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, 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
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 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 Statements 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 11-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22-23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
(unaudited)
ASSETS
June 30, September 30,
1999 1998
Cash and due from financial institutions: ----------------------------
Noninterest bearing deposits $ 5,755,297 $ 7,039,152
Interest bearing deposits 3,295,730 14,744,548
----------------------------
9,051,027 21,783,700
Investments and mortgage-backed securities: ----------------------------
Available for sale 32,415,448 35,415,199
----------------------------
Loans receivable 212,725,659 192,735,300
Loans held for sale - at market value 21,134,448 8,213,741
Less: Allowance for loan losses (1,795,664) (1,728,122)
----------------------------
232,064,443 199,220,919
----------------------------
Accrued interest receivable 1,407,470 1,389,399
Premises and fixed assets - net 6,877,760 5,339,925
Real estate owned - net 1,092,878 1,723,865
Other assets 627,416 835,515
----------------------------
TOTAL ASSETS $283,536,442 $265,708,522
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $180,010,187 $170,833,817
Federal Home Loan Bank advances 29,418,514 11,618,062
Other liabilities and accrued expenses 833,485 1,477,033
----------------------------
TOTAL LIABILITIES 210,262,186 183,928,912
----------------------------
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 49,070,489 60,183,217
Unearned Shares - Employee Stock Ownership Plan (7,137,322) (7,533,807)
Retained earnings 31,697,861 28,947,783
Accumulated other comprehensive income (loss) (410,631) 119,598
----------------------------
TOTAL SHAREHOLDERS' EQUITY 73,274,256 81,779,610
TOTAL LIABILITIES AND SHAREHOLDERS' ----------------------------
EQUITY $283,536,442 $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 nine months ended June 30, 1999 and 1998
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------------- -----------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 5,078,163 $ 4,453,634 $14,999,392 $13,130,673
Investments and mortgage-
backed securities 328,651 372,870 1,057,318 653,469
Dividends 159,945 32,565 602,886 95,479
Financial institutions 33,187 459,880 194,694 1,367,881
------------------------------------------------
TOTAL INTEREST INCOME 5,599,946 5,318,949 16,854,290 15,247,502
------------------------------------------------
INTEREST EXPENSE
Deposits 1,758,107 1,762,111 5,404,341 5,677,661
Federal Home Loan Bank
advances 268,168 165,494 621,631 509,530
------------------------------------------------
TOTAL INTEREST EXPENSE 2,026,275 1,927,605 6,025,972 6,187,191
------------------------------------------------
NET INTEREST INCOME 3,573,671 3,391,344 10,828,318 9,060,311
PROVISION FOR LOAN LOSSES 70,000 45,000 143,593 155,000
------------------------------------------------
Net interest income after
provision for loan losses 3,503,671 3,346,344 10,684,725 8,905,311
NONINTEREST INCOME
Service charges on deposits 121,820 80,485 315,853 250,613
Gain (loss) on sale of
loans - net (1,619) 87,173 38,206 253,237
Market value (writedown)
recovery on loans held
for sale (368,962) (746) (405,378) 16,900
Gain on sale of securities 518 -- 2,103 --
Other fees 89,350 73,870 233,923 205,862
Escrow fees 62,952 70,870 186,801 169,771
Servicing income (expense)
on loans sold 10,457 90,000 (17,832) 249,969
Other 26,020 22,486 76,928 60,642
------------------------------------------------
TOTAL NONINTEREST INCOME (59,464) 424,138 430,604 1,206,994
------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee
benefits 1,063,233 936,439 3,171,592 2,747,025
Premises and fixed assets 211,372 178,223 645,793 558,231
Deposit insurance premiums 25,637 38,943 74,840 91,644
Advertising 107,149 67,957 227,049 192,499
Loss on operations of real
estate - net 6,843 6,463 38,266 7,878
Other 377,128 349,368 1,205,125 1,004,667
------------------------------------------------
TOTAL NONINTEREST EXPENSE 1,791,362 1,577,393 5,362,665 4,601,944
------------------------------------------------
INCOME BEFORE INCOME TAXES 1,652,845 2,193,089 5,752,664 5,510,361
PROVISION FOR INCOME TAXES 546,338 741,995 1,913,639 1,841,395
------------------------------------------------
NET INCOME $ 1,106,507 $ 1,451,094 $ 3,839,025 $ 3,668,966
================================================
Earnings per common share:
Basic $ 0.23 $ 0.24 $ 0.74 $ 0.60
Diluted $ 0.23 $ 0.24 $ 0.74 $ 0.60
Weighted average shares
outstanding (1):
Basic 4,883,372 6,092,414 5,169,682 6,086,547
Diluted 4,883,372 6,092,414 5,169,682 6,086,547
(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 nine months ended June 30, 1999
(unaudited)
Accumu-
lated
Compre-
Common Common Additional Unearned hensive Other
Stock Stock Paid in ESOP Retained Income Shareholders
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 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 3,839,025 3,839,025
Repurchase of
Common Stock (895,953) (8,960) (11,035,381) (11,044,341)
Payment of Dividend (1,088,947) (1,088,947)
ESOP Compensation
Expense (2) (77,347) 396,485 319,138
Net Unrealized loss
On available for
sale securities (530,229) (530,229)
Balance, June 30, -----------------------------------------------------------------------------------
1999 5,385,922 $53,859 $49,070,489 $(7,137,322) $31,697,861 $(410,631) $73,274,256
-----------------------------------------------------------------------------------
- --------------------
(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 Nine months ended June 30, 1999 and 1998
(unaudited)
Nine Months Ended
June 30,
1999 1998
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,839,025 $ 3,668,966
Noncash revenues, expenses, gains and losses -------------------------
included in income:
Depreciation 263,594 261,161
Deferred federal income taxes 273,150 --
Federal Home Loan Bank stock dividends (98,800) (94,600)
Market value adjustment - loans held for sale 405,378 (16,900)
Noncash compensation expense related to ESOP
benefit 319,138 201,859
Loss (gain) on sale of real estate owned, net (6,516) 4,543
Provision for loan and real estate owned losses 172,093 164,526
Net decrease (increase) in loans originated for
sale (13,326,085) 436,753
Net decrease (increase) in other assets 190,028 (504,085)
Decrease in other liabilities and accrued
expenses, net (643,548) (496,731)
-------------------------
(12,451,568) (43,474)
-------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (8,612,543) 3,625,492
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to
maturity -- 1,644,286
Purchase of securities available for sale (29,689,858) (8,115,813)
Purchase of securities held to maturity -- (16,194,351)
Proceeds from maturities and sales of securities
available for sale 31,985,030 --
Increase in loans receivable, net (20,066,410) (1,927,974)
Additions to premises and fixed assets, net (1,801,429) (154,839)
Additions to real estate owned (737,284) (4,165,803)
Dispositions of real estate owned 1,346,287 2,052,501
-------------------------
NET CASH USED BY INVESTING ACTIVITIES (18,963,664) (26,861,993)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits, net 9,176,370 (7,844,791)
Increase (decrease) in Federal Home Loan Bank
advances, net 17,800,452 (591,335)
Repurchase of common stock (11,044,341) --
Payment of Dividends (1,088,947) (396,750)
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 BY FINANCING ACTIVITIES 14,843,534 48,186,817
-------------------------
NET INCREASE (DECREASE) IN CASH (12,732,673) 24,950,316
Cash and due from financial institutions,
Beginning 21,783,700 11,446,455
Cash and due from financial institutions, -------------------------
Ending $ 9,051,027 $36,396,771
-------------------------
See notes to unaudited consolidated financial statements
(continued)
6
Nine Months Ended
June 30,
1999 1998
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,839,025 $ 3,668,966
Noncash revenues, expenses, gains and losses -------------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 2,125,000 $ 2,237,289
Interest paid 5,986,791 6,250,527
Supplemental Disclosure of Noncash Investing
Activities
Loans transferred to real estate owned 517,064 3,608,848
Market Value adjustment of investments held
for sale (803,379) (3,019)
Deferred federal income taxes on market value
adjustment of investments held for sale 273,150 1,026
See notes to unaudited consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months and nine months ended June 30, 1999 and 1998
(unaudited)
Three months ended June 30, Nine months ended June 30,
1999 1998 1999 1998
-------------------------- -------------------------
Comprehensive Income:
Net income $ 1,106,507 $ 1,451,094 $ 3,839,025 $ 3,668,966
Change in unrealized
losses on securi-
ties available for
sale, net of tax (335,337) (6,700) (530,229) (1,993)
------------------------------------------------------
Comprehensive income $ 771,170 $ 1,444,394 $ 3,308,796 $ 3,666,973
======================================================
See notes to unaudited consolidated financial statements
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 nine months ended
June 30, 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 June 30, 1999, there were 502,550 ESOP
shares that had not been allocated.
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------- ----------------------
Basic EPS computation
Numerator - Net Income $1,106,507 $1,451,094 $3,839,025 $3,668,966
Denominator - Weighted
average common shares
outstanding 4,883,372 6,092,414 5,169,682 6,086,547
Basic EPS $ 0.23 $ 0.24 $ 0.74 $ 0.60
Diluted EPS computation
Numerator - Net Income $1,106,507 $1,451,094 $3,839,025 $3,668,966
Denominator - Weighted
average common shares
outstanding 4,883,372 6,092,414 5,169,682 6,086,547
Effect of dilutive stock
option -- -- -- --
---------- ---------- ---------- ----------
Weighted average common
shares and common stock
equivalents 4,883,372 6,092,414 5,169,682 6,086,547
Diluted EPS $ 0.23 $ 0.24 $ 0.74 $ 0.60
(4) DIVIDEND
On July 26, 1999, the Company announced a quarterly cash dividend of $.08 per
common share. The dividend is to be paid August 20, 1999, to shareholders of
record as of the close of business August 6, 1999.
(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 unallocated 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
10
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.
Reporting Comprehensive Income. SFAS No. 130, "Reporting Comprehensive
Income," was issued in June 1997 and requires businesses to disclose
comprehensive income and its components in their financial statements. This
statement does not affect the results of operations or financial condition of
the Company. The Company adopted SFAS No. 130 on October 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company adopted SFAS No. 133
as of September 30, 1998.
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, 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 June 30, 1999
Total Assets: Total assets increased 6.7% from $265.7 million at September 30,
1998 to $283.5 million at June 30, 1999, primarily as a result of a $32.8
million increase in loans receivable and loans held for sale, net, which was
primarily funded by increased Federal Home Loan Bank borrowings and increased
deposits. The increase in loans receivable and loans held for sale, net, was
partially offset by the use of $11.0 million to repurchase shares of the
Company's stock.
Cash and Due from Financial Institutions: Cash and due from financial
institutions decreased by 58.5% from $21.8 million at September 30, 1998 to
$9.1 million at June 30, 1999. This decrease is primarily due to using $11.0
million in funds to repurchase 895,953 shares of the Company's stock. (These
shares were repurchased in October 1998 and February 1999.)
Investments and Mortgage-backed Securities: Investments and mortgage-backed
securities decreased by 8.5% from $35.4 million at September 30, 1998 to $32.4
million at June 30, 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 16.5% from
$199.2 million at September 30, 1998 to $232.1 million at
11
June 30, 1999. This increase is primarily a result of an increase in
one-to-four family mortgage loans (including loans held for sale),
construction loans, commercial mortgage loans, and commercial business loans
held in the Bank's portfolio.
Premises and Fixed Assets: Premises and fixed assets increased by 28.8% from
$5.3 million at September 30, 1998 to $6.9 million at June 30, 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 $1.1 million at June 30, 1999. This decrease is
primarily attributable to a $752,000 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 5.4% from $170.8 million at September 30, 1998
to $180.0 million at June 30, 1999. This increase is primarily attributable
to growth of $6.3 million in the Bank's certificate of deposit accounts and
smaller increases in non-interest bearing accounts and money market accounts.
Federal Home Loan Bank Advances: Federal Home Loan Bank ("FHLB") advances
increased 153.2% from $11.6 million at September 30, 1999 to $29.4 million at
June 30, 1999, primarily to fund loan portfolio growth.
Shareholders' Equity: Total shareholders' equity decreased 10.4% from $81.8
million at September 30, 1998 to $73.3 million at June 30, 1999, primarily as
the result of the repurchase of 895,953 shares of the Company's stock for
$11.0 million, and is partially offset by net income of $3.8 million (less
dividends paid of $1.1 million.)
12
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at June 30, 1999 and September 30, 1998.
At June 30, At September 30,
1999 1998
---------- ---------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 866 $ 996
Commercial 1,871 2,919
Construction and land development 49 --
Land 146 397
Consumer loans 367 17
Commercial Business Loans -- 81
-------- --------
Total 3,299 4,410
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Construction and land development 337 396
-------- --------
Total 337 396
Total of nonaccrual and
90 days past due loans $ 3,636 $ 4,806
Real estate owned and other
repossessed assets 1,093 1,724
-------- --------
Total nonperforming assets $ 4,729 $ 6,530
Restructured loans 494 236
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, (including loans held for
sale)(1) 1.55% 2.39%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 1.28% 1.81%
Nonperforming assets as a percentage
of total assets 1.67% 2.46%
Loans receivable, (including loans
held for sale) (1) $233,860 $200,949
-------- --------
Total assets $283,536 $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 June
30, 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 June 30, 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. The loans were classified by the Bank as "Real Estate Owned" of
$213,000 at March 31, 1999. The Bank actively marketed the project and, as of
June 30, 1999, all of the 30 units have been sold.
14
Loans Receivable
- ----------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan.
At June 30, At September 30,
1999 1998
Amount Percent Amount Percent
------------------- --------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1) $ 112,040 41.06% $ 100,921 43.48%
Multi family 13,302 4.88 12,432 5.36
Commercial 45,392 16.64 32,906 14.18
Construction and
land development 77,254 28.32 64,172 27.65
Land 8,631 3.16 7,749 3.34
--------- ------ --------- ------
Total mortgage loans 256,619 94.06 218,180 94.01
Consumer Loans:
Home equity and second
mortgage 7,470 2.74 8,740 3.77
Other 4,290 1.57 4,066 1.74
--------- ------ --------- ------
11,760 4.31 12,806 5.51
Commercial business loans 4,453 1.63 1,105 0.48
--------- ------ --------- ------
Total loans 272,832 100.00% 232,091 100.00%
====== ======
Less:
Undisbursed portion of
loans in process (35,753) (28,886)
Unearned income (2,814) (2,256)
Allowance for loan losses (1,796) (1,728)
Market value adjustment
of loans held-for-sale (405) --
Total loans receivable, --------- ---------
net $ 232,064 $ 199,221
========= =========
- ----------------
(1) Includes loans held-for-sale.
15
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1999
Net Income: Net income for the quarter ended June 30, 1999 was $1,107,000 or
$0.23 per basic share ($0.23 per diluted share) compared to net income of
$1,451,000 or $0.24 per basic share ($0.24 per diluted share) for the quarter
ended June 30, 1998. Net income for the current quarter was suppressed by a
$369,000 ($244,000 after income tax) market value adjustment on loans held for
sale. Earnings per basic share and earnings per diluted share would have been
$0.28 without this market value adjustment.
Net Interest Income: Net interest income increased 5.4% from $3.4 million for
the three months ended June 30, 1998 to $3.6 million for the three months
ended June 30, 1999.
Total interest income increased 5.3% from $5.3 million for the three months
ended June 30, 1998 to $5.6 million for the three months ended June 30, 1999.
The increase is primarily a result of a $625,000 increase in interest from
loans receivable and is partially offset by a $344,000 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. 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 increased 5.1% from $1.9 million for the three months
ended June 30, 1998 to $2.0 million for the three months ended June 30, 1999.
This increase is primarily a result of a $103,000 increase in interest paid on
FHLB advances as average FHLB advances increased from $11.9 million for the
quarter ended June 30, 1998 to $20.6 million for the quarter ended June 30,
1999. This increase is partially offset by a $4,000 decrease in interest
expense on deposits as the weighted average rate paid on interest-bearing
deposits decreased from 4.53% for the three months ended June 30, 1998 to
4.26% for the three months ended June 30, 1999.
Provision for Loan Losses: The provision for loan losses increased from
$45,000 for the three months ended June 30, 1998 to $70,000 for the three
months ended June 30, 1999. Management increased the provision for loan
losses due to growth in the Bank's loan portfolio. Management deemed the
general loan loss reserves of $1.8 million at June 30, 1999 (.77% of loans
receivable and loans held for sale, and 49.4% 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 $3.6 million at June 30,
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 114.0% from $424,000
for the three months ended June 30, 1998 to a negative $59,000 for the three
months ended June 30, 1999, primarily due to a $369,000 market value writedown
on loans held for sale. A $3.9 million decrease in loan sales also resulted
in a decrease in servicing income on loans sold and a decrease in gain on sale
of loans. These decreases were partially offset by a $41,000 increase in
service charges on deposits.
Noninterest Expense: Total noninterest expense increased 13.6% from $1.6
million for the three months ended June 30, 1998 to $1.8 million for the three
months ended June 30, 1999, primarily due to increases in salary and benefit
expense. Salary and benefit expenses increased by $127,000 primarily due to
adding additional employees. The number of full-time equivalent employees
increased from 97 at June 30, 1998 to 106 at June 30, 1999 as a result of
hiring three commercial loan officers, opening a new branch in Yelm, hiring
employees for the new Bethel Station Branch in Spanaway (scheduled to open in
October) and elevating several
16
part-time positions to full-time positions. Smaller increases in expenses
relating to premises and fixed assets and advertising accounted for the
majority of the remaining increases.
Provision for Income Taxes: The provision for income taxes decreased from
$742,000 for the three months ended June 30, 1998 to $546,000 for the three
months ended June 30, 1999 primarily as a result of lower income before income
taxes.
17
Comparison of Operating Results for the Nine Months Ended June 30, 1998 and
1999
Net Income: Net income for the nine months ended June 30, 1999 was $3.8
million or $0.74 per basic share ($0.74 per diluted share) compared to $3.7
million or $0.60 per basic share ($0.60 per diluted share) for the nine months
ended June 30, 1998.
Net Interest Income: Net interest income increased 19.5% from $9.1 million for
the nine months ended June 30, 1998 to $10.8 million for the nine months ended
June 30, 1999.
Total interest income increased 10.5% from $15.2 million for the nine months
ended June 30, 1998 to $16.9 million for the nine months ended June 30, 1999.
The increase is primarily a result of a $1.9 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 delinquent
interest and fee income on a large non-performing loan that paid o ff in March
1999.
Total interest expense decreased 2.6% from $6.2 million for the nine months
ended June 30, 1998 to $6.0 million for the nine months ended June 30, 1999.
This decrease is primarily the result of a decrease in the weighted average
rate paid on interest-bearing deposits from 4.53% for the nine months ended
June 30, 1998 to 4.38% for the nine months ended June 30, 1999. This decrease
is partially offset by a $112,000 increase in interest expense on FHLB
advances as the average balance of FHLB advances increased from $12.1 for the
nine months ended June 30, 1998 to $15.4 for the nine months ended June 30,
1999.
Provision for Loan Losses: The provision for loan losses decreased from
$155,000 for the nine months ended June 30, 1998 to $144,000 for the nine
months ended June 30, 1999, even though management increased the provision
during the current quarter. Management deemed the general loan loss reserves
of $1.8 million at June 30, 1999 (.77% of loans receivable, net and 49.4% 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 $3.6
million at June 30, 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 64.3% from $1.2
million for the nine months ended June 30, 1998 to $431,000 for the nine
months ended June 30, 1999. These decreases were primarily a result of a
$405,000 market value writedown on loans held for sale, and an $11.6 million
decrease in loan sales which resulted in a decrease in recognized servicing
income on loans sold and a decrease in gain on sale of loans. These decreases
are partially offset by a $65,000 increase in service charges on deposits, a
$17,000 increase in escrow fees and a $14,000 increase in ATM fees.
Noninterest Expense: Total noninterest expense increased 16.5% from $4.6
million for the nine months ended June 30, 1998 to $5.4 million for the nine
months ended June 30, 1999. The largest portion of this increase is a result
of increased salary and employee benefit expense, which increased from $2.7
million for the nine months ended June 30, 1998 to $3.2 million for the nine
months ended June 30, 1999. ESOP compensation expense increased by $48,000
for the nine months ended June 30, 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 97 at June 30, 1998 to 106 at June 30, 1999 as a result of
hiring three commercial loan officers, opening a new branch in Yelm, hiring
employees for the new Bethel Station Branch (scheduled to open in October) 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 majority of the remaining increases.
18
Provision for Income Taxes: The provision for income taxes increased from
$1.8 million for the nine months ended June 30, 1998 to $1.9 million for the
nine months ended June 30, 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 June 30, 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 24.4%.
The Bank also maintained an uncommitted credit facility with the FHLB-Seattle
that provided for immediately available advances up to an aggregate amount of
$55.0 million, under which $29.4 million was outstanding at June 30, 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 June
30, 1999, the Bank had loan commitments totaling $19.9 million and undisbursed
loans in process totaling $35.8 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,
1999 totaled $75.3 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, 1999, the Bank was in compliance with all applicable
capital requirements. For additional details see "Regulatory Capital".
19
Regulatory Capital
The following table compares the Bank's regulatory capital at June 30, 1999 to
its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Amount Adjusted Total Assets (1)
------ -------------------------
GAAP capital $ 57,029 22.07%
Tier 1 (leverage) capital $ 57,139 21.78%
Tier 1 (leverage) capital requirement 10,496 4.00
-------- ------
Excess 46,643 17.78%
Tier 1 risk adjusted capital $ 57,139 29.14%
Tier 1 risk adjusted capital
requirement 7,843 4.00
-------- ------
Excess $ 49,296 25.14%
Total risk based capital $ 58,935 30.06%
Total risk based capital requirement 15,685 8.00
-------- ------
Excess $ 43,250 22.06%
- -------------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$262.4 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $196.1 million.
20
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------ -----------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.63% 2.21% 1.90% 1.93%
Return on average equity (1) 6.05% 6.78% 6.76% 7.88%
Net interest margin 5.47% 5.44% 5.59% 5.02%
Efficiency ratio 52.01% 41.74% 48.25% 45.47%
June 30, September 30,
1999 1998
--------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 3,636 $ 4,806
Total non-performing assets 4,729 6,530
Non-performing assets to total
assets 1.67% 2.46%
Allowance for loan losses to
non-performing loans 49.39% 35.96%
BOOK VALUE PER SHARE (2) $ 13.60 $ 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 tested the system with regulatory
suggested dates in November 1998. The test results have indicated that this
system is compliant in all material respects.
21
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 installed and tested 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 has developed contingency plans in the event
of a business disruption due to power outages or natural disasters. The
contingency plan has been validated and tested. The Year 2000 committee will
continue to review and retest aspects of the Year 2000 Readiness Plan
throughout the remainder of the year.
The Company has budgeted approximately $162,000 towards its Year 2000
compliance efforts. To date, the Company has expended approximately $132,000
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
- ----------------------------------------
22
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**
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 June 30,
1999.
23
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 10, 1999 By: /s/ Clarence E. Hamre
---------------------------------------
Clarence E. Hamre
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 1999 By: /s/ Michael R. Sand
---------------------------------------
Michael R. Sand
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
24