UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 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 10-27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27-45
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4T. Controls and Procedures 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45-47
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 48
Item 3. Defaults Upon Senior Securities 48
Item 4. Removed and Reserved 48
Item 5. Other Information 48
Item 6. Exhibits 48-49
SIGNATURES 50
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2010 and September 30, 2009
(Dollars in thousands, except per share data)
June 30, September 30,
2010 2009
------------------------
Assets (Unaudited)
Cash and cash equivalents:
Cash and due from financial institutions $ 11,748 $ 10,205
Interest bearing deposits in other banks 83,507 56,257
----------------------
Total cash and cash equivalents 95,255 66,462
----------------------
Certificates of deposit ("CDs") held for investment,
(at cost) 15,188 3,251
Mortgage-backed securities and other investments -
held to maturity, at amortized cost 5,604 7,087
(fair value $5,387 and $6,215)
Mortgage-backed securities and other investments -
available for sale 11,578 13,471
Federal Home Loan Bank of Seattle ("FHLB") stock 5,705 5,705
Loans receivable 542,577 560,750
Loans held for sale 1,454 630
Less: Allowance for loan losses (10,900) (14,172)
----------------------
Net loans receivable 533,131 547,208
----------------------
Premises and equipment, net 17,529 18,046
Other real estate owned ("OREO") and other
repossessed assets 12,957 8,185
Accrued interest receivable 2,709 2,805
Bank owned life insurance ("BOLI") 13,278 12,918
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 612 755
Mortgage servicing rights ("MSRs"), net 2,683 2,618
Prepaid Federal Deposit Insurance Corporation
("FDIC") insurance assessment 3,569 - -
Other assets 6,970 7,515
----------------------
Total assets $732,418 $701,676
======================
Liabilities and shareholders' equity
Deposits: Demand, non-interest-bearing $ 52,018 $ 50,295
Deposits: Interest-bearing 515,967 455,366
----------------------
Total Deposits 567,985 505,661
----------------------
FHLB advances 75,000 95,000
Federal Reserve Bank of San Francisco ("FRB")
borrowings -- 10,000
Repurchase agreements 713 777
Other liabilities and accrued expenses 3,041 3,039
----------------------
Total liabilities 646,739 614,477
----------------------
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 15,710 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; 10,373 10,315
7,045,036 shares issued and outstanding
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,313) (2,512)
Retained earnings 62,641 65,854
Accumulated other comprehensive loss (732) (2,012)
----------------------
Total shareholders' equity 85,679 87,199
----------------------
Total liabilities and shareholders' equity $732,418 $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 nine months ended June 30, 2010 and 2009
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
2010 2009 2010 2009
------------------- ------------------
Interest and dividend income
Loans receivable $ 8,764 $ 9,240 $26,661 $28,229
Mortgage-backed securities and other
investments 239 322 695 1,081
Dividends from mutual funds 9 9 27 29
Federal funds sold - - 8 - - 36
Interest bearing deposits in banks 90 32 218 62
------------------- ------------------
Total interest and dividend income 9,102 9,611 27,601 29,437
------------------- ------------------
Interest expense
Deposits 1,950 2,440 5,986 7,321
FHLB advances - long term 760 979 2,384 3,042
FRB borrowings and other borrowings 1 - - 3 1
------------------- ------------------
Total interest expense 2,711 3,419 8,373 10,364
------------------- ------------------
Net interest income 6,391 6,192 19,228 19,073
Provision for loan losses 750 1,000 8,545 7,491
------------------- ------------------
Net interest income after provision
for loan losses 5,641 5,192 10,683 11,582
------------------- ------------------
Non-interest income
Total new other than temporary
impairment ("OTTI")on investment
securities (81) (853) (688) (2,987)
Adjustment for portion recorded as
(transferred from) other
comprehensive loss before taxes (71) 756 (1,340) 756
------------------- ------------------
Net OTTI loss on investment
securities (152) (97) (2,028) (2,231)
Realized loss on investment
securities - - (28) (17) (57)
Service charges on deposits 1,066 1,066 3,218 3,224
ATM transaction fees 439 326 1,187 920
BOLI net earnings 120 123 369 501
Gain on sale of loans, net 238 1,170 987 2,471
Servicing income on loans sold 32 20 86 76
Valuation recovery (allowance) on
MSRs 22 (169) - - (169)
Fee income from non-deposit investment
sales 17 24 52 68
Other 159 239 486 688
------------------- ------------------
Total non-interest income 1,941 2,674 4,340 5,491
------------------- ------------------
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (continued)
For the three and nine months ended June 30, 2010 and 2009
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
2010 2009 2010 2009
------------------ ------------------
Non-interest expense
Salaries and employee benefits $ 3,117 $ 2,919 $ 9,019 $ 8,818
Premises and equipment 717 719 2,120 2,079
Advertising 235 252 626 672
OREO and other repossessed items
expense, net 373 391 767 552
ATM expenses 164 162 490 448
Postage and courier 130 203 400 448
Amortization of CDI 48 54 143 163
State and local taxes 159 152 453 449
Professional fees 193 199 561 547
FDIC insurance 317 400 1,323 586
Other 969 922 2,710 2,589
------------------ ------------------
Total non-interest expense 6,422 6,373 18,612 17,351
------------------ ------------------
Income (loss) before income taxes 1,160 1,493 (3,589) (278)
Provision (benefit) for income taxes 356 435 (1,439) (305)
------------------ ------------------
Net income (loss) 804 1,058 (2,150) 27
================== ==================
Preferred stock dividends accrued 208 210 624 437
Preferred stock discount accretion 53 79 156 79
------------------ ------------------
Net income (loss) to common
shareholders: $ 543 $ 769 $(2,930) $ (489)
================== ==================
Income (loss) per common share:
Basic $ 0.08 $ 0.12 $ (0.44) $ (0.07)
Diluted $ 0.08 $ 0.12 $ (0.44) $ (0.07)
Weighted average shares outstanding:
Basic 6,715,410 6,645,229 6,713,103 6,609,915
Diluted 6,715,410 6,645,229 6,711,103 6,609,915
Dividends paid per common share: $ -- $ 0.11 $ 0.04 $ 0.33
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 nine months ended June 30, 2010
(Dollars in thousands, except per share amounts)
Accumu-
lated
Unearned Other
Preferred Common Shares Compre-
Preferred Common Stock Stock 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 - - - - - - - - - - (2,150) - - (2,150)
Accretion of preferred stock
discount - - - - 156 - - - - (156) - - - -
Cash dividends
($0.04 per common share) - - - - - - - - - - (283) - - (283)
(5% preferred stock) - - - - - - - - - - (624) - - (624)
Earned ESOP shares - - - - - - (76) 199 - - - - 123
MRDP compensation expense - - - - - - 130 - - - - - - 130
Stock option compensation
expense - - - - - - 4 - - - - - - 4
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 384 384
Change in OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 871 871
Accretion of OTTI on
securities held to maturity,
net of tax - - - - - - - - - - - - 25 25
------ --------- ------- ------- ------- ------- ----- -------
Balance, June 30, 2010 16,641 7,045,036 $15,710 $10,373 $(2,313) $62,641 $(732) $85,679
====== ========= ======= ======= ======= ======= ===== =======
(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 nine months ended June 30, 2010 and 2009
(In thousands)
(unaudited)
Nine Months Ended June 30,
2010 2009
----------------------
Cash flow from operating activities
Net income (loss) $ (2,150) $ 27
Adjustments to reconcile net income (loss) to net
cash proved by operating activities:
Provision for loan losses 8,545 7,491
Depreciation 881 843
Deferred federal income taxes 1,466 (1,263)
Amortization of CDI 143 163
Earned ESOP shares 199 198
MRDP compensation expense 128 141
Stock option compensation expense 4 2
Stock option tax effect - - 46
Gain on sale of OREO, and other repossessed
items, net (270) (3)
Valuation adjustment for OREO 505 - -
Loss on the disposition of premises and equipment 14 - -
BOLI net earnings (360) (501)
Gain on sale of loans (987) (2,471)
Decrease in deferred loan origination fees (207) (421)
OTTI losses on securities 2,028 2,231
Realized losses on held-to-maturity securities 17 57
Loans originated for sale (44,213) (139,176)
Proceeds from sale of loans 44,376 141,175
Decrease in other assets, net (5,235) (1,245)
Increase (decrease) in other liabilities and
accrued expenses, net (206) 442
----------------------
Net cash provided by operating activities 4,678 7,736
Cash flow from investing activities
Net increase in CDs held for investment (11,937) - -
Proceeds from maturities and prepayments of
securities available for sale 2,432 2,719
Proceeds from maturities and prepayments of
securities held to maturity 955 1,367
Increase in loans receivable, net (1,095) (2,055)
Additions to premises and equipment (378) (2,133)
Proceeds from sale of OREO and other repossessed
items 2,651 104
----------------------
Net cash provided by (used in) investing activities (7,372) 2
Cash flow from financing activities
Increase (decrease) in deposits, net 62,324 (11,153)
Repayment of FHLB advances - long term (20,000) (9,628)
Repayment of FRB advances - short term (10,000) - -
Decrease in repurchase agreements (64) (92)
Proceeds from exercise of stock options - - 345
ESOP tax effect (76) (55)
MRDP compensation tax effect 2 18
Issuance of common stock - - 1
Issuance of stock warrants - - 1,158
Issuance of preferred stock - - 15,408
Payment of dividends (699) (2,643)
----------------------
Net cash provided by (used in) financing activities 31,487 (6,641)
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended June 30, 2010 and 2009
(In thousands)
(unaudited)
Nine Months Ended June 30,
2010 2009
----------------------
Net increase in cash and cash equivalents $ 28,793 $ 1,097
Cash and cash equivalents
Beginning of period 66,462 42,874
----------------------
End of period $ 95,255 $ 43,971
======================
Supplemental disclosure of cash flow information
Income taxes paid $ 791 $ 1,002
Interest paid 8,555 10,407
Supplemental disclosure of non-cash investing
activities
Loans transferred to OREO and other
repossessed assets $ 9,009 $ 7,504
Loan originated to facilitate the sale of OREO 1,351 - -
Change in unrealized holding loss on securities
available for sale, net of tax 384 (241)
Change in OTTI on securities,
held to maturity, net of tax 896 (491)
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 INCOME (LOSS)
For the three and nine months ended June 30, 2010 and 2009
(In thousands)
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
2010 2009 2010 2009
------------------ ------------------
Comprehensive income (loss):
Net income (loss) $ 804 $ 1,058 $(2,150) $ 27
Cumulative effect of Financial
Accounting Standards Board
("FASB") guidance regarding
recognition of OTTI - - (91) - - (91)
Unrealized holding gain (loss) on
securities available for sale,
net of tax 79 246 384 (241)
Change in OTTI on securities held
to maturity, net of tax:
Additions 23 - - 83 - -
Additional amount recognized
related to credit loss for
which OTTI was previously
recognized 10 - - 706 - -
Amount reclassified to credit
loss for previously recorded
market loss 13 - - 82 - -
Accretion of OTTI securities
held to maturity, net of tax 7 (4) 25 (491)
------------------ ------------------
Total comprehensive income (loss) $ 936 $ 1,209 $ (870) $(796)
================== ==================
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 nine months ended June 30, 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 June
30, 2010 presentation with no change to net income (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 ("CPP"). The CPP was established as part of the Troubled Asset Relief
Program ("TARP"). The Company sold 16,641 shares of 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 through December 23, 2018.
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.
On May 17, 2010, the Federal Reserve denied the Company's request to pay
dividends on its Series A Preferred Stock issued under the CPP and its common
stock for the March 31, 2010 quarter. There can be no assurances that our
regulators will approve such payments or dividends in the future. The
Company may not declare or
10
pay dividends on its common stock or, with certain exceptions, repurchase
common stock without first having paid all cumulative preferred dividends that
are due. If dividends on the Series A Preferred Stock are not paid for six
quarters, whether or not consecutive, the Treasury has the right to appoint
two members to the Board of Directors of the Company.
(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
--------- ---------- ---------- -------
June 30, 2010
Held to Maturity
U.S. treasury securities $ 28 $ 1 $ - - $ 29
Mortgage-backed securities
and collateralized mortgage
obligations ("CMOs"):
U.S. government agencies 2,196 31 (8) 2,219
Private label residential 3,380 332 (573) 3,139
------- ----- ------ -------
Total $ 5,604 $ 364 $ (581) $ 5,387
======= ===== ====== =======
Available for Sale
Mortgage-backed securities
and CMOs:
U.S. government agencies $ 8,344 $ 276 $ - - $ 8,620
Private label residential 2,323 70 (416) 1,977
Mutual funds 1,000 - - (19) 981
------- ----- ------ -------
Total $11,667 $ 346 $ (435) $11,578
======= ===== ====== =======
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
======= ===== ====== =======
11
The estimated fair value of temporarily impaired securities, the amount of
unrealized losses and the length of time these unrealized losses existed as of
June 30, 2010 are as follows (in thousands):
Less Than 12 Months 12 Months or Longer
------------------- ------------------- Total
Esti- Esti- Esti-
mated Gross mated Gross mated Gross
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Held to Maturity
Mortgage-backed
securities and
CMOs:
U.S. government
agencies $ 311 $ (2) $ 556 $ (6) $ 867 $ (8)
Private label
residential 97 (1) 2,297 (572) 2,394 (573)
----- ----- ------ ----- ------ -----
Total $ 408 $ (3) $2,853 $(578) $3,261 $(581)
===== ===== ====== ===== ====== =====
Available for Sale
Mortgage-backed
securities and
CMOs:
Private label
residential $ - - $ - - $1,513 $(416) $1,513 $(416)
Mutual funds - - - - 981 (19) 981 (19)
----- ----- ------ ----- ------ -----
Total $ - - $ - - $2,494 $(435) $2,494 $(435)
===== ===== ====== ===== ====== =====
During the three months ended June 30, 2010 and 2009, the Company recorded net
OTTI charges through earnings on residential mortgage-backed securities of
$152,000 and $97,000. During the nine months ended June 30, 2010 and June 30,
2009, the Company recorded net OTTI charges through earnings on residential
mortgage-backed securities of $2.03 million and $2.23 million. Effective
January 1, 2009, the Company adopted new accounting guidance in accordance
with GAAP, 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 (loss).
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 June 30, 2010 and September 30, 2009:
Range
--------------------- Weighted
Minimum Maximum Average
------- ------- --------
At June 30, 2010
----------------
Constant prepayment rate 0.0% 15.0% 11.9%
Collateral default rate 4.4% 66.7% 34.3%
Loss severity rate 32.0% 64.8% 53.3%
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%
12
The following tables present the OTTI losses for the three and nine months
ended June 30, 2010 and 2009 (in thousands).
Three months ended Three months ended
June 30, 2010 June 30, 2009
-------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI losses $ 81 $ - - $ 853 $ - -
Portion of OTTI losses (gains)
recognized in other
comprehensive loss (before
taxes) (1) 71 - - (756) - -
------- ------ ------ -------
Impairment losses recognized
in earnings (2) $ 152 $ - - $ 97 $ - -
======= ====== ====== =======
Nine months ended Nine months ended
June 30, 2010 June 30, 2009
-------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI losses $ 595 $ 93 $2,863 $ 124
Portion of OTTI losses (gains)
recognized in other
comprehensive loss (before
taxes) (1) (1,340) - - 756 - -
------- ------ ------ -------
Impairment losses recognized
in earnings (2) $ 1,935 $ 93 $2,107 $ 124
======= ====== ====== =======
-----------
(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 1,623
Subtractions:
Realized losses recorded previously
as credit losses (499)
------
Balance, June 30, 2010 $5,049
======
There were no gross realized gains on sale of securities for the three or nine
months ended June 30, 2010 and 2009. During the three months ended June 30,
2010, the Company recorded a $247,000 realized loss (as a result of the
securities being deemed worthless) on nine held to maturity residential
mortgage-backed securities which had been recognized previously as a credit
loss. During the nine months ended June 30, 2010, the Company recorded a
$499,000 realized loss (as a result of securities being deemed worthless) on
thirteen held to maturity residential mortgage-backed securities of which
$482,000 had been recognized previously as a credit loss. During the three
months ended June 30, 2009, the Company recorded a $28,000 realized loss on
13
one held to maturity residential mortgage-backed security which had been
recognized previously as a credit loss. During the nine months ended June 30,
2009, the Company recorded a $57,000 realized loss on two held to maturity
residential mortgage-backed securities of which $50,000 had been recognized
previously as a credit loss.
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 $13.47 million and $16.40 million at June 30, 2010 and September 30,
2009, respectively.
The contractual maturities of debt securities at June 30, 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
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- --------------------
Due within one year $ - - $ - - $ 27 $ 27
Due after one year to five years 19 21 299 284
Due after five to ten years 42 44 137 148
Due after ten years 5,543 5,322 10,204 10,138
------ ------ ------- -------
Total $5,604 $5,387 $10,667 $10,597
====== ====== ======= =======
(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 June 30, 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 June 30, 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.
14
(5) LOANS
Loans receivable and loans held for sale consisted of the following (dollars
in thousands):
At June 30, At September 30,
2010 2009
----------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
Mortgage loans:
One- to four-family (1) $116,805 20.8% $110,556 18.6%
Multi-family 33,127 5.9 25,638 4.3
Commercial 215,336 38.3 188,205 31.6
Construction and land development 66,248 11.8 139,728 23.5
Land 63,684 11.3 65,642 11.0
-------- ----- -------- -----
Total mortgage loans 495,200 88.1 529,769 89.0
Consumer loans:
Home equity and second mortgage 39,215 7.0 41,746 7.0
Other 9,514 1.7 9,827 1.7
-------- ----- -------- -----
Total consumer loans 48,729 8.7 51,573 8.7
Commercial business loans 18,114 3.2 13,775 2.3
-------- ----- -------- -----
Total loans receivable 562,043 100.0% 595,117 100.0%
===== =====
Less:
Undisbursed portion of
construction loans in process 15,780 31,298
Deferred loan origination fees 2,232 2,439
Allowance for loan losses 10,900 14,172
-------- --------
28,912 47,909
-------- --------
Total loans receivable, net $533,131 $547,208
======== ========
----------
(1) Includes loans held-for-sale.
Construction and Land Development Loan Portfolio Composition
------------------------------------------------------------
The following table sets forth the composition of the Company's construction
and land development loan portfolio.
At June 30, At September 30,
2010 2009
----------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Custom and owner / builder $29,080 43.9% $ 35,414 25.3%
Speculative one- to four-family 5,071 7.7 16,959 12.1
Commercial real estate 20,363 30.7 49,397 35.4
Multi-family
(including condominiums) 4,014 6.1 18,800 13.5
Land development 7,720 11.6 19,158 13.7
------- ----- -------- -----
Total construction and
land development loans $66,248 100.0% $139,728 100.0%
======= ===== ======== =====
15
Allowance for Loan Losses
-------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
June 30,
---------------------
2010 2009
---------------------
(In thousands)
Balance at beginning of period $16,687 $12,049
Provision for loan losses 750 1,000
Loans charged off (6,759) (646)
Recoveries on loans previously charged off 222 37
Net charge-offs (6,537) (609)
------- -------
Balance at end of period $10,900 $12,440
======= =======
Nine Months Ended
June 30,
---------------------
2010 2009
---------------------
(In thousands)
Balance at beginning of period $14,172 $ 8,050
Provision for loan losses 8,545 7,491
Allocated to commitments - - (126)
Loans charged off (12,162) (3,051)
Recoveries on loans previously charged off 345 76
Net charge-offs (11,817) (2,975)
------- -------
Balance at end of period $10,900 $12,440
======= =======
Impaired Loans
--------------
A loan is considered impaired when it is probable that the Company 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 estimated 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.
The categories of non-accrual loans and impaired loans overlap, although they
are not coextensive. The Company 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 estimated collateral value, reasons for the delay, payment
record, the amount past due and the number of days past due.
At June 30, 2010 and September 30, 2009, the Company had impaired loans
totaling approximately $38.41 million and $47.62 million respectively. At
June 30, 2010 the Company had four loans totaling $1.2 million that were 90
days or more past due and still accruing interest. At September 30, 2009 the
Company 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 nine months ended June 30, 2010 and June 30, 2009 was $861,000 and
$713,000, respectively. Interest income recognized on a cash basis on
impaired loans for the nine months ended June 30, 2010 and June 30, 2009, was
$517,000 and $449,000, respectively. The average investment in impaired loans
for the nine months ended June 30, 2010 and June 30, 2009 was $42.87 million
and $28.84 million respectively. The Company had $14.36 million in troubled
debt restructured loans included in impaired loans at June 30, 2010. The
Company had $1.08 million in commitments to lend additional funds on these
16
loans. The Company had $9.24 million in troubled debt restructured loans
included in impaired loans at September 30, 2009. The Company 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 June 30, At September 30,
2010 2009
------- -------
Impaired loans without a valuation allowance $34,437 $35,557
Impaired loans with a valuation allowance 3,973 12,065
------- -------
Total impaired loans $38,410 $47,622
======= =======
Valuation allowance related to impaired loans $ 495 $ 3,835
======= =======
17
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
June 30, September 30,
2010 2009
-------- --------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 3,462 $ 1,343
Commercial real estate 4,957 5,004
Construction and land development 7,487 17,594
Land 4,849 5,023
Consumer loans 178 258
Commercial business loans 98 65
-------- --------
Total non-accrual loans 21,031 29,287
Accruing loans which are contractually
past due 90 days or more: 1,198 796
-------- --------
Total of non-accrual and 90 days past due loans 22,229 30,083
Non-accrual investment securities 3,482 477
OREO and other repossessed items 12,957 8,185
-------- --------
Total non-performing assets (1) $ 37,470 $ 37,949
======== ========
Troubled debt restructured loans (2) $ 14,359 $ 9,242
======== ========
Non-accrual and 90 days or more past
due loans as a percentage of loans receivable 4.09% 5.36%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 3.04% 4.28%
Non-performing assets as a percentage
of total assets 5.12% 5.41%
Loans receivable (3) $544,031 $561,380
======== ========
Total assets $732,418 $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 June 30, 2010, $5,464 of the $14,359 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.
18
(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 per share. At June 30, 2010
and 2009, there were 329,626 and 339,117 ESOP shares, respectively, that had
not been allocated.
The following table is in thousands, except for share and per share data:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2010 2009 2010 2009
------------------ -----------------
Basic earnings (loss) per common
--------------------------------
share computation:
------------------
Numerator - net income (loss) $ 804 $ 1,058 $(2,150) $ 27
Preferred stock dividend 208 210 624 437
Preferred stock discount
accretion 53 79 156 79
----- ------- ------- -------
Net income (loss) to common
shareholders $ 543 $ 769 $(2,930) $ (489)
===== ======= ====== =======
Denominator - weighted average
common shares outstanding 6,715,410 6,645,229 6,713,103 6,609,915
--------- --------- --------- ---------
Basic earnings (loss) per
common share $0.08 $ 0.12 $ (0.44) $ (0.07)
===== ======= ====== =======
Diluted earnings (loss) per common
----------------------------------
share computation:
------------------
Numerator - net income (loss) $ 804 $ 1,058 $(2,150) $ 27
Preferred stock dividend 208 210 624 437
Preferred stock discount
accretion 53 79 156 79
----- ------- ------- -------
Net income (loss) to common
shareholders $ 543 $ 769 $(2,930) $ (489)
===== ======= ====== =======
Denominator - weighted average
common shares outstanding 6,715,410 6,645,229 6,713,103 6,609,915
Effect of dilutive stock
options (1)(2) - - - - - - - -
Effect of dilutive stock
warrants (3)(4) - - - - - - - -
----- ------- ------- -------
Weighted average common shares
and common stock equivalents 6,715,410 6,645,229 6,713,103 6,609,915
--------- --------- --------- ---------
Diluted earnings (loss) per
common share $0.08 $ 0.12 $(0.44) $ (0.07)
===== ======= ====== =======
19
----------------------
(1) For the three and nine months ended June 30, 2010, options to purchase
194,864 and 192,483 shares of common stock, respectively, were outstanding but
not included in the computation of diluted earnings per common share because
the options' exercise prices were greater than the average market price of the
common stock and, therefore, their effect would have been anti-dilutive. For
the three and nine months ended June 30, 2009, options to purchase 168,864 and
179,577 shares of common stock, respectively, were outstanding but not
included in the computation of diluted earnings per common share because the
options' exercise prices were greater than the average market price of the
common stock and, therefore, their effect would have been anti-dilutive.
(2) For the nine months ended June 30, 2009, the effect of dilutive stock
options was computed to be 1,738 shares. However, the dilutive effect of
these stock options has been excluded from the diluted EPS computation for the
nine months ended June 30, 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 nine months ended June 30, 2010, warrants to purchase
370,899 shares of common stock were outstanding but not included in the
computation of diluted earnings 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 nine months ended June 30, 2009, warrants to purchase 370,899 and 247,266
shares of common stock, respectively, were outstanding but not included in the
computation of diluted earnings 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.
(4) For the nine months ended June 30, 2009, the effect of dilutive stock
warrants was computed to be 724 shares. However, the dilutive effect of these
stock warrants has been excluded from the diluted EPS computation for the nine
months ended June 30, 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 June 30, 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.
20
Following is activity under the plans:
Nine Months Ended
June 30, 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 June 30,
2010, as the exercise price of all options outstanding was greater than the
stock's current market value.
At June 30, 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 June 30, 2010, as the
exercise price was greater than the stock's current market value. There were
no options that vested during the nine months ended June 30, 2010.
At June 30, 2009, there were no unvested options. There were 5,668 options
that vested during the nine months ended June 30, 2009 with an aggregate grant
date fair value of $13,000.
There were 26,000 options granted during the nine months ended June 30, 2010
with an aggregate grant date fair value of $34,000. There were no options
granted during the nine months ended June 30, 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 nine months ended June 30, 2010 were:
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
21
the five anniversaries from the date of the grant.
There were no MRDP shares granted to officers and directors during the nine
months ended June 30, 2010.
At June 30, 2010, there were a total of 38,827 unvested MRDP shares with an
aggregated grant date fair value of $449,000. There were 11,031 MRDP shares
that vested during the nine months ended June 30, 2010 with an aggregated
grant date fair value of $132,000. At June 30, 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:
Nine Months Ended June 30,
--------------------------
2010 2009
---- ----
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in
income $ 4 $ 130 $ 2 $ 159
Related tax benefit recognized 1 45 - - 34
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 $ 2 $ 43 $ 45
2011 7 165 172
2012 7 112 119
2013 7 38 45
2014 6 1 7
----- ------ ------
Total $ 29 $ 359 $ 388
===== ====== ======
(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 estimated fair value of financial instruments that are short-term or
re-price frequently and that have little or no risk are considered to
have an estimated fair value equal to the recorded value.
Certificates of Deposit Held for Investment
-------------------------------------------
The estimated fair value of financial instruments that are short-term or
re-price frequently and that have little or no risk are considered to
have an estimated fair value equal to the recorded value.
Mortgage-Backed Securities and Other Investments
-------------------------------------------------
The estimated 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.
22
FHLB Stock
----------
FHLB stock is not publicly traded, however the recorded value of the
stock holdings approximates the estimated fair value, as the FHLB is
required to pay par value upon re-acquiring this stock.
Loans Receivable
----------------
At June 30, 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 estimated fair value has been based on quoted market prices obtained
from the Federal Home Loan Mortgage Corporation.
Accrued Interest
----------------
The recorded amount of accrued interest approximates the estimated fair
value.
Deposits
--------
The estimated fair value of deposits with no stated maturity date is
included at the amount payable on demand. The estimated fair value of
fixed maturity certificates of deposit is computed by discounting
future cash flows using the rates currently offered by the Bank for
deposits of similar remaining maturities.
FHLB Advances
-------------
The estimated fair value of borrowed funds is computed 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
estimated fair value due to the short-term nature of the borrowings.
Repurchase Agreements
---------------------
The recorded value of repurchase agreements approximates the estimated
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 estimated fair value.
23
The estimated fair value of financial instruments were as follows (in
thousands):
June 30, 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 $ 95,255 $ 95,255 $ 66,462 $ 66,462
CDs held for investment 15,188 15,188 3,251 3,251
Mortgage-backed securities and
other investments 17,182 16,965 20,558 19,686
FHLB stock 5,705 5,705 5,705 5,705
Loans receivable, net 531,677 491,868 546,578 471,178
Loans held for sale 1,454 1,496 630 648
Accrued interest receivable 2,709 2,709 2,805 2,805
Financial Liabilities
Deposits $567,985 $569,617 $505,661 $507,465
FHLB advances - long term 75,000 80,282 95,000 99,414
FRB borrowings - short term - - - - 10,000 10,000
Repurchase agreements 713 713 777 777
Accrued interest payable 782 782 965 965
--------------------
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
estimated 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
24
available in the circumstances.
The following table summarizes the balances of assets and liabilities measured
at estimated fair value on a recurring basis at June 30, 2010 (in thousands):
Estimated Fair Value
---------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Available for Sale Securities
-----------------------------
Mutual Funds $ 981 $ - - $ - - $ - -
Mortgage-backed securities - - 10,597 - - 93
------- ------- ------- -------
Total $ 981 $10,597 $ - - $ 93
======= ======= ======= =======
The following table summarizes the balance of assets and liabilities measured
at estimated fair value on a nonrecurring basis at June 30, 2010, and the
total losses resulting from these estimated fair value adjustments for the
nine months ended June 30, 2010 (in thousands):
Estimated Fair Value
---------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired Loans (1) $ - - $ - - $ 3,478 $ 12,163
Mortgage-backed securities - HTM (2) - - 977 - - 1,935
OREO and other repossessed items (3) - - - - 12,957 346
------- ------- ------- --------
Total $ - - $ 977 $16,435 $ 14,444
======= ======= ======= ========
---------------
(1) The loss represents charge offs on collateral dependent loans for
estimated fair value adjustments based on the estimated 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
estimated fair value of the collateral less estimated costs to sell. The
estimated 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
estimated 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
estimated fair value less estimated costs to sell. This amount becomes the
property's new basis. Estimated fair value was generally determined by
management based on a number of factors, including third-party appraisals of
estimated fair value in an orderly sale. Estimated costs to sell 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 estimated
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
25
Regulations; obtain the prior consent from the FDIC and the 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 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. On May 17, 2010, the Federal Reserve denied the
Company's request to pay dividends on its Series A Preferred Stock issued
under the CPP and its common stock for the March 31, 2010 quarter. There can
be no assurances that our regulators will approve such payments or dividends
in the future.
For additional information regarding the Bank MOU and the Company MOU, see
"Part II Other Information, 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 January 2010, the FASB issued updated guidance on fair value measurements
and disclosures. The new guidance requires expanded disclosures related to
fair value measurements including (i) the amounts of significant transfers of
assets or liabilities between Levels 1 and 2 of the fair value hierarchy and
the reasons for the transfers; and (ii) separate presentation of purchases,
sales, issuances, and settlements in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). The guidance
also further clarifies that (i) fair value instrument disclosures should be
provided for each class of assets and liabilities (rather than major
category), which would generally be a subset of assets or liabilities within a
line item in the statement of financial position and (ii) companies should
provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements for
each class of assets and liabilities included in Levels 2 and 3 of the fair
value hierarchy. The new guidance was effective on January 1, 2010 except for
the disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements, which are effective
for the Company on October 1, 2011. The adoption of the guidance effective on
January 1, 2010 was disclosure-related only and did not impact the Company's
financial condition or consolidated results of operations.
In February 2010, the FASB issued updated guidance on subsequent events and
disclosure requirements. The new guidance removes the requirement for a
Securities and Exchange Commission ("SEC") filer to disclose a date through
which subsequent events have been evaluated in both issued and revised
financial statements. The FASB believes these amendments remove potential
conflicts with the SEC's literature. This guidance was effective upon
issuance and did not have a material impact on the Company's consolidated
financial statements.
In July 2010, the FASB issued updated guidance on disclosure requirements for
the credit quality of financing receivables and the allowance for credit
losses. The new guidance requires entities to provide disclosures designed to
facilitate financial statement users' evaluation of (i) the nature of credit
risk inherent in the entity's portfolio of financing receivables, (ii) how
that risk is analyzed and assessed in arriving at the allowance for credit
losses and (iii) the changes and reasons for those changes in the allowance
for credit losses. Disclosures must be disaggregated by portfolio segment,
the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses, and class of financing
receivable, which is generally a disaggregration of portfolio segment. The
required disclosures include, among other things, a roll forward of the
allowance for credit losses as well as information about modified, impaired,
non-accrual and past due loans
26
and credit quality indicators. This guidance will be effective for the
Company's consolidated financial statements as of December 31, 2010, as it
relates to disclosures required as of the end of a reporting period.
Disclosures that relate to activity during a reporting period will be required
for the Company's financial statements that include periods beginning on or
after January 1, 2011. Since this new guidance is disclosure related only,
the Company does not expect it to have an impact on its financial conditions
or consolidated results of operations.
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
nine months ended June 30, 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 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
reserve 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
27
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 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 June 30, 2010, the
Company had total assets of $732.42 million and total shareholders' equity of
$85.68 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.
Net income is also affected by non-interest income and non-interest expenses.
For the three and nine month periods ended June 30, 2010, non-interest income
consisted primarily of service charges and fees on deposit accounts, gain on
sale of loans, ATM transaction fees, 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
28
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 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.
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 Condensed 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 condensed 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 June 30, 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
29
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 Estimated 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 estimated fair value of the security is less than the recorded value
primarily as a result of current market conditions and not a result of
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 estimated 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 June 30, 2010, the Company
engaged a third party firm to perform the annual test for goodwill impairment.
The test concluded that recorded goodwill was not impaired. As of June 30,
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 estimated
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 June 30, 2010 and September 30, 2009
The Company's total assets increased by $30.74 million, or 4.4%, to $732.42
million at June 30, 2010 from $701.68 million at September 30, 2009. The
increase was primarily attributable to an increase in cash
30
equivalents and short-term CDs held for investment, which was partially offset
by a decrease in net loans receivable.
Net loans receivable decreased by $14.08 million, or 2.6%, to $533.13 million
at June 30, 2010 from $547.21 million at September 30, 2009. The decrease was
primarily due to a significant decrease in construction and land development
loan balances during the nine months ended June 30, 2010, which was partially
offset by increases in commercial real estate loan balances, multi-family loan
balances, one- to four-family loan balances and commercial business loan
balances.
Total deposits increased by $62.32 million, or 12.3%, to $567.99 million at
June 30, 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.
Shareholders' equity decreased by $1.52 million, or 1.7%, to $85.68 million at
June 30, 2010 from $87.20 million at September 30, 2009. The decrease was
primarily due to a net loss for the nine months ended June 30, 2010, 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 $40.73 million, or 58.4%, to $110.44 million at
June 30, 2010 from $69.71 million at September 30, 2009. The increase in cash
equivalents and short-term CDs was primarily due to increased deposits and 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 $3.38 million, or 16.4%, to $17.18 million
at June 30, 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
Company'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 $14.08 million, or 2.6% to $533.13
million at June 30, 2010 from $547.21 million at September 30, 2009. The
decrease in the portfolio was primarily a result of a $57.96 million decrease
in construction loan balances (net of undisbursed portion of construction
loans in process), a $2.84 million decrease in consumer loan balances and a
$1.96 million decrease in land loan balances. These decreases to net loans
receivable were partially offset by a $27.13 million increase in commercial
real estate loan balances, a $7.49 million increase in multi-family loan
balances, a $6.25 million increase in one- to four-family loan balances and a
$4.34 million increase in commercial business loan balances. The decrease in
the construction and land development loan balances was primarily due to loan
payoffs, construction projects being completed and converted to permanent
financing, loan charge-offs and changes in the Company's underwriting
standards for these types of loans, which has decreased the level of
construction and land development loan originations.
Loan originations decreased to $133.24 million for the nine months ended June
30, 2010 from $236.99 million for the nine months ended June 30, 2009,
primarily due to a decrease in the demand for single family home loan
refinances. The Company continued to sell longer-term fixed rate loans for
asset liability management purposes and to generate non-interest income. The
Company sold fixed rate one- to four-family mortgage loans totaling $43.72
million for the nine months ended June 30, 2010 compared to $140.88 million
for the nine months ended June 30, 2009.
31
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 $517,000, or
2.9%, to $17.53 million at June 30, 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 $4.77 million, or 58.3%, to $12.96 million at June 30, 2010 from $8.19
million at September 30, 2009. At June 30, 2010, OREO consisted of 28
individual properties and two other repossessed assets. The properties
consisted of two condominium projects totaling $3.95 million, three land
development projects totaling $3.65 million, ten single family homes totaling
$2.88 million, ten land parcels totaling $1.34 million and three commercial
real estate properties totaling $1.13 million.
Goodwill and CDI: The value of goodwill at $5.65 million at June 30, 2010
remained unchanged from September 30, 2009. The amortized value of the CDI
decreased to $612,000 at June 30, 2010 from $755,000 at September 30, 2009.
The decrease was attributable to scheduled amortization of the CDI.
Prepaid FDIC Insurance Assessment: The prepaid FDIC insurance assessment
increased to $3.57 million at June 30, 2010 due to the FDIC's new requirement
to prepay three year's worth of estimated insurance fees on December 31, 2009.
Deposits: Deposits increased by $62.32 million, or 12.3%, to $567.99 million
at June 30, 2010 from $505.66 million at September 30, 2009. The increase was
primarily a result of a $37.40 million increase in N.O.W. checking account
balances, a $23.65 million increase in CD account balances, a $7.53 million
increase in savings account balances and a $1.72 million increase in
non-interest bearing account balances. These increases were partially offset
by a $7.97 million decrease in money market account balances. The increase in
N.O.W. account balances was primarily a result of the Company's checking
account promotions. The increase in CD account balances was primarily a
result of increased demand for CD accounts by customers in the Company's
market areas. The Company experienced deposit inflows due to a number of
customers transferring funds from other financial institutions during the nine
months ended June 30, 2010.
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
decreased by $30.00 million, or 28.6%, to $75.00 million at June 30, 2010 from
$105.00 million at September 30, 2009 as the Bank used a portion of its liquid
assets to repay maturing FHLB advances and FRB borrowings. For additional
information, see "Borrowing Maturity Schedule" set forth below.
Shareholders' Equity: Total shareholders' equity decreased by $1.52 million,
or 1.7%, to $85.68 million at June 30, 2010 from $87.20 million at September
30, 2009. The decrease was primarily due to a $2.15 million net loss and the
payment and accrual of $907,000 in dividends to common and preferred
shareholders and was partially offset by a $1.28 million reduction in the
accumulated other comprehensive loss equity component, due to a reduction in
unrealized losses on investment securities.
As previously noted, in May 2010, the FRB denied the Company's request to pay
cash dividends on its outstanding Series A Preferred Stock held by the
Treasury. Cash dividends on the Series A Preferred Stock are cumulative and
accrue and compound on each subsequent date. Accordingly, during the deferral
period, the Company will continue to accrue, and reflect in the condensed
consolidated financial statements, the deferred dividends on the outstanding
Series A Preferred Stock.
As a result of not receiving permission from the FRB, the Company did not make
the May 2010 dividend payment as of June 30, 2010. At June 30, 2010, the
Company had unpaid preferred stock dividends in arrears of $208,000. If the
Company does not make six quarterly dividend payments on the Series A
Preferred Stock, whether or not consecutive, the Treasury will have the right
to appoint two directors to the Company's board of directors until all accrued
but unpaid dividends have been paid.
32
In May 2010, the FRB denied the Company's request to pay cash dividends on its
common stock. The Company's ability to pay dividends with respect to common
stock is subject to obtaining approval from the FRB and the Treasury and is
restricted until the obligations under the Series A Preferred Stock are
brought current.
Non-performing Assets: Non-performing assets consist of non-accrual loans,
non-accrual investment securities, and OREO and other repossessed assets. At
June 30, 2010, four loans totaling $1.20 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 decreased to 5.12% at June 30, 2010 from
5.41% at September 30, 2009, as non-accrual loans decreased by $8.26 million.
Offsetting this decrease to non-performing assets was $4.77 million increase
to OREO and other repossessed assets and a $3.01 million increase to
non-accrual investment securities.
Total non-performing loans of $21.03 million at June 30, 2010 were comprised
of 66 loans and 44 credit relationships. Included in these non-performing
loans at June 30, 2010 were:
* Seven commercial real estate loans totaling $4.96 million (of which
the largest had a balance of $2.84 million)
* 22 land loans totaling $4.85 million (of which the largest had a
balance of $835,000)
* 12 single family home loans totaling $3.46 million (of which the
largest had a balance of $722,000)
* Seven land development loans totaling $3.21 million (of which the
largest had a balance of $1.49 million)
* Seven single family speculative home loans totaling $2.08 million
(of which the largest had a balance of $767,000)
* Two condominium construction loans totaling $1.93 million (of which
the largest had a balance of $1.60 million)
* One single family construction loan with a balance of $274,000
* Four home equity loans totaling $114,000
* Two commercial business loans totaling $98,000
* Two consumer loans totaling $64,000
The Company had net charge-offs totaling $11.82 million for the nine months
ended June 30, 2010 compared to $2.98 million for the nine months ended June
30, 2009. The charge-offs during the nine months ended June 30, 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:
* $4.48 million on land development loans
* $2.86 million on land loans
* $1.73 million on condominium construction loans
* $1.41 million on commercial real estate loans
* $547,000 on single-family construction loans
* $313,000 on single-family speculative construction loans
* $319,000 on home equity and consumer loans
* $162,000 on single family loans
For additional information, see Note 5 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
33
Deposit Breakdown
-----------------
The following table sets forth the composition of the Company's deposit
balances.
At At
June 30, 2010 September 30, 2009
------------- ------------------
(In thousands)
Non-interest bearing $ 52,018 $ 50,295
N.O.W. checking 154,753 117,357
Savings 66,134 58,609
Money market accounts 54,506 62,478
CDs under $100 148,864 135,242
CDs $100 and over 91,710 77,926
CDs brokered - - 3,754
-------- --------
Total deposits $567,985 $505,661
======== ========
Borrowing Maturity Schedule
---------------------------
The Company 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 June 30, 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%
======= ===== ======= =====
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 June 30, 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 Company also maintains a short-term borrowing line with the Federal
Reserve Bank of San Francisco with total credit based on eligible collateral.
As of June 30, 2010, the Company had a borrowing line capacity of $40.18
million of which the Company did not have an amount outstanding. As of
September 30, 2009 the Company had $10.00 million outstanding on the borrowing
line with the Federal Reserve Bank of San Francisco.
34
The Company 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 June 30,
2010 and September 30, 2009, the Company did not have any outstanding advances
on this borrowing line. As of June 30, 2010 and September 30, 2009, the
Company did not have any collateral pledged for this borrowing line.
Comparison of Operating Results for the Three and Nine Months Ended June 30,
2010 and 2009
The Company reported net income of $804,000 for the quarter ended June 30,
2010 compared to net income of $1.06 million for the quarter ended June 30,
2009. Net income available to common shareholders after adjusting for the
preferred stock dividend and the preferred stock discount accretion was
$543,000 for the quarter ended June 30, 2010 compared to $769,000 for the
quarter ended June 30, 2009. The decrease in net income was primarily a
result of decreased non-interest income during the current period. Diluted
earnings per common share were $0.08 for the quarter ended June 30, 2010
compared to $0.12 for the quarter ended June 30, 2009.
The Company reported a net loss of $(2.15 million) for the nine months ended
June 30, 2010 compared to net income of $27,000 for the nine months ended June
30, 2009. Net loss to common shareholders after adjusting for the preferred
stock dividend and the preferred stock discount accretion was $(2.93 million)
for the nine months ended June 30, 2010 compared to a net loss of $(489,000)
for the nine months ended June 30, 2009. The increased loss was primarily a
result of increased provisions for loan losses, decreased non-interest income
and increased non-interest expenses. Loss per diluted common share was
$(0.44) for the nine months ended June 30, 2010 compared to a loss per diluted
common share of $(0.07) for the nine months ended June 30, 2009.
A more detailed explanation of the income statement categories is presented
below.
Net Income (Loss): Net income for the quarter ended June 30, 2010 decreased by
$254,000, or 24.0%, to $804,000 from net income of $1.06 million for the
quarter ended June 30, 2009. Net income available to common shareholders
after adjusting for preferred stock dividends of $208,000 and preferred stock
discount accretion of $53,000 was $543,000, or $0.08 per diluted common share
for the quarter ended June 30, 2010, compared to $769,000, or $0.12 per
diluted common share, for the quarter ended June 30, 2009.
The $0.04 decrease in income per diluted common share was primarily the result
of a $733,000 ($484,000 net of income tax - $0.07 per diluted common share)
decrease in non-interest income and a $49,000 ($32,000 net of income tax -
$0.01 per diluted common share) increase non-interest expense. These decreases
to earnings per diluted common share were partially offset by a $250,000
($165,000 net of income tax - $0.02 per diluted common share) decrease in the
provision for loan losses and a $199,000 ($131,000 net of income tax - $0.02
per diluted common share) increase in net interest income.
The Company reported a net loss for the nine months ended June 30, 2010 of
$(2.15 million) compared to net income of $27,000 for the nine months ended
June 30, 2009. Net loss to common shareholders after adjusting for preferred
stock dividends of $624,000 and preferred stock discount accretion of $156,000
was $(2.93 million), or $(0.44) per diluted common share for the nine months
ended June 30, 2010, compared to a net loss to common shareholders of
$(489,000), or $(0.07) per diluted common share for the nine months ended June
30, 2009.
The $0.37 increase in loss per diluted common share for the nine months ended
June 30, 2010 was primarily the result of a $1.26 million ($832,000 net of
income tax - $0.12 per diluted common share) increase in non-interest
expenses, a $1.15 million ($760,000 net of income tax - $0.12 per diluted
common share) decrease in non-interest income, a $1.05 million ($696,000 net
of income tax - $0.11 per diluted common share) increase in the
35
provision for loan losses and a $264,000 increase in preferred stock dividends
accrued and preferred stock accretion which increased the net loss to common
shareholders by approximately $0.04 per diluted common share. These increases
to the loss per diluted common share were partially offset by a $155,000
($102,000 net of income tax - $0.02 per diluted common share) increase to net
interest income.
Net Interest Income: Net interest income increased by $199,000, or 3.2%, to
$6.39 million for the quarter ended June 30, 2010 from $6.19 million for the
quarter ended June 30, 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 $509,000 or 5.3%, to $9.10
million for the quarter ended June 30, 2010 from $9.61 million for the quarter
ended June 30, 2009 as the yield on interest earning assets decreased to 5.49%
from 5.99%. 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 a change in the composition of
the loan portfolio as the level of higher yielding construction loans
decreased. Total interest expense decreased by $708,000, or 20.7%, to $2.71
million for the quarter ended June 30, 2010 from $3.42 million for the quarter
ended June 30, 2009 as the average rate paid on interest bearing liabilities
decreased to 1.86% for the quarter ended June 30, 2010 from 2.51% for the
quarter ended June 30, 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. The net interest margin decreased to 3.85% for the
quarter ended June 30, 2010 from 3.86% for the quarter ended June 30, 2009.
The reversal of interest income on loans placed on non-accrual status during
the quarter ended June 30, 2010 reduced the net interest margin by
approximately eight basis points.
Net interest income increased by $155,000, or 0.8%, to $19.23 million for the
nine months ended June 30, 2010 from $19.07 million for the nine months ended
June 30, 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 $1.84 million or 6.2%, to
$27.60 million for the nine months ended June 30, 2010 from $29.44 million for
the nine months ended June 30, 2009 as the yield on interest earning assets
decreased to 5.61% from 6.23%. 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 a change in the
composition of the loan portfolio as the level of higher yielding construction
loans decreased. Total interest expense decreased by $1.99 million, or 19.2%,
to $8.37 million for the nine months ended June 30, 2010 from $10.36 million
for the nine months ended June 30, 2009 as the average rate paid on interest
bearing liabilities decreased to 1.96% for the nine months ended June 30, 2010
from 2.58% for the nine months ended June 30, 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. The net interest margin
decreased to 3.91% for the nine months ended June 30, 2010 from 4.03% for the
nine months ended June 30, 2009. The margin compression was primarily due to
an increased level of liquid assets with lower yields and the reversal of
interest income on loans placed on non-accrual status during the nine months
ended June 30, 2010. The reversal of interest income on loans placed on
non-accrual status during the nine months ended June 30, 2010 reduced the net
interest margin by approximately 13 basis points.
36
Average Balances, Interest and Average Yields/Cost The following tables sets
forth, for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts (in thousands) of
interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities and average yields and costs. Such yields
and costs for the periods indicated are derived by dividing income or expense
by the average daily balance of assets or liabilities, respectively, for the
periods presented.
Three Months Ended June 30,
----------------------------------------------------
2010 2009
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
Interest-earning
assets: (1)
Loans receivable (2) $552,055 $8,764 6.35% $562,105 $9,240 6.58%
Mortgage-backed and
investment securities 16,822 239 5.68 23,758 322 5.42
FHLB stock and equity
securities 6,676 9 0.54 6,658 9 0.54
Federal funds sold - - - 15,684 8 0.20
Interest-bearing
deposits 87,958 90 0.41 33,263 32 0.39
-------- ------ -------- ------
Total interest-
earning assets 663,511 9,102 5.49 641,468 9,611 5.99
Non-interest-earning
assets 57,490 46,943
-------- --------
Total assets $721,001 $688,411
======== ========
Interest-bearing
liabilities:
Savings accounts 64,965 115 0.71 54,978 97 0.71
Money market accounts 57,163 148 1.04 61,453 250 1.63
NOW accounts 148,660 488 1.32 99,928 268 1.08
Certificates of
deposit 237,397 1,199 2.03 234,615 1,825 3.12
Short-term
borrowings (3) 859 1 0.32 612 1 0.05
Long-term
borrowings (4) 75,000 760 4.06 95,000 978 4.13
-------- ------ -------- ------
Total interest-
bearing
liabilities 584,044 2,711 1.86 546,586 3,419 2.51
------ ------
Non-interest-bearing
liabilities 51,856 53,392
-------- --------
Total liabilities 635,900 599,978
Shareholders' equity 85,101 88,433
-------- --------
Total liabilities
and shareholders'
equity $721,001 $688,411
======== ========
Net interest income $6,391 $6,192
====== ======
Interest rate spread 3.63% 3.48%
====== ======
Net interest margin (5) 3.85% 3.86%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 113.61% 117.36%
====== ======
---------------
(1) Interest yield on loans and mortgage-backed securities is calculated
assuming a 30/360 basis; interest yield on all other categories is based
on daily interest basis.
(2) Average balances include non-accrual loans.
(3) Includes FHLB, FRB and PCBB advances with original maturities of less than
one year and other short-term borrowings-repurchase agreements.
(4) Includes FHLB advances with original maturities of one year or greater.
(5) Net Interest income divided by total average interest earning assets.
37
Nine Months Ended June 30,
----------------------------------------------------
2010 2009
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
Interest-earning ------- --------- ---- ------- --------- ----
assets: (1)
Loans receivable(2) $558,587 $26,661 6.38% $565,274 $28,229 6.68%
Mortgage-backed and
investment securities 18,045 695 5.14 26,893 1,081 5.36
FHLB stock and equity
securities 6,672 27 0.52 6,650 29 0.58
Federal funds sold - - - 11,666 36 0.41
Interest-bearing
deposits 72,543 218 0.40 19,938 62 0.42
-------- ------- -------- -------
Total interest-earning
assets 655,847 27,601 5.61 630,421 29,437 6.23
Non-interest-earning
assets 55,704 46,388
-------- --------
Total assets 711,551 676,809
======== ========
Interest-bearing
liabilities:
Savings accounts 62,596 333 0.71 55,108 291 0.71
Money market accounts 61,403 544 1.18 61,367 821 1.79
NOW accounts 136,403 1,324 1.30 93,775 694 0.99
Certificates of deposit 232,598 3,785 2.18 228,512 5,515 3.23
Short-term
borrowings (3) 1,037 3 0.39 674 1 0.12
Long-term
borrowings (4) 78,315 2,384 4.07 97,280 3,042 4.18
-------- ------- -------- -------
Total interest-bearing
liabilities 572,352 8,373 1.96 536,716 10,364 2.58
------- -------
Non-interest-bearing
liabilities 52,467 54,648
-------- --------
Total liabilities 624,819 591,364
Shareholders' equity 86,732 85,445
-------- --------
Total liabilites and
shareholders' equity $711,551 $676,809
======== ========
Net interest income $19,228 $19,073
======= =======
Interest rate spread 3.65% 3.64%
====== ======
Net interest margin (5) 3.91% 4.03%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 114.59% 117.46%
====== ======
----------------
(1) Interest yield on loans and mortgage-backed securities is calculated
assuming a 30/360 basis; interest yield on all other categories is based
on daily interest basis.
(2) Average balances include non-accrual loans.
(3) Includes FHLB, FRB and PCBB advances with original maturities of less than
one year and other short-term borrowings - repurchase agreements.
(4) Includes FHLB advances with original maturities of one year or greater.
(5) Net Interest income divided by total average interest earning assets.
38
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 June 30, 2010 Nine months ended June 30, 2010
compared to three months compared to nine months
ended June 30, 2009 ended June 30, 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) $(313) $(163) $(476) $(1,237) $(331) $(1,568)
Investments and
mortgage-backed
securities 15 (98) (83) (43) (343) (386)
FHLB stock and
equity securities -- -- - - (2) -- (2)
Federal funds sold -- (8) (8) -- (36) (36)
Interest-bearing
deposits 2 56 58 (3) 159 156
----- ----- ----- ------- ----- -------
Total net decrease
in income on interest-
earning assets (296) (213) (509) (1,285) (551) (1,836)
----- ----- ----- ------- ----- -------
Interest-bearing liabilities:
Savings accounts -- 18 18 3 39 42
NOW accounts 69 151 220 256 374 630
Money market accounts (85) (17) (102) (277) -- (277)
CD accounts (648) 22 (626) (1,832) 102 (1,730)
Short-term borrowings - - -- - - -- 2 2
Long-term borrowings (16) (202) (218) (79) (579) (658)
----- ----- ----- ------- ----- -------
Total net decrease
in expense on interest-
bearing liabilities (680) (28) (708) (1,929) (62) (1,991)
----- ----- ----- ------- ----- -------
Net increase (decrease) in
net interest income $ 384 $(185) $ 199 $ 644 $(489) $ 155
===== ===== ===== ======= ===== =======
(1) Excludes interest on loans on non-accrual status. Includes loans originated for sale.
39
Provision for Loan Losses: The provision for loan losses decreased $250,000,
or 25.0%, to $750,000 for the quarter ended June 30, 2010 from $1.00 million
for the quarter ended June 30, 2009. Net charge-offs during the three months
ended June 30, 2010 exceeded the quarterly provision expense primarily due to
the charge-off of $5.1 million in impairments previously identified and
factored into prior quarter's provisions. The decrease in provisions for the
three months ended June 30, 2010 compared to the three months ended June 30,
2009 was primarily due to a decreased level of non-performing loans and a
decrease in the Bank's construction and land development loan portfolio.
The provision for loan losses increased $1.06 million, or 14.1%, to $8.55
million for the nine months ended June 30, 2010 from $7.49 million for the
nine months ended June 30, 2009. The increased provisions for the nine months
ended June 30, 2010 were primarily the result of an increase in the level of
net charge-offs, and uncertainties in real estate values in certain market
areas of the Pacific Northwest.
The Company has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Company 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 nine months ended June 30,
2010, also placed greater emphasis on the Company'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 $10.90 million at June
30, 2010 (2.00% of loans receivable and loans held for sale and 51.8% 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 June 30, 2010 was $495,000. The
allowance for loan losses was $12.44 million (2.23% of loans receivable and
49.5% of non-performing loans) at June 30, 2009. The Company had net
charge-offs of $11.82 million during the nine months ended June 30, 2010 and
net charge-offs of $2.98 million for the nine months ended June 30, 2009.
Non-accrual and 90 day past due loans decreased $7.85 million to $22.23
million at June 30, 2010 from $30.08 million at September 30, 2009. 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 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 $733,000, or 27.4%,
to $1.94 million for the quarter ended June 30, 2010 from $2.67 million for
the quarter ended June 30, 2009. This decrease was primarily a result of a
$932,000 decrease in gains on sale of loans. The decreased income from loan
sales was primarily a
40
result of a decrease in the dollar value of residential mortgage loans sold in
the secondary market during the three months ended June 30, 2010. The sale of
fixed rate one-to four-family mortgage loans totaled $11.40 million for the
three months ended June 30, 2010 compared to $69.62 million for the three
months ended June 30, 2009. The higher loan sales during the three months
ended June 30, 2009 was primarily due to increased refinancing activity that
was attributable to low interest rates for 30-year fixed rates loans.
Partially offsetting this decrease to non-interest income was a $22,000
valuation recovery on MSRs for the quarter ended June 30, 2010 compared to a
$169,000 valuation write down allowance on MSRs for the quarter ended June 30,
2009.
Total non-interest income decreased by $1.15 million, or 21.0%, to $4.34
million for the nine months ended June 30, 2010 from $5.49 million for the
nine months ended June 30, 2009. This decrease was primarily a result of a
$1.48 million decrease in gains on sale of loans and a $132,000 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 nine months ended June 30, 2010. The sale of
fixed rate one-to four-family mortgage loans totaled $43.72 million for the
nine months ended June 30, 2010 compared to $141.18 million for the nine
months ended June 30, 2009. The higher loan sales during the nine months
ended June 30, 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 nine months ended June 30, 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. Partially offsetting these
decreases to non-interest income was a $267,000 increase in ATM transaction
fees and a $203,000 decrease in the net OTTI loss on investment securities.
Also impacting the comparison was a $169,000 valuation write-down allowance on
MSRs for the nine months ended June 30, 2009.
Non-interest Expense: Total non-interest expense increased by $49,000, or
0.8%, to $6.42 million for the quarter ended June 30, 2010 from $6.37 million
for the quarter ended June 30, 2009. This increase was primarily a result of
a $198,000 increase in salaries and employee benefits expense, which was
partially offset by an $83,000 decrease in FDIC insurance expense and a
$73,000 decrease in postage and courier expenses. The increase in salaries
and employee benefit expense was primarily a result of a decreased level of
loan originations. Under GAAP, the portion of a loan origination fee that is
attributable to the estimated employee costs to generate the loan is recorded
as a reduction to salaries and employee benefit expense. With the decrease in
loan originations, the loan originations fees that reduced salaries and
employee benefits expense decreased by $200,000 during the quarter ended June
30, 2010 compared to the quarter ended June 30, 2009. The decrease in FDIC
insurance expense was primarily due to the special assessment of $300,000 that
the Bank paid during the quarter ended June 30, 2009.
Total non-interest expense increased by $1.26 million, or 7.3%, to $18.61
million for the nine months ended June 30, 2010 from $17.35 million for the
nine months ended June 30, 2009. This increase was primarily a result of a
$737,000 increase in FDIC insurance expense, a $221,000 increase in the
Company's general liability insurance expense, a $215,000 increase in OREO and
other repossessed items expense and a $201,000 increase in salaries and
employee benefits 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 nine months ended June 30, 2010
by $400,000. Without the non-recurring adjustment the FDIC insurance expense
would have been $923,000 for the nine months ended June 30, 2010 compared to
$586,000 for the nine months ended June 30, 2009. The increase in general
liability insurance cost was primarily due to increased insurance costs for
financial institutions in this economic cycle. 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 provision for income taxes
decreased $79,000 to $356,000 for the quarter ended June 30, 2010 from
$435,000 for the quarter ended June 30, 2009 primarily as a result of
decreased income before income taxes. The Company's effective tax rate was
30.7% for the quarter ended June 30, 2010 and 29.1% for the quarter ended June
30, 2009. The benefit for income taxes increased by $1.13
41
million to $1.44 million for the nine months ended June 30, 2010 from a net
benefit of $305,000 for the nine months ended June 30, 2009 primarily as a
result of an increased 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 nine months ended June 30, 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 and cash equivalents increased by $28.79 million, or
43.3% to $95.26 million at June 30, 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 June 30, 2010,
the Bank's regulatory liquidity ratio (net cash, and short-term and marketable
assets, as a percentage of net deposits and short-term liabilities) was
19.34%. 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 $99.79 million was available for
additional borrowings at June 30, 2010. The Bank also maintains a short-term
borrowing line with the Federal Reserve Bank with total credit based on
eligible collateral. At June 30, 2010, the Bank had $40.18 million available
for borrowings with the Federal Reserve Bank and there was no outstanding
balance 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
June 30, 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 June 30, 2010,
the Bank had loan commitments totaling $43.34 million and undisbursed loans in
process totaling $15.78 million. The Bank anticipates that it will have
sufficient funds available to meet current loan commitments. CDs that are
scheduled to mature in less than one year from June 30, 2010 totaled $186.65
million. Historically, the Bank has been able to retain a significant amount
of its non-brokered certificates of deposit as they mature. At June 30, 2010,
the Bank had no brokered deposits.
42
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 June 30, 2010, the Bank was in compliance with all applicable capital
requirements.
The following table compares the Company's and the Bank's actual capital
amounts at June 30, 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 $80,417 11.25% $28,601 4.00% N/A N/A
Timberland Bank (1) 72,524 10.22 70,988 10.00 $70,988 10.00%
Tier 1 risk adjusted
capital:
Consolidated 80,417 14.70 21,855 4.00 N/A N/A
Timberland Bank (1) 72,524 13.28 32,764 6.00 32,764 6.00
Total risk based
capital
Consolidated 87,306 15.96 43,771 8.00 N/A N/A
Timberland Bank (1) 79,400 14.54 54,607 10.00 54,607 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.
43
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
2010 2009 2010 2009
-------------- ---------------
PERFORMANCE RATIOS:
Return (loss) on average assets (1) 0.45% 0.61% (0.40%) 0.01%
Return (loss) on average equity (1) 3.78% 4.79% (3.31%) 0.04%
Net interest margin (1) 3.85% 3.86% 3.91% 4.03%
Efficiency ratio 77.08% 71.88% 78.97% 70.64%
At At At
June 30, September 30, June 30,
2010 2009 2009
-----------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $21,031 $29,287 $25,113
Non-performing investment securities 3,482 477 175
OREO & other repossessed assets 12,957 8,185 7,698
------- ------- -------
Total non-performing assets (2) $37,470 $37,949 $32,986
======= ======= =======
Non-performing assets to total assets (2) 5.12% 5.41% 4.88%
Allowance for loan losses to non-
performing loans 52% 48% 50%
Allowance for loan losses to total loans 2.00% 2.52% 2.23%
Troubled debt restructured loans (3) $14,359 $ 9,492 $ - -
Past due 90 day and still accruing $ 1,198 $ 796 $ 830
Book Values:
Book value per common share $ 9.93 $ 10.17 $ 10.39
Less: goodwill and core deposit
intangible 0.89 0.91 1.06
------- ------- -------
Tangible book value per common share (4) $ 9.04 $ 9.26 $ 9.33
======= ======= =======
------------
(1) Annualized
(2) Non-performing assets include non-accrual loans, non-accrual investment
securities, other real estate owned and other repossessed assets
(3) At June 30, 2010, $5,464 of the $14,359 in troubled debt restructured
loans were on non-accrual status and included in 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 Nine Months Ended
June 30, June 30,
2010 2009 2010 2009
-------------- ---------------
AVERAGE BALANCE SHEET:
Average total loans $552,055 $562,105 $558,587 $565,274
Average total interest earning assets
(1) 663,511 641,468 655,847 630,421
Average total assets 721,001 688,411 711,551 676,809
Average total interest bearing
deposits 508,185 450,974 492,999 438,762
Average FHLB advances & other
borrowings 75,859 95,612 79,352 97,954
Average shareholders' equity 85,101 88,433 86,732 85,445
-------------
(1) Includes loans on non-accrual status
44
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 June 30, 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 Jume 30, 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.
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.
45
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 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.
On May 17, 2010, the FRB denied the Company's request to pay dividends on its
Series A Preferred Stock (issued under TARP) and its common stock for the
March 31, 2010 quarter. There can be no assurance that our regulators will
approve such payments or dividends in the future. The Company may not declare
or pay dividends on its common stock or, with certain exceptions, repurchase
common stock without first having
46
paid all cumulative preferred dividends that are due. If dividends on the
Series A Preferred Stock are not paid for six quarters, whether or not
consecutive, the Treasury has the right to appoint two members to the Board of
Directors of the Company.
Financial reform legislation recently enacted by Congress will, among other
things, tighten capital standards, create a new Consumer Financial Protection
Bureau and result in new laws and regulations that are expected to increase
our costs of operations.
Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"). This new law will significantly change
the current bank regulatory structure and affect the lending, deposit,
investment, trading and operating activities of financial institutions and
their holding companies. The Dodd-Frank Act requires various federal agencies
to adopt a broad range of new implementing rules and regulations, and to
prepare numerous studies and reports for Congress. The federal agencies are
given significant discretion in drafting the implementing rules and
regulations, and consequently, many of the details and much of the impact of
the Dodd-Frank Act may not be known for many months or years.
Certain provisions of the Dodd-Frank Act are expected to have a near term
impact on the Company. For example, one year after the date of enactment a
provision of the Dodd-Frank Act eliminates the federal prohibitions on paying
interest on demand deposits, thus allowing businesses to have interest bearing
checking accounts. Depending on competitive responses, this significant change
to existing law could have an adverse impact on the Company's interest expense
and deposit balances.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance
Corporation insurance assessments. Assessments will now be based on the
average consolidated total assets less tangible equity capital of a financial
institution. The Dodd-Frank Act also permanently increases the maximum amount
of deposit insurance for banks, savings institutions and credit unions to
$250,000 per depositor, retroactive to January 1, 2009, and non-interest
bearing transaction accounts have unlimited deposit insurance through December
31, 2013.
The Dodd-Frank Act will require publicly traded companies to give stockholders
a non-binding vote on executive compensation and so-called "golden parachute"
payments, and authorizes the Securities and Exchange Commission to promulgate
rules that would allow stockholders to nominate their own candidates using a
company's proxy materials. The legislation also directs the Federal Reserve
Board to promulgate rules prohibiting excessive compensation paid to bank
holding company executives, regardless of whether the company is publicly
traded or not.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws. The Consumer
Financial Protection Bureau has broad rule-making authority for a wide range
of consumer protection laws that apply to all banks and savings institutions,
including the authority to prohibit "unfair, deceptive or abusive" acts and
practices. The Consumer Financial Protection Bureau has examination and
enforcement authority over all banks and savings institutions with more than
$10 billion in assets. Financial institutions such as the Bank, with $10
billion or less in assets will continue to be examined for compliance with the
consumer laws by their primary bank regulators.
It is difficult to predict at this time what specific impact the Dodd-Frank
Act and the yet to be written implementing rules and regulations will have on
community banks. However, it is expected that at a minimum they will increase
our operating and compliance costs and could increase our interest expense.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
---------------------------------------------------------------------
Not applicable
47
Item 3. Defaults Upon Senior Securities
-----------------------------------------
See discussion in Item 2 of Part 1 with respect to cumulative preferred
stock dividends in arrears, which discussion is incorporated here by
reference.
Item 4. Removed and Reserved
----------------------------
Item 5. Other Information
--------------------------
None to be reported.
Item 6. Exhibits
------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Certificate of Designation relating to the Company's Fixed
Rate Cumulative Perpetual Preferred Stock Series A (2)
3.3 Bylaws of the Registrant (1)
3.4 Amendment to Bylaws (3)
4.1 Warrant to purchase shares of Company's common stock dated
December 23, 2008 (2)
4.2 Letter Agreement (including Securities Purchase Agreement
Standard Terms attached as Exhibit A) dated December 23, 2008
between the Company and the United States Department of the
Treasury (2)
10.1 Employee Severance Compensation Plan, as revised (4)
10.2 Employee Stock Ownership Plan (4)
10.3 1999 Stock Option Plan (5)
10.4 Management Recognition and Development Plan (5)
10.5 2003 Stock Option Plan (6)
10.6 Form of Incentive Stock Option Agreement (7)
10.7 Form of Non-qualified Stock Option Agreement (7)
10.8 Form of Management Recognition and Development Award
Agreement (7)
10.9 Employment Agreement between the Company and the Bank and
Michael R. Sand (8)
10.10 Employment Agreement between the Company and the Bank and
Dean J. Brydon (8)
10.11 Form of Compensation Modification Agreements (2)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
-------------
(1) Incorporated by reference to the Registrant's Registration
Statement 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.
48
(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.
49
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.
/s/Michael R. Sand
Date: August 6, 2010 By: ------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
/s/Dean J. Brydon
Date: August 6, 2010 By: ------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
50
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
51