UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
934 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 May 10, 1999
----- ----------------------------------
common stock, $.01 par value 5,385,922
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) 9-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and September 30, 1998
(unaudited)
ASSETS
March 31, September 30,
1999 1998
---------------------------------
Cash and due from financial institutions:
Noninterest bearing deposits $ 5,826,591 $ 7,039,152
Interest bearing deposits 2,419,430 14,744,548
---------------------------------
8,246,021 21,783,700
---------------------------------
Investments and mortgage-backed securities:
Available for sale 34,295,522 35,415,199
---------------------------------
Loans receivable 195,301,107 192,735,300
Loans held for sale - at market value 18,208,833 8,213,741
Less: Allowance for loan losses (1,791,716) (1,728,122)
---------------------------------
211,718,224 199,220,919
---------------------------------
Accrued interest receivable 1,390,083 1,389,399
Premises and fixed assets - net 6,473,405 5,339,925
Real estate owned - net 1,223,172 1,723,865
Other assets 612,958 835,515
---------------------------------
TOTAL ASSETS $ 263,959,385 $265,708,522
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 176,381,410 $170,833,817
Federal Home Loan Bank advances 13,553,290 11,618,062
Other liabilities and accrued expenses 1,246,049 1,477,033
---------------------------------
TOTAL LIABILITIES 191,180,749 183,928,912
---------------------------------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
50,000,000 shares authorized;
6,612,500 shares issued,
5,385,922 and 6,281,875 shares
outstanding, respectively. 53,859 62,819
Additional paid in capital 49,101,186 60,183,217
Unearned Shares - Employee Stock
Ownership Plan (7,269,484) (7,533,807)
Retained earnings 30,968,369 28,947,783
Accumulated other comprehensive
income (loss) (75,294) 119,598
---------------------------------
TOTAL SHAREHOLDERS' EQUITY 72,778,636 81,779,610
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 263,959,385 $265,708,522
---------------------------------
See notes to unaudited consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three months and six months ended March 31, 1999 and 1998
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
1999 1998 1999 1998
------------------------------- ---------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 5,128,587 $ 4,345,333 $ 9,921,229 $ 8,677,039
Investments and mortgage-backed securities 333,705 222,295 728,667 280,599
Dividends 233,448 30,925 442,941 62,914
Financial institutions 46,354 675,482 161,507 908,001
-----------------------------------------------------------
TOTAL INTEREST INCOME 5,742,094 5,274,035 11,254,344 9,928,553
-----------------------------------------------------------
INTEREST EXPENSE
Deposits 1,797,440 1,849,042 3,646,234 3,915,550
Federal Home Loan Bank advances 187,131 169,894 353,463 344,036
-----------------------------------------------------------
TOTAL INTEREST EXPENSE 1,984,571 2,018,936 3,999,697 4,259,586
-----------------------------------------------------------
NET INTEREST INCOME 3,757,523 3,255,099 7,254,647 5,668,967
PROVISION FOR LOAN LOSSES 30,000 50,000 73,593 110,000
-----------------------------------------------------------
Net interest income after
provision for loan losses 3,727,523 3,205,099 7,181,054 5,558,967
NONINTEREST INCOME
Service charges on deposits 108,993 82,818 194,033 170,128
Gain on sale of loans-net 5,448 98,315 39,825 166,064
Market value (writedown) recovery
on loans held for sale (34,956) 5,207 (36,416) 17,646
Gain on sale of securities 1,585 -- 1,585 --
Other fees 77,043 79,881 144,573 131,992
Income (loss) on operations of real estate - net (12,163) 444 (31,423) (1,415)
Escrow fees 58,798 57,742 123,849 98,901
Servicing income (loss) on loans sold (28,334) 113,525 (28,289) 159,969
Other 27,919 19,213 50,908 38,156
------------------------------------------------------------
TOTAL NONINTEREST INCOME 204,333 457,145 458,645 781,441
------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,057,196 971,923 2,108,359 1,810,586
Premises and fixed assets 214,377 197,081 434,421 380,008
Deposit insurance premiums 25,586 26,710 49,203 52,701
Advertising 63,915 52,255 119,900 124,542
Other 447,493 284,300 827,997 655,299
------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 1,808,567 1,532,269 3,539,880 3,023,136
------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,123,289 2,129,975 4,099,819 3,317,272
PROVISION FOR INCOME TAXES 707,445 716,053 1,367,301 1,099,400
------------------------------------------------------------
NET INCOME $ 1,415,844 $ 1,413,922 $ 2,732,518 $ 2,217,872
============================================================
Earnings per common share:
Basic $ 0.28 $ 0.23 $ 0.51 $ 0.36
Diluted $ 0.28 $ 0.23 $ 0.51 $ 0.36
Weighted average shares outstanding (1):
Basic 5,143,479 6,083,613 5,312,837 6,083,613
Diluted 5,145,777 6,083,613 5,315,135 6,083,613
(1) Unallocated 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 six months ended March 31, 1999
(unaudited)
Accumu-
lated
Other
Addi- Compre- Total
Common Common tional 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 6,612,500 66,125 64,883,875 64,950,000
related to Conversion
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
securities 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 2,732,518 2,732,518
Repurchase of Common Stock (895,953) (8,960) (11,035,381) (11,044,341)
Payment of Dividend (711,932) (711,932)
ESOP Compensation Expense (2) (46,650) 264,323 217,673
Net Unrealized loss
On available for sale
securities (194,892) (194,892)
---------------------------------------------------------------------------
Balance, March 31, 1999 5,385,922 $53,859 $49,101,186 (7,269,484)$30,968,369 $(75,294)$72,778,636
---------------------------------------------------------------------------
- ----------------------------
(1) Unearned ESOP Shares are not considered outstanding for the purpose of computing earnings per share
(see Note 3). 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 Six months ended March 31, 1999 and 1998
(unaudited)
Six Months Ended
March 31,
---------
1999 1998
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,732,518 $ 2,217,872
-----------------------
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 175,790 177,082
Deferred federal income taxes 100,400 --
Federal Home Loan Bank stock dividends (66,700) (62,800)
Market value adjustment - loans held for sale 36,416 (17,646)
Noncash compensation expense related to
ESOP benefit 217,673 113,036
Gain on sale of real estate owned, net (6,516) --
Provision for loan and real estate owned losses 102,093 119,526
Net decrease (increase) in loans originated for
sale (10,031,508) 612,076
Net decrease (increase) in other assets 221,873 (395,902)
Decrease in other liabilities and accrued expenses,
net (230,983) (427,485)
------------------------
(9,481,462) 117,887
------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,748,944) 2,335,759
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held
to maturity -- 804,281
Purchase of securities available for sale
(29,544,147) (5,269,593)
Purchase of securities held to maturity -- (16,194,112)
Proceeds from maturities & sales of securities
available for sale 30,435,231 --
Decrease (increase) in loans receivable, net (2,575,806) 555,415
Additions to premises and fixed assets, net (1,309,270) (118,064)
Additions to real estate owned (507,602) (3,833,270)
Dispositions of real estate owned 986,311 301,490
------------------------
NET CASH USED BY INVESTING ACTIVITIES (2,515,283) (23,753,853)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits, net 5,547,593 (8,975,791)
Increase (decrease) in Federal Home Loan Bank
advances, net 1,935,228 (59,428)
Repurchase of common stock (11,044,341) --
Payment of Dividend (711,932) --
Net proceeds from issuance of common stock -- 64,950,000
Funding to ESOP trust for purchase of common stock -- (7,930,307)
------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (4,273,452) 47,984,474
------------------------
NET INCREASE (DECREASE) IN CASH (13,537,679) 26,566,380
Cash and due from financial institutions, Beginning 21,783,700 11,446,455
------------------------
Cash and due from financial institutions, Ending $ 8,246,021 $ 38,012,835
------------------------
See notes to unaudited consolidated financial statements
(continued)
6
Six months ended
March 31,
1999 1998
----------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 1,150,000 $ 1,437,289
Interest paid 3,997,846 4,311,276
Supplemental Disclosure of Noncash Investing Activities
Loans transferred to real estate owned 311,961 3,526,209
Market Value adjustment of investments held for sale (295,292) 7,132
Deferred federal income taxes on market value adjustment
of investments held for sale 100,400 (2,425)
See notes to unaudited consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the three months and six months ended March 31, 1999 and 1998
(unaudited)
Three months Six months
ended March 31, ended March 31,
1999 1998 1999 1998
----------------------- ----------------------
Comprehensive Income:
Net income $ 1,415,844 $ 1,413,922 $ 2,732,518 $ 2,217,872
Change in unrealized
gain (losses)
on securities available
for sale, net of tax (61,861) -- (194,892) 4,707
------------------------------------------------
Comprehensive income $ 1,353,983 $ 1,413,922 $ 2,537,626 $ 2,222,579
================================================
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 and six months ended
March 31, 1999 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. On
January 13, 1998, the Company's common stock began trading on the Nasdaq
National Market under the symbol "TSBK".
9
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted earnings
per share is computed by dividing net income applicable to 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. In accordance with Statement of
Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership
Plans (ESOP), 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 March 31, 1999, there were 502,550 ESOP
shares that had not been allocated.
Three Months Six Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
--------------------- ----------------
Basic EPS computation
Numerator - Net Income $ 1,415,844 $ 1,413,922 $ 2,732,518 $2,217,872
Denominator - Weighted
average common shares
outstanding 5,143,479 6,083,613 5,312,837 6,083,613
Basic EPS $ 0.28 $ 0.23 $ 0.51 $ 0.36
Diluted EPS computation
Numerator- Net Income $ 1,415,844 $ 1,413,922 $ 2,732,518 $2,217,872
Denominator-Weighted average
common shares outstanding 5,143,479 6,083,613 5,312,837 6,083,613
Effect of dilutive stock
option 2,298 -- 2,298 --
---------- --------- --------- ---------
Weighted average common
shares and common stock
equivalents 5,145,777 6,083,613 5,315,135 6,083,613
Diluted EPS $ 0.28 $ 0.23 $ 0.51 $ 0.36
(4)DIVIDEND
On April 22, 1999, the Company declared a quarterly cash dividend of $.07 per
common share. The dividend is to be paid May 21, 1999, to shareholders of
record as of the close of business May 7, 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. On February 19, 1999, the Company announced the
completion of its previously announced stock repurchase program, at an average
price of $12.431 per share.
(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
10
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
and six months ended March 31, 1999. This report contains certain
"forward-looking statements." The Company desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this statement for the express purpose of availing
itself of the protection of such safe harbor with forward looking statements.
These forward looking statements may describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the economic climate in the Company's market areas and the country as
a whole, loan delinquency rates, and changes in federal and state regulation.
These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
Comparison of Financial Condition at September 30, 1998 and March 31, 1999
Total Assets: Total assets decreased 0.7% from $265.7 million at September 30,
1998 to $264.0 million at March 31, 1999, primarily as a result of using $11.0
million to repurchase shares of the Company's stock, and is partially offset
by an increase in loans receivable and loans held-for-sale, net, which were
primarily funded by increased deposits.
Cash and Due from Financial Institutions: Cash and due from financial
institutions decreased by 62.1% from $21.8 million at September 30, 1998 to
$8.2 million at March 31, 1999. This decrease is primarily a result of using
$11.0 million in funds to repurchase shares of the Company's stock.
Investments and Mortgage-backed Securities: Investments and mortgage-backed
securities decreased by 3.2% from $35.4 million at September 30, 1998 to $34.3
million at March 31, 1999. This decrease is primarily due to scheduled
amortization, prepayments, maturities and sales.
Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses:
Loans receivable, including loans held-for-sale, net, increased by 6.3% from
$199.2 million at September 30, 1998 to $211.7 million at March 31, 1999.
This increase is primarily a result of an increase in one-to-four family
mortgage loans (including loans held for sale), construction loans, and
commercial business loans held in the Bank's portfolio.
11
Premises and Fixed Assets: Premises and fixed assets increased by 21.2% from
$5.3 million at September 30, 1998 to $6.5 million at March 31, 1999. This
increase is primarily a result of the Bank acquiring the Yelm branch building
(which opened March 1st) and two other properties for future branch locations.
Real Estate Owned, net: Real estate owned, net, decreased from $1.7 million at
September 30, 1998 to $1.2 million at March 31, 1999. This decrease is
primarily attributable to a $539,000 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 3.2% from $170.8 million at September 30, 1998
to $176.4 million at March 31, 1999. This increase is primarily attributable
to growth of $4.7 million in the Bank's certificate of deposit accounts and
smaller increases in non-interest bearing accounts and money market accounts.
Shareholders' Equity: Total shareholders' equity decreased 11.0% from $81.8
million at September 30, 1998 to $72.8 million at March 31, 1999, primarily as
a result of using $11.0 million to repurchase 895,953 shares of the Company's
stock, and is partially offset by net income of $2.7 million (less dividends
paid of $712,000.)
12
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at March 31, 1999 and September 30, 1998.
At March 31, At September 30,
1999 1998
----------- ----------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 814 $ 996
Commercial 1,703 2,919
Construction and land development 78 --
Land 291 397
Consumer loans 109 17
Commercial Business Loans 81 81
-------- --------
Total 3,076 4,410
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Construction and land development 1,108 396
-------- --------
Total 1,108 396
Total of nonaccrual and
90 days past due loans $ 4,184 $ 4,806
Real estate owned and other
repossessed assets 1,223 1,724
-------- --------
Total nonperforming assets $ 5,407 $ 6,530
Restructured loans 234 236
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable,
(including loans held for sale)(1) 1.96% 2.39%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 1.59% 1.81%
Nonperforming assets as a percentage
of total assets 2.05% 2.46%
Loans receivable, (including loans
held for sale) (1) $213,510 $200,949
-------- --------
Total assets $263,959 $265,709
-------- --------
- ------------------
(1) Loans receivable is before the allowance for loan losses
13
The following is a discussion of the Company's major problem assets at March
31, 1999:
Convenience store/retail space and mini-storage, Kitsap County, Washington.
- ----------------------------------------------------------------------------
The Bank had 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
September 30, 1998. These loans became delinquent primarily because of a
dispute between the two borrowers. The Bank initiated foreclosure proceedings
which were stayed due to a bankruptcy filing by the borrowers in January of
1998. The bankruptcy was subsequently dismissed and the mini storage facility
was sold at a trustees sale on March 12, 1999 for the full balance, accrued
interest, late charges and fees owed. The foreclosure of the convenience
store is in progress. As of March 31, 1999 the remaining loan was classified
as "substandard" and had a principal balance of $1.4 million. Although no
assurances can be given, the Bank does not expect to incur any material loss
on this loan.
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 $213,000
at March 31, 1999. The Bank has been actively marketing the project and, as
of May 3, 1999, 29 of the 30 units had sold and the remaining Real Estate
Owned balance was $109,000. 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.
14
Loans Receivable
- ----------------
The following table sets forth the composition of the Company's loan
portfolio by type of loan.
At March 31, At September 30,
1999 1998
Amount Percent Amount Percent
------------------ ---------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1) $ 108,451 43.81% $ 100,921 43.48%
Multi family 13,365 5.40 12,432 5.36
Commercial 34,000 13.73 32,906 14.18
Construction and land
development 68,422 27.64 64,172 27.65
Land 8,140 3.29 7,749 3.34
--------- ------ --------- ------
Total mortgage loans 232,378 93.87 218,180 94.01
Consumer Loans:
Home equity and second
mortgage 8,037 3.25 8,740 3.77
Other 4,139 1.67 4,066 1.74
--------- ------ --------- ------
12,176 4.92 12,806 5.51
Commercial business loans 2,996 1.21 1,105 0.48
--------- ------ --------- ------
Total loans 247,550 100.00% 232,091 100.00%
------ ------
Less:
Undisbursed portion of loans
in process (31,564) (28,886)
Unearned income (2,440) (2,256)
Allowance for loan losses (1,792) (1,728)
Market value adjustment of
loans --
held-for-sale (36) --
--------- ---------
Total loans receivable,
net $ 211,718 $ 199,221
--------- ---------
- -----------------
(1) Includes loans held-for-sale.
15
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1999
Net Income: Net income increased from $1,414,000 ($0.23 per basic share) for
the three months ended March 31, 1998 to $1,416,000 ($0.28 per basic share)
for the three months ended March 31, 1999.
Net Interest Income: Net interest income increased 15.4% from $3.3 million for
the three months ended March 31, 1998 to $3.8 million for the three months
ended March 31, 1999.
Total interest income increased 8.9% from $5.3 million for the three months
ended March 31, 1998 to $5.7 million for the three months ended March 31,
1999. The increase is primarily a result of a $783,000 increase in interest
from loans receivable and is partially offset by a $315,000 net decrease in
interest and dividends from investment securities and financial institutions.
The increase in interest income from loans receivable is primarily a result of
higher average balances for the quarter in loans receivable due to loan
growth, and the recognition of $313,000 of back interest and fee income on a
large non-performing loan that paid off in March. The net decrease in interest
and dividends from investments securities and financial institutions is
primarily a result of lower average balances for the quarter in funds held
with financial institutions due to a portion of these funds being used to
repurchase shares of the Company's stock and to fund loan growth.
Total interest expense decreased 1.7% from $2,019,000 for the three months
ended March 31, 1998 to $1,985,000 for the three months ended March 31, 1999,
primarily as a result of a decrease in the weighted average rate paid on
interest-bearing deposits from 4.53% for the three months ended March 31, 1998
to 4.34% for the three months ended March 31, 1999.
Provision for Loan Losses: The provision for loan losses decreased from
$50,000 for the three months ended March 31, 1998 to $30,000 for the three
months ended March 31, 1999. Management decreased the provision for loan
losses because it deemed the general loan loss reserves of $1.8 million at
March 31, 1999 (.84% of loans receivable, net and 42.8% 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. Non-performing
loans decreased from $4.8 million at September 30, 1998 to $4.2 million at
March 31, 1999, primarily due to a large delinquent commercial loan being paid
off. For additional information see "Non Performing Assets" section.
Noninterest Income: Total noninterest income decreased 55.4% from $457,000
for the three months ended March 31, 1998 to $204,000 for the three months
ended March 31, 1999, primarily due to a decrease in loan sales which resulted
in a $142,000 decrease in servicing income on loans sold and a $93,000
decrease in gain on sale of loans. These decreases were partially offset by a
$26,000 increase in service charges on deposits.
Noninterest Expense: Total noninterest expense increased 18.0% from $1.5
million for the three months ended March 31, 1998 to $1.8 million for the
three months ended March 31, 1999, primarily due to increases in salary and
benefit expense, and expenses associated with the Company's first annual
meeting. Salary and benefit expenses increased by $85,000 primarily a result
of adding additional employees. The number of full-time equivalent employees
increased from 91 at March 31, 1998 to 101 at March 31, 1999 as a result of
hiring three commercial loan officers, opening a new branch in Yelm,
restructuring the loan department and the loan servicing department, and
elevating several part-time positions to full-time positions. Costs
associated with the Company's initial annual report and annual meeting
increased noninterest expense by approximately $66,000. Smaller increases in
expenses relating to premises and fixed assets, advertising, ATMs,
organizational dues and office supplies accounted for the bulk of the
remaining increases.
16
Comparison of Operating Results for the Six Months Ended March 31, 1998 and
1999
Net Income: Net income increased from $2.2 million ($0.36 per basic share) for
the six months ended March 31, 1998 to $2.7 million ($0.51 per basic share)
for the six months ended March 31, 1999.
Net Interest Income: Net interest income increased 28.0% from $5.7 million for
the six months ended March 31, 1998 to $7.3 million for the six months ended
March 31, 1999.
Total interest income increased 13.4% from $9.9 million for the six months
ended March 31, 1998 to $11.3 million for the six months ended March 31, 1999.
The increase is primarily a result of a $1.2 million increase in interest from
loans receivable. The increase in interest income from loans receivable is
primarily a result of higher average balances for the quarter in loans
receivable due to loan growth, and the recognition of $313,000 of back
interest and fee income on a large non-performing loan that paid off in March.
Total interest expense decreased 6.1% from $4.3 million for the six months
ended March 31, 1998 to $4.0 million for the six months ended March 31, 1998.
This decrease is primarily the result of a decrease in the average balance of
interest bearing deposit accounts from $173.1 million for the six months
ending March 31, 1998 to $164.5 million for the six months ending March 31,
1999 and a decrease in the weighted average rate paid on interest-bearing
deposits from 4.52% for the six months ended March 31, 1998 to 4.43% for the
six months ended March 31, 1999.
Provision for Loan Losses: The provision for loan losses decreased from
$110,000 for the six months ended March 31, 1998 to $74,000 for the six months
ended March 31, 1999. Management decreased the provision for loan losses
because it deemed the general loan loss reserves of $1.8 million at March 31,
1999 (.84% of loans receivable, net and 42.8% 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. Non-performing loans
decreased from $4.8 million at September 30, 1998 to $4.2 million at March 31,
1999, primarily due to a large delinquent commercial loan being paid off. For
additional information see "Non Performing Assets" section.
Noninterest Income: Total noninterest income decreased 41.2% from $781,000
for the six months ended March 31, 1998 to $459,000 for the six months ended
March 31, 1999, primarily due to a decrease in loan sales which resulted in a
$188,000 decrease in servicing income on loans sold and a $126,000 decrease in
gain on sale of loans. These decreases are partially offset by $25,000
increase in escrow fees and a $24,000 increase in service charges on deposits.
Noninterest Expense: Total noninterest expense increased 17.1% from $3.0
million for the six months ended March 31, 1998 to $3.5 million for the six
months ended March 31, 1999. The largest portion of this increase is a result
of increased salary and employee benefit expense, which increased from $1.8
million for the six months ended March 31, 1998 to $2.1 million for the six
months ended March 31, 1999. ESOP compensation expense increased by $105,000
for the six months ended March 31, 1999, and the remaining portion of the
increased compensation expense is a result of adding additional employees and
increases for current employees. The number of full-time equivalent employees
increased from 91 at March 31, 1998 to 101 at March 31, 1999 as a result of
hiring three commercial loan officers, opening a new branch in Yelm,
restructuring the loan department and the loan servicing department, and
elevating several part-time positions to full-time positions. Smaller
increases in expenses relating to premises and fixed assets, advertising,
ATMs, organizational dues, office supplies, and the Company's first annual
meeting accounted for the bulk of the remaining increases.
17
Provision for Income Taxes: The provision for income taxes increased from
$1.1 million for the six months ended March 31, 1998 to $1.4 million for the
six months ended March 31, 1999 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 loans and proceeds from 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
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.
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 March 31, 1999,
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 25.6%.
The Bank also maintained an uncommitted credit facility with the FHLB-Seattle
that provided for immediately available advances up to an aggregate amount of
$51.0 million, under which $13.6 million was outstanding at March 31, 1999.
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 March
31, 1999, the Bank had loan commitments totaling $19.8 million and undisbursed
loans in process totaling $31.6 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 March 31, 1999 totaled $72.9 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 March 31, 1999, the Bank was in compliance with all applicable
capital requirements. For additional details see "Regulatory Capital".
18
Regulatory Capital
- ------------------
The following table compares the Bank's regulatory capital at March 31, 1999
to its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Adjusted
Amount Total Assets (1)
-------- ----------------
GAAP capital $ 56,294 22.07%
Tier 1 (leverage) capital $ 56,163 22.05%
Tier 1 (leverage) capital requirement 10,186 4.00
-------- -----
Excess 45,977 18.05%
Tier 1 risk adjusted capital $ 56,163 31.53%
Tier 1 risk adjusted capital requirement 7,125 4.00
-------- -----
Excess $ 49,038 27.53%
Total risk based capital $ 57,955 32.54%
Total risk based capital requirement 14,250 8.00
-------- -----
Excess $ 43,705 24.54%
- -------------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$254.7 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $178.1 million.
19
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
(unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
--------------- ---------------
PERFORMANCE RATIOS:
Return on average assets (1) 2.11% 2.09% 2.04% 1.78%
Return on average equity (1) 7.53% 7.21% 7.10% 8.57%
Net interest margin 5.84% 4.99% 5.65% 4.76%
Efficiency ratio 46.00% 41.84% 46.34% 47.68%
March 31, September 30,
1999 1998
--------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 4,184 $ 4,806
Total non-performing assets 5,407 6,530
Non-performing assets to total assets 2.05% 2.46%
Allowance for loan losses to
non-performing loans 42.83% 35.96%
BOOK VALUE PER SHARE (2) $ 13.51 $ 13.02
- ----------------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
Year 2000 Readiness Disclosure
- ------------------------------
The Year 2000 (Y2K) 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 Company 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 Company's business will function correctly with dates past
1999.
The Company has an in-house data processing department, which maintains the
Company's main system on an IBM AS400. The Company has completed the
extensive project of reprogramming all of its internal codes on this system to
be Year 2000 compliant. The Company 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.
20
The Company also uses software from third party vendors for applications such
as accounts payable, fixed assets, loan processing, and wire transfers. The
Company has received Year 2000 compliant software updates for all mission
critical software.
Timberland's Year 2000 committee has also assessed credit risk within the
Bank's loan portfolio. The Bank realizes that commercial borrowers, like
itself, must also address the Year 2000 issue. To help assess each individual
commercial loan, Timberland sent out questionnaires to its commercial
borrowers asking them if they were aware of the Year 2000 issues and if they
were taking steps to address the issues. The committee then assigned each
commercial loan a Year 2000 risk rating (low, moderate, or high) based on a
variety of factors, which include: responses to the Y2K questionnaire,
industry vulnerability, loan size, and collateral position. Although no
assurances can be given, the committee does not believe credit risk to the
Bank will be material, based on the assessment analysis. 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 issues affects the borrower's business.
The Company'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 and additional liquidity requirements.
These plans are scheduled to be validated and tested by June 30, 1999.
The Company has budgeted approximately $159,000 towards its Year 2000
compliance efforts. To date, the Company has expended approximately $119,000
towards Year 2000 compliance issues. The Company does not believe that the
ultimate costs associated with its Year 2000 compliance efforts will be
material to the Company. However, no assurances can be given that such costs
will not be higher and have a material adverse effect on the Company's
financial condition and results of operations.
The above discussion contains certain forward-looking statements. The
discussion is based on the Company'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 Company's
expectation.
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, 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.
21
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 **
10(c) Timberland Bancorp, Inc. 1999 Stock Option 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.
*** Incorporated by reference to the Registrants Annual Meeting Proxy
Statement dated December 15, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: May 10, 1999 By: \s\Clarence E. Hamre
----------------------------------
Clarence E. Hamre
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1999 By: \s\Michael R. Sand
----------------------------------
Michael R. Sand
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
23