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EX-32 - EXHIBIT 32 - TIMBERLAND BANCORP INCtsbk-3312020x10qxexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - TIMBERLAND BANCORP INCtsbk-3312020x10qxexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - TIMBERLAND BANCORP INCtsbk-3312020x10qxexhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

OR

[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____.

Commission file number 000-23333

TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter) 
Washington 
91-1863696 
(State or other jurisdiction of incorporation or organization) 
(IRS Employer Identification No.) 
 
624 Simpson Avenue, Hoquiam, Washington 
98550
(Address of principal executive offices) 
(Zip Code)
(360) 533-4747
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $.01 par value
TSBK
The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 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_

As of April 30, 2020, there were 8,309,193 shares of the registrant's common stock, $.01 par value per share outstanding.



INDEX

 
 
Page
 
 
 
 
  Item 1.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.    
 
 
 
 
 
  Item 4.     
 
 
 
 
 
 
 
 
 
 
 
  Item 1.     
 
  
 
 
 
  Item 1A.     
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.     
 
 
 
 
 
  Item 4.
 
 
 
 
 
  Item 5.     
 
57 
 
 
 
 
  Item 6.     
 
 
 
 
 
 
Certifications 
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32
 
 
 
Exhibit 101
 


2


PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements (unaudited)

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2020 and September 30, 2019
(Dollars in thousands, except per share amounts)
 
March 31,
2020

 
September 30,
2019

 
(Unaudited)
 
*

Assets
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from financial institutions
$
22,862

 
$
25,179

Interest-bearing deposits in banks
145,286

 
117,836

Total cash and cash equivalents
168,148

 
143,015

 
 
 
 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)
82,472

 
78,346

Investment securities held to maturity, at amortized cost (estimated fair value $38,332 and $32,580)
36,667

 
31,102

Investment securities available for sale, at fair value
41,470

 
22,532

Investments in equity securities, at fair value
969

 
958

Federal Home Loan Bank of Des Moines (“FHLB”) stock
1,922

 
1,437

Other investments, at cost
3,000

 
3,000

Loans held for sale
5,798

 
6,071

Loans receivable, net of allowance for loan losses of $11,890 and $9,690
907,657

 
886,662

Premises and equipment, net
23,072

 
22,830

Other real estate owned (“OREO”) and other repossessed assets, net
1,623

 
1,683

Accrued interest receivable
3,595

 
3,598

Bank owned life insurance (“BOLI”)
21,299

 
21,005

Goodwill
15,131

 
15,131

Core deposit intangible (“CDI”), net
1,828

 
2,031

Servicing rights, net
2,724

 
2,408

Operating lease right-of-use ("ROU") assets
2,759

 

Other assets
2,967

 
5,323

Total assets
$
1,323,101

 
$
1,247,132

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities
 

 
 

Deposits:
 
 
 
     Non-interest-bearing demand
$
316,328

 
$
296,472

     Interest-bearing
809,320

 
771,755

Total deposits
1,125,648

 
1,068,227

 
 
 
 
FHLB borrowings
10,000

 

Operating lease liabilities
2,759

 

Other liabilities and accrued expenses
6,686

 
7,838

Total liabilities
1,145,093

 
1,076,065

* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements

3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
March 31, 2020 and September 30, 2019
(Dollars in thousands, except per share amounts)
 
 
March 31,
2020

 
September 30,
2019

 
(Unaudited)
 
*

Shareholders’ equity
 
 
 
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued
$

 
$

Common stock, $0.01 par value; 50,000,000 shares authorized;
8,309,193 shares issued and outstanding - March 31, 2020 8,329,419 shares issued and outstanding - September 30, 2019
42,258

 
43,030

Retained earnings
135,929

 
127,987

Accumulated other comprehensive income (loss)
(179
)
 
50

Total shareholders’ equity
178,008

 
171,067

Total liabilities and shareholders’ equity
$
1,323,101

 
$
1,247,132

* Derived from audited consolidated financial statements.


See notes to unaudited consolidated financial statements


4


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2020 and 2019
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2020

 
2019

 
2020

 
2019

Interest and dividend income
 
 
 
 
 
 
 
Loans receivable and loans held for sale
$
12,823

 
$
12,216

 
$
25,587

 
$
23,997

Investment securities
489

 
297

 
928

 
575

Dividends from mutual funds, FHLB stock and other investments
35

 
39

 
72

 
78

Interest-bearing deposits in banks and CDs
784

 
1,289

 
1,735

 
2,506

Total interest and dividend income
14,131

 
13,841

 
28,322

 
27,156

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
1,243

 
1,113

 
2,432

 
2,084

FHLB borrowings
8

 

 
8

 

Total interest expense
1,251

 
1,113

 
2,440

 
2,084

 
 
 
 
 
 
 
 
Net interest income
12,880

 
12,728

 
25,882

 
25,072

 
 
 
 
 
 
 
 
Provision for loan losses
2,000

 

 
2,200

 

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
10,880

 
12,728

 
23,682

 
25,072

 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
Recoveries on investment securities
3

 
20

 
106

 
32

Adjustment for portion of other than temporary impairment ("OTTI") transferred from other comprehensive income (loss) (before income taxes)

 
(11
)
 

 
(12
)
Net recoveries on investment securities
3

 
9

 
106

 
20

Service charges on deposits
1,078

 
1,190

 
2,278

 
2,405

ATM and debit card interchange transaction fees
1,015

 
857

 
2,109

 
1,806

BOLI net earnings
147

 
1,156

 
294

 
1,313

Gain on sales of loans, net
736

 
288

 
1,688

 
675

Escrow fees
47

 
39

 
130

 
96

Servicing income on loans sold
62

 
117

 
113

 
265

Fee income from non-deposit investment sales
7

 
7

 
13

 
37

Other, net
585

 
277

 
887

 
589

Total non-interest income, net
3,680

 
3,940

 
7,618

 
7,206



 See notes to unaudited consolidated financial statements

5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and six months ended March 31, 2020 and 2019
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2020

 
2019

 
2020

 
2019

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
4,621

 
$
4,867

 
$
9,343

 
$
9,473

Premises and equipment
943

 
993

 
1,837

 
1,947

Loss (gain) on sales/dispositions of premises and equipment, net
(3
)
 
8

 
(102
)
 
8

Advertising
159

 
175

 
342

 
366

OREO and other repossessed assets, net
51

 
52

 
50

 
102

ATM and debit card interchange transaction fees
359

 
389

 
799

 
811

Postage and courier
145

 
138

 
279

 
248

State and local taxes
233

 
209

 
449

 
405

Professional fees
210

 
184

 
480

 
419

Federal Deposit Insurance Corporation ("FDIC") insurance

 
97

 
(27
)
 
171

Loan administration and foreclosure
78

 
84

 
167

 
171

Data processing and telecommunications
515

 
1,068

 
1,099

 
1,681

Deposit operations
274

 
364

 
591

 
658

Amortization of CDI
102

 
110

 
203

 
219

Other
599

 
539

 
1,149

 
1,160

Total non-interest expense, net
8,286

 
9,277

 
16,659

 
17,839

 
 
 
 
 
 
 
 
Income before income taxes
6,274

 
7,391

 
14,641

 
14,439

 
 
 
 
 
 
 
 
Provision for income taxes
1,225

 
1,277

 
2,940

 
2,710

 
 
 
 
 
 
 
 
     Net income
$
5,049

 
$
6,114

 
$
11,701

 
$
11,729

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.74

 
$
1.40

 
$
1.41

Diluted
$
0.60

 
$
0.72

 
$
1.38

 
$
1.39

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
8,344,201

 
8,310,074

 
8,342,828

 
8,301,550

Diluted
8,456,659

 
8,464,650

 
8,465,894

 
8,461,138

 
 
 
 
 
 
 
 
Dividends paid per common share
$
0.20

 
$
0.15

 
$
0.45

 
$
0.38


See notes to unaudited consolidated financial statements

6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2020 and 2019
(Dollars in thousands)
(Unaudited) 
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2020

 
2019

 
2020

 
2019

Comprehensive income
 
 
 
 
 
 
 
Net income
$
5,049

 
$
6,114

 
$
11,701

 
$
11,729

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of ($9), $21, ($63) and ($1) respectively
(35
)
 
84

 
(241
)
 
(2
)
Change in OTTI on investment securities held to maturity, net of income taxes:
 
 
 
 
 
 
 
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of $0, $1, $0 and $0, respectively

 
3

 

 

Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $0, $2, $0 and $3, respectively

 
9

 

 
9

Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, $1, $3 and $4, respectively
2

 
4

 
12

 
14

Total other comprehensive income (loss), net of income taxes
(33
)
 
100

 
(229
)
 
21

 
 
 
 
 
 
 
 
Total comprehensive income
$
5,016

 
$
6,214

 
$
11,472


$
11,750




See notes to unaudited consolidated financial statements

7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2020 and 2019
(Dollars in thousands, except per share amounts)
(Unaudited)


 
Common Stock
 
Unearned
 Shares Issued to
ESOP

 
 
 
Accumulated
Other
Compre-
hensive
Income (Loss)

 
 
 
Number of Shares
 
Amount
 
 
Retained
Earnings
 
 
Total
Balance, December 31, 2018
8,313,403

 
$
42,951

 
$
(67
)
 
$
114,166

 
$
(145
)
 
$
156,905

 
 
 
 
 
 
 
 
 
 
 


Net income

 

 

 
6,114

 

 
6,114

Other comprehensive income

 

 

 

 
100

 
100

Exercise of stock options
23,016

 
212

 

 

 

 
212

Common stock dividends ($0.15 per common share)

 

 

 
(1,248
)
 

 
(1,248
)
Earned ESOP shares, net of income taxes

 
135

 
67

 

 

 
202

Stock option compensation expense

 
53

 

 

 

 
53

Balance, March 31, 2019
8,336,419

 
$
43,351

 
$

 
$
119,032

 
$
(45
)
 
$
162,338

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
8,346,394

 
$
43,246

 
$

 
$
132,553

 
$
(146
)
 
$
175,653

 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
5,049

 

 
5,049

Other comprehensive loss

 

 

 

 
(33
)
 
(33
)
Repurchase of common stock
(56,601
)
 
(1,238
)
 

 

 

 
(1,238
)
Exercise of stock options
19,400

 
204

 

 

 

 
204

Common stock dividends ($0.20 per common share)

 

 

 
(1,673
)
 

 
(1,673
)
Stock option compensation expense

 
46

 

 

 

 
46

Balance, March 31, 2020
8,309,193

 
$
42,258

 
$

 
$
135,929

 
$
(179
)
 
$
178,008



See notes to unaudited consolidated financial statements























8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the six months ended March 31, 2020 and 2019
(Dollars in thousands, except per share amounts)
(Unaudited)


 
 
Common Stock
 
Unearned
 Shares Issued to ESOP

 
 
 
Accumulated
Other
Compre-hensive
Income (Loss)

 
 
 
 
Number of Shares
 
Amount
 
 
Retained
Earnings
 
 
Total
Balance, September 30, 2018
 
7,401,177

 
$
14,394

 
$
(133
)
 
$
110,525

 
$
(129
)
 
$
124,657

Net income
 

 

 

 
11,729

 

 
11,729

Other comprehensive income
 

 

 

 

 
21

 
21

Common stock issued for business combination
 
904,826

 
28,267

 

 

 

 
28,267

Exercise of stock options
 
30,416

 
283

 

 

 

 
283

Common stock dividends ($0.38 per common share)
 

 

 

 
(3,159
)
 

 
(3,159
)
Earned ESOP shares, net of income taxes
 

 
301

 
133

 

 

 
434

Stock option compensation expense
 

 
106

 

 

 

 
106

Adoption of Accounting Standards Update ("ASU") 2016-01
 

 

 

 
(63
)
 
63

 

Balance, March 31, 2019
 
8,336,419

 
$
43,351

 
$

 
$
119,032

 
$
(45
)
 
$
162,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
 
8,329,419

 
$
43,030

 
$

 
$
127,987

 
$
50

 
$
171,067

Net income
 

 

 

 
11,701

 

 
11,701

Other comprehensive loss
 

 

 

 

 
(229
)
 
(229
)
Repurchase of common stock
 
(56,601
)
 
(1,238
)
 

 

 

 
(1,238
)
Exercise of stock options
 
36,375

 
374

 

 

 

 
374

Common stock dividends ($0.45 per common share)
 

 

 

 
(3,759
)
 

 
(3,759
)
Stock option compensation expense
 

 
92

 

 

 

 
92

Balance, March 31, 2020
 
8,309,193

 
$
42,258

 
$

 
$
135,929

 
$
(179
)
 
$
178,008




9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2020 and 2019
(Dollars in thousands)
(Unaudited)
 
Six Months Ended
March 31,
 
2020

 
2019

Cash flows from operating activities
 
 
 
Net income
$
11,701

 
$
11,729

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
2,200

 

Depreciation
748

 
790

Accretion of discount on purchased loans
(253
)
 
(388
)
Amortization of CDI
203

 
219

Earned ESOP shares

 
434

Stock option compensation expense
92

 
106

Net recoveries on investment securities
(106
)
 
(20
)
Change in fair value of investments in equity securities
(11
)
 
(20
)
Gain on sales of OREO and other repossessed assets, net
(39
)
 

Provision for OREO losses
25

 
23

Gain on sales of loans, net
(1,688
)
 
(675
)
(Gain) loss on sales/disposition of premises and equipment, net
(102
)
 
8

Loans originated for sale
(60,097
)
 
(28,879
)
Proceeds from sales of loans
62,058

 
28,271

Amortization of servicing rights
383

 
311

Valuation adjustment on servicing rights
23

 

BOLI net earnings
(294
)
 
(314
)
BOLI death benefit in excess of cash surrender value

 
(999
)
(Decrease) increase in deferred loan origination fees
(104
)
 
219

Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses
457

 
(1,114
)
Net cash provided by operating activities
15,196

 
9,701

 
 
 
 
Cash flows from investing activities
 

 
 

Net (increase) decrease in CDs held for investment
(4,126
)
 
526

Proceeds from sale of investment securities available for sale

 
2,332

Purchase of investment securities held to maturity
(9,755
)
 
(10,048
)
Purchase of investment securities available for sale
(21,521
)
 

Proceeds from maturities and prepayments of investment securities held to maturity
4,412

 
1,242

Proceeds from maturities and prepayments of investment securities available for sale
2,266

 
784

Purchase of FHLB stock
(485
)
 
(42
)
Increase in loans receivable, net
(22,838
)
 
(26,271
)
Additions to premises and equipment
(1,195
)
 
(1,360
)
Proceeds from sales of premises and equipment
307

 

Cash acquired, net of cash consideration paid in business combination

 
14,284

Escrow deposit for business combination

 
6,900

Proceeds from sales of OREO and other repossessed assets
74

 

Net used in investing activities
(52,861
)
 
(11,653
)
See notes to unaudited consolidated financial statements

10


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2020 and 2019
(Dollars in thousands)
(Unaudited)

 
Six Months Ended
March 31,
 
2020

 
2019

Cash flows from financing activities
 

 
 

Net increase in deposits
$
57,421

 
$
30,550

FHLB borrowings
10,000

 

Proceeds from exercise of stock options
374

 
283

Repurchase of common stock
(1,238
)
 

Payment of dividends
(3,759
)
 
(3,159
)
Net cash provided by financing activities
62,798

 
27,674

 
 

 
 

Net increase in cash and cash equivalents
25,133

 
25,722

Cash and cash equivalents
 

 
 

Beginning of period
143,015

 
148,864

End of period
$
168,148

 
$
174,586

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Income taxes paid
$
1,988

 
$
2,741

Interest paid
2,416

 
2,053

 
 
 
 
Supplemental disclosure of non-cash investing activities
 

 
 

Loans transferred to OREO and other repossessed assets
$

 
$
91

Other comprehensive (loss) income related to investment securities
(229
)
 
21

Operating lease liabilities arising from recording of ROU assets
2,889

 

 
 
 
 
Business Combination (see Note 2)
 
 
 
 Fair value of assets acquired
$

 
$
180,518

 Fair value of liabilities assumed

 
154,829

See notes to unaudited consolidated financial statements

11


Timberland Bancorp, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)  Basis of Presentation:  The accompanying unaudited consolidated financial statements for Timberland Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Timberland Bank (the "Bank") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included.  All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019 (“2019 Form 10-K”).  The unaudited consolidated results of operations for the six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2020.

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition"). The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank. See Note 2 for additional information on the South Sound Acquisition.

(b)  Principles of Consolidation:  The unaudited consolidated financial statements include the accounts of the Company and the Bank, and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.   All significant inter-company transactions and balances have been eliminated in consolidation.

(c)  Operating Segment:  The Company has one reportable operating segment which is defined as community banking in western Washington.

(d)  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.

(e)  Certain prior period amounts have been reclassified to conform to the March 31, 2020 presentation with no change to previously reported net income or total shareholders’ equity.


12


(2) BUSINESS COMBINATION

On October 1, 2018, the Company completed the South Sound Acquisition. The primary reason for the acquisition was to expand the Company's presence along Washington State's economically important I-5 corridor.

Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share the Company's common stock and $5.68825 in cash per share of South Sound Bank common stock. The Company issued 904,826 shares of its common stock (valued at $28.27 million based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6.90 million in cash in the transaction for total consideration paid of $35.17 million.

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed. The Company was considered the acquirer in this transaction. Accordingly, the estimates of fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the South Sound Acquisition were measured and recorded as of October 1, 2018. The excess of the total consideration paid over the fair value of the net assets acquired was allocated to goodwill. The South Sound Acquisition resulted in $9.48 million of goodwill. The goodwill arising from the transaction consists largely of the synergies and expected economies of scale from combining the operations of the Company and South Sound Bank. This goodwill is not deductible for tax purposes.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawal, and other factors. One of the most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. In accordance with GAAP, there was no carry-over of South Sound Bank's previously established allowance for loan losses.

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:


13


 
At October 1, 2018
 
Book Value
 
Fair Value Adjustment
 
Estimated Fair Value
 
(Dollars in thousands)
Total acquisition consideration
 
 
 
 
$
35,170

 
 
 
 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
 
 
     Identifiable assets acquired:
 
 
 
 
 
          Cash and cash equivalents
$
21,187

 
$

 
21,187

          CDs held for investment
2,973

 

 
2,973

          FHLB stock
205

 

 
205

          Investment securities held to maturity
19,891

 
(189
)
 
19,702

          Investment securities available for sale
5,022

 

 
5,022

          Loans receivable
123,627

 
(2,083
)
 
121,544

          Premises and equipment
3,225

 
112

 
3,337

          OREO
25

 

 
25

          Accrued interest receivable
554

 

 
554

          BOLI
2,629

 

 
2,629

          CDI

 
2,483

 
2,483

          Servicing rights
285

 
(4
)
 
281

          Other assets
1,087

 
(511
)
 
576

               Total assets
180,710

 
(192
)
 
180,518

 
 
 
 
 
 
     Liabilities assumed:
 
 
 
 
 
          Deposits
151,378

 
160

 
151,538

          Other liabilities and accrued expenses
3,291

 

 
3,291

               Total liabilities assumed
154,669

 
160

 
154,829

               Total identifiable net assets acquired
$
26,041

 
$
(352
)
 
25,689

               Goodwill recognized
 
 
 
 
$
9,481



The acquired loan portfolio was valued using Level 3 inputs (see Note 10) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values. Credit discounts were included in the determination of the fair value of the loans acquired; therefore, an allowance for loan losses was not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The Company determined that PCI loans acquired in the South Sound Acquisition were insignificant.

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording an allowance for loan losses.

CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

The operating results of the Company for the three and six months ended March 31, 2020 and 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date. The

14


Company determined that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date is impracticable. The financial activity and operating results of the net assets acquired in the South Sound Acquisition were commingled with the Company's financial activity and operating results as of the acquisition date.

During the six months ended March 31, 2020, the Company incurred acquisition-related expenses of $69,000 related to the South Sound Acquisition, of which $67,000 is included in the data processing and telecommunications expense category and $2,000 is included in the professional fees expense category in the accompanying consolidated statement of income. During the six months ended March 31, 2019, the Company incurred acquisition-related expenses of $119,000 related to the South Sound Acquisition, which are included in the professional fees expense category in the accompanying consolidated statement of income.


(3) INVESTMENT SECURITIES

Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of March 31, 2020 and September 30, 2019 (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2020
 
 
 
 
 
 
 
Held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities ("MBS"):
 
 
 
 
 
 
 
U.S. government agencies
$
33,407

 
$
1,442

 
$
(33
)
 
$
34,816

Private label residential
261

 
262

 
(4
)
 
519

U.S. Treasury and U.S government agency securities
2,999

 

 
(2
)
 
2,997

Total
$
36,667

 
$
1,704

 
$
(39
)
 
$
38,332

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS: U.S. government agencies
$
41,661

 
$
74

 
$
(265
)
 
$
41,470

Total
$
41,661

 
$
74

 
$
(265
)
 
$
41,470

 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
Held to maturity
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
27,786

 
$
999

 
$
(2
)
 
$
28,783

Private label residential
317

 
490

 
(1
)
 
806

U.S. Treasury and U.S. government agency securities
2,999

 

 
(8
)
 
2,991

Total
$
31,102

 
$
1,489

 
$
(11
)
 
$
32,580

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS: U.S. government agencies
$
22,418

 
$
114

 
$

 
$
22,532

Total
$
22,418

 
$
114

 
$

 
$
22,532



15


Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2020 (dollars in thousands):
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
Held to maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
5,110

 
$
(32
)
 
6

 
$
45

 
$
(1
)
 
5

 
$
5,155

 
$
(33
)
Private label residential
13

 
(2
)
 
2

 
11

 
(2
)
 
2

 
24

 
(4
)
U.S. Treasury and U.S. government agency securities

 

 

 
2,997

 
(2
)
 
1

 
2,997

 
(2
)
     Total
$
5,123

 
$
(34
)
 
8

 
$
3,053

 
$
(5
)
 
8

 
$
8,176

 
$
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS: U.S. government agencies
$
32,116

 
$
(265
)
 
5

 
$

 
$

 

 
$
32,116

 
$
(265
)
     Total
$
32,116

 
$
(265
)
 
5

 
$

 
$

 

 
$
32,116

 
$
(265
)

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (dollars in thousands):
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
Held to maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
291

 
$
(1
)
 
2

 
$
76

 
$
(1
)
 
6

 
$
367

 
$
(2
)
Private label residential

 

 

 
23

 
(1
)
 
5

 
23

 
(1
)
U.S. Treasury and U.S. government agency securities

 

 

 
2,991

 
(8
)
 
1

 
2,991

 
(8
)
     Total
$
291

 
$
(1
)
 
2

 
$
3,090

 
$
(10
)
 
12

 
$
3,381

 
$
(11
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary.  The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities.  The Company has the ability and the intent to hold the investments until the fair value recovers.  Furthermore, as of March 31, 2020, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield.  The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic

16


reports.  Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.  

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of March 31, 2020 and 2019:
 
Range
 
Weighted
 
Minimum 
 
Maximum 
 
Average 
March 31, 2020
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
10.91
%
Collateral default rate
1.86
%
 
22.47
%
 
10.44
%
Loss severity rate
%
 
16.34
%
 
4.02
%
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
10.24
%
Collateral default rate
%
 
16.06
%
 
5.20
%
Loss severity rate
%
 
78.00
%
 
40.02
%

The following table presents the OTTI recoveries for the three and six months ended March 31, 2020 and 2019 (dollars in thousands):

 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total recoveries
$
3

 
$

 
$
20

 
$

Adjustment for portion of OTTI transferred from
       other comprehensive income (loss) before income taxes (1)

 

 
(11
)
 

Net recoveries recognized in earnings (2)
$
3

 
$

 
$
9

 
$

 
Six Months Ended
March 31, 2020
 
Six Months Ended
March 31, 2019
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total recoveries
$
106

 
$

 
$
32

 
$

Adjustment for portion of OTTI transferred from
       other comprehensive income (loss) before income taxes (1)

 

 
(12
)
 

Net recoveries recognized in earnings (2)
$
106

 
$

 
$
20

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________
(1) Represents OTTI related to all other factors.
(2) Represents OTTI related to credit losses.


17


The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the six months ended March 31, 2020 and 2019 (dollars in thousands):
 
Six Months Ended March 31,
 
2020

 
2019

Beginning balance of credit loss
$
1,071

 
$
1,153

Additions:
 

 
 

Additional increases to the amount
related to credit loss for which OTTI
was previously recognized

 
12

Subtractions:
 
 
 

Realized losses previously recorded
as credit losses
(60
)
 
(13
)
Recovery of prior credit loss
(106
)
 
(32
)
Ending balance of credit loss
$
905

 
$
1,120


During the six months ended March 31, 2020, the Company recorded a $60,000 net realized loss (as a result of investment securities being deemed worthless) on 19 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the six months ended March 31, 2019, the Company recorded a $13,000 net realized loss (as a result of investment securities being deemed worthless) on 17 held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $43.71 million and $18.59 million at March 31, 2020 and September 30, 2019, respectively.

The contractual maturities of debt securities at March 31, 2020 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 
Held to Maturity
 
Available for Sale
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
Due within one year
$
3,004

 
$
3,001

 
$

 
$

Due after one year to five years
164

 
172

 
121

 
121

Due after five years to ten years
5,817

 
6,282

 
6,301

 
6,068

Due after ten years
27,682

 
28,877

 
35,239

 
35,281

Total
$
36,667

 
$
38,332

 
$
41,661

 
$
41,470



(4) GOODWILL AND CDI

Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed.  Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment.  The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit.

The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of

18


goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2019.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

Due to the current market conditions as a result of the COVID-19 pandemic, the Company performed a qualitative assessment of goodwill as of March 31, 2020 and determined that the fair value of the reporting unit more likely than not exceeded the carrying value at March 31, 2020. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. The recorded amount of goodwill at March 31, 2020 and September 30, 2019 remained unchanged at $15.13 million.

CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of March 31, 2020, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.


19


(5) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable at March 31, 2020 are reported net of unamortized discounts totaling $1.13 million.

Loans receivable by portfolio segment consisted of the following at March 31, 2020 and September 30, 2019 (dollars in thousands):
 
March 31,
2020
 
September 30,
2019
 
Amount
 
Percent
 
Amount
 
Percent
Mortgage loans:
 
 
 
 
 
 
 
One- to four-family (1)
$
125,285

 
12.4
%
 
$
132,661

 
13.4
%
Multi-family
81,298

 
8.1

 
76,036

 
7.7

Commercial
444,276

 
44.1

 
419,117

 
42.3

Construction - custom and owner/builder
119,175

 
11.8

 
128,848

 
13.0

Construction - speculative one- to four-family
14,679

 
1.5

 
16,445

 
1.7

Construction - commercial
37,446

 
3.6

 
39,566

 
4.0

Construction - multi-family
34,026

 
3.4

 
36,263

 
3.6

Construction - land development
5,774

 
0.6

 
2,404

 
0.2

Land
29,333

 
2.9

 
30,770

 
3.1

Total mortgage loans
891,292

 
88.4

 
882,110

 
89.0

 
 
 
 
 
 
 
 
Consumer loans:
 

 
 

 
 

 
 

Home equity and second mortgage
38,972

 
3.9

 
40,190

 
4.1

Other
3,829

 
0.4

 
4,312

 
0.4

Total consumer loans
42,801

 
4.3

 
44,502

 
4.5

 
 
 
 
 
 
 
 
Commercial business loans
73,622

 
7.3

 
64,764

 
6.5

 
 
 
 
 
 
 
 
Total loans receivable
1,007,715

 
100.0
%
 
991,376

 
100.0
%
Less:
 

 
 

 
 

 
 

Undisbursed portion of construction 
loans in process
85,474

 
 

 
92,226

 
 

Deferred loan origination fees, net
2,694

 
 

 
2,798

 
 

Allowance for loan losses
11,890

 
 

 
9,690

 
 

 
100,058

 
 
 
104,714

 
 
Loans receivable, net
$
907,657

 
 

 
$
886,662

 
 

_____________________________
 
 
 
 
 
 
 
 (1) Does not include one- to four-family loans held for sale totaling $5,798 and $6,071 at March 31, 2020 and September 30, 2019, respectively.
















20



Allowance for Loan Losses
The following tables set forth information for the three and six months ended March 31, 2020 and 2019 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

 
Three Months Ended March 31, 2020
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,065

 
$
83

 
$

 
$
1

 
$
1,149

Multi-family
499

 
96

 

 

 
595

Commercial
4,410

 
1,351

 

 
1

 
5,762

Construction – custom and owner/builder
754

 
(57
)
 

 

 
697

Construction – speculative one- to four-family
248

 
(44
)
 

 

 
204

Construction – commercial
403

 
20

 

 

 
423

Construction – multi-family
333

 
61

 

 

 
394

Construction – land development
48

 
32

 

 

 
80

Land
654

 
19

 

 
5

 
678

Consumer loans:
 

 
 

 
 

 
 

 
 
Home equity and second mortgage
609

 
47

 

 

 
656

Other
87

 
(10
)
 
(1
)
 
2

 
78

Commercial business loans
772

 
402

 

 

 
1,174

Total
$
9,882

 
$
2,000

 
$
(1
)
 
$
9

 
$
11,890

 
Six Months Ended March 31, 2020
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One-to four-family
$
1,167

 
$
(21
)
 
$

 
$
3

 
$
1,149

Multi-family
481

 
114

 

 

 
595

Commercial
4,154

 
1,603

 

 
5

 
5,762

Construction – custom and owner/builder
755

 
(63
)
 

 
5

 
697

Construction – speculative one- to four-family
212

 
(8
)
 

 

 
204

Construction – commercial
338

 
85

 

 

 
423

Construction – multi-family
375

 
19

 

 

 
394

Construction – land development
67

 
13

 

 

 
80

Land
697

 
(29
)
 

 
10

 
678

Consumer loans:
 

 
 

 
 

 
 

 
 

Home equity and second mortgage
623

 
33

 

 

 
656

Other
99

 
(13
)
 
(11
)
 
3

 
78

Commercial business loans
722

 
467

 
(15
)
 

 
1,174

Total
$
9,690

 
$
2,200

 
$
(26
)
 
$
26

 
$
11,890

 
 
 
 
 
 
 
 
 
 

21


 
Three Months Ended March 31, 2019
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
  One- to four-family
$
1,159

 
$
(72
)
 
$

 
$
67

 
$
1,154

  Multi-family
449

 
21

 

 

 
470
  Commercial
4,239

 
(267
)
 

 
150

 
4,122
  Construction – custom and owner/builder
643

 
23

 

 

 
666
  Construction – speculative one- to four-family
206

 
43

 

 

 
249
  Construction – commercial
386

 
(2
)
 

 

 
384
Construction – multi-family
209

 
63

 

 

 
272

  Construction – land development
143

 
101

 

 

 
244

  Land
757

 
(112
)
 

 
4

 
649
Consumer loans:
 
 
 
 
 
 
 
 
 
  Home equity and second mortgage
666

 
5

 
(4
)
 

 
667
  Other
101

 
11

 
(1
)
 
1

 
112
Commercial business loans
575

 
186

 
(9
)
 

 
752
Total
$
9,533

 
$

 
$
(14
)
 
$
222

 
$
9,741

 
Six Months Ended March 31, 2019
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
  One-to four-family
$
1,086

 
$
1

 
$

 
$
67

 
$
1,154

  Multi-family
433

 
37

 

 

 
470
  Commercial
4,248

 
(276
)
 

 
150

 
4,122
  Construction – custom and owner/builder
671

 
(5
)
 

 

 
666
  Construction – speculative one- to four-family
178

 
71

 

 

 
249
  Construction – commercial
563

 
(179
)
 

 

 
384
Construction – multi-family
135

 
137

 

 

 
272

  Construction – land development
49

 
195

 

 

 
244

  Land
844

 
(203
)
 

 
8

 
649
Consumer loans:
 
 
 
 
 
 
 
 
 
  Home equity and second mortgage
649

 
22

 
(4
)
 

 
667
  Other
117

 
(4
)
 
(3
)
 
2

 
112
Commercial business loans
557

 
204

 
(9
)
 

 
752
Total
$
9,530

 
$

 
$
(16
)
 
$
227

 
$
9,741

 
 
 
 
 
 
 
 
 
 

22


The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at March 31, 2020 and September 30, 2019 (dollars in thousands):

 
Allowance for Loan Losses
 
Recorded Investment in Loans
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 
Total
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$

 
$
1,149

 
$
1,149

 
$
1,426

 
$
123,859

 
$
125,285

Multi-family

 
595

 
595

 

 
81,298

 
81,298

Commercial

 
5,762

 
5,762

 
3,339

 
440,937

 
444,276

Construction – custom and owner/builder

 
697

 
697

 

 
69,298

 
69,298

Construction – speculative one- to four-family

 
204

 
204

 

 
9,507

 
9,507

Construction – commercial

 
423

 
423

 

 
25,803

 
25,803

Construction – multi-family

 
394

 
394

 

 
18,753

 
18,753

Construction – land development

 
80

 
80

 

 
2,265

 
2,265

Land
25

 
653

 
678

 
193

 
29,140

 
29,333

Consumer loans:
 

 
 
 
 

 
 

 
 

 
 

Home equity and second mortgage

 
656

 
656

 
581

 
38,391

 
38,972

Other

 
78

 
78

 
11

 
3,818

 
3,829

Commercial business loans
64

 
1,110

 
1,174

 
543

 
73,079

 
73,622

Total
$
89

 
$
11,801

 
$
11,890

 
$
6,093

 
$
916,148

 
$
922,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$

 
$
1,167

 
$
1,167

 
$
1,192

 
$
131,469

 
$
132,661

Multi-family

 
481

 
481

 

 
76,036

 
76,036

Commercial

 
4,154

 
4,154

 
3,190

 
415,927

 
419,117

Construction – custom and owner/builder

 
755

 
755

 

 
75,411

 
75,411

Construction – speculative one- to four-family

 
212

 
212

 

 
10,779

 
10,779

Construction – commercial

 
338

 
338

 

 
24,051

 
24,051

Construction – multi-family

 
375

 
375

 

 
19,256

 
19,256

Construction – land development

 
67

 
67

 

 
1,803

 
1,803

Land
27

 
670

 
697

 
204

 
30,566

 
30,770

Consumer loans:
 

 
 

 
 

 
 

 
 

 
 

Home equity and second mortgage

 
623

 
623

 
603

 
39,587

 
40,190

Other
17

 
82

 
99

 
23

 
4,289

 
4,312

Commercial business loans
128

 
594

 
722

 
725

 
64,039

 
64,764

Total
$
172

 
$
9,518

 
$
9,690

 
$
5,937

 
$
893,213

 
$
899,150



23


The following tables present an analysis of loans by aging category and portfolio segment at March 31, 2020 and September 30, 2019 (dollars in thousands):
 
30–59
Days
Past Due
 
60-89
Days
Past Due
 
Non-
Accrual (1)
 
Past Due
90 Days
or More
and Still
Accruing
 
Total
Past Due
 
Current
 
Total
Loans
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$

 
$

 
$
941

 
$

 
$
941

 
$
124,344

 
$
125,285

Multi-family

 

 

 

 

 
81,298

 
81,298

Commercial
91

 

 
947

 

 
1,038

 
443,238

 
444,276

Construction – custom and owner/builder

 

 

 

 

 
69,298

 
69,298

Construction – speculative one- to four- family

 

 

 

 

 
9,507

 
9,507

Construction – commercial

 

 

 

 

 
25,803

 
25,803

Construction – multi-family

 

 

 

 

 
18,753

 
18,753

Construction – land development

 

 

 

 

 
2,265

 
2,265

Land

 

 
193

 

 
193

 
29,140

 
29,333

Consumer loans:
 

 
 

 
 

 
 

 


 
 
 
 
Home equity and second mortgage

 

 
581

 

 
581

 
38,391

 
38,972

Other
1

 

 
11

 

 
12

 
3,817

 
3,829

Commercial business loans
125

 

 
543

 

 
668

 
72,954

 
73,622

Total
$
217

 
$

 
$
3,216

 
$

 
$
3,433

 
$
918,808

 
$
922,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
$

 
$
286

 
$
699

 
$

 
$
985

 
$
131,676

 
$
132,661

Multi-family

 

 

 

 

 
76,036

 
76,036

Commercial
94

 
218

 
779

 

 
1,091

 
418,026

 
419,117

   Construction – custom and owner/
       builder

 

 

 

 

 
75,411

 
75,411

Construction – speculative one- to four- family

 

 

 

 

 
10,779

 
10,779

Construction – commercial

 

 

 

 

 
24,051

 
24,051

Construction – multi-family

 

 

 

 

 
19,256

 
19,256

Construction – land development

 

 

 

 

 
1,803

 
1,803

Land
5

 
193

 
204

 

 
402

 
30,368

 
30,770

Consumer loans:
 

 
 

 
 

 
 

 
 
 
 

 
 
Home equity and second mortgage
94

 

 
603

 

 
697

 
39,493

 
40,190

Other

 

 
23

 

 
23

 
4,289

 
4,312

Commercial business loans

 
2

 
725

 

 
727

 
64,037

 
64,764

Total
$
193

 
$
699

 
$
3,033

 
$

 
$
3,925

 
$
895,225

 
$
899,150

______________________
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.


Credit Quality Indicators
The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential.  The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral.  The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass:  Pass loans are defined as those loans that meet acceptable quality underwriting standards.


24


Watch:  Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention.  If these concerns are not corrected, a potential for further adverse categorization exists.  These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. 

Substandard:  Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loss:  Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At March 31, 2020 and September 30, 2019, there were no loans classified as loss.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at March 31, 2020 and September 30, 2019 (dollars in thousands):
 
Loan Grades
 
 
March 31, 2020
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
One- to four-family
$
122,490

 
$
1,286

 
$
557

 
$
952

 
$
125,285

Multi-family
81,298

 

 

 

 
81,298

Commercial
433,461

 
8,667

 
668

 
1,480

 
444,276

Construction – custom and owner/builder
68,256

 
1,042

 

 

 
69,298

Construction – speculative one- to four-family
9,507

 

 

 

 
9,507

Construction – commercial
25,803

 

 

 

 
25,803

Construction – multi-family
18,753

 

 

 

 
18,753

Construction – land development
2,133

 

 

 
132

 
2,265

Land
27,013

 
1,539

 
588

 
193

 
29,333

Consumer loans:
 

 
 

 
 

 
 

 
 
Home equity and second mortgage
38,402

 
56

 

 
514

 
38,972

Other
3,785

 
33

 

 
11

 
3,829

Commercial business loans
72,715

 
231

 
79

 
597

 
73,622

Total
$
903,616

 
$
12,854

 
$
1,892

 
$
3,879

 
$
922,241

 
 
 
 
 
 
 
 
 
 
September 30, 2019
 

 
 

 
 

 
 

 
 

Mortgage loans:
 
 
 

 
 

 
 

 
 

One- to four-family
$
129,748

 
$
296

 
$
562

 
$
2,055

 
$
132,661

Multi-family
76,036

 

 

 

 
76,036

Commercial
405,165

 
11,944

 
683

 
1,325

 
419,117

Construction – custom and owner/builder
75,178

 
233

 

 

 
75,411

Construction – speculative one- to four-family
10,779

 

 

 

 
10,779

Construction – commercial
24,051

 

 

 

 
24,051

Construction – multi-family
19,256

 

 

 

 
19,256

Construction – land development
1,659

 

 

 
144

 
1,803

Land
28,390

 
952

 
1,217

 
211

 
30,770

Consumer loans:
 

 
 

 
 

 
 

 
 
Home equity and second mortgage
39,364

 
41

 

 
785

 
40,190

Other
4,257

 
33

 

 
22

 
4,312

Commercial business loans
63,669

 
232

 
85

 
778

 
64,764

Total
$
877,552

 
$
13,731

 
$
2,547

 
$
5,320

 
$
899,150




25


Impaired Loans
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions.  Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties.  In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals.  Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

The categories of non-accrual loans and impaired loans overlap, although they are not identical.  

26


The following table is a summary of information related to impaired loans by portfolio segment as of March 31, 2020 and for the three and six months then ended (dollars in thousands):
 
Recorded
Investment
 
Unpaid Principal Balance (Loan Balance Plus Charge Off)
 
Related
Allowance
 
Quarter to Date ("QTD") Average Recorded Investment (1)
 
Year to Date ("YTD") Average Recorded Investment (2)
 
QTD Interest Income Recognized (1)
 
YTD Interest Income Recognized (2)
 
QTD Cash Basis Interest Income Recognized (1)
 
YTD Cash Basis Interest Income Recognized (2)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$
941

 
$
984

 
$

 
$
1,186

 
$
1,188

 
$
20

 
$
25

 
$
18

 
$
23

Commercial
3,339

 
3,339

 

 
3,240

 
3,223

 
52

 
105

 
42

 
73

Land
57

 
111

 

 
58

 
60

 

 

 

 

Consumer loans:
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgage
581

 
581

 

 
581

 
588

 

 

 

 

Other
11

 
11

 

 
6

 
4

 

 

 

 

Commercial business loans
144

 
262

 

 
164

 
172

 

 

 

 

Subtotal
5,073

 
5,288

 

 
5,235

 
5,235

 
72

 
130

 
60

 
96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
485

 
485

 

 
243

 
162

 

 

 

 

Land
136

 
136

 
25

 
138

 
139

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other 

 

 

 
6

 
12

 

 

 

 

Commercial business loans
399

 
399

 
64

 
409

 
451

 

 

 

 

Subtotal
1,020

 
1,020

 
89

 
796

 
764

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
1,426

 
1,469

 

 
1,429

 
1,350

 
20

 
25

 
18

 
23

Commercial
3,339

 
3,339

 

 
3,240

 
3,223

 
52

 
105

 
42

 
73

Land
193

 
247

 
25

 
196

 
199

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgage
581

 
581

 

 
581

 
588

 

 

 

 

Other
11

 
11

 

 
12

 
16

 

 

 

 

Commercial business loans
543

 
661

 
64

 
573

 
623

 

 

 

 

Total
$
6,093

 
$
6,308

 
$
89

 
$
6,031

 
$
5,999

 
$
72

 
$
130

 
$
60

 
$
96

______________________________________________
(1)
For the three months ended March 31, 2020.
(2)
For the six months ended March 31, 2020.



27


The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2019 (dollars in thousands):
 
Recorded
Investment
 
Unpaid Principal Balance (Loan Balance Plus Charge Off)
 
Related
Allowance
 
YTD
Average
Recorded
Investment (1)
 
YTD Interest
Income
Recognized
(1)
 
YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,192

 
$
1,236

 
$

 
$
1,110

 
$
71

 
$
62

Commercial
3,190

 
3,190

 

 
2,920

 
227

 
192

Land
63

 
126

 

 
100

 
3

 
3

Consumer loans:
 

 
 

 
 

 
 

 
 

 
 

Home equity and second mortgage
603

 
603

 

 
459

 

 

Commercial business loans
189

 
291

 

 
142

 
30

 
30

Subtotal
5,237

 
5,446

 

 
4,731

 
331

 
287

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

Land
141

 
141

 
27

 
246

 

 

Consumer loans:
 

 
 

 
 

 
 

 
 

 
 

Other
23

 
23

 
17

 
10

 

 

Commercial business loans
536

 
536

 
128

 
350

 
30

 
30

Subtotal
700

 
700

 
172

 
606

 
30

 
30

Total
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans:
 

 
 

 
 

 
 

 
 

 
 

One- to four-family
1,192

 
1,236

 

 
1,110

 
71

 
62

Commercial
3,190

 
3,190

 

 
2,920

 
227

 
192

Land
204

 
267

 
27

 
346

 
3

 
3

Consumer loans:
 

 
 

 
 

 
 

 
 

 
 

Home equity and second mortgage
603

 
603

 

 
459

 

 

Other
23

 
23

 
17

 
10

 

 

Commercial business loans
725

 
827

 
128

 
492

 
60

 
60

Total
$
5,937

 
$
6,146

 
$
172

 
$
5,337

 
$
361

 
$
317

_____________________________________________
(1) For the year ended September 30, 2019.

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider.  Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals.  TDRs are considered impaired and are individually evaluated for impairment.  TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $3.22 million and $3.27 million in TDRs included in impaired loans at March 31, 2020 and September 30, 2019, respectively, and had no commitments at these dates to lend additional funds on these loans.  The allowance for loan losses allocated to TDRs at March 31, 2020 and September 30, 2019 was $47,000 and $56,000, respectively. There were no TDRs for which there was a payment default within the first 12 months of the modification during the three months ended March 31, 2020.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers,

28


extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of March 31, 2020, the Company had approved COVID-19 pandemic related loan modifications for 125 loans aggregating to $79.41 million, or 8.6% of loans receivable. The Company is continuing to make COVID-19 pandemic related modifications for borrowers and as of April 30, 2020, had approved 178 loan modifications aggregating to $125.24 million, or 13.6% of loans receivable balances as of March 31, 2020.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of March 31, 2020 and September 30, 2019 (dollars in thousands):

 
March 31, 2020
 
Accruing
 
Non-
Accrual
 
Total
Mortgage loans:
 
 
 
 
 
One- to four-family
$
485

 
$

 
$
485

Commercial
2,392

 

 
2,392

Land

 
136

 
136

Consumer loans:
 

 
 

 
 

   Home equity and second mortgage

 
77

 
77

Commercial business loans

 
130

 
130

Total
$
2,877

 
$
343

 
$
3,220


 
September 30, 2019
 
Accruing
 
Non-
Accrual
 
Total
Mortgage loans:
 
 
 
 
 
One- to four-family
$
493

 
$
141

 
$
634

Commercial
2,410

 

 
2,410

Consumer loans:
 

 
 

 
 

   Home equity and second mortgage

 
82

 
82

Commercial business loans

 
143

 
143

Total
$
2,903

 
$
366

 
$
3,269


There were no new TDRs during the six months ended March 31, 2020.

There was one new TDR during the year ended September 30, 2019. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the year ended September 30, 2019 (dollars in thousands):
2019
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post- Modification
Outstanding
Recorded
Investment
 
End of
Period
Balance
Home equity and second mortgage loan (1)
1
 
$
85

 
$
85

 
$
82

Total
1
 
$
85

 
$
85

 
$
82

(1) Modification was a result of a reduction in interest rate and monthly payment.
 
 
 
 
 
 
 





29


(6) LEASES

The Company adopted Accounting Standards Codification ("ASC") 842 ("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets on the consolidated balance sheets. The Company has operating leases for three retail bank branch offices. The ROU assets totaled $2.89 million at October 1, 2019. The Company's leases have remaining lease terms of twelve months to eleven years, some of which include options to extend the leases for up to five years.

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three and six months ended March 31, 2020 (dollars in thousands):

 
Three Months Ended March 31, 2020
 
Six Months Ended March 31, 2020
Lease cost:
 
 
 
Operating lease cost
$
83

 
$
166

Short-term lease cost

 

Total lease cost
$
83

 
166


The following table provides supplemental information to operating leases at or for the three and six months ended March 31, 2020 (dollars in thousands):

 
At or For the Three Months Ended March 31, 2020
 
At or For the Six Months Ended March 31, 2020
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
$
80

 
$
158

 
Weighted average remaining lease term-operating leases
9.7

years
9.7

years
Weighted average discount rate-operating leases
2.22
%
 
2.22
%
 

The Company's leases typically do not contain a discount rate implicit in the lease contract. As an alternative, the weighted average discount rate used to value the future value of lease payments due in calculating the value of the ROU asset and lease liability was determined by utilizing the September 30, 2019 fixed-rate advances issued by the FHLB, for all leases entered into prior to the October 1, 2019 adoption date.

Maturities of operating lease liabilities at March 31, 2020 for future fiscal years are as follows (dollars in thousands):

Remainder of 2020
$
159

2021
327

2022
342

2023
310

2024
313

Thereafter
1,639

Total lease payments
3,090

Less imputed interest
331

Total
$
2,759







30


(7) NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period, without considering any dilutive items.  Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period.  Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.  Shares owned by the Bank’s ESOP that had not been allocated were not considered to be outstanding for the purpose of computing basic and diluted net income per common share. At March 31, 2020 and March 31, 2019, all shares had been allocated under the Bank's ESOP.

Information regarding the calculation of basic and diluted net income per common share for the three and six months ended March 31, 2020 and 2019 is as follows (dollars in thousands, except per share amounts):
 
Three Months Ended    March 31,
 
Six Months Ended    March 31,
 
2020

 
2019

 
2020

 
2019

 
 
 
 
 
 
 
 
Numerator – net income
$
5,049

 
$
6,114

 
$
11,701

 
$
11,729

 
 
 
 
 
 
 
 
Denominator – weighted average common shares outstanding
8,344,201

 
8,310,074

 
8,342,828

 
8,301,550

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.61

 
$
0.74

 
$
1.40

 
$
1.41

 
 
 
 
 
 
 
 
Diluted net income per common share computation
 
 
 
 
 

 
 

Numerator – net income
$
5,049

 
$
6,114

 
$
11,701

 
$
11,729

 
 
 
 
 
 
 
 
Denominator – weighted average common shares outstanding
8,344,201

 
8,310,074

 
8,342,828

 
8,301,550

Effect of dilutive stock options (1)
112,458

 
154,576

 
123,066

 
159,588

Weighted average common shares outstanding - assuming dilution
8,456,659

 
8,464,650

 
8,465,894

 
8,461,138

 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.60

 
$
0.72

 
$
1.38

 
$
1.39

____________________________________________
(1) For the three and six months ended March 31, 2020, average options to purchase 138,362 and 121,497 shares of common stock were outstanding but not included in the computation of diluted net income per share because their effect would have been anti-dilutive. For the three and six months ended March 31, 2019, average options to purchase 102,150 and 102,504 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because their effect would have bee anti-dilutive.




(8) ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in accumulated other comprehensive loss ("AOCI") by component during the three and six months ended March 31, 2020 and 2019 are as follows (dollars in thousands):
 
Three Months Ended March 31, 2020
 
Changes in fair value of available for sale securities (1)
 
Changes in OTTI on held to maturity securities (1)
 
Total (1)
Balance of AOCI at the beginning of period
$
(116
)
 
$
(30
)
 
$
(146
)
Other comprehensive (loss) income
(35
)
 
2

 
(33
)
Balance of AOCI at the end of period
$
(151
)
 
$
(28
)
 
$
(179
)
 
Six Months Ended March 31, 2020
 
Changes in fair value of available for sale securities (1)
 
Changes in OTTI on held to maturity securities (1)
 
Total (1)
Balance of AOCI at the beginning of period
$
90

 
$
(40
)
 
$
50

Other comprehensive (loss) income
(241
)
 
12

 
(229
)
Balance of AOCI at the end of period
$
(151
)
 
$
(28
)
 
$
(179
)
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Changes in fair value of available for sale securities (1)
 
Changes in OTTI on held to maturity securities (1)
 
Total (1)
Balance of AOCI at the beginning of period
$
(81
)
 
$
(64
)
 
$
(145
)
Other comprehensive income
84

 
16

 
100

Balance of AOCI at the end of period
$
3

 
$
(48
)
 
$
(45
)
 
Six Months Ended March 31, 2019
 
Changes in fair value of available for sale securities (1)
 
Changes in OTTI on held to maturity securities (1)
 
Total (1)
Balance of AOCI at the beginning of period
$
(58
)
 
$
(71
)
 
$
(129
)
Other comprehensive (loss) income
(2
)
 
23

 
21

Adoption of ASU 2016-01
$
63

 
$

 
$
63

Balance of AOCI at the end of period
$
3

 
$
(48
)
 
$
(45
)
 
 
 
 
 
 
__________________________
(1) All amounts are net of income taxes.


(9) STOCK COMPENSATION PLANS

Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti.  Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, which was approved by shareholders on January 28, 2020, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock to employees, officers, directors and directors emeriti.  Shares issued may be purchased in the open market or may be issued from authorized and unissued shares.  The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally,

31


options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At March 31, 2020, there were 37,726 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At March 31, 2020, there were 350,000 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.

At both March 31, 2020 and 2019, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the six months ended March 31, 2020 and 2019.

Stock option activity for the six months ended March 31, 2020 and 2019 is summarized as follows:
 
Six Months Ended
March 31, 2020
 
Six Months Ended
March 31, 2019
 
 Number of Shares

 
Weighted
Average
Exercise
Price

 
 Number of Shares

 
Weighted
Average
Exercise
Price

Options outstanding, beginning of period
378,304

 
$
18.15

 
380,820

 
$
16.03

Exercised
(36,375
)
 
10.30

 
(30,416
)
 
9.31

Granted
1,000

 
26.50

 

 

Forfeited
(8,650
)
 
24.84

 
(3,900
)
 
18.63

Options outstanding, end of period
334,279

 
$
18.86

 
346,504

 
$
16.59


The weighted average assumptions for options granted during the six months ended March 31, 2020 were as follows:
Expected volatility
29
%
Expected life (in years)
5

Expected dividend yield
3.36
%
Risk free interest rate
1.61
%
Grant date fair value per share
$
4.98


The aggregate intrinsic value of options exercised during the six months ended March 31, 2020 and 2019 was $628,000 and $610,000, respectively.

At March 31, 2020, there were 154,670 unvested options with an aggregate grant date fair value of $584,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2020 was $222,000.  There were no options vested during the six months ended March 31, 2020.

At March 31, 2019, there were 169,650 unvested options with an aggregate grant date fair value of $513,000. There were 23,400 options with an aggregate grant date fair value of $218,000 that vested during the six months ended March 31, 2019.
 
 

32


Additional information regarding options outstanding at March 31, 2020 is as follows:
 
 
Options Outstanding
 
Options Exercisable
Range of
Exercise
Prices ($)
 
Number

 
Weighted
Average
Exercise
Price

 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Number

 
Weighted
Average
Exercise
Price

 
Weighted
Average
Remaining
Contractual
Life (Years)
$ 4.01 - 4.55
 
1,000

 
$
4.01

 
1.7
 
1,000

 
$
4.01

 
1.7
   5.86 - 6.00
 
19,100

 
5.97

 
2.6
 
19,100

 
5.97

 
2.6
   9.00
 
37,425

 
9.00

 
3.6
 
37,425

 
9.00

 
3.6
 10.26 - 10.71
 
91,064

 
10.59

 
5.1
 
68,914

 
10.58

 
5.0
 15.67
 
42,800

 
15.67

 
6.5
 
23,000

 
15.67

 
6.5
 26.50 - 27.14
 
46,640

 
27.13

 
9.5
 

 
N/A

 
N/A
 29.69
 
53,200

 
29.69

 
7.5
 
21,400

 
29.69

 
7.5
 31.80
 
43,050

 
31.80

 
8.5
 
8,770

 
31.80

 
8.5
 
 
334,279

 
$
18.86

 
6.4
 
179,609

 
$
13.69

 
5.1

The aggregate intrinsic value of options outstanding at March 31, 2020 and 2019 was $1.41 million and $4.22 million, respectively.

As of March 31, 2020, unrecognized compensation cost related to unvested stock options was $510,000, which is expected to be recognized over a weighted average life of 2.24 years.


(10) FAIR VALUE MEASUREMENTS

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

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 for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities 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.

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at March 31, 2020 and September 30, 2019. The Company's assets measured at estimated fair value on a recurring basis at March 31, 2020 and September 30, 2019 were as follows (dollars in thousands):

33


March 31, 2020
Estimated Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale investment securities
 
 
 
 
 
 
 
   MBS: U.S. government agencies
$

 
$
41,470

 
$

 
$
41,470

Investments in equity securities
 
 
 
 
 
 
 
   Mutual funds
969

 

 

 
969

Total
$
969

 
$
41,470

 
$

 
$
42,439

 
 
 
 
 
 
 
 
September 30, 2019
Estimated Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale investment securities
 
 
 
 
 
 
 
   MBS: U.S. government agencies
$

 
$
22,532

 
$

 
$
22,532

Investments in equity securities
 
 
 
 
 
 
 
   Mutual funds
958

 

 

 
958

Total
$
958

 
$
22,532

 
$

 
$
23,490


There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2020 and the year ended September 30, 2019.

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis.  The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable.  In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net:  OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell.  Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale.  Estimated costs to sell are based on standard market factors.  The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).













34


The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2020 (dollars in thousands):
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
Impaired loans:
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
One- to four-family
$

 
$

 
$
485

Land

 

 
111

Consumer loans:
 
 
 
 
 
  Commercial business loans

 

 
335

Total impaired loans

 

 
931

Investment securities – held to maturity:
 

 
 

 
 

MBS - private label residential

 
15

 
15

OREO and other repossessed assets

 

 
1,623

Total
$

 
$
15

 
$
2,569


The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, 2020 (dollars in thousands):
 
 Estimated
Fair Value
 
 Valuation
Technique(s)
 
 Unobservable Input(s)
 
 Range
Impaired loans
$
931

 
Market approach
 
Appraised value less estimated selling costs
 
NA
 
 
 
 
 
 
 
 
OREO and other repossessed assets
$
1,623

 
Market approach
 
Lower of appraised value or listing price less estimated selling costs
 
NA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2019 (dollars in thousands):
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
Impaired loans:
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Land
$

 
$

 
$
114

Consumer loans:
 

 
 

 
 

Other

 

 
6

  Commercial business loans

 

 
408

Total impaired loans

 

 
528

Investment securities – held to maturity:
 

 
 

 
 

MBS - private label residential

 
2

 

OREO and other repossessed assets

 

 
1,683

Total
$

 
$
2

 
$
2,211


The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2019 (dollars in thousands):
 
 Estimated
Fair Value
 
 Valuation
Technique(s)
 
 Unobservable Input(s)
 
 Range
Impaired loans
$
528

 
Market approach
 
Appraised value less estimated selling costs
 
NA
 
 
 
 
 
 
 
 
OREO and other repossessed assets
$
1,683

 
Market approach
 
Lower of appraised value or listing price less estimated selling costs
 
NA


35


GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a represented fair value for these types of items as of March 31, 2020 and September 30, 2019. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with ASU No. 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The recorded amounts and estimated fair values of financial instruments were as follows as of March 31, 2020 and September 30, 2019 (dollars in thousands):
 
March 31, 2020
 
 
 
 
 
Fair Value Measurements Using:
 
Recorded
Amount
 
 Estimated Fair Value
 
 
Level 1
 
 
Level 2
 
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
168,148

 
$
168,148

 
$
168,148

 
$

 
$

CDs held for investment
82,472

 
82,472

 
82,472

 

 

Investment securities
78,137

 
79,803

 
2,997

 
76,806

 

Investments in equity securities
969

 
969

 
969

 

 

FHLB stock
1,922

 
1,922

 
1,922

 

 

Other investments
3,000

 
3,000

 
3,000

 

 

Loans held for sale
5,798

 
5,900

 
5,900

 

 

Loans receivable, net
907,657

 
928,886

 

 

 
928,886

     Accrued interest receivable
3,595

 
3,595

 
3,595

 

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 

 
 

 
 

 
 

 
 

Certificates of deposit
173,201

 
175,645

 

 

 
175,645

FHLB borrowings
10,000

 
10,028

 

 

 
10,028

Accrued interest payable
357

 
357

 
357

 

 


36


 
September 30, 2019
 
 
 
 
 
Fair Value Measurements Using:
 
Recorded
Amount
 
 Estimated Fair Value
 
 
Level 1
 
 
Level 2
 
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
143,015

 
$
143,015

 
$
143,015

 
$

 
$

CDs held for investment
78,346

 
78,346

 
78,346

 

 

Investment securities
53,634

 
55,112

 
3,949

 
51,163

 

Investments in equity securities
958

 
958

 
958

 

 

FHLB stock
1,437

 
1,437

 
1,437

 

 

Other investments
3,000

 
3,000

 
3,000

 

 

Loans held for sale
6,071

 
6,260

 
6,260

 

 

Loans receivable, net
886,662

 
892,495

 

 

 
892,495

     Accrued interest receivable
3,598

 
3,598

 
3,598

 

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 

 
 

 
 

 
 

 
 

Certificates of deposit
165,655

 
166,852

 

 

 
166,852

Accrued interest payable
333

 
333

 
333

 

 



(11) RECENT ACCOUNTING PRONOUNCEMENTS

In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 generally requires equity investments - except those accounted for under the valuation method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 effective October 1, 2018. As required by ASU 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet. Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 10.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which created FASB Accounting Standards Codification ("ASC") Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ASC 842 also provides an optional transition method for adoption, under which an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts ASC 842 will continue to be in accordance with current GAAP. ASC 842 was effective for annual periods, and interim

37


periods within those annual periods, beginning after December 15, 2018. The Company adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods. The Company also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Company also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. As a result of adopting ASC 842, total other assets and other liabilities increased by $2.89 million on October 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. As a smaller reporting company, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. ASU 2017-08 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-08 effective October 1, 2019 and it did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and were measured at the earlier of the commitment date or the date performance was completed. The amendments in this ASU require nonemployee share-based payment awards to be measured at the grant-date fair value of the equity instrument. ASU 2018-07 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-07 effective October 1, 2019 and it did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of

38


transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, including interim periods within fiscal years. The adoption of ASU 2019-12 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.


(12) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not in the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income with the exception of gains on sale of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense.

If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue when it satisfies its performance obligation. Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance

39


obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed.
ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.
Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property per the customer's contract. Fees are recognized when the escrow contract closes.
Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.


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


As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc. and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2020.  This analysis as well as other sections of this report contains certain “forward-looking statements.”

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions 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 economic performance.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the effect of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; 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 which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; 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; uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Federal Reserve and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our

40


consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force 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; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; 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 FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"); and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including our 2019 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management’s beliefs and assumptions at the time they are made.  We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements.  These risks could cause our actual results for fiscal 2020 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.


Overview

Timberland Bancorp Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 offices (including its main office in Hoquiam). At March 31, 2020, the Company had total assets of $1.32 billion, net loans receivable of $907.66 million, total deposits of $1.13 billion and total shareholders’ equity of $178.01 million.  The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set for this report, including consolidated financial statements and related data, relates primarily to the Bank's operations.

On October 1, 2018, the Company completed the South Sound Acquisition. The operating results for the three and six months ended March 31, 2020 and 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition. For additional information on the South Sound Acquisition, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."

The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses.  Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).  Net interest income is affected by changes in the volume and mix of interest-earning assets, interest earned on those assets, the volume and mix of interest-bearing liabilities and interest paid on those interest-bearing liabilities. Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis

41


point reductions in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in the current fiscal year and possibly longer.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company recorded a provision of $2.00 million for the second quarter of fiscal 2020, compared to none in the comparable quarter a year ago due primarily to forecasted probable credit losses reflecting the potential future impact of the COVID-19 pandemic on the economy. On March 24, 2020, Washington State Governor Jay Inslee signed a statewide order requiring residents to stay-at-home unless involved in an essential activity. All business, except those that are considered essential, were also ordered to close. As a result of the mandated shutdown and as an essential business, the Company has taken various steps to ensure the safety of customers and personnel including branch lobby closures. To ensure the safety of the Company's customers and employees, services are offered through drive up facilities and/or by appointment. Many of the Company's employees are working remotely or have flexible work schedules, and protective measures within the Company's offices have been established to help ensure the safety of those employees who must work on-site.

The Company began working with loan customers on loan deferral and forbearance plans. As of March 31, 2020, the Company had granted payment deferral plans on 125 loans totaling $79.41 million. These modifications were not classified as TDRs at March 31, 2020 in accordance with the guidance of the CARES Act. The Company is continuing to work on forbearance plans with customers impacted by the COVID-19 Pandemic.

Net income is also affected by non-interest income and non-interest expenses.  For the three and six month period ended March 31, 2020, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.  Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.  Non-interest expenses consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.  Non-interest expenses in certain periods are reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expenses are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Critical Accounting Policies and Estimates

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company’s 2019 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2019 Form 10-K.

Comparison of Financial Condition at March 31, 2020 and September 30, 2019

The Company’s total assets increased by $75.97 million, or 6.1%, to $1.323 billion at March 31, 2020 from $1.247 billion at September 30, 2019.  The increase in total assets was primarily due to increases in cash and cash equivalents, net loans receivable, investment securities, and CDs held for investment. The increase in total assets was funded primarily by increases in total deposits and FHLB borrowings.

Net loans receivable increased by $21.00 million, or 2.4%, to $907.66 million at March 31, 2020 from $886.66 million at September 30, 2019, primarily due to increases in commercial real estate loans and commercial business loans. These increases were partially offset by a decrease in construction loans.  


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Total deposits increased by $57.42 million, or 5.4%, to $1.126 billion at March 31, 2020 from $1.068 billion at September 30, 2019, primarily due to increases in non-interest bearing demand account balances, savings account balances, and NOW checking account balances.
 
Shareholders’ equity increased by $6.94 million, or 4.1%, to $178.01 million at March 31, 2020 from $171.07 million at September 30, 2019.  The increase in shareholders' equity was primarily due to net income, which was partially offset by the payment of dividends to common shareholders and the repurchase of common stock.

A more detailed explanation of the changes in significant balance sheet categories follows:

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment increased by $29.26 million, or 13.2%, to $250.62 million at March 31, 2020 from $221.36 million at September 30, 2019.

Investment Securities:  Investment securities (including investments in equity securities) increased by $24.51 million, or 44.9%, to $79.11 million at March 31, 2020 from $54.59 million at September 30, 2019. This increase was primarily due to the purchase of additional agency mortgage-backed investment securities during the six months ended March 31, 2020, as the Company put a portion of its excess overnight liquidity into higher-earning investment securities during the period. For additional information on investment securities, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB Stock: FHLB stock increased by $485,000, or 33.8%, to $1.92 million at March 31, 2020 from $1.44 million at September 30, 2019, due to purchases required by the FHLB as a result of the increase in total assets and FHLB borrowings.

Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both March 31, 2020 and September 30, 2019. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by $21.00 million, or 2.4%, to $907.66 million at March 31, 2020 from $886.66 million at September 30, 2019.  The increase was primarily due to a $25.16 million increase in commercial real estate loans, an $8.86 million increase in commercial business loans, a $5.26 million increase in multi-family mortgage loans, and a $6.75 million decrease in the undisbursed portion construction loans in process. These increases to net loans receivable were partially offset by a $12.43 million decrease in construction loans, a $7.38 million decrease in one- to four-family mortgage loans, a $2.20 million increase in the allowance for loan losses, and smaller decreases in several other loan categories.

Loan originations increased by $62.17 million, or 36.4%, to $233.03 million for the six months ended March 31, 2020 from $170.86 million for the six months ended March 31, 2019.  The increase in loan originations was primarily due to increased loan demand for one- to four-family mortgage loan refinances and the funding of several larger commercial business and commercial real estate loans. The Company continued to sell longer-term fixed rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. The Company also (on a much smaller volume) sells the guaranteed portion of U.S. Small Business Administration ("SBA") loans.  Sales of fixed rate one- to four-family mortgage loans and SBA loans increased by $33.79 million, or 119.5%, to $62.06 million for the six months ended March 31, 2020 compared to $28.27 million for the six months ended March 31, 2019, primarily due to increased refinance activity for one- to four-family loans.

For additional information, see Note 5 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

The CARES Act authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program ("PPP"). The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As of April 30, 2020, the Company has funded $102.72 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance issued in April 2020. In addition to the 1% interest earned on these loans, the SBA pays banks fees for processing

43


PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. Banks may not collect any fees from the loan applicants.

Premises and Equipment:  Premises and equipment increased by $242,000, or 1.1%, to $23.07 million at March 31, 2020 from $22.83 million at September 30, 2019.  These increases were primarily due to capitalized remodeling costs associated with the Company's new data center facility. The increase was partially offset by normal depreciation and the sale of land acquired in the South Sound Acquisition that had been held for future expansion.

OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by $60,000, or 3.6%, to $1.62 million at March 31, 2020 from $1.68 million at September 30, 2019. The decrease was primarily due to the sale of a commercial real estate property and a land parcel during the six months ended March 31, 2020.  At March 31, 2020, total OREO and other repossessed assets consisted of 10 land parcels totaling $1.62 million.

BOLI (Bank Owned Life Insurance): BOLI increased by $294,000, or 1.4%. to $21.30 million at March 31, 2020 from $21.01 million at September 30, 2019. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI:  The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2020 and September 30, 2019. CDI decreased by $203,000, or 10.0%, to $1.83 million at March 31, 2020 from $2.03 million at September 30, 2019 due to scheduled amortization. For additional information on goodwill and CDI, see Notes 2 and 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Operating Lease Right-of-Use Assets: Operating lease right-of-use assets increased to $2.76 million at March 31, 2020 as the Company adopted ASC 842 on October 1, 2019 and began recording operating lease right-of-use assets and operating lease liabilities on the balance sheet. The operating lease right-of-use assets at March 31, 2020 represented the present value of three operating leases on branch facilities. The Company adopted the provisions of ASC 842 utilizing the optional transition method and therefore prior periods have not been restated.

Deposits: Deposits increased by $57.42 million, or 5.4%, to $1.126 billion at March 31, 2020 from $1.068 billion at September 30, 2019. The increase in total deposits was primarily due to a $19.86 million increase in non-interest bearing demand account balances, a $17.82 million increase in savings account balances, an $11.11 million increase in NOW checking account balances, a $7.55 million increase in certificates of deposit account balances, and a $1.09 million increase in money market account balances.

Deposits consisted of the following at March 31, 2020 and September 30, 2019 (dollars in thousands):
 
March 31, 2020
 
September 30, 2019
 
Amount
 
Percent
 
Amount
 
Percent
Non-interest-bearing demand
$
316,328

 
28.1
%
 
$
296,472

 
27.8
%
NOW checking
308,165

 
27.4

 
297,055

 
27.8

Savings
182,321

 
16.2

 
164,506

 
15.4

Money market
133,839

 
11.9

 
136,151

 
12.7

Money market - reciprocal
11,794

 
1.0

 
8,388

 
0.8

Certificates of deposit under $250
138,906

 
12.3

 
133,241

 
12.5

Certificates of deposit $250 and over
31,088

 
2.8

 
29,211

 
2.7

Certificates of deposit - brokered
3,207

 
0.3

 
3,203

 
0.3

Total
$
1,125,648

 
100.0
%
 
$
1,068,227

 
100.0
%

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings increased to $10.00 million at March 31, 2020, as the Company borrowed funds consistent with its asset-liability objectives in March 2020 as long-term borrowing rates dropped to historic lows in response to the COVID-19 pandemic. At March 31, 2020, FHLB borrowings consisted of two $5.00 million borrowings, with scheduled maturities in March 2025 and March 2027, which bear interest at 1.19% and 1.11%, respectively. The Company did not have any FHLB borrowings at September 30, 2019.


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Operating Lease Liabilities: Operating lease liabilities increased to $2.76 million at March 31, 2020 as the Company adopted ASC 842 on October 1, 2019 and began recording operating lease liabilities and operating lease right-of-use assets on the balance sheet. The operating lease liability at March 31, 2020 represented the present value of three operating leases on branch facilities. The Company adopted the provisions of ASC 842 utilizing the optional transition method and therefore prior periods have not been restated.

Shareholders’ Equity:  Total shareholders’ equity increased by $6.94 million, or 4.1%, to $178.01 million at March 31, 2020 from $171.07 million at September 30, 2019.  The increase was primarily due to net income of $11.70 million for the six months ended March 31, 2020 which was partially offset by dividend payments to common shareholders of $3.76 million and the repurchase of 56,601 shares of the Company's common stock at an average price of $21.88 per share or $1.24 million in total during the six months ended March 31, 2020. The Company had 144,852 shares available to be repurchased under the Company's existing stock repurchase plan at March 31, 2020, but temporarily suspended further repurchase activity on March 16, 2020. For additional information, see Item 2 of Part II of this Form 10-Q.

Asset Quality: The non-performing assets to total assets ratio was 0.38% at March 31, 2020 compared to 0.40% at September 30, 2019. Total non-performing assets increased by $67,000, or 1.3%, to $5.08 million at March 31, 2020 from $5.01 million at September 30, 2019. The increase in non-performing assets was due to an increase of $183,000 in non-accrual loans, which were partially offset by a $60,000 decrease in OREO and other repossessed assets and a $56,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2020 and September 30, 2019 (dollars in thousands):
 
March 31,
2020

 
September 30,
2019

Loans accounted for on a non-accrual basis:
 
 
 
Mortgage loans:
 
 
 
    One- to four-family (1)
$
941

 
$
699

    Commercial
947

 
779

    Land
193

 
204

Consumer loans:
 

 
 

    Home equity and second mortgage
581

 
626

Other
11

 

Commercial business loans
543

 
725

       Total loans accounted for on a non-accrual basis
3,216

 
3,033

 
 
 
 
Accruing loans which are contractually past due 90 days or more

 

 
 
 
 
Total of non-accrual and 90 days past due loans
3,216

 
3,033

 
 
 
 
Non-accrual investment securities
238

 
294

 
 
 
 
OREO and other repossessed assets, net (2)
1,623

 
1,683

       Total non-performing assets (3)
$
5,077

 
$
5,010

 
 
 
 
TDRs on accrual status (4)
$
2,877

 
$
2,903

 
 
 
 
Non-accrual and 90 days or more past due loans as a percentage of loans receivable
0.35
%
 
0.34
%
 
 
 
 
Non-accrual and 90 days or more past due loans as a percentage of total assets
0.24
%
 
0.24
%
 
 
 
 
Non-performing assets as a percentage of total assets
0.38
%
 
0.40
%
 
 
 
 
Loans receivable (5)
$
919,547

 
$
896,352

 
 
 
 
Total assets
$
1,323,101

 
$
1,247,132


45


___________________________________
(1) As of March 31, 2020 and September 30, 2019, the balance of non-accrual one- to-four family properties in the process of foreclosure was $12 and $150, respectively.
(2) As of March 31, 2020 and September 30, 2019, the balance of OREO did not include any foreclosed residential real estate property.
(3) Does not include TDRs on accrual status.
(4) Does not include TDRs totaling $343 and $366 reported as non-accrual loans at March 31, 2020 and September 30, 2019, respectively.
(5)  Does not include loans held for sale and loan balances are before the allowance for loan losses.

The Company has received, and continues to receive, inquiries and requests from borrowers for some type of payment relief due to the COVID 19-pandemic. In response, the Company has made available 90-day payment deferrals with interest continuing to accrue (or scheduled to be paid monthly) to borrowers affected by the COVID-19 pandemic. As of March 31, 2020, the Company had approved COVID-19 pandemic related loan modifications for 125 loans aggregating to $79.41 million, or 8.6% of loans receivable. The Company is continuing to make COVID-19 pandemic related modifications for borrowers and as of April 30, 2020, had approved 178 loan modifications aggregating to $125.24 million, or 13.6% of loans receivable balances as of March 31, 2020.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2020 and 2019

Net income decreased by $1.06 million, or 17.4%, to $5.05 million for the quarter ended March 31, 2020 from $6.11 million for the quarter ended March 31, 2019. Net income per diluted common share decreased by $0.12, or 16.7%, to $0.60 for the quarter ended March 31, 2020 from $0.72 for the quarter ended March 31, 2019. The decreases in net income and net income per diluted common share for the three months ended March 31, 2020 were primarily due to a $2.00 million increase in the provision for loan losses, which was partially offset by a decrease in non-interest expense. Earnings for the current quarter reflect the impact of the COVID-19 pandemic which resulted in a substantial reduction in business activity in market areas the Company operates in.

Net income decreased by $28,000, or 0.2%, to $11.70 million for the six months ended March 31, 2020 from $11.73 million for the six months ended March 31, 2019. Net income per diluted common share decreased $0.01, or 0.7%, to $1.38 for the six months ended March 31, 2020 from $1.39 for the six months ended March 31, 2019. The decreases in net income and net income per diluted common share for the six months ended March 31, 2020 were primarily due to a $2.20 million increase in the provision for loan losses, which was partially offset by a decrease in non-interest expense, and increases in net interest income and non-interest income.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income: Net interest income increased by $152,000, or 1.2%, to $12.88 million for the quarter ended March 31, 2020 from $12.73 million for the quarter ended March 31, 2019. The increase in net interest income was primarily due to an increase in the average balance of interest-earning assets, which was partially offset by a decrease in the average yield on interest-earning assets.

Total interest and dividend income increased by $290,000, or 2.1%, to $14.13 million for the quarter ended March 31, 2020 from $13.84 million for the quarter ended March 31, 2019, primarily due to an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $78.50 million, or 7.0%, to $1.21 billion for the quarter ended March 31, 2020 from $1.13 billion for the quarter ended March 31, 2019. Average loans receivable increased by $45.32 million, or 5.2%, average investment securities increased by $37.81 million, or 98.0%, and average interest-bearing deposits in banks and CDs decreased by $4.82 million, or 2.3%, between the periods. The average yield on interest-earning assets decreased to 4.68% for the quarter ended March 31, 2020 from 4.90% for the quarter ended March 31, 2019. During the quarters ended March 31, 2020 and 2019, interest income on loans receivable increased by $107,000 and $301,000, respectively, due to the accretion of the fair value discount on loans acquired in the South Sound Acquisition. During the quarter ended March 31, 2020, there was a total of $320,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $16,000 collected for the quarter ended March 31, 2019. Total interest expense increased by $138,000, or 12.4%, to $1.25 million for the quarter ended March 31, 2020 from $1.11 million for the quarter ended March 31, 2019. The

46


increase in interest expense was primarily due to increases in both the average cost and the average balance of interest-bearing deposits. The average cost of interest-bearing deposits increased to 0.63% for the quarter ended March 31, 2020 from 0.59% for the quarter ended March 31, 2019. Average interest-bearing liabilities increased by $32.83 million, or 4.3%, to $797.95 million for the quarter ended March 31, 2020 from $765.12 million for the quarter ended March 31, 2019, primarily due to increases in the average balances of savings accounts, NOW checking accounts, certificates of deposit accounts, and borrowings, which were partially offset by a decrease in the average balance of money market accounts.

As a result of these changes, the net interest margin ("NIM") decreased to 4.27% for the quarter ended March 31, 2020 from 4.51% for the quarter ended March 31, 2019. The NIM for the current quarter was increased by approximately 15 basis points due to the accretion of $107,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $320,000 in pre-payment penalties, non-accrual interest, and late fees. The NIM for the comparable quarter one year ago was increased by approximately 11 basis points due to the accretion of $301,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $16,000 of non-accrual interest. The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines. The remaining net discount on these purchased loans was $1.13 million at March 31, 2020.

Net interest income increased by $810,000, or 3.2%, to $25.88 million for the six months ended March 31, 2020 from $25.07 million for the six months ended March 31, 2019. The increase in net interest income was primarily due to an increase in the average balance of interest-earning assets, which was partially offset by a decrease in the average yield on interest-earning assets. Beginning in August 2019, the Federal Reserve reduced the targeted federal funds by 25 basis points three times in 2019 and 150 basis points during the current quarter to a range of 0.00% to 0.25% at March 31, 2020. The 150 basis-point decrease in the federal funds target rate in response to COVID-19 pandemic did not occur until late in the quarter in March 2020, and the full effect of the lower interest rate environment had not yet been realized at quarter end.

Total interest and dividend income increased by $1.17 million, or 4.3%, to $28.32 million for the six months ended March 31, 2020 from $27.16 million for the six months ended March 31, 2019, primarily due to an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $72.99 million, or 6.5%, to $1.19 billion for the six months ended March 31, 2020 from $1.12 billion for the six months ended March 31, 2019. Average loans receivable increased by $47.75 million, or 5.5%, average investment securities increased by $34.58 million, or 102.2%, and average interest bearing deposits in banks and CDs decreased by $9.53 million, or 4.5%, between the periods. The average yield on interest-earning assets decreased to 4.76% for the six months ended March 31, 2020 from 4.86% for the six months ended March 31, 2019. Total interest expense increased by $356,000, or 17.1% to $2.44 million for the six months ended March 31, 2020 from $2.08 million for the six months ended March 31, 2019. The increase in interest expense was primarily due to increases in the average cost and the average balance of interest-bearing deposits. The average cost of interest-bearing deposits increased to 0.62% for the six months ended March 31, 2020 from 0.55% for the six months ended March 31, 2019. Average interest-bearing liabilities increased by $25.21 million, or 3.3%, to $784.68 million for the six months ended March 31, 2020 from $759.47 million for the six months ended March 31, 2019, primarily due to increases in the average balances of savings accounts, NOW checking accounts, certificates of deposit accounts, and borrowings, which were partially offset by a decrease in the average balance of money market accounts. The NIM for the six months ended March 31, 2020 decreased to 4.35% from 4.49% for the six months ended March 31, 2019.




47


Average Balances, Interest and Average Yields/Cost

The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. (Dollars in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable (1)(2)
$
922,011

 
$
12,823

 
5.56
%
 
$
876,688

 
$
12,216

 
5.57
%
Investment securities (2)
76,412

 
489

 
2.56

 
38,599

 
297

 
3.08

Dividends from mutual funds, FHLB stock and other investments
5,513

 
35

 
2.54

 
5,324

 
39

 
2.97

Interest-bearing deposits in banks and CDs
203,936

 
784

 
1.54

 
208,760

 
1,289

 
2.50

Total interest-earning assets
1,207,872

 
14,131

 
4.68

 
1,129,371

 
13,841

 
4.90

Non-interest-earning assets
85,226

 
 

 
 

 
87,299

 
 

 
 

     Total assets
$
1,293,098

 
 

 
 

 
$
1,216,670

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings
$
178,688

 
52

 
0.12

 
$
162,702

 
24

 
0.06

Money market
143,817

 
207

 
0.58

 
158,762

 
309

 
0.79

NOW checking
303,403

 
234

 
0.31

 
288,429

 
204

 
0.29

Certificates of deposit
169,293

 
750

 
1.78

 
155,227

 
576

 
1.50

Long-term borrowings
2,747

 
8

 
1.17

 

 

 

Total interest-bearing liabilities
797,948

 
1,251

 
0.63

 
765,120

 
1,113

 
0.59

Non-interest-bearing deposits
306,907

 
 
 
 
 
281,240

 
 
 
 
Other liabilities
10,982

 
 

 
 

 
11,994

 
 

 
 

Total liabilities
1,115,837

 
 

 
 

 
1,058,354

 
 

 
 

Shareholders' equity
177,261

 
 

 
 

 
158,316

 
 

 
 

Total liabilities and
 
 
 

 
 

 
 
 
 

 
 

shareholders' equity
$
1,293,098

 
 
 
 
 
$
1,216,670

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
12,880

 
 
 
 

 
$
12,728

 
 

Interest rate spread
 
 
 
 
4.05
%
 
 

 
 

 
4.31
%
Net interest margin (3)
 
 
 
 
4.27
%
 
 

 
 

 
4.51
%
Ratio of average interest-earning
   assets to average interest-bearing
   liabilities
 
 
 
 
151.37
%
 
 

 
 

 
147.61
%
_______________
(1)
Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)
Average balances include loans and investment securities on non-accrual status.
(3)
Net interest income divided by total average interest-earning assets, annualized.


48


 
Six Months Ended March 31,
 
2020
 
2019
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest and
Dividends
 
Yield/
Cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable (1)(2)
$
916,931

 
$
25,587

 
5.58
%
 
$
869,184

 
$
23,997

 
5.52
%
Investment securities (2)
68,440

 
928

 
2.71

 
33,856

 
575

 
3.40

Dividends from mutual funds, FHLB stock and other investments
5,453

 
72

 
2.64

 
5,264

 
78

 
2.96

Interest-bearing deposits in banks and CDs
200,107

 
1,735

 
1.73

 
209,641

 
2,506

 
2.39

Total interest-earning assets
1,190,931

 
28,322

 
4.76

 
1,117,945

 
27,156

 
4.86

Non-interest-earning assets
84,311

 
 

 
 

 
88,868

 
 

 
 

     Total assets
$
1,275,242

 
 

 
 

 
$
1,206,813

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings
$
176,628

 
86

 
0.10

 
$
161,643

 
52

 
0.06

Money market
138,758

 
396

 
0.57

 
157,688

 
543

 
0.69

N.O.W. checking
299,884

 
454

 
0.30

 
284,724

 
391

 
0.28

Certificates of deposit
168,039

 
1,496

 
1.78

 
155,413

 
1,098

 
1.42

Short-term borrowings
1

 

 
2.53

 

 

 

Long-term borrowings
1,366

 
8

 
1.17

 

 

 

Total interest-bearing liabilities
784,676

 
2,440

 
0.62

 
759,468

 
2,084

 
0.55

Non-interest-bearing deposits
306,175

 
 
 
 
 
282,019

 
 
 
 
Other liabilities
9,394

 
 

 
 

 
8,806

 
 

 
 

Total liabilities
1,100,245

 
 

 
 

 
1,050,293

 
 

 
 

Shareholders' equity
174,997

 
 

 
 

 
156,520

 
 

 
 

Total liabilities and
 
 
 

 
 

 
 
 
 

 
 

shareholders' equity
$
1,275,242

 
 

 
 

 
$
1,206,813

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
25,882

 
 

 
 

 
$
25,072

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread
 

 
 

 
4.14
%
 
 

 
 

 
4.31
%
Net interest margin (3)
 

 
 

 
4.35
%
 
 

 
 

 
4.49
%
Ratio of average interest-earning
   assets to average interest-bearing
   liabilities
 

 
 

 
151.77
%
 
 

 
 

 
147.20
%
 
 
 
 
 
 
 
 
 
 
 
 
_______________
(1)
Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)
Average balances include loans and investment securities on non-accrual status.
(3)
Net interest income divided by total average interest-earning assets, annualized.


49


Rate Volume Analysis

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company.   Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns).  Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands):
 
Three months ended March 31, 2020
compared to three months
ended March 31, 2019
increase (decrease) due to
 
Six months ended March 31, 2020
compared to six months
ended March 31, 2019
increase (decrease) due to
 
Rate
 
Volume
 
Net
Change
 
Rate
 
Volume
 
Net
Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable and loans held for sale
$
(23
)
 
$
630

 
$
607

 
$
260

 
$
1,330

 
$
1,590

Investment securities
(63
)
 
255

 
192

 
(39
)
 
392

 
353

Dividends from mutual funds, FHLB stock and other investments
(5
)
 
1

 
(4
)
 
(6
)
 

 
(6
)
  Interest-bearing deposits in banks and CDs
(476
)
 
(29
)
 
(505
)
 
(662
)
 
(109
)
 
(771
)
Total net increase in income on interest-earning assets
(567
)
 
857

 
290

 
(447
)
 
1,613

 
1,166

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

 
 
 
 
 
 
Savings
26

 
2

 
28

 
28

 
6

 
34

Money market
(76
)
 
(26
)
 
(102
)
 
(87
)
 
(60
)
 
(147
)
NOW checking
19

 
11

 
30

 
42

 
21

 
63

Certificates of deposit
116

 
58

 
174

 
302

 
96

 
398

   Long-term borrowings

 
8

 
8

 

 
8

 
8

Total net increase in expense on interest-bearing liabilities
85

 
53

 
138

 
285

 
71

 
356

 
 
 
 
 
 
 
 
 
 
 
 
Net increase in net interest income
$
(652
)
 
$
804

 
$
152

 
$
(732
)
 
$
1,542

 
$
810


Provision for Loan Losses: A $2.00 million provision for loan losses was made for the quarter ended March 31, 2020, primarily due to the deteriorating economic conditions and probable losses driven by the impact of the COVID-19 pandemic on the U.S. and global economies. There was no provision for loans losses made for the quarter ended March 31, 2019. For the quarter ended March 31, 2020, there were net recoveries of $8,000 compared to net recoveries of $208,000 for the quarter ended March 31, 2019. Non-accrual loans increased by $183,000, or 6.0%, to $3.22 million at March 31, 2020, from $3.03 million at September 30, 2019 and increased by $471,000, or 17.1%, from $2.75 million at March 31, 2019. Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $492,000, or 12.5%, to $3.43 million at March 31, 2020, from $3.93 million at September 30, 2019 and decreased by $142,000, or 4.0%, from $3.58 million one year ago. 

As of March 31, 2020, Timberland had approved payment deferral plans on 125 loans totaling $79.41 million. These modifications were not classified as TDRs at March 31, 2020 in accordance with the guidance of the CARES Act. The CARES Act provided that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

For the six months ended March 31, 2020 there was a $2.20 million provision for loan losses, primarily due to the COVID-19 pandemic related economic uncertainties discussed above and, to a much lesser extent, loan portfolio growth. There was no provision for loan losses for the six months ended March 31, 2019. There were no net charge-offs for six months ended March 31, 2020 compared to net recoveries of $211,000 for the six months ended March 31, 2019.


50


The Company has established a comprehensive methodology for determining the allowance for loan losses.  On a quarterly basis the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio.  These factors include changes in the amount and composition of the loan portfolio, historical loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.  The aggregate principal impairment reserve amount determined at March 31, 2020 was $89,000 compared to $172,000 at September 30, 2019 and $231,000 at March 31, 2019

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was $1.13 million at March 31, 2020. The Company believes this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on its comprehensive analysis, management believes the allowance for loan losses of $11.89 million at March 31, 2020 (1.29% of loans receivable and 369.7% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.  The allowance for loan losses was $9.69 million (1.08% of loans receivable and 319.5% of non-performing loans) at September 30, 2019 and $9.74 mil1ion (1.10% of loans receivable and 354.9% of non-performing loans) at March 31, 2019. While the Company believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that a substantial increase will not be necessary should the quality of any loans deteriorate. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 5 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income decreased by $260,000, or 6.6%, to $3.68 million for the quarter ended March 31, 2020 from $3.94 million for the quarter ended March 31, 2019. The decrease in non-interest income compared to the same quarter last year was primarily due to a $1.01 million decrease in net BOLI earnings, and smaller decreases in several other categories. These decreases were partially offset by a $448,000 increase in gain on sale of loans, a $283,000 recovery of a previously charged off receivable acquired in the South Sound Acquisition (which is recorded in the "Other" non-interest income category), and smaller increases in several other categories.

Net BOLI earnings were higher for the comparable period one year ago primarily due to a BOLI death benefit claim. The increase in gain on sale of loans was primarily due to an increase in the dollar volume of fixed-rate one- to four-family loans sold during the current quarter.

Total non-interest income for the six months ended March 31, 2020 increased by $412,000, or 5.7%, to $7.62 million from $7.21 million for the six months ended March 31, 2019. This increase was primarily due to a $1.01 million increase in gain on sale of loans, a $303,000 increase in ATM and debit card interchange transaction fees, and smaller increases in several categories. These increases were partially offset by $1.02 million decrease in BOLI net earnings, and smaller decreases in several other categories. The increase in gain on sale of loans was primarily due to an increase in the dollar volume of fixed-rate one- to four-family loans sold during the current period. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions. Net BOLI earnings were higher for the comparable period one year ago primarily due to the BOLI death benefit claim discussed above.

Non-interest Expense:  Total non-interest expense decreased by $991,000, or 10.7%, to $8.29 million for the quarter ended March 31, 2020 from $9.28 million for the quarter ended March 31, 2019. This decrease was primarily due to a $553,000 decrease in data processing and telecommunication expense, a $246,000 decrease in salaries and employee benefits expense, a $97,000 decrease in FDIC insurance expense, and smaller decreases in several other categories. These decreases were partially offset by smaller increases in several categories. Data processing expenses and telecommunications expense and salaries and employee benefits expenses were higher for the prior year's quarter due to expenses associated with the core-operating system conversion to the Jack Henry Silverlake platform. The decrease in salaries and employee benefits expense was primarily due to a decrease in expenses associated with Company's Employee Stock Ownership Plan ("ESOP"), (which was fully allocated as of

51


March 31, 2019) and a decrease in core-operating system conversion related overtime and bonus expenses. The FDIC insurance expense was reduced due to the Bank's receipt of an FDIC insurance assessment credit.

Total non-interest expense decreased by $1.18 million, or 6.6%, to $16.66 million for the six months ended March 31, 2020 from $17.84 million for the six months ended March 31, 2019. This decrease was primarily due to a $582,000 decrease in data processing and telecommunications expense, a $198,000 decrease in FDIC insurance expense, a $130,000 decrease in salaries and employee benefits expense, a $110,000 decrease in premises and equipment expense, a $110,000 increase in gain on disposition of premises and expenses, and smaller decreases in several other categories. These decreases were partially offset by smaller increases in several other categories. Data processing expenses and salaries and employee benefits expenses were higher for the prior year's period due to expenses associated with the Company's core-operating system conversion. The FDIC insurance expense was reduced due to the Bank's receipt of an FDIC insurance assessment credit. The decrease in premises and equipment expense was primarily due to a decrease in building and equipment maintenance expenses. The gain on the disposition of premises and equipment expense was primarily due to the sale of land acquired in the South Sound Acquisition that had been held for future expansion.

The efficiency ratio for the current quarter improved to 50.04% from 55.66% for the comparable quarter one year ago and the efficiency ratio for the six months ended March 31, 2020 improved to 49.73% from 55.27% for the six months ended March 31, 2019.

Provision for Income Taxes: The provision for income taxes decreased by $52,000, or 4.1%, to $1.23 million for the quarter ended March 31, 2020 from $1.28 million for the quarter ended March 31, 2019, primarily due to lower income before income taxes. The provision for income taxes increased by $230,000, or 8.5%, to $2.94 million for the six months ended March 31, 2020 from $2.71 million for the six months ended March 31, 2019. The Company's effective income tax rate was 19.53% for the quarter ended March 31, 2020 and 17.28% for the quarter ended March 31, 2019. The Company's effective income tax rate was 20.08% for the six months ended March 31, 2020 and 18.77% for the six months ended March 31, 2019. The effective income tax rates for both the three and six month periods ended March 31, 2019, were lower primarily due a BOLI death benefit claim which increased the percentage of non-taxable income.

Liquidity

The Company’s primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed).  While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

Liquidity management is both a short and long-term responsibility of the Bank’s management.  The Bank adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits.  Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term investments.

The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.  At March 31, 2020, the Bank’s regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 24.93%.

The Company’s total cash and cash equivalents and CDs held for investment increased by $29.26 million, or 13.2%, to $250.62 million at March 31, 2020 from $221.36 million at September 30, 2019. If the Bank requires funds that exceed its ability to generate them internally, it has additional borrowing capacity with the FHLB, the Federal Reserve Bank of San Francisco ("FRB") and Pacific Coast Bankers' Bank ("PCBB"). At March 31, 2020, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. At March 31, 2020, the Bank had $364.75 million available for additional FHLB borrowings.  At March 31, 2020, the Bank had $10.00 million in FHLB borrowings outstanding. The Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral.  At March 31, 2020, the Bank had $87.15 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line. The Bank also maintains a $10.00 million overnight borrowing line with PCBB. At March 31, 2020, the Bank did not have an outstanding balance on this borrowing line.

The Bank’s primary investing activity is the origination of one- to four-family mortgage loans, commercial mortgage loans, construction loans, consumer loans, and commercial business loans.  At March 31, 2020, the Bank had loan commitments

52


totaling $94.09 million and undisbursed construction loans in process totaling $85.47 million.  The Bank anticipates that it will have sufficient funds available to meet current loan commitments.  CDs that are scheduled to mature in less than one year from March 31, 2020 totaled $104.49 million. 

Capital Resources

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Based on its capital levels at March 31, 2020, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, 2020, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The following table compares the Bank’s actual capital amounts at March 31, 2020 to its minimum regulatory capital requirements at that date (dollars in thousands):
 
 Actual
 
Regulatory
Minimum To
Be “Adequately
Capitalized”
 
To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Leverage Capital Ratio:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital

$159,626

 
12.52
%
 

$51,003

 
4.00
%
 

$63,754

 
5.00
%
Risk-based Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
159,626

 
18.15

 
39,568

 
4.50

 
57,154

 
6.50

Tier 1 capital
159,626

 
18.15

 
52,758

 
6.00

 
70,344

 
8.00

Total capital
170,632

 
19.41

 
70,344

 
8.00

 
87,930

 
10.00


In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets 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 retained income that could be utilized for such actions. At March 31, 2020, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2020, Timberland Bancorp, Inc. would have exceeded all regulatory requirements.


53


The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of March 31, 2020 (dollars in thousands):
 
Actual
 
Amount
 
Ratio
Leverage Capital Ratio:
 
 
 
Tier 1 capital

$162,841

 
12.75
%
Risk-based Capital Ratios:
 
 
 
Common equity tier 1 capital
162,841

 
18.53

Tier 1 capital
162,841

 
18.53

Total capital
173,842

 
19.78


Key Financial Ratios and Data
(Dollars in thousands, except per share data)
 
Three Months Ended March 31,
 
Six Months Ended
March 31,
 
2020

 
2019

 
2020

 
2019

PERFORMANCE RATIOS:
 
 
 
 
 
 
 
Return on average assets
1.56
%
 
2.01
%
 
1.84
%
 
1.94
%
Return on average equity
11.39
%
 
15.45
%
 
13.37
%
 
14.99
%
Net interest margin
4.27
%
 
4.51
%
 
4.35
%
 
4.49
%
Efficiency ratio
50.04
%
 
55.66
%
 
49.73
%
 
55.27
%

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information concerning market risk from the information provided in the Company’s Form 10-K for the fiscal year ended September 30, 2019.

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 several other members of the Company’s senior management as of the end of the period covered by this report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020 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 Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
(b)
Changes in Internal Controls:  There have been no changes in our internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.  The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and 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; as over time, controls may 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
Neither the Company nor the Bank is a party to any material legal proceedings at this time.  From time to time,
the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 1A.    Risk Factors

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In light of recent developments relating to the Coronavirus disease (“COVID-19”) pandemic, the Company is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended September 30, 2019, as filed with the Securities and Exchange Commission on December 9, 2019. The following risk factor should be read in conjunction with the risk factors described in the 2019 Form 10-K.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders.  As an essential business, we continue to provide banking and financial services to our customers with drive-thru access available at the majority of our branch locations and in-person services available by appointment. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

In response to the stay-at-home orders, a number of our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand, other than through government sponsored programs such as the Paycheck Protection Program ("PPP"), deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.
The impact of the pandemic is expected to continue to adversely affect us during fiscal 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made

55


payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank. In addition, since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not
limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us. In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition.

We are an entity separate and distinct from our principal subsidiary, Timberland Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. If the COVID-19 pandemic were to materially adversely affect Timberland Bank’s regulatory capital levels or liquidity, it may result in Timberland Bank being unable to pay dividends to us, which may result in our not being able to pay dividends on our common stock at the same rate or at all.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our 2019 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.


56


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

(a)    Not applicable

(b)    Not applicable

(c)    Stock Repurchases

The following table sets forth the shares repurchased by the Company during the quarter ended March 31, 2020:
 
 
 
 
 
 
 
 
 
Period
 
Total No. of Shares Repurchased
 
Average Price Paid Per Share
 
Total No. of Shares Purchased as Part of Publicly Announced Plan
 
Maximum No. of Shares that May Yet Be Purchased Under the Plan (1)
1/1/2020 - 1/31/2020
 

 
$

 

 
201,453

2/1/2020 - 2/28/2020
 
10,800

 
24.67

 
10,800

 
190,653

3/1/2020 - 3/31/2020
 
45,801

 
21.22

 
45,801

 
144,852

Total
 
56,601

 
$
21.88

 
56,601

 
144,852


(1) On July 28, 2015 the Company announced a plan to repurchase 352,681 shares of the Company's common stock. As of March 31, 2020, a total of 207,829 shares had been repurchased at an average price of $15.71 per share and there were 144,852 shares still authorized to be repurchased under the plan. All shares were repurchased through open market broker transactions and no shares were directly repurchased from directors or officers of the Company.


Item 3.      Defaults Upon Senior Securities
Not applicable.

Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
None to be reported.


57


Item 6.         Exhibits

(a)   Exhibits
 
2.1
Agreement and Plan of Merger, dated as of May 22, 2018, by and between Timberland Bancorp, Timberland Bank and South Sound Bank (1)
 
3.1
 
3.3
 
4.1
Form of Certificate of Timberland Bancorp, Inc. Common Stock (2)
 
10.1
 
10.2
 
10.4
 
10.5
 
10.6
 
10.8
 
10.9
 
10.10
 
10.11
Timberland Bancorp, Inc. 2019 Equity Incentive Plan (10)
 
31.1
 
31.2
 
32
 
101
The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended March 31, 2020, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements
_________________
(1)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 23, 2018.
(2)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).
(3)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2019.
(4)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.
(5)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(6)
Incorporated by reference to the Registrant’s 2004 Annual Meeting Proxy Statement dated December 24, 2003.
(7)
Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).
(8)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.
(9)
Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(10)
Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.

58


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.
 

 
 
Timberland Bancorp, Inc. 
 
 
 
 
Date: May 8, 2020
By:  /s/ Michael R. Sand                                   
 
Michael R. Sand 
 
Chief Executive Officer 
 
(Principal Executive Officer) 
 
 
 
 
Date: May 8, 2020
By:  /s/ Dean J. Brydon                                    
 
Dean J. Brydon 
 
Chief Financial Officer
 
(Principal Financial Officer)

59