0000939057-15-000383.txt : 20150805 0000939057-15-000383.hdr.sgml : 20150805 20150805141015 ACCESSION NUMBER: 0000939057-15-000383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150805 DATE AS OF CHANGE: 20150805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMBERLAND BANCORP INC CENTRAL INDEX KEY: 0001046050 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911863696 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23333 FILM NUMBER: 151028497 BUSINESS ADDRESS: STREET 1: 624 SIMPSON AVE CITY: HOQUIAM STATE: WA ZIP: 98550 BUSINESS PHONE: 3605334747 MAIL ADDRESS: STREET 1: 624 SIMPSON AVE CITY: HOQUIAM STATE: WA ZIP: 98550 10-Q 1 tsbk-6302015x10q.htm 10-Q TSBK-6.30.2015-10Q
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, 2015

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 0-23333

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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ___    Accelerated Filer       Non-accelerated filer __  Smaller reporting company _X_

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___    No   _X_

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

CLASS
 
SHARES OUTSTANDING AT JULY 31, 2015
 
Common stock, $.01 par value
7,053,636
 



INDEX

 
 
Page
 
 
 
 
  Item 1.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.    
 
 
 
 
 
  Item 4.     
 
 
 
 
 
 
 
 
 
 
 
  Item 1.     
 
  
 
 
 
  Item 1A.     
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.     
 
 
 
 
 
  Item 4.
 
 
 
 
 
  Item 5.     
 
50 
 
 
 
 
  Item 6.     
 
 
 
 
 
 
Certifications 
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32
 
 
 
Exhibit 101
 


2


PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements (unaudited)
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2015 and September 30, 2014
(Dollars in thousands, except per share amounts)
(Unaudited) 
 
June 30,
2015

 
September 30,
2014

Assets
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from financial institutions
$
13,800

 
$
11,818

Interest-bearing deposits in banks
62,373

 
60,536

Total cash and cash equivalents
76,173

 
72,354

 
 
 
 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)
47,053

 
35,845

Investment securities - held to maturity, at amortized cost
     (estimated fair value $8,958 and $6,274)
8,018

 
5,298

Investment securities - available for sale
1,401

 
2,857

Federal Home Loan Bank of Des Moines (“FHLB”) stock
2,699

 
5,246

 
 
 
 
Loans receivable
604,843

 
575,280

Loans held for sale
3,835

 
899

Less: Allowance for loan losses
(10,467
)
 
(10,427
)
Net loans receivable
598,211

 
565,752

 
 
 
 
Premises and equipment, net
17,083

 
17,679

Other real estate owned (“OREO”) and other repossessed assets, net
8,063

 
9,092

Accrued interest receivable
2,132

 
1,910

Bank owned life insurance (“BOLI”)
18,034

 
17,632

Goodwill
5,650

 
5,650

Core deposit intangible (“CDI”)

 
3

Mortgage servicing rights (“MSRs”)
1,469

 
1,684

Other assets
3,801

 
4,563

Total assets
$
789,787

 
$
745,565

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities:
 

 
 

Deposits:
 
 
 
     Non-interest-bearing demand
$
122,133

 
$
106,417

     Interest-bearing
532,585

 
508,699

Total deposits
654,718

 
615,116

 
 
 
 
FHLB advances
45,000

 
45,000

Other liabilities and accrued expenses
2,779

 
2,671

Total liabilities
702,497

 
662,787

See notes to unaudited condensed consolidated financial statements

3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
June 30, 2015 and September 30, 2014
(Dollars in thousands, except per share amounts)
(Unaudited) 
 
June 30,
2015

 
September 30,
2014

Shareholders’ equity
 
 
 
Common stock, $.01 par value; 50,000,000 shares authorized;
7,053,636 shares issued and outstanding - June 30, 2015 7,047,336 shares issued and outstanding - September 30, 2014
$
10,948

 
$
10,773

Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)
(992
)
 
(1,190
)
Retained earnings
77,673

 
73,534

Accumulated other comprehensive loss
(339
)
 
(339
)
Total shareholders’ equity
87,290

 
82,778

Total liabilities and shareholders’ equity
$
789,787

 
$
745,565

See notes to unaudited condensed consolidated financial statements


4


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended June 30, 2015 and 2014
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended   June 30,
 
Nine Months Ended June 30,
 
2015

 
2014

 
2015

 
2014

Interest and dividend income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
7,756

 
$
7,238

 
$
22,617

 
$
21,811

Investment securities
59

 
66

 
179

 
190

Dividends from mutual funds and FHLB stock
7

 
6

 
21

 
21

Interest-bearing deposits in banks
125

 
87

 
343

 
268

Total interest and dividend income
7,947

 
7,397

 
23,160

 
22,290

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
492

 
498

 
1,496

 
1,562

FHLB advances
471

 
466

 
1,411

 
1,399

Total interest expense
963

 
964

 
2,907

 
2,961

 
 
 
 
 
 
 
 
Net interest income
6,984

 
6,433

 
20,253

 
19,329

 
 
 
 
 
 
 
 
Provision for loan losses

 

 

 

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
6,984

 
6,433

 
20,253

 
19,329

 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recoveries (other than temporary impairment “OTTI”) on investment securities

 
(38
)
 

 
49

Adjustment for portion of OTTI (transferred from) recorded as other comprehensive income (loss) before income taxes
(4
)
 
29

 
(5
)
 
29

Net recoveries (OTTI) on investment securities
(4
)
 
(9
)
 
(5
)
 
78

 
 
 
 
 
 
 
 
Gain (loss) on sale of investment securities available for sale, net

 

 
45

 
(32
)
Service charges on deposits
899

 
921

 
2,635

 
2,795

ATM and debit card interchange transaction fees
691

 
611

 
1,964

 
1,769

BOLI net earnings
133

 
134

 
401

 
392

Gain on sales of loans, net
514

 
241

 
1,098

 
714

Escrow fees
57

 
45

 
155

 
111

Fee income from non-deposit investment sales
26

 
14

 
38

 
58

Other
207

 
159

 
529

 
439

Total non-interest income, net
2,523

 
2,116

 
6,860

 
6,324


 See notes to unaudited condensed consolidated financial statements

5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and nine months ended June 30, 2015 and 2014
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended   June 30,
 
Nine Months Ended 
June 30,
 
2015

 
2014

 
2015

 
2014

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
3,196

 
$
3,325

 
$
9,877

 
$
10,138

Premises and equipment
763

 
759

 
2,239

 
2,099

Gain on sale of premises and equipment, net
(299
)
 
(5
)
 
(299
)
 
(5
)
Advertising
169

 
187

 
529

 
537

OREO and other repossessed assets, net
193

 
240

 
617

 
795

ATM and debit card interchange transaction fees
336

 
207

 
929

 
791

Postage and courier
104

 
122

 
322

 
329

Amortization of CDI

 
29

 
3

 
87

State and local taxes
189

 
123

 
426

 
361

Professional fees
207

 
196

 
606

 
590

Federal Deposit Insurance Corporation ("FDIC") insurance
142

 
158

 
449

 
479

Other insurance
28

 
34

 
103

 
113

Loan administration and foreclosure
88

 
129

 
207

 
377

Data processing and telecommunications
449

 
399

 
1,299

 
1,058

Deposit operations
220

 
146

 
615

 
569

Other
435

 
381

 
1,225

 
1,107

Total non-interest expense
6,220

 
6,430

 
19,147

 
19,425

 
 
 
 
 
 
 
 
Income before federal income taxes
3,287

 
2,119

 
7,966

 
6,228

 
 
 
 
 
 
 
 
Provision for federal income taxes
1,128

 
685

 
2,629

 
2,024

     Net income
2,159

 
1,434

 
5,337

 
4,204

 
 
 
 
 
 
 
 
Preferred stock dividends

 

 

 
(136
)
Preferred stock discount accretion

 

 

 
(70
)
Net income to common shareholders
$
2,159

 
$
1,434

 
$
5,337

 
$
3,998

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.21

 
$
0.77

 
$
0.58

Diluted
$
0.31

 
$
0.20

 
$
0.76

 
$
0.57

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
6,902,067

 
6,857,149

 
6,897,381

 
6,855,811

Diluted
7,071,221

 
7,033,713

 
7,068,821

 
7,015,155

 
 
 
 
 
 
 
 
Dividends paid per common share
$
0.06

 
$
0.04

 
$
0.17

 
$
0.11



See notes to unaudited condensed consolidated financial statements

6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended June 30, 2015 and 2014
(Dollars in thousands)
(Unaudited)
 

 
 
Three Months Ended   June 30,
 
Nine Months Ended   June 30,
 
2015

 
2014

 
2015

 
2014

 
 
 
 
 
 
 
 
Net income
$
2,159

 
$
1,434

 
$
5,337

 
$
4,204

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Unrealized holding loss on investment securities available for sale, net of income taxes
(14
)
 
(8
)
 
(39
)
 
(59
)
Change in OTTI on investment securities held to maturity, net of income taxes:
 
 
 
 
 
 
 
Additional amount recovered related to credit loss for which OTTI was previously recognized
7

 
11

 
8

 
11

Amount reclassified to credit loss for previously recorded market loss
3

 
8

 
4

 
8

Accretion of OTTI on investment securities held to maturity, net of income taxes
12

 
14

 
27

 
38

 
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of income taxes
8

 
25

 

 
(2
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
2,167

 
$
1,459

 
$
5,337


$
4,202




See notes to unaudited condensed consolidated financial statements

7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the nine months ended June 30, 2015 and the year ended September 30, 2014
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Number of Shares
 
Amount
 
Unearned
 Shares Issued to
ESOP

 
 
 
Accumulated
Other
Compre-
hensive
Loss

 
 
 
Preferred
Stock
 
Common
Stock
 
Preferred
Stock
 
Common
Stock
 
 
Retained
Earnings
 
 
Total
Balance, September 30, 2013
12,065

 
7,045,036

 
$
11,936

 
$
10,570

 
$
(1,454
)
 
$
68,998

 
$
(362
)
 
$
89,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
5,850

 

 
5,850

Accretion of preferred stock
  discount

 

 
70

 

 

 
(70
)
 

 

Redemption of preferred stock
(12,065
)
 

 
(12,006
)
 

 

 
(59
)
 

 
(12,065
)
Exercise of stock options

 
5,000

 

 
23

 

 

 

 
23

Forfeiture of MRDP (1) shares

 
(2,700
)
 

 

 

 

 

 

5% preferred stock dividends

 

 

 

 

 
(58
)
 

 
(58
)
Common stock dividends ($0.16 per common share)

 

 

 

 

 
(1,127
)
 

 
(1,127
)
Earned ESOP shares, net of tax

 

 

 
64

 
264

 

 

 
328

MRDP compensation expense, net of tax

 

 

 
4

 

 

 

 
4

Stock option compensation expense

 

 

 
112

 

 

 

 
112

Unrealized holding loss on investment securities available for sale, net of tax

 

 

 

 

 

 
(63
)
 
(63
)
Change in OTTI on investment securities held to maturity, net of tax

 

 

 

 

 

 
34

 
34

Accretion of OTTI on investment securities held to maturity, net of tax

 

 

 

 

 

 
52

 
52

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2014

 
7,047,336

 

 
10,773

 
(1,190
)
 
73,534

 
(339
)
 
82,778

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
5,337

 

 
5,337

Exercise of stock options

 
6,300

 

 
30

 

 

 

 
30

Common stock dividends ($0.17 per common share)

 

 

 

 

 
(1,198
)
 

 
(1,198
)
Earned ESOP shares, net of tax

 

 

 
54

 
198

 

 

 
252

Stock option compensation expense

 

 

 
91

 

 

 

 
91

Unrealized holding loss on investment securities available for sale, net of tax

 

 

 

 

 

 
(39
)
 
(39
)
Change in OTTI on securities held to maturity, net of tax

 

 

 

 

 

 
12

 
12

Accretion of OTTI on investment securities held to maturity, net of tax

 

 

 

 

 

 
27

 
27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2015

 
7,053,636

 
$

 
$
10,948

 
$
(992
)
 
$
77,673

 
$
(339
)
 
$
87,290

__________________________
(1) 1998 Management Recognition and Development Plan (“MRDP”).


See notes to unaudited condensed consolidated financial statements

8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2015 and 2014
(In thousands)
(Unaudited)
 
Nine Months Ended
June 30,
 
2015

 
2014

Cash flows from operating activities
 
 
 
Net income
$
5,337

 
$
4,204

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

 
 

Depreciation
1,014

 
886

Deferred federal income taxes
231

 

Amortization of CDI
3

 
87

Earned ESOP shares
198

 
198

MRDP compensation expense

 
2

Stock option compensation expense
89

 
76

Stock option tax effect less excess tax benefit
1

 

Gain on sales of OREO and other repossessed assets, net
(109
)
 
(185
)
Provision for OREO losses
490

 
491

Gain on sale of premises and equipment, net
(299
)
 
(5
)
BOLI net earnings
(401
)
 
(392
)
Gain on sales of loans, net
(1,098
)
 
(714
)
Net change in deferred loan origination fees
323

 
(23
)
Net OTTI (recoveries) on investment securities
5

 
(78
)
(Gain) loss on sale of investment securities available for sale, net
(45
)
 
32

Amortization of MSRs
40

 

Loans originated for sale
(39,299
)
 
(22,177
)
Proceeds from sales of loans
37,461

 
23,301

Net change in accrued interest receivable and other assets
439

 
559

Net change in other liabilities and accrued expenses
108

 
(29
)
Net cash provided by operating activities
4,488

 
6,233

 
 
 
 
Cash flows from investing activities
 

 
 

Net increase in CDs held for investment
(11,208
)
 
(2,294
)
Proceeds from sale of investment securities available for sale
1,220

 
856

Proceeds from maturities and prepayments of investment securities available for sale
224

 
288

Purchase of investment securities held to maturity
(2,988
)
 
(3,003
)
Proceeds from maturities and prepayments of investment securities held to maturity
364

 
424

Redemption of FHLB stock
2,547

 
153

Increase in loans receivable, net
(31,414
)
 
(14,834
)
Additions to premises and equipment
(584
)
 
(1,021
)
Proceeds from sale of premises and equipment
465

 
37

Proceeds from sales of OREO and other repossessed assets
2,216

 
5,098

Net cash used in investing activities
(39,158
)
 
(14,296
)
See notes to unaudited condensed consolidated financial statements

9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended June 30, 2015 and 2014
(In thousands)
(Unaudited)

 
Nine Months Ended
June 30,
 
2015

 
2014

Cash flows from financing activities
 

 
 

Increase (decrease) in deposits, net
$
39,602

 
$
(9,630
)
ESOP tax effect
54

 
46

Proceeds from exercise of stock options
29

 
16

Stock option excess tax benefit
1

 

Issuance of common stock
1

 

Redemption of preferred stock

 
(12,065
)
Dividends paid
(1,198
)
 
(833
)
Net cash provided by (used in) financing activities
38,489

 
(22,466
)
 
 

 
 

Net increase (decrease) in cash and cash equivalents
3,819

 
(30,529
)
Cash and cash equivalents
 

 
 

Beginning of period
72,354

 
94,496

End of period
$
76,173

 
$
63,967

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Income taxes paid
$
2,630

 
$
2,108

Interest paid
2,917

 
2,987

 
 
 
 
Supplemental disclosure of non-cash investing activities
 

 
 

Loans transferred to OREO and other repossessed assets
$
1,568

 
$
5,665

Other comprehensive loss related to investment securities

 
38

Loans originated to facilitate the sale of OREO

 
809

 

 


See notes to unaudited condensed consolidated financial statements

10


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

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)  Basis of Presentation:  The accompanying unaudited condensed 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 condensed consolidated financial statements have been included.  All such adjustments are of a normal recurring nature. The unaudited condensed 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, 2014 (“2014 Form 10-K”).  The unaudited condensed consolidated results of operations for the nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2015.

(b)  Principles of Consolidation:  The unaudited condensed 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 Corp.   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 condensed 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 condensed 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, 2015 presentation with no change to net income or total shareholders’ equity previously reported.


(2) PREFERRED STOCK SOLD IN TROUBLED ASSET RELIEF PROGRAM (“TARP”) CAPITAL PURCHASE PROGRAM (“CPP”)
On December 23, 2008, the Company received $16.64 million from the U.S. Treasury Department (“Treasury”) as a part of the Treasury’s CPP, which was established as part of the TARP.  The Company sold 16,641 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), with a liquidation value of $1,000 per share and a related 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. 

On November 13, 2012, the Company’s outstanding 16,641 shares of Series A Preferred Stock were sold by the Treasury as part of its efforts to manage and recover its investments under the TARP.  While the sale of the shares of Series A Preferred Stock to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients.

On June 12, 2013, the Treasury sold, to private investors, the warrant to purchase up to 370,899 shares of the Company's common stock. The sale of the warrant to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for the warrant.

During the year ended September 30, 2013, the Company purchased and retired 4,576 shares of its Series A Preferred Stock for $4.32 million; a $255,000 discount from the liquidation value. The discount from the liquidation value on the repurchased shares was recorded as an increase to retained earnings. On December 20, 2013, the Company redeemed the remaining 12,065 shares of its Series A Preferred Stock at the liquidation value of $12.07 million. The Series A Preferred Stock paid a 5.0% dividend through December 20, 2013, the date of its redemption.







11


(3) INVESTMENT SECURITIES
Held to maturity and available for sale investment securities have been classified according to management’s intent and are as follows as of June 30, 2015 and September 30, 2014 (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2015
 
 
 
 
 
 
 
Held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities ("MBS"):
 
 
 
 
 
 
 
U.S. government agencies
$
873

 
$
25

 
$
(2
)
 
$
896

Private label residential
1,141

 
913

 
(5
)
 
2,049

U.S. treasury and U.S government agency securities
6,004

 
32

 
(23
)
 
6,013

Total
$
8,018

 
$
970

 
$
(30
)
 
$
8,958

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
404

 
$
35

 
$
(1
)
 
$
438

Mutual funds
1,000

 

 
(37
)
 
963

Total
$
1,404

 
$
35

 
$
(38
)
 
$
1,401

 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
Held to maturity
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
1,002

 
$
32

 
$
(2
)
 
$
1,032

Private label residential
1,280

 
965

 
(7
)
 
2,238

U.S. government agency securities
3,016

 
1

 
(13
)
 
3,004

Total
$
5,298

 
$
998

 
$
(22
)
 
$
6,274

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
1,801

 
$
100

 
$
(2
)
 
$
1,899

Mutual funds
1,000

 

 
(42
)
 
958

Total
$
2,801

 
$
100

 
$
(44
)
 
$
2,857



12


The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of June 30, 2015 (dollars in thousands):

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Qty
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Qty
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
Held to maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$

 
$

 

 
$
66

 
$
(2
)
 
5

 
$
66

 
$
(2
)
Private label residential
1

 

 
3

 
178

 
(5
)
 
11

 
179

 
(5
)
U.S. treasury and U.S. government agency securities
2,965

 
(23
)
 
1

 

 

 

 
2,965

 
(23
)
     Total
$
2,966

 
$
(23
)
 
4

 
$
244

 
$
(7
)
 
16

 
$
3,210

 
$
(30
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
1

 
$

 
2

 
$
50

 
$
(1
)
 
2

 
$
51

 
$
(1
)
Mutual Funds

 

 

 
963

 
(37
)
 
1

 
963

 
(37
)
     Total
$
1

 
$

 
2

 
$
1,013

 
$
(38
)
 
3

 
$
1,014

 
$
(38
)

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of September 30, 2014 (dollars in thousands):

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
 
Qty
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
 
Qty
 
Estimated
 Fair
 Value
 
Gross
Unrealized Losses
Held to maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$

 
$

 

 
$
76

 
$
(2
)
 
8

 
$
76

 
$
(2
)
Private label residential
9

 

 
1

 
188

 
(7
)
 
11

 
197

 
(7
)
U.S. government agency securities
2,989

 
(13
)
 
1

 

 

 

 
2,989

 
(13
)
     Total
$
2,998

 
$
(13
)
 
2

 
$
264

 
$
(9
)
 
19

 
$
3,262

 
$
(22
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
19

 
$

 
1

 
$
40

 
$
(2
)
 
1

 
$
59

 
$
(2
)
Mutual funds

 

 

 
958

 
(42
)
 
1

 
958

 
(42
)
     Total
$
19

 
$

 
1

 
$
998

 
$
(44
)
 
2

 
$
1,017

 
$
(44
)

The Company has evaluated these securities 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

13


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, 2015, 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.

In accordance with GAAP, 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 each 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 estimate of the credit loss component on OTTI securities as of June 30, 2015 and September 30, 2014:
 
Range
 
Weighted
 
Minimum 
 
Maximum 
 
Average 
June 30, 2015
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
10.38
%
Collateral default rate
0.22
%
 
18.51
%
 
6.78
%
Loss severity rate
5.41
%
 
68.54
%
 
44.17
%
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
10.59
%
Collateral default rate
0.01
%
 
22.34
%
 
7.41
%
Loss severity rate
0.16
%
 
75.17
%
 
45.81
%

The following tables present the OTTI for the three and nine months ended June 30, 2015 and 2014 (in thousands):

 
Three Months Ended June 30, 2015
 
Three Months Ended
June 30, 2014
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total (OTTI) recoveries
$

 
$

 
$
(38
)
 
$

Adjustment for portion recorded as (transfered from)
       other comprehensive income (loss) before income taxes (1)
(4
)
 

 
29

 

Net (OTTI) recoveries recognized in earnings (2)
$
(4
)
 
$

 
$
(9
)
 
$

    
 
Nine Months Ended June 30, 2015
 
Nine Months Ended
June 30, 2014
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total (OTTI) recoveries
$

 
$

 
$
49

 
$

Adjustment for portion recorded as (transferred from)
       other comprehensive income (loss) before income taxes (1)
(5
)
 

 
29

 

Net (OTTI) recoveries recognized in earnings (2)
$
(5
)
 
$

 
$
78

 
$

 
 
 
 
 
 
 
 
________________________
(1)
Represents (OTTI) recoveries related to all other factors or (OTTI) recoveries related to credit losses transferred from OCI.
(2)
Represents net recoveries (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 and the remaining impairment loss related to all other factors recognized in other comprehensive income (loss) for the nine months ended June 30, 2015 and 2014 (in thousands):
 
Nine Months Ended June 30,
 
2015

 
2014

Beginning balance of credit loss
$
1,654

 
$
2,084

Additions:
 

 
 

Credit losses for which OTTI was
not previously recognized

 
2

Additional increases to the amount
related to credit loss for which OTTI
was previously recognized
5

 
13

Subtractions:
 
 
 

Realized losses previously recorded
as credit losses
(58
)
 
(535
)
Recovery of prior credit loss

 
90

Ending balance of credit loss
$
1,601

 
$
1,654


There was no realized gain on the sale of investment securities for the three months ended June 30, 2015, and there was a $45,000 realized gain on the sale of investment securities for the nine months ended June 30, 2015. There was no realized loss on the sale of investment securities for the three months ended June 30, 2014, and there was a $32,000 realized loss on the sale of investment securities for the nine months ended June 30, 2014. During the three months ended June 30, 2015, the Company recorded a net $20,000 realized loss (as a result of the securities being deemed worthless) on 12 held to maturity residential MBS, of which the entire amount had been recognized previously as a credit loss. During the nine months ended June 30, 2015, the Company recorded a net $58,000 realized loss (as a result of securities being deemed worthless) on 14 held to maturity residential MBS, of which the entire amount had been recognized previously as a credit loss. During the three months ended June 30, 2014, the Company recorded a $40,000 realized loss (as a result of the securities being deemed worthless) on 12 held to maturity residential MBS, of which the entire amount had been recognized previously as a credit loss. During the nine months ended June 30, 2014, the Company recorded a net $445,000 realized loss (as a result of securities being deemed worthless) on 15 held to maturity residential MBS and six available for sale MBS, of which the entire amount had previously been recognized as a credit loss.

The amortized cost of residential mortgage-backed and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral, retail repurchase agreements and other non-profit organization deposits totaled $7.31 million and $6.22 million at June 30, 2015 and September 30, 2014, respectively.

The contractual maturities of debt securities at June 30, 2015 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities as a result of 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
$

 
$

 
$

 
$

Due after one year to five years
6,006

 
6,015

 
13

 
13

Due after five to ten years
23

 
24

 

 

Due after ten years
1,989

 
2,919

 
391

 
425

Total
$
8,018

 
$
8,958

 
$
404

 
$
438





15


(4) GOODWILL

The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit. If the estimated fair value of the Company's sole reporting unit, the Bank, under step one exceeds the recorded value of the reporting unit, goodwill is not considered impaired and no further analysis is necessary. If the estimated fair value of the Company's sole reporting unit is less than the recorded value, then a step two test, which calculates the fair value of assets and liabilities to calculate an implied value of goodwill, is performed.

Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing a discounted cash flow income approach analysis, a public company market approach analysis, a merger and acquisition market approach analysis and a trading price market approach analysis in order to derive an enterprise value for the Company.

The discounted cash flow income approach analysis uses a reporting unit's projection of estimated operating results and cash flows and discounts them using a rate that reflects current market conditions. The projection uses management's estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Key assumptions used by the Company in its discounted cash flow model (income approach) included an annual loan growth rate that ranged from 3.00% to 3.60%, an annual deposit growth rate that ranged from 2.20% to 3.20% and a return on assets that ranged from 0.80% to 1.00%. In addition to the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 12.2% and the residual capitalization rate of 9.2%. The discount rate used was the cost of equity capital. The cost of equity capital was based on the capital asset pricing model ("CAPM"), modified to account for a small stock premium. The small stock premium represents the additional return required by investors for small stocks based on the 2015 Valuation Handbook - Guide to Cost of Capital. Beyond the approximate five-year forecast period, residual free cash flows were estimated to increase at a constant rate into perpetuity. These cash flows were converted to a residual value using an appropriate residual capitalization rate. The residual capitalization rate was equal to the discount rate minus the expected long-term growth rate of cash flows. Based on historical results, the economic climate, the outlook for the industry and management's expectations, a long-term growth rate of 3.0% was estimated.

The public company market approach analysis estimates the fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples were derived from comparable publicly traded companies with operating and investment characteristics similar to those of the Company. Key assumptions used by the Company included the selection of comparable public companies and performance ratios. In applying the public company analysis, the Company selected nine publicly traded institutions based on similar lines of business, markets, growth prospects, risks and firm size. The performance ratios included price to earnings (last twelve months), price to earnings (current year to date), price to book value, price to tangible book value and price to deposits.

The merger and acquisition market approach analysis estimates the fair value by using merger and acquisition transactions involving companies that are similar in nature to the Company. Key assumptions used by the Company included the selection of comparable merger and acquisition transactions and the valuation ratios to be used. The analysis used banks located in Washington and Oregon that were acquired after January 1, 2013. The valuation ratios from these transactions for price to earnings and price to tangible book value were then used to derive an estimated fair value of the Company.

The trading price market approach analysis used the closing market price at May 29, 2015 of the Company's common stock, traded on the NASDAQ Global Market to determine the market value of total equity capital.

A key assumption used by the Company in the public company market approach analysis and the trading price market approach analysis was the application of a control premium. The Company's common stock is thinly traded and, therefore, management believes reflects a discount for illiquidity. In addition, the trading price of the Company's common stock reflects a minority interest value. To determine the fair market value of a majority interest in the Company's stock, premiums were calculated and applied to the indicated values. Therefore, a control premium was applied to the results of the discounted cash flow income approach analysis, the public company market approach analysis and the trading price market approach analysis because the initial value conclusion was based on minority interest transactions. Merger and acquisition studies were analyzed to conclude that the difference between the acquisition price and a company's stock price prior to acquisition indicates, in part, the price effect of a controlling interest. Based on the evaluation of mergers and acquisition studies, a control premium of 25% was used.

The Company performed its fiscal year 2015 goodwill impairment test during the quarter ended June 30, 2015 with the assistance of a third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2015 and the step one test concluded that the reporting unit's fair value was more than

16


its recorded value and, therefore, step two of the analysis was not necessary. Accordingly, the recorded value of goodwill as of May 31, 2015 was not impaired.

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 the 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. Key assumptions used in the annual goodwill impairment test are highly judgmental and include: selection of comparable companies, amount of control premium, projected cash flows and discount rate applied to projected cash flows. Any change in these indicators or key assumptions 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, 2015, management believed that there had been no events or changes in the circumstances since May 31, 2015 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.

17


(5) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale by portfolio segment consisted of the following at June 30, 2015 and September 30, 2014
(dollars in thousands):
 
June 30,
2015
 
September 30,
2014
 
Amount
 
Percent
 
Amount
 
Percent
Mortgage loans:
 
 
 
 
 
 
 
One- to four-family (1)
$
111,184

 
16.6
%
 
$
98,534

 
16.2
%
Multi-family
50,587

 
7.6

 
46,206

 
7.6

Commercial
293,438

 
43.9

 
294,354

 
48.5

Construction and land development
109,678

 
16.4

 
68,479

 
11.3

Land
27,495

 
4.1

 
29,589

 
4.9

Total mortgage loans
592,382

 
88.6

 
537,162

 
88.5

 
 
 
 
 
 
 
 
Consumer loans:
 

 
 

 
 

 
 

Home equity and second mortgage
35,040

 
5.3

 
34,921

 
5.7

Other
4,711

 
0.7

 
4,699

 
0.8

Total consumer loans
39,751

 
6.0

 
39,620

 
6.5

 
 
 
 
 
 
 
 
Commercial business loans
36,288

 
5.4

 
30,559

 
5.0

 
 
 
 
 
 
 
 
Total loans receivable
668,421

 
100.0
%
 
607,341

 
100.0
%
Less:
 

 
 

 
 

 
 

Undisbursed portion of construction 
loans in process
(57,674
)
 
 

 
(29,416
)
 
 

Deferred loan origination fees
(2,069
)
 
 

 
(1,746
)
 
 

Allowance for loan losses
(10,467
)
 
 

 
(10,427
)
 
 

 
 
 
 
 
 
 
 
Total loans receivable, net
$
598,211

 
 

 
$
565,752

 
 

________________________
(1)    Includes loans held for sale.


Construction and Land Development Loan Portfolio Composition
The following table sets forth the composition of the Company’s construction and land development loan portfolio at June 30, 2015 and September 30, 2014 (dollars in thousands):

 
June 30,
2015
 
September 30,
2014
 
Amount
 
Percent
 
Amount
 
Percent
Custom and owner/builder
$
62,579

 
57.1
%
 
$
59,752

 
87.3
%
Speculative one- to four-family
5,205

 
4.8

 
2,577

 
3.8

Commercial real estate
18,924

 
17.2

 
3,310

 
4.8

Multi-family
(including condominiums)
22,970

 
20.9

 
2,840

 
4.1

Total construction and
 land development loans
$
109,678

 
100.0
%
 
$
68,479

 
100.0
%

18





Allowance for Loan Losses
The following tables set forth information for the three and nine months ended June 30, 2015 and 2014 regarding activity in the allowance for loan losses by portfolio segment (in thousands):

 
Three Months Ended June 30, 2015
 
Beginning
Allowance
 
Provision
/(Credit)
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One-to four-family