UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2009
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 JANUARY 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 10-24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-37
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 38
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 1A Risk Factors 38-40
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits 40-41
SIGNATURES 42
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2009 and September 30, 2009
(Dollars in thousands, except per share data)
December 31, September 30,
2009 2009
-------------------------
Assets (Unaudited)
Cash equivalents:
Cash and due from financial institutions $ 11,676 $ 10,205
Interest bearing deposits in other banks 57,250 56,257
------------------------
Total cash equivalents 68,926 66,462
------------------------
Certificate of deposits ("CDs") held for
investment, (at cost) 14,442 3,251
Investments and mortgage-backed securities - held
to maturity (fair value $5,952 and $6,215) 6,413 7,087
Investments and mortgage-backed securities -
available for sale 12,594 13,471
Federal Home Loan Bank of Seattle ("FHLB") stock 5,705 5,705
Loans receivable 559,153 560,750
Loans held for sale 2,934 630
Less: Allowance for loan losses (14,931) (14,172)
------------------------
Net loans receivable 547,156 547,208
------------------------
Premises and equipment, net 17,951 18,046
Other real estate owned ("OREO") and other
repossessed assets 8,119 8,185
Accrued interest receivable 2,997 2,805
Bank owned life insurance ("BOLI") 13,042 12,918
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 707 755
Mortgage servicing rights ("MSRs") 2,691 2,618
Other assets 10,073 7,515
------------------------
Total assets $716,466 $701,676
========================
Liabilities and shareholders' equity
Deposits: Demand, non-interest-bearing $ 50,525 $ 50,295
Deposits: Interest-bearing 490,488 455,366
------------------------
Total Deposits 541,013 505,661
------------------------
FHLB advances 75,000 95,000
Federal Reserve Bank ("FRB") advances 10,000 10,000
Other borrowings: repurchase agreements 622 777
Other liabilities and accrued expenses 2,625 3,039
------------------------
Total liabilities 629,260 614,477
------------------------
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 15,605 15,554
December 31, 2009 - 16,641 shares, Series A,
issued and outstanding
September 30, 2009 - 16,641 shares, Series A,
issued and outstanding
Series A shares: $1,000 liquidation value
Common stock, $.01 par value; 50,000,000 shares
authorized; 10,343 10,315
December 31, 2009 - 7,045,036 shares issued and
outstanding
September 30, 2009 - 7,045,036 shares issued and
outstanding
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,446) (2,512)
Retained earnings 65,607 65,854
Accumulated other comprehensive loss (1,903) (2,012)
------------------------
Total shareholders' equity 87,206 87,199
------------------------
Total liabilities and shareholders' equity $716,466 $701,676
========================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, 2009 and 2008
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended December 31,
2009 2008
------------------------
Interest and dividend income
Loans receivable $9,065 $9,570
Investments and mortgage-backed securities 216 412
Dividends from mutual funds 9 10
Interest bearing deposits in banks 51 33
-------------------
Total interest and dividend income 9,341 10,025
===================
Interest expense
Deposits 2,077 2,496
FHLB advances - short term - - - -
FHLB advances - long term 873 1,065
FRB advances and other borrowings - - - -
-------------------
Total interest expense 2,950 3,561
===================
Net interest income 6,391 6,464
Provision for loan losses 2,600 1,315
-------------------
Net interest income after provision for loan
losses 3,791 5,149
===================
Non-interest income
Total impairment loss on investment securities (317) (1,170)
Less: portion recorded as other comprehensive loss
(before taxes) 29 - -
-------------------
Net impairment loss on investment securities (288) (1,170)
-------------------
Realized losses on held-to-maturity securities (48) - -
Service charges on deposits 1,130 1,150
ATM transaction fees 362 288
BOLI net earnings 134 121
Gain on sale of loans, net 449 281
Servicing income on loans sold 29 33
Fee income from non-deposit investment sales 32 28
Other 169 175
-------------------
Total non-interest income 1,969 906
===================
See notes to unaudited condensed consolidated financial statements (continued)
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (concluded)
For the three months ended December 31, 2009 and 2008
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended December 31,
2009 2008
------------------------
Non-interest expense
Salaries and employee benefits 2,981 3,073
Premises and equipment 701 663
Advertising 172 191
OREO and other repossessed items expense 50 62
ATM expenses 155 125
Postage and courier 128 119
Amortization of CDI 48 54
State and local taxes 141 143
Professional fees 172 135
Federal Deposit Insurance Corporation ("FDIC")
insurance 200 86
Other 750 886
-------------------
Total non-interest expense 5,498 5,537
===================
Income before federal and state income taxes 262 518
Provision for federal and state income taxes 38 157
-------------------
Net income $ 224 $ 361
===================
Preferred stock dividends $ 208 $ 18
Preferred stock discount accretion 51 - -
-------------------
Net income (loss) available to common shareholders $ (35) $ 343
===================
Earnings (loss) per common share
Basic $(0.01) $ 0.05
Diluted $(0.01) $ 0.05
Weighted average common shares outstanding
Basic 6,709,985 6,570,776
Diluted 6,709,985 6,578,080
Dividends paid per common share $ 0.03 $ 0.11
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 three months ended December 31, 2009
(Dollars in thousands, except per share amounts, common shares and preferred shares)
Accumu-
lated
Unearned Other
Preferred Common Shares Compre-
Preferred Common Stock Stock Issued to Retained hensive
Shares Shares Amount Amount ESOP Earnings Loss Total
------ ------ ------- ------ --------- -------- --------- -----
Balance, September 30, 2008 - - 6,967,579 $ - - $8,672 $(2,776) $69,406 $(461) $74,841
Net loss - - - - - - - - - - (242) - - (242)
Issuance of preferred stock
with attached common stock
warrants 16,641 - - 15,425 1,158 - - - - - - 16,583
Accretion of preferred stock
discount - - - - 129 - - - - (129) - - - -
Issuance of MRDP(1) shares - - 19,758 - - - - - - - - - - - -
Exercise of stock options - - 57,699 - - 392 - - - - - - 392
Cash dividends
($0.39 per common share) - - - - - - - - - - (2,736) - - (2,736)
(5% preferred stock) - - - - - - - - - - (536) - - (536)
Earned ESOP shares - - - - - - (47) 264 - - - - 217
MRDP compensation expense - - - - - - 137 - - - - - - 137
Stock option compensation
expense - - - - - - 3 - - - - - - 3
Cumulative effect of FASB
guidance regarding
recognition of other than
temporary impairment
("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 income - - - - - - - - - - 224 - - 224
Accretion of preferred stock
discount - - - - 51 - - - - (51) - - - -
Cash dividends
($0.03 per common share) - - - - - - - - - - (212) - - (212)
(5% preferred stock) - - - - - - - - - - (208) - - (208)
Earned ESOP shares - - - - - - (17) 66 - - - - 49
MRDP compensation expense - - - - - - 44 - - - - - - 44
Stock option compensation
expense - - - - - - 1 - - - - - - 1
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 118 118
Change in OTTI on securities
held-to-maturity, net of tax - - - - - - - - - - - - (19) (19)
Accretion of OTTI on securities
held-to-maturity, net of tax - - - - - - - - - - - - 10 10
Balance, December 31, 2009 16,641 7,045,036 $15,605 $10,343 $(2,446) $65,607 $(1,903) $87,206
(1) 1998 Management Recognition and Development Plan ("MRDP").
See notes to unaudited condensed consolidated financial statements
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2009 and 2008
(In thousands)
(unaudited)
Three Months Ended December 31,
Cash flow from operating activities 2009 2008
----------------------
Net income $ 224 $ 361
Non-cash revenues, expenses, gains and losses
included in income:
Provision for loan losses 2,600 1,315
Depreciation 301 273
Deferred federal income taxes - - (41)
Amortization of CDI 48 54
Earned ESOP shares 66 66
MRDP compensation expense 44 41
Stock option compensation expense 1 1
Stock option tax effect - - 40
Gain on sale of OREO and other repossessed items,
net (121) (2)
Valuation of OREO 31 42
Loss on the disposition of premises and equipment 1 - -
BOLI net earnings (134) (121)
Gain on sale of loans (449) (281)
Decrease in deferred loan origination fees (103) (69)
OTTI losses on securities 288 1,170
Realized losses on held-to-maturity securities 48 - -
Loans originated for sale (20,707) (10,894)
Proceeds from sale of loans 18,852 10,539
Increase in other assets, net (2,981) (215)
Decrease in other liabilities and accrued expenses,
net (414) (99)
----------------------
Net cash provided by (used in) operating activities (2,405) 2,180
Cash flow from investing activities
Net increase in CD's held for investment (11,191) - -
Proceeds from maturities and prepayments of
securities available for sale 439 797
Proceeds from maturities and prepayments of
securities held to maturity 1,052 347
Increase in loans receivable, net (1,676) (1,278)
Additions to premises and equipment (207) (758)
Proceeds from sale of OREO and other repossessed
items 1,691 5
----------------------
Net cash used in investing activities (9,892) (887)
Cash flow from financing activities
Increase (decrease) in deposits, net 35,352 (21,231)
Repayment of FHLB advances - long term (20,000) (5,019)
Decrease in repurchase agreements (155) (44)
Proceeds from exercise of stock options - - 244
ESOP tax effect (17) (9)
MRDP compensation tax effect 1 5
Issuance of stock warrants - - 1,158
Issuance of preferred stock - - 15,408
Payment of dividends (420) (767)
----------------------
Net cash provided by (used in) financing
activities 14,761 (10,255)
See notes to unaudited condensed consolidated financial statements
(continued)
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the three months ended December 31, 2009 and 2008
(In thousands)
(unaudited)
Three Months Ended December 31,
2009 2008
----------------------
Net increase (decrease) in cash equivalents 2,464 (8,962)
Cash equivalents
Beginning of period 66,462 42,874
----------------------
End of period $ 68,926 $ 33,912
----------------------
Supplemental disclosure of cash flow information
Income taxes paid $ - - $ - -
Interest paid 3,074 4,414
Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed
assets 1,535 800
Loan originated to facilitate the sale of OREO 858 - -
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 months ended December 31, 2009 and 2008
In thousands
(unaudited)
Three Months Ended December 31,
2009 2008
------------------------
Comprehensive income:
Net income $ 224 $ 361
Unrealized holding gain (loss) on securities
available for sale, net of tax 118 (446)
Change in OTTI on securities held-to-maturity,
net of tax
Additions (45) - -
Additional amount recognized related to
credit loss for which OTTI was previously
recognized (89) - -
Amount reclassed to credit loss for
previously recorded market loss 115 - -
Accretion of OTTI securities held-to-maturity,
net of tax 10 - -
----- -----
Total comprehensive income (loss) $ 333 $ (85)
===== =====
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 months ended December 31, 2009 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
December 31, 2009 presentation with no change to net income or total
shareholders' equity previously reported. Additional paid-in capital and
stock warrants, which were previously reported as separate components in the
shareholders' equity section are now reported as part of common stock and
preferred stock.
(2) SUBSEQUENT EVENTS
Management has evaluated events and transactions that occurred after the
balance sheet date of December 31, 2009 through February 5, 2010.
On January 28, 2010, the Company announced a quarterly cash dividend of $0.01
per common share, payable February 26, 2010, to shareholders of record as of
the close of business on February 15, 2010.
On February 1, 2010, the Company entered into a Memorandum of Understanding
(the "FRB MOU") with the Federal Reserve Bank of San Francisco ("FRB"). The
terms of the FRB MOU restrict the Company from certain activities, and require
the Company to obtain prior written approval, or non-objection, of the FRB to
engage in certain activities, including the payment of cash dividends. For
additional information regarding the FRB MOU, see "Item 1A, Risk Factors The
Company and the Bank are required to comply with terms of separate memorandums
of understanding issued by their respective regulators and lack of compliance
could result in additional regulatory actions."
10
(3) U.S. TREASURY DEPARTMENT'S CAPITAL PURCHASE PROGRAM
On December 23, 2008, the Company received $16.64 million from the U.S.
Treasury Department ("Treasury") as a part of the Treasury's Capital Purchase
Program. The Company sold $16.64 million in senior preferred stock, with a
related warrant to purchase 370,899 shares of the Company's common stock at a
price of $6.73 per share at any time during the next ten years. The
transaction is part of the Treasury's program to encourage qualified financial
institutions to build capital to increase the flow of financing to businesses
and consumers and to support the U.S. economy. The preferred stock 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 net income for
computing income available to common shareholders and earnings per share
computations.
(4) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities have been classified according to
management's intent (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
December 31, 2009
Held to Maturity ("HTM")
U.S. treasury securities $ 27 $ 2 $ - - $ 29
Mortgage-backed securities
and collateralized mortgage
obligations ("CMOs"):
U.S. government agencies 2,387 23 (10) 2,400
Private label residential 3,999 361 (837) 3,523
------- ----- ----- -------
Total $ 6,413 $ 386 $(847) $ 5,952
Available for Sale
Mortgage-backed securities
and CMOs:
U.S. government agencies $ 9,431 $ 217 $ (3) $ 9,645
Private label residential 2,663 60 (729) 1,994
Mutual funds 1,000 - - (45) 955
------- ----- ----- -------
Total $13,094 $ 277 $(777) $12,594
September 30, 2009
Held to Maturity ("HTM")
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
11
Available for Sale
Mortgage-backed securities
and CMOs:
U.S. government agencies $10,378 $ 221 $ (5) $10,594
Private label residential 2,774 - - (865) 1,909
Mutual funds 1,000 - - (32) 968
------- ----- ----- -------
Total $14,152 $ 221 $(902) $13,471
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of December
31, 2009 are as follows (in thousands):
Less Than 12 Months 12 Months or Longer
------------------- ------------------- Total
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Held to Maturity
Mortgage-backed
securities and
CMOs:
U.S. government
agencies $ 405 $ (3) $ 949 $ (7) $1,354 $ (10)
Private
residential 71 (1) 3,138 (836) 3,209 (837)
----- ---- ------ ----- ------ -----
Total $ 476 $ (4) $4,087 $(843) $4,563 $(847)
Available for Sale
Mortgage-backed
securities and
CMOs:
U.S. government
agencies $ 222 $ (2) $ 682 $ (1) $ 904 $ (3)
Private label
residential - - - - 1,839 (729) 1,839 (729)
Mutual funds - - - - 955 (45) 955 (45)
----- ---- ------ ----- ------ -----
$ 222 $ (2) $3,476 $(775) $3,698 $(777)
During the three months ended December 31, 2009 and 2008 the Company recorded
net OTTI charges through earnings on residential mortgage-backed securities of
$336,000 and $1.17 million. As discussed later in Note 10, effective January
1, 2009, the Company adopted Financial Accounting Standards Board ("FASB")
Recognition and Presentation of Other-Than-Temporary Impairments, which
provides for the bifurcation of OTTI into (i) amounts related to credit losses
which are recognized through earnings, and (ii) amounts related to all other
factors which are recognized as a component of other comprehensive income.
To determine the component of the gross OTTI related to credit losses, the
Company compared the amortized cost basis of each OTTI security to the present
value of its revised expected cash flows, discounted using its pre-impairment
yield. The revised expected cash flow estimates for individual securities are
based primarily on an analysis of default rates, prepayment speeds and
third-party analytic reports. Significant judgment of management is required
in this analysis that includes, but is not limited to, assumptions regarding
the collectability of principal and interest, net of related expenses, on the
underlying loans. The following table presents a summary of the significant
inputs utilized to measure management's estimate of the credit loss component
on OTTI securities as of December 31, 2009 and September 30, 2009:
Range
--------------------- Weighted
Minimum Maximum Average
At December 31, 2009
--------------------
Constant prepayment rate 0.0% 15.0% 7.3%
Collateral default rate 6.7% 62.4% 29.1%
Loss severity rate 13.6% 51.0% 33.3%
At September 30, 2009
---------------------
12
Constant prepayment rate 6.0% 15.0% 10.9%
Collateral default rate 6.8% 59.6% 25.4%
Loss severity rate 14.3% 52.0% 34.0%
The following table presents the OTTI losses for the three months ended
December 31, 2009 and 2008 (in thousands).
Three months ended Three months ended
December 31, 2009 December 31, 2008
-------------------- -------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- --------
Total OTTI losses $ 307 $ 10 $1,046 $ 124
Portion of OTTI losses recognized
in other comprehensive loss
(before taxes) (1) 29 - - - - - -
----- ----- ------ -----
impairment losses recognized in
earnings (2) $ 278 $ 10 $1,046 $ 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 $3,323
Additions:
Credit losses for which OTTI was
not previously recognized 18
Additional increases to the amount
related to credit loss for which OTTI
was previously recognized 260
Subtractions:
Realized losses recorded previously
as credit losses (147)
------
Balance, December 31, 2009 $3,454
======
There were no gross realized gains on sale of securities for the three months
ended December 31, 2009 and 2008. During the three months ended December 31,
2009 the Company recorded a $195,000 realized loss (as a result of the
securities being deemed worthless) on seven held to maturity residential
mortgage-backed securities of which $147,000 had been recognized previously as
a credit loss. During the three months ended December 31, 2008 there were no
gross realized losses on available for sale or held to maturity securities.
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 $15.45 million and $16.40 million at December 31, 2009 and September
30, 2009, respectively.
The contractual maturities of debt securities at December 31, 2009 are as
follows (in thousands). Expected maturities may differ from scheduled
maturities as a result of the prepayment of principal or call provisions.
13
Held to Maturity Available for Sale
------------------ --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ --------------------
Due within one year $ - - $ - - $ 8 $ 8
Due after one year to five years 14 14 395 363
Due after five to ten years 54 56 235 247
Due after ten years 6,345 5,882 11,456 11,021
Mutual funds - - - - 1,000 955
------ ------ ------- -------
Total $6,413 $5,952 $13,094 $12,594
(5) 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 September 30, 2009, 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 September 30, 2009, 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. As of the date of this Quarterly Report on Form 10-Q, the FHLB
of Seattle has not reported its results for the quarter ended December 31,
2009.
(6) LOANS
Loans receivable and loans held for sale consisted of the following (dollars
in thousands):
At December 31, At September 30,
2009 2009
Amount Percent Amount Percent
----------------- ------------------
Mortgage loans:
One- to four-family (1) $112,678 19.3% $110,556 18.6%
Multi-family 27,833 4.8 25,638 4.3
Commercial 197,614 33.8 188,205 31.6
Construction and land development 118,552 20.3 139,728 23.5
Land 65,159 11.1 65,642 11.0
-------- ----- -------- -----
Total mortgage loans 521,836 89.3 529,769 89.0
Consumer loans:
Home equity and second mortgage 40,212 6.9 41,746 7.0
Other 9,449 1.6 9,827 1.7
-------- ----- -------- -----
Total consumer loans 49,661 8.5 51,573 8.7
Commercial business loans 13,023 2.2 13,775 2.3
-------- ----- -------- -----
Total loans receivable 584,520 100.0% 595,117 100.0%
======== ===== ======== =====
Less:
Undisbursed portion of
construction loans in process 20,096 31,298
14
Deferred loan origination fees 2,337 2,439
Allowance for loan losses 14,931 14,172
-------- --------
37,364 47,909
-------- --------
Total loans receivable, net $547,156 $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 December 31, At September 30,
2009 2009
Amount Percent Amount Percent
------------------ ------------------
(Dollars in thousands)
Custom and owner / builder const. $ 32,014 27.0% $ 35,414 25.3%
Speculative construction 12,523 10.6 16,959 12.1
Commercial real estate 36,890 31.1 49,397 35.4
Multi-family
(including condominium) 19,084 16.1 18,800 13.5
Land development 18,041 15.2 19,158 13.7
-------- ----- -------- -----
Total construction loans $118,552 100.0% $139,728 100.0%
======== ===== ======== =====
Allowance for Loan Losses
-------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
December 31,
2009 2008
----------------------
(In thousands)
Balance at beginning of period $14,172 $ 8,050
Provision for loan losses 2,600 1,315
Allocated to commitments - - - -
Loans charged off (1,841) (1,199)
Recoveries on loans previously charged off - - - -
------- -------
Net charge-offs (1,841) (1,199)
------- -------
Balance at end of period $14,931 $ 8,166
======= =======
Impaired Loans
--------------
A loan is considered impaired when it is probable that the Bank will be unable
to collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. Impaired loans are measured based on
the fair value of the collateral if the loan is considered collateral
dependent. Impaired loans not considered to be collateral dependent are
measured based on the present value of expected future cash flows.
The categories of non-accrual loans and impaired loans overlap, although they
are not coextensive. The Bank considers all circumstances regarding the loan
and borrower on an individual basis when determining whether an impaired loan
should be placed on non-accrual status, such as the financial strength of the
borrower, the collateral value, reasons for the delay, payment record, the
amount past due and the number of days past due.
15
At December 31, 2009 and September 30, 2009, the Bank had impaired loans
totaling approximately $42.44 million and $47.62 million respectively. At
December 31, 2009 the Bank had nine loans totaling $6.30 million that were 90
days or more past due and still accruing interest. At September 30, 2009 the
Bank had five loans totaling $796,000 that were 90 days or more past due and
still accruing interest. Interest income recognized on impaired loans for the
three months ended December 31, 2009 and September 30, 2009 was $236,000 and
$90,000, respectively. Interest income recognized on a cash basis on
impaired loans for the three months ended December 31, 2009 and September 30,
2009, was $129,000 and $198,000, respectively. The average investment in
impaired loans for the three months ended December 31, 2009 and September 30,
2009 was $45.03 million and $46.32 million respectively. The Bank had $9.80
million in troubled debt restructured loans on non-accrual status and included
in impaired loans at December 31, 2009. The Bank had $1.39 million in
commitments to lend additional funds on these loans. The Bank had $9.49
million in troubled debt restructured loan on non-accrual status and included
in impaired loans at September 30, 2009. The Bank had $1.43 million in
commitments to lend additional funds on these loans.
Following is a summary of information related to impaired loans (in
thousands):
At December 31, At September 30,
2009 2009
------- -------
Impaired loans without a valuation
allowance $31,823 $35,557
Impaired loans with a valuation allowance 10,619 12,065
------- -------
Total impaired loans $42,442 $47,622
======= =======
Valuation allowance related to impaired loans $ 4,082 $ 3,835
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets and restructured loans within the meaning of FASB
guidance on troubled debt restructurings.
At At
December 31, September 30,
2009 2009
------------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 1,722 $ 1,343
Commercial real estate 6,513 5,004
Construction and land development 17,081 17,594
Land 9,036 5,023
Consumer loans 100 258
Commercial business loans 111 65
-------- --------
Total non-accrual loans 34,563 29,287
Accruing loans which are contractually
past due 90 days or more: 6,299 796
-------- --------
Total of non-accrual and
90 days past due loans 40,862 30,083
16
Non-accrual investment securities 2,976 477
OREO and other repossessed items 8,119 8,185
Total non-performing assets (1) $ 45,658 $ 37,949
Troubled debt restructured loans (2) $ 9,799 $ 9,242
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable 7.27% 5.36%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 5.70% 4.28%
Non-performing assets as a percentage
of total assets 6.37% 5.41%
Loans receivable (3) $562,087 $561,380
======== ========
Total assets $716,466 $701,676
======== ========
-----------
(1) Includes non-accrual loans, non-accrual investment securities, and other
real estate owned and otherrepossessed assets. Loans considered impaired are
not included if they are still on accrual status. Loans classified as troubled
debt restructurings are not included if they are still on accrual status.
(2) At December 31, 2009 and 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.
(7) EARNINGS PER COMMON SHARE
Basic earnings per common share ("EPS") 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 EPS is computed by dividing net income (loss) available for common
stock by the weighted average number of common shares and common stock
equivalents for items that are dilutive, net of shares assumed to be
repurchased using the treasury stock method at the average share price for the
Company's common stock during the period. Common stock equivalents arise from
assumed conversion of outstanding stock options 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 December 31, 2009 and 2008, there were 331,094 and 370,294 ESOP
shares, respectively, that had not been allocated.
The following table is in thousands, except for share and per share data:
Three Months Ended December 31,
2009 2008
------------------------
Basic EPS computation
---------------------
Numerator - net income $ 224 $ 361
17
Less: Preferred stock dividend 208 18
Less: Preferred stock discount accretion 51 - -
------ -----
Net income (loss) available
for common shareholders $ (35) $ 343
====== =====
Denominator - weighted average
common shares outstanding 6,709,985 6,570,776
Basic EPS $(0.01) $0.05
Diluted EPS computation
-----------------------
Numerator - net income $ 224 $ 361
Less: Preferred stock dividend 208 18
Less: Preferred stock discount accretion 51 - -
------ -----
Net income (loss) available
for common shareholders $ (35) $ 343
====== =====
Denominator - weighted average
common shares outstanding 6,709,985 6,570,776
Effect of dilutive stock options (1) - - 5,157
Effect of dilutive stock warrants (2) - - 2,147
------ -----
Weighted average common shares
and common stock equivalents 6,709,985 6,578,080
Diluted EPS $(0.01) $0.05
------------------
(1) For the three months ended December 31, 2009 and December 31, 2008,
options to purchase 187,799 and 168,864 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 three months ended December 31, 2009, 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. There were no warrants to
purchase shares of common stock excluded from the computation of dilutive
earnings per share for the three months ended December 31, 2008.
(8) 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 December 31, 2009, options for
249,738 shares are available for future grant under the 2003 Stock Option Plan
and no shares are available for future grant under the 1999 Stock Option Plan.
Following is activity under the plans:
Three Months Ended
18
December 31, 2009
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 all options outstanding at December
31, 2009, as the exercise price of all options outstanding was greater than
the stock's current market value. The aggregate intrinsic value of all
options outstanding at December 31, 2008 was $93,000. The aggregate intrinsic
value of all options that were exercisable at December 31, 2008 was $93,000.
At December 31, 2009, there were 26,000 unvested options with an aggregate
grant date fair value of $34,000, all of which are assumed will vest. There
was no aggregate intrinsic value of unvested options at December 31, 2009 as
the exercise price was greater than the stock's current market value. There
were no options that vested during the three months ended December 31, 2009.
At December 31, 2008, there were 5,668 unvested options, all of which are
assumed will vest. There was no aggregate intrinsic value of unvested options
at December 31, 2008 as the exercise price was greater than the stock's
current market value. There were no options that vested during the three
months ended December 31, 2008.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Three Months Ended
December 31,
-----------
(In thousands)
2009 2008
---- ----
Proceeds from options exercised $ -- $244
Related tax benefit recognized -- 41
Intrinsic value of options exercised -- 40
There were 26,000 options granted during the three months ended December 31,
2009 with an aggregate grant date fair value of $34,000. There were no
options granted during the three months ended December 31, 2008.
The Black-Scholes option pricing model was used in estimating the fair value
of option grants. The weighted average assumptions used were:
Three Months Ended
December 31,
-----------
2009 2008
---- ----
19
Expected Volatility 38% --
Expected term (in years) 5 --
Expected dividend yield 2.64% --%
Risk free interest rate 2.47% --%
Grant date fair value per share $1.29 $ --
Stock Grant Plans
-----------------
The Company adopted the Management Recognition and Development Plan ("MRDP")
in 1998 for the benefit of employees, officers and directors of the Company.
The objective of the MRDP is to retain and attract personnel of experience and
ability in key positions by providing them with a proprietary interest in the
Company.
The MRDP allowed for the issuance to participants of up to 529,000 shares of
the Company's common stock. Awards under the MRDP are made in the form of
restricted shares of common stock that are subject to restrictions on the
transfer of ownership. Compensation expense in the amount of the fair value
of the common stock at the date of the grant to the plan participants is
recognized over a five-year vesting period, with 20% vesting on each of the
five anniversaries from the date of the grant.
There were no MRDP shares granted to officers and directors during the three
months ended December 31, 2009. During the three months ended December 31,
2008 the Company awarded 19,758 MRDP shares to officers and directors. These
shares had a weighted average grant date fair value of $7.01 per share.
At December 31, 2009, there were a total of 42,427 unvested MRDP shares with
an aggregated grant date fair value of $501,000. There were 7,431 MRDP shares
that vested during the three months ended December 31, 2009 with an aggregated
grant date fair value of $81,000. At December 31, 2009, 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:
Three Months Ended December 31,
2009 2008
---------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
(In thousands)
Compensation expense recognized in income $ 1 $ 44 $ 1 $ 46
Related tax benefit recognized -- 15 -- 16
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 $ 5 $ 128 $ 133
2011 7 165 172
2012 7 112 119
2013 7 38 45
2014 7 2 9
---- ----- -----
Total $ 33 $ 445 $ 478
20
(9) 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, Interest-Bearing Deposits in
----------------------------------------------------------------------
Banks, and Federal Funds Sold
-----------------------------
The fair value of financial instruments that are short-term or re-price
frequently and that have little or no risk are considered to have a fair
value equal to the recorded value.
Certificate of Deposits Held for Investment
-------------------------------------------
The fair value of financial instruments that are short-term or re-price
frequently and that have little or no risk are considered to have a fair
value equal to the recorded value.
Investments and Mortgage-Backed Securities
------------------------------------------
The fair value of investments and mortgage-backed securities 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.
Federal Home Loan Bank Stock
----------------------------
FHLB stock is not publically traded, however the recorded value of the
stock holdings approximates the fair value, as the FHLB is required to
pay par value upon re-acquiring this stock.
Loans Receivable
----------------
Fair value of loans at December 31, 2009 is estimated based on comparable
market statistics. Loan portfolio sales reported by the FDIC for the
period October 1, 2007 through December 31, 2009 were used as the basis
for comparable market statistics.
Loans Held for Sale
-------------------
The fair value has been based on quoted market prices obtained from the
Federal Home Loan Mortgage Corporation.
Deposits
--------
The fair value of deposits with no stated maturity date is included at
the amount payable on demand. The fair value of fixed maturity
certificates of deposit is estimated by discounting future cash flows
using the rates currently offered by the Bank for deposits of similar
remaining maturities.
Federal Home Loan Bank Advances
-------------------------------
The fair value of borrowed funds is estimated by discounting the future
cash flows of the borrowings at a rate which approximates the current
offering rate of the borrowings with a comparable remaining life.
Federal Reserve Bank Advances
-----------------------------
The recorded value of Federal Reserve Bank advances approximates the fair
value due to the short-term nature of the borrowings.
Other Borrowings: Repurchase Agreements
---------------------------------------
The recorded value of repurchase agreements approximates fair value due
to the short-term nature of the borrowings.
Accrued Interest
----------------
The recorded amounts of accrued interest approximate fair value.
Mortgage Servicing Rights ("MSRs")
---------------------------------
The fair value of the mortgage servicing rights was determined using a
model, which incorporates the expected life of the loans, estimated cost
to service the loans, servicing fees received and other factors.
The Company calculates MSRs fair value by stratifying MSRs based on the
predominant risk
21
characteristics that include the underlying loan's interest rate, cash
flows of the loan, origination date and term.
Off-Balance-Sheet Instruments
-----------------------------
The fair value of commitments to extend credit was estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the customers. Since the majority of the Company's
off-balance-sheet instruments consist of variable-rate commitments, the
Company has determined they do not have a distinguishable fair value.
The estimated fair value of financial instruments were as follows (in
thousands):
December 31, 2009 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 $ 68,926 $ 68,926 $ 66,462 $ 66,462
Certificates of Deposit, held
for investment 14,442 14,442 3,251 3,251
Investments and mortgage-backed
securities 19,007 18,546 20,558 19,686
FHLB stock 5,705 5,705 5,705 5,705
Loans receivable 544,222 348,833 546,578 357,422
Loans held for sale 2,934 2,934 630 648
Accrued interest receivable 2,997 2,997 2,805 2,805
Mortgage servicing rights 2,691 2,744 2,618 2,650
Financial Liabilities
Deposits $541,013 $542,559 $505,661 $507,465
FHLB advances - long term 75,000 78,054 95,000 99,414
Federal Reserve Bank advances -
short term 10,000 10,000 10,000 10,000
Other borrowings: repurchase
agreements 622 622 777 777
Accrued interest payable 841 841 965 965
----------------------
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the
fair value of the Company's financial instruments will change when interest
rate levels change and that change may either be favorable or unfavorable to
the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk.
However, borrowers with fixed interest rate obligations are less likely to
prepay in a rising interest rate environment and more likely to prepay in a
falling interest rate environment. Conversely, depositors who are receiving
fixed interest rates are more likely to withdraw funds before maturity in a
rising interest rate environment and less likely to do so in a falling
interest rate environment. Management monitors interest rates and maturities
of assets and liabilities, and attempts to minimize interest rate risk by
adjusting terms of new loans, and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
Accounting guidance regarding fair value measurements defines fair value and
establishes a framework for measuring fair value in accordance with GAAP.
Fair value is the exchange price that would be received for an asset or paid
to transfer a liability in an orderly transaction between market participants
on the measurement date. The following definitions describe the levels of
inputs that may be used to measure fair value:
22
Level 1: Quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access
at the measurement date.
Level 2: Significant other observable inputs other than quoted prices
included within Level 1, such as quoted prices in markets that are not
active, and inputs other than quoted prices that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company's own
assumptions about the assumptions market participants would use in
pricing an asset or liability based on the best information available in
the circumstances.
The following table summarizes the balances of assets and liabilities measured
at fair value on a recurring basis at December 31, 2009 (in thousands):
Fair Value
----------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Available for Sale Securities
-----------------------------
Mutual Funds $ 955 $ - - $ - - $ - -
Mortgage-backed securities - - 11,639 - - 10
------ ------- ------ ------
Total $ 955 $11,639 $ - - $ 10
The following table summarizes the balance of assets and liabilities measured
at fair value on a nonrecurring basis at December 31, 2009, and the total
losses resulting from these fair value adjustments for the three months ended
December 31, 2009 (in thousands):
Fair Value
----------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired Loans (1) $ - - $ - - $ 7,100 $ 1,841
Mortgage-backed securities -
HTM (2) - - 1,140 - - 278
OREO and other repossessed
items (3) - - - - 7,446 31
------- ------ ------- -------
Total $ - - $1,140 $14,546 $ 2,150
---------------
(1) The loss represents charge offs on collateral dependent loans for fair
value adjustments based on the fair value of the collateral. A loan is
considered to be impaired when, based on current information and events, it is
probable the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The specific reserve for
collateral dependent impaired loans was based on the fair value of the
collateral less estimated costs to sell. The fair value of collateral was
determined based primarily on appraisals. In some cases, adjustments were
made to the appraised values due to various factors including age of the
appraisal, age of comparables included in the appraisal, and known changes in
the market and in the collateral. When significant adjustments were based on
unobservable inputs, the resulting fair value measurement has been categorized
as Level 3 measurement.
(2) The loss represents OTTI credit-related charges on held-to-maturity
mortgage-backed securities.
(3)The Company's OREO and other repossessed items is initially recorded at
fair value less estimated costs to sell. This amount becomes the property's
new basis. Fair value was generally determined by management based on a
number of factors, including third-party appraisals of fair value in an
orderly sale. Estimated costs to sell were based on standard market factors.
The valuation of OREO and other repossessed items is subject to significant
external and internal judgment. Management periodically reviews the recorded
value to determine
23
whether the property continues to be recorded at the lower of its recorded
book value or fair value, net of estimated costs to sell.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued FAS 168, "The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles
replacement of FAS 162" (the "Codification"). The Codification supersedes all
existing accounting and reporting standards other than the rules of the
Securities and Exchange Commission (the "SEC"). Rules and interpretive
releases of the SEC under authority of federal securities laws are also
sources of authoritative guidance for SEC registrants. Updates to the
Codification are being issued as Accounting Standards Updates, which will also
provide background information about the guidance, and provide the basis for
conclusions on changes in the Codification. The Codification became effective
for the Company on July 1, 2009 and did not have a material impact on the
Company's consolidated financial statements.
In September 2006, the FASB issued a statement on fair value measurements,
which defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurements. This
statement expands other accounting pronouncements that require or permit fair
value measurements. This statement is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued a staff position, which delayed the effective
date of the September 2006 statement on fair value measurements for certain
nonfinancial assets and nonfinancial liabilities, to fiscal years beginning
after November 15, 2008, and interim periods within those years. The delay
was intended to allow additional time to consider the effect of various
implementation issues that arose, or that may arise, from the application of
the guidance. The Company elected to apply the deferral provisions in the
February 2008 staff position and therefore only partially adopted the
provisions of the September 2006 statement on fair value measurements on
October 1, 2008. The Company's partial adoption of the September 2006
statement on fair value measurements on October 1, 2008 did not have a
material impact on the Company's consolidated financial statements. The
Company more fully adopted the provisions of the fair value guidance with
respect to certain nonfinancial instruments on October 1, 2009 and this
adoption did not have a material impact on the Company's consolidated
financial statements. For further information, see Note 9 of the Notes to
Condensed Consolidated Statements included herein.
In June 2008, the FASB issued a staff position on determining whether
instruments granted in share-based payment transactions are participating
securities. The guidance clarifies that all outstanding unvested share- based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are
required to be included in computing basic and diluted earnings per common
share under the two-class method. This staff position was effective for
financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those years. The adoption of this staff position
did not have a material impact on the Company's consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three months
ended December 31, 2009. 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 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
24
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
the MOUs; 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; costs and effects of litigation, including settlements and
judgments; 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 polices and principles, including the interpretation of regulatory
capital or other rules; 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 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 operating and
stock price performance.
25
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 December 31, 2009,
the Company had total assets of $716.47 million and total shareholders' equity
of $87.21 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 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. The results of the
Company's operations may also be affected by local and general economic
conditions. Changes in the levels of interest rates affect the Company's net
interest income. Management strives to match the re-pricing characteristics
of the interest earning assets and interest bearing liabilities to protect net
interest income from changes in market interest rates and changes in the shape
of the yield curve.
The provision for loan losses is dependent on changes in the loan portfolio
and management's assessment of the collectability of the loan portfolio as
well as prevailing economic and market conditions. The provision for loan
losses reflects the amount that the Company believes is adequate to cover
potential credit losses in its loan portfolio. Additionally, net income is
affected by non-interest income and non-interest expenses. For the three
month period ended December 31, 2009, non-interest income consisted primarily
of service charges and fees on deposit accounts, gain on sale of loans,
increase in the cash surrender value of life insurance, servicing income and
other operating income. Operating expenses consisted primarily of salaries
and employee benefits, premises and equipment, advertising, ATM related
expenses, postage and courier, professional fees, state and local taxes and
deposit insurance premiums.
Results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities. Net interest
income 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 interest bearing liabilities. Other income
and other expenses are impacted by growth of operations and growth in the
number of loan and deposit accounts.
The Bank is a community-oriented bank which has traditionally offered a
variety of savings products to its retail customers while concentrating its
lending activities on real estate mortgage loans. Lending activities have
been focused primarily on the origination of loans secured by real estate,
including an emphasis on residential construction loans, one- to four-family
residential loans, multi-family loans, commercial real estate loans and land
loans. The Bank originates adjustable-rate residential mortgage loans that do
not qualify for sale in the secondary market. The Bank also originates
commercial business loans and in 1998 established a business banking division
to increase the origination of these 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 Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level sufficient to provide for probable loan losses based on evaluating known
and inherent risks in the portfolio. The allowance is based
26
upon management's comprehensive analysis of the pertinent factors underlying
the quality of the loan portfolio. These factors include changes in the
amount and composition of the loan portfolio, actual loss experience, current
economic conditions, and detailed analysis of individual loans for which the
full collectability may not be assured. The detailed analysis includes
methods to estimate the fair value of loan collateral and the existence of
potential alternative sources of repayment. The appropriate allowance for
loan loss level is estimated based upon factors and trends identified by
management at the time consolidated financial statements are prepared.
While the Company believes it has established its existing allowance for loan
losses in accordance with GAAP, there can be no assurance that regulators, in
reviewing the Company's loan portfolio, will not request the Company to
significantly increase or decrease its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed elsewhere in this document. Although management believes
the level of the allowance as of December 31, 2009 was adequate to absorb
probable losses inherent in the loan portfolio, a decline in local economic
conditions, results of examinations by the Company's or the Bank's regulators
or other factors, could result in a material increase in the allowance for
loan losses and may adversely affect the Company's financial condition and
results of operations.
Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") are capitalized
when acquired through the origination of loans that are subsequently sold with
servicing rights retained and are amortized to servicing income on loans sold
in proportion to and over the period of estimated net servicing income. The
value of MSRs at the date of the sale of loans is determined based on the
discounted present value of expected future cash flows using key assumptions
for servicing income and costs and prepayment rates on the underlying loans.
The estimated fair value is periodically evaluated for impairment by comparing
actual cash flows and estimated cash flows from the servicing assets to those
estimated at the time servicing assets were originated. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSRs portfolio. The Company's
methodology for estimating the fair value of MSRs is highly sensitive to
changes in assumptions. For example, the determination of fair value uses
anticipated prepayment speeds. Actual prepayment experience may differ and
any difference may have a material effect on the fair value. Thus, any
measurement of MSRs' fair value is limited by the conditions existing and
assumptions as of the date made. Those assumptions may not be appropriate if
they are applied at different times.
OTTIs (Other-Than-Temporary Impairments) in the Fair Value of Investment
Securities. Unrealized investment securities losses on available for sale and
held to maturity securities are evaluated at least quarterly to determine
whether declines in value should be considered "other than temporary" and
therefore be subject to immediate loss recognition through earnings for the
portion related to credit losses. Although these evaluations involve
significant judgment, an unrealized loss in the fair value of a debt security
is generally deemed to be temporary when the fair value of the security is
less than the recorded value primarily as a result of changes in interest
rates, when there has not been significant deterioration in the financial
condition of the issuer, and it is more likely than not the Company will not
have to sell the security before recovery of its cost basis. An unrealized
loss in the value of an equity security is generally considered temporary when
the fair value of the security is less than the recorded value primarily as a
result of current market conditions and not a result of 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.
27
Goodwill. Goodwill is initially recorded when the purchase price paid for an
acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired and liabilities assumed. Goodwill is presumed
to have an indefinite useful life and is analyzed annually for impairment. An
annual test is performed during the third quarter of each fiscal year, or more
frequently if indicators of potential impairment exist, to determine if the
recorded goodwill is impaired. If the fair value of the Company's sole
reporting unit exceeds the recorded value, goodwill is not considered impaired
and no additional analysis is necessary.
One of the circumstances evaluated when determining if an impairment test of
goodwill is needed more frequently than annually is the extent and duration
that the Company's market capitalization (total common shares outstanding
multiplied by current stock price) is less than the total equity applicable to
common shareholders. During the quarter ended March 31, 2009, the Company's
market capitalization decreased to a level that required a goodwill impairment
test prior to the annual test. Therefore, the Company engaged a third party
firm to perform an interim test for goodwill impairment during the quarter
ended March 31, 2009. The test concluded that recorded goodwill was not
impaired. The Company updated the interim test for goodwill impairment
internally during the quarter ended June 30, 2009 and concluded that recorded
goodwill was not impaired. As of December 31, 2009, 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 in lieu of foreclosure, and are recorded initially at the fair value of the
properties less estimated costs of disposal. Costs relating to the
development and improvement of the properties or assets are capitalized while
costs relating to holding the properties or assets are expensed. Valuations
are periodically performed by management, and a charge to earnings is recorded
if the recorded value of a property exceeds its estimated net realizable
value.
Comparison of Financial Condition at December 31, 2009 and September 30, 2009
The Company's total assets increased by $14.79 million, or 2.1%, to $716.47
million at December 31, 2009 from $701.68 million at September 30, 2009. The
increase was primarily attributable to an increase in cash equivalents and
short-term CDs held for investment.
Net loans receivable was relatively unchanged at $547.16 million at December
31, 2009 as compared to $547.21 million at September 30, 2009. A significant
decrease in construction and land development loan balances and an increase in
the allowance for loan losses during the three months ended December 31, 2009
were partially offset by an increase in commercial real estate loan balances.
Total deposits increased by $35.35 million, or 7.0%, to $541.01 million at
December 31, 2009 from $505.66 million at September 30, 2009, primarily as a
result of increases in CD account balances and N.O.W. checking account
balances.
Shareholders' equity increased by $7,000, to $87.21 million at December 31,
2009 from $87.20 million at September 30, 2009.
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 $13.66 million, or 19.6%, to $83.37 million at
December 31, 2009 from $69.71 million at September 30, 2009. The increase in
cash equivalents and short-term CDs was primarily due to the Company's
decision to increase its liquidity position.
28
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $1.55 million, or 7.5%, to $19.01
million at December 31, 2009 from $20.56 million at September 30, 2009. The
decrease was primarily as a result of regular amortization and prepayments on
mortgage-backed securities and OTTI charges recorded on private label
residential mortgage-backed securities. The securities on which the OTTI
charges were recognized were acquired from the in-kind redemption of the
Bank's investment in the AMF family of mutual funds in June 2008. For
additional information, see Note 3 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Loans: Net loans receivable decreased by $52,000, or 0.01% to $547.16 million
at December 31, 2009 from $547.21 million at September 30, 2009. The decrease
in the portfolio was primarily a result of a $9.97 million decrease in
construction loans (net of undisbursed portion of construction loans in
process), a $1.91 million decrease in consumer loans, a $752,000 decrease in
commercial business loans, a $483,000 decrease in land loans and a $759,000
increase in the allowance for loan losses. These decreases to net loans
receivable were partially offset by a $9.41 million increase in commercial
real estate loans, a $2.20 million increase in multi-family loans and a $2.12
million increase in one-to-four family loans.
Loan originations increased to $54.01 million for the three months ended
December 31, 2009 from $43.94 million for the three months ended December 31,
2008. The Bank continued to sell longer-term fixed rate loans for asset
liability management purposes and to generate non-interest income. The Bank
sold fixed rate one- to four-family mortgage loans totaling $18.85 million for
the three months ended December 31, 2009 compared to $10.54 million for the
three months ended December 31, 2008.
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 $95,000, or 0.5%,
to $17.95 million at December 31, 2009 from $18.05 million at September 30,
2009. The decrease was primarily a result of accumulated depreciation.
Other Real Estate Owned ("OREO"): OREO and other repossessed assets totaled
$8.12 million at December 31, 2009 and consisted of 23 individual properties
and two other repossessed assets representing 19 relationships. The
properties consisted of two land development projects totaling $3.03 million,
nine single family homes totaling $2.76 million, a nine unit condominium
property with a balance of $1.06 million, nine land parcels totaling $631,000
and two commercial real estate properties totaling $616,000.
Goodwill and CDI: The value of goodwill at $5.65 million at December 31, 2009
remained unchanged from September 30, 2009. The amortized value of the CDI
decreased to $707,000 at December 31, 2009 from $755,000 at September 30,
2009. The $48,000 decrease was attributable to scheduled amortization of the
CDI.
Deposits: Deposits increased by $35.35 million, or 7.0%, to $541.01 million at
December 31, 2009 from $505.66 million at September 30, 2009. The increase
was primarily a result of a $16.15 million increase in N.O.W. checking account
balances, a $14.39 million increase in CD account balances and a $3.09 million
increase in savings account balances.
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
decreased by $20.16 million, or 19.1%, to $85.62 million at December 31, 2009
from $105.78 million at September 30, 2009 as the Bank used a portion of its
liquid assets to repay maturing FHLB advances. For additional information,
see "Borrowing Maturity Schedule" set forth below.
29
Shareholders' Equity: Total shareholders' equity increased by $7,000, to
$87.21 million at December 31, 2009 from $87.20 million at September 30, 2009.
Non-performing Assets: Non-performing assets consist of non-accrual loans,
non-accrual investment securities, and OREO and other repossessed assets. At
December 31, 2009, nine loans totaling $6.30 million were 90 days or more past
due and still accruing interest. At September 30, 2009, five loans totaling
$796,000 were 90 days or more past due and still accruing interest.
Non-performing assets to total assets increased to 6.37% at December 31, 2009
from 5.41% at September 30, 2009, as non-accrual loans increased by $5.27
million and non-accrual investment securities increased by $2.50 million.
Partially offsetting these increases to non-performing assets was a $66,000
decrease in OREO and other repossessed assets.
Total non-accrual loans of $34.56 million at December 31, 2009 were comprised
of 64 loans and 45 credit relationships. Included in these non-accrual loans
were:
* 23 land loans totaling $9.04 million (of which the largest had a
balance of $2.49 million)
* Seven land development loans totaling $7.76 million (of which the
largest had a balance of $2.25 million)
* Six commercial real estate loans totaling $6.51 million (of which the
largest had a balance $3.48 million)
* Two condominium construction loans totaling $5.72 million (of which
the largest had a balance of $3.24 million)
* Eight single family speculative loans totaling $2.94 million (of which
the largest had a balance of $783,000)
* Seven single family home loans totaling $1.72 million (of which the
largest had a balance of $752,000)
* Three one-to-four family owner/builder construction loans totaling
$662,000
* Four consumer loans totaling $111,000
* Four second mortgage loans totaling $100,000.
The Company had net charge-offs totaling $1.84 million for the three months
ended December 31, 2009 compared to $1.20 million for the three months ended
December 31, 2008. The charge-offs during the three months ended December 31,
2009 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:
* $502,000 on a condominium construction loan
* $350,000 on seven land loans
* $324,000 on three land development loans
* $305,000 on two commercial real estate loans
* $200,000 on four single family speculative construction loans
* $109,000 on four home equity loans
* $35,000 on a single family construction loan
* $10,000 on two single family home loans
* $6,000 on a a secured consumer loan
For additional information, see Note 5 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Deposit Breakdown
-----------------
The following table sets forth the composition of the Bank's deposit balances.
At At
December 31, 2009 September 30, 2009
----------------- ------------------
(In thousands)
30
Non-interest bearing $ 50,525 $ 50,295
N.O.W. checking 133,510 117,357
Savings 61,697 58,609
Money market accounts 63,965 62,478
CDs under $100 136,838 135,242
CDs $100 and over 90,478 77,926
CDs - brokered 4,000 3,754
-------- --------
Total deposits $541,013 $505,661
======== ========
Borrowing Maturity Schedule
---------------------------
The Bank has short- and long-term borrowing lines with the FHLB of Seattle
with total credit on the lines equal to 30% of the Bank's total assets,
limited by available collateral. Borrowings are considered short-term when
the original maturity is less than one year. FHLB advances consisted of the
following:
At December 31, At September 30,
2009 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 December 31, 2009 was 4.08%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2010 $ - -
2011 20,000
2012 10,000
2013 - -
2014 - -
Thereafter 45,000
-------
Total $75,000
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
The Bank also maintains a short-term borrowing line with the Federal Reserve
Bank with total credit based on eligible collateral. As of December 31, 2009,
the Bank had a borrowing line capacity of $10.82 million of which, one note in
the amount of $10.00 million was outstanding. The borrowing matures on
January 4, 2010 and bears an interest rate of 0.50%. As of September 30, 2009
the Bank had $10.00 million outstanding on the borrowing line with the Federal
Reserve Bank.
The Bank has also been approved for a $10.00 million overnight borrowing line
with Pacific Coast Bankers Bank ("PCBB"). The borrowing line may be reduced
or withdrawn at any time and must be collateralized. As of December 31, 2009
and September 30, 2009, the Bank did not have any outstanding advances on this
31
borrowing line. As of December 31, 2009 and September 30, 2009, the Bank did
not have any collateral pledged for this borrowing line.
Comparison of Operating Results for the Three Months Ended December 31, 2009
and 2008
The Company reported net income of $224,000 for the quarter ended December 31,
2009 compared to net income of $361,000 for the quarter ended December 31,
2008. Income available to common shareholders after adjusting for the
preferred stock dividend and the preferred stock discount accretion was a loss
of $(35,000) for the quarter ended December 31, 2009 compared to income of
$343,000 for the quarter ended December 31, 2008. The decrease was primarily
a result of an increased provision for loan losses, which was partially offset
by increased non-interest income. Diluted earnings per common share decreased
by 120.0% to a loss of $(0.01) for the quarter ended December 31, 2009 from
$0.05 for the quarter ended December 31, 2008.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended December 31, 2009 decreased by
$137,000, or 38.0%, to $224,000 from $361,000 for the quarter ended December
31, 2008. Income available to common shareholders after adjusting for
preferred stock dividends of $208,000 and preferred stock discount accretion
of $51,000 was a loss of $(35,000), or $(0.01) per diluted common share for
the quarter ended December 31, 2009, compared to net income available to
common shareholders of $343,000, or $0.05 per diluted common share for the
quarter ended December 31, 2008.
The $0.06 decrease in diluted earnings per common share was primarily the
result of a $1.29 million ($848,000 net of income tax - $0.13 per diluted
common share) increase in the provision for loan losses, a $73,000 ($48,000
net of income tax - $0.01 per diluted common share) decrease in net interest
income and a $241,000 increase in preferred stock dividends and preferred
stock accretion which decreased earnings by approximately $0.03 per diluted
common share. These decreases to diluted earnings per common share were
partially offset by a $1.06 million ($701,000 net of income tax - $0.11 per
diluted common share) increase in non-interest income.
Net Interest Income: Net interest income decreased by $73,000, or 1.1%, to
$6.39 million for the quarter ended December 31, 2009 from $6.46 million for
the quarter ended December 31, 2008. The decrease in net interest income was
primarily attributable to an increased level of non-accrual loans and an
increased level of relatively low yielding cash equivalents and other liquid
assets.
Total interest and dividend income decreased by $684,000 or 6.8%, to $9.34
million for the quarter ended December 31, 2009 from $10.03 million for the
quarter ended December 31, 2008 as the yield on interest earning assets
decreased to 5.76% from 6.50%. Total average interest earning assets
increased by $31.44 million to $648.72 million for the quarter ended December
31, 2009 from $617.28 million for quarter ended December 31, 2008. Total
interest expense decreased by $611,000, or 17.2%, to $2.95 million for the
quarter ended December 31, 2009 from $3.56 million for the quarter ended
December 31, 2008 as the average rate paid on interest bearing liabilities
decreased to 2.09% for the quarter ended December 31, 2009 from 2.67% for the
quarter ended December 31, 2008. Total average interest bearing liabilities
increased by $29.74 million to $560.44 million for the quarter ended December
31, 2009 from $530.70 million for the quarter ended December 31, 2008. The
net interest margin decreased to 3.94% for the quarter ended December 31, 2009
from 4.19% for the quarter ended December 31, 2008. The margin compression
was primarily attributable to the reversal of interest income on loans placed
on non-accrual status during the quarter ended December 31, 2009 and an
increased level of liquid assets with lower yields. The reversal of interest
income on loans placed on non-accrual status during the quarter ended December
31, 2009 reduced the net interest margin by approximately 22 basis points.
32
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the net interest income on the Company. Information is provided with respect
to the (i) effects on interest income attributable to change in volume
(changes in volume multiplied by prior rate), and (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior
volume), and (iii) the net change (sum of the prior columns). Changes in
rate/volume have been allocated to rate and volume variances based on the
absolute values of each.
Three months ended December 31, 2009
compared to three months
ended December 31, 2008
increase (decrease)
due to
------
Rate Volume Net Change
---- ------ ----------
(In thousands)
Interest-earning assets:
Loans receivable (1) $(447) $ (58) $(505)
Investments and
mortgage-backed securities (71) (125) (196)
FHLB stock and equity securities (1) - - (1)
Federal funds sold (12) (12) (24)
Interest-bearing deposits (10) 52 42
----- ----- -----
Total net increase (decrease) in
income on interest-earning assets $(541) $(143) $(684)
Interest-bearing liabilities:
Savings accounts 1 7 8
N.O.W. accounts 87 98 185
Money market accounts (119) 12 (107)
CD accounts (530) 25 (505)
Long-term borrowings (39) (153) (192)
----- ----- -----
Total net decrease in expense
on interest bearing liabilities $(600) $ (11) $(611)
Net increase (decrease) in
net interest income $ 59 $(132) $ (73)
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
Provision for Loan Losses: The provision for loan losses increased $1.29
million, or 97.7%, to $2.60 million for the quarter ended December 31, 2009
from $1.32 million for the quarter ended December 31, 2008. The increased
provision for the three months ended December 31, 2009 was primarily as a
result of an increase in the level of net charge-offs, an increase in the
level of potential principal impairment on non-performing loans, an increase
in the level of loans classified as substandard and uncertainties in real
estate values in certain market areas of the Pacific Northwest.
The Bank has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Bank performs an analysis
that considers pertinent factors underlying the quality of the loan portfolio.
The factors include changes in the amount and composition of the loan
portfolio, historic loss experience for various loan segments, changes in
economic conditions, delinquency rates, a detailed analysis of
33
impaired loans, and other factors to determine an appropriate level of
allowance for loan losses. Management's analysis for the three months ended
December 31, 2009, also placed greater emphasis on the Bank's construction and
land development loan portfolio and the effect of various factors such as
geographic and loan type concentrations. Based on its comprehensive analysis,
management believes the allowance for loan losses of $14.93 million at
December 31, 2009 (2.66% of loans receivable and 43.2% of non-performing
loans) adequate to provide for probable losses based on an evaluation of known
and inherent risks in the loan portfolio at that date. Impaired loans are
subjected to an impairment analysis to determine an appropriate reserve amount
to be held against each loan. The aggregate impairment amount determined at
December 31, 2009 was $4.08 million. The allowance for loan losses was $8.17
million (1.44% of loans receivable and 60.4% of non-performing loans) at
December 31, 2008. The Company had net charge-offs of $1.84 million during
the three months ended December 31, 2009 and net charge-offs of $1.20 million
for the three months ended December 31, 2008.
Non-accrual and 90 day past due loans increased by $5.27 million to $34.56
million at December 31, 2009 from $29.29 million at September 30, 2009.
Non-accrual loans were comprised of 64 loans and 45 credit relationships.
Management's evaluation determined that there was potential principal
impairment of $4.08 million on these loans. 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 increased by $1.06 million, or
117.3%, to $1.97 million for the quarter ended December 31, 2009 from $906,000
for the quarter ended December 31, 2008. The increase was primarily due to an
$786,000 decrease in net OTTI charges, a $168,000 increase in gain on sale of
loans and a $74,000 increase in ATM transaction fees. The increased income
from loan sales was primarily a result of an increase in the dollar value of
residential mortgage loans sold in the secondary market during the quarter
ended December 31, 2009. The sale of fixed rate one-to four-family mortgage
loans totaled $18.9 million for the quarter ended December 31, 2009 compared
to $10.5 million for the quarter ended December 31, 2008. The increase in ATM
transaction fees was attributable to the increase in transaction accounts.
Non-interest Expense: Total non-interest expense decreased by $40,000, or
0.7%, to $5.50 million for the quarter ended December 31, 2009 from $5.54
million for the quarter ended December 31, 2008. The decrease was primarily
attributable to decreases in salaries, employee related expenses and
advertising. A change in the Bank's vacation accrual policy reduced salaries
and employee benefits by approximately $164,000 during the quarter ended
December 31, 2009. These decreases were partially offset by increases in FDIC
insurance expense, professional fees and premises and equipment expenses. The
Company's efficiency ratio decreased to 65.77% for the quarter ended December
31, 2009 from 75.13% for the quarter ended December 31, 2008.
34
Provision for Income Taxes: The provision for income taxes decreased by
$119,000 to $38,000 for the quarter ended December 31, 2009 from $157,000 for
the quarter ended December 31, 2008, primarily due to a decrease in income
before income taxes. The Company's effective tax rate was 14.5% for the
quarter ended December 31, 2009 and 30.31% for the quarter ended December 31,
2008. The decrease in the effective tax rate was primarily attributable to an
increased percentage of income before taxes that was non-taxable.
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 three months ended December 31, 2009. The
condensed consolidated statement of cash flows includes operating, investing
and financing categories. Operating activities include net income, which is
adjusted for non-cash items, and increases or decreases in cash due to changes
in assets and liabilities. Investing activities consist primarily of proceeds
from maturities and sales of securities, purchases of securities, and the net
change in loans. Financing activities present the cash flows associated with
the Company's deposit accounts, other borrowings and stock related
transactions.
The Company's total cash equivalents increased by $2.5 million, or 3.76% to
$68.93 million at December 31, 2009 from $66.46 million at September 30, 2009.
The increase in liquid assets was primarily reflected in an increase in both
interest bearing deposits in other banks and cash and due from financial
institutions.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds for loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2009, 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 14.74%. 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 $109.57 million was available for
additional borrowings at December 31, 2009. The Bank also maintains a
short-term borrowing line with the Federal Reserve Bank with total credit
based on eligible collateral. At December 31, 2009, the Bank had $10.00
million outstanding on this borrowing line. The Bank has also been approved
for a $10.00 million overnight borrowing line with PCBB, which must be
collateralized. At December 31, 2009, 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 December 31,
2009, the Bank had loan commitments totaling $44.15 million and undisbursed
loans in process totaling $20.05 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 December 31, 2009 totaled
$112.15
35
million. Historically, the Bank has been able to retain a significant amount
of its non-brokered certificates of deposit as they mature. At December 31,
2009, the Bank's brokered deposits consisted of $4.00 million in reciprocal
brokered certificate of deposit accounts exchanged through the Certificate of
Deposits Account Registry Service ("CDARS") program.
Capital Resources
-----------------
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 4.0% to 5.0%, (ii) a ratio of Tier 1
capital to risk weighted assets of at least 4.0% and (iii) a ratio of total
capital to risk weighted assets of at least 8.0%. The Bank is currently
required to maintain a well capitalized status and a Tier 1 leverage capital
ratio of at least 10.0% under terms of a Memorandum of Understanding with the
FDIC and the Washington Department of Financial Institutions, Division of
Banks (the "Bank MOU"). For additional information regarding the Bank MOU,
see "Item 1A, Risk Factors The Company and the Bank are required to comply
with the terms of separate memorandums of understanding issued by their
respective regulators and lack of compliance could result in additional
regulatory actions."
At December 31, 2009, 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 December 31, 2009 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 $83,162 11.95% $27,828 4.00% N/A N/A
Timberland Bank (1) 70,184 10.24 68,537 10.00 $68,537 10.00%
Tier 1 risk adjusted capital:
Consolidated 83,162 14.63 22,738 4.00 N/A N/A
Timberland Bank (1) 70,184 12.39 33,975 6.00 33,975 6.00
Total risk based capital
Consolidated 90,364 15.90 45,475 8.00 N/A N/A
Timberland Bank (1) 77,359 13.66 56,624 10.00 56,624 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 reflect 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.
36
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended
-----------------------------------------
December 31, September 30, December 31,
2009 2009 2008
PERFORMANCE RATIOS:
Return (loss) on average assets (1) 0.13% (0.16)% 0.22%
Return (loss) on average equity (1) 1.02% (1.20)% 1.88%
Net interest margin (1) 3.94% 3.93% 4.19%
Efficiency ratio 65.77% 70.14% 75.13%
At At At
December 31, September 30, December 31,
2009 2009 2008
----------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $34,563 $29,287 $13,520
Non-performing investment securities 2,976 477 - -
OREO & other repossessed assets 8,119 8,185 1,266
------- ------- -------
Total non-performing assets (2) $45,658 $37,949 $14,786
Non-performing assets to total assets (2) 6.37% 5.41% 2.20%
Allowance for loan losses to non-
performing loans 43% 48% 60%
Restructured loans (3) $ 9,799 $ 9,492 $ - -
Past due 90 days and still accruing $ 6,299 $ 796 $ --
Book Values:
Book value per common share $ 10.16 $ 10.17 $ 10.58
Tangible book value per common share (4) $ 9.26 $ 9.26 $ 9.65
---------------
(1) Annualized
(2) Non-performing assets include non-accrual loans, non-accrual investment
securities, other real estate owned and other repossessed assets
(3) At December 31, 2009 and September 30, 2009 all troubled debt
restructured loans were on non-accrual status and included in total
non-performing assets.
(4) Calculation subtracts goodwill and core deposit intangible from the
equity component
Three Months Ended
-----------------------------------------
December 31, September 30, December 31,
2009 2009 2008
AVERAGE BALANCE SHEET:
Average total loans $561,378 $563,159 564,782
Average total interest earning
assets (1) 648,716 633,803 617,284
Average total assets 701,614 685,534 663,339
Average total interest bearing
deposits 474,898 444,241 430,259
Average FHLB advances & other
borrowings 85,537 95,668 100,436
Average shareholders' equity 87,756 89,164 76,702
----------------
(1) Includes loans on non-accrual status
37
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 December 31, 2009 the
Company's disclosure controls and procedures were effective in ensuring
that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: There have been no changes in our internal
control over financial reporting (as defined in 13a-15(f) of the Exchange
Act) that occurred during the quarter ended December 31, 2009, that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. The Company continued,
however, to implement suggestions from its internal auditor and
independent auditors to strengthen existing controls. The Company does
not expect that its disclosure controls and procedures and internal
controls over financial reporting will prevent all errors and fraud. A
control procedure, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any control procedure
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; as over
time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the 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
38
Listed below are updates to the risk factors provided in the Company's Annual
Report of Form 10-K for the fiscal year ended September 30, 2009 ("2009 Form
10-K"). These updates should be read in conjunction with the 2009 Form 10-K.
The Company and the Bank are required to comply with the terms of separate
memorandums of understanding issued by their respective regulators and lack of
compliance could result in additional regulatory actions.
As previously disclosed in the 2009 Form 10-K, in December 2009, the
Federal Deposit Insurance Corporation ("FDIC") and the Washington State
Department of Financial Institutions, Division of Banks ("Division")
determined that the Bank required supervisory attention and December 22, 2009
reached 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; an 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
"FRB MOU"). Under the terms of the FRB 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 FRB MOU, the Company is required to
provide the FRB with progress reports regarding its compliance with the
provisions of the FRB MOU.
The Bank MOU and the FRB 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 FRB MOU and the
Bank MOU, respectively. Although compliance will be determined by the FDIC,
Division and FRB, management believes that the Company and the Bank will
comply in all material respects with the provisions of the MOU. Any of these
regulators may determine, however, in their sole discretion that the issues
raised by the FRB 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 limitations on the Company's business and
negatively
39
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
---------------------------------------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
-----------------------------------------
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
None to be reported
Item 5. Other Information
---------------------------
None to be reported.
Item 6. Exhibits
------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Certificate of Designation relating to the Company's Fixed Rate
Cumulative Perpetual Preferred Stock Series A (2)
3.3 Bylaws of the Registrant (1)
3.4 Amendment to Bylaws (3)
4.1 Warrant to purchase shares of Company's common stock dated
December 23, 2008 (2)
4.2 Letter Agreement (including Securities Purchase Agreement
Standard Terms attached as Exhibit A) dated December 23, 2008
between the Company and the United States Department of the
Treasury (2)
10.1 Employee Severance Compensation Plan, as revised (4)
10.2 Employee Stock Ownership Plan (4)
10.3 1999 Stock Option Plan (5)
10.4 Management Recognition and Development Plan (5)
10.5 2003 Stock Option Plan (6)
10.6 Form of Incentive Stock Option Agreement (7)
10.7 Form of Non-qualified Stock Option Agreement (7)
10.8 Form of Management Recognition and Development Award Agreement
(7)
10.9 Employment Agreement between the Company and the Bank and
Michael R. Sand (8)
10.10 Employment Agreement between the Company and the Bank and Dean
J. Brydon (8)
10.11 Form of Compensation Modification Agreements (2)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
------------------
(1) Incorporated by reference to the Registrant's Registration
Statement of Form S-1 (333- 35817).
40
(2) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on December 23, 2008.
(3) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002.
(4) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997; and to the
Registrant's Current Report on Form 8-K dated April 13, 2007, and
to the Registrant's Current Report on Form 8-K dated December 18,
2007.
(5) Incorporated by reference to the Registrant's 1999 Annual Meeting
Proxy Statement dated December 15, 1998.
(6) Incorporated by reference to the Registrant's 2004 Annual Meeting
Proxy Statement dated December 24, 2003.
(7) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2005.
(8) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated April 13, 2007.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: February 5, 2010 By: /s/ Michael R. Sand
----------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 2010 By: /s/ Dean J. Brydon
----------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
42
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
43