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, 2011
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 or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
624 Simpson Avenue, Hoquiam, Washington 98550
(Address of principal executive offices) (Zip Code)
(360) 533-4747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated Filer
---- ----
Non-accelerated filer Smaller reporting company X
---- ----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT July 31, 2011
----- -----------------------------------
Common stock, $.01 par value 7,045,036
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4-5
Condensed Consolidated Statements of Shareholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7-8
Condensed Consolidated Statements of Comprehensive Income
(Loss) 9
Notes to Unaudited Condensed Consolidated Financial
Statements 10-32
Item 2. Management's Discussion and Analysis of Financial 32-49
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
Item 4. Controls and Procedures 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 50
Item 1A. Risk Factors 50
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. (Removed and Reserved) 51
Item 5. Other Information 51
Item 6. Exhibits 51-52
SIGNATURES 53
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2011 and September 30, 2010
(Dollars in thousands, except share data)
(Unaudited)
June 30, September 30,
2011 2010
----------------------
Assets
Cash and cash equivalents:
Cash and due from financial institutions $ 10,997 $ 9,466
Interest-bearing deposits in banks 103,306 102,320
----------------------
Total cash and cash equivalents 114,303 111,786
----------------------
Certificates of deposit ("CDs") held for
investment (at cost) 18,087 18,047
Mortgage-backed securities ("MBS") and other 4,283 5,066
investments - held to maturity,
at amortized cost (estimated fair value $4,352
and $4,842)
MBS and other investments - available for sale 7,679 11,119
Federal Home Loan Bank of Seattle ("FHLB") stock 5,705 5,705
Loans receivable 532,322 535,885
Loans held for sale 766 2,970
Less: Allowance for loan losses (11,790) (11,264)
----------------------
Net loans receivable 521,298 527,591
----------------------
Premises and equipment, net 16,981 17,383
Other real estate owned ("OREO") and other
repossessed assets, net 10,996 11,519
Accrued interest receivable 2,527 2,630
Bank owned life insurance ("BOLI") 13,762 13,400
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 439 564
Mortgage servicing rights ("MSRs"), net 2,463 1,929
Prepaid Federal Deposit Insurance Corporation
("FDIC") insurance assessment 2,335 3,268
Other assets 8,510 7,030
----------------------
Total assets $735,018 $742,687
======================
Liabilities and shareholders' equity
Deposits: Non-interest-bearing demand $ 57,735 $ 58,755
Deposits: Interest-bearing 531,763 520,114
----------------------
Total deposits 589,498 578,869
----------------------
FHLB advances 55,000 75,000
Repurchase agreements 598 622
Other liabilities and accrued expenses 3,588 2,788
----------------------
Total liabilities 648,684 657,279
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 15,932 15,764
shares authorized;
16,641 shares, Series A, issued and outstanding;
$1,000 per share liquidation value
Common stock, $.01 par value; 50,000,000 shares 10,464 10,377
authorized;
7,045,036 shares issued and outstanding
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,049) (2,247)
Retained earnings 62,608 62,238
Accumulated other comprehensive loss (621) (724)
----------------------
Total shareholders' equity 86,334 85,408
----------------------
Total liabilities and shareholders' equity $735,018 $742,687
======================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2011 and 2010
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
------------------- -------------------
Interest and dividend income
Loans receivable $ 8,192 $ 8,764 $24,966 $26,661
MBS and other investments 141 239 486 695
Dividends from mutual funds 8 9 23 27
Interest-bearing deposits in
banks 90 90 260 218
------------------- -------------------
Total interest and dividend
income 8,431 9,102 25,735 27,601
------------------- -------------------
Interest expense
Deposits 1,463 1,950 4,805 5,986
FHLB advances - long term 556 760 1,835 2,384
Federal Reserve Bank of San
Francisco ("FRB") and other
borrowings - - 1 - - 3
------------------- -------------------
Total interest expense 2,019 2,711 6,640 8,373
------------------- -------------------
Net interest income 6,412 6,391 19,095 19,228
Provision for loan losses 3,400 750 5,000 8,545
------------------- -------------------
Net interest income after
provision for loan losses 3,012 5,641 14,095 10,683
------------------- -------------------
Non-interest income
Total other than temporary
impairment ("OTTI") (70) (81) (224) (688)
Portion of OTTI recognized in other
comprehensive loss (before income
taxes) (95) (71) (112) (1,340)
------------------- -------------------
Net OTTI recognized in earnings (165) (152) (336) (2,028)
Realized loss on MBS and other
investments -- -- (2) (17)
Gains on sales of MBS and other
investments -- -- 79 - -
Service charges on deposits 993 1,066 2,875 3,218
ATM transaction fees 515 439 1,384 1,187
BOLI net earnings 121 120 361 369
Gains on sales of loans, net 247 238 1,214 987
Servicing income (expense) on
loans sold, net 7 32 (13) 86
Valuation recovery (allowance)
on MSRs (137) 22 703 --
Fee income from non-deposit
investment sales 25 17 73 52
Other 155 159 482 486
------------------- -------------------
Total non-interest income, net 1,761 1,941 6,820 4,340
------------------- -------------------
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (continued)
For the three and nine months ended June 30, 2011 and 2010
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
------------------- -------------------
Non-interest expense
Salaries and employee benefits $ 3,150 $ 3,117 $ 9,393 $ 9,019
Premises and equipment 667 717 2,036 2,120
Advertising 235 235 604 626
OREO and other repossessed assets
expense, net 496 373 930 767
ATM expenses 203 164 583 490
Postage and courier 139 130 400 400
Amortization of CDI 42 48 125 143
State and local taxes 155 159 475 453
Professional fees 190 193 567 561
FDIC insurance 248 317 919 1,323
Insurance 56 154 299 283
Other 1,201 815 3,005 2,427
------------------- -------------------
Total non-interest expense 6,782 6,422 19,336 18,612
------------------- -------------------
Income (loss) before federal and
state income taxes (2,009) 1,160 1,579 (3,589)
Provision (benefit) for federal
and state income taxes (729) 356 417 (1,439)
------------------- -------------------
Net income (loss) (1,280) 804 1,162 (2,150)
Preferred stock dividends (208) (208) (624) (624)
Preferred stock discount accretion (57) (53) (168) (156)
------------------- -------------------
Net income (loss) to common
shareholders $(1,545) $ 543 $ 370 $(2,930)
=================== ===================
Net income (loss) per common share:
Basic $ (0.23) $ 0.08 $ 0.05 $ (0.44)
Diluted $ (0.23) $ 0.08 $ 0.05 $ (0.44)
Weighted average shares
outstanding:
Basic 6,745,250 6,715,410 6,745,250 6,713,103
Diluted 6,745,250 6,715,410 6,745,487 6,711,103
Dividends paid per common
share: $ - - $ 0.01 $ - - $ 0.04
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the nine months ended June 30, 2011 and the year ended September 30, 2010
(Dollars in thousands, except per share amounts)
(Unaudited)
Accumu-
lated
Number of Shares Amount Other
------------------- ------------------ Unearned Compre-
Preferred Common Preferred Common Shares - Retained hensive
Stock Stock Stock Stock ESOP Earnings Loss Total
------ ------ ------- ------ --------- -------- --------- -----
Balance, September 30, 2009 16,641 7,045,036 $15,554 $10,315 $(2,512) $65,854 $(2,012) $87,199
Net loss - - - - - - - - - - (2,291) - - (2,291)
Accretion of preferred stock
discount - - - - 210 - - - - (210) - - - -
Cash dividends
($0.04 per common share) - - - - - - - - - - (283) - - (283)
(5% preferred stock) - - - - - - - - - - (832) - - (832)
Earned ESOP shares - - - - - - (78) 265 - - - - 187
MRDP (1) compensation expense - - - - - - 134 - - - - - - 134
Stock option compensation
expense - - - - - - 6 - - - - - - 6
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 491 491
Change in OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 766 766
Accretion of OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 31 31
------ --------- ------- ------- ------- ------- ------ -------
Balance, September 30, 2010 16,641 7,045,036 15,764 10,377 (2,247) 62,238 (724) 85,408
Net income - - - - - - - - - - 1,162 - - 1,162
Accretion of preferred stock
discount - - - - 168 - - - - (168) - - - -
5% preferred stock dividend - - - - - - - - - - (624) - - (624)
Earned ESOP shares - - - - - - (47) 198 - - - - 151
MRDP (1) compensation expense - - - - - - 129 - - - - - - 129
Stock option compensation
expense - - - - - - 5 - - - - - - 5
Unrealized holding gain on
securities available for
sale, net of tax - - - - - - - - - - - - 2 2
Change in OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 74 74
Accretion of OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 27 27
------ --------- ------- ------- ------- ------- ------ -------
Balance, June 30, 2011 16,641 7,045,036 $15,932 $10,464 $(2,049) $62,608 $(621) $86,334
====== ========= ======= ======= ======= ======= ====== =======
----------------
(1) 1998 Management Recognition and Development Plan ("MRDP").
See notes to unaudited condensed consolidated financial statements
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30,
Cash flow from operating activities 2011 2010
---------------------
Net income (loss) $ 1,162 $ (2,150)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 5,000 8,545
Depreciation 743 881
Deferred federal income taxes (412) 1,466
Amortization of CDI 125 143
Earned ESOP shares 198 199
MRDP compensation expense 129 128
Stock option compensation expense 5 4
Gains on sales of OREO and other repossessed
assets, net (527) (270)
Provision for OREO losses 973 505
Loss on disposition of premises and equipment 3 14
BOLI net earnings (361) (360)
Gains on sales of loans, net (1,214) (987)
Decrease in deferred loan origination fees (241) (207)
OTTI losses on MBS and other investments 336 2,028
Gains on sales of available for sale securities (79) - -
Realized losses on held to maturity securities 2 17
Loans originated for sale (44,266) (44,213)
Proceeds from sale of loans 47,684 44,376
Increase in other assets, net (718) (5,235)
Increase (decrease) in other liabilities and
accrued expenses, net 177 (206)
---------------------
Net cash provided by operating activities 8,719 4,678
Cash flow from investing activities
Net increase in CDs held for investment (40) (11,937)
Proceeds from maturities and prepayments of
securities available for sale 1,248 2,432
Proceeds from maturities and prepayments of
securities held to maturity 697 955
Proceeds from sales of available for sale
securities 2,272 - -
Increase in loans receivable, net (3,476) (1,095)
Additions to premises and equipment (344) (378)
Proceeds from sales of OREO and other repossessed
assets 2,883 2,651
---------------------
Net cash provided by (used in) investing activities 3,240 (7,372)
Cash flow from financing activities
Increase in deposits, net 10,629 62,324
Repayment of FHLB advances (20,000) (20,000)
Repayment of FRB advances -- (10,000)
Decrease in repurchase agreements (24) (64)
ESOP tax effect (47) (76)
MRDP compensation tax effect - - 2
Payment of dividends - - (699)
---------------------
Net cash provided by (used in) financing
activities (9,442) 31,487
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended June 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30,
2011 2010
---------------------
Net increase in cash and cash equivalents
$ 2,517 $ 28,793
Cash and cash equivalents
Beginning of period 111,786 66,462
---------------------
End of period $114,303 $ 95,255
=====================
Supplemental disclosure of cash flow information
Income taxes paid $ 2,097 $ 791
Interest paid 6,786 8,555
Supplemental disclosure of non-cash investing
activities
Loans transferred to OREO and other repossessed
assets $ 4,344 $ 9,009
Loan originated to facilitate the sale of OREO 1,538 1,351
See notes to unaudited condensed consolidated financial statements
8
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended June 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
------------------- -------------------
Comprehensive income (loss):
Net income (loss) $(1,280) $ 804 $1,162 $(2,150)
Unrealized holding gain on
securities available for
sale, net of tax 50 79 2 84
Change in OTTI on securities
held to maturity, net of tax:
Additions (9) 23 (65) 83
Additional amount recognized
related to credit loss for
which OTTI was previously
recognized 5 10 15 706
Amount reclassified to credit
loss for previously recorded
market loss 67 13 124 82
Accretion of OTTI securities
held to maturity, net of tax 8 7 27 25
------------------- -------------------
Total comprehensive income (loss) $(1,159) $ 936 $1,265 $ (870)
=================== ===================
See notes to unaudited condensed consolidated financial statements
9
Timberland Bancorp, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements for Timberland Bancorp, Inc. ("Company") were prepared in
accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and with instructions
for Form 10-Q and, therefore, do not include all disclosures necessary for a
complete presentation of financial condition, results of operations, and cash
flows in conformity with GAAP. However, all adjustments which are in the
opinion of management necessary for a fair presentation of the interim
condensed consolidated financial statements have been included. All such
adjustments are of a normal recurring nature. The unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2010 ("2010 Form 10-K").
The results of operations for the three and nine months ended June 30, 2011
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
(b) Principles of Consolidation: The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-owned subsidiary,
Timberland Service Corp. All significant inter-company balances have been
eliminated in consolidation.
(c) Operating Segment: The Company has one reportable operating segment
which is defined as community banking in western Washington under the
operating name, "Timberland Bank."
(d) The preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(e) Certain prior period amounts have been reclassified to conform to the
June 30, 2011 presentation with no change to net income (loss) or total
shareholders' equity previously reported.
(2) REGULATORY MATTERS
In December 2009, the FDIC and the Washington State Department of Financial
Institutions, Division of Banks ("Division") determined that the Bank required
supervisory attention and, on December 29, 2009, entered into an agreement on
a Memorandum of Understanding with the Bank ("Bank MOU"). Under the Bank MOU,
the Bank must among other things, maintain Tier 1 Capital of not less than
10.0% of the Bank's adjusted total assets and maintain capital ratios above
the "well capitalized" thresholds as defined under FDIC Rules and Regulations;
obtain the prior consent from the FDIC and the Division prior to the Bank
declaring a dividend to its holding company; and not engage in any
transactions that would materially change the Bank's balance sheet composition
including growth in total assets of five percent or more or significant
changes in funding sources without the prior non-objection of the FDIC.
In addition, on February 1, 2010, the Federal Reserve Bank of San Francisco
("FRB") determined that the Company required additional supervisory attention
and entered into a Memorandum of Understanding with the Company ("Company
MOU"). Under the Company MOU, the Company must, among other things, obtain
prior written approval or non-objection from the FRB to declare or pay any
dividends, or make any other capital distributions; issue any trust preferred
securities; or purchase or redeem any of its stock. The FRB has denied
10
the Company's requests to pay dividends on its Series A Preferred Stock issued
under the U.S. Treasury Department's Capital Purchase Program ("CPP") for
quarterly payments due for the last five quarters commencing with the payments
due May 15, 2010. For additional information on the CPP, see Note 3 below
entitled "U.S Treasury Department's Capital Purchase Program."
(3) U.S. TREASURY DEPARTMENT'S CAPITAL PURCHASE PROGRAM
On December 23, 2008, the Company received $16.64 million from the U.S.
Treasury Department ("Treasury") as a part of the Treasury's CPP. The CPP was
established as part of the Troubled Asset Relief Program ("TARP"). The
Company sold 16,641 shares of senior preferred stock with a related warrant to
purchase 370,899 shares of the Company's common stock at a price of $6.73 per
share at any time through December 23, 2018. The preferred stock pays a 5.0%
dividend for the first five years, after which the rate increases to 9.0% if
the preferred shares are not redeemed by the Company.
Preferred stock is initially recorded at the amount of proceeds received. Any
discount from the liquidation value is accreted to the expected call date and
charged to retained earnings. This accretion is recorded using the
level-yield method. Preferred dividends paid (or accrued) and any accretion
is deducted from (added to) net income (loss) for computing income available
(loss) to common shareholders and net income (loss) per share computations.
Under the Company MOU, the Company must, among other things, obtain prior
written approval, or non-objection from the FRB to declare or pay any
dividends. The FRB has denied the Company's requests to pay dividends on its
Series A Preferred Stock issued under the CPP for quarterly payments due for
the last five quarters commencing with the payment due May 15, 2010. There
can be no assurances that the FRB will approve such payments or dividends in
the future. The Company may not declare or pay dividends on its common stock
or, with certain exceptions, repurchase common stock without first having paid
all cumulative preferred dividends that are due. If dividends on the Series A
Preferred Stock are not paid for six quarters, whether or not consecutive, the
Treasury has the right to appoint two members to the Company's Board of
Directors.
11
(4) MBS AND OTHER INVESTMENTS
MBS and other investments have been classified according to management's
intent and are as follows as of June 30, 2011 and September 30, 2010 (dollars
in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
June 30, 2011
-------------
Held to Maturity
MBS:
U.S. government agencies $ 1,889 $ 35 $ (4) $ 1,920
Private label residential 2,366 107 (71) 2,402
U.S. agency securities 28 2 - - 30
------- ----- ------ -------
Total $ 4,283 $ 144 $ (75) $ 4,352
======= ===== ====== =======
Available for Sale
MBS:
U.S. government agencies $ 4,800 $ 176 $ - - $ 4,976
Private label residential 1,804 69 (145) 1,728
Mutual funds 1,000 - - (25) 975
------- ----- ------ -------
Total $ 7,604 $ 245 $ (170) $ 7,679
======= ===== ====== =======
September 30, 2010
------------------
Held to Maturity
MBS:
U.S. government agencies $ 2,107 $ 29 $ (5) $ 2,131
Private label residential 2,931 161 (411) 2,681
U.S. agency securities 28 2 - - 30
------- ----- ------ -------
Total $ 5,066 $ 192 $ (416) $ 4,842
======= ===== ====== =======
Available for Sale
MBS:
U.S. government agencies $ 7,846 $ 262 $ - - $ 8,108
Private label residential 2,198 73 (248) 2,023
Mutual funds 1,000 - - (12) 988
------- ----- ------ -------
Total $11,044 $ 335 $ (260) $11,119
======= ===== ====== =======
12
The estimated fair value of temporarily impaired securities, the amount of
unrealized losses and the length of time these unrealized losses existed as of
June 30, 2011 are as follows (dollars in thousands):
Less Than 12 Months 12 Months or Longer
------------------- ------------------- Total
Esti- Esti- Esti-
mated Gross mated Gross mated Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Held to Maturity
MBS:
U.S. government
agencies $ 77 $ (1) $ 365 $ (3) $ 442 $ (4)
Private label
residential - - - - 549 (71) 549 (71)
----- ----- ------ ----- ------ -----
Total $ 77 $ (1) $ 914 $ (74) $ 991 $ (75)
===== ===== ====== ===== ====== =====
Available for Sale
MBS:
U.S. government
agencies $ - - $ - - $ - - $ - - $ - - $ - -
Private label
residential - - - - 1,033 (145) 1,033 (145)
Mutual funds - - - - 975 (25) 975 (25)
----- ----- ------ ----- ------ -----
Total $ - - $ - - $2,008 $(170) $2,008 $(170)
===== ===== ====== ===== ====== =====
During the three months ended June 30, 2011 and 2010, the Company recorded net
OTTI charges through earnings on residential MBS of $165,000 and $152,000,
respectively. During the nine months ended June 30, 2011 and 2010, the
Company recorded net OTTI charges through earnings on residential MBS of
$336,000 and $2.03 million, respectively. The Company provides for the
bifurcation of OTTI into (i) amounts related to credit losses which are
recognized through earnings, and (ii) amounts related to all other factors
which are recognized as a component of other comprehensive income (loss).
To determine the component of the gross OTTI related to credit losses, the
Company compared the amortized cost basis of each OTTI security to the present
value of its revised expected cash flows, discounted using its pre-impairment
yield. The revised expected cash flow estimates for individual securities are
based primarily on an analysis of default rates, prepayment speeds and
third-party analytic reports. Significant judgment by management is required
in this analysis that includes, but is not limited to, assumptions regarding
the collectability of principal and interest, net of related expenses, on the
underlying loans. The following table presents a summary of the significant
inputs utilized to measure management's estimate of the credit loss component
on OTTI securities as of June 30, 2011 and September 30, 2010:
Range
--------------------- Weighted
Minimum Maximum Average
------- ------- --------
At June 30, 2011
----------------
Constant prepayment rate 6.00% 15.00% 10.16%
Collateral default rate 0.51% 40.48% 10.52%
Loss severity rate 28.13% 66.10% 45.74%
At September 30, 2010
---------------------
Constant prepayment rate 6.00% 15.00% 8.28%
Collateral default rate 3.69% 68.09% 34.75%
Loss severity rate 30.02% 60.43% 45.35%
13
The following tables present the OTTI for the three and nine months ended June
30, 2011 and 2010 (dollars in thousands):
Three months ended Three months ended
June 30, 2011 June 30, 2011
------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI $ 41 $ 29 $ 81 $ - -
Portion of OTTI recognized in
other comprehensive loss
(before income taxes) (1) 95 - - 71 - -
------ ------ ------- -----
Net OTTI recognized in
earnings (2) $ 136 $ 29 $ 152 $ - -
====== ====== ======= =====
Nine months ended Nine months ended
June 30, 2011 June 30, 2011
------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI $ 194 $ 30 $ 595 $ 93
Portion of OTTI recognized in
other comprehensive loss
(before income taxes) (1) 112 - - 1,340 - -
------ ------ ------- -----
Net OTTI recognized in
earnings (2) $ 306 $ 30 $ 1,935 $ 93
====== ====== ======= =====
-------------
(1) Represents OTTI related to all other factors.
(2) Represents OTTI related to credit losses.
The following table presents a roll-forward of the credit loss component of
held to maturity debt securities that have been written down for OTTI with the
credit loss component recognized in earnings and the remaining impairment loss
related to all other factors recognized in other comprehensive income (loss)
for the nine months ended June 30, 2011 and 2010 (in thousands):
Nine months ended June 30,
2011 2010
------- -------
Beginning balance of credit loss $ 4,725 $ 3,551
Additions:
Credit losses for which OTTI was
not previously recognized 53 374
Additional increases to the amount
related to credit loss for which OTTI
was previously recognized 283 1,623
Subtractions:
Realized losses recorded previously
as credit losses (1,390) (499)
------- -------
Ending balance of credit loss $ 3,671 $ 5,049
======= =======
There were no gross realized gains on sale of securities for the three months
ended June 30, 2011. There was a gross realized gain on sale of securities for
the nine months ended June 30, 2011 of $79,000. There were no gross realized
gains on sale of securities for the three or nine months ended June 30, 2010.
During the three
14
months ended June 30, 2011, the Company recorded a $509,000 realized loss (as
a result of the securities being deemed worthless) on 22 held to maturity
residential MBS and one available for sale residential MBS of which the entire
amount had been recognized previously as a credit loss. During the nine months
ended June 30, 2011, the Company recorded a $1.392 million realized loss on 23
held to maturity residential MBS and one available for sale residential MBS of
which $1.390 million had been recognized previously as a credit loss. During
the three months ended June 30, 2010, the Company recorded a $247,000 realized
loss on nine held to maturity residential MBS which had previously been
recognized as a credit loss. During the nine months ended June 30, 2010, the
Company recorded a $499,000 realized loss on thirteen held to maturity
residential MBS of which $482,000 had been recognized previously as a credit
loss.
The amortized cost of residential mortgage-backed and agency securities
pledged as collateral for public fund deposits, federal treasury tax and loan
deposits, FHLB collateral, retail repurchase agreements and other non-profit
organization deposits totaled $8.68 million and $12.80 million at June 30,
2011 and September 30, 2010, respectively.
The contractual maturities of debt securities at June 30, 2011 are as follows
(dollars in thousands). Expected maturities may differ from scheduled
maturities as a result of the prepayment of principal or call provisions.
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------- ---------------------
Due within one year $ - - $ - - $ 218 $ 216
Due after one year to five
years 25 26 - - - -
Due after five to ten years 39 41 115 123
Due after ten years 4,219 4,285 6,271 6,365
------ ------ ------ ------
Total $4,283 $4,352 $6,604 $6,704
====== ====== ====== ======
(5) FHLB STOCK
The Company views its investment in the FHLB stock as a long-term investment.
Accordingly, when evaluating for impairment, the value is determined based on
the ultimate recovery of the par value rather than recognizing temporary
declines in value. The determination of whether a decline affects the
ultimate recovery is influenced by criteria such as: 1) the significance of
the decline in net assets of the FHLB as compared to the capital stock amount
and length of time a decline has persisted; 2) the impact of legislative and
regulatory changes on the FHLB and 3) the liquidity position of the FHLB. On
October 25, 2010, the FHLB announced that it had entered into a Consent
Agreement with the Federal Housing Finance Agency ("FHFA"), which requires the
FHLB to take certain specific actions related to its business and operations.
The FHLB will not pay a dividend or repurchase capital stock while it is
classified as undercapitalized. As of June 30, 2011, the FHLB reported that
it had met all of its regulatory capital requirements pursuant to the Consent
Agreement issued by the FHFA. The Company does not believe that its
investment in the FHLB is impaired and did not recognize an OTTI loss on its
FHLB stock during the three and nine months ended June 30, 2011. However,
this estimate could change in the near term if: 1) significant
other-than-temporary losses are incurred on the FHLB's MBS causing a
significant decline in its regulatory capital status; 2) the economic losses
resulting from credit deterioration on the FHLB's MBS increases significantly
or 3) capital preservation strategies being utilized by the FHLB become
ineffective.
15
(6) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable and loans held for sale consisted of the following at June
30, 2011 and September 30, 2010 (dollars in thousands):
June 30, September 30,
2011 2010
------------------- ------------------
Amount Percent Amount Percent
------------------- ------------------
Mortgage loans:
One- to four-family (1) $112,838 20.2% $121,014 21.6%
Multi-family 31,058 5.6 32,267 5.8
Commercial 229,800 41.2 208,002 37.2
Construction and land development 68,017 12.2 69,271 12.4
Land 50,238 9.0 62,999 11.3
-------- ----- -------- -----
Total mortgage loans 491,951 88.2 493,553 88.3
Consumer loans:
Home equity and second mortgage 36,991 6.6 38,418 6.9
Other 8,226 1.5 9,086 1.6
-------- ----- -------- -----
Total consumer loans 45,217 8.1 47,504 8.5
Commercial business loans 20,621 3.7 17,979 3.2
-------- ----- -------- -----
Total loans receivable 557,789 100.0% 559,036 100.0%
-------- ===== -------- =====
Less:
Undisbursed portion of construction
loans in process (22,713) (17,952)
Deferred loan origination fees (1,988) (2,229)
Allowance for loan losses (11,790) (11,264)
-------- --------
Total loans receivable, net $521,298 $527,591
======== ========
-------------
(1) Includes loans held for sale.
Construction and Land Development Loan Portfolio Composition
------------------------------------------------------------
The following table sets forth the composition of the Company's construction
and land development loan portfolio at June 30, 2011 and September 30, 2010
(dollars in thousands):
June 30, September 30,
2011 2010
------------------- ------------------
Amount Percent Amount Percent
------------------- ------------------
Custom and owner/builder $ 28,128 41.4% $ 30,945 44.7%
Speculative one- to four-family 3,028 4.5 4,777 6.9
Commercial real estate 26,081 38.3 23,528 33.9
Multi-family
(including condominiums) 8,254 12.1 3,587 5.2
Land development 2,526 3.7 6,434 9.3
-------- ----- -------- -----
Total construction and
land development loans $ 68,017 100.0% $ 69,271 100.0%
======== ===== ======== =====
16
Loan Segment Risk Characteristics
---------------------------------
One- To Four-Family Residential Lending: The Company originates both fixed
rate and adjustable rate loans secured by one- to four-family residences. A
portion of the fixed-rate one- to four-family loans are sold in the secondary
market for asset/liability management purposes and to generate non-interest
income. The Company's lending policies generally limit the maximum
loan-to-value on one- to four-family loans to 95% of the lesser of the
appraised value or the purchase price. However, the Company usually obtains
private mortgage insurance on the portion of the principal amount that exceeds
80% of the appraised value of the property.
Multi-Family Lending: The Company originates loans secured by multi-family
dwelling units (more than four units). Multi-family lending generally affords
the Company an opportunity to receive interest at rates higher than those
generally available from one- to four-family residential lending. However,
loans secured by multi-family properties usually are greater in amount, more
difficult to evaluate and monitor and, therefore, involve a greater degree of
risk than one- to four-family residential mortgage loans. Because payments on
the loans secured by multi-family properties are often dependent on the
successful operation and management of the properties, repayment of such loans
may be affected by adverse conditions in the real estate market or economy.
The Company seeks to minimize these risks by scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan.
Commercial Real Estate Lending: The Company originates commercial real estate
loans secured by properties such as office buildings, retail/wholesale
facilities, motels, restaurants, mini-storage facilities and other commercial
properties. Commercial real estate lending generally affords the Company an
opportunity to receive interest at higher rates than those available from one-
to four-family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of these loans may be affected by adverse conditions in
the real estate market or economy. The Company seeks to mitigate these risks
by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing
the financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.
Construction and Land Development Lending: The Company currently originates
the following types of construction loans: custom construction loans,
owner/builder construction loans, speculative construction loans (on a very
limited basis), commercial real estate construction loans, and multi-family
construction loans. The Company is no longer originating land development
loans.
Custom construction loans are made to home builders who, at the time of
construction, have a signed contract with a home buyer who has a commitment to
purchase the finished home. Owner/builder construction loans are originated
to home owners rather than home builders and are typically refinanced into
permanent loans at the completion of construction.
Speculative one-to four-family construction loans are made to home builders
and are termed "speculative" because the home builder does not have, at the
time of the loan origination, a signed contract with a home buyer who has a
commitment for permanent financing with the Bank or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to provide the
debt service for the speculative construction loan and finance real estate
taxes and other carrying costs of the completed home for a significant time
after the completion of construction until the home
17
buyer is identified and a sale is consummated. The Company is currently
originating speculative one-to four-family construction loans on a very
limited basis.
Commercial construction loans are originated to construct properties such as
office buildings, hotels, retail rental space and mini-storage facilities.
Multi-family construction loans are originated to construct apartment
buildings and condominium projects.
The Company historically originated loans to real estate developers for the
purpose of developing residential subdivisions. The Company is not currently
originating any new land development loans.
Construction lending affords the Company the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than one-to four
family residential lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimated cost of construction
proves to be inaccurate, the Company may be required to advance funds beyond
the amount originally committed to complete the project. If the estimate of
value upon completion proves to be inaccurate, the Company may be confronted
with a project whose value is insufficient to assure full repayment and it may
incur a loss. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to construct homes for which no purchaser has been identified carry more
risk because the payoff for the loan depends on the builder's ability to sell
the property prior to the time that the construction loan is due. The Company
has sought to address these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices.
Land Lending: The Company has historically originated loans for the
acquisition of land upon which the purchaser can then build or make
improvements necessary to build or to sell as improved lots. Currently, the
Company is not offering land loans to new customers and is attempting to
decrease its land loan portfolio. Loans secured by undeveloped land or
improved lots involve greater risks than one- to four-family residential
mortgage loans because these loans are more difficult to evaluate. If the
estimate of value proves to be inaccurate, in the event of default or
foreclosure, the Company may be confronted with a property value which is
insufficient to assure full repayment. The Company attempts to minimize this
risk by generally limiting the maximum loan-to-value ratio on land loans to
75%.
Consumer Lending: Consumer loans generally have shorter terms to maturity than
mortgage loans. Consumer loans include home equity lines of credit, second
mortgage loans, savings account loans, automobile loans, boat loans,
motorcycle loans, recreational vehicle loans and unsecured loans. Home equity
lines of credit and second mortgage loans have a greater credit risk than one-
to four-family residential mortgage loans because they are secured by
mortgages subordinated to the existing first mortgage on the property, which
may or may not be held by the Company. Other consumer loans generally entail
greater risk than do residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by rapidly depreciating assets
such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation.
Commercial Business Lending: Commercial business loans are generally secured
by business equipment, accounts receivable, inventory or other property. The
Company also generally obtains personal guarantees from the principals based
on a review of personal financial statements. Commercial business lending
generally involves risks that are different from those associated with
residential and commercial real estate lending. Real estate lending is
generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values, and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the
event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable, or other business
assets, the liquidation of collateral in the event of a
18
borrower default is often an insufficient source of repayment, because
accounts receivable may be uncollectible and inventories and equipment may be
obsolete or of limited use. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and
any guarantors), while the liquidation of collateral is a secondary and
potentially insufficient source of repayment.
Allowance for Loan Losses
-------------------------
The following table sets forth information for the three and nine months ended
June 30, 2011, regarding activity in the allowance for loan losses (dollars in
thousands):
For the Three Months Ended June 30, 2011
-----------------------------------------
Beginning Ending
Allowance Provision Charge-offs Recoveries Allowance
--------- --------- ----------- ---------- ---------
Mortgage loans:
One-to four-family $ 738 $ 250 $ 172 $ 1 $ 817
Multi-family 1,016 88 - - 11 1,115
Commercial real estate 4,179 (343) - - 4 3,840
Construction - custom
and owner / builder 346 (92) - - - - 254
Construction -
speculative one- to
four-family 260 (63) - - - - 197
Construction -
commercial 179 2,282 1,444 - - 1,017
Construction -
multi-family 263 (125) - - - - 138
Construction - land
development 28 667 667 - - 28
Land 3,254 790 1,147 6 2,903
Consumer loans:
Home equity and
second mortgage 505 (52) - - - - 453
Other 436 (8) - - - - 428
Commercial business
loans 594 6 - - - - 600
------- ------ ------ ---- -------
Total $11,798 $3,400 $3,430 $ 22 $11,790
======= ====== ====== ==== =======
For the Nine Months Ended June 30, 2011
---------------------------------------
Beginning Ending
Allowance Provision Charge-offs Recoveries Allowance
--------- --------- ----------- ---------- ---------
Mortgage loans:
One-to four-family $ 530 $ 543 $ 405 $149 $ 817
Multi-family 393 692 - - 30 1,115
Commercial real estate 3,173 609 47 105 3,840
Construction - custom
and owner / builder 481 (227) - - - - 254
Construction -
speculative one- to
four-family 414 (177) 40 - - 197
Construction -
commercial 245 2,216 1,444 - - 1,017
Construction - multi-
family 245 (107) - - - - 138
Construction - land
development 240 938 1,150 - - 28
Land 3,709 709 1,560 45 2,903
Consumer loans:
Home equity and
second mortgage 922 (362) 114 7 453
Other 451 5 30 2 428
Commercial business
loans 461 161 22 - - 600
------- ------ ------ ---- -------
Total $11,264 $5,000 $4,812 $338 $11,790
======= ====== ====== ==== =======
19
The following table presents information on the loans evaluated individually
for impairment and collectively evaluated for impairment in the allowance for
loan losses at June 30, 2011 (dollars in thousands):
Allowance for Loan Losses Recorded Investment in Loans
------------------------- ----------------------------
Individually Collectively Individually Collectively
Evaluated for Evaluated for Evaluated for Evaluated for
Impairment Impairment Total Impairment Impairment Total
---------- ---------- ----- ---------- ---------- -----
Mortgage loans:
One- to four-family $ 56 $ 761 $ 817 $ 3,180 $109,658 $112,838
Multi-family 632 483 1,115 5,482 25,576 31,058
Commercial real estate 245 3,595 3,840 19,054 210,746 229,800
Construction - custom
and owner / builder 13 241 254 591 19,056 19,647
Construction -
speculative one- to
four-family 39 158 197 1,500 1,008 2,508
Construction -
commercial real
estate 772 245 1,017 5,451 10,785 16,236
Construction -
multi-family - - 138 138 1,911 2,485 4,396
Construction - land
development - - 28 28 2,374 143 2,517
Land 461 2,442 2,903 10,498 39,740 50,238
Consumer loans:
Home equity and
second mortgage 13 440 453 993 35,998 36,991
Other 1 427 428 1 8,225 8,226
Commercial business
loans - - 600 600 47 20,574 20,621
------ ------ ------- ------- -------- --------
$2,232 $9,558 $11,790 $51,082 $483,994 $535,076
====== ====== ======= ======= ======== ========
Credit Quality Indicators
-------------------------
The Company uses credit risk grades which reflect the Company's assessment of
a loan's risk or loss potential. The Company categorizes loans into risk
grade categories based on relevant information about the ability of borrowers
to service their debt such as: current financial information, historical
payment experience, credit documentation, public information and current
economic trends, among other factors such as the estimated fair value of the
collateral. The Company uses the following definitions for credit risk
ratings:
Pass: Pass loans are defined as those loans that meet acceptable quality
underwriting standards.
Watch: Watch loans are defined as those loans that still exhibit marginal
acceptable quality, but have some concerns that justify greater attention. If
these concerns are not corrected, a potential for further adverse
categorization exists. These concerns could relate to a specific condition
peculiar to the borrower or their industry segment or the general economic
environment.
Special Mention: Special mention loans are defined as those loans deemed by
management to have some potential weakness that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in the
deterioration of the payment prospects of the loan. Assets in this category
do not expose the Company to sufficient risk to warrant a substandard
classification.
Substandard: Substandard loans are defined as those loans that are
inadequately protected by the current net worth and paying capacity of the
obligor, or of the collateral pledged. Loans classified as substandard have a
well-defined weakness or weaknesses that jeopardize the repayment of the debt.
If the weakness or weaknesses are not corrected, there is the distinct
possibility that some loss will be sustained.
20
The following table lists the loan credit risk grades utilized by the Company
that serve as credit quality indicators. Each of the credit risk loan grades
include high and low factors associated with their classification that are
utilized to calculate the aggregate ranges of the allowance for loan losses at
June 30, 2011 (dollars in thousands):
Credit Risk Profile by Internally Assigned Grades
Loan Grades
---------------------------------------
Special
Pass Watch Mention Substandard Total
------ ----- ------- ----------- -----
Mortgage loans:
One- to four-family $ 97,338 $ 7,754 $ 1,708 $ 6,038 $112,838
Multi-family 18,948 264 10,397 1,449 31,058
Commercial 188,985 10,104 5,271 25,440 229,800
Construction - custom and
owner / builder 18,822 234 - - 591 19,647
Construction - speculative
one- to four-family 286 - - 1,500 722 2,508
Construction - commercial
real estate 10,785 - - - - 5,451 16,236
Construction - multi-family 1,733 - - 752 1,911 4,396
Construction - land
development 143 - - - - 2,374 2,517
Land 26,171 7,568 5,095 11,404 50,238
Consumer loans:
Home equity and second
mortgage 33,612 745 1,524 1,110 36,991
Other 8,163 51 - - 12 8,226
Commercial business loans 17,147 85 2,124 1,265 20,621
-------- ------- ------- ------- --------
Total $422,133 $26,805 $28,371 $57,767 $535,076
======== ======= ======= ======= ========
The following table presents an age analysis of past due status of loans by
category at June 30, 2011 (dollars in thousands):
Past Due
90 Days 90 Days
30-59 Days 60-89 Days or More Total Total or More and
Past Due Past Due Past Due (1) Past Due Current Loans Still Accruing
-------- -------- ----------- -------- ------- ----- --------------
Mortgage loans:
One- to four-family $ 218 $ 1,547 $ 2,634 $ 4,399 $108,439 $112,838 $ 302
Multi-family 1,449 - - - - 1,449 29,609 31,058 - -
Commercial - - 12,454 9,483 21,937 207,863 229,800 3,778
Construction - custom and
owner / builder - - - - 591 591 19,056 19,647 209
Construction - speculative
one- to four-family - - - - - - - - 2,508 2,508
Construction - commercial - - - - 704 704 15,532 16,236 - -
Construction - multi-family - - - - 1,910 1,910 2,486 4,396 - -
Construction - land
development - - - - 2,374 2,374 143 2,517 - -
Land 606 1,870 7,775 10,251 39,987 50,238 29
Consumer loans:
Home equity and second
mortgage 257 43 643 943 36,048 36,991 299
Other 33 - - 1 34 8,192 8,226 - -
Commercial business loans 49 15 323 387 20,234 20,621 276
------ ------- ------- ------- -------- -------- ------
Total $2,612 $15,929 $26,438 $44,979 $490,097 $535,076 $4,893
====== ======= ======= ======= ======== ======== ======
------------
(1) Includes loans past due 90 days or more and still accruing.
21
Impaired Loans
--------------
A loan is considered impaired when it is probable that the Company will be
unable to collect all contractual principal and interest payments due in
accordance with the original or modified terms of the loan agreement.
Impaired loans are measured based on the estimated fair value of the
collateral less estimated cost to sell if the loan is considered collateral
dependent. Impaired loans not considered to be collateral dependent are
measured based on the present value of expected future cash flows.
The categories of non-accrual loans and impaired loans overlap, although they
are not coextensive. The Company considers all circumstances regarding the
loan and borrower on an individual basis when determining whether an impaired
loan should be placed on non-accrual status, such as the financial strength of
the borrower, the estimated collateral value, reasons for the delay, payment
record, the amount past due and the number of days past due.
At June 30, 2011 and September 30, 2010, the Company had impaired loans
totaling $51.08 million and $42.25 million, respectively. At June 30, 2011,
the Company had loans totaling $4.89 million that were 90 days or more past
due and still accruing interest. At September 30, 2010, the Company had loans
totaling $1.33 million that were 90 days or more past due and still accruing
interest. Interest income recognized on impaired loans for the nine months
ended June 30, 2011 and June 30, 2010 was $1.43 million and $861,000,
respectively. Interest income recognized on a cash basis on impaired loans
for the nine months ended June 30, 2011 and June 30, 2010, was $843,000 and
$517,000, respectively. The average investment in impaired loans for the nine
months ended June 30, 2011 and June 30, 2010 was $46.15 million and $42.87
million, respectively.
Troubled debt restructured loans are loans for which the Company, for economic
or legal reasons related to the borrower's financial condition, has granted a
significant concession to the borrower that it would otherwise not consider.
Troubled debt restructured loans are considered impaired loans and can be
classified as either accrual or non-accrual. The Company had $25.80 million in
troubled debt restructured loans included in impaired loans at June 30, 2011
and had $144,000 in commitments to lend additional funds on these loans. At
June 30, 2011, $4.96 million of the $25.80 million in troubled debt
restructured loans were on non-accrual status and included in non-performing
loans. The Company had $16.40 million in troubled debt restructured loans
included in impaired loans at September 30, 2010 and had $1.06 million in
commitments to lend additional funds on these loans. At September 30, 2010,
$7.41 million of the $16.40 million in troubled debt restructured loans were
on non-accrual status and included in non-performing loans.
22
The following table is a summary of information related to impaired loans as of June 30, 2011 (dollars in
thousands):
Average Interest
Recorded Unpaid Principal Related Recorded Income
Investment Balance Allowance Investment Recognized (1)
---------- ------- --------- ---------- --------------
With no related allowance recorded:
Mortgage loans:
One- to four-family $ 2,212 $ 2,436 $ - - $ 2,437 $ 6
Commercial 16,315 16,737 - - 14,727 397
Construction - custom and
owner / builder 478 478 - - 513 7
Construction - speculative one-
to four-family - - 20 - - 132 - -
Construction - commercial - - - - - - - - - -
Construction - multi-family 1,911 1,915 - - 1,505 4
Construction - land development 2,374 7,663 - - 2,704 - -
Land 6,113 10,106 - - 6,475 12
Consumer loans:
Home equity and second mortgage 647 698 - - 528 12
Other - - - - - - 6 - -
Commercial business loans 47 68 - - 44 1
------- ------- ------ ------- ----
Subtotal 30,097 40,121 - - 29,071 439
With an allowance recorded:
Mortgage loans:
One- to four-family 968 968 56 957 6
Multi-family 5,482 5,482 632 5,482 73
Commercial 2,739 3,459 245 2,931 - -
Construction - custom and owner /
builder 113 113 13 57 - -
Construction - speculative one-
to four-family 1,500 1,500 39 1,500 20
Construction - commercial 5,451 6,895 772 6,126 91
Land 4,385 4,408 461 4,403 34
Consumer loans:
Home equity and second mortgage 346 346 13 343 5
Other 1 1 1 1 - -
------- ------- ------ ------- ----
Subtotal 20,985 23,172 2,232 21,800 229
Total
Mortgage loans:
One- to four-family 3,180 3,404 56 3,394 12
Multi-family 5,482 5,482 632 5,482 73
Commercial 19,054 20,196 245 17,658 397
Construction - custom and owner /
builder 591 591 13 570 7
Construction - speculative one- to
four-family 1,500 1,520 39 1,632 20
Construction - commercial 5,451 6,895 772 6,126 91
Construction - multi-family 1,911 1,915 - - 1,505 4
Construction - land development 2,374 7,663 - - 2,704 - -
Land 10,498 14,514 461 10,878 46
Consumer loans:
Home equity and second mortgage 993 1,044 13 871 17
Other 1 1 1 7 - -
Commercial business loans 47 68 - - 44 1
------- ------- ------ ------- ----
Total $51,082 $63,293 $2,232 $50,871 $668
======= ======= ====== ======= ====
--------------
(1) For the three months ended June 30, 2011
The following is a summary of information related to impaired loans at
September 30, 2010 (dollars in thousands):
Impaired loans without a valuation allowance $ 36,475
Impaired loans with a valuation allowance 5,770
--------
Total impaired loans $ 42,245
========
Valuation allowance related to impaired loans $ 862
23
The following table sets forth information with respect to the Company's
non-performing assets at June 30, 2011 and September 30, 2010 (dollars in
thousands):
Loans accounted for on a non-accrual basis:
June 30, September 30,
2011 2010
-------- --------
Mortgage loans:
One- to four family $ 2,332 $ 3,691
Commercial 5,706 7,252
Construction - custom and owner / builder 382 - -
Construction - speculative one- to four-family - - 2,050
Construction - commercial real estate 704 - -
Construction - multi-family 1,910 1,771
Construction - land development 2,374 3,788
Land 7,745 5,460
Consumer loans:
Home equity and second mortgage 344 781
Other 1 25
Commercial business 47 46
-------- --------
Total 21,545 24,864
Accruing loans which are contractually
past due 90 days or more 4,893 1,325
-------- --------
Total of non-accrual and 90 days past due loans 26,438 26,189
Non-accrual investment securities 3,184 3,390
OREO and other repossessed assets 10,996 11,519
-------- --------
Total non-performing assets (1) $ 40,618 $ 41,098
======== ========
Troubled debt restructured loans on accrual
status (2) $ 20,783 $ 8,995
Non-accrual and 90 days or more past
due loans as a percentage of loans receivable 4.96% 4.86%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 3.60% 3.53%
Non-performing assets as a percentage of total
assets 5.53% 5.53%
Loans receivable (3) $533,088 $538,855
======== ========
Total assets $735,018 $742,687
======== ========
(1) Does not include troubled debt restructured loans on accrual status.
(2) Does not include troubled debt restructured loans totaling $4,956 and
$7,405 reported as non-accrual loans at June 30, 2011 and September 30,
2010, respectively.
(3) Includes loans held-for-sale and is before the allowance for loan losses.
24
(7) NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) to common shareholders by the weighted average number of common shares
outstanding during the period, without considering any dilutive items.
Diluted net income (loss) per common share is computed by dividing net income
(loss) to common shareholders 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. Diluted net loss per
common share is the same as basic net loss per common share due to the
anti-dilutive effect of common stock equivalents. Common stock equivalents
arise from the assumed conversion of outstanding stock options and the
outstanding warrant to purchase common stock. In accordance with the
Financial Accounting Standards Board ("FASB") guidance for stock compensation,
shares owned by the Bank's ESOP that have not been allocated are not
considered to be outstanding for the purpose of computing net income (loss)
per common share. At June 30, 2011 and 2010, there were 299,810 and 329,626
shares, respectively, that had not been allocated under the Bank's ESOP.
The following table is in thousands, except for share and per share data:
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
---------------- -----------------
Basic net income (loss)
-----------------------
per common share computation:
----------------------------
Numerator - net income (loss) $(1,280) $ 804 $ 1,162 $(2,150)
Preferred stock dividend (208) (208) (624) (624)
Preferred stock discount
accretion (57) (53) (168) (156)
------- ----- ------- -------
Net income (loss) to common
shareholders $(1,545) $ 543 $ 370 $(2,930)
======= ===== ======= =======
Denominator - weighted average
common shares outstanding 6,745,250 6,715,410 6,745,250 6,713,103
--------- --------- --------- ---------
Basic net income (loss) per
common share $ (0.23) $0.08 $ 0.05 $ (0.44)
======= ===== ======= =======
Diluted net income (loss)
------------------------
per common share computation:
----------------------------
Numerator - net income (net
loss) $(1,280) $ 804 $ 1,162 $(2,150)
Preferred stock dividend (208) (208) (624) (624)
Preferred stock discount
accretion (57) (53) (168) (156)
------- ----- ------- -------
Net income (loss) to common
shareholders $(1,545) $ 543 $ 370 $(2,930)
======= ===== ======= =======
Denominator - weighted average
common shares outstanding 6,745,250 6,715,410 6,745,250 6,713,103
Effect of dilutive stock
options (1) (2) - - - - 237 - -
Effect of dilutive stock
warrants (3) - - - - - - - -
------- ----- ------- -------
Weighted average common shares
and common stock equivalents 6,745,250 6,715,410 6,745,487 6,713,103
--------- --------- --------- ---------
Diluted net income (loss)
per common share $ (0.23) $0.08 $ 0.05 $ (0.44)
======= ===== ======= =======
25
--------------------
(1) For the three months and nine months ended June 30, 2011, options to
purchase 140,545 and 168,186 shares of common stock, respectively, were
outstanding but not included in the computation of diluted net income (loss)
per common share because the options' exercise prices were greater than the
average market price of the common stock, and, therefore, their effect would
have been anti-dilutive. For the three months and nine months ended June 30,
2010, options to purchase 194,864 and 192,483 shares of common stock,
respectively, were outstanding but not included in the computation of diluted
net income (loss) per common share because the options' exercise prices were
greater than the average market price of the common stock, and, therefore,
their effect would have been anti-dilutive.
(2) For the three months ended June 30, 2011, the dilutive effect of dilutive
stock options was computed to be 710 shares. However, the dilutive effect of
these stock options has been excluded from the diluted net income (loss) per
common share for the three months ended June 30, 2011 because the Company
reported a net loss for the period, and, therefore, their effect would have
been anti-dilutive.
(3) For the three and nine months ended June 30, 2011 and June 30, 2010, a
warrant to purchase 370,899 shares of common stock was outstanding but not
included in the computation of diluted net income (loss) per common share
because the warrant's exercise price was greater than the average market price
of the common stock, and, therefore, its effect would have been anti-dilutive.
(8) STOCK PLANS AND STOCK BASED COMPENSATION
Stock Option Plans
------------------
Under the Company's stock option plans (the 1999 Stock Option Plan and the
2003 Stock Option Plan), the Company was able to grant options for up to a
combined total of 1,622,500 shares of common stock to employees, officers and
directors. Shares issued may be purchased in the open market or may be issued
from authorized and unissued shares. The exercise price of each option equals
the fair market value of the Company's common stock on the date of grant.
Generally, options vest in 20% annual installments on each of the five
anniversaries from the date of the grant. At June 30, 2011, options for
250,238 shares are available for future grant under the 2003 Stock Option Plan
and no shares are available for future grant under the 1999 Stock Option Plan.
Activity under the plans for the nine months ended June 30, 2011 is as
follows:
Total Options Outstanding
-------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period 194,864 $ 8.71
Forfeited 57,138 7.42
-------
Options outstanding, end of period 137,726 $ 9.25
=======
Options exercisable, end of period 117,326 $ 10.06
=======
The aggregate intrinsic value of options outstanding at June 30, 2011 was
$35,000.
At June 30, 2011, there were 20,400 unvested options with an aggregate grant
date fair value of $26,000, all of which the Company assumes will vest. The
aggregate intrinsic value of unvested options at June 30, 2011 was $28,000.
There were 5,200 options with an aggregate grant date fair value of $7,000
that vested during the nine months ended June 30, 2011.
26
At June 30, 2010, there were 26,000 unvested options with an aggregate grant
date fair value of $34,000, all of which the Company assumes will vest. There
were no options that vested during the nine months ended June 30, 2010.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the weighted average assumptions noted in the
following table. The risk-free interest rate is based on the U.S. Treasury
rate of a similar term as the stock option at the particular grant date. The
expected life is based on historical data, vesting terms and estimated
exercise dates. The expected dividend yield is based on the most recent
quarterly dividend on an annualized basis in effect at the time the options
were granted. The expected volatility is based on historical volatility of
the Company's stock price. There were no options granted during the nine
months ended June 30, 2011, and there were 26,000 options granted during the
nine months ended June 30, 2010. The weighted average assumptions for options
granted during the nine months ended June 30, 2010 were:
Expected volatility 38%
Expected term (in years) 5
Expected dividend yield 2.64%
Risk free interest rate 2.47%
Grant date fair value per share $1.29
Stock Grant Plan
----------------
The Company adopted the Management Recognition and Development Plan ("MRDP")
in 1998 for the benefit of employees, officers and directors of the Company.
The objective of the MRDP is to retain and attract personnel of experience and
ability in key positions by providing them with a proprietary interest in the
Company.
The MRDP allowed for the issuance to participants of up to 529,000 shares of
the Company's common stock. Awards under the MRDP are made in the form of
shares of common stock that are subject to restrictions on the transfer of
ownership and are subject to a five-year vesting period. Compensation expense
is the amount of the fair value of the common stock at the date of the grant
to the plan participants and is recognized over a five-year vesting period,
with 20% vesting on each of the five anniversaries from the date of the grant.
There were no MRDP shares granted to officers and directors during the nine
months ended June 30, 2011 and 2010.
At June 30, 2011, there were a total of 24,892 unvested MRDP shares with an
aggregated grant date fair value of $273,000. There were 11,033 MRDP shares
that vested during the nine months ended June 30, 2011 with an aggregated
grant date fair value of $132,000. There were 500 MRDP shares forfeited
during the nine months ended June 30, 2011 with a grant date fair value of
$5,000. At June 30, 2011, there were no shares available for future awards
under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Nine Months Ended June 30,
--------------------------
2011 2010
---- ----
(Dollars in thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in
income $ 5 $ 129 $ 4 $ 130
Related tax benefit recognized 2 44 1 45
27
The compensation expense yet to be recognized for stock based awards that have
been awarded but not vested for the years ending September 30 is as follows
(dollars in thousands):
Stock Stock Total
Options Grants Awards
------- ------ ------
Remainder of 2011 $ 2 $ 36 $ 38
2012 7 112 119
2013 6 38 44
2014 6 2 8
2015 1 - - 1
----- ------ ------
Total $ 22 $ 188 $ 210
===== ====== ======
(9) FAIR VALUE MEASUREMENTS
GAAP requires disclosure of estimated fair values for financial instruments.
Such estimates are subjective in nature, and significant judgment is required
regarding the risk characteristics of various financial instruments at a
discrete point in time. Therefore, such estimates could vary significantly if
assumptions regarding uncertain factors were to change. In addition, as the
Company normally intends to hold the majority of its financial instruments
until maturity, it does not expect to realize many of the estimated amounts
disclosed. The disclosures also do not include estimated fair value amounts
for certain items which are not defined as financial instruments but which may
have significant value. The Company does not believe that it would be
practicable to estimate a representational fair value for these types of items
as of June 30, 2011 and September 30, 2010. Because GAAP excludes certain
items from fair value disclosure requirements, any aggregation of the fair
value amounts presented would not represent the underlying value of the
Company. Major assumptions, methods and fair value estimates for the
Company's significant financial instruments are set forth below:
Cash and Cash Equivalents
-------------------------
The estimated fair value of financial instruments that are short-term or
re-price frequently and that have little or no risk are considered to have
an estimated fair value equal to the recorded value.
CDs Held for Investment
-----------------------
The estimated fair value of financial instruments that are short-term or
re-price frequently and that have little or no risk are considered to have
an estimated fair value equal to the recorded value.
MBS and Other Investments
-------------------------
The estimated fair value of MBS and other investments are based upon the
assumptions market participants would use in pricing the security. Such
assumptions include observable and unobservable inputs such as quoted
market prices, dealer quotes, or discounted cash flows.
FHLB Stock
----------
FHLB stock is not publicly traded; however, the recorded value of the
stock holdings approximates the estimated fair value, as the FHLB is
required to pay par value upon re-acquiring this stock.
Loans Receivable, Net
---------------------
At June 30, 2011 and September 30, 2010, because of the illiquid market
for loan sales, loans were priced using comparable market statistics. The
loan portfolio was segregated into various categories and a weighted
average valuation discount that approximated similar loan sales was
applied to each category.
28
Loans Held for Sale
-------------------
The estimated fair value is based on quoted market prices obtained
from the Federal Home Loan Mortgage Corporation.
Accrued Interest
----------------
The recorded amount of accrued interest approximates the estimated fair
value.
Deposits
--------
The estimated fair value of deposits with no stated maturity date is
included at the amount payable on demand. The estimated fair value of
fixed maturity certificates of deposit is computed by discounting
future cash flows using the rates currently offered by the Bank for
deposits of similar remaining maturities.
FHLB Advances
-------------
The estimated fair value of FHLB advances is computed by discounting the
future cash flows of the borrowings at a rate which approximates the
current offering rate of the borrowings with a comparable remaining life.
Repurchase Agreements
---------------------
The recorded value of repurchase agreements approximates the estimated
fair value due to the short-term nature of the borrowings.
Off-Balance-Sheet Instruments
-----------------------------
Since the majority of the Company's off-balance-sheet instruments consist
of variable-rate commitments, the Company has determined that they do not
have a distinguishable estimated fair value.
The estimated fair values of financial instruments were as follows as of June
30, 2011 and September 30, 2010 (dollars in thousands):
June 30, 2011 September 30, 2010
------------------- -------------------
Estimated Estimated
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial Assets
Cash and cash equivalents $114,303 $114,303 $111,786 $111,786
CDs held for investment 18,087 18,087 18,047 18,047
MBS and other investments 11,962 12,031 16,185 15,961
FHLB stock 5,705 5,705 5,705 5,705
Loans receivable, net 520,532 474,021 524,621 473,986
Loans held for sale 766 786 2,970 3,059
Accrued interest receivable 2,527 2,527 2,630 2,630
Financial Liabilities
Deposits $589,498 $592,058 $578,869 $581,046
FHLB advances 55,000 59,268 75,000 81,579
Repurchase agreements 598 598 622 622
Accrued interest payable 591 591 737 737
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the
estimated fair value of the Company's financial instruments will change
29
when interest rate levels change, and that change may either be favorable or
unfavorable to the Company. Management attempts to match maturities of assets
and liabilities to the extent believed necessary to minimize interest rate
risk. However, borrowers with fixed interest rate obligations are less likely
to prepay in a rising interest rate environment and more likely to prepay in a
falling interest rate environment. Conversely, depositors who are receiving
fixed interest rates are more likely to withdraw funds before maturity in a
rising interest rate environment and less likely to do so in a falling
interest rate environment. Management monitors interest rates and maturities
of assets and liabilities, and attempts to minimize interest rate risk by
adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
Accounting guidance regarding fair value measurements defines fair value and
establishes a framework for measuring fair value in accordance with GAAP.
Fair value is the exchange price that would be received for an asset or paid
to transfer a liability in an orderly transaction between market participants
on the measurement date. The following definitions describe the levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access
at the measurement date.
Level 2: Significant observable inputs other than quoted prices included
within Level 1, such as quoted prices in markets that are not active, and
inputs other than quoted prices that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company's own
assumptions about the assumptions market participants would use in
pricing an asset or liability based on the best information available in
the circumstances.
The following table summarizes the balances of assets and liabilities measured
at estimated fair value on a recurring basis at June 30, 2011, and the total
losses resulting from these estimated fair value adjustments for the nine
months ended June 30, 2011 (dollars in thousands):
Estimated Fair Value
---------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Available for Sale Securities
-----------------------------
Mutual funds $ 975 $ - - $ - - $ - -
MBS - - 6,704 - - 29
------ ------ ------ ------
Total $ 975 $6,704 $ - - $ 29
====== ====== ====== ======
The following table summarizes the balances of assets and liabilities measured
at estimated fair value on a nonrecurring basis at June 30, 2011, and the
total losses resulting from these estimated fair value adjustments for the
nine months ended June 30, 2011 (dollars in thousands):
Estimated Fair Value
---------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired loans (1) $ - - $ - - $20,716 $ 4,811
MBS - held to maturity (2) - - 673 - - 306
OREO and other repossessed items (3) - - - - 10,996 973
------ ------ ------- -------
Total $ - - $ 673 $31,712 $ 6,090
====== ====== ======= =======
30
----------------
(1) The loss represents charge offs on collateral dependent loans for
estimated fair value adjustments based on the estimated fair value of the
collateral. A loan is considered to be impaired when, based on current
information and events, it is probable the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
specific reserve for collateral dependent impaired loans was based on the
estimated fair value of the collateral less estimated costs to sell. The
estimated fair value of collateral was determined based primarily on
appraisals. In some cases, adjustments were made to the appraised values due
to various factors including age of the appraisal, age of comparables included
in the appraisal, and known changes in the market and in the collateral.
(2) The loss represents OTTI credit-related charges on held-to-maturity MBS.
(3) The Company's OREO and other repossessed assets are initially recorded at
estimated fair value less estimated costs to sell. This amount becomes the
property's new basis. Estimated fair value was generally determined by
management based on a number of factors, including third-party appraisals of
estimated fair value in an orderly sale. Estimated costs to sell were based
on standard market factors. The valuation of OREO and other repossessed items
is subject to significant external and internal judgment. Management
periodically reviews the recorded value to determine whether the property
continues to be recorded at the lower of its recorded book value or estimated
fair value, net of estimated costs to sell.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2010, the FASB issued updated guidance on goodwill and other
intangibles regarding when to perform step two of the goodwill impairment test
for reporting units with zero or negative carrying amounts. The guidance
modifies step one of the goodwill impairment test for reporting units with
zero or negative carrying amounts. For those reporting units, an entity is
required to perform step two of the goodwill impairment test if it is more
likely than not that a goodwill impairment exists. In determining whether it
is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an
impairment may exist such as if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
recorded amount. This guidance becomes effective for the Company on October
1, 2011. The Company does not expect it to have an impact on its condensed
consolidated financial statements.
In April 2011, the FASB issued updated guidance on receivables and the
determination of whether a restructuring is a troubled debt restructuring.
The new guidance clarifies which loan modifications constitute troubled debt
restructurings and is intended to assist creditors in determining whether a
modification of the terms of a receivable meets the criteria to be considered
a troubled debt restructuring, both for purposes of recording an impairment
loss and for disclosure of troubled debt restructurings. In evaluating whether
a restructuring constitutes a troubled debt restructuring, a creditor must
separately conclude under the guidance that both of the following exist: (a)
the restructuring constitutes a concession; and (b) the debtor is experiencing
financial difficulties. This guidance is effective for the Company's condensed
consolidated financial statements as of July 1, 2011, and applies
retrospectively to restructurings occurring on or after January 1, 2011. The
Company does not expect it to have on impact on its condensed consolidated
financial statements.
In May 2011, the FASB issued amended guidance regarding the application of
existing fair value measurement guidance. The provisions of the amended
guidance clarify the application of existing fair value measurement guidance
and revise certain measurement and disclosure requirements to achieve
convergence of GAAP and International Financial Reporting Standards. The
amendments clarify the FASB's intent about the application of the
highest-and-best-use and valuation premise and with respect to the measurement
of fair value of an instrument classified as equity. The amendment also
expands the information required to be disclosed with respect to fair value
measurements categorized in Level 3 fair value measurements and the items not
measured at fair value but for which fair value must be disclosed. The
provisions of this amended guidance are effective for the Company's first
reporting period beginning January 1, 2012, with early adoption not permitted.
The
31
Company is in the process of evaluating the impact of adoption of this
guidance and does not expect it to have a material impact its condensed
consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of
comprehensive income. The new guidance eliminates the current option to
present the components of other comprehensive income in the statement of
changes in equity and requires the presentation of net income and other
comprehensive income (and their respective components) either in a single
continuous statement or in two separate but consecutive statements. The
amendments do not alter any current recognition or measurement requirements
with respect to the items of other comprehensive income. The provision of
this guidance are effective for the Company's first reporting period beginning
on January 1, 2012, with early adoption permitted. The Company does not
expect it to have a material impact on its condensed consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
The following analysis discusses the material changes in the consolidated
financial condition and results of operations of the Company at and for the
three and nine months ended June 30, 2011. This analysis as well as other
sections of this report contains certain "forward-looking statements."
Certain matters discussed in this Form 10-Q may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements are not statements of historical fact and
often include the words "believes," "expects," "anticipates," "estimates,"
"forecasts," "intends," "plans," "targets," "potentially," "probably,"
"projects," "outlook" or similar expressions or future or conditional verbs
such as "may," "will," "should," "would" and "could." Forward-looking
statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, assumptions and statements about future performance.
These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results to differ
materially from the results anticipated, including, but not limited to: the
credit risks of lending activities, including changes in the level and trend
of loan delinquencies and write-offs and changes in our allowance for loan
losses and provision for loan losses that may be impacted by deterioration in
the housing and commercial real estate markets and may lead to increased
losses and non-performing assets in our loan portfolio, and may result in our
allowance for loan losses not being adequate to cover actual losses, and
require us to materially increase our loan loss reserves; changes in general
economic conditions, either nationally or in our market areas; changes in the
levels of general interest rates, and the relative differences between short
and long term interest rates, deposit interest rates, our net interest margin
and funding sources; fluctuations in the demand for loans, the number of
unsold homes, land and other properties and fluctuations in real estate values
in our market areas; secondary market conditions for loans and our ability to
sell loans in the secondary market; results of examinations of us by the
Federal Reserve and our bank subsidiary by the Federal Deposit Insurance
Corporation, the Washington State Department of Financial Institutions,
Division of Banks or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to
increase our allowance for loan losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or maintain
or increase deposits, which could adversely affect our liquidity and earnings;
our compliance with regulatory enforcement actions, including regulatory
memoranda of understandings ("MOUs") to which we are subject; legislative or
regulatory changes that adversely affect our business including changes in
regulatory policies and principles, or the interpretation of regulatory
capital or other rules; the impact of the Dodd-Frank Wall Street Reform and
Consumer Protection Act and the implementation regulations; our ability to
attract and retain deposits; further increases in premiums for deposit
insurance; our ability to control operating costs and expenses; the use of
estimates in determining fair value of certain of our assets, which estimates
may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risk associated with the loans on our consolidated
balance sheet; staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our workforce and potential
associated charges; computer systems on which we depend could fail or
32
experience a security breach; our ability to retain key members of our senior
management team; costs and effects of litigation, including settlements and
judgments; our ability to successfully integrate any assets, liabilities,
customers, systems, and management personnel we may in the future acquire into
our operations and our ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related thereto;
our ability to manage loan delinquency rates; increased competitive pressures
among financial services companies; changes in consumer spending, borrowing
and savings habits; legislative or regulatory changes that adversely affect
our business including changes in regulatory policies and principles, the
interpretation of regulatory capital or other rules and any changes in the
rules applicable to institutions participating in the TARP Capital Purchase
Program; the availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory actions; our ability to pay dividends
on our common and preferred stock; adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the
financial institution regulatory agencies or the Financial Accounting
Standards Board, including additional guidance and interpretation on
accounting issues and details of the implementation of new accounting methods;
the economic impact of war or any terrorist activities; other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations; pricing, products and services; and other risks detailed in our
reports filed with the Securities and Exchange Commission, including our
Annual Report on Form 10-K for the year ended September 30, 2010.
Any of the forward-looking statements that we make in this Form 10-Q and in
the other public statements we make are based upon management's beliefs and
assumptions at the time they are made. We undertake no obligation to publicly
update or revise any forward-looking statements included in this report or to
update the reasons why actual results could differ from those contained in
such statements, whether as a result of new information, future events or
otherwise. We caution readers not to place undue reliance on any
forward-looking statements. We do not undertake and specifically disclaim any
obligation to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements. These risks could cause our actual results for 2011 and beyond to
differ materially from those expressed in any forward-looking statements by,
or on behalf of us, and could negatively affect the Company's operations and
stock price performance.
Overview
Timberland Bancorp, Inc., a Washington corporation, is the holding company for
Timberland Bank. The Bank opened for business in 1915 and serves consumers
and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis
counties, Washington with a full range of lending and deposit services through
its 22 branches (including its main office in Hoquiam). At June 30, 2011, the
Company had total assets of $735.02 million and total shareholders' equity of
$86.33 million. The Company's business activities generally are limited to
passive investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth in this report relates primarily to the
Bank's operations.
The profitability of the Company's operations depends primarily on its net
interest income after provision for loan losses. Net interest income is the
difference between interest income, which is the income that the Company earns
on interest-earning assets, comprised of primarily loans and investments, and
interest expense, the amount the Company pays on its interest-bearing
liabilities, which are primarily deposits and borrowings. Net interest income
is affected by changes in the volume and mix of interest earning assets,
interest earned on those assets, the volume and mix of interest bearing
liabilities and interest paid on those interest bearing liabilities.
Management strives to match the re-pricing characteristics of the interest
earning assets and interest bearing liabilities to protect net interest income
from changes in market interest rates and changes in the shape of the yield
curve.
33
The provision for loan losses is dependent on changes in the loan portfolio
and management's assessment of the collectability of the loan portfolio as
well as prevailing economic and market conditions. The provision for loan
losses reflects the amount that the Company believes is adequate to cover
potential credit losses in its loan portfolio.
Net income (loss) is also affected by non-interest income and non-interest
expenses. For the three and nine month periods ended June 30, 2011,
non-interest income consisted primarily of service charges and fees on deposit
accounts, gain on sale of loans, ATM transaction fees, increase in the cash
surrender value of life insurance, gain on sale of MBS, other operating income
and a valuation allowance recovery on MSRs. Non-interest income is reduced by
net OTTI losses on investment securities and by a valuation allowance on MSRs.
Non-interest expenses consisted primarily of salaries and employee benefits,
premises and equipment, advertising,ATM expenses, OREO expenses, postage and
courier, professional fees, insurance premiums, state and local taxes and
deposit insurance premiums. Non-interest income and non-interest expenses are
affected by the growth of our operations and growth in the number of loan and
deposit accounts.
Results of operations may be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
The Bank is a community-oriented bank which has traditionally offered a
variety of savings products to its retail customers while concentrating its
lending activities on real estate mortgage loans. Lending activities have
been focused primarily on the origination of loans secured by real estate,
including residential construction loans, one- to four-family residential
loans, multi-family loans, commercial real estate loans and land loans. The
Bank originates adjustable-rate residential mortgage loans that do not qualify
for sale in the secondary market. The Bank also originates commercial
business loans.
Critical Accounting Policies and Estimates
The Company has identified several accounting policies that as a result of
judgments, estimates and assumptions inherent in those policies, are critical
to an understanding of the Company's Condensed Consolidated Financial
Statements.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed to be
sufficient to provide for estimated loan losses based on evaluating known and
inherent risks in the loan portfolio. The allowance is provided based upon
management's comprehensive analysis of the pertinent factors underlying the
quality of the loan portfolio. These factors include changes in the amount
and composition of the loan portfolio, delinquency levels, actual loss
experience, current economic conditions, and detailed analysis of individual
loans for which the full collectability may not be assured. The detailed
analysis includes methods to estimate the fair value of loan collateral and
the existence of potential alternative sources of repayment. The allowance
consists of specific and general components. The specific component relates to
loans that are deemed impaired. For such loans that are classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the recorded value of that loan. The general component covers loans that
are not evaluated individually for impairment and is based on historical loss
experience adjusted for qualitative factors. The appropriateness of the
allowance for loan losses is estimated based upon these factors and trends
identified by management at the time consolidated financial statements are
prepared.
In accordance with the FASB guidance for receivables, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts (principal and interest) due according to the contractual terms of the
loan agreement. Troubled debt restructured loans are considered impaired
loans. Smaller balance homogenous loans, such as residential mortgage loans
and consumer loans, may be collectively evaluated for
34
impairment. When a loan has been identified as being impaired, the amount of
the impairment is measured by using discounted cash flows, except when, as an
alternative, the current estimated fair value of the collateral, reduced by
estimated costs to sell, is used. The valuation of real estate collateral is
subjective in nature and may be adjusted in future periods because of changes
in economic conditions. Management considers third-party appraisals, as well
as independent fair market value assessments from realtors or persons involved
in selling real estate in determining the estimated fair value of particular
properties. In addition, as certain of these third-party appraisals and
independent fair market value assessments are only updated periodically,
changes in the values of specific properties may have occurred subsequent to
the most recent appraisals. Accordingly, the amounts of any such potential
changes and any related adjustments are generally recorded at the time such
information is received. When the measurement of the impaired loan is less
than the recorded investment in the loan (including accrued interest and net
deferred loan origination fees or costs), impairment is recognized by creating
or adjusting an allocation of the allowance for loan losses and uncollected
accrued interest is reversed against interest income. If ultimate collection
of principal is in doubt, all cash receipts on impaired loans are applied to
reduce the principal balance.
A provision for loan losses is charged against operations and is added to the
allowance for loan losses based on quarterly comprehensive analyses of the
loan portfolio. The allowance for loan losses is allocated to certain loan
categories based on the relative risk characteristics, asset classifications
and actual loss experience of the loan portfolio. While management has
allocated the allowance for loan losses to various loan portfolio segments,
the allowance is general in nature and is available for the loan portfolio in
its entirety.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Company's control. These factors may result in losses or recoveries
differing significantly from those provided in the consolidated financial
statements. The Company has experienced a significant decline in valuations
for some real estate collateral since October 2008. If real estate values
continue to decline and as updated appraisals are received on collateral for
impaired loans, the Company may need to increase the allowance for loan losses
appropriately. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses, and may require the Company to make additions to the allowance based
on their judgment about information available to them at the time of their
examinations.
MSRs (Mortgage Servicing Rights)
MSRs are capitalized when acquired through the origination of loans that are
subsequently sold with servicing rights retained and are amortized to
servicing income on loans sold in proportion to and over the period of
estimated net servicing income. The value of MSRs at the date of the sale of
loans is determined based on the discounted present value of expected future
cash flows using key assumptions for servicing income and costs and prepayment
rates on the underlying loans.
The estimated fair value is evaluated at least annually by a third party firm
for impairment by comparing actual cash flows and estimated cash flows from
the servicing assets to those estimated at the time servicing assets were
originated. The effect of changes in market interest rates on estimated rates
of loan prepayments represents the predominant risk characteristic underlying
the MSRs portfolio. The Company's methodology for estimating the fair value
of MSRs is highly sensitive to changes in assumptions. For example, the
determination of fair value uses anticipated prepayment speeds. Actual
prepayment experience may differ and any difference may have a material effect
on the fair value. Thus, any measurement of MSRs' fair value is limited by
the conditions existing and assumptions as of the date made. Those
assumptions may not be appropriate if they are applied at different times.
For purposes of measuring impairment, the rights must be stratified by one or
more predominant risk characteristics of the underlying loans. The Company
stratifies its capitalized MSRs based on product type, interest rate and term
of the underlying loans. The amount of impairment recognized is the amount,
if any, by which the amortized cost of the rights for each stratum exceed
their fair value. Impairment, if deemed temporary, is recognized through a
valuation allowance to the extent that fair value is less than the recorded
35
amount.
OTTIs (Other-Than-Temporary Impairments) in the Estimated Fair Value of
Investment Securities Unrealized losses on available for sale and held to
maturity investment securities are evaluated at least quarterly to determine
whether declines in value should be considered "other than temporary" and
therefore be subject to immediate loss recognition through earnings for the
portion related to credit losses. Although these evaluations involve
significant judgment, an unrealized loss in the fair value of a debt security
is generally deemed to be temporary when the fair value of the security is
less than the recorded value primarily as a result of changes in interest
rates, when there has not been significant deterioration in the financial
condition of the issuer, and it is more likely than not the Company will not
have to sell the security before recovery of its cost basis. An unrealized
loss in the value of an equity security is generally considered temporary when
the estimated fair value of the security is less than the recorded value
primarily as a result of current market conditions and not a result of
deterioration in the financial condition of the issuer or the underlying
collateral (in the case of mutual funds) and the Company has the intent and
the ability to hold the security for a sufficient time to recover the recorded
value. Other factors that may be considered in determining whether a decline
in the value of either a debt or equity security is "other than temporary"
include ratings by recognized rating agencies, capital strength and near-term
prospects of the issuer, and recommendation of investment advisors or market
analysts. Therefore, continued deterioration of current market conditions
could result in additional impairment losses recognized within the Company's
investment portfolio.
Goodwill
Goodwill is initially recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired and liabilities assumed. Goodwill is presumed to have an
indefinite useful life and is analyzed annually for impairment. An annual
test is performed during the third quarter of each fiscal year, or more
frequently if indicators of potential impairment exist, to determine if the
recorded goodwill is impaired. If the estimated fair value of the Company's
sole reporting unit exceeds the recorded value, goodwill is not considered
impaired and no additional analysis is necessary.
One of the circumstances evaluated when determining if an impairment test of
goodwill is needed more frequently than annually is the extent and duration
that the Company's market capitalization (total common shares outstanding
multiplied by current stock price) is less than the total equity applicable to
common shareholders. During the quarter ended June 30, 2011, the Company
engaged a third party firm to perform the annual test for goodwill impairment.
The test concluded that recorded goodwill was not impaired. No assurance can
be given, however, that the Company will not record an impairment loss on
goodwill in the future.
OREO (Other Real Estate Owned) and Other Repossessed Assets
OREO and other repossessed assets consist of properties or assets acquired
through or by deed in lieu of foreclosure, and are recorded initially at the
estimated fair value of the properties less estimated costs of disposal.
Costs relating to the development and improvement of the properties or assets
are capitalized while costs relating to holding the properties or assets are
expensed. Valuations are periodically performed by management, and a charge
to earnings is recorded if the recorded value of a property exceeds its
estimated net realizable value.
Comparison of Financial Condition at June 30, 2011 and September 30, 2010
The Company's total assets decreased by $7.67 million, or 1.0%, to $735.02
million at June 30, 2011 from $742.69 million at September 30, 2010. The
decrease was primarily attributable to a decrease in net loans receivable and
MBS and other investments.
36
Net loans receivable decreased by $6.29 million, or 1.2%, to $521.30 million
at June 30, 2011 from $527.59 million at September 30, 2010. The decrease was
primarily due to a decrease in all loan categories other than commercial real
estate and commercial business loans which increased $21.80 million and $2.64
million, respectively.
Total deposits increased by $10.63 million, or 1.8%, to $589.50 million at
June 30, 2011 from $578.87 million at September 30, 2010, primarily as a
result of increases in savings account balances and N.O.W. account balances.
Shareholders' equity increased by $926,000, or 1.1%, to $86.33 million at June
30, 2011 from $85.41 million at September 30, 2010. The increase was
primarily due to net income for the nine months ended June 30, 2011.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents and CDs Held for Investment: Cash equivalents and CDs held
for investment increased by $2.56 million, or 2.0%, to $132.39 million at June
30, 2011 from $129.83 million at September 30, 2010. The increase in cash
equivalents and short-term CDs was primarily due to the Company's decision to
increase its liquidity position for asset-liability management purposes.
MBS (Mortgage-backed Securities) and Other Investments: Mortgage-backed
securities and other investments decreased by $4.22 million, or 26.1%, to
$11.96 million at June 30, 2011 from $16.19 million at September 30, 2010.
The decrease was primarily as a result of the sale of $2.27 million in agency
MBS, scheduled amortization and prepayments on MBS and OTTI charges recorded
on private label residential MBS. The securities on which the OTTI charges
were recognized were acquired from the in-kind redemption of the Company's
investment in the AMF family of mutual funds in June 2008. For additional
information on MBS and other investments, see Note 4 of the Notes to Condensed
Consolidated Financial Statements contained in "Item 1, Financial Statements."
Loans: Net loans receivable decreased by $6.29 million, or 1.2%, to $521.30
million at June 30, 2011 from $527.59 million at September 30, 2010. The
decrease in the portfolio was primarily a result of a $12.76 million decrease
in land loans, an $8.18 million decrease in one- to four-family loan balances,
a $6.02 million decrease in construction and land development loan balances
(net of undisbursed portion of construction loans in process), a $2.29 million
decrease in consumer loan balances and a $1.25 million decrease in
multi-family loan balances. These decreases to net loans receivable were
partially offset by a $21.80 million increase in commercial real estate loan
balances and a $2.64 million increase in commercial business loan balances.
Loan originations decreased to $123.20 million for the nine months ended June
30, 2011 from $133.24 million for the nine months ended June 30, 2010. The
Company continued to sell longer-term fixed rate loans for asset liability
management purposes and to generate non-interest income. The Company sold
fixed rate one- to four- family mortgage loans totaling $46.43 million for the
nine months ended June 30, 2011 compared to $44.38 million for the nine months
ended June 30, 2010.
For additional information, see Note 6 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Premises and Equipment: Premises and equipment decreased by $402,000, or
2.3%, to $16.98 million at June 30, 2011 from $17.38 million at September 30,
2010. The decrease was primarily a result of depreciation.
OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by
$523,000, or 4.5%, to $11.00 million at June 30, 2011 from $11.52 million at
September 30, 2010, primarily due to the sale of OREO properties. During the
nine months ended June 30, 2011, OREO properties and other repossessed assets
totaling $3.90 million were sold, resulting in a net gain on sale of $534,000.
At June 30, 2011, OREO consisted
37
of 42 individual properties and four other repossessed assets. The properties
consisted of two condominium projects totaling $3.65 million, 24 land parcels
totaling $2.66 million, 11 single family homes totaling $2.36 million, three
commercial real estate properties totaling $1.23 million and two land
development projects totaling $991,000.
Goodwill and CDI: The recorded value of goodwill of $5.65 million at June 30,
2011 remained unchanged from September 30, 2010. The amortized value of the
CDI decreased to $439,000 at June 30, 2011 from $564,000 at September 30,
2010. The decrease was attributable to scheduled amortization of the CDI.
Prepaid FDIC Insurance Assessment: The prepaid FDIC insurance assessment
decreased $933,000, or 28.5%, to $2.34 million at June 30, 2011 from $3.27
million at September 30, 2010 as a portion of the prepaid amount was expensed.
Deposits: Deposits increased by $10.63 million, or 1.8%, to $589.50 million at
June 30, 2011 from $578.87 million at September 30, 2010. The increase was
primarily a result of a $9.94 million increase in savings account balances, a
$5.42 million increase in N.O.W. checking account balances and a $428,000
increase in money market account balances. These increases were partially
offset by a $4.14 million decrease in certificates of deposit account balances
and a $1.02 million decrease in non-interest bearing account balances.
FHLB Advances: FHLB advances and other borrowings decreased by $20.00
million, or 26.7%, to $55.00 million at June 30, 2011 from $75.00 million at
September 30, 2010 as the Bank used a portion of its liquid assets to repay
FHLB advances. For additional information, see "Borrowing Maturity Schedule"
set forth below.
Shareholders' Equity: Total shareholders' equity increased by $926,000, or
1.1%, to $86.33 million at June 30, 2011 from $85.41 million at September 30,
2010. The increase was primarily due to net income of $1.16 million for the
nine months ended June 30, 2011.
The FRB has denied the Company's requests to pay cash dividends on its
outstanding Series A Preferred Stock held by the Treasury for the quarterly
dividend payments due for the last five quarters commencing with the payment
due May 15, 2010. Cash dividends on the Series A Preferred Stock are
cumulative and accrue and compound on each subsequent date. Accordingly,
during the deferral period, the Company will continue to accrue, and reflect
in the consolidated financial statements, the deferred dividends on the
outstanding Series A Preferred Stock. As a result of not receiving permission
from the FRB to pay these dividends, the Company had not made these five
quarterly dividend payment as of June 30, 2011. At June 30, 2011, the Company
had unpaid preferred stock dividends in arrears of $1.04 million. If the
Company does not make six quarterly dividend payments on the Series A
Preferred Stock, whether or not consecutive, the Treasury will have the right
to appoint two directors to the Company's board of directors until all accrued
but unpaid dividends have been paid. In addition, the Company's ability to
pay dividends with respect to common stock is restricted until the dividend
obligations under the Series A Preferred Stock are brought current.
Non-performing Assets: Non-performing assets consist of non-accrual loans,
loans past due 90 days or more and still accruing, non-accrual investment
securities, and OREO and other repossessed assets. Non-performing assets
decreased by $480,000, or 1.2%, to $40.62 million at June 30, 2011 from $41.10
million at September 30, 2010. The decrease in non-performing assets was
primarily a result of a $3.32 million decrease in non-accrual loans, a
$523,000 decrease in OREO and other repossessed assets and a $206,000 decrease
in non-accrual investment securities. These decreases were partially offset
by a $3.57 million increase in loans past due 90 days or more and still
accruing. The increase in loans past due 90 days or more and still accruing
was primarily due to the addition of two commercial real estate loans totaling
$3.43 million. These loans were secured and in the process of collection on
June 30, 2011.
38
For additional information, see Note 6 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Deposit Breakdown
-----------------
The following table sets forth the composition of the Company's deposit
balances.
At At
June 30, 2011 September 30, 2010
------------- ------------------
(Dollars in thousands)
Non-interest bearing $ 57,735 $ 58,755
N.O.W. checking 158,725 153,304
Savings 77,391 67,448
Money market accounts 56,151 55,723
CDs under $100 146,037 150,633
CDs $100 and over 93,459 93,006
-------- --------
Total deposits $589,498 $578,869
======== ========
The Company had no brokered deposits at June 30, 2011 or September 30, 2010.
Borrowing Maturity Schedule
---------------------------
The Company has short- and long-term borrowing lines with the FHLB of Seattle
with total credit available on the lines equal to 30% of the Bank's total
assets, limited by available collateral. Borrowings are considered short-term
when the original maturity is less than one year. FHLB advances consisted of
the following:
At June 30, At September 30,
2011 2010
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Short-term $ - - - -% $ - - - -%
Long-term 55,000 100.0 75,000 100.0
------- ----- ------- -----
Total FHLB advances $55,000 100.0% $75,000 100.0%
======= ===== ======= =====
The long-term borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.49% to 4.34%. The weighted average
interest rate on FHLB borrowings at June 30, 2011 was 4.01%. Principal
reduction amounts due for future years ending September 30 are as follows
(dollars in thousands):
Remainder of 2011 $ - -
2012 10,000
2013 - -
2014 - -
2015 - -
2016
2017 45,000
-------
Total $55,000
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
39
The Company also maintains a short-term borrowing line with the FRB with total
credit based on eligible collateral. As of June 30, 2011, the Company had a
borrowing line capacity with the FRB of $55.98 million of which none was
outstanding.
Comparison of Operating Results for the Three and Nine Months Ended June 30,
2011 and 2010
The Company reported a net loss of $(1.28 million) for the quarter ended June
30, 2011 compared to net income of $804,000 for the quarter ended June 30,
2010. Net loss to common shareholders after adjusting for the preferred stock
dividend and the preferred stock discount accretion was $(1.55 million) for
the quarter ended June 30, 2011 compared to net income of $543,000 for the
quarter ended June 30, 2010. The decrease in earnings was primarily a result
of an increased provision for loan losses, decreased non-interest income and
increased non-interest expense as net interest income was essentially
unchanged. Diluted net loss per common share was $(0.23) for the quarter
ended June 30, 2011 compared to net income per diluted common share of $0.08
for the quarter ended June 30, 2010.
The Company reported net income of $1.16 million for the nine months ended
June 30, 2011 compared to a net loss of $(2.15 million) for the nine months
ended June 30, 2010. Net income to common shareholders after adjusting for
the preferred stock dividend and the preferred stock discount accretion was
$370,000 for the nine months ended June 30, 2011 compared to a net loss of
$(2.93 million) for the nine months ended June 30, 2010. The increase in net
income was primarily a result of a decreased provision for loan losses and
increased non-interest income, which was partially offset by decreased net
interest income and increased non-interest expense. Diluted net income per
common share was $0.05 for the nine months ended June 30, 2011 compared to a
loss of $(0.44) per diluted common share for the nine months ended June 30,
2010.
A more detailed explanation of the income statement categories is presented
below.
Net Income (Loss): The Company reported a net loss of $(1.28 million) for the
quarter ended June 30, 2011 compared to net income of $804,000 for the quarter
ended June 30, 2010. Net loss to common shareholders after adjusting for
preferred stock dividends of $208,000 and preferred stock discount accretion
of $57,000 was $(1.55 million), or $(0.23) per diluted common share for the
quarter ended June 30, 2011, compared to $543,000, or $0.08 per diluted common
share for the quarter ended June 30, 2010.
The decrease in net income for the quarter ended June 30, 2011 was primarily
the result of a $2.65 million increase in the provision for loan losses, a
$180,000 decrease in non-interest income and a $360,000 increase in
non-interest expense. These decreases to net income were partially offset by
a $21,000 increase in net interest income and a $1.09 million change in the
provision (benefit) for federal and state income taxes.
Net income for the nine months ended June 30, 2011 increased by $3.31 million
to $1.16 million from a net loss of $(2.15 million) for the nine months ended
June 30, 2010. Net income to common shareholders after adjusting for
preferred stock dividends of $624,000 and preferred stock discount accretion
of $168,000 was $370,000, or $0.05 per diluted common share for the nine
months ended June 30, 2011, compared to a net loss of $(2.93 million), or
$(0.44) per diluted common share for the nine months ended June 30, 2010.
The increase in net income for the nine months ended June 30, 2011 was
primarily the result of a $3.55 million decrease in the provision for loan
losses and a $2.48 million increase in non-interest income. These increases
to net income were partially offset by a $724,000 increase to non-interest
expense, a $133,000 decrease to net interest income and a $1.86 million change
in the provision (benefit) for federal and state income taxes.
Net Interest Income: Net interest income increased by $21,000, or 0.3%, to
$6.41 million for the quarter ended June 30, 2011 from $6.39 million for the
quarter ended June 30, 2010. The increase in net interest income was
40
primarily attributable to an increase in the level of total interest-earning
assets, which was partially offset by a decrease in the net interest margin.
Total interest and dividend income decreased by $671,000 or 7.4%, to $8.43
million for the quarter ended June 30, 2011 from $9.10 million for the quarter
ended June 30, 2010 as the yield on interest earning assets decreased to 4.94%
from 5.49% and average loans receivable declined $14.2 million as compared the
same period last year. The decrease in the weighted average yield on interest
earning assets was primarily a result of decreased market rates for loans and
an increase in the amount of lower yielding cash equivalents and other liquid
assets. Total interest expense decreased by $692,000, or 25.5%, to $2.02
million for the quarter ended June 30, 2011 from $2.71 million for the quarter
ended June 30, 2010 as the average rate paid on interest bearing liabilities
decreased to 1.37% for the quarter ended June 30, 2011 from 1.86% for the
quarter ended June 30, 2010. The decrease in funding costs was primarily a
result of a decrease in overall market rates and a decrease in the level of
average FHLB advances. The net interest margin decreased to 3.76% for the
quarter ended June 30, 2011 from 3.85% for the quarter ended June 30, 2010.
Net interest income decreased by $133,000, or 0.7%, to $19.10 million for the
nine months ended June 30, 2011 from $19.23 million for the nine months ended
June 30, 2010. The decrease in net interest income was primarily attributable
to a change in the composition of average interest earning assets as the
percentage of lower yielding cash equivalents and other liquid assets
increased and the percentage of higher yielding loans decreased for the nine
months ended June 30, 2011 relative to the nine months ended June 30, 2010.
Total interest and dividend income decreased by $1.87 million or 6.8%, to
$25.74 million for the nine months ended June 30, 2011 from $27.6 million for
the nine months ended June 30, 2010 as the yield on interest earning assets
decreased to 5.10% from 5.61%. The decrease in the weighted average yield on
interest earning assets was primarily a result of decreased market rates for
loans, an increase in the amount of lower yielding cash equivalents and other
liquid assets and a change in the composition of the loan portfolio as the
level of higher yielding construction loans decreased. Total interest expense
decreased by $1.73 million, or 20.7%, to $6.64 million for the nine months
ended June 30, 2011 from $8.37 million for the nine months ended June 30, 2010
as the average rate paid on interest bearing liabilities decreased to 1.52%
for the nine months ended June 30, 2011 from 1.96% for the nine months ended
June 30, 2010. The decrease in funding costs was primarily a result of a
decrease in overall market rates and a decrease in the level of average FHLB
advances. The net interest margin decreased to 3.78% for the nine months
ended June 30, 2011 from 3.91% for the nine months ended June 30, 2010.
41
Average Balances, Interest and Average Yields/Cost
The following tables sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts (in thousands) of interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities and
average yields and costs. Such yields and costs for the periods indicated are
derived by dividing income or expense by the average daily balance of assets
or liabilities, respectively, for the periods presented.
Three Months Ended June 30,
----------------------------------------------------
2011 2010
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
Interest-earning
assets: (1)
Loans receivable (2) $537,858 $8,192 6.09% $552,055 $8,764 6.35%
MBS and other
investments (2) 11,256 141 5.01 16,822 239 5.68
FHLB stock and equity
securities 6,676 8 0.48 6,676 9 0.54
Interest-bearing
deposits 126,739 90 0.28 87,958 90 0.41
-------- ------ -------- ------
Total interest-
earning assets 682,529 8,431 4.94 663,511 9,102 5.49
Non-interest-earning
assets 60,678 57,490
-------- --------
Total assets $743,207 $721,001
======== ========
Interest-bearing liabilities:
Savings accounts $ 76,411 107 0.56 $ 64,965 115 0.71
Money market accounts 57,984 94 0.65 57,163 148 1.04
N.O.W. accounts 158,905 340 0.86 148,660 488 1.32
Certificates of
deposit 242,573 922 1.52 237,397 1,199 2.03
Short-term borrowings
(3) 509 - 0.05 859 1 0.32
Long-term borrowings
(4) 55,000 556 4.05 75,000 760 4.06
-------- ------ -------- ------
Total interest-bearing
liabilities 591,382 2,019 1.37 584,044 2,711 1.86
------ ------
Non-interest-bearing
liabilities 64,028 51,856
-------- --------
Total liabilities 655,410 635,900
Shareholders' equity 87,797 85,101
-------- --------
Total liabilities
and shareholders'
equity $743,207 $721,001
======== ========
Net interest income $6,412 $6,391
====== ======
------ ------
Interest rate spread 3.57% 3.63%
====== ======
Net interest margin (5) 3.76% 3.85%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 115.41% 113.61%
====== ======
----------------
(1) Interest yield on loans and MBS is calculated assuming a 30/360 basis;
interest yield on all other categories is based on daily interest basis.
(2) Average balances include loans and MBS on non-accrual status.
(3) Includes FHLB and FRB advances with original maturities of less than one
year and other short-term borrowings repurchase agreements.
(4) Includes FHLB advances with original maturities of one year or greater.
(5) Net interest income divided by total average interest earning assets,
annualized.
42
Nine Months Ended June 30,
----------------------------------------------------
2011 2010
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
Interest-earning assets: (1)
Loans receivable (2) $537,782 $24,966 6.19% $558,587 $26,661 6.38%
MBS and other
investments (2) 12,056 486 5.37 18,045 695 5.14
FHLB stock and equity
securities 6,677 23 0.46 6,672 27 0.52
Interest-bearing
deposits 116,257 260 0.30 72,543 218 0.40
-------- ------- -------- -------
Total interest-earning
assets 672,772 25,735 5.10 655,847 27,601 5.61
Non-interest-earning
assets 59,269 55,704
-------- --------
Total assets $732,041 $711,551
======== ========
Interest-bearing liabilities:
Savings accounts $ 71,723 355 0.66 $ 62,596 333 0.71
Money market accounts 57,919 342 0.79 61,403 544 1.18
N.O.W. accounts 157,397 1,140 0.97 136,403 1,324 1.30
Certificates of deposit 242,697 2,968 1.64 232,598 3,785 2.18
Short-term borrowings
(3) 514 - 0.05 1,037 3 0.39
Long-term borrowings
(4) 55,000 1,835 4.46 78,315 2,384 4.07
-------- ------- -------- -------
Total interest-bearing
liabilities 585,250 6,640 1.52 572,352 8,373 1.96
------- -------
Non-interest-bearing
liabilities 60,105 52,467
-------- --------
Total liabilities 645,355 624,819
Shareholders' equity 86,686 86,732
-------- --------
Total liabilities
and shareholders'
equity $732,041 $711,551
======== ========
Net interest income $19,095 $19,228
======= =======
------ ------
Interest rate spread 3.58% 3.65%
====== ======
Net interest margin (5) 3.78% 3.91%
====== ======
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 114.95% 114.59%
====== ======
----------------
(1) Interest yield on loans and MBS is calculated assuming a 30/360 basis;
interest yield on all other categories is based on daily interest basis.
(2) Average balances include loans and MBS on non-accrual status.
(3) Includes FHLB and FRB advances with original maturities of less than one
year and other short-term borrowings repurchase agreements.
(4) Includes FHLB advances with original maturities of one year or greater.
(5) Net interest income divided by total average interest earning assets,
annualized.
43
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the net interest income of the Company. Information is provided with respect
to the (i) effects on interest income attributable to change in volume
(changes in volume multiplied by prior rate), and (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior
volume), and (iii) the net change (sum of the prior columns). Changes in
rate/volume have been allocated to rate and volume variances based on the
absolute values of each.
Three months ended Nine months ended
June 30, 2011 June 30, 2011
compared to three months compared to nine months
ended June 30, 2010 ended June 30, 2010
increase (decrease) increase (decrease)
due to due to
------ ------
Net Net
Rate Volume Change Rate Volume Change
---- ------ ------ ---- ------ ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $(350) $(222) $(572) $ (718) $ (977) $(1,695)
MBS and other
investments (26) (72) (98) (7) (202) (209)
Equity securities (1) - - (1) (4) - - (4)
Interest-bearing
deposits (33) 33 - - (14) 56 42
---- ------ ----- ------ ------- -------
Total net decrease in
income on interest-
earning assets (410) (261) (671) (743) (1,123) (1,866)
---- ------ ----- ------ ------- -------
Interest-bearing liabilities:
Savings accounts (26) 18 (8) (4) 26 22
N.O.W accounts (180) 32 (148) (199) 15 (184)
Money market accounts (56) 2 (54) (173) (29) (202)
CD accounts (302) 25 (277) (789) (28) (817)
Short-term borrowings (1) - - (1) (2) (1) (3)
Long-term borrowings (2) (202) (204) (17) (532) (549)
---- ------ ----- ------ ------- -------
Total net decrease
in expense on interest-
bearing liabilities (567) (125) (692) (1,184) (549) (1,733)
---- ------ ----- ------ ------- -------
Net increase (decrease)
in net interest income $157 $(136) $ 21 $ 441 $ (574) $ (133)
==== ===== ===== ====== ======= =======
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
44
Provision for Loan Losses: The provision for loan losses increased $2.65
million, or 353.3%, to $3.40 million for the quarter ended June 30, 2011 from
$750,000 for the quarter ended June 30, 2010. The increased provision for
loan losses for the quarter ended June 30, 2011 was primarily the result of
receiving updated appraisals reflecting decreased valuations for three
properties involving two borrowing relationships. The Company had net
charge-offs of $3.41 million during the quarter ended June 30, 2011 compared
to net charge-off of $6.54 million during the quarter ended June 30, 2010.
Net charge-offs during the three months ended June 30, 2010 exceeded the
quarterly provision expense primarily due to charge-offs of $5.1 million in
impairments previously identified and factored into prior quarter's
provisions.
The provision for loan losses decreased $3.55 million, or 41.5%, to $5.00
million for the nine months ended June 30, 2011 from $8.55 million for the
nine months ended June 30, 2010. The decreased provision for loan losses for
the nine months ended June 30, 2011 was primarily due to a decreased level of
net charge-offs and a decrease in the Company's construction and land
development portfolio. The Company had net charge-offs of $4.47 million
during the nine months ended June 30, 2011 and net charge-offs of $11.82
million for the nine months ended June 30, 2010.
The Company has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Company performs an
analysis that considers pertinent factors underlying the quality of the loan
portfolio. The factors include changes in the amount and composition of the
loan portfolio, historic loss experience for various loan segments, changes in
economic conditions, delinquency rates, a detailed analysis of impaired loans,
and other factors to determine an appropriate level of allowance for loan
losses. Based on its comprehensive analysis, management believes the
allowance for loan losses of $11.79 million at June 30, 2011 (2.21% of loans
receivable and loans held for sale and 44.6% of non-performing loans) was
adequate to provide for probable losses based on an evaluation of known and
inherent risks in the loan portfolio at that date. Impaired loans are
subjected to an impairment analysis to determine an appropriate reserve amount
to be held against each loan. The aggregate principal impairment amount
determined at June 30, 2011 was $2.23 million. The allowance for loan losses
was $10.90 million (2.00% of loans receivable and loans held for sale and
51.8% of non-performing loans) at June 30, 2010.
Non-accrual and loans past due 90 days or more and still accruing increased
$249,000 to $26.44 million at June 30, 2011 from $26.19 million at September
30, 2010. For additional information, see the section entitled "Comparison of
Financial Condition at June 30, 2011 and September 30, 2010 - Non-performing
Assets" included herein.
While management believes the estimates and assumptions used in its
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be
required will not adversely impact the Company's consolidated financial
condition and results of operations. In addition, the determination of the
amount of the Bank's allowance for loan losses is subject to review by bank
regulators as part of the routine examination process, which may result in the
establishment of additional reserves based upon their analysis of information
available to them at the time of their examination. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate. Any material increase in the allowance
for loan losses would adversely affect the Company's financial condition and
results of operations. For additional information, see Note 6 of the Notes to
Condensed Consolidated Financial Statements contained in "Item 1, Financial
Statements."
Non-interest Income: Total non-interest income decreased $180,000, or 9.3%, to
$1.76 million for the quarter ended June 30, 2011 from $1.94 million for the
quarter ended June 30, 2010. The decrease was primarily a result of a
$159,000 change in the valuation recovery (allowance) on MSRs and a $73,000
decrease in service
45
charges on deposits. These decreases to non-interest income were partially
offset by a $76,000 increase in ATM transaction fees.
The $137,000 valuation allowance on MSRs during the quarter ended June 30,
2011 was primarily a result of a decrease in mortgage interest rates at June
30, 2011 relative to March 31, 2011. The decrease in mortgage interest rates
increased estimated mortgage prepayment speeds, shortened the estimated
average life of loans comprising the MSR asset and reduced the fair value of
the MSR asset.
Total non-interest income increased by $2.48 million, or 57.1%, to $6.82
million for the nine months ended June 30, 2011 from $4.34 million for the
nine months ended June 30, 2010. The increase was primarily a result of a
$1.69 million reduction in net OTTI on MBS and other investments, a $703,000
valuation recovery on MSRs, a $227,000 increase in gain on sale of loans, a
$197,000 increase in ATM transaction fees and a $79,000 gain on sale of MBS
and other investments. These increases to non-interest income were partially
offset by a $343,000 decrease in service charges on deposits.
The OTTI charges were higher during the first nine months of the previous
fiscal year partially due to changes in the third party model that the Company
uses to evaluate projected cash flows on certain private label MBS. The
changes in the model were implemented during the quarter ended March 31, 2010
and incorporated harsher assumptions relative to earlier periods. The
securities on which the OTTI charges were recognized were private label MBS
acquired from the in-kind redemption of the Company's investment in the AMF
family of mutual funds in June 2008. At June 30, 2011, the Company's
remaining private label MBS portfolio had been reduced to $4.09 million from
an original acquired balance of $15.30 million.
The $703,000 MSR valuation recovery during the nine months ended June 30, 2011
represents the majority of the $890,000 valuation allowance that was recorded
during the quarter ended September 30, 2010. The recovery was primarily due
to increased mortgage rates at December 31, 2010 and March 31, 2011 relative
to September 30, 2010, which reduced estimated prepayment speeds and increased
the expected life and corresponding value of the MSR portfolio. The increased
gain on sale of loans was primarily due to an increase in the dollar volume of
fixed rate one- to four-family mortgage loans sold during the nine months
ended June 30, 2011, relative to the nine months ended June 30, 2010 and an
increased pricing spread.
Non-interest Expense: Total non-interest expense increased by $360,000, or
5.6%, to $6.78 million for the quarter ended June 30, 2011 from $6.42 million
for the quarter ended June 30, 2010. The increase was primarily the result of
a $284,000 increase in foreclosure and loan administration related expenses
(which are reflected in the other non-interest expense category) and a
$123,000 increase OREO and other repossessed assets expense. These increases
to non-interest expense were partially offset by a $98,000 decrease in
insurance expense and a $69,000 decrease in FDIC insurance expense.
Total non-interest expense increased by $724,000, or 3.9%, to $19.34 million
for the nine months ended June 30, 2011 from $18.61 million for the nine
months ended June 30, 2010. The increase was primarily due to a $374,000
increase in salaries and employee benefits and a $361,000 increase in
foreclosure and loan administration related expenses, a $163,000 increase in
OREO and other repossessed assets expense, and a $93,000 increase in ATM
expenses. These increases to expense were partially offset by a $404,000
decrease in FDIC insurance expense. The comparison between periods for
salaries and employee benefits expense was affected by a change in the Bank's
vacation accrual policy during the prior year which reduced salaries and
employee benefits expense by $340,000 during the nine months ended June 30,
2010.
Provision (Benefit) for Income Taxes: As a result of a loss before taxes for
the current quarter, the Company recorded a benefit for income taxes of
$(729,000) for the quarter ended June 30, 2011 compared to a provision for
income taxes of $356,000 for the quarter ended June 30, 2010. The Company's
effective tax (benefit) rate was (36.29)% for the quarter ended June 30, 2011
and 30.70% for the quarter ended June 30, 2010.
46
The provision for income taxes increased to $417,000 for the nine months ended
June 30, 2011 from a $(1.44 million) benefit for the nine months ended June
30, 2010 primarily as a result of increased income before taxes. The
Company's effective tax (benefit) rate was 26.41% for the nine months ended
June 30, 2011 and (40.09)% for the nine months ended June 30, 2010.
The change in the effective tax (benefit) rate between periods is primarily
due to the loss before taxes and the non-taxable BOLI earnings. The BOLI
earnings reduce the effective tax rate in periods with income before taxes and
increase the effective tax benefit in periods with a loss before taxes.
Liquidity
---------
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and MBS, proceeds from the sale of
loans, proceeds from maturing securities and maturing CDs held for investment,
FHLB advances, and other borrowings. While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
An analysis of liquidity should include a review of the Condensed Consolidated
Statement of Cash Flows for the nine months ended June 30, 2011. The
Condensed Consolidated Statement of Cash Flows includes operating, investing
and financing categories. Operating activities include net income, which is
adjusted for non-cash items, and increases or decreases in cash due to changes
in certain assets and liabilities. Investing activities consist primarily of
proceeds from maturities and sales of securities, purchases of securities, the
net change in loans and proceeds from the sale of OREO and other repossessed
assets. Financing activities present the cash flows associated with the
Company's deposit accounts, other borrowings and stock related transactions.
The Company's total cash and cash equivalents increased by $2.52 million, or
2.3% to $114.30 million at June 30, 2011 from $111.79 million at September 30,
2010. The increase in liquid assets was primarily a result of an increase in
deposits.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds for loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At June 30, 2011,
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
22.18%. The Bank maintained an uncommitted credit facility with the FHLB that
provided for immediately available advances up to an aggregate amount equal to
30% of total assets, limited by available collateral, under which $55.00
million was outstanding and $100.82 million was available for additional
borrowings at June 30, 2011. The Bank also maintains a short-term borrowing
line with the FRB with total credit based on eligible collateral. At June 30,
2011, the Bank had $55.98 million available for borrowings with the FRB and
there was no outstanding balance on this borrowing line.
Liquidity management is both a short and long-term responsibility of the
Bank's management. The Bank adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, and (iv) yields available on
interest-bearing deposits. Excess liquidity is invested generally in
interest-bearing overnight deposits, federal funds sold, and other short-term
investments. If the Bank requires funds that exceed its ability to generate
them internally, it has additional borrowing capacity with the FHLB and the
FRB.
The Bank's primary investing activity is the origination of one- to
four-family mortgage loans, commercial mortgage loans, construction loans,
consumer loans, and commercial business loans. At June 30, 2011, the Bank had
loan commitments totaling $31.82 million and undisbursed construction loans in
process totaling $22.71 million. The Bank anticipates that it will have
sufficient funds available to meet current loan commitments. CDs that are
scheduled to mature in less than one year from June 30, 2011 totaled $164.68
47
million. Historically, the Bank has been able to retain a significant amount
of its non-brokered CDs as they mature. At June 30, 2011, the Bank had no
brokered deposits.
Capital Resources
-----------------
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 4.0%, (ii) a ratio of Tier 1 capital to
risk weighted assets of at least 4.0% and (iii) a ratio of total capital to
risk weighted assets of at least 8.0%. The Bank is currently required to
maintain a "well capitalized" status and a Tier 1 leverage capital ratio of at
least 10.0% under terms of the Bank MOU.
At June 30, 2011, the Bank was in compliance with all applicable capital
requirements.
The following table compares the Company's and the Bank's actual capital
amounts at June 30, 2011 to its minimum regulatory capital requirements at
that date (dollars in thousands):
To Be Well
Capitalized
Regulatory Under Prompt
Minimum To Corrective
Be "Adequately Action
Actual Capitalized" Provisions
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tier 1 leverage capital:
Consolidated $81,204 11.01% $29,499 4.00% N/A N/A
Timberland Bank (1) 74,442 10.15 73,371 10.00 $73,371 10.00%
Tier 1 risk adjusted capital:
Consolidated 81,204 15.34 21,181 4.00 N/A N/A
Timberland Bank (1) 74,442 14.09 31,695 6.00 31,695 6.00
Total risk-based capital
Consolidated 87,887 16.60 42,362 8.00 N/A N/A
Timberland Bank (1) 81,109 15.35 52,825 10.00 52,825 10.00
--------------
(1) Reflects the higher Tier 1 leverage capital ratio that the Bank is
required to comply with under terms of the Bank MOU with the FDIC and the
Division. Also reflects that the Bank is required to maintain Tier 1 risk
adjusted capital ratio and Total risk-based capital ratio at or above the
"well capitalized" thresholds under the terms of the Bank MOU.
48
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
--------------- ----------------
PERFORMANCE RATIOS:
Return (loss) on average assets (1) (0.69)% 0.45% 0.21% (0.40)%
Return (loss) on average equity (1) (5.83)% 3.78% 1.79% (3.31)%
Net interest margin (1) 3.76% 3.85% 3.78% 3.91%
Efficiency ratio 82.98% 77.08% 74.61% 78.97%
At At At
June 30, September 30, June 30,
2011 2010 2010
----------------------------------
ASSET QUALITY RATIOS:
Non-accrual loans $21,545 $24,864 $21,031
Loans past due 90 days and still accruing 4,893 1,325 1,198
Non-performing investment securities 3,184 3,390 3,482
OREO & other repossessed assets 10,996 11,519 12,957
------- ------- -------
Total non-performing assets $40,618 $41,098 $38,668
======= ======= =======
Non-performing assets to total assets 5.53% 5.53% 5.28%
Allowance for loan losses to non-accrual
loans 55% 45% 52%
Troubled debt restructured loans
on accrual status (2) $20,783 $ 8,995 $ 8,895
BOOK VALUES:
Book value per common share $ 9.99 $ 9.89 $ 9.93
Tangible book value per common share (3) $ 9.13 $ 9.00 $ 9.04
-------------
(1) Annualized
(2) Does not include troubled debt restructured loans totaling $4,956, $7,405
and $5,464 that were included as non-accrual loans at June 30, 2011,
September 30, 2010 and June 30, 2010, respectively.
(3) Calculation subtracts goodwill and core deposit intangible from the
equity component.
Three Months Ended Nine Months Ended
June 30, June 30,
2011 2010 2011 2010
--------------- ----------------
AVERAGE BALANCE SHEET:
Average total loans $537,858 $552,055 $537,782 $558,587
Average total interest earning
assets (1) 682,529 663,511 672,772 655,847
Average total assets 743,207 721,001 732,041 711,551
Average total interest bearing
deposits 535,873 508,185 529,736 492,999
Average FHLB advances and other
borrowings 55,509 75,859 55,514 79,352
Average shareholders' equity 87,797 85,101 86,686 86,732
-------------
(1) Includes loans and MBS on non-accrual status.
49
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, 2010.
Item 4. Controls and Procedures
--------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"))
was carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management as of the end of the
period covered by this report. The Company's Chief Executive Officer
and Chief Financial Officer concluded that as of June 30, 2011 the
Company's disclosure controls and procedures were effective in ensuring
that the information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner to allow timely
decisions regarding required disclosure, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms.
(b) Changes in Internal Controls: There have been no changes in our internal
control over financial reporting (as defined in 13a-15(f) of the Exchange
Act) that occurred during the quarter ended June 30, 2011, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. The Company continued,
however, to implement suggestions from its internal auditor and
independent auditors to strengthen existing controls. The Company does
not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent all errors and fraud. A
control procedure, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any control procedure
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; as over
time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be
detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. From time to time, the Bank is involved in various claims and
legal actions arising in the ordinary course of business.
Item 1A. Risk Factors
There have been no material changes in the Risk Factors previously disclosed
in Item 1A of the Company's 2010 Form 10-K.
50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
----------------------------------------
See discussion in Item 2 of Part 1 with respect to cumulative preferred stock
dividends in arrears, which discussion is incorporated here by reference.
Item 4. (Removed and Reserved)
-----------------------------
Item 5. Other Information
--------------------------
None to be reported.
Item 6. Exhibits
-----------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Certificate of Designation relating to the Company's Fixed Rate
Cumulative Perpetual Preferred Stock Series A (2)
3.3 Bylaws of the Registrant (1)
3.4 Amendment to Bylaws (3)
4.1 Warrant to purchase shares of Company's common stock dated
December 23, 2008 (2)
4.2 Letter Agreement (including Securities Purchase Agreement
Standard Terms attached as Exhibit A) dated December 23, 2008
between the Company and the United States Department of the
Treasury (2)
10.1 Employee Severance Compensation Plan, as revised (4)
10.2 Employee Stock Ownership Plan (4)
10.3 1999 Stock Option Plan (5)
10.4 Management Recognition and Development Plan (5)
10.5 2003 Stock Option Plan (6)
10.6 Form of Incentive Stock Option Agreement (7)
10.7 Form of Non-qualified Stock Option Agreement (7)
10.8 Form of Management Recognition and Development Award Agreement
(7)
10.9 Form of Compensation Modification Agreements (2)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
101 The following materials from Timberland Bancorp, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2011, formatted in Extensible Business Reporting Language
(XBRL): (a) Condensed Consolidated Balance Sheets; (b)
Condensed Consolidated Statements of Operations; (c)
Condensed Consolidated Statements of Shareholders' Equity; (d)
Condensed Consolidated Statements of Cash Flows; (e) Condensed
Consolidated Statements of Comprehensive Income (Loss); and (f)
Notes to Unaudited Condensed Consolidated Financial
Statements (8)
----------------
(1) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (333- 35817).
(2) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on December 23, 2008.
(3) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2002.
(4) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997; and to the
Registrant's Current Report on Form 8-K
51
dated April 13, 2007, and to the Registrant's Current Report on
Form 8-K dated December 18, 2007.
(5) Incorporated by reference to the Registrant's 1999 Annual Meeting
Proxy Statement dated December 15, 1998.
(6) Incorporated by reference to the Registrant's 2004 Annual Meeting
Proxy Statement dated December 24, 2003.
(7) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2005.
(8) Pursuant to Rule 406T of Regulation S-T, these interactive data
files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933 or Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those
sections.
52
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 5, 2011 By: /s/ Michael R. Sand
-----------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 2011 By: /s/ Dean J. Brydon
-----------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
53
EXHIBIT INDEX
Exhibit No. Description of Exhibit
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101 The following materials from Timberland Bancorp, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011, formatted
in Extensible Business Reporting Language (XBRL): (a) Condensed
Consolidated Balance Sheets; (b) Condensed Consolidated Statements of
Operations; (c) Condensed Consolidated Statements of Shareholders'
Equity; (d) Condensed Consolidated Statements of Cash Flows; (e)
Condensed Consolidated Statements of Comprehensive Income (Loss);
and (f) Notes to Unaudited Condensed Consolidated Financial
Statements.
54