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, 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 February 10, 1999
----- ---------------------------------------
common stock, $.01 par value 5,669,392
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
Consolidated Statement of Comprehensive Income 8
Notes to Consolidated Financial Statements (unaudited) 9-10
Item 2. Management's Discussion and Analysis of Financial Condition 10-18
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and September 30, 1998
(unaudited)
ASSETS
December 31, September 30,
1998 1998
-------------------------------
Cash and due from financial institutions:
Noninterest bearing deposits $ 5,997,151 $ 7,039,152
Interest bearing deposits 4,549,004 14,744,548
-------------------------------
10,546,155 21,783,700
-------------------------------
Investments and mortgage-backed securities:
Available for sale 43,875,152 35,415,199
-------------------------------
Loans receivable 194,328,905 192,735,300
Loans held for sale - at market value 12,814,712 8,213,741
Less: Allowance for loan losses (1,771,716) (1,728,122)
-------------------------------
205,371,901 199,220,919
-------------------------------
Accrued interest receivable 1,353,207 1,389,399
Premises and fixed assets - net 6,416,829 5,339,925
Real estate owned - net 1,289,667 1,723,865
Other assets 603,455 835,515
-------------------------------
TOTAL ASSETS $ 269,456,366 $265,708,522
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 177,431,894 $170,833,817
Federal Home Loan Bank advances 11,586,154 11,618,062
Other liabilities and accrued expenses 1,549,899 1,477,033
-------------------------------
TOTAL LIABILITIES 190,567,947 183,928,912
-------------------------------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
50,000,000 shares authorized;
6,612,500 shares issued, 5,967,781 and
6,281,875 shares outstanding, respectively. 59,678 62,819
Additional paid in capital 56,337,427 60,183,217
Unearned Shares - Employee Stock Ownership
Plan (7,401,645) (7,533,807)
Retained earnings 29,906,392 28,947,783
Accumulated other comprehensive income
(loss) (13,433) 119,598
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 78,888,419 81,779,610
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 269,456,366 $ 265,708,522
-------------------------------
See notes to unaudited consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 1998 and 1997
(unaudited)
Three Months Ended December 31,
1998 1997
-------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 4,792,642 $ 4,331,706
Investments and mortgage-backed securities 394,962 58,304
Dividends 209,493 31,989
Financial institutions 115,153 232,519
------------------------------
TOTAL INTEREST INCOME 5,512,250 4,654,518
------------------------------
INTEREST EXPENSE
Deposits 1,848,794 2,066,508
Federal Home Loan Bank advances 166,332 174,142
------------------------------
TOTAL INTEREST EXPENSE 2,015,126 2,240,650
------------------------------
NET INTEREST INCOME 3,497,124 2,413,868
PROVISION FOR LOAN LOSSES 43,593 60,000
------------------------------
Net interest income after
provision for loan losses 3,453,531 2,353,868
NONINTEREST INCOME
Service charges on deposits 85,040 87,310
Gain on sale of loans - net 32,917 80,188
Other fees 67,530 52,111
Income (loss) on operations of real
estate - net (19,260) (1,859)
Escrow and annuity fees 65,051 41,159
Servicing income on loans sold 45 46,444
Other 22,989 18,943
------------------------------
TOTAL NONINTEREST INCOME 254,312 324,296
------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,051,163 838,663
Premises and fixed assets 220,044 182,927
Deposit insurance premiums 23,617 25,991
Advertising 55,985 72,287
Other 380,504 370,999
------------------------------
TOTAL NONINTEREST EXPENSE 1,731,313 1,490,867
------------------------------
INCOME BEFORE INCOME TAXES 1,976,530 1,187,297
PROVISION FOR INCOME TAXES 659,856 383,347
------------------------------
NET INCOME $ 1,316,674 $ 803,950
Basic earnings per common share (1) $ 0.24 N/A
Weighted average shares outstanding (2) 5,478,514 N/A
------------------------------
(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) 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 year ended September 30, 1998 and the three months ended December 31, 1998
(unaudited)
Accumu-
lated
Other
Compre- Total
Common Common Additional Unearned hensive Share-
Stock Stock Paid in ESOP Retained Income holders
Shares(1) Amount($) Capital($) Shares($) Earnings($) (Loss) Equity($)
--------- --------- ----------- --------- ----------- --------- ---------
Balance,
September 30,
1997 -- $ -- $ -- $ -- $24,644,885 $ -- $24,644,885
Net income 5,096,398 5,096,398
Issuance of
Common Stock
related to
Conversion 6,612,500 66,125 64,883,875 64,950,000
Shares acquired
for ESOP (7,930,307) (7,930,307)
Payment of
Dividend (793,500) (793,500)
Repurchase of
Common Stock (330,625) (3,306) (4,731,694) (4,735,000)
ESOP
Compensation
Expense (2) 31,036 396,500 427,536
Net Unrealized
gain on
available for
sale investments 119,598 119,598
------------------------------------------------------------------------------------
Balance,
September 30,
1998 6,281,875 $62,819 $60,183,217 $ (7,533,807) $28,947,783 $119,598 $81,779,610
------------------------------------------------------------------------------------
Balance,
September 30,
1998 6,281,875 62,819 60,183,217 (7,533,807) 28,947,783 119,598 $81,779,610
Net Income 1,316,674 1,316,674
Repurchase of
Common Stock (314,094) (3,141) (3,824,926) (3,828,067)
Payment of
Dividend (358,065) (358,065)
ESOP
Compensation
Expense (2) (20,864) 132,162 111,298
Net Unrealized
loss On
available for
sale securities (133,031) (133,031)
--------------------------------------------------------------------------------------
Balance,
December 31, 1998 5,967,781 $59,678 $56,337,427 $ (7,401,645) $29,906,392 $(13,433) $78,888,419
--------------------------------------------------------------------------------------
- ----------------------
(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 Three months ended December 31, 1998 and 1997
(unaudited)
Three Months Ended
December 31,
------------
1998 1997
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,316,674 $ 803,950
---------------------------
Noncash revenues, expenses, gains and
losses included in income:
Depreciation 85,420 84,910
Deferred federal income taxes 68,531 --
Federal Home Loan Bank stock dividends (33,400) (31,900)
Market value adjustment - loans held for
sale 1,461 (12,439)
Noncash compensation expense related to
ESOP benefit 111,298 --
Loss on sale of other real estate owned, net 2,373 --
Provision for loan and other real estate
owned losses 57,093 59,526
Net increase in loans originated for sale (4,602,432) (29,147)
Net Decrease (increase) in other assets 268,252 (429,088)
Increase (decrease) in other liabilities and
accrued expenses, net 72,866 (108,368)
---------------------------
(3,968,538) (466,506)
---------------------------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (2,651,864) 337,444
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
held to maturity -- 412,587
Purchase of securities available for sale (15,129,459) --
Proceeds from maturities of securities
available for sale 6,501,346 --
Increase in loans receivable, net (1,593,604) (281,950)
Additions to premises and fixed assets, net (1,162,324) (99,724)
Additions to other real estate owned (207,294) (3,049,693)
Dispositions of other real estate owned 625,619 1,724
---------------------------
NET CASH USED BY INVESTING ACTIVITIES (10,965,716) (3,017,056)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in certificates of
deposit, net 5,391,424 (5,113,226)
Increase in other deposits, net 1,206,653 86,171,918
Decrease in Federal Home Loan Bank advances,
net (31,908) (29,276)
Repurchase of common stock (3,828,067) --
Payment of Dividend (358,067) --
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,380,035 81,029,416
---------------------------
NET (DECREASE) INCREASE IN CASH (11,237,545) 78,349,804
Cash and due from financial institutions,
Beginning 21,783,700 11,446,455
---------------------------
Cash and due from financial institutions,
Ending $10,546,155 $89,796,259
---------------------------
See notes to unaudited consolidated financial statements
(continued)
6
Three months ended December 31,
1998 1997
------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Income taxes paid $ -- $ 252,289
Interest paid 2,015,670 2,192,717
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Loans transferred to real estate owned 93,763 2,964,261
Market Value adjustment of investments
held for sale (201,562) --
Deferred federal income taxes on market
value adjustment of investments held
for sale 68,531 --
See notes to unaudited consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the three months ended December 31, 1998 and 1997
(unaudited)
Three months ended December 31,
1998 1997
-------------------------------
Comprehensive Income:
Net income $ 1,316,674 $ 803,950
Change in unrealized gain (losses)
on securities available for sale,
net of tax (133,031) --
------------------------------
Comprehensive income $ 1,183,643 $ 803,950
8
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 months ended December 31, 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 ("SOP") 93-6, Employers' Accounting for Employee Stock
Ownership Plans, issued by the American Institute of Certified Public
Accountants, shares owned by the Bank's Employee Stock Ownership Plan that
have not been allocated are not considered to be outstanding for the purpose
of computing earnings per share. At December 31, 1998, there were 502,550
shares that had not been allocated. Diluted earnings per share are not
applicable because the Company had no common stock equivalents outstanding.
(4) DIVIDEND
On January 25, 1999, the Company declared a quarterly cash dividend of $.06
per common share. The dividend is to be paid February 19, 1999, to
shareholders of record as of the close of business February 5, 1999.
(5) COMMON STOCK REPURCHASE
On January 29, 1999, the Company announced that it would repurchase up to 5%
of its outstanding common shares, or 298,389 shares. On February 3, 1999, the
Company announced the completion of the previously announced stock repurchase
program, at an average price of $12.375 per share. On February 5, 1999, the
Company announced that it would repurchase up to 5% of its outstanding common
shares, or 283,470 shares.
9
(6) 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 ownership on January 12, 1998, the Company
acquired 529,000 shares for the Bank's employee stock ownership plan.
EARNINGS PER SHARE. Statement of Financial Accounting Standards ("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
ended December 31, 1998.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1998
TOTAL ASSETS: Total assets increased 1.4% from $265.7 million at September 30,
1998 to $269.5 million at December 31, 1998, primarily as a result of an
increase in loans receivable, net, which was funded by increased deposits.
CASH AND DUE FROM FINANCIAL INSTITUTIONS: Cash and due from financial
institutions decreased by 51.6% from $21.8 million at September 30, 1998 to
$10.5 million at December 31, 1998. This decrease is primarily due to a
portion of these funds being invested into mutual funds, mortgage-backed
securities, and U.S. Agency securities.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: Investments and mortgage-backed
securities increased by 23.9% from $35.4 million at September 30, 1998 to
$43.9 million at December 31, 1998. This increase is attributable primarily to
a portion of funds previously held with financial institutions being invested
into these assets.
LOANS RECEIVABLE, AND LOANS HELD-FOR-SALE, NET OF ALLOWANCE FOR LOAN LOSSES:
Loans receivable, including loans held-for-sale, net, increased by 3.1% from
$199.2 million at September 30, 1998 to $205.4 million at December 31, 1998.
This increase is primarily a result of an increase in one-to-four family
mortgage loans, construction loans, and commercial business loans held in the
Bank's portfolio.
PREMISES AND FIXED ASSETS: Premises and fixed assets increased by 20.2% from
$5.3 million at September 30, 1998 to $6.4 million at December 31, 1998. This
increase is primarily a result of the Bank acquiring three properties for
future branch locations.
10
REAL ESTATE OWNED, NET: Real estate owned, net, decreased from $1.7 million at
September 30, 1997 to $1.3 million at December 31, 1998. This decrease is
primarily attributable to a $373,000 decrease in the real estate owned balance
of the condominium project that the Bank accepted a deed in lieu of
foreclosure on in November 1997. For additional information see "Non
Performing Assets" section.
DEPOSITS: Deposits increased by 3.9% from $170.8 million at September 30, 1998
to $177.4 million at December 31, 1998. This increase is primarily
attributable to growth of $5.4 million in the Bank's certificate of deposit
accounts and smaller increases in NOW accounts and money market accounts.
SHAREHOLDERS' EQUITY: Total shareholders' equity decreased 3.5% from $81.8
million at September 30, 1998 to $78.9 million at December 31, 1998, primarily
as a result of using $3.8 million to repurchase 5% of the Company's shares in
October, and is partially offset by net income of $1.3 million (less dividends
paid of $358,000.)
11
NON PERFORMING ASSETS
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at December 31, 1998 and September 30, 1998.
At December 31, At September 30,
1998 1998
-------------- ---------------
(Dollars in thousands)
Loans accounted for on a nonaccrual
basis:
Mortgage loans:
One-to-four family $ 955 $ 996
Commercial 2,917 2,919
Land 334 397
Consumer loans 91 17
Commercial Business Loans -- 81
--------- ----------
Total 4,297 4,410
Accruing loans which are
contractually past due 90
days or more:
Mortgage loans:
Construction and land development 397 396
--------- ----------
Total 397 396
Total of nonaccrual and
90 days past due loans $ 4,694 $ 4,806
Real estate owned and other
repossessed assets 1,290 1,724
--------- ----------
Total nonperforming assets $ 5,984 $ 6,530
Restructured loans 235 236
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, (including loans held
for sale)(1) 2.27% 2.39%
Nonaccrual and 90 days or more past
due loans as a percentage of total
assets 1.74% 1.81%
Nonperforming assets as a percentage
of total assets 2.22% 2.46%
Loans receivable, (including loans
held for sale) (1) $ 207,144 $ 200,949
--------- ----------
Total assets $ 269,456 $ 265,709
--------- ----------
- --------------
(1) Loans receivable is before the allowance for loan losses
12
The following is a discussion of the Company's major problem assets at
December 31, 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
December 31, 1998. These loans became delinquent primarily because of a
dispute between the two borrowers. These loans were classified as
"substandard" at December 31, 1998. The Bank initiated foreclosure proceedings
which were stayed due to a bankruptcy filing by the borrowers in January of
1998. The bankruptcy has been dismissed and foreclosure is in progress.
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. On November
7, 1997 the Bank accepted a deed in lieu of foreclosure on two delinquent
loans for the construction and sale of a 61-unit condominium complex. They
were classified by the Bank as "Real Estate Owned" of $379,000 at December 31,
1998. The Bank has been actively marketing the project and, as of February 3,
1999, 27 of the 30 units had sold and the remaining Real Estate Owned balance
was $393,000. Although no assurances can be give 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.
13
LOANS RECEIVABLE
- ----------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan.
At December 31, At September 30,
1998 1998
Amount Percent Amount Percent
------------------- ------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1) $ 104,149 44.04% $ 100,921 43.48%
Multi family 11,530 4.88 12,432 5.36
Commercial 33,349 14.10 32,906 14.18
Construction and
land development 64,652 27.34 64,172 27.65
Land 8,088 3.42 7,749 3.34
--------- ------ --------- ------
Total mortgage loans 221,768 93.78 218,180 94.01
Consumer Loans:
Home equity and second mortgage 8,514 3.60 8,740 3.77
Other 4,144 1.76 4,066 1.74
--------- ------ --------- ------
12,658 5.36 12,806 5.51
Commercial business loans 2,036 0.86 1,105 0.48
--------- ------ --------- ------
Total loans 236,462 100.00% 232,091 100.00%
------ ------
Less:
Undisbursed portion of loans
in process (26,976) (28,886)
Unearned income (2,341) (2,256)
Allowance for loan losses (1,772) (1,728)
Market value adjustment of loans --
held-for-sale (1) --
--------- ---------
Total loans receivable, net $ 205,372 $ 199,221
--------- ---------
- ----------------
(1) Includes loans held-for-sale.
14
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND 1998
NET INCOME: Net income increased 63.8% from $804,000 for the three months
ended December 31, 1997 to $1.3 million for the three months ended December
31, 1998. Basic earnings per share for the current quarter were $.24.
Earnings per share for the prior comparative period are not applicable because
the Company had no stock issued and outstanding at that time.
NET INTEREST INCOME: Net interest income increased 44.9% from $2.4 million for
the three months ended December 31, 1997 to $3.5 million for the three months
ended December 31, 1998.
Total interest income increased 18.4% from $4.7 million for the three months
ended December 31, 1997 to $5.5 million for the three months ended December
31, 1998. The increases are primarily a result of a $461,000 increase in
interest from loans receivable and a $397,000 net increase in interest and
dividends from investment securities and financial institutions. The Company
had higher average balances for the quarter in loans receivable due to loan
growth and higher average balances in investments securities and funds held
with financial institutions due to a portion of the net proceeds from the
stock conversion being invested in these assets.
Total interest expense decreased 10.1% from $2.2 million for the three months
ended December 31, 1997 to $2.0 million for the three months ended December
31, 1998, primarily as a result of a decrease in the average balance of
interest bearing deposit accounts from $183.1 million for the quarter ending
December 31, 1997 to $163.5 million for the quarter December 31, 1998. The
average interest bearing deposit balance for the quarter ending December 31,
1997 was higher primarily due to funds received for stock orders in December
1997.
PROVISION FOR LOAN LOSSES: The provision for loan losses decreased from
$60,000 for the three months ended December 31, 1997 to $44,000 for the three
months ended December 31, 1998. Management decreased the provision for loan
losses because it deemed the general loan loss reserves of $1.8 million at
December 31, 1998 (.86% of loans receivable, net and 37.8% 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 decreased 21.6% from $324,000 for
the three months ended December 31, 1997 to $254,000 for the three months
ended December 31, 1998. This decrease is primarily as a result of a $47,000
decrease in gain on sale of loans and $46,000 decrease in servicing income on
loans sold, and is partially offset by a $24,000 increase in escrow fees.
NONINTEREST EXPENSE: Total noninterest expense increased 16.1% from $1.5
million for the three months ended December 31, 1997 to $1.7 million for the
three months ended December 31, 1998. The largest portion of this increase is
a result of increased salary and employee benefit expense, which increased
from $839,000 for the three months ended December 31, 1997 to $1.1 million for
the three months ended December 31, 1998. The release of ESOP shares accounted
for $79,000 of the increased compensation expense. The remaining portion of
the increased compensation expense is a result of adding additional employees
and cost of living increases for current employees. The number of full-time
equivalent employees increased from 90 at December 31, 1997 to 97 at December
31, 1998 as a result of restructuring the loan department and the loan
servicing department, hiring three commercial loan officers, hiring additional
personnel for the Auburn Escrow department and elevating several part-time
positions to full-time positions.
15
PROVISION FOR INCOME TAXES: The provision for income taxes increased from
$383,000 for the three months ended December 31, 1997 to $660,000 for the
three months ended December 31, 1998 primarily as a result of higher income
before income taxes.
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 December 31,
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 23.0%. At December 31, 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 $49.1 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 December
31, 1998, the Bank had loan commitments totaling $15.8 million and undisbursed
loans in process totaling $27.0 million. The Bank anticipates that it will
have sufficient funds available to meet current loan commitments. Certificates
of deposit that are scheduled to mature in less than one year from December
31, 1998 totaled $72.2 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 December 31, 1998, the Bank was in compliance with all
applicable capital requirements. For additional details see "Regulatory
Capital".
16
REGULATORY CAPITAL
- ------------------
The following table compares the Bank's regulatory capital at December 31,
1998 to its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Adjusted Total
Amount Assets (1)
------ --------------
GAAP capital $ 54,961 21.72%
Tier 1 (leverage) capital $ 54,821 22.02%
Tier 1 (leverage) capital requirement 9,956 4.00
-------- -----
Excess 44,865 18.02%
Tier 1 risk adjusted capital $ 54,821 31.29%
Tier 1 risk adjusted capital requirement 7,008 4.00
-------- -----
Excess $ 47,813 27.29%
Total risk based capital $ 56,593 32.30%
Total risk based capital requirement 14,016 8.00
-------- -----
Excess $ 42,577 24.30%
- -------------------
(1) For the Tier 1 (leverage) capital and Washington regulatory capital
calculations, percent of total average assets of $248.9 million. For the Tier
1 risk-based capital and total risk-based capital calculations, percent of
total risk-weighted assets of $175.2 million.
17
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended December 31,
1998 1997
----------------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.97% 1.41%
Return on average equity (1) 6.70% 12.84%
Net interest margin 5.46% 4.48%
Efficiency ratio 46.68% 55.68%
December 31, September 30,
1998 1998
-----------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 4,694 $ 4,806
Total non-performing assets 5,984 6,530
Non-performing assets to total assets 2.22% 2.46%
Allowance for loan losses to
non-performing loans 37.75% 35.96%
BOOK VALUE PER SHARE (2) $ 13.22 $ 13.02
- ---------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
YEAR 2000 ISSUES
- ----------------
The Year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all.
This inability to recognize or properly treat the year 2000 may cause systems
to fail or process financial and operational information incorrectly.
The Bank has established a committee to address Year 2000 issues. The
committee has conducted a comprehensive review of its computer systems and
equipment to identify applications that could be affected by Year 2000 issues
and has implemented a plan designed to ensure that all software used in
connection with the Bank's business will function correctly with dates past
1999.
The Bank has an in-house data processing department, which maintains the
Bank's main system on an IBM AS400. The Bank has completed the extensive
project of reprogramming all of its internal codes on this system to be Year
2000 compliant. The Bank also completed testing of the system with regulatory
suggested dates in November 1998. The test results have indicated that this
system is compliant in all material respects.
18
The Bank also uses software from third party vendors for applications such as
accounts payable, fixed assets, loan processing, and wire transfers. The Bank
has received Year 2000 compliant software updates for all mission critical
software.
The Bank's Year 2000 committee is also in the process of addressing the credit
risk within the Bank's lending activities. The Bank realizes that current and
prospective commercial borrowers, like itself, must address the Year 2000
issue. Recently, the Bank sent out questionnaires to its largest commercial
borrowers asking them if they were aware of the Year 2000 issues and if they
were taking steps to address the issue. The Bank has received responses back
from approximately half of the commercial borrowers. All responses have
indicated that borrowers are aware of the Year 2000 issue and are taking the
necessary steps to prepare for it or that they have no mission critical
computer systems. In addition, when underwriting a prospective commercial
loan, the Bank considers what effect, if any, the Year 2000 issue may have on
the business of the prospective borrower as well as the borrower's ability to
meet its contractual obligations with the Bank in the event the Year 2000
issue affects the borrower's business.
The Bank's Year 2000 committee is currently developing contingency plans for
other areas which may be affected by Year 2000 issues, such as the loss of
electrical power for sustained periods.
The Bank has budgeted approximately $162,000 towards its Year 2000 compliance
efforts. To date, the Bank has expended approximately $112,000 towards Year
2000 compliance issues. The Bank does not believe that the ultimate costs
associated with its Year 2000 compliance efforts will be material to the Bank.
However, no assurances can be given that such costs will not be higher and
have a material adverse effect on the Bank's financial condition and results
of operations.
The above discussion contains certain forward-looking statements. The
discussion is based on the Bank's current assessment and is subject to
uncertainties that could cause the implementation schedule, the costs and the
results contemplated by the plan to differ materially from the Bank's
expectation.
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,
1998.
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.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------
The annual Meeting of Shareholders of the Company was held on January 25,
1999. The results of the vote on the matters presented at the meeting is as
follows:
1. The following individuals were elected as directors:
For Withheld
--- --------
No. of Votes Percentage No. of Votes Percentage
------------------------- -------------------------
Clarence E. Hamre 5,268,186 96.46% 193,368 3.54%
(one-year term)
Andrea M. Clinton 5,230,651 95.77% 230,903 4.23%
(one-year term)
Robert Backstrom 5,250,851 96.14% 210,703 3.86%
(one-year term)
Michael R. Sand 5,279,351 96.66% 182,203 3.34%
(two-year term)
Alan E. Smith 5,271,176 96.51% 190,378 3.49%
(two-year term)
Peter J. Majar 5,256,376 96.24% 205,178 3.76%
(two-year term)
Richard R. Morris, Jr. 5,257,891 96.27% 203,663 3.73%
(three-year term)
Jon C. Parker 5,231,610 95.79% 229,944 4.21%
(three-year term)
James C. Mason 5,345,950 97.88% 115,604 2.12%
(three-year term)
2. The Timberland Bancorp, Inc. 1999 Stock Option Plan was approved by the
following votes:
For 2,896,361 76.79%
Against 783,970 20.78%
Abstain 91,572 2.43%
3. The Timberland Bancorp, Inc. 1999 Management Recognition and Development
Plan was approved by the following votes:
For 3,059,031 80.47%
Against 685,009 18.02%
Abstain 57,277 1.51%
20
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
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
21
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 10, 1999 By: /s/ Clarence E. Hamre
--------------------------
Clarence E. Hamre
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 10, 1999 By: /s/ Michael R. Sand
--------------------------
Michael R. Sand
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
22