TSBK Q1 2018 10-Q

Timberland Bancorp Inc (TSBK) SEC Quarterly Report (10-Q) for Q2 2018

TSBK 2018 10-K
TSBK Q1 2018 10-Q TSBK 2018 10-K

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 June 30, 2018


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)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X      No ___


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_   No __

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


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


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


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

Yes ___    No   _X_


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

CLASS

SHARES OUTSTANDING AT AUGUST 1, 2018

Common stock, $.01 par value

7,395,927



INDEX


PART I. 

FINANCIAL INFORMATION 

Page

Item 1.

Financial Statements (unaudited) 

Consolidated Balance Sheets 

3

Consolidated Statements of Income 

5

Consolidated Statements of Comprehensive Income 

7

Consolidated Statements of Shareholders' Equity 

8

Consolidated Statements of Cash Flows 

9

Notes to Unaudited Consolidated Financial Statements 

11

Item 2.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

37

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk  

50

Item 4. 

Controls and Procedures 

50

PART II.

OTHER INFORMATION 

Item 1.

Legal Proceedings 

50

Item 1A.

Risk Factors 

50

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures 

51

Item 5 .     

Other Information

51

Item 6.

Exhibits

51

SIGNATURES

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

June 30, 2018 and September 30, 2017

(Dollars in thousands, except per share amounts)

June 30,
2018


September 30,
2017


(Unaudited)

*


Assets

Cash and cash equivalents:

Cash and due from financial institutions

$

19,552


$

17,447


Interest-bearing deposits in banks

137,274


130,741


Total cash and cash equivalents

156,826


148,188


Certificates of deposit ("CDs") held for investment (at cost, which

     approximates fair value)

63,132


43,034


Investment securities held to maturity, at amortized cost

     (estimated fair value $8,440 and $7,744)

7,951


7,139


Investment securities available for sale, at fair value

1,176


1,241


Federal Home Loan Bank of Des Moines ("FHLB") stock

1,190


1,107


Other investments, at cost

3,000


3,000


Loans held for sale

2,321


3,599


Loans receivable, net of allowance for loan losses of $9,532 and $9,553

717,324


690,364


Premises and equipment, net

18,515


18,418


Other real estate owned ("OREO") and other repossessed assets, net

2,112


3,301


Accrued interest receivable

2,797


2,520


Bank owned life insurance ("BOLI")

19,673


19,266


Goodwill

5,650


5,650


Mortgage servicing rights ("MSRs"), net

1,980


1,825


Other assets

2,736


3,372


Total assets

$

1,006,383


$

952,024


Liabilities and shareholders' equity



Liabilities



Deposits:

     Non-interest-bearing demand

$

229,201


$

205,952


     Interest-bearing

651,526


631,946


Total deposits

880,727


837,898


Other liabilities and accrued expenses

4,762


3,126


Total liabilities

885,489


841,024


* Derived from audited consolidated financial statements.


See notes to unaudited consolidated financial statements


3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (continued)

June 30, 2018 and September 30, 2017

(Dollars in thousands, except per share amounts)

June 30,
2018


September 30,
2017


(Unaudited)

*


Shareholders' equity

Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued

$

-


$

-


Common stock, $.01 par value; 50,000,000 shares authorized;

7,395,927 shares issued and outstanding - June 30, 2018 7,361,077 shares issued and outstanding - September 30, 2017

14,162


13,286


Unearned shares issued to Employee Stock Ownership Plan ("ESOP")

(199

)

(397

)

Retained earnings

107,065


98,235


Accumulated other comprehensive loss

(134

)

(124

)

Total shareholders' equity

120,894


111,000


Total liabilities and shareholders' equity

$

1,006,383


$

952,024


* 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 nine months ended June 30, 2018 and 2017

(Dollars in thousands, except per share amounts)

(Unaudited)


Three Months Ended 
 June 30,

Nine Months Ended 
 June 30,

2018


2017


2018


2017


Interest and dividend income

Loans receivable and loans held for sale

$

9,530


$

9,652


$

28,342


$

27,280


Investment securities

51


69


147


207


Dividends from mutual funds, FHLB stock and other investments

31


23


83


60


Interest-bearing deposits in banks and CDs

845


421


2,209


1,081


Total interest and dividend income

10,457


10,165


30,781


28,628


Interest expense

Deposits

730


549


1,996


1,637


FHLB borrowings

-


369


-


979


Total interest expense

730


918


1,996


2,616


Net interest income

9,727


9,247


28,785


26,012


Recapture of loan losses

-


(1,000

)

-


(1,250

)

Net interest income after recapture of loan losses

9,727


10,247


28,785


27,262


Non-interest income

Recoveries (other than temporary impairment "OTTI") on investment securities

19


-


60


-


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

-


-


(5

)

-


Net recoveries on investment securities

19


-


55


-


Service charges on deposits

1,137


1,153


3,447


3,348


ATM and debit card interchange transaction fees

921


855


2,648


2,448


BOLI net earnings

134


133


407


406


Gain on sales of loans, net

435


561


1,427


1,656


Escrow fees

47


51


158


191


Servicing income on loans sold

121


106


354


302


Other, net

331


297


868


873


Total non-interest income, net

3,145


3,156


9,364


9,224




See notes to unaudited consolidated financial statements


5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three and nine months ended June 30, 2018 and 2017

(Dollars in thousands, except per share amounts)

(Unaudited)

Three Months Ended 
 June 30,

Nine Months Ended 
 June 30,

2018


2017


2018


2017


Non-interest expense

Salaries and employee benefits

$

3,912


$

3,741


$

11,862


$

11,176


Premises and equipment

795


764


2,361


2,295


(Gain) loss on sales of premises and equipment, net

-


3


(113

)

3


Advertising

205


170


591


499


OREO and other repossessed assets, net

(92

)

4


114


22


ATM and debit card interchange transaction fees

334


375


982


1,036


Postage and courier

104


109


340


324


State and local taxes

169


176


498


484


Professional fees

368


230


829


629


Federal Deposit Insurance Corporation ("FDIC") insurance

101


99


242


319


Loan administration and foreclosure

76


20


247


113


Data processing and telecommunications

465


480


1,427


1,394


Deposit operations

285


301


815


850


Other

400


466


1,324


1,462


Total non-interest expense

7,122


6,938


21,519


20,606


Income before income taxes

5,750


6,465


16,630


15,880


Provision for income taxes

1,334


2,188


4,331


5,328


Net income

$

4,416


$

4,277


$

12,299


$

10,552


Net income per common share

Basic

$

0.60


$

0.59


$

1.68


$

1.49


Diluted

$

0.59


$

0.58


$

1.64


$

1.44


Weighted average common shares outstanding

Basic

7,345,618


7,269,564


7,328,702


7,088,134


Diluted

7,535,157


7,432,171


7,518,447


7,348,486


Dividends paid per common share

$

0.23


$

0.11


$

0.47


$

0.31



See notes to unaudited consolidated financial statements


6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and nine months ended June 30, 2018 and 2017

(Dollars in thousands)

(Unaudited) 

Three Months Ended 
 June 30,

Nine Months Ended 
 June 30,

2018


2017


2018


2017


Comprehensive income

Net income

$

4,416


$

4,277


$

12,299


$

10,552


Unrealized holding (loss) gain on investment securities available for sale, net of income taxes of ($1), $3, ($5) and ($11), respectively

(7

)

5


(32

)

(22

)

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, $0, ($2) and $0, respectively

-


-


(6

)

-


Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $0, $0, $1 and $0, respectively

-


-


4


-


Accretion of OTTI on investment securities held to maturity, net of income taxes of $2, $5, $8 and $18, respectively

5


11


24


35


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

(2

)

16


(10

)

13


Total comprehensive income

$

4,414


$

4,293


$

12,289



$

10,565





See notes to unaudited consolidated financial statements


7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the nine months ended June 30, 2018 and 2017

(Dollars in thousands, except per share amounts)

(Unaudited)


Common Stock

Unearned

 Shares Issued to ESOP


Accumulated

Other

Compre-

hensive
Loss


Number of Shares

Amount

Retained

Earnings

Total

Balance, September 30, 2016

6,943,868


$

9,961


$

(661

)

$

87,709


$

(175

)

$

96,834


Net income

-


-


-


10,552


-


10,552


Other comprehensive income

-


-


-


-


13


13


Exercise of stock warrant

370,899


2,496


-


-


-


2,496


Exercise of stock options

39,810


265


-


-


-


265


Common stock dividends ($0.31 per common share)

-


-


-


(2,243

)

-


(2,243

)

Earned ESOP shares, net of income taxes

-


230


198


-


-


428


Stock option compensation expense

-


271


-


-


-


271


Balance, June 30, 2017

7,354,577


13,223


(463

)

96,018


(162

)

108,616


Balance, September 30, 2017

7,361,077


13,286


(397

)

98,235


(124

)

111,000


Net income

-


-


-


12,299


-


12,299


Other comprehensive loss

-


-


-


-


(10

)

(10

)

Exercise of stock options

34,850


292


-


-


-


292


Common stock dividends ($0.47 per common share)

-


-


-


(3,469

)

-


(3,469

)

Earned ESOP shares, net of income taxes

-


454


198


-


-


652


Stock option compensation expense

-


130


-


-


-


130


Balance, June 30, 2018

7,395,927


$

14,162


$

(199

)

$

107,065


$

(134

)

$

120,894


See notes to unaudited consolidated financial statements


8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended June 30, 2018 and 2017

(In thousands)

(Unaudited)


Nine Months Ended
June 30,

2018


2017


Cash flows from operating activities

Net income

$

12,299


$

10,552


Adjustments to reconcile net income to net cash provided by

   operating activities:



Recapture of loan losses

-


(1,250

)

Depreciation

940


946


Earned ESOP shares

652


428


Stock option compensation expense

130


271


Net recoveries on investment securities

(55

)

-


Gain on sales of OREO and other repossessed assets, net

(217

)

(53

)

Provision for OREO losses

224


42


Gain on sales of loans, net

(1,427

)

(1,656

)

(Gain) loss on sales of premises and equipment, net

(113

)

3


Loans originated for sale

(46,256

)

(54,805

)

Proceeds from sales of loans

48,961


56,542


Amortization of MSRs

363


369


BOLI net earnings

(407

)

(406

)

Increase in deferred loan origination fees

3


80


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

1,445


(332

)

Net cash provided by operating activities

16,542


10,731


Cash flows from investing activities



Net (increase) decrease in CDs held for investment

(20,098

)

11,813


Proceeds from maturities and prepayments of investment securities held to maturity

413


387


Purchase of investment securities held to maturity

(1,111

)

-


Proceeds from maturities and prepayments of investment securities available for sale

28


49


Purchase of FHLB stock

(83

)

(103

)

Redemption of FHLB stock

-


1,200


Purchase of other investments

-


(3,000

)

Increase in loans receivable, net

(27,287

)

(23,566

)

Additions to premises and equipment

(1,387

)

(3,249

)

Proceeds from sales of premises and equipment

463


-


Proceeds from sales of OREO and other repossessed assets

1,506


1,435


Net cash used in investing activities

(47,556

)

(15,034

)

S ee notes to unaudited consolidated financial statements


9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the nine months ended June 30, 2018 and 2017

(In thousands)

(Unaudited)


Nine Months Ended
June 30,

2018


2017


Cash flows from financing activities



Net increase in deposits

$

42,829


$

57,284


Repayment of FHLB borrowings

-


(30,000

)

Proceeds from exercise of stock options

292


265


Proceeds from exercise of stock warrant

-


2,496


Payment of dividends

(3,469

)

(2,243

)

Net cash provided by financing activities

39,652


27,802




Net increase in cash and cash equivalents

8,638


23,499


Cash and cash equivalents



Beginning of period

148,188


108,941


End of period

$

156,826


$

132,440


Supplemental disclosure of cash flow information



Income taxes paid

$

2,208


$

5,376


Interest paid

1,939


2,701


Supplemental disclosure of non-cash investing activities



Loans transferred to OREO and other repossessed assets

$

324


$

724


Other comprehensive (loss) income related to investment securities

(10

)

13


See notes to unaudited consolidated financial statements


10


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. ("Company") 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, 2017 ("2017 Form 10-K").  The unaudited consolidated results of operations for the nine months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2018.


(b)  Principles of Consolidation:  The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-owned subsidiary, Timberland Service Corporation.   All significant intercompany 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 under the operating name, "Timberland Bank."


(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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue 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 June 30, 2018 presentation with no change to net income or total shareholders' equity as previously reported.



11


(2) 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 June 30, 2018 and September 30, 2017 (dollars in thousands):

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Estimated

Fair Value

June 30, 2018

Held to maturity

Mortgage-backed securities ("MBS"):

U.S. government agencies

$

1,466


$

9


$

(19

)

$

1,456


Private label residential

489


575


(1

)

1,063


U.S. Treasury and U.S government agency securities

5,996


-


(75

)

5,921


Total

$

7,951


$

584


$

(95

)

$

8,440


Available for sale





MBS: U.S. government agencies

$

243


$

9


$

-


$

252


Mutual funds

1,000


-


(76

)

924


Total

$

1,243


$

9


$

(76

)

$

1,176


September 30, 2017

Held to maturity





MBS:





U.S. government agencies

$

532


$

11


$

(1

)

$

542


Private label residential

599


596


(2

)

1,193


U.S. Treasury and U.S. government agency securities

6,008


10


(9

)

6,009


Total

$

7,139


$

617


$

(12

)

$

7,744


Available for sale





MBS: U.S. government agencies

$

271


$

18


$

-


$

289


Mutual funds

1,000


-


(48

)

952


Total

$

1,271


$

18


$

(48

)

$

1,241




12


Held to maturity and available for sale investment securities with unrealized losses were as follows for June 30, 2018 (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

$

1,010


$

(18

)

2


$

67


$

(1

)

5


$

1,077


$

(19

)

Private label residential

-


-


-


52


(1

)

8


52


(1

)

U.S. Treasury and U.S. government agency securities

5,921


(75

)

2


-


-


-


5,921


(75

)

Total

$

6,931


$

(93

)

4


$

119


$

(2

)

13


$

7,050


$

(95

)

Available for sale









MBS: U.S. government agency

$

35


$

-


1


$

-


$

-


-


$

35


$

-


Mutual funds

-


-


-


924


(76

)

1


924


(76

)

Total

$

35


$

-


1


$

924


$

(76

)

1


$

959


$

(76

)


Held to maturity and available for sale investment securities with unrealized losses were as follows for September 30, 2017 (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

$

-


$

-


-


$

114


$

(1

)

6


$

114


$

(1

)

Private label residential

-


-


-


85


(2

)

10


85


(2

)

U.S. Treasury and U.S. government agency securities

2,984


(9

)

1


-


-


-


2,984


(9

)

Total

$

2,984


$

(9

)

1


$

199


$

(3

)

16


$

3,183


$

(12

)

Available for sale









Mutual funds

$

-


$

-


-


$

952


$

(48

)

1


$

952


$

(48

)

Total

$

-


$

-


-


$

952


$

(48

)

1


$

952


$

(48

)


The Company has evaluated the investment securities in the above tables and has determined that the decline in their 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 market value recovers.  Furthermore, as of June 30, 2018 , 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).



13


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 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 June 30, 2018 and 2017:

Range

Weighted

Minimum 

Maximum 

Average 

June 30, 2018

Constant prepayment rate

6.00

%

15.00

%

11.58

%

Collateral default rate

-

%

12.31

%

5.51

%

Loss severity rate

-

%

74.00

%

42.49

%

June 30, 2017

Constant prepayment rate

6.00

%

15.00

%

11.54

%

Collateral default rate

0.09

%

9.88

%

4.66

%

Loss severity rate

6.00

%

62.00

%

41.93

%


The following table presents the OTTI recoveries (losses) for the three and nine months ended June 30, 2018 and 2017 (dollars in thousands):


Three Months Ended
June 30, 2018

Three Months Ended
June 30, 2017

Held To

Maturity

Available

For Sale

Held To

Maturity

Available

For Sale

Total recoveries

$

19


$

-


$

-


$

-


Adjustment for portion of OTTI transferred from

       other comprehensive income (loss) before income taxes (1)

-


-


-


-


Net recoveries recognized in earnings (2)

$

19


$

-


$

-


$

-


Nine Months Ended
June 30, 2018

Nine Months Ended
June 30, 2017

Held To

Maturity

Available

For Sale

Held To

Maturity

Available

For Sale

Total recoveries

$

60


$

-


$

-


$

-


Adjustment for portion of OTTI transferred from

       other comprehensive income (loss) before income taxes (1)

(5

)

-


-


-


Net recoveries recognized in earnings (2)

$

55


$

-


$

-


$

-


_________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.


14


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 nine months ended June 30, 2018 and 2017 (dollars in thousands):

Nine Months Ended June 30,

2018


2017


Beginning balance of credit loss

$

1,301


$

1,505


Additions:



Additional increases to the amount

related to credit loss for which OTTI

was previously recognized

14


-


Subtractions:


Realized losses previously recorded

as credit losses

(69

)

(48

)

Recovery of prior credit loss

(55

)

-


Ending balance of credit loss

$

1,191


$

1,457



During the three months ended June 30, 2018 , the Company recorded a $28,000 net realized loss (as a result of the securities being deemed worthless) on 16 held to maturity investment securities, of which the entire amount had been recognized previously as a credit loss. During the nine months ended June 30, 2018, the Company recorded a $69,000 net realized loss (as a result of securities being deemed worthless) on 17 held to maturity residential MBS, of which the entire amount had been previously recognized as a credit loss. During the three months ended June 30, 2017 , the Company recorded a $12,000 net realized loss (as a result of the securities being deemed worthless) on 15 held to maturity investment securities, of which the entire amount had been recognized previously as a credit loss. During the nine months ended June 30, 2017, the Company recorded a $ 48,000 net realized loss (as a result of securities being deemed worthless) on 18 held to maturity residential MBS, of which the entire amount had been previously recognized 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 $7.20 million and $6.82 million at June 30, 2018 and September 30, 2017 , respectively.


The contractual maturities of debt securities at June 30, 2018 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

$

3,001


$

2,983


$

-


$

-


Due after one year to five years

4,018


3,943


-


-


Due after five years to ten years

42


42


-


-


Due after ten years

890


1,472


243


252


Total

$

7,951


$

8,440


$

243


$

252




(3) GOODWILL


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.



15


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 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. 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, 2018.


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.


As of June 30, 2018, management believes that there have been no events or changes in the circumstances since May 31, 2018 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.



16


(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES


Loans receivable by portfolio segment consisted of the following at June 30, 2018 and September 30, 2017 (dollars in thousands):

June 30,
2018

September 30,
2017

Amount

Percent

Amount

Percent

Mortgage loans:

One- to four-family (1)

$

114,148


14.4

%

$

118,147


15.1

%

Multi-family

58,169


7.3


58,607


7.5


Commercial

345,543


43.5


328,927


41.9


Construction - custom and owner/builder

113,468


14.3


117,641


15.0


Construction - speculative one- to four-family

10,146


1.3


9,918


1.2


Construction - commercial

26,347


3.3


19,630


2.5


Construction - multi-family

15,225


1.9


21,327


2.7


Construction - land development

3,190


0.4


-


-


Land

23,662


3.0


23,910


3.0


Total mortgage loans

709,898


89.4


698,107


88.9


Consumer loans:





Home equity and second mortgage

38,143


4.8


38,420


4.9


Other

3,674


0.4


3,823


0.5


Total consumer loans

41,817


5.2


42,243


5.4


Commercial business loans (2)

43,284


5.4


44,444


5.7


Total loans receivable

794,999


100.0

%

784,794


100.0

%

Less:





Undisbursed portion of construction 

loans in process

65,674



82,411



Deferred loan origination fees, net

2,469



2,466



Allowance for loan losses

9,532



9,553



77,675


94,430


Loans receivable, net

$

717,324



$

690,364



_____________________________

 (1) Does not include one- to four-family loans held for sale totaling $2,321 and $3,515 at June 30, 2018 and September 30, 2017, respectively.

 (2) Does not include commercial business loans held for sale totaling $0 and $84 at June 30, 2018 and September 30, 2017, respectively.

















17






Allowance for Loan Losses

The following tables set forth information for the three and nine months ended June 30, 2018 and 2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


Three Months Ended June 30, 2018

Beginning

Allowance

Provision for

(Recapture of) Loan Losses

Charge-

offs

Recoveries

Ending

Allowance

Mortgage loans:

One- to four-family

$

1,060


$

(33

)

$

-


$

-


$

1,027


Multi-family

386


21


-


-


407


Commercial

4,198


(15

)

-


-


4,183


Construction – custom and owner/builder

705


(38

)

-


-


667


Construction – speculative one- to four-family

99


34


-


-


133


Construction – commercial

445


74


-


-


519


Construction – multi-family

284


(137

)

-


-


147


Construction – land development

48


32


-


-


80


Land

691


64


(16

)

5


744


Consumer loans:





Home equity and second mortgage

945


1


-


-


946


Other

120


2


(1

)

-


121


Commercial business loans

563


(5

)

-


-


558


Total

$

9,544


$

-


$

(17

)

$

5


$

9,532



Nine Months Ended June 30, 2018

Beginning

Allowance

Provision for

(Recapture of) Loan Losses

Charge-

offs

Recoveries

Ending

Allowance

Mortgage loans:

One-to four-family

$

1,082


$

(55

)

$

-


$

-


$

1,027


Multi-family

447


(40

)

-


-


407


Commercial

4,184


27


(28

)

-


4,183


Construction – custom and owner/builder

699


(32

)

-


-


667


Construction – speculative one- to four-family

128


(6

)

-


11


133


Construction – commercial

303


216


-


-


519


Construction – multi-family

173


(26

)

-


-


147


Construction – land development

-


80


-


-


80


Land

918


(172

)

(16

)

14


744


Consumer loans:






Home equity and second mortgage

983


(37

)

-


-


946


Other

121


2


(3

)

1


121


Commercial business loans

515


43


-


-


558


Total

$

9,553


$

-


$

(47

)

$

26


$

9,532




18


Three Months Ended June 30, 2017

Beginning

Allowance

Provision for

(Recapture of) Loan Losses

Charge-

offs

Recoveries

Ending

Allowance

Mortgage loans:

  One- to four-family

$

1,126


$

(11

)

$

-


$

-


$

1,115


  Multi-family

480


(16

)

-


-


464

  Commercial

4,316


(1,040

)

-


1,061


4,337

  Construction – custom and owner/builder

695


17


-


-


712

  Construction – speculative one- to four-family

85


(15

)

-


5


75

  Construction – commercial

268


15


-


-


283

Construction – multi-family

96


36


-


-


132


  Land

947


1


(49

)

5


904

Consumer loans:

  Home equity and second mortgage

957


(2

)

-


-


955

  Other

130


6


(2

)

-


134

Commercial business loans

490


9


-


-


499

Total

$

9,590


$

(1,000

)

$

(51

)

$

1,071


$

9,610




Nine Months Ended June 30, 2017

Beginning

Allowance

Provision for

(Recapture of) Loan Losses

Charge-

offs

Recoveries

Ending

Allowance

Mortgage loans:

  One-to four-family

$

1,239


$

(145

)

$

-


$

21


$

1,115


  Multi-family

473


(9)


-


-


464

  Commercial

4,384


(1,095)


(13

)

1,061


4,337

  Construction – custom and owner/builder

619


93


-


-


712

  Construction – speculative one- to four-family

130


(60)


-


5


75

  Construction – commercial

268


15


-


-


283

Construction – multi-family

316


(184

)

-


-


132


  Land

820


120


(51

)

15


904

Consumer loans:

  Home equity and second mortgage

939


16


-


-


955

  Other

156


(18)


(6

)

2


134

Commercial business loans

482


17


-


-


499

Total

$

9,826


$

(1,250

)

$

(70

)

$

1,104


$

9,610




19


The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at June 30, 2018 and September 30, 2017 (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

June 30, 2018

Mortgage loans:

One- to four-family

$

-


$

1,027


$

1,027


$

1,873


$

112,275


$

114,148


Multi-family

-


407


407


-


58,169


58,169


Commercial

-


4,183


4,183


2,801


342,742


345,543


Construction – custom and owner/builder

-


667


667


-


66,651


66,651


Construction – speculative one- to four-family

-


133


133


-


5,312


5,312


Construction – commercial

-


519


519


-


21,640


21,640


Construction –  multi-family

-


147


147


-


6,526


6,526


Construction – land development

-


80


80


-


2,573


2,573


Land

-


744


744


540


23,122


23,662


Consumer loans:






Home equity and second mortgage

297


649


946


570


37,573


38,143


Other

-


121


121




3,674


3,674


Commercial business loans

61


497


558


174


43,110


43,284


Total

$

358


$

9,174


$

9,532


$

5,958


$

723,367


$

729,325


September 30, 2017







Mortgage loans:







One- to four-family

$

-


$

1,082


$

1,082


$

1,443


$

116,704


$

118,147


Multi-family

-


447


447


-


58,607


58,607


Commercial

26


4,158


4,184


3,873


325,054


328,927


Construction – custom and owner/builder

-


699


699


-


63,538


63,538


Construction – speculative one- to four-family

-


128


128


-


4,639


4,639


Construction – commercial

-


303


303


-


11,016


11,016


Construction – multi-family

-


173


173


-


6,912


6,912


Land

125


793


918


1,119


22,791


23,910


Consumer loans:







Home equity and second mortgage

325


658


983


557


37,863


38,420


Other

-


121


121


-


3,823


3,823


Commercial business loans

-


515


515


-


44,444


44,444


Total

$

476


$

9,077


$

9,553


$

6,992


$

695,391


$

702,383




20


The following tables present an analysis of loans by aging category and portfolio segment at June 30, 2018 and September 30, 2017 (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

June 30, 2018

Mortgage loans:

One- to four-family

$

-


$

-


$

1,361


$

-


$

1,361


$

112,787


$

114,148


Multi-family

-


-


-


-


-


58,169


58,169


Commercial

103


-


598


-


701


344,842


345,543


Construction – custom and owner/builder

-


-


-


-


-


66,651


66,651


Construction – speculative one- to four- family

-


-


-


-


-


5,312


5,312


Construction – commercial

-


-


-


-


-


21,640


21,640


Construction – multi-family

-


-


-


-


-


6,526


6,526


Construction – land development

-


-


-


-


-


2,573


2,573


Land

42


-


295


-


337


23,325


23,662


Consumer loans:







Home equity and second mortgage

34


-


278


428


740


37,403


38,143


Other

4


-


-


-


4


3,670


3,674


Commercial business loans

110


-


174


-


284


43,000


43,284


Total

$

293


$

-


$

2,706


$

428


$

3,427


$

725,898


$

729,325


September 30, 2017








Mortgage loans:








One- to four-family

$

193


$

-


$

874


$

-


$

1,067


$

117,080


$

118,147


Multi-family

-


-


-


-


-


58,607


58,607


Commercial

-


107


213


-


320


328,607


328,927


   Construction – custom and owner/
       builder

-


-


-


-


-


63,538


63,538


Construction – speculative one- to four- family

-


-


-


-


-


4,639


4,639


Construction – commercial

-


-


-


-


-


11,016


11,016


Construction – multi-family

-


-


-


-


-


6,912


6,912


Land

-


-


566


-


566


23,344


23,910


Consumer loans:






Home equity and second mortgage

56


-


258


-


314


38,106


38,420


Other

36


-


-


-


36


3,787


3,823


Commercial business loans

110


-


-


-


110


44,334


44,444


Total

$

395


$

107


$

1,911


$

-


$

2,413


$

699,970


$

702,383


______________________

(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.


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.


21



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 June 30, 2018 and September 30, 2017 , there were no loans classified as loss.



22


The following tables present an analysis of loans by credit quality indicator and portfolio segment at June 30, 2018 and September 30, 2017 (dollars in thousands):

Loan Grades

June 30, 2018

Pass

Watch

Special
Mention

Substandard

Total

Mortgage loans:

One- to four-family

$

110,784


$

888


$

587


$

1,889


$

114,148


Multi-family

58,169


-


-


-


58,169


Commercial

335,497


5,961


3,199


886


345,543


Construction – custom and owner/builder

65,739


912


-


-


66,651


Construction – speculative one- to four-family

5,312


-


-


-


5,312


Construction – commercial

21,640


-


-


-


21,640


Construction – multi-family

6,526


-


-


-


6,526


Construction – land development

2,573


-


-


-


2,573


Land

20,610


996


1,761


295


23,662


Consumer loans:





Home equity and second mortgage

37,559


144


-


440


38,143


Other

3,639


-


-


35


3,674


Commercial business loans

43,037


24


49


174


43,284


Total

$

711,085


$

8,925


$

5,596


$

3,719


$

729,325


September 30, 2017






Mortgage loans:





One- to four-family

$

115,481


$

422


$

644


$

1,600


$

118,147


Multi-family

56,857


-


1,750


-


58,607


Commercial

318,717


6,059


3,540


611


328,927


Construction – custom and owner/builder

63,210


328


-


-


63,538


Construction – speculative one- to four-family

4,639


-


-


-


4,639


Construction – commercial

11,016


-


-


-


11,016


Construction – multi-family

6,912


-


-


-


6,912


Land

20,528


1,022


1,794


566


23,910


Consumer loans:





Home equity and second mortgage

37,828


152


-


440


38,420


Other

3,787


-


-


36


3,823


Commercial business loans

43,416


973


55


-


44,444


Total

$

682,391


$

8,956


$

7,783


$

3,253


$

702,383



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


23


measurement 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.  


24


The following table is a summary of information related to impaired loans by portfolio segment as of June 30, 2018 and for the three and nine 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

$

1,873


$

2,020


$

-


$

1,596


$

1,514


$

21


$

62


$

18


$

53


Commercial

2,801


2,801


-


2,690


2,374


38


114


31


93


Land

540


644


-


493


332


5


11


5


10


Consumer loans:


Home equity and second mortgage

195


195


-


190


173


-


3


-


3


Subtotal

5,409


5,660


-


4,969


4,393


64


190


54


159


With an allowance recorded:




Mortgage loans:




One- to four-family

-


-


-


-


11


-


-


-


-


Commercial

-


-


-


-


950


-


27


-


21


Land

-




-


98


479


-


9


-


8


Consumer loans:

Home equity and second mortgage

375


375


297


335


350


5


16


3


13


Commercial business loans

174


174


61


178


134


-


-


-


-


Subtotal

549


549


358


611


1,924


5


52


3


42


Total:




Mortgage loans:




One- to four-family

1,873


2,020


-


1,596


1,525


21


62


18


53


Commercial

2,801


2,801


-


2,690


3,324


38


141


31


114


Land

540


644


-


591


811


5


20


5


18


Consumer loans:

Home equity and second mortgage

570


570


297


525


523


5


19


3


16


Commercial business loans

174


174


61


178


134


-


-


-


-


Total

$

5,958


$

6,209


$

358


$

5,580


$

6,317


$

69


$

242


$

57


$

201


______________________________________________

(1)

For the three months ended June 30, 2018 .

(2)

For the nine months ended June 30, 2018.


25


The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2017 (dollars in thousands):

Recorded

Investment

Unpaid Principal Balance (Loan Balance Plus Charge Off)

Related

Allowance


Average

Recorded

Investment (1)

Interest

Income

Recognized

(1)

Cash Basis Interest Income Recognized (1)

With no related allowance recorded:

Mortgage loans:

One- to four-family

$

1,443


$

1,589


$

-


$

1,108


$

68


$

62


Commercial

1,967


1,967


-


3,901


188


143


Construction – custom and owner/builder

-


-


-


147


7


7


Land

297


410


-


512


8


6


Consumer loans:







Home equity and second mortgage

123


123


-


284


-


-


Commercial business loans

-


-


-


11


-


-


Subtotal

3,830


4,089


-


5,963


271


218


With an allowance recorded:







Mortgage loans:







One- to four-family

-


-


-


721


50


38


Commercial

1,906


1,906


26


3,326


182


144


Land

822


881


125


666


35


29


Consumer loans:







Home equity and second mortgage

434


434


325


530


29


26


Other

-


-


-


17


-


-


Subtotal

3,162


3,221


476


5,260


296


237


Total:







Mortgage loans:







One- to four-family

1,443


1,589


-


1,829


118


100


Commercial

3,873


3,873


26


7,227


370


287


Construction – custom and owner/builder

-


-


-


147


7


7


Land

1,119


1,291


125


1,178


43


35


Consumer loans:







Home equity and second mortgage

557


557


325


814


29


26


Other

-


-


-


17


-


-


Commercial business loans

-


-


-


11


-


-


Total

$

6,992


$

7,310


$

476


$

11,223


$

567


$

455


______________________________________________

(1) For the year ended September 30, 2017.



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 $3.12 million and $3.60 million in TDRs included in impaired loans at June 30, 2018 and September 30, 2017, respectively, and had no commitments at these dates to lend additional funds on these loans.  The allowance for loan losses allocated to TDRs at June 30, 2018 and September 30, 2017 was $0 and $10,000 , respectively. There were no TDRs for which there was a payment default within the first 12 months of the modification during the nine months ended June 30, 2018.





26


The following tables set forth information with respect to the Company's TDRs by interest accrual status as of June 30, 2018 and September 30, 2017 (dollars in thousands):


June 30, 2018

Accruing

Non-

Accrual

Total

Mortgage loans:

One- to four-family

$

512


$

-


$

512


Commercial

2,203


-


2,203


Land

245


155


400


Total

$

2,960


$

155


$

3,115



September 30, 2017

Accruing

Non-

Accrual

Total

Mortgage loans:

One- to four-family

$

569


$

-


$

569


Commercial

2,219


-


2,219


Land

554


253


807


Total

$

3,342


$

253


$

3,595



There was one new TDR during the nine months ended June 30, 2018 as a result of a reduction in the face amount of the debt on a land loan. This TDR had a pre-modification balance of $214,000 , a post-modification balance of $155,000 and a balance at June 30, 2018 of $155,000 . There were no new TDRs during the year ended September 30, 2017.




27


(5) 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 and the outstanding warrant to purchase common stock.  Shares owned by the Bank's ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share. At June 30, 2018 and 2017, there were 45,999 and 79,032 shares, respectively, that had not been allocated under the Bank's ESOP.


Information regarding the calculation of basic and diluted net income per common share for the three and nine months ended June 30, 2018 and 2017 is as follows (dollars in thousands, except share and per share amounts):

Three Months Ended 
 June 30,

Nine Months Ended 
 June 30,

2018


2017


2018


2017


Basic net income per common share computation

Numerator – net income

$

4,416


$

4,277


$

12,299


$

10,552


Denominator – weighted average common shares outstanding

7,345,618


7,269,564


7,328,702


7,088,134


Basic net income per common share

$

0.60


$

0.59


$

1.68


$

1.49


Diluted net income per common share computation



Numerator – net income

$

4,416


$

4,277


$

12,299


$

10,552


Denominator – weighted average common shares outstanding

7,345,618


7,269,564


7,328,702


7,088,134


Effect of dilutive stock options (1)

189,539


162,607


189,745


153,941


Effect of dilutive stock warrant (2)

-


-


-


106,411


Weighted average common shares outstanding - assuming dilution

7,535,157


7,432,171


7,518,447


7,348,486


Diluted net income per common share

$

0.59


$

0.58


$

1.64


$

1.44


____________________________________________

(1) For the three months ended June 30, 2018, all outstanding options were included in the computation of diluted net income per share. For the nine months ended June 30, 2018, average options to purchase 38,709 shares of common stock were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive. For the three and nine months ended June 30, 2017, all outstanding options were included in the computation of diluted net income per share.


(2) Represented a warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018 (the "Warrant"). On January 31, 2017, the Warrant was exercised and 370,899 shares of the Company's common stock were issued in exchange for $2.50 million .



28


(6) ACCUMULATED OTHER COMPREHENSIVE LOSS


The changes in accumulated other comprehensive loss ("AOCI") by component during the three and nine months ended June 30, 2018 and 2017 are as follows (dollars in thousands):

Three Months Ended June 30, 2018

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

$

(44

)

$

(88

)

$

(132

)

Net change

(7

)

5


(2

)

Balance of AOCI at the end of period

$

(51

)

$

(83

)

$

(134

)

Nine Months Ended June 30, 2018

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

$

(19

)

$

(105

)

$

(124

)

Net change

(32

)

22


(10

)

Balance of AOCI at the end of period

$

(51

)

$

(83

)

$

(134

)

Three Months Ended June 30, 2017

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

$

(23

)

$

(155

)

$

(178

)

Net change

5


11


16


Balance of AOCI at the end of period

$

(18

)

$

(144

)

$

(162

)

Nine Months Ended June 30, 2017

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

$

4


$

(179

)

$

(175

)

Net change

(22

)

35


13


Balance of AOCI at the end of period

$

(18

)

$

(144

)

$

(162

)

__________________________

(1) All amounts are net of income taxes.



(7) 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.  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, 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 10 years from


29


the date of grant. At June 30, 2018 , there were 117,366 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 both June 30, 2018 and 2017, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the nine months ended June 30, 2018 and 2017.


Stock option activity for the nine months ended June 30, 2018 and 2017 is summarized as follows:

Nine Months Ended
June 30, 2018

Nine Months Ended
June 30, 2017

 Number of Shares


Weighted

Average

Exercise

Price


 Number of Shares


Weighted

Average

Exercise

Price


Options outstanding, beginning of period

380,120


$

13.23


373,130


$

9.82


Exercised

(34,850

)

8.39


(39,810

)

6.65


Forfeited

(5,150

)

13.39


(4,950

)

6.28


Options outstanding, end of period

340,120


$

13.73


328,370


$

10.26



The aggregate intrinsic value of options exercised during the nine months ended June 30, 2018 and 2017 was $741,000 and $545,000 , respectively.


At June 30, 2018 , there were 183,150 unvested options with an aggregate grant date fair value of $454,000 , all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at June 30, 2018 was $3.61 million .  There were 43,900 options with an aggregate grant date fair value of $104,000 that vested during the nine months ended June 30, 2018 .


At June 30, 2017 , there were 201,100 unvested options with an aggregate grant date fair value of $393,000 . There were 48,600 options with an aggregate grant date fair value of $111,000 that vested during the nine months ended June 30, 2017 .

Additional information regarding options outstanding at June 30, 2018 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

6,000


$

4.28


2.4

6,000


$

4.28


2.4

   5.86 - 6.00

30,300


5.96


4.3

30,300


5.96


4.3

   9.00

72,800


9.00


5.3

54,600


9.00


5.3

 10.26 - 10.71

121,320


10.58


6.8

57,470


10.54


6.7

 15.67

52,200


15.67


8.3

8,600


15.67


8.3

 29.69

57,500


29.69


9.3

-


N/A


NA

340,120


$

13.73


6.8

156,970


$

9.16


5.7


The aggregate intrinsic value of options outstanding at June 30, 2018 and 2017 was $8.03 million and $4.93 million , respectively.


As of June 30, 2018, unrecognized compensation cost related to non-vested stock options was $358,000 , which is expected to be recognized over a weighted average life of 2.10 years.



(8) FAIR VALUE MEASUREMENTS


GAAP defines fair value and establishes a framework for measuring fair value.  Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  The three levels for categorizing assets and liabilities under GAAP's fair value measurement requirements are as follows:


30



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. 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 June 30, 2018 and September 30, 2017. The Company's assets measured at estimated fair value on a recurring basis at June 30, 2018 and September 30, 2017 were as follows (dollars in thousands):

June 30, 2018

Estimated Fair Value

Level 1

Level 2

Level 3

Total

Available for sale investment securities

MBS: U.S. government agencies

$

-


$

252


$

-


$

252


Mutual funds

924


-


-


924


Total

$

924


$

252


$

-


$

1,176


September 30, 2017

Estimated Fair Value

Level 1

Level 2

Level 3

Total

Available for sale investment securities

MBS: U.S. government agencies

$

-


$

289


$

-


$

289


Mutual funds

952


-


-


952


Total

$

952


$

289


$

-


$

1,241



There were no transfers among Level 1, Level 2 and Level 3 during the nine months ended June 30, 2018 and the year ended September 30, 2017 .


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,


31


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).


The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at June 30, 2018 (dollars in thousands):

Estimated Fair Value

Level 1

Level 2

Level 3

Impaired loans:

Consumer loans:

Home equity and second mortgage

$

-


$

-


$

78


Commercial business loans

-


-


113


Total impaired loans

-


-


191


Investment securities – held to maturity:




MBS - private label residential

-


1


-


OREO and other repossessed assets

-


-


2,112


Total

$

-


$

1


$

2,303



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 June 30, 2018 (dollars in thousands):

 Estimated

Fair Value

 Valuation

Technique(s)

 Unobservable Input(s)

 Range

Impaired loans

$

191


Market approach

Appraised value less selling costs

NA

OREO and other repossessed assets

$

2,112


Market approach

Lower of appraised value or listing price less selling costs

NA


The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2017 (dollars in thousands):

Estimated Fair Value

Level 1

Level 2

Level 3

Impaired loans:

Mortgage loans:

Commercial

$

-


$

-


$

1,880


Land

-


-


697


Consumer loans:




Home equity and second mortgage

-


-


109


Total impaired loans

-


-


2,686


Investment securities – held to maturity:




MBS - private label residential

-


125


-


OREO and other repossessed assets

-


-


3,301


Total

$

-


$

125


$

5,987




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, 2017 (dollars in thousands):

 Estimated

Fair Value

 Valuation

Technique(s)

 Unobservable Input(s)

 Range

Impaired loans

$

2,686


Market approach

Appraised value less selling costs

NA

OREO and other repossessed assets

$

3,301


Market approach

Lower of appraised value or listing price less selling costs

NA



32



GAAP requires disclosure of estimated fair values for 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 which may have significant value.  The Company does not believe that it would be practicable to estimate a representational fair value for these types of items as of June 30, 2018 and September 30, 2017.  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.


The following methods and assumptions were used by the Company in estimating fair value of its other financial instruments:


Cash and Cash Equivalents and CDs Held for Investment:   The estimated fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have an estimated fair value equal to the recorded value.


Investment Securities: See descriptions above.


FHLB Stock:   No ready market exists for this stock, and it has no quoted market value.  However, redemption of this stock has historically been at par value.  Accordingly, par value is deemed to be a reasonable estimate of fair value.


Other Investments: The Bank invests in the Solomon Hess SBA Loan Fund LLC. Shares in the fund are not publicly traded and therefore have no readily determinable fair market value, therefore they are recorded on the balance sheet at cost. An investor can have its investment in the funds redeemed for the balance of its capital account at any quarter end with 60 days notice to the fund.


Loans Held for Sale:   The estimated fair value is based on quoted market prices (for one-to four-family loans) and the guaranteed value of U.S. Small Business Administration ("SBA") loans (made to small businesses under the SBA's 7(a) loan programs). Quoted market prices are obtained from the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the FHLB.


Loans Receivable, Net: The fair value of non-impaired loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Prepayments are based on the historical experience of the Bank. Fair values for impaired loans are estimated using the methods described above.


Accrued Interest:   The recorded amount of accrued interest approximates the estimated fair value.


Deposits :  The estimated fair value of deposits with no stated maturity date is deemed to be the amount payable on demand.  The estimated fair value of fixed maturity certificates of deposit is computed by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.


Off-Balance-Sheet Instruments:   Since the majority of the Company's off-balance-sheet instruments consist of variable-rate commitments, the Company has determined that they do not have a distinguishable estimated fair value.



33


The recorded amounts and estimated fair values of financial instruments were as follows as of June 30, 2018 and September 30, 2017 (dollars in thousands):

June 30, 2018

Fair Value Measurements Using:

Recorded

Amount

 Estimated Fair Value

Level 1

Level 2

Level 3

Financial assets

Cash and cash equivalents

$

156,826


$

156,826


$

156,826


$

-


$

-


CDs held for investment

63,132


63,132


63,132


-


-


Investment securities

9,127


9,616


3,862


5,754


-


FHLB stock

1,190


1,190


1,190


-


-


Other investments

3,000


3,000


3,000


-


-


Loans held for sale

2,321


2,366


2,366


-


-


Loans receivable, net

717,324


713,173


-


-


713,173


Accrued interest receivable

2,797


2,797


2,797


-


-


Financial liabilities






Deposits:





Non-interest-bearing demand

229,201


229,201


229,201


-


-


Interest-bearing

651,526


650,884


510,536


-


140,348


Total deposits

880,727


880,085


739,737


-


140,348


Accrued interest payable

218


218


218


-


-


September 30, 2017

Fair Value Measurements Using:

Recorded

Amount

 Estimated Fair Value

Level 1

Level 2

Level 3

Financial assets

Cash and cash equivalents

$

148,188


$

148,188


$

148,188


$

-


$

-


CDs held for investment

43,034


43,034


43,034


-


-


Investment securities

8,380


8,985


3,954


5,031


-


FHLB stock

1,107


1,107


1,107


-


-


Other investments

3,000


3,000


3,000


-


-


Loans held for sale

3,599


3,619


3,619


-


-


Loans receivable, net

690,364


688,332


-


-


688,332


Accrued interest receivable

2,520


2,520


2,520


-


-


Financial liabilities






Deposits:





Non-interest-bearing demand

205,952


205,952


205,952


-


-


Interest-bearing

631,946


632,629


492,305


-


140,324


Total deposits

837,898


838,581


698,257


-


140,324


Accrued interest payable

161


161


161


-


-



The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the estimated fair value of the Company's financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk.  However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling


34


interest rate environment.  Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment.  Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.



(9) RECENT ACCOUNTING PRONOUNCEMENTS


In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) . The core principle of this ASU is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract and estimating the amount of variable consideration to include in the transaction price related to each separate performance obligation. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company's primary source of revenue is interest income, which is recognized when earned and is deemed to be in compliance with this ASU. Accordingly, the adoption of ASU No. 2014-09 is not expected to have a material impact on the Company's future consolidated financial statements.


In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The main provisions of this ASU address the valuation and impairment of certain equity investments along with simplified disclosures about the fair value of financial instruments. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management is in the planning stages of developing processes and procedures to comply with the disclosure requirements of this ASU, which could impact the disclosures the Company makes related to the fair value of its financial instruments; however, the adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's future consolidated financial statements.


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This ASU 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 this ASU 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 on a generally 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. This ASU also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of the amendments in this ASU is permitted. The effect of adoption will depend on leases at the time of adoption. Once adopted, the Company expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under non-cancelable operating lease agreements; however, based on current leases the adoption of ASU No. 2016-02 is not expected to have a material impact on the Company's future consolidated financial statements.


In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses . 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 No. 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. The standard retains many of the current disclosure requirements in GAAP and expands disclosure requirements. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, 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 No. 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the


35


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 No. 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 No. 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 No. 2017-04 is 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 No. 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 No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.


In May 2017, the FASB issued ASU No. 2017-09, Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification. ASU No. 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company's future consolidated financial statements.


In June 2018, the FASB issued ASU No. 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 was 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 No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity's adoption of Topic 606. The adoption of ASU No. 2018-07 is not expected to have a material impact on the Company's future consolidated financial statements.


(10) U.S. TAX REFORM


On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, decreasing U.S. corporate income tax rate to 21.0% from 35.0%. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a blended U.S. statutory federal rate of approximately  24.5%  for the Company's fiscal year ending September 30, 2018, and 21.0% for subsequent fiscal years. In addition, the reduction of the corporate tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal tax rate of 21.0%.


As a result of the new legislation, during the quarter ended December 31, 2017, the Company recorded a one-time income tax expense of $548,000 in conjunction with writing down its net deferred tax assets. The impact of using the 24.5% blended federal tax rate for the nine months ended June 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $1.62 million , which was partially offset by the $548,000 one-time net deferred tax asset write-down.






36


(11) DEFINITIVE AGREEMENT


On May 23, 2018, the Company announced the signing of a definitive agreement and plan of merger (the "Agreement") with South Sound Bank, a Washington-state chartered bank, pursuant to which South Sound Bank will merge with and into Timberland Bank. Under the terms of the Agreement, based on 1,213,027 shares of South Sound Bank outstanding as of the date of the Agreement, South Sound Bank shareholders will receive 904,918 shares of the Company's common stock and $6.90 million in cash (fixed per share consideration of (i) 0.7460 of a share of the Company's common stock and (ii) $5.68825 in cash). The transaction is expected to close during the fourth calendar quarter of 2018, subject to approval by South Sound Bank shareholders, the receipt of all required regulatory approvals, and the satisfaction of customary closing conditions.



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 nine months ended June 30, 2018 .  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 actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the expected cost savings, synergies and other financial benefits from our pending acquisition of South Sound Bank

("merger") might not be realized within the expected time frames or at all; governmental approval of the merger may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; conditions to the closing of the merger may not be satisfied; the shareholders of South Sound Bank may fail to approve the consummation of the merger; the integration of the combined company, including personnel changes/retention, might not proceed as planned; and the combined company might not perform as well as expected; 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; 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 Board of Governors of the Federal Reserve System ("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 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


37


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; 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 2017 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 2018 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 22 branches (including its main office in Hoquiam).  At June 30, 2018 , the Company had total assets of $1.01 billion and total shareholders' equity of $120.89 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 forth in this report relates primarily to the Bank's operations.


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 any borrowings.  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 strives to match the re-pricing characteristics of the interest-earning assets and interest-bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.


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.


Net income is also affected by non-interest income and non-interest expenses.  For the three and nine month period ended June 30, 2018 , 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 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 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.



38


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.


The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage 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 originates adjustable-rate residential mortgage loans that do not qualify for sale in the secondary market.  The Bank also originates commercial business loans and other consumer loans.


On May 23, 2018, the Company announced the signing of a definitive merger agreement pursuant to which South Sound Bank will merge with and into Timberland Bank. The transaction is expected to close during the fourth calendar quarter of 2018, subject to approval by South Sound Bank shareholders, the receipt of all required regulatory approvals, and the satisfaction of customary closing conditions. South Sound Bank, a Washington-state chartered bank, operates two branch locations located in Lacey and Olympia, Washington. South Sound Bank reported $186.9 million in total assets at March 31, 2018. For additional information regarding the proposed transaction, see Note (11), Definitive Agreement.



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 2017 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 2017 Form 10-K.


Comparison of Financial Condition at June 30, 2018 and September 30, 2017


The Company's total assets increased by $54.36 million , or 5.7% , to $1.01 billion at June 30, 2018 from $952.02 million at September 30, 2017 .  The increase in total assets was primarily due to an increase in net loans receivable, CDs held for investment and total cash and cash equivalents. The increase in total assets was funded primarily by an increase in total deposits.


Net loans receivable increased by $26.96 million , or 3.9% , to $717.32 million at June 30, 2018 from $690.36 million at September 30, 2017 .  The increase was primarily due to increases in commercial real estate loans and construction loans. These increases to net loans receivable were partially offset primarily by decreases in one- to four-family loans.


Total deposits increased by $42.83 million , or 5.1% , to $880.73 million at June 30, 2018 from $837.90 million at September 30, 2017 . The increase was a result of increases in non-interest bearing demand account balances, money market account balances, savings account balances, N.O.W. checking account balances and certificates of deposit account balances.

Shareholders' equity increased by $9.89 million , or 8.9% , to $120.89 million at June 30, 2018 from $111.00 million at September 30, 2017 .  The increase in shareholders' equity was primarily due to net income for the nine months ended June 30, 2018 and was partially offset by the payment of cash dividends to common shareholders.


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 $28.74 million , or 15.0% , to $219.96 million at June 30, 2018 from $191.22 million at September 30, 2017 .  The increase was primarily due to a $20.10 million increase CDs held for investment and a $6.53 million increase in interest-bearing deposits in banks.


Investment Securities:   Investment securities increased by $747,000, or 8.9% , to $9.13 million at June 30, 2018 from $ 8.38 million at September 30, 2017 . This increase was primarily due to the purchase of a $1.11 million U.S. government agency investment security, which was partially offset by scheduled amortization and prepayments. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."



39


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 June 30, 2018 and September 30, 2017. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.


Loans: Net loans receivable increased by $26.96 million , or 3.9% , to $717.32 million at June 30, 2018 from $690.36 million at September 30, 2017 .  The increase in the portfolio was primarily a result of a $16.74 million decrease in the amount of undisbursed construction loans in process, a $16.62 million increase in commercial real estate loans, a $6.72 million increase in commercial construction loans, a $3.19 million increase in land development loans, and smaller increases in other categories. These increases were partially offset by a $6.10 million decrease in multi-family construction loans, a $4.17 million decrease in custom and owner/building construction loans, a $4.00 million decrease in one-to four-family mortgage loans, a $1.16 million decrease in commercial business loans and smaller decreases in other categories.


Loan originations decreased by $30.61 million , or 11.7% , to $231.97 million for the nine months ended June 30, 2018 from $262.58 million for the nine months ended June 30, 2017 .  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 decreased by $7.58 million , or 13.4% , to $48.96 million for the nine months ended June 30, 2018 compared to $56.54 million for the nine months ended June 30, 2017 .


For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."


Premises and Equipment:   Premises and equipment increased by $97,000 , or 0.5% , to $18.52 million at June 30, 2018 from $18.42 million at September 30, 2017 .  The increase was primarily due the purchase of a building that will be used as the Company's data center facility in the future, which was partially offset by the sale of excess land and normal depreciation.


OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by $1.19 million , or 36.0% , to $2.11 million at June 30, 2018 from $ 3.30 million at September 30, 2017 . The decrease was primarily due to the disposition of four OREO properties and one recreational vehicle.  At June 30, 2018 , total OREO and other repossessed assets consisted of 13 individual real estate properties. The properties consisted of 11 land parcels totaling $1.66 million and two commercial real estate properties with a carrying value of $448,000 .


Goodwill:   The recorded amount of goodwill of $5.65 million at June 30, 2018 was unchanged from September 30, 2017.  


Deposits: Deposits increased by $42.83 million , or 5.1% , to $880.73 million at June 30, 2018 from $837.90 million at September 30, 2017 . This increase was primarily due to a $23.25 million increase in non-interest bearing demand account balances, an $8.64 million increase in money market account balances, a $7.70 million increase in savings account balances, a $1.89 million increase in N.O.W. checking account balances and a $1.35 million increase in certificates of deposit account balances.


Deposits consisted of the following at June 30, 2018 and September 30, 2017 (dollars in thousands):

June 30, 2018

September 30, 2017

Amount

Percent

Amount

Percent

Non-interest-bearing demand

$

229,201


26.0

%

$

205,952


24.5

%

N.O.W. checking

222,203


25.2

%

220,315


26.3

%

Savings

148,690


16.9

%

140,987


16.8

%

Money market

129,559


14.7

%

122,877


14.7

%

Money market - brokered

10,084


1.1

%

8,125


1.0

%

Certificates of deposit under $250

120,156


13.7

%

120,844


14.4

%

Certificates of deposit $250 and over

17,637


2.0

%

15,601


1.9

%

Certificates of deposit - brokered

3,197


0.4

%

3,197


0.4

%

Total

$

880,727


100.0

%

$

837,898


100.0

%



Shareholders' Equity:   Total shareholders' equity increased by $9.89 million , or 8.9% , to $120.89 million at June 30, 2018 from $111.00 million at September 30, 2017 .  The increase was primarily due to net income of $12.30 million for the nine


40


months ended June 30, 2018 , which was partially offset by the payment of $3.47 million in cash dividends on the Company's common stock. The Company did not repurchase any shares of its common stock during the nine months ended June 30, 2018 .


Asset Quality: The non-performing assets to total assets ratio improved to 0.56% at June 30, 2018 from 0.60% at September 30, 2017 as total non-performing assets decreased by $66,000 , or 1.1% , to $5.68 million at June 30, 2018 from $5.75 million at September 30, 2017. The decrease was primarily due to a $1.19 million decrease in OREO and other repossessed assets, which was partially offset by a $795,000 increase in non-accrual loans which is primarily a result of two one- to four-family loans becoming delinquent and a $428,000 increase in accruing loans which are contractually past due 90 days or more.


TDRs on accrual status (which are not included in the non-performing asset totals) decreased by $382,000 , or 11.4% , to $2.96 million at June 30, 2018 from $3.34 million at September 30, 2017.



41


The following table sets forth information with respect to the Company's non-performing assets at June 30, 2018 and September 30, 2017 (dollars in thousands):

June 30,
2018


September 30,
2017


Loans accounted for on a non-accrual basis:

Mortgage loans:

    One- to four-family (1)

$

1,361


$

874


    Commercial

598


213


    Land

295


566


Consumer loans:



    Home equity and second mortgage

278


258


Commercial business loans

174


-


       Total loans accounted for on a non-accrual basis

2,706


1,911


Accruing loans which are contractually

past due 90 days or more

428


-


Total of non-accrual and 90 days past due loans

3,134


1,911


Non-accrual investment securities

433


533


OREO and other repossessed assets, net (2)

2,112


3,301


       Total non-performing assets (3)

$

5,679


$

5,745


TDRs on accrual status (4)

$

2,960


$

3,342


Non-accrual and 90 days or more past due loans as a percentage of loans receivable

0.43

%

0.27

%

Non-accrual and 90 days or more past due loans as a percentage of total assets

0.31

%

0.20

%

Non-performing assets as a percentage of total assets

0.56

%

0.60

%

Loans receivable (5)

$

726,856


$

699,917


Total assets

$

1,006,383


$

952,024


___________________________________

(1) As of June 30, 2018 and September 30, 2017, the balance of non-accrual one- to-four family properties included $15 and $100, respectively, in the process of foreclosure.

(2) As of June 30, 2018 and September 30, 2017, the balance of OREO included $0 and $875, respectively, of foreclosed residential real estate property recorded as a result of obtaining physical possession of the property.

(3) Does not include TDRs on accrual status.

(4) Does not include TDRs totaling $155 and $253 reported as non-accrual loans at June 30, 2018 and September 30, 2017, respectively.

(5)  Does not include loans held for sale and loan balances are before the allowance for loan losses.


Comparison of Operating Results for the Three and Nine Months Ended June 30, 2018 and 2017


Net income increased by $139,000 , or 3.2% , to $4.42 million for the quarter ended June 30, 2018 from $4.28 million for the quarter ended June 30, 2017 . Net income per diluted common share increased $0.01 , or 1.7% , to $0.59 for the quarter ended June 30, 2018 from $0.58 for the quarter ended June 30, 2017 .



42


Net income increased by $1.75 million , or 16.6% , to $12.30 million for the nine months ended June 30, 2018 from $10.55 million for the nine months ended June 30, 2017 . Net income per diluted common share increased $0.20 , or 13.9% , to $1.64 for the nine months ended June 30, 2018 from $1.44 for the nine months ended June 30, 2017 .


The increase in net income for the three months ended June 30, 2018 was primarily due to an increase in net interest income and a decrease in the Company's effective income tax rate. These increases to net income were partially offset by a decrease in the recapture of loan losses and an increase in non-interest expense. The increase in net income for the nine months ended June 30, 2018 was primarily due to increases in net interest income and non-interest income and a decrease in the Company's effective income tax rate. These increases to net income were partially offset by a decrease in the recapture of loan losses and an increase in non-interest expense. A more detailed explanation of the income statement categories is presented below.


Net Interest Income: Net interest income increased by $480,000 , or 5.2% , to $9.73 million for the quarter ended June 30, 2018 from $9.25 million for the quarter ended June 30, 2017 . The increase in net interest income was due to an increase in interest income and a decrease in interest expense. 


Total interest and dividend income increased by $292,000 , or 2.9% , to $10.46 million for the quarter ended June 30, 2018 from $10.17 million for the quarter ended June 30, 2017 , primarily due to an increase the average balance of interest-earning assets, which was partially offset by a decrease in the average yield earned on interest-earning assets. Average total interest-earning assets increased by $67.39 million , or 7.8% , to $930.31 million for the quarter ended June 30, 2018 from $862.92 million for the quarter ended June 30, 2017 . Average loans receivable increased by $33.88 million , or 4.9% , and average interest-earning deposits in banks and CDs increased by $32.61 million, or 20.8%, between the periods. The average yield on interest-earning assets decreased to 4.50% for the quarter ended June 30, 2018 from 4.71% for the quarter ended June 30, 2017 , primarily due to a decrease in the amount of non-accrual interest and loan pre-payment penalties collected. During the quarter ended June 30, 2018 , a total of $10,000 in non-accrual interest and loan pre-payment penalties was collected compared to $819,000 for the quarter ended June 30, 2017 . Partially offsetting the decrease in the average yield on loans receivable, was an increase in the average yield on interest-earning deposits in banks and CDs to 1.79% from 1.08%, primarily due to increases in the Fed Funds target rate. Total interest expense decreased by $188,000 , or 20.5% , to $730,000 for the quarter ended June 30, 2018 from $918,000 for the quarter ended June 30, 2017 . The decrease in interest expense was primarily due to a $369,000 decrease in interest expense on FHLB borrowings, as the Company repaid all of its FHLB borrowings during the quarter ended June 30, 2017. The decrease in interest expense on FHLB borrowings was partially offset by a $181,000 increase in interest expense on deposits as both the average balance and average cost of interest-bearing deposits increased during the quarter ended June 30, 2018 compared to the quarter ended June 30, 2017 . The average cost of interest-bearing liabilities decreased to 0.45% for the quarter ended June 30, 2018 from 0.59% for the quarter ended June 30, 2017. The net interest margin ("NIM") decreased to 4.18% for the quarter ended June 30, 2018 from 4.29% for the quarter ended June 30, 2017 , however, the NIM for the quarter ended June 30, 2017 was increased approximately 22 basis points due to the net effect of collecting $748,000 of non-accrual interest and paying $282,000 in FHLB borrowings prepayment penalties.


Net interest income increased by $2.77 million , or 10.7% , to $28.79 million for the nine months ended June 30, 2018 from $26.01 million for the nine months ended June 30, 2017 . The increase in net interest income was due to an increase in interest income and a decrease in interest expense. 


Total interest and dividend income increased by $2.15 million , or 7.5% , to $30.78 million for the nine months ended June 30, 2018 from $28.63 million for the nine months ended June 30, 2017 , primarily due to increases in both the average balance and average yield earned on interest-earning assets. Average total interest-earning assets increased by $55.67 million , or 6.5% , to $916.51 million for the nine months ended June 30, 2018 from $860.84 million for the nine months ended June 30, 2017 . Average loans receivable increased by $29.16 million , or 4.2% , and average interest-earning deposits in banks and CDs increased by $24.95 million, or 15.5%, between periods. The average yield on interest-earning assets increased to 4.48% for the nine months ended June 30, 2018 from 4.43% for the nine months ended June 30, 2017 , primarily due to increases in short-term interest rates by the Federal Reserve. Partially offsetting the increase in the average yield on interest-earnings assets was a decrease in the amount of non-accrual interest and loan pre-payment penalties collected during the current period. During the nine months ended June 30, 2018 , a total of $291,000 in non-accrual interest and loan pre-payment penalties was collected compared to $1.07 million for the nine months ended June 30, 2017. Total interest expense decreased by $620,000 , or 23.7% , to $2.00 million for the nine months ended June 30, 2018 from $2.62 million for the nine months ended June 30, 2017 . The decrease in interest expense was primarily due to a $979,000 decrease in interest expense on FHLB borrowings, as the Company repaid all of its FHLB borrowings during the quarter ended June 30, 2017. The decrease in interest expense on FHLB borrowings was partially offset by a $359,000 increase in interest expense on deposits as both the average balance and average cost of interest-bearing deposits increased during the nine months ended June 30, 2018 compared to the nine months ended June 30, 2017. The average cost of interest-bearing liabilities decreased to 0.42% for the nine months ended June 30,


43


2018 from 0.55% for the nine months ended June 30, 2017. As a result of these the changes, the NIM increased to 4.19% for the nine months ended June 30, 2018 from 4.03% for the nine months ended June 30, 2017 .


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 June 30,

2018

2017

Average
Balance

Interest and
Dividends

Yield/
Cost

Average
Balance

Interest and
Dividends

Yield/
Cost

Interest-earning assets:

Loans receivable (1)(2)

$

727,807


$

9,530


5.24

%

$

693,931


$

9,652


5.58

%

Investment securities (2)

8,277


51


2.46


7,610


69


3.63


Dividends from mutual funds, FHLB stock and other investments

5,101


31


2.43


4,872


23


1.89


Interest-earning deposits in banks and CDs

189,120


845


1.79


156,507


421


1.08


Total interest-earning assets

930,305


10,457


4.50


862,920


10,165


4.71


Non-interest-earning assets

60,395




57,841




   Total assets

$

990,700




$

920,761




Interest-bearing liabilities:







Savings

$

147,881


22


0.06


$

137,108


20


0.06


Money market

142,557


202


0.57


125,787


110


0.35


N.O.W. checking

214,256


110


0.21


207,060


113


0.22


Certificates of deposit

142,285


396


1.12


141,254


306


0.87


Long-term borrowings (3)

-


-


-


8,571


369


17.27


Total interest-bearing liabilities

646,979


730


0.45


619,780


918


0.59


Non-interest-bearing deposits

220,511


190,631


Other liabilities

4,456




4,379




Total liabilities

871,946




814,790




Shareholders' equity

118,754




105,971




Total liabilities and





shareholders' equity

$

990,700


$

920,761




Net interest income

$

9,727



$

9,247



Interest rate spread

4.05

%



4.12

%

Net interest margin (4)

4.18

%



4.29

%

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

142.88

%



139.23

%


44


Nine Months Ended June 30,

2018

2017

Average
Balance

Interest and
Dividends

Yield/
Cost

Average
Balance

Interest and
Dividends

Yield/
Cost

Interest-earning assets:

Loans receivable (1)(2)

$

718,099


$

28,342


5.26

%

$

688,936


$

27,280


5.29

%

Investment securities (2)

7,936


147


2.47


7,717


207


3.58


Dividends from mutual funds, FHLB stock and other investments

5,067


83


2.18


3,730


60


2.15


Interest-earning deposits in banks and CDs

185,405


2,209


1.59


160,458


1,081


0.90


Total interest-earning assets

916,507


30,781


4.48


860,841


28,628


4.43


Non-interest-earning assets

59,704




58,324




   Total assets

$

976,211




$

919,165




Interest-bearing liabilities:







Savings

$

144,191


63


0.06


$

132,922


57


0.06


Money market

140,186


520


0.50


124,650


314


0.34


N.O.W. checking

214,828


334


0.21


206,037


346


0.22


Certificates of deposit

140,194


1,079


1.03


144,249


920


0.85


Long-term borrowings (3)

-


-


-


22,857


979


5.73


Total interest-bearing liabilities

639,399


1,996


0.42


630,715


2,616


0.55


Non-interest-bearing deposits

217,388


182,117


Other liabilities

3,997




4,368




Total liabilities

860,784




817,200




Shareholders' equity

115,427




101,965




Total liabilities and





shareholders' equity

$

976,211




$

919,165




Net interest income

$

28,785




$

26,012



Interest rate spread



4.06

%



3.88

%

Net interest margin (4)



4.19

%



4.03

%

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



143.34

%



136.49

%

_______________

(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 and prepayment penalties are included with interest and dividends.

(2)

Average balances include loans and investment securities on non-accrual status.

(3)

Includes FHLB borrowings with original maturities of one year or greater.

(4)

Net interest income divided by total average interest-earning assets, annualized.


45


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 (in thousands):

Three months ended June 30, 2018
compared to three months
ended June 30, 2017
increase (decrease) due to

Nine months ended June 30, 2018
compared to nine months
ended June 30, 2017
increase (decrease) due to

Rate

Volume

Net

Change

Rate

Volume

Net

Change

Interest-earning assets:

Loans receivable and loans held for sale

$

(581

)

$

459


$

(122

)

$

39


$

1,023


$

1,062


Investment securities

(24

)

6


(18

)

(57

)

(3

)

(60

)

Dividends from mutual funds, FHLB stock and other investments

7


1


8


1


22


23


  Interest-earning deposits

322


102


424


939


189


1,128


Total net increase in income on interest-earning assets

(276

)

568


292


922


1,231


2,153


Interest-bearing liabilities:




Savings

-


2


2


1


5


6


Money market

75


17


92


148


58


206


N.O.W. checking

(7

)

4


(3

)

(12

)

-


(12

)

Certificates of deposit

88


2


90


147


12


159


   Long term FHLB borrowings

(184

)

(185

)

(369

)

(392

)

(587

)

(979

)

Total net decrease in expense on interest-bearing liabilities

(28

)

(160

)

(188

)

(108

)

(512

)

(620

)

Net increase in net interest income

$

(248

)

$

728


$

480


$

1,030


$

1,743


$

2,773



Provision for Loan Losses:   There was no provision for (recapture of) loan losses for the quarter ended June 30, 2018 compared to a $1.0 million recapture of loan losses for the quarter ended June 30, 2017. The recapture of loan losses during quarter ended June 30, 2017 was primarily due to net recoveries and overall improvements in other credit quality metrics. For the quarter ended June 30, 2018 there were net charge-offs of $12,000 compared to net charge-offs of $21,000 for the quarter ended March 31, 2018 and net recoveries of $1.02 million for the quarter ended June 30, 2017 . Non-accrual loans increased by $795,000, or 41.6%, to $2.71 million at June 30, 2018 , from $1.91 million at September 30, 2017 and increased by $651,000, or 31.6% , from $2.06 million at June 30, 2017 . Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $1.02 million or 42.0%, to $3.43 million at June 30, 2018 , from $2.41 million at September 30, 2017 and increased by $985,000, or 40.4%, from $2.44 million one year ago. 


For the nine months ended June 30, 2018 there was no provision for (recapture of) loan losses compared to a $1.25 million recapture of loan losses for the nine months ended June 30, 2017. Net charge-offs for the nine months ended June 30, 2018 were $21,000 compared to net recoveries of $1.03 million for the nine months ended June 30, 2017.


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 June 30, 2018 was $358,000 compared to $476,000 at September 30, 2017 and $429,000 at June 30, 2017 . 



46


Based on its comprehensive analysis, management believes the allowance for loan losses of $9.53 million at June 30, 2018 (1.31% of loans receivable and 304.1% 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 $9.55 million (1.36% of loans receivable and 499.9% of non-performing loans) at September 30, 2017 and $9.61 mil1ion (1.38% of loans receivable and 467.6% of non-performing loans) at June 30, 2017 . 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. Any material increase in the allowance for loan losses would adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."


Non-interest Income: Total non-interest income decreased slightly by $11,000 , or 0.3% , to $3.15 million for the quarter ended June 30, 2018 from $3.16 million for the quarter ended June 30, 2017 . The decrease in non-interest income was primarily due to a $126,000 decrease in gain on sales of loans, which was partially offset by a $66,000 increase in ATM and debit card interchange transaction fees and smaller increases in several other categories. The decrease in gain on sales of loans was primarily due to a decrease in the dollar volume of fixed-rate one- to four-family loans sold during the quarter. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the volume of debit card transactions.


Total non-interest income increased by $140,000 or 1.5% , to $9.36 million for the nine months ended June 30, 2018 from $9.22 million for the nine months ended June 30, 2017 . The increase in non-interest income was primarily due to a $200,000 increase in ATM and debit card interchange transaction fees, a $99,000 increase in services charges on deposits and smaller increases in in several other categories. These increases were partially offset by a $229,000 decrease in gains on sales of loans, net and smaller decreases in several other categories. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the volume of debit card transactions. The increase in service charges on deposits was primarily due to an increase in the amount of service charges collected on checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. The decrease in gain on sale of loans was primarily due to a decrease in the dollar volume of fixed-rate one- to four-family loans sold during the nine months ended June 30, 2018.


Non-interest Expense:   Total non-interest expense increased by $184,000 , or 2.7% , to $7.12 million for the quarter ended June 30, 2018 from $6.94 million for the quarter ended June 30, 2017 .  The increased expense was primarily due to a $171,000 increase in salaries and employee benefits expense, a $138,000 increase in professional fees and smaller increases in several other categories. These increases were partially offset by a $96,000 decrease in OREO and other repossessed assets expense and smaller decreases in several other categories. The increase in salary and employee benefits expense was primarily due to annual salary adjustments and the hiring of additional lending personnel. The increase in professional fees was primarily due to $147,000 in merger related expenses associated with the Company's announced acquisition of South Sound Bank. The decrease in OREO and other repossessed assets expense was primarily due to a $124,000 gain on the sale of an OREO property during the current quarter.


Total non-interest expense increased by $913,000 , or 4.4% , to $21.52 million for the nine months ended June 30, 2018 from $20.61 million for the nine months ended June 30, 2017 . The increased expense was primarily due to a $686,000 increase in salaries and employee benefits expense, a $200,000 increase in professional fees and smaller increases in several other categories. These increases were partially offset by a $113,000 gain on disposition of premises and equipment, net and smaller decreases in several other categories.


The efficiency ratio for the current quarte r improved to 55.33% from 55.94% for the comparable quarter one year ago. The efficiency ratio for the nine months ended June 30, 2018 improved to 56.41% f rom 58.48% for the nine months ended June 30, 2017 as increases in revenue outpaced the increase in non-interest expense.


Provision for Income Taxes: The provision for income taxes decreased by $854,000 , or 39.0% , to $ 1.33 million for the quarter ended June 30, 2018 from $2.19 million for the quarter ended June 30, 2017 , and decreased by $997,000 , or 18.7% , to $4.33 million for the nine months ended June 30, 2018 from $5.33 million for the nine months ended June 30, 2017 . The decrease in the provision for income taxes was primarily due to a lower effective federal corporate income tax rate as a result of the Tax Act that was enacted on December 22, 2017. As a result of the Tax Act (which decreases the federal corporate income tax rate to 21.0% from 35.0%), the Company recorded a one-time income tax expense of $548,000 in conjunction with writing down its net deferred tax assets during the quarter ended December 31, 2017 and began using a blended federal tax rate of 24.5% for the fiscal year ending September 30, 2018. Since the Company is a September 30th fiscal year-end corporation, it


47


will use a blended federal tax rate of 24.5% to calculate income tax expense for the fiscal year ending September 30, 2018 and then use a 21.0% tax rate thereafter. The Company's effective tax rate was 23.20% for the quarter ended June 30, 2018 and 33.84% for the quarter ended June 30, 2017 . The Company's effective tax rate was 26.04% for the nine months ended June 30, 2018 and 33.55% for the nine months ended June 30, 2017.


For additional information, see Note 10 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."



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 June 30, 2018 , 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 24.98%.


The Company's total cash and cash equivalents and CDs held for investment increased by $28.74 million , or 15.0% , to $219.96 million at June 30, 2018 from $ 191.22 million at September 30, 2017. 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 June 30, 2018 , the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available advances up to an aggregate amount equal to 35% of total assets, limited by available collateral. The Bank also has a Letter of Credit ("LOC") of up to $19.00 million with the FHLB for the purpose of collateralizing Washington State public deposits. Any amount pledged for public deposit under the LOC reduces the Bank's available borrowing amount under the FHLB advance agreement. At June 30, 2018 , the Bank had $19.00 million pledged under the LOC, which left $281.80 million available for additional FHLB borrowings.  The Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral.  At June 30, 2018 , the Bank had $71.35 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 June 30, 2018 , 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 June 30, 2018 , the Bank had loan commitments totaling $75.32 million and undisbursed construction loans in process totaling $65.67 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 June 30, 2018 totaled 73.36 million.  Historically, the Bank has been able to retain a significant amount of its non-brokered CDs as they mature.  At June 30, 2018 , the Bank had $3.20 million in brokered CDs.


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 June 30, 2018 , 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 June 30, 2018 , 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.


48



The following table compares the Bank's actual capital amounts at June 30, 2018 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


$113,394


11.53

%


$39,351


4.00

%


$49,189


5.00

%

Risk-based Capital Ratios:

Common equity tier 1 capital

113,394


16.56


30,817


4.50


44,513


6.50


Tier 1 capital

113,394


16.56


41,089


6.00


54,785


8.00


Total capital

121,968


17.81


54,785


8.00


68,481


10.00



In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. The new capital conservation buffer requirement began to be phased in beginning in January 2016 to an amount more than 0.625% of risk-weighted assets and increases each year until fully implemented to an amount more than 2.5% of risk weighted assets in January 2019. At June 30, 2018, the conservation buffer was an amount more than 1.875%.


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 $1.0 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 $1.0 billion or more in assets, at June 30, 2018 , Timberland Bancorp, Inc. would have exceeded all regulatory requirements.


The following table presents the regulatory capital ratios for Timberland Bancorp, Inc. as of June 30, 2018 (dollars in thousands):

Actual

Amount

Ratio

Leverage Capital Ratio:

Tier 1 capital


$116,401


11.80

%

Risk-based Capital Ratios:

Common equity tier 1 capital

116,401


16.98


Tier 1 capital

116,401


16.98




Total capital

124,982


18.24




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Key Financial Ratios and Data

(Dollars in thousands, except per share data)

Three Months Ended June 30,

Nine Months Ended
June 30,

2018


2017


2018


2017


PERFORMANCE RATIOS :

Return on average assets

1.78

%

1.86

%

1.68

%

1.53

%

Return on average equity

14.87

%

16.14

%

14.21

%

13.80

%

Net interest margin

4.18

%

4.29

%

4.19

%

4.03

%

Efficiency ratio

55.33

%

55.94

%

56.41

%

58.48

%


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, 2017.


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 June 30, 2018 the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the 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 June 30, 2018 , 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

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's

2017 Form 10-K.



50


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


(a)    Not applicable


(b)    Not applicable


(c)    Stock Repurchases


There were no shares repurchased by the Company during the quarter ended June 30, 2018 . On July 28, 2015 the Company announced a plan to repurchase 352,681 shares of the Company's common stock. As of June 30, 2018, a total of 130,788 shares had been repurchased at an average price of $11.69 per share and there were 221,893 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.


Item 6.         Exhibits


(a)   Exhibits

2.1

Merger Agreement (1)

3.1

Articles of Incorporation of the Registrant (2) 

3.3

Amended and Restated Bylaws of the Registrant (3) 

10.1

Employee Severance Compensation Plan, as revised (4) 

10.2

Employee Stock Ownership Plan (5) 

10.4

2003 Stock Option Plan (6) 

10.5

Form of Incentive Stock Option Agreement (7) 

10.6

Form of Non-qualified Stock Option Agreement (8) 

10.8

Employment Agreement with Michael R. Sand (8)

10.9

Employment Agreement with Dean J. Brydon (8)

10.10

Timberland Bancorp, Inc. 2014 Equity Incentive Plan (9)

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes OxleyAct

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act

32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act

101

The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended June 30, 2018, 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 1, 2017.

(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.


51


(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.


52


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: August 6, 2018

By:  /s/ Michael R. Sand                                   

Michael R. Sand 

Chief Executive Officer 

(Principal Executive Officer) 

Date: August 6, 2018

By:   /s/ Dean J. Brydon                                    

Dean J. Brydon 

Chief Financial Officer

(Principal Financial Officer)


53


EXHIBIT INDEX


Exhibit No. 

Description of Exhibit 

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 

32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 

101

The following materials from Timberland Bancorp Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, 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






54