Timberland Bancorp Earnings 2019-03-31

TSBK 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 tsbk-3312019x10q.htm 10-Q Document

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, 2019

[ ] 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes _X_ No __

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

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

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

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

Yes ___ No _X_

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $.01 par value	TSBK	The NASDAQ Stock Market LLC

As of May 1, 2019, there were 8,337,759 shares of the registrant's common stock, $.01 par value per share outstanding.

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	10

	Notes to Unaudited Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	53

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

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

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

SIGNATURES
Certifications
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32
	Exhibit 101

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

March 31, 2019 and September 30, 2018

(Dollars in thousands, except per share amounts)



	March 31, 2019		September 30, 2018
	(Unaudited)		*
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	23,957	$	20,238
Interest-bearing deposits in banks	150,629		128,626
Total cash and cash equivalents	174,586		148,864

Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	65,737		63,290
Investment securities held to maturity, at amortized cost (estimated fair value $42,190 and $13,264)	41,361		12,810
Investment securities available for sale, at fair value	2,141		1,154
Investments in equity securities, at fair value	937		—
Federal Home Loan Bank of Des Moines (“FHLB”) stock	1,437		1,190
Other investments, at cost	3,000		3,000
Loans held for sale	3,068		1,785
Loans receivable, net of allowance for loan losses of $9,741 and $9,530	873,284		725,391
Premises and equipment, net	22,852		18,953
Other real estate owned (“OREO”) and other repossessed assets, net	2,006		1,913
Accrued interest receivable	3,702		2,877
Bank owned life insurance (“BOLI”)	20,707		19,813
Goodwill	15,131		5,650
Core deposit intangible (“CDI”), net	2,264		—
Mortgage servicing rights (“MSRs”), net	2,322		2,028
Escrow deposit for business combination	—		6,900
BOLI death benefit receivable	3,048		—
Other assets	2,986		2,672
Total assets	$	1,240,569	$	1,018,290

Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing demand	$	287,338	$	233,258
Interest-bearing	784,256		656,248
Total deposits	1,071,594		889,506

Other liabilities and accrued expenses	6,637		4,127
Total liabilities	1,078,231		893,633

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (continued)

March 31, 2019 and September 30, 2018

(Dollars in thousands, except per share amounts)



	March 31, 2019			September 30, 2018
	(Unaudited)			*
Shareholders’ equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	$	—		$	—
Common stock, $0.01 par value; 50,000,000 shares authorized; 8,336,419 shares issued and outstanding - March 31, 2019 7,401,177 shares issued and outstanding - September 30, 2018	43,351			14,394
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	—			(133		)
Retained earnings	119,032			110,525
Accumulated other comprehensive loss	(45		)	(129		)
Total shareholders’ equity	162,338			124,657
Total liabilities and shareholders’ equity	$	1,240,569		$	1,018,290

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the three and six months ended March 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended March 31,					Six Months Ended March 31,
	2019			2018		2019			2018
Interest and dividend income
Loans receivable and loans held for sale	$	12,216		$	9,484	$	23,997		$	18,812
Investment securities	297			39		575			96
Dividends from mutual funds, FHLB stock and other investments	39			26		78			52
Interest-bearing deposits in banks and CDs	1,289			741		2,506			1,364
Total interest and dividend income	13,841			10,290		27,156			20,324

Interest expense
Deposits	1,113			666		2,084			1,266
Total interest expense	1,113			666		2,084			1,266

Net interest income	12,728			9,624		25,072			19,058

Provision for loan losses	—			—		—			—

Net interest income after provision for loan losses	12,728			9,624		25,072			19,058

Non-interest income
Recoveries (other than temporary impairment "OTTI") on investment securities	20			14		32			41
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes	(11		)	—		(12		)	(5		)
Net recoveries on investment securities	9			14		20			36
Service charges on deposits	1,190			1,132		2,405			2,310
ATM and debit card interchange transaction fees	857			883		1,806			1,727
BOLI net earnings	1,156			137		1,313			273
Gain on sales of loans, net	288			470		675			992
Escrow fees	39			52		96			112
Servicing income on loans sold	117			117		265			233
Fee income from non-deposit investment sales	7			26		37			45
Other, net	277			251		589			491
Total non-interest income, net	3,940			3,082		7,206			6,219

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three and six months ended March 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended March 31,					Six Months Ended March 31,
	2019		2018			2019		2018
Non-interest expense
Salaries and employee benefits	$	4,867	$	4,001		$	9,473	$	7,950
Premises and equipment	993		799			1,947		1,567
Loss (gain) on sales/dispositions of premises and equipment, net	8		(113		)	8		(113		)
Advertising	175		176			366		386
OREO and other repossessed assets, net	52		91			102		204
ATM and debit card interchange transaction fees	389		318			811		648
Postage and courier	138		131			248		237
State and local taxes	209		168			405		329
Professional fees	184		243			419		460
Federal Deposit Insurance Corporation ("FDIC") insurance	97		75			171		141
Loan administration and foreclosure	84		92			171		171
Data processing and telecommunications	1,068		495			1,681		962
Deposit operations	364		252			658		530
Amortization of CDI	110		—			219		—
Other	539		493			1,160		925
Total non-interest expense	9,277		7,221			17,839		14,397

Income before income taxes	7,391		5,485			14,439		10,880

Provision for income taxes	1,277		1,216			2,710		2,997

Net income	$	6,114	$	4,269		$	11,729	$	7,883

Net income per common share
Basic	$	0.74	$	0.58		$	1.41	$	1.08
Diluted	$	0.72	$	0.57		$	1.39	$	1.05

Weighted average common shares outstanding
Basic	8,310,074		7,328,127			8,301,550		7,320,243
Diluted	8,464,650		7,512,058			8,461,138		7,510,092

Dividends paid per common share	$	0.15	$	0.13		$	0.38	$	0.24

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and six months ended March 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)



	Three Months Ended March 31,					Six Months Ended March 31,
	2019		2018			2019			2018
Comprehensive income
Net income	$	6,114	$	4,269		$	11,729		$	7,883
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $21, ($2), ($1) and ($4), respectively	84		(18		)	(2		)	(25		)
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 $1, $5, $0 and ($2), respectively	3		15			—			(6		)
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $2, $0, $3 and $1, respectively	9		—			9			4
Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, $2, $4 and $6, respectively	4		7			14			19
Total other comprehensive income (loss), net of income taxes	100		4			21			(8		)

Total comprehensive income	$	6,214	$	4,273		$	11,750		$	7,875

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)



	Common Stock			Unearned Shares Issued to ESOP						Accumulated Other Compre- hensive Loss
	Number of Shares	Amount		Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Compre- hensive Loss			Total
Balance, December 31, 2017	7,367,327	$	13,540	$	(331	)	$	101,039		$	(136	)	$	114,112
													—
Net income	—	—		—			4,269			—			4,269
Other comprehensive income	—	—		—			—			4			4
Exercise of stock options	22,900	173		—			—			—			173
Common stock dividends ($0.13 per common share)	—	—		—			(959		)	—			(959		)
Earned ESOP shares, net of tax	—	135		66			—			—			201
Stock option compensation expense	—	43		—			—			—			43

Balance, March 31, 2018	7,390,227	13,891		(265		)	104,349			(132		)	117,843

Balance, December 31, 2018	8,313,403	42,951		(67		)	114,166			(145		)	156,905

Net income	—	—		—			6,114			—			6,114
Other comprehensive income	—	—		—			—			100			100
Exercise of stock options	23,016	212		—			—			—			212
Common stock dividends ($0.15 per common share)	—	—		—			(1,248		)	—			(1,248		)
Earned ESOP shares, net of tax	—	135		67			—			—			202
Stock option compensation expense	—	53		—			—			—			53

Balance, March 31, 2019	8,336,419	$	43,351	$	—		$	119,032		$	(45	)	$	162,338

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six months ended March 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)



	Common Stock			Unearned Shares Issued to ESOP						Accumulated Other Compre-hensive Loss
	Number of Shares	Amount		Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Compre-hensive Loss			Total
Balance, September 30, 2017	7,361,077	$	13,286	$	(397	)	$	98,235		$	(124	)	$	111,000
Net income	—	—		—			7,883			—			7,883
Other comprehensive loss	—	—		—			—			(8		)	(8		)
Exercise of stock options	29,150	234		—			—			—			234
Common stock dividends ($0.24 per common share)	—	—		—			(1,769		)	—			(1,769		)
Earned ESOP shares, net of income taxes	—	284		132			—			—			416
Stock option compensation expense	—	87		—			—			—			87
Balance, March 31, 2018	7,390,227	13,891		(265		)	104,349			(132		)	117,843


Balance, September 30, 2018	7,401,177	14,394		(133		)	110,525			(129		)	124,657
Net income	—	—		—			11,729			—			11,729
Other comprehensive income	—	—		—			—			21			21
Common stock issued for business combination	904,826	28,267		—			—			—			28,267
Exercise of stock options	30,416	283		—			—			—			283
Common stock dividends ($0.38 per common share)	—	—		—			(3,159		)	—			(3,159		)
Earned ESOP shares, net of income taxes	—	301		133			—			—			434
Stock option compensation expense	—	106		—			—			—			106
Adoption of Accounting Standards Update ("ASU") 2016-01	—	—		—			(63		)	63			—
Balance, March 31, 2019	8,336,419	$	43,351	$	—		$	119,032		$	(45	)	$	162,338

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended March 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)



	Six Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net income	$	11,729		$	7,883
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	790			621
Accretion of discount on purchased loans	(388		)	—
Amortization of CDI	219			—
Earned ESOP shares	434			416
Stock option compensation expense	106			87
Net recoveries on investment securities	(20		)	(36		)
Change in fair value of investments in equity securities	(20		)	—
Gain on sales of OREO and other repossessed assets, net	—			(93		)
Provision for OREO losses	23			224
Gain on sales of loans, net	(675		)	(992		)
(Gain) loss on sales/disposition of premises and equipment, net	8			(113		)
Loans originated for sale	(28,879		)	(30,608		)
Proceeds from sales of loans	28,271			31,218
Amortization of MSRs	311			242
BOLI net earnings	(314		)	(273		)
BOLI death benefit in excess of cash surrender value	(999		)	—
Increase in deferred loan origination fees	219			49
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	(1,114		)	(209		)
Net cash provided by operating activities	9,701			8,416

Cash flows from investing activities
Net decrease (increase) in CDs held for investment	526			(9,904		)
Proceeds from sale of investment securities available for sale	2,332			—
Proceeds from maturities and prepayments of investment securities held to maturity	1,242			266
Purchase of investment securities held to maturity	(10,048		)	(1,111		)
Proceeds from maturities and prepayments of investment securities available for sale	784			19
Purchase of FHLB stock	(42		)	—
Increase in loans receivable, net	(26,271		)	(18,416		)
Additions to premises and equipment	(1,360		)	(606		)
Proceeds from sales of premises and equipment	—			463
Cash acquired, net of cash consideration paid in business combination	14,284			—
Escrow deposit for business combination	6,900			—
Proceeds from sales of OREO and other repossessed assets	—			1,112
Net cash used in investing activities	(11,653		)	(28,177		)

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the six months ended March 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)



	Six Months Ended March 31,
	2019			2018
Cash flows from financing activities
Net increase in deposits	$	30,550		$	42,513
Proceeds from exercise of stock options	283			234
Payment of dividends	(3,159		)	(1,769		)
Net cash provided by financing activities	27,674			40,978

Net increase in cash and cash equivalents	25,722			21,217
Cash and cash equivalents
Beginning of period	148,864			148,188
End of period	$	174,586		$	169,405

Supplemental disclosure of cash flow information
Income taxes paid	$	2,741		$	2,208
Interest paid	2,053			1,243

Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	91		$	163
Other comprehensive income (loss) related to investment securities	21			(8		)

Business Combination (see Note 2)
Fair value of assets acquired	$	180,518		$	—
Fair value of liabilities assumed	$	154,829		$	—

See notes to unaudited consolidated financial statements

Timberland Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation: The accompanying unaudited consolidated financial statements for Timberland Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Timberland Bank (the "Bank") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018 (“2018 Form 10-K”). The unaudited consolidated results of operations for the six months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2019.

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

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

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

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

(e) Certain prior period amounts have been reclassified to conform to the March 31, 2019 presentation with no change to previously reported net income or total shareholders’ equity.

(2) BUSINESS COMBINATION

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

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

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

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

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



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

Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—		21,187
CDs held for investment	2,973		—			2,973
FHLB stock	205		—			205
Investment securities	24,913		(189		)	24,724
Loans receivable	123,627		(2,083		)	121,544
Premises and equipment	3,225		112			3,337
OREO	25		—			25
Accrued interest receivable	554		—			554
BOLI	2,629		—			2,629
CDI	—		2,483			2,483
MSRs	285		(4		)	281
Other assets	1,087		(511		)	576
Total assets	180,710		(192		)	180,518

Liabilities assumed:
Deposits	151,378		160			151,538
Other liabilities and accrued expenses	3,291		—			3,291
Total liabilities assumed	154,669		160			154,829
Total identifiable net assets acquired	$	26,041	$	(352	)	25,689
Goodwill recognized						$	9,481

Fair values on the acquisition date represent management's best estimates based on available information and facts and circumstances in existence as of the filing date of this report. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

The acquired loan portfolio was valued using Level 3 inputs (see Note 9) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values. Credit discounts were included in the determination of the fair value of the loans acquired; therefore, an allowance for loan losses was not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The Company determined that PCI loans acquired in the South Sound Merger were insignificant.

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

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

The operating results of the Company for the three and six months ended March 31, 2019 include the operating results produced by the net assets acquired in the South Sound Merger since the October 1, 2018 merger date. The table below presents the significant operating results of the acquired business since the October 1, 2018 merger date:



	Three Months Ended March 31, 2019			Six Months Ended March 31, 2019
	(Dollars in thousands)
Interest income: Interest and fees on loans (1)	$	1,867		$	3,605
Interest income: Interest and dividends on investment securities and FHLB stock	185			386
Interest income: Other interest earning assets	169			269
Interest expense	(155		)	(283		)
Provision for loan losses	—			—
Non-interest income	131			270
Non-interest expense (2)	(684		)	(1,544		)
Net effect, pre-tax	$	1,513		$	2,703

_________________________

(1) Includes the accretion of the fair value discount on the purchased loans of $301,000 and $388,000, respectively, for the three and six months ended March 31, 2019.

(2) Excludes certain compensation and employee benefits for management, and excludes certain other non-interest expenses that are impracticable to determine due to the integration of the operations for this merger. Also includes certain acquisition-related costs of $55,000 and $119,000, respectively, incurred by the Company for the three and six months ended March 31, 2019.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the six months ended March 31, 2019 and 2018. This unaudited estimated pro forma information was calculated as if South Sound Bank had been acquired as of the beginning of the fiscal year ended September 30, 2018. This unaudited pro forma information combines the historical results of South Sound Bank with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the transaction occurred at the beginning of the fiscal year ended September 30, 2018. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loans at fair value. Additionally, the Company expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.



	Unaudited Pro Forma Six Months Ended March 31,
	2019		2018
	(Dollars in thousands except per share data)
Total revenues (net interest income plus non-interest income)	$	32,278	$	28,883
Net income	11,823		8,513
Basic net income per common share	1.42		1.06
Diluted net income per common share	1.40		1.03

During the six months ended March 31, 2019 and 2018, the Company incurred acquisition-related expenses of $119,000 and $89,000, respectively, related to the South Sound Merger, which are included in professional fees in the accompanying consolidated statement of income. South Sound Bank incurred acquisition-related expenses of $30,000 for the six months ended March 31, 2018 related to the South Sound Merger. These acquisition-related expenses incurred by the Company and South Sound Bank are not included in the unaudited pro forma information presented for the six months ended March 31, 2019 and 2018.

The Company expects to incur additional acquisition-related expenses of approximately $700,000 over the next two quarters. These expenses are related to the conversion of South Sound Bank's current core processing and ancillary information technology systems to the Company's new core processing system.

(3) INVESTMENT SECURITIES

Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of March 31, 2019 and September 30, 2018 (dollars in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2019
Held to maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	30,001	$	386	$	(16	)	$	30,371
Private label residential	375		500		(1		)	874
U.S. Treasury and U.S government agency securities	10,985		—		(40		)	10,945
Total	$	41,361	$	886	$	(57	)	$	42,190

Available for sale
MBS: U.S. government agencies	$	2,138	$	13	$	(10	)	$	2,141
Total	$	2,138	$	13	$	(10	)	$	2,141

September 30, 2018
Held to maturity
MBS:
U.S. government agencies	$	1,385	$	8	$	(21	)	$	1,372
Private label residential	460		552		(2		)	1,010
U.S. Treasury and U.S. government agency securities	10,965		—		(83		)	10,882
Total	$	12,810	$	560	$	(106	)	$	13,264

Available for sale
MBS: U.S. government agencies	$	231	$	7	$	(1	)	$	237
Mutual funds	1,000		—		(83		)	917
Total	$	1,231	$	7	$	(84	)	$	1,154

Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2019 (dollars in thousands):



	Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity
MBS:
U.S. government agencies	$	1,725	$	(5	)	6	$	904	$	(11	)	6	$	2,629	$	(16	)
Private label residential	—		—			—	40		(1		)	7	40		(1		)
U.S. Treasury and U.S. government agency securities	4,985		(2		)	1	5,960		(38		)	2	10,945		(40		)
Total	$	6,710	$	(7	)	7	$	6,904	$	(50	)	15	$	13,614	$	(57	)

Available for sale
MBS: U.S. government agencies	$	1,101	$	(10	)	3	$	—	$	—		—	$	1,101	$	(10	)
Total	$	1,101	$	(10	)	3	$	—	$	—		—	$	1,101	$	(10	)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 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	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)
Private label residential	—		—			—	50		(2		)	8	50		(2		)
U.S. Treasury and U.S. government agency securities	7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)
Total	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)

Available for sale
MBS:
U.S. government agencies	$	34	$	(1	)	1	$	—	$	—		—	$	34	$	(1	)
Mutual funds	—		—			—	917		(83		)	1	917		(83		)
Total	$	34	$	(1	)	1	$	917	$	(83	)	1	$	951	$	(84	)

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 March 31, 2019, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more

likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of March 31, 2019 and 2018:



	Range				Weighted
	Minimum		Maximum		Average
March 31, 2019
Constant prepayment rate	6.00	%	15.00	%	10.24	%
Collateral default rate	—	%	16.06	%	5.20	%
Loss severity rate	—	%	78.00	%	40.02	%

March 31, 2018
Constant prepayment rate	6.00	%	15.00	%	11.01	%
Collateral default rate	—	%	11.85	%	5.04	%
Loss severity rate	—	%	72.00	%	38.32	%

The following table presents the OTTI recoveries (losses) for the three and six months ended March 31, 2019 and 2018 (dollars in thousands):




	Three Months Ended March 31, 2019					Three Months Ended March 31, 2018
	Held To Maturity			Available For Sale		Held To Maturity		Available For Sale
Total recoveries	$	20		$	—	$	14	$	—
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	(11		)	—		—		—
Net recoveries recognized in earnings (2)	$	9		$	—	$	14	$	—



	Six Months Ended March 31, 2019					Six Months Ended March 31, 2018
	Held To Maturity			Available For Sale		Held To Maturity			Available For Sale
Total recoveries	$	32		$	—	$	41		$	—
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	(12		)	—		(5		)	—
Net recoveries recognized in earnings (2)	$	20		$	—	$	36		$	—

_________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

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, 2019 and 2018 (dollars in thousands):



	Six Months Ended March 31,
	2019			2018
Beginning balance of credit loss	$	1,153		$	1,301
Additions:
Additional increases to the amount related to credit loss for which OTTI was previously recognized	12			13
Subtractions:
Realized losses previously recorded as credit losses	(13		)	(41		)
Recovery of prior credit loss	(32		)	(35		)
Ending balance of credit loss	$	1,120		$	1,238

During the six months ended March 31, 2019, the Company recorded a $13,000 net realized loss (as a result of investment securities being deemed worthless) on 17 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the six months ended March 31, 2018, the Company recorded a $41,000 net realized loss (as a result of investment securities being deemed worthless) on 15 held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $14.80 million and $12.10 million at March 31, 2019 and September 30, 2018, respectively.

The contractual maturities of debt securities at March 31, 2019 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

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$29.75	8	$248

10-Q	2019-03-31	Quarter: 2019-03-31
10-Q	2018-12-31	Quarter: 2018-12-31
10-K	2018-09-30	Annual: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-Q	2017-12-31	Quarter: 2017-12-31
10-K	2017-09-30	Annual: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-Q	2016-12-31	Quarter: 2016-12-31
10-K	2016-09-30	Annual: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-Q	2015-12-31	Quarter: 2015-12-31
10-K	2015-09-30	Annual: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-Q	2014-12-31	Quarter: 2014-12-31
10-K	2014-09-30	Annual: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-Q	2013-12-31	Quarter: 2013-12-31

8-K	2019-06-25	Amend Bylaw, Exhibits
8-K	2019-04-30	Earnings, Exhibits
8-K	2019-01-22	Shareholder Vote
8-K	2019-01-22	Earnings, Exhibits
8-K	2019-01-22	Shareholder Vote
8-K	2019-01-22	Earnings, Exhibits
8-K	2018-11-01	Earnings, Exhibits
8-K	2018-10-01	M&A, Officers, Amend Bylaw, Exhibits
8-K	2018-07-24	Earnings, Exhibits
8-K	2018-05-22	Other Events, Exhibits
8-K	2018-04-24	Earnings, Exhibits
8-K	2018-01-23	Shareholder Vote
8-K	2018-01-22	Earnings, Exhibits

INTC	Intel	208,720
POST	Post Holdings	7,950
BILI	Bilibili	5,590
BXMT	Blackstone Mortgage Trust	4,430
ICPT	Intercept Pharmaceuticals	2,500
MMYT	MakeMyTrip	1,420
ACOR	Acorda Therapeutics	559
HALL	Hallmark Financial Services	197
CNCL	Cancer Capital	0
STMM	Stemcell Holdings	0

EX-31.1	tsbk-3312019x10qxexhibit311.htm
EX-31.2	tsbk-33119x10qxexhibit312.htm
EX-32	tsbk-33119x10qxexhibit32.htm