Item 1. Financial Statements
Item 1. Financial Statements (unaudited)
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2022 and September 30, 2021
(Dollars in thousands, except per share amounts)
March 31,
2022 September 30,
2021
(Unaudited) *
Assets
Cash and cash equivalents:
Cash and due from financial institutions $ 26,500 $ 26,316
Interest-bearing deposits in banks 465,802 553,880
Total cash and cash equivalents 492,302 580,196
Certificates of deposit (“CDs”) held for investment (at cost, which
approximates fair value) 28,619 28,482
Investment securities held to maturity, at amortized cost (estimated fair value of $ 184,707 and $ 70,109 )
189,405 69,102
Investment securities available for sale, at fair value 50,624 63,176
Investments in equity securities, at fair value 902 955
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost 2,194 2,103
Other investments, at cost 3,000 3,000
Loans held for sale 2,772 3,217
Loans receivable, net of allowance for loan losses of $ 13,433 and $ 13,469
1,034,080 968,454
Premises and equipment, net 21,878 22,367
Other real estate owned (“OREO”) and other repossessed assets, net 157 157
Accrued interest receivable 3,927 3,745
Bank owned life insurance (“BOLI”) 22,498 22,193
Goodwill 15,131 15,131
Core deposit intangible (“CDI”), net 1,106 1,264
Loan servicing rights, net 3,390 3,482
Operating lease right-of-use ("ROU") assets 2,129 2,283
Other assets 3,356 2,873
Total assets $ 1,877,470 $ 1,792,180
Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing demand $ 525,488 $ 535,212
Interest-bearing 1,130,938 1,035,343
Total deposits 1,656,426 1,570,555
FHLB borrowings — 5,000
Operating lease liabilities 2,210 2,359
Other liabilities and accrued expenses 6,565 7,367
Total liabilities $ 1,665,201 $ 1,585,281
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
March 31, 2022 and September 30, 2021
(Dollars in thousands, except per share amounts)
March 31,
2022 September 30,
2021
(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;
8,305,826 shares issued and outstanding - March 31, 2022 8,355,469 shares issued and outstanding - September 30, 2021
40,988 42,673
Retained earnings 171,388 164,167
Accumulated other comprehensive income (loss) ( 107 ) 59
Total shareholders’ equity 212,269 206,899
Total liabilities and shareholders’ equity $ 1,877,470 $ 1,792,180
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2022 and 2021
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, Six Months Ended
March 31,
2022 2021 2022 2021
Interest and dividend income
Loans receivable and loans held for sale $ 12,620 $ 12,790 $ 25,242 $ 26,108
Investment securities 590 284 996 585
Dividends from mutual funds, FHLB stock and other investments 27 27 54 55
Interest-bearing deposits in banks and CDs 283 259 571 569
Total interest and dividend income 13,520 13,360 26,863 27,317
Interest expense
Deposits 625 764 1,257 1,668
FHLB borrowings 2 29 17 58
Total interest expense 627 793 1,274 1,726
Net interest income 12,893 12,567 25,589 25,591
Provision for loan losses — — — —
Net interest income after provision for loan losses 12,893 12,567 25,589 25,591
Non-interest income
Net recoveries on investment securities 3 3 11 8
Service charges on deposits 1,014 941 1,927 1,996
ATM and debit card interchange transaction fees 1,247 1,237 2,523 2,393
BOLI net earnings 152 146 305 295
Gain on sales of loans, net 416 1,758 1,079 3,760
Escrow fees 44 74 123 179
Valuation recovery on loan servicing rights, net — 438 119 202
Other, net 207 289 438 612
Total non-interest income 3,083 4,886 6,525 9,445
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and six months ended March 31, 2022 and 2021
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, Six Months Ended
March 31,
2022 2021 2022 2021
Non-interest expense
Salaries and employee benefits $ 5,192 $ 4,778 $ 10,363 $ 9,391
Premises and equipment 988 998 1,916 1,955
Advertising 161 155 327 311
OREO and other repossessed assets, net 2 ( 68 ) ( 16 ) ( 94 )
ATM and debit card interchange transaction fees 450 445 914 876
Postage and courier 164 149 300 287
State and local taxes 235 255 489 538
Professional fees 322 181 593 412
Federal Deposit Insurance Corporation ("FDIC") insurance 126 105 254 201
Loan administration and foreclosure 96 90 200 171
Data processing and telecommunications 669 634 1,282 1,240
Deposit operations 262 245 561 529
Amortization of CDI 79 91 158 181
Other 587 493 1,256 963
Total non-interest expense, net 9,333 8,551 18,597 16,961
Income before income taxes 6,643 8,902 13,517 18,075
Provision for income taxes 1,316 1,651 2,705 3,534
Net income
$ 5,327 $ 7,251 $ 10,812 $ 14,541
Net income per common share
Basic $ 0.64 $ 0.87 $ 1.30 $ 1.75
Diluted $ 0.63 $ 0.86 $ 1.28 $ 1.73
Weighted average common shares outstanding
Basic 8,337,407 8,331,121 8,346,839 8,322,210
Diluted 8,421,875 8,444,798 8,435,536 8,428,595
Dividends paid per common share $ 0.22 $ 0.31 $ 0.43 $ 0.51
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2022 and 2021
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31, Six Months Ended
March 31,
2022 2021 2022 2021
Comprehensive income
Net income $ 5,327 $ 7,251 $ 10,812 $ 14,541
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $( 40 ), $ 19 , $( 45 ), and $ 15 , respectively
( 152 ) 74 ( 170 ) 57
Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:
Accretion of OTTI on investment securities held to maturity, net of income taxes of $ 1 , $ 1 , $1, and $1, respectively
3 3 4 3
Total other comprehensive income (loss), net of income taxes ( 149 ) 77 ( 166 ) 60
Total comprehensive income $ 5,178 $ 7,328 $ 10,646 $ 14,601
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three and six months ended March 31, 2022 and 2021
(Dollars in thousands, except per share amounts)
(Unaudited)
Number of Shares Amount Accumulated
Other
Compre-hensive
Income (Loss)
Common
Stock Common
Stock Retained
Earnings Total
Balance, December 31, 2020 8,317,793 $ 42,480 $ 150,801 $ 44 $ 193,325
Net income — — 7,251 — 7,251
Other comprehensive income — — — 77 77
Exercise of stock options 43,664 423 — — 423
Common stock dividends ($0.31 per common share) — — ( 2,579 ) — ( 2,579 )
Stock option compensation expense — 46 — — 46
Balance, March 31, 2021 8,361,457 $ 42,949 $ 155,473 $ 121 $ 198,543
Balance, December 31, 2021 8,348,821 $ 42,436 $ 167,897 $ 42 $ 210,375
Net income — — 5,327 — 5,327
Other comprehensive loss — — — ( 149 ) ( 149 )
Repurchase of common stock ( 61,565 ) ( 1,716 ) — — ( 1,716 )
Exercise of stock options 18,570 202 — — 202
Common stock dividends ($0.22 per common share) — — ( 1,836 ) — ( 1,836 )
Stock option compensation expense — 66 — — 66
Balance, March 31, 2022 8,305,826 $ 40,988 $ 171,388 $ ( 107 ) $ 212,269
Common Stock Accumulated
Other
Compre-hensive
Income (Loss)
Number of Shares Amount Retained
Earnings Total
Balance, September 30, 2020 8,310,793 $ 42,396 $ 145,173 $ 61 $ 187,630
Net income — — 14,541 — 14,541
Other comprehensive income — — — 60 60
Repurchase of common stock ( 2,900 ) ( 58 ) — — ( 58 )
Exercise of stock options 53,564 519 — — 519
Common stock dividends ($0.51 per common share) — — ( 4,241 ) — ( 4,241 )
Stock option compensation expense — 92 — — 92
Balance, March 31, 2021 8,361,457 $ 42,949 $ 155,473 $ 121 $ 198,543
Balance, September 30, 2021 8,355,469 $ 42,673 $ 164,167 $ 59 $ 206,899
Net income — — 10,812 — 10,812
Other comprehensive loss — — — ( 166 ) ( 166 )
Repurchase of common stock ( 77,113 ) ( 2,149 ) — — ( 2,149 )
Exercise of stock options 27,470 332 — — 332
Common stock dividends ($0.43 per common share) — — ( 3,591 ) — ( 3,591 )
Stock option compensation expense — 132 — — 132
Balance, March 31, 2022 8,305,826 $ 40,988 $ 171,388 $ ( 107 ) $ 212,269
See notes to unaudited consolidated financial statements
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TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2022 and 2021
(Dollars in thousands)
(Unaudited)
Six Months Ended March 31,
2022 2021
Cash flows from operating activities
Net income $ 10,812 $ 14,541
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 708 781
Deferred income taxes 266 51
Accretion of discount on purchased loans ( 91 ) ( 207 )
Amortization of CDI 158 181
Stock option compensation expense 132 92
Net recoveries on investment securities ( 11 ) ( 8 )
Change in fair value of investments in equity securities 53 20
Amortization (accretion) of discounts and premiums on securities 176 ( 16 )
Gain on sales of OREO and other repossessed assets, net — ( 92 )
Gain on sales of loans, net ( 1,079 ) ( 3,760 )
Loans originated for sale ( 37,915 ) ( 85,313 )
Proceeds from sales of loans 39,439 85,127
Amortization of loan servicing rights 600 529
Valuation recovery on loan servicing rights, net ( 119 ) ( 202 )
BOLI net earnings ( 305 ) ( 295 )
Increase (decrease) in deferred loan origination fees ( 1,342 ) 563
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 2,071 ) ( 1,826 )
Net cash provided by operating activities 9,411 10,166
Cash flows from investing activities
Net (increase) decrease in CDs held for investment ( 137 ) 25,871
Purchase of investment securities held to maturity ( 126,272 ) ( 15,050 )
Purchase of investment securities available for sale — ( 16,383 )
Proceeds from maturities and prepayments of investment securities held to maturity 5,992 6,589
Proceeds from maturities and prepayments of investment securities available for sale 12,152 5,093
Purchase of FHLB stock ( 91 ) ( 381 )
Increase in loans receivable, net ( 64,193 ) ( 17,164 )
Purchases of premises and equipment ( 219 ) ( 509 )
Proceeds from sales of OREO and other repossessed assets — 985
Net cash used in investing activities ( 172,768 ) ( 10,949 )
S ee notes to unaudited consolidated financial statements
9
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2022 and 2021
(Dollars in thousands)
(Unaudited)
Six Months Ended March 31,
2022 2021
Cash flows from financing activities
Net increase in deposits $ 85,871 $ 123,453
Repayments of FHLB borrowings ( 5,000 ) —
Proceeds from exercise of stock options 332 519
Repurchase of common stock ( 2,149 ) ( 58 )
Payment of dividends ( 3,591 ) ( 4,241 )
Net cash provided by financing activities 75,463 119,673
Net increase (decrease) in cash and cash equivalents ( 87,894 ) 118,890
Cash and cash equivalents
Beginning of period 580,196 314,452
End of period $ 492,302 $ 433,342
Supplemental disclosure of cash flow information
Income taxes paid $ 2,188 $ 2,688
Interest paid $ 1,305 $ 1,818
Supplemental disclosure of non-cash investing activities
Other comprehensive income (loss) related to investment securities $ ( 166 ) $ 60
See notes to unaudited consolidated financial statements
10
Timberland Bancorp, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited consolidated financial statements of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank (the "Bank") (collectively, "the Company") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021 (“2021 Form 10-K”). The unaudited consolidated results of operations for the six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2022.
(b) Principles of Consolidation: The unaudited consolidated financial statements include the accounts of the Company 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 under the operating name, "Timberland Bank."
(d) The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
(e) Certain prior period amounts have been reclassified to conform to the March 31, 2022 presentation with no change to previously reported net income or total shareholders’ equity.
11
(2) INVESTMENT SECURITIES
Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of March 31, 2022 and September 30, 2021 (dollars in thousands):
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
March 31, 2022
Held to maturity
U.S. Treasury and U.S. government agency securities $ 141,927 $ 24 $ ( 4,150 ) $ 137,801
Mortgage-backed securities ("MBS"):
U.S. government agencies 21,858 215 ( 508 ) 21,565
Private label residential 25,120 273 ( 542 ) 24,851
Bank issued trust preferred securities 500 — ( 10 ) 490
Total $ 189,405 $ 512 $ ( 5,210 ) $ 184,707
Available for sale
MBS: U.S. government agencies $ 50,745 $ 105 $ ( 226 ) $ 50,624
Total $ 50,745 $ 105 $ ( 226 ) $ 50,624
September 30, 2021
Held to maturity
U.S. Treasury and U.S. government agency securities $ 28,760 $ 8 $ ( 99 ) $ 28,669
MBS:
U.S. government agencies 25,913 936 ( 122 ) 26,727
Private label residential 13,929 302 ( 23 ) 14,208
Bank issued trust preferred securities 500 5 — 505
Total $ 69,102 $ 1,251 $ ( 244 ) $ 70,109
Available for sale
MBS: U.S. government agencies $ 63,080 $ 210 $ ( 114 ) $ 63,176
Total $ 63,080 $ 210 $ ( 114 ) $ 63,176
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Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2022 (dollars in thousands):
Less Than 12 Months 12 Months or Longer Total
Estimated
Fair
Value Gross
Unrealized
Losses Quantity Estimated
Fair
Value Gross
Unrealized
Losses Quantity Estimated
Fair
Value Gross
Unrealized
Losses
Held to maturity
U.S. Treasury and U.S. government agency securities $ 127,757 $ ( 4,150 ) 23 $ — $ — 1 $ 127,757 $ ( 4,150 )
MBS:
U.S. government agencies 8,405 ( 507 ) 10 416 ( 1 ) 4 8,821 ( 508 )
Private label residential 21,091 ( 505 ) 15 3,356 ( 37 ) 1 24,447 ( 542 )
Bank issued trust preferred securities 500 ( 10 ) 1 — — — 500 ( 10 )
Total
$ 157,753 $ ( 5,172 ) 49 $ 3,772 $ ( 38 ) 6 $ 161,525 $ ( 5,210 )
Available for sale
MBS: U.S. government agencies $ 12,072 $ ( 27 ) 10 $ 17,391 $ ( 199 ) 10 $ 29,463 $ ( 226 )
Total
$ 12,072 $ ( 27 ) 10 $ 17,391 $ ( 199 ) 10 $ 29,463 $ ( 226 )
Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2021 (dollars in thousands):
Less Than 12 Months 12 Months or Longer Total
Estimated
Fair
Value Gross
Unrealized Losses Quantity Estimated
Fair
Value Gross
Unrealized Losses Quantity Estimated
Fair
Value Gross
Unrealized Losses
Held to maturity
U.S. Treasury and U.S. government agency securities $ 18,795 $ ( 99 ) 5 $ — $ — — $ 18,795 $ ( 99 )
MBS:
U.S. government agencies 8,091 ( 122 ) 5 15 — 3 8,106 ( 122 )
Private label residential
9,712 ( 23 ) 4 1 — 1 9,713 ( 23 )
Total
$ 36,598 $ ( 244 ) 14 $ 16 $ — 4 $ 36,614 $ ( 244 )
Available for sale
MBS: U.S. government agencies $ 20,146 $ ( 103 ) 13 $ 5,491 $ ( 11 ) 3 $ 25,637 $ ( 114 )
Total
$ 20,146 $ ( 103 ) 13 $ 5,491 $ ( 11 ) 3 $ 25,637 $ ( 114 )
The Company has evaluated the investment securities in the above tables and has determined that the declines in their fair value are temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the fair value recovers. Further, as of March 31, 2022, management does not have the intent to sell any of the securities classified as available for sale for which 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).
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The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.
The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of March 31, 2022 and 2021:
Range Weighted
Minimum Maximum Average
March 31, 2022
Constant prepayment rate 6.00 % 15.00 % 8.37 %
Collateral default rate 0.53 % 21.55 % 10.53 %
Loss severity rate — % 8.53 % 3.72 %
March 31, 2021
Constant prepayment rate 6.00 % 15.00 % 13.18 %
Collateral default rate 1.73 % 28.92 % 13.94 %
Loss severity rate — % 18.93 % 5.79 %
The following table presents the OTTI recoveries for the three and six months ended March 31, 2022 and 2021 (dollars in thousands):
Three Months Ended
March 31, 2022 Three Months Ended
March 31, 2021
Held To
Maturity Held To
Maturity
Total recoveries $ 3 $ 3
Net recoveries recognized in earnings (1) $ 3 $ 3
Six Months Ended
March 31, 2022 Six Months Ended
March 31, 2021
Held To
Maturity Held To
Maturity
Total recoveries $ 11 $ 8
Net recoveries recognized in earnings (1) $ 11 $ 8
_________________
(1) Represents OTTI related to credit losses.
14
The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the six months ended March 31, 2022 and 2021 (dollars in thousands):
Six Months Ended
March 31,
2022 2021
Beginning balance of credit loss $ 853 $ 885
Additions (subtractions):
Net realized gain (losses) previously recorded
as credit losses
1 ( 5 )
Recovery of prior credit loss ( 8 ) ( 8 )
Ending balance of credit loss $ 846 $ 872
During the six months ended March 31, 2022, the Company recorded a $ 1,000 net realized gain on 14 held to maturity investment securities. During the six months ended March 31, 2021, the Company recorded a $ 5,000 net realized loss (as a result of investment securities being deemed worthless) on 13 held to maturity investment securities, all of which had been recognized previously as a credit loss.
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 $ 82.57 million and $ 97.60 million at March 31, 2022 and September 30, 2021, respectively.
The contractual maturities of debt securities at March 31, 2022 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
Held to Maturity Available for Sale
Amortized
Cost Estimated
Fair
Value Amortized
Cost Estimated
Fair
Value
Due after one year to five years 109,829 105,932 3,622 3,616
Due after five years to ten years 50,532 50,333 12,062 12,047
Due after ten years 29,044 28,442 35,061 34,961
Total $ 189,405 $ 184,707 $ 50,745 $ 50,624
(3) GOODWILL AND CDI
Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit.
The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.
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The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.
Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. The Company performed its fiscal year 2021 goodwill impairment test during the quarter ended June 30, 2021. 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, 2021.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.
As of March 31, 2022, management believes that there have been no events or changes in the circumstances since May 31, 2021 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or decreases in the Company's stock price and market capitalization as a result of the novel coronavirus of 2019 ("COVID-19") pandemic were to be deemed to be other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at March 31, 2022 and September 30, 2021 remained unchanged at $ 15.13 million.
CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of March 31, 2022, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.
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(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable by portfolio segment consisted of the following at March 31, 2022 and September 30, 2021 (dollars in thousands):
March 31,
2022 September 30,
2021
Amount Percent Amount Percent
Mortgage loans:
One- to four-family (1) $ 133,925 11.6 % $ 119,935 11.1 %
Multi-family 82,526 7.2 87,563 8.1
Commercial 523,479 45.5 470,650 43.5
Construction - custom and owner/builder 114,394 9.9 109,152 10.1
Construction - speculative one- to four-family 15,438 1.3 17,813 1.6
Construction - commercial 35,416 3.1 43,365 4.0
Construction - multi-family 64,141 5.6 52,071 4.8
Construction - land development 10,687 0.9 10,804 1.0
Land 22,192 1.9 19,936 1.8
Total mortgage loans 1,002,198 87.0 931,289 86.0
Consumer loans:
Home equity and second mortgage 32,980 2.9 32,988 3.1
Other 2,277 0.2 2,512 0.2
Total consumer loans 35,257 3.1 35,500 3.3
Commercial loans:
Commercial business 108,644 9.4 74,579 6.9
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans 5,934 0.5 40,922 3.8
Total commercial loans 114,578 9.9 % 115,501 10.7
Total loans receivable 1,152,033 100.0 % 1,082,290 100.0 %
Less:
Undisbursed portion of construction loans in process 100,719 95,224
Deferred loan origination fees, net 3,801 5,143
Allowance for loan losses 13,433 13,469
Subtotal 117,953 113,836
Loans receivable, net $ 1,034,080 $ 968,454
_____________________________
(1) Does not include one- to four-family loans held for sale totaling $ 2,772 and $ 3,217 at March 31, 2022 and September 30, 2021, respectively.
Loans receivable at March 31, 2022 and September 30, 2021 are reported net of unamortized discounts totaling $ 358,000 and $ 449,000 , respectively.
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Allowance for Loan Losses
The following tables set forth information for the three and six months ended March 31, 2022 and 2021 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):
Three Months Ended March 31, 2022
Beginning
Allowance Provision for
(Recapture of) Loan Losses Charge-
offs Recoveries Ending
Allowance
Mortgage loans:
One- to four-family $ 1,237 $ 10 $ — $ — $ 1,247
Multi-family 748 ( 13 ) — — 735
Commercial 6,807 124 — — 6,931
Construction – custom and owner/builder 671 15 — — 686
Construction – speculative one- to four-family 153 ( 27 ) — — 126
Construction – commercial 593 ( 130 ) — — 463
Construction – multi-family 460 ( 24 ) — — 436
Construction – land development 157 ( 31 ) — — 126
Land 435 ( 58 ) — — 377
Consumer loans:
Home equity and second mortgage 532 ( 63 ) — — 469
Other 48 ( 4 ) ( 1 ) 1 44
Commercial business loans 1,627 201 ( 49 ) 14 1,793
Total $ 13,468 $ — $ ( 50 ) $ 15 $ 13,433
Six Months Ended March 31, 2022
Beginning
Allowance Provision for
(Recapture of) Loan Losses Charge-
offs Recoveries Ending
Allowance
Mortgage loans:
One-to four-family $ 1,154 $ 93 $ — $ — $ 1,247
Multi-family 765 ( 30 ) — — 735
Commercial 6,813 118 — — 6,931
Construction – custom and owner/builder 644 42 — — 686
Construction – speculative one- to four-family 188 ( 62 ) — — 126
Construction – commercial 784 ( 321 ) — — 463
Construction – multi-family 436 — — — 436
Construction – land development 124 2 — — 126
Land 470 ( 93 ) — — 377
Consumer loans:
Home equity and second mortgage 528 ( 59 ) — — 469
Other 50 ( 5 ) ( 2 ) 1 44
Commercial business loans 1,513 315 ( 49 ) 14 1,793
Total $ 13,469 $ — $ ( 51 ) $ 15 $ 13,433
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Three Months Ended March 31, 2021
Beginning
Allowance Provision for
(Recapture of) Loan Losses Charge-
offs Recoveries Ending
Allowance
Mortgage loans:
One- to four-family $ 1,135 $ 16 $ — $ — $ 1,151
Multi-family 757 27 — — 784
Commercial 7,136 102 — — 7,238
Construction – custom and owner/builder 770 ( 75 ) — — 695
Construction – speculative one- to four-family 182 ( 34 ) — — 148
Construction – commercial 558 156 — — 714
Construction – multi-family 186 137 — — 323
Construction – land development 123 ( 104 ) — — 19
Land 474 ( 72 ) — 5 407
Consumer loans:
Home equity and second mortgage 605 ( 53 ) — — 552
Other 57 — ( 1 ) — 56
Commercial business loans 1,449 ( 100 ) ( 2 ) — 1,347
Total $ 13,432 $ — $ ( 3 ) $ 5 $ 13,434
Six Months Ended March 31, 2021
Beginning
Allowance Provision for
(Recapture of) Loan Losses Charge-
offs Recoveries Ending
Allowance
Mortgage loans:
One-to four-family $ 1,163 $ ( 12 ) $ — $ — $ 1,151
Multi-family 718 66 — — 784
Commercial 7,144 94 — — 7,238
Construction – custom and owner/builder 832 ( 137 ) — — 695
Construction – speculative one- to four-family 158 ( 10 ) — — 148
Construction – commercial 420 294 — — 714
Construction – multi-family 238 85 — — 323
Construction – land development 133 ( 114 ) — — 19
Land 572 ( 175 ) — 10 407
Consumer loans:
Home equity and second mortgage 593 ( 41 ) — — 552
Other 71 ( 18 ) ( 1 ) 4 56
Commercial business loans 1,372 ( 32 ) ( 2 ) 9 1,347
Total $ 13,414 $ — $ ( 3 ) $ 23 $ 13,434
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The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at March 31, 2022 and September 30, 2021 (dollars in thousands):
Allowance for Loan Losses Recorded Investment in Loans
Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Total Individually
Evaluated for
Impairment Collectively
Evaluated for
Impairment Total
March 31, 2022
Mortgage loans:
One- to four-family $ — $ 1,247 $ 1,247 $ 578 $ 133,347 $ 133,925
Multi-family — 735 735 — 82,526 82,526
Commercial — 6,931 6,931 3,023 520,456 523,479
Construction – custom and owner/builder — 686 686 — 68,530 68,530
Construction – speculative one- to four-family — 126 126 — 7,634 7,634
Construction – commercial — 463 463 — 28,005 28,005
Construction – multi-family — 436 436 — 29,048 29,048
Construction – land development — 126 126 — 6,140 6,140
Land — 377 377 723 21,469 22,192
Consumer loans:
Home equity and second mortgage — 469 469 413 32,567 32,980
Other — 44 44 5 2,272 2,277
Commercial business loans 127 1,666 1,793 405 108,239 108,644
SBA PPP loans — — — — 5,934 5,934
Total $ 127 $ 13,306 $ 13,433 $ 5,147 $ 1,046,167 $ 1,051,314
September 30, 2021
Mortgage loans:
One- to four-family $ — $ 1,154 $ 1,154 $ 407 $ 119,528 $ 119,935
Multi-family — 765 765 — 87,563 87,563
Commercial — 6,813 6,813 3,143 467,507 470,650
Construction – custom and owner/builder
— 644 644 — 61,003 61,003
Construction – speculative one- to four-family
— 188 188 — 9,657 9,657
Construction – commercial — 784 784 — 38,931 38,931
Construction – multi-family — 436 436 — 22,888 22,888
Construction – land development — 124 124 — 5,502 5,502
Land 76 394 470 683 19,253 19,936
Consumer loans:
Home equity and second mortgage
— 528 528 516 32,472 32,988
Other — 50 50 17 2,495 2,512
Commercial business loans 171 1,342 1,513 458 74,121 74,579
SBA PPP loans — — — — 40,922 40,922
Total $ 247 $ 13,222 $ 13,469 $ 5,224 $ 981,842 $ 987,066
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The following tables present an analysis of loans by aging category and portfolio segment at March 31, 2022 and September 30, 2021 (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
March 31, 2022
Mortgage loans:
One- to four-family $ — $ — $ 578 $ — $ 578 $ 133,347 $ 133,925
Multi-family — — — — — 82,526 82,526
Commercial 215 8 671 — 894 522,585 523,479
Construction – custom and owner/builder — — — — — 68,530 68,530
Construction – speculative one- to four-family — — — — — 7,634 7,634
Construction – commercial — — — — — 28,005 28,005
Construction – multi-family — — — — — 29,048 29,048
Construction – land development — — — — — 6,140 6,140
Land — — 723 — 723 21,469 22,192
Consumer loans:
Home equity and second mortgage 67 — 269 — 336 32,644 32,980
Other — — 5 — 5 2,272 2,277
Commercial business loans — — 405 — 405 108,239 108,644
SBA PPP loans — — — — — 5,934 5,934
Total $ 282 $ 8 $ 2,651 $ — $ 2,941 $ 1,048,373 $ 1,051,314
September 30, 2021
Mortgage loans:
One- to four-family $ — $ 180 $ 407 $ — $ 587 $ 119,348 $ 119,935
Multi-family — — — — — 87,563 87,563
Commercial — — 773 — 773 469,877 470,650
Construction – custom and owner/builder
— — — — — 61,003 61,003
Construction – speculative one- to four-family
— — — — — 9,657 9,657
Construction – commercial — — — — — 38,931 38,931
Construction – multi-family — — — — — 22,888 22,888
Construction – land development — — — — — 5,502 5,502
Land — — 683 — 683 19,253 19,936
Consumer loans:
Home equity and second mortgage — — 516 — 516 32,472 32,988
Other — — 17 — 17 2,495 2,512
Commercial business loans 5 458 463 74,116 74,579
SBA PPP loans — — — — — 40,922 40,922
Total $ 5 $ 180 $ 2,854 $ — $ 3,039 $ 984,027 $ 987,066
______________________
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.
21
Credit Quality Indicators
The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:
Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.
Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.
Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.
Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.
Doubtful: Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. At March 31, 2022 and September 30, 2021, there were no loans classified as doubtful.
Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At March 31, 2022 and September 30, 2021, there were no loans classified as loss.
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The following tables present an analysis of loans by credit quality indicator and portfolio segment at March 31, 2022 and September 30, 2021 (dollars in thousands):
Loan Grades
March 31, 2022 Pass Watch Special
Mention Substandard Total
Mortgage loans:
One- to four-family $ 133,298 $ 45 $ — $ 582 $ 133,925
Multi-family 82,526 — — — 82,526
Commercial 511,127 3,418 2,915 6,019 523,479
Construction – custom and owner/builder 67,692 838 — — 68,530
Construction – speculative one- to four-family 7,634 — — — 7,634
Construction – commercial 26,488 — 1,517 — 28,005
Construction – multi-family 29,048 — — — 29,048
Construction – land development 6,109 — — 31 6,140
Land 20,929 540 — 723 22,192
Consumer loans:
Home equity and second mortgage 32,355 144 — 481 32,980
Other 2,207 65 — 5 2,277
Commercial business loans 108,199 — — 445 108,644
SBA PPP loans 5,934 — — — 5,934
Total $ 1,033,546 $ 5,050 $ 4,432 $ 8,286 $ 1,051,314
September 30, 2021
Mortgage loans:
One- to four-family $ 118,857 $ 129 $ 537 $ 412 $ 119,935
Multi-family 87,563 — — — 87,563
Commercial 456,188 10,285 2,921 1,256 470,650
Construction – custom and owner/builder 59,699 1,304 — — 61,003
Construction – speculative one- to four-family 9,657 — — — 9,657
Construction – commercial 37,414 — 1,517 — 38,931
Construction – multi-family 22,888 — — — 22,888
Construction – land development 5,467 — — 35 5,502
Land 18,648 558 — 730 19,936
Consumer loans:
Home equity and second mortgage 32,190 145 — 653 32,988
Other 2,465 30 — 17 2,512
Commercial business loans
73,992 49 37 501 74,579
SBA PPP loans 40,922 — — — 40,922
Total $ 965,950 $ 12,500 $ 5,012 $ 3,604 $ 987,066
Impaired Loans
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.
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The following table is a summary of information related to impaired loans by portfolio segment as of March 31, 2022 and for the three and six months then ended (dollars in thousands):
Recorded
Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related
Allowance Quarter to Date ("QTD") Average Recorded Investment (1) Year to Date ("YTD") Average Recorded Investment (2) QTD Interest Income Recognized (1) YTD Interest Income Recognized (2) QTD Cash Basis Interest Income Recognized (1) YTD Cash Basis Interest Income Recognized (2)
With no related allowance recorded:
Mortgage loans:
One- to four-family $ 578 $ 621 $ — $ 580 $ 522 $ 8 $ 16 $ 8 $ 16
Commercial 3,023 3,023 — 3,030 3,068 39 79 32 63
Land 723 723 — 518 452 — — — —
Consumer loans:
Home equity and second mortgage 413 413 — 435 462 1 1 1 1
Other 5 5 — 5 9 — — — —
Commercial business loans 156 204 — 158 160 — — — —
Subtotal 4,898 4,989 — 4,726 4,673 48 96 41 80
With an allowance recorded:
Mortgage loans:
Land — — — 181 241 — — — —
Commercial business loans 249 249 127 274 281 — — — —
Subtotal 249 249 127 455 522 — — — —
Total:
Mortgage loans:
One- to four-family 578 621 — 580 522 8 16 8 16
Commercial 3,023 3,023 — 3,030 3,068 39 79 32 63
Land 723 723 — 699 693 — — — —
Consumer loans:
Home equity and second mortgage 413 413 — 435 462 1 1 1 1
Other 5 5 — 5 9 — — — —
Commercial business loans 405 453 127 432 441 — — — —
Total $ 5,147 $ 5,238 $ 127 $ 5,181 $ 5,195 $ 48 $ 96 $ 41 $ 80
______________________________________________
(1) For the three months ended March 31, 2022 .
(2) For the six months ended March 31, 2022.
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The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2021 (dollars in thousands):
Recorded
Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related
Allowance YTD
Average
Recorded
Investment (1) YTD Interest
Income
Recognized
(1) YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:
Mortgage loans:
One- to four-family $ 407 $ 450 $ — $ 655 $ 58 $ 52
Commercial 3,143 3,143 — 3,039 159 127
Land
321 321 — 292 2 2
Consumer loans:
Home equity and second mortgage 516 516 — 552 1 1
Other 17 17 — 12 — —
Commercial business loans 164 168 — 200 — —
Subtotal 4,568 4,615 — 4,750 220 182
With an allowance recorded:
Mortgage loans:
One- to four-family — — — 97 — —
Land 362 362 76 72 — —
Commercial business loans 294 294 171 285 — —
Subtotal 656 656 247 454 — —
Total
Mortgage loans:
One- to four-family 407 450 — 752 58 52
Commercial 3,143 3,143 — 3,039 159 127
Land 683 683 76 364 2 2
Consumer loans:
Home equity and second mortgage 516 516 — 552 1 1
Other 17 17 — 12 — —
Commercial business loans 458 462 171 485 — —
Total $ 5,224 $ 5,271 $ 247 $ 5,204 $ 220 $ 182
_____________________________________________
(1) For the year ended September 30, 2021.
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 $ 2.67 million and $ 2.55 million in TDRs included in impaired loans at March 31, 2022 and September 30, 2021, respectively, and had no commitments at these dates to lend additional funds on these loans. There was no allowance for loan losses allocated to TDRs at March 31, 2022 and September 30, 2021. There were no TDRs for which there was a payment default within the first 12 months of the modification during the six months ended March 31, 2022.
The Coronavirus Aid, Relief, and Economic Security Act of 2020, signed into law on March 27, 2020 ("CARES Act"), provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers,
25
extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. On December 27, 2020, the Consolidated Appropriations Act, 2021 ("CAA 2021") was signed into law. Among other purposes,the CAA 2021, provided coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19. The provisions ended on January 1, 2022.
In response to requests from borrowers and in accordance with the CARES Act and related regulatory guidance, the Company made payment deferral COVID-19 related modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All of these borrowers had resumed making payments as of March 31, 2022. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.
There were no loans with COVID-19 loan modifications on deferral status outstanding at March 31, 2022. The following table sets forth information with respect to COVID-19 loan modifications on deferral status at September 30, 2021 (dollars in thousands):
COVID-19 Loan Modifications September 30, 2021
Mortgage loans Number Balance Percent
One- to four-family 1 $ 323 100.0 %
Total COVID-19 Modifications 1 $ 323 100.0 %
The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of March 31, 2022 and September 30, 2021 (dollars in thousands):
March 31, 2022
Accruing Non-
Accrual Total
Mortgage loans:
Commercial $ 2,352 $ — $ 2,352
Land — 113 113
Consumer loans:
Home equity and second mortgage 144 59 203
Total $ 2,496 $ 172 $ 2,668
September 30, 2021
Accruing Non-
Accrual Total
Mortgage loans:
Commercial $ 2,371 $ — $ 2,371
Land — 119 119
Consumer loans:
Home equity and second mortgage — 63 63
Total $ 2,371 $ 182 $ 2,553
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There was one new TDR recognized during the six months ended March 31, 2022. There were no new TDRs recognized during the year ended September 30, 2021. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the six months ended March 31, 2022:
March 31, 2022 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 $ 136 $ 144 $ 144
Total 1 $ 136 $ 144 $ 144
(1) Modification was a result of an increase in principal balance and a reduction in interest rate and monthly payment.
(5) LEASES
The Company adopted the Financial Accounting Standard Board's ("FASB's") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets in 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 sixteen months to eleven years, some of which include options to extend the leases for up to five years.
The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three and six months ended March 31, 2022 and 2021 (dollars in thousands):
Three Months Ended March 31, Six Months Ended March 31,
Lease cost: 2022 2021 2022 2021
Operating lease cost $ 94 $ 92 $ 188 $ 185
Short-term lease cost — — — —
Total lease cost $ 94 $ 92 $ 188 $ 185
The following tables provide supplemental information related to operating leases at or for the three and six months ended March 31, 2022 and 2021 (dollars in thousands):
At or For the Three Months Ended March 31, 2022 At or For the
Six Months Ended
March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 87 $ 174
Weighted average remaining lease term-operating leases 8.1 years 8.1 years
Weighted average discount rate-operating leases 2.24 % 2.24 %
At or For the Three Months Ended March 31, 2021 At or For Six Months Ended March 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 80 $ 160
Weighted average remaining lease term-operating leases 8.8 years 8.8 years
Weighted average discount rate-operating leases 2.23 % 2.23 %
The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset and
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liability was determined by utilizing the September 30, 2019 fixed-rate advances issued by the FHLB, for all leases entered into prior to the October 1, 2019 adoption date.
Maturities of operating lease liabilities at March 31, 2022 for future fiscal years are as follows (dollars in thousands):
Remainder of 2022 $ 168
2023 310
2024 313
2025 317
2026 284
Thereafter 1,038
Total lease payments 2,430
Less imputed interest 220
Total $ 2,210
(6) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.
Information regarding the calculation of basic and diluted net income per common share for the three and six months ended March 31, 2022 and 2021 is as follows (dollars in thousands, except per share amounts):
Three Months Ended March 31, Six Months Ended March 31,
2022 2021 2022 2021
Basic net income per common share computation
Numerator – net income $ 5,327 $ 7,251 $ 10,812 $ 14,541
Denominator – weighted average common shares outstanding 8,337,407 8,331,121 8,346,839 8,322,210
Basic net income per common share $ 0.64 $ 0.87 $ 1.30 $ 1.75
Diluted net income per common share computation
Numerator – net income $ 5,327 $ 7,251 $ 10,812 $ 14,541
Denominator – weighted average common shares outstanding 8,337,407 8,331,121 8,346,839 8,322,210
Effect of dilutive stock options (1) 84,468 113,677 88,697 106,385
Weighted average common shares outstanding - assuming dilution 8,421,875 8,444,798 8,435,536 8,428,595
Diluted net income per common share $ 0.63 $ 0.86 $ 1.28 $ 1.73
____________________________________________
(1) For the three and six months ended March 31, 2022, average options to purchase 204,398 and 207,256 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive. For the three and six months ended March 31, 2021, average options to purchase 135,590 and 136,631 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive.
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(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three and six months ended March 31, 2022 and 2021 are as follows (dollars in thousands):
Three Months Ended March 31, 2022
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 $ 57 $ ( 15 ) $ 42
Other comprehensive income (loss) ( 152 ) 3 ( 149 )
Balance of AOCI at the end of period $ ( 95 ) $ ( 12 ) $ ( 107 )
Six Months Ended March 31, 2022
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 $ 75 $ ( 16 ) $ 59
Other comprehensive income (loss) ( 170 ) 4 ( 166 )
Balance of AOCI at the end of period $ ( 95 ) $ ( 12 ) $ ( 107 )
Three Months Ended March 31, 2021
Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1)
Balance of AOCI at the beginning of period $ 70 $ ( 26 ) $ 44
Other comprehensive income 74 3 77
Balance of AOCI at the end of period $ 144 $ ( 23 ) $ 121
Six Months Ended March 31, 2021
Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1)
Balance of AOCI at the beginning of period $ 87 $ ( 26 ) $ 61
Other comprehensive income 57 3 60
Balance of AOCI at the end of period $ 144 $ ( 23 ) $ 121
__________________________
(1) All amounts are net of income taxes.
(8) STOCK COMPENSATION PLANS
Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000
29
shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20 % annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At March 31, 2022, there were 26,696 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At March 31, 2022, there were 238,400 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.
At both March 31, 2022 and 2021, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the six months ended March 31, 2022 and 2021.
Stock option activity for the six months ended March 31, 2022 and 2021 is summarized as follows:
Six Months Ended March 31, 2022 Six Months Ended March 31, 2021
Number of Shares Weighted
Average
Exercise
Price Number of Shares Weighted
Average
Exercise
Price
Options outstanding, beginning of period 406,815 $ 21.62 395,349 $ 18.45
Exercised ( 27,470 ) 12.09 ( 53,564 ) 9.70
Granted 1,000 27.25 1,500 19.13
Forfeited ( 17,170 ) 25.91 ( 4,520 ) 27.57
Options outstanding, end of period 363,175 $ 22.15 338,765 $ 19.71
The fair value of stock options is determined using the Black-Scholes valuation model.
The weighted average assumptions for options granted during the six months ended March 31, 2022 were as follows:
Expected volatility 34 %
Expected life (in years) 5
Expected dividend yield 3.49 %
Risk free interest rate 1.22 %
Grant date fair value per share $ 5.88
The aggregate intrinsic value of options exercised during the six months ended March 31, 2022 and 2021 was $ 443,000 and $ 947,000 , respectively.
At March 31, 2022, there were 178,670 unvested options with an aggregate grant date fair value of $ 847,000 , all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2022 was $ 538,000 . There were 400 options vested during the six months ended March 31, 2022 with a total fair value of $ 2,000 .
At March 31, 2021, there were 158,392 unvested options with an aggregate grant date fair value of $ 565,000 . There were 200 options that vested during the six months ended March 31, 2021 with a total fair value of $ 1,000 .
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Additional information regarding options outstanding at March 31, 2022 is as follows:
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)
$ 5.86 - 6.00 4,000 $ 5.93 0.5 4,000 $ 5.93 0.5
9.00 17,500 9.00 1.6 17,500 9.00 1.6
10.26 - 10.71 50,575 10.56 2.9 50,575 10.56 2.9
15.67 - 19.13 89,450 16.53 7.3 36,130 16.05 5.7
26.50 - 27.25 41,700 27.13 7.6 16,280 27.12 7.5
28.23 - 29.69 122,250 28.79 8.0 37,400 29.69 5.5
31.80 37,700 31.80 6.5 22,620 31.80 6.5
363,175 $ 22.15 6.5 184,505 $ 19.33 4.7
The aggregate intrinsic value of options outstanding at March 31, 2022 and 2021 was $ 2.17 million and $ 2.99 million , respectively.
As of March 31, 2022, unrecognized compensation cost related to unvested stock options was $ 777,000 , which is expected to be recognized over a weighted average life of 2.31 years.
(9) FAIR VALUE MEASUREMENTS
Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances.
The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).
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The Company had no liabilities measured at fair value on a recurring basis at March 31, 2022 and September 30, 2021. The Company's assets measured at estimated fair value on a recurring basis at March 31, 2022 and September 30, 2021 were as follows (dollars in thousands):
March 31, 2022 Estimated Fair Value
Level 1 Level 2 Level 3 Total
Available for sale investment securities
MBS: U.S. government agencies $ — $ 50,624 $ — $ 50,624
Investments in equity securities
Mutual funds 902 — — 902
Total $ 902 $ 50,624 $ — $ 51,526
September 30, 2021 Estimated Fair Value
Level 1 Level 2 Level 3 Total
Available for sale investment securities
MBS: U.S. government agencies $ — $ 63,176 $ — $ 63,176
Investments in equity securities
Mutual funds 955 — — 955
Total $ 955 $ 63,176 $ — $ 64,131
There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2022 and the year ended September 30, 2021.
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 the comparable collateral included in the appraisal and known changes in the market and in the underlying 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).
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The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2022 (dollars in thousands):
Estimated Fair Value
Level 1 Level 2 Level 3
Impaired loans:
Commercial business loans $ — $ — $ 122
Total impaired loans — — 122
Investment securities – held to maturity:
MBS - private label residential — 1 —
OREO and other repossessed assets — — 157
Total $ — $ 1 $ 279
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, 2022 (dollars in thousands):
Estimated
Fair Value Valuation
Technique(s) Unobservable Input(s) Range
Impaired loans $ 122 Market approach Appraised value less estimated selling costs NA
OREO and other repossessed assets $ 157 Market approach Lower of appraised value or listing price less estimated selling costs NA
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The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2021 (dollars in thousands):
Estimated Fair Value
Level 1 Level 2 Level 3
Impaired loans:
Mortgage loans:
Land $ — $ — $ 286
Commercial business loans — — 123
Total impaired loans — — 409
Investment securities – held to maturity:
MBS - private label residential — 10 —
OREO and other repossessed assets — — 157
Total $ — $ 10 $ 566
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, 2021 (dollars in thousands):
Estimated
Fair Value Valuation
Technique(s) Unobservable Input(s) Range
Impaired loans $ 409 Market approach Appraised value less estimated selling costs NA
OREO and other repossessed assets $ 157 Market approach Lower of appraised value or listing price less estimated selling costs NA
GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a representative fair value for these types of items as of March 31, 2022 and September 30, 2021. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
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The recorded amounts and estimated fair values of financial instruments were as follows as of March 31, 2022 and September 30, 2021 (dollars in thousands):
March 31, 2022
Fair Value Measurements Using:
Recorded
Amount Estimated Fair Value
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents $ 492,302 $ 492,302 $ 492,302 $ — $ —
CDs held for investment 28,619 28,619 28,619 — —
Investment securities 240,029 235,331 137,802 97,529 —
Investments in equity securities 902 902 902 — —
FHLB stock 2,194 2,194 2,194 — —
Other investments 3,000 3,000 3,000 — —
Loans held for sale 2,772 2,822 2,822 — —
Loans receivable, net 1,034,080 1,042,196 — — 1,042,196
Accrued interest receivable 3,927 3,927 3,927 — —
Financial liabilities
Certificates of deposit 126,646 127,017 — — 127,017
Accrued interest payable 103 103 103 — —
September 30, 2021
Fair Value Measurements Using:
Recorded
Amount Estimated Fair Value
Level 1
Level 2
Level 3
Financial assets
Cash and cash equivalents $ 580,196 $ 580,196 $ 580,196 $ — $ —
CDs held for investment 28,482 28,482 28,482 — —
Investment securities 132,278 133,286 28,670 104,616 —
Investments in equity securities 955 955 955 — —
FHLB stock 2,103 2,103 2,103 — —
Other investments 3,000 3,000 3,000 — —
Loans held for sale 3,217 3,290 3,290 — —
Loans receivable, net 968,454 981,905 — — 981,905
Accrued interest receivable 3,745 3,745 3,745 — —
Financial liabilities
Certificates of deposit 134,129 135,178 — — 135,178
Accrued interest payable 134 134 134 — —
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments , as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired securities
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and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for OTTI on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to help ensure that it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates that the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax
deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption ASU 2017-04 is not expected to a have a material impact on the Company's future consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidelines. ASU 2019-12 was effective for fiscal years beginning after December 15, 2020,
including interim periods within those fiscal years. The Company adopted ASU 2019-12 effective October 1, 2021, and it did not have a material impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not adopted ASU 2020-04 as of December 31, 2021. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.
(11) REVENUE FROM CONTRACTS WITH CUSTOMERS
ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 60 6 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended March 31, 2022, the Company recognized $ 1.01 million in service charges on deposits, $ 1.25 million in ATM and debit card interchange transaction fees, $ 44,000 in escrow fees, and $ 8,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the six months ended March 31, 2022, the Company recognized $ 1.93 million in service charges on deposits, $ 2.52 million in ATM and debit card interchange transaction fees, $ 123,000 in escrow fees, and $ 10,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended March 31,
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2021, the Company recognized $ 941,000 in service charges on deposits, $ 1.24 million in ATM and debit card interchange transaction fees, $ 74,000 in escrow fees, and $ 3,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the six months ended March 31, 2021, the Company recognized $ 2.00 million in service charges on deposits, $ 2.39 million in ATM and debit card interchange transaction fees, $ 179,000 in escrow fees, and $ 7,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.
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 according to the customer's contract. Fees are recognized when the escrow contract closes.
• Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.