UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____.
Commission file number 0-23333
TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1863696
(State of Incorporation) (IRS Employer Identification No.)
624 Simpson Avenue, Hoquiam, Washington 98550
(Address of principal executive office) (Zip Code)
(360) 533-4747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer [ ] Accelerated Filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (in Rule 12b-2
of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT January 31, 2009
----- --------------------------------------
Common stock, $.01 par value 7,045,036
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6-7
Condensed Consolidated Statements of Comprehensive Income 8
Notes to Condensed Consolidated Financial Statements 9-21
Item 2. Management's Discussion and Analysis of Financial Condition 21-33
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 33-34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 1A - Risk Factors 34-35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits 36-37
SIGNATURES 38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2008 and September 30, 2008
(Dollars in thousands, except share amounts)
December 31, September 30,
2008 2008
Assets --------------------------
(Unaudited)
Cash equivalents:
Non-interest bearing $ 12,049 $ 14,013
Interest bearing deposits in banks 12,138 3,431
Federal funds sold 9,725 25,430
--------------------------
33,912 42,874
--------------------------
Investments and mortgage-backed securities: held
to maturity 12,891 14,233
Investments and mortgage-backed securities: available
for sale 15,491 17,098
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
Loans receivable 563,312 563,964
Loans held for sale 2,410 1,773
Less: Allowance for loan losses (8,166) (8,050)
--------------------------
Net loans receivable 557,556 557,687
--------------------------
Accrued interest receivable 3,087 2,870
Premises and equipment 17,369 16,884
Other real estate owned ("OREO") and other
repossessed items 1,266 511
Bank owned life insurance ("BOLI") 13,023 12,902
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 918 972
Mortgage servicing rights 1,336 1,306
Other assets 3,388 3,191
--------------------------
Total assets $ 671,592 $ 681,883
==========================
Liabilities and shareholders' equity
Deposits $ 477,341 $ 498,572
FHLB advances 99,609 104,628
Other borrowings: repurchase agreements 714 758
Other liabilities and accrued expenses 2,985 3,084
--------------------------
Total liabilities 580,649 607,042
--------------------------
Commitments and contingencies - - - -
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; - - - -
December 31, 2008 - 16,641 shares, Series A,
issued and outstanding
Common stock, $.01 par value; 50,000,000 shares
authorized; 70 70
December 31, 2008 - 7,028,015 shares issued and
outstanding
September 30, 2008 - 6,967,579 shares issued and
outstanding
Additional paid in capital 24,332 8,602
Unearned shares-Employee Stock Ownership Plan("ESOP") (2,710) (2,776)
Stock warrants 1,158 - -
Retained earnings 69,000 69,406
Accumulated other comprehensive loss (907) (461)
--------------------------
Total shareholders' equity 90,943 74,841
--------------------------
Total liabilities and shareholders' equity $ 671,592 $ 681,883
==========================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 2008 and 2007
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended December 31,
Interest and dividend income 2008 2007
-------------------
Loans receivable $9,570 $10,764
Investments and mortgage-backed securities 412 249
Dividends from mutual funds and FHLB stock 10 423
Federal funds sold 24 31
Interest bearing deposits in banks 9 10
-------------------
Total interest and dividend income 10,025 11,477
Interest expense -------------------
Deposits 2,496 3,334
FHLB advances - short term - - 468
FHLB advances - long term 1,065 748
Other borrowings - - 8
-------------------
Total interest expense 3,561 4,558
-------------------
Net interest income 6,464 6,919
Provision for loan losses 1,315 1,200
-------------------
Net interest income after provision for loan losses 5,149 5,719
-------------------
Non-interest income
Service charges on deposits 1,150 696
Gain on sale of loans, net 164 92
Other than temporary impairment on securities (1,170) - -
BOLI net earnings 121 120
Servicing income on loans sold 150 118
ATM transaction fees 288 299
Fee income from non-deposit investment sales 28 39
Other 175 133
-------------------
Total non-interest income 906 1,497
-------------------
Non-interest expense
Salaries and employee benefits 3,073 2,920
Premises and equipment 663 464
Advertising 191 182
OREO and other repossessed items expense 62 - -
ATM expenses 125 148
Postage and courier 119 118
Amortization of CDI 54 62
State and local taxes 143 151
Professional fees 135 147
Other 972 659
-------------------
Total non-interest expense 5,537 4,851
-------------------
Income before federal and state income taxes 518 2,365
Federal income taxes 156 750
State income taxes 1 --
-------------------
Net income $ 361 $ 1,615
===================
Preferred stock dividend payable $ 18 $ --
Net income available to common shareholders $ 343 $ 1,615
Earnings per common share:
Basic $ 0.05 $ 0.25
Diluted $ 0.05 $ 0.24
Weighted average common shares outstanding:
Basic 6,570,776 6,515,428
Diluted 6,578,080 6,674,773
Dividends paid per common share: $ 0.11 $ 0.10
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2008 and the three months ended December 31, 2008
(Dollars in thousands, except per share amounts, common shares and preferred shares)
Accumulated
Other
Unearned Compre-
Preferred Common Additional Shares hensive
Preferred Common Stock Stock Paid-In Issued to Stock Retained Income
Shares Shares Amount Amount Capital ESOP Warrants Earnings (Loss) Total
------ ------ ------ ------ ------- ---- -------- -------- ------- -------
Balance, Sept. 30, 2007 -- 6,953,360 $ -- $ 70 $ 9,923 ($3,040) $ -- $68,378 ($784) $74,547
Net income -- -- -- -- -- -- -- 4,005 - 4,005
Stock split -- -- -- - -- -- -- -- -- --
Issuance of MRDP(1) shares -- 20,315 -- -- -- -- -- -- -- --
Repurchase of
common stock -- (144,950) -- (1) (1,920) -- -- -- -- (1,921)
Exercise of stock options -- 138,854 -- 1 856 -- -- -- -- 857
Cash dividends
($.43 per common share) -- -- -- -- -- -- -- (2,977) -- (2,977)
Earned ESOP shares -- -- -- -- (409) 264 -- -- -- (145)
MRDP compensation expense -- -- -- -- 147 -- -- -- -- 147
Stock option
compensation expense -- -- -- -- 5 -- -- -- -- 5
Unrealized holding gain on
securities available
for sale, net of tax -- -- -- -- -- -- -- -- 323 323
Balance, Sept. 30, 2008 -- 6,967,579 $ -- $ 70 $ 8,602 ($2,776) $ -- $ 69,406 ($461) $ 74,841
(Unaudited)
Net income -- -- -- -- -- -- -- 361 -- 361
Issuance of stock net of
issuance cost 16,641 -- -- -- 15,408 -- 1,158 -- -- 16,566
Issuance of MRDP shares -- 19,758 -- -- -- -- -- -- -- --
Repurchase of
common stock -- -- -- - -- -- -- -- -- --
Exercise of stock options -- 40,678 -- 284 -- -- -- -- 284
Cash dividends
($0.11 per common share) -- -- -- -- -- -- -- (767) -- (767)
Earned ESOP shares - -- -- -- (9) 66 -- -- - 57
MRDP compensation expense -- -- -- -- 46 -- -- -- -- 46
Stock option
compensation expense -- -- -- -- 1 -- -- -- -- 1
Unrealized holding gain (loss)
on securities available
for sale, net of tax -- -- -- -- -- -- -- -- (446) (446)
Balance,
December 31, 2008 16,641 7,028,015 $ -- $ 70 $ 24,332 ($2,710) $ 1,158 $ 69,000 ($907) $90,943
(1) 1998 Management Recognition and Development Plan.
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2008 and 2007
(In thousands)
(unaudited)
Three Months Ended December 31,
Cash flow from operating activities 2008 2007
-------------------
Net income $ 361 $ 1,615
Non-cash revenues, expenses, gains and losses
included in income:
Provision for loan losses 1,315 1,200
Depreciation 273 283
Deferred federal income taxes (41) (399)
Amortization of CDI 54 62
Earned ESOP shares 66 66
MRDP compensation expense 41 30
Stock option compensation expense 1 1
Stock option tax effect less excess tax benefit 40 --
Gain on sale of OREO, net (2) --
Gain on the disposition of premises and equipment -- (171)
BOLI cash surrender value increase (121) (120)
Gain on sale of loans (164) (92)
Decrease in deferred loan origination fees (69) (40)
Other than temporary impairment losses on securities 1,170 --
Loans originated for sale (11,011) (6,564)
Proceeds from sale of loans 10,539 7,413
Decrease (increase) in other assets, net (173) 1,225
Increase (decrease) in other liabilities and accrued
expenses, net (99) 93
-------------------
Net cash provided by operating activities 2,180 4,602
Cash flow from investing activities
Proceeds from maturities of securities available for sale 797 18,938
Proceeds from maturities of securities held to maturity 347 3
Increase in loans receivable, net (1,278) (23,223)
Additions to premises and equipment (758) (224)
Proceeds from the disposition of premises and equipment -- 175
Proceeds from sale of OREO 5 --
-------------------
Net cash used in investing activities (887) (4,331)
Cash flow from financing activities
Decrease in deposits, net (21,231) (5,488)
Proceeds from FHLB advances - long term -- 25,000
Repayment of FHLB advances - long term (5,019) (15,017)
Proceeds from FHLB advances - short term -- (3,300)
Increase (decrease) in repurchase agreements (44) 16
Proceeds from exercise of stock options 244 --
ESOP tax effect (9) 62
MRDP compensation tax effect 5 --
Repurchase of common stock -- (703)
Issuance of stock warrants 1,158 --
Issuance of preferred stock 15,408 --
Payment of dividends (767) (693)
-------------------
Net cash used by financing activities (10,255) (123)
See notes to unaudited condensed consolidated financial statements (continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the three months ended December 31, 2008 and 2007
(In thousands)
(unaudited)
Three Months Ended December 31,
2008 2007
-------------------
Net (increase) decrease in cash equivalents (8,962) 148
Cash equivalents
Beginning of period 42,874 16,670
-------------------
End of period $ 33,912 $ 16,818
-------------------
Supplemental disclosure of cash flow information
Income taxes paid $ 1,002 $ --
Interest paid 3,558 4,414
Supplemental disclosure of non-cash investing activities
Change in unrealized holding gain (loss) on securities
held for sale, net of tax $ (687) $ 64
Loans transferred to OREO and other repossessed assets 800 --
Supplemental disclosure of non-cash financing activities
Shares issued to MRDP $ 138 $ 210
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31, 2008 and 2007
In thousands
(unaudited)
Three Months Ended December 31,
2008 2007
-------------------
Comprehensive income:
Net income $ 361 $ 1,615
Unrealized holding gain (loss) on securities
available for sale, net of tax (446) 64
-------------------
Total comprehensive income (loss) $ (85) $ 1,679
===================
See notes to unaudited condensed consolidated financial statements
8
Timberland Bancorp, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements for Timberland Bancorp, Inc. ("Company") were prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with instructions for Form 10-Q
and therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments which are in the opinion of management,
necessary for a fair presentation of the interim condensed consolidated
financial statements have been included. All such adjustments are of a normal
recurring nature. The unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended September 30, 2008
("2008 Form 10-K"). The results of operations for the three months ended
December 31, 2008 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
(b) Principles of Consolidation: The interim condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Timberland Bank ("Bank"), and the Bank's wholly-owned subsidiary, Timberland
Service Corp. All significant inter-company balances have been eliminated in
consolidation.
(c) Operating Segment: The Company provides a broad range of financial
services to individuals and companies located primarily in western Washington.
These services include demand, time and savings deposits; real estate, business
and consumer lending; escrow services; and investment advisory services. While
the Company's chief operating decision maker monitors the revenue streams from
the various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the
Company's operations are considered by management to be one reportable operating
segment.
(d) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(e) Certain prior period amounts have been reclassified to conform to the
December 31, 2008 presentation with no change to net income or shareholders'
equity previously reported.
(2) U.S. TREASURY DEPARTMENT'S CAPITAL PURCHASE PROGRAM
On December 23, 2008, the Company received $16.64 million from the U.S. Treasury
Department as a part of the Treasury's Capital Purchase Program. The Company
sold $16.64 million in senior preferred stock, with a related warrant to
purchase up to $2.50 million in common stock to the U.S. Treasury. The
transaction is part of the Treasury's program to encourage qualified financial
institutions to build capital to increase the flow of financing to businesses
and consumers and to support the U.S. economy. The preferred stock will pay a
5.0% dividend for the first five years, after which the rate will increase to
9.0% if the preferred shares are not redeemed by the Company. In addition to
the preferred shares, the Treasury received a warrant to purchase 370,899 shares
of the Company's common stock at a price of $6.73 per share at any time during
the next ten years.
9
(3) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities have been classified according to
management's intent (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2008
Held to Maturity ("HTM")
Mortgage-backed securities $ 12,864 $ 10 ($3,949) $ 8,925
U.S. agency securities 27 3 -- 30
Total $ 12,891 $ 13 ($3,949) $ 8,955
Available for Sale
Mortgage-backed securities $ 15,887 $ 54 ($1,397) $ 14,544
Mutual funds 1,000 -- (53) 947
Total $ 16,887 $ 54 ($1,450) $ 15,491
September 30, 2008
Held to Maturity
Mortgage-backed securities $ 14,205 $ 8 ($2,267) $ 11,946
U.S. agency securities 28 -- -- 28
Total $ 14,233 $ 8 ($2,267) $ 11,974
Available for Sale
Mortgage-backed securities $ 16,806 $ 52 ($696) $ 16,162
Mutual funds 1,000 -- (64) 936
Total $ 17,806 $ 52 ($760) $ 17,098
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of December 31,
2008 are as follows (in thousands):
Less Than 12 Months or
12 Months Longer Total
---------------- -----------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
Held to Maturity
U.S. agency securities $ -- $ -- $ -- $ -- $ -- $ --
Mortgage-backed securities 7,897 (3,949) -- -- 7,897 (3,949)
Total 7,897 (3,949) -- -- 7,897 (3,949)
Available for Sale
Mortgage-backed securities 10,650 (1,394) 110 (3) 10,760 (1,397)
Mutual funds -- -- 947 (53) 947 (53)
Total $10,650 ($1,394) $1,057 ($56) $11,707 ($1,450)
10
During the quarter ended December 31, 2008 the Company recorded a $1.17 million
other-than-temporary impairment charge on mortgage-backed securities. The
Company has evaluated the remaining investments and mortgage-backed securities
with unrealized losses at December 31, 2008 and has determined that the decline
in value is temporary.
There were no gross realized gains or losses for the quarter ended December 31,
2007.
Mortgage-backed and agency securities pledged as collateral for public fund
deposits, federal treasury tax and loan deposits, FHLB collateral, retail
repurchase agreements and other non-profit organization deposits totaled $19.15
million and $23.00 million at December 31, 2008 and September 30, 2008,
respectively.
The contractual maturities of debt securities at December 31, 2008 are as
follows (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 Fair Amortized Fair
Cost Value Cost Value
---------------- ----------------
Due within one year $ -- $ -- $ 2 $ 2
Due after one year to five years 14 16 591 468
Due after five to ten years 68 69 269 273
Due after ten years 12,809 8,870 15,025 13,801
Mutual funds -- -- 1,000 947
Total $12,891 $ 8,955 $16,887 $15,491
(4) FHLB STOCK
The Company views its investment in the FHLB stock as a long-term investment.
Accordingly, when evaluating for impairment, the value is determined based on
the ultimate recovery of the par value rather than recognizing temporary
declines in value. The determination of whether a decline affects the ultimate
recovery is influenced by criteria such as: 1) the significance of the decline
in net assets of the FHLB as compared to the capital stock amount and length of
time a decline has persisted; 2) impact of legislative and regulatory changes on
the FHLB and 3) the liquidity position of the FHLB. The FHLB of Seattle
recently announced that it will likely report a risk-based capital deficiency as
of December 31, 2008, and therefore will not pay a dividend for the fourth
quarter of 2008 and will not repurchase capital stock. The FHLB noted their
primary concern with meeting the risk-based capital requirements relates to the
potential impact of other-than-temporary impairment charges that they may be
required to record on their private label mortgage back securities. While it
appears that the FHLB of Seattle will be less than adequately capitalized as of
December 31, 2008, the Company does not believe that its investment in the FHLB
is impaired as of this date. However, this estimate could change in the near
term if: 1) significant other-than-temporary losses are incurred on the mortgage
backed securities causing a significant decline in their regulatory capital
status; 2) the economic losses resulting from credit deterioration on the
mortgage backed securities increases significantly and 3) capital preservation
strategies being utilized by the FHLB become ineffective.
(5) LOANS
Loans receivable and loans held for sale consisted of the following (dollars in
thousands):
At December 31, At September 30,
2008 2008
Amount Percent Amount Percent
--------------- -----------------
Mortgage loans:
11
One- to four-family (1) $114,169 18.8% $112,299 18.4%
Multi-family 26,449 4.4 25,927 4.2
Commercial 151,630 25.0 146,223 23.9
Construction and land development 172,828 28.5 186,344 30.5
Land 63,241 10.4 60,701 9.9
Total mortgage loans 528,317 87.1 531,494 86.9
Consumer loans:
Home equity and second mortgage 49,895 8.2 48,690 8.0
Other 9,838 1.6 10,635 1.7
Total consumer loans 59,733 9.8 59,325 9.7
Commercial business loans 18,700 3.1 21,018 3.4
Total loans receivable 606,750 100.0% 611,837 100.0%
Less:
Undisbursed portion of construction
loans in process 38,350 43,353
Deferred loan origination fees 2,678 2,747
Allowance for loan losses 8,166 8,050
49,194 54,150
Total Loans receivable, net $557,556 $557,687
_________________________
(1) Includes loans held-for-sale
Construction and Land Development Loan Portfolio Composition
-------------------------------------------------------------
The following table sets forth the composition of the Company's construction and
land development loan portfolio.
At December 31, At September 30,
2008 2008
Amount Percent Amount Percent
----------------- -----------------
(Dollars in thousands)
Custom and owner/builder const. $ 43,832 25.4% $ 47,168 25.3%
Speculative construction 27,117 15.7 30,895 16.6
Commercial real estate 43,043 24.9 39,620 21.3
Multi-family 32,117 18.6 40,509 21.7
(including condominium)
Land development 26,719 15.4 28,152 15.1
------- ----- ------- -----
Total construction loans $172,828 100.0% $186,344 100.0%
======= ===== ======= =====
Allowance for Loan Losses
-------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
December 31,
2008 2007
-------------------
(In thousands)
Balance at beginning of period $8,050 $4,797
Provision for loan losses 1,315 1,200
Loans charged off (1,199) --
Recoveries on loans previously charged off -- --
------ ------
Net charge-offs (1,199) --
------ ------
Balance at end of period $8,166 $5,997
====== ======
12
At December 31, 2008 and December 31, 2007, the Bank had impaired loans totaling
approximately $16.42 million and $3.91 million respectively. At December 31,
2008 and December 31, 2007 no loans were 90 days or more past due and still
accruing interest. Interest income recognized on impaired loans for the
quarters ended December 31, 2008 and 2007 were $93,000 and $1,000, respectively.
Interest income recognized on a cash basis on impaired loans for the quarters
ended December 31, 2008 and 2007, was $38,000, and $1,000, respectively. The
average investment in impaired loans for the quarters ended December 31, 2008
and 2007 was $15.03 million and $2.70 million respectively. The Bank had no
troubled debt restructured loans at December 31, 2008 or December 31, 2007 that
were included in impaired loans.
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets.
At At
December 31, September 30,
2008 2008
------------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 645 $ 300
Commercial real estate 1,182 714
Construction and land development 9,736 9,840
Land 1,927 726
Consumer loans 30 160
Commercial business loans -- 250
------- -------
Total 13,520 11,990
Accruing loans which are contractually
past due 90 days or more: -- --
------- -------
Total -- --
Total of non-accrual and
90 days past due loans 13,520 11,990
OREO and other
repossessed items 1,266 511
------- -------
Total non-performing assets (1) $ 14,786 $ 12,501
======= =======
Restructured loans $ -- $ 272
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable 2.39% 2.12%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 2.01% 1.76%
Non-performing assets as a percentage
13
of total assets 2.20% 1.83%
Loans receivable (2) $565,722 $565,737
Total assets $671,592 $681,883
______________
(1) Includes non-accrual loans, other real estate owned and other repossessed
assets
(2) Includes loans held-for-sale and is before the allowance for loan losses
Following is a summary of information related to impaired loans (in thousands):
At December 31,
2008 2007
----------------
Impaired loans without a valuation allowance $ 12,102 $ 1,571
Impaired loans with a valuation allowance 4,318 2,337
$ 16,420 $ 3,908
Valuation allowance related to impaired loans $ 668 $ 293
(6) GOODWILL
Goodwill is initially recorded when the purchase price paid for an acquisition
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. An annual test
is performed at the end of the third quarter of each fiscal year, or more
frequently if indicators of potential impairment exist, to determine if the
recorded goodwill is impaired. If the fair value of the Company's sole
reporting unit exceeds the recorded value, goodwill is not considered impaired
and no additional analysis is necessary. As of June 30, 2008, when the annual
impairment test was performed, the fair value of the Company's reporting unit
exceeded the recorded value.
One of the circumstances evaluated when determining if an impairment test of
goodwill is needed more frequently than annually is the level of the Company's
market capitalization (total common shares outstanding multiplied by current
stock price) compared to the total equity applicable to common shareholders.
While the Company's market capitalization at December 31, 2008 was below the
total equity applicable to common shareholders, due to the length of time this
shortfall the Company does not believe this was a triggering circumstance that
would require an interim test of goodwill for impairment. Given the Company's
net income and financial performance during the current quarter, management does
not believe there were any other events or changes in the circumstances that
would indicate a potential impairment of goodwill at December 31, 2008.
The Company's market capitalization decreased subsequent to December 31, 2008 by
approximately $11.01 million to $41.35 million at January 31, 2009. Should the
Company's market capitalization stay at this level or continue to decrease, an
interim test of goodwill for impairment may be required before the scheduled
annual impairment testing date. Accordingly, no assurance can be given that the
Company will not have to recognize impairment of its goodwill in 2009. However,
because goodwill is not included in the calculation of regulatory capital, the
Company's and the Bank's regulatory capital ratios would not be affected by this
potential non-cash goodwill impairment expense.
14
(7) EARNINGS PER COMMON SHARE
Basic earnings per common share ("EPS") is computed by dividing net income
available for common stock by the weighted average number of common shares
outstanding during the period, without considering any dilutive items. Diluted
EPS is computed by dividing net income available for common stock 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 assumed conversion of
outstanding stock options, outstanding warrants to purchase common stock and
awarded but not released MRDP shares. In accordance with Statement of Position
("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans, issued
by the American Institute of Certified Public Accountants, shares owned by the
Bank's ESOP that have not been allocated are not considered to be outstanding
for the purpose of computing earnings per share. At December 31, 2008 and 2007,
there were 370,294 and 405,562 ESOP shares, respectively, that had not been
allocated.
The following table is in thousands, except for share and per share data:
Three Months Ended December 31,
2008 2007
-------------------
Basic EPS computation
Numerator - net income $ 361 $ 1,615
Dividend on preferred stock (18) --
----- ------
Net income available for common stock $ 343 $ 1,615
Denominator - weighted average
common shares outstanding 6,570,776 6,515,428
Basic EPS $ 0.05 $ 0.25
Diluted EPS computation
Numerator - net income $ 361 $ 1,615
Dividend on preferred stock (18) --
----- ------
Net income available for common stock $ 343 $ 1,615
Denominator - weighted average
common shares outstanding 6,570,776 6,515,428
Effect of dilutive stock options (a) 5,157 159,345
Effect of dilutive stock warrants 2,147 --
Effect of dilutive MRDP shares -- --
Weighted average common shares ----- ------
and common stock equivalents 6,578,080 6,674,773
Diluted EPS $ 0.05 $ 0.24
___________________________________
(a) For the three months ended December 31, 2008, options to purchase 168,864
shares of common stock were outstanding but not included in the computation of
diluted earnings per common share because the options' exercise prices were
greater than the average market price of the common stock and, therefore, their
effect would have been anti-dilutive. There were no options to purchase shares
of common stock excluded from the computation of diluted earnings per share for
the three months ended December 31, 2007.
15
(8) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Statement
of Financial Accounting Standards ("SFAS" or "Statement") No. 123(R), Share
Based Payment, which requires measurement of the compensation cost for all
stock-based awards based on the grant-date fair value and recognition of
compensation cost over the service period of stock-based awards. The fair value
of stock options is determined using the Black-Scholes valuation model, which is
consistent with the Company's valuation methodology previously utilized for
options in footnote disclosures required under SFAS No. 123. The Company has
adopted SFAS No. 123(R) using the modified prospective method, which provides
for no restatement of prior periods and no cumulative adjustment to equity
accounts. It also provides for expense recognition, for both new and existing
stock-based awards.
(9) STOCK COMPENSATION PLANS
Stock Option Plans
------------------
Under the Company's stock option plans (i.e., the 1999 Stock Option Plan and the
2003 Stock Option Plan), the Company may grant options for up to a combined
total of 1,622,500 shares of common stock to employees, officers and directors.
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 vest in 10% annual installments on each of the ten
anniversaries from the date of the grant. However, if the Company meets three
of four established performance criteria the vesting is accelerated to 20% for
that year. These four performance criteria are: (i) generating a return on
assets which exceeds that of the median of all thrifts in the 12th FHLB District
having assets within $250 million of the Company; (ii) generating an efficiency
ratio which is less than that of the median of all thrifts in the 12th FHLB
District having assets within $250 million of the Company; (iii) generating a
net interest margin which exceeds the median of all thrifts in the 12th FHLB
District having assets within $250 million of the Company; and (iv) increasing
the Company's earnings per share over the prior fiscal year. The Company
performs the accelerated vesting analysis in February of each year based on the
results of the most recently completed fiscal year. At December 31, 2008,
options for 279,416 shares are available for future grant under these plans.
Following is activity under the plans:
Three Months Ended
December 31, 2008
Total Options Outstanding
-------------------------
Weighted
Weighted Average
Average Grant Date
Exercise Fair
Shares Price Value
------ ------- -----
Options outstanding, beginning of period 273,820 $ 8.07 $1.99
Exercised 40,678 6.00 1.63
Forfeited -- -- --
Granted -- -- --
-------
Options outstanding, end of period 233,142 $ 8.43 $2.05
Options exercisable, end of period 227,474 $ 8.40 $2.04
The aggregate intrinsic value of all options (with exercise prices below the
stock's current fair market value) outstanding and exercisable at December 31,
2008 was $93,000. The aggregate intrinsic value of all options
16
outstanding at December 31, 2007 was $1.98 million. The aggregate intrinsic
value of all options that were exercisable at December 31, 2007 was $1.92
million.
At December 31, 2008 there were 5,668 unvested options, all of which are assumed
will vest. There was no aggregate intrinsic value of unvested options at
December 31, 2008 as the exercise price was greater than the stock's current
market value.
There were no options that vested during the three months ended December 31,
2008 or December 31, 2007.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Three Months Ended
December 31,
------------
(In thousands)
2008 2007
------ ------
Proceeds from options exercised $244 $ --
Related tax benefit recognized 41 --
Intrinsic value of options exercised 40 --
Options outstanding at December 31, 2008 were as follows:
Outstanding Exercisable
----------------------------- ----------------------------
Weighted Weighted
Weighted Average Weighted Average
Range Average Remaining Average Remaining
Exercise Exercise Contractual Exercise Contractual
Prices Shares Price Life (Years) Shares Price Life (Years)
----------- ------ ------- ----------- ------ -------- -----------
$ 6.00 64,278 $ 6.00 0.1 64,278 $ 6.00 0.1
6.80-7.45 56,638 7.45 2.4 56,638 7.45 2.9
7.85-7.98 6,000 7.91 3.4 6,000 7.90 3.4
9.52 56,680 9.52 4.2 51,012 9.52 4.2
11.46-11.63 49,546 11.51 5.1 49,546 11.51 5.1
------- -------
233,142 $ 8.43 2.8 227,374 $ 8.40 2.7
There were no options granted during the three months ended December 31, 2008
and December 31, 2007.
Stock Grant Plans
-----------------
The Company adopted the MRDP in 1998, which was subsequently approved by
shareholders in 1999 for the benefit of employees, officers and directors of the
Company. The objective of the MRDP is to retain and attract personnel of
experience and ability in key positions by providing them with a proprietary
interest in the Company.
The MRDP allows for the issuance to participants of up to 529,000 shares of the
Company's common stock. Shares may be purchased in the open market or may be
issued from authorized and unissued shares. Awards under the MRDP are made in
the form of restricted shares of common stock that are subject to restrictions
on the transfer of ownership. Compensation expense in the amount of the fair
value of the common stock at the date of the grant to the plan participants is
recognized over a five-year vesting period, with 20% vesting on each of the five
anniversaries from the date of the grant. During the three months ended
December 31, 2008, the Company awarded 19,758 MRDP shares to officers and
directors. These shares had a weighted average grant date fair value of $7.01
per share. During the three months ended December 31, 2007 the Company awarded
17
14,315 shares to officers and directors. These shares had a weighted average
grant date fair value of $14.69 per share.
At December 31, 2008, there were a total of 55,858 unvested MRDP shares with an
aggregated grant date fair value of $672,000. There were 3,479 MRDP shares that
vested during the three months ended December 31, 2008 with an aggregated grant
date fair value of $53,000. There were 616 MRDP shares that vested during the
three months ended December 31, 2007 with an aggregated grant date fair value of
$11,000. At December 31, 2008, there were 51,993 shares available for future
award under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Three Months Ended December 31,
2008 2007
----------------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in income $ 1 $ 46 $ 1 $ 34
Related tax benefit recognized -- 16 -- 12
The compensation expense yet to be recognized for stock based awards that have
been awarded but not vested for the years ending September 30 is as follows (in
thousands):
Stock Stock Total
Options Grants Awards
------- ------ ------
Remainder of 2009 $ 2 $128 $130
2010 -- 171 171
2011 -- 165 165
2012 -- 112 112
2013 -- 38 38
2014 -- 2 2
------- ------ ------
Total $ 2 $616 $618
(10) INCOME TAXES
The Company files a consolidated federal income tax return with its subsidiary,
the Bank. The Bank provides for income taxes separately and remits to the
Company amounts currently due.
Deferred federal income taxes result from temporary differences between the tax
basis of assets and liabilities, and their reported amounts in the consolidated
financial statements. These will result in differences between income for tax
purposes and income for financial reporting purposes in future years. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. Valuation allowances are
established to reduce the net recorded amount of deferred tax assets if it is
determined to be more likely than not, that all or some portion of the potential
deferred tax asset will not be realized.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"). The interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company adopted the
18
provisions of FIN 48 on October 1, 2007. It is the Company's policy to record
any penalties or interest arising from federal or state taxes as a component of
non-interest expense.
The Company is no longer subject to United States federal income tax examination
by tax authorities for years ended on or before September 30, 2004.
(11) FAIR VALUE MEASUREMENTS
SFAS No. 157 defines fair value and establishes a framework for measuring fair
value in accordance with GAAP. Fair value is the exchange price that would be
received for an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 identifies
three levels of inputs that may be used to measure fair value:
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 other observable inputs other than quoted prices included
within level 1, such as quoted prices 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 following table summarizes the balances of assets and liabilities measured
at fair value on a recurring basis at December 31, 2008 (in thousands):
Fair Value at December 31, 2008
Level 1 Level 2 Level 3 Total
Available for Sale Securities ------- ------- ------- -----
-----------------------------
Mutual Funds $ 947 $ -- $ -- $ 947
Mortgage-backed securities -- 14,544 -- 14,544
------ ------ ----- ------
Total $ 947 $14,544 $ -- $15,491
The following table summarizes the balance of assets and liabilities measured at
fair value on a nonrecurring basis at December 31, 2008, and the total losses
resulting from these fair value adjustments for the three months ended December
31, 2008 (in thousands):
Three Months
Ended
December 31,
Fair Value at December 31, 2008 2008
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired Loans (a) $ -- $ -- $16,420 $ 1,180
Mortgage-backed securities-HTM (b) -- 603 -- 1,046
------- ------- ------- ------------
Total $ -- $ 603 $16,420 $ 2,226
19
_____________
(a) The loss represents charge offs on collateral dependent loans for fair
value adjustments based on the fair value of the collateral. A loan is
considered to be impaired when, based on current information and events, it
is probable the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement.
(b) The loss represents other than temporary impairment charges on
held-to-maturity mortgaged backed securities.
(12) DIVIDEND / SUBSEQUENT EVENT
On January 27, 2009, the Company announced a quarterly cash dividend of $0.11
per common share, payable February 27, 2009, to shareholders of record as of the
close of business on February 12, 2009.
(13) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value under Generally Accepted
Accounting Principles ("GAAP"), and expands disclosures about fair value
measurements. This Statement expands other accounting pronouncements that
require or permit fair value measurements. This Statement is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. In February 2008, the FASB issued Staff Position ("FSP") No. FAS
157-2 ("FSP 157-2"), which delays the effective date of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities, to fiscal years beginning
after November 15, 2008, and interim periods within those years. The delay is
intended to allow additional time to consider the effect of various
implementation issues that have arisen, or that may arise, from the application
of SFAS 157. The Company has elected to apply the deferral provisions in FSP
157-2 and therefore only partially adopted the provisions of SFAS 157 on October
1, 2008. The Company's partial adoption of SFAS 157 on October 1, 2008 did not
have a material impact on the Company's consolidated financial statements. See
Footnote 11, "Fair Value Measurements" for further information. The Company has
not adopted the provisions of SFAS 157 with respect to certain nonfinancial
assets, such as other real estate owned. The Company will more fully adopt SFAS
157 with respect to such items effective October 1, 2009. The Company does not
believe that such adoption will have a material impact on the consolidated
financial statements, but will result in additional disclosures related to the
fair value of nonfinancial assets.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115 ("SFAS 159"). This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the FASB's long-term measurement
objectives for accounting for financial instruments. The Company adopted SFAS
159 on October 1, 2008 and elected not to fair value the Company's financial
assets and liabilities at this time. The adoption of SFAS 159 did not have a
material impact on the Company's consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. This
FSP states that unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those years. The adoption of this FSP is not expected to have a
material impact on the Company's Consolidated Financial Statements.
20
In October 2008, the FASB issued FSP FAS No. 157-3, Determining Fair Value of a
Financial Asset When the Market for That Asset Is Not Active ("FAS 157-3"). The
FSP clarifies the application of SFAS 157 when the market for a financial asset
is not active. The FSP was effective upon issuance, including reporting for
prior periods for which financial statements have not been issued. The
Company's adoption of FAS 157-3 in October 2008 did not have a material impact
on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
-------------------------------------------------------------------------
The following analysis discusses the material changes in the financial condition
and results of operations of the Company at and for the three months ended
December 31, 2008. This analysis as well as other sections of this report
contains certain "forward-looking statements." The Company desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protection of such safe harbor with forward looking
statements. These forward looking statements may describe future plans or
strategies and include the Company's expectations of future financial results.
The words "believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could cause actual results to differ materially,
include, but are not limited to, the credit risks of lending activities,
including changes in the level and trend of loan delinquencies and charge-offs;
changes in the general economic conditions, either nationally or in our market
areas; changes in the level of general interest rates, deposit interest rates,
our net interest margin and funding sources; fluctuations in the demand for
loans, the number of unsold homes and other properties and fluctuations in real
estate values in our market areas; results of examinations of the Company by the
Federal Reserve and of the Bank by the Federal Deposit Insurance Corporation,
the Washington Department of Financial Institutions or other regulatory
authorities, including the possibility that any such regulatory authority may,
among other things, require us to increase our reserve for loan losses or to
write-down assets; our ability to control operating costs and expenses; our
ability to implement our branch expansion strategy; our ability to successfully
integrate any assets, liabilities, customers, systems, and management personnel
we have acquired or may in the future acquire into our operations and our
ability to realize related revenue synergies and cost savings within expected
time frames and any goodwill charges related thereto; our ability to manage loan
delinquency rates; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments;
increased competitive pressures among financial service companies; changes in
consumer spending, borrowing and savings habits; legislative or regulatory
changes that adversely affect our business; 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 Financial Accounting Standards
Board; war or terrorist activities; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing,
products and services and other risks detailed in the Company's reports filed
with the Securities and Exchange Commission, including the Annual Report on Form
10-K for the fiscal year ended September 30, 2008. The Company undertakes no
responsibility to update or revise any forward-looking statements.
Overview
Timberland Bancorp, Inc., a Washington corporation, was organized on September
8, 1997 for the purpose of becoming the holding company for Timberland Savings
Bank, SSB upon the Bank's conversion from a Washington-chartered mutual savings
bank to a Washington-chartered stock savings bank ("Conversion"). The
Conversion was completed on January 12, 1998 through the sale and issuance of
13,225,000 shares of common stock by the Company. At December 31, 2008, the
Company had total assets of $671.59 million and total shareholders' equity of
$90.94 million. The Company's business activities generally are limited to
passive
21
investment activities and oversight of its investment in the Bank. Accordingly,
the information set forth in this report relates primarily to the Bank.
The Bank was established in 1915 as "Southwest Washington Savings and Loan
Association." In 1935, the Bank converted from a state-chartered mutual savings
and loan association to a federally-chartered mutual savings and loan
association, and in 1972 changed its name to "Timberland Federal Savings and
Loan Association." In 1990, the Bank converted to a federally chartered mutual
savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Bank
converted to a Washington-chartered mutual savings bank and changed its name to
"Timberland Savings Bank, SSB." In 2000, the Bank changed its name to
"Timberland Bank." The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to applicable legal limits. The Bank has been
a member of the Federal Home Loan Bank System since 1937. The Bank is regulated
by the Washington State Department of Financial Institutions, Division of Banks
and the FDIC.
The Bank is a community-oriented bank which offers a variety of deposit and loan
products to its customers. The Bank operates 21 branches (including its main
office in Hoquiam) and a loan production office (which is in the process of
being converted to a full service branch) in the following market areas:
* Grays Harbor County
* Thurston County
* Pierce County
* King County
* Kitsap County
* Lewis County
Historically, the principal lending activity of the Bank has consisted of the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences and loans for the construction of one- to four-family
residences. Since 2001, the Bank has expanded its business banking capabilities
and has emphasized the origination of commercial real estate and commercial
business loans.
Critical Accounting Policies and Estimates
The Company has identified two 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.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level sufficient to provide for probable loan losses based on evaluating known
and inherent risks in the portfolio. The allowance is based upon management's
comprehensive analysis of the pertinent factors underlying the quality of the
loan portfolio. These factors include changes in the amount and composition of
the loan portfolio, actual loss experience, current economic conditions, and
detailed analysis of individual loans for which the full collectibility may not
be assured. The appropriate allowance for loan loss level is estimated based
upon factors and trends identified by management at the time consolidated
financial statements are prepared.
While the Company believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the United
States, there can be no assurance that regulators, in reviewing the Company's
loan portfolio, will not request the Company to significantly increase or
decrease its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed elsewhere in this document.
Although management believes the levels of the allowance as of both
22
December 31, 2008 and September 30, 2008 were adequate to absorb probable losses
inherent in the loan portfolio, a decline in local economic conditions, or other
factors, could result in a material increase in the allowance for loan losses
and may adversely affect the Company's financial condition and results of
operations.
Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") are capitalized
when acquired through the origination of loans that are subsequently sold with
servicing rights retained and are amortized to servicing income on loans sold in
proportion to and over the period of estimated net servicing income. The value
of MSRs at the date of the sale of loans is determined based on the discounted
present value of expected future cash flows using key assumptions for servicing
income and costs and prepayment rates on the underlying loans. The estimated
fair value is periodically evaluated for impairment by comparing actual cash
flows and estimated cash flows from the servicing assets to those estimated at
the time servicing assets were originated. The effect of changes in market
interest rates on estimated rates of loan prepayments represents the predominant
risk characteristic underlying the MSRs portfolio. The Company's methodology
for estimating the fair value of MSRs is highly sensitive to changes in
assumptions. For example, the determination of fair value uses anticipated
prepayment speeds. Actual prepayment experience may differ and any difference
may have a material effect on the fair value. Thus, any measurement of MSRs'
fair value is limited by the conditions existing and assumptions as of the date
made. Those assumptions may not be appropriate if they are applied at different
times.
Comparison of Financial Condition at December 31, 2008 and September 30, 2008
The Company's total assets decreased by $10.29 million, or 1.5%, to $671.59
million at December 31, 2008 from $681.88 million at September 30, 2008,
primarily attributable to a decrease in cash equivalents and a decrease in
investment and mortgage backed securities.
Total deposits decreased by $21.23 million, or 4.3%, to $477.34 million at
December 31, 2008 from $498.57 million at September 30, 2008, primarily
attributable to a decrease in money market account balances and jumbo
certificate of deposit account balances.
Shareholders' equity increased by $16.10 million, or 21.5%, to $90.94 million at
December 31, 2008 from $74.84 million at September 30, 2008. The increase in
shareholders' equity was primarily a result of the sale of $16.64 million in
senior preferred stock to the U.S. Treasury Department as part of the Treasury's
Capital Purchase Program.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents: Cash equivalents decreased by $8.96 million, or 20.9%, to
$33.91 million at December 31, 2008 from $42.87 million at September 30, 2008.
The decrease was primarily a result of a decrease in federal funds sold. The
decrease in liquid assets was primarily a result of a large short-term deposit
made by a commercial customer in August 2008 that was withdrawn for business
purposes during the three months ended December 31, 2008 and correspondingly
reduced the amount that the Bank had been holding in federal funds sold. The
Bank also used a portion of its liquid assets to reduce its FHLB advances.
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $2.95 million, or 9.4%, to $28.38
million at December 31, 2008 from $31.33 million at September 30, 2008. The
decrease was primarily as a result of a $1.17 million other than temporary
impairment ("OTTI") charge recorded on 17 private label mortgage-backed
securities and regular amortization and prepayments on mortgage-backed
securities. The securities, on which the impairments were recognized, were
acquired from the in-kind redemption of the Bank's investment in the AMF family
of mutual funds in June 2008.
23
At December 31, 2008, the Company's securities' portfolio was comprised of
mortgage-backed securities of $27.41 million (of which $12.86 million were
classified as held to maturity), mutual funds of $947,000 and U.S. agency
securities of $27,000. For additional information, see Note 3 of the Notes to
Condensed Consolidated Financial Statements contained in "Item 1, Financial
Statements."
Loans: Net loans receivable remained stable at $557.56 million at December 31,
2008 compared to $557.69 million at September 30, 2008. During the three months
ended December 31, 2008, decreases in construction and land development loans
and commercial business loans, were offset by increases in commercial real
estate loans, land loans, and one-to-four family loans. The decrease in
construction loans was primarily reflected in an $8.39 million decrease in
multi-family and condominium construction loans, a $3.78 million decrease in
speculative construction loans, a $3.34 million decrease in custom and owner /
builder construction loans, and a $1.43 million decrease in land development
loans; which were partially offset by a $3.42 million increase in commercial
real estate loans.
Loan originations decreased to $43.9 million for the three months ended
December 31, 2008 compared to $65.5 million for the three months ended December
31, 2007. The reduction in loan volume was primarily a result of lower demand
for financing in the Bank's market areas due to a slowing economy and a
tightening in the Bank's underwriting standards. However, the demand for
single family home refinance loans began to increase significantly during the
latter part of December 2008 as a result of historically low interest rates.
The Bank continues to sell longer-term fixed rate loans for asset liability
management purposes. The Bank sold fixed rate one- to four-family mortgage
loans totaling $10.54 million for the three months ended December 31, 2008
compared to $7.41 million for the three months ended December 31, 2007.
For additional information, see Note 5 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Premises and Equipment: Premises and equipment increased by $485,000, or 2.9%,
to $17.37 million at December 31, 2008 from $16.88 million at September 30,
2008. The increase was primarily a result of capitalized construction costs on
the Bank's new branch facility being constructed in Lewis County. The new
branch is scheduled to open in May 2009.
Goodwill and Core Deposit Intangible: The value of goodwill remained unchanged
at $5.65 million at December 31, 2008 from September 30, 2008. The amortized
value of the core deposit intangible decreased to $918,000 at December 31, 2008
from $972,000 at September 30, 2008. The decrease is attributable to scheduled
amortization of the core deposit intangible.
Deposits: Deposits decreased by $21.23 million, or 4.3%, to $477.34 million at
December 31, 2008 from $498.57 million at September 30, 2008. The decrease was
primarily a result of a $9.17 million decrease in money market account balances,
an $8.83 million decrease in jumbo certificate of deposit account balances, a
$1.32 million decrease in N.O.W. checking account balances, and a $1.31 million
decrease in savings account balances. The decrease in money market account
balances was primarily due to a large short-term deposit made by a commercial
customer in the prior quarter that was withdrawn for business purposes during
the quarter ended December 31, 2008. The decrease in jumbo certificate of
deposit accounts balances was primarily due to the Company's decision to reduce
its exposure to county government jumbo CD's in anticipation of receiving
proceeds from the sale of preferred stock to the Treasury under the terms of its
Capital Purchase Program. The cost of holding these public deposits increased
during the quarter as the Federal Reserve decreased the yield on short-term
investments through additional rate decreases. Reducing these jumbo certificate
of deposit balances eliminated the negative interest carry associated with
retaining them on the balance sheet. For additional information, see the
section entitled "Deposit Breakdown" included herein.
24
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
decreased by $5.06 million, or 4.8%, to $100.32 million at December 31, 2008
from $105.39 million at September 30, 2008 as the Bank used a portion of it
liquid assets to repay a portion of its FHLB advances. For additional
information, see "FHLB Advance Maturity Schedule" included herein.
Shareholders' Equity: Total shareholders' equity increased by $16.10 million,
or 21.5%, to $90.94 million at December 31, 2008 from $74.84 million at
September 30, 2008. The increase was primarily a result of the sale of $16.64
million in senior preferred stock to the U.S. Treasury Department as part of the
Treasury's Capital Purchase Program. As part of the transaction, the Company
also issued to the Treasury warrants to purchase up to $2.5 million in common
stock. The transaction is part of the Treasury's program to encourage qualified
financial institutions to build capital to increase the flow of financing to
businesses and consumers and to support the U.S. economy.
Also impacting shareholders' equity during the three months ended December 31,
2008 was the payment of $767,000 in cash dividends on common stock and a
$446,000 increase in the accumulated other comprehensive loss equity category.
These items were partially offset by net income of $361,000 and proceeds from
stock option exercises of $284,000.
The Company did not repurchase any shares of its common stock during the three
months ended December 31, 2008. As part of the Company's participation in the
Treasury's Capital Purchase Program, the existing share repurchase plan
announced on February 25, 2008 was suspended indefinitely. For additional
information, see Item 2 of Part II of this Form 10-Q.
Non-performing Assets: Non-performing assets consist of non-accrual loans, OREO
and other repossessed assets. Non-performing assets to total assets increased to
2.20% at December 31, 2008 from 1.83% at September 30, 2008, as non-accrual
loans increased by $1.53 million to $13.52 million at December 31, 2008 from
$11.99 million at September 30, 2008 and OREO and other repossessed assets
increased by $755,000 to $1.27 million at December 31, 2008 from $511,000 at
September 30, 2008.
Total non-accrual loans of $13.52 million at December 31, 2008 were comprised of
44 loans and 27 credit relationships. These 44 loans consisted of 15 single
family speculative construction loans totaling $4.40 million (of which the
largest has a balance of $395,00), a $2.60 million land development loan in
Eastern Washington, a $1.36 million participation interest in a land development
loan located in Clark County, 16 individual lot (land ) loans totaling $1.93
million, three commercial real estate loans totaling $1.18 million, a $1.39
million multi-family loan, three single family home loans totaling $328,000,
three home equity consumer loans totaling $317,000 and a $31,000 consumer loan.
The Company had net charge-offs totaling $1.20 million for the quarter ended
December 31, 2008. The charge-offs were associated with six relationships which
primarily involved construction loans. In recognition of a real estate market
that reflected lower valuations during the quarter, net charge-off consisted of
the following:
* $464,000 to reduce exposure to the speculative construction inventory and land
holdings of three contractors.
* $475,000 on one land development loan.
* $250,000 on one of the few unsecured loans in the portfolio.
* $6,000 on one auto loan.
OREO and other repossessed assets totaled $1.27 million at December 31, 2008 and
consisted of three single family homes in Pierce County totaling $1.13 million,
one single family home in Kitsap County at $102,000, one land parcel in Grays
Harbor County at $28,000 and one vehicle at $5,000.
25
For additional information, see Note 5 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Deposit Breakdown
-----------------
The following table sets forth the composition of the Company's deposit
balances.
At At
December 31, 2008 September 30, 2008
(In thousands)
Non-interest bearing $ 51,775 $ 51,955
N.O.W. checking 89,151 90,468
Savings 55,082 56,391
Money market accounts 61,210 70,379
Certificates of deposit under $100 129,867 130,313
Certificates of deposit $100 and over 64,281 73,107
Certificates of deposit - brokered 25,975 25,959
-------- --------
Total deposits $ 477,341 $ 498,572
======== ========
FHLB Advance Maturity Schedule
------------------------------
The Bank has short- and long-term borrowing lines with the FHLB of Seattle with
total credit on the lines equal to 30% of the Bank's total assets, limited by
available collateral. Borrowings are considered short-term when the original
maturity is less than one year. FHLB advances consisted of the following:
At December 31, At September 30,
2008 2008
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Short-term $ -- --% $ -- --%
Long-term 99,609 100.0 104,628 100.0
------ ----- ------- -----
Total FHLB advances $ 99,609 100.0% $104,628 100.0%
====== ===== ======= =====
The Bank's FHLB borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.49% to 5.54%. The weighted average
interest rate on FHLB borrowings at December 31, 2008 was 4.17%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2009 $ 4,609
2010 20,000
2011 20,000
2012 10,000
2013 --
Thereafter 45,000
-------
Total $ 99,609
=======
A portion of these advances have a putable feature and may be called by the FHLB
earlier than the above schedule indicates.
26
Comparison of Operating Results for the Three Months Ended December 31, 2008 and
2007
The Company's net income decreased by $1.25 million, or 77.6%, to $361,000 for
the three months ended December 31, 2008 from $1.62 million for the three months
ended December 31, 2007. Diluted earnings per common share decreased 79.2% to
$0.05 for the three months ended December 31, 2008 from $0.24 for the three
months ended December 31, 2007.
The decrease in net income and diluted earnings per common share was primarily a
result of a $1.17 million other than temporary impairment charge on
mortgage-backed securities, a $686,000 increase in non-interest expense, a
$455,000 decrease in net interest income, and a $115,000 increase in the
provision for loan losses. These items were partially offset by a $579,000
increase in non-interest income (excluding the impairment charge).
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended December 31, 2008 decreased by
$1.25 million, or 77.6%, to $361,000 from $1.62 million for the quarter ended
December 31, 2007. Earnings per diluted common share for the quarter ended
December 31, 2008 decreased to $0.05 from $0.24 for the quarter ended December
31, 2007. The $0.19 decrease in diluted earnings per common share was primarily
a result of a $1.17 million ($772,000 net of income tax - $0.12 per diluted
common share) other than temporary impairment charge on mortgage-backed
securities, a $686,000 ($453,000 net of income tax - $0.07 per diluted common
share) increase in non-interest expense, a $455,000 ($300,000 net of income tax
- $0.05 per diluted common share) decrease in net interest income, and a
$115,000 ($76,000 net of income tax - $0.01 per diluted common share) increase
in the provision for loan losses. These decreases to earnings per common share
were partially offset by a $579,000 increase ($382,000 net of income tax - $0.06
per diluted common share) in non-interest income (excluding the impairment
charge).
Net Interest Income: Net interest income decreased by $455,000 or 6.6%, to
$6.46 million for the quarter ended December 31, 2008 from $6.92 million for the
quarter ended December 31, 2007. The decrease in net interest income was
primarily attributable to interest rate decreases, which compressed margins, and
the reversal of interest on loans placed on non-accrual status. These decreases
were, however, partially offset by a larger interest earning asset base. Total
interest and dividend income decreased by $1.45 million, or 12.7%, to $10.03
million for the quarter ended December 31, 2008 from $11.48 million for the
quarter ended December 31, 2007 as the yield on interest earning assets
decreased to 6.50% from 7.62%. Total average interest earning assets increased
by $14.65 million to $617.28 million for the quarter ended December 31, 2008
from $602.63 million for quarter ended December 31, 2007. Total interest
expense decreased by $997,000, or 21.9%, to $3.56 million for the quarter ended
December 31, 2008 from $4.56 million for the quarter ended December 31, 2007 as
the average rate paid on interest bearing liabilities decreased to 2.67% for the
quarter ended December 31, 2008 from 3.49% for the quarter ended December 31,
2007. Total average interest bearing liabilities increased by $11.99 million to
$530.69 million for the quarter ended December 31, 2008 from $518.70 million for
the quarter ended December 31, 2007. The net interest margin decreased to 4.19%
for the quarter ended December 31, 2008 from 4.59% for the quarter ended
December 31, 2007. The margin compression was primarily attributable to
significant interest rate decreases by the Federal Reserve which reduced the
yield on interest earning assets at a faster pace than the Bank was able to
reduce its funding costs. The reversal of interest income on loans placed on
non-accrual status also contributed to the margin compression and reduced the
net interest margin by approximately 11 basis points during the quarter ended
December 31, 2008. For additional information, see the section below entitled
"Rate Volume Analysis."
27
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on the
net interest income on the Company. Information is provided with respect to the
(i) effects on interest income attributable to change in volume (changes in
volume multiplied by prior rate), and (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.
Three months ended December 31, 2008
compared to three months
ended December 31, 2007
increase (decrease)
due to
------
Rate Volume Net Change
------ ------ ----------
(In thousands)
Interest-earning assets:
Loans receivable (1) ($1,704) $510 ($1,194)
Investments and
mortgage-backed securities 83 80 163
FHLB stock and equity securities (212) (201) (413)
Federal funds sold (42) 35 (7)
Interest-bearing deposits (13) 12 (1)
Total net increase in income ------ ------- ------
on interest-earning assets ($1,888) 436 ($1,452)
Interest-bearing liabilities:
Savings accounts -- - --
NOW accounts 18 22 40
Money market accounts (118) 84 (34)
Certificate accounts (787) (56) (843)
Short-term borrowings (241) (235) (476)
Long-term borrowings (17) 333 316
Total net increase in expense ------ ------ ------
on interest bearing liabilities ($1,145) 148 ($997)
Net increase (decrease) in
net interest income ($743) $288 ($455)
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
Provision for Loan Losses: The provision for loan losses increased $115,000, or
9.6%, to $1.32 million for the quarter ended December 31, 2008 from $1.20
million for the quarter ended December 31, 2007. The increased provision was
made primarily as a result of an increase in the level of net charge-offs, an
increase in the level of potential principal impairment on non-performing loans,
and uncertainties in the housing market in certain market areas of the Pacific
Northwest.
The Bank has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Bank performs an analysis
that considers pertinent factors underlying the quality of the loan portfolio.
The factors include changes in the amount and composition of the loan portfolio,
historic loss experience for various loan segments, changes in economic
conditions, delinquency rates, a detailed analysis of
28
impaired loans, and other factors to determine an appropriate level of allowance
for loan losses. Management's analysis, however, for the three months ended
December 31, 2008, placed greater emphasis on the Bank's construction and land
development loan portfolio and the effect of various factors such as geographic
and loan type concentrations. The Bank also reviewed the national trend of
declining home sales with potential housing market value depreciation. Based on
its comprehensive analysis, management deemed the allowance for loan losses of
$8.17 million at December 31, 2008 (1.44% of loans receivable and 60% of
non-performing loans) adequate to provide for probable losses based on an
evaluation of known and inherent risks in the loan portfolio at that date.
Impaired loans are subjected to an impairment analysis to determine an
appropriate reserve amount to be held against each loan. The aggregate
impairment amount determined at December 31, 2008 was $668,000. The allowance
for loan losses was $6.00 million (1.11% of loans receivable and 153% of
non-performing loans) at December 31, 2007. The Company had net charge-offs of
$1.20 million during the three months ended December 31, 2008 and no charge-offs
for the three months ended December 31, 2007.
Non-performing loans increased by $1.53 million during the current quarter to
$13.52 million at December 31, 2008 from $11.99 million at September 30, 2008.
Non-performing loans were comprised of 44 loans and 27 credit relationships..
Management's evaluation of these 44 loans determined that there was potential
principal impairment of $668,000 on these non-performing loans. For additional
information, see the section entitled "Non-performing Assets" included herein.
Management believes that the allowance for loan losses as of December 31, 2008
was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While management believes the estimates and assumptions
used in its determination of the adequacy of the allowance are reasonable, there
can be no assurance that such estimates and assumptions will not be proven
incorrect in the future, or that the actual amount of future provisions will not
exceed the amount of past provisions or that any increased provisions that may
be required will not adversely impact the Company's financial condition and
results of operations. In addition, the determination of the amount of the
Bank's allowance for loan losses is subject to review by bank regulators as part
of the routine examination process, which may result in the establishment of
additional reserves based upon their judgment of information available to them
at the time of their examination. For additional information, see Note 5 of the
Notes to Condensed Consolidated Financial Statements contained in "Item 1,
Financial Statements."
Non-interest Income: Total non-interest income decreased by $591,000 to $906,000
for the quarter ended December 31, 2008 from $1.50 million for the quarter ended
December 31, 2007, primarily as a result of $1.17 million in other than
temporary impairment charge.
Excluding the impairment charge, non-interest income increased by $579,000, or
38.7% to $2.08 million for the quarter ended December 31, 2008 from $1.50
million for the quarter ended December 31, 2007. This increase was primarily a
result of a $454,000 increase in service charges on deposit accounts and a
$104,000 increase in loan sale income (gain on sale of loans and servicing
income on loans sold). The increase in service charge income was primarily a
result of implementing an automated overdraft decisioning program in May 2008
and increasing the fee charged for overdrafts. The increased income from loan
sales was primarily a result of an increase in the dollar value of residential
mortgage loans sold in the secondary market during the quarter ended December
31, 2008. The sale of fixed rate one-to four-family mortgage loans totaled
$10.54 million for the quarter ended December 31, 2008 compared to $7.41 million
for the quarter ended December 31, 2007. The increase in loan sales was
primarily attributable to lower interest rates for 30-year fixed rates loans
which increased refinancing activity.
Non-interest Expense: Total non-interest expense increased by $686,000, or
14.1%, to $5.54 million for the quarter ended December 31, 2008 from $4.85
million for the quarter ended December 31, 2007. The increase was primarily
attributable to a $219,000 increase in deposit related expenses, a $199,000
increase in premises and equipments expenses, a $153,000 increase in salaries
and employee benefits expense, and a $62,000
29
increase in OREO related expenses. The increased deposit related expenses were
primarily attributable to expenses associated with several new deposit related
programs implemented and an increase in FDIC insurance expense. The increase
reflected in premises and equipment expense was primarily a result of an
insurance settlement received in December 2007 that reduced the Company's
premises and equipment expense by $172,000 for the quarter ended December 31,
2007. The increased salary and benefit expense was primarily the result of
annual salary adjustments (effective October 1, 2008) and increased employee
insurance expenses.
Provision for Income Taxes: The provision for income taxes decreased to
$157,000 for the quarter ended December 31, 2008 from $750,000 for the quarter
ended December 31, 2007 primarily as a result of lower income before taxes. The
Company's effective tax rate was 30.31% for the quarter ended December 31, 2008
and 31.71% for the quarter ended December 31, 2007.
Liquidity
---------
The Company's primary sources of funds are customer deposits, brokered deposits,
proceeds from principal and interest payments on loans and mortgage-backed
securities, proceeds from the sale of loans, proceeds from maturing securities,
FHLB advances, and other borrowings. 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.
An analysis of liquidity should include a review of the Condensed Consolidated
Statement of Cash Flows for the three months ended December 31, 2008. The
statement of cash flows includes operating, investing and financing categories.
Operating activities include net income, which is adjusted for non-cash items,
and increases or decreases in cash due to changes in assets and liabilities.
Investing activities consist primarily of proceeds from maturities and sales of
securities, purchases of securities, and the net change in loans. Financing
activities present the cash flows associated with the Company's deposit
accounts, other borrowings and stock related transactions.
The Company's total cash equivalents decreased by 20.9% to $33.91 million at
December 31, 2008 from $42.87 million at September 30, 2008. The decrease in
liquid assets was primarily reflected in a decrease in federal funds sold and
non-interest bearing deposits and were partially offset by an increase in
interest bearing deposits in banks.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds for loan originations and deposit withdrawals, to satisfy
other financial commitments and to take advantage of investment opportunities.
The Bank generally maintains sufficient cash and short-term investments to meet
short-term liquidity needs. At December 31, 2008, 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 6.05%. The Bank maintained an
uncommitted credit facility with the FHLB of Seattle that provided for
immediately available advances up to an aggregate amount equal to 30% of total
assets, limited by available collateral, under which $99.61 million was
outstanding and $89.30 million was available for additional borrowings at
December 31, 2008. The Bank also has a $10.00 million overnight credit line
with Pacific Coast Banker's Bank ("PCBB"). At December 31, 2008, the Bank did
not have any outstanding advances on this credit line.
The Bank has also elected to participate in the FDIC's Temporary Liquidity
Guaranty Program ("TLGP"). The TLGP includes the Debt Guarantee Program
("DGP"), under which the FDIC guarantees certain senior unsecured debt of
FDIC-insured institutions. The unsecured debt must be issued on or after
October 14, 2008 and not later than June 30, 2009, and the guarantee is
effective through the earlier of the maturity date or June 30, 2012. The DGP
coverage limit is equal to 2% of the Bank's liabilities at September 30, 2008.
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)
30
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, federal funds sold, and other short-term
investments. If the Bank requires funds that exceed its ability to generate
them internally, it has additional borrowing capacity with the FHLB of Seattle
and PCBB.
The Bank's primary investing activity is the origination of one- to four-family
mortgage loans, commercial mortgage loans, construction and land development
loans, land loans, consumer loans, and commercial business loans. At December
31, 2008, the Bank had loan commitments totaling $41.50 million and undisbursed
loans in process totaling $38.35 million. The Bank anticipates that it will
have sufficient funds available to meet current loan commitments. Certificates
of deposit that are scheduled to mature in less than one year from December 31,
2008 totaled $185.93 million. Historically, the Bank has been able to retain a
significant amount of its non-brokered certificates of deposit as they mature.
At December 31, 2008, the Bank had $25.98 million in brokered certificate of
deposit accounts, all of which are scheduled to mature in less than one year.
As these brokered certificate of deposit accounts approach maturity, the Bank
will evaluate its liquidity needs and the cost of other alternative funding
sources before determining if additional brokered deposits will be acquired to
replace the maturing brokered deposits.
Capital Resources
-----------------
Federally-insured state-chartered banks are required to maintain minimum levels
of regulatory capital. Under current FDIC regulations, insured state-chartered
banks generally must maintain (i) a ratio of Tier 1 leverage capital to total
assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks),
(ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and
(iii) a ratio of total capital to risk weighted assets of at least 8.0%. At
December 31, 2008, the Bank was in compliance with all applicable capital
requirements.
Regulatory Capital
------------------
The following table compares the Company's and the Bank's actual capital amounts
at December 31, 2008 to its minimum regulatory capital requirements at that date
(dollars in thousands):
To Be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
Tier 1 capital (to average assets):
Consolidated $85,919 13.07% $26,298 4.00% N/A N/A
Timberland Bank 68,539 10.47 26,173 4.00 $32,716 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 85,919 15.47 22,209 4.00 N/A N/A
Timberland Bank 68,539 12.41 22,097 4.00 33,146 6.00
Total capital (to risk-weighted assets):
Consolidated 92,874 16.73 44,418 8.00 N/A N/A
Timberland Bank 75,460 13.66 44,195 8.00 55,243 10.00
31
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
For the Three Months Ended
December 31, September 30, December 31,
2008 2008 2007
----------------------------------
PERFORMANCE RATIOS:
Return on average assets (a) 0.22% 0.80% 0.99%
Return on average equity (a) 1.88% 7.22% 8.61%
Net interest margin (a) 4.19% 4.36% 4.59%
Efficiency ratio (b) 75.13% 60.96% 57.64%
At At At
December 31, September 30, December 31,
2008 2008 2007
----------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 13,520 $ 11,990 $ 3,908
OREO & other repossessed assets 1,266 511 --
Total non-performing assets $ 14,786 $ 12,501 $ 3,908
Non-performing assets to total assets (c) 2.20% 1.83% 0.60%
Allowance for loan losses to
non-performing loans 60% 67% 153%
Restructured loans $ -- $ 272 $ 2,462
Capital Ratios:
Tier 1 leverage capital 13.07% 10.28% 10.53%
Tier 1 risk based capital 15.47% 12.37% 12.39%
Total risk based capital 16.73% 13.62% 13.49%
Book Values:
Book value per share (d) $ 10.58 $ 10.74 $ 10.84
Book value per share (e) $ 11.16 $ 11.34 $ 11.50
Tangible book value per share (d) (f) $ 9.65 $ 9.79 $ 9.86
Tangible book value per share (e) (f) $ 10.17 $ 10.34 $ 10.46
______________________
(a) Annualized
(b) Excluding the $1.17 million other than temporary impairment charge the
efficiency ratio was 64.84% for the three months ended December 31, 2008
(c) Non-performing assets include non-accrual loans, other real estate owned
and other repossessed assets
(d) Calculation includes ESOP shares not committed to be released
(e) Calculation excludes ESOP shares not committed to be released
(f) Calculation subtracts goodwill and core deposit intangible from the equity
component
32
For the Three Months Ended
December 31, September 30, December 31,
2007 2007 2006
----------------------------------
AVERAGE BALANCE SHEET:
----------------------
Average total loans $ 538,284 $ 509,166 $439,294
Average total interest earning assets 602,628 586,056 529,572
Average total assets 650,893 634,762 580,114
Average total interest bearing deposits 411,766 405,078 376,365
Average FHLB advances & other borrowings 106,937 96,442 65,970
Average shareholders' equity 75,002 73,916 78,646
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, 2008.
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 December 31, 2008 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, 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 December 31, 2008, that has
materially affected, or is 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 controls 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
33
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. Further, neither the Company nor the Bank is aware of the threat of
any such proceedings. 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
Listed below are updates to the market risk information provided in the
Company's Annual Report of Form 10-K for the fiscal year ended September 30,
2008 ("2008 Form 10-K"). These updates should be read in conjunction with the
2008 Form 10-K.
Downturns in the real estate markets in our primary market areas could hurt our
business and require increased levels of allowance for loan losses.
Our business activities and credit exposures are primarily concentrated in
our local market areas of Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis
Counties. Our residential loan portfolio, and our commercial real estate and
multi-family loan portfolio and a certain number of our other loans have been
affected by the downturn in the residential real estate market. Further
declines in the real estate markets in our primary market areas may negatively
impact our business. As of December 31, 2008, substantially all of our loan
portfolio consisted of loans secured by real estate located in Washington. If
real estate values continue to decline, the collateral for our loans will
provide less security. As a result, our ability to recover on defaulted loans
by selling the underlying real estate may be diminished, and we would be more
likely to suffer losses on defaulted loans. Therefore if real estate values
continue to decline and as updated appraisals are received, the Bank may have to
increase its allowance for loan losses. The events and conditions described in
this risk factor could therefore have a material adverse effect on our business,
results of operations and financial condition.
The securities purchase agreement between us and Treasury limits our ability to
pay dividends on and repurchase our common stock.
The securities purchase agreement between us and Treasury provides that
prior to the earlier of (i) December 23, 2011 and (ii) the date on which all of
the shares of the Series A Preferred Stock have been redeemed by us or
transferred by Treasury to third parties, we may not, without the consent of
Treasury, (a) increase the cash dividend on our common stock or (b) subject to
limited exceptions, redeem, repurchase or otherwise acquire shares of our common
stock or preferred stock (other than the Series A Preferred Stock) or trust
preferred securities. In addition, we are unable to pay any dividends on our
common stock unless we are current in our dividend payments on the Series A
Preferred Stock. These restrictions, together with the potentially dilutive
impact of the warrant described in the next risk factor, could have a negative
effect on the value of our common stock. Moreover, holders of our common stock
are entitled to receive dividends only when, and if declared by our Board of
Directors. Although we have historically paid cash dividends on our common
stock, we are not required to do so and our Board of Directors could reduce or
eliminate our common stock dividend in the future.
34
The Series A Preferred Stock impacts net income available to our common
shareholders and earnings per common share, and the warrant we issued to
Treasury may be dilutive to holders of our common stock.
The dividends declared on the Series A Preferred Stock will reduce the net
income available to common shareholders and our earnings per common share. The
Series A Preferred Stock will also receive preferential treatment in the event
of liquidation, dissolution or winding up of Timberland Bancorp. Additionally,
the ownership interest of the existing holders of our common stock will be
diluted to the extent the warrant we issued to Treasury in conjunction with the
sale to Treasury of the Series A Preferred Stock is exercised. The shares of
common stock underlying the warrant represent approximately 5.0% of the shares
of our common stock outstanding as of January 31, 2009 (including the shares
issuable upon exercise of the warrant in total shares outstanding). Although
Treasury has agreed not to vote any of the shares of common stock it receives
upon exercise of the warrant, a transferee of any portion of the warrant or of
any shares of common stock acquired upon exercise of the warrant is not bound by
this restriction.
If other financial institutions holding deposits for government related entities
in Washington state fail, we may be assessed a pro-rata share of the uninsured
portion of the deposits by the State of Washington.
We participate in the Washington Public Deposit Protection Program by accepting
deposits from local governments, school districts and other municipalities
located in the state of Washington. Under the recovery provisions of the 1969
Public Deposit Protection Act, when a participating bank fails and has public
entity deposits that are not insured by the FDIC, the remaining banks that
participate in the program are assessed a pro-rata share of the uninsured
deposits. Accordingly if other financial institutions participating in the
program fail, we may be assessed a portion of the uninsured deposits they held
for public entities located in Washington state.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------------------------------------------------------------------------
Not applicable
Stock Repurchases
The following table sets forth the shares repurchased by the Company during the
three months ended December 31, 2008:
Period Total No. of Average Price Total No. of Maximum No. of
Shares Paid per Shares Purchased as Shares that May
Purchased Share Part of Publicly Yet Be Purchased
Announced Plan Under the Plan
(1)
---------- --------- ----------- -------------- --------------
10/01/2008 - - - - 343,468
10/31/2008
11/01/2008 - - - - 343,468
11/30/2008
12/01/2008 - - - - 343,468
12/31/2008
Total - $ - -- 343,468
35
(1) On February 25, 2008, the Company announced a share repurchase plan
authorizing the repurchase of up to 5% of its outstanding shares, or
343,468 shares. As of December 31, 2008 no shares under this plan had been
repurchased. As part of the Company's participation in the Treasury's
Capital Purchase Program this share repurchase program was suspended
indefinitely.
Item 3. Defaults Upon Senior Securities
------------------------------------------
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------
None to be reported.
Item 5. Other Information
----------------------------
None to be reported.
Item 6. Exhibits
-------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Certificate of Designation relating to the Company's Fixed Rate
Cumulative Perpetual Preferred Stock Series A (2)
3.3 Bylaws of the Registrant (1)
3.4 Amendment to Bylaws (3)
4.1 Warrant to purchase shares of Company's common stock dated December
23, 2008 (2)
4.2 Letter Agreement (including Securities Purchase Agreement Standard
Terms attached as Exhibit A) dated December 23, 2008 between the
Company and the United States Department of the Treasury (2)
10.1 Employee Severance Compensation Plan, as revised (4)
10.2 Employee Stock Ownership Plan (4)
10.3 1999 Stock Option Plan (5)
10.4 Management Recognition and Development Plan (5)
10.5 2003 Stock Option Plan (6)
10.6 Form of Incentive Stock Option Agreement (7)
10.7 Form of Non-qualified Stock Option Agreement (7)
10.8 Form of Management Recognition and Development Award Agreement (7)
10.9 Employment Agreement between the Company and the Bank and Michael R.
Sand (8)
10.10 Employment Agreement between the Company and the Bank and Dean J.
Brydon (8)
10.11 Form of Compensation Modification Agreements (2)
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 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes Oxley Act
_________________
(1) Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (333- 35817).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on December 23, 2008.
36
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 2002.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997; and to the Registrant's
Current Report on Form 8-K dated April 13, 2007, and to the Registrant's
Current Report on Form 8-K dated December 18, 2007.
(5) Incorporated by reference to the Registrant's 1999 Annual Meeting Proxy
Statement dated December 15, 1998.
(6) Incorporated by reference to the Registrant's 2004 Annual Meeting Proxy
Statement dated December 24, 2003.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 2005.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated April 13, 2007.
37
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: February 5, 2009 By:/s/Michael R. Sand
-------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 2009 By:/s/Dean J. Brydon
------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
38
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
39