Company Quick10K Filing
Quick10K
Timberland Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.78 8 $231
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 2019-01-22 Shareholder Vote
8-K 2019-01-22 Shareholder Vote
8-K 2019-01-22 Earnings, Exhibits
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
ROST Ross Stores 36,330
NTES Netease 34,900
GPRO Gopro 1,010
MESA Mesa Air Group 192
OFS OFS Capital 163
AEYE Audioeye 69
LPTH Lightpath Technologies 38
PALA Palayan Resources 0
ALPP Alpine 4 Technologies 0
MEEC Midwest Energy Emissions 0
TSBK 2018-12-31
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tsbk-12312018x10qxexhibit311.htm
EX-31.2 tsbk-12312018x10qxexhibit312.htm
EX-32 tsbk-12312018x10qxexhibit32.htm

Timberland Bancorp Earnings 2018-12-31

TSBK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tsbk-12312018x10q.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 December 31, 2018

OR

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

Commission file number 000-23333

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

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

Indicate by check mark whether the registrant has submitted electronically 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 and post such files). Yes _X_   No __
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
CLASS
 
SHARES OUTSTANDING AT FEBRUARY 1, 2019
 
Common stock, $.01 par value
8,313,403
 



INDEX

 
 
Page
 
 
 
 
  Item 1.    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.    
 
 
 
 
 
  Item 4.     
 
 
 
 
 
 
 
 
 
 
 
  Item 1.     
 
  
 
 
 
  Item 1A.     
 
 
 
 
 
  Item 2.     
 
 
 
 
 
  Item 3.     
 
 
 
 
 
  Item 4.
 
 
 
 
 
  Item 5.     
 
52 
 
 
 
 
  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
December 31, 2018 and September 30, 2018
(Dollars in thousands, except per share amounts)
 
 
December 31,
2018

 
September 30,
2018

 
(Unaudited)
 
*

Assets
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from financial institutions
$
18,938

 
$
20,238

Interest-bearing deposits in banks
142,805

 
128,626

Total cash and cash equivalents
161,743

 
148,864

 
 
 
 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)
65,830

 
63,290

Investment securities held to maturity, at amortized cost (estimated fair value $32,472 and $13,264)
31,950

 
12,810

Investment securities available for sale, at fair value
2,197

 
237

Investments in equity securities, at fair value
925

 
917

Federal Home Loan Bank of Des Moines (“FHLB”) stock
1,395

 
1,190

Other investments, at cost
3,000

 
3,000

Loans held for sale
2,988

 
1,785

Loans receivable, net of allowance for loan losses of $9,533 and $9,530
857,070

 
725,391

Premises and equipment, net
22,884

 
18,953

Other real estate owned (“OREO”) and other repossessed assets, net
2,026

 
1,913

Accrued interest receivable
3,497

 
2,877

Bank owned life insurance (“BOLI”)
22,599

 
19,813

Goodwill
14,620

 
5,650

Core deposit intangible (“CDI”), net
2,374

 

Mortgage servicing rights (“MSRs”), net
2,338

 
2,028

Escrow deposit for business combination

 
6,900

Other assets
2,879

 
2,672

Total assets
$
1,200,315

 
$
1,018,290

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities
 

 
 

Deposits:
 
 
 
     Non-interest-bearing demand
$
271,251

 
$
233,258

     Interest-bearing
763,926

 
656,248

Total deposits
1,035,177

 
889,506

 
 
 
 
Other liabilities and accrued expenses
8,233

 
4,127

Total liabilities
1,043,410

 
893,633

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 2018 and September 30, 2018
(Dollars in thousands, except per share amounts)
 
 
December 31,
2018

 
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;
8,313,403 shares issued and outstanding - December 31, 2018 7,401,177 shares issued and outstanding - September 30, 2018
42,951

 
14,394

Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)
(67
)
 
(133
)
Retained earnings
114,166

 
110,525

Accumulated other comprehensive loss
(145
)
 
(129
)
Total shareholders’ equity
156,905

 
124,657

Total liabilities and shareholders’ equity
$
1,200,315

 
$
1,018,290

* 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 months ended December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended 
 December 31,
 
2018

 
2017

Interest and dividend income
 
 
 
Loans receivable and loans held for sale
$
11,782

 
$
9,328

Investment securities
278

 
58

Dividends from mutual funds, FHLB stock and other investments
39

 
26

Interest-bearing deposits in banks and CDs
1,216

 
623

Total interest and dividend income
13,315

 
10,035

 
 
 
 
Interest expense
 
 
 
Deposits
971

 
601

Total interest expense
971

 
601

 
 
 
 
Net interest income
12,344

 
9,434

 
 
 
 
Provision for loan losses

 

 
 
 
 
Net interest income after provision for loan losses
12,344

 
9,434

 
 
 
 
Non-interest income
 
 
 
Recoveries (other than temporary impairment "OTTI") on investment securities
11

 
27

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

 
(5
)
Net recoveries on investment securities
11

 
22

Service charges on deposits
1,216

 
1,179

ATM and debit card interchange transaction fees
949

 
845

BOLI net earnings
157

 
136

Gain on sales of loans, net
386

 
521

Escrow fees
56

 
59

Servicing income on loans sold
148

 
116

Fee income from non-deposit investment sales
31

 
19

Other, net
312

 
240

Total non-interest income, net
3,266

 
3,137



 See notes to unaudited consolidated financial statements

5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three months ended December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended 
 December 31,
 
2018

 
2017

Non-interest expense
 
 
 
Salaries and employee benefits
$
4,606

 
$
3,950

Premises and equipment
954

 
768

Advertising
191

 
209

OREO and other repossessed assets, net
50

 
113

ATM and debit card interchange transaction fees
422

 
331

Postage and courier
110

 
105

Amortization of CDI
109

 

State and local taxes
196

 
161

Professional fees
265

 
218

Federal Deposit Insurance Corporation ("FDIC") insurance
74

 
65

Loan administration and foreclosure
87

 
79

Data processing and telecommunications
673

 
467

Deposit operations
294

 
278

Other
531

 
432

Total non-interest expense
8,562

 
7,176

 
 
 
 
Income before income taxes
7,048

 
5,395

 
 
 
 
Provision for income taxes
1,433

 
1,781

 
 
 
 
     Net income
$
5,615

 
$
3,614

 
 
 
 
Net income per common share
 
 
 
Basic
$
0.68

 
$
0.49

Diluted
$
0.66

 
$
0.48

 
 
 
 
Weighted average common shares outstanding
 
 
 
Basic
8,293,212

 
7,312,531

Diluted
8,457,703

 
7,508,169

 
 
 
 
Dividends paid per common share
$
0.23

 
$
0.11


See notes to unaudited consolidated financial statements

6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31, 2018 and 2017
(Dollars in thousands)
(Unaudited) 
 
Three Months Ended 
 December 31,
 
2018

 
2017

Comprehensive income
 
 
 
Net income
$
5,615

 
$
3,614

Unrealized holding loss on investment securities available for sale, net of income taxes of ($22) and ($2), respectively
(86
)
 
(7
)
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) and ($6), respectively
(3
)
 
(21
)
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $0 and $1, respectively

 
4

Accretion of OTTI on investment securities held to maturity, net of income taxes of $3 and $3, respectively
10

 
12

Total other comprehensive loss, net of income taxes
(79
)
 
(12
)
 
 
 
 
Total comprehensive income
$
5,536

 
$
3,602




See notes to unaudited consolidated financial statements

7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended December 31, 2018 and 2017
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Common Stock
 
Unearned
 Shares Issued to ESOP

 
 
 
Accumulated
Other
Compre-hensive
Loss

 
 
 
Number of Shares
 
Amount
 
 
Retained
Earnings
 
 
Total
Balance, September 30, 2017
7,361,077

 
$
13,286

 
$
(397
)
 
$
98,235

 
$
(124
)
 
$
111,000

Net income

 

 

 
3,614

 

 
3,614

Other comprehensive loss

 

 

 

 
(12
)
 
(12
)
Exercise of stock options
6,250

 
61

 

 

 

 
61

Common stock dividends ($0.11 per common share)

 

 

 
(810
)
 

 
(810
)
Earned ESOP shares, net of income taxes

 
149

 
66

 

 

 
215

Stock option compensation expense

 
44

 

 

 

 
44

Balance, December 31, 2017
7,367,327

 
13,540

 
(331
)
 
101,039

 
(136
)
 
114,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
7,401,177

 
14,394

 
(133
)
 
110,525

 
(129
)
 
124,657

Net income

 

 

 
5,615

 

 
5,615

Other comprehensive loss

 

 

 

 
(79
)
 
(79
)
Common stock issued for business combination
904,826

 
28,267

 

 

 

 
28,267

Exercise of stock options
7,400

 
71

 

 

 

 
71

Common stock dividends ($0.23 per common share)

 

 

 
(1,911
)
 

 
(1,911
)
Earned ESOP shares, net of income taxes

 
166

 
66

 

 

 
232

Stock option compensation expense

 
53

 

 

 

 
53

Adoption of ASU 2016-01

 

 

 
(63
)
 
63

 

Balance, December 31, 2018
8,313,403

 
$
42,951

 
$
(67
)
 
$
114,166

 
$
(145
)
 
$
156,905

See notes to unaudited consolidated financial statements

8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2018 and 2017
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
December 31,
 
2018

 
2017

Cash flows from operating activities
 
 
 
Net income
$
5,615

 
$
3,614

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

 
 

Depreciation
390

 
310

Accretion of discount on purchased loans
(87
)
 

Amortization of CDI
109

 

Earned ESOP shares
232

 
215

Stock option compensation expense
53

 
44

Net recoveries on investment securities
(11
)
 
(22
)
Change in fair value of investments in equity securities
(8
)
 

Gain on sales of OREO and other repossessed assets, net

 
(12
)
Provision for OREO losses
3

 
94

Gain on sales of loans, net
(386
)
 
(521
)
Loans originated for sale
(16,932
)
 
(15,193
)
Proceeds from sales of loans
16,115

 
15,906

Amortization of MSRs
153

 
120

BOLI net earnings
(157
)
 
(136
)
Increase in deferred loan origination fees
238

 
38

Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses
1,447

 
1,301

Net cash provided by operating activities
6,774

 
5,758

 
 
 
 
Cash flows from investing activities
 

 
 

Net decrease (increase) in CDs held for investment
433

 
(10,494
)
Proceeds from sale of investment securities available for sale
2,332

 

Proceeds from maturities and prepayments of investment securities held to maturity
580

 
11

Proceeds from maturities and prepayments of investment securities available for sale
644

 
126

Increase in loans receivable, net
(10,377
)
 
(15,105
)
Additions to premises and equipment
(984
)
 
(199
)
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

 
495

Net cash provided by (used in) investing activities
13,812

 
(25,166
)
See notes to unaudited consolidated financial statements

9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the three months ended December 31, 2018 and 2017
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
December 31,
 
2018

 
2017

Cash flows from financing activities
 

 
 

Net (decrease) increase in deposits
$
(5,867
)
 
$
38,176

Proceeds from exercise of stock options
71

 
61

Payment of dividends
(1,911
)
 
(810
)
Net cash (used in) provided by financing activities
(7,707
)
 
37,427

 
 

 
 

Net increase in cash and cash equivalents
12,879

 
18,019

Cash and cash equivalents
 

 
 

Beginning of period
148,864

 
148,188

End of period
$
161,743

 
$
166,207

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Income taxes paid
$

 
$

Interest paid
901

 
584

 
 
 
 
Supplemental disclosure of non-cash investing activities
 

 
 

Loans transferred to OREO and other repossessed assets
$
91

 
$
163

Other comprehensive loss related to investment securities
(79
)
 
(12
)
 
 
 
 
Business Combination (see Note 2)
 
 
 
 Fair value of assets acquired
$
180,825

 
$

 Fair value of liabilities assumed
$
154,625

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 the 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, 2018 (“2018 Form 10-K”).  The unaudited consolidated results of operations for the three months ended December 31, 2018 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 its wholly-owned subsidiary, 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 December 31, 2018 presentation with no change to previously reported net income or total shareholders’ equity.


11


(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 $8.97 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 preliminary estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting preliminary goodwill relating to the transaction:


12


 
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
883

 

 
883

               Total assets
180,506

 
319

 
180,825

 
 
 
 
 
 
     Liabilities assumed:
 
 
 
 
 
          Deposits
151,378

 
160

 
151,538

          Other liabilities and accrued expenses
3,087

 

 
3,087

               Total liabilities assumed
154,465

 
160

 
154,625

               Total identifiable net assets acquired
$
26,041

 
$
159

 
26,200

               Preliminary goodwill recognized
 
 
 
 
$
8,970



Fair values on the acquisition date are preliminary and 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 Company expects to finalize the purchase price allocation by March 31, 2019 when the valuation of tax-related matters is complete.

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

13


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 months ended December 31, 2018 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 December 31, 2018
 
 
(Dollars in thousands)
Interest income: Interest and fees on loans (1)
 
$
1,738

Interest income: Interest and dividends on investment securities and FHLB stock
 
201

Interest income: Other interest earning assets
 
100

Interest expense
 
(128
)
Provision for loan losses
 

Non-interest income
 
139

Non-interest expense (2)
 
(860
)
       Net effect, pre-tax
 
$
1,190

(1) Includes the accretion of the fair value discount on the purchased loans of $87,000.
(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 $64,000 incurred by the Company.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the three months ended December 31, 2018 and 2017. 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 Three Months Ended December 31,
 
2018
 
2017
 
(Dollars in thousands except per share data)
Total revenues (net interest income plus non-interest income)
$
15,610

 
$
14,362

Net income
5,666

 
3,789

Basic net income per common share
0.68

 
0.46

Diluted net income per common share
0.67

 
0.45


During the three months ended December 31, 2018 and 2017, the Company incurred acquisition-related expenses of $64,000 and $41,000, 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 $2,000 for the three months ended December 31, 2017 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 three months ended December 31, 2018 and 2017. The Company incurred acquisition-related expenses of $616,000 for the fiscal year ended September 30, 2018 related to the South Sound Merger, which were included in professional fees.

The Company expects to incur additional acquisition-related expenses of approximately $580,000 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.

14




(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 December 31, 2018 and September 30, 2018 (dollars in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2018
 
 
 
 
 
 
 
Held to maturity
 
 
 
 
 
 
 
Mortgage-backed securities ("MBS"):
 
 
 
 
 
 
 
U.S. government agencies
$
20,551

 
$
90

 
$
(25
)
 
$
20,616

Private label residential
424

 
527

 
(2
)
 
949

U.S. Treasury and U.S government agency securities
10,975

 

 
(68
)
 
10,907

Total
$
31,950

 
$
617

 
$
(95
)
 
$
32,472

 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

MBS: U.S. government agencies
$
2,299

 
$
8

 
$
(110
)
 
$
2,197

Total
$
2,299

 
$
8

 
$
(110
)
 
$
2,197

 
 
 
 
 
 
 
 
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

Total
$
231

 
$
7

 
$
(1
)
 
$
237



15


Held to maturity and available for sale investment securities with unrealized losses were as follows as of December 31, 2018 (dollars in thousands):
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
 
Quantity
 
Estimated
 Fair
 Value
 
Gross
Unrealized
Losses
Held to maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government agencies
$
1,443

 
$
(10
)
 
7

 
$
960

 
$
(15
)
 
6

 
$
2,403

 
$
(25
)
Private label residential

 

 

 
45

 
(2
)
 
7

 
45

 
(2
)
U.S. Treasury and U.S. government agency securities
4,970

 
(7
)
 
1

 
5,936

 
(61
)
 
2

 
10,906

 
(68
)
     Total
$
6,413

 
$
(17
)
 
8

 
$
6,941

 
$
(78
)
 
15

 
$
13,354

 
$
(95
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

MBS: U.S. government agencies
$
2,004

 
$
(110
)
 
7

 
$

 
$

 

 
$
2,004

 
$
(110
)
     Total
$
2,004

 
$
(110
)
 
7

 
$

 
$

 

 
$
2,004

 
$
(110
)

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
)
     Total
$
34

 
$
(1
)
 
1

 
$

 
$

 

 
$
34

 
$
(1
)

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 December 31, 2018, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).

16



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 December 31, 2018 and 2017:
 
Range
 
Weighted
 
Minimum 
 
Maximum 
 
Average 
December 31, 2018
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
13.56
%
Collateral default rate
%
 
11.94
%
 
5.72
%
Loss severity rate
%
 
77.00
%
 
46.97
%
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Constant prepayment rate
6.00
%
 
15.00
%
 
9.91
%
Collateral default rate
%
 
11.08
%
 
4.77
%
Loss severity rate
%
 
62.00
%
 
37.32
%

The following table presents the OTTI recoveries (losses) for the three months ended December 31, 2018 and 2017 (dollars in thousands):

 
 
Three Months Ended
December 31, 2018
 
Three Months Ended
December 31, 2017
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total recoveries
$
11

 
$

 
$
27

 
$

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

 

 
(5
)
 

Net recoveries recognized in earnings (2)
$
11

 
$

 
$
22

 
$

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

17


The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the three months ended December 31, 2018 and 2017 (dollars in thousands):
 
Three Months Ended December 31,
 
2018

 
2017

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
1

 
6

Subtractions:
 
 
 

Realized losses previously recorded
as credit losses
(20
)
 
(22
)
Recovery of prior credit loss
(12
)
 
(26
)
Ending balance of credit loss
$
1,122

 
$
1,259


During the three months ended December 31, 2018, the Company recorded a $20,000 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. During the three months ended December 31, 2017, the Company recorded a $22,000 net realized loss (as a result of investment securities being deemed worthless) on 12 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 $14.94 million and $12.10 million at December 31, 2018 and September 30, 2018, respectively.

The contractual maturities of debt securities at December 31, 2018 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 
Held to Maturity
 
Available for Sale
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
Due within one year
$
7,978

 
$
7,960

 
$

 
$

Due after one year to five years
7,192

 
7,142

 

 

Due after five years to ten years
969

 
974

 
447

 
434

Due after ten years
15,811

 
16,396

 
1,852

 
1,763

Total
$
31,950

 
$
32,472

 
$
2,299

 
$
2,197



(4) GOODWILL AND CDI


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

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

18


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

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

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2018.

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

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

The following table presents the change in the carrying amount of goodwill for the period indicated (dollars in thousands).
 
 
Three Months Ended December 31,
 
 
2018
Balance at the beginning of the period
 
$
5,650

     Addition as a result of the South Sound Merger (see Note 2)
 
8,970

Balance at the end of the period
 
$
14,620


The following table presents the change in CDI for the period indicated (dollars in thousands).

 
Three Months Ended December 31,
 
2018
 
Balance at the beginning of the period
$

 
     Addition as a result of the South Sound Merger (see Note 2)
2,483

 
     Amortization
(109
)
 
Balance at the end of the period
$
2,374

 


19


(5) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES


Loans receivable by portfolio segment consisted of the following at December 31, 2018 and September 30, 2018 (dollars in thousands):
 
December 31,
2018
 
September 30,
2018
 
Amount
 
Percent
 
Amount
 
Percent
Mortgage loans:
 
 
 
 
 
 
 
One- to four-family (1)
$
130,219

 
13.4
%
 
$
115,941

 
14.1
%
Multi-family
72,076

 
7.4

 
61,928

 
7.5

Commercial
426,144

 
43.9

 
345,113

 
42.0

Construction - custom and owner/builder
119,214

 
12.3

 
119,555

 
14.6

Construction - speculative one- to four-family
17,934

 
1.9

 
15,433

 
1.9

Construction - commercial
42,416

 
4.4

 
39,590

 
4.8

Construction - multi-family
25,645

 
2.6

 
10,740

 
1.3

Construction - land development
10,578

 
1.1

 
3,040

 
0.4

Land
22,734

 
2.3

 
25,546

 
3.1

Total mortgage loans
866,960

 
89.3

 
736,886

 
89.8

 
 
 
 
 
 
 
 
Consumer loans:
 

 
 

 
 

 
 

Home equity and second mortgage
40,468

 
4.2

 
37,341

 
4.5

Other
4,443

 
0.5

 
3,515

 
0.5

Total consumer loans
44,911

 
4.7

 
40,856

 
5.0

 
 
 
 
 
 
 
 
Commercial business loans
58,202

 
6.0

 
43,053

 
5.2

 
 
 
 
 
 
 
 
Total loans receivable
970,073

 
100.0
%
 
820,795

 
100.0
%
Less:
 

 
 

 
 

 
 

Undisbursed portion of construction 
loans in process
100,595

 
 

 
83,237

 
 

Deferred loan origination fees, net
2,875

 
 

 
2,637

 
 

Allowance for loan losses
9,533

 
 

 
9,530

 
 

 
113,003

 
 
 
95,404

 
 
Loans receivable, net
$
857,070

 
 

 
$
725,391

 
 

_____________________________
 
 
 
 
 
 
 
 (1) Does not include one- to four-family loans held for sale totaling $2,988 and $1,785 at December 31, 2018 and September 30, 2018, respectively.
















20







Allowance for Loan Losses
The following tables set forth information for the three months ended December 31, 2018 and 2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

 
Three Months Ended December 31, 2018
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,086

 
$
73

 
$

 
$

 
$
1,159

Multi-family
433

 
16

 

 

 
449

Commercial
4,248

 
(9
)
 

 

 
4,239

Construction – custom and owner/builder
671

 
(28
)
 

 

 
643

Construction – speculative one- to four-family
178

 
28

 

 

 
206

Construction – commercial
563

 
(177
)
 

 

 
386

Construction – multi-family
135

 
74

 

 

 
209

Construction – land development
49

 
94

 

 

 
143

Land
844

 
(91
)
 

 
4

 
757

Consumer loans:
 

 
 

 
 

 
 

 
 
Home equity and second mortgage
649

 
17

 

 

 
666

Other
117

 
(15
)
 
(2
)
 
1

 
101

Commercial business loans
557

 
18

 

 

 
575

Total
$
9,530

 
$

 
$
(2
)
 
$
5

 
$
9,533


 
 
 
 
 
 
 
 
 
 

 
Three Months Ended December 31, 2017
 
Beginning
Allowance
 
Provision for
(Recapture of) Loan Losses
 
Charge-
offs
 
Recoveries
 
Ending
Allowance
Mortgage loans:
 
 
 
 
 
 
 
 
 
  One- to four-family
$
1,082

 
$
43

 
$

 
$

 
$
1,125

  Multi-family
447

 
(17
)
 

 

 
430
  Commercial
4,184

 
(91
)
 

 

 
4,093
  Construction – custom and owner/builder
699

 
89

 

 

 
788
  Construction – speculative one- to four-family
128

 
(61
)
 

 
8

 
75
  Construction – commercial
303

 
93

 

 

 
396
Construction – multi-family
173

 
55

 

 

 
228

  Land
918

 
(142
)
 

 
4

 
780
Consumer loans:
 
 
 
 
 
 
 
 
 
  Home equity and second mortgage
983

 
(25
)
 

 

 
958
  Other
121

 
8

 
(1
)
 
1

 
129
Commercial business loans
515

 
48

 

 

 
563
Total
$
9,553

 
$

 
$
(1
)
 
$
13

 
$
9,565



 
 
 
 
 
 
 
 
 
 

21


The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at December 31, 2018 and September 30, 2018 (dollars in thousands):

 
Allowance for Loan Losses
 
Recorded Investment in Loans
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 
Total
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
 
Total
December 31, 2018