Anchor Bancorp - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Anchor Bancorp	ancb10-q2018331exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Anchor Bancorp	ancb10-q2018331exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Anchor Bancorp	ancb10-q2018331exhibit311.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2018



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

For the transition period from _____ to _____

Commission File Number: 001-34965

ANCHOR BANCORP

(Exact name of registrant as specified in its charter)



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

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

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

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

Yes [X] No [ ]

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

Yes [X] No [ ]

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

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

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

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

Yes [ ] No [X]

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 7, 2018, there were 2,484,030 shares of common stock, $0.01 par value per share, outstanding.

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ANCHOR BANCORP

FORM 10-Q

TABLE OF CONTENTS



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

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	51

Item 4 - Controls and Procedures	53

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	53

Item 1A - Risk Factors	53

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3 – Defaults Upon Senior Securities	54

Item 4 – Mine Safety Disclosures	54

Item 5 - Other Information	54

Item 6 - Exhibits	55

SIGNATURES	56

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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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)	March 31, 2018			June 30, 2017
ASSETS
Cash and cash equivalents	$	20,272		$	14,194
Securities available-for-sale, at fair value, amortized cost of $19,300 and $21,391	18,714			21,170
Securities held-to-maturity, at amortized cost, fair value of $3,682 and $4,954	3,740			4,949
Loans held for sale	—			1,551
Loans receivable, net of allowance for loan losses of $4,257 and $4,106	398,573			377,908
Bank owned life insurance investment, net of surrender charges	20,417			20,030
Accrued interest receivable	1,459			1,332
Real estate owned ("REO"), net	737			867
Federal Home Loan Bank ("FHLB") stock, at cost	2,407			2,348
Property, premises, and equipment, at cost, less accumulated depreciation of $12,379 and $11,971	8,785			9,360
Deferred tax asset, net	4,589			8,011
Prepaid expenses and other assets	516			805
Total assets	$	480,209		$	462,525
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	57,767		$	52,606
Interest-bearing	302,452			292,581
Total deposits	360,219			345,187

FHLB advances	46,000			45,500
Advance payments by borrowers for taxes and insurance	2,144			1,195
Supplemental Executive Retirement Plan liability	1,731			1,709
Accounts payable and other liabilities	3,862			3,083
Total liabilities	413,956			396,674
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value per share authorized 5,000,000 shares; no shares issued or outstanding	—			—
Common stock, $0.01 par value per share, authorized 45,000,000 shares; 2,484,030 issued and outstanding at March 31, 2018 and 2,504,740 issued and outstanding at June 30, 2017, respectively	25			25
Additional paid-in capital	22,258			22,619
Retained earnings	45,614			44,585
Unearned Employee Stock Ownership Plan ("ESOP") shares	(556		)	(607		)
Accumulated other comprehensive loss, net of tax	(1,088		)	(771		)
Total stockholders’ equity	66,253			65,851
Total liabilities and stockholders’ equity	$	480,209		$	462,525

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

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ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)	Three Months Ended March 31,						Nine Months Ended March 31,
	Three Months Ended March 31,						Nine Months Ended March 31,
	2018			2017			2018			2017
Interest income:
Loans receivable, including fees	$	5,520		$	4,861		$	16,024		$	14,255
Securities	31			29			90			81
Mortgage-backed securities	119			132			376			439
Total interest income	5,670			5,022			16,490			14,775
Interest expense:
Deposits	845			708			2,530			1,987
FHLB advances	211			127			452			411
Total interest expense	1,056			835			2,982			2,398
Net interest income before provision for loan losses	4,614			4,187			13,508			12,377
Provision for loan losses	120			135			300			285
Net interest income after provision for loan losses	4,494			4,052			13,208			12,092
Noninterest income:
Deposit service fees	261			314			851			1,010
Other deposit fees	193			185			580			558
Other loan fees	212			175			612			618
Gain on sale of loans	14			25			171			125
Bank owned life insurance investment	129			125			387			387
Other income	111			199			483			469
Total noninterest income	920			1,023			3,084			3,167
Noninterest expense:
Compensation and benefits	2,113			2,191			6,418			6,797
General and administrative expenses	514			654			1,660			2,223
Merger expenses	22			—			56			—
Real estate owned holding costs, net	72			(1		)	138			37
Federal Deposit Insurance Corporation ("FDIC") insurance premiums	55			14			131			106
Information technology	506			509			1,533			1,534
Occupancy and equipment	436			485			1,305			1,433
Deposit services	88			111			292			350
Marketing	99			130			274			397
Gain on sale of property, premises and equipment	(15		)	—			(10		)	—
Gain on sale of real estate owned	(163		)	(20		)	(148		)	(59		)
Total noninterest expense	3,727			4,073			11,649			12,818
Income before provision for income taxes	1,687			1,002			4,643			2,441
Provision for income taxes	299			300			3,614			746
Net income	$	1,388		$	702		$	1,029		$	1,695
Basic earnings per share	$	0.57		$	0.29		$	0.42		$	0.71
Diluted earnings per share	$	0.57		$	0.29		$	0.42		$	0.70
Weighted average number of basic shares outstanding	2,423,566			2,406,072			2,433,525			2,400,217
Weighted average number of diluted shares outstanding	2,427,703			2,431,139			2,440,570			2,422,171

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

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ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited)	Three Months Ended March 31,					Nine Months Ended March 31,
	Three Months Ended March 31,					Nine Months Ended March 31,
	2018			2017		2018			2017
NET INCOME	$	1,388		$	702	$	1,029		$	1,695
OTHER COMPREHENSIVE (LOSS) INCOME, net of income tax
Unrealized holding (losses) gains on available-for-sale securities during the period, net of income tax benefit of $(20), $14, $(48), and $(130) respectively	(262		)	28		(317		)	(253		)
Other comprehensive (loss) income, net of income tax	(262		)	28		(317		)	(253		)
COMPREHENSIVE INCOME	$	1,126		$	730	$	712		$	1,442

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

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ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except share data) (Unaudited)	Nine Months Ended March 31,
	Nine Months Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,029		$	1,695
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	471			530
Net amortization of premiums on securities	198			238
Provision for loan losses	300			285
ESOP expense	129			133
Deferred federal income taxes	3,469			696
Stock compensation expense	78			503
Increase in cash surrender value of life insurance investment	(387		)	(387		)
Gain on sale of loans	(171		)	(125		)
Originations of loans held for sale	(7,830		)	(12,075		)
Proceeds from sale of loans held for sale	8,447			10,429
Gain on sale of property, premises, and equipment	(10		)	—
Gain on sale of real estate owned	(148		)	(59		)
Change in operating assets and liabilities:
Accrued interest receivable	(127		)	(16		)
Prepaid expenses and other assets	289			266
Supplemental Executive Retirement Plan ("SERP")	22			11
Accounts payable and other liabilities	779			1,474
Net cash provided by operating activities	6,538			3,598
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales, calls and maturities of available-for-sale securities	—			852
Principal repayments on mortgage-backed available-for-sale securities	3,067			3,616
Principal repayments on mortgage-backed held-to-maturity securities	1,142			1,094
Loan originations, net of undisbursed loan proceeds and principal repayments	(22,751		)	(32,107		)
Proceeds from sale of real estate owned	2,887			510
Capital improvements on real estate owned	(823		)	—
Proceeds from sale of property, premises, and equipment, net	175			—
Purchase of property, premises, and equipment, net	(61		)	(62		)
Redemption of FHLB stock	(59		)	411
Net cash provided by investing activities	(16,423		)	(25,686		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	15,032			42,371
Net change in advance payments by borrowers for taxes and insurance	949			(204		)
Proceeds from FHLB advances	96,950			54,600
Repayment of FHLB advances	(96,450		)	(66,100		)
Repurchase and retirement of common stock	(249		)	—
Net share settlement of stock awards	(269		)	(285		)
Net cash used in financing activities	$	15,963		$	30,382

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ANCHOR BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands, except share data) (Unaudited)	Nine Months Ended March 31,
	Nine Months Ended March 31,
	2018			2017
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	6,078		$	8,294
Beginning of period	14,194			8,320
End of period	$	20,272		$	16,614
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	2,982		$	2,407
Income taxes	$	145		$	65
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Noncash investing activities:
Net loans transferred to real estate owned	$	1,786		$	298
Unrealized holding loss on available-for-sale securities, net of tax	$	(317	)	$	(253	)
Loans securitized into mortgage-backed securities	$	1,105		$	2,107

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

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ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Nature of Business

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

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

Note 2 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2017 (“2017 Form 10-K”). The results of operations for the three and nine months ended March 31, 2018 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2018. Certain prior year amounts have been reclassified to conform to current fiscal year presentation. The reclassifications had no impact on previously reported consolidated net income or equity. The Company has evaluated events and transactions subsequent to March 31, 2018 for potential recognition or disclosure.

Note 3 - Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. These standards were effective for interim and annual periods beginning after December 15, 2017. The Company has analyzed its revenue sources of noninterest income to determine when the satisfaction of the performance obligation occurs and the appropriate recognition of revenue. The adoption of these ASUs did not have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured as fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 did not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The amendments in

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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 amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently have items on its cash flow statement that were impacted by adoption of this ASU and therefore adoption of ASU No. 2016-15 did not 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 was effective 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 did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 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.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company has not had any modifications on share-based payment awards and therefore the adoption of ASU No. 2017-09 did not have a material impact on the Company's consolidated financial statements.

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

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"). ASU 2018-02 eliminates the stranded tax effects within AOCI resulting from the application of current U.S. GAAP in response to the change in the U.S. corporate income tax rate from 35 percent to 21 percent as part of the Tax Cuts and Jobs Act of 2017 enacted in December 2017 (the "Tax Act"). Stranded tax effects unrelated to the Tax Act are released from AOCI using the security-by-security approach. The effective date of ASU 2018-02 is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted for public entities for which financial statements had not yet been issued. The Company elected to early adopt ASU 2018-02 effective for the year ended December 31, 2017, and applied the provisions retrospectively within our Consolidated Balance Sheets and Statements of Shareholders' Equity. This adoption resulted in a one-time reclassification of the effect of remeasuring deferred tax liabilities related to items, primarily unrealized gains and losses on investments, within AOCI to retained earnings resulting from the change in the U.S. corporate income tax rate. This reclassification resulted in a decrease to AOCI and an increase to retained earnings in the amount of $39,496 for the quarter ended March 31, 2018, with no net impact to total stockholders' equity.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740). This ASU was issued to provide guidance on the income tax accounting implications of the Tax Cuts and Jobs Act (the Act) and allows for entities to report provisional amounts for specific income tax effects of the Act for which the accounting under ASC Topic 740 was not yet complete but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the Consolidated Financial Statements in the 2017 Form 10-K. As of March 31, 2018, the Company did not incur any adjustments to the provisional recognition.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 - Earnings Per Share ("EPS")

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



	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
	2018		2017		2018		2017
	(Dollars in thousands, except share data)
Net income	$	1,388	$	702	$	1,029	$	1,695
Earnings allocated to common shareholders	$	1,388	$	702	$	1,029	$	1,695

Basic weighted-average common shares outstanding	2,423,566		2,406,072		2,433,525		2,400,217
Potentially dilutive incremental shares	4,137		25,067		7,045		21,954
Diluted weighted-average common shares outstanding	2,427,703		2,431,139		2,440,570		2,422,171

Basic earnings per share	$	0.57	$	0.29	$	0.42	$	0.71
Diluted earnings per share	$	0.57	$	0.29	$	0.42	$	0.70

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 March 31, 2018 and March 31, 2017 there were 50,209 and 57,092 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 both the three and nine months ended March 31, 2018 and 2017, there were no anti-dilutive shares included in the computation of diluted earnings per share.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Investments

The amortized cost and estimated fair market values of investment securities as of March 31, 2018 and June 30, 2017, were as follows:



March 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds	$	158	$	—	$	—		$	158
Mortgage-backed securities:
FHLMC ⁽¹⁾	10,723		20		(282		)	10,461
FNMA ⁽²⁾	7,972		—		(306		)	7,666
GNMA ⁽³⁾	447		—		(18		)	429
	$	19,300	$	20	$	(606	)	$	18,714
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	1,906	$	39	$	(78	)	$	1,867
FNMA	1,032		49		(26		)	1,055
GNMA	802		—		(42		)	760
	$	3,740	$	88	$	(146	)	$	3,682

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

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

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



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

There were 54 and 47 securities in an unrealized loss position at March 31, 2018 and June 30, 2017, respectively. The unrealized losses on investments in mortgage-backed securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. We do not intend to sell the temporarily impaired securities and it is not likely that we will be required to sell the securities prior to their maturity. We do expect to recover the entire amortized cost basis of the securities. The fair value of temporarily impaired securities, the amount of unrealized losses, and the length of time these unrealized losses existed as of the dates indicated, were as follows:

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2018	(In thousands)
Securities available-for-sale
Mortgage-backed securities:
FHLMC	$	5,320	$	(91	)	$	3,902	$	(191	)	$	9,222	$	(282	)
FNMA	2,455		(63		)	5,211		(243		)	7,666		(306		)
GNMA	—		—			429		(18		)	429		(18		)
	$	7,775	$	(154	)	$	9,542	$	(452	)	$	17,317	$	(606	)



	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2018	(In thousands)
Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	—	$	—	$	1,288	$	(78	)	$	1,288	$	(78	)
FNMA	—		—		455		(26		)	455		(26		)
GNMA	—		—		760		(42		)	760		(42		)
	$	—	$	—	$	2,503	$	(146	)	$	2,503	$	(146	)



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



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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual maturities of securities at March 31, 2018 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.



March 31, 2018	Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale
Municipal bonds:
Due after ten years	$	158	$	158
Mortgage-backed securities:
FHLMC	10,723		10,461
FNMA	7,972		7,666
GNMA	447		429
	$	19,300	$	18,714



Securities held-to-maturity
Mortgage-backed securities:
FHLMC	$	1,906	$	1,867
FNMA	1,032		1,055
GNMA	802		760
	$	3,740	$	3,682

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



	Three Months Ended March 31,				Nine Months Ended March 31,
	2018		2017		2018		2017
	(In thousands)
Proceeds from sales	$	—	$	—	$	—	$	—
Proceeds from maturities, sales and calls	—		—		—		852
Gross realized gains	—		—		—		—
Gross realized losses	—		—		—		—

Pledged securities at the dates indicated are summarized as follows:



	March 31, 2018				June 30, 2017
Pledged to secure:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Public deposits	$	5,903	$	5,840	$	5,143	$	5,172
FHLB borrowings	794		819		977		1,009
Federal Reserve borrowing line	1,342		1,322		852		840

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 - Loans Receivable, net

Loans receivable consisted of the following at the dates indicated:



	March 31, 2018		June 30, 2017
	(In thousands)
Real estate:
One-to-four family	$	62,788	$	59,735
Multi-family	58,847		60,500
Commercial	152,928		155,525
Construction	85,247		49,151
Land	6,234		8,054
Total real estate	366,044		332,965
Consumer:
Home equity	13,309		13,991
Credit cards	2,346		2,596
Automobile	392		627
Other consumer	1,310		1,524
Total consumer	17,357		18,738

Business:
Commercial business	20,575		31,603
Total loans	403,976		383,306
Less:
Deferred loan fees and loan premiums, net	1,146		1,292
Allowance for loan losses	4,257		4,106
Loans receivable, net	$	398,573	$	377,908

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018:



	One-to- four family			Multi- family		Commercial real estate		Construction		Land			Consumer (1)			Commercial business			Unallocated		Three months ended 3/31/18
	(In thousands)
Allowance for loan losses:
Beginning balance	$	355		$	561	$	1,342	$	1,085	$	96		$	267		$	422		$	—	$	4,128
Provision (benefit) for loan losses	(30		)	6		109		161		(4		)	44			(166		)	—		120
Charge-offs	—			—		—		—		—			(18		)	—			—		(18		)
Recoveries	15			—		—		1		—			11			—			—		27
Ending balance	$	340		$	567	$	1,451	$	1,247	$	92		$	304		$	256		$	—	$	4,257


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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2018:



	One-to- four family			Multi- family			Commercial real estate			Construction		Land			Consumer (1)			Commercial business			Unallocated		Nine months ended 3/31/18
	(In thousands)
Allowance for loan losses:
Beginning balance	$	495		$	580		$	1,566		$	651	$	120		$	378		$	316		$	—	$	4,106
Provision (benefit) for loan losses	(199		)	(13		)	85			593		(28		)	(73		)	(65		)	—		300
Charge-offs	—			—			(200		)	—		—			(34		)	—			—		(234		)
Recoveries	44			—			—			3		—			33			5			—		85
Ending balance	$	340		$	567		$	1,451		$	1,247	$	92		$	304		$	256		$	—	$	4,257


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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017:



	One-to- four family			Multi- family		Commercial real estate			Construction		Land		Consumer (1)			Commercial business		Unallocated		Three months ended 3/31/17
	(In thousands)
Allowance for loan losses:
Beginning balance	$	768		$	430	$	1,268		$	480	$	103	$	517		$	295	$	—	$	3,861
Provision (benefit) for loan losses	(228		)	111		121			151		26		(83		)	37		—		135
Charge-offs	—			—		(2		)	—		—		(62		)	—		—		(64		)
Recoveries	11			—		—			1		—		14			1		—		27
Ending balance	$	551		$	541	$	1,387		$	632	$	129	$	386		$	333	$	—	$	3,959


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

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2017:



	One-to- four family			Multi- family		Commercial real estate			Construction		Land		Consumer (1)			Commercial business			Unallocated		Nine months ended 3/31/17
	(In thousands)
Allowance for loan losses:
Beginning balance	$	798		$	454	$	1,333		$	271	$	75	$	516		$	332		$	—	$	3,779
Provision (benefit) for loan losses	(344		)	87		166			323		54		5			(6		)	—		285
Charge-offs	—			—		(112		)	—		—		(181		)	—			—		(293		)
Recoveries	97			—		—			38		—		46			7			—		188
Ending balance	$	551		$	541	$	1,387		$	632	$	129	$	386		$	333		$	—	$	3,959


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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2018:



	Recorded Investments		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded
One-to-four family	$	784	$	967	$	—
Home equity	270		283		—
Commercial business	291		367		—
With an allowance recorded
One-to-four family	$	2,709	$	2,719	$	94
Land	302		302		15
Home equity	222		222		39
Other consumer	15		15		15
Commercial business	40		42		16
Total
One-to-four family	$	3,493	$	3,686	$	94
Land	302		302		15
Home equity	492		505		39
Other consumer	15		15		15
Commercial business	331		409		16
Total	$	4,633	$	4,917	$	179

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and nine months ended March 31, 2018:



	Three Months Ended March 31, 2018				Nine Months Ended March 31, 2018
	Three Months Ended March 31, 2018				Nine Months Ended March 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	1,459	$	1	$	1,301	$	3
Commercial real estate	—		—		996		—
Home equity	274		1		285		4
Commercial business	177		2		449		6
With an allowance recorded
One-to-four family	$	2,568	$	31	$	2,960	$	93
Land	304		7		307		14
Home equity	148		3		242		8
Other consumer	16		—		8		—
Commercial business	163		—		32		—
Total
One-to-four family	$	4,027	$	32	$	4,261	$	96
Commercial real estate	—		—		996		—
Land	304		7		307		14
Home equity	422		4		527		12
Other consumer	16		—		8		—
Commercial business	340		2		481		6
Total	$	5,109	$	45	$	6,580	$	128

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and nine months ended March 31, 2017:



	Three Months Ended March 31, 2017				Nine Months Ended March 31, 2017
	Three Months Ended March 31, 2017				Nine Months Ended March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded
One-to-four family	$	2,186	$	14	$	2,257	$	42
Commercial real estate	202		—		260		—
Land	169		2		171		7
Home equity	73		1		70		2
Commercial business	239		3		239		10
With an allowance recorded
One-to-four family	$	4,527	$	38	$	5,508	$	115
Land	315		7		315		15
Home equity	334		3		315		10
Commercial business	68		—		75		1
Total
One-to-four family	$	6,713	$	52	$	7,765	$	157
Commercial real estate	202		—		260		—
Land	484		9		486		22
Home equity	407		4		385		12
Commercial business	307		3		314		11
Total	$	8,113	$	68	$	9,210	$	202

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2018:



	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	340	$	567	$	1,451	$	1,247	$	92	$	304	$	256	$	—	$	4,257
Ending balance: individually evaluated for impairment	94		—		—		—		15		54		16		—		179
Ending balance: collectively evaluated for impairment	$	246	$	567	$	1,451	$	1,247	$	77	$	250	$	240	$	—	$	4,078

Loans receivable:
Ending balance	$	62,788	$	58,847	$	152,928	$	85,247	$	6,234	$	17,357	$	20,575	$	—	$	403,976
Ending balance: individually evaluated for impairment	3,493		—		—		—		302		507		331		—		4,633
Ending balance: collectively evaluated for impairment	$	59,295	$	58,847	$	152,928	$	85,247	$	5,932	$	16,850	$	20,244	$	—	$	399,343


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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	One-to-four family		Multi- family		Commercial real estate		Construction		Land		Consumer(1)		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance	$	495	$	580	$	1,566	$	651	$	120	$	378	$	316	$	—	$	4,106
Ending balance: individually evaluated for impairment	143		—		—		—		22		32		1		—		198
Ending balance: collectively evaluated for impairment	$	352	$	580	$	1,566	$	651	$	98	$	346	$	315	$	—	$	3,908

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


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

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

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



	March 31, 2018		June 30, 2017
	(In thousands)
One-to-four family	$	682	$	1,170
Commercial	—		1,992
Home equity	216		242
Commercial business	268		300
Total	$	1,166	$	3,704

There were no loans past due 90 days or more and still accruing interest at March 31, 2018 and June 30, 2017.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class of loan, as of March 31, 2018:



	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due ⁽¹⁾		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	97	$	—	$	682	$	779	$	62,009	$	62,788
Multi-family	—		—		—		—		58,847		58,847
Commercial real estate	—		—		—		—		152,928		152,928
Construction	—		—		—		—		85,247		85,247
Land	—		—		—		—		6,234		6,234
Home equity	—		—		216		216		13,093		13,309
Credit cards	1		—		—		1		2,345		2,346
Automobile	—		—		—		—		392		392
Other consumer	9		5		—		14		1,296		1,310
Commercial business	—		—		268		268		20,307		20,575
Total	$	107	$	5	$	1,166	$	1,278	$	402,698	$	403,976


	⁽¹⁾ Includes loans on nonaccrual status.

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



	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due ⁽¹⁾		Total Past Due		Current		Total Loans
	(In thousands)
One-to-four family	$	15	$	—	$	1,170	$	1,185	$	58,550	$	59,735
Multi-family	—		—		—		—		60,500		60,500
Commercial real estate	187		—		1,992		2,179		153,346		155,525
Construction	—		—		—		—		49,151		49,151
Land	—		—		—		—		8,054		8,054
Home equity	16		4		242		262		13,729		13,991
Credit cards	13		—		—		13		2,583		2,596
Automobile	—		—		—		—		627		627
Other consumer	—		8		—		8		1,516		1,524
Commercial business	107		—		300		407		31,196		31,603
Total	$	338	$	12	$	3,704	$	4,054	$	379,252	$	383,306

⁽¹⁾ Includes loans on nonaccrual status.

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

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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

A loan classified as Watch may have the following characteristics:


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


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


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


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

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

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


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

•

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


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


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


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

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

A loan classified as Substandard may have the following characteristics:


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


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


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

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

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


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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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

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

A loan classified as a Loss has the following characteristics:


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


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


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

The following table presents the internally assigned grade as of March 31, 2018, by class of loans:



	One-to- four family		Multi- family		Commercial real estate		Construction		Land		Home equity		Credit cards		Automobile		Other consumer		Commercial business		Total
	(In thousands)
Grade:
Pass	$	61,174	$	58,330	$	151,441	$	85,247	$	6,234	$	12,643	$	2,345	$	392	$	1,304	$	19,835	$	398,945
Watch	695		517		1,487		—		—		300		1		—		—		472		3,472
Special Mention	249		—		—		—		—		150		—		—		6		—		405
Substandard	670		—		—		—		—		216		—		—		—		268		1,154
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Total	$	62,788	$	58,847	$	152,928	$	85,247	$	6,234	$	13,309	$	2,346	$	392	$	1,310	$	20,575	$	403,976

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



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

Troubled Debt Restructures. A troubled debt restructure ("TDR") is a loan where the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider so that the borrower can continue to make payments while minimizing the Company's potential loss. The modifications have included items such as lowering the interest rate on the loan for a period of time and extending the maturity date of the loan. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in the Bank's best interest. At March 31, 2018, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents TDRs by accrual versus nonaccrual status and by loan class as of March 31, 2018:



	March 31, 2018
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	2,811	$	113	$	2,924
Land	302		—		302
Home equity	126		—		126
Other consumer	15		—		15
Commercial business	63		—		63
Total	$	3,317	$	113	$	3,430

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



	June 30, 2017
	Accrual Status		Nonaccrual Status		Total Modifications
	(In thousands)
One-to-four family	$	3,622	$	131	$	3,753
Land	311		—		311
Home equity	169		—		169
Commercial business	87		—		87
Total	$	4,189	$	131	$	4,320

There were no new TDR loans, or renewals or modifications of existing TDR loans during the three and nine months ended March 31, 2018.

For both the three and nine months ended March 31, 2018 and 2017, there were no TDRs for which there was a payment default within 12 months of their restructure.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 - Real Estate Owned, net

The following table is a summary of REO activity for the three and nine months ended March 31, 2018 and 2017:



	Three Months Ended March 31,						Nine Months Ended March 31,
	Three Months Ended March 31,						Nine Months Ended March 31,
	2018			2017			2018			2017
	(In thousands)
Balance at the beginning of the period	$	3,346		$	103		$	867		$	373
Net loans transferred to real estate owned	—			130			1,786			298
Capitalized improvements	—			—			823			—
Sales	(2,772		)	(33		)	(2,887		)	(510		)
Gain on sale of REO	163			20			148			59
Balance at the end of the period	$	737		$	220		$	737		$	220

At March 31, 2018, there were no loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

Note 8 - Employee Benefit Plans

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

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

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

Compensation expense related to the ESOP for the three months ended March 31, 2018 and 2017 was $43,000 and $45,000, respectively. For the nine months ended March 31, 2018 and 2017 compensation expense related to the ESOP was $129,000 and $133,000, respectively.

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



	March 31, 2018		June 30, 2017
	(Dollars in thousands)
Allocated shares	51,791		46,631
Unallocated shares	50,209		55,369
Total ESOP shares	102,000		102,000
Fair value of unallocated shares	$	1,241	$	1,387

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9 - Fair Value Measurements

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

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

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

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

There were no transfers between Level 1, Level 2, or Level 3 during the nine months ended March 31, 2018. The following tables show the Company's assets and liabilities at the dates indicated measured at fair value on a recurring basis:



	March 31, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	158	$	—	$	158
Mortgage-backed securities:
FHLMC	—		10,461		—		10,461
FNMA	—		7,666		—		7,666
GNMA	—		429		—		429



	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Municipal bonds	$	—	$	165	$	—	$	165
Mortgage-backed securities:
FHLMC	—		11,103		—		11,103
FNMA	—		9,363		—		9,363
GNMA	—		539		—		539

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

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balances of assets measured at fair value on a nonrecurring basis at March 31, 2018:



	March 31, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	2,924	$	2,924
Land	—		—		302		302
Home equity	—		—		222		222
Other consumer	—		—		7		7
Commercial business	—		—		40		40
Total impaired loans	—		—		3,495		3,495

Total	$	—	$	—	$	3,495	$	3,495

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



	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans:
Mortgage loans
One-to-four family	$	—	$	—	$	4,227	$	4,227
Construction	—		—		262		262
Land	—		—		311		311
Commercial business	—		—		23		23
Total impaired loans	—		—		4,823		4,823

Total	$	—	$	—	$	4,823	$	4,823

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2018 and June 30, 2017:



	March 31, 2018
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	3,495	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 10% (5%)



	June 30, 2017
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average Discount)
	(Dollars in thousands)
Impaired loans	$	4,823	Fair value of underlying collateral	Discount applied to the obtained appraisal	0% - 10% (3%)

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company's financial instruments as of March 31, 2018 and June 30, 2017:



	March 31, 2018
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	20,272	$	20,272	$	20,272	$	—	$	—
Securities available-for-sale	18,714		18,714		—		18,714		—
Securities held-to-maturity	3,740		3,682		—		3,682		—
FHLB stock	2,407		2,407		—		2,407		—
Loans receivable	402,830		393,275		—		—		393,275
Accrued interest receivable	1,459		1,459		—		1,459		—

Financial Instruments-Liabilities
Demand deposits, savings and money market	$	200,609	$	200,609	$	200,609	$	—	$	—
Certificates of deposit	159,610		159,435		—		159,435		—
FHLB advances	46,000		45,680		—		45,680		—
Advance payments by borrowers for taxes and insurance	2,144		2,144		2,144		—		—

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	June 30, 2017
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Instruments-Assets
Cash and cash equivalents	$	14,194	$	14,194	$	14,194	$	—	$	—
Securities available-for-sale	21,170		21,170		—		21,170		—
Securities held-to-maturity	4,949		4,954		—		4,954		—
FHLB stock	2,348		2,348		—		2,348		—
Loans held for sale	1,551		1,551		1,551		—		—
Loans receivable	382,014		374,599		—		—		374,599
Accrued interest receivable	1,332		1,332		—		1,332		—

Financial Instruments-Liabilities
Demand deposits, savings and money market	$	200,678	$	200,678	$	200,678	$	—	$	—
Certificates of deposit	144,509		144,854		—		144,854		—
FHLB advances	45,500		45,226		—		45,226		—
Advance payments by borrowers for taxes and insurance	1,195		1,195		1,195		—		—

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

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

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

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

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

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

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.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 - Stock-Based Compensation

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

As of March 31, 2018, awards for restricted stock totaling 87,572 were outstanding and no stock options were granted. Awarded shares of restricted stock typically vest over various periods as long as the director, advisory director, directors emeriti, officer or employee remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For the three and nine months ended March 31, 2018 total compensation expense for the Plan was $12,000 and $78,000, respectively, and the related income tax benefit was $3,000 and $22,000, respectively.

The following tables provide a summary of changes in non-vested restricted stock awards for the three and nine months ended March 31, 2018:



	For the Three Months Ended March 31, 2018
	For the Three Months Ended March 31, 2018
		Weighted-Average Grant Date Fair Value
	Shares	Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2018	7,456	$	25.75
Granted	—	—
Vested	—	—
Forfeited and canceled	—	—
Non-vested at March 31, 2018	7,456	25.75



	For the Nine Months Ended March 31, 2018
	For the Nine Months Ended March 31, 2018
			Weighted-Average Grant Date Fair Value
	Shares		Weighted-Average Grant Date Fair Value
Non-vested at July 1, 2017	38,424		$	25.75
Granted	—		—
Vested	(20,258	)	25.75
Forfeited and canceled	(10,710	)	25.03
Non-vested at March 31, 2018	7,456		25.75

As of March 31, 2018, there was $76,000 of total unrecognized compensation costs related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately three years.

ANCHOR BANCORP AND SUBSIDIARY

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 - Federal Income Taxes

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

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

As of March 31, 2018, the Condensed Consolidated Statements of Financial Condition included a net deferred tax asset of $4.6 million. The Company's primary deferred tax assets relate to the allowance for loan losses. The Company has prepared federal tax returns through June 30, 2017. At June 30, 2017 the net operating loss carryforward was $9.2 million which will begin to expire in 2031.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. Our policy is to evaluate our deferred tax assets on a quarterly basis and record a valuation allowance for our deferred tax asset if we do not have sufficient positive evidence indicating that it is more likely than not that some or all of the deferred tax asset will be realized. Each quarter, we consider positive evidence, which may include taxes paid in carryback years, reversing timing differences, available tax planning strategies, and projected taxable income and weigh it against negative evidence, which may include cumulative losses in the most recent three year period and uncertainty regarding short-term future earnings, among other items. At March 31, 2018, management determined that no valuation allowance on the deferred tax asset was required. This determination was based on sufficient positive evidence associated with our return to profitability, demonstrated through cumulative earnings over the recent three year period, strong quarterly income, and our projections for future taxable income.

Note 12 - Agreement and Plan of Merger

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

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

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

On April 2, 2018, Washington Federal and the Company entered into Amendment No. 2 ("Amendment No. 2") to the Merger Agreement. Amendment No. 2 allows the Company and its representatives, notwithstanding any provision of the Merger Agreement or any amendment thereto, the right to solicit, pursue and otherwise take all action to facilitate a possible alternative transaction with a party other than Washington Federal for a 120 day period beginning on April 2, 2018 and ending on July 31, 2018. Amendment No. 2 also includes the right to terminate the Agreement during that period, upon the acceptance by Anchor of a non-binding letter of intent for an alternative transaction, without the payment of any termination fee or other penalty to Washington Federal. Amendment No. 2 also extends from June 30, 2018 to August 31, 2018 the date after which either party may elect to terminate the Merger Agreement if the Merger has not yet been completed and leaves in place the three additional extension periods that were previously agreed to.

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.

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

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

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


•	the Merger Agreement with Washington Federal, Inc. may be terminated in accordance with its terms, and the Merger may not be completed;


•	termination of the Merger Agreement could negatively impact us;


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


•	the Merger Agreement limits our ability to pursue an alternative acquisition proposal and requires us to pay a termination fee under limited circumstances relating to alternative acquisition proposals;


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


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


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


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


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

•

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


•	our ability to attract and retain deposits;


•	increases in premiums for deposit insurance;


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


•	our ability to control operating costs and expenses;


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


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


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


•	disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;


•	our ability to retain key members of our senior management team and our ability to attract, motivate and retain qualified personnel;


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


•	our ability to manage loan delinquency rates;


•	increased competitive pressures among financial services companies;


•	changes in consumer spending, borrowing and savings habits;


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


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


•	our ability to pay dividends on our common stock;


•	adverse changes in the securities markets;


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


•	changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues

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and details of the implementation of new accounting methods including relating to fair value accounting and loan loss reserve requirements; and


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

Some of these and other factors are discussed in our 2017 Form10-K under Item 1A. “Risk Factors.” Such developments could have an adverse impact on our financial position and results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Because of these and other uncertainties, our actual results for fiscal year 2018 and beyond may differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity, operating results and stock price performance.

Background and Overview

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

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

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

Critical Accounting Estimates and Related Accounting Policies

We use estimates and assumptions in our consolidated financial statements in accordance with generally accepted accounting principles. Management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the determination of the allowance for loan losses and the associated provision for loan losses, deferred income taxes and the associated income tax expense, as well as valuation of real estate owned. Management reviews the allowance for loan losses for

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

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

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

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, we carried no valuation allowance at March 31, 2018. The tax provision for the period is equal to the net change in the net deferred tax asset from the beginning to the end of the period, less amounts applicable to the change in value related to securities available-for-sale. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from REO, deferred loan fees and costs, and loan loss reserves.

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

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

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Comparison of Financial Condition at March 31, 2018 and June 30, 2017

General. Total assets increased by $17.7 million, or 3.8%, to $480.2 million at March 31, 2018 from $462.5 million at June 30, 2017. The increase in assets during this period was primarily a result of a $20.7 million, or 5.5% increase in loan receivable, net, to $398.6 million at March 31, 2018 from $377.9 million at June 30, 2017. Cash and cash equivalents increased $6.1 million, or 42.8%, to $20.3 million at March 31, 2018 from $14.2 million at June 30, 2017. Partially offsetting these increases was a $3.4 million, or 42.7%, decrease in our deferred tax asset, net, to $4.6 million at March 31, 2018 from $8.0 million at June 30, 2017 primarily due to a one-time revaluation adjustment of $2.4 million to our deferred tax assets and tax liabilities to account for future corporate tax rates resulting from the Tax Act. Further, loans held for sale decreased to none at March 31, 2018 from $1.5 million at June 30, 2017. Total liabilities increased $17.3 million, or 4.4%, to $414.0 million at March 31, 2018 compared to $396.7 million at June 30, 2017 primarily as the result of an increase in total deposits of $15.0 million, or 4.4%. In addition, we had an increase of $949,000 for advance payments by borrowers for taxes and insurance and an increase of $500,000 for FHLB borrowings.

Assets. The following table details the increases and decreases in the composition of the Company's assets from June 30, 2017 to March 31, 2018:



	Balance at March 31, 2018		Balance at June 30, 2017		Increase/(Decrease)
	Balance at March 31, 2018		Balance at June 30, 2017		Amount			Percent
	(Dollars in thousands)
Cash and cash equivalents	$	20,272	$	14,194	$	6,078		42.8	%
Securities, available-for-sale	18,714		21,170		(2,456		)	(11.6	)
Securities, held-to-maturity	3,740		4,949		(1,209		)	(24.4	)
Loans receivable, net of allowance for loan losses	398,573		377,908		20,665			5.5
Real estate owned, net	737		867		(130		)	(15.0	)

Cash and cash equivalents increased by $6.1 million, or 42.8%, to $20.3 million at March 31, 2018, from $14.2 million at June 30, 2017 due to an increase in deposits.

Securities available-for-sale decreased $2.5 million, or 11.6%, to $18.7 million at March 31, 2018 from $21.2 million at June 30, 2017. Securities held-to-maturity decreased $1.2 million or 24.4%, to $3.7 million at March 31, 2018 from $4.9 million at June 30, 2017. Our securities portfolios are almost entirely comprised of mortgage-backed securities. The decreases in these portfolios were primarily the result of contractual principal repayments.

Loans receivable, net, increased $20.7 million, or 5.5%, to $398.6 million at March 31, 2018 from $377.9 million at June 30, 2017 due primarily to increases in construction loans and, to a lesser extent, one-to-four family loans. Construction loans increased $36.0 million, or 73.4%, to $85.2 million at March 31, 2018 from $49.2 million at June 30, 2017. There was $36.7 million in undisbursed construction loan commitments at March 31. 2018. Our construction loans are primarily for the construction of multi-family properties and to a lesser extent, loans for the construction of single family and commercial properties. One-to-four family loans increased $3.1 million, or 5.1%, to $62.8 million at March 31, 2018 from $59.7 million at June 30, 2017. All other loan categories decreased. Commercial business loans decreased $11.0 million, or 34.9%, to $20.6 million at March 31, 2018 from $31.6 million at June 30, 2017 primarily related to the payoff of a $9.0 million participation loan. Commercial real estate loans decreased $2.6 million, or 1.7%, to $152.9 million at December 31, 2017 from $155.5 million at June 30, 2017. During the nine months ended March 31, 2018 we also reclassified a $2.0 million multi-tenant commercial real estate loan to real estate owned ("REO") and recorded a $200,000 charge upon transfer to reflect its fair market value. Land loans decreased $1.8 million, or 22.6%, to $6.2 million at March 31, 2018 from $8.1 million at June 30, 2017. Multi-family loans decreased $1.6 million, or 2.7%, to $58.9 million at March 31, 2018 from $60.5 million at June 30, 2017. Consumer loans decreased $1.4 million, or 7.4%, to $17.3 million at December 31, 2017 from $18.7 million at June 30, 2017.

Total delinquent loans (past due 30 days or more), decreased $2.8 million to $1.3 million at March 31, 2018 from $4.1 million at June 30, 2017 primarily due to the transfer of the $2.0 million commercial real estate loan discussed above to REO at a fair market value of $1.8 million. Nonperforming loans, consisting solely of nonaccrual loans and primarily of one-to-four family loans, totaled $1.2 million at March 31, 2018 as compared to $3.7 million at June 30, 2017. Total classified loans consisting

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solely of substandard loans decreased $2.5 million, or 68.9%, to $1.2 million at March 31, 2018 from $3.7 million at June 30, 2017. The percentage of nonperforming loans, to total loans decreased to 0.3% at March 31, 2018 from 1.0% at June 30, 2017.

As of March 31, 2018, the Company had two REO properties with an aggregate book value of $737,000 compared to three properties with an aggregate book value of $867,000 at June 30, 2017. During the quarter ended March 31, 2018, we sold the $2.0 million commercial real estate property discussed above at a gain on sale of $163,000, net of capital improvements incurred subsequent to its transfer to REO.

Liabilities. Total liabilities increased $17.3 million between June 30, 2017 and March 31, 2018. Deposits increased $15.0 million, or 4.4%, to $360.2 million at March 31, 2018 from $345.2 million at June 30, 2017, primarily due to a $15.1 million increase in certificates of deposit and a $7.1 million increase in demand deposits, partially offset by a $8.8 million decrease in money market accounts. The increase in certificates of deposit accounts was the result of the Bank's deposit marketing campaign as well as other deposit gathering activities. In addition, we had an increase of $949,000 for advance payments by borrowers for taxes and insurance and an increase of $500,000 for FHLB borrowings.

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



	Balance at March 31, 2018		Balance at June 30, 2017		Increase/(Decrease)
	Balance at March 31, 2018		Balance at June 30, 2017		Amount			Percent
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	57,767	$	52,606	$	5,161		9.8	%
Interest-bearing demand deposits	33,446		31,464		1,982			6.3
Money market accounts	64,344		73,154		(8,810		)	(12.0	)
Savings deposits	45,052		43,454		1,598			3.7
Certificates of deposit	159,610		144,509		15,101			10.4
Total deposit accounts	$	360,219	$	345,187	$	15,032		4.4	%

Stockholders' Equity. Total stockholders' equity increased $402,000, or 0.6%, to $66.3 million at March 31, 2018 from $65.9 million at June 30, 2017 primarily due to net income of $1.0 million, which was partially offset by a $317,000 increase in other comprehensive loss, net of tax, and the $249,000 repurchase of 10,000 shares of stock at a price of $24.85 per share.

Comparison of Operating Results for the Three and Nine Months Ended March 31, 2018 and 2017

General. Net income for the three months ended March 31, 2018 was $1.4 million or $0.57 per diluted share compared to net income of $702,000 or $0.29 per diluted share for the three months ended March 31, 2017. For the nine months ended March 31, 2018 the net income was $1.0 million or $0.42 per diluted share compared to net income of $1.7 million per $0.70 per diluted share for the same period last year. The revaluation of the Company's deferred tax asset due to the Tax Act resulted in a $2.4 million charge to the Company's income tax expense for the nine months ended March 31, 2018.

Net Interest Income. Net interest income before the provision for loan losses increased $427,000, or 10.2%, to $4.6 million for the quarter ended March 31, 2018 compared to $4.2 million for the same period last year primarily due to the increase in average loans receivable, net. Average loans receivable, net, for the quarter ended March 31, 2018 increased $28.1 million, or 7.5%, to $402.1 million compared to $374.0 million for the quarter ended March 31, 2017. For the nine months ended March 31, 2018 net interest income before the provision for loan losses increased $1.1 million, or 9.1%, to $13.5 million from $12.4 million for the same period in 2017 primarily due to the increase in average loans receivable, net.

The Company's net interest margin increased 18 basis points to 4.28% for the quarter ended March 31, 2018 compared to 4.10% for the quarter ended March 31, 2017. The average yield on loans receivable, net, increased 29 basis points to 5.49% for the quarter ended March 31, 2018 compared to 5.20% for the same period of the prior year, reflecting the increase in higher yielding construction loan and the repricing of variable rate loans to higher interest rates. The average yield on average mortgage-backed securities during the three months ended March 31, 2018 increased to 2.06% from 1.98% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. The average yield on interest-earning assets increased 34 basis points to 5.26% from 4.92% for the quarters ended March 31, 2018 and 2017, respectively. The average cost of total deposits increased 13 basis points to 1.14% for the quarter ended March 31, 2018 compared to 1.01% for the same period in the prior year. The average cost of interest-bearing liabilities increased 19

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basis points to 1.22% for the quarter ended March 31, 2018 compared to 1.03% for the same period in the prior year, reflecting the increases in interest rates over the last year.

The following table sets forth the changes to our net interest income for the three months ended March 31, 2018 compared to the same period in 2017. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.



	Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	294		$	365		$	659
Mortgage-backed securities	5			(18		)	(13		)
Investment securities, FHLB stock and cash and cash equivalents	8			(6		)	2
Total net change in income on interest-earning assets	$	307		$	341		$	648
Interest-bearing liabilities:
Savings deposits	$	(1	)	$	—		$	(1	)
Interest-bearing demand deposits	—			1			1
Money market accounts	(2		)	(32		)	(34		)
Certificates of deposit	3			168			171
FHLB advances	65			19			84
Total net change in expense on interest-bearing liabilities	65			156			221
Net change in net interest income	$	242		$	185		$	427

For the nine months ended March 31, 2018, the Company's net interest margin increased nine basis points to 4.23% compared to 4.14% for the same period in 2017, reflecting the increase in the average balance of loans receivable, net. The average yield on loans receivable, net, increased 17 basis points to 5.41% for the nine months ended March 31, 2018 compared to 5.24% for the same period of the prior year, reflecting the increase in higher yielding construction loan and the repricing of variable rate loans to higher interest rates. The average yield on average mortgage-backed securities during the nine months ended March 31, 2018 increased modestly to 2.08% from 2.07% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. The average yield on interest-bearing assets increased 22 basis point to 5.16% for the nine months ended March 31, 2018 compared to 4.94% for the same period in the prior year. The average cost of interest-bearing liabilities increased 16 basis points to 1.17% for the nine months ended March 31, 2018 compared to 1.01% for the same period of the prior year, reflecting the increases in interest rates over the last year.

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The following table sets forth the changes to our net interest income for the nine months ended March 31, 2018 compared to the same period in 2017:



	Nine Months Ended March 31, 2018 Compared to Nine Months Ended March 31, 2017
	Increase (Decrease) Due to
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, including fees	$	490		$	1,279		$	1,769
Mortgage-backed securities	1			(64		)	(63		)
Investment securities, FHLB stock and cash and cash equivalents	23			(14		)	9
Total net change in income on interest-earning assets	$	514		$	1,201		$	1,715
Interest-bearing liabilities:
Savings deposits	$	—		$	—		$	—
Interest-bearing demand deposits	(1		)	2			1
Money market accounts	61			(16		)	45
Certificates of deposit	34			463			497
FHLB advances	103			(62		)	41
Total net change in expense on interest-bearing liabilities	197			387			584
Net change in net interest income	$	317		$	814		$	1,131

Interest Income. Total interest income for the three months ended March 31, 2018 increased $648,000, or 12.9%, to $5.7 million from $5.0 million for the three months ended March 31, 2017. The increase during the period was primarily attributable to increases in the average balance and yield of loans receivable, net. Average loans receivable, net, increased $28.1 million or 7.5% during the quarter ended March 31, 2018 compared to the same quarter last year. The average yield on loans receivable, net, increased 29 basis points to 5.49% during the three months ended March 31, 2018 compared to 5.20% for the same period in the prior year primarily due to the increase in construction loans and the repricing of variable rate loans to higher interest rates. Average mortgage-backed securities declined $3.6 million during the three months ended March 31, 2018 compared to the same period in the prior year. The average yield on mortgage-backed securities increased eight basis points to 2.06% for the three months ended March 31, 2018 compared to 1.98% for the same period in the prior year primarily due to a decrease of large principal pay downs resulting in a decrease in amortization of premiums. Average interest-earning assets increased $22.8 million, or 5.6%, to $431.4 million for the three months ended March 31, 2018 compared to $408.6 million for the same period in 2017.

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The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018				2017				Increase/(Decrease) in Interest and Dividend Income from 2017
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	$	402,127	5.49	%	$	374,053	5.20	%	$	659
Mortgage-backed securities	23,072		2.06		26,646		1.98		(13		)
Investment securities	159		5.03		169		7.10		(1		)
FHLB stock	2,587		3.56		2,266		3.18		5
Cash and cash equivalents	3,437		0.70		5,476		0.58		(2		)
Total interest-earning assets	$	431,382	5.26	%	$	408,610	4.92	%	$	648


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

For the nine months ended March 31, 2018, total interest income increased $1.7 million, or 11.6%, to $16.5 million from $14.8 million for the nine months ended March 31, 2017. The increase during the period was primarily attributable to the increase in the average balance on loans receivable, net. The average yield on loans receivable, net, increased 17 basis points to 5.41% for the nine months ended March 31, 2018 compared to 5.24% for the same period in the prior year primarily due to the increase in construction loans and the repricing of variable rate loans to higher interest rates. Average loans receivable, net, increased $32.5 million or 9.0% during the nine months ended March 31, 2018 compared to the same period in the prior year. Average mortgage-backed securities declined $4.1 million during the nine months ended March 31, 2018 compared to the same period in the prior year. The average yield on mortgage-backed securities increased modestly to 2.08% for the nine months ended March 31, 2018 compared to 2.07% for the same period in the prior year. Average interest-earning assets increased $27.0 million, or 6.8%, to $425.8 million for the nine months ended March 31, 2018 compared to $398.8 million for the same period in 2017.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the nine months ended March 31, 2018 and 2017:



	Nine Months Ended March 31,
	2018				2017				Increase/(Decrease) in Interest and Dividend Income from 2017
	Average Balance		Yield		Average Balance		Yield
	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	$	395,156	5.41	%	$	362,626	5.24	%	$	1,769
Mortgage-backed securities	24,122		2.08		28,256		2.07		(63		)
Investment securities	161		5.80		171		6.24		(1		)
FHLB stock	2,276		3.46		2,536		3.05		1
Cash and cash equivalents	4,073		0.79		5,186		0.39		9
Total interest-earning assets	$	425,788	5.16	%	$	398,775	4.94	%	$	1,715


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

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Interest Expense. Interest expense increased $221,000, or 26.5% to $1.1 million for the three months ended March 31, 2018 as compared to $835,000 for the three months ended March 31, 2017. The increase during the period was primarily attributable to the increase in the average balance of both certificates of deposit and interest bearing demand deposits. The average balance of certificates of deposit increased $34.7 million, or 29.5%, to $152.4 million during the quarter ended March 31, 2018 compared to $117.7 million for the same quarter last year. The average balance of interest bearing demand deposits increased $5.6 million, or 19.9%, to $33.5 million for the three months ended March 31, 2018 compared to $28.0 million for the same period of the prior year. The average balance of money market accounts decreased $24.2 million, or 27.2%, to $64.6 million for the three months ended March 31, 2018 compared to $88.8 million for the same period of the prior year, reflecting our customers' preference for higher yielding certificates of deposit. Average interest-bearing liabilities increased $22.9 million, or 7.1%, to $346.6 million for the three months ended March 31, 2018 compared to $323.7 million for the same period in 2017 primarily due to the increase in deposits which we utilized to fund our loan growth.

The following table details average balances, cost of funds and the change in interest expense for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018				2017				Increase/(Decrease) in Interest Expense from 2017
	Average Balance		Cost		Average Balance		Cost		Increase/(Decrease) in Interest Expense from 2017
	(Dollars in thousands)
Savings deposits	$	44,686	0.14	%	$	44,632	0.15	%	$	(1	)
Interest-bearing demand deposits	33,528		0.05		27,964		0.04		1
Money market deposits	64,586		0.51		88,760		0.53		(34		)
Certificates of deposit	152,414		1.95		117,691		1.94		171
FHLB advances	51,419		1.64		44,663		1.14		84
Total interest-bearing liabilities	$	346,633	1.22	%	$	323,710	1.03	%	$	221

For the nine months ended March31, 2018 interest expense increased $584,000, or 24.4%, to $3.0 million from $2.4 million for the nine months ended March 31, 2017. The increase during the period was primarily attributable to the increase in the average balance of both certificates of deposit and interest bearing demand deposits. The average balance of certificates of deposit increased $31.7 million, or 27.1%, to $148.7 million for the nine months ended March 31, 2018 compared to $117.0 million for the same period in 2017. The average balance of interest bearing demand deposits increased $6.1 million, or 21.7%, to $34.3 million for the nine months ended March 31, 2018 compared to $28.2 million for the same period in 2017. The average balance of money market deposits decreased $5.6 million, or 7.5%, to $70.0 million for the nine months ended March 31, 2018 compared to $75.6 million for the same period of the prior year. Average interest-bearing liabilities increased $24.8 million, or 7.8%, to $341.2 million for the nine months ended March 31, 2018 compared to $316.4 million for the same period in 2017.

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The following table details average balances, cost of funds and the change in interest expense for the nine months ended March 31, 2018 and 2017:



	Nine Months Ended March 31,
	2018				2017				Increase/(Decrease) in Interest Expense from 2017
	Average Balance		Cost		Average Balance		Cost		Increase/(Decrease) in Interest Expense from 2017
	(Dollars in thousands)
Savings deposits	$	44,605	0.15	%	$	44,246	0.15	%	$	—
Interest-bearing demand deposits	34,307		0.04		28,186		0.04		1
Money market deposits	69,927		0.51		75,574		0.39		45
Certificates of deposit	148,746		1.98		117,026		1.95		497
FHLB advances	43,630		1.38		51,416		1.07		41
Total interest-bearing liabilities	$	341,215	1.17	%	$	316,448	1.01	%	$	584

Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a $120,000 provision for loan losses was required for the three months ended March 31, 2018 compared to $135,000 for the same period last year, primarily reflecting our recent loan growth. The provision for loan losses for the nine months ended March 31, 2018 was $300,000 compared to $285,000 for the same period last year.

Nonperforming loans decreased to $1.2 million at March 31, 2018, a decrease of $1.2 million from $2.4 million at March 31, 2017. The ratio of nonperforming loans to total loans was 0.3% at March 31, 2018 compared to 0.6% at March 31, 2017. Total classified loans decreased $1.4 million, or 56.4%, to $1.2 million at March 31, 2018 from $2.6 million at March 31, 2017. The allowance for loan losses of $4.3 million at March 31, 2018 represented 1.1% of total loans receivable and 365.1% of nonperforming loans. This compares to an allowance for loan losses of $4.1 million at June 30, 2017, representing 1.1% of total loans receivable and 110.8% of nonperforming loans.

Management considers the allowance for loan losses at March 31, 2018 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by our regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

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The following table details activity and information related to the allowance for loan losses at and for the three months ended March 31, 2018 and 2017:



	At or For the Three Months Ended March 31,
	At or For the Three Months Ended March 31,
	2018			2017
	(Dollars in thousands)
Provision for loan losses	$	120		$	135
Net (recoveries) charge-offs	(9		)	37
Allowance for loan losses	4,257			3,959
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.1		%	1.0		%
Nonaccrual and 90 days or more past due and still accruing interest	$	1,166		$	2,365
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	365.1		%	167.4		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.3		%	0.6		%
Total loans	$	403,976		$	384,227

The following table details activity and information related to the allowance for loan losses at and for the nine months ended March 31, 2018 and 2017:



	At or For the Nine Months Ended March 31,
	At or For the Nine Months Ended March 31,
	2018			2017
	(Dollars in thousands)
Provision for loan losses	$	300		$	285
Net charge-offs	149			105
Allowance for loan losses	4,257			3,959
Allowance for loan losses as a percentage of gross loans receivable at the end of the period	1.1		%	1.0		%
Nonaccrual and 90 days or more past due and still accruing interest	$	1,166		$	2,365
Allowance for loan losses as a percentage of nonperforming loans at the end of the period	365.1		%	167.4		%
Nonaccrual and 90 days or more past due loans still accruing interest as a percentage of loans receivable at the end of the period	0.3		%	0.6		%
Total loans	$	403,976		$	384,227

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 March 31, 2018 and March 31, 2017, we have identified 24 and 29 loans, respectively, with aggregate net principal balances of $3.4 million and $5.0 million, respectively, as TDRs. At March 31, 2018 and March 31, 2017, there were $113,000 and $477,000, respectively, of TDRs included in nonperforming loans. At March 31, 2018 the Company had REO with a book value of $737,000 compared to $867,000 at June 30, 2017.

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Noninterest Income. Noninterest income decreased $103,000, or 10.1%, to $920,000 for the quarter ended March 31, 2018 compared to $1.0 million for the same period a year ago. The following table provides a detailed analysis of the changes in the components of noninterest income for the three months ended March 31, 2018 compared to the same period in 2017:



	Three Months Ended March 31,				Increase (decrease)
	Three Months Ended March 31,				Increase (decrease)
	2018		2017		Amount			Percent
	(Dollars in thousands)
Deposit service fees	$	261	$	314	$	(53	)	(16.9	)%
Other deposit fees	193		185		8			4.3
Other loan fees	212		175		37			21.1
Gain on sale of loans	14		25		(11		)	(44.0	)
Bank owned life insurance investment	129		125		4			3.2
Other income	111		199		(88		)	(44.2	)
Total noninterest income	$	920	$	1,023	$	(103	)	(10.1	)%

The decrease in noninterest income was primarily attributable to the $88,000, or 44.2%, decrease in other income for the quarter ended March 31, 2018 to $111,000 compared to $199,000 for the same quarter a year ago primarily due to no loan prepayment penalties in the current quarter. Deposit related fees declined $53,000 as consumers reduced their deposit account overdrafts. These decreases were partially offset by an increase of $37,000, or 21.1%, to $212,000 for other loan fees.

The following table provides a detailed analysis of the changes in the components of noninterest income for the nine months ended March 31, 2018 compared to the same period in 2017:



	Nine Months Ended March 31,				Increase (decrease)
	Nine Months Ended March 31,				Increase (decrease)
	2018		2017		Amount			Percent
	(Dollars in thousands)
Deposit service fees	$	851	$	1,010	$	(159	)	(15.7	)%
Other deposit fees	580		558		22			3.9
Other loan fees	612		618		(6		)	(1.0	)
Gain on sale of loans	171		125		46			36.8
Bank owned life insurance investment	387		387		—			—
Other income	483		469		14			3.0
Total noninterest income	$	3,084	$	3,167	$	(83	)	(2.6	)%

Noninterest income decreased $83,000, or 2.6%, to $3.1 million for the nine months ended March 31, 2018 compared to $3.2 million during the nine months ended March 31, 2017. The decrease was primarily due to a $159,000, or 15.7%, decrease in deposit service fees as consumers reduced their deposit account overdrafts, partially offset by an increase of $46,000 from gain on sale of loans due to an increase in loans sold.

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Noninterest Expense. For the three months ended March 31, 2018, noninterest expense decreased $346,000, or 8.5%, to $3.7 million from $4.1 million for the three months ended March 31, 2017. The following table provides an analysis of the changes in the components of noninterest expense for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,						Increase (decrease)
	Three Months Ended March 31,						Increase (decrease)
	2018			2017			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	2,113		$	2,191		$	(78	)	(3.6	)%
General and administrative expenses	514			654			(140		)	(21.4	)
Merger expenses	22			—			22			—
Real estate holding costs	72			(1		)	73			(7,300.0	)
FDIC insurance premiums	55			14			41			292.9
Information technology	506			509			(3		)	(0.6	)
Occupancy and equipment	436			485			(49		)	(10.1	)
Deposit services	88			111			(23		)	(20.7	)
Marketing	99			130			(31		)	(23.8	)
Gain on sale of property, premises and equipment	(15		)	—			(15		)	—
Gain on sale of real estate owned	(163		)	(20		)	(143		)	715.0
Total noninterest expense	$	3,727		$	4,073		$	(346	)	(8.5	)%

The decrease in noninterest expense was primarily due to a $143,000, or 715.0% increase in gain on sale of real estate owned to $163,000 for the three months ended March 31, 2018 compared to $20,000 in the same quarter in the previous year. As discussed above, during the quarter ended March 31, 2018 we sold a $2.0 million commercial real estate REO property for $3.0 million, resulting in a gain on sale of $163,000, net of capital improvements incurred subsequent to its transfer to REO. General and administrative expenses declined $140,000 to $514,000 for the three months ended March 31, 2018 compared to $654,000 for the same period in 2017. This decrease was mainly due to no unfunded loan reserve commitment expense during the current quarter compared to a $75,000 unfunded loan reserve commitment expense in the quarter ended March 31, 2017, a $15,000 reduction in accounting fees, and a $15,000 decrease in contribution expense between the periods. Compensation and benefits expense decreased $78,000 or 3.6%, to $2.1 million for the quarter ended March 31, 2018 from $2.2 million for the same period in the previous year. The decrease was primarily due to a reduction of employee compensation of $130,000 to $1.2 million for the quarter ended March 31, 2018 from $1.3 million in the same quarter in the previous year due to a decline in full-time employees. Also, stock-based compensation expense related to the Anchor Bancorp 2015 Equity Plan decreased to $12,000 for the quarter ended March 31, 2018 from $132,000 for the same quarter last year and incentive loan commission decreased $55,000 from $130,000 for the same quarter last year. These decreases were partially offset by $180,000 for retention bonuses paid this quarter associated with the pending merger with Washington Federal, Inc.

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The following table provides an analysis of the changes in the components of noninterest expense for the nine months ended March 31, 2018 and 2017:



	Nine Months Ended March 31,						Increase (decrease)
	Nine Months Ended March 31,						Increase (decrease)
	2018			2017			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	6,418		$	6,797		$	(379	)	(5.6	)%
General and administrative expenses	1,660			2,223			(563		)	(25.3	)
Merger expenses	56			—			56			—
Real estate holding costs	138			37			101			273.0
FDIC insurance premiums	131			106			25			23.6
Information technology	1,533			1,534			(1		)	(0.1	)
Occupancy and equipment	1,305			1,433			(128		)	(8.9	)
Deposit services	292			350			(58		)	(16.6	)
Marketing	274			397			(123		)	(31.0	)
Gain on sale of property, premises and equipment	(10		)	—			(10		)	—
Gain on sale of real estate owned	(148		)	(59		)	(89		)	150.8
Total noninterest expense	$	11,649		$	12,818		$	(1,169	)	(9.1	)%

Noninterest expense decreased $1.2 million, or 9.1%, to $11.6 million in the nine months ended March 31, 2018 compared to $12.8 million for the nine months ended March 31, 2017. The decrease was primarily due to a $563,000 decrease in general and administrative expenses. This decrease was partially due to a $135,000 decline in unfunded loan commitment reserve expense, a $65,000 decrease in direct loan expense, a $45,000 decrease in stationery supplies, a $44,000 decline in consulting services, a $35,000 decrease in credit card expenses due to the efficiencies realized from our new credit card program, a $34,000 reduction in legal fees, and a $24,000 decrease in contribution expense. Compensation and benefits decreased $379,000, or 5.6%, to $6.4 million in the nine months ended March 31, 2018 compared to $6.8 million in the nine months ended March 31, 2017. The decrease was primarily due to a decrease of $309,000 in employee compensation from $4.1 million to $3.8 million due to a decline in full-time employees. In addition incentive loan commission decreased $120,000 to $265,000 from $385,000 for the same period last year. Also a factor for the reduction is a $425,000 decrease in stock-based compensation related to the Anchor Bancorp 2015 Equity Plan during the nine months ended March 31, 2018 partially offset by an increase in performance compensation of $417,000 for retention bonuses associated with the pending merger with Washington Federal, Inc. that had no related expense for the same period in 2017. For the nine months ended March 31, 2018 we expensed $56,000 associated with the pending merger with Washington Federal, Inc. compared to none for the same period ended March 31, 2017.

Income Taxes. The provision for income taxes was $299,000 and $3.6 million for the three and nine months ended March 31, 2018, respectively, compared to $300,000 and $746,000 for the three and nine months ended March 31, 2017, respectively. The effective tax rate was 17% and 78% for the three and nine months ended March 31, 2018, respectively, compared to 31% and 31% for the three and nine months ended March 31, 2017, respectively. The provision for income taxes and the effective tax rate was lower for the three months ended March 31, 2018 compared to the same period in prior year due to the Tax Act, which lowered the federal corporate income tax rate to 21%. Our fiscal year requires the use of a blended federal tax rate as prescribed by the Internal Revenue Code, which is 28.0% for our fiscal year ending June 30, 2018 and 21% thereafter.

The provision for income taxes and effective tax rate was higher for the nine months ended March 31, 2018 from the same period in the previous year primarily due to a one-time charge to the provision for income taxes of $2.4 million as a result of the Tax Act, which resulted in the Company revaluing its deferred tax assets and liabilities based upon the lower enacted federal corporate income tax rate. At March 31, 2018, the Company had a net deferred tax asset of $3.4 million compared to $8.0 million at June 30, 2017. As of March 31, 2018, management deemed that a net deferred tax asset valuation allowance related to the Company’s deferred tax asset was not necessary.

Liquidity, Commitments and Capital Resources

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

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

We believe that our current liquidity position is sufficient to fund all of our existing commitments. At March 31, 2018, the total approved loan origination commitments outstanding were $1.3 million and undisbursed construction loan commitments totaled $36.7 million. At the same date, unused lines of credit were $58.7 million.

For purposes of determining our liquidity position, we use the liquidity ratio, a regulatory measure of liquidity calculated as the total of net cash, short-term, and marketable assets divided by net deposits and short-term liabilities. Our Board of Directors has established a liquidity ratio target of 10%. For the three months ended March 31, 2018, our average liquidity ratio was 7.1%, which indicates we are below the liquidity standard set by our Board. Management believes the Bank's current liquidity position is adequate to meet foreseeable short and long term liquidity requirements.

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

Certificates of deposit scheduled to mature in one year or less at March 31, 2018 totaled $100.1 million. We had one brokered certificate of deposit for $5.0 million at March 31, 2018. Management's policy is to generally maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing deposits will remain with us. In addition, we had the ability to borrow an additional $113.3 million from the FHLB of Des Moines. We also have a line of credit with the Federal Reserve Bank of San Francisco for $1.3 million which is collateralized with securities and a line of credit with Pacific Coast Bankers' Bank, which we have the ability to borrow an additional $4.0 million.

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

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

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary sources of income are dividends from the Bank, ESOP loan payments and ESOP loan interest income. During the three month period ended March 31, 2018, the Bank did not pay a dividend to the Company. At March 31, 2018, the Company (on an unconsolidated basis) had liquid assets of $3.2 million.

Commitments and Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of our customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. Our maximum exposure to

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credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Collateral is not required to support commitments.

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

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

The following is a summary of commitments and contingent liabilities with off-balance sheet risks as of March 31, 2018:



	Amount of Commitment Expiration Per Period
	Total Amounts Committed ⁽²⁾		Due in One Year
	(In thousands)
Commitments to originate loans ⁽¹⁾	$	1,343	$	1,343
Undisbursed portion of construction loans	36,701		36,701
Total loan commitments	$	38,044	$	38,044

Lines of credit
Fixed rate ⁽³⁾	$	17,841	$	5,688
Adjustable rate	40,819		15,499
Undisbursed balance of lines of credit	$	58,660	$	21,187


⁽¹⁾	Interest rates on fixed rate loans are 6.0% to 19.75%.


⁽²⁾	At March 31, 2018 there was $301 in reserves for unfunded commitments.


⁽³⁾	Includes standby letters of credit.

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



Year Ended June 30,
Year Ended June 30,		Amount
		(In thousands)
2018		$31
2019		$86
2020		$36

Capital. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. As of March 31, 2018, the Bank exceeded all regulatory capital requirements with, Tier 1 Leverage-Based Capital, Common Equity Tier 1 Capital (CET1), Tier 1 Risk-Based Capital,

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and Total Risk-Based Capital ratios of 13.2%, 14.7%, 14.7%, and 15.8%, respectively. As of June 30, 2017 these ratios were 13.0%, 14.1%, 14.1%, and 15.1%, respectively. At March 31, 2018, the Bank met the requirements to be deemed "well-capitalized" under applicable regulatory guidelines.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of March 31, 2018, the conservation buffer was 1.875%.

Anchor Bancorp exceeded all regulatory capital requirements with Tier 1 Leverage-Based Capital, CET1, Tier 1 Risk- Based Capital and Total Risk-Based Capital ratios of 14.1%, 15.8%, 15.8%, and 16.8%, respectively, as of March 31, 2018. As of June 30, 2017, these ratios were 14.0%, 15.2%, 15.2% and 16.2%, respectively.

The Bank's actual capital amounts and ratios at March 31, 2018 are presented in the following table:



Anchor Bank									Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
					Minimum Capital Requirement
	Actual				Minimum Capital Requirement
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
March 31, 2018
Total capital (to risk-weighted assets)	$	65,781	15.8	%	$	33,407	8.0	%	$	41,759	10.0	%
Tier I capital (to risk-weighted assets)	$	61,524	14.7	%	$	25,055	6.0	%	$	33,407	8.0	%
Common equity tier 1 capital (to risk-weighted assets)	$	61,524	14.7	%	$	18,791	4.5	%	$	27,143	6.5	%
Tier I leverage capital (to average assets)	$	61,524	13.2	%	$	18,688	4.0	%	$	23,360	5.0	%

The actual regulatory capital amounts and ratios calculated for Anchor Bancorp as of March 31, 2018, were as follows:



Anchor Bancorp	Actual
	Amount		Ratio
	(Dollars in thousands)
March 31, 2018
Total capital (to risk-weighted assets)	$	70,320	16.8	%
Tier I capital (to risk-weighted assets)	$	66,063	15.8	%
Common equity tier 1 capital (to risk-weighted assets)	$	66,063	15.8	%
Tier I leverage capital (to average assets)	$	66,063	14.1	%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management and Market Risk

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


•	economic conditions;


•	interest rate outlook;


•	asset/liability mix;


•	interest rate risk sensitivity;


•	change in net interest income;


•	current market opportunities to promote specific products;


•	historical financial results;


•	projected financial results; and


•	capital position.

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

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

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


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


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


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

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

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

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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 March 31, 2018 that would occur upon an immediate change in interest rates based on our assumptions, but without giving effect to any steps that we might take to counteract that change. The net portfolio value is calculated based upon the present value of the discounted cash flows from assets and liabilities. The difference between the present value of assets and liabilities is the net portfolio value and represents the market value of equity for the given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how much equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.



	Net Portfolio Value							Net Portfolio as % of Portfolio Value of Assets
Basis Point Change in Rates	Net Portfolio Value							Net Portfolio as % of Portfolio Value of Assets				Market Value of Assets⁽⁴⁾
Basis Point Change in Rates	Amount		$ Change ⁽¹⁾			% Change		NPV Ratio ⁽²⁾		% Change ⁽³⁾		Market Value of Assets⁽⁴⁾
	(Dollars in thousands)
300	$	63,718	$	(1,041	)	(1.61	)%	14.36	%	0.46	%	$	443,586
200	64,508		(251		)	(0.39	)	14.30		0.40		451,097
100	64,965		206			0.32		14.17		0.26		458,586
Base	64,759		—			—		13.90		—		465,743
(100)	63,707		(1,052		)	(1.62	)	13.48		(0.42	)	472,485

___________



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

The following table illustrates the change in net interest income that would occur in the event of an immediate change in interest rates at March 31, 2018, but without giving effect to any steps that might be taken to counter the effect of that change in interest rates.



Basis Point Change in Rates	Net Interest Income
Basis Point Change in Rates	Amount		$ Change ⁽¹⁾			% Change
	(Dollars in thousands)
300	$	23,248	$	2,686		13.1	%
200	22,381		1,819			8.8
100	21,495		933			4.5
Base	20,562		—			—
(100)	19,275		(1,287		)	(6.3	)

⁽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

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer, and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2018, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.

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

(a) Not applicable

(b) Not applicable



				Total Number of Shares Repurchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet be Repurchased ⁽¹⁾
	Total Number of Shares Purchased	Average Price Paid per Share

Period

January 1 - January 31, 2018	5,000	$	24.85	5,000	30,000
February 1 - February 28, 2018	—	—		—	30,000
March 1 - March 31, 2018	—	—		—	30,000
	5,000	$	24.85	5,000


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

During the quarter ended March 31, 2018, the Company purchased 5,000 shares of the Company’s common stock at a cost of $24.85 per share of the 40,000 shares authorized in the November stock repurchase plan, leaving 30,000 shares available for future purchases.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

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Item 6. Exhibits



2.1	Agreement and Plan of Merger, dated as of April 11, 2017, by and between Washington Federal, Inc. and Anchor Bancorp (1)
2.2	Amendment No. 1 dated as of September 27, 2017, to the Agreement and Plan of Merger, dated as of April 11, 2017, by and between Washington Federal, Inc. and Anchor Bancorp (7)
2.3	Amendment No. 2 dated as of April 2, 2018, to the Agreement and Plan of Merger, dated as of April 11, 2017, by and between Washington Federal, Inc. and Anchor Bancorp (8)
3.1	Articles of Incorporation of the Registrant (2)
3.2	Amended and Restated Bylaws of the Registrant (3)
10.1	Form of Anchor Bank Employee Severance Compensation Plan (2)
10.2	Anchor Mutual Savings 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)
10.8	Anchor Bancorp, Inc. 2015 Equity Incentive Plan ("Equity Incentive Plan") (6)
10.9	Form of Incentive Stock Option Award Agreement under the Equity Incentive Plan (6)
10.10	Form of Non-Qualified Stock Option Award Agreement under the Equity Incentive Plan (6)
10.11	Form of Restricted Stock Award Agreement under the Equity Incentive Plan (6)
10.12	Form of Restricted Stock Unit Award Agreement under the Equity Incentive Plan (6)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements


(1)	Filed as an exhibit to the Company's Current Report on Form 8-K filed April 13, 2017.


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


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


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


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


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


(7)	Filed as an exhibit to the Company's Current Report on Form 8-K dated September 27, 2017.


(8)	Filed as an exhibit to the Company's Current Report on Form 8-K dated April 2, 2018.

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SIGNATURES

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



	ANCHOR BANCORP

Date: May 7, 2018	/s/Jerald L. Shaw
	Jerald L. Shaw
	President and Chief Executive Officer
	(Principal Executive Officer)


Date: May 7, 2018	/s/Terri L. Degner
	Terri L. Degner
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX



31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Income; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Cash Flows; and (5) Selected Notes to Condensed Consolidated Financial Statements

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