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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021

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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $.01 par valueTSBKThe NASDAQ Stock Market LLC

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 ☒     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 _☒_   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   __

As of May 4, 2021, there were 8,362,907 shares of the registrant's common stock, $.01 par value per share outstanding.



INDEX

 
Page
   
  Item 1.    
 
   
 
   
 
   
 
   
 
   
 
   
 
   
  Item 2.     
   
  Item 3.    
   
  Item 4.     
   
 
   
  Item 1.     
    
  Item 1A.     
   
  Item 2.     
   
  Item 3.     
   
  Item 4.
   
  Item 5.     
53 
   
  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, 2021 and September 30, 2020
(Dollars in thousands, except per share amounts)
March 31,
2021
September 30,
2020
(Unaudited)*
Assets  
Cash and cash equivalents:  
Cash and due from financial institutions$21,707 $21,877 
Interest-bearing deposits in banks411,635 292,575 
Total cash and cash equivalents433,342 314,452 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)
39,674 65,545 
Investment securities held to maturity, at amortized cost (estimated fair value of $37,838 and $29,827)
36,465 27,890 
Investment securities available for sale, at fair value69,184 57,907 
Investments in equity securities, at fair value957 977 
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost2,303 1,922 
Other investments, at cost3,000 3,000 
Loans held for sale8,455 4,509 
Loans receivable, net of allowance for loan losses of $13,434 and $13,414
1,030,683 1,013,875 
Premises and equipment, net22,763 23,035 
Other real estate owned (“OREO”) and other repossessed assets, net157 1,050 
Accrued interest receivable4,471 4,484 
Bank owned life insurance (“BOLI”)21,891 21,596 
Goodwill15,131 15,131 
Core deposit intangible (“CDI”), net1,444 1,625 
Servicing rights, net3,604 3,095 
Operating lease right-of-use ("ROU") assets2,436 2,587 
Other assets3,284 3,298 
Total assets$1,699,244 $1,565,978 
Liabilities and shareholders’ equity  
Liabilities  
Deposits:
     Non-interest-bearing demand$499,541 $441,889 
     Interest-bearing982,318 916,517 
Total deposits1,481,859 1,358,406 
FHLB borrowings10,000 10,000 
Operating lease liabilities2,499 2,630 
Other liabilities and accrued expenses6,343 7,312 
Total liabilities1,500,701 1,378,348 
* 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, 2021 and September 30, 2020
(Dollars in thousands, except per share amounts)
 
March 31,
2021
September 30,
2020
(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;
8,361,457 shares issued and outstanding - March 31, 2021 8,310,793 shares issued and outstanding - September 30, 2020
42,949 42,396 
Retained earnings155,473 145,173 
Accumulated other comprehensive income121 61 
Total shareholders’ equity198,543 187,630 
Total liabilities and shareholders’ equity$1,699,244 $1,565,978 
* 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, 2021 and 2020
(Dollars in thousands, except per share amounts)
(Unaudited)

 Three Months Ended 
 March 31,
Six Months Ended 
March 31,
 2021202020212020
Interest and dividend income  
Loans receivable and loans held for sale$12,790 $12,823 $26,108 $25,587 
Investment securities284 489 585 928 
Dividends from mutual funds, FHLB stock and other investments27 35 55 72 
Interest-bearing deposits in banks and CDs259 784 569 1,735 
Total interest and dividend income13,360 14,131 27,317 28,322 
Interest expense  
Deposits764 1,243 1,668 2,432 
FHLB borrowings29 8 58 8 
Total interest expense793 1,251 1,726 2,440 
Net interest income12,567 12,880 25,591 25,882 
Provision for loan losses 2,000  2,200 
Net interest income after provision for loan losses12,567 10,880 25,591 23,682 
Non-interest income  
Net recoveries on investment securities3 3 8 106 
Service charges on deposits941 1,078 1,996 2,278 
ATM and debit card interchange transaction fees1,237 1,015 2,393 2,109 
BOLI net earnings146 147 295 294 
Gain on sales of loans, net1,758 736 3,760 1,688 
Escrow fees74 47 179 130 
Servicing income (expense) on loans sold(10)62 5 136 
Valuation recovery (allowance) on servicing rights, net438  202 (23)
Other, net299 592 607 900 
Total non-interest income, net4,886 3,680 9,445 7,618 


 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, 2021 and 2020
(Dollars in thousands, except per share amounts)
(Unaudited)
 Three Months Ended 
 March 31,
Six Months Ended 
March 31,
 2021202020212020
Non-interest expense  
Salaries and employee benefits$4,778 $4,621 $9,391 $9,343 
Premises and equipment998 943 1,955 1,837 
Gain on sales/dispositions of premises and equipment, net (3) (102)
Advertising155 159 311 342 
OREO and other repossessed assets, net(68)51 (94)50 
ATM and debit card interchange transaction fees445 359 876 799 
Postage and courier149 145 287 279 
State and local taxes255 233 538 449 
Professional fees181 210 412 480 
Federal Deposit Insurance Corporation ("FDIC") insurance105  201 (27)
Loan administration and foreclosure90 78 171 167 
Data processing and telecommunications634 515 1,240 1,099 
Deposit operations245 274 529 591 
Amortization of CDI91 102 181 203 
Other493 599 963 1,149 
Total non-interest expense, net8,551 8,286 16,961 16,659 
Income before income taxes8,902 6,274 18,075 14,641 
Provision for income taxes1,651 1,225 3,534 2,940 
     Net income
$7,251 $5,049 $14,541 $11,701 
Net income per common share  
Basic$0.87 $0.61 $1.75 $1.40 
Diluted$0.86 $0.60 $1.73 $1.38 
Weighted average common shares outstanding  
Basic8,331,121 8,344,201 8,322,210 8,342,828 
Diluted8,444,798 8,456,659 8,428,595 8,465,894 
Dividends paid per common share$0.31 $0.20 $0.51 $0.45 

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, 2021 and 2020
(Dollars in thousands)
(Unaudited) 
 Three Months Ended 
 March 31,
Six Months Ended 
 March 31,
 2021202020212020
Comprehensive income
Net income$7,251 $5,049 $14,541 $11,701 
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $19, $(9), $15 and $(63), respectively
74 (35)57 (241)
Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:  
Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, $1, $1 and $3, respectively
3 2 3 12 
Total other comprehensive income (loss), net of income taxes77 (33)60 (229)
Total comprehensive income$7,328 $5,016 $14,601 $11,472 



See notes to unaudited consolidated financial statements
7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three and six months ended March 31, 2021 and 2020
(Dollars in thousands, except per share amounts)
(Unaudited)

 Common Stock Accumulated
Other
Compre-
hensive
Income (Loss)
 
 Number of SharesAmountRetained
Earnings
Total
Balance, December 31, 20198,346,394 $43,246 $132,553 $(146)$175,653 
Net income— — 5,049 — 5,049 
Other comprehensive loss— — — (33)(33)
Repurchase of common stock(56,601)(1,238)— — (1,238)
Exercise of stock options19,400 204 — — 204 
Common stock dividends ($0.20 per common share)
— — (1,673)— (1,673)
Stock option compensation expense
— 46 — — 46 
Balance, March 31, 20208,309,193 $42,258 $135,929 $(179)$178,008 
Balance, December 31, 20208,317,793 $42,480 $150,801 $44 $193,325 
Net income— — 7,251 — 7,251 
Other comprehensive income— — — 77 77 
Exercise of stock options 43,664 423 — — 423 
Common stock dividends ($0.31 per common share)
— — (2,579)— (2,579)
Stock option compensation expense— 46 — — 46 
Balance, March 31, 20218,361,457 $42,949 $155,473 $121 $198,543 

 Common Stock Accumulated
Other
Compre-hensive
Income (Loss)
 
 Number of SharesAmountRetained
Earnings
Total
Balance, September 30, 20198,329,419 $43,030 $127,987 $50 $171,067 
Net income— — 11,701 — 11,701 
Other comprehensive loss— — — (229)(229)
Repurchase of common stock(56,601)(1,238)— — (1,238)
Exercise of stock options36,375 374 — — 374 
Common stock dividends ($0.45 per common share)
— — (3,759)— (3,759)
Stock option compensation expense— 92 — — 92 
Balance, March 31, 20208,309,193 $42,258 $135,929 $(179)$178,008 
Balance, September 30, 20208,310,793 $42,396 $145,173 $61 $187,630 
Net income— — 14,541 — 14,541 
Other comprehensive income— — — 60 60 
Repurchase of common stock(2,900)(58)— — (58)
Exercise of stock options 53,564 519 — — 519 
Common stock dividends ($0.51 per common share)
— — (4,241)— (4,241)
Stock option compensation expense— 92 — — 92 
Balance, March 31, 20218,361,457 $42,949 $155,473 $121 $198,543 

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, 2021 and 2020
(Dollars in thousands)
(Unaudited)
 Six Months Ended March 31,
 20212020
Cash flows from operating activities  
Net income$14,541 $11,701 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for loan losses 2,200 
Depreciation781 748 
Deferred income taxes51  
Accretion of discount on purchased loans(207)(253)
Amortization of CDI181 203 
Stock option compensation expense92 92 
Net recoveries on investment securities(8)(106)
Change in fair value of investments in equity securities20 (11)
Accretion of discounts and premiums on securities(16)(88)
Gain on sales of OREO and other repossessed assets, net(92)(39)
Provision for OREO losses 25 
Gain on sales of loans, net(3,760)(1,688)
Gain on sales/disposition of premises and equipment, net (102)
Loans originated for sale(85,313)(60,097)
Proceeds from sales of loans85,127 62,058 
Amortization of servicing rights529 383 
Valuation adjustment on servicing rights(202)23 
BOLI net earnings(295)(294)
Increase (decrease) in deferred loan origination fees563 (104)
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses(1,826)545 
Net cash provided by operating activities10,166 15,196 
Cash flows from investing activities  
Net decrease (increase) in CDs held for investment25,871 (4,126)
Purchase of investment securities held to maturity(15,050)(9,755)
Purchase of investment securities available for sale(16,383)(21,521)
Proceeds from maturities and prepayments of investment securities held to maturity6,589 4,412 
Proceeds from maturities and prepayments of investment securities available for sale5,093 2,266 
Purchase of FHLB stock(381)(485)
Increase in loans receivable, net(17,164)(22,838)
Additions to premises and equipment(509)(1,195)
Proceeds from sales of premises and equipment 307 
Proceeds from sales of OREO and other repossessed assets985 74 
Net cash used in investing activities(10,949)(52,861)
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, 2021 and 2020
(Dollars in thousands)
(Unaudited)
 Six Months Ended March 31,
 20212020
Cash flows from financing activities  
Net increase in deposits$123,453 $57,421 
FHLB borrowings 10,000 
Proceeds from exercise of stock options519 374 
Repurchase of common stock(58)(1,238)
Payment of dividends(4,241)(3,759)
Net cash provided by financing activities119,673 62,798 
  
Net increase in cash and cash equivalents118,890 25,133 
Cash and cash equivalents  
Beginning of period314,452 143,015 
End of period$433,342 $168,148 
Supplemental disclosure of cash flow information  
Income taxes paid$2,688 $1,988 
Interest paid1,818 2,416 
Supplemental disclosure of non-cash investing activities  
Other comprehensive income (loss) related to investment securities$60 $(229)
Operating lease liabilities arising from recording of ROU assets 2,889 
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 of Timberland Bancorp, Inc.and its wholly-owned subsidiary, Timberland Bank (the "Bank") (collectively, "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, 2020 (“2020 Form 10-K”).  The unaudited consolidated results of operations for the six months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2021.

(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, 2021 presentation with no change to previously reported net income or total shareholders’ equity.

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, 2021 and September 30, 2020 (dollars in thousands):
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
March 31, 2021    
Held to maturity    
Mortgage-backed securities ("MBS"):    
U.S. government agencies$21,888 $1,164 $(9)$23,043 
Private label residential5,056 312 (23)5,345 
U.S. Treasury and U.S. government agency securities9,021  (68)8,953 
Bank issued trust preferred securities500  (3)497 
Total$36,465 $1,476 $(103)$37,838 
Available for sale    
MBS: U.S. government agencies$69,001 $282 $(99)$69,184 
Total$69,001 $282 $(99)$69,184 
September 30, 2020
Held to maturity    
MBS:    
U.S. government agencies$27,161 $1,635 $(3)$28,793 
Private label residential229 307 (1)535 
Bank issued trust preferred securities500  (1)499 
Total$27,890 $1,942 $(5)$29,827 
Available for sale    
MBS: U.S. government agencies$57,797 $178 $(68)$57,907 
Total$57,797 $178 $(68)$57,907 

12


Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2021 (dollars in thousands):
 Less Than 12 Months12 Months or LongerTotal
 Estimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
Held to maturity        
MBS:        
U.S. government agencies$2,098 $(8)3 $34 $(1)4 $2,132 $(9)
Private label residential4,836 (23)1 2  2 4,838 (23)
U.S. Treasury and U.S. government agency securities8,953 (68)3    8,953 (68)
Bank issued trust preferred securities497 (3)1    497 (3)
     Total
$16,384 $(102)8 $36 $(1)6 $16,420 $(103)
Available for sale        
MBS: U.S. government agencies$22,873 $(99)12 $ $  $22,873 $(99)
     Total
$22,873 $(99)12 $ $  $22,873 $(99)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2020 (dollars in thousands):
 Less Than 12 Months12 Months or LongerTotal
 Estimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
Held to maturity        
MBS:        
U.S. government agencies
$5,130 $(2)4 $39 $(1)4 $5,169 $(3)
Private label residential
7  1 11 (1)2 18 (1)
Bank issued trust preferred securities499 (1)1    499 (1)
     Total
$5,636 $(3)6 $50 $(2)6 $5,686 $(5)
Available for sale        
MBS:        
U.S. government agencies
$21,464 $(68)11 $ $  $21,464 $(68)
     Total
$21,464 $(68)11 $ $  $21,464 $(68)

The Company has evaluated the investment securities in the above tables and has determined that the declines in their fair value are 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 fair value recovers.  Furthermore, as of March 31, 2021, management does not have the intent to sell
13


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, 2021 and 2020:
 RangeWeighted
Minimum Maximum Average 
March 31, 2021   
Constant prepayment rate6.00 %15.00 %13.18 %
Collateral default rate1.73 %28.92 %13.94 %
Loss severity rate %18.93 %5.79 %
March 31, 2020   
Constant prepayment rate6.00 %15.00 %10.91 %
Collateral default rate1.86 %22.47 %10.44 %
Loss severity rate %16.34 %4.02 %

The following table presents the OTTI recoveries for the three and six months ended March 31, 2021 and 2020 (dollars in thousands):
 Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
 Held To
Maturity
Held To
Maturity
Total recoveries $3 $3 
Adjustment for portion of OTTI transferred from
       other comprehensive income (loss) before income taxes (1)
  
Net recoveries recognized in earnings (2)$3 $3 
 Six Months Ended
March 31, 2021
Six Months Ended
March 31, 2020
 Held To
Maturity
Held To
Maturity
Total recoveries$8 $106 
Adjustment for portion of OTTI transferred from
       other comprehensive income (loss) before income taxes (1)
  
Net recoveries recognized in earnings (2)$8 $106 
_________________
(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, 2021 and 2020 (dollars in thousands):
 Six Months Ended
March 31,
 20212020
Beginning balance of credit loss$885 $1,071 
Subtractions: 
Realized losses previously recorded
as credit losses
(5)(60)
Recovery of prior credit loss(8)(106)
Ending balance of credit loss$872 $905 

During the six months ended March 31, 2021, the Company recorded a $5,000 net realized loss (as a result of investment securities being deemed worthless) on 13 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the six months ended March 31, 2020, the Company recorded a $60,000 net realized loss (as a result of investment securities being deemed worthless) on 19 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 $96.24 million and $81.03 million at March 31, 2021 and September 30, 2020, respectively.

The contractual maturities of debt securities at March 31, 2021 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 Held to MaturityAvailable for Sale
 Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Due within one year$ $ $1,428 $1,421 
Due after one year to five years8,230 8,290 2,829 2,829 
Due after five years to ten years13,703 14,180 19,173 19,236 
Due after ten years14,532 15,368 45,571 45,698 
Total$36,465 $37,838 $69,001 $69,184 


(3) 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 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.
15



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. The Company performed its fiscal year 2020 goodwill impairment test during the quarter ended June 30, 2020 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, 2020, 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, 2020 was not impaired.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in 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 March 31, 2021, management believes that there have been no events or changes in the circumstances since May 31, 2020 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. If adverse economic conditions or decreases in the Company's stock price and market capitalization as a result of the novel coronavirus of 2019 ("COVID-19") pandemic were to be deemed sustained rather then temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at March 31, 2021 and September 30, 2020 remained unchanged at $15.13 million.

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. As of March 31, 2021, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

16


(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES



Loans receivable by portfolio segment consisted of the following at March 31, 2021 and September 30, 2020 (dollars in thousands):
 March 31,
2021
September 30,
2020
 AmountPercentAmountPercent
Mortgage loans:    
One- to four-family (1)$117,184 10.3 %$118,580 10.5 %
Multi-family92,435 8.1 85,053 7.5 
Commercial461,966 40.5 453,574 40.0 
Construction - custom and owner/builder105,305 9.2 129,572 11.4 
Construction - speculative one- to four-family17,289 1.5 14,592 1.3 
Construction - commercial42,340 3.7 33,144 2.9 
Construction - multi-family44,266 3.9 34,476 3.0 
Construction - land development2,238 0.2 7,712 0.7 
Land19,041 1.7 25,571 2.3 
Total mortgage loans902,064 79.1 902,274 79.6 
Consumer loans:    
Home equity and second mortgage32,026 2.8 32,077 2.8 
Other2,756 0.2 3,572 0.3 
Total consumer loans34,782 3.0 35,649 3.1 
Commercial loans:
Commercial business66,645 5.8 69,540 6.1 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans138,175 12.1 126,820 11.2 
    Total commercial loans204,820 17.9 %196,360 17.3 
Total loans receivable1,141,666 100.0 %1,134,283 100.0 %
Less:    
Undisbursed portion of construction 
loans in process
90,550  100,558  
Deferred loan origination fees, net6,999  6,436  
Allowance for loan losses13,434  13,414  
Subtotal110,983 120,408 
Loans receivable, net$1,030,683  $1,013,875  
_____________________________
 (1) Does not include one- to four-family loans held for sale totaling $8,455 and $4,509 at March 31, 2021 and September 30, 2020, respectively.

Loans receivable at March 31, 2021 and September 30, 2020 are reported net of unamortized discounts totaling $583,000 and $790,000, respectively.







17




Allowance for Loan Losses

The following tables set forth information for the three and six months ended March 31, 2021 and 2020 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):
 Three Months Ended March 31, 2021
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
One- to four-family$1,135 $16 $ $ $1,151 
Multi-family757 27   784 
Commercial7,136 102   7,238 
Construction – custom and owner/builder770 (75)  695 
Construction – speculative one- to four-family182 (34)  148 
Construction – commercial558 156   714 
Construction – multi-family186 137   323 
Construction – land development123 (104)  19 
Land474 (72) 5 407 
Consumer loans:    
Home equity and second mortgage605 (53)  552 
Other57  (1) 56 
Commercial business loans1,449 (100)(2) 1,347 
SBA PPP loans     
Total$13,432 $ $(3)$5 $13,434 
 Six Months Ended March 31, 2021
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
One-to four-family$1,163 $(12)$ $ $1,151 
Multi-family718 66   784 
Commercial7,144 94   7,238 
Construction – custom and owner/builder832 (137)  695 
Construction – speculative one- to four-family158 (10)  148 
Construction – commercial420 294   714 
Construction – multi-family238 85   323 
Construction – land development133 (114)  19 
Land572 (175) 10 407 
Consumer loans:     
Home equity and second mortgage593 (41)  552 
Other71 (18)(1)4 56 
Commercial business loans1,372 (32)(2)9 1,347 
SBA PPP loans     
Total$13,414 $ $(3)$23 $13,434 
18


 Three Months Ended March 31, 2020
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
  One- to four-family$1,065 $83 $ $1 $1,149 
  Multi-family499 96   595
  Commercial4,410 1,351  1 5,762
  Construction – custom and owner/builder754 (57)  697
  Construction – speculative one- to four-family248 (44)  204
  Construction – commercial403 20   423
Construction – multi-family333 61   394 
  Construction – land development48 32   80 
  Land654 19  5 678
Consumer loans:     
  Home equity and second mortgage609 47   656
  Other87 (10)(1)2 78
Commercial business loans772 402   1,174
Total$9,882 $2,000 $(1)$9 $11,890 
 Six Months Ended March 31, 2020
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
  One-to four-family$1,167 $(21)$ $3 $1,149 
  Multi-family481114   595
  Commercial4,1541,603  5 5,762
  Construction – custom and owner/builder755(63) 5 697
  Construction – speculative one- to four-family212(8)  204
  Construction – commercial33885   423
Construction – multi-family375 19   394 
  Construction – land development67 13   80 
  Land697(29) 10 678
Consumer loans:     
  Home equity and second mortgage62333   656
  Other99(13)(11)3 78
Commercial business loans722467 (15) 1,174
Total$9,690 $2,200 $(26)$26 $11,890 
19


The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at March 31, 2021 and September 30, 2020 (dollars in thousands):
 Allowance for Loan LossesRecorded Investment in Loans
 Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
TotalIndividually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
March 31, 2021      
Mortgage loans:      
One- to four-family$ $1,151 $1,151 $896 $116,288 $117,184 
Multi-family 784 784  92,435 92,435 
Commercial 7,238 7,238 3,028 458,938 461,966 
Construction – custom and owner/builder 695 695  62,973 62,973 
Construction – speculative one- to four-family 148 148  7,336 7,336 
Construction – commercial 714 714  34,217 34,217 
Construction – multi-family 323 323  15,739 15,739 
Construction – land development 19 19  623 623 
Land 407 407 173 18,868 19,041 
Consumer loans:     
Home equity and second mortgage 552 552 537 31,489 32,026 
Other 56 56 8 2,748 2,756 
Commercial business loans73 1,274 1,347 527 66,118 66,645 
SBA PPP loans    138,175 138,175 
Total$73 $13,361 $13,434 $5,169 $1,045,947 $1,051,116 
September 30, 2020      
Mortgage loans:      
One- to four-family$3 $1,160 $1,163 $1,143 $117,437 $118,580 
Multi-family 718 718  85,053 85,053 
Commercial 7,144 7,144 3,242 450,332 453,574 
Construction – custom and owner/builder
 832 832  75,332 75,332 
Construction – speculative one- to four-family
 158 158  7,108 7,108 
Construction – commercial 420 420  20,927 20,927 
Construction – multi-family 238 238  10,832 10,832 
Construction – land development 133 133  4,739 4,739 
Land 572 572 394 25,177 25,571 
Consumer loans:      
Home equity and second mortgage
 593 593 555 31,522 32,077 
Other 71 71 9 3,563 3,572 
Commercial business loans38 1,334 1,372 430 69,110 69,540 
SBA PPP loans    126,820 126,820 
Total$41 $13,373 $13,414 $5,773 $1,027,952 $1,033,725 

20


The following tables present an analysis of loans by aging category and portfolio segment at March 31, 2021 and September 30, 2020 (dollars in thousands):
 30–59
Days
Past Due
60-89
Days
Past Due
Non-
Accrual (1)
Past Due
90 Days
or More
and Still
Accruing
Total
Past Due
CurrentTotal
Loans
March 31, 2021       
Mortgage loans:       
One- to four-family$ $ $415 $ $415 $116,769 $117,184 
Multi-family     92,435 92,435 
Commercial514  643  1,157 460,809 461,966 
Construction – custom and owner/builder808    808 62,165 62,973 
Construction – speculative one- to four-family     7,336 7,336 
Construction – commercial     34,217 34,217 
Construction – multi-family     15,739 15,739 
Construction – land development     623 623 
Land217  173  390 18,651 19,041 
Consumer loans:    
Home equity and second mortgage 73 539  612 31,414 32,026 
Other11  8  19 2,737 2,756 
Commercial business loans  527  527 66,118 66,645 
SBA PPP loans     138,175 138,175 
Total$1,550 $73 $2,305 $ $3,928 $1,047,188 $1,051,116 
September 30, 2020       
Mortgage loans:       
One- to four-family$ $68 $659 $ $727 $117,853 $118,580 
Multi-family     85,053 85,053 
Commercial 519 858  1,377 452,197 453,574 
Construction – custom and owner/builder
     75,332 75,332 
Construction – speculative one- to four-family
     7,108 7,108 
Construction – commercial     20,927 20,927 
Construction – multi-family     10,832 10,832 
Construction – land development 38   38 4,701 4,739 
Land 144 394  538 25,033 25,571 
Consumer loans:     
Home equity and second mortgage 22 555  577 31,500 32,077 
Other3  9  12 3,560 3,572 
Commercial business loans49 430 479 69,061 69,540 
SBA PPP loans     126,820 126,820 
Total$52 $791 $2,905 $ $3,748 $1,029,977 $1,033,725 
______________________
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.


21



Credit Quality Indicators
The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential.  The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral.  The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass:  Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch:  Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention.  If these concerns are not corrected, a potential for further adverse categorization exists.  These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. 

Substandard:  Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Doubtful: Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. At both March 31, 2021 and September 30, 2020, there were no loans classified as doubtful.

Loss:  Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At both March 31, 2021 and September 30, 2020, there were no loans classified as loss.

22


The following tables present an analysis of loans by credit quality indicator and portfolio segment at March 31, 2021 and September 30, 2020 (dollars in thousands):
Loan Grades 
March 31, 2021PassWatchSpecial
Mention
SubstandardTotal
Mortgage loans:     
One- to four-family$115,603 $615 $544 $422 $117,184 
Multi-family92,435    92,435 
Commercial439,977 13,290 7,600 1,099 461,966 
Construction – custom and owner/builder62,165 808   62,973 
Construction – speculative one- to four-family7,336    7,336 
Construction – commercial32,700  1,517  34,217 
Construction – multi-family15,739    15,739 
Construction – land development583   40 623 
Land17,727 575 566 173 19,041 
Consumer loans:    
Home equity and second mortgage31,331 36  659 32,026 
Other2,717 31  8 2,756 
Commercial business loans66,030  45 570 66,645 
SBA PPP loans138,175    138,175 
Total$1,022,518 $15,355 $10,272 $2,971 $1,051,116 
September 30, 2020     
Mortgage loans:    
One- to four-family$115,992 $1,369 $551 $668 $118,580 
Multi-family85,053    85,053 
Commercial441,037 7,712 3,447 1,378 453,574 
Construction – custom and owner/builder74,529 803   75,332 
Construction – speculative one- to four-family7,108    7,108 
Construction – commercial19,525  1,402  20,927 
Construction – multi-family10,832    10,832 
Construction – land development4,701   38 4,739 
Land23,290 1,518 370 393 25,571 
Consumer loans:    
Home equity and second mortgage31,344 53  680 32,077 
Other3,531 32  9 3,572 
Commercial business loans
68,904 59 94 483 69,540 
SBA PPP loans126,820    126,820 
Total$1,012,666 $11,546 $5,864 $3,649 $1,033,725 

Impaired Loans
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions.  Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties.  In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals.  Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.  
23


The following table is a summary of information related to impaired loans by portfolio segment as of March 31, 2021 and for the three and six months then ended (dollars in thousands):
Recorded
Investment
Unpaid Principal Balance (Loan Balance Plus Charge Off)Related
Allowance
Quarter to Date ("QTD") Average Recorded Investment (1)Year to Date ("YTD") Average Recorded Investment (2)QTD Interest Income Recognized (1)YTD Interest Income Recognized (2)QTD Cash Basis Interest Income Recognized (1)YTD Cash Basis Interest Income Recognized (2)
With no related allowance recorded:   
Mortgage loans:   
One- to four-family$895 $938 $— $899 $819 $19 $41 $16 $36 
Commercial3,028 3,028 — 3,028 3,099 40 80 33 63 
Land173 208 — 289 324 1 1 1 1 
Consumer loans: 
Home equity and second mortgage538 538 — 573 567 1 1 1 1 
Other8 8 — 9 9     
Commercial business loans233 236 — 218 206     
Subtotal4,875 4,956 — 5,016 5,024 61 123 51 101 
With an allowance recorded:   
Mortgage loans:   
One- to four-family    161     
Commercial business loans294 294 73 295 279     
Subtotal294 294 73 295 440     
Total:   
Mortgage loans:   
One- to four-family895 938  899 980 19 41 16 36 
Commercial3,028 3,028  3,028 3,099 40 80 33 63 
Land173 208  289 324 1 1 1 1 
Consumer loans:
Home equity and second mortgage538 538  573 567 1 1 1 1 
Other8 8  9 9     
Commercial business loans527 530 73 513 485     
Total$5,169 $5,250 $73 $5,311 $5,464 $61 $123 $51 $101 
______________________________________________
(1)For the three months ended March 31, 2021.
(2)For the six months ended March 31, 2021.


24


The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2020 (dollars in thousands):
Recorded
Investment
Unpaid Principal Balance (Loan Balance Plus Charge Off)Related
Allowance
YTD
Average
Recorded
Investment (1)
YTD Interest
Income
Recognized
(1)
YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:      
Mortgage loans:      
One- to four-family$659 $703 $— $1,127 $44 $34 
Commercial3,242 3,242 — 3,236 133 107 
Land
394 438 — 125   
Consumer loans:      
Home equity and second mortgage555 555 — 581   
Other9 9 — 6   
Commercial business loans182 182 — 176   
Subtotal5,041 5,129 — 5,251 177 141 
With an allowance recorded:      
Mortgage loans:      
One- to four-family484 484 3 194 16 8 
Land   110   
Consumer loans:      
Other   7   
Commercial business loans248 248 38 370   
Subtotal732 732 41 681 16 8 
Total      
Mortgage loans:      
One- to four-family1,143 1,187 3 1,321 60 42 
Commercial3,242 3,242  3,236 133 107 
Land394 438  235   
Consumer loans:      
Home equity and second mortgage555 555  581   
Other9 9  13   
Commercial business loans430 430 38 546   
Total$5,773 $5,861 $41 $5,932 $193 $149 
_____________________________________________
(1) For the year ended September 30, 2020.

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider.  Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals.  TDRs are considered impaired and are individually evaluated for impairment.  TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $3.06 million and $3.07 million in TDRs included in impaired loans at March 31, 2021 and September 30, 2020, respectively, and had no commitments at these dates to lend additional funds on these loans.  There was no allowance for loan losses allocated to TDRs at March 31, 2021, and, at September 30, 2020, there was $3,000 in allowance for loan losses allocated to TDRs. There were no TDRs for which there was a payment default within the first 12 months of the modification during the six months ended March 31, 2021.

25


The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. On December 27, 2020, the Consolidated Appropriations Act, 2021 ("CAA 2021") was signed into law. Among other purposes, this act provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the the national emergency declared by the President, whichever is earlier.

In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. The majority of these borrowers had resumed making payments as of March 31, 2021, and as of that date, only eight loans totaling $12.88 million remained on deferral status under COVID-19 loan modification forbearance agreements. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. See Note 10 - Recent Accounting Pronouncements.

The following tables set forth information with respect to total COVID-19 loan modifications, on deferral status, as of March 31, 2021 and September 30, 2020 (dollars in thousands):

COVID-19 Loan ModificationsMarch 31, 2021
Mortgage loansCountBalancePercent
     Commercial 4$11,174 86.7 %
     Construction11,517 11.8 
          Total mortgage loans512,691 98.5 
Consumer loans
     Home equity and second mortgage1180.1 
          Total consumer loans1180.1 
Commercial loans2175 1.4 
Total COVID-19 Modifications8$12,884 100.0 %


COVID-19 Loan ModificationsSeptember 30, 2020
Mortgage loansNumberBalancePercent
     One- to four-family1$467 8.0 %
     Commercial 23,951 67.2 
     Construction11,402 23.9 
          Total mortgage loans45,820 99.1 
Consumer loans
     Home equity and second mortgage1500.9 
          Total consumer loans1500.9 
Total COVID-19 Modifications5$5,870 100.0 %




26






The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of March 31, 2021 and September 30, 2020 (dollars in thousands):

 March 31, 2021
 AccruingNon-
Accrual
Total
Mortgage loans:   
One- to four-family$479 $ $479 
Commercial2,385  2,385 
Land 124 124 
Consumer loans:   
   Home equity and second mortgage 68 68 
Total$2,864 $192 $3,056 

 September 30, 2020
 AccruingNon-
Accrual
Total
Mortgage loans:   
One- to four-family$483 $ $483 
Commercial2,385  2,385 
Land 130 130 
Consumer loans:   
   Home equity and second mortgage 73 73 
Total$2,868 $203 $3,071 


There were no new TDRs during the six months ended March 31, 2021 or during the year ended September 30, 2020.





27


(5) LEASES

The Company adopted Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets on the consolidated balance sheets. The Company has operating leases for three retail bank branch offices. The ROU assets totaled $2.89 million at October 1, 2019. The Company's leases have remaining lease terms of nineteen months to eleven years, some of which include options to extend the leases for up to five years.

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three and six months ended March 31, 2021 and 2020 (dollars in thousands):
Three Months Ended March 31, 2021Six Months Ended March 31, 2021
Lease cost:
Operating lease cost$92 $185
Short-term lease cost
Total lease cost$92 $185 
Three Months Ended March 31, 2020Six Months Ended March 31, 2020
Lease cost:
Operating lease cost$83$166
Short-term lease cost
Total lease cost$83 $166 

The following table provides supplemental information to operating leases for the three and six months ended March 31, 2021 and 2020 (dollars in thousands):
At or For Three Months Ended March 31, 2021At or For Six Months Ended March 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$80 $160 
Weighted average remaining lease term-operating leases8.8years8.8years
Weighted average discount rate-operating leases2.23 %2.23 %
At or For Three Months Ended March 31, 2020At or For Six Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$80 $158 
Weighted average remaining lease term-operating leases9.7years9.7years
Weighted average discount rate-operating leases2.22 %2.22 %

The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to value the future value of lease payments due in calculating the value of the ROU asset and lease liability was determined by utilizing the September 30, 2019 fixed-rate advances issued by the FHLB, for all leases entered into prior to the October 1, 2019 adoption date.





28


Maturities of operating lease liabilities at March 31, 2021 for future fiscal years are as follows (dollars in thousands):
Remainder of 2021$167 
2022342 
2023310 
2024313 
2025317 
Thereafter1,322 
Total lease payments2,771 
Less imputed interest272 
Total$2,499 


(6) NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items.  Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period.  Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.  

Information regarding the calculation of basic and diluted net income per common share for the three and six months ended March 31, 2021 and 2020 is as follows (dollars in thousands, except per share amounts):
 Three Months Ended March 31,Six Months Ended March 31,
2021202020212020
Basic net income per common share computation  
Numerator – net income $7,251 $5,049 $14,541 $11,701 
Denominator – weighted average common shares outstanding8,331,121 8,344,201 8,322,210 8,342,828 
Basic net income per common share$0.87 $0.61 $1.75 $1.40 
Diluted net income per common share computation  
Numerator – net income$7,251 $5,049 $14,541 $11,701 
Denominator – weighted average common shares outstanding8,331,121 8,344,201 8,322,210 8,342,828 
Effect of dilutive stock options (1)113,677 112,458 106,385 123,066 
Weighted average common shares outstanding - assuming dilution8,444,798 8,456,659 8,428,595 8,465,894 
Diluted net income per common share$0.86 $0.60 $1.73 $1.38 
____________________________________________
(1) For the three and six months ended March 31, 2021, average options to purchase 135,590 and 136,631 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share, because their effect would have been anti-dilutive. For the three and six months ended March 31, 2020, average options to purchase 138,362 and 121,497 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per shares, because their effect would have been anti-dilutive.



29


(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three and six months ended March 31, 2021 and 2020 are as follows (dollars in thousands):
Three Months Ended March 31, 2021
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$70 $(26)$44 
Other comprehensive income (loss)74 3 77 
Balance of AOCI at the end of period$144 $(23)$121 
Six Months Ended March 31, 2021
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$87 $(26)$61 
Other comprehensive income (loss)57 3 60 
Balance of AOCI at the end of period$144 $(23)$121 
Three Months Ended March 31, 2020
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$(116)$(30)$(146)
Other comprehensive (loss) income (35)2 (33)
Balance of AOCI at the end of period$(151)$(28)$(179)
Six Months Ended March 31, 2020
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$90 $(40)$50 
Other comprehensive (loss) income(241)12 (229)
Balance of AOCI at the end of period$(151)$(28)$(179)
__________________________
(1) All amounts are net of income taxes.


(8) STOCK COMPENSATION PLANS

Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti.  Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, which was approved by shareholders on January 28, 2020, the Company is able to grant options and awards or restricted stock (with or
30


without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti.  Shares issued may be purchased in the open market or may be issued from authorized and unissued shares.  The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At March 31, 2021, there were 29,676 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At March 31, 2021, there were 298,000 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.

At both March 31, 2021 and 2020, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the six months ended March 31, 2021 and 2020.

Stock option activity for the six months ended March 31, 2021 and 2020 is summarized as follows:
 Six Months Ended March 31, 2021Six Months Ended March 31, 2020
  Number of SharesWeighted
Average
Exercise
Price
 Number of SharesWeighted
Average
Exercise
Price
Options outstanding, beginning of period395,349 $18.45 378,304 $18.15 
Exercised(53,564)9.70 (36,375)10.30 
Granted1,500 19.13 1,000 26.50 
Forfeited(4,520)27.57 (8,650)24.84 
Options outstanding, end of period338,765 $19.71 334,279 $18.86 

The fair value of stock options is determined using the Black-Scholes valuation model.

The weighted average assumptions for options granted during the six months ended March 31, 2021 were as follows:
Expected volatility33 %
Expected life (in years)5
Expected dividend yield4.76 %
Risk free interest rate0.38 %
Grant date fair value per share$3.26 

The aggregate intrinsic value of options exercised during the six months ended March 31, 2021 and 2020 was $947,000 and $628,000, respectively.

At March 31, 2021, there were 158,392 unvested options with an aggregate grant date fair value of $565,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2021 was $897,000.  There were 200 options vested during the six months ended March 31, 2021 with a total fair value of $1,000.

At March 31, 2020, there were 154,670 unvested options with an aggregate grant date fair value of $584,000. There were no options that vested during the six months ended March 31, 2020.
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Additional information regarding options outstanding at March 31, 2021 is as follows:

 Options OutstandingOptions Exercisable
Range of
Exercise
Prices ($)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
$5.86-6.004,200 $5.93 1.54,200 $5.93 1.5
  9.0030,000 9.00 2.630,000 9.00 2.6
10.26-10.7165,575 10.57 4.065,575 10.57 4.0
15.67-19.13104,500 16.50 8.225,400 15.67 5.5
26.50-27.1443,990 27.13 8.58,798 27.13 8.5
29.6950,400 29.69 6.530,300 29.69 6.5
31.8040,100 31.80 7.516,100 31.80 7.5
 338,765 $19.71 6.5180,373 $16.83 4.9

The aggregate intrinsic value of options outstanding at March 31, 2021 and 2020 was $2.99 million and $1.41 million, respectively.

As of March 31, 2021, unrecognized compensation cost related to unvested stock options was $507,000, which is expected to be recognized over a weighted average life of 2.12 years.


(9) FAIR VALUE MEASUREMENTS

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances.

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at both March 31, 2021 and September 30, 2020. The Company's assets measured at estimated fair value on a recurring basis at March 31, 2021 and September 30, 2020 were as follows (dollars in thousands):
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March 31, 2021Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$ $69,184 $ $69,184 
Investments in equity securities
   Mutual funds957   957 
Total$957 $69,184 $ $70,141 
September 30, 2020Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$ $57,907 $ $57,907 
Investments in equity securities
   Mutual funds977   977 
Total$977 $57,907 $ $58,884 

There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2021 and the year ended September 30, 2020.

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis.  The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable.  In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net:  OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell.  Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale.  Estimated costs to sell are based on standard market factors.  The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2021 (dollars in thousands):
 Estimated Fair Value
 Level 1Level 2Level 3
Impaired loans:   
  Commercial business loans$ $ $221 
Total impaired loans  221 
OREO and other repossessed assets  157 
Total$ $ $378 

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The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, 2021 (dollars in thousands):
  Estimated
Fair Value
 Valuation
Technique(s)
 Unobservable Input(s) Range
Impaired loans$221 Market approachAppraised value less estimated selling costsNA
OREO and other repossessed assets$157 Market approachLower of appraised value or listing price less estimated selling costsNA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2020 (dollars in thousands):
 Estimated Fair Value
 Level 1Level 2Level 3
Impaired loans:   
Mortgage loans:   
One- to four-family$ $ $481 
  Commercial business loans  210 
Total impaired loans  691 
Investment securities – held to maturity:   
MBS - private label residential 8  
OREO and other repossessed assets  1,050 
Total$ $8 $1,741 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2020 (dollars in thousands):
  Estimated
Fair Value
 Valuation
Technique(s)
 Unobservable Input(s) Range
Impaired loans$691 Market approachAppraised value less estimated selling costsNA
OREO and other repossessed assets$1,050 Market approachLower of appraised value or listing price less estimated selling costsNA

GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a representative fair value for these types of items as of March 31, 2021 and September 30, 2020. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

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The recorded amounts and estimated fair values of financial instruments were as follows as of March 31, 2021 and September 30, 2020 (dollars in thousands):
 March 31, 2021
  Fair Value Measurements Using:
 Recorded
Amount
 Estimated Fair Value 
Level 1
 
Level 2
 
Level 3
Financial assets     
Cash and cash equivalents$433,342 $433,342 $433,342 $ $ 
CDs held for investment39,674 39,674 39,674   
Investment securities105,649 107,022 8,953 97,572 497 
Investments in equity securities957 957 957   
FHLB stock2,303 2,303 2,303   
Other investments3,000 3,000 3,000   
Loans held for sale8,455 8,714 8,714   
Loans receivable, net1,030,683 1,040,302   1,040,302 
     Accrued interest receivable4,471 4,471 4,471   
Financial liabilities     
Certificates of deposit142,781 144,344   144,344 
FHLB borrowings10,000 9,939   9,939 
Accrued interest payable182 182 182   
 September 30, 2020
  Fair Value Measurements Using:
 Recorded
Amount
 Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets     
Cash and cash equivalents$314,452 $314,452 $314,452 $ $ 
CDs held for investment65,545 65,545 65,545   
Investment securities85,797 87,734  87,235 499 
Investments in equity securities977 977 977   
FHLB stock1,922 1,922 1,922   
Other investments3,000 3,000 3,000   
Loans held for sale4,509 4,664 4,664   
Loans receivable, net1,013,875 1,034,876   1,034,876 
     Accrued interest receivable4,484 4,484 4,484   
Financial liabilities     
Certificates of deposit158,524 160,921   160,921 
FHLB borrowings10,000 10,167   10,167 
Accrued interest payable274 274 274   


(10) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded
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through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for OTTI on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to help ensure that it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax
deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption ASU 2017-04 is not expected to a have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2018-13 effective October 1, 2020, and it did not have a material impact on the Company's unaudited interim consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2018-15 effective October 1, 2020, and it did not have a material impact on the Company's unaudited interim consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidelines. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020,
36


including interim periods within those fiscal years. The adoption of ASU 2019-12 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not adopted ASU 2020-04 as of March 31, 2021. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting for loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.


(11) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended March 31, 2021, the Company recognized $941,000 in service charges on deposits, $1.24 million in ATM and debit card interchange fees, $74,000 in escrow fees, and $3,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the six months ended March 31, 2021, the Company recognized $2.00 million in service charges on deposits, $2.39 million in ATM and debit card interchange fees, $179,000 in escrow fees, and $7,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended March 31, 2020, the Company recognized $1.08 million in service charges on deposits, $1.02 million in ATM and debit card interchange fees, $47,000 in escrow fees, and $7,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the six months ended March 31, 2020, the Company recognized $2.28 million in service charges on deposits, $2.11 million in ATM and debit card interchange fees, $130,000 in escrow fees, and $13,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue when it satisfies its performance obligation. Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed, as the contract duration does not extend beyond the service performed.
ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.
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Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property according to the customer's contract. Fees are recognized when the escrow contract closes.
Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.




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

As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2021.  

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the effect of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans in our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business
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strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; including as a result of the CARES Act and the CAA 2021; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID-19 vaccination and economic stimulus efforts; and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including our 2020 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made.  We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements.  These risks could cause our actual results for fiscal year 2021 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.


Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 offices (including its main office in Hoquiam). At March 31, 2021, the Company had total assets of $1.70 billion, net loans receivable of $1.03 billion, total deposits of $1.48 billion and total shareholders’ equity of $198.54 million.  The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank's operations.

The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses.  Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).  Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities. Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reductions in the targeted federal funds rate in March 2020, until the pandemic subsides, the Company expects that its net interest income and net interest margin will be adversely affected.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company did not record a provision for loan losses for the six months ended March 31, 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during this period. The Company recorded a provision for loan losses of $2.00 million for the three months ended March 31, 2020 and $3.70 million for the year ended September 30,
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2020. The provisions recorded during the last nine months of the year ended September 30, 2020 were primarily due to forecasted probable loan losses reflecting the potential future impact of the COVID-19 pandemic on the economy.

The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic. The Company remains focused on keeping its employees safe and the Bank running effectively to serve its customers. The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines. To help ensure the safety of the Company's customers and employees, services are offered primarily through drive up facilities and/or by appointment. Some of the Company's employees are working remotely or have flexible work schedules, and protective measures within the Company's offices have been established to help ensure the safety of those employees who must work on-site.

The Company has worked with loan customers on loan deferral and forbearance plans. In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. The majority of these borrowers had resumed making payments as of March 31, 2021, and only eight loans with balances totaling $12.88 million remained on deferral status as of that date. Borrowers were paying interest monthly on five of these eight deferred loans totaling $8.46 million. These modifications were not classified as TDRs at March 31, 2021 in accordance with the guidance of the CARES Act and related regulatory guidance. The Company is continuing to work on forbearance plans with customers impacted by the COVID-19 pandemic. The CARES Act also authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program ("PPP"). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans in April 2020 and originated $127.54 million in PPP loans through the program's initial conclusion in August 2020. The CAA 2021, which was signed into law on December 27, 2020, renews and extends the PPP until May 31, 2021. As a result, the Company began originating PPP loans again in January 2021. As of March 31, 2021, the Company had $138.18 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance.

Net income is also affected by non-interest income and non-interest expense.  For the three and six months ended March 31, 2021, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.  Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.  Non-interest income is also decreased by valuation allowances on servicing rights and increased by recoveries of valuation allowances on servicing rights, if any.  Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.  Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.


Critical Accounting Policies and Estimates

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company’s 2020 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2020 Form 10-K.

Comparison of Financial Condition at March 31, 2021 and September 30, 2020

The Company’s total assets increased by $133.27 million, or 8.5%, to $1.699 billion at March 31, 2021 from $1.566 billion at September 30, 2020.  The increase in total assets was primarily due to increased cash and cash equivalents, and to a much lesser
40


extent, increases in investment securities, and net loans receivable, partially offset by a decrease in CDs held for investment. The increase in total assets was funded primarily by an increase in total deposits.

Net loans receivable increased by $16.81 million, or 1.7%, to $1.031 billion at March 31, 2021 from $1.014 billion at September 30, 2020, primarily due to an increase in SBA PPP loans and smaller increases in several other categories. These increases were partially offset by decreases in construction loans, land loans, and smaller decreases in several other categories.  

Total deposits increased by $123.45 million, or 9.1%, to $1.482 billion at March 31, 2021 from $1.358 billion at September 30, 2020, primarily due to increases in non-interest-bearing demand account balances, savings account balances, NOW checking account balances, and money market account balances. These increases were partially offset by a decrease in certificates of deposit account balances.
 
Shareholders’ equity increased by $10.91 million, or 5.8%, to $198.54 million at March 31, 2021 from $187.63 million at September 30, 2020.  The increase in shareholders' equity was primarily due to net income, partially offset by the payment of dividends to common shareholders.

A more detailed explanation of the changes in significant balance sheet categories follows:

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment increased by $93.02 million, or 24.5%, to $473.02 million at March 31, 2021 from $380.00 million at September 30, 2020. The increase was primarily a result of an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities.

Investment Securities:  Investment securities (including investments in equity securities) increased by $19.84 million, or 22.9%, to $106.61 million at March 31, 2021 from $86.77 million at September 30, 2020. This increase was primarily due to the purchase of additional mortgage-backed investment securities and U.S. Treasury securities during the six months ended March 31, 2021 as the Company put a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB Stock: FHLB stock increased $381,000, or 19.8% to $2.30 million at March 31, 2021 from $1.92 million at September 30, 2020, due to purchases required by the FHLB due to the increase in total assets.

Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both March 31, 2021 and September 30, 2020. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by $16.81 million, or 1.7%, to $1.031 billion at March 31, 2021 from $1.014 billion at September 30, 2020.  The increase was primarily due to an $11.36 million increase in SBA PPP loans, a $10.01 million decrease in the undisbursed portion of construction loans in process, an $8.39 million increase in commercial real estate mortgage loans, and a $7.38 million increase in multi-family mortgage loans. These increases to net loans receivable were partially offset by an $8.06 million decrease in construction loans, a $6.52 million decrease in land loans, and smaller decreases in several other loan categories. The SBA PPP loan balances increased primarily due to the renewal of the program in December 2020 and was partially offset by borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.

Loan originations increased by $90.69 million, or 38.9%, to $323.72 million for the six months ended March 31, 2021 from $233.03 million for the six months ended March 31, 2020.  The increase in loan originations was primarily due to funding new SBA PPP loans, increased loan demand for one- to four-family mortgage loan refinances, and the funding of several larger commercial business and commercial real estate loans. The Company continued to sell longer-term fixed rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. The Company also periodically sells the guaranteed portion of SBA loans.  Sales of fixed rate one- to four-family mortgage loans increased by $23.07 million, or 37.2%, to $85.13 million for the six months ended March 31, 2021 from $62.06 million for the six months ended March 31, 2020, primarily due to increased refinance activity for one- to four-family loan due to the decrease in mortgage interest rates.

41


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

Premises and Equipment:  Premises and equipment decreased by $272,000, or 1.2%, to $22.76 million at March 31, 2021 from $23.04 million at September 30, 2020.  This decrease was primarily due to normal depreciation.

OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by $893,000, or 85.0%, to $157,000 at March 31, 2021 from $1.05 million at September 30, 2020, primarily due to the sale of three land parcels.  At March 31, 2021, total OREO and other repossessed assets consisted of three land parcels totaling $157,000.

BOLI (Bank Owned Life Insurance): BOLI increased by $295,000 or 1.4%. to $21.89 million at March 31, 2021 from $21.60 million at September 30, 2020. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI:  The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2021 and September 30, 2020. CDI decreased by $181,000, or 11.1%, to $1.44 million at March 31, 2021 from $1.63 million at September 30, 2020 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Deposits: Deposits increased by $123.45 million, or 9.1%, to $1.482 billion at March 31, 2021 from $1.358 billion at September 30, 2020. The increase in total deposits was primarily due to a $57.65 million increase in non-interest bearing demand account balances, a $30.87 million increase in savings account balances, a $26.91 million increase in NOW checking account balances, and a $23.77 million increase in money market account balances. These increases were partially offset by a $15.74 million decrease in certificates of deposit account balances.

Deposits consisted of the following at March 31, 2021 and September 30, 2020 (dollars in thousands):
 March 31, 2021September 30, 2020
AmountPercentAmountPercent
Non-interest-bearing demand$499,541 33.7 %$441,889 32.5 %
NOW checking403,811 27.2 376,899 27.8 
Savings250,736 16.9 219,869 16.2 
Money market171,896 11.6 149,922 11.0 
Money market - reciprocal13,094 0.9 11,303 0.9 
Certificates of deposit under $250119,388 8.1 129,579 9.5 
Certificates of deposit $250 and over23,393 1.6 28,945 2.1 
Total$1,481,859 100.0 %$1,358,406 100.0 %

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings remained unchanged at $10.00 million at both March 31, 2021 and September 30, 2020, and consisted of two $5.00 million borrowings, with scheduled maturities in March 2025 and March 2027, respectively, and which bear interest at 1.19% and 1.11%, respectively.

Shareholders’ Equity:  Total shareholders’ equity increased by $10.91 million, or 5.8%, to $198.54 million at March 31, 2021 from $187.63 million at September 30, 2020.  The increase was primarily due to net income of $14.54 million for the six months ended March 31, 2021 and $519,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $4.24 million and the repurchase of 2,900 shares of the Company's common stock for $58,000 (an average price of $20.04 per share). During the quarter ended March 31, 2021, the Company adopted a new stock repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares, or 415,970 shares. The new stock repurchase program replaces the existing stock repurchase program, which had 141,952 shares available to be repurchased. For additional information, see Item 2 of Part II of this Form 10-Q.

Asset Quality: The non-performing assets to total assets ratio was 0.16% at March 31, 2021 compared to 0.27% at September 30, 2020. Total non-performing assets decreased by $1.51 million, or 36.4%, to $2.65 million at March 31, 2021 from $4.16 million at September 30, 2020. The decrease in non-performing assets was due to an $893,000 decrease in OREO and other repossessed assets, a $600,000 decrease in non-accrual loans, and a $21,000 decrease in non-accrual investment securities.

42





The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2021 and September 30, 2020 (dollars in thousands):
March 31,
2021
September 30,
2020
Loans accounted for on a non-accrual basis:  
Mortgage loans:  
    One- to four-family (1)$415 $659 
    Commercial643 858 
    Land173 394 
Consumer loans:  
    Home equity and second mortgage539 564 
Other— 
Commercial business loans 527 430 
       Total loans accounted for on a non-accrual basis2,305 2,905 
Accruing loans which are contractually past due 90 days or more— — 
Total of non-accrual and 90 days past due loans 2,305 2,905 
Non-accrual investment securities188 209 
OREO and other repossessed assets, net (2)157 1,050 
       Total non-performing assets (3)$2,650 $4,164 
TDRs on accrual status (4)$2,864 $2,868 
Non-accrual and 90 days or more past due loans as a percentage of loans receivable0.22 %0.28 %
Non-accrual and 90 days or more past due loans as a percentage of total assets0.14 %0.19 %
Non-performing assets as a percentage of total assets0.16 %0.27 %
Loans receivable (5)$1,044,117 $1,027,289 
Total assets$1,699,244 $1,565,978 
___________________________________
(1) As of March 31, 2021 and September 30, 2020, there were no one- to-four family properties in the process of foreclosure.
(2) As of March 31, 2021 and September 30, 2020, the balance of OREO did not include any foreclosed residential real estate property.
(3) Does not include TDRs on accrual status.
(4) Does not include TDRs totaling $192 and $203 reported as non-accrual loans at March 31, 2021 and September 30, 2020, respectively.
(5)  Does not include loans held for sale and loan balances are before the allowance for loan losses.

The Company has received, and continues to receive, inquiries and requests from borrowers for some type of payment relief due to the COVID 19-pandemic. In response, the Company has made payment deferral modifications (typically 90-day payment deferral with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All loans modified due to COVID-19 are separately monitored, and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. For additional information on these loan modifications, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."

43





Comparison of Operating Results for the Three and Six Months Ended March 31, 2021 and 2020

Net income increased by $2.20 million, or 43.6%, to $7.25 million for the quarter ended March 31, 2021 from $5.05 million for the quarter ended March 31, 2020. Net income per diluted common share increased by $0.26, or 43.3%, to $0.86 for the quarter ended March 31, 2021 from $0.60 for the quarter ended March 31, 2020. The increases in net income and net income per diluted common share for the three months ended March 31, 2021 were primarily due to a $2.00 million decrease in the provision for loan losses and a $1.21 million increase in non-interest income, which were partially offset by a $312,000 decrease in net interest income, a $265,000 increase in non-interest expense, and a $427,000 increase in the provision for income taxes.

Net income increased by $2.84 million, or 24.3%, to $14.54 million for the six months ended March 31, 2021 from $11.70 million for the six months ended March 31, 2020. Net income per diluted common share increased by $0.35, or 25.4%, to $1.73 for the six months ended March 31, 2021 from $1.38 for the six months ended March 31, 2021. The increases in net income and net income per diluted common share were primarily due to a $2.20 million decrease in the provision for loan losses and a $1.83 million increase in non-interest income, which were partially offset by a $302,000 increase in non-interest expense, a $291,000 decrease in net interest income, and a $594,000 increase in the provision for income taxes.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income: Net interest income decreased by $313,000, or 2.4%, to $12.57 million for the quarter ended March 31, 2021 from $12.88 million for the quarter ended March 31, 2020. The decrease in net interest income was primarily due to a decrease in the average yield of interest-earning assets, which was partially offset by an increase in the average balance on interest-earnings assets and a decline in the average cost of interest-bearing liabilities.

Total interest and dividend income decreased by $771,000, or 5.5%, to $13.36 million for the quarter ended March 31, 2021 from $14.13 million for the quarter ended March 31, 2020, primarily due to a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.41% for the quarter ended March 31, 2021 from 4.68% for the quarter ended March 31, 2020, as market interest rates decreased following the 150 basis point decline in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at March 31, 2021. Partially offsetting the decrease in the average yield on interest earning assets was an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $360.57 million, or 29.9%, to $1.57 billion for the quarter ended March 31, 2021 from $1.21 billion for the quarter ended March 31, 2020. Average loans receivable increased by $122.47 million, or 13.3%, average investment securities increased by $19.36 million, or 25.3%, and average interest-bearing deposits in banks and CDs increased by $218.35 million, or 107.1%, between the periods. During the quarter ended March 31, 2021, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $86,000 compared to $107,000 for the quarter ended March 31, 2020. The incremental accretion will change during any period based on the volume of prepayments, but is expected to decrease over time as the balance of the net discount declines. During the quarter ended March 31, 2021, there was a total of $129,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $320,000 collected for the quarter ended March 31, 2020. Also impacting the average yield and average interest-earning asset balances during the current quarter were SBA PPP loans originated. These PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan. For the quarter ended March 31, 2021, average PPP loans were $124.48 million and the Company recorded $306,000 in interest income and accreted $1.14 million in PPP loan origination fees into income. At March 31, 2021, PPP deferred loan origination fees of $3.86 million remain to be accreted into interest income during the remaining life of the loans.

Total interest expense decreased by $458,000, or 36.6%, to $793,000 for the quarter ended March 31, 2021 from $1.25 million for the quarter ended March 31, 2020. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, which was partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.33% for the quarter ended March 31, 2021 from 0.63% for the quarter ended March 31, 2020. Average interest-bearing liabilities increased by $168.00 million, or 21.1%, to $965.95 million for the quarter ended March 31, 2021 from $797.95 million for the quarter ended March 31, 2020, due to increases in the average balances of savings accounts, NOW checking accounts, money market accounts, and borrowings.

44


As a result of these changes, the net interest margin ("NIM") decreased to 3.21% for the quarter ended March 31, 2021 from 4.27% for the quarter ended March 31, 2020.

Net interest income decreased by $291,000, or 1.1%, to $25.59 million for the six months ended March 31, 2021 from $25.88 million for the six months ended March 31, 2020. The decrease in net interest income was primarily due to a decrease in the average yield of interest-earning assets, which was partially offset by an increase in the average balance on interest-earning assets and a decline in the average cost of interest-bearing liabilities.

Total interest and dividend income decreased by $1.01 million, or 3.5%, to $27.32 million for the six months ended March 31, 2021 from $28.32 million for the six months ended March 31, 2020, primarily due to a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.56% for the six months ended March 31, 2021 from 4.76% for the six months ended March 31, 2020 as market interest rates decreased following the 150 basis point decline in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at March 31, 2021. Substantially offsetting the decrease in the average yield on interest-earning assets was an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $342.25 million, or 28.7%, to $1.53 billion for the six months ended March 31, 2021 from $1.19 billion for the six months ended March 31, 2020. Average loans receivable increased by $120.37 million, or 13.1%, average investment securities increased by $23.47 million, or 34.3%, and average interest-bearing deposits in banks and CDs increased by $197.96 million, or 98.9%, between the periods.

Total interest expense decreased by $714,000, or 29.3%, to $1.73 million for the six months ended March 31, 2021 from $2.44 million for the six months ended March 31, 2020. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, which was partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.36% for the six months ended March 31, 2021 from 0.62% for the six months ended March 31, 2020. Average interest-bearing liabilities increased by $165.25 million, or 21.1%, to $949.93 million for the six months ended March 31, 2021 from $784.68 million for the six months ended March 31, 2020, due to increases in the average balances of savings accounts, NOW checking accounts, money market accounts, and borrowings.

As a result of these changes, the NIM decreased to 3.34% for the six months ended March 31, 2021 from 4.35% for the six months ended March 31, 2020.


45


Average Balances, Interest and Average Yields/Cost

The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands).
 Three Months Ended March 31,
 20212020
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Interest and
Dividends
Yield/
Cost
Interest-earning assets:
Loans receivable (1)(2)$1,044,476 $12,791 4.90 %$922,011 $12,823 5.56 %
Investment securities (2)95,771 284 1.19 76,412 489 2.56 
Dividends from mutual funds, FHLB stock and other investments 5,904 28 1.92 5,513 35 2.54 
Interest-bearing deposits in banks and CDs422,286 258 0.24 203,936 784 1.54 
Total interest-earning assets1,568,437 13,361 3.41 1,207,872 14,131 4.68 
Non-interest-earning assets85,203   85,226   
     Total assets$1,653,640   $1,293,098   
Interest-bearing liabilities:      
Savings $236,504 48 0.08 $178,688 52 0.12 
Money market178,768 134 0.30 143,817 207 0.58 
NOW checking 394,612 153 0.16 303,403 234 0.31 
Certificates of deposit146,065 429 1.19 169,293 750 1.78 
Short-term borrowings— 0.23 — — — 
Long-term borrowings10,000 29 1.16 2,747 1.17 
Total interest-bearing liabilities965,952 793 0.33 797,948 1,251 0.63 
Non-interest-bearing deposits482,528 306,907 
Other liabilities10,365   10,982   
Total liabilities1,458,845   1,115,837   
Shareholders' equity194,795   177,261   
Total liabilities and    
shareholders' equity$1,653,640 $1,293,098   
Net interest income$12,568  $12,880  
Interest rate spread3.08 %  4.05 %
Net interest margin (3)3.21 %  4.27 %
Ratio of average interest-earning
   assets to average interest- bearing liabilities
162.37 %  151.37 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.

46


 Six Months Ended March 31,
 20212020
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Interest and
Dividends
Yield/
Cost
Interest-earning assets:       
Loans receivable (1)(2)$1,037,304 $26,108 5.03 %$916,931 $25,587 5.58 %
Investment securities (2)91,912 585 1.27 68,440 928 2.71 
Dividends from mutual funds, FHLB stock and other investments5,900 55 1.87 5,453 72 2.64 
Interest-bearing deposits in banks and CDs398,067 569 0.29 200,107 1,735 1.73 
Total interest-earning assets1,533,183 27,317 3.56 1,190,931 28,322 4.76 
Non-interest-earning assets84,635   84,311   
     Total assets
$1,617,818   $1,275,242   
Interest-bearing liabilities:      
Savings $229,610 96 0.08 $176,628 86 0.10 
Money market173,579 272 0.31 138,758 396 0.57 
NOW checking386,093 330 0.17 299,884 454 0.30 
Certificates of deposit150,645 970 1.29 168,039 1,496 1.78 
Short-term borrowings— 0.13 — 2.53 
Long-term borrowings10,000 58 1.16 1,366 1.17 
Total interest-bearing liabilities949,929 1,726 0.36 784,676 2,440 0.62 
Non-interest-bearing deposits465,251 306,175 
Other liabilities10,528   9,394   
Total liabilities1,425,708   1,100,245   
Shareholders' equity192,110   174,997   
Total liabilities and    
shareholders' equity$1,617,818   $1,275,242   
Net interest income$25,591   $25,882  
Interest rate spread  3.20 %  4.14 %
Net interest margin (3)  3.34 %  4.35 %
Ratio of average interest-earning
assets to average interest-bearing liabilities
  161.40 %  151.77 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.
47


Rate Volume Analysis

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company.   Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns).  Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).
 Three months ended
March 31, 2021
compared to three months
ended March 31, 2020
increase (decrease) due to
Six months ended
March 31, 2021
compared to six months
ended March 31, 2020
increase (decrease) due to
 RateVolumeNet
Change
RateVolumeNet
Change
Interest-earning assets:   
Loans receivable and loans held for sale$(1,628)$1,596 $(32)$(1,214)$1,735 $521 
Investment securities(308)103 (205)(402)59 (343)
Dividends from mutual funds, FHLB stock and other investments (10)(7)(18)(17)
  Interest-bearing deposits in banks and CDs(970)444 (526)(1,319)153 (1,166)
Total net increase (decrease) in income on interest-earning assets(2,916)2,146 (770)(2,953)1,948 (1,005)
Interest-bearing liabilities:   
Savings (18)14 (4)(6)16 10 
Money market (115)42 (73)(143)19 (124)
NOW checking (138)57 (81)(153)29 (124)
Certificates of deposit (227)(94)(321)(383)(143)(526)
   FHLB borrowings— 21 21 — 50 50 
Total net increase (decrease) in expense on interest-bearing liabilities(498)40 (458)(685)(29)(714)
Net increase (decrease) in net interest income$(2,418)$2,106 $(312)$(2,268)$1,977 $(291)

Provision for Loan Losses: There was no provision for loan losses made for the quarter ended March 31, 2021 compared to a $2.00 million provision for loans losses for the quarter ended March 31, 2020 due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of March 31, 2021.. For the quarter ended March 31, 2021, there were net recoveries of $2,000 compared to net recoveries of $8,000 for the quarter ended March 31, 2020. Non-accrual loans decreased by $600,000 or 20.7%, to $2.31 million at March 31, 2021, from $2.91 million at September 30, 2020 and decreased by $911,000, or 28.3%, from $3.22 million at March 31, 2020. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $180,000, or 4.8%, to $3.93 million at March 31, 2021, from $3.75 million at September 30, 2020 and increased by $495,000, or 14.4%, from $3.43 million one year ago. 

The $138.18 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at March 31, 2021, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

There was no provision for loan losses made for the six months ended March 31, 2021 compared to a $2.20 million provision for loan losses for the six months ended March 31, 2020 due primarily to forecasted probable credit losses reflecting the potential future impact of the COVID-19 pandemic on the economy as of March 31, 2020. For the six months ended March 31, 2021, there were net recoveries of $20,000 compared to no net charge-offs for the six months ended March 31, 2020.

The Company has established a comprehensive methodology for determining the allowance for loan losses.  On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio.  These
48


factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.  The aggregate principal impairment reserve amount determined at March 31, 2021 was $73,000 compared to $41,000 at September 30, 2020 and $89,000 at March 31, 2020. 

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was $583,000 at March 31, 2021. The Company believes that this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $13.43 million at March 31, 2021 (1.29% of loans receivable and 582.8% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.  The allowance for loan losses was $13.41 million (1.31% of loans receivable and 461.8% of non-performing loans) at September 30, 2020 and $11.89 mil1ion (1.29% of loans receivable and 369.7% of non-performing loans) at March 31, 2020. While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income increased by $1.21 million, or 32.8%, to $4.89 million for the quarter ended March 31, 2021 from $3.68 million for the quarter ended March 31, 2020. The increase was primarily due to a $1.02 million increase in gain on sales of loans, a $438,000 valuation recovery on servicing rights, a $222,000 increase in ATM and debit card interchange transaction fees, and smaller increases in several other categories. These increases to non-interest income were partially offset by a $293,000 decrease in the other non-interest income category, a $137,000 decrease in service charges on deposits, and smaller decreases in several other categories. The increase in gain on sales of loans was primarily due to an increase in the dollar amount of fixed rate one- to four-family loans originated and sold during the current quarter and an increase in the average pricing margin compared to the same period last year. The increased mortgage banking volumes were largely due to increased refinance activity for single family homes. The valuation recovery on servicing rights was primarily due to a decrease in the projected mortgage prepayment speeds as mortgage interest rates increased during the quarter. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions. The decrease in the other non-interest income category was related to a non-recurring $283,000 recovery (during the quarter ended March 31, 2020) of a previously charged off receivable acquired in the South Sound Acquisition. The decrease in service charges on deposits was primarily due to a decrease in overdraft fee income.

Total non-interest income for the six months ended March 31, 2021 increased by $1.83 million, or 24.0%, to $9.46 million from $7.62 million for the six months ended March 31, 2020. This increase was primarily due to a $2.07 million increase in gain on sales of loans, a $284,000 increase in ATM and debit card interchange transaction fees, a $202,000 valuation recovery on servicing rights (compared to a $23,000 valuation allowance in the comparable period one year ago), and smaller increases in several other categories. These increases were partially offset by a $293,000 decrease in the other non-interest income category (primarily due the $283,000 recovery discussed above), a $282,000 decrease in services charges on deposits, and smaller decreases in several other categories.

Non-interest Expense:  Total non-interest expense increased by $265,000, or 3.2%, to $8.55 million for the quarter ended March 31, 2021 from $8.29 million for the quarter ended March 31, 2020. This increase was primarily due to a $157,000 increase in salary and employee benefits expense and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in salaries and employee benefits expense was primarily due to annual salary adjustments. The efficiency ratio for the current quarter improved to 48.99% from 50.04% for the comparable quarter one year ago.

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Total non-interest expense increased by $302,000, or 1.8%, to $16.96 million for the six months ended March 31, 2021 from $16.66 million for the six months ended March 31, 2020. The increase was primarily due to a $228,000 increase in FDIC insurance expense and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in FDIC insurance expense was primarily due an assessment credit which reduced the expense in the comparable period one year ago. The efficiency ratio for the six months ended March 31, 2021 improved to 48.41% from 49.73% for the six months ended March 31, 2020.

Provision for Income Taxes: The provision for income taxes increased by $426,000, or 34.8%, to $1.65 million for the quarter ended March 31, 2021 from $1.23 million for the quarter ended March 31, 2020, primarily due to higher income before income taxes. The provision for income tax increased by $594,000, or 20.2%, to $3.53 million for the six months ended March 31, 2021 from $2.94 million for the six months ended March 31, 2020. The Company's effective income tax rate was 18.56% for the quarter ended March 31, 2021 and 19.53% for the quarter ended March 31, 2020. The Company's effective tax rate was 19.55% for the six months ended March 31, 2020 and 20.08% for the six months ended March 31, 2020. The effective income tax rates for both the three and six months ended March 31, 2021 were lower primarily due to tax benefits recognized from the disposition of stock options.


Liquidity

The Company’s primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed).  While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

Liquidity management is both a short and long-term responsibility of the Bank’s management.  The Bank adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits.  Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term investments.

The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.  At March 31, 2021, the Bank’s regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 34.52%.

The Company’s total cash and cash equivalents and CDs held for investment increased by $93.02 million, or 24.5%, to $473.02 million at March 31, 2021 from $380.00 million at September 30, 2020. If the Bank requires funds that exceed its ability to generate them internally, it has additional borrowing capacity with the FHLB, the Federal Reserve Bank of San Francisco ("FRB") and Pacific Coast Bankers' Bank ("PCBB"). At March 31, 2021, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. At March 31, 2021, the Bank had $10.00 million in FHLB borrowings outstanding and $378.24 million available for additional FHLB borrowings. Additionally, the Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral.  At March 31, 2021, the Bank had $63.76 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line. Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility ("PPPLF") to improve the effectiveness of the PPP. As of March 31, 2021, the Bank was approved to utilize the PPPLF, which allows banks to pledge PPP loans at face value as collateral to obtain FRB non-recourse loans. There were no borrowings outstanding under this program during the quarter ended March 31, 2021. The Bank also maintains a $50.00 million overnight borrowing line with PCBB. At March 31, 2021, the Bank did not have an outstanding balance on this borrowing line.

The Bank’s primary investing activity is the origination of one- to four-family mortgage loans, commercial mortgage loans, construction loans, consumer loans, and commercial business loans.  At March 31, 2021, the Bank had loan commitments totaling $107.65 million and undisbursed construction loans in process totaling $90.55 million.  The Bank anticipates that it will have sufficient funds available to meet current loan commitments.  CDs that are scheduled to mature in less than one year from March 31, 2021 totaled $91.32 million. 





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Capital Resources

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Based on its capital levels at March 31, 2021, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, 2021, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The following table compares the Bank’s actual capital amounts at March 31, 2021 to its minimum regulatory capital requirements at that date (dollars in thousands):
 Actual
Regulatory
Minimum To
Be “Adequately
Capitalized”
To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
 AmountRatioAmountRatioAmountRatio
Leverage Capital Ratio:      
Tier 1 capital$179,906 10.90 %$65,997 4.00 %$82,497 5.00 %
Risk-based Capital Ratios:
Common equity tier 1 capital179,906 19.12 42,340 4.50 61,158 6.50 
Tier 1 capital179,906 19.12 56,453 6.00 75,271 8.00 
Total capital191,692 20.37 75,271 8.00 94,089 10.00 

In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At March 31, 2021, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2021, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of March 31, 2021 (dollars in thousands):
Actual
 AmountRatio
Leverage Capital Ratio:  
Tier 1 capital$183,374 11.19 %
Risk-based Capital Ratios:
Common equity tier 1 capital183,374 19.47 
Tier 1 capital183,374 19.47 
Total capital195,171 20.72 

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Key Financial Ratios and Data
 Three Months Ended March 31,Six Months Ended
March 31,
2021202020212020
PERFORMANCE RATIOS:
   
Return on average assets1.75 %1.56 %1.80 %1.84 %
Return on average equity14.89 %11.39 %15.14 %13.37 %
Net interest margin3.21 %4.27 %3.34 %4.35 %
Efficiency ratio48.99 %50.04 %48.41 %49.73 %


Item 3.  Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information concerning market risk from the information provided in the Company’s Form 10-K for the fiscal year ended September 30, 2020.


Item 4.  Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2021 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
(b)Changes in Internal Controls:  There have been no changes in our internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.  The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; as over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II.   OTHER INFORMATION

Item 1.       Legal Proceedings
Neither the Company nor the Bank is a party to any material legal proceedings at this time.  From time to time,
the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 1A.    Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's Form 10-K for the fiscal year ended September 30, 2020.

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

(a)    Not applicable

(b)    Not applicable

(c)    Stock Repurchases

The following table sets forth the shares repurchased by the Company during the quarter ended March 31, 2021:
PeriodTotal No. of Shares RepurchasedAverage Price Paid Per ShareTotal No. of Shares Purchased as Part of Publicly Announced PlanMaximum No. of Shares that May Yet Be Purchased Under the Plan (1) (2)
1/1/2021 - 1/31/2021— $— — 141,952 
2/1/2021 - 2/28/2021— — — 415,970 
3/1/2021 - 3/31/2021— — — 415,970 
Total $  415,970 
(1) On July 28, 2015, the Company announced a plan to repurchase 352,681 shares of the Company's common stock. This plan was replaced on February 24, 2021, as discussed below. As of February 24, 2021, a total of 210,729 shares had been repurchased at an average price of $15.77 per share. All shares were repurchased through open market broker transactions, and no shares were directly repurchased from directors or officers of the Company.

(2) On February 24, 2021, the Company announced a plan to repurchase 415,970 shares of the Company's common stock. As of March 31, 2021, no shares had been repurchased, and there were 415,970 shares still authorized to be repurchased under the plan.


Item 3.      Defaults Upon Senior Securities
Not applicable.

Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
None to be reported.

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Item 6.         Exhibits

(a)   Exhibits
3.1
3.2
4.1Form of Certificate of Timberland Bancorp, Inc. Common Stock (1)
10.1
10.2
10.4
10.5
10.7
10.8
10.9
10.10Timberland Bancorp, Inc. 2019 Equity Incentive Plan (8)
31.1
31.2
32
101The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended March 31, 2021, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements
_________________

(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).
(2)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 20, 2021.
(3)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.
(4)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(5)Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).
(6)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.
(7)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
 Timberland Bancorp, Inc. 
  
  
Date: May 7, 2021
By:  /s/ Michael R. Sand                                   
 Michael R. Sand 
 Chief Executive Officer 
 (Principal Executive Officer) 
  
 
 
Date: May 7, 2021
By:  /s/ Dean J. Brydon                                    
 Dean J. Brydon 
 Chief Financial Officer
(Principal Financial Officer)
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