UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30,~~December 31, 2019

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____.

Commission file number 000-23333

TIMBERLAND BANCORP, INC.

(Exact name of registrant as specified in its charter)



Washington	91-1863696
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)



624 Simpson Avenue, Hoquiam, Washington	98550
(Address of principal executive offices)	(Zip Code)

(360) 533-4747

(Registrant’s telephone number, including area code)

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



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

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

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

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

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

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

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

Yes ___ No _X_

As of ~~August 1, 2019,~~January 31, 2020, there were ~~8,340,928~~8,365,794 shares of the registrant's common stock, $.01 par value per share outstanding.

INDEX



PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets	3

	Consolidated Statements of Income	5

	Consolidated Statements of Comprehensive Income	7

	Consolidated Statements of Shareholders’ Equity	8

	Consolidated Statements of Cash Flows	109

	Notes to Unaudited Consolidated Financial Statements	1211

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4138

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5449

Item 4.	Controls and Procedures	5449

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	5450

Item 1A.	Risk Factors	5450

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5551

Item 3.	Defaults Upon Senior Securities	5551

Item 4.	Mine Safety Disclosures	5551

Item 5.	Other Information	5551

Item 6.	Exhibits	5652

SIGNATURES
Certifications
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32
	Exhibit 101

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019

(Dollars in thousands, except per share amounts)


	June 30, 2019		September 30, 2018		December 31, 2019		September 30, 2019
	(Unaudited)		*		(Unaudited)		*
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	24,169	$	20,238	$	24,322	$	25,179
Interest-bearing deposits in banks	146,666		128,626		94,529		117,836
Total cash and cash equivalents	170,835		148,864		118,851		143,015

Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	81,184		63,290		76,249		78,346
Investment securities held to maturity, at amortized cost (estimated fair value $39,091 and $13,264)	37,645		12,810
Investment securities held to maturity, at amortized cost (estimated fair value $40,240 and $32,580)					39,080		31,102
Investment securities available for sale, at fair value	2,028		1,154		37,873		22,532
Investments in equity securities, at fair value	951		—		953		958
Federal Home Loan Bank of Des Moines (“FHLB”) stock	1,437		1,190		1,437		1,437
Other investments, at cost	3,000		3,000		3,000		3,000
Loans held for sale	3,338		1,785		5,420		6,071
Loans receivable, net of allowance for loan losses of $9,631 and $9,530	873,982		725,391
Loans receivable, net of allowance for loan losses of $9,882 and $9,690					913,150		886,662
Premises and equipment, net	23,090		18,953		22,588		22,830
Other real estate owned (“OREO”) and other repossessed assets, net	1,719		1,913		1,659		1,683
Accrued interest receivable	3,759		2,877		3,665		3,598
Bank owned life insurance (“BOLI”)	20,866		19,813		21,152		21,005
Goodwill	15,131		5,650		15,131		15,131
Core deposit intangible (“CDI”), net	2,144		—		1,930		2,031
Mortgage servicing rights (“MSRs”), net	2,372		2,028
Escrow deposit for business combination	—		6,900
BOLI death benefit receivable	1,019		—
Servicing rights, net					2,599		2,408
Operating lease right-of-use ("ROU") assets					2,823		—
Other assets	2,810		2,672		2,982		5,323
Total assets	$	1,247,310	$	1,018,290	$	1,270,542	$	1,247,132

Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing demand	$	287,552	$	233,258	$	297,676	$	296,472
Interest-bearing	784,983		656,248		786,801		771,755
Total deposits	1,072,535		889,506		1,084,477		1,068,227

Operating lease liabilities					2,823		—
Other liabilities and accrued expenses	8,506		4,127		7,589		7,838
Total liabilities	1,081,041		893,633		1,094,889		1,076,065

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (continued)

~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019

(Dollars in thousands, except per share amounts)


	June 30, 2019			September 30, 2018			December 31, 2019			September 30, 2019
	(Unaudited)			*			(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; 8,340,928 shares issued and outstanding - June 30, 2019 7,401,177 shares issued and outstanding - September 30, 2018	43,398			14,394
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	—			(133		)
Common stock, $0.01 par value; 50,000,000 shares authorized; 8,346,394 shares issued and outstanding - December 31, 2019 8,329,419 shares issued and outstanding - September 30, 2019							43,246			43,030
Retained earnings	122,904			110,525			132,553			127,987
Accumulated other comprehensive loss	(33		)	(129		)
Accumulated other comprehensive income (loss)							(146		)	50
Total shareholders’ equity	166,269			124,657			175,653			171,067
Total liabilities and shareholders’ equity	$	1,247,310		$	1,018,290		$	1,270,542		$	1,247,132

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,						Three Months Ended December 31,
	2019		2018		2019			2018			2019		2018
Interest and dividend income
Loans receivable and loans held for sale	$	12,459	$	9,530	$	36,457		$	28,342		$	12,764	$	11,782
Investment securities	339		51		915			147			439		278
Dividends from mutual funds, FHLB stock and other investments	43		31		121			83			37		39
Interest-bearing deposits in banks and CDs	1,344		845		3,849			2,209			951		1,216
Total interest and dividend income	14,185		10,457		41,342			30,781			14,191		13,315

Interest expense
Deposits	1,248		730		3,332			1,996			1,189		971
Total interest expense	1,248		730		3,332			1,996			1,189		971

Net interest income	12,937		9,727		38,010			28,785			13,002		12,344

Provision for loan losses	—		—		—			—			200		—

Net interest income after provision for loan losses	12,937		9,727		38,010			28,785			12,802		12,344

Non-interest income
Recoveries (other than temporary impairment "OTTI") on investment securities	14		19		46			60
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes	—		—		(12		)	(5		)
Recoveries on investment securities											103		11
Adjustment for portion of other than temporary impairment ("OTTI") transferred from other comprehensive income (loss) (before income taxes)											—		—
Net recoveries on investment securities	14		19		34			55			103		11
Gain on sale of investment securities held to maturity, net	47		—		47			—
Service charges on deposits	1,175		1,137		3,581			3,447			1,200		1,216
ATM and debit card interchange transaction fees	1,090		921		2,896			2,648			1,094		949
BOLI net earnings	188		134		1,502			407			147		157
Gain on sales of loans, net	520		435		1,194			1,427			953		386
Escrow fees	54		47		150			158			83		56
Servicing income on loans sold	110		121		375			354			51		148
Fee income from non-deposit investment sales	6		28		43			74			6		31
Other, net	334		303		922			794			301		312
Total non-interest income, net	3,538		3,145		10,744			9,364			3,938		3,266

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,					Nine Months Ended June 30,					Three Months Ended December 31,
	2019		2018			2019		2018			2019			2018
Non-interest expense
Salaries and employee benefits	$	4,501	$	3,912		$	13,974	$	11,862		$	4,722		$	4,606
Premises and equipment	998		795			2,946		2,361			894			954
Loss (gain) on sales/dispositions of premises and equipment, net	—		—			8		(113		)	(99		)	—
Advertising	177		205			543		591			183			191
OREO and other repossessed assets, net	145		(92		)	247		114			(1		)	50
ATM and debit card interchange transaction fees	364		334			1,174		982			440			422
Postage and courier	131		104			379		340			135			110
State and local taxes	237		169			642		498			216			196
Professional fees	267		368			687		829			269			265
Federal Deposit Insurance Corporation ("FDIC") insurance	72		101			243		242			(27		)	74
Loan administration and foreclosure	73		76			244		247			89			87
Data processing and telecommunications	987		465			2,667		1,427			584			673
Deposit operations	391		285			1,049		815			317			294
Amortization of CDI	120		—			339		—			101			109
Other	504		400			1,665		1,324			550			531
Total non-interest expense	8,967		7,122			26,807		21,519
Total non-interest expense, net											8,373			8,562

Income before income taxes	7,508		5,750			21,947		16,630			8,367			7,048

Provision for income taxes	1,552		1,334			4,262		4,331			1,715			1,433

Net income	$	5,956	$	4,416		$	17,685	$	12,299		$	6,652		$	5,615

Net income per common share
Basic	$	0.71	$	0.60		$	2.13	$	1.68		$	0.80		$	0.68
Diluted	$	0.70	$	0.59		$	2.09	$	1.64		$	0.78		$	0.66

Weighted average common shares outstanding
Basic	8,338,637		7,345,618			8,313,913		7,328,702			8,341,470			8,293,212
Diluted	8,482,360		7,535,157			8,468,212		7,518,447			8,475,029			8,457,703

Dividends paid per common share	$	0.25	$	0.23		$	0.63	$	0.47		$	0.25		$	0.23

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018			2019			2018
Comprehensive income
Net income	$	5,956		$	4,416		$	17,685		$	12,299		$	6,652		$	5,615
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $3, ($1), $2 and ($5), respectively	9			(7		)	7			(32		)
Unrealized holding loss on investment securities available for sale, net of income taxes of ($55) and ($22), respectively													(206		)	(86		)
Change in OTTI on investment securities held to maturity, net of income taxes:
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of ($1), $0, ($1) and ($2), respectively	(4		)	—			(4		)	(6		)
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $0, $0, $3 and $1, respectively	—			—			9			4
Accretion of OTTI on investment securities held to maturity, net of income taxes of $2, $2, $6 and $8, respectively	7			5			21			24
Total other comprehensive income (loss), net of income taxes	12			(2		)	33			(10		)
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of $0 and ($1), respectively													—			(3		)
Accretion of OTTI on investment securities held to maturity, net of income taxes of $3 and $3, respectively													10			10
Total other comprehensive loss, net of income taxes													(196		)	(79		)

Total comprehensive income	$	5,968		$	4,414		$	17,718		$	12,289		$	6,456		$	5,536

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)


	Common Stock					Unearned Shares Issued to ESOP							Accumulated Other Compre- hensive Loss							Common Stock				Unearned Shares Issued to ESOP							Accumulated Other Compre- hensive Income (Loss)
	Number of Shares		Amount						Retained Earnings							Total			Number of Shares		Amount						Retained Earnings							Total
Balance, March 31, 2018	7,390,227		$	13,891			$	(265	)		$	104,349		$	(132	)		$	117,843
Balance, September 30, 2018																				7,401,177		$	14,394	$	(133	)		$	110,525		$	(129	)		$	124,657

Net income																				—		—		—				5,615			—				5,615
Other comprehensive loss																				—		—		—				—			(79		)		(79		)
Common stock issued for business combination																				904,826		28,267		—				—			—				28,267
Exercise of stock options																				7,400		71		—				—			—				71
Common stock dividends ($0.23 per common share)																				—		—		—				(1,911		)	—				(1,911		)
Earned ESOP shares, net of income taxes																				—		166		66				—			—				232
Stock option compensation expense																				—		53		—				—			—				53
Adoption of Accounting Standards Update ("ASU") 2016-01																				—		—		—				(63		)	63				—
Balance, December 31, 2018																				8,313,403		42,951		(67		)		114,166			(145		)		156,905

Balance, September 30, 2019																				8,329,419		43,030		—				127,987			50				171,067
																	—
Net income	—		—			—				4,416			—				4,416			—		—		—				6,652			—				6,652
Other comprehensive loss	—		—			—				—			(2		)		(2		)	—		—		—				—			(196		)		(196		)
Exercise of stock options	5,700		58			—				—			—				58			16,975		170		—				—			—				170
Common stock dividends ($0.23 per common share)	—		—			—				(1,700		)	—				(1,700		)
Earned ESOP shares, net of income taxes	—		170			66				—			—				236
Common stock dividends ($0.25 per common share)																				—		—		—				(2,086		)	—				(2,086		)
Stock option compensation expense	—		43			—				—			—				43			—		46		—				—			—				46

Balance, June 30, 2018	7,395,927		14,162			(199		)		107,065			(134		)		120,894

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

Net income	—		—			—				5,956			—				5,956
Other comprehensive income	—		—			—				—			12				12
Repurchase of common stock	(2,831	)	(70		)	—				—			—				(70		)
Exercise of stock options	7,340		57			—				—			—				57
Common stock dividends ($0.25 per common share)	—		—			—				(2,084		)	—				(2,084		)
Earned ESOP shares, net of income taxes	—		7			—				—			—				7
Stock option compensation expense	—		53			—				—			—				53

Balance, June 30, 2019	8,340,928		$	43,398		$	—			$	122,904		$	(33	)		$	166,269
Balance, December 31, 2019																				8,346,394		$	43,246	$	—			$	132,553		$	(146	)		$	175,653

See notes to unaudited consolidated financial statements

~~TIMBERLAND BANCORP, INC. AND SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY~~

~~For the nine months ended June 30, 2019 and 2018~~

~~(Dollars in thousands, except per share amounts)~~

~~(Unaudited)~~

Common Stock
Unearned
Shares Issued to ESOP

Accumulated
Other
Compre-hensive
Loss

Number of Shares Amount
Retained
Earnings
Total
Balance, September 30, 2017 7,361,077
$ 13,286
$ (397 ) $ 98,235
$ (124 ) $ 111,000
Net income —
—
—
12,299
—
12,299
Other comprehensive loss —
—
—
—
(10 ) (10 )
Exercise of stock options 34,850
292
—
—
—
292
Common stock dividends ($0.47 per common share) —
—
—
(3,469 ) —
(3,469 )
Earned ESOP shares, net of income taxes —
454
198
—
—
652
Stock option compensation expense —
130
—
—
—
130
Balance, June 30, 2018 7,395,927
14,162
(199 ) 107,065
(134 ) 120,894

Balance, September 30, 2018 7,401,177
14,394
(133 ) 110,525
(129 ) 124,657
Net income —
—
—
17,685
—
17,685
Other comprehensive income —
—
—
—
33
33
Repurchase of common stock (2,831 ) (70 ) —
—
—
(70 )
Common stock issued for business combination 904,826
28,267
—
—
—
28,267
Exercise of stock options 37,756
340
—
—
—
340
Common stock dividends ($0.63 per common share) —
—
—
(5,243 ) —
(5,243 )
Earned ESOP shares, net of income taxes —
308
133
—
—
441
Stock option compensation expense —
159
—
—
—
159
Adoption of Accounting Standards Update ("ASU") 2016-01 —
—
—
(63 ) 63
—
Balance, June 30, 2019 8,340,928
$ 43,398
$ —
$ 122,904
$ (33 ) $ 166,269

~~See notes to unaudited consolidated financial statements~~

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)


	Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018
Cash flows from operating activities
Net income	$	17,685		$	12,299		$	6,652		$	5,615
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses							200			—
Depreciation	1,232			940			376			390
Accretion of discount on purchased loans	(457		)	—			(145		)	(87		)
Amortization of CDI	339			—			101			109
Earned ESOP shares	441			652			—			232
Stock option compensation expense	159			130			46			53
Net recoveries on investment securities	(34		)	(55		)	(103		)	(11		)
Change in fair value of investments in equity securities	(34		)	—			5			(8		)
Gain on sale of investment securities held to maturity	(47		)	—
Gain on sales of OREO and other repossessed assets, net	(31		)	(217		)	(39		)	—
Provision for OREO losses	23			224			—			3
Gain on sales of loans, net	(1,194		)	(1,427		)	(953		)	(386		)
Loss (gain) on sales/disposition of premises and equipment, net	8			(113		)	(99		)	—
Loans originated for sale	(48,542		)	(46,256		)	(32,959		)	(16,932		)
Proceeds from sales of loans	48,183			48,961			34,563			16,115
Amortization of MSRs	476			363
Amortization of servicing rights							185			153
Valuation adjustment on servicing rights							24			—
BOLI net earnings	(474		)	(407		)	(147		)	(157		)
BOLI death benefit in excess of cash surrender value	(1,028		)	—
Increase in deferred loan origination fees	201			3			36			238
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	659			1,445			1,632			1,447
Net cash provided by operating activities	17,565			16,542			9,375			6,774

Cash flows from investing activities
Net increase in CDs held for investment	(14,921		)	(20,098		)
Net decrease in CDs held for investment							2,097			433
Proceeds from sale of investment securities available for sale	2,332			—			—			2,332
Proceeds from sale of investment securities held to maturity	2,937			—
Purchase of investment securities held to maturity							(9,755		)	—
Purchase of investment securities available for sale							(16,502		)	—
Proceeds from maturities and prepayments of investment securities held to maturity	5,266			413			1,946			580
Purchase of investment securities held to maturity	(13,229		)	(1,111		)
Proceeds from maturities and prepayments of investment securities available for sale	906			28			892			644
Purchase of FHLB stock	(42		)	(83		)
Increase in loans receivable, net	(26,882		)	(27,287		)	(26,579		)	(10,377		)
Additions to premises and equipment	(2,040		)	(1,387		)	(339		)	(984		)
Proceeds from sales of premises and equipment	—			463			304			—
Cash acquired, net of cash consideration paid in business combination	14,284			—			—			14,284
Escrow deposit for business combination	6,900			—			—			6,900
Proceeds from death benefit on BOLI	2,059			—
Proceeds from sales of OREO and other repossessed assets	318			1,506			63			—
Net cash used in investing activities	(22,112		)	(47,556		)
Net cash (used in) provided by investing activities							(47,873		)	13,812

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018

(Dollars in thousands)

(Unaudited)


	Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018
Cash flows from financing activities
Net increase in deposits	$	31,491		$	42,829
Net increase (decrease) in deposits							$	16,250		$	(5,867	)
Proceeds from exercise of stock options	340			292			170			71
Repurchase of common stock	(70		)	—
Payment of dividends	(5,243		)	(3,469		)	(2,086		)	(1,911		)
Net cash provided by financing activities	26,518			39,652
Net cash provided by (used in) financing activities							14,334			(7,707		)

Net increase in cash and cash equivalents	21,971			8,638
Net (decrease) increase in cash and cash equivalents							(24,164		)	12,879
Cash and cash equivalents
Beginning of period	148,864			148,188			143,015			148,864
End of period	$	170,835		$	156,826		$	118,851		$	161,743

Supplemental disclosure of cash flow information
Income taxes paid	$	3,845		$	2,208
Interest paid	3,247			1,939			1,171			901

Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	91		$	324		$	—		$	91
Other comprehensive income (loss) related to investment securities	33			(10		)
Other comprehensive loss related to investment securities							(196		)	(79		)
Operating lease liabilities arising from recording of ROU assets							2,889			—

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

See notes to unaudited consolidated financial statements

Timberland Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation: The accompanying unaudited consolidated financial statements for Timberland Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Timberland Bank (the "Bank") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, ~~2018~~2019 (“~~2018~~2019 Form 10-K”). The unaudited consolidated results of operations for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, ~~2019.~~2020.

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

(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 ~~June 30,~~December 31, 2019 presentation with no change to previously reported net income or total shareholders’ equity.

(2) BUSINESS COMBINATION

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

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

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

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

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


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

Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—		21,187		$	21,187	$	—		21,187
CDs held for investment	2,973		—			2,973		2,973		—			2,973
FHLB stock	205		—			205		205		—			205
Investment securities held to maturity	19,891		(189		)	19,702		19,891		(189		)	19,702
Investment securities available for sale	5,022		—			5,022		5,022		—			5,022
Loans receivable	123,627		(2,083		)	121,544		123,627		(2,083		)	121,544
Premises and equipment	3,225		112			3,337		3,225		112			3,337
OREO	25		—			25		25		—			25
Accrued interest receivable	554		—			554		554		—			554
BOLI	2,629		—			2,629		2,629		—			2,629
CDI	—		2,483			2,483		—		2,483			2,483
MSRs	285		(4		)	281
Servicing rights								285		(4		)	281
Other assets	1,087		(511		)	576		1,087		(511		)	576
Total assets	180,710		(192		)	180,518		180,710		(192		)	180,518

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

The acquired loan portfolio was valued using Level 3 inputs (see Note 9)10) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values. Credit discounts were included in the determination of the fair value of the loans acquired; therefore, an allowance for loan losses was not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The Company determined that PCI loans acquired in the South Sound ~~Merger~~Acquisition were insignificant.

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

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

The operating results of the Company for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 include the operating results produced by the net assets acquired in the South Sound ~~Merger~~Acquisition since the October 1, 2018 ~~merger~~acquisition date. The ~~table below presents~~Company

determined that the ~~significant operating results~~disclosure requirements related to the amounts of revenues and earnings from the net assets acquired ~~business~~in the South Sound Acquisition since the October 1, 2018 ~~merger date:~~

Three Months Ended June 30, 2019 Nine Months Ended June 30, 2019
(Dollars in thousands)
Interest income: Interest and fees on loans (1) $ 1,739
$ 5,345
Interest income: Interest and dividends on investment securities and FHLB stock 129
515
Interest income: Other interest earning assets 205
474
Interest expense (200 ) (484 )
Provision for loan losses —
—
Non-interest income 138
408
Non-interest expense (2) (1,002 ) (2,546 )
Net effect, pre-tax $ 1,009
$ 3,712

~~_________________________~~

~~(1) Includes the accretion~~acquisition date is impracticable. The financial activity and operating results of the ~~fair value discount on~~net assets acquired in the ~~purchased loans of $69,000 and $457,000, respectively, for the three and nine months ended June 30, 2019.~~

(2) Excludes certain compensation and employee benefits for management, and excludes certain other non-interest expenses that are impracticable to determine due to the integration of the operations for this merger. Also includes certain acquisition-related costs of $328,000 and $447,000, respectively, incurred by the Company for the three and nine months ended June 30, 2019.

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

Unaudited Pro Forma Nine Months Ended June 30,
2019 2018
(Dollars in thousands except per share data)
Total revenues (net interest income plus non-interest income) $ 48,754
$ 43,958
Net income 18,038
13,824
Basic net income per common share 2.17
1.68
Diluted net income per common share 2.13
1.64
date.

During the ~~nine~~three months ended ~~June 30,~~December 31, 2019, the Company incurred acquisition-related expenses of $67,000 related to the South Sound Acquisition, which are included in the data processing and telecommunications expense category in the accompanying consolidated statement of income. During the three months ended December 31, 2018, the Company incurred acquisition-related expenses of ~~$447,000 and $317,000, respectively,~~$64,000 related to the South Sound ~~Merger,~~Acquisition, which are included in the professional fees expense category in the accompanying consolidated statement of income. South Sound Bank incurred acquisition-related expenses of $143,000 for the nine months ended June 30, 2018 related to the South Sound Merger. These acquisition-related expenses incurred by the Company and South Sound Bank are not included in the unaudited pro forma information presented for the nine months ended June 30, 2019 and 2018.

The Company expects to incur additional acquisition-related expenses of approximately $450,000 in the quarter ending September 30, 2019. These expenses are related to the conversion of South Sound Bank's current core processing and ancillary information technology systems to the Company's new core processing system.

(3) INVESTMENT SECURITIES

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2019
December 31, 2019
Held to maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	29,305	$	966	$	(2	)	$	30,269	$	35,805	$	848	$	(33	)	$	36,620
Private label residential	345		499		(2		)	842		276		348		(1		)	623
U.S. Treasury and U.S government agency securities	7,995		—		(15		)	7,980		2,999		—		(2		)	2,997
Total	$	37,645	$	1,465	$	(19	)	$	39,091	$	39,080	$	1,196	$	(36	)	$	40,240

Available for sale
MBS: U.S. government agencies	$	2,013	$	22	$	(7	)	$	2,028	$	38,020	$	16	$	(163	)	$	37,873
Total	$	2,013	$	22	$	(7	)	$	2,028	$	38,020	$	16	$	(163	)	$	37,873

September 30, 2018
September 30, 2019
Held to maturity
MBS:
U.S. government agencies	$	1,385	$	8	$	(21	)	$	1,372	$	27,786	$	999	$	(2	)	$	28,783
Private label residential	460		552		(2		)	1,010		317		490		(1		)	806
U.S. Treasury and U.S. government agency securities	10,965		—		(83		)	10,882		2,999		—		(8		)	2,991
Total	$	12,810	$	560	$	(106	)	$	13,264	$	31,102	$	1,489	$	(11	)	$	32,580

Available for sale
MBS: U.S. government agencies	$	231	$	7	$	(1	)	$	237	$	22,418	$	114	$	—		$	22,532
Mutual funds	1,000		—		(83		)	917
Total	$	1,231	$	7	$	(84	)	$	1,154	$	22,418	$	114	$	—		$	22,532

Held to maturity and available for sale investment securities with unrealized losses were as follows as of ~~June 30,~~December 31, 2019 (dollars in thousands):


	Less Than 12 Months						12 Months or Longer						Total					Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity
MBS:
U.S. government agencies	$	64	$	(1	)	2	$	53	$	(1	)	5	$	117	$	(2	)	$	9,542	$	(31	)	6	$	69	$	(2	)	6	$	9,611	$	(33	)
Private label residential	2		—			1	38		(2		)	7	40		(2		)	8		—			1	23		(1		)	3	31		(1		)
U.S. Treasury and U.S. government agency securities	4,996		(1		)	1	2,984		(14		)	1	7,980		(15		)	—		—			—	2,997		(2		)	1	2,997		(2		)
Total	$	5,062	$	(2	)	4	$	3,075	$	(17	)	13	$	8,137	$	(19	)	$	9,550	$	(31	)	7	$	3,089	$	(5	)	10	$	12,639	$	(36	)

Available for sale
MBS: U.S. government agencies	$	1,074	$	(7	)	1	$	—	$	—		—	$	1,074	$	(7	)	$	36,494	$	(163	)	7	$	—	$	—		—	$	36,494	$	(163	)
Total	$	1,074	$	(7	)	1	$	—	$	—		—	$	1,074	$	(7	)	$	36,494	$	(163	)	7	$	—	$	—		—	$	36,494	$	(163	)

Held to maturity ~~and available for sale~~ investment securities with unrealized losses were as follows as of September 30, ~~2018~~2019 (dollars in thousands):


	Less Than 12 Months						12 Months or Longer						Total					Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses			Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity
MBS:
U.S. government agencies	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)	$	291	$	(1	)	2	$	76	$	(1	)	6	$	367	$	(2	)
Private label residential	—		—			—	50		(2		)	8	50		(2		)	—		—			—	23		(1		)	5	23		(1		)
U.S. Treasury and U.S. government agency securities	7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)	—		—			—	2,991		(8		)	1	2,991		(8		)
Total	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)	$	291	$	(1	)	2	$	3,090	$	(10	)	12	$	3,381	$	(11	)

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

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the fair value recovers. Furthermore, as of ~~June 30,~~December 31, 2019, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more likely than

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

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic

reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of ~~June 30,~~December 31, 2019 and 2018:


	Range				Weighted		Range				Weighted
	Minimum		Maximum		Average		Minimum		Maximum		Average
June 30, 2019
December 31, 2019
Constant prepayment rate	6.00	%	15.00	%	11.52	%	6.00	%	15.00	%	9.41	%
Collateral default rate	—	%	11.28	%	5.28	%	2.68	%	19.93	%	10.59	%
Loss severity rate	—	%	78.00	%	37.73	%	0.11	%	14.24	%	4.21	%

June 30, 2018
December 31, 2018
Constant prepayment rate	6.00	%	15.00	%	11.58	%	6.00	%	15.00	%	13.56	%
Collateral default rate	—	%	12.31	%	5.51	%	—	%	11.94	%	5.72	%
Loss severity rate	—	%	74.00	%	42.49	%	—	%	77.00	%	46.97	%

The following table presents the OTTI recoveries (losses) for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 (dollars in thousands):


	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018				Three Months Ended December 31, 2019				Three Months Ended December 31, 2018
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale		Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total recoveries	$	14	$	—	$	19	$	—	$	103	$	—	$	11	$	—
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	—		—		—		—		—		—		—		—
Net recoveries recognized in earnings (2)	$	14	$	—	$	19	$	—	$	103	$	—	$	11	$	—

Nine Months Ended
June 30, 2019 Nine Months Ended
June 30, 2018

Held To
Maturity

Available
For Sale

Held To
Maturity

Available
For Sale
Total recoveries $ 46
$ —
$ 60
$ —
Adjustment for portion of OTTI transferred from
other comprehensive income (loss) before income taxes (1)
(12 ) —
(5 ) —
Net recoveries recognized in earnings (2) $ 34
$ —
$ 55
$ —

_________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 (dollars in thousands):


	Nine Months Ended June 30,						Three Months Ended December 31,
	2019			2018			2019			2018
Beginning balance of credit loss	$	1,153		$	1,301		$	1,071		$	1,153
Additions:
Additional increases to the amount related to credit loss for which OTTI was previously recognized	13			14			—			1
Subtractions:
Realized losses previously recorded as credit losses	(16		)	(69		)	(53		)	(20		)
Recovery of prior credit loss	(47		)	(55		)	(103		)	(12		)
Ending balance of credit loss	$	1,103		$	1,191		$	915		$	1,122

During the ~~nine~~three months ended ~~June 30,~~December 31, 2019, the Company recorded a ~~$16,000~~$53,000 net realized loss (as a result of investment securities being deemed worthless) on 1718 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the ~~nine~~three months ended ~~June 30,~~December 31, 2018, the Company recorded a ~~$69,000~~$20,000 net realized loss (as a result of investment securities being deemed worthless) on 1715 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 ~~$11.59~~$44.47 million and ~~$12.10~~$18.59 million at ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively.

The contractual maturities of debt securities at ~~June 30,~~December 31, 2019 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.


	Held to Maturity				Available for Sale				Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	8,034	$	8,019	$	—	$	—	$	3,013	$	3,011	$	—	$	—
Due after one year to five years	1,028		1,032		156		156		189		193		133		133
Due after five years to ten years	5,945		6,245		188		189		5,852		6,153		1,432		1,427
Due after ten years	22,638		23,795		1,669		1,683		30,026		30,883		36,455		36,313
Total	$	37,645	$	39,091	$	2,013	$	2,028	$	39,080	$	40,240	$	38,020	$	37,873

(4) GOODWILL AND CDI

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

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

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

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

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2019.

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 ~~June 30,~~December 31, 2019, management believes that there have been no events or changes in the circumstances since May 31, 2019 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.

The ~~following table presents the change in the carrying~~recorded amount of goodwill ~~for the period indicated (dollars in thousands).~~

Nine Months Ended June 30,
2019
Balance at the beginning of the period $ 5,650
Addition as a result of the South Sound Merger (see Note 2) 9,481
Balance at the end of the period $ 15,131
at December 31, 2019 and September 30, 2019 remained unchanged at $15.13 million.

~~The following table presents~~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 ~~change~~revised remaining life. As of December 31, 2019, management believes that there have been no events or changes in ~~CDI for~~ the ~~period indicated (dollars in thousands).~~

Nine Months Ended June 30,
2019
Balance at the beginning of the period $ —
Addition as a result of the South Sound Merger (see Note 2) 2,483
Amortization (339 )
Balance at the end of the period $ 2,144
circumstances that would indicate a potential impairment of CDI.

(5) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable at ~~June 30,~~December 31, 2019 are reported net of unamortized discounts totaling ~~$1.57~~$1.24 million.

Loans receivable by portfolio segment consisted of the following at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	June 30, 2019				September 30, 2018				December 31, 2019				September 30, 2019
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Mortgage loans:
One- to four-family (1)	$	129,050	13.2	%	$	115,941	14.1	%	$	129,373	12.8	%	$	132,661	13.4	%
Multi-family	70,374		7.2		61,928		7.5		78,326		7.8		76,036		7.7
Commercial	418,778		42.7		345,113		42.0		439,024		43.6		419,117		42.3
Construction - custom and owner/builder	130,516		13.3		119,555		14.6		124,530		12.4		128,848		13.0
Construction - speculative one- to four-family	18,165		1.9		15,433		1.9		18,764		1.9		16,445		1.7
Construction - commercial	41,805		4.3		39,590		4.8		36,670		3.6		39,566		4.0
Construction - multi-family	29,400		2.9		10,740		1.3		33,290		3.2		36,263		3.6
Construction - land development	3,047		0.3		3,040		0.4		1,656		0.2		2,404		0.2
Land	26,653		2.7		25,546		3.1		29,419		2.9		30,770		3.1
Total mortgage loans	867,788		88.5		736,886		89.8		891,052		88.4		882,110		89.0

Consumer loans:
Home equity and second mortgage	42,204		4.3		37,341		4.5		39,103		3.9		40,190		4.1
Other	4,450		0.5		3,515		0.5		4,093		0.4		4,312		0.4
Total consumer loans	46,654		4.8		40,856		5.0		43,196		4.3		44,502		4.5

Commercial business loans	65,185		6.7		43,053		5.2		73,790		7.3		64,764		6.5

Total loans receivable	979,627		100.0	%	820,795		100.0	%	1,008,038		100.0	%	991,376		100.0	%
Less:
Undisbursed portion of construction loans in process	93,176				83,237				82,172				92,226
Deferred loan origination fees, net	2,838				2,637				2,834				2,798
Allowance for loan losses	9,631				9,530				9,882				9,690
	105,645				95,404				94,888				104,714
Loans receivable, net	$	873,982			$	725,391			$	913,150			$	886,662
_____________________________
(1) Does not include one- to four-family loans held for sale totaling $3,338 and $1,785 at June 30, 2019 and September 30, 2018, respectively.
(1) Does not include one- to four-family loans held for sale totaling $5,420 and $6,071 at December 31, 2019 and September 30, 2019, respectively.									(1) Does not include one- to four-family loans held for sale totaling $5,420 and $6,071 at December 31, 2019 and September 30, 2019, respectively.

Allowance for Loan Losses

The following tables set forth information for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


	Three Months Ended June 30, 2019												Three Months Ended December 31, 2019
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance		Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,154	$	(36	)	$	—		$	—	$	1,118	$	1,167	$	(104	)	$	—		$	2	$	1,065
Multi-family	470		(32		)	—			—		438		481		18			—			—		499
Commercial	4,122		(70		)	—			—		4,052		4,154		252			—			4		4,410
Construction – custom and owner/builder	666		36			—			—		702		755		(6		)	—			5		754
Construction – speculative one- to four-family	249		(28		)	—			—		221		212		36			—			—		248
Construction – commercial	384		—			—			—		384		338		65			—			—		403
Construction – multi-family	272		95			—			—		367		375		(42		)	—			—		333
Construction – land development	244		(118		)	—			—		126		67		(19		)	—			—		48
Land	649		48			(46		)	5		656		697		(48		)	—			5		654
Consumer loans:
Home equity and second mortgage	667		(21		)	(1		)	—		645		623		(14		)	—			—		609
Other	112		(25		)	(1		)	1		87		99		(3		)	(10		)	1		87
Commercial business loans	752		151			(93		)	25		835		722		65			(15		)	—		772
Total	$	9,741	$	—		$	(141	)	$	31	$	9,631	$	9,690	$	200		$	(25	)	$	17	$	9,882

Nine Months Ended June 30, 2019

Beginning
Allowance

Provision for
(Recapture of) Loan Losses

Charge-
offs
Recoveries
Ending
Allowance
Mortgage loans:
One-to four-family $ 1,086
$ (35 ) $ —
$ 67
$ 1,118
Multi-family 433
5
—
—
438
Commercial 4,248
(346 ) —
150
4,052
Construction – custom and owner/builder 671
31
—
—
702
Construction – speculative one- to four-family 178
43
—
—
221
Construction – commercial 563
(179 ) —
—
384
Construction – multi-family 135
232
—
—
367
Construction – land development 49
77
—
—
126
Land 844
(155 ) (46 ) 13
656
Consumer loans:

Home equity and second mortgage 649
1
(5 ) —
645
Other 117
(29 ) (4 ) 3
87
Commercial business loans 557
355
(102 ) 25
835
Total $ 9,530
$ —
$ (157 ) $ 258
$ 9,631


	Three Months Ended June 30, 2018												Three Months Ended December 31, 2018
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance		Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,060	$	(33	)	$	—		$	—	$	1,027	$	1,086	$	73		$	—		$	—	$	1,159
Multi-family	386		21			—			—		407		433		16			—			—		449
Commercial	4,198		(15		)	—			—		4,183		4,248		(9		)	—			—		4,239
Construction – custom and owner/builder	705		(38		)	—			—		667		671		(28		)	—			—		643
Construction – speculative one- to four-family	99		34			—			—		133		178		28			—			—		206
Construction – commercial	445		74			—			—		519		563		(177		)	—			—		386
Construction – multi-family	284		(137		)	—			—		147		135		74			—			—		209
Construction – land development	48		32			—			—		80		49		94			—			—		143
Land	691		64			(16		)	5		744		844		(91		)	—			4		757
Consumer loans:
Home equity and second mortgage	945		1			—			—		946		649		17			—			—		666
Other	120		2			(1		)	—		121		117		(15		)	(2		)	1		101
Commercial business loans	563		(5		)	—			—		558		557		18			—			—		575
Total	$	9,544	$	—		$	(17	)	$	5	$	9,532	$	9,530	$	—		$	(2	)	$	5	$	9,533

Nine Months Ended June 30, 2018

Beginning
Allowance

Provision for
(Recapture of) Loan Losses

Charge-
offs
Recoveries
Ending
Allowance
Mortgage loans:
  One-to four-family $ 1,082
$ (55 ) $ —
$ —
$ 1,027
  Multi-family 447
(40 ) —
—
407
  Commercial 4,184
27
(28 ) —
4,183
  Construction – custom and owner/builder 699
(32 ) —
—
667
  Construction – speculative one- to four-family 128
(6 ) —
11
133
  Construction – commercial 303
216
—
—
519
Construction – multi-family 173
(26 ) —
—
147
  Construction – land development —
80
—
—
80
  Land 918
(172 ) (16 ) 14
744
Consumer loans:
  Home equity and second mortgage 983
(37 ) —
—
946
  Other 121
2
(3 ) 1
121
Commercial business loans 515
43
—
—
558
Total $ 9,553
$ —
$ (47 ) $ 26
$ 9,532

The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	Allowance for Loan Losses						Recorded Investment in Loans						Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
June 30, 2019
December 31, 2019
Mortgage loans:
One- to four-family	$	—	$	1,118	$	1,118	$	1,220	$	127,830	$	129,050	$	—	$	1,065	$	1,065	$	1,431	$	127,942	$	129,373
Multi-family	—		438		438		—		70,374		70,374		—		499		499		—		78,326		78,326
Commercial	—		4,052		4,052		3,255		415,523		418,778		—		4,410		4,410		3,141		435,883		439,024
Construction – custom and owner/builder	—		702		702		—		70,237		70,237		—		754		754		—		75,026		75,026
Construction – speculative one- to four-family	—		221		221		—		10,545		10,545		—		248		248		—		12,473		12,473
Construction – commercial	—		384		384		—		27,567		27,567		—		403		403		—		27,151		27,151
Construction – multi-family	—		367		367		—		18,418		18,418		—		333		333		—		17,024		17,024
Construction – land development	—		126		126		—		2,990		2,990		—		48		48		—		1,064		1,064
Land	37		619		656		422		26,231		26,653		28		626		654		198		29,221		29,419
Consumer loans:
Home equity and second mortgage	—		645		645		606		41,598		42,204		—		609		609		581		38,522		39,103
Other	8		79		87		14		4,436		4,450		6		81		87		12		4,081		4,093
Commercial business loans	214		621		835		749		64,436		65,185		71		701		772		601		73,189		73,790
Total	$	259	$	9,372	$	9,631	$	6,266	$	880,185	$	886,451	$	105	$	9,777	$	9,882	$	5,964	$	919,902	$	925,866


September 30, 2018
September 30, 2019
Mortgage loans:
One- to four-family	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941	$	—	$	1,167	$	1,167	$	1,192	$	131,469	$	132,661
Multi-family	—		433		433		—		61,928		61,928		—		481		481		—		76,036		76,036
Commercial	—		4,248		4,248		2,446		342,667		345,113		—		4,154		4,154		3,190		415,927		419,117
Construction – custom and owner/builder	—		671		671		—		67,024		67,024		—		755		755		—		75,411		75,411
Construction – speculative one- to four-family	—		178		178		—		7,107		7,107		—		212		212		—		10,779		10,779
Construction – commercial	—		563		563		—		23,440		23,440		—		338		338		—		24,051		24,051
Construction – multi-family	—		135		135		—		5,983		5,983		—		375		375		—		19,256		19,256
Construction – land development	—		49		49		—		1,567		1,567		—		67		67		—		1,803		1,803
Land	34		810		844		243		25,303		25,546		27		670		697		204		30,566		30,770
Consumer loans:
Home equity and second mortgage	—		649		649		359		36,982		37,341		—		623		623		603		39,587		40,190
Other	—		117		117		—		3,515		3,515		17		82		99		23		4,289		4,312
Commercial business loans	63		494		557		170		42,883		43,053		128		594		722		725		64,039		64,764
Total	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558	$	172	$	9,518	$	9,690	$	5,937	$	893,213	$	899,150

The following tables present an analysis of loans by aging category and portfolio segment at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (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		Current		Total Loans		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		Current		Total Loans
June 30, 2019
December 31, 2019
Mortgage loans:
One- to four-family	$	161	$	—	$	723	$	—	$	884	$	128,166	$	129,050	$	—	$	277	$	942	$	—	$	1,219	$	128,154	$	129,373
Multi-family	—		—		—		—		—		70,374		70,374		—		—		—		—		—		78,326		78,326
Commercial	—		—		836		—		836		417,942		418,778		—		217		736		—		953		438,071		439,024
Construction – custom and owner/builder	—		—		—		—		—		70,237		70,237		—		—		—		—		—		75,026		75,026
Construction – speculative one- to four- family	—		—		—		—		—		10,545		10,545		—		—		—		—		—		12,473		12,473
Construction – commercial	—		—		—		—		—		27,567		27,567		—		—		—		—		—		27,151		27,151
Construction – multi-family	—		—		—		—		—		18,418		18,418		—		—		—		—		—		17,024		17,024
Construction – land development	—		—		—		—		—		2,990		2,990		—		—		—		—		—		1,064		1,064
Land	—		—		422		—		422		26,231		26,653		65		215		198		—		478		28,941		29,419
Consumer loans:
Home equity and second mortgage	—		—		606		—		606		41,598		42,204		28		—		581		—		609		38,494		39,103
Other	10		—		14		—		24		4,426		4,450		—		—		12		—		12		4,081		4,093
Commercial business loans	—		—		749		—		749		64,436		65,185		—		—		601		—		601		73,189		73,790
Total	$	171	$	—	$	3,350	$	—	$	3,521	$	882,930	$	886,451	$	93	$	709	$	3,070	$	—	$	3,872	$	921,994	$	925,866


September 30, 2018
September 30, 2019
Mortgage loans:
One- to four-family	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941	$	—	$	286	$	699	$	—	$	985	$	131,676	$	132,661
Multi-family	—		—		—		—		—		61,928		61,928		—		—		—		—		—		76,036		76,036
Commercial	574		—		—		—		574		344,539		345,113		94		218		779		—		1,091		418,026		419,117
Construction – custom and owner/ builder	—		—		—		—		—		67,024		67,024		—		—		—		—		—		75,411		75,411
Construction – speculative one- to four- family	—		—		—		—		—		7,107		7,107		—		—		—		—		—		10,779		10,779
Construction – commercial	—		—		—		—		—		23,440		23,440		—		—		—		—		—		24,051		24,051
Construction – multi-family	—		—		—		—		—		5,983		5,983		—		—		—		—		—		19,256		19,256
Construction – land development	—		—		—		—		—		1,567		1,567		—		—		—		—		—		1,803		1,803
Land	40		—		243		—		283		25,263		25,546		5		193		204		—		402		30,368		30,770
Consumer loans:
Home equity and second mortgage	42		—		359		—		401		36,940		37,341		94		—		603		—		697		39,493		40,190
Other	10		16		—		—		26		3,489		3,515		—		—		23		—		23		4,289		4,312
Commercial business loans	—		—		170		—		170		42,883		43,053		—		2		725		—		727		64,037		64,764
Total	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558	$	193	$	699	$	3,033	$	—	$	3,925	$	895,225	$	899,150

______________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

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.

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 ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, there were no loans classified as loss.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	Loan Grades										Loan Grades
June 30, 2019	Pass		Watch		Special Mention		Substandard		Total
December 31, 2019											Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	126,094	$	302	$	566	$	2,088	$	129,050	$	126,562	$	1,300	$	557	$	954	$	129,373
Multi-family	70,374		—		—		—		70,374		78,326		—		—		—		78,326
Commercial	408,798		8,237		636		1,107		418,778		427,832		9,246		673		1,273		439,024
Construction – custom and owner/builder	70,004		233		—		—		70,237		73,984		1,042		—		—		75,026
Construction – speculative one- to four-family	10,545		—		—		—		10,545		12,473		—		—		—		12,473
Construction – commercial	27,567		—		—		—		27,567		27,151		—		—		—		27,151
Construction – multi-family	18,418		—		—		—		18,418		17,024		—		—		—		17,024
Construction – land development	2,766		—		—		224		2,990		926		—		—		138		1,064
Land	24,049		956		1,226		422		26,653		27,075		1,556		590		198		29,419
Consumer loans:
Home equity and second mortgage	41,369		42		—		793		42,204		38,303		41		—		759		39,103
Other	4,402		34		—		14		4,450		4,048		33		—		12		4,093
Commercial business loans	64,374		13		49		749		65,185		72,824		235		82		649		73,790
Total	$	868,760	$	9,817	$	2,477	$	5,397	$	886,451	$	906,528	$	13,453	$	1,902	$	3,983	$	925,866

September 30, 2018
September 30, 2019
Mortgage loans:
One- to four-family	$	113,148	$	882	$	581	$	1,330	$	115,941	$	129,748	$	296	$	562	$	2,055	$	132,661
Multi-family	61,928		—		—		—		61,928		76,036		—		—		—		76,036
Commercial	334,908		8,375		988		842		345,113		405,165		11,944		683		1,325		419,117
Construction – custom and owner/builder	66,720		304		—		—		67,024		75,178		233		—		—		75,411
Construction – speculative one- to four-family	7,107		—		—		—		7,107		10,779		—		—		—		10,779
Construction – commercial	23,440		—		—		—		23,440		24,051		—		—		—		24,051
Construction – multi-family	5,983		—		—		—		5,983		19,256		—		—		—		19,256
Construction – land development	1,567		—		—		—		1,567		1,659		—		—		144		1,803
Land	22,810		988		1,505		243		25,546		28,390		952		1,217		211		30,770
Consumer loans:
Home equity and second mortgage	36,697		82		—		562		37,341		39,364		41		—		785		40,190
Other	3,480		—		—		35		3,515		4,257		33		—		22		4,312
Commercial business loans	42,812		22		49		170		43,053		63,669		232		85		778		64,764
Total	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558	$	877,552	$	13,731	$	2,547	$	5,320	$	899,150

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 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.

The following table is a summary of information related to impaired loans by portfolio segment as of ~~June 30,~~December 31, 2019 and for the three ~~and nine~~ 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)		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Year to Date ("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	$	1,220	$	1,301	$	—	$	1,145	$	1,089	$	18	$	53	$	15	$	47	$	1,431	$	1,475	$	—	$	1,312	$	5	$	5
Commercial	3,255		3,255		—		3,263		2,852		78		158		70		132		3,141		3,141		—		3,166		53		31
Land	279		393		—		174		109		3		3		3		3		59		181		—		61		—		—
Consumer loans:
Home equity and second mortgage	606		606		—		474		423		—		—		—		—		581		581		—		592		—		—
Commercial business loans	200		208		—		203		130		18		20		18		20		183		300		—		186		—		—
Subtotal	5,560		5,763		—		5,259		4,603		117		234		106		202		5,395		5,678		—		5,317		58		36

With an allowance recorded:
Mortgage loans:
Land	143		143		37		268		233		—		—		—		—		139		139		28		140		—		—
Consumer loans:
Home equity and second mortgage	—		—		—		—		38		—		—		—		—
Other	14		14		8		15		7		—		—		—		—		12		12		6		18		—		—
Commercial business loans	549		549		214		430		304		—		25		—		25		418		418		71		477		—		—
Subtotal	706		706		259		713		582		—		25		—		25		569		569		105		635		—		—

Total:
Mortgage loans:
One- to four-family	1,220		1,301		—		1,145		1,089		18		53		15		47		1,431		1,475		—		1,312		5		5
Commercial	3,255		3,255		—		3,263		2,852		78		158		70		132		3,141		3,141		—		3,166		53		31
Land	422		536		37		442		342		3		3		3		3		198		320		28		201		—		—
Consumer loans:
Home equity and second mortgage	606		606		—		474		461		—		—		—		—		581		581		—		592		—		—
Other	14		14		8		15		7		—		—		—		—		12		12		6		18		—		—
Commercial business loans	749		757		214		633		434		18		45		18		45		601		718		71		663		—		—
Total	$	6,266	$	6,469	$	259	$	5,972	$	5,185	$	117	$	259	$	106	$	227	$	5,964	$	6,247	$	105	$	5,952	$	58	$	36


(1)	For the three months ended ~~June 30,~~December 31, 2019.


~~(2)~~	~~For the nine months ended June 30, 2019.~~

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, ~~2018~~2019 (dollars in thousands):


	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment (1)		Interest Income Recognized (1)		Cash Basis Interest Income Recognized (1)		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	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69	$	1,192	$	1,236	$	—	$	1,110	$	71	$	62
Commercial	2,446		2,446		—		2,389		121		93		3,190		3,190		—		2,920		227		192
Land	90		195		—		283		11		10		63		126		—		100		3		3
Consumer loans:
Home equity and second mortgage	359		359		—		210		3		3		603		603		—		459		—		—
Commercial business loans													189		291		—		142		30		30
Subtotal	3,949		4,200		—		4,304		215		175		5,237		5,446		—		4,731		331		287

With an allowance recorded:
Mortgage loans:
Land													141		141		27		246		—		—
Consumer loans:
Other													23		23		17		10		—
Commercial business loans													536		536		128		350		30		30
Subtotal													700		700		172		606		30		30
Total
Mortgage loans:
One- to four-family	—		—		—		9		—		—		1,192		1,236		—		1,110		71		62
Commercial	—		—		—		760		28		21		3,190		3,190		—		2,920		227		192
Land	153		153		34		383		9		8		204		267		27		346		3		3
Consumer loans:
Home equity and second mortgage	—		—		—		310		16		13		603		603		—		459		—		—
Commercial business loans	170		170		63		141		—		—
Subtotal	323		323		97		1,603		53		42
Total:
Mortgage loans:
One- to four-family	1,054		1,200		—		1,431		80		69
Commercial	2,446		2,446		—		3,149		149		114
Land	243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	359		359		—		520		19		16
Other													23		23		17		10		—		—
Commercial business loans	170		170		63		141		—		—		725		827		128		492		60		60
Total	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217	$	5,937	$	6,146	$	172	$	5,337	$	361	$	317

(1) For the year ended September 30, ~~2018.~~2019.

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 ~~$3.21~~$3.25 million and ~~$3.28~~$3.27 million in TDRs included in impaired loans at ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively, and had no commitments at these dates to lend additional funds on these loans. The allowance for loan losses allocated to TDRs at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 was ~~$69,000~~$53,000 and ~~$97,000,~~$56,000, respectively. There were no TDRs for which there was a payment default within the first 12 months of the modification during the ~~nine~~three months ended ~~June 30,~~December 31, 2019.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	June 30, 2019						December 31, 2019
	Accruing		Non- Accrual		Total		Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	497	$	143	$	640	$	489	$	139	$	628
Commercial	2,419		—		2,419		2,405		—		2,405
Consumer loans:
Home equity and second mortgage							—		79		79
Commercial business loans	—		149		149		—		136		136
Total	$	2,916	$	292	$	3,208	$	2,894	$	354	$	3,248


	September 30, 2018						September 30, 2019
	Accruing		Non- Accrual		Total		Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509	$	493	$	141	$	634
Commercial	2,446		—		2,446		2,410		—		2,410
Land	—		153		153
Consumer loans:
Home equity and second mortgage							—		82		82
Commercial business loans	—		170		170		—		143		143
Total	$	2,955	$	323	$	3,278	$	2,903	$	366	$	3,269

There were no new TDRs during the ~~nine~~three months ended ~~June 30,~~December 31, 2019.

There ~~were three~~was one new ~~TDRs for~~TDR during the year ended September 30, ~~2018.~~2019. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the year ended September 30, ~~2018~~2019 (dollars in thousands):

2018
Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post- Modification
Outstanding
Recorded
Investment

End of
Period
Balance
Land loans (1) 1 $ 244
$ 155
$ 153
Commercial business loans (2) 2 183
183
170
Total 3 $ 427
$ 338
$ 323
(1) Modification was a result of a reduction in principal balance.
(2) Modifications were a result of reduction in monthly payment amounts.



2019	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	85	$	85	$	82
Total	1	$	85	$	85	$	82
(1) Modification was a result of a reduction in interest rate and monthly payment.

(6) LEASES

The Company adopted Accounting Standards Codification ("ASC") 842 ("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 twelve 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 months ended December 31, 2019 (dollars in thousands):



	Three Months Ended December 31, 2019
Lease cost:
Operating lease cost	$	83
Short-term lease cost	—
Total lease cost	$	83

The following table provides supplemental information to operating leases at or for the three months ended December 31, 2019 (dollars in thousands):



	At or For the Three Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	79
Weighted average lease term-operating leases	10.04			years
Weighted average discount rate-operating leases	2.22		%

The Company's leases typically do not contain a discount rate implicit in the lease contract. 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 of Des Moines, for all leases entered into prior to the October 1, 2019 adoption date.

Maturities of operating lease liabilities at December 31, 2019 for future fiscal years are as follows (dollars in thousands):



Remainder of 2020	$	239
2021	327
2022	342
2023	310
2024	313
Thereafter	1,639
Total lease payments	3,170
Less imputed interest	347
Total	$	2,823

(7) 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. Shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share. At ~~June 30,~~December 31, 2019, all shares had been allocated under the Bank's ESOP. At ~~June 30,~~December 31, 2018, there were ~~45,999~~14,027 shares that had not been allocated under the Bank’s ESOP.

Information regarding the calculation of basic and diluted net income per common share for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 is as follows (dollars in thousands, except per share amounts):


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2019		2018		2019		2018		2019		2018
Basic net income per common share computation

Numerator – net income	$	5,956	$	4,416	$	17,685	$	12,299	$	6,652	$	5,615

Denominator – weighted average common shares outstanding	8,338,637		7,345,618		8,313,913		7,328,702		8,341,470		8,293,212

Basic net income per common share	$	0.71	$	0.60	$	2.13	$	1.68	$	0.80	$	0.68

Diluted net income per common share computation
Numerator – net income	$	5,956	$	4,416	$	17,685	$	12,299	$	6,652	$	5,615

Denominator – weighted average common shares outstanding	8,338,637		7,345,618		8,313,913		7,328,702		8,341,470		8,293,212
Effect of dilutive stock options (1)	143,723		189,539		154,299		189,745		133,559		164,491
Weighted average common shares outstanding - assuming dilution	8,482,360		7,535,157		8,468,212		7,518,447		8,475,029		8,457,703

Diluted net income per common share	$	0.70	$	0.59	$	2.09	$	1.64	$	0.78	$	0.66

(1) For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 ~~average options to purchase 102,050~~ and 102,353 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 months ended June 30, 2018, there were no options to purchase shares of common stock that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. For the nine months ended June 30, 2018, average options to purchase ~~38,709~~104,816 and 102,850 shares of common stock were outstanding but not included in the computation of diluted net income per share because their effect would have been anti-dilutive.

~~(7)~~(8) ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in accumulated other comprehensive loss ("AOCI") by component during the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 are as follows (dollars in thousands):


	Three Months Ended June 30, 2019								Three Months Ended December 31, 2019
	Changes in fair value of available for sale securities (1)		Changes in OTTI on held to maturity securities (1)			Total (1)			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	$	3	$	(48	)	$	(45	)	$	90		$	(40	)	$	50
Other comprehensive income	9		3			12
Other comprehensive income (loss)									(206		)	10			(196		)
Balance of AOCI at the end of period	$	12	$	(45	)	$	(33	)	$	(116	)	$	(30	)	$	(146	)

Nine Months Ended June 30, 2019
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 $ (58 ) $ (71 ) $ (129 )
Other comprehensive income 7
26
33
Adoption of ASU 2016-01 63
—
63
Balance of AOCI at the end of period $ 12
$ (45 ) $ (33 )


	Three Months Ended June 30, 2018									Three Months Ended December 31, 2018
	Changes in fair value of available for sale securities (1)			Changes in OTTI on held to maturity securities (1)			Total (1)			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	$	(44	)	$	(88	)	$	(132	)	$	(58	)	$	(71	)	$	(129	)
Other comprehensive income (loss)	(7		)	5			(2		)	(86		)	7			(79		)
Adoption of ASU 2016-01										63			—			$	63
Balance of AOCI at the end of period	$	(51	)	$	(83	)	$	(134	)	$	(81	)	$	(64	)	$	(145	)

Nine Months Ended June 30, 2018
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 $ (19 ) $ (105 ) $ (124 )
Other comprehensive income (loss) (32 ) 22
(10 )
Balance of AOCI at the end of period $ (51 ) $ (83 ) $ (134 )

__________________________

(1) All amounts are net of income taxes.

~~(8)~~(9) 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. 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 ~~June 30,~~December 31, 2019, there were ~~75,316~~29,526 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 both ~~June 30,~~December 31, 2019 and 2018, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the ~~nine~~three months ended ~~June 30,~~December 31, 2019 or 2018.

Stock option activity for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 is summarized as follows:


	Nine Months Ended June 30, 2019				Nine Months Ended June 30, 2018				Three Months Ended December 31, 2019				Three Months Ended December 31, 2018
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	380,820		$	16.03	380,120		$	13.23	378,304		$	18.15	380,820		$	16.03
Exercised	(37,756	)	9.00		(34,850	)	8.39		(16,975	)	10.03		(7,400	)	9.55
Granted									1,000		26.50		—		—
Forfeited	(3,900	)	18.63		(5,150	)	13.39		(450	)	15.99		(3,700	)	18.03
Options outstanding, end of period	339,164		$	16.79	340,120		$	13.73	361,879		$	18.56	369,720		$	16.14

The weighted average assumptions for options granted during the three months ended December 31, 2019 were as follows:



Expected volatility	29		%
Expected life (in years)	5
Expected dividend yield	3.36		%
Risk free interest rate	1.61		%
Grant date fair value per share	$	4.98

The aggregate intrinsic value of options exercised during the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 was ~~$751,000~~$284,000 and ~~$741,000,~~$142,000, respectively.

At ~~June 30,~~December 31, 2019, there were ~~155,750~~161,750 unvested options with an aggregate grant date fair value of ~~$485,000,~~$610,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at ~~June 30,~~December 31, 2019 was ~~$1.09 million.~~$867,000. There were ~~37,300~~no options ~~with an aggregate grant date fair value of $88,000 that~~ vested during the ~~nine~~three months ended ~~June 30,~~December 31, 2019.

At ~~June 30,~~December 31, 2018, there were ~~183,150~~174,850 unvested options with an aggregate grant date fair value of $~~454,000~~527,000. There were ~~43,900~~18,200 options with an aggregate grant date fair value of $~~104,000~~164,000 that vested during the ~~nine~~three months ended ~~June 30,~~December 31, 2018.

Additional information regarding options outstanding at ~~June 30,~~December 31, 2019 is as follows:


	Options Outstanding				Options Exercisable				Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$ 4.01 - 4.55	2,500	$	4.33	1.2	2,500	$	4.33	1.2	1,000	$	4.01	1.9	1,000	$	4.01	1.9
5.86 - 6.00	19,850	5.97		3.3	19,850	5.97		3.3	19,100	5.97		2.8	19,100	5.97		2.8
9.00	52,775	9.00		4.3	52,775	9.00		4.3	44,425	9.00		3.8	44,425	9.00		3.8
10.26 - 10.71	113,189	10.58		5.8	79,989	10.55		5.7	102,564	10.59		5.3	79,314	10.58		5.3
15.67	48,800	15.67		7.3	17,000	15.67		7.3	46,000	15.67		6.8	25,000	15.67		6.8
26.50 - 27.14									47,840	27.13		9.8	—	N/A		N/A
29.69	56,100	29.69		8.3	11,300	29.69		8.3	55,500	29.69		7.8	22,200	29.69		7.8
31.80	45,950	31.80		9.3	—	N/A		N/A	45,450	31.80		8.8	9,090	31.80		8.8
	339,164	$	16.79	6.5	183,414	$	11.18	5.3	361,879	$	18.56	6.6	200,129	$	13.48	5.3

The aggregate intrinsic value of options outstanding at ~~June 30,~~December 31, 2019 and 2018 was ~~$4.53~~$4.14 million and $~~8.03~~3.13 million, respectively.

As of ~~June 30,~~December 31, 2019, unrecognized compensation cost related to ~~non-vested~~unvested stock options was ~~$401,000,~~$559,000, which is expected to be recognized over a weighted average life of ~~2.14~~2.33 years.

~~(9)~~(10) 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 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 ~~June 30,~~December 31, 2019 and September 30, ~~2018.~~2019. The Company's assets measured at estimated fair value on a recurring basis at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 were as follows (dollars in thousands):


June 30, 2019	Estimated Fair Value
December 31, 2019									Estimated Fair Value
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	2,028	$	—	$	2,028	$	—	$	37,873	$	—	$	37,873
Investments in equity securities
Mutual funds	951		—		—		951		953		—		—		953
Total	$	951	$	2,028	$	—	$	2,979	$	953	$	37,873	$	—	$	38,826



September 30, 2018	Estimated Fair Value
September 30, 2019									Estimated Fair Value
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	237	$	—	$	237	$	—	$	22,532	$	—	$	22,532
Investments in equity securities
Mutual funds	917		—		—		917		958		—		—		958
Total	$	917	$	237	$	—	$	1,154	$	958	$	22,532	$	—	$	23,490

There were no transfers among Level 1, Level 2 and Level 3 during the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and the year ended September 30, ~~2018.~~2019.

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 ~~June 30,~~December 31, 2019 (dollars in thousands):


	Estimated Fair Value						Estimated Fair Value
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Impaired loans:
Mortgage loans:
Land	$	—	$	—	$	106	$	—	$	—	$	111
Consumer loans:
Other	—		—		6		—		—		6
Commercial business loans	—		—		335		—		—		347
Total impaired loans	—		—		447		—		—		464
Investment securities – held to maturity:
MBS - private label residential	—		17		—

OREO and other repossessed assets	—		—		1,719		—		—		1,659
Total	$	—	$	17	$	2,166	$	—	$	—	$	2,123

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 ~~June 30,~~December 31, 2019 (dollars in thousands):

Estimated

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range

Estimated

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range

Impaired loans

447

Market approach

Appraised value less estimated selling costs

464

Market approach

Appraised value less estimated selling costs

OREO and other repossessed assets

1,719

Market approach

Lower of appraised value or listing price less estimated selling costs

1,659

Market approach

Lower of appraised value or listing price less estimated selling costs

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, ~~2018~~2019 (dollars in thousands):


	Estimated Fair Value						Estimated Fair Value
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Impaired loans:
Mortgage loans:
Land	$	—	$	—	$	119	$	—	$	—	$	114
Consumer loans:
Home equity and second mortgage							—		—		—
Other							—		—		6
Commercial business loans	—		—		107		—		—		408
Total impaired loans	—		—		226		—		—		528
Investment securities – held to maturity:
MBS - private label residential	—		3		—		—		2		—
OREO and other repossessed assets	—		—		1,913		—		—		1,683
Total	$	—	$	3	$	2,139	$	—	$	2	$	2,211

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, ~~2018~~2019 (dollars in thousands):

Estimated

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range

Estimated

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range

Impaired loans

226

Market approach

Appraised value less estimated selling costs

528

Market approach

Appraised value less estimated selling costs

OREO and other repossessed assets

1,913

Market approach

Lower of appraised value or listing price less estimated selling costs

1,683

Market approach

Lower of appraised value or listing price less estimated selling costs

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 represented fair value for these types of items as of ~~June 30,~~December 31, 2019 and September 30, ~~2018.~~2019. 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 ASU No. 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The recorded amounts and estimated fair values of financial instruments were as follows as of ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	June 30, 2019										December 31, 2019
					Fair Value Measurements Using:										Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	170,835	$	170,835	$	170,835	$	—	$	—	$	118,851	$	118,851	$	118,851	$	—	$	—
CDs held for investment	81,184		81,184		81,184		—		—		76,249		76,249		76,249		—		—
Investment securities	40,624		42,070		8,931		33,139		—		76,953		79,114		2,997		76,117		—
Investments in equity securities											953		953		953		—		—
FHLB stock	1,437		1,437		1,437		—		—		1,437		1,437		1,437		—		—
Other investments	3,000		3,000		3,000		—		—		3,000		3,000		3,000		—		—
Loans held for sale	3,338		3,411		3,411		—		—		5,420		5,501		5,501		—		—
Loans receivable, net	873,982		873,520		—		—		873,520		913,150		917,475		—		—		917,475
Accrued interest receivable	3,759		3,759		3,759		—		—		3,665		3,665		3,665		—		—

Financial liabilities
Time deposits	164,193		165,086		—		—		165,086
Certificates of deposits											165,408		166,432		—		—		166,432
Accrued interest payable	310		310		310		—		—		351		351		351		—		—


	September 30, 2018										September 30, 2019
					Fair Value Measurements Using:										Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	148,864	$	148,864	$	148,864	$	—	$	—	$	143,015	$	143,015	$	143,015	$	—	$	—
CDs held for investment	63,290		63,290		63,290		—		—		78,346		78,346		78,346		—		—
Investment securities	13,964		14,418		8,812		5,606		—		53,634		55,112		3,949		51,163		—
Investments in equity securities											958		958		958		—		—
FHLB stock	1,190		1,190		1,190		—		—		1,437		1,437		1,437		—		—
Other investments	3,000		3,000		3,000		—		—		3,000		3,000		3,000		—		—
Loans held for sale	1,785		1,814		1,814		—		—		6,071		6,260		6,260		—		—
Loans receivable, net	725,391		711,071		—		—		711,071		886,662		892,495		—		—		892,495
Accrued interest receivable	2,877		2,877		2,877		—		—		3,598		3,598		3,598		—		—

Financial liabilities
Time deposits	141,808		140,831		—		—		140,831
Certificates of deposits											165,655		166,852		—		—		166,852
Accrued interest payable	225		225		225		—		—		333		333		333		—		—

~~(10)~~(11) RECENT ACCOUNTING PRONOUNCEMENTS

In ~~May 2014,~~January 2016, the Financial Accounting Standards Board ("FASB") issued ASU ~~No. 2014-09,~~ ~~Revenue from Contracts with Customers,~~ which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASC 606 on October 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under superseded ASC 605. There was no cumulative effect adjustment as of

October 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the nine months ended June 30, 2019; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Company elected to apply the practical expedient pursuant to ACS 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less. See Note 12 for additional information.

~~In January 2016, the FASB issued ASU No.~~ 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU ~~No.~~ 2016-01 generally requires equity investments - except those accounted for under the valuation method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU ~~No.~~ 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU ~~No.~~ 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU ~~No.~~ 2016-01 oneffective October 1, 2018. As required by ASU ~~No.~~ 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet. Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 9.10.

In February 2016, the FASB issued ASU ~~No.~~ 2016-02, Leases (Topic 842)~~. This ASU~~, which created FASB Accounting Standards Codification ("ASC") Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ~~this ASU~~ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a ~~generally~~ straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ~~This ASU~~ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ~~In July 2018,~~ASC 842 also provides an optional transition method for adoption, under which an entity initially applies ASC 842 at the ~~FASB issued ASU No. 2018-11,~~ ~~Leases (Topic 842), Targeted Improvements. This ASU amended~~adoption date and recognizes a cumulative-effect adjustment to the ~~new lease standard to give entities another option~~opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for ~~transition and to provide lessors with a practical expedient. The transition option allows entities to not apply~~ the ~~new leases standard in~~ comparative periods ~~they present~~presented in ~~their~~the financial statements in ~~the year of adoption. The practical expedient provides lessors with an option~~which it adopts ASC 842 will continue to ~~not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component~~be in accordance with current GAAP. ASC ~~606 if the associated non-lease components are the predominant components. The amendments have the same effective date as ASU No. 2016-02. In March 2019, the FASB issued ASU No. 2019-01,~~ ~~Leases (Topic 842), Codification Improvements~~. The amendments in this ASU include the following items: (i) determining the fair value of the underlying assets by lessors that are not manufacturers or dealers; (ii) requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and (iii) clarifying interim disclosure requirements. The effective date and transition requirements for the first and second items in this ASU are842 was effective for annual periods, and interim

periods within those annual periods, beginning after December 15, ~~2019 and early adoption is permitted.~~2018. The effective date and transition requirements for the third item of this ASU are the same as ASU No. 2016-02. The amendments in ASU No. 2016-02 are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early application of the amendments in this ASU is permitted. The effect of adoption of this ASU will depend on the nature and terms of the Company's leases at the time of adoption. OnceCompany adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods. The Company ~~expects~~also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to ~~report higher assets~~carryforward its historical lease classifications and ~~liabilities~~its assessment as to whether a ~~result of including right-of-use~~contract is or contains a lease. The Company also elected to not recognize lease assets and lease liabilities ~~related to certain banking offices~~for leases with an initial term of 12 months or less. As a result of adopting ASC 842, total other assets and ~~certain equipment under non-cancelable operating lease agreements; however, based~~other liabilities increased by $2.89 million on ~~current leases the adoption of ASU No. 2016-02 is not expected to have a material impact on the Company's future consolidated financial statements.~~October 1, 2019.

In June 2016, the FASB issued ASU ~~No.~~ 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU 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, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU ~~No.~~ 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU ~~No.~~ 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU ~~No.~~ 2016-13 is effective for fiscal years beginning after December 15, ~~2019,~~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 other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU ~~No.~~ 2016-13 and has begun developing and implementing processes and procedures to ensure 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 ~~No.~~ 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 ~~No.~~ 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 ~~No.~~ 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU ~~No.~~ 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU ~~No.~~ 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. ~~This~~ ASU is2017-08 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The ~~adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.~~

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting.~~ This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification. ASU No. 2017-09 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted ~~this~~ ASU on2017-08 effective October 1, ~~2018. The adoption of ASU No. 2017-09~~2019 and it did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU ~~No.~~ 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment ~~Accounting~~Accounting.. This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and ~~was~~were measured at the earlier of the commitment date or the date performance was completed. The amendments in this ASU require nonemployee share-based payment awards to be measured at the grant-date fair value of the equity instrument. ASU ~~No.~~ 2018-07 iswas effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. ~~Early adoption is permitted, but no earlier than an entity's adoption of Topic 606.~~ The ~~adoption of~~Company adopted ASU ~~No.~~ 2018-07 iseffective October 1, 2019 and it did not ~~expected to~~ have a material impact on the Company's ~~future~~ consolidated financial statements.

In August 2018, the FASB issued ASU ~~No.~~ 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 ~~No.~~ 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU ~~No.~~ 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU ~~No.~~ 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 ~~No.~~ 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU ~~No.~~ 2018-15 is not expected to have a material impact on the Company's future 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 guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, including interim periods within fiscal years. The adoption of ASU 2019-12 is not expected to have a material impact on the Company's future consolidated financial statements.

~~(11)~~(12) U.S. TAX REFORM

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, decreasing the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018. As the Company has a September 30 fiscal year-end, the lower corporate federal income tax rate was phased in, resulting in a blended federal income tax rate of approximately 24.5% for the Company's fiscal year ended September 30, 2018, and 21.0% for subsequent fiscal years. In addition, the reduction of the corporate federal income tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal tax rate of 21.0%.

As a result of the Tax Act, during the quarter ended December 31, 2017, the Company recorded a one-time income tax expense of $548,000 in conjunction with remeasuring its net deferred tax assets. The impact of using the 24.5% blended federal income tax rate for the quarter ended September 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $551,000.

~~(12)~~(13) 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 in 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 in the scope of ASC 606 is recognized in non-interest income with the exception of gains on sale of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense.

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.

Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property per 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 nine~~ months ended ~~June 30,~~December 31, 2019. This analysis as well as other sections of this report contains certain “forward-looking statements.”

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: our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel from our recent merger with South Sound Bank into our operations and our ability to realize related revenue synergies and cost savings with expected time frames and any goodwill charges related and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which may be greater than expected; 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; 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 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 on 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 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; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; 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 ~~2018~~2019 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management’s beliefs and assumptions at the time 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 ~~2019~~2020 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 ~~June 30,~~December 31, 2019, the Company had total assets of ~~$1.25~~$1.27 billion, net loans receivable of ~~$873.98~~$913.15 million, total deposits of ~~$1.07~~$1.08 billion and total shareholders’ equity of ~~$166.27~~$175.65 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 for this report, including consolidated financial statements and related data, relates primarily to the Bank's operations.

On October 1, 2018, the Company completed the South Sound ~~Merger.~~Acquisition. The operating results for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 include the operating results produced by the net assets acquired in the South Sound ~~Merger.~~Acquisition. For additional information on the South Sound ~~Merger,~~Acquisition, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."

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 ~~mortgage~~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 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, interest earned on those assets, the volume and mix of interest-bearing liabilities and interest paid on those interest-bearing liabilities. Management attempts to ~~match the re-pricing characteristics of the interest-earning assets and interest-bearing liabilities to protect~~maintain a net interest ~~income from changes in market interest rates and changes in~~margin placing it within the ~~shape~~top quartile of ~~the yield curve.~~

its Washington State peers.

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.

Net income is also affected by non-interest income and non-interest expenses. For the three ~~and nine~~ month ~~periods~~period ended ~~June 30,~~December 31, 2019, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, ~~a BOLI death benefit claim,~~ an increase in the cash surrender value of BOLI, servicing income on loans sold ~~gain on sale of investment securities~~ 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 expenses 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 expenses in certain periods are reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expenses 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 ~~2018~~2019 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 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 ~~2018~~2019 Form ~~10-K, other than the accounting for business combinations. See Note 2 of the Notes to Unaudited Financial Statements contained in "Item 1, Financial Statements."~~10-K.

Comparison of Financial Condition at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019

The Company’s total assets increased by ~~$229.02~~$23.41 million, or ~~22.5%~~1.9%, to ~~$1.25~~$1.271 billion at ~~June 30,~~December 31, 2019 from ~~$1.02~~$1.247 billion at September 30, ~~2018.~~2019. The increase in total assets was primarily due to ~~the South Sound Merger,~~increases in net loans receivable and investment securities, which ~~resulted~~were partially offset by a decrease in ~~a $183.10 million~~total cash and cash equivalents. The increase in total assets ~~(including goodwill and net of cash consideration paid) at the merger date (October 1, 2018). The~~was funded primarily by an increase in ~~assets was primarily comprised of a $148.59 million increase in~~total deposits and by retained net loans receivable, a $44.55 million increase in investment securities and CDs held for investment, a $21.97 million increase in cash and cash equivalents, and an $11.63 million increase in goodwill and CDI.income.

Net loans receivable increased by ~~$148.59~~$26.49 million, or ~~20.5%~~3.0%, to ~~$873.98~~$913.15 million at ~~June 30,~~December 31, 2019 from ~~$725.39~~$886.66 million at September 30, ~~2018. The increase was~~2019, primarily due to increases in commercial real estate loans ~~acquired in the South Sound Merger ($121.54 million at the merger date)~~ and ~~to a lesser extent, organic loan growth.~~commercial business loans.

Total deposits increased by ~~$183.03~~$16.25 million, or ~~20.6%~~1.5%, to ~~$1.07~~$1.084 billion at ~~June 30,~~December 31, 2019 from ~~$889.51 million~~$1.068 billion at September 30, ~~2018. The increase in total deposits was~~2019, primarily due to ~~deposits acquired~~increases in ~~the South Sound Merger ($151.54 million at the merger date)~~savings account balances and ~~to a lesser extent, organic deposit growth.~~NOW checking account balances.

Shareholders’ equity increased by ~~$41.61~~$4.59 million, or ~~33.4%~~2.7%, to ~~$166.27~~$175.65 million at ~~June 30,~~December 31, 2019 from ~~$124.66~~$171.07 million at September 30, ~~2018.~~2019. The increase in shareholders' equity was primarily due to ~~$28.27 million in common stock issued in the South Sound Merger and~~ net income, which was 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~~decreased by ~~$39.87~~$26.26 million, or ~~18.8%~~11.9%, to ~~$252.02~~$195.10 million at ~~June 30,~~December 31, 2019 from ~~$212.15~~$221.36 million at September 30, ~~2018. The~~2019,

~~increase was primarily due to cash~~as a portion of the Company's excess overnight liquidity and ~~cash equivalents and~~maturing CDs held for investment ~~that~~ were ~~acquired in~~put into higher-earning investment securities and loans during the ~~South Sound Merger ($24.16 million at the merger date) net of cash consideration paid to the South Sound Bank shareholders.~~quarter.

Investment Securities: Investment securities (including investments in equity securities) increased by ~~$26.66~~$23.31 million, or ~~190.9%~~42.7%, to ~~$40.62~~$77.91 million at ~~June 30,~~December 31, 2019 from ~~$13.96~~$54.59 million at September 30, ~~2018.~~2019. This increase was primarily due to ~~investment securities that were acquired in the South Sound Merger ($24.72 million at the merger date) and~~ the purchase of additional ~~held-to-maturity~~agency mortgage-backed investment securities during the ~~nine~~three months ended ~~June 30,~~December 31, 2019, ~~which was partially offset by scheduled amortization, prepayments and~~as the ~~sale~~Company put a portion of ~~several~~its excess overnight liquidity into higher-earning investment securities ~~that were acquired in~~during the ~~South Sound Merger.~~quarter. For additional information on investment securities, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB Stock: FHLB stock ~~increased by $247,000, or 20.8%, to~~remained constant at $1.44 million at ~~June 30,~~both December 31, 2019 ~~from $1.19 million at~~and September 30, ~~2018 due to the FHLB stock acquired in the South Sound Merger and purchases required by the FHLB due to the increase in total assets.~~2019.

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 ~~June 30,~~December 31, 2019 and September 30, ~~2018.~~2019. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by ~~$148.59~~$26.49 million, or ~~20.5%~~3.0%, to ~~$873.98~~$913.15 million at ~~June 30,~~December 31, 2019 from ~~$725.39~~$886.66 million at September 30, ~~2018.~~2019. The increase was primarily due to ~~loans acquired in the South Sound Merger ($121.54 million at the merger date) and, to~~ a ~~lesser extent, organic loan growth. The increase consisted of a $73.67~~$19.91 million increase in commercial real estate loans, a ~~$34.58 million increase in construction loans, a $22.13~~$9.03 million increase in commercial business loans, a ~~$13.11 million increase in one- to four-family loans, an $8.45~~$2.29 million increase in multi-family ~~loans, a $5.80 million increase in consumer~~mortgage loans, and a ~~$1.11~~$10.05 million ~~increase~~decrease in ~~land loans.~~the undisbursed portion construction loans in process. These increases to net loans receivable were partially offset by an ~~$9.94~~$8.62 million ~~increase~~decrease in ~~the undisbursed portion of~~ construction loans, a $3.29 million decrease in ~~process~~one- to ~~$93.18 million at June 30, 2019.~~four-family mortgage loans and smaller decreases in several other loan categories.

Loan originations increased by ~~$22.19~~$26.16 million, or ~~9.6%~~24.6%, to ~~$254.16~~$132.55 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 from ~~$231.97~~$106.39 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The increase in loan originations was primarily due to increased loan demand for one- to four-family mortgage loan refinances and the funding of several larger ~~multi-family construction projects.~~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 (on a much smaller volume) sells the guaranteed portion of U.S. Small Business Administration ("SBA") loans. Sales of fixed rate one- to four-family mortgage loans and SBA loans ~~decreased~~increased by ~~$780,000,~~$18.44 million, or ~~1.6%~~114.4%, to ~~$48.18~~$34.56 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 compared to ~~$48.96~~$16.12 million for the ~~nine~~three months ended ~~June 30, 2018.~~December 31, 2018, primarily due to increased refinance activity for one- to four-family loans.

For additional information, see Note 5 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Premises and Equipment: Premises and equipment ~~increased~~decreased by ~~$4.14 million,~~$242,000, or ~~21.8%~~1.1%, to ~~$23.09~~$22.59 million at ~~June 30,~~December 31, 2019 from ~~$18.95~~$22.83 million at September 30, ~~2018.~~2019. The ~~increase~~decrease was primarily due ~~to premises~~normal depreciation and ~~equipment~~the sale of land acquired in the South Sound ~~Merger ($3.34 million at the merger date) and a branch remodeling project, which was~~Acquisition that had been held for future expansion. These decreases were partially offset by ~~normal depreciation.~~capitalized remodeling costs associated with the building that will become the Company's new data center facility.

OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by ~~$194,000,~~$24,000, or ~~10.1%~~1.4%, to ~~$1.72~~$1.66 million at ~~June 30,~~December 31, 2019 from ~~$1.91~~$1.68 million at September 30, ~~2018.~~2019. The decrease was primarily due to the sale of a commercial real estate ~~property.~~property during the quarter. At ~~June 30,~~December 31, 2019, total OREO and other repossessed assets consisted of ~~13 individual real estate properties. The properties consisted of~~ 11 land parcels totaling ~~$1.53 million and two commercial real estate properties with a recorded value of $186,000.~~$1.66 million.

BOLI (Bank Owned Life Insurance): BOLI increased by ~~$1.05 million,~~$147,000, or ~~5.3%~~0.7%. to ~~$20.87~~$21.15 million at ~~June 30,~~December 31, 2019 from ~~$19.81~~$21.01 million at September 30, ~~2018.~~2019. The increase was ~~primarily~~ due to net BOLI ~~acquired in~~earnings, representing the ~~South Sound Merger ($2.63 million at the merger date) and normal increases~~increase in the cash surrender value of the BOLI policies. ~~These increases were partially offset by a death benefit claim in March 2019, which reduced the BOLI cash surrender value by $2.05 million.~~

Goodwill and CDI: The recorded amount of goodwill ~~increased by $9.48 million, or 167.78%, to~~remained unchanged at $15.13 million at ~~June~~both December 31, 2019 and September 30, 2019. CDI decreased by $101,000, or 5.0%, to $1.93 million at December 31, 2019 from ~~$5.65~~$2.03 million at September 30, ~~2018, due to the goodwill recorded in the South Sound Merger. CDI increased to $2.14 million at June 30,~~ 2019 due to ~~$2.48 million of CDI recorded in the South Sound Merger, net of $339,000 in~~

~~amortization for the nine month period.~~scheduled amortization. For additional information on goodwill and CDI, see Notes 2 and 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

~~BOLI Death Benefit Receivable:~~Operating Lease Right-of-Use Assets: ~~BOLI death benefit receivable~~Operating lease right-of-use assets increased ~~by $1.02~~to $2.82 million at ~~June 30,~~December 31, 2019 ~~due to a $1.02 million receivable for a BOLI death benefit claim.~~as the Company adopted ASC 842 on October 1, 2019 and began recording operating lease right-of-use assets and operating lease liabilities on the balance sheet. The operating lease right-of-use assets at December 31, 2019 represented the present value of

three operating leases on branch facilities. The Company adopted the provisions of ASC 842 utilizing the optional transition method and therefore prior periods have not been restated.

Deposits: Deposits increased by ~~$183.03~~$16.25 million, or ~~20.6%~~1.5%, to ~~$1.07~~$1.084 billion at ~~June 30,~~December 31, 2019 from ~~$889.51 million~~$1.068 billion at September 30, ~~2018.~~2019. The increase in total deposits was primarily due to deposits acquired in the South Sound Merger. The balance of the deposits acquired in the South Sound Merger was $151.54 million at the merger date and $156.20 million at June 30, 2019. The increase in total deposits consisted of a $77.10an $11.10 million increase in ~~N.O.W.~~savings account balances, a $6.43 million increase in NOW checking account balances, and a ~~$54.29~~$1.20 million increase in ~~non-interest bearing~~non-interest-bearing demand account ~~balances,~~balances. These increases were partially offset by a ~~$22.39~~$2.25 million ~~increase in certificates of deposit account balances, a $17.09 million increase~~decrease in money market account balances and a ~~$12.16 million increase~~$247,000 decrease in ~~savings~~certificates of deposit account balances.

Deposits consisted of the following at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	June 30, 2019				September 30, 2018				December 31, 2019				September 30, 2019
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Non-interest-bearing demand	$	287,552	26.8	%	$	233,258	26.2	%	$	297,676	27.5	%	$	296,472	27.8	%
N.O.W. checking	302,390		28.2		225,290		25.3
NOW checking									303,493		28.0		297,055		27.8
Savings	163,560		15.3		151,404		17.0		175,610		16.2		164,506		15.4
Money market	146,132		13.6		127,791		14.4		134,131		12.4		136,151		12.7
Money market - reciprocal	8,708		0.8		9,955		1.1		8,159		0.8		8,388		0.8
Certificates of deposit under $250	136,693		12.7		120,443		13.5		133,271		12.3		133,241		12.5
Certificates of deposit $250 and over	26,301		2.5		18,164		2.1		28,933		2.7		29,211		2.7
Certificates of deposit - brokered	1,199		0.1		3,201		0.4		3,204		0.1		3,203		0.3
Total	$	1,072,535	100.0	%	$	889,506	100.0	%	$	1,084,477	100.0	%	$	1,068,227	100.0	%

~~Other Liabilities~~Operating Lease Liabilities: Operating lease liabilities increased to $2.82 million at December 31, 2019 as the Company adopted ASC 842 on October 1, 2019 and ~~Accrued Expenses:~~ ~~Other~~began recording operating lease liabilities and ~~accrued expenses increased by $4.38 million, or 106.1%, to $8.51 million~~operating lease right-of-use assets on the balance sheet. The operating lease liability at ~~June 30,~~December 31, 2019 ~~from $4.13 million at September 30, 2018.~~represented the present value of three operating leases on branch facilities. The ~~increase was primarily due to liabilities assumed in~~Company adopted the ~~South Sound Merger~~provisions of ASC 842 utilizing the optional transition method and ~~accrued expenses related to the conversion of South Sound Bank's current core processing and ancillary information technology systems to the Company's new core processing system.~~therefore prior periods have not been restated.

Shareholders’ Equity: Total shareholders’ equity increased by ~~$41.61~~$4.59 million, or ~~33.4%~~2.7%, to ~~$166.27~~$175.65 million at ~~June 30,~~December 31, 2019 from ~~$124.66~~$171.07 million at September 30, ~~2018.~~2019. The increase was primarily due to ~~$28.27 million in common stock issued in the South Sound Merger and~~ net income of ~~$17.69~~$6.65 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019, which was partially offset by dividend payments to common shareholders of ~~$5.24 million~~$2.09 million. The Company did not repurchase any of its common shares during the quarter and ~~the repurchase of 2,831~~had 201,453 shares ~~of the Company's common stock for $70,450 (an average price of $24.89 per share). At June 30, 2019 there were 219,062 shares remaining~~available to be repurchased under the Company's existing stock repurchase ~~plan.~~plan at December 31, 2019. For additional information, see Item 2 of Part II of this ~~form~~Form 10-Q.

Asset Quality: The non-performing assets to total assets ratio was ~~0.43%~~0.39% at ~~June 30,~~December 31, 2019 compared to ~~0.36%~~0.40% at September 30, ~~2018.~~2019. Total non-performing assets ~~increased~~decreased by ~~$1.74 million,~~$27,000, or ~~47.7%~~0.5%, to ~~$5.37~~$4.98 million at ~~June 30,~~December 31, 2019 from ~~$3.64~~$5.01 million at September 30, ~~2018.~~2019. The ~~increase~~decrease in non-performing assets was ~~primarily~~ due to ~~a $2.03 million increase~~decreases of $40,000 in non-accrual ~~loans,~~investment securities and $24,000 in OREO and other repossessed assets, which ~~was~~were partially offset by a ~~$194,000 decrease~~$37,000 increase in ~~the balance of OREO and other repossessed assets.~~non-accrual loans.

The following table sets forth information with respect to the Company’s non-performing assets at ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 (dollars in thousands):


	June 30, 2019			September 30, 2018			December 31, 2019			September 30, 2019
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family (1)	$	723		$	545		$	942		$	699
Commercial	836			—			736			779
Land	422			243			198			204
Consumer loans:
Home equity and second mortgage	606			359			581			626
Other	14			—			12			—
Commercial business loans	749			170			601			725
Total loans accounted for on a non-accrual basis	3,350			1,317			3,070			3,033

Accruing loans which are contractually past due 90 days or more	—			—			—			—

Total of non-accrual and 90 days past due loans	3,350			1,317			3,070			3,033

Non-accrual investment securities	303			406			254			294

OREO and other repossessed assets, net (2)	1,719			1,913			1,659			1,683
Total non-performing assets (3)	$	5,372		$	3,636		$	4,983		$	5,010

TDRs on accrual status (4)	$	2,916		$	2,955		$	2,894		$	2,903

Non-accrual and 90 days or more past due loans as a percentage of loans receivable	0.38		%	0.18		%	0.33		%	0.34		%

Non-accrual and 90 days or more past due loans as a percentage of total assets	0.27		%	0.13		%	0.24		%	0.24		%

Non-performing assets as a percentage of total assets	0.43		%	0.36		%	0.39		%	0.40		%

Loans receivable (5)	$	883,613		$	734,921		$	923,032		$	896,352

Total assets	$	1,247,310		$	1,018,290		$	1,270,542		$	1,247,132

(1) As of ~~June~~December 31, 2019 and September 30, 2019, the balance of non-accrual one- to-four family properties in the process of foreclosure was ~~$363. At September 30, 2018, the balance of non-accrual one- to-four family properties did not include any loans in the process of foreclosure.~~$150 and $150, respectively.

(2) As of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, 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 ~~$292~~$354 and ~~$323~~$366 reported as non-accrual loans at ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively.

(5) Does not include loans held for sale and loan balances are before the allowance for loan losses.

Comparison of Operating Results for the Three ~~and Nine~~ Months Ended ~~June 30,~~December 31, 2019 and 2018

Net income increased by ~~$1.54~~$1.04 million, or ~~34.9%~~18.5%, to ~~$5.96~~$6.65 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$4.42~~$5.62 million for the quarter ended ~~June 30,~~December 31, 2018. Net income per diluted common share increased by ~~$0.11,~~$0.12, or ~~18.6%~~18.2%, to ~~$0.70~~$0.78 for the quarter ended ~~June 30,~~December 31, 2019 from ~~$0.59~~$0.66 for the quarter ended ~~June 30,~~December 31, 2018.

Net income increased by $5.39 million, or 43.8%, to $17.69 million for the nine months ended June 30, 2019 from $12.30 million for the nine months ended June 30, 2018. Net income per diluted common share increased $0.45 or 27.4%, to $2.09 for the nine months ended June 30, 2019 from $1.64 for the nine months ended June 30, 2018.

The increase in net income for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 was primarily due to increases in net interest income and non-interest income, and a ~~reduction~~decrease in ~~the Company's effective income tax rate.~~non-interest expense. These increases to net income were partially offset by an increase in ~~non-interest expense. The increases in net interest income~~the provision for loan losses and non-interest expense were primarily the result of the South Sound Merger, which was completed on October 1, 2018. The increase in non-interest income for the nine months ended June 30, 2019 was primarily due to an increase in ~~BOLI net earnings as a result of a death benefit claim.~~the provision for income tax.

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

Net Interest Income: Net interest income increased by ~~$3.21 million,~~$658,000, or ~~33.0%~~5.3%, to ~~$12.94~~$13.00 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$9.73~~$12.34 million for the quarter ended ~~June 30,~~December 31, 2018. The increase in net interest income was primarily due to a ~~24.0%~~6.2% increase in the average balance of interest-earning assets, primarily as a result of the South Sound Merger. Net interest income also increased due to increases in short-term market interest rates, which resulted in yields increasing on interest-earning assets at a greater rate than the cost of deposits.assets.

Total interest and dividend income increased by ~~$3.73 million,~~$876,000, or ~~35.7%~~6.6%, to $14.19 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$10.46~~$13.32 million for the quarter ended ~~June 30,~~December 31, 2018, primarily due to ~~increases~~an increase in the average balance ~~and to a lesser extent, the average yield~~ of interest-earning assets. Average total interest-earning assets increased by ~~$222.90~~$68.36 million, or ~~24.0%~~6.2%, to ~~$1.15~~$1.17 billion for the quarter ended ~~June 30,~~December 31, 2019 from ~~$930.31 million~~$1.11 billion for the quarter ended ~~June 30, 2018, primarily due to interest-earning assets acquired in the South Sound Merger.~~December 31, 2018. Average loans receivable increased by ~~$158.65~~$51.27 million, or ~~21.8%~~6.0%, average investment securities increased by ~~$34.02~~$31.34 million, or ~~411.1%~~107.3%, and average interest-bearing deposits in banks and CDs ~~increased~~decreased by ~~$29.95~~$14.44 million, or ~~15.8%~~6.8%, between the periods. The average yield on interest-earning assets increased to ~~4.92%~~4.83% for the quarter ended ~~June 30,~~December 31, 2019 from ~~4.50%~~4.82% for the quarter ended June 30, 2018. The increase in the average yield on interest-earning assets was primarily due to increases in short-term interest rates as the Federal Reserve steadily increased the targeted Fed Funds rate by 1.00% duringDecember 31, 2018. During the ~~quarter~~quarters ended ~~June 30,~~December 31, 2019 and 2018, interest income on loans receivable increased by ~~$69,000~~$145,000 and $87,000, respectively, due to the accretion of the fair value discount on loans acquired in the South Sound ~~Merger.~~Acquisition. During the quarter ended ~~June 30,~~December 31, 2019, there was a total of $186,000 of non-accrual interest and pre-payment penalties ~~collected compared to $10,000~~collected. There was no non-accrual interest collected for the quarter ended ~~June 30,~~December 31, 2018.

Total interest expense increased by ~~$518,000,~~$218,000, or ~~71.0%~~22.5%, to ~~$1.25~~$1.19 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$730,000~~$971,000 for the quarter ended June 30, 2018. The increase in interest expense was due to increases in the average cost and to a lesser extent, the average balance of interest-bearing deposits. Average interest-bearing deposits increased by $132.95 million, or 20.5%, to $779.93 million for the quarter ended June 30, 2019 from $646.98 million for the quarter ended June 30, 2018, primarily due to the interest-bearing deposits acquired in the South Sound Merger. The average cost of deposits increased to 0.64% for the quarter ended June 30, 2019 from 0.45% for the quarter ended June 30, 2018, as market interest rates for deposits increased.

~~Net interest income increased by $9.23 million, or 32.0%, to $38.01 million for the nine months ended June 30, 2019 from $28.79 million for the nine months ended June 30, 2018.~~

Total interest and dividend income increased by $10.56 million, or 34.3%, to $41.34 million for the nine months ended June 30, 2019 from $30.78 million for the nine months ended June 30, 2018, primarily due to increases in the average balance and to a lesser extent, the average yield on interest-earning assets. Average total interest-earning assets increased by $213.19 million, or 23.3%, to $1.13 billion for the nine months ended June 30, 2019 from $916.51 million for the nine months ended June 30, 2018. Average loans receivable increased by $156.84 million, or 21.8%, average investment securities increased by $28.73 million, or 362.1%, and average interest-bearing deposits in banks and CDs increased by $27.38 million, or 14.8%, between the periods. The average yield on interest-earning assets increased to 4.88% for the nine months ended June 30, 2019 from 4.48% for the nine months ended June 30, 2018.

~~Total interest expense increased by $1.34 million, or 66.9%, to $3.33 million for the nine months ended June 30, 2019 from $2.00 million for the nine months ended June 30,~~December 31, 2018. The increase in interest expense was primarily due to increases in the average cost and to a lesser extent, the average balance of interest-bearing deposits. Average interest bearing deposits increased $126.89 million, or 19.8%, to $766.29 million for the nine months ended June 30, 2019 from $639.40 million for the nine months ended June 30, 2018, primarily due to the interest-bearing deposits acquired in the South Sound Merger. The average cost of interest-bearing deposits increased to ~~0.58%~~0.61% for the ~~nine months~~quarter ended ~~June 30,~~December 31, 2019 from ~~0.42%~~0.51% for the ~~nine months~~quarter ended ~~June 30,~~December 31, 2018, as market interest rates ~~and competition~~ for deposits increased.

Average interest-bearing deposits increased by $17.61 million, or 2.3%, to $771.55 million for the quarter ended December 31, 2019 from $753.94 million for the quarter ended December 31, 2018, primarily due to increases in the average balances of savings accounts, NOW checking accounts and certificates of deposit accounts, which were partially offset by a decrease in the average balance of money market accounts.

As a result of these changes, the net interest margin ("NIM") ~~increased~~decreased to ~~4.49%~~4.43% for the quarter ended ~~June 30,~~December 31, 2019 from ~~4.18%~~4.47% for the quarter ended ~~June 30,~~December 31, 2018. ~~For the nine months ended June 30, 2019 the~~The NIM ~~increased to 4.49% from 4.19%~~ for the ~~nine months ended June 30, 2018.~~current quarter was increased by approximately 13 basis points due to the accretion of $146,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $233,000 in pre-payment penalties, non-accrual interest, and late fees. The NIM for the comparable quarter one year ago was increased by approximately four basis points due to the accretion of $87,000 of the fair value discount on loans acquired in the South Sound Acquisition. The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines. The remaining net discount on these purchased loans was $1.24 million at December 31, 2019.

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 June 30,												Three Months Ended December 31,
	2019						2018						2019						2018
	Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
Interest-earning assets:
Loans receivable (1)(2)	$	886,460	$	12,459	5.62	%	$	727,807	$	9,530	5.24	%	$	911,905	$	12,764	5.60	%	$	860,639	$	11,782	5.48	%
Investment securities (2)	42,300		339		3.22		8,277		51		2.46		60,555		439		2.90		29,214		278		3.81
Dividends from mutual funds, FHLB stock and other investments	5,377		43		3.20		5,101		31		2.43		5,394		37		2.74		5,205		39		2.97
Interest-bearing deposits in banks and CDs	219,070		1,344		2.45		189,120		845		1.79		196,322		951		1.94		210,757		1,216		2.29
Total interest-earning assets	1,153,207		14,185		4.92		930,305		10,457		4.50		1,174,176		14,191		4.83		1,105,815		13,315		4.82
Non-interest-earning assets	82,113						60,395						83,405						91,142
Total assets	$	1,235,320					$	990,700					$	1,257,581					$	1,196,957

Interest-bearing liabilities:
Savings	$	163,122	28		0.07		$	147,881	22		0.06		$	174,590	33		0.08		$	160,584	27		0.07
Money market	154,238		314		0.82		142,557		202		0.57		133,755		189		0.56		156,638		234		0.59
N.O.W. checking	300,330		228		0.30		214,256		110		0.21
NOW checking													296,402		221		0.30		281,123		187		0.26
Certificates of deposit	162,237		678		1.68		142,285		396		1.12		166,799		746		1.78		155,595		523		1.33
Total interest-bearing liabilities	779,927		1,248		0.64		646,979		730		0.45		771,546		1,189		0.61		753,940		971		0.51
Non-interest-bearing deposits	288,308						220,511						305,452						281,620
Other liabilities	3,405						4,456						7,825						7,133
Total liabilities	1,071,640						871,946						1,084,823						1,042,693
Shareholders' equity	163,680						118,754						172,758						154,264
Total liabilities and
shareholders' equity	$	1,235,320					$	990,700					$	1,257,581					$	1,196,957

Net interest income			$	12,937					$	9,727					$	13,002					$	12,344
Interest rate spread					4.28	%					4.05	%					4.22	%					4.31	%
Net interest margin (3)					4.49	%					4.18	%					4.43	%					4.47	%
Ratio of average interest-earning assets to average interest-bearing liabilities					147.86	%					142.88	%					152.18	%					146.67	%

_______________


(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 ~~Merger~~Acquistion 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.

Nine Months Ended June 30,
2019 2018
Average
Balance Interest and
Dividends Yield/
Cost Average
Balance Interest and
Dividends Yield/
Cost
Interest-earning assets:
Loans receivable (1)(2) $ 874,943
$ 36,457
5.56 % $ 718,099
$ 28,342
5.26 %
Investment securities (2) 36,670
915
3.33
7,936
147
2.47
Dividends from mutual funds, FHLB stock and other investments 5,302
121
3.04
5,067
83
2.18
Interest-bearing deposits in banks and CDs 212,785
3,849
2.41
185,405
2,209
1.59
Total interest-earning assets 1,129,700
41,342
4.88
916,507
30,781
4.48
Non-interest-earning assets 86,616

59,704

     Total assets
$ 1,216,316

$ 976,211

Interest-bearing liabilities:

Savings $ 162,136
80
0.07
$ 144,191
63
0.06
Money market 156,538
858
0.73
140,186
520
0.50
N.O.W. checking 289,926
619
0.29
214,828
334
0.21
Certificates of deposit 157,688
1,775
1.50
140,194
1,079
1.03
Total interest-bearing liabilities 766,288
3,332
0.58
639,399
1,996
0.42
Non-interest-bearing deposits 288,624
217,388

Other liabilities 2,681

3,997

Total liabilities 1,057,593

860,784

Shareholders' equity 158,723

115,427

Total liabilities and

shareholders' equity $ 1,216,316

$ 976,211

Net interest income $ 38,010

$ 28,785

Interest rate spread

4.30 %

4.06 %
Net interest margin (3)

4.49 %

4.19 %
Ratio of average interest-earning
   assets to average interest-bearing
   liabilities

147.42 %

143.34 %

~~_______________~~



~~(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 Merger 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.~~

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 June 30, 2019 compared to three months ended June 30, 2018 increase (decrease) due to						Nine months ended June 30, 2019 compared to nine months ended June 30, 2018 increase (decrease) due to						Three months ended December 31, 2019 compared to three months ended December 31, 2018 increase (decrease) due to
	Rate		Volume		Net Change		Rate		Volume		Net Change		Rate			Volume			Net Change
Interest-earning assets:
Loans receivable and loans held for sale	$	737	$	2,192	$	2,929	$	1,650	$	6,465	$	8,115	$	268		$	714		$	982
Investment securities	20		268		288		67		701		768		(79		)	240			161
Dividends from mutual funds, FHLB stock and other investments	11		1		12		34		4		38		(3		)	1			(2		)
Interest-bearing deposits in banks and CDs	350		149		499		1,276		364		1,640		(186		)	(79		)	(265		)
Total net increase in income on interest-earning assets	1,118		2,610		3,728		3,027		7,534		10,561		—			876			876

Interest-bearing liabilities:
Savings	4		2		6		8		9		17		3			3			6
Money market	94		18		112		272		66		338		(12		)	(33		)	(45		)
N.O.W. checking	64		54		118		147		138		285
NOW checking													24			10			34
Certificates of deposit	220		62		282		548		148		696		184			39			223
Total net increase in expense on interest-bearing liabilities	382		136		518		975		361		1,336		199			19			218

Net increase in net interest income	$	736	$	2,474	$	3,210	$	2,052	$	7,173	$	9,225	$	(199	)	$	857		$	658

Provision for Loan Losses: A $200,000 provision for loan losses was made for the quarter ended December 31, 2019, primarily due to loan portfolio growth as net loans receivable increased by $26.49 million during the quarter. There was no provision for ~~(recapture of)~~ loan losses made for ~~both~~ the ~~quarters~~quarter ended ~~June 30, 2019 and~~December 31, 2018. For the quarter ended ~~June 30,~~December 31, 2019, there were net charge-offs of ~~$110,000~~$8,000 compared to net ~~charge-offs~~recoveries of ~~$12,000~~$3,000 for the quarter ended ~~June 30,~~December 31, 2018. Non-accrual loans increased by ~~$2.03 million,~~$37,000, or ~~154.4%~~1.2%, to ~~$3.35~~$3.07 million at ~~June 30,~~December 31, 2019, from ~~$1.32~~$3.03 million at September 30, ~~2018~~2019 and increased by ~~$644,000,~~$1.48 million, or ~~23.8%~~93.1%, from ~~$2.71~~$1.59 million at ~~June 30,~~December 31, 2018. Total delinquent loans (past due 30 days or more) and non-accrual loans ~~increased~~decreased by ~~$965,000,~~$53,000, or ~~37.8%~~1.3%, to ~~$3.52~~$3.87 million at ~~June 30,~~December 31, 2019, from ~~$2.56~~$3.93 million at September 30, ~~2018~~2019 and increased by ~~$94,000,~~$616,000, or ~~2.7%~~18.9%, from ~~$3.43~~$3.26 million one year ago.

For the nine months ended June 30, 2019 and June 30, 2018 there was no provision for (recapture of) loan losses. Net recoveries for the nine months ended June 30, 2019 were $101,000 compared to net charge-offs of $21,000 for the nine months ended June 30, 2018.

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 factors include changes in the amount and composition of the loan portfolio, historical 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 ~~June 30,~~December 31, 2019 was ~~$259,000~~$105,000 compared to ~~$97,000~~$172,000 at September 30, ~~2018~~2019 and ~~$358,000~~$137,000 at ~~June 30,~~December 31, 2018.

In accordance with GAAP, loans acquired in the South Sound ~~Merger~~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 ~~Merger~~

Acquisition was ~~$1.57~~$1.24 million at ~~June 30,~~December 31, 2019. ~~We believe~~The Company believes 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 ~~Merger.~~Acquisition.

Based on its comprehensive analysis, management believes the allowance for loan losses of ~~$9.63~~$9.88 million at ~~June 30,~~December 31, 2019 ~~(1.09%~~(1.07% of loans receivable and ~~287.5%~~321.9% 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 ~~$9.53~~$9.69 million ~~(1.30%~~(1.08% of loans receivable and ~~723.6%~~319.5% of non-performing loans) at September 30, ~~2018~~2019 and $9.53 mil1ion ~~(1.31%~~(1.10% of loans receivable and ~~304.1%~~599.6% of non-performing loans) at ~~June 30,~~December 31, 2018. While the Company believes 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 increase significantly 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 a substantial increase will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses would adversely affect the Company's financial condition and results of operations. For additional information, see Note 5 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income increased by ~~$393,000,~~$672,000, or ~~12.5%~~20.6%, to ~~$3.54~~$3.94 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$3.15~~$3.27 million for the quarter ended ~~June 30,~~December 31, 2018. The increase in non-interest income was primarily due to a ~~$169,000~~$567,000 increase in gain on sales of loans, a $145,000 increase in ATM and debit card interchange fees, ~~an $85,000~~a $92,000 increase in recoveries on ~~gain on sales of loans~~investment securities, and smaller increases in several other categories. ~~The increase~~These increases were partially offset by a $97,000 decrease in ~~ATM~~servicing income on loans sold and ~~debit card interchange fees was primarily due to an increase~~smaller decreases in ~~the dollar volume of debit card transactions, which was in part a result of the transaction accounts acquired in the South Sound Merger.~~several other categories. The increase in gain on sale of loans was primarily due to an increase in the dollar volume of fixed-rate one- to four-family loans sold during the current ~~quarter.~~

~~Total non-interest income for the nine months ended June 30, 2019 increased~~quarter, which was largely driven by ~~$1.38 million, or 14.7%, to $10.74 million from $9.36 million for the nine months ended June 30, 2018, primarily due to a $1.10 million~~an increase in ~~BOLI net earnings, a $248,000~~refinance activity. The increase in ATM and debit card interchange fees a $134,000 increase in service charges on deposits and smaller increases in several other categories. Partially offsetting these increases was a $233,000 decrease in gain on sales of loans and smaller decreases in several other categories. The increased BOLI income was primarily the result of a $1.03 million BOLI death benefit claim. The increases in ATM and debit card interchange fees and service charges on deposits were primarily a result of income from the deposit accounts acquired in the South Sound Merger. The decrease in gain on sale of loans was primarily due to ~~a lower average loan sale margin on loans sold and a decrease~~an increase in the dollar volume of ~~fixed-rate one-~~debit card transactions. The increase in recoveries on investment securities was primarily due to ~~four-family~~the payoffs of several investment securities for which OTTI had previously been recorded. The decrease in servicing income on loans sold ~~during~~was primarily due to an increase in the ~~period.~~amortization of servicing rights.

Non-interest Expense: Total non-interest expense ~~increased~~decreased by ~~$1.85 million,~~$189,000, or ~~25.9%~~2.2%, to ~~$8.97~~$8.37 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$7.12~~$8.56 million for the quarter ended ~~June 30,~~December 31, 2018. This ~~increase~~decrease was primarily due to ~~increases~~a $101,000 decrease in FDIC insurance expense, a $99,000 gain on sales/dispositions of ~~$589,000~~premises and equipment, an $89,000 decrease in data processing and telecommunications and smaller decreases in several other categories. These decreases were partially offset by a $116,000 increase in salaries and employee ~~benefits~~benefit expense ~~$522,000~~and smaller increases in several other categories. The FDIC insurance expense was reduced due to the Bank's receipt of an FDIC insurance assessment credit. The gain on sales/dispositions was primarily due to the sale of land acquired in the South Sound Acquisition that had been held for future expansion. The decrease in data processing and telecommunications expense ~~$237,000~~was primarily due to net decreased costs with the Company's new core processing provider and converting the acquired South Sound Bank branches to the new system in ~~OREO related expenses, $203,000 in premises and equipment expenses, $120,000 in CDI amortization and smaller increases in several other categories.~~July 2019. The increase in salaries and employee benefits expense was primarily due to ~~the additional employees added as a result of the South Sound Merger and~~ annual salary ~~adjustments. The increase~~adjustments in data processing and telecommunications expense was primarily a result of expenses associated with the recent core operating system conversion to the Jack Henry Silverlake platform and the upcoming conversion of the branches acquired in the South Sound Merger to the Silverlake platform. The increase in OREO related expenses was primarily due to a $124,000 gain on sale of an OREO property in the comparable quarter one year ago (which reduced expenses) and higher maintenance costs in the current quarter. The increase in premises and equipment expense was primarily a result of the South Sound Merger and an increase in building maintenance expenses.October 2019.

~~Total non-interest expense increased by $5.29 million, or 24.6%, to $26.81 million for the nine months ended June 30, 2019 from $21.52 million for the nine months ended June 30, 2018.~~ This increase was primarily due to increases of $2.11 million in salaries and employee benefits expense, $1.24 million in data processing and telecommunications expense, $585,000 in premises and equipment expenses, $339,000 in CDI amortization and smaller increases in several other categories.

During the nine months ended June 30, 2019, the Company incurred South Sound Merger acquisition related expenses of $447,000, of which $317,000 is included in data processing and telecommunication category and $130,000 is included in the professional fees category. During the nine months ended June 30, 2018, the Company incurred South Sound Merger acquisition related expenses of $270,000, which are included in the professional fees category. The Company is scheduled to fully integrate the branches acquired in the South Sound Merger to the new core operating system in the upcoming quarter and expects to incur approximately $450,000 in conversion related expense during the quarter ending September 30, 2019.

The efficiency ratio for the current quarter improved to ~~54.43%~~49.43% from ~~55.33.%~~54.85% for the comparable quarter one year ago as ~~the increases in~~ net interest income and non-interest income ~~outpaced the increase in~~increased and non-interest ~~expense. The efficiency ratio for the nine months ended June 30, 2019 improved to 54.98% from 56.41% for the nine months ended June 30, 2018.~~expenses decreased.

Provision for Income Taxes: The provision for income taxes increased by ~~$218,000,~~$282,000, or ~~16.3%~~19.7%, to ~~$1.55~~$1.72 million for the quarter ended ~~June 30,~~December 31, 2019 from ~~$1.33~~$1.43 million for the quarter ended ~~June 30,~~December 31, 2018, ~~and decreased by $69,000, or 1.6%,~~primarily due to ~~$4.26 million for the nine months ended June 30, 2019 from $4.33 million for the nine months ended June 30. 2018.~~higher income before income taxes. The Company's effective tax rate was ~~20.67%~~20.50% for the quarter ended ~~June 30,~~December 31, 2019 and ~~23.20%~~20.33% for the quarter ended ~~June 30,~~December 31, 2018. The Company's effective tax rate was 19.42% for the nine months ended June 30, 2019 and 26.04% for the nine months ended June 30, 2018. The decrease in the effective tax rate for the current periods was primarily due to the lower effective corporate federal income tax rate as a result of the Tax Act. A higher percentage of tax-exempt income, primarily due to the BOLI death benefit claim, also contributed to the lower effective tax rate for the nine months ended June 30, 2019.

For additional information, see Note 1112 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

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 ~~June 30,~~December 31, 2019, 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 ~~24.93%~~19.97%.

The Company’s total cash and cash equivalents and CDs held for investment ~~increased~~decreased by ~~$39.87~~$26.26 million, or ~~18.8%~~11.9%, to ~~$252.02~~$195.10 million at ~~June 30,~~December 31, 2019 from ~~$212.15~~$221.36 million at September 30, ~~2018.~~2019. 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 ~~June 30,~~December 31, 2019, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available advances up to an aggregate amount equal to 45% of total assets, limited by available collateral. The Bank also has a Letter of Credit ("LOC") of up to $23.00 million with the FHLB for the purpose of collateralizing Washington State public deposits. Any amount pledged for public deposit under the LOC reduces the Bank's available borrowing amount under the FHLB advance agreement. At ~~June 30,~~December 31, 2019, the Bank had ~~$23.00 million pledged under the LOC, which left $294.12~~$367.28 million available for additional FHLB borrowings. The Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral. At ~~June 30,~~December 31, 2019, the Bank had ~~$84.02~~$80.32 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line. The Bank also maintains a $10.00 million overnight borrowing line with PCBB. At ~~June 30,~~December 31, 2019, 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 ~~June 30,~~December 31, 2019, the Bank had loan commitments totaling ~~$96.31~~$103.63 million and undisbursed construction loans in process totaling ~~$93.18~~$82.17 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 ~~June 30,~~December 31, 2019 totaled ~~$89.30~~$94.53 million.

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 ~~June 30,~~December 31, 2019, 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 ~~June 30,~~December 31, 2019, 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 ~~June 30,~~December 31, 2019 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
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Actual				Regulatory Minimum To Be “Adequately Capitalized”				To Be “Well Capitalized” Under Prompt Corrective Action Provisions
													Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital		$147,311	12.11	%		$48,654	4.00	%		$60,817	5.00	%		$157,277	12.69	%		$49,582	4.00	%		$61,978	5.00	%

Risk-based Capital Ratios:
Common equity tier 1 capital	147,311		17.41		38,067		4.50		54,986		6.50		157,277		17.97		39,299		4.50		56,765		6.50

Tier 1 capital	147,311		17.41		50,756		6.00		67,675		8.00		157,277		17.97		52,398		6.00		69,865		8.00

Total capital	157,179		18.58		67,675		8.00		84,594		10.00		167,390		19.13		69,865		8.00		87,331		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 ~~June 30,~~December 31, 2019, the Bank's CET1 capital exceeded the required capital conservation ~~buffer was 10.41%.~~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 ~~June 30,~~December 31, 2019, 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 ~~June 30,~~December 31, 2019 (dollars in thousands):


	Actual
	Amount		Ratio		Actual
					Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital		$150,193	12.32	%		$160,351	12.91	%

Risk-based Capital Ratios:
Common equity tier 1 capital	150,193		17.74		160,351		18.31

Tier 1 capital	150,193		17.74		160,351		18.31

Total capital	160,061		18.91		170,464		19.47

Key Financial Ratios and Data

(Dollars in thousands, except per share data)


	Three Months Ended June 30,				Nine Months Ended June 30,				Three Months Ended December 31,
	2019		2018		2019		2018		2019		2018
PERFORMANCE RATIOS:
Return on average assets	1.93	%	1.78	%	1.94	%	1.68	%	2.12	%	1.88	%
Return on average equity	14.56	%	14.87	%	14.86	%	14.21	%	15.40	%	14.56	%
Net interest margin	4.49	%	4.18	%	4.49	%	4.19	%	4.43	%	4.47	%
Efficiency ratio	54.43	%	55.33	%	54.98	%	56.41	%	49.43	%	54.85	%

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, ~~2018.~~2019.

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 ~~June 30,~~December 31, 2019 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports 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 ~~June 30,~~December 31, 2019, 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.

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

~~2018~~2019 Form 10-K.

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

(a) Not applicable

(b) Not applicable

The following table sets forth the shares repurchased by the Company during the quarter ended ~~June 30,~~December 31, 2019:

Period Total No. of Shares Repurchased Average Price Paid Per Share Total No. of Shares Purchased as Part of Publicly Announced Plan Maximum No. of Shares that May Yet Be Purchased Under the Plan (1)
04/01/2019 - 04/30/2019 —
$ —
—
221,893
05/01/2019 - 05/31/2019 —
—
—
221,893
06/01/2019 - 06/30/2019 2,831
24.89
2,831
219,062
Total 2,831
$ 24.89
2,831
219,062




Period	Total No. of Shares Repurchased	Average Price Paid Per Share		Total No. of Shares Purchased as Part of Publicly Announced Plan	Maximum No. of Shares that May Yet Be Purchased Under the Plan (1)
10/01/2019 - 10/31/2019	—	$	—	—	201,453
11/01/2019 - 11/30/2019	—	—		—	201,453
12/01/2019 - 12/31/2019	—	—		—	201,453
Total	—	$	—	—	201,453

(1) On July 28, 2015 the Company announced a plan to repurchase 352,681 shares of the Company's common stock. As of ~~June 30,~~December 31, 2019, a total of ~~133,619~~151,228 shares had been repurchased at an average price of ~~$11.97~~$13.41 per share and there were ~~219,062~~201,453 shares still authorized to be repurchased under the plan. All shares were repurchased through open market broker transactions and no shares were directly repurchased from directors or officers of the Company.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None to be reported.

Item 6. Exhibits

(a) Exhibits



	2.1	Agreement and Plan of Merger, dated as of May 22, 2018, by and between Timberland Bancorp, Timberland Bank and South Sound Bank (1)
	3.1	Articles of Incorporation of the Registrant (2)
	3.3	Amended and Restated Bylaws of the Registrant (3)
	4.1	Form of Certificate of Timberland Bancorp, Inc. Common Stock (2)
	10.1	Employee Severance Compensation Plan, as revised (4)
	10.2	Employee Stock Ownership Plan (5)
	10.4	2003 Stock Option Plan (6)
	10.5	Form of Incentive Stock Option Agreement (7)
	10.6	Form of Non-qualified Stock Option Agreement (8)
	10.8	Employment Agreement with Michael R. Sand (8)
	10.9	Employment Agreement with Dean J. Brydon (8)
	10.10	Timberland Bancorp, Inc. 2014 Equity Incentive Plan (9)
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes OxleyAct
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act
	101	The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended ~~June 30,~~December 31, 2019, 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 Current Report on Form 8-K filed on May 23, 2018.


(2)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).


(3)	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2019.


(4)	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.


(5)	Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.


(6)	Incorporated by reference to the Registrant’s 2004 Annual Meeting Proxy Statement dated December 24, 2003.


(7)	Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).


(8)	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.


(9)	Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.

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: ~~August 6, 2019~~February 7, 2020	By: /s/ Michael R. Sand
	Michael R. Sand
	Chief Executive Officer
	(Principal Executive Officer)

Date: ~~August 6, 2019~~February 7, 2020	By: /s/ Dean J. Brydon
	Dean J. Brydon
	Chief Financial Officer
	(Principal Financial Officer)

EXHIBIT INDEX



Exhibit No.	Description of Exhibit

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from Timberland Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30,~~December 31, 2019 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.

5854



	Common Stock					Unearned Shares Issued to ESOP						Accumulated Other Compre-hensive Loss
	Number of Shares		Amount			Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Compre-hensive Loss			Total
Balance, September 30, 2017	7,361,077		$	13,286		$	(397	)	$	98,235		$	(124	)	$	111,000
Net income	—		—			—			12,299			—			12,299
Other comprehensive loss	—		—			—			—			(10		)	(10		)
Exercise of stock options	34,850		292			—			—			—			292
Common stock dividends ($0.47 per common share)	—		—			—			(3,469		)	—			(3,469		)
Earned ESOP shares, net of income taxes	—		454			198			—			—			652
Stock option compensation expense	—		130			—			—			—			130
Balance, June 30, 2018	7,395,927		14,162			(199		)	107,065			(134		)	120,894


Balance, September 30, 2018	7,401,177		14,394			(133		)	110,525			(129		)	124,657
Net income	—		—			—			17,685			—			17,685
Other comprehensive income	—		—			—			—			33			33
Repurchase of common stock	(2,831	)	(70		)	—			—			—			(70		)
Common stock issued for business combination	904,826		28,267			—			—			—			28,267
Exercise of stock options	37,756		340			—			—			—			340
Common stock dividends ($0.63 per common share)	—		—			—			(5,243		)	—			(5,243		)
Earned ESOP shares, net of income taxes	—		308			133			—			—			441
Stock option compensation expense	—		159			—			—			—			159
Adoption of Accounting Standards Update ("ASU") 2016-01	—		—			—			(63		)	63			—
Balance, June 30, 2019	8,340,928		$	43,398		$	—		$	122,904		$	(33	)	$	166,269



	Three Months Ended June 30, 2019			Nine Months Ended June 30, 2019
	(Dollars in thousands)
Interest income: Interest and fees on loans (1)	$	1,739		$	5,345
Interest income: Interest and dividends on investment securities and FHLB stock	129			515
Interest income: Other interest earning assets	205			474
Interest expense	(200		)	(484		)
Provision for loan losses	—			—
Non-interest income	138			408
Non-interest expense (2)	(1,002		)	(2,546		)
Net effect, pre-tax	$	1,009		$	3,712



	Nine Months Ended June 30,
	2019
Balance at the beginning of the period	$	5,650
Addition as a result of the South Sound Merger (see Note 2)	9,481
Balance at the end of the period	$	15,131



	Nine Months Ended June 30, 2018
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,082	$	(55	)	$	—		$	—	$	1,027
Multi-family	447		(40		)	—			—		407
Commercial	4,184		27			(28		)	—		4,183
Construction – custom and owner/builder	699		(32		)	—			—		667
Construction – speculative one- to four-family	128		(6		)	—			11		133
Construction – commercial	303		216			—			—		519
Construction – multi-family	173		(26		)	—			—		147
Construction – land development	—		80			—			—		80
Land	918		(172		)	(16		)	14		744
Consumer loans:
Home equity and second mortgage	983		(37		)	—			—		946
Other	121		2			(3		)	1		121
Commercial business loans	515		43			—			—		558
Total	$	9,553	$	—		$	(47	)	$	26	$	9,532