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 March 31, 2010
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes 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.
Large accelerated filer Accelerated Filer
----- -----
Non-accelerated filer Smaller reporting company X
----- -----
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 APRIL 30, 2010
----- ------------------------------------
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 Operations 4-5
Condensed Consolidated Statements of Shareholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7-8
Condensed Consolidated Statements of Comprehensive
Income (Loss) 9
Notes to Condensed Consolidated Financial Statements 10-24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-40
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 1A Risk Factors 42-43
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 43
Item 3. Defaults Upon Senior Securities 43
Item 4. Removed and Reserved 43
Item 5. Other Information 43
Item 6. Exhibits 43-44
SIGNATURES 45
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2010 and September 30, 2009
(Dollars in thousands, except per share data)
March 31, September 30,
2010 2009
------------------------
Assets (Unaudited)
Cash equivalents:
Cash and due from financial institutions $ 9,883 $ 10,205
Interest bearing deposits in other banks 65,574 56,257
------------------------
Total cash equivalents 75,457 66,462
------------------------
Certificates of deposit ("CDs") held for
investment, (at cost) 18,108 3,251
Mortgage-backed securities and other
investments - held to maturity, at amortized
cost (fair value $5,596 and $6,215) 5,982 7,087
Mortgage-backed securities and other
investments - available for sale, at fair value 12,225 13,471
Federal Home Loan Bank of Seattle ("FHLB") stock 5,705 5,705
Loans receivable 554,880 560,750
Loans held for sale 459 630
Less: Allowance for loan losses (16,687) (14,172)
------------------------
Net loans receivable 538,652 547,208
------------------------
Premises and equipment, net 17,751 18,046
Other real estate owned ("OREO") and other
repossessed assets 13,477 8,185
Accrued interest receivable 2,996 2,805
Bank owned life insurance ("BOLI") 13,158 12,918
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 659 755
Mortgage servicing rights ("MSRs"), net 2,678 2,618
Prepaid Federal Deposit Insurance Corporation
("FDIC") insurance assessment 3,863 - -
Other assets 8,415 7,515
------------------------
Total assets $724,776 $701,676
========================
Liabilities and shareholders' equity
Deposits: Demand, non-interest-bearing $ 49,870 $ 50,295
Deposits: Interest-bearing 501,8544 55,366
------------------------
Total Deposits 551,724 505,661
------------------------
FHLB advances 75,000 95,000
Federal Reserve Bank of San Francisco ("FRB")
borrowings 10,000 10,000
Repurchase agreements 445 777
Other liabilities and accrued expenses 2,738 3,039
------------------------
Total liabilities 639,907 614,477
------------------------
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 15,657 15,554
16,641 shares, Series A, issued and outstanding
Series A shares: $1,000 per share liquidation
value
Common stock, $.01 par value; 50,000,000 shares
authorized; 10,357 10,315
7,045,036 shares issued and outstanding
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,379) (2,512)
Retained earnings 62,098 65,854
Accumulated other comprehensive loss (864) (2,012)
------------------------
Total shareholders' equity 84,869 87,199
------------------------
Total liabilities and shareholders' equity $724,776 $701,676
========================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2010 and 2009
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
------------------- -------------------
Interest and dividend income
Loans receivable $ 8,832 $ 9,419 $17,897 $18,989
------------------- -------------------
Mortgage-backed securities and
other investments 239 347 456 760
Dividends from mutual funds 9 9 18 19
Federal funds sold -- 5 -- 28
Interest bearing deposits in
banks 77 21 128 30
------------------- -------------------
Total interest and dividend
income 9,157 9,801 18,499 19,826
------------------- -------------------
Interest expense
Deposits 1,958 2,385 4,036 4,882
FHLB advances - long term 751 999 1,624 2,063
FRB borrowings and other
borrowings 2 - - 2 1
------------------- -------------------
Total interest expense 2,711 3,384 5,662 6,946
------------------- -------------------
Net interest income 6,446 6,417 12,837 12,880
Provision for loan losses 5,195 5,176 7,795 6,491
------------------- -------------------
Net interest income after
provision for loan losses 1,251 1,241 5,042 6,389
------------------- -------------------
Non-interest income
Total new other than temporary
impairment ("OTTI") on investment
securities (258) (1,713) (607) (2,883)
Adjustment for portion recorded as
(transferred from) other
comprehensive loss before taxes (1,298) 749 (1,269) 749
------------------- -------------------
Net OTTI loss on investment
securities (1,556) (964) (1,876) (2,134)
Realized loss on investment
securities (1) (29) (17) (29)
Service charges on deposits 1,022 1,009 2,152 2,159
ATM transaction fees 386 306 747 594
BOLI net earnings 115 256 249 378
Gain on sale of loans, net 300 1,022 749 1,303
Servicing income on loans sold 25 21 54 54
Valuation allowance on MSRs (22) - - (22) - -
Fee income from non-deposit
investment sales 3 16 35 44
Other 158 275 328 449
------------------- -------------------
Total non-interest income 430 1,912 2,399 2,818
------------------- -------------------
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (continued)
For the three and six months ended March 31, 2010 and 2009
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
------------------- -------------------
Non-interest expense
Salaries and employee benefits $ 2,921 $ 2,826 $ 5,902 $ 5,899
Premises and equipment 702 696 1,403 1,359
Advertising 220 229 392 420
OREO and other repossessed
items expense, net 344 99 395 160
ATM expenses 171 161 326 286
Postage and courier 142 126 270 244
Amortization of CDI 48 54 95 109
State and local taxes 153 154 294 297
Professional fees 196 213 368 348
FDIC insurance 806 99 1,005 186
Other 989 785 1,740 1,669
------------------- -------------------
Total non-interest expense 6,692 5,442 12,190 10,977
------------------- -------------------
Loss before income taxes (5,011) (2,289) (4,749) (1,770)
Benefit for income taxes 1,833 896 1,795 739
------------------- -------------------
Net loss (3,178) (1,393) (2,954) (1,031)
------------------- -------------------
Preferred stock dividends (208) (208) (416) (227)
Preferred stock discount
accretion (52) - - (103) - -
------------------- -------------------
Net loss to common shareholders: $(3,438) $(1,601) $(3,473) $(1,258)
=================== ===================
Loss per common share:
Basic $ (0.51) $ (0.24) $ (0.52) $ (0.19)
Diluted $ (0.51) $ (0.24) $ (0.52) $ (0.19)
Weighted average shares outstanding:
Basic 6,713,958 6,614,216 6,711,950 6,592,257
Diluted 6,713,958 6,614,216 6,711,950 6,592,257
Dividends paid per common share: $ 0.01 $ 0.11 $ 0.04 $ 0.22
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2009 and the six months ended March 31, 2010
(Dollars in thousands, except per share amounts)
Accumu-
lated
Unearned Other
Preferred Common Shares Compre-
Preferred Common Stock Stock Issued to Retained hensive
Shares Shares Amount Amount ESOP Earnings Loss Total
------ ------ ------- ------ --------- -------- --------- -----
Balance, September 30, 2008 - - 6,967,579 $ - - $8,672 $(2,776) $69,406 $(461) $74,841
Net loss - - - - - - - - - - (242) - - (242)
Issuance of preferred stock
with attached common stock
warrants 16,641 - - 15,425 1,158 - - - - - - 16,583
Accretion of preferred stock
discount - - - - 129 - - - - (129) - - - -
Issuance of MRDP(1) shares - - 19,758 - - - - - - - - - - - -
Exercise of stock options - - 57,699 - - 392 - - - - - - 392
Cash dividends
($0.39 per common share) - - - - - - - - - - (2,736) - - (2,736)
(5% preferred stock) - - - - - - - - - - (536) - - (536)
Earned ESOP shares - - - - - - (47) 264 - - - - 217
MRDP compensation expense - - - - - - 137 - - - - - - 137
Stock option compensation
expense - - - - - - 3 - - - - - - 3
Cumulative effect of FASB
guidance regarding
recognition of OTTI - - - - - - - - - - 91 (91) - -
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 18 18
OTTI on securities
held-to-maturity, net of tax - - - - - - - - - - - - (1,478) (1,478)
------ --------- ------- ------- ------- ------- ----- -------
Balance, September 30, 2009 16,641 7,045,036 15,554 10,315 (2,512) 65,854 (2,012) 87,199
(Unaudited)
Net loss - - - - - - - - - - (2,954) - - (2,954)
Accretion of preferred stock
discount - - - - 103 - - - - (103) - - - -
Cash dividends
($0.04 per common share) - - - - - - - - - - (283) - - (283)
(5% preferred stock) - - - - - - - - - - (416) - - (416)
Earned ESOP shares - - - - - - (48) 133 - - - - 85
MRDP compensation expense - - - - - - 87 - - - - - - 87
Stock option compensation
expense - - - - - - 3 - - - - - - 3
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 305 305
Change in OTTI on securities
held-to-maturity, net of tax - - - - - - - - - - - - 825 825
Accretion of OTTI on
securities held-to-maturity,
net of tax - - - - - - - - - - - - 18 18
------ --------- ------- ------- ------- ------- ----- -------
Balance, March 31, 2010 16,641 7,045,036 $15,657 $10,357 $(2,379) $62,098 $(864) $84,869
====== ========= ======= ======= ======= ======= ===== =======
(1) 1998 Management Recognition and Development Plan ("MRDP").
See notes to unaudited condensed consolidated financial statements
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2010 and 2009
(In thousands)
(unaudited)
Six Months Ended March 31,
2010 2009
Cash flow from operating activities ----------------------
Net loss $ (2,954) $ (1,031)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Provision for loan losses 7,795 6,491
Depreciation 595 555
Deferred federal income taxes (89) (1,245)
Amortization of CDI 95 109
Earned ESOP shares 133 132
MRDP compensation expense 85 81
Stock option compensation expense 3 2
Stock option tax effect - - 46
Gain on sale of OREO, and other repossessed
items, net (188) (2)
Valuation of OREO 346 132
Loss on the disposition of premises and equipment 13 - -
BOLI net earnings (240) (378)
Gain on sale of loans (749) (1,303)
Decrease in deferred loan origination fees (153) (236)
OTTI losses on securities 1,876 2,134
Realized losses on held-to-maturity securities 17 29
Loans originated for sale (31,401) (76,258)
Proceeds from sale of loans 32,321 71,556
Increase in other assets, net (5,580) (1,479)
Decrease in other liabilities and accrued expenses,
net (301) (136)
----------------------
Net cash provided by (used in) operating activities 1,624 (801)
Cash flow from investing activities
Net increase in CDs held for investment (14,857) - -
Proceeds from maturities and prepayments of
securities available for sale 1,635 1,667
Proceeds from maturities and prepayments of
securities held to maturity 627 903
(Increase) decrease in loans receivable, net (6,015) 734
Additions to premises and equipment (313) (1,369)
Proceeds from sale of OREO and other repossessed
items 1,308 10
----------------------
Net cash provided by (used in) investing activities (17,615) 1,945
Cash flow from financing activities
Increase in deposits, net 46,063 7,326
Repayment of FHLB advances - long term (20,000) (9,628)
Decrease in repurchase agreements (332) (69)
Proceeds from exercise of stock options - - 345
ESOP tax effect (48) (16)
MRDP compensation tax effect 2 12
Issuance of common stock - - 1
Issuance of stock warrants - - 1,158
Issuance of preferred stock - - 15,408
Payment of dividends (699) (1,662)
----------------------
Net cash provided by financing activities 24,986 12,875
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2010 and 2009
(In thousands)
(unaudited)
Six Months Ended March 31,
2010 2009
----------------------
Net increase in cash equivalents $ 8,995 $ 14,019
Cash equivalents
Beginning of period 66,462 42,874
----------------------
End of period $ 75,457 $ 56,893
======================
Supplemental disclosure of cash flow information
Income taxes paid $ 791 $ 1,002
Interest paid 5,775 6,954
Supplemental disclosure of non-cash investing
activities
Loans transferred to OREO and other repossessed
assets $ 8,006 $ 2,456
Loan originated to facilitate the sale of OREO 1,248 - -
Change in unrealized holding loss on securities
held for sale, net of tax 305 (488)
Change in other-than-temporary impairment on
securities, held-to-maturity, net of tax 843 (486)
Supplemental disclosure of non-cash financing activities
Shares issued to MRDP $ -- $ 138
See notes to unaudited condensed consolidated financial statements
8
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the three and six months ended March 31, 2010 and 2009
In thousands
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
------------------- -------------------
Comprehensive loss:
Net loss $(3,178) $(1,393) $(2,954) $(1,031)
Cumulative effect of adoption
of new accounting standard
relating to impairment of
debt securities - - (91) - - (91)
Unrealized holding gain (loss)
on securities available for
sale, net of tax 187 (42) 305 (488)
Change in OTTI on securities
held-to-maturity, net of tax:
Additions 105 (486) 60 (486)
Additional amount recognized
related to credit loss for
which OTTI was previously
recognized 785 - - 696 - -
Amount reclassified to credit
loss for previously recorded
market loss (46) - - 69 - -
Accretion of OTTI securities
held-to-maturity, net of tax 10 - - 18 - -
------------------- -------------------
Total comprehensive loss $(2,137) $(2,012) $(1,806) $(2,096)
=================== ===================
See notes to unaudited condensed consolidated financial statements
9
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 ("GAAP") for interim financial information and with instructions
for Form 10-Q and therefore, do not include all disclosures necessary for a
complete presentation of financial condition, results of operations, and cash
flows in conformity with GAAP. However, all adjustments, which are in the
opinion of management, necessary for a fair presentation of the interim
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 consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2009 ("2009 Form 10-K").
The results of operations for the three and six months ended March 31, 2010
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 has one reportable operating segment which
is defined as community banking in western Washington under the operating name
Timberland Bank.
(d) The preparation of financial statements in conformity with GAAP 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
March 31, 2010 presentation with no change to net loss or total 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 ("Treasury") 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 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. The preferred
stock pays a 5.0% dividend for the first five years, after which the rate
increases to 9.0% if the preferred shares are not redeemed by the Company.
Preferred stock callable at the option of the Company is initially recorded at
the amount of proceeds received. Any discount from the liquidation value is
accreted to the expected call date and charged to retained earnings. This
accretion is recorded using the level-yield method. Preferred dividends paid
(declared and accrued) and any accretion is deducted from (added to) net
income (loss) for computing income available (loss) to common shareholders and
earnings (loss) per share computations.
10
(3) MORTGAGE-BACKED SECURITIES AND OTHER INVESTMENTS
Mortgage-backed securities and other investments have been classified
according to management's intent (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
March 31, 2010 (unaudited)
Held to Maturity
U.S. treasury securities $ 28 $ 1 $ - - $ 29
Mortgage-backed securities
and collateralized mortgage
obligations ("CMOs"):
U.S. government agencies 2,283 35 (6) 2,312
Private label residential 3,671 11 (427) 3,255
------- ---- ----- -------
Total $ 5,982 $ 47 $(433) $ 5,596
======= ==== ===== =======
Available for Sale
Mortgage-backed securities
and CMOs:
U.S. government agencies $ 8,979 $282 $ - - $ 9,261
Private label residential 2,457 60 (521) 1,996
Mutual funds 1,000 - - (32) 968
------- ---- ----- -------
Total $12,436 $342 $(553) $12,225
======= ==== ===== =======
September 30, 2009
Held to Maturity
U.S. treasury securities $ 27 $ 2 $ - - $ 29
Mortgage-backed securities
and CMOs:
U.S. government agencies 2,455 23 (10) 2,468
Private label residential 4,605 3 (890) 3,718
------- ---- ----- -------
Total $ 7,087 $ 28 $(900) $ 6,215
======= ==== ===== =======
Available for Sale
Mortgage-backed securities
and CMOs:
U.S. government agencies $10,378 $221 $ (5) $10,594
Private label residential 2,774 - - (865) 1,909
Mutual funds 1,000 - - (32) 968
------- ---- ----- -------
Total $14,152 $221 $(902) $13,471
======= ==== ===== =======
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of March 31,
2010 are as follows (in thousands):
Less Than 12 Months 12 Months or Longer
------------------- ------------------- Total
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Mortgage-backed
securities and
CMOs:
U.S. government
agencies $ 264 $ (2) $ 495 $ (4) $ 759 $ (6)
Private label
residential 192 (1) 2,849 (426) 3,041 (427)
----- ----- ------ ----- ------ -----
Total $ 456 $ (3) $3,344 $(430) $3,800 $(433)
===== ===== ====== ===== ====== =====
11
Available for Sale
Mortgage-backed
securities and
CMOs:
U.S. government
agencies $ - - $ - - $ - - $ - - $ - - $ - -
Private label
residential - - - - 1,844 (521) 1,844 (521)
Mutual funds - - - - 968 (32) 968 (32)
----- ----- ------ ----- ------ -----
Total $ - - $ - - $2,812 $(553) $2,812 $(553)
===== ===== ====== ===== ====== =====
During the three months ended March 31, 2010 and 2009 the Company recorded net
OTTI charges through earnings on residential mortgage-backed securities of
$1.56 million and $964,000. During the six months ended March 31, 2010 and
March 31, 2009, the Company recorded net OTTI charges through earnings on
residential mortgage-backed securities of $1.88 million and $2.13 million.
Effective January 1, 2009, the Company adopted Financial Accounting Standards
Board ("FASB") Recognition and Presentation of Other-Than-Temporary
Impairments, which provides for the bifurcation of OTTI into (i) amounts
related to credit losses which are recognized through earnings, and (ii)
amounts related to all other factors which are recognized as a component of
other comprehensive income.
To determine the component of the gross OTTI related to credit losses, the
Company compared the amortized cost basis of each OTTI security to the present
value of its revised expected cash flows, discounted using its pre-impairment
yield. The revised expected cash flow estimates for individual securities are
based primarily on an analysis of default rates, prepayment speeds and
third-party analytic reports. Significant judgment of management is required
in this analysis that includes, but is not limited to, assumptions regarding
the collectability of principal and interest, net of related expenses, on the
underlying loans. The following table presents a summary of the significant
inputs utilized to measure management's estimate of the credit loss component
on OTTI securities as of March 31, 2010 and September 30, 2009:
Range
--------------------- Weighted
Minimum Maximum Average
At March 31, 2010
-----------------
Constant prepayment rate 0.0% 15.0% 13.8%
Collateral default rate 5.9% 62.4% 33.3%
Loss severity rate 15.8% 52.1% 41.6%
At September 30, 2009
---------------------
Constant prepayment rate 6.0% 15.0% 10.9%
Collateral default rate 6.8% 59.6% 25.4%
Loss severity rate 14.3% 52.0% 34.0%
The following table presents the OTTI losses for the six months ended March
31, 2010 and 2009 (in thousands).
Six months ended Six months ended
March 31, 2010 March 31, 2009
-------------------- -------------------
Held To Available Held To Available
Maturity For Sale Total Maturity For Sale Total
-------- --------- ----- -------- -------- -----
Total OTTI losses $ 514 $ 93 $ 607 $ 2,759 $ 124 2,883
Portion of OTTI
losses (gains)
recognized in other
comprehensive loss
(before taxes)
(1) (1,269) - - (1,269) 749 - - 749
------- ----- ------- ------- ----- ------
Impairment losses
recognized in
earnings (2) $ 1,783 $ 93 $ 1,876 $ 2,010 $ 124 $2,134
======= ===== ======= ======= ===== ======
12
-------------
(1) Represents OTTI losses related to all other factors.
(2) Represents OTTI losses related to credit losses.
The following table presents a roll forward of the credit loss component of
held to maturity debt securities that have been written down for OTTI with the
credit loss component recognized in earnings and the remaining impairment loss
related to all other factors recognized in other comprehensive loss (in
thousands).
Balance, September 30, 2009 $ 3,551
Additions:
Credit losses for which OTTI was
not previously recognized 374
Additional increases to the amount
related to credit loss for which OTTI
was previously recognized 1,472
Subtractions:
Realized losses recorded previously
as credit losses (252)
-------
Balance, March 31, 2010 $ 5,145
=======
There were no gross realized gains on sale of securities for the three or six
months ended March 31, 2010 and 2009. During the three months ended March 31,
2010 the Company recorded a $141,000 realized loss (as a result of the
securities being deemed worthless) on six held to maturity residential
mortgage-backed securities of which $140,000 had been recognized previously as
a credit loss. During the six months ended March 31, 2010 the Company
recorded a $252,000 realized loss (as a result of securities being deemed
worthless) on eight held to maturity residential mortgage-backed securities of
which $235,000 had been recognized previously as a credit loss. During the
three and six months ended March 31, 2009 there was a $29,000 realized loss on
one held to maturity residential mortgage-backed security of which no prior
credit loss had been recorded. Investment securities on non-accrual status
were $3.26 million at March 31, 2010 and $477,000 at September 30, 2010.
Residential 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 $14.77 million and $16.40 million at March 31, 2010 and September 30,
2009, respectively.
The contractual maturities of debt securities at March 31, 2010 are as follows
(in thousands). Expected maturities may differ from scheduled maturities as a
result of 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 $ - - $ - - $ 26 $ 26
Due after one year to five years 20 21 338 313
Due after five to ten years 45 46 189 201
Due after ten years 5,917 5,529 10,883 10,717
------ ------ ------- -------
Total $5,982 $5,596 $11,436 $11,257
====== ====== ======= =======
13
(4) FHLB STOCK
The Company views its investment in the Seattle 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) the impact
of legislative and regulatory changes on the FHLB and 3) the liquidity
position of the FHLB. As of March 31, 2010, the Seattle FHLB reported that it
had met all of its regulatory capital requirements, but remained classified as
undercapitalized by its regulator, the Federal Housing Finance Agency. The
FHLB will not pay a dividend or repurchase capital stock while it is
classified as undercapitalized. While the FHLB was classified as
undercapitalized as of March 31, 2010, the Company does not believe that its
investment in the FHLB is impaired. However, this estimate could change in
the near term if: 1) significant other-than-temporary losses are incurred on
the FHLB's mortgage-backed securities causing a significant decline in its
regulatory capital status; 2) the economic losses resulting from credit
deterioration on the FHLB's mortgage-backed securities increases significantly
or 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 March 31, At September 30,
2010 2009
Amount Percent Amount Percent
------------------- --------------------
Mortgage loans:
One- to four-family (1) $113,295 19.6% $110,556 18.6%
Multi-family 33,236 5.8 25,638 4.3
Commercial 198,171 34.4 188,205 31.6
Construction and land development 100,938 17.5 139,728 23.5
Land 63,856 11.1 65,642 11.0
-------- ----- -------- -----
Total mortgage loans 509,496 88.4 529,769 89.0
Consumer loans:
Home equity and second mortgage 39,303 6.8 41,746 7.0
Other 9,477 1.6 9,827 1.7
-------- ----- -------- -----
Total consumer loans 48,780 8.4 51,573 8.7
Commercial business loans 18,173 3.2 13,775 2.3
-------- ----- -------- -----
Total loans receivable 576,449 100.0% 595,117 100.0%
===== =====
Less:
Undisbursed portion of construction
loans in process 18,824 31,298
Deferred loan origination fees 2,286 2,439
Allowance for loan losses 16,687 14,172
-------- --------
37,797 47,909
-------- --------
Total loans receivable, net $538,652 $547,208
======== ========
-------------
(1) Includes loans held-for-sale.
14
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 March 31, At September 30,
2010 2009
Amount Percent Amount Percent
------------------- --------------------
(Dollars in thousands)
Custom and owner / builder const. $ 29,101 28.8% $ 35,414 25.3%
Speculative construction 10,070 10.0 16,959 12.1
Commercial real estate 40,369 40.0 49,397 35.4
Multi-family
(including condominiums) 6,135 6.1 18,800 13.5
Land development 15,263 15.1 19,158 13.7
-------- ----- -------- -----
Total construction loans $100,938 100.0% $139,728 100.0%
======== ===== ======== =====
Allowance for Loan Losses
-------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
March 31,
2010 2009
---------------------
(In thousands)
Balance at beginning of period $14,931 $ 8,166
Provision for loan losses 5,195 5,176
Allocated to commitments - - (126)
Loans charged off (3,562) (1,206)
Recoveries on loans previously charged off 123 39
------- -------
Net charge-offs (3,439) (1,167)
------- -------
Balance at end of period $16,687 $12,049
======= =======
Six Months Ended
March 31,
2010 2009
---------------------
(In thousands)
Balance at beginning of period $14,172 $ 8,050
Provision for loan losses 7,795 6,491
Allocated to commitments - - (126)
Loans charged off (5,403) (2,405)
Recoveries on loans previously charged off 123 39
------- -------
Net charge-offs (5,280) (2,366)
------- -------
Balance at end of period $16,687 $12,049
======= =======
Impaired Loans
--------------
A loan is considered impaired when it is probable that the Bank will be unable
to collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. Impaired loans are measured based on
the fair value of the collateral if the loan is considered collateral
dependent. Impaired loans not considered to be collateral dependent are
measured based on the present value of expected future cash flows.
15
The categories of non-accrual loans and impaired loans overlap, although they
are not coextensive. The Bank considers all circumstances regarding the loan
and borrower on an individual basis when determining whether an impaired loan
should be placed on non-accrual status, such as the financial strength of the
borrower, the collateral value, reasons for the delay, payment record, the
amount past due and the number of days past due.
At March 31, 2010 and September 30, 2009, the Bank had impaired loans totaling
approximately $43.02 million and $47.62 million respectively. At March 31,
2010 the Bank had five loans totaling $5.22 million that were 90 days or more
past due and still accruing interest. At September 30, 2009 the Bank had five
loans totaling $796,000 that were 90 days or more past due and still accruing
interest. Interest income recognized on impaired loans for the six months
ended March 31, 2010 and March 31, 2009 was $496,000 and $328,000,
respectively. Interest income recognized on a cash basis on impaired loans
for the six months ended March 31, 2010 and March 31, 2009, was $328,000 and
$132,000, respectively. The average investment in impaired loans for the six
months ended March 31, 2010 and March 31, 2009 was $44.36 million and $23.45
million respectively. The Bank had $18.62 million in troubled debt
restructured loans included in impaired loans at March 31, 2010. The Bank had
$1.25 million in commitments to lend additional funds on these loans. The
Bank had $9.24 million in troubled debt restructured loans included in
impaired loans at September 30, 2009. The Bank had $1.43 million in
commitments to lend additional funds on these loans.
Following is a summary of information related to impaired loans (in
thousands):
At March 31, At September 30,
2010 2009
------- -------
Impaired loans without a valuation allowance $31,494 $35,557
Impaired loans with a valuation allowance 11,523 12,065
------- -------
Total impaired loans $43,017 $47,622
======= =======
Valuation allowance related to impaired loans $ 5,543 $ 3,835
======= =======
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets and restructured loans within the meaning of FASB
guidance on troubled debt restructurings.
At At
March 31, September 30,
2010 2009
----------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 2,685 $ 1,343
Commercial real estate 3,471 5,004
Construction and land development 12,211 17,594
Land 7,793 5,023
Consumer loans 113 258
Commercial business loans 78 65
------- -------
Total non-accrual loans 26,351 29,287
Accruing loans which are contractually
past due 90 days or more: 5,216 796
------- -------
16
Total of non-accrual and
90 days past due loans 31,567 30,083
Non-accrual investment securities 3,262 477
OREO and other repossessed items 13,477 8,185
-------- --------
Total non-performing assets (1) $ 43,090 $ 37,949
======== ========
Troubled debt restructured loans (2) $ 18,623 $ 9,242
======== ========
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable 5.68% 5.36%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 4.36% 4.28%
Non-performing assets as a percentage
of total assets 5.95% 5.41%
Loans receivable (3) $555,339 $561,380
======== ========
Total assets $724,776 $701,676
======== ========
------------
(1) Includes non-accrual loans, non-accrual investment securities, and other
real estate owned and other repossessed assets. Loans considered
impaired or classified as troubled debt restructurings are not included
if they are still on accrual status.
(2) At March 31, 2010, $10,265 of the $18,623 in troubled debt restructured
loans were on non-accrual status and included in total non-performing
assets. At September 30, 2009 all troubled debt restructured loans were
on non-accrual status and are included in non-performing assets.
(3) Includes loans held-for-sale and is before the allowance for loan losses.
(6) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) available for common stock by the weighted average number of common
shares outstanding during the period, without considering any dilutive items.
Diluted earnings per common share 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. Diluted loss per common share is
the same as basic loss per common share due to the anti-dilutive effect of
common stock equivalents. Common stock equivalents arise from assumed
conversion of outstanding stock options and outstanding warrants to purchase
common stock. In accordance with FASB guidance for stock compensation, shares
owned by the Bank's ESOP that have not been allocated are not considered to be
outstanding for the purpose of computing earnings (loss) per common share. At
March 31, 2010 and 2009, there were 329,626 and 370,294 ESOP shares,
respectively, that had not been allocated.
17
The following table is in thousands, except for share and per share data:
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
---------------- ----------------
Basic loss per common share computation
---------------------------------------
Numerator - net loss $(3,178) $(1,393) $(2,954) $(1,031)
Preferred stock dividend (208) (208) (416) (227)
Preferred stock discount
accretion (52) - - (103) - -
------- ------- ------- -------
Net loss to common shareholders $(3,438) $(1,601) $(3,473) $(1,258)
======= ======= ======= =======
Denominator - weighted average
common shares outstanding 6,713,958 6,614,216 6,711,950 6,592,257
--------- --------- --------- ---------
Basic loss per common share $ (0.51) $ (0.24) $ (0.52) $ (0.19)
======= ======= ======= =======
Diluted loss per common share computation
-----------------------------------------
Numerator - net loss $(3,178) $(1,393) $(2,954) $(1,031)
Preferred stock dividend (208) (208) (416) (227)
Preferred stock discount
accretion (52) - - (103) - -
------- ------- ------- -------
Net loss to common shareholders $(3,438) $ 1,601 $(3,473) $(1,258)
======= ======= ======= =======
Denominator - weighted average
common shares outstanding 6,713,958 6,614,216 6,711,950 6,592,257
Effect of dilutive stock options
(1)(2) - - - - - - - -
Effect of dilutive stock
warrants (3)(4) - - - - - - - -
------- ------- ------- -------
Weighted average common shares
and common stock equivalents 6,713,958 6,614,216 6,711,950 6,592,257
--------- --------- --------- ---------
Diluted loss per common share $ (0.51) $ (0.24) $ (0.52) $ (0.19)
======= ======= ======= =======
--------------
(1) For the three and six months ended March 31, 2010, options to purchase
194,864 and 191,332 shares of common stock, respectively, were outstanding but
not included in the computation of diluted loss 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. For
the three and six months ended March 31, 2009, options to purchase 201,003 and
168,864 shares of common stock, respectively, were outstanding but not
included in the computation of diluted loss 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.
(2) For the six months ended March 31, 2009, the effect of dilutive stock
options was computed to be 2,607 shares. However, the dilutive effect of
these stock options has been excluded from the diluted loss per common share
computation for the six months ended March 31, 2009 because the Company
reported a net loss for the period and, therefore, their effect would have
been anti-dilutive.
(3) For the three and six months ended March 31, 2010, warrants to purchase
370,899 shares of common stock were outstanding but not included in the
computation of diluted loss per common share because the warrant's exercise
prices were greater than the average market price of the common stock and,
therefore, their effect would have been anti-dilutive. For the three and six
months ended March 31, 2009, warrants to purchase 370,899 and 185,449 shares
of common stock, respectively, were outstanding but not included in the
computation of diluted loss per common share because the warrant's exercise
prices were greater than the average market price of the common stock and,
therefore, their effect would have been anti-dilutive.
18
(4) For the six months ended March 31, 2009, the effect of dilutive stock
warrants was computed to be 1,085 shares. However, the dilutive effect of
these stock warrants has been excluded from the diluted loss per common share
computation for the six months ended March 31, 2009 because the Company
reported a net loss for the period and, therefore, their effect would have
been anti-dilutive.
(7) STOCK PLANS AND STOCK BASED COMPENSATION
Stock Option Plans
------------------
Under the Company's stock option plans (the 1999 Stock Option Plan and the
2003 Stock Option Plan), the Company was able to 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 20% annual installments on each of the five
anniversaries from the date of the grant. At March 31, 2010, options for
249,738 shares are available for future grant under the 2003 Stock Option Plan
and no shares are available for future grant under the 1999 Stock Option Plan.
Following is activity under the plans:
Six Months Ended
March 31, 2010
Total Options Outstanding
-------------------------
Weighted
Average
Exercise
Shares Price
------ --------
Options outstanding, beginning of period 168,864 $ 9.35
Exercised -- --
Forfeited -- --
Granted 26,000 4.55
-------
Options outstanding, end of period 194,864 $ 8.71
=======
Options exercisable, end of period 168,864 $ 9.35
=======
There was no aggregate intrinsic value of options outstanding at March 31,
2010, as the exercise price of all options outstanding was greater than the
stock's current market value.
At March 31, 2010, there were 26,000 unvested options with an aggregate grant
date fair value of $34,000, all of which the Company assumes will vest. There
was no aggregate intrinsic value of unvested options at March 31, 2010 as the
exercise price was greater than the stock's current market value. There were
no options that vested during the six months ended March 31, 2010.
At March 31, 2009, there were no unvested options. There were 5,668 options
that vested during the six months ended March 31, 2009 with an aggregate grant
date fair value of $13,000.
There were 26,000 options granted during the six months ended March 31, 2010
with an aggregate grant date fair value of $34,000. There were no options
granted during the six months ended March 31, 2009.
The Black-Scholes option pricing model was used in estimating the fair value
of option grants. The weighted average assumptions for options granted during
the six months ended March 31, 2010 were:
19
Expected Volatility 38%
Expected term (in years) 5
Expected dividend yield 2.64%
Risk free interest rate 2.47%
Grant date fair value per share $1.29
Stock Grant Plans
-----------------
The Company adopted the Management Recognition and Development Plan ("MRDP")
in 1998 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 allowed for the issuance to participants of up to 529,000 shares of
the Company's common stock. Awards under the MRDP are made in the form of
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.
There were no MRDP shares granted to officers and directors during the six
months ended March 31, 2010.
At March 31, 2010, there were a total of 42,427 unvested MRDP shares with an
aggregated grant date fair value of $501,000. There were 7,431 MRDP shares
that vested during the six months ended March 31, 2010 with an aggregated
grant date fair value of $81,000. At March 31, 2010, there were no shares
available for future awards under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Six Months Ended March 31,
2010 2009
---- ----
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in income $ 3 $ 87 $ 2 $ 93
Related tax benefit recognized 1 29 1 32
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 2010 $ 3 $ 86 $ 89
2011 7 165 172
2012 7 112 119
2013 7 38 45
2014 7 1 8
---- ----- -----
Total $ 31 $ 402 $ 433
==== ===== =====
20
(8) FAIR VALUE MEASUREMENTS
The FASB Disclosures About Fair Value of Financial Instruments requires
disclosure of estimated fair values for financial instruments. Such estimates
are subjective in nature, and significant judgment is required regarding the
risk characteristics of various financial instruments at a discrete point in
time. Therefore, such estimates could vary significantly if assumptions
regarding uncertain factors were to change. Major assumptions, methods and
fair value estimates for the Company's significant financial instruments are
set forth below:
Cash and Due from Financial Institutions and Interest-Bearing Deposits in
-------------------------------------------------------------------------
Banks
-----
The fair value of financial instruments that are short-term or re-price
frequently and that have little or no risk are considered to have a fair
value equal to the recorded value.
Certificates of Deposit Held for Investment
-------------------------------------------
The fair value of financial instruments that are short-term or re-price
frequently and that have little or no risk are considered to have a fair
value equal to the recorded value.
Mortgage-Backed Securities and Other Investments
------------------------------------------------
The fair value of mortgage-backed securities and other investments are
based upon the assumptions market participants would use in pricing the
security. Such assumptions include observable and unobservable inputs
such as quoted market prices, dealer quotes, or discounted cash flows.
FHLB Stock
----------
FHLB stock is not publicly traded, however the recorded value of the
stock holdings approximates the fair value, as the FHLB is required to
pay par value upon re-acquiring this stock.
Loans Receivable
----------------
At March 31, 2010 and September 30, 2009, because of the illiquid market
for loan sales, loans were priced using comparable market statistics.
The loan portfolio was segregated into various categories and a weighted
average valuation discount that approximated similar loan sales was
applied to each category.
Loans Held for Sale
-------------------
The fair value has been based on quoted market prices obtained from the
Federal Home Loan Mortgage Corporation.
Accrued Interest
----------------
The recorded amounts of accrued interest approximate fair value.
Deposits
--------
The fair value of deposits with no stated maturity date is included at
the amount payable on demand. The fair value of fixed maturity
certificates of deposit is estimated by discounting future cash flows
using the rates currently offered by the Bank for deposits of similar
remaining maturities.
FHLB Advances
-------------
The fair value of borrowed funds is estimated by discounting the future
cash flows of the borrowings at a rate which approximates the current
offering rate of the borrowings with a comparable remaining life.
FRB Borrowings
--------------
The recorded value of Federal Reserve Bank borrowings approximates the
fair value due to the short-term nature of the borrowings.
Repurchase Agreements
---------------------
The recorded value of repurchase agreements approximates fair value due
to the short-term nature of the borrowings.
Off-Balance-Sheet Instruments
-----------------------------
Since the majority of the Company's off-balance-sheet instruments consist
of variable-rate commitments, the Company has determined they do not have
a distinguishable fair value.
21
The estimated fair value of financial instruments were as follows (in
thousands):
March 31, 2010 September 30, 2009
-------------------- -------------------
Estimated Estimated
Recorded Fair Recorded Fair
Amount Value Amount Value
Financial Assets
Cash and due from financial
institutions and interest-
bearing deposits in banks $ 75,457 $ 75,457 $ 66,462 $ 66,462
Certificates of Deposit, held
for investment 18,108 18,108 3,251 3,251
Mortgage-backed securities and
other investments 18,207 17,821 20,558 19,686
FHLB stock 5,705 5,705 5,705 5,705
Loans receivable 538,193 466,378 546,578 471,178
Loans held for sale 459 465 630 648
Accrued interest receivable 2,996 2,996 2,805 2,805
Financial Liabilities
Deposits $551,724 $553,346 $505,661 $507,465
FHLB advances - long term 75,000 78,549 95,000 99,414
FRB borrowings - short term 10,000 10,000 10,000 10,000
Repurchase agreements 445 445 777 777
Accrued interest payable 802 802 965 965
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the
fair value of the Company's financial instruments will change when interest
rate levels change and that change may either be favorable or unfavorable to
the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk.
However, borrowers with fixed interest rate obligations are less likely to
prepay in a rising interest rate environment and more likely to prepay in a
falling interest rate environment. Conversely, depositors who are receiving
fixed interest rates are more likely to withdraw funds before maturity in a
rising interest rate environment and less likely to do so in a falling
interest rate environment. Management monitors interest rates and maturities
of assets and liabilities, and attempts to minimize interest rate risk by
adjusting terms of new loans, and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
Accounting guidance regarding fair value measurements 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. The following definitions describe the 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 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.
22
The following table summarizes the balances of assets and liabilities measured
at fair value on a recurring basis at March 31, 2010 and the total losses
resulting from these fair value adjustments for the six months ended March 31,
2010 (in thousands):
Fair Value
----------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Available for Sale Securities
-----------------------------
Mutual Funds $ 968 $ - - $ - - $ - -
Mortgage-backed securities - - 11,257 - - 93
------ ------- ------ ------
Total $ 968 $11,257 $ - - $ 93
====== ======= ====== ======
The following table summarizes the balance of assets and liabilities measured
at fair value on a nonrecurring basis at March 31, 2010, and the total losses
resulting from these fair value adjustments for the six months ended March 31,
2010 (in thousands):
Fair Value
----------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired Loans (1) $ - - $ - - $ 6,564 $5,403
Mortgage-backed securities - HTM
(2) - - 1,371 - - 1,783
OREO and other repossessed items
(3) - - - - 9,144 346
------ ------ ------- ------
Total $ - - $1,371 $15,708 $7,532
====== ====== ======= ======
---------------
(1) 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. The specific reserve for
collateral dependent impaired loans was based on the fair value of the
collateral less estimated costs to sell. The fair value of collateral was
determined based primarily on appraisals. In some cases, adjustments were
made to the appraised values due to various factors including age of the
appraisal, age of comparables included in the appraisal, and known changes in
the market and in the collateral. When significant adjustments were based on
unobservable inputs, the resulting fair value measurement has been categorized
as Level 3 measurement.
(2) The loss represents OTTI credit-related charges on held-to-maturity
mortgage-backed securities.
(3)The Company's OREO and other repossessed items is initially recorded at
fair value less estimated costs to sell. This amount becomes the property's
new basis. Fair value was generally determined by management based on a
number of factors, including third-party appraisals of fair value in an
orderly sale. Estimated costs to sell were based on standard market factors.
The valuation of OREO and other repossessed items is subject to significant
external and internal judgment. Management periodically reviews the recorded
value to determine whether the property continues to be recorded at the lower
of its recorded book value or fair value, net of estimated costs to sell.
(9) REGULATORY MATTERS
In December 2009, the FDIC and the Washington State Department of Financial
Institutions, Division of Banks ("Division") determined that the Bank required
supervisory attention and on December 29, 2009 entered into an agreement on a
Memorandum of Understanding with the Bank (the "Bank MOU"). Under that
agreement the Bank must among other things, maintain Tier 1 Capital of not
less than 10.0% of the Bank's adjusted total assets and maintain capital
ratios above the "well capitalized" thresholds as defined under FDIC Rules and
Regulations; obtain the prior consent from the FDIC and the Division prior to
the Bank declaring a dividend to
23
its holding company; and not engage in any transactions that would materially
change the Bank's balance sheet composition including growth in total assets
of five percent or more or significant changes in funding sources without the
prior non-objection of the FDIC.
In addition, on February 1, 2010, the FRB determined that the Company required
additional supervisory attention and entered into a Memorandum of
Understanding with the Company (the "Company MOU"). Under the agreement the
Company must among other things obtain prior written approval, or
non-objection from the FRB to declare or pay any dividends, or make any other
capital distributions; issue any trust preferred securities; or purchase or
redeem any of its stock.
For additional information regarding the Bank MOU and the Company MOU, see
"Item 1A, Risk Factors - The Company and the Bank are required to comply with
the terms of separate memorandums of understanding issued by their respective
regulators and lack of compliance could result in additional regulatory
actions.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued a statement on fair value measurements,
which defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurements. This
statement expands other accounting pronouncements that require or permit fair
value measurements. This statement was to become effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued a staff position, which delayed the
effective date of the September 2006 statement on fair value measurements for
certain nonfinancial assets and nonfinancial liabilities, to fiscal years
beginning after November 15, 2008, and interim periods within those years.
The delay was intended to allow additional time to consider the effect of
various implementation issues that arose, or that may arise, from the
application of the guidance. The Company elected to apply the deferral
provisions in the February 2008 staff position and therefore only partially
adopted the provisions of the September 2006 statement on fair value
measurements on October 1, 2008. The Company's partial adoption of the
September 2006 statement on fair value measurements on October 1, 2008 did not
have a material impact on the Company's consolidated financial statements. The
Company more fully adopted the provisions of the fair value guidance with
respect to certain nonfinancial instruments on October 1, 2009 and this
adoption did not have a material impact on the Company's consolidated
financial statements. For further information, see Note 9 of the Notes to
Condensed Consolidated Statements included herein.
In June 2008, the FASB issued a staff position on determining whether
instruments granted in share-based payment transactions are participating
securities. The guidance clarifies that all outstanding unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are
required to be included in computing basic and diluted earnings (loss) per
common share under the two-class method. This staff position was effective
for financial statements issued for fiscal years beginning after December 15,
2008 and interim periods within those years. The adoption of this staff
position 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 and
six months ended March 31, 2010. This analysis as well as other sections of
this report contains certain "forward-looking statements."
Certain matters discussed in this Form 10-Q may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are not statements of historical fact and
often include the words "believes," "expects," "anticipates," "estimates,"
"forecasts," "intends," "plans," "targets," "potentially," "probably,"
"projects," "outlook" or similar expressions or future or
24
conditional verbs such as "may," "will," "should," "would" and "could."
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, assumptions and statements about
future performance. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from the results anticipated, including, but not
limited to: the credit risks of lending activities, including changes in the
level and trend of loan delinquencies and write-offs and changes in our
allowance for loan losses and provision for loan losses that may be impacted
by deterioration in the housing and commercial real estate markets and may
lead to increased losses and non-performing assets in our loan portfolio, and
may result in our allowance for loan losses not being adequate to cover actual
losses, and require us to materially increase our reserves; changes in general
economic conditions, either nationally or in our market areas; changes in the
levels of general interest rates, and the relative differences between short
and long term interest rates, deposit interest rates, our net interest margin
and funding sources; fluctuations in the demand for loans, the number of
unsold homes, land and other properties and fluctuations in real estate values
in our market areas; secondary market conditions for loans and our ability to
sell loans in the secondary market; results of examinations of us by the
Federal Reserve and our bank subsidiary by the Federal Deposit Insurance
Corporation, the Washington State Department of Financial Institutions,
Division of Banks or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to
increase our allowance for loan losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or maintain
or increase deposits, which could adversely affect our liquidity and earnings;
our compliance with regulatory enforcement actions, including regulatory
memoranda of understandings ("MOUs") to which we are subject; legislative or
regulatory changes that adversely affect our business including changes in
regulatory policies and principles, or the interpretation of regulatory
capital or other rules; our ability to attract and retain deposits; further
increases in premiums for deposit insurance; our ability to control operating
costs and expenses; the use of estimates in determining fair value of certain
of our assets, which estimates may prove to be incorrect and result in
significant declines in valuation; difficulties in reducing risk associated
with the loans on our balance sheet; staffing fluctuations in response to
product demand or the implementation of corporate strategies that affect our
workforce and potential associated charges; computer systems on which we
depend could fail or experience a security breach; our ability to retain key
members of our senior management team; costs and effects of litigation,
including settlements and judgments; our ability to successfully integrate any
assets, liabilities, customers, systems, and management personnel we 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; increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits; legislative or
regulatory changes that adversely affect our business including changes in
regulatory policies and principles, the interpretation of regulatory capital
or other rules and any changes in the rules applicable to institutions
participating in the TARP Capital Purchase Program; the availability of
resources to address changes in laws, rules, or regulations or to respond to
regulatory actions; 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,
including additional guidance and interpretation on accounting issues and
details of the implementation of new accounting methods; the economic impact
of war or any terrorist activities; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations; pricing,
products and services; and other risks detailed in our reports filed with the
Securities and Exchange Commission, including our Annual Report on Form 10-K
for the year ended September 30, 2009.
Any of the forward-looking statements that we make in this Form 10-Q and in
the other public statements we make are based upon management's beliefs and
assumptions at the time they are made. We undertake no obligation to publicly
update or revise any forward-looking statements included in this report or to
update the reasons why actual results could differ from those contained in
such statements, whether as a result of new information, future events or
otherwise. We caution readers not to place undue reliance on any
forward-looking
25
statements. We do not undertake and specifically disclaim any obligation to
revise any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
These risks could cause our actual results for 2010 and beyond to differ
materially from those expressed in any forward-looking statements by, or on
behalf of us, and could negatively affect the Company's operations and stock
price performance.
Overview
Timberland Bancorp, Inc., a Washington corporation, is the holding company for
Timberland Bank. The Bank opened for business in 1915 and serves consumers
and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis
counties, Washington with a full range of lending and deposit services through
its 22 branches (including its main office in Hoquiam). At March 31, 2010,
the Company had total assets of $724.78 million and total shareholders' equity
of $84.87 million. The Company's business activities generally are limited to
passive investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth in this report relates primarily to the
Bank's operations.
The profitability of the Company's operations depends primarily on its net
interest income after provision for loan losses. Net interest income is the
difference between interest income, which is the income that the Company earns
on interest-earning assets, comprised of primarily loans and investments, and
interest expense, the amount the Company pays on its interest-bearing
liabilities, which are primarily deposits and borrowings. Net interest income
is affected by changes in the volume and mix of interest earning assets,
interest earned on those assets, the volume and mix of interest bearing
liabilities and interest paid on those interest bearing liabilities.
Management strives to match the re-pricing characteristics of the interest
earning assets and interest bearing liabilities to protect net interest income
from changes in market interest rates and changes in the shape of the yield
curve.
The provision for loan losses is dependent on changes in the loan portfolio
and management's assessment of the collectability of the loan portfolio as
well as prevailing economic and market conditions. The provision for loan
losses reflects the amount that the Company believes is adequate to cover
potential credit losses in its loan portfolio. Additionally, net income is
affected by non-interest income and non-interest expenses. For the three and
six month periods ended March 31, 2010, non-interest income consisted
primarily of service charges and fees on deposit accounts, ATM transaction
fees, gain on sale of loans, increase in the cash surrender value of life
insurance, servicing income and other operating income. Non-interest income
is reduced by net OTTI losses on investment securities. Non-interest expenses
consisted primarily of salaries and employee benefits, premises and equipment,
advertising, ATM related expenses, OREO expenses, postage and courier,
professional fees, state and local taxes and deposit insurance premiums.
Non-interest income and non-interest expenses are affected by the growth of
our operations and growth in the number of loan and deposit accounts.
Results of operations may be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
The Bank is a community-oriented bank which has traditionally offered a
variety of savings products to its retail customers while concentrating its
lending activities on real estate mortgage loans. Lending activities have
been focused primarily on the origination of loans secured by real estate,
including an emphasis on residential construction loans, one- to four-family
residential loans, multi-family loans, commercial real estate loans and land
loans. The Bank originates adjustable-rate residential mortgage loans that do
not qualify for sale in the secondary market. The Bank also originates
commercial business loans.
26
Critical Accounting Policies and Estimates
The Company has identified several accounting policies that as a result of
judgments, estimates and assumptions inherent in those policies, are critical
to an understanding of the Company's Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level believed to be sufficient to provide for probable loan losses based on
evaluating known and inherent risks in the loan 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 collectability may not be assured. The detailed analysis
includes methods to estimate the fair value of loan collateral and the
existence of potential alternative sources of repayment. 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 GAAP, 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 level of the allowance as of March 31, 2010 was adequate to absorb
probable losses inherent in the loan portfolio, a decline in local economic
conditions, results of examinations by the Company's or the Bank's regulators
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.
OTTIs (Other-Than-Temporary Impairments) in the Fair Value of Investment
Securities. Unrealized losses on available for sale and held to maturity
investment securities are evaluated at least quarterly to determine whether
declines in value should be considered "other than temporary" and therefore be
subject to immediate loss recognition through earnings for the portion related
to credit losses. Although these evaluations involve significant judgment, an
unrealized loss in the fair value of a debt security is generally deemed to be
temporary when the fair value of the security is less than the recorded value
primarily as a result of changes in interest rates, when there has not been
significant deterioration in the financial condition of the issuer, and it is
more likely than not the Company will not have to sell the security before
recovery of its cost basis. An unrealized loss in the value of an equity
security is generally considered temporary when the fair value of the security
is less than the recorded value primarily as a result of current market
conditions and not a result of
27
deterioration in the financial condition of the issuer or the underlying
collateral (in the case of mutual funds) and the Company has the intent and
the ability to hold the security for a sufficient time to recover the recorded
value. Other factors that may be considered in determining whether a decline
in the value of either a debt or equity security is "other than temporary"
include ratings by recognized rating agencies; capital strength and near-term
prospects of the issuer, and recommendation of investment advisors or market
analysts. Therefore, continued deterioration of current market conditions
could result in additional impairment losses recognized within the Company's
investment portfolio.
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 during the third quarter of each fiscal year, or more
frequently if indicators of potential impairment exist, to determine if the
recorded goodwill is impaired. 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.
One of the circumstances evaluated when determining if an impairment test of
goodwill is needed more frequently than annually is the extent and duration
that the Company's market capitalization (total common shares outstanding
multiplied by current stock price) is less than the total equity applicable to
common shareholders. During the quarter ended March 31, 2009, the Company's
market capitalization decreased to a level that required a goodwill impairment
test prior to the annual test. Therefore, the Company engaged a third party
firm to perform an interim test for goodwill impairment during the quarter
ended March 31, 2009. The test concluded that recorded goodwill was not
impaired. The Company updated the interim test for goodwill impairment
internally during the quarter ended June 30, 2009 and concluded that recorded
goodwill was not impaired. As of March 31, 2010, there have been no events or
changes in the circumstances that would indicate a potential impairment to
recorded goodwill. No assurance can be given, however, that the Company will
not record an impairment loss on goodwill in the future.
Other Real Estate Owned and Other Repossessed Assets. Other real estate owned
and other repossessed assets consist of properties or assets acquired through
or by deed in lieu of foreclosure, and are recorded initially at the fair
value of the properties less estimated costs of disposal. Costs relating to
the development and improvement of the properties or assets are capitalized
while costs relating to holding the properties or assets are expensed.
Valuations are periodically performed by management, and a charge to earnings
is recorded if the recorded value of a property exceeds its estimated net
realizable value.
Comparison of Financial Condition at March 31, 2010 and September 30, 2009
The Company's total assets increased by $23.10 million, or 3.3%, to $724.78
million at March 31, 2010 from $701.68 million at September 30, 2009. The
increase was primarily attributable to an increase in cash equivalents and
short-term CDs held for investment.
Net loans receivable decreased by $8.56 million, or 1.6%, to $538.65 million
at March 31, 2010 as compared to $547.21 million at September 30, 2009. The
decrease was primarily due to a significant decrease in construction and land
development loan balances and an increase in the allowance for loan losses
during the six months ended March 31, 2010, which were partially offset by an
increase in commercial real estate loan balances, multi-family loan balances
and commercial business loan balances.
Total deposits increased by $46.06 million, or 9.1%, to $551.72 million at
March 31, 2010 from $505.66 million at September 30, 2009, primarily as a
result of increases in N.O.W. checking account balances and CD account
balances.
28
Shareholders' equity decreased by $2.33 million, or 2.7%, to $84.87 million at
March 31, 2010 from $87.20 million at September 30, 2009. The decrease was
primarily due to a net loss for the six months, which was partially offset by
a reduction in the accumulated other comprehensive loss equity component, due
to a reduction in unrealized losses on investment securities.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents and CDs Held for Investment: Cash equivalents and CDs held
for investment increased by $23.85 million, or 34.2%, to $93.57 million at
March 31, 2010 from $69.71 million at September 30, 2009. The increase in
cash equivalents and short-term CDs was primarily due to the Company's
decision to increase its liquidity position for regulatory and asset-liability
management purposes.
Mortgage-backed Securities and Other Investments: Mortgage-backed securities
and other investments decreased by $2.35 million, or 11.4%, to $18.21 million
at March 31, 2010 from $20.56 million at September 30, 2009. The decrease was
primarily as a result of regular amortization and prepayments on
mortgage-backed securities and OTTI charges recorded on private label
residential mortgage-backed securities. The securities on which the OTTI
charges were recognized were acquired from the in-kind redemption of the
Bank's investment in the AMF family of mutual funds in June 2008. For
additional information, see Note 3 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Loans: Net loans receivable decreased by $8.56 million, or 1.6% to $538.65
million at March 31, 2010 from $547.21 million at September 30, 2009. The
decrease in the portfolio was primarily a result of a $26.32 million decrease
in construction loan balances (net of undisbursed portion of construction
loans in process), a $2.79 million decrease in consumer loan balances, a $1.79
million decrease in land loan balances and a $2.52 million increase in the
allowance for loan losses. These decreases to net loans receivable were
partially offset by a $9.97 million increase in commercial real estate loan
balances, a $7.60 million increase in multi-family loan balances, a $4.40
million increase in commercial business loan balances and a $2.74 million
increase in one-to-four family loan balances. The decrease in the
construction and land loan balances was primarily due to loan payoffs and
changes in the Bank's underwriting standards for these types of loans, which
has decreased the level of construction and land loan originations.
Loan originations decreased to $96.69 million for the six months ended March
31, 2010 from $142.22 million for the six months ended March 31, 2009
primarily due to a decrease in the demand for single family home loan
refinances. The Bank continued to sell longer-term fixed rate loans for asset
liability management purposes and to generate non-interest income. The Bank
sold fixed rate one- to four-family mortgage loans totaling $32.32 million for
the six months ended March 31, 2010 compared to $71.26 million for the six
months ended March 31, 2009.
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 decreased by $295,000, or
1.6%, to $17.75 million at March 31, 2010 from $18.05 million at September 30,
2009. The decrease was primarily a result of depreciation.
Other Real Estate Owned ("OREO"): OREO and other repossessed assets increased
by $5.29 million, or 64.7%, to $13.48 million at March 31, 2010 from $8.19
million at September 30, 2009. At March 31, 2010, OREO consisted of 29
individual properties and three other repossessed assets representing 25
relationships. The properties consisted of two condominium projects totaling
$4.21 million, three land development projects totaling $4.19 million, 12
single family homes totaling $3.54 million, two commercial real estate
properties totaling $951,000 and ten land parcels totaling $512,000.
29
Goodwill and CDI: The value of goodwill at $5.65 million at March 31, 2010
remained unchanged from September 30, 2009. The amortized value of the CDI
decreased to $659,000 at March 31, 2010 from $755,000 at September 30, 2009.
The decrease was attributable to scheduled amortization of the CDI.
Deposits: Deposits increased by $46.06 million, or 9.1%, to $551.72 million at
March 31, 2010 from $505.66 million at September 30, 2009. The increase was
primarily a result of a $23.76 million increase in N.O.W. checking account
balances, a $21.30 million increase in CD account balances and a $6.19 million
increase in savings account balances. These increases were partially offset
by a $4.76 million decrease in money market account balances. The increase in
N.O.W. account balances was primarily a result of the Bank's checking account
promotions. The increase in CD account balances was primarily a result
increased demand for CD accounts by customers in the Bank's market areas. The
Bank experienced deposit inflows due to a number of customers transferring
funds from other financial institutions during the six months ended March 31,
2010.
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
(including repurchase agreements) decreased by $20.33 million, or 19.2%, to
$85.45 million at March 31, 2010 from $105.78 million at September 30, 2009 as
the Bank used a portion of its liquid assets to repay maturing FHLB advances.
For additional information, see "Borrowing Maturity Schedule" set forth below.
Shareholders' Equity: Total shareholders' equity decreased by $2.33 million,
or 2.7%, to $84.87 million at March 31, 2010 from $87.20 million at September
30, 2009. The decrease was primarily due to a $2.95 million net loss and the
payment of $699,000 in dividends to common and preferred shareholders and was
partially offset by a $1.15 million reduction in the accumulated other
comprehensive loss equity component, due to a reduction in unrealized losses
on investment securities.
Non-performing Assets: Non-performing assets consist of non-accrual loans,
non-accrual investment securities, and OREO and other repossessed assets. At
March 31, 2010, five loans totaling $5.22 million were 90 days or more past
due and still accruing interest. At September 30, 2009, five loans totaling
$796,000 were 90 days or more past due and still accruing interest.
Non-performing assets to total assets increased to 5.95% at March 31, 2010
from 5.41% at September 30, 2009, as OREO and other repossessed assets
increased by $5.29 million and non-accrual investment securities increased by
$2.79 million. Partially offsetting these increases to non-performing assets
was a $2.94 million decrease in non-accrual loans.
Total non-performing loans of $26.35 million at March 31, 2010 were comprised
of 65 loans and 43 credit relationships. Included in these non-performing
loans at March 31, 2010 were:
* 27 land loans totaling $7.78 million (of which the largest had a
balance of $844,000)
* Six land development loans totaling $6.64 million (of which the
largest had a balance of $2.34 million)
* Four commercial real estate loans totaling $3.47 million (of which the
largest had a balance of $2.84 million)
* 12 single family home loans totaling $2.69 million (of which the
largest had a balance of $756,000)
* Six single family speculative loans totaling $2.45 million (of which
the largest had a balance of $775,000)
* Two condominium construction loans totaling $2.13 million (of which
the largest had a balance of $1.80 million)
* Two one-to-four family owner/builder construction loans totaling
$991,000 (of which the largest had a balance of $800,000)
* One commercial business loan with a balance of $78,000
* Three home equity loans totaling $70,000
* Two consumer loans totaling $63,000
30
The Company had net charge-offs totaling $5.28 million for the six months
ended March 31, 2010 compared to $2.37 million for the six months ended March
31, 2009. The charge-offs during the six months ended March 31, 2010 were
primarily associated with construction loans and land loans. In recognition
of a real estate market that reflected lower valuations during the period net
charge-offs consisted of the following:
* $1.55 million on three condominium construction loans
* $1.22 million on three commercial real estate loans
* $1.12 million on 17 land loans
* $488,000 on four land development loans
* $414,000 on three single family construction loans
* $266,000 on six single family speculative construction loans
* $164,000 on six home equity loans
* $46,000 on four single family home loans
* $11,000 on three consumer loans
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 Bank's deposit balances.
At At
March 31, 2010 September 30, 2009
-------------- ------------------
(In thousands)
Non-interest bearing $ 49,870 $ 50,295
N.O.W. checking 141,119 117,357
Savings 64,800 58,609
Money market accounts 57,716 62,478
CDs under $100 144,957 135,242
CDs $100 and over 89,262 77,926
CDs - brokered 4,000 3,754
-------- --------
Total deposits $551,724 $505,661
======== ========
Borrowing 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 March 31, At September 30,
2010 2009
Amount Percent Amount Percent
------------------ ------------------
(Dollars in thousands)
Short-term $ - - - -% $ - - - -%
Long-term 75,000 100.0 95,000 100.0
------- ----- ------- -----
Total FHLB advances $75,000 100.0% $95,000 100.0%
======= ===== ======= =====
31
The long-term borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.49% to 4.66%. The weighted average
interest rate on FHLB borrowings at March 31, 2010 was 4.03%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2010 $ - -
2011 20,000
2012 10,000
2013 - -
2014 - -
Thereafter 45,000
-------
Total $75,000
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
The Bank also maintains a short-term borrowing line with the Federal Reserve
Bank of San Francisco with total credit based on eligible collateral. As of
March 31, 2010, the Bank had a borrowing line capacity of $11.44 million of
which, one note in the amount of $10.00 million was outstanding. The
borrowing matured on April 1, 2010 and had an interest rate of 0.75%. As of
September 30, 2009 the Bank had $10.00 million outstanding on the borrowing
line with the Federal Reserve Bank of San Francisco.
The Bank has also been approved for a $10.00 million overnight borrowing line
with Pacific Coast Bankers Bank ("PCBB"). The borrowing line may be reduced
or withdrawn at any time and must be collateralized. As of March 31, 2010 and
September 30, 2009, the Bank did not have any outstanding advances on this
borrowing line. As of March 31, 2010 and September 30, 2009, the Bank did not
have any collateral pledged for this borrowing line.
Comparison of Operating Results for the Three and Six Months Ended March 31,
2010 and 2009 The Company reported a net loss of $(3.18 million) for the
quarter ended March 31, 2010 compared to a net loss of $ (1.39 million) for
the quarter ended March 31, 2009. Net loss to common shareholders after
adjusting for the preferred stock dividend and the preferred stock discount
accretion was $(3.44 million) for the quarter ended March 31, 2010 compared to
a net loss of $(1.60 million) for the quarter ended March 31, 2009. The
increased loss was primarily a result of decreased non-interest income and
increased non-interest expenses. Diluted loss per common share was $(0.51)
for the quarter ended March 31, 2010 compared to a loss of $(0.24) for the
quarter ended March 31, 2009.
The Company reported a net loss of $(2.95 million) for the six months ended
March 31, 2010 compared to a net loss of $ (1.03 million) for the six months
ended March 31, 2009. Net loss to common shareholders after adjusting for the
preferred stock dividend and the preferred stock discount accretion was $(3.47
million) for the six months ended March 31, 2010 compared to a net loss of
$(1.26 million) for the six months ended March 31, 2009. The increased loss
was primarily a result of increased provisions for loan losses, decreased
non-interest income and increased non-interest expenses. Diluted loss per
common share was $(0.52) for the six months ended March 31, 2010 compared to a
loss of $(0.19) for the six months ended March 31, 2009.
A more detailed explanation of the income statement categories is presented
below.
Net Loss: The net loss for the quarter ended March 31, 2010 increased by $1.79
million, or 128.1%, to $(3.18 million) from a net loss of $(1.39 million) for
the quarter ended March 31, 2009. Net loss to common shareholders after
adjusting for preferred stock dividends of $208,000 and preferred stock
discount accretion of $52,000 was a loss of $(3.44 million), or $(0.51) per
diluted common share for the quarter ended March 31,
32
2010, compared to a net loss of $(1.60 million), or $(0.24) per diluted common
share for the quarter ended March 31, 2009.
The $0.27 increase in diluted loss per common share was primarily the result
of a $1.48 million ($978,000 net of income tax - $0.15 per diluted common
share) decrease in non-interest income and a $1.25 million ($825,000 net of
income tax - $0.12 per diluted common share) increase in non-interest expense.
The net loss for the six months ended March 31, 2010 increased by $1.92
million, or 186.5%, to $(2.95 million) from a net loss of $(1.03 million) for
the six months ended March 31, 2009. Net loss to common shareholders after
adjusting for preferred stock dividends of $416,000 and preferred stock
discount accretion of $103,000 was a loss of $(3.47 million), or $(0.52) per
diluted common share for the six months ended March 31, 2010, compared to a
net loss of $(1.26 million), or $(0.19) per diluted common share for the six
months ended March 31, 2009.
The $0.33 increase in diluted loss per common share for the six months ended
March 31, 2010 was primarily the result of a $1.30 million ($861,000 net of
income tax - $0.13 per diluted common share) increase in the provision for
loan losses, a $1.21 million ($801,000 net of income tax - $0.12 per diluted
common share) increase in non-interest expense, a $419,000 ($277,000 net of
income tax - $0.04 per diluted common share) decrease in non-interest income
and a $292,000 increase in preferred stock dividends and preferred stock
accretion which increased the net loss to common shareholders by approximately
$0.04 per diluted common share.
Net Interest Income: Net interest income increased by $29,000, or 0.5%, to
$6.45 million for the quarter ended March 31, 2010 from $6.42 million for the
quarter ended March 31, 2009. The increase in net interest income was
primarily attributable to an increased level of average interest earning
assets which was partially offset by margin compression due to an increased
level of relatively low yielding cash equivalents and other liquid assets.
Total interest and dividend income decreased by $644,000 or 6.6%, to $9.16
million for the quarter ended March 31, 2010 from $9.80 million for the
quarter ended March 31, 2009 as the yield on interest earning assets decreased
to 5.59% from 6.20%. The decrease in the weighted average yield on interest
earning assets was primarily a result of an increase in the amount of lower
yielding cash equivalents and other liquid assets and an increase in the
amount of loans on non-accrual status. Total average interest earning assets
increased by $22.88 million to $655.36 million for the quarter ended March 31,
2010 from $632.48 million for quarter ended March 31, 2009. Total interest
expense decreased by $673,000, or 19.9%, to $2.71 million for the quarter
ended March 31, 2010 from $3.38 million for the quarter ended March 31, 2009
as the average rate paid on interest bearing liabilities decreased to 1.88%
for the quarter ended March 31, 2010 from 2.58% for the quarter ended March
31, 2009. The decrease in funding costs was primarily a result of a decrease
in overall market rates and a decrease in the level of average FHLB advances.
Total average interest bearing liabilities increased by $40.03 million to
$572.71 million for the quarter ended March 31, 2010 from $532.68 million for
the quarter ended March 31, 2009. The net interest margin decreased to 3.93%
for the quarter ended March 31, 2010 from 4.06% for the quarter ended March
31, 2009. The margin compression was primarily attributable to the reversal
of interest income on loans placed on non-accrual status during the quarter
ended March 31, 2010 and an increased level of liquid assets with lower
yields. The reversal of interest income on loans placed on non-accrual status
during the quarter ended March 31, 2010 reduced the net interest margin by
approximately 10 basis points.
Net interest income decreased by $43,000, or 0.3%, to $12.84 million for the
six months ended March 31, 2010 from $12.88 million for the six months ended
March 31, 2009. The decrease in net interest income was primarily
attributable to an increased level of non-accrual loans and an increased level
of relatively low yielding cash equivalents and other liquid assets.
33
Total interest and dividend income decreased by $1.33 million or 6.7%, to
$18.50 million for the six months ended March 31, 2010 from $19.83 million for
the six months ended March 31, 2009 as the yield on interest earning assets
decreased to 5.67% from 6.35%. The decrease in the weighted average yield on
interest earning assets was primarily a result of an increase in the amount of
lower yielding cash equivalents and other liquid assets and an increase in the
amount of loans on non-accrual status. Total average interest earning assets
increased by $27.12 million to $652.02 million for the six months ended March
31, 2010 from $624.90 million for the six months ended March 31, 2009. Total
interest expense decreased by $1.28 million, or 18.5%, to $5.66 million for
the six months ended March 31, 2010 from $6.95 million for the six months
ended March 31, 2009 as the average rate paid on interest bearing liabilities
decreased to 2.00% for the six months ended March 31, 2010 from 2.62% for the
six months ended March 31, 2009. The decrease in funding costs was primarily
a result of a decrease in overall market rates and a decrease in the level of
average FHLB advances. Total average interest bearing liabilities increased
by $34.72 million to $566.51 million for the six months ended March 31, 2010
from $531.78 million for the six months ended March 31, 2009. The net
interest margin decreased to 3.94% for the six months ended March 31, 2010
from 4.12% for the six months ended March 31, 2009. The margin compression
was primarily attributable to the reversal of interest income on loans placed
on non-accrual status during the six months ended March 31, 2010 and an
increased level of liquid assets with lower yields. The reversal of interest
income on loans placed on non-accrual status during the six months ended March
31, 2010 reduced the net interest margin by approximately 16 basis points.
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 March 31, 2010 Six months ended March 31, 2010
compared to three months compared to six months
ended March 31, 2009 ended March 31, 2009
increase (decrease) increase (decrease)
due to due to
------ ------
Rate Volume Net Change Rate Volume Net Change
------ ------ ---------- ------ ------ ---------
(In thousands)
Interest-earning assets:
Loans receivable (1) $(478) $(109) $(587) $ (925) $(167) $(1,092)
Mortgage-backed
securities and
other investments 15 (123) (108) (60) (244) (304)
FHLB stock and
equity securities -- -- - - (1) -- (1)
Federal funds sold (2) (3) (5) (14) (14) (28)
Interest-bearing
deposits 5 51 56 (4) 102 98
----- ----- ----- ------- ----- -------
Total net decrease
in income on interest-
earning assets (460) (184) (644) (1,004) (323) (1,327)
----- ----- ----- ------- ----- -------
Interest-bearing liabilities:
Savings accounts 1 15 16 2 22 24
NOW accounts 98 126 224 187 223 410
34
Money market accounts (76) 8 (68) (196) 21 (175)
Certificate accounts (651) 52 (599) (1,184) 79 (1,105)
Short-term borrowings -- 2 2 -- 2 2
Long-term borrowings (25) (223) (248) (62) (378) (440)
----- ----- ----- ------- ----- -------
Total net decrease
in expense on interest-
bearing liabilities (653) (20) (673) (1,253) (31) (1,284)
----- ----- ----- ------- ----- -------
Net increase (decrease) in
net interest income $ 193 $(164) $ 29 $ 249 $(292) $ (43)
===== ===== ===== ======= ===== =======
(1) Excludes interest on loans on non-accrual status. Includes loans originated for sale.
Provision for Loan Losses: The provision for loan losses increased $19,000,
or 0.4%, to $5.20 million for the quarter ended March 31, 2010 from $5.18
million for the quarter ended March 31, 2009. The provision for loan losses
increased $1.30 million, or 20.1%, to $7.80 million for the six months ended
March 31, 2010 from $6.49 million for the six months ended March 31, 2009.
The increased provisions for the three and six months ended March 31, 2010
were 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 real estate values 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 impaired loans,
and other factors to determine an appropriate level of allowance for loan
losses. Management's analysis for the three and six months ended March 31,
2010, also 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. Based on its comprehensive analysis,
management believes the allowance for loan losses of $16.69 million at March
31, 2010 (3.00% of loans receivable and loans held for sale and 63.3% of non-
performing loans) is 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
principal impairment amount determined at March 31, 2010 was $5.54 million.
The allowance for loan losses was $12.05 million (2.13% of loans receivable
and 60.6% of non-performing loans) at March 31, 2009. The Company had net
charge-offs of $5.28 million during the six months ended March 31, 2010 and
net charge-offs of $2.37 million for the six months ended March 31, 2009.
Non-accrual and 90 day past due loans increased $1.48 million to $31.57
million at March 31, 2010 from $30.01 million at September 30, 2009.
Non-accrual loans were comprised of 65 loans and 43 credit relationships. For
additional information, see the section entitled "Non-performing Assets"
included herein.
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 analysis of information available to
them at the time of their examination. In addition, because future events
affecting borrowers and collateral
35
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. Any
material increase in the allowance for loan losses would adversely affect the
Company's financial condition and results of operations. For additional
information, see Note 5 of the Notes to Condensed Consolidated Financial
Statements contained in "Item 1, Financial Statements."
Non-interest Income: Total non-interest income decreased $1.48 million, or
77.5%, to $430,000 for the quarter ended March 31, 2010 from $1.91 million for
the quarter ended March 31, 2009. Excluding net OTTI losses on investment
securities, non-interest income decreased $890,000, or 30.9% to $1.99 million
for the quarter ended March 31, 2010 from $2.88 million for the quarter ended
March 31, 2009. This decrease was primarily a result of a $722,000 decrease
in gains on sale of loans and a $141,000 decrease in BOLI income. The
decreased income from loan sales was primarily a result of a decrease in the
dollar value of residential mortgage loans sold in the secondary market during
the three months ended March 31, 2010. The sale of fixed rate one-to four-
family mortgage loans totaled $13.47 million for the three months ended March
31, 2010 compared to $61.02 million for the three months ended March 31, 2009.
The higher loan sales during the three months ended March 31, 2009 was
primarily due to increased refinancing activity that was attributable to lower
interest rates for 30-year fixed rates loans. The higher BOLI income for the
three months ended March 31, 2009 was primarily due to a $134,000
non-recurring gain associated with transferring a portion of the BOLI
portfolio to a new insurance company.
The net OTTI loss on investment securities increased $592,000, or 61.4%, to
$1.56 million for the quarter ended March 31, 2010 from $964,000 for the
quarter ended March 31, 2009. The increased OTTI loss was primarily the
result of using an updated third party model that incorporated harsher
assumptions to evaluate the projected cash flows on certain private label
mortgage-backed securities in the Bank's investment portfolio and additional
deterioration in the underlying loans supporting the securities.
Total non-interest income decreased by $419,000, or 14.9%, to $2.40 million
for the six months ended March 31, 2010 from $2.82 million for the six months
ended March 31, 2009. Excluding net OTTI losses on investment securities,
non-interest income decreased by $677,000, or 13.7% to $4.28 million for the
six months ended March 31, 2010 from $4.95 million for the six months ended
March 31, 2009. This decrease was primarily a result of a $554,000 decrease
in gains on sale of loans and a $129,000 decrease in BOLI income. The
decreased income from loan sales was primarily a result of a decrease in the
dollar value of residential mortgage loans sold in the secondary market during
the six months ended March 31, 2010. The sale of fixed rate one-to
four-family mortgage loans totaled $32.32 million for the six months ended
March 31, 2010 compared to $71.56 million for the six months ended March 31,
2009. The higher loan sales during the six months ended March 31, 2009 was
primarily due to increased refinancing activity that was attributable to lower
interest rates for 30-year fixed rates loans. The higher BOLI income for the
six months ended March 31, 2009 was primarily due to a $134,000 non-recurring
gain associated with transferring a portion of the BOLI portfolio to a new
insurance company.
The net OTTI loss on investment securities decreased $258,000, or 12.1% to
$1.88 million for the six months ended March 31, 2010 from $2.13 million for
the six months ended March 31, 2009.
Non-interest Expense: Total non-interest expense increased by $1.25 million,
or 23.0%, to $6.69 million for the quarter ended March 31, 2010 from $5.44
million for the quarter ended March 31, 2009. This increase was primarily a
result of a $707,000 increase in FDIC insurance expense, a $245,000 increase
in OREO and other repossessed items expense, a $95,000 increase in salaries
and employee benefits expense and an $89,000 increase in the Company's general
liability insurance expense. The increase in FDIC insurance expense was
primarily due to increased assessment rates and a $503,000 non-recurring
accrual adjustment. Without the non-recurring adjustment the FDIC insurance
expense would have been $303,000 for the three months ended March 31, 2010
compared to $99,000 for the three months ended March 31, 2009. Management
concluded, after
36
performing an analysis, that an adjustment to reported results for prior
periods was not necessary for the non-recurring accrual adjustment. The
increase in OREO related expenses was primarily a result of valuation
write-downs based on updated appraisals received for several Bank owned
properties.
Total non-interest expense increased by $1.21 million, or 11.1%, to $12.19
million for the six months ended March 31, 2010 from $10.98 million for the
six months ended March 31, 2009. This increase was primarily a result of an
$819,000 increase in FDIC insurance expense, a $235,000 increase in OREO and
other repossessed items expense and an $88,000 increase in the Company's
general liability insurance expense. The increase in FDIC insurance expense
was primarily due to increased assessment rates and a non-recurring accrual
adjustment which increased the expense for the six months ended March 31, 2010
by $400,000. Without the non-recurring adjustment the FDIC insurance expense
would have been $605,000 for the six months ended March 31, 2010 compared to
$186,000 for the six months ended March 31, 2009. The increase in OREO
related expenses was primarily a result of valuation write-downs based on
updated appraisals received for several Bank owned properties.
Provision (Benefit) for Income Taxes: The benefit for income taxes increased
$937,000 to $1.83 million for the quarter ended March 31, 2010 from a net
benefit of $896,000 for the quarter ended March 31, 2009 primarily as a result
of an increased loss before taxes. The Company's effective tax (benefit) rate
was (36.58%) for the quarter ended March 31, 2010 and (39.14%) for the quarter
ended March 31, 2009.
The benefit for income taxes increased by $1.06 million to $1.80 million for
the six months ended March 31, 2010 from a net benefit of $739,000 for the six
months ended March 31, 2009 primarily as a result of an increased loss before
taxes. The Company's effective tax (benefit) rate was (37.80%) for the six
months ended March 31, 2010 and (41.75%) for the six months ended March 31,
2009.
The change in the effective tax (benefit) rate is primarily due to the loss
before taxes and the non-taxable BOLI earnings which increases the effective
tax benefit in periods with a loss before taxes.
Liquidity
---------
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities,
proceeds from the sale of loans, proceeds from maturing securities and
maturing CDs held for investment, 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 six months ended March 31, 2010. The
Condensed Consolidated Statement of Cash Flows includes operating, investing
and financing categories. Operating activities include net loss, 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 increased by $9.00 million, or 13.5% to
$75.46 million at March 31, 2010 from $66.46 million at September 30, 2009.
The increase in liquid assets was primarily reflected in an increase in
interest bearing deposits in other 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 March 31, 2010,
the Bank's regulatory liquidity ratio (net cash, and short-term
37
and marketable assets, as a percentage of net deposits and short-term
liabilities) was 16.26%. 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 $75.00 million was outstanding and $98.91 million was
available for additional borrowings at March 31, 2010. The Bank also
maintains a short-term borrowing line with the Federal Reserve Bank with total
credit based on eligible collateral. At March 31, 2010, the Bank had $10.00
million outstanding on this borrowing line. The Bank has also been approved
for a $10.00 million overnight borrowing line with PCBB, which must be
collateralized. At March 31, 2010, the Bank had not pledged any collateral
for this borrowing line and there was no outstanding balance.
Liquidity management is both a short and long-term responsibility of the
Bank's management. The Bank adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, and (iv) yields available on
interest-bearing deposits. Excess liquidity is invested generally in
interest-bearing overnight deposits, 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 the Federal Reserve Bank.
The Bank's primary investing activity is the origination of one- to
four-family mortgage loans, commercial mortgage loans, construction loans,
land loans, consumer loans, and commercial business loans. At March 31, 2010,
the Bank had loan commitments totaling $42.49 million and undisbursed loans in
process totaling $18.82 million. The Bank anticipates that it will have
sufficient funds available to meet current loan commitments. CDs that are
scheduled to mature in less than one year from March 31, 2010 totaled $191.77
million. Historically, the Bank has been able to retain a significant amount
of its non-brokered certificates of deposit as they mature. At March 31,
2010, the Bank's brokered deposits consisted of $4.00 million in reciprocal
brokered certificate of deposit accounts exchanged through the Certificate of
Deposits Account Registry Service ("CDARS") program.
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 4.0% to 5.0%, (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%. The Bank is currently
required to maintain a well capitalized status and a Tier 1 leverage capital
ratio of at least 10.0% under terms of a Memorandum of Understanding with the
FDIC and the Washington Department of Financial Institutions, Division of
Banks (the "Bank MOU"). For additional information regarding the Bank MOU,
see "Item 1A, Risk Factors The Company and the Bank are required to comply
with the terms of separate memoranda of understanding issued by their
respective regulators and lack of compliance could result in additional
regulatory actions."
At March 31, 2010, the Bank was in compliance with all applicable capital
requirements.
38
The following table compares the Company's and the Bank's actual capital
amounts at March 31, 2010 to its minimum regulatory capital requirements at
that date (dollars in thousands):
To Be Well
Capitalized
Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tier 1 leverage capital:
Consolidated $79,605 11.27% $28,244 4.00% N/A N/A
Timberland Bank (1) 69,952 10.02 69,798 10.00 $69,798 10.00%
Tier 1 risk adjusted capital:
Consolidated 79,605 14.04 22,687 4.00 N/A N/A
Timberland Bank (1) 69,952 12.37 33,916 6.00 33,916 6.00
Total risk based capital
Consolidated 86,813 15.31 45,373 8.00 N/A N/A
Timberland Bank (1) 77,147 13.65 56,527 10.00 56,527 10.00
--------------
(1) Reflects the higher Tier 1 leverage capital ratio that the Bank is
required to comply with under terms of the Bank MOU with the FDIC and the
Division. Also reflects that the Bank is required to maintain Tier 1 risk
adjusted capital ratio and Total risk-based capital ratio at or above the
"well capitalized" thresholds under the terms of the Bank MOU.
39
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
---------------- ----------------
PERFORMANCE RATIOS:
Loss on average assets (1) (1.78%) (0.82%) (0.84%) (0.31%)
Loss on average equity (1) (14.56%) (6.10%) (6.75%) (2.46%)
Net interest margin (1) 3.93% 4.06% 3.94% 4.12%
Efficiency ratio 97.32% 65.34% 80.01% 69.93%
At At At
March 31, September 30, March 31,
2010 2009 2009
-------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $26,351 $29,287 $19,867
Non-performing investment securities 3,262 477 310
OREO & other repossessed assets 13,477 8,185 2,827
------- ------- -------
Total non-performing assets (2) $43,090 $37,949 $23,004
======= ======= =======
Non-performing assets to total assets
(2) 5.95% 5.41% 3.32%
Allowance for loan losses to
non-performing loans 63% 48% 61%
Allowance for loan losses to total loans 3.00% 2.52% 2.13%
Troubled debt restructured loans (3) $18,623 $ 9,492 $ - -
Past due 90 days and still accruing $ 5,216 $ 796 $ - -
Book Values:
Book value per common share $ 9.82 $ 10.17 $ 10.18
Less: goodwill and core deposit
intangible $ 0.89 $ 0.91 $ 0.92
------- ------- -------
Tangible book value per common share (4) $ 8.93 $ 9.26 $ 9.26
-------------
(1) Annualized
(2) Non-performing assets include non-accrual loans, non-accrual investment
securities, other real estate owned and other repossessed assets
(3) At March 31, 2010, $10,265 of the $18,623 in troubled debt restructured
loans were on non-accrual status and included in total non-performing
loans. At September 30, 2009 all troubled debt restructured loans were on
non-accrual status and included in total non-performing loans.
(4) Calculation subtracts goodwill and core deposit intangible from the
equity component
Three Months Ended Six Months Ended
March 31, March 31,
2010 2009 2010 2009
---------------- ----------------
AVERAGE BALANCE SHEET:
---------------------
Average total loans $562,335 $568,981 $561,851 $566,858
Average total interest earning
assets (1) 655,357 632,479 652,020 624,898
Average total assets 712,205 678,750 706,827 671,001
Average total interest bearing
deposits 496,148 434,896 485,406 432,657
Average FHLB advances & other
borrowings 76,561 97,786 81,099 99,124
Average shareholders' equity 87,333 91,368 87,547 83,951
---------------
(1) Includes loans on non-accrual status
40
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, 2009.
Item 4T. Controls and Procedures
---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"))
was carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management as of the end of the
period covered by this report. The Company's Chief Executive Officer
and Chief Financial Officer concluded that as of March 31, 2010 the
Company's disclosure controls and procedures were effective in ensuring
that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner to allow timely
decisions regarding required disclosure, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms.
(b) Changes in Internal Controls: There have been no changes in our internal
control over financial reporting (as defined in 13a-15(f) of the Exchange
Act) that occurred during the quarter ended March 31, 2010, 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
control over financial reporting will prevent all errors and fraud. A
control procedure, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any control procedure
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; as over
time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be
detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
---------------------------
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. From time to time, the Bank is involved in various claims and
legal actions arising in the ordinary course of business.
41
Item 1A. Risk Factors
Listed below are updates to the risk factors provided in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2009 ("2009 Form
10-K"). These updates should be read in conjunction with the 2009 Form 10-K.
The Company and the Bank are required to comply with the terms of separate
memorandums of understanding issued by their respective regulators and lack of
compliance could result in additional regulatory actions.
As previously disclosed in the 2009 Form 10-K, in December 2009, the
Federal Deposit Insurance Corporation ("FDIC") and the Washington State
Department of Financial Institutions, Division of Banks ("Division")
determined that the Bank required supervisory attention and on December 29,
2009 entered into an agreement on a Memorandum of Understanding with the Bank
(the "Bank MOU"). Under that agreement, the Bank must among other things,
maintain Tier 1 Capital of not less than 10.0% of the Bank's adjusted total
assets and maintain capital ratios above "well capitalized" thresholds as
defined under FDIC Rules and Regulations; obtain the prior consent from the
FDIC and Division prior to the Bank declaring a dividend to its holding
company; and not engage in any transactions that would materially change the
Bank's balance sheet composition including growth in total assets of five
percent or more or significant changes in funding sources, such as by
increasing brokered deposits, without the prior non-objection of the FDIC.
In addition on February 1, 2010, the Federal Reserve Bank of San
Francisco ("FRB") determined that the Company required additional supervisory
attention and entered into a Memorandum of Understanding with the Company (the
"Company MOU"). Under the terms of the Company MOU, the Company, without
prior written approval, or non-objection, of the FRB, may not:
* appoint any new director or senior executive officer or change the
responsibilities of any current senior executive officers;
* receive dividends or any other form of payment or distribution
representing a reduction in capital from the Bank;
* declare or pay any dividends, or make any other capital distributions;
* incur, renew, increase, or guarantee any debt;
* issue any trust preferred securities; and
* purchase or redeem any of its stock.
Following the effective date of the Company MOU, the Company is required
to provide the FRB with progress reports regarding its compliance with
the provisions of the Company MOU.
The Bank MOU and the Company MOU will remain in effect until stayed,
modified, terminated or suspended by the FDIC and the Division or FRB,
as the case may be. If either the Company or the Bank was found not in
compliance with their respective MOU, it could be subject to various
remedies, including among others, the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to direct an increase in
capital, to restrict growth, to remove officers and / or directors, and
to assess civil monetary penalties. Management of the Company and
the Bank have been taking action and implementing programs to comply with
the requirements of the Company MOU and the Bank MOU, respectively.
Compliance will be determined by the FDIC, Division and FRB. Any of
these regulators may determine in their sole discretion that the issues
raised by the Company MOU or the Bank MOU have not been addressed
satisfactorily, or that any current or past actions, violations or
deficiencies could be the subject of further regulatory enforcement
actions. Such enforcement actions could involve penalties or further
limitations on the Company's business and negatively affect its
42
ability to implement its business plan, pay dividends on its common stock
or the value of its common stock, as well as its financial condition and
result of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
-----------------------------------------
None to be reported.
Item 4. Removed and Reserved
------------------------------
Item 5. Other Information
---------------------------
The Company's 2009 Annual Meeting of Shareholders was held on January 26, 2010
at the Hoquiam Timberland Library, 420 7th Street, Hoquiam, Washington. The
results of the vote on the matters presented at the meeting are as follows:
The following individuals were elected as directors:
Broker
For Withheld Non-Votes
-------------------- ------------------- ---------
Percentage Percentage
No. of of Votes No. of of Votes No. of
Votes Cast Votes Cast Votes
------ ---------- ------ ---------- ------
Michael R. Sand 2,877,958 97.20% 82,876 2.80% 2,221,986
(three-year term)
David A. Smith 2,885,218 97.45% 75,616 2.55% 2,221,986
(three-year term)
Larry D. Goldberg 2,857,255 96.50% 103,579 3.50% 2,221,986
(two-year term)
The following directors, who were not up for re-election at the Annual Meeting
of Shareholders, will continue to serve as directors: Andrea M. Clinton,
James C. Mason, Jon C. Parker, and Ronald A. Robbel.
The compensation of the Company's named executive officers submitted for
advisory approval was approved by the following vote:
No. of Votes Percentage
---------------------------
For 4,709,204 90.86%
Against 305,004 5.89%
Abstain 168,606 3.25%
McGladrey and Pullen, LLP was ratified as the Company's independent auditor by
the following vote:
No. of Votes Percentage
----------------------------
For 5,026,532 96.98%
Against 95,925 1.85%
Abstain 60,363 1.17%
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
43
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 on Form S-1 (333- 35817).
(2) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on December 23, 2008.
(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.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: May 6, 2010 By: /s/ Michael R. Sand
-------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: May 6, 2010 By: /s/ Dean J. Brydon
-------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
45
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
46