UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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
(Address of principal executive office)
98550
(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 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 August 12, 1998
----- ------------------------------------------------
common stock, 6,101,134 (excludes 511,366 unearned ESOP shares)
$.01 par value
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements (unaudited) 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and June 30, 1998
(unaudited)
ASSETS
September 30, June 30,
1997 1998
--------------------------------
Cash and due from financial institutions:
Noninterest bearing deposits $ 4,996,116 $ 5,307,991
Interest bearing deposits 6,450,339 31,088,780
--------------------------------
11,446,455 36,396,771
--------------------------------
Investments and mortgage-backed securities:
Held to maturity 3,990,229 18,540,294
Available for sale 1,586,400 9,794,820
--------------------------------
5,576,629 28,335,114
--------------------------------
Loans receivable 184,887,137 186,677,326
Loans held for sale - at market value 3,856,293 3,436,440
Less: Allowance for loan losses (1,716,110) (1,733,325)
--------------------------------
187,027,320 188,380,441
--------------------------------
Accrued interest receivable 1,137,052 1,544,298
Premises and fixed assets - net 5,431,187 5,324,865
Other real estate owned - net 433,715 2,532,948
Other assets 500,740 597,579
--------------------------------
TOTAL ASSETS $ 211,553,098 263,112,016
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 173,003,403 $ 165,158,612
Federal Home Loan Bank advances 12,241,304 11,649,969
Other liabilities and accrued expenses 1,663,506 1,166,775
--------------------------------
TOTAL LIABILITIES 186,908,213 177,975,356
--------------------------------
SHAREHOLDERS' EQUITY
Common Stock, June 30, 1998- $.01 par value;
50,000,000 shares authorized; 6,612,500
shares issued, 6,101,134 shares outstanding
(excludes 511,366 unearned ESOP shares) --- 66,125
Additional paid in capital --- 64,919,848
Unearned Shares - Employee Stock Ownership Plan --- (7,764,421)
Retained earnings 24,644,885 27,917,101
Net unrealized depreciation on available for
sale securities --- (1,993)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY 24,644,885 85,136,660
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 211,553,098 $ 263,112,016
--------------------------------
See notes to unaudited consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three months and nine months ended June 30, 1997 and 1998
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
1997 1998 1997 1998
-----------------------------------------------------
INTEREST AND DIVIDEND
INCOME
Loans receivable $ 4,345,275 $ 4,453,634 $ 12,974,675 $ 13,130,673
Investments and
mortgage-backed
securities 66,879 372,870 215,349 653,469
Dividends 28,546 32,565 84,924 95,479
Financial institutions 27,495 459,880 95,159 1,367,881
-----------------------------------------------------
TOTAL INTEREST
INCOME 4,468,195 5,318,949 13,370,107 15,247,502
-----------------------------------------------------
INTEREST EXPENSE
Deposits 1,914,179 1,762,111 5,565,230 5,677,661
Federal Home Loan
Bank advances 183,589 165,494 671,384 509,530
-----------------------------------------------------
TOTAL INTEREST
EXPENSE 2,097,768 1,927,605 6,236,614 6,187,191
-----------------------------------------------------
NET INTEREST INCOME 2,370,427 3,391,344 7,133,493 9,060,311
PROVISION FOR LOAN
LOSSES 115,500 45,000 334,282 155,000
-----------------------------------------------------
Net interest income
after provision for
loan losses 2,254,927 3,346,344 6,799,211 8,905,311
NONINTEREST INCOME
Service charges on
deposits 80,186 80,485 225,982 250,613
Gain on sale of
loans - net 70,168 86,427 179,502 270,137
Other fees 50,148 73,870 140,167 205,862
Income (loss) on
operations of real
estate - net (2,436) (6,463) 8,677 (7,878)
Escrow and annuity fees 27,894 70,870 78,986 169,771
Servicing income on
loans sold 49,374 90,000 117,642 249,969
Other 21,190 22,486 85,056 60,642
-----------------------------------------------------
TOTAL NONINTEREST
INCOME 296,524 417,675 836,012 1,199,116
-----------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee
benefits 752,741 936,439 2,143,259 2,747,025
Premises and fixed
assets 183,664 178,223 519,767 558,231
Deposit insurance
premiums 25,595 38,943 50,558 91,644
Advertising 68,117 67,957 179,024 192,499
Other 212,523 349,368 759,098 1,004,667
-----------------------------------------------------
TOTAL NONINTEREST
EXPENSE 1,242,640 1,570,930 3,651,706 4,594,066
-----------------------------------------------------
INCOME BEFORE INCOME
TAXES 1,308,811 2,193,089 3,983,517 5,510,361
PROVISION FOR INCOME
TAXES 446,714 741,995 1,433,629 1,841,395
-----------------------------------------------------
NET INCOME $ 862,097 $ 1,451,094 $ 2,549,888 $ 3,668,966
Basic earnings per
common share (1) $ 0.24 $ 0.60
Weighted average shares
outstanding (2) 6,092,414 6,086,547
___________________
(1) Per share information for prior periods is not applicable as the Company
did not complete its stock offering until January 12, 1998. Diluted earnings
per share is not applicable because the Company has no common stock
equivalents outstanding.
(2) The weighted average shares outstanding for the quarter ended March 31,
1998 were also used as the weighted average shares outstanding for the period
before the stock issuance (October 1, 1997 - January 12, 1998) in computing
the weighted average shares outstanding for the nine months ended June 30,
1998. Unearned ESOP shares are not considered outstanding (see Note 3).
See notes to unaudited consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the six months ended June 30 1997 and June 30, 1998
(unaudited)
Net
Unrealized
Apprec./ Total
Common Common Additional Unearned (Deprec.) Share-
Stock Stock Paid in ESOP Retained in Equity holders
Shares(1) Amount($) Capital($) Shares($) Earnings($) Invest($) Equity($)
--------- --------- ----------- --------- ----------- --------- ---------
Balance, Septem-
ber 30, 1996 21,315,990 13,312 $21,329,302
Net income 2,549,888 2,549,888
Realized gain on
sale of invest-
ments (13,312) (13,312)
------------------------------------------------------------------------------------
Balance, June 30,
1997 23,865,878 0 23,865,878
------------------------------------------------------------------------------------
Balance, Septem-
ber 30, 1997 24,644,885 0 24,644,885
Net income 3,668,966 3,668,966
Issuance of
Common Stock 6,612,500 66,125 64,883,875 64,950,000
related to
Conversion
Shares acquired
for ESOP (529,000) (7,930,307) (7,930,307)
Release of ESOP
Shares (2) 17,634 35,973 165,886 201,859
Payment of
Dividend (396,750) (396,750)
Net Unrealized
(Deprec.) on
available for
sale investments (1,993) (1,993)
------------------------------------------------------------------------------------
Balance, June 30,
1998 6,101,134 66,125 64,919,848 (7,764,421) 27,917,101 (1,993) $85,136,660
------------------------------------------------------------------------------------
______________
(1) Unearned ESOP Shares are not considered outstanding for the purpose of computing earnings per share.
They are however considered outstanding for legal purposes.
(2) The release of ESOP shares resulted in a market value adjustment to additional paid in capital.
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months ended June 30, 1997 and 1998
(unaudited)
Nine Months Ended
June 30,
--------
1997 1998
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,549,888 $ 3,668,966
----------------------------
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 210,320 261,161
Deferred federal income taxes 118,000 --
Federal Home Loan Bank stock dividends (84,800) (94,600)
Market value adjustment - loans held for
sale (26,631) (16,900)
Market value adjustment: ESOP shares
released -- 35,973
Gain (loss) on sale of other real estate
owned, net (12,358) 4,543
Provision for loan and other real estate
owned losses 334,282 164,526
Net decrease in loans originated for sale 743,734 436,753
Increase in other assets, net (27,423) (504,085)
Decrease in other liabilities and accrued
expenses, net (831,024) (496,731)
----------------------------
424,100 (209,360)
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,973,988 3,459,606
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of held to maturity investments -- (16,194,351)
Principal repayments on mortgage-backed
securities 765,743 1,644,286
Purchase of available for sale investments -- (8,115,813)
Sale of available for sale investments 101,376 --
Decrease (increase) in loans receivable, net (12,044,117) (1,927,974)
Additions to premises and fixed assets, net (846,075) (154,839)
Additions to other real estate owned (450,998) (4,165,803)
Dispositions of other real estate owned 270,482 2,052,501
----------------------------
NET CASH USED BY INVESTING ACTIVITIES (12,203,589) (26,861,993)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 64,950,000
Funding to ESOP for purchase of common stock -- (7,930,307)
Release of ESOP shares -- 165,886
Payment of Dividend -- (396,750)
Increase (decrease) in certificates of
deposit, net 10,674,853 (7,902,887)
Increase (decrease) in other deposits, net (83,858) 58,096
Decrease in Federal Home Loan Bank advances, net (583,801) (591,335)
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,007,194 48,352,703
----------------------------
NET INCREASE IN CASH 777,593 24,950,316
Cash and due from financial institutions,
Beginning 5,055,325 11,446,455
----------------------------
Cash and due from financial institutions,
Ending 5,832,918 36,396,771
----------------------------
See notes to unaudited consolidated financial statements (continued)
6
Nine Months Ended June 30,
1997 1998
-------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 1,303,367 $ 2,237,289
Interest paid 6,232,147 6,250,527
Supplemental Disclosure of Noncash Investing
Activities
Loans transferred to other real estate owned 390,838 3,608,848
Market Value adjustment of investments held
for sale (20,136) (3,019)
Deferred federal income taxes on market value
adjustment of investments held for sale 6,824 1,026
See notes to unaudited consolidated financial statements
7
Timberland Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited consolidated financial
statements for Timberland Bancorp, Inc. ("Company") were prepared in
accordance with the 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 generally accepted
accounting principles. However, all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim financial
statements have been included. All such adjustments are of a normal recurring
nature. The results of operations for the three and nine months ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the entire fiscal year.
(b) Principles of Consolidation: The interim consolidated financial
statements include the accounts of Timberland Bancorp, Inc. and its
wholly-owned subsidiary, Timberland Savings Bank, S.S.B. ("Bank"), and the
Bank's wholly-owned subsidiary, Timberland Service Corp. All significant
intercompany balances have been eliminated in consolidation.
(2) CONVERSION AND REORGANIZATION
On January 12, 1998, the Bank converted from a Washington-chartered mutual
savings bank to a Washington-chartered capital stock savings bank and became a
wholly-owned subsidiary of the Company. The stock conversion resulted in the
sale and issuance by the Company of 6,612,500 shares of $.01 par value common
stock at a price of $10.00 per share which resulted in gross proceeds of
$66,125,000. After reducing gross proceeds for conversion costs of
$1,175,000, net proceeds totaled $64,950,000. In conjunction with the
conversion, the Company loaned $7,930,307 to the Bank's employee stock
ownership plan for the purchase of 529,000 shares of common stock in the open
market immediately following the completion of the stock conversion.
(3) EARNINGS PER SHARE
The basic earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. In accordance with
Statement of Position No. 93-6, Employers' Accounting for Employee Stock
Ownership Plans, issued by the American Institute of Certified Public
Accountants, shares owned by the Bank's Employee Stock Ownership Plan that
have not been committed to be released are not considered to be outstanding
for the purpose of computing earnings per share. At June 30, 1998, there were
511,366 shares that had not been committed to be released. Diluted earnings
per share is not applicable because the Company had no common stock
equivalents outstanding.
(4) DIVIDEND
On July 23, 1998, the Company declared a quarterly cash dividend of $.06 per
common share. The dividend is to be paid August 21, 1998, to shareholders of
record as of the close of business August 7, 1998.
(5) ACCOUNTING CHANGES
Accounting for Employee Stock Ownership Plans. In November 1993 the American
Institute of Certified Public Accountants issued SOP 93-6, which requires an
employer to record compensation expense in an amount equal to the fair value
of shares committed to be released to employees from an employee stock
ownership plan and to exclude unearned shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share
in future periods cannot be predicted due to the uncertainty of the fair value
of the shares at the time they will be committed to be released. Subsequent
to the Bank's conversion to stock
8
ownership on January 12, 1998, the Company acquired 529,000 shares for the
Bank's employee stock ownership plan.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on
the face of the income statement. SFAS No. 128 is effective for the financial
statements for the periods ending after December 15, 1997. SFAS No. 128
requires restatement of all prior period EPS data presented. Subsequent to
the Bank's conversion to stock ownership on January 12, 1998, the Company
adopted SFAS No. 128 for all future periods.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
- -------------------------------------------------------------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three months
and nine months ended June 30, 1998.
Comparison of Financial Condition at September 30, 1997 and June 30, 1998
Total Assets: Total assets increased 24.4% from $211.6 million at September
30, 1997 to $263.1 million at June 30, 1998, primarily as a result of the
January 1998 stock offering which resulted net proceeds of $65.0 million. A
portion of this increase was offset by $7.8 million in unearned shares issued
to the employee stock ownership plan ("ESOP") trust and approximately $8.0
million in funds withdrawn from deposit accounts to purchase stock.
Cash and Due from Financial Institutions: Cash and due from financial
institutions increased by 218.0% from $11.4 million at September 30, 1997 to
$36.4 million at June 30, 1998. This increase is primarily due to a portion of
the stock offering proceeds being invested with financial institutions.
Investments and Mortgage-backed Securities: Investments and mortgage-backed
securities increased by 408.1% from $5.6 million at September 30, 1997 to
$28.3 million at June 30, 1998. This increase is attributable primarily to a
portion of the stock offering proceeds being invested into these assets.
Loans Receivable, and Loans Held-for-sale, net of allowance for loan loss
reserves: Loans receivable, including loans held-for-sale, net, increased by
0.7% from $187.0 million at September 30, 1997 to $188.4 million at June 30,
1998. This flat growth is primarily attributable to several large loans
paying off and an increase in secondary market sales of fixed rate mortgage
loans. During the quarter ended June 30, 1998 loans totaling $8.3 million
were sold to Freddie Mac as compared to $3.9 million sold during the same
period last year.
Other Real Estate Owned, net: Other real estate owned, net, increased from
$434,000 at September 30, 1997 to $2.5 million at June 30, 1998. This
increase is primarily attributable to the Bank accepting a deed in lieu of
foreclosure on two related condominium loans (with balances totaling $1.6
million at June 30, 1998, down from $3.0 million at March 31, 1998) in
Southern King County, Washington. These two loans were classified as
"substandard assets" at September 30, 1997. Although no assurances can be
given, the Company does not expect to incur a material loss on the disposition
of these assets.
Deposits: Deposits decreased by 4.5% from $173.0 million at September 30, 1997
to $165.2 million at June 30, 1998. This decrease is primarily attributable
to depositors withdrawing approximately $8.0 million from their deposit
accounts to purchase stock in the Company's stock offering.
9
Shareholders' Equity: Total shareholders' equity increased 245.5% from $24.6
million at September 30, 1997 to $85.1 million at June 30, 1998, primarily as
a result of the $65.0 million in net proceeds raised from the January 1998
stock offering and retained net income of $3.3 million. The net proceeds are
offset by $7.8 million in unearned shares purchased for the ESOP trust.
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Bank's non
performing assets at September 30, 1997 and June 30, 1998.
At September 30, At June 30,
1997 1998
---------------- -----------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 776 $ 1,921
Commercial 2,886 2,922
Construction and land development 3,891 73
Land -- 344
Consumer loans 2 45
Commercial Business Loans -- 81
-------- ---------
Total 7,555 5,386
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Construction and land development 109 226
-------- ---------
Total 109 226
Total of nonaccrual and
90 days past due loans $ 7,664 $ 5,612
Real estate owned and other
repossessed assets 434 2,533
-------- ---------
Total nonperforming assets $ 8,098 $ 8,145
Restructured loans 70 --
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, (including loans held
for sale)(1) 4.06% 2.95%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 3.62% 2.13%
Nonperforming assets as a percentage
of total assets 3.83% 3.10%
Loans receivable, (including loans
held for sale) (1) $188,743 $ 190,113
-------- ---------
Total assets $211,553 $ 263,112
-------- ---------
- ---------
(1) Loans receivable is before the allowance for loan losses
10
The following is a discussion of the Bank's major problem assets at June 30,
1998:
Convenience store/retail space and mini-storage, Kitsap County, Washington.
- ---------------------------------------------------------------------------
The Bank has two loans that were originated in 1996 on two separate
properties: a convenience store combined with retail space and a 436 unit mini
storage facility. These two loans had a combined balance of $2.9 million at
June 30, 1998. These loans became delinquent primarily because of a dispute
between the two borrowers. These loans were classified as "substandard" at
June 30, 1998. The Bank initiated foreclosure proceedings which were stayed
due to a bankruptcy filing by the borrowers in January of 1998. Attorneys
representing the Bank are moving to have the stay lifted to enable foreclosure
to proceed. Although no assurances can be given, the Bank does not expect to
incur any material loss on these two loans.
Real Estate Owned: Condominiums, Southern King County, Washington.
- ------------------------------------------------------------------- The Bank
accepted a deed in lieu of foreclosure on two delinquent loans for the
construction and sale of a 61-unit condominium complex. These loans were
classified as "substandard" at September 30, 1997 and had a balance of $2.9
million. They were classified by the Bank as "Other Real Estate Owned" of
$1.6 million at June 30, 1998. The Bank has been actively marketing the
project and, as of August 10, 1998, had accepted earnest money agreements for
25 of the 30 units. As of August 10, 1998, nineteen of these sales had closed
and the remaining REO balance was $1.1 million. The Bank does not expect to
incur any material losses on the disposition of these assets based on the
prices at which the units are selling.
11
Loans Receivable
- ----------------
The following table sets forth the composition of the Company's loan
portfolio by type of loan.
At September 30, At June 30,
1997 1998
Amount Percent Amount Percent
--------------------- ---------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1) $ 100,127 48.76% $ 98,114 45.93%
Multi family 12,178 5.93 11,927 5.58
Commercial 29,410 14.32 31,935 14.95
Construction and
land development 45,031 21.93 51,015 23.88
Land 6,937 3.38 7,105 3.33
-------- ------- -------- -------
Total mortgage loans 193,683 94.32 200,096 93.67
Consumer Loans:
Home equity and second
mortgage 8,142 3.97 8,491 3.98
Other 2,824 1.37 4,061 1.90
-------- ------- -------- -------
10,966 5.34 12,552 5.88
Commercial business loans 694 .34 965 .45
Total loans 205,343 100.00% 213,613 100.00%
------- -------
Less:
Undisbursed portion of
loans in process (14,280) (21,557)
Unearned income (1,761) (1,941)
Allowance for loan losses (1,716) (1,733)
Market value adjustment
of loans --
held-for-sale (19) (2)
-------- --------
Total loans receivable,
net $187,027 $188,380
-------- --------
________________
(1) Includes loans held-for-sale.
12
Comparison of Operating Results for the Three Months Ended June 30, 1997 and
1998
Net Income: Net income increased 68.3% from $862,000 for the three months
ended June 30, 1997 to $1.5 million for the three months ended June 30, 1998.
Basic earnings per share for the current quarter was $.24. Earnings per
share for the prior comparative period is not applicable because the Company
had no stock issued and outstanding at that time.
Net Interest Income: Net interest income increased 43.1% from $2.4 million for
the three months ended June 30, 1997 to $3.4 million for the three months
ended June 30, 1998.
Total interest income increased 19.0% from $4.5 million for the three months
ended June 30, 1997 to $5.3 million for the three months ended June 30, 1998.
The increases are primarily the result of a $432,000 increase in interest from
financial institutions and a $306,000 increase in interest from investments
and mortgage-backed securities. The Company had higher balances in interest
bearing deposits at financial institutions and investment securities due to
net proceeds from the stock conversion being invested in those assets.
Total interest expense decreased 2.6% from $2.1 million for the three months
ended June 30, 1997 to $1.9 million for the three months ended June 30, 1998,
primarily due to a decrease in interest expense associated with deposits due
to lower average deposit balances for the quarter ended June 30, 1998.
Provision for Loan Losses: The provision for loan losses decreased from
$116,000 for the three months ended June 30, 1997 to $45,000 for the three
months ended June 30, 1998. Management decreased the provision for loan
losses because it deemed the general loan loss reserves of $1.7 million at
June 30, 1998 (.91% of loans receivable, net and 30.9% of non-performing
loans) adequate to provide for estimated losses based on an evaluation of
known and inherent risks in the loan portfolio at that date.
Noninterest Income: Total noninterest income increased 40.7% from $297,000
for the three months ended June 30, 1997 to $418,000 for the three months
ended June 30, 1998. The largest portion of this increase was attributable to
a $43,000 increase in escrow fees and a $41,000 increase in servicing income
on loans sold. These increases are due to increased escrow activity and a
larger volume of fixed rate loans being sold to FHLMC. Increases in gain on
sale of loans and miscellaneous fees account for the remaining portion of the
increase.
Noninterest Expense: Total noninterest expense increased 26.4% from $1.2
million for the three months ended June 30, 1997 to $1.6 million for the three
months ended June 30, 1998. The largest portion of this increase is a result
of increased salary and employee benefit expense which increased from $753,000
for the three months ended June 30, 1997 to $936,000 for the three months
ended June 30, 1998. The release of ESOP shares accounted for $57,000 of the
increased compensation expense. The remaining portion of the increased
compensation expense is a result of adding additional employees, normal cost
of living increases for current employees and increased health insurance
costs. The number of full-time equivalent employees increased from 84 at June
30, 1997 to 97 at June 30, 1998 as a result of restructuring the loan
origination department and the loan servicing department, hiring additional
personnel for the Auburn Escrow department, elevating several part-time
positions to full-time positions, and hiring an individual to assist in
preparing the reports required of the Company as a public company
Provision for Income Taxes: The provision for income taxes increased from
$447,000 for the three months ended June 30, 1997 to $742,000 for the three
months ended June 30, 1998 primarily as a result of higher income before
income taxes.
13
Comparison of Operating Results for Nine Months Ended June 30, 1997 and 1998:
Net Income: Net income increased 43.9% from $2.5 million for the nine months
ended June 30, 1997 to $3.7 million for the nine months ended June 30, 1998.
Basic earnings per share for the nine months was $.60. Earnings per share
for the prior comparative period is not applicable because the Company had no
stock issued and outstanding at that time.
Net Interest Income: Net interest income increased 27.0% from $7.1 million for
nine months ended June 30, 1997 to $9.1 million for the nine months ended June
30, 1998.
Total interest income increased 14.0% from $13.4 million for the nine months
ended June 30, 1997 to $15.2 million for the nine months ended June 30, 1998.
The increases are primarily a result of an $1.3 million increase in interest
from financial institutions and a $438,000 increase in interest from
investments and mortgage-backed securities. The Company had higher balances
in interest bearing deposits at financial institutions and investment
securities due to net proceeds from the stock conversion being invested in
those assets.
Total interest expense remained level at $6.2 million for both the nine months
June 30, 1997 and June 30, 1998.
Provision for Loan Losses: The provision for loan losses decreased 53.6%
from $334,000 for the nine months ended June 30, 1997 to $155,000 for the nine
months ended June 30, 1998. Management decreased the provision for loan
losses because it deemed the general loan loss reserves of $1.7 million at
June 30, 1998 (.91% of loans receivable, net and 30.9% of non-performing
loans) adequate to provide for estimated losses based on an evaluation of
known and inherent risks in the portfolio at that date.
Noninterest Income: Total noninterest income increased 44.8% from $836,000
for the nine months June 30, 1997 to $1.2 million for the nine months ended
June 30, 1998. The largest portion of this increase is attributable to a
$132,000 increase in servicing income on loans sold and to a $91,000 increase
in gain of sale of loans. These increases were primarily due to a larger
volume of fixed rate loans being sold in the secondary market. Increases in
escrow fees and miscellaneous fees account for the remaining portion of the
increase.
Noninterest Expense: Total noninterest expense increased 25.8% from $3.7
million for the nine months ended June 30, 1997 to $4.6 million for the nine
months ended June 30, 1998. The largest portion of this increase is a result
of increased salary and employee benefit expense which increased from $2.1
million for the nine months ended June 30, 1997 to $2.7 million for the nine
months ended June 30, 1998. The release of ESOP shares accounted for
$170,000 of the increased compensation expense. The remaining portion of the
increased compensation expense is a result of adding additional employees,
normal cost of living increases for current employees and increased health
insurance costs. The number of full-time equivalent employees increased from
84 at June 30, 1997 to 97 at June 30, 1998 as a result of restructuring the
loan origination department and the loan servicing department, hiring
additional personnel for the Auburn Escrow department, elevating several
part-time positions to full-time positions, and hiring an individual to assist
in preparing the reports required of the Company as a public company.
Provision for Income Taxes: The provision for income taxes increased from
$1.4 million for the nine months ended June 30, 1997 to $1.8 million for the
nine months ended June 30, 1998 primarily as a result of higher income
before income taxes.
14
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of loans, maturing securities
and FHLB advances. The Company also raised $65.0 million in net proceeds from
the January 1998 stock offering. While maturities and 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.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At June 30, 1998,
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 25.2%.
At June 30, 1998, the Bank also maintained an uncommitted credit facility with
the FHLB-Seattle that provided for immediately available advances up to an
aggregate amount of $47.6 million, under which $11.6 million was outstanding.
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 and other short-term government and agency
obligations. If the Bank requires funds beyond its ability to generate them
internally, it has additional borrowing capacity with the FHLB and collateral
for repurchase agreements.
The Bank's primary investing activity is the origination of one- to- four
family mortgage loans and construction and land development loans. At June
30, 1998, the Bank had loan commitments totaling $13.6 million and undisbursed
loans in process totaling $21.6 million. The Bank anticipates that it will
have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year
from June 30, 1998 totaled $70.9 million. Historically, the Bank has been
able to retain a significant amount of its deposits as they mature.
Federally-insured state-chartered banks are required to maintained minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (I) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At June 30, 1998, the Bank was in compliance with all applicable
capital requirements. For additional details see the Regulatory Capital
table.
15
Regulatory Capital
- ------------------
The following table compares Timberland Savings Bank's regulatory capital at
June 30, 1998 to its minimum regulatory capital requirements at that date
(dollars in thousands):
Percent of
Amount Adjusted Total Assets (1)
------ -------------------------
GAAP capital $ 52,461 22.03%
Tier 1 (leverage) capital $ 52,449 22.17%
Tier 1 (leverage) capital
requirement 9,464 4.00
-------- -----
Excess 42,985 18.17%
Tier 1 risk adjusted capital $ 52,449 32.02%
Tier 1 risk adjusted capital
requirement 6,392 4.00
-------- -----
Excess $ 46,057 28.82%
Total risk based capital $ 52,449 32.82%
Total risk based capital
requirement 12,784 8.00
-------- -----
Excess 39,665 24.82%
___________________
(1) For the Tier 1 (leverage) capital and Washington regulatory capital
calculations, percent of total average assets of $236.6 million. For the Tier
1 risk-based capital and total risk-based capital calculations, percent of
total risk-weighted assets of $159.8 million.
16
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------------- ---------------
PERFORMANCE RATIOS:
Return on average assets (1) 2.21% 1.68% 1.93% 1.67%
Return on average equity (1) 6.78% 14.71% 7.88% 14.95%
Net interest margin 5.44% 4.79% 5.02% 4.85%
Efficiency ratio 41.74% 48.70% 45.47% 47.83%
June 30, September 30,
1998 1997
------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 5,612 $ 7,664
Total non-performing assets 8,145 8,098
Non-performing assets to total
assets 3.10% 3.83%
Allowance for loan losses to
non-performing loans 30.88% 22.39%
BOOK VALUE PER SHARE (2) $ 12.88 --
______________________
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
Year 2000 Issues
- ----------------
The Bank has an in-house data processing department which maintains the Bank's
main system on an IBM AS400. The Bank also uses software purchased from third
party vendors for applications such as accounts payable and fixed assets. As
with other organizations, many of the data processing programs were originally
designed to recognize calendar years by their last two digits. Calculations
performed using these truncated fields will not work properly with dates
beyond 1999. The Bank has established a committee to address "Year 2000"
issues. The data processing department also submits monthly progress reports
on Year 2000 issues to the Board of Directors. Currently the Bank is on
schedule to have all Year 2000 issues resolved. If the Bank is unable to
confirm Year 2000 compliance on its main internal system for all regulatory
specified testing dates by September 30, 1998, a conversion to Jack Henry &
Associates' system (which is already Year 2000 compliant) will be pursued. If
we do not receive confirmation of Year 2000 compliance from third party
vendors by December 31, 1998, a conversion to comparable software will be
pursued. The Company believes that the Year 2000 problem will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operations.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes in information about market risk that was
provided in the Company's Form 10-K for the Fiscal Year Ended September 30,
1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. Further, neither the Company nor the Bank is aware of the
threat of any such proceedings. From time to time, the Bank is involved in
various claims and legal actions arising in the ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
- ---------------------------------------------------
Change in Securities -- None to be reported.
Use of proceeds -- None to be reported.
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 and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant *
3(b) Bylaws of the Registrant *
10(a) Employee Severance Compensation Plan **
10(b) Timberland Savings Bank, S.S.B. Employee Stock Ownership
Plan **
27 Financial Data Schedule
_________________
* Incorporated by reference to the Registrant's Registration
Statement of Form S-1 (333-35817).
** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997.
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 30, 1998 to report a change in
independent auditors.
18
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: August 12, 1998 By: /s/Clarence E. Hamre
______________________________
Clarence E. Hamre
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1998 By: /s/Michael R. Sand
______________________________
Michael R. Sand
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
19
Exhibit 27
Financial Data Schedule (in thousands)
This schedule contains financial information extracted from the consolidated
financial statements of Timberland Bancorp, Inc. for the nine months ended
June 30, 1998 and is qualified in its entirely by reference to such financial
statements.
Financial Data
as of or for the nine months
Item Number ended June 30, 1998 Item Description
- ----------- ------------------- ----------------
9-03 (1) 5,308 Cash and Due from Banks
9-03 (2) 31,089 Interest - bearing deposits
9-03 (3) N/A Federal funds sold - purchased
securities for resale
9-03 (4) N/A Trading account assets
9-03 (6) 9,795 Investment and mortgage backed
securities held for sale
9-03 (6) 18,540 Investment and mortgage backed
securities held to
maturity - carrying value
9-03 (6) 18,479 Investment and mortgage backed
securities held to
maturity - market value
9-03 (7) 190,114 Loans
9-03 (7)(2) 1,733 Allowance for loan losses
9-03 (11) 263,112 Total assets
9-03 (12) 165,158 Deposits
9-03 (13) 0 Short - term borrowings
9-03 (15) 1,167 Other liabilities
9-03 (16) 11,650 Long - term debt
9-03 (19) N/A Preferred stock - mandatory
redemption
9-03 (20) N/A Preferred stock - no mandatory
redemption
9-03 (21) 66 Common stocks
9-03 (22) 85,071 Other stockholders' equity
9-03 (23) 263,112 Total liabilities and
stockholders' equity
9-04 (1) 13,130 Interest and fees on loans
9-04 (2) 749 Interest and dividends on
investments
9-04 (4) 1,368 Other interest income
9-04 (5) 15,247 Total interest income
9-04 (6) 5,678 Interest on deposits
9-04 (9) 6,187 Total interest expense
9-04 (10) 9,060 Net interest income
9-04 (11) 155 Provision for loan losses
9-04 (13)(h) 0 Investment securities
gains/(losses)
9-04 (14) 4,594 Other expenses
9-04 (15) 5,510 Income/loss before income tax
9-04 (17) 5,510 Income/loss before extraordinary
items
9-04 (18) N/A Extraordinary items, less tax
9-04 (19) N/A Cumulative change in accounting
principles
9-04 (20) 3,669 Net income or loss
9-04 (21) .60 Earnings per share - primary
9-04 (21) .60 Earnings per share - fully
diluted
I.B. 5 8.44% Net yield - interest earnings -
actual
III.C.1. (a) 5,386 Loans on non-accrual
III.C.1. (b) 226 Accruing loans past due 90 days
or more
III.C.2. (c) 0 Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 1,716 Allowance for loan loss -
beginning of period
IV.A.2 138 Total chargeoffs
IV.A.3 -- Total recoveries
IV.A.4 1,733 Allowance for loan loss - end of
period
IV.B.1 1,733 Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 -- Loan loss allowance - unallocated
20