UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 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 APRIL 30, 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 Condensed Consolidated Financial Statements 10-32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 32-49
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
March 31, 2011 and September 30, 2010
(Dollars in thousands, except share data)
(Unaudited) March 31, September 30,
2011 2010
-----------------------
Assets
Cash and cash equivalents:
Cash and due from financial institutions $ 11,126 $ 9,466
Interest-bearing deposits in banks 107,871 102,320
-----------------------
Total cash and cash equivalents 118,997 111,786
-----------------------
Certificates of deposit ("CDs") held for investment
(at cost) 17,430 18,047
Mortgage-backed securities ("MBS") and other
investments - held to maturity, 4,497 5,066
at amortized cost (estimated fair value $4,536
and $4,842)
MBS and other investments - available for sale 7,893 11,119
Federal Home Loan Bank of Seattle ("FHLB") stock 5,705 5,705
Loans receivable 537,856 535,885
Loans held for sale 1,169 2,970
Less: Allowance for loan losses (11,798) (11,264)
-----------------------
Net loans receivable 527,227 527,591
-----------------------
Premises and equipment, net 17,106 17,383
Other real estate owned ("OREO") and other
repossessed assets, net 10,140 11,519
Accrued interest receivable 2,674 2,630
Bank owned life insurance ("BOLI") 13,640 13,400
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 481 564
Mortgage servicing rights ("MSRs"), net 2,702 1,929
Prepaid Federal Deposit Insurance Corporation
("FDIC") insurance assessment 2,653 3,268
Other assets 7,063 7,030
-----------------------
Total assets $743,858 $742,687
=======================
Liabilities and shareholders' equity
Deposits: Non-interest-bearing demand $ 58,957 $ 58,755
Deposits: Interest-bearing 538,206 520,114
-----------------------
Total deposits 597,163 578,869
-----------------------
FHLB advances 55,000 75,000
Repurchase agreements 595 622
Other liabilities and accrued expenses 3,519 2,788
-----------------------
Total liabilities 656,277 657,279
-----------------------
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 16,641 shares, Series A, issued and 15,875 15,764
outstanding; $1,000 per share liquidation value
Common stock, $.01 par value; 50,000,000 shares
authorized; 7,045,036 shares issued and 10,410 10,377
outstanding
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,115) (2,247)
Retained earnings 64,153 62,238
Accumulated other comprehensive loss (742) (724)
-----------------------
Total shareholders' equity 87,581 85,408
-----------------------
Total liabilities and shareholders' equity $743,858 $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 six months ended March 31, 2011 and 2010
(Dollars in thousands, except share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------- -------------------
Interest and dividend income
Loans receivable $ 8,240 $ 8,832 $16,774 $17,897
MBS and other investments 162 239 344 456
Dividends from mutual funds 8 9 16 18
Interest bearing deposits in
banks 83 77 170 128
------------------- -------------------
Total interest and dividend
income 8,493 9,157 17,304 18,499
------------------- -------------------
Interest expense
Deposits 1,591 1,958 3,342 4,036
FHLB advances - long term 550 751 1,279 1,624
Federal Reserve Bank of San
Francisco ("FRB") and other
borrowings - - 2 - - 2
------------------- -------------------
Total interest expense 2,141 2,711 4,621 5,662
------------------- -------------------
Net interest income 6,352 6,446 12,683 12,837
Provision for loan losses 700 5,195 1,600 7,795
------------------- -------------------
Net interest income after
provision for loan losses 5,652 1,251 11,083 5,042
------------------- -------------------
Non-interest income
Total other than temporary
impairment ("OTTI") (9) (258) (154) (607)
Portion of OTTI recognized in other
comprehensive loss (before taxes) (26) (1,298) (17) (1,269)
------------------- -------------------
Net OTTI recognized in earnings (35) (1,556) (171) (1,876)
Realized loss on MBS and other
investments (2) (1) (2) (17)
Gains on sales of MBS and other
investments - - - - 79 - -
Service charges on deposits 898 1,022 1,882 2,152
ATM transaction fees 458 386 869 747
BOLI net earnings 118 115 240 249
Gains on sales of loans, net 266 300 967 749
Servicing income (expense) on
loans sold 16 25 (20) 54
Valuation recovery (allowance)
on MSRs 206 (22) 840 (22)
Fee income from non-deposit
investment sales 17 3 48 35
Other 166 158 328 328
------------------- -------------------
Total non-interest income 2,108 430 5,060 2,399
------------------- -------------------
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (continued)
For the three and six months ended March 31, 2011 and 2010
(Dollars in thousands, except share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------- -------------------
Non-interest expense
Salaries and employee benefits $ 3,115 $ 2,921 $ 6,243 $ 5,902
Premises and equipment 675 702 1,369 1,403
Advertising 201 220 368 392
OREO and other repossessed
assets expense, net 6 344 434 395
ATM expenses 206 171 380 326
Postage and courier 146 142 261 270
Amortization of CDI 42 48 83 95
State and local taxes 160 153 320 294
Professional fees 196 196 377 368
FDIC insurance 332 806 672 1,005
Insurance 89 109 243 129
Other 1,010 880 1,804 1,611
------------------- -------------------
Total non-interest expense 6,178 6,692 12,554 12,190
------------------- -------------------
Income (loss) before federal and
state income taxes 1,582 (5,011) 3,589 (4,749)
Provision (benefit) for federal
and state income taxes 499 (1,833) 1,147 (1,795)
------------------- -------------------
Net income (loss) 1,083 (3,178) 2,442 (2,954)
Preferred stock dividends (208) (208) (416) (416)
Preferred stock discount
accretion (56) (52) (111) (103)
------------------- -------------------
Net income (loss) to common
shareholders: $ 819 $(3,438) $ 1,915 $(3,473)
=================== ===================
Net income (loss) per common share:
Basic $ 0.12 $ (0.51) $ 0.28 $ (0.52)
Diluted $ 0.12 $ (0.51) $ 0.28 $ (0.52)
Weighted average shares outstanding:
Basic 6,745,250 6,713,958 6,745,250 6,711,950
Diluted 6,745,250 6,713,958 6,745,250 6,711,950
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 six months ended March 31, 2011 and the year ended September 30, 2010
(Dollars in thousands, except per share amounts)
(Unaudited)
Accumu-
lated
Number of Shares Amount Unearned Other
------------------- ------------------ Shares Compre-
Preferred Common Preferred Common Issued to 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 - - - - - - - - - - 2,442 - - 2,442
Accretion of preferred stock
discount - - - - 111 - - - - (111) - - - -
5% preferred stock dividend - - - - - - - - - - (416) - - (416)
Earned ESOP shares - - - - - - (55) 132 - - - - 77
MRDP (1) compensation expense - - - - - - 85 - - - - - - 85
Stock option compensation
expense - - - - - - 3 - - - - - - 3
Unrealized holding loss on
securities available for
sale, net of tax - - - - - - - - - - - - (48) (48)
Change in OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 11 11
Accretion of OTTI on securities
held to maturity, net of tax - - - - - - - - - - - - 19 19
------ --------- ------- ------- ------- ------- ----- -------
Balance, March 31, 2011 16,641 7,045,036 $15,875 $10,410 $(2,115) $64,153 $(742) $87,581
====== ========= ======= ======= ======= ======= ===== =======
-------------
(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 six months ended March 31, 2011 and 2010
(Dollars in thousands)
(unaudited)
Six Months Ended March 31,
Cash flow from operating activities 2011 2010
-------------------
Net income (loss) $ 2,442 $(2,954)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 1,600 7,795
Depreciation 499 595
Deferred federal income taxes 128 (89)
Amortization of CDI 83 95
Earned ESOP shares 132 133
MRDP compensation expense 85 85
Stock option compensation expense 3 3
Gains on sales of OREO and other repossessed assets,
net (555) (188)
Provision for OREO losses 684 346
Loss on disposition of premises and equipment 3 13
BOLI net earnings (240) (240)
Gains on sales of loans, net (967) (749)
Decrease in deferred loan origination fees (169) (153)
OTTI losses on MBS and other investments 171 1,876
Gains on sales of available for sale securities (79) - -
Realized losses on held to maturity securities 2 17
Loans originated for sale (35,449) (31,401)
Proceeds from sale of loans 38,217 32,321
Increase in other assets, net (431) (5,580)
Increase (decrease) in other liabilities and accrued
expenses, net 316 (301)
-------------------
Net cash provided by operating activities 6,475 1,624
Cash flow from investing activities
Net decrease (increase) in CDs held for investment 617 (14,857)
Proceeds from maturities and prepayments of securities
available for sale 981 1,635
Proceeds from maturities and prepayments of securities
held to maturity 497 627
Proceeds from sales of available for sale securities 2,272 - -
Increase in loans receivable, net (3,395) (6,015)
Additions to premises and equipment (225) (313)
Proceeds from sales of OREO and other repossessed
assets 1,777 1,308
-------------------
Net cash provided by (used in) investing activities 2,524 (17,615)
Cash flow from financing activities
Increase in deposits, net 18,294 46,063
Repayment of FHLB advances (20,000) (20,000)
Decrease in repurchase agreements (27) (332)
ESOP tax effect (55) (48)
MRDP compensation tax effect - - 2
Payment of dividends - - (699)
-------------------
Net cash provided by (used in) financing activities (1,788) 24,986
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2011 and 2010
(Dollars in thousands)
(Unaudited)
Six Months Ended March 31,
2011 2010
-------------------
Net increase in cash and cash equivalents $ 7,211 $ 8,995
Cash and cash equivalents
Beginning of period 111,786 66,462
-------------------
End of period $118,997 $75,457
===================
Supplemental disclosure of cash flow information
Income taxes paid $ 1,137 $ 791
Interest paid 4,738 5,775
Supplemental disclosure of non-cash investing
activities
Loans transferred to OREO and other repossessed
assets $ 2,065 $ 8,006
Loan originated to facilitate the sale of OREO 1,538 1,248
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 six months ended March 31, 2011 and 2010
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------- -------------------
Comprehensive income (loss):
Net income (loss) $1,083 $(3,178) $2,442 $(2,954)
Unrealized holding gain (loss)
on securities available for
sale, net of tax 27 187 (48) 305
Change in OTTI on securities
held-to-maturity, net of tax:
Additions (8) 105 (55) 60
Additional amount recognized
related to credit loss for
which OTTI was previously
recognized 13 785 9 696
Amount reclassified to credit
loss for previously recorded
market loss 12 (46) 57 69
Accretion of OTTI securities
held-to-maturity, net of tax 13 10 19 18
------------------- -------------------
Total comprehensive income
(loss) $1,140 $(2,137) $2,424 $(1,806)
=================== ===================
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 six months ended March 31, 2011
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
(b) Principles of Consolidation: The interim 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
March 31, 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
payments due May 15, 2010, August 15, 2010, November 15, 2010 and February 15,
2011. 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 payments due May 15, 2010,
August 15, 2010, November 15, 2010 and February 15, 2011. 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 March 31, 2011 and September 30, 2010 (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
March 31, 2011
--------------
Held to Maturity
MBS:
U.S. government agencies $ 1,949 $ 47 $ (4) $ 1,992
Private label residential 2,521 224 (230) 2,515
U.S. agency securities 27 2 - - 29
------- ----- ------ -------
Total $ 4,497 $ 273 $ (234) $ 4,536
======= ===== ====== =======
Available for Sale
MBS:
U.S. government agencies $ 4,963 $ 149 $ (3) $ 5,109
Private label residential 1,930 66 (173) 1,823
Mutual funds 1,000 - - (39) 961
------- ----- ------ -------
Total $ 7,893 $ 215 $ (215) $ 7,893
======= ===== ====== =======
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
March 31, 2011 are as follows (in thousands):
Less Than 12 Months 12 Months or Longer
------------------- ------------------- Total
Esti- Esti- Esti-
mated Gross mated Gross mated Gross
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Held to Maturity
MBS:
U.S.
government
agencies $ 173 $ (1) $ 372 $ (3) $ 545 $ (4)
Private label
residential - - - - 650 (230) 650 (230)
----- ---- ------ ----- ------ ------
Total $ 173 $ (1) $1,022 $(233) $1,195 $ (234)
===== ==== ====== ===== ====== ======
Available for Sale
MBS:
U.S.
government
agencies $ 186 $ (3) $ - - $ - - $ 186 $ (3)
Private label
residential - - - - 1,094 (173) 1,094 (173)
Mutual funds - - - - 961 (39) 961 (39)
----- ---- ------ ----- ------ ------
Total $ 186 $ (3) $2,055 $(212) $2,241 $ (215)
===== ==== ====== ===== ====== ======
During the three months ended March 31, 2011 and 2010, the Company recorded
net OTTI charges through earnings on residential MBS of $35,000 and $1.56
million, respectively. During the six months ended March 31, 2011 and 2010
the Company recorded net OTTI charges through earnings on residential MBS of
$171,000 and $1.88 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 March 31, 2011 and September 30, 2010:
Range
--------------------- Weighted
Minimum Maximum Average
------- ------- --------
At March 31, 2011
-----------------
Constant prepayment rate 6.00% 15.00% 10.41%
Collateral default rate 0.43% 39.34% 9.87%
Loss severity rate 25.20% 65.15% 43.54%
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 six months ended March
31, 2011 and 2010 (in thousands).
Three months ended Three months ended
March 31, 2011 March 31, 2010
------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI $ 8 $ 1 $ 211 $ 47
Portion of OTTI recognized in
other comprehensive loss
(before taxes) (1) 26 - - 1,298 - -
----- ----- ------ ------
Net OTTI recognized in
earnings (2) $ 34 $ 1 $1,509 $ 47
===== ===== ====== ======
Six months ended Six months ended
March 31, 2011 March 31, 2010
------------------- --------------------
Held To Available Held To Available
Maturity For Sale Maturity For Sale
-------- --------- -------- ---------
Total OTTI $ 153 $ 1 $ 514 $ 93
Portion of OTTI recognized in
other comprehensive loss
(before taxes) (1) 17 - - 1,269 - -
----- ----- ------ ------
Net OTTI recognized in
earnings (2) $ 170 $ 1 $1,783 $ 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 six months ended March 31, 2011 and 2010 (in thousands).
Six months ended March 31,
2011 2010
------- -------
Beginning balance of credit loss $ 4,725 $ 3,551
Additions:
Credit losses for which OTTI was
not previously recognized 47 374
Additional increases to the amount
related to credit loss for which OTTI
was previously recognized 124 1,472
Subtractions:
Realized losses recorded previously
as credit losses (881) (252)
------- -------
Ending balance of credit loss $ 4,015 $ 5,145
======= =======
There were no gross realized gains on sale of securities for the three months
ended March 31, 2011. There was a gross realized gain on sale of securities
for the six months ended March 31, 2011 of $79,000. There were no gross
realized gains on sale of securities for the three or six months ended March
31, 2010. During the three months ended March 31, 2011, the Company recorded a
$386,000 realized loss (as a result of the securities
14
being deemed worthless) on 17 held to maturity residential MBS of which
$384,000 had been recognized previously as a credit loss. During the six
months ended March 31, 2011, the Company recorded a $883,000 realized loss on
18 held to maturity residential MBS and one available for sale residential MBS
of which $881,000 had been recognized previously as a credit loss. During the
three months ended March 31, 2010, the Company recorded a $141,000 realized
loss on six held to maturity residential MBS of which $140,000 had previously
been recognized as a credit loss. During the six months ended March 31, 2010,
the Company recorded a $252,000 realized loss on eight held to maturity
residential MBS of which $235,000 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 $9.02 million and $12.80 million at March 31,
2011 and September 30, 2010, respectively.
The contractual maturities of debt securities at March 31, 2011 are as follows
(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 $ - - $ - - $ 235 $ 231
Due after one year to five years 21 22 - - - -
Due after five to ten years 33 35 121 130
Due after ten years 4,443 4,479 6,537 6,571
------- ------- ------- -------
Total $ 4,497 $ 4,536 $ 6,893 $ 6,932
======= ======= ======= =======
(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 March 31, 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 six months ended March 31, 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 March
31, 2011 and September 30, 2010 (dollars in thousands):
March 31, September 30,
2011 2010
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
Mortgage loans:
One- to four-family (1) $115,193 20.7% $121,014 21.6%
Multi-family 29,724 5.3 32,267 5.8
Commercial 224,489 40.2 208,002 37.2
Construction and land development 65,325 11.7 69,271 12.4
Land 57,643 10.3 62,999 11.3
-------- ----- -------- -----
Total mortgage loans 492,374 88.2 493,553 88.3
Consumer loans:
Home equity and second mortgage 37,478 6.7 38,418 6.9
Other 8,512 1.6 9,086 1.6
-------- ----- -------- -----
Total consumer loans 45,990 8.3 47,504 8.5
Commercial business loans 19,605 3.5 17,979 3.2
-------- ----- -------- -----
Total loans receivable 557,969 100.0% 559,036 100.0%
-------- ===== -------- =====
Less:
Undisbursed portion of construction
loans in process (16,884) (17,952)
Deferred loan origination fees (2,060) (2,229)
Allowance for loan losses (11,798) (11,264)
-------- --------
Total loans receivable, net $527,227 $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 March 31, 2011 and September 30, 2010
(dollars in thousands):
March 31, September 30,
2011 2010
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
Custom and owner/builder $29,375 45.0% $30,945 44.7%
Speculative one- to four-family 3,013 4.6 4,777 6.9
Commercial real estate 24,863 38.1 23,528 33.9
Multi-family
(including condominiums) 3,905 5.9 3,587 5.2
Land development 4,169 6.4 6,434 9.3
------- ----- ------- -----
Total construction and
land development loans $65,325 100.0% $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 form 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), multi-family construction loans, and commercial real estate
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 the value of 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 six months ended
March 31, 2011, regarding activity in the allowance for loan losses (in
thousands):
For the Three Months Ended March 31, 2011
-----------------------------------------
Beginning Ending
Allowance Provision Charge-offs Recoveries Allowance
--------- --------- ----------- ---------- ---------
Mortgage loans:
One-to four-family $ 738 $ (44) $ 104 $ 148 $ 738
Multi-family 875 131 - - 10 1,016
Commercial real estate 3,431 670 23 101 4,179
Construction - custom
and owner / builder 365 (19) - - - - 346
Construction -
speculative one-
to four-family 333 (61) 12 - - 260
Construction -
commercial 457 (278) - - - - 179
Construction -
multi-family 227 36 - - - - 263
Construction - land
development 71 440 483 - - 28
Land 3,526 (14) 282 24 3,254
Consumer loans:
Home equity and
second mortgage 846 (312) 36 7 505
Other 441 (4) 2 1 436
Commercial business
loans 439 155 - - - - 594
------- ----- ----- ----- -------
Total $11,749 $ 700 $ 942 $ 291 $11,798
======= ===== ===== ===== =======
For the Six Months Ended March 31, 2011
-----------------------------------------
Beginning Ending
Allowance Provision Charge-offs Recoveries Allowance
--------- --------- ----------- ---------- ---------
Mortgage loans:
One-to four-family $ 530 $ 293 $ 233 $ 148 $ 738
Multi-family 393 604 - - 19 1,016
Commercial real
estate 3,173 952 47 101 4,179
Construction -
custom and
owner / builder 481 (135) - - - - 346
Construction -
speculative one-
to four-family 414 (114) 40 - - 260
Construction -
commercial 245 (66) - - - - 179
Construction -
multi-family 245 18 - - - - 263
Construction - land
development 240 271 483 - - 28
Land 3,709 (81) 413 39 3,254
Consumer loans:
Home equity and
second mortgage 922 (310) 114 7 505
Other 451 13 30 2 436
Commercial business
loans 461 155 22 - - 594
------- ------ ------ ----- -------
Total $11,264 $1,600 $1,382 $ 316 $11,798
======= ====== ====== ===== =======
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 March 31, 2011 (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
---------- ---------- ----- ---------- ---------- -----
December 31, 2010
Mortgage loans:
One- to four-family $ 73 $ 651 $ 724 $ 3,607 $111,586 $115,193
Multi-family 632 375 1,007 5,482 24,242 29,724
Commercial real estate 287 3,811 4,098 16,261 208,228 224,489
Construction - custom
and owner / builder - - 338 338 548 18,668 19,216
Construction -
speculative one- to
four-family 37 254 291 1,764 824 2,588
Construction -
commercial real
estate 138 175 313 6,800 13,404 20,204
Construction -
multi-family - - 257 257 1,099 2,166 3,265
Construction -
land development - - 28 28 3,034 134 3,168
Land 561 2,678 3,239 11,255 46,388 57,643
Consumer loans:
Home equity and
second mortgage 55 440 495 747 36,731 37,478
Other 1 426 427 13 8,499 8,512
Commercial business
loans - - 581 581 40 19,565 19,605
------ ------- ------- ------- -------- --------
$1,784 $10,014 $11,798 $50,650 $490,435 $541,085
====== ======= ======= ======= ======== ========
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
March 31, 2011 (in thousands):
Credit Risk Profile by Internally Assigned Grades
(In thousands) Loan Grades
---------------------------------------
Special
Pass Watch Mention Substandard Total
------ ----- ------- ----------- -----
Mortgage loans:
One- to four-family $100,261 $ 6,959 $ 2,537 $ 5,436 $115,193
Multi-family 17,598 4,526 669 6,931 29,724
Commercial 187,061 8,847 4,920 23,661 224,489
Construction - custom
and owner / builder 18,072 274 - - 870 19,216
Construction -
speculative one- to
four-family 20 - - - - 2,568 2,588
Construction - commercial
real estate 13,404 - - - - 6,800 20,204
Construction - multi-
family 602 - - 752 1,911 3,265
Construction - land
development 134 - - - - 3,034 3,168
Land 28,106 12,722 4,896 11,919 57,643
Consumer loans:
Home equity and second
mortgage 34,416 953 1,266 843 37,478
Other 8,409 90 - - 13 8,512
Commercial business loans 17,516 641 155 1,293 19,605
-------- ------- ------- ------- --------
Total $425,599 $35,012 $15,195 $65,279 $541,085
======== ======= ======= ======= ========
The following table presents an age analysis of past due status of loans by
category at March 31, 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 $ 1,251 $ 711 $ 3,060 $ 5,022 $110,171 $115,193 $ - -
Multi-family 1,449 - - - - 1,449 28,275 29,724 - -
Commercial 13,367 - - 6,425 19,792 204,697 224,489 - -
Construction - custom and
owner / builder 322 - - 548 870 18,346 19,216 - -
Construction - speculative
one- to four-family - - - - 264 264 2,324 2,588
Construction - commercial - - 6,800 - - 6,800 13,404 20,204 - -
Construction - multi-family 812 - - 1,099 1,911 1,354 3,265 - -
Construction - land
development - - - - 3,034 3,034 134 3,168 - -
Land 2,611 606 8,478 11,695 45,948 57,643 29
Consumer loans:
Home equity and second
mortgage 218 299 743 1,260 36,218 37,478 - -
Other 22 - - 13 35 8,477 8,512 - -
Commercial business loans - - 52 316 368 19,237 19,605 276
------- ------ ------- ------- -------- -------- -----
Total $20,052 $8,468 $23,980 $52,500 $488,585 $541,085 $ 305
======= ====== ======= ======= ======== ======== =====
-----------
(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 March 31, 2011 and September 30, 2010, the Company had impaired loans
totaling $50.65 million and $42.25 million, respectively. At March 31, 2011,
the Company had loans totaling $305,000 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 six months
ended March 31, 2011 and March 31, 2010 was $760,000 and $496,000,
respectively. Interest income recognized on a cash basis on impaired loans
for the six months ended March 31, 2011 and March 31, 2010, was $474,000 and
$328,000, respectively. The average investment in impaired loans for the six
months ended March 31, 2011 and March 31, 2010 was $44.51 million and $44.36
million, respectively.
Troubled debt restructured loans are loans where 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 $27.12 million in
troubled debt restructured loans included in impaired loans at March 31, 2011
and had $208,000 in commitments to lend additional funds on these loans. At
March 31, 2011, $4.67 million of the $27.12 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 March 31, 2011 (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 $ 2,662 $ 2,794 $ - - $ 3,272 $ 6
Commercial 13,138 13,560 - - 12,707 173
Construction - custom and
owner / builder 548 548 - - 414 - -
Construction - speculative one- to
four-family 264 372 - - 608 - -
Construction - commercial real
estate - - - - - - - - - -
Construction - multi-family 1,099 1,104 - - 1,222 - -
Construction - land development 3,034 7,656 - - 3,278 - -
Land 6,836 10,266 - - 7,823 - -
Consumer loans:
Home equity and second mortgage 408 476 - - 381 - -
Other 12 32 - - 20 - -
Commercial business loans 40 40 - - 42 1
------- ------- ------ ------- -----
Subtotal 28,041 36,848 - - 29,767 180
With an allowance recorded:
Mortgage loans:
One- to four-family 945 945 73 631 2
Multi-family 5,482 5,482 632 5,477 66
Commercial 3,122 3,842 287 1,561 23
Construction - speculative
one- to four-family 1,500 1,500 37 1,125 20
Construction - commercial 6,800 6,800 138 3,400 112
Land 4,420 4,431 561 3,322 35
Consumer loans:
Home equity and second mortgage 339 339 55 362 - -
Other 1 1 1 1 - -
------- ------- ------ ------- -----
Subtotal 22,609 23,340 1,784 15,879 258
Total
Mortgage loans:
One- to four-family 3,607 3,739 73 3,903 8
Multi-family 5,482 5,482 632 5,477 66
Commercial 16,260 17,402 287 14,268 196
Construction - custom and
owner / builder 548 548 - - 414 - -
Construction - speculative one-
to four-family 1,764 1,872 37 1,733 20
Construction - commercial real
estate 6,800 6,800 138 3,400 112
Construction - multi-family 1,099 1,104 - - 1,222 - -
Construction - land development 3,034 7,656 - - 3,278 - -
Land 11,256 14,697 561 11,145 35
Consumer loans:
Home equity and second mortgage 747 815 55 743 - -
Other 13 33 1 21 - -
Commercial business loans 40 40 - - 42 1
------- ------- ------ ------- -----
Total $50,650 $60,188 $1,784 $45,646 $ 438
======= ======= ====== ======= =====
------------
(1) For the three months ended March 31, 2011
The following is a summary of information related to impaired loans at
September 30, 2010 (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 March 31, 2011 and September 30, 2010 (in thousands):
Loans accounted for on a non-accrual basis:
March 31, September 30,
2011 2010
-------- --------
Mortgage loans:
One- to four family $ 3,060 $ 3,691
Commercial 6,425 7,252
Construction - custom and owner / builder 548 - -
Construction - speculative one- to four-family 264 2,050
Construction - multi-family 1,099 1,771
Construction - land development 3,034 3,788
Land 8,449 5,460
Consumer loans:
Home equity and second mortgage 743 781
Other 13 25
Commercial business 40 46
-------- --------
Total 23,675 24,864
Accruing loans which are contractually
past due 90 days or more 305 1,325
-------- --------
Total of non-accrual and 90 days past due loans 23,980 26,189
Non-accrual investment securities 3,355 3,390
OREO and other repossessed assets 10,140 11,519
-------- --------
Total non-performing assets (1) $ 37,475 $ 41,098
======== ========
Troubled debt restructured loans on accrual status
(2) $ 22,447 $ 8,995
Non-accrual and 90 days or more past
due loans as a percentage of loans receivable 4.45% 4.86%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 3.22% 3.53%
Non-performing assets as a percentage of total
assets 5.04% 5.53%
Loans receivable (3) $539,025 $538,855
======== ========
Total assets $743,858 $742,687
======== ========
(1) Does not include troubled debt restructured loans on accrual status.
(2) Does not include troubled debt restructured loans totaling $4,671 and
$7,405 reported as non-accrual loans at March 31, 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 loss per
common share is the same as basic 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 share. At March 31, 2011 and 2010, there were 299,786 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 Six Months Ended
March 31, March 31,
2011 2010 2011 2010
---------------- -----------------
Basic net income (loss)
-----------------------
per common share computation:
----------------------------
Numerator - net income (loss) $1,083 $(3,178) $2,442 $(2,954)
Preferred stock dividend (208) (208) (416) (416)
Preferred stock discount
accretion (56) (52) (111) (103)
------ ------- ------ -------
Net income (loss) to common
shareholders $ 819 $(3,438) $1,915 $(3,473)
====== ======= ====== =======
Denominator - weighted average
common shares outstanding 6,745,250 6,713,958 6,745,250 6,711,950
--------- --------- --------- ---------
Basic net income (loss) per
common share $ 0.12 $ (0.51) $ 0.28 $ (0.52)
====== ======= ====== =======
Diluted net income (loss)
-------------------------
per common share computation:
----------------------------
Numerator - net income (net
loss) $1,083 $(3,178) $2,442 $(2,954)
Preferred stock dividend (208) (208) (416) (416)
Preferred stock discount
accretion (56) (52) (111) (103)
------ ------- ------ -------
Net income (loss) to common
shareholders $ 819 $(3,438) $1,915 $(3,473)
====== ======= ====== =======
Denominator - weighted average
common shares outstanding 6,745,250 6,713,958 6,745,250 6,711,950
Effect of dilutive stock
options (1) - - - - - - - -
Effect of dilutive stock
warrants (2) - - - - - - - -
------ ------- ------ -------
Weighted average common shares
and common stock equivalents 6,745,250 6,713,958 6,745,250 6,711,950
--------- --------- --------- ---------
Diluted net income (loss)
per common share $ 0.12 $ (0.51) $ 0.28 $ (0.52)
====== ======= ====== =======
25
---------------------------
(1) For the three months and six months ended March 31, 2011, options to
purchase 168,864 and 182,007 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 six months ended March 31,
2010, options to purchase 194,864 and 191,332 shares of common stock,
respectively, were outstanding but not included in the computation of diluted
net income (loss) per common share because their effect would have been
anti-dilutive.
(2) For the three and six months ended March 31, 2011 and March 31, 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 March 31, 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 six months ended March 31, 2011 is as
follows:
Total Options Outstanding
-------------------------
Weighted
Average
Exercise
Shares Price
------ --------
Options outstanding, beginning of period 194,864 $ 8.71
Forfeited 500 4.55
-------
Options outstanding, end of period 194,364 $ 8.72
=======
Options exercisable, end of period 173,964 $ 9.21
=======
The aggregate intrinsic value of options outstanding at March 31, 2011 was
$27,000.
At March 31, 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 March 31, 2011 was $22,000.
There were 5,200 options with an aggregate grant date fair value of $7,000
that vested during the six months ended March 31, 2011.
At March 31, 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 six months ended March 31, 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
26
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 six months ended March 31, 2011, and there were
26,000 options granted during the six months ended March 31, 2010. The
weighted average assumptions for options granted during the six months ended
March 31, 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 six
months ended March 31, 2011 and 2010.
At March 31, 2011, there were a total of 28,492 unvested MRDP shares with an
aggregated grant date fair value of $324,000. There were 7,433 MRDP shares
that vested during the six months ended March 31, 2011 with an aggregated
grant date fair value of $81,000. There were 500 MRDP shares forfeited during
the six months ended March 31, 2011 with a grant date fair value of $5,000.
At March 31, 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:
Six Months Ended March 31,
--------------------------
2011 2010
---- ----
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in
income $ 3 $ 85 $ 3 $ 87
Related tax benefit recognized 1 29 1 29
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
(in thousands):
Stock Stock Total
Options Grants Awards
------- ------ ------
Remainder of 2011 $ 3 $ 79 $ 82
2012 7 112 119
2013 7 38 45
2014 6 2 8
2015 1 - - 1
----- ----- -----
Total $ 24 $ 231 $ 255
===== ===== =====
(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 March 31, 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 March 31, 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 has been 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 March
31, 2011 and September 30, 2010 (in thousands):
March 31, 2011 September 30, 2010
------------------- -------------------
Estimated Estimated
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial Assets
Cash and cash equivalents $118,997 $118,997 $111,786 $111,786
CDs held for investment 17,430 17,430 18,047 18,047
MBS and other investments 12,390 12,429 16,185 15,961
FHLB stock 5,705 5,705 5,705 5,705
Loans receivable, net 526,058 474,799 524,621 473,986
Loans held for sale 1,169 1,210 2,970 3,059
Accrued interest receivable 2,674 2,674 2,630 2,630
Financial Liabilities
Deposits $597,163 $599,404 $578,869 $581,046
FHLB advances 55,000 58,681 75,000 81,579
Repurchase agreements 595 595 622 622
Accrued interest payable 620 620 737 737
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 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
29
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 March 31, 2011, and the total
losses resulting from these estimated fair value adjustments for the three
months ended March 31, 2011 (in thousands):
Estimated Fair Value
-----------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Available for Sale Securities
Mutual funds $ 961 $ - - $ - - $ - -
MBS - - 6,932 - - 1
----- ------ ------ -----
Total $ 961 $6,932 $ - - $ 1
===== ====== ====== =====
The following table summarizes the balances of assets and liabilities measured
at estimated fair value on a nonrecurring basis at March 31, 2011, and the
total losses resulting from these estimated fair value adjustments for the
three months ended March 31, 2011 (in thousands):
Estimated Fair Value
-----------------------------
Level 1 Level 2 Level 3 Total Losses
------- ------- ------- ------------
Impaired loans (1) $ - - $ - - $20,825 $1,382
MBS - held to maturity (2) - - 484 - - 170
OREO and other repossessed
items (3) - - - - 10,140 684
----- ----- ------- ------
Total $ - - $ 484 $30,965 $2,236
===== ===== ======= ======
-------------
(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
30
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 January 2010, the FASB issued updated guidance on fair value measurements
and disclosures. The new guidance requires expanded disclosures related to
fair value measurements including separate presentation of purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The new guidance will be
effective for the Company on October 1, 2011. Since the new guidance is
disclosure related only, the Company does not expect it to have an impact on
its condensed consolidated financial statements.
In July 2010, the FASB issued updated guidance on disclosure requirements for
the credit quality of financing receivables and the allowance for credit
losses. The new guidance requires entities to provide disclosures designed to
facilitate financial statement users' evaluation of (i) the nature of credit
risk inherent in the entity's portfolio of financing receivables, (ii) how
that risk is analyzed and assessed in arriving at the allowance for credit
losses and (iii) the changes and reasons for those changes in the allowance
for credit losses. Disclosures must be disaggregated by portfolio segment,
the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses, and class of financing
receivable, which is generally a disaggregation of portfolio segment. The
required disclosures include, among other things, a roll forward of the
allowance for credit losses, as well as information about modified, impaired,
non-accrual and past due loans and credit quality indicators. This guidance
became effective for the Company's condensed consolidated financial statements
as of December 31, 2010, as it relates to disclosures required as of the end
of a reporting period. Disclosures that relate to activity during a reporting
period became effective for the Company's condensed consolidated financial
statements on January 1, 2011. Since this new guidance is disclosure related
only, it did not impact the Company's condensed consolidated financial
statements.
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 became effective for the Company's condensed
consolidated financial statements as of December 31, 2010, as it relates to
disclosures required as of the end of a reporting period. Disclosures that
relate to activity during a reporting period will be required for the
Company's condensed consolidated financial statements that include periods
beginning on or after January 1, 2011. The Company does not expect it to have
an impact on its condensed consolidated financial statements.
31
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 will be effective for the Company's
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.
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 six months ended March 31, 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 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
reserve 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; 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 experience a security breach; our ability to retain key
members of our senior management team; costs and
32
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; 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 March 31, 2011,
the Company had total assets of $743.86 million and total shareholders' equity
of $87.58 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.
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
33
losses reflects the amount that the Company believes is adequate to cover
potential credit losses in its loan portfolio.
Net income is also affected by non-interest income and non-interest expenses.
For the three and six month periods ended March 31, 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. 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 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,
34
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
amount.
35
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, 2010, the Company
engaged a third party firm to perform the annual test for goodwill impairment.
The test concluded that recorded goodwill was not impaired. As of March 31,
2011, there have been no events or changes in the circumstances that would
indicate a potential impairment to recorded goodwill. 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 March 31, 2011 and September 30, 2010
The Company's total assets increased by $1.17 million, or 0.2%, to $743.86
million at March 31, 2011 from $742.69 million at September 30, 2010. The
increase was primarily attributable to an increase in total cash and cash
equivalents, which was partially offset by a decrease in MBS and other
investments.
Net loans receivable decreased by $364,000, or 0.1%, to $527.23 million at
March 31, 2011 from $527.59 million at September 30, 2010. The slight
decrease was primarily due to a decrease in one- to four-family loan
36
balances, land loan balances, construction and land development loan balances
and multi-family loan balances during the six months ended March 31, 2011,
which was partially offset by an increase in commercial real estate loan
balances and commercial business loan balances.
Total deposits increased by $18.29 million, or 3.2%, to $597.16 million at
March 31, 2011 from $578.87 million at September 30, 2010, primarily as a
result of increases in savings account balances, N.O.W. account balances and
money market account balances.
Shareholders' equity increased by $2.17 million, or 2.5%, to $87.58 million at
March 31, 2011 from $85.41 million at September 30, 2010. The increase was
primarily due to net income for the six months ended March 31, 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 $6.59 million, or 5.1%, to $136.43 million at
March 31, 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 $3.80 million, or 23.4%, to
$12.39 million at March 31, 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 $364,000, or 0.1%, to $527.23
million at March 31, 2011 from $527.59 million at September 30, 2010. The
decrease in the portfolio was primarily a result of a $5.82 million decrease
in one- to four-family loan balances, a $5.36 million decrease in land loan
balances, a $3.95 million decrease in construction and land development loan
balances, a $2.54 million decrease in multi-family loan balances and a $1.51
million decrease in consumer loan balances. These decreases to net loans
receivable were partially offset by a $16.49 million increase in commercial
real estate loan balances and a $1.63 million increase in commercial business
loan balances.
Loan originations decreased to $87.47 million for the six months ended March
31, 2011 from $96.69 million for the six months ended March 31, 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 $38.22 million for the
six months ended March 31, 2011 compared to $32.32 million for the six months
ended March 31, 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 $277,000, or
1.6%, to $17.11 million at March 31, 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
$1.38 million, or 12.0%, to $10.14 million at March 31, 2011 from $11.52
million at September 30, 2010, primarily due to the sale of OREO properties.
During the six months ended March 31, 2011, OREO properties and other
37
repossessed assets totaling $2.80 million were sold, resulting in a net gain
on sale of $555,000. At March 31, 2011, OREO consisted of 32 individual
properties and four other repossessed assets. The properties consisted of two
condominium projects totaling $3.65 million, 19 land parcels totaling $2.57
million, six single family homes totaling $1.55 million, three commercial real
estate properties totaling $1.23 million and two land development projects
totaling $1.03 million.
Goodwill and CDI: The recorded value of goodwill of $5.65 million at March
31, 2011 remained unchanged from September 30, 2010. The amortized value of
the CDI decreased to $481,000 at March 31, 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 $615,000, or 18.8%, to $2.65 million at March 31, 2011 from $3.27
million at September 30, 2010 as a portion of the prepaid amount was expensed.
Deposits: Deposits increased by $18.29 million, or 3.2%, to $597.16 million at
March 31, 2011 from $578.87 million at September 30, 2010. The increase was
primarily a result of a $7.56 million increase in savings account balances, a
$6.11 million increase in N.O.W. checking account balances and a $3.58 million
increase in money market account balances.
FHLB Advances: FHLB advances and other borrowings decreased by $20.00
million, or 26.7%, to $55.00 million at March 31, 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 $2.17 million,
or 2.5%, to $87.58 million at March 31, 2011 from $85.41 million at September
30, 2010. The increase was primarily due to net income of $2.44 million for
the six months ended March 31, 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 payments due
May 15, 2010, August 15, 2010, November 15, 2010 and February 15, 2011. 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 the May 15, 2010, August 15, 2010,
November 15, 2010 or the February 15, 2011 dividend payment as of March 31,
2011. At March 31, 2011, the Company had unpaid preferred stock dividends in
arrears of $832,000. 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 to
total assets decreased to 5.04% at March 31, 2011 from 5.53% at September 30,
2010. The decrease in the non-performing asset ratio was primarily a result
of a $1.38 million decrease in OREO and other repossessed assets, a $1.19
million decrease in non-accrual loans and a $1.02 million decrease in loans
past due 90 days or more and still accruing.
Total non-accrual loans of $23.68 million at March 31, 2011 were comprised of
76 loans and 57 credit relationships. Included in these non-accrual loans at
March 31, 2011 were:
* 33 land loans totaling $8.45 million (of which the largest had a balance
of $2.73 million)
38
* Six commercial real estate loans totaling $6.42 million (of which the
largest had a balance of $2.70 million)
* 14 single family home loans totaling $3.06 million (of which the largest
had a balance of $465,000)
* Seven land development loans totaling $3.03 million (of which the largest
had a balance of $1.42 million)
* Two condominium construction loans totaling $1.10 million (of which the
largest had a balance of $779,000)
* Six home equity loans totaling $743,000 (of which the largest had a
balance of $339,000)
* Two single family owner / builder construction loans with a balance of
$548,000
* One single family speculative home loan with a balance of $264,000
* Two commercial business loans totaling $40,000
* Three consumer loans totaling $13,000
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
March 31, 2011 September 30, 2010
-------------- ------------------
(In thousands)
Non-interest bearing $ 58,957 $ 58,755
N.O.W. checking 159,410 153,304
Savings 75,004 67,448
Money market accounts 59,306 55,723
CDs under $100 148,978 150,633
CDs $100 and over 95,508 93,006
-------- --------
Total deposits $597,163 $578,869
======== ========
The Company had no brokered deposits at March 31, 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 March 31, 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 March 31, 2011 was 4.01%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
39
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.
The Company also maintains a short-term borrowing line with the FRB with total
credit based on eligible collateral. As of March 31, 2011, the Company had a
borrowing line capacity of $45.90 million of which the Company did not have an
amount outstanding.
Comparison of Operating Results for the Three and Six Months Ended March 31,
2011 and 2010
The Company reported net income of $1.08 million for the quarter ended March
31, 2011 compared to a net loss of $(3.18 million) for the quarter ended March
31, 2010. Net income to common shareholders after adjusting for the preferred
stock dividend and the preferred stock discount accretion was $819,000 for the
quarter ended March 31, 2011 compared to a loss of $(3.44 million) for the
quarter ended March 31, 2010. The increase in net income was primarily a
result of a decreased provision for loan losses, increased non-interest income
and decreased non-interest expense, which was partially offset by decreased
net interest income. Diluted net income per common share was $0.12 for the
quarter ended March 31, 2011 compared to a loss of $(0.51) per diluted common
share for the quarter ended March 31, 2010.
The Company reported net income of $2.44 million for the six months ended
March 31, 2011 compared to a net loss of $(2.95 million) for the six months
ended March 31, 2010. Net income to common shareholders after adjusting for
the preferred stock dividend and the preferred stock discount accretion was
$1.92 million for the six months ended March 31, 2011 compared to a net loss
of $(3.47 million) for the six months ended March 31, 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 $0.28 for the six months ended March 31, 2011 compared to a
loss of $(0.52) per diluted common share for the six months ended March 31,
2010.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended March 31, 2011 increased by $4.26
million to $1.08 million from a net loss of $(3.18 million) for the quarter
ended March 31, 2010. Net income to common shareholders after adjusting for
preferred stock dividends of $208,000 and preferred stock discount accretion
of $56,000 was $819,000, or $0.12 per diluted common share for the quarter
ended March 31, 2011, compared to a net loss to common shareholders of $(3.44
million), or $(0.51) per diluted common share for the quarter ended March 31,
2010.
The increase in net income for the quarter ended March 31, 2011 was primarily
the result of a $4.50 million decrease in the provision for loan losses, a
$1.68 million increase in non-interest income and a $514,000
40
decrease in non-interest expense. These increases to net income were
partially offset by a $94,000 decrease in net interest income and a $2.33
million change in the provision (benefit) for federal and state income taxes.
Net income for the six months ended March 31, 2011 increased by $5.40 million
to $2.44 million from a net loss of $(2.95 million) for the six months ended
March 31, 2010. Net income to common shareholders after adjusting for
preferred stock dividends of $416,000 and preferred stock discount accretion
of $111,000 was income of $1.92 million, or $0.28 per diluted common share for
the six months ended March 31, 2011, compared to a net loss of $(3.47
million), or $(0.52) per diluted common share for the six months ended March
31, 2010.
The increase in net income for the six months ended March 31, 2011 was
primarily the result of a $6.20 million decrease in the provision for loan
losses and a $2.66 million increase in non-interest income. These increases
to net income were partially offset by a $364,000 increase to non-interest
expense, a $154,000 decrease to net interest income and a $2.94 million change
in the provision (benefit) for federal and state income taxes.
Net Interest Income: Net interest income decreased by $94,000, or 1.5%, to
$6.35 million for the quarter ended March 31, 2011 from $6.45 million for the
quarter ended March 31, 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 quarter ended March 31, 2011 relative to the quarter ended March 31,
2010.
Total interest and dividend income decreased by $664,000 or 7.3%, to $8.49
million for the quarter ended March 31, 2011 from $9.16 million for the
quarter ended March 31, 2010 as the yield on interest earning assets decreased
to 5.05% from 5.59%. The decrease in the weighted average yield on interest
earning assets was primarily a result of 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 $570,000, or 21.0%, to
$2.14 million for the quarter ended March 31, 2011 from $2.71 million for the
quarter ended March 31, 2010 as the average rate paid on interest bearing
liabilities decreased to 1.45% for the quarter ended March 31, 2011 from 1.88%
for the quarter ended March 31, 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 quarter ended March 31, 2011 from 3.93% for the quarter ended March
31, 2010.
Net interest income decreased by $154,000, or 1.2%, to $12.68 million for the
six months ended March 31, 2011 from $12.84 million for the six months ended
March 31, 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 six
months ended March 31, 2011 relative to the six months ended March 31, 2010.
Total interest and dividend income decreased by $1.20 million or 6.5%, to
$17.30 million for the six months ended March 31, 2011 from $18.50 million for
the six months ended March 31, 2010 as the yield on interest earning assets
decreased to 5.18% from 5.67%. The decrease in the weighted average yield on
interest earning assets was primarily a result of 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 $1.04 million, or 18.4%,
to $4.62 million for the six months ended March 31, 2011 from $5.66 million
for the six months ended March 31, 2010 as the average rate paid on interest
bearing liabilities decreased to 1.59% for the six months ended March 31, 2011
from 2.00% for the six months ended March 31, 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 3.80% for the six months ended March 31, 2011 from 3.94% for the
six months ended March 31, 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 March 31,
----------------------------------------------------
2011 2010
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
Interest-earning ------- --------- ---- ------- --------- ----
assets: (1)
Loans receivable (2) $536,453 $8,240 6.14% $562,335 $8,832 6.28%
MBS and other
investments (2) 11,700 162 5.54 17,871 239 5.35
FHLB stock and
equity securities 6,669 8 0.48 6,669 9 0.55
Interest-bearing
deposits 117,357 83 0.28 68,482 77 0.46
-------- ------ -------- ------
Total interest-
earning assets 672,179 8,493 5.05 655,357 9,157 5.59
Non-interest-earning
assets 58,840 56,848
-------- --------
Total assets $731,019 $712,205
======== ========
Interest-bearing
liabilities:
Savings accounts $ 70,747 125 0.72 $ 63,351 111 0.71
Money market accounts 58,861 114 0.79 62,410 187 1.22
N.O.W. accounts 158,201 380 0.97 135,476 435 1.30
Certificates of
deposit 242,383 972 1.63 234,911 1,225 2.11
Short-term
borrowings (3) 486 - 0.05 1,561 2 0.48
Long-term
borrowings (4) 55,000 550 4.06 75,000 751 4.06
-------- ------ -------- ------
Total interest-
bearing liabilities 585,678 2,141 1.45 572,709 2,711 1.88
------ ------
Non-interest-bearing
liabilities 58,663 52,163
-------- --------
Total liabilities 644,341 624,872
Shareholders' equity 86,678 87,333
-------- --------
Total liabilities
and shareholders'
equity $731,019 $712,205
======== ========
Net interest income $6,352 $6,446
====== ======
Interest rate spread 3.60% 3.71%
====== ======
Net interest margin (5) 3.78% 3.93%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 114.77% 114.43%
====== ======
--------------
(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
Six Months Ended March 31,
----------------------------------------------------
2011 2010
------------------------ -------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
Interest-earning ------- --------- ---- ------- --------- ----
assets: (1)
Loans receivable (2) $537,745 $16,774 6.24% $561,851 $17,897 6.37%
MBS and other
investments (2) 12,456 344 5.52 18,657 456 4.89
FHLB stock and
equity securities 6,679 16 0.48 6,672 18 0.54
Interest-bearing
deposits 111,016 170 0.31 64,840 128 0.40
-------- ------- -------- -------
Total interest-
earning assets 667,896 17,304 5.18 652,020 18,499 5.67
Non-interest-earning
assets 58,562 54,807
-------- --------
Total assets $726,458 $706,827
======== ========
Interest-bearing
liabilities:
Savings accounts $ 69,378 248 0.72 $ 61,411 218 0.71
Money market accounts 57,888 249 0.86 63,523 396 1.25
N.O.W. accounts 156,643 799 1.02 130,274 836 1.29
Certificates of
deposit 242,759 2,046 1.69 230,198 2,586 2.25
Short-term
borrowings (3) 516 - 0.05 1,126 2 0.36
Long-term
borrowings (4) 55,000 1,279 4.66 79,973 1,624 4.07
-------- ------- -------- -------
Total interest-
bearing liabilities 582,184 4,621 1.59 566,505 5,662 2.00
------- -------
Non-interest-bearing
liabilities 58,143 52,775
-------- --------
Total liabilities 640,327 619,280
Shareholders' equity 86,131 87,547
-------- --------
Total liabilities
and shareholders'
equity $726,458 $706,827
======== ========
Net interest income $12,683 $12,837
======= =======
Interest rate spread 3.59% 3.67%
====== ======
Net interest margin (5) 3.80% 3.94%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 114.72% 115.10%
====== ======
------------
(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 Six months ended
March 31, 2011 March 31, 2011
compared to three months compared to six months
ended March 31, 2010 ended March 31, 2010
increase (decrease) increase (decrease)
due to due to
------ ------
Net Net
Rate Volume Change Rate Volume Change
---- ------ ------ ---- ------ ------
(In thousands)
Interest-earning assets:
Loans receivable (1) $(191) $(401) $(592) $(366) $(758) $(1,124)
MBS and other
investments 8 (85) (77) 11 (123) (112)
FHLB stock and
equity securities (1) - - (1) (2) - - (2)
Interest-bearing
deposits (36) 42 6 (11) 54 43
----- ----- ----- ----- ----- -------
Total net decrease in
income on interest-
earning assets (220) (444) (664) (368) (827) (1,195)
----- ----- ----- ----- ----- -------
Interest-bearing
liabilities:
Savings accounts 1 13 14 2 28 30
N.O.W accounts (122) 67 (55) (104) 67 (37)
Money market accounts (63) (10) (73) (114) (33) (147)
CD accounts (292) 39 (253) (559) 19 (540)
Short-term borrowings (2) - - (2) (1) (1) (2)
Long-term borrowings (1) (200) (201) 51 (396) (344)
----- ----- ----- ----- ----- -------
Total net decrease
in expense on interest-
bearing liabilities (479) (91) (570) (725) (316) (1,041)
----- ----- ----- ----- ----- -------
Net increase (decrease) in
net interest income $ 259 $(353) $ (94) $ 357 $(511) $ (154)
===== ===== ===== ===== ===== =======
(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 decreased $4.50
million, or 86.5%, to $700,000 for the quarter ended March 31, 2011 from $5.20
million for the quarter ended March 31, 2010. The provision for loan losses
decreased $6.20 million, or 79.5%, to $1.60 million for the six months ended
March 31, 2011 from $7.80 million for the six months ended March 31, 2010.
The decreased provisions for the three and six months ended March 31, 2011
were primarily due to a decreased level of net charge-offs and a decrease in
the Company's construction and land development portfolio.
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 $11.80 million at March 31, 2011 (2.19% of loans
receivable and loans held for sale and 49.2% of non-performing loans) is
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 March 31, 2011 was $1.78 million. The allowance for loan losses
was $16.69 million (3.00% of loans receivable and loans held for sale and
63.3% of non-performing loans) at March 31, 2010. The Company had net
charge-offs of $1.07 million during the six months ended March 31, 2011 and
net charge-offs of $5.28 million for the six months ended March 31, 2010.
Non-accrual and loans past due 90 days or more and still accruing decreased
$2.21 million to $23.98 million at March 31, 2011 from $26.19 million at
September 30, 2010. For additional information, see the section entitled
"Comparison of Financial Condition at March 31, 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 increased $1.68 million, or
390.2%, to $2.11 million for the quarter ended March 31, 2011 from $430,000
for the quarter ended March 31, 2010. This increase was primarily a result of
a $1.52 million reduction in net OTTI on MBS and other investments, a $206,000
valuation recovery on MSRs and a $72,000 increase in ATM transaction fees.
These increases to non-interest income were partially offset by a $124,000
decrease in service charges on deposits.
Total non-interest income increased by $2.66 million, or 110.9%, to $5.06
million for the six months ended March 31, 2011 from $2.40 million for the six
months ended March 31, 2010. This increase was primarily a result of a $1.71
million reduction in net OTTI on MBS and other investments, an $840,000
valuation recovery on MSRs, a $218,000 increase in gain on sale of loans, a
$122,000 increase in ATM transaction fees and a
45
$79,000 gain on sale of MBS and other investments. These increases to
non-interest income were partially offset by a $270,000 decrease in service
charges on deposits.
The OTTI charges were higher during the previous 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 March
31, 2011, the Company's remaining private label MBS portfolio had been reduced
to $4.30 million from an original acquired balance of $15.30 million.
The $862,000 MSR valuation recovery during the six months ended March 31, 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 six months ended
March 31, 2011.
Non-interest Expense: Total non-interest expense decreased by $514,000, or
7.7%, to $6.18 million for the quarter ended March 31, 2011 from $6.69 million
for the quarter ended March 31, 2010. The decrease was primarily a result of
a $474,000 decrease in FDIC insurance expense and a $338,000 decrease in OREO
and other repossessed assets expense. The decreases to non-interest expense
were partially offset by a $194,000 increase in salaries and employee benefits
expense. The FDIC insurance expense was higher during the quarter ended March
31, 2010 primarily due to a $503,000 non-recurring accrual adjustment.
Without the non-recurring adjustment, the FDIC insurance expense would have
been $303,000 for the three months ended March 31, 2010. The decreased OREO
related expenses for the quarter ended March 31, 2011 were primarily due to
the sale of $2.49 million in OREO properties for a net gain of $533,000 which
offset other OREO related expenses incurred during the quarter. Also
affecting the comparison between quarters was a change in the Bank's vacation
accrual policy during the prior year which reduced the salaries and employee
benefits expense by $176,000 for the three months ended March 31, 2010.
Total non-interest expense increased by $364,000, or 3.0%, to $12.55 million
for the six months ended March 31, 2011 from $12.19 million for the six months
ended March 31, 2010. The increase was primarily due to a $341,000 increase in
salaries and employee benefits and a $114,000 increase in insurance expense.
The increases to non-interest expense were partially offset by a decrease in
the FDIC insurance expense. The comparison between periods 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 six
months ended March 31, 2010.
Provision (Benefit) for Income Taxes: The provision for income taxes
increased to $499,000 for the quarter ended March 31, 2011 from a $(1.83
million) benefit for the quarter ended March 31, 2010 primarily as a result of
increased income before taxes. The Company's effective tax (benefit) rate was
31.54% for the quarter ended March 31, 2011 and (36.58%) for the quarter ended
March 31, 2010.
The provision for income taxes increased to $1.15 million for the six months
ended March 31, 2011 from a $(1.80 million) benefit for the six months ended
March 31, 2010 primarily as a result of increased income before taxes. The
Company's effective tax (benefit) rate was 31.96% for the six months ended
March 31, 2011 and (37.80%) for the six months ended March 31, 2010.
46
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 six months ended March 31, 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 $7.21 million, or
6.5% to $119.00 million at March 31, 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 March 31, 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
23.03%. 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 $118.79 million was available for additional
borrowings at March 31, 2011. The Bank also maintains a short-term borrowing
line with the FRB with total credit based on eligible collateral. At March
31, 2011, the Bank had $45.93 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,
land loans, consumer loans, and commercial business loans. At March 31, 2011,
the Bank had loan commitments totaling $40.12 million and undisbursed loans in
process totaling $16.88 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 March 31, 2011 totaled $167.90
million. Historically, the Bank has been able to retain a significant amount
of its non-brokered CDs as they mature. At March 31, 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
47
(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 March 31, 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 March 31, 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 $82,469 11.37% $29,008 4.00% N/A N/A
Timberland Bank (1) 75,496 10.46 72,157 10.00 $72,157 10.00%
Tier 1 risk adjusted capital:
Consolidated 82,469 15.44 21,363 4.00 N/A N/A
Timberland Bank (1) 75,496 14.17 31,967 6.00 31,967 6.00
Total risk based capital
Consolidated 89,208 16.70 42,727 8.00 N/A N/A
Timberland Bank (1) 82,219 15.43 53,279 10.00 53,279 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 Six Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------ -----------------
PERFORMANCE RATIOS:
Return (loss) on average assets (1) 0.59% (1.78%) 0.67% (0.84%)
Return (loss) on average equity (1) 5.00% (14.56%) 5.67% (6.75%)
Net interest margin (1) 3.78% 3.93% 3.80% 3.94%
Efficiency ratio 73.03% 97.32% 70.75% 80.01%
At At At
March 31, September 30, March 31,
2011 2010 2010
-----------------------------------
ASSET QUALITY RATIOS:
Non-accrual loans $23,675 $24,864 $26,351
Loans past due 90 days and still
accruing 305 1,325 5,216
Non-performing investment securities 3,355 3,390 3,262
OREO & other repossessed assets 10,140 11,519 13,477
------- ------- -------
Total non-performing assets $37,475 $41,098 $48,306
======= ======= =======
Non-performing assets to total assets 5.04% 5.53% 6.66%
Allowance for loan losses to non-
performing loans 49% 45% 63%
Troubled debt restructured loans
on accrual status (2) $22,447 $ 8,995 $ - -
BOOK VALUES:
Book value per common share $10.18 $9.89 $9.82
Tangible book value per common share (3) $ 9.31 $9.00 $8.93
---------------
(1) Annualized
(2) Does not include troubled debt restructured loans totaling $4,671, $7,405
and $10,265 that were included as non-accrual loans at March 31, 2011,
September 30, 2010 and March 31, 2010, respectively.
(3) Calculation subtracts goodwill and core deposit intangible from the
equity component.
Three Months Ended Six Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------ -----------------
AVERAGE BALANCE SHEET:
Average total loans $536,453 $562,335 $537,745 $561,851
Average total interest earning
assets (1) 672,179 655,357 667,896 652,020
Average total assets 731,019 712,205 726,458 706,827
Average total interest bearing
deposits 530,192 496,148 526,668 485,406
Average FHLB advances and other
borrowings 55,486 76,561 55,516 81,099
Average shareholders' equity 86,678 87,333 86,131 87,547
---------------
(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 March 31, 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 March 31, 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 Employment Agreement between the Company and the Bank and
Michael R. Sand (8)
10.10 Employment Agreement between the Company and the Bank and Dean
J. Brydon (8)
10.11 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
--------------------
(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.
51
(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 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) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated April 13, 2007.
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: May 10, 2011 By: /s/ Michael R. Sand
-----------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 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
54