank, he has extensive knowledge of our operations. He is a distinguished graduate of the School for Executive Development of the U.S. League of Savings Institutions at the University of Washington. Mr. Shaw is also a graduate of the Asset Liability Management School of America's Community Bankers, and many other educational programs. He is a member of the Board of Trustees for the Thurston County Chamber of Commerce, as well as South Sound YMCA.

Douglas A. Kay is self-employed on a part-time basis as a Certified Public Accountant and Certified Fraud Examiner, and is accredited in business valuation, specializing in accounting, consulting and business valuation. He has served as the Chief Financial Officer of Laserfab, Inc., a sheet metal fabrication manufacturing company with facilities in Puyallup, Redmond and Moses Lake, Washington since April 2013. Prior to that, he was employed by the public accounting firm of McSwain and Company, PS from 2004 to 2006. Mr. Kay brings valuable insight to Board discussions of the financial condition of large borrowers. Over the course of his career, he has been closely involved in the creation, review and analysis of financial statements of different size companies in widely diverse industries. As Chairman of the Audit Committee, Mr. Kay provides professional oversight to the internal and external audit processes of the Bank.

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George W. Donovan is the Secretary and Treasurer of Barrier West, Inc., a trucking and heavy equipment provider, a position he has held since 1992. He is currently on the management team for a Barrier West-affiliated company active in the construction business in the Bakken Oil Field in North Dakota. He has also served as President of Geo Dan Land, Inc. since 1993. Mr. Donovan brings an understanding of entrepreneurial endeavors to our Board. Mr. Donovan's accomplishments include working on the general partners management team which was able to acquire, staff and restart a local paper mill operation. This activity transferred ownership from a multi-national corporation to local ownership and retained approximately 250 jobs. The mill recently shut down after 18 years of operation. He also managed two separate corporations that provided support services crucial to the operation of the paper mill and now leases equipment for construction and oil support services. Mr. Donovan also brings years of experience as a land developer. These experiences have allowed him to develop expertise in all facets of management and to provide valuable input to our business planning. Mr. Donovan is on the Board of Directors of the Grays Harbor Community Foundation, serving on its Grants Committee.

Terri L. Degner is the Executive Vice President, Chief Financial Officer and Treasurer of the Bank, positions she has held since 2004. She has also served in those capacities for the Company since its formation in September 2008. Prior to serving as Executive Vice President, Chief Financial Officer and Treasurer, Ms. Degner has served the Bank in a variety of capacities since 1990, including as Senior Vice President and Controller from 1994 to 2004. Ms. Degner has been in banking since high school. She has worked in multiple lending positions in various size institutions. Since 1990, she has held a variety of positions in the finance area of the Bank. Ms. Degner demonstrated her determination to succeed when she worked full time in the Bank's Accounting Department and commuted 60 miles to evening classes at St. Martin's College where she received her Bachelor's Degree in Accounting. At the same time she worked full days and met all expectations for performance. In 2000, she graduated from the Pacific Coast Banking School at the University of Washington in the top 10% of her class and her thesis was published in the University's library. She has become the management expert on issues ranging from information technology to asset-liability management. Ms. Degner also serves on the Board of Directors and Finance Committee of NeighborWorks of Grays Harbor, sits on the St. Martin's University Accounting Advisory Committee and is on the Executive Committee of the Providence St. Peter Foundation Christmas Forest.

Reid A. Bates has extensive business experience in the staffing, real estate, banking, alternative energy and recycling industries. Since 2007, he has been the majority owner of a recruiting and staffing agency, Express Employment Professionals, located in Aberdeen, Centralia and Olympia, Washington. Prior to that, Mr. Bates was employed by Weyerhaeuser Company from 1988 to 2006 and served in various capacities, most recently serving as Vice President, Eastern Region - Recycling, in Aurora, Illinois from 2001 to 2006. From 1986 to 1988, Mr. Bates was employed by CURA Financial/Prudential Federal Savings, Salt Lake City, Utah and served as a commercial loan officer in San Ramon, California. From 1985 to 1986, he was employed by Renewable Energy Ventures, Inc. as a financial analyst and from 1983 to 1985 he was employed by Coordinated Financial Analysts serving as a Vice President - Financial Analyst. Mr. Bates has a Bachelor of Science degree in Business Management - Finance from Brigham Young University, Provo, Utah. Mr. Bates brings to the Board of Directors economic development expertise and strong ties to the business community in many of the markets we serve. He is past Chairman and Board member of the Thurston County Chamber of Commerce, the President of the Board of the Thurston County Economic Development Council, and a past Board member of the United Way of Thurston County. He is a longtime supporter and leader within the Boy Scouts of America, a Rotarian, and serves on the Business Advisory Council of Grays Harbor College and Saint Martin's University.

Gordon Stephenson is the co-founder and Chief Executive Officer of Real Property Associates, a 25 year old full service real estate brokerage and property management company based in Seattle, Washington. He is an original and current member of Zillow Group's Board of Directors, and an advisor to several early stage companies, including Realty Mogul and Democracy Live. Mr. Stephenson brings extensive experience in the residential real estate industry as a founder and manager of a real estate brokerage firm. As a result of his experience in these roles, he possesses valuable financial and management skills. Mr. Stephenson is a past Board member of Seattle's Union Gospel Mission. He holds a Bachelor of Arts in Economics from Stanford University.

Board of Directors

The Board of Directors of the Company meets quarterly and the Board of Directors of the Bank meets monthly; additionally, the Bank holds one or two strategic planning meetings each year. During the year ended June 30, 2017, the Board of Directors of the Company held four regular meetings and ten special meetings and the Board of Directors of the Bank held twelve regular meetings and four special meetings. No director attended fewer than 75% of the total meetings of the Boards of Directors and committees on which he or she served during this period.

Committees and Committee Charters

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The Board of Directors of the Company has standing Audit, Compensation, Nominating and Corporate Governance, Strategic Planning and Executive committees. The Board has adopted written charters for the Audit, Compensation, Nominating and Corporate Governance, and Strategic Planning committees. Copies of the Audit, Compensation, Nominating and Corporate Governance committee charters are available on our website at www.anchornetbank.com.

Audit Committee. The Audit Committee consists of Directors Kay (Chairman), Donovan and Ruecker. The Audit Committee meets quarterly and on an as needed basis. The Audit Committee oversees the design and operation of the Bank's internal controls for safeguarding its assets and ensuring the quality and integrity of financial reporting. The committee hires the independent auditor and reviews the audit report prepared by the independent auditor. The Audit Committee met four times during the year ended June 30, 2017.

Each member of the Audit Committee is "independent" in accordance with the requirements for companies listed on Nasdaq. In addition, the Board of Directors has determined that Mr. Kay meets the definition of "audit committee financial expert," as defined by the SEC.

Compensation Committee. The Compensation Committee consists of Directors Ruecker (Chairman), Kay, Bates, Donovan and Stephenson. This committee meets on an as needed basis, and provides general oversight regarding the personnel, compensation and benefits matters of the Bank. The Compensation Committee is responsible for evaluating the performance of our Chief Executive Officer, while the Chief Executive Officer evaluates the performance of other senior officers and makes recommendations to the Committee regarding compensation levels. The Compensation Committee met three times during the year ended June 30, 2017.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee has a rotating membership, currently consisting of Directors Kay (Chairman), Bates and Donovan. The committee is responsible for the annual selection of nominees for election as directors, assessment of Board and committee membership needs, and implementation of corporate governance policies and processes. The committee meets at least twice a year. Each member of the committee is "independent," in accordance with the requirements for companies listed on Nasdaq. This committee met three times during the year ended June 30, 2017.

Only those nominations made by the Nominating and Corporate Governance Committee or properly presented by shareholders will be voted upon at the annual meeting. In its deliberations for selecting candidates for nominees as director, the Committee considers the candidate's knowledge of the banking business and involvement in community, business and civic affairs, and also considers whether the candidate would provide for adequate representation of the Bank's market area. Any nominee for director made by the Committee must be highly qualified with regard to some or all these attributes. The Committee does not take diversity into account when searching for director candidates but believes its selection process provides for diverse viewpoints. In searching for qualified director candidates to fill vacancies on the Board, the Committee solicits its current Board of Directors for names of potentially qualified candidates. Additionally, the Committee may request that members of the Board of Directors pursue their own business contacts for the names of potentially qualified candidates. The Committee would then consider the potential pool of director candidates, select the candidate it believes best meets the then-current needs of the Board, and conduct a thorough investigation of the proposed candidate's background to ensure there is no past history that would cause the candidate not to be qualified to serve as one of our directors. Although the Nominating and Corporate Governance Committee charter does not specifically provide for the consideration of shareholder nominees for directors, the Committee will consider director candidates recommended by a shareholder that are submitted in accordance with our Articles of Incorporation. Because our Articles of Incorporation provide a process for shareholder nominations, the Committee did not believe it was necessary to provide for shareholder nominations of directors in its charter. If a shareholder submits a proposed nominee, the Committee would consider the proposed nominee, along with any other proposed nominees recommended by members of our Board of Directors, in the same manner in which the Committee would evaluate its nominees for director.

Strategic Planning Committee. The Strategic Planning Committee consists of Directors Stephenson (Chairman), Bates, Donovan, Kay, and Ruecker. The committee meets quarterly and on an as needed basis. The Strategic Planning Committee was formed in October 2015 to assist the Board in establishing plans for the Company's growth, reviewing capital and financing levels, and performing other related duties. The committee met 14 times during the year ended June 30, 2017.

Executive Committee. The Executive Committee consists of Directors Shaw, Kay and Ruecker (Chairman). The committee meets on an as needed basis to discuss items of concern to the Bank. The flexible meeting schedule allows for advance discussion of items appearing on the Board agenda and review of issues of concern that arise in between scheduled Board meetings. The Executive Committee did not meet during the year ended June 30, 2017.

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For information regarding the executive officers of the Company and the Bank, see the information contained herein under the section captioned "Item 1. Business – Employees – Executive Officers."

Code of Business Conduct and Ethics

The Board of Directors adopted our Code of Business Conduct and Ethics, which applies to all employees and directors and is designed to deter wrongdoing and to promote honest and ethical conduct in every respect. The Code addresses conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules, and regulations. A copy of the Code of Business Conduct and Ethics is available on our website at www.anchornetbank.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of the Company's common stock to report their initial ownership of the common stock and any subsequent changes in that ownership to the SEC. Directors, executive officers and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. The SEC has established filing deadlines for these reports and we are required to disclose in this Form 10-K any late filings or failures to file. Based solely on our review of the copies of such forms we have received and written representations provided to us by the above referenced persons, we believe that, during the fiscal year ended June 30, 2017, all filing requirements applicable to our reporting officers, directors and greater than 10% shareholders were properly and timely complied with.

Nomination Procedures

There have been no material changes to the procedures by which shareholders may recommend nominees to the Company's Board of Directors.

Item 11. Executive Compensation

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table shows information regarding compensation for our named executive officers: (1) Jerald L. Shaw, our Chief Executive Officer; and (2) our two other most highly compensated executive officers, who are Terri L. Degner and Matthew F. Moran.



Name and Principal Position	Year	Salary ($)	Stock Awards ($)(1)	Change in Pension Value and Deferred Compensation Earnings ($)(2)		All Other Compensation ($)(3)	Total ($)
Jerald L. Shaw	2017	295,006	--	(4	)	69,468	364,474
President and Chief	2016	295,006	824,000	(4	)	68,543	1,187,549
Executive Officer
Terri L. Degner	2017	180,001	--	18,530		17,336	215,867
Executive Vice President	2016	180,001	824,000	18,075		16,151	1,072,544
Chief Financial Officer
and Treasurer
Matthew F. Moran	2017	170,004	--	--		690	170,694
Executive Vice President	2016	167,999	170,027	--		601	338,627
and Chief Credit Officer
_________________

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	(1)	Represents the aggregate grant date fair value of awards, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, "Compensation - Stock Compensation" ("FASB ASC Topic 718"). For a discussion of valuation assumptions, see Note 11 of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended June 30, 2017. Last year's annual meeting proxy statement inadvertently presented the value of restricted stock that vested during the fiscal year, and has been corrected to present aggregate grant date fair value.


	(2)	Represents aggregate change during the fiscal year in the actuarial present value of the executive's accumulated benefit under the Supplemental Executive Retirement Plan ("SERP"), which is described below. The only named executive officers who participate in this plan are Mr. Shaw and Ms. Degner.

	(3)	For 2017, represents 401(k) match, life insurance premium and ESOP contribution and use of company car for Mr. Shaw and Ms. Degner. For Mr. Shaw, also includes SERP payments of $40,900. Represents life insurance premium for Mr. Moran.

	(4)	Mr. Shaw turned 65 during the year ended June 30, 2011 and his total benefit under the SERP was frozen effective as of June 30, 2012; he began receiving benefits on June 30, 2011.

Employment and Severance Agreements. On May 19, 2014, the Bank entered into employment agreements with Jerald L. Shaw and Terri L. Degner. The material terms of these agreements are summarized below.

The employment agreements were effective on May 19, 2014, and provide for an initial three-year term, provided the agreement has not been terminated earlier by either party to the agreement. On each anniversary beginning on May 19, 2015, the term of each agreement will be extended for a period of one year in addition to the then-remaining term unless notice is given by the executive to the Bank, or by the Bank to the executive, at least 90 days prior to such anniversary, that the agreement will not be extended.

Under the employment agreements, Mr. Shaw's and Ms. Degner's current annual base salaries are $295,006 and $180,001, respectively. These amounts may be increased at the discretion of the Bank's Board of Directors or an authorized committee of the Board as provided for in the agreements. Each executive's annual base salary will be adjusted from time to time to reflect amounts approved by the Bank's Board or the committee administering the agreement. The executives also may participate, to the same extent as executive officers of the Bank generally, in all plans of the Bank relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof. In addition, the executives are entitled to participate in any other fringe benefit plans or perquisites which are generally available to the Bank's executive officers, including but not limited to supplemental retirement, deferred compensation programs, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services. The executives also will receive an annual paid vacation, and voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Bank's Board or the Committee administering the agreement may determine.

The agreements provide that compensation may be paid in the event of disability, death, involuntary termination or a change in control, as described below under "Potential Payments Upon Termination or Change in Control."

The employment agreements include noncompetition provisions that restrict the executives, during the one-year period following termination of the agreement, from becoming a director, officer or employee of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity in any county in which the Bank or any other affiliate of the Bank operates a full service branch office or lending center on the date of termination of the agreement. However, each executive may acquire and own an interest in a business that is dissimilar from that of the Company or the Bank, or solely as a passive investor in any business. The agreements also include confidentiality and non-solicitation restrictions.

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Outstanding Equity Awards

The following information with respect to outstanding stock awards as of June 30, 2017 is presented for the named executive officers. The named executive officers have no stock option awards outstanding.



Name		Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)(1)
Jerald L. Shaw		10,666	(2)	267,183
Terri L. Degner		10,666	(2)	267,183
Matthew F. Moran		5,282	(3)	132,314

(1)	Based on the closing price of the Company's common stock on the Nasdaq Global Market of $25.05 on June 30, 2017.
(2)	Consists of an award of 32,000 shares of restricted stock on December 8, 2015. One-third of the shares vested immediately, one-third vested on July 1, 2016 and one-third vest on July 1, 2017.
(3)	Consists of an award of 6,602 shares of restricted stock on December 8, 2015, which vest in equal installments over a period of five years with the first 20% vesting on the first anniversary of the award.

Non-Qualified Deferred Compensation

The following information is presented with respect to plans that provide for the deferral of compensation on a basis that is not tax-qualified in which the named executive officers participated in the year ended June 30, 2017.



Name	Executive Contributions in Last FY ($)	Registrant Contributions in Last FY ($)	Aggregate Earnings in Last FY ($)	Aggregate Withdrawals/ Distributions ($)		Aggregate Balance at Last FYE ($)
Jerald L. Shaw	--	--	(1)	40,900	(2)	278,186
Terri L. Degner	--	--	--	--		136,469
Matthew F. Moran	--	--	--	--		--
______________


(1)	Mr. Shaw turned 65 during the year ended June 30, 2011 and his total benefit under the SERP was frozen effective as of June 30, 2012.


(2)	Mr. Shaw turned 65 and began receiving benefits on June 30, 2011.

The Bank maintains a SERP for the benefit of certain directors and executive officers. The plan is a non-qualified, unfunded deferred compensation plan. The only named executive officers who participate in the plan are Jerald L. Shaw and Terri L. Degner. The plan is unfunded, but the Bank has purchased life insurance policies on Mr. Shaw and Ms. Degner that are intended to offset the costs associated with the plan during the life of the participant and provide a recovery of plan costs upon the participant's death. The Bank is the sole owner of the insurance policies. Awards under the plan are granted in the form of SERP units. A SERP unit is a hypothetical share of stock determined by reference to the publicly traded value of a share of the Company's common stock. The initial value of a SERP award is the number of SERP units times the value of a SERP unit at the time the award is granted. Each year thereafter, the value of the SERP award is redetermined to reflect the then-current value of the Company's common stock. In no year may the change in value of a SERP unit be less than 90 percent, nor more than 125 percent, of the value of the SERP unit in the previous year. No changes in value are taken into account after the participant's separation from service or retirement age, or after a change in control. The value of a participant's SERP benefit is based on the sum of the positive differences between the value of each unit of SERP awarded to the participant (taking into account the valuation limitations described in the preceding two sentences) over the value of that SERP unit as determined on the grant date.

A participant's SERP benefit vests at a rate of 20 percent for each year of service, with full vesting occurring after five years of service. Full vesting also occurs upon death or disability while actively employed, separation from service after attaining age 65, a change in control involving the Bank prior to the participant's separation from service, or other circumstances described in a participant's award agreement. In the case of SERP retirement awards, on the June 30 th or December 31 st following the participant's

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retirement age, a monthly benefit will be paid based on the value of the participant's vested SERP benefit. Mr. Shaw's and Ms. Degner's agreements each specify a retirement age of 65, with the benefit to be paid over 180 months. Mr. Shaw turned 65 during the year ended June 30, 2011, his total benefit under the SERP was frozen effective as of June 30, 2012 and he began receiving payments under the plan effective as of June 30, 2011. In the case of SERP awards, the award will be paid in a cash lump sum upon the fifth anniversary of the award date, if elected by the participant at the time the award is granted and the participant has not previously separated from service, died or become disabled. If the participant does not make this election, the participant's SERP award benefit will be paid in a cash lump sum upon the participant's attaining his or her retirement age. In either case with respect to a SERP award, after the fifth anniversary of the award, adjustments in the value of the participant's SERP benefit will cease to be determined by reference to the value of the SERP, and instead will be based on an interest factor. The estate of a participant who dies prior to the commencement of benefits will receive a lump sum death benefit equal to the present value of his or her remaining SERP benefit. The death benefit will not be paid under the plan, but instead under an insurance policy on the life of the participant.

Potential Payments Upon Termination or Change in Control

We have entered into agreements with our named executive officers that provide for potential payments upon disability, termination, retirement and death. The following table shows, as of June 30, 2017, the value of potential payments and benefits following a termination of employment under a variety of scenarios.



		Death ($)		Disability ($)		Involuntary Termination ($)	Involuntary Termination with Change in Control ($)		Retirement ($)
Jerald L. Shaw
Employment Agreement		--		10,000	(1)	442,509	1,192,791		--
SERP		278,186	(2)	--		--	368,100	(3)	40,900	(4)
Equity Plan		267,183		267,183		--	267,183		--
Terri L. Degner
Employment Agreement		--		10,000	(1)	270,000	753,302		--
SERP		136,469	(2)	--		--	356,085	(3)	23,739	(4)
Equity Plan		267,183		267,183		--	267,183		--
Matthew F. Moran
Equity Plan		132,314		132,314		--	132,314		--
________________
(1)	Monthly benefit.
(2)	A participant who dies prior to the commencement of benefits will receive a lump sum death benefit equal to the present value of his or her remaining SERP benefit.
(3)	In the event of a change in control, each participant employed by the Bank immediately prior to the change in control will be 100 percent vested in his or her SERP benefit and will receive a lump sum equal to the value of his or her entire SERP.
(4)	Annual benefit

Employment Agreements. The employment agreements with Mr. Shaw and Ms. Degner provide for payments in the event of death, disability or termination. In the event of an executive's death during the term of his or her employment agreement, the Bank will pay to the executive's estate the compensation due through the last day of the calendar month in which his or her death occurred, as well as benefits due under the agreement. The agreements also provide that if Mr. Shaw or Ms. Degner becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Bank or becomes otherwise unable to fulfill his or her duties under the agreement, the executive shall be entitled to receive such group and other disability benefits as are then provided for executive employees. In the event of either executive's disability, his or her employment agreement is not suspended, except that (1) the obligation to pay the executive's salary will be reduced by the amount of disability income benefits he receives and (2) upon a resolution adopted by a majority of the disinterested members of the Bank's Board or the committee administering the agreement, the Bank may discontinue payment of the executive's salary beginning six months following a determination that the executive has become entitled to benefits under the disability plan or otherwise unable to fulfill the duties under the agreement.

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The employment agreements may be terminated by the executive for good reason, as defined in the agreements. Good reason means any of the following actions unless consented to: (1) a requirement that the executive be based at any place other than within 60 miles of Aberdeen, Washington; (2) a material demotion of the executive; (3) a material reduction in the number or seniority of personnel reporting to the executive, other than as part of a company-wide or bank-wide reduction in staff; (4) a ten percent or more reduction in the executive's salary, other than as part of an overall program applied uniformly and with equitable effect to all members of senior management; (5) a material permanent increase in the required hours of work or the workload of the executive; (6) the failure of the Bank's Board to elect Mr. Shaw as the President and Chief Executive Officer and Ms. Degner as Executive Vice President, Chief Financial Officer and Treasurer or any action by the Board removing the executive from such office. The agreements may be terminated by the Board at any time. If the executive's employment is terminated other than for cause, without the executive's consent or by the executive for good reason, then for 18 months after the date of termination, the Bank would be required to pay the executive's salary at the rate in effect immediately prior to the date of termination, and continue the executive's coverage under the Bank's medical, life and disability programs.

The employment agreements also provide for severance payments and other benefits if an executive is involuntarily terminated during the period beginning on the six month anniversary preceding a change in control and ending on the first anniversary of the effective time of the change in control. In such an event, the Bank will (1) pay the executive his or her salary through the date of termination, (2) pay the executive within 25 days after the date of termination a cash lump sum equal to 2.99 times his or her base amount, as determined under Section 280G of the Internal Revenue Code (generally, the average of the executive's includible compensation from the Bank during the five-year period ending with the year preceding the year in which the change in control event occurs); and (3) continue to provide the executive during the remaining term of the agreement with various group benefits, such as medical, dental and long term disability insurance, or if such coverage is not available to the executive, then a lump sum cash payment within 25 days of the executive's termination equal to the present value of the monthly cost of such coverage that cannot be provided. The agreements further provide that if an executive's payment made in connection with a change in control equals or exceeds three times the executive's base amount, then a portion of those payments will be deemed to be "excess parachute payments" pursuant to the provisions of Section 280G of the Internal Revenue Code. Any such payments will be reduced to the extent necessary to ensure that no amounts payable to the executive will be considered excess parachute payments.

Equity Plan. The 2015 Equity Incentive Plan provides that any participant who experiences an involuntary separation from service within a year following a change in control will have the vesting date of unvested stock options and restricted stock awards accelerated to the date of the separation from service. If a participant terminates service prior to the vesting date on account of death or disability, the vesting date will be accelerated to the date of the participant's termination of service.

Compensation Policies and Risk

The Compensation Committee believes that any risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company or the Bank. As a result of the economic environment and challenges we have faced, the Compensation Committee has limited the available benefits and believes the mix and design of the elements of our executive compensation does not encourage management to assume excessive risks.

DIRECTORS' COMPENSATION

The following table shows the compensation paid to our directors for the year ended June 30, 2017, with the exception of Jerald L. Shaw, our President and Chief Executive Officer, and Terri L. Degner, our Executive Vice President, Chief Financial Officer and Treasurer, whose compensation is included in the section entitled "Executive Compensation."

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Name		Fees Earned or Paid in Cash ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(1)	Total ($)
George W. Donovan		22,520	7,832	30,352
Douglas A. Kay		25,040	10,523	35,563
Robert D. Ruecker		27,560	15,345	42,905
Reid A. Bates		18,260	--	18,260
Gordon Stephenson (2)		15,820	--	15,820
Varonica S. Ragan (3)		8,040	--	8,040

(1)	Represents aggregate change between June 30, 2016 and June 30, 2017 in the actuarial present value of the director's accumulated benefit under the SERP, which is described below.
(2)	Mr. Stephenson was appointed to the Board effective August 29, 2016.
(3)	Ms. Ragan resigned from the Board effective November 15, 2016.

Non-employee directors of the Bank receive a monthly retainer of $700, with the exception of the Chairman of the Board, who receives a monthly retainer of $1,120, and the Chairman of the Audit Committee, who receives a monthly retainer of $910. Members of the Bank's Strategic Planning and the Company's Audit Committee receive a quarterly retainer of $260. Non-employee directors also receive a fee of $700 for each Board meeting attended. Members of the Company's Audit Committee and the Bank's Senior Loan Committee, Compensation Committee, Executive Committee, Nominating and Corporate Governance Committee and Strategic Planning Committee receive a fee of $260 per committee meeting attended.

The Bank maintains a Supplemental Executive Retirement Plan, or SERP, for the benefit of certain directors and executive officers. The plan is a non-qualified, unfunded deferred compensation plan. Each director participates in the plan, with the exception of Mr. Bates and Mr. Stephenson. For more information regarding the SERP, see the discussion included in "Executive Compensation - Non-Qualified Deferred Compensation" above.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


(a)	Security Ownership of Certain Beneficial Owners.

The following table sets forth, as of August 30, 2017, information regarding share ownership of:


•	those persons or entities (or groups of affiliated person or entities) known by management to beneficially own more than five percent of the Company's common stock other than directors and executive officers;


•	each director of the Company;


•	each executive officer of the Company or the Bank named in the Summary Compensation Table appearing under "Executive Compensation" above (known as "named executive officers"); and


•	all current directors and executive officers of the Company and the Bank as a group.

Persons and groups who beneficially own in excess of five percent of the Company's common stock are required to file with the SEC, and provide us a copy, reports disclosing their ownership pursuant to the Securities Exchange Act of 1934. To our knowledge, no other person or entity, other than the ones set forth below, beneficially owned more than five percent of the outstanding shares of the Company common stock as of the close of business on August 30, 2017.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In accordance with Rule 13d-3 of the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner of any shares of common stock if he or she has voting and/or investment power with respect to those shares. Therefore, the table below includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, shares held in the ESOP, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power.

As of August 30, 2017, there were 2,494,940 shares of the Company's common stock outstanding.

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		Number of Shares Beneficially Owned (1)	Percent of Shares Outstanding (%)
Name

Beneficial Owners of More Than 5%

Context BH Capital Management, LP		151,106 (2)	6.06
401 City Avenue, Suite 800
Bala Cynwyd, Pennsylvania 19004

Joel S. Lawson, IV		225,000 (3)	9.02
2040 Grubbs Mill Road
Berwyn, Pennsylvania 19312

Manulife Asset Management (US) LLC		167,336 (4)	6.71
101 Huntington Avenue
Boston, Massachusetts 02199

Stieven Capital Advisors, L.P.		204,100 (5)	8.18
12412 Powerscourt Drive, Suite 250
St. Louis, Missouri 63131

Joseph Stilwell		236,466 (6)	9.48
111 Broadway, 12 th Floor
New York, New York 10006

Directors

Robert D. Ruecker		22,700 (7)	*
Jerald L. Shaw		37,258 (8)	*
Douglas A. Kay		8,200 (9)	*
George W. Donovan		17,200 (10)	*
Terri L. Degner		28,659 (11)	*
Reid A. Bates		2,250 (9)	*
Gordon Stephenson		3,050 (12)	*

Named Executive Officers Who Are Not Directors
Matthew F. Moran		13,324 (13)	*

All Executive Officers and Directors as a Group (9 persons)		140,216	5.62

*	Less than one percent of shares outstanding.
(1)	Shares of restricted stock granted under the 2015 Equity Incentive Plan, as to which the holders have voting power but not investment power, are included as follows: Messrs. Ruecker, Kay and Donovan, 2,300 shares each; Mr. Bates, 250 shares; Mr. Moran, 3,961 shares; and all executive officers and directors as a group, 14,606 shares.
(2)	According to a Schedule 13G filed April 18, 2017, Context BH Capital Management, LP has sole voting and dispositive power over the shares reported.
(3)	According to a Schedule 13D/A filed December 10, 2015, Mr. Lawson has sole voting and dispositive power over the shares reported.

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(4)	According to a Schedule 13G/A filed February 14, 2017, Manulife Asset Management (US) LLC has sole voting and dispositive power over the shares reported.
(5)	According to a Schedule 13G/A filed February 13, 2017, Stieven Financial Investors, L.P. ("SFI") has shared voting and dispositive power over 171,426 shares. Stieven Financial Offshore Investors, Ltd. ("SFOI") has shared voting and dispositive power over 32,674 shares. Stieven Capital Advisors, L.P. ("SCA"), which serves as investment manager to SFI and SFOI, and Joseph A. Stieven, as CEO of SCA report shared voting and dispositive power over 204,100 shares.
(6)	According to a Schedule 13D/A filed September 6, 2016, Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Partners, L.P., Stilwell Value LLC and Joseph Stilwell have shared voting and dispositive power over the shares reported
(7)	Includes shares of restricted stock noted in footnote (1); remaining shares are held in individual retirement account ("IRA").
(8)	Includes shares of restricted stock noted in footnote (1), 9,500 shares held jointly with spouse, 849 shares held in IRA, 2,217 shares held in the ESOP, 3,245 shares held in spouse's IRA and 3,406 shares held by Shaw Family I LLC.
(9)	Includes shares of restricted stock noted in footnote (1); remaining shares are held jointly with spouse.
(10)	Includes shares of restricted stock noted in footnote (1), 4,000 shares held jointly with spouse, 4,000 shares held by William M. Donovan Trust as to which Mr. Donovan is trustee, as well as 2,000 shares held for his children.
(11)	Includes shares of restricted stock noted in footnote (1), 10,000 shares held jointly with spouse and 1,409 shares held in the ESOP.
(12)	Consists of 1,000 shares held jointly with spouse, 1,000 shares held in his spouse's IRA and 1,050 shares held as custodian for minors.
(13)	Includes shares of restricted stock noted in footnote (1).


(b)	Security Ownership of Management.

The information contained in section 12(a) above captioned "Security Ownership of Certain Beneficial Owners" is incorporated herein by reference.

See Item 1-"Pending Merger" for information concerning the proposed merger of the Company with and into Washington Federal, Inc.

(d) Equity Compensation Plan Information

The following table summarizes share and exercise price information about the Company's equity compensation plans as of June 30, 2017:



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights	Weighted-average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders:
2015 Equity Incentive Plan (1)	-	$	-	87,572
Equity compensation plans not approved by security holders	N/A	N/A		N/A
Total	-	$	-	87,572

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(1) As of June 30, 2017, there were no outstanding options, warrants and rights. At that date, there were 106,228 restricted shares granted pursuant to the 2015 Equity Incentive Plan (the "Plan") and 87,572 shares were available for future grants of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, non-qualified stock options, which do not satisfy the requirements for treatment as incentive stock options, restricted stock and restricted stock units under the Plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Related Transactions

The Bank has followed a policy of granting loans to officers and directors, which fully complies with all applicable federal regulations. Loans to directors and executive officers are made in the ordinary course of business and on the same terms and conditions as those of comparable transactions with all customers prevailing at the time, in accordance with our underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features. Loans and available lines of credit to all directors and executive officers and their associates totaled approximately $148,000 at June 30, 2017, which was less than one percent of our equity at that date. All loans to directors and executive officers were performing in accordance with their terms at June 30, 2017. Total deposits of directors and executive officers were approximately $1.9 million at June 30, 2017.

We recognize that transactions between us and any of our directors or executive officers can present potential or actual conflicts of interest and create the appearance that these decisions are based on considerations other than our best interests. Therefore as a general matter and in accordance with our Code of Business Conduct and Ethics, it is our preference to avoid such transactions. Nevertheless, we recognize that there are situations where such transactions may be in, or may not be inconsistent with, our best interests. Accordingly, the Code requires the Board of Directors or a committee of the Board to review and, if appropriate, to approve or ratify any such transaction if the amount involved exceeds $200,000. If a Board member is a participant in the transaction, then that member is required to abstain from the discussion, approval or ratification process. After its review, the Board or committee will only approve or ratify those transactions that are in, or are not inconsistent with, our best interests, as determined in good faith.

Director Independence

The Company's common stock is listed on the Nasdaq Global Select Market. In accordance with Nasdaq requirements, at least a majority of our directors must be independent directors. The Board has determined that five of our seven directors are independent, as defined by Nasdaq. Directors Robert D. Ruecker, Douglas A. Kay, George W. Donovan, Reid A. Bates and Gordon Stephenson are all independent. Only Jerald L. Shaw, who is our President and Chief Executive Officer, and Terri L. Degner, who is our Executive Vice President and Chief Financial Officer, are not independent. Former Director Varonica S. Ragan was independent.

Item 14. Principal Accounting Fees and Services

The following table sets forth the aggregate fees billed to the Company and the Bank by Moss Adams LLP for professional services rendered for the fiscal years ended June 30, 2017 and 2016.



	Year Ended June 30,

	2017		2016
Audit Fees..................................................................	$	139,175	$	146,175
Audit-Related Fees....................................................	73,444		41,292
Tax Fees.....................................................................	20,320		16,000
Total............................................................................	$	232,939	$	203,467

The Audit Committee pre-approves all audit and permissible non-audit services to be provided by the independent auditor and the estimated fees for these services in connection with its annual review of its charter. In considering non-audit services, the Audit Committee will consider various factors, including but not limited to, whether it would be beneficial to have the service provided by the independent auditor and whether the service could compromise the independence of the independent auditor. All of the services provided by Moss Adams LLP in the year ended June 30, 2017 were approved by the Audit Committee.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

( a) 1. Financial Statements.

For a list of the financial statements filed as part of this report see Part II – Item 8.

2. Financial Statement Schedules.

All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in Part II, Item 8 of this Form 10-K.

3. Exhibits:

Exhibits are available from the Company by written request.



2.1			Agreement and Plan of Merger, dated as of April 11, 2017, by and between Washington Federal, Inc. and Anchor Bancorp (1)
3.1			Articles of Incorporation (2)
3.2			Amended and Restated Bylaws (3)
4.1			Form of Stock Certificate of the Company (2)
10.1			Form of Anchor Bank Employee Severance Compensation Plan (2)
10.2			Anchor Bank Phantom Stock Plan (2)
10.3			Form of 401(k) Retirement Plan (2)
10.4			Form of Employment Agreement between Anchor Bank and Jerald L. Shaw and Terri L. Degner (4)
10.5			Form of Severance Agreement and Release (5)
10.6			Agreement in Connection with Anchor Annual Meeting between Anchor Bancorp and Joel S. Lawson IV dated October 21, 2015 (6)
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 (7)
10.8			Anchor Bancorp, Inc. 2015 Equity Incentive Plan ("Equity Incentive Plan") (8)
10.9			Form of Incentive Stock Option Award Agreement under the Equity Incentive Plan (8)
10.10			Form of Non-Qualified Stock Option Award Agreement under the Equity Incentive Plan (8)
10.11			Form of Restricted Stock Award agreement under the Equity Incentive Plan (8)
10.12			Form of Restricted Stock Unit Award agreement under the Equity Incentive Plan (8)
14			Code of Ethics (9)
21			Subsidiaries of Registrant
23			Consent of Independent Registered Public Accounting Firm - Moss Adams LLP
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 of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101			The following materials from Anchor Bancorp's Annual Report on Form 10-K for the year ended June 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Statements of Financial Condition; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements

________________________

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(1	)	Filed as an exhibit to the Company's Current Report on Form 8-K filed April 13, 2017.
(2	)	Filed on October 24, 2008, as an exhibit to the Company's Registration Statement on Form S-1 (File No. 333-154734) and incorporated herein by reference.
(3	)	Filed as an exhibit to the Company's Current Report on Form 8-K dated December 10, 2015 and incorporated herein by reference.
(4	)	Filed as an exhibit to the Company's Current Report on Form 8-K dated May 22, 2014 and incorporated herein by reference.
(5	)	Filed as an exhibit to the Company's Current Report on Form 8-K dated January 22, 2015 and incorporated herein by reference.
(6	)	Filed as an exhibit to the Company's Current Report on Form 8-K dated October 23, 2015 and incorporated herein by reference.
(7	)	Filed as an exhibit to the Company's Current Report on Form 8-K dated December 10, 2015 and incorporated herein by reference.
(8	)	Filed as an exhibit to the Company's Registration Statement on Form S-8 date December 8, 2015 and incorporated herein by reference.
(9	)	The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.anchornetbank.com.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

September 15, 2017	By: /s/Jerald L. Shaw
	Jerald L. Shaw
	President, Chief Executive Officer and Director
	(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



By: /s/Jerald L. Shaw	September 15, 2017
Jerald L. Shaw President, Chief Executive Officer and Director (Principal Executive Officer)

By: /s/Terri L. Degner	September 15, 2017
Terri L. Degner Chief Financial Officer and Director (Principal Financial and Accounting Officer)

By: /s/Robert D. Ruecker	September 15, 2017
Robert D. Ruecker
Chairman of the Board and Director

By: /s/Douglas A. Kay	September 15, 2017
Douglas A. Kay
Director

By: /s/George W. Donovan	September 15, 2017
George W. Donovan
Director

By: /s/Reid A. Bates	September 15, 2017
Reid A. Bates
Director

By: /s/Gordon Stephenson	September 15, 2017
Gordon Stephenson
Director

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Exhibit Number



21	Subsidiaries of the Registrant

23	Consent of Independent Registered Public Accounting Firm - Moss Adams LLP

31.1	Certification of Chief Executive Officer of Anchor Bancorp Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer of Anchor Bancorp Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer of Anchor Bancorp Pursuant to Section 906 of the Sarbanes-Oxley Act

101	The following materials from Anchor Bancorp's Annual Report on Form 10-K for the year ended June 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Statements of Financial Condition; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income (Loss); (4) Consolidated Statements of Stockholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements