10-Q 1 tsbk-3312016x10q.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016

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 MAY 5, 2016
 
Common stock, $.01 par value
6,936,068
 



INDEX

 
 
Page
 
 
 
 
  Item 1.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.    
 
 
 
 
 
  Item 4.     
 
 
 
 
 
 
 
 
 
 
 
  Item 1.     
 
  
 
 
 
  Item 1A.     
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.     
 
 
 
 
 
  Item 4.
 
 
 
 
 
  Item 5.     
 
51 
 
 
 
 
  Item 6.     
 
 
 
 
 
 
Certifications 
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32
 
 
 
Exhibit 101
 


2


PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements (unaudited)
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2016 and September 30, 2015
(Dollars in thousands, except per share amounts)
 
 
March 31,
2016

 
September 30,
2015

 
(Unaudited)
 
*

Assets
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from financial institutions
$
17,121

 
$
14,014

Interest-bearing deposits in banks
92,908

 
78,275

Total cash and cash equivalents
110,029

 
92,289

 
 
 
 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)
52,524

 
48,611

Investment securities held to maturity, at amortized cost
     (estimated fair value $8,628 and $8,894)
7,743

 
7,913

Investment securities available for sale
1,365

 
1,392

Federal Home Loan Bank (“FHLB”) stock
2,804

 
2,699

Loans held for sale
1,584

 
3,051

 
 
 
 
Loans receivable
632,894

 
614,201

Less: Allowance for loan losses
(10,043
)
 
(9,924
)
Net loans receivable
622,851

 
604,277

 
 
 
 
Premises and equipment, net
16,355

 
16,854

Other real estate owned (“OREO”) and other repossessed assets, net
5,458

 
7,854

Accrued interest receivable
2,232

 
2,170

Bank owned life insurance (“BOLI”)
18,443

 
18,170

Goodwill
5,650

 
5,650

Mortgage servicing rights (“MSRs”), net
1,488

 
1,478

Other assets
3,436

 
3,407

Total assets
$
851,962

 
$
815,815

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities
 

 
 

Deposits:
 
 
 
     Non-interest-bearing demand
$
148,980

 
$
141,388

     Interest-bearing
563,058

 
537,524

Total deposits
712,038

 
678,912

 
 
 
 
FHLB advances
45,000

 
45,000

Other liabilities and accrued expenses
2,662

 
2,716

Total liabilities
759,700

 
726,628

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
March 31, 2016 and September 30, 2015
(Dollars in thousands, except per share amounts)
 
 
March 31,
2016

 
September 30,
2015

 
(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;
6,933,068 shares issued and outstanding - March 31, 2016 6,988,848 shares issued and outstanding - September 30, 2015
9,698

 
10,293

Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)
(793
)
 
(926
)
Retained earnings
83,643

 
80,133

Accumulated other comprehensive loss
(286
)
 
(313
)
Total shareholders’ equity
92,262

 
89,187

Total liabilities and shareholders’ equity
$
851,962

 
$
815,815

* Derived from audited consolidated financial statements.


See notes to unaudited consolidated financial statements


4


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2016 and 2015
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended 
 March 31,
 
Six Months Ended March 31,
 
2016

 
2015

 
2016

 
2015

Interest and dividend income
 
 
 
 
 
 
 
Loans receivable and loans held for sale
$
8,306

 
$
7,352

 
$
16,735

 
$
14,861

Investment securities
74

 
55

 
143

 
120

Dividends from mutual funds and FHLB stock
39

 
6

 
61

 
13

Interest-bearing deposits in banks and CDs
231

 
114

 
402

 
219

Total interest and dividend income
8,650

 
7,527

 
17,341

 
15,213

 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
Deposits
507

 
495

 
1,012

 
1,004

FHLB advances
472

 
465

 
948

 
940

Total interest expense
979

 
960

 
1,960

 
1,944

 
 
 
 
 
 
 
 
Net interest income
7,671

 
6,567

 
15,381

 
13,269

 
 
 
 
 
 
 
 
Provision for loan losses

 

 

 

 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
7,671

 
6,567

 
15,381

 
13,269

 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
Other than temporary impairment (“OTTI”) on investment securities
(24
)
 

 
(24
)
 

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

 
(1
)
 
1

 
(1
)
Net OTTI on investment securities
(23
)
 
(1
)
 
(23
)
 
(1
)
Gain on sale of investment securities available for sale, net

 

 

 
45

Service charges on deposits
937

 
852

 
1,909

 
1,737

ATM and debit card interchange transaction fees
710

 
643

 
1,409

 
1,273

BOLI net earnings
137

 
131

 
273

 
268

Gain on sales of loans, net
393

 
348

 
787

 
584

Escrow fees
49

 
56

 
89

 
98

Servicing income (loss) on loans sold
55

 
(12
)
 
120

 
(40
)
Other, net
255

 
197

 
467

 
374

Total non-interest income, net
2,513

 
2,214

 
5,031

 
4,338








 See notes to unaudited consolidated financial statements

5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and six months ended March 31, 2016 and 2015
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended 
 March 31,
 
Six Months Ended March 31,
 
2016

 
2015

 
2016

 
2015

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
3,466

 
$
3,284

 
$
6,936

 
$
6,680

Premises and equipment
771

 
751

 
1,531

 
1,476

Advertising
193

 
173

 
398

 
361

OREO and other repossessed assets, net
195

 
349

 
438

 
425

ATM and debit card interchange transaction fees
331

 
255

 
653

 
593

Postage and courier
110

 
114

 
211

 
218

State and local taxes
138

 
119

 
270

 
236

Professional fees
117

 
223

 
247

 
399

Federal Deposit Insurance Corporation ("FDIC") insurance
127

 
148

 
234

 
308

Loan administration and foreclosure
95

 
76

 
124

 
119

Data processing and telecommunications
474

 
471

 
924

 
850

Deposit operations
234

 
219

 
406

 
395

Other
378

 
472

 
735

 
868

Total non-interest expense
6,629

 
6,654

 
13,107

 
12,928

 
 
 
 
 
 
 
 
Income before federal income taxes
3,555

 
2,127

 
7,305

 
4,679

 
 
 
 
 
 
 
 
Provision for federal income taxes
1,175

 
676

 
2,397

 
1,501

 
 
 
 
 
 
 
 
     Net income
$
2,380

 
$
1,451

 
$
4,908

 
$
3,178

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.21

 
$
0.72

 
$
0.46

Diluted
$
0.34

 
$
0.21

 
$
0.69

 
$
0.45

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
6,846,527

 
6,898,192

 
6,858,190

 
6,895,038

Diluted
7,080,005

 
7,071,792

 
7,081,945

 
7,067,621

 
 
 
 
 
 
 
 
Dividends paid per common share
$
0.08

 
$
0.06

 
$
0.20

 
$
0.11




See notes to unaudited consolidated financial statements

6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2016 and 2015
(Dollars in thousands)
(Unaudited) 
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2016

 
2015

 
2016

 
2015

Comprehensive income
 
 
 
 
 
 
 
Net income
$
2,380

 
$
1,451

 
$
4,908

 
$
3,178

Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $6, $4, ($1) and $2, respectively
11

 
8

 
(1
)
 
5

Reclassification adjustment for gain on sale of investment securities available for sale included in net income, net of income taxes of $0, $0, $0 and ($15), respectively.

 

 

 
(30
)
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, net of income taxes of $6, $1, $7 and $1, respectively
12

 
1

 
12

 
1

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

 
(1
)
 
1

Accretion of OTTI on investment securities held to maturity, net of income taxes of $4, $4, $9, and $8, respectively
7

 
7

 
17

 
15

Total other comprehensive income (loss), net of income taxes
$
29

 
$
17

 
$
27

 
$
(8
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
2,409

 
$
1,468

 
$
4,935


$
3,170




See notes to unaudited consolidated financial statements

7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the six months ended March 31, 2016 and 2015
(Dollars in thousands, except per share amounts)
(Unaudited)

 
 
Number of Shares
 
Amount
 
Unearned
 Shares Issued to
ESOP

 
 
 
Accumulated
Other
Compre-
hensive
Loss

 
 
 
 
Common
Stock
 
Common
Stock
 
 
Retained
Earnings
 
 
Total
Balance, September 30, 2014
 
7,047,336

 
$
10,773

 
$
(1,190
)
 
$
73,534

 
$
(339
)
 
$
82,778

Net income
 

 

 

 
3,178

 

 
3,178

Other comprehensive loss
 

 

 

 

 
(8
)
 
(8
)
Exercise of stock options
 
5,300

 
25

 

 

 

 
25

Common stock dividends ($0.11 per common share)
 

 

 

 
(775
)
 

 
(775
)
Earned ESOP shares, net of income taxes
 

 
36

 
132

 

 

 
168

Stock option compensation expense
 

 
58

 

 

 

 
58

Balance, March 31, 2015
 
7,052,636

 
10,892

 
(1,058
)
 
75,937

 
(347
)
 
85,424

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
 
6,988,848

 
10,293

 
(926
)
 
80,133

 
(313
)
 
89,187

Repurchase of common stock
 
(66,000
)
 
(820
)
 

 

 

 
(820
)
Net income
 

 

 

 
4,908

 

 
4,908

Other comprehensive income
 

 

 

 

 
27

 
27

Exercise of stock options
 
10,220

 
86

 

 

 

 
86

Common stock dividends ($0.20 per common share)
 

 

 

 
(1,398
)
 

 
(1,398
)
Earned ESOP shares, net of income taxes
 

 
55

 
133

 

 

 
188

Stock option compensation expense
 

 
84

 

 

 

 
84

Balance, March 31, 2016
 
6,933,068

 
$
9,698

 
$
(793
)
 
$
83,643

 
$
(286
)
 
$
92,262





See notes to unaudited consolidated financial statements

8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2016 and 2015
(In thousands)
(Unaudited)

 
Six Months Ended
March 31,
 
2016

 
2015

Cash flows from operating activities
 
 
 
Net income
$
4,908

 
$
3,178

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

 
 

Depreciation
673

 
669

Amortization of core deposit intangible ("CDI")

 
3

Earned ESOP shares
133

 
132

Stock option compensation expense
75

 
56

Stock option tax effect less excess tax benefit
5

 
1

Gain on sales of OREO and other repossessed assets, net
(13
)
 
(127
)
Provision for OREO losses
301

 
405

Loss on sales/dispositions of premises and equipment, net
3

 

BOLI net earnings
(273
)
 
(268
)
Gain on sales of loans, net
(787
)
 
(584
)
Increase (decrease) in deferred loan origination fees
(145
)
 
147

Net OTTI on investment securities
23

 
1

Gain on sale of investment securities available for sale, net

 
(45
)
Amortization of MSRs
295

 
40

Loans originated for sale
(24,305
)
 
(21,696
)
Proceeds from sales of loans
26,559

 
20,927

Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses
(514
)
 
524

Net cash provided by operating activities
6,938

 
3,363

 
 
 
 
Cash flows from investing activities
 

 
 

Net increase in CDs held for investment
(3,913
)
 
(6,023
)
Proceeds from sale of investment securities available for sale

 
1,220

Proceeds from maturities and prepayments of investment securities available for sale
27

 
159

Proceeds from maturities and prepayments of investment securities held to maturity
238

 
243

Purchase of FHLB stock
(105
)
 

Redemption of FHLB stock

 
111

Increase in loans receivable, net
(18,505
)
 
(17,955
)
Additions to premises and equipment
(177
)
 
(412
)
Capitalized improvements to OREO
(142
)
 

Proceeds from sales of OREO and other repossessed assets
2,326

 
1,589

Net cash used in investing activities
(20,251
)
 
(21,068
)
 
 
 
 
See notes to unaudited consolidated financial statements

9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2016 and 2015
(In thousands)
(Unaudited)

 
Six Months Ended
March 31,
 
2016

 
2015

Cash flows from financing activities
 

 
 

Net increase in deposits
$
33,126

 
$
28,157

ESOP tax effect
55

 
36

Proceeds from exercise of stock options
86

 
24

Stock option excess tax benefit
4

 
1

Issuance of common stock

 
1

Repurchase of common stock
(820
)
 

Payment of dividends
(1,398
)
 
(775
)
Net cash provided by financing activities
31,053

 
27,444

 
 

 
 

Net increase in cash and cash equivalents
17,740

 
9,739

Cash and cash equivalents
 

 
 

Beginning of period
92,289

 
72,354

End of period
$
110,029

 
$
82,093

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Income taxes paid
$
2,280

 
$
1,560

Interest paid
1,938

 
1,937

 
 
 
 
Supplemental disclosure of non-cash investing activities
 

 
 

Loans transferred to OREO and other repossessed assets
$
76

 
$
641

Other comprehensive loss related to investment securities
27

 
(8
)


 


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, 2015 (“2015 Form 10-K”).  The unaudited consolidated results of operations for the six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2016.

(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 March 31, 2016 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 March 31, 2016 and September 30, 2015 (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2016
 
 
 
 
 
 
 
Held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities ("MBS"):
 
 
 
 
 
 
 
U.S. government agencies
$
745

 
$
21

 
$
(1
)
 
$
765

Private label residential
993

 
799

 
(6
)
 
1,786

U.S. Treasury and U.S government agency securities
6,005

 
72

 

 
6,077

Total
$
7,743

 
$
892

 
$
(7
)
 
$
8,628

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
361

 
$
30

 
$

 
$
391

Mutual funds
1,000

 

 
(26
)
 
974

Total
$
1,361

 
$
30

 
$
(26
)
 
$
1,365

 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
Held to maturity
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
828

 
$
23

 
$
(1
)
 
$
850

Private label residential
1,081

 
894

 
(12
)
 
1,963

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

 
77

 

 
6,081

Total
$
7,913

 
$
994

 
$
(13
)
 
$
8,894

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

U.S. government agencies
$
387

 
$
34

 
$

 
$
421

Mutual funds
1,000

 

 
(29
)
 
971

Total
$
1,387

 
$
34

 
$
(29
)
 
$
1,392



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 March 31, 2016 (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
$
91

 
$

 
2

 
$
59

 
$
(1
)
 
4

 
$
150

 
$
(1
)
Private label residential
40

 
(1
)
 
3

 
163

 
(5
)
 
12

 
203

 
(6
)
     Total
$
131

 
$
(1
)
 
5

 
$
222

 
$
(6
)
 
16

 
$
353

 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mutual funds
$

 
$

 

 
$
974

 
$
(26
)
 
1

 
$
974

 
$
(26
)
     Total
$

 
$

 

 
$
974

 
$
(26
)
 
1

 
$
974

 
$
(26
)

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, 2015 (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
$
49

 
$

 
4

 
$
63

 
$
(1
)
 
5

 
$
112

 
$
(1
)
Private label residential
1

 

 
1

 
157

 
(12
)
 
11

 
158

 
(12
)
     Total
$
50

 
$

 
5

 
$
220

 
$
(13
)
 
16

 
$
270

 
$
(13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
1

 
$

 
1

 
$
48

 
$

 
2

 
$
49

 
$

Mutual funds

 

 

 
971

 
(29
)
 
1

 
971

 
(29
)
     Total
$
1

 
$

 
1

 
$
1,019

 
$
(29
)
 
3

 
$
1,020

 
$
(29
)

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 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 March 31, 2016, 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 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

13


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 March 31, 2016 and September 30, 2015:
 
Range
 
Weighted
 
Minimum 
 
Maximum 
 
Average 
March 31, 2016
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
9.16
%
Collateral default rate
0.24
%
 
17.64
%
 
5.70
%
Loss severity rate
7.00
%
 
77.00
%
 
41.97
%
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
11.49
%
Collateral default rate
0.16
%
 
14.65
%
 
6.08
%
Loss severity rate
3.92
%
 
65.00
%
 
39.83
%

The following table presents the OTTI for the three and six months ended March 31, 2016 and 2015 (dollars in thousands):
 
Three Months Ended March 31, 2016
 
Three Months Ended
March 31, 2015
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total OTTI
$
(24
)
 
$

 
$

 
$

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

 

 
(1
)
 

Net OTTI recognized in earnings (2)
$
(23
)
 
$

 
$
(1
)
 
$

    
 
Six Months Ended March 31, 2016
 
Six Months Ended
March 31, 2015
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total OTTI
$
(24
)
 
$

 
$

 
$

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

 

 
(1
)
 

Net OTTI recognized in earnings (2)
$
(23
)
 
$

 
$
(1
)
 
$

 
 
 
 
 
 
 
 
________________________
(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 six months ended March 31, 2016 and 2015 (dollars in thousands):
 
Six Months Ended March 31,
 
2016

 
2015

Beginning balance of credit loss
$
1,576

 
$
1,654

Additions:
 

 
 

Credit losses for which OTTI was
not previously recognized

 
1

Additional increases to the amount
related to credit loss for which OTTI
was previously recognized
20

 

Subtractions:
 
 
 

Realized losses previously recorded
as credit losses
(59
)
 
(38
)
Ending balance of credit loss
$
1,537

 
$
1,617


There was no realized gain on the sale of investment securities for the three and six months ended March 31, 2016. There was no realized gain on the sale of investment securities for the three months ended March 31, 2015 and there was a $45,000 realized gain on the sale of investment securities for the six months ended March 31, 2015. During the three months ended March 31, 2016, the Company recorded a $35,000 net realized loss (as a result of the securities being deemed worthless) on 12 held to maturity residential MBS, of which $32,000 had been recognized previously as a credit loss. During the six months ended March 31, 2016 the Company recorded a $63,000 net realized loss (as a result of securities being deemed worthless) on 15 held to maturity residential MBS, of which $59,000 had been previously recognized as a credit loss. During the three months ended March 31, 2015, the Company recorded a $21,000 net 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 six months ended March 31, 2015, the Company recorded a $38,000 net 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.

The recorded amount of residential MBS, treasury and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $7.14 million and $7.25 million at March 31, 2016 and September 30, 2015, respectively.

The contractual maturities of debt securities at March 31, 2016 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
$

 
$

 
$
5

 
$
6

Due after one year to five years
6,005

 
6,077

 

 

Due after five to ten years
22

 
23

 

 

Due after ten years
1,716

 
2,528

 
356

 
385

Total
$
7,743

 
$
8,628

 
$
361

 
$
391



(3) GOODWILL

Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.  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.


15


The goodwill impairment test involves a two-step process. Step one 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.

The Company performed its fiscal year 2015 goodwill impairment test during the quarter ended June 30, 2015 with the assistance of an independent 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 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.

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 are 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 or 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.

16



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 March 31, 2016, 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


(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale by portfolio segment consisted of the following at March 31, 2016 and September 30, 2015 (dollars in thousands):
 
March 31,
2016
 
September 30,
2015
 
Amount
 
Percent
 
Amount
 
Percent
Mortgage loans:
 
 
 
 
 
 
 
One- to four-family
$
117,465

 
17.3
%
 
$
116,664

 
17.4
%
Multi-family
42,666

 
6.3

 
52,322

 
7.8

Commercial
290,817

 
42.8

 
291,216

 
43.5

Construction - custom and owner/builder
69,817

 
10.3

 
62,954

 
9.4

Construction - speculative one- to four-family
6,384

 
0.9

 
6,668

 
1.0

Construction - commercial
22,487

 
3.3

 
20,728

 
3.1

Construction - multi-family
20,570

 
3.0

 
20,570

 
3.1

Land
24,322

 
3.6

 
26,140

 
3.9

Total mortgage loans
594,528

 
87.5

 
597,262

 
89.2

 
 
 
 
 
 
 
 
Consumer loans:
 

 
 

 
 

 
 

Home equity and second mortgage
37,144

 
5.5

 
34,157

 
5.1

Other
4,380

 
0.6

 
4,669

 
0.7

Total consumer loans
41,524

 
6.1

 
38,826

 
5.8

 
 
 
 
 
 
 
 
Commercial business loans
43,355

 
6.4

 
33,763

 
5.0

 
 
 
 
 
 
 
 
Total loans receivable
679,407

 
100.0
%
 
669,851

 
100.0
%
Less:
 

 
 

 
 

 
 

Undisbursed portion of construction 
loans in process
44,465

 
 

 
53,457

 
 

Deferred loan origination fees
2,048

 
 

 
2,193

 
 

Allowance for loan losses
10,043

 
 

 
9,924

 
 

 
56,556

 
 
 
65,574

 
 
Loans receivable, net
622,851

 
 

 
604,277

 
 

Loans held for sale (one- to four-family)
1,584

 
 
 
3,051

 
 
Total loans receivable and loans held for sale, net
$
624,435

 
 
 
$
607,328

 
 



















18


Allowance for Loan Losses
The following tables set forth information for the three and six months ended March 31, 2016 and 2015 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

 
Three Months Ended March 31, 2016
 
Beginning
Allowance
 
Provision for
/(Recapture of)
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One-to four-family
$
1,420

 
$
(147
)
 
$
(2
)
 
$
52

 
$
1,323

Multi-family
373

 
(58
)
 

 

 
315

Commercial
3,898

 
239

 
(54
)
 

 
4,083

Construction – custom and owner/builder
555

 
(13
)
 

 

 
542

Construction – speculative one- to four-family
122

 
(28
)
 

 
2

 
96

Construction – commercial
486

 
131

 

 

 
617

Construction – multi-family
336

 
(77
)
 

 
150

 
409

Land
923

 
24

 

 
7

 
954

Consumer loans:
 

 
 

 
 

 
 

 
 
Home equity and second mortgage
1,102

 
(81
)
 

 

 
1,021

Other
161

 
3

 
(2
)
 

 
162

Commercial business loans
513

 
7

 

 
1

 
521

Total
$
9,889

 
$

 
$
(58
)
 
$
212

 
$
10,043


 
Six Months Ended March 31, 2016
 
Beginning
Allowance
 
Provision for
/(Recapture of)
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One-to four-family
$
1,480

 
$
(184
)
 
$
(28
)
 
$
55

 
$
1,323

Multi-family
392

 
(77
)
 

 

 
315

Commercial
4,065

 
99

 
(81
)
 

 
4,083

Construction – custom and owner/builder
451

 
91

 

 

 
542

Construction – speculative one- to four-family
123

 
(29
)
 

 
2

 
96

Construction – commercial
426

 
191

 

 

 
617

Construction – multi-family
283

 
(55
)
 

 
181

 
409

Land
1,021

 
(72
)
 
(8
)
 
13

 
954

Consumer loans:
 

 
 

 
 

 
 

 
 

Home equity and second mortgage
1,073

 
(39
)
 
(13
)
 

 
1,021

Other
187

 
(21
)
 
(5
)
 
1

 
162

Commercial business loans
423

 
96

 

 
2

 
521

Total
$
9,924

 
$

 
$
(135
)
 
$
254

 
$
10,043

 
 
 
 
 
 
 
 
 
 


19


 
Three Months Ended March 31, 2015
 
Beginning
Allowance
 
Provision for
/(Recapture of)
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
  One-to four-family
$
1,504

 
$
24

 
$
(39
)
 
$
107

 
$
1,596

  Multi-family
368

 
(66)

 

 

 
302
  Commercial
3,646