SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 incorporation (I.R.S. Employer
or organization) I.D. Number)
624 Simpson Avenue, Hoquiam, Washington 98550
---------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 533-4747
--------------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------------
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. X
------
As of December 6, 2000, there were issued and outstanding 4,753,295
shares of the registrant's Common Stock, which are listed on the Nasdaq
National Market System under the symbol "TSBK." Based on the average of the
bid and asked prices for the Common Stock on December 6, 2000, the aggregate
value of the Common Stock outstanding held by nonaffiliates of the registrant
was $59,119,107 (4,753,295 shares at $12.4375 per share). For purposes of
this calculation, Common Stock held by officers and directors of the
registrant and Timberland Savings Bank, SSB Employee Stock Ownership Plan and
Trust are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders (Part III).
<PAGE>
TIMBERLAND BANCORP, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I. ............................................................ 1
Item 1. Business............................................... 1
General................................................... 1
Market Area............................................... 1
Lending Activities........................................ 2
Investment Activities..................................... 18
Deposit Activities and Other Sources of Funds............. 19
Regulation of the Bank.................................... 23
Regulation of the Company................................. 29
Taxation.................................................. 30
Competition............................................... 32
Subsidiary Activities..................................... 32
Personnel................................................. 32
Item 2. Properties............................................. 32
Item 3. Legal Proceedings...................................... 33
Item 4. Submission of Matters to a Vote of Security Holders.... 34
PART II............................................................. 34
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............................ 34
Item 6. Selected Financial Data................................ 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 37
General................................................ 37
Operating Strategy..................................... 37
Market Risk and Asset and Liability Management......... 38
Comparison of Financial Condition at
September 30, 2000 and 1999.......................... 40
Comparison of Financial Condition at
September 30, 1999 and 1998.......................... 40
Comparison of Operating Results for Years Ended
September 30, 2000 and 1999.......................... 41
Comparison of Operating Results for Years Ended
September 30, 1999 and 1998.......................... 43
Nonperforming Assets................................... 43
Average Balances, Interest and Average Yields/Cost..... 44
Rate/Volume Analysis................................... 46
Liquidity and Capital Resources........................ 46
Effect of Inflation and Changing Prices................ 47
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk...................................... 47
Item 8. Financial Statements and Supplementary Data............ 48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 81
PART III............................................................ 81
Item 10. Directors and Executive Officers of the Registrant.... 81
Item 11. Executive Compensation................................ 81
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................. 81
Item 13. Certain Relationships and Related Transactions........ 82
PART IV............................................................. 82
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................... 82
<PAGE>
PART I
Item 1. Business
General
Timberland Bancorp, Inc. ("Company"), a Washington corporation, was
organized on September 8, 1997 for the purpose of becoming the holding company
for Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a
Washington-chartered mutual to a Washington-chartered stock savings bank
("Conversion"). The Conversion was completed on January 12, 1998 through the
sale and issuance of 6,612,500 shares of common stock by the Company. At
September 30, 2000, the Company had total assets of $368.1 million, total
deposits of $212.6 million and total shareholders' equity of $72.3 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, including consolidated financial
statements and related data, relates primarily to the Bank and its subsidiary.
The Bank was established in 1915 as "Southwest Washington Savings and
Loan Association." In 1935, the Bank converted from a state-chartered mutual
savings and loan association to a federally chartered mutual savings and loan
association, and in 1972, changed its name to "Timberland Federal Savings and
Loan Association." In 1990, the Bank converted to a federally chartered
mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991,
the Bank converted to a Washington-chartered mutual savings bank and adopted
its current name. The Bank's deposits are insured by the FDIC up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since
1937. The Bank is regulated by the Washington Department of Financial
Institutions, Division of Banks ("Division") and the FDIC.
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 one- to- four
family residential dwellings, including an emphasis on construction and land
development loans, as well as the origination of multi-family and commercial
real estate loans. The Bank actively originates adjustable rate residential
mortgage loans that do not qualify for sale in the secondary market under
Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. The Bank also
originates commercial business loans and in 1998 established a business
banking division to increase the origination of these loans.
Market Area
The Bank considers Grays Harbor, Thurston, Pierce, King and Kitsap
Counties as its primary market areas. The Bank conducts operations from its
main office in Hoquiam (Grays Harbor County), three branch offices in Grays
Harbor County (Aberdeen, Montesano and Ocean Shores), a branch office in King
County (Auburn, opened in 1994), three branch offices in Pierce County
(Edgewood, opened in 1980, Puyallup, opened in 1996 and Spanaway, opened in
1999), two branch offices in Thurston County (Lacey, opened in 1997 and Yelm,
opened in 1999) and a branch office in Kitsap County (Poulsbo opened in 1999).
See "Item 2. Properties."
Hoquiam, population approximately 9,000, is located in Grays Harbor
County which is situated along Washington State's central Pacific coast.
Hoquiam is located approximately 110 miles southwest of Seattle and 145 miles
northwest of Portland, Oregon.
The Bank considers its primary market area to include three submarkets:
primarily rural Grays Harbor County with its historical dependence on the
timber and fishing industries; Ocean Shores with its dependence on tourism and
vacation home residents; and Pierce, King, Thurston and Kitsap Counties with
their dependence on state government in Olympia, the state capital, and the
aerospace and computer industries in the Seattle-Tacoma metropolitan area.
Each of these markets present operating risks to the Bank. The Bank's recent
expansion into
1
<PAGE>
Thurston, King and Kitsap Counties and three branch offices in Pierce County
represents the Bank's strategy to diversify its primary market area to become
less reliant on the economy of Grays Harbor County.
Lending Activities
General. Historically, the principal lending activity of the Bank has
consisted of the origination of loans secured by first mortgages on
owner-occupied, one- to- four family residences and loans for the construction
of one- to- four family residences. In recent years, the Bank has increased
its origination of loans secured by multi-family properties, construction and
land development loans, land loans and commercial real estate loans. The
Bank's net loans receivable, including loans held for sale, totaled
approximately $313.0 million at September 30, 2000, representing approximately
85.0% of consolidated total assets and at that date construction and land
development loans, land loans and loans secured by commercial and multi-family
properties were $194.7 million, or 55.3%, of total loans.
The Bank's internal loan policy limits the maximum amount of loans to one
borrower to 25% of its capital. At September 30, 2000, the maximum amount
which the Bank could have lent to any one borrower and the borrower's related
entities was approximately $14.6 million under its policy. At September 30,
2000, the Bank had no loans with an aggregate outstanding balance in excess of
this amount. At that date, the Bank had 45 borrowers or related borrowers with
total loans outstanding in excess of $1.0 million. The largest amount
outstanding to any one borrower and the borrower's related entities was
approximately $7.6 million, which includes $1.3 million of undisbursed loans
in process balance.
Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio by type of loan as of the dates indicated.
<TABLE>
At September 30,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to- four
family(1)(2)... $136,825 38.85% $115,133 38.42% $100,921 43.48% $100,127 48.76% $ 95,978 48.51%
Multi-family 33,604 9.54 15,945 5.32 12,432 5.36 12,178 5.93 12,569 6.35
Commercial....... 58,632 16.65 52,049 17.37 32,906 14.18 29,410 14.32 26,529 13.41
Construction and
land develop-
ment........... 89,903 25.52 90,621 30.24 64,172 27.65 45,031 21.93 47,140 23.83
Land(2).......... 12,561 3.56 9,059 3.02 7,749 3.34 6,937 3.38 6,115 3.09
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans.......... 331,525 94.12 282,807 94.37 218,180 94.01 193,683 94.32 188,331 95.19
Consumer Loans:
Home equity and
second
mortgage....... 9,816 2.79 7,978 2.66 8,740 3.77 8,142 3.97 6,576 3.32
Other............ 6,081 1.72 4,279 1.43 4,066 1.74 2,824 1.37 2,476 1.25
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
15,897 4.51 12,257 4.09 12,806 5.51 10,966 5.34 9,052 4.57
Commercial business
loans........... 4,808 1.37 4,611 1.54 1,105 0.48 694 0.34 476 0.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans... 352,230 100.00% 299,675 100.00% 232,091 100.00% 205,343 100.00% 197,859 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed portion
of loans
in process..... (32,831) (37,781) (28,886) (14,820) (18,434)
Unearned income.. (3,578) (3,170) (2,256) (1,761) (1,708)
Allowance for loan
losses......... (2,640) (2,056) (1,728) (1,716) (1,133)
Market value adjust-
ment of loans
held-for-sale.. (175) (583) -- (19) (89)
-------- -------- -------- -------- --------
Total loans
receivable,
net........... $313,006 $256,085 $199,221 $187,027 $176,495
======== ======== ======== ======== ========
---------
(1) Includes loans held-for-sale.
(2) Includes real estate contracts totaling $1.2 million at September 30, 2000. See " -- Lending Activities
-- Real Estate Contracts."
</TABLE>
2
<PAGE>
Residential One- to- Four Family Lending. At September 30, 2000, $136.8
million, or 38.9%, of the Bank's loan portfolio consisted of loans secured by
one- to- four family residences.
The Bank originates both fixed-rate loans and adjustable-rate loans.
Generally, 15- and 30-year fixed-rate loans are originated to meet the
requirements for sale in the secondary market to the FHLMC, however, from time
to time, a portion of these fixed-rate loans originated by the Bank may be
retained in the Bank's loan portfolio to meet the Bank's asset/liability
management objectives. The Bank has recently begun to utilize an automated
underwriting program, which preliminarily qualifies a loan as conforming to
FHLMC underwriting standards when the loan is originated. At September 30,
2000, $49.9 million, or 36.5%, of the Bank's one- to- four family loan
portfolio consisted of fixed rate one- to- four family mortgage loans.
The Bank also offers adjustable rate mortgage ("ARM") loans at rates and
terms competitive with market conditions. All of the Bank's ARM loans are
retained in its loan portfolio and not with a view toward sale in the
secondary market.
The Bank offers several ARM products which adjust annually after an
initial period ranging from one to five years subject to a limitation on the
annual increase of 2% and an overall limitation of 6%. These ARM products have
utilized the weekly average yield on one year U.S. Treasury securities
adjusted to a constant maturity of one year plus a margin of 2.875% to 3.500%.
ARM loans held in the Bank's portfolio do not permit negative amortization of
principal and carry no prepayment restrictions. Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan.
The relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment. At September 30, 2000, $86.9 million, or 63.5%, of
the Bank's one- to- four family loan portfolio consisted of ARM loans.
The material portion of the Bank's ARM loans are "non-conforming" because
they do not satisfy acreage limits, or various other requirements imposed by
the FHLMC. Some of these loans are also originated to meet the needs of
borrowers who cannot otherwise satisfy the FHLMC credit requirements because
of personal and financial reasons (i.e., divorce, bankruptcy, length of time
employed, etc.), and other aspects, which do not conform to the FHLMC's
guidelines. Many of these borrowers have higher debt to income ratios, or the
loans are secured by unique properties in rural markets for which there are no
comparable sales of comparable properties to support value according to
secondary market requirements. These loans are known as non- conforming loans
and the Bank may require additional collateral or lower loan-to-value ratios
prior to the origination of the loan. The Bank believes that these loans
satisfy a need in its local market area. As a result, subject to market
conditions, the Bank intends to continue to originate such loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates. It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Bank generally
provide, as a marketing incentive, for initial rates of interest below the
rates which would apply were the adjustment index used for pricing initially,
these loans are subject to increased risks of default or delinquency. The
Bank attempts to reduce the potential for delinquencies and defaults on ARM
loans by qualifying the borrower based on the borrower's ability to repay the
ARM loan assuming that the maximum interest rate that could be charged at the
first adjustment period remains constant during the loan term. Another
consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base due to changes in the interest rates, the extent
of this interest sensitivity is limited by the periodic and lifetime interest
rate adjustment limits. Because of these considerations, the Bank has no
assurance that yields on ARM loans will be sufficient to offset increases in
the Bank's cost of funds.
3
<PAGE>
While fixed-rate, single-family residential mortgage loans are normally
originated with 15 to 30 year terms, such loans typically remain outstanding
for substantially shorter periods. This is because borrowers often prepay
their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans
in the Bank's loan portfolio contain due-on-sale clauses providing that the
Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, the Bank enforces these due-on-sale
clauses to the extent permitted by law and as business judgment dictates.
Thus, average loan maturity is a function of, among other factors, the level
of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
The Bank requires fire and extended coverage casualty insurance (and
loans originated since 1994, if appropriate, generally requires flood
insurance) be maintained on all of its real estate secured loans.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price. However, the Bank
usually obtains private mortgage insurance ("PMI") on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property. The maximum loan-to-value ratio on mortgage loans secured by non-
owner-occupied properties is generally 75% (70% for loans originated for sale
in the secondary market to the FHLMC).
Construction and Land Development Lending. Prompted by unfavorable
economic conditions in its primary market area in 1980, the Bank sought to
establish a market niche and, as a result, began originating construction
loans. In recent periods, construction lending activities have been primarily
in the Pierce County, King County, Thurston County, and Kitsap County markets.
Competition from other financial institutions has increased in recent periods
and the Bank expects that its margins on construction loans may be reduced in
the future.
The Bank currently originates three types of residential construction
loans: (i) speculative construction loans, (ii) custom construction loans and
(iii) owner/builder loans. The Bank initiated its construction lending with
the origination of speculative construction loans. As a result, the Bank
began to establish contacts with the building community and increased the
origination of custom construction and land development loans in rural market
areas. The Bank believes that its in-house computer system has enabled it to
establish processing and disbursement procedures to meet the needs of these
borrowers. To a lesser extent, the Bank also originates construction loans
for the development of multi-family and commercial properties. Subject to
market conditions, the Bank intends to continue to emphasize its residential
construction lending activities.
At September 30, 2000, the composition of the Bank's construction and
land development loan portfolio was as follows:
Outstanding Percent of
Balance Total
------- -----
(In thousands)
Speculative construction...................... $24,464 27.21%
Custom and owner/builder construction......... 26,655 29.65
Multi-family.................................. 15,338 17.06
Land development.............................. 12,167 13.53
Commercial real estate........................ 11,279 12.55
------- ------
Total....................................... $89,903 100.00%
======= ======
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either 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 debt service
the speculative
4
<PAGE>
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 buyer is identified. The Bank lends to approximately 75
builders located in the Bank's primary market area, each of which generally
have three to six speculative loans outstanding from the Bank during a 12
month period. Rather than originating lines of credit to home builders to
construct several homes at once, the Bank originates and underwrites a
separate loan for each home. Speculative construction loans are originated
for a term of 12 months, with fixed interest rates ranging from 9.5% to 10.0%,
and with a loan-to-value ratio of no more than 80% of the appraised estimated
value of the completed property. During this 12 month period, the borrower is
required to make monthly payments of accrued interest on the outstanding loan
balance. At September 30, 2000 speculative construction loans totaled $24.5
million, or 27.2%, of the total construction loan portfolio. At September 30,
2000, the Bank had 13 borrowers each with aggregate outstanding speculative
loan balances of more than $500,000. The largest aggregate outstanding balance
to one borrower amounted to $2.1 million, and the largest outstanding balance
for a single speculative loan was $480,000. At September 30, 2000, five
speculative construction loans totaling $690,000 were not performing according
to terms. See "-- Lending Activities -- Nonperforming Assets and
Delinquencies."
Unlike speculative construction 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 for permanent financing for the finished
home with the Bank or another lender. Custom construction loans are generally
originated for a term of 12 months, with fixed interest rates ranging from
9.0% to 10.0% and with loan-to-value ratios of 80% of the appraised estimated
value of the completed property or sales price, whichever is less. During
this 12 month period, the borrower is required to make monthly payments of
accrued interest on the outstanding loan balance.
Owner/builder construction loans are originated to the home owner rather
than the home builder as a single loan that automatically converts to a
permanent loan at the completion of construction. The construction phase of a
owner/builder construction loan generally lasts six to nine months with fixed
interest rates ranging from 9.0% to 9.5%, and with loan-to-value ratios of 80%
(or up to 95% with PMI) of the appraised estimated value of the completed
property or cost, whichever is less. During this 12 month period, the
borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. At the completion of construction, the loan
converts automatically to either a fixed-rate mortgage loan, which conforms to
secondary market standards, or an ARM loan for retention in the Bank's
portfolio. At September 30, 2000, custom and owner/builder construction loans
totaled $26.7 million, or 29.7%, of the total construction loan portfolio. At
September 30, 2000, the largest outstanding custom construction loan had an
outstanding balance of $1.2 million and was performing according to its terms.
The Bank originates loans to local real estate developers with whom it
has established relationships for the purpose of developing residential
subdivisions (i.e., installing roads, sewers, water and other utilities)
(generally with ten to 50 lots). At September 30, 2000, subdivision
development loans totaled $12.2 million, or 13.5% of construction and land
development loans receivable. Land development loans are secured by a lien on
the property and made for a period of two to five years with generally fixed
interest rates, and are made with loan-to-value ratios generally not exceeding
75%. Monthly interest payments are required during the term of the loan.
Land development loans are structured so that the Bank is repaid in full upon
the sale by the borrower of approximately 80% of the subdivision lots.
Substantially all of the Bank's land development loans are secured by property
located in its primary market area. In addition, in the case of a corporate
borrower, the Bank also generally obtains personal guarantees from corporate
principals and reviews their personal financial statements. At September 30,
2000, the largest land development loan had an outstanding loan balance of
$2.5 million and was performing according to its terms. At September 30,
2000, $577,000 of land development loans were not performing according to
terms. See "-- Lending Activities Nonperforming Assets and Delinquencies."
Land development loans secured by land under development involve greater
risks than one- to- four family residential mortgage loans because such loans
are advanced upon the predicted future value of the developed property. If
the estimate of such future value proves to be inaccurate, in the event of
default and foreclosure the Bank may be confronted with a property the value
of which is insufficient to assure full repayment. The Bank attempts to
minimize
5
<PAGE>
this risk by generally limiting the maximum loan-to-value ratio on land loans
to 75% of the estimated developed value of the secured property.
The Bank also provides construction financing for multi-family and
commercial properties. At September 30, 2000, such construction loans
amounted to $26.6 million. These loans are secured by motels, apartment
buildings, condominiums, office buildings and retail rental space located in
the Bank's primary market area and typically range in amount from $300,000 to
$2.0 million. At September 30, 2000, the largest outstanding commercial real
estate construction loan had a balance of $3.8 million and was performing
according to terms. Periodically, the Bank purchases (without recourse to the
seller other than for fraud) from other lenders participation interests in
multi-family and commercial construction loans secured by properties located
in the Bank's primary market area. The Bank underwrites such participation
interests according to its own standards. At September 30, 2000, the largest
construction participation interest had an outstanding balance of $2.7 million
(including $1.4 million of undisbursed loans in process balance), which
represented a 50% interest in a construction loan secured by a multi-family
property located in Vancouver, Washington. At September 30, 2000, this loan
was performing according to its terms.
All construction loans must be approved by the Bank's Loan Committee or
the Bank's Board of Directors. See "-- Lending Activities -- Loan
Solicitation and Processing." Prior to preliminary approval of any
construction loan application, an independent fee appraiser inspects the site
and the Bank reviews the existing or proposed improvements, identifies the
market for the proposed project and analyzes the pro forma data and
assumptions on the project. In the case of a speculative or custom
construction loan, the Bank reviews the experience and expertise of the
builder. After preliminary approval has been given, the application is
processed, which includes obtaining credit reports, financial statements and
tax returns on the borrowers and guarantors, an independent appraisal of the
project, and any other expert reports necessary to evaluate the proposed
project. In the event of cost overruns, the Bank requires that the borrower
increase the funds available for construction by depositing its own funds into
a loans in process account.
Loan disbursements during the construction period are made to the builder
based on a line item budget. Periodic on-site inspections are made by
qualified Bank employees to document the reasonableness of the draw Request.
For most builders, the Bank disburses loan funds by providing vouchers to
suppliers, which when used by the builder to purchase supplies are submitted
by the supplier to the Bank for payment.
The Bank regularly monitors the construction loan disbursements using an
internal computer program. Property inspections are performed by Bank
personnel for properties located within the Bank's primary market area and by
independent inspectors for properties outside the primary market area. The
Bank believes that its internal monitoring system helps reduce many of the
risks inherent in its construction lending.
The Bank originates construction loan applications through customer
referrals, contacts in the business community and real estate brokers seeking
financing for their clients.
Construction lending affords the Bank 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 single-family
permanent mortgage 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 estimate of construction cost
proves to be inaccurate, the Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Bank may be
confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders 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 Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices. In
addition, because the Bank's construction lending is primarily secured by
properties in its
6
<PAGE>
primary market area changes in the local and state economies and real estate
markets could adversely affect the Bank's construction loan portfolio.
Real Estate Contracts. The Bank purchases real estate contracts and
deeds of trust from individuals who have privately sold their homes or
property. These contracts are generally secured by one- to- four family
properties, building lots and undeveloped land and range in principal amount
from $10,000 to $200,000, but typically are in amounts between $20,000 and
$40,000. Real estate contracts purchased by the Bank are generally located
within its primary market area. Prior to purchasing the real estate contract,
the Bank reviews the contract and analyzes and assesses the collateral for the
loan, the down payment made by the borrower and the credit history on the
loan. As of September 30, 2000, the Bank had outstanding $1.2 million of real
estate contracts.
Multi-Family Lending. At September 30, 2000, the Bank had $33.6 million,
or 9.5% of the Bank's total loan portfolio, secured by multi-family dwelling
units (more than four units) located primarily in the Bank's primary market
area. This amount represents a $17.7 million increase from the prior fiscal
year. Approximately one-third of this increase was due to the conversion to
permanent financing of a large multi-family project that had previously been
included in the Bank's construction loan portfolio. The balance of the
increase is due to loans made and/or purchased in the Puget Sound area, an
important primary market of the Bank that has evidenced strong demand for
multi-family housing. At September 30, 2000, approximately 39.5% of the
Bank's multi-family loans represent participation interests in loans, secured
by properties located in the Bank's primary market area, purchased from other
lenders. Such participation interests are purchased without recourse to the
seller other than for fraud. The Bank underwrites such participation
interests according to its own standards.
Multi-family loans are generally originated with variable rates of
interest ranging from 3.00% to 3.50% over the one-year constant maturity U.S.
Treasury Bill Index, with principal and interest payments fully amortizing
over terms of up to 30 years. Multi-family loans generally range in principal
balance from $300,000 to $6.5 million. At September 30, 2000, the largest
multi-family loan had an outstanding principal balance of $6.1 million and was
secured by an apartment building located in the Bank's primary market area.
At September 30, 2000, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally 75%.
The Bank requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Bank also
inspects the subject property annually. The Bank generally imposes a minimum
debt coverage ratio of approximately 1.10 for loans secured by multi-family
properties.
Multi-family mortgage lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by 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 the economy. The Bank seeks to minimize these risks
by strictly scrutinizing the financial condition of the borrower, the quality
of the collateral and the management of the property securing the loan. If
the borrower is a corporation, the Bank also generally obtains personal
guarantees from corporate principals based on a review of personal financial
statements.
Commercial Real Estate Lending. Commercial real estate loans totaled
$58.6 million, or 16.7% of total loans receivable at September 30, 2000, and
consisted of 183 loans. The Bank originates commercial real estate loans
generally at variable interest rates and secured by properties, such as
restaurants, motels, office buildings and retail/wholesale facilities, located
in its primary market area. The principal balance of a commercial real estate
loan generally ranges between $100,000 and $3.0 million. At September 30,
2000, the largest commercial real estate loan had an outstanding principal
balance of $4.2 million, which represented a 50% interest in a commercial
property
7
<PAGE>
located in Bellingham, Washington. At September 30, 2000, four commercial
real estate loans totaling $551,000 were not performing according to terms.
See "-- Lending Activities -- Nonperforming Assets and Delinquencies."
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent appraiser designated
by the Bank, all of which are reviewed by management. The Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.
The Bank generally imposes a minimum debt coverage ratio of approximately
1.10x for originated loans secured by income producing commercial properties.
Loan-to-value ratios on commercial real estate loans are generally limited to
75%. The Bank generally obtains loan guarantees from financially capable
parties based on a review of personal financial statements.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these risks by
generally limiting the maximum loan-to-value ratio to 75% and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.
Land Lending. The Bank occasionally originates 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. At September 30, 2000, land loans
totaled $12.6 million, or 3.6% of the Bank's total loan portfolio. Land loans
originated by the Bank are generally fixed-rate loans and have maturities of
five to ten years. Land loans generally range in principal amount from
$40,000 to $100,000. The largest land loan had an outstanding balance of
$730,000 at September 30, 2000 and was performing according to its terms. At
September 30, 2000, six land loans totaling $233,000 were not performing
according to terms. See "-- Lending Activities Nonperforming Assets and
Delinquencies."
Loans secured by undeveloped land or improved lots involve greater risks
than one- to- four family residential mortgage loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate,
in the event of default and foreclosure the Bank may be confronted with a
property the value of which is insufficient to assure full repayment. The
Bank attempts to minimize this risk by generally limiting the maximum loan-to-
value ratio on land loans to 75%.
Consumer Lending. Consumer lending has traditionally been a small part
of the Bank's business. Consumer loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. Consumer loans
include home equity lines of credit, Title I home improvement loans, second
mortgage loans, savings account loans, automobile loans, boat loans,
motorcycle loans, recreational vehicle loans and unsecured loans. Consumer
loans are made with both fixed and variable interest rates and with varying
terms. At September 30, 2000, consumer loans amounted to $15.9 million, or
4.5% of the total loan portfolio.
At September 30, 2000, the largest component of the consumer loan
portfolio consisted of second mortgage loans and home equity lines of credit,
which totaled $9.8 million, or 2.8%, of the total loan portfolio. Home equity
lines of credit and second mortgage loans are made for purposes such as the
improvement of residential properties, debt consolidation and education
expenses, among others. The majority of these loans are made to existing
customers and are secured by a first or second mortgage on residential
property. The Bank occasionally solicits these loans. The loan-to-value
ratio is typically 80% or less, when taking into account both the first and
second mortgage loans. Second mortgage loans typically carry fixed interest
rates with a fixed payment over a term between five and 20 years. Home equity
lines of credit are generally for a one year term and the interest rate is
tied to the 26 week Treasury Bill plus 4.0%.
8
<PAGE>
In July 1997, the Bank began issuing VISA credit cards to its existing
customers. At September 30, 2000, credit card loans amounted to $1.9 million.
The Bank does not engage in direct mailings of pre-approved credit cards.
Consumer loans 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. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans. The Bank
believes that these risks are not as prevalent in the case of the Bank's
consumer loan portfolio because a large percentage of the portfolio consists
of second mortgage loans and home equity lines of credit that are underwritten
in a manner such that they result in credit risk that is substantially similar
to one- to- four family residential mortgage loans. Nevertheless, second
mortgage loans and home equity lines of credit have 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 Bank. At September 30, 2000, there were
$273,000 of consumer loans delinquent in excess of 90 days.
Commercial Business Lending. Commercial business loans totaled $4.8
million, or 1.4% of total loans receivable at September 30, 2000, and
consisted of 70 loans. In July 1998, the Bank established a business banking
division staffed by three experienced commercial bankers to increase the
Bank's origination of commercial business loans. Commercial business loans
are generally secured by business equipment or other property and are made at
variable rates of interest equal to a negotiated margin above the prime rate.
The Bank also generally obtains personal guarantees from financially capable
parties based on a review of personal financial statements.
Commercial business lending generally involves greater risk than
residential mortgage lending and 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
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, among other things. Accordingly, the repayment of a
commercial business loan depends primarily on the creditworthiness of the
borrower (and any guarantors), while liquidation of collateral is a secondary
and often insufficient source of repayment.
Loan Maturity. The following table sets forth certain information at
September 30, 2000 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.
9
<PAGE>
<TABLE>
After After
One Year 3 Years 5 Years
Within Through Through Through After
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to- four family....... $ 740 $ 597 $ 1,438 $ 5,218 $128,832 $136,825
Multi-family............... 6,593 2,004 2,482 16,382 6,143 33,604
Commercial................. 382 900 4,741 24,202 28,407 58,632
Construction and land
development(1)........... 32,830 16,909 186 7,764 32,214 89,903
Land....................... 821 2,174 8,608 717 241 12,561
Consumer loans:
Home equity and second
mortgage................. 3,147 655 1,240 1,844 2,930 9,816
Other...................... 1,803 1,208 1,393 386 1,291 6,081
Commercial business loans.... 2,337 873 1,248 350 -- 4,808
------- ------- ------- ------- -------- --------
Total................... $48,653 $25,320 $21,336 $56,863 $200,058 $352,230
======= ======= ======= ======= ======== --------
Less:
Undisbursed portion of
loans in process......... $(32,831)
Unearned income............ (3,578)
Allowance for loan losses (2,640)
Market value adjustment of
Loans held-for-sale...... (175)
--------
Loans receivable, net..... $313,006
========
-----------
(1) Includes construction/permanent that convert to a permanent mortgage loan once construction is
completed.
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
Mortgage loans:
One- to- four family........... $ 49,919 $ 86,906 $136,825
Multi-family.................. 19,788 13,816 33,604
Commercial.................... 15,660 42,972 58,632
Construction and land
development................. 69,186 20,717 89,903
Land.......................... 12,427 134 12,561
Consumer loans:
Home equity and second
mortgage.................... 6,213 3,603 9,816
Other......................... 5,882 199 6,081
Commercial business loans...... 2,643 2,165 4,808
-------- -------- --------
Total....................... $181,718 $170,512 $352,230
======== ======== ========
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life
10
<PAGE>
of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan originations are obtained from a
variety of sources, including walk-in customers, and referrals from builders
and Realtors. Upon receipt of a loan application from a prospective borrower,
a credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate offered as collateral generally is undertaken by
an appraiser retained by the Bank and certified by the State of Washington.
Mortgage loan applications are initiated by loan officers and are
required to be approved by the Bank's Loan Committee, which consists of the
Bank's President, Executive Vice President and Vice President. Certain
consumer loans up to and including $25,000 may be approved by individual loan
officers. All other loans up to and including $300,000 may be approved by any
two members of the Bank's Loan Committee. Commercial business loans up to and
including $250,000 may also be approved by the Bank's Senior Vice President.
Loans in excess of $300,000, as well as loans of any size granted to a single
borrower whose aggregate lending relationship exceeds $300,000, must be
approved by the Bank's Board of Directors.
Loan Originations, Purchases and Sales. During the years ended September
30, 2000 and 1999, the Bank's total gross loan originations were $136.2
million and $144.4 million, respectively. Periodically, the Bank purchases
participation interests in construction and land development loans and
multi-family loans, secured by properties located in the Bank's primary market
area, from other lenders. Such purchases are underwritten to the Bank's
underwriting guidelines and are without recourse to the seller other than for
fraud. See "-- Lending Activities -- Construction and Land Development
Lending" and "-- Lending Activities -- Multi-Family Lending."
Consistent with its asset/liability management strategy, the Bank's
policy has been to retain in its portfolio all of the ARM loans and generally
originates fixed rate loans with a view toward sale in the secondary market to
FHLMC; however, from time to time, a portion of fixed-rate loans may be
retained in the Bank's portfolio to meet its asset-liability objectives.
Loans sold in the secondary market are generally sold on a servicing retained
basis. At September 30, 2000, the Bank's loan servicing portfolio totaled
$68.8 million.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Loans originated:
Mortgage loans:
One- to- four family............. $ 34,240 $ 41,084 $ 45,377
Multi-family..................... 7,124 6,952 5,461
Commercial....................... 8,855 15,722 6,750
Construction and land
development.................... 69,638 63,162 58,054
Land............................. 6,279 4,605 3,265
Consumer.......................... 8,601 6,845 7,437
Commercial business loans......... 1,497 6,069 525
-------- -------- --------
Total loans originated........... 136,234 144,439 126,869
(table continued on following page)
11
<PAGE>
Year Ended September 30,
-------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
One- to- four family............. $ 34,240 $ 41,084 $ 45,377
Loans purchased:
Mortgage loans:
One- to- four family............. 60 269 619
Multi-family..................... 6,163 -- --
Commercial....................... 2,745 9,170 --
Construction..................... -- 7,226 --
Land............................. -- 34 --
-------- -------- --------
Total loans purchased........... 8,968 16,699 619
-------- -------- --------
Total loans originated
and purchased................ 145,202 161,138 127,488
Loans sold:
Total whole loans sold........... (11,800) (13,572) (25,236)
Participation loans.............. -- (6,249) --
-------- -------- --------
Total loans sold................. (11,800) (19,821) (25,236)
Mortgage loan principal repayments. (80,847) (73,733) (75,504)
Decrease (increase) in other
items, net....................... 4,366 (10,720) (14,554)
-------- -------- --------
Net increase in loans
receivable, net.................. $ 56,921 $ 56,864 $ 12,194
======== ======== ========
Loan Origination and Other Fees. The Bank, in some instances, receives
loan origination fees. Loan fees are a percentage of the principal amount of
the mortgage loan which are charged to the borrower for funding the loan. The
amount of fees charged by the Bank is generally 1.0% to 2.0%. Current
accounting standards require fees received (net of certain loan origination
costs) for originating loans to be deferred and amortized into interest income
over the contractual life of the loan. Net deferred fees or costs associated
with loans that are prepaid are recognized as income at the time of
prepayment. The Bank had $3.6 million of net deferred loan fees at September
30, 2000.
Nonperforming Assets and Delinquencies. The Bank assesses late fees or
penalty charges on delinquent loans of approximately 5% of the monthly loan
payment amount. Substantially all fixed-rate and ARM loan payments are due on
the first day of the month; however, the borrower is given a 15 day grace
period to make the loan payment. When a mortgage loan borrower fails to make
a required payment when due, the Bank institutes collection procedures. A
notice is mailed to the borrower 16 days after the date the payment is due,
giving the borrower 15 days to respond and correct the delinquency. Attempts
to contact the borrower by telephone generally begin upon the thirtieth day of
delinquency. If a satisfactory response is not obtained, continuous follow-up
contacts are attempted until the loan has been brought current. Before the
90th day of delinquency, attempts to interview the borrower, preferably in
person, are made to establish (i) the cause of the delinquency, (ii) whether
the cause is temporary, (iii) the attitude of the borrower toward the debt,
and (iv) a mutually satisfactory arrangement for curing the default.
If the borrower is chronically delinquent and all reasonable means of
obtaining payment on time have been exhausted, foreclosure is initiated
according to the terms of the security instrument and applicable law.
Interest income on loans is reduced by the full amount of accrued and
uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Bank institutes the same collection
procedures as for its mortgage loan borrowers.
12
<PAGE>
The Bank's Board of Directors is informed monthly as to the status of all
loans that are delinquent by more than 30 days, the status on all loans
currently in foreclosure, and the status of all foreclosed and repossessed
property owned by the Bank.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
At September 30,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Mortgage loans:
One- to- four family.......$ 1,203 $ 941 $ 996 $ 776 $ 735
Commercial................. 551 1,675 2,919 2,886 --
Construction and land
development............... 1,267 390 -- 3,891 771
Land....................... 233 253 397 -- --
Consumer loans.............. 273 330 17 2 14
Commercial business loans... 85 -- 81 -- --
-------- -------- -------- -------- --------
Total................... 3,612 3,589 4,410 7,555 1,520
Accruing loans which are
contractually past due 90
days or more:
Mortgage loans:
Construction and land
development............... -- 449 396 109 --
-------- -------- -------- -------- --------
Total.................. -- 449 396 109 --
-------- -------- -------- -------- --------
Total of nonaccrual and
90 days past due loans...... 3,612 4,038 4,806 7,664 1,520
Real estate owned and other
repossessed assets.......... 1,966 867 1,724 434 125
-------- -------- -------- -------- --------
Total nonperforming
assets................ 5,578 4,905 6,530 8,098 1,645
Restructured loans........... -- 509 236 70 158
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net.... 1.14% 1.56% 2.39% 4.06% 0.86%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets............. 0.98% 1.31% 1.81% 3.62% 0.78%
Nonperforming assets as a
percentage of total assets.. 1.52% 1.60% 2.46% 3.83% 0.85%
Loans receivable, net(1).....$315,646 $258,141 $200,949 $188,743 $177,628
======== ======== ======== ======== ========
Total assets.................$368,080 $307,116 $265,709 $211,553 $194,357
======== ======== ======== ======== ========
--------
(1) Includes loans held-for-sale and is before the allowance for loan
losses.
13
<PAGE>
The following is a discussion of the Bank's major problem assets at
September 30, 2000:
Convenience store/retail space and mini-storage, Kitsap County,
Washington. The Bank had two loans that were originated in 1996 on two
separate properties: a convenience store combined with retail space and a 436
unit mini-storage facility. These two loans had a combined balance of $2.9
million at September 30, 1998. These loans became delinquent primarily
because of a dispute between the two borrowers. The Bank initiated foreclosure
proceedings which were stayed due to a bankruptcy filing by the borrowers in
January of 1998. The bankruptcy was subsequently dismissed and the
mini-storage facility was sold at a trustees sale on March 12, 1999 for the
full balance, accrued interest, late charges and fees owed. The foreclosure
of the convenience store progressed to a sheriff's sale on December 10, 1999.
The Bank was the successful bidder and the sale was confirmed on January 28,
2000. The Bank charged off $260,000 on the loan during the quarter ended
March 31, 2000, but in June 2000 recovered the amount charged off along with
$290,000 in delinquent interest and other fees through the collection of a
deficiency judgement against the borrower. The property is classified as real
estate owned ("REO") with a balance of $1.3 million at September 30, 2000.
The Bank is actively marketing the project and has accepted an offer to
purchase one of the retail/office buildings on the site. It is anticipated
that the sale will close during the first quarter of 2001. Although no
assurances can be given, the Bank does not expect to incur any material loss
on the disposition of this property.
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of
its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value. Subsequent to foreclosure, the
property is carried at the lower of the foreclosed amount or fair value, less
estimated selling costs. At September 30, 2000, the Bank had $2.0 million in
real estate owned consisting primarily of three one- to- four family
properties, two commercial real estate properties, and several land parcels.
Restructured Loans. Under generally accepted accounting principles
("GAAP"), the Bank is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that
the Bank would not otherwise consider. Debt restructuring or loan
modifications for a borrower does not necessarily always constitute troubled
debt restructuring, however, and troubled debt restructuring do not
necessarily result in non-accrual loans. The Bank had no restructured loans
at September 30, 2000.
Asset Classification. Applicable regulations require that each insured
institution review and classify its assets on a regular basis. In addition,
in connection with examinations of insured institutions, regulatory examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified as loss is
considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted. When an insured institution classifies
problem assets as either substandard or doubtful, it is required to establish
general allowances for loan losses in an amount deemed prudent by management.
These allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities and the risks
associated with particular problem assets. When an insured institution
classifies problem assets as loss, it charges off the balance of the asset.
Assets which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are required to be designated as special mention. The
Bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by the FDIC and the Division
which can order the establishment of additional loss allowances.
14
<PAGE>
The Bank's classified assets increased by $3.7 million at September 30,
2000. This increase is primarily the result of four loan relationships. The
first is with a builder in Pierce County who has five single-family loans with
the Bank totaling $939,000 at September 30, 2000. Of the five loans, one is
the borrower's personal residence and the remaining four are spec loans. The
builder has received and accepted earnest money agreements on two of the
properties. The second relationship is with three partners who borrowed to
finance the construction of condominium units in Clark County, Washington.
The Bank's 50% participation interest in this loan was $2.7 million with $1.4
million not funded at September 30, 2000. The loan has since September 30,
2000 been reduced to $930,000. The loan is current and borrowers continue to
make interest payments monthly, however, absorption of the first phase units
has been slower than anticipated and the borrowers may sell the plat rather
than build additional units. The third relationship is with a builder in
Kitsap County who has converted five construction loans to permanent financing
for rental purposes. The loans total $367,000 at September 30, 2000 and the
borrower has not paid as agreed. Foreclosure may be initiated against these
properties. The fourth relationship is with a borrower having a loan balance
of $311,000 at September 30, 2000. The commercial property that secures the
loan is currently leased. The borrower's payment history has been sporadic,
however, the loan was current at December 1, 2000.
The aggregate amounts of the Bank's classified assets (as determined by
the Bank), and of the Bank's general loss allowances at the dates indicated,
were as follows:
At September 30,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Loss..................... $ -- $ -- $ --
Doubtful................. 206 89 --
Substandard(1)........... 7,016 4,108 4,888
Special mention(1)....... 1,764 1,059 1,160
General loss allowances.. 2,640 2,006 1,728
Specific loss allowance.. -- 50 --
--------
(1) For further information concerning the increase in classified assets,
see "-- Lending Activities -- Nonperforming Assets and Delinquencies."
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses that takes
into consideration the need for an overall general valuation allowance.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management reviews the adequacy of the allowance at least
quarterly based on management's assessment of current economic conditions,
past loss and collection experience, and risk characteristics of the loan
portfolio. A provision for losses is charged against income monthly to
maintain the allowances.
At September 30, 2000, the Bank had a general allowance for loan losses
of $2.6 million. Management believes that the amount maintained in the
allowances will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
15
<PAGE>
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to increase significantly its allowance for loan losses. 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 as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Bank's financial condition and results of operations.
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated.
Year Ended September 30,
---------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of year.... $2,056 $1,728 $1,716 $1,133 $1,119
Provision for loan losses......... 885 363 200 596 --
Recoveries:
Mortgage loans:
Commercial real estate......... 260 -- -- -- --
Consumer loans:
Automobile...................... -- -- -- -- --
Other........................... 2 -- -- 9 --
------ ------ ------ ------ ------
Total recoveries............... 262 -- -- 9 --
Charge-offs:
Mortgage loans:
One- to- four family............ -- -- 4 19 --
Home equity and second mortgage. -- -- -- -- --
Other........................... 113 5 4 -- 1
Commercial business loans........ 180 -- -- -- --
------ ------ ------ ------ ------
Total charge-offs.............. 293 5 8 19 1
------ ------ ------ ------ ------
Net charge-offs................ 31 5 8 10
Transfers...................... 270 30 180 3 55
------ ------ ------ ------ ------
Balance at end of year....... $2,640 $2,056 $1,728 $1,716 $1,133
====== ====== ====== ====== ======
Allowance for loan losses as a
percentage of total loans
(net)(1) outstanding at the
end of the year.................. 0.84% 0.80% 0.86% 0.91% 0.64%
Net charge-offs as a percentage
of average loans outstanding
during the year.................. 0.01% --% --% 0.01% --
Allowance for loan losses as
a percentage of nonperforming
loans at end of year............. 73.09% 50.92% 35.96% 22.39% 74.54%
--------
(1) Total loans (net) includes loans held for sale and is before the
allowance for loan losses.
16
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category at the
dates indicated.
At September 30,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- --------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to- four family. $ 374 38.85% $ 288 38.42% $ 311 43.48% $ 311 48.76% $ 261 48.51%
Multi-family......... 171 9.54 82 5.32 70 5.36 149 5.93 83 6.35
Commercial........... 662 16.65 674 17.37 706 14.18 409 14.32 317 13.41
Construction......... 929 25.52 633 30.24 368 27.65 646 21.93 316 23.83
Land................. 220 3.56 170 3.02 180 3.34 138 3.38 102 3.09
Non-mortgage loans:
Consumer loans....... 121 4.51 126 4.09 65 5.51 50 5.34 46 4.57
Commercial business
loans.............. 124 1.37 83 1.54 28 0.48 13 0.34 8 0.24
Commitments.......... 39 -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses.. $2,640 100.00% $2,056 100.00% $1,728 100.00% $1,716 100.00% $1,133 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
17
</TABLE>
<PAGE>
Investment Activities
At September 30, 2000, the Company's investment portfolio totaled $29.1
million, consisting of $17.5 million of securities available for sale and
$11.6 million of mortgage-backed securities available for sale. This compares
with a total portfolio of $31.7 million at September 30, 1999, comprised of
$17.7 million of securities available for sale and $14.0 million of
mortgage-backed securities available for sale. The composition of the
portfolios by type of security, at each respective date is presented in the
table, which follows.
The investment policies of the Company are established and monitored by
the Board of Directors. The policies are designed primarily to provide and
maintain liquidity, to generate a favorable return on investments without
incurring undue interest rate and credit risk, and to compliment the Bank's
lending activities. These policies dictate the criteria for classifying
securities as either available for sale or held to maturity. The policies
permit investment in various types of liquid assets permissible under
applicable regulations, which includes U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks,
banker's acceptances, federal funds, FHLB stock, and mortgage-backed
securities. The Company's investment policy also permits investment in equity
securities in certain financial service companies.
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated.
At September 30,
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Available-for-Sale (at fair value):
U.S. Agency Securities.... $ 6,416 22.07% $ 6,419 20.28% $ 8,937 5.23%
Mortgage-backed
securities.............. 11,569 39.79 13,992 44.20 17,555 49.57
Municipal bonds........... 71 0.24 -- -- -- --
Mutual funds.............. 6,472 22.26 8,845 27.94 7,121 20.11
FHLB stock................ 4,150 14.27 2,338 7.39 1,713 4.84
Equity securities......... 397 1.37 62 0.19 89 0.25
------- ------ ------- ------ ------- ------
Total portfolio........... $29,075 100.00% $31,656 100.00% $35,415 100.00%
======= ====== ======= ====== ======= ======
18
<PAGE>
The following table sets forth the maturities and weighted average yields
of the investment and mortgage-backed securities in the Company's investment
securities portfolio at September 30, 2000. Mutual funds, FHLB stock and
equity securities, which by their nature do not have maturities, are
classified in the less than one year category.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------ ------------ ------------ ------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Available-for-Sale:
U.S. Agency
securities.......$ 1,989 5.20% $4,427 5.92% $ -- --% $ -- --%
Mortgage-backed
securities....... 7 4.29 4 5.28 2,976 6.21 8,582 6.25
Municipal bonds... -- -- 71 6.92 -- -- -- --
Mutual funds...... 6,472 6.51 -- -- -- -- -- --
FHLB Stock........ 4,150 6.50 -- -- -- -- -- --
Equity securities. 397 2.80 -- -- -- -- -- --
------- ---- ------ ---- ------ ---- ------ ----
Total portfolio...$13,015 6.19% $4,502 5.94% $2,976 6.21% $8,582 6.25%
======= ==== ====== ==== ====== ==== ====== ====
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle may be
used to compensate for reductions in the availability of funds from other
sources.
Deposit Accounts. Substantially all of the Bank's depositors are
residents of Washington. Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments,
including money market deposit accounts, checking accounts, regular savings
accounts and certificates of deposit. Deposit account terms vary, according
to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In determining the terms
of its deposit accounts, the Bank considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. In recent periods, the Bank has used deposit
interest rate promotions in connection with the opening of new branch offices.
At September 30, 2000 the Bank had $42.4 million of jumbo certificates of
deposit, which includes $19.2 million in public unit funds. The Bank does not
solicit brokered deposits and believes that its jumbo certificates of deposit,
which represented 20.0% of total deposits at September 30, 2000, present
similar interest rate risk compared to its other deposit products.
19
<PAGE>
The following table sets forth information concerning the Bank's deposits
at September 30, 2000.
Weighted
Average Percentage
Interest of Total
Category Rate Amount Deposits
-------- ---- ------ --------
(In thousands)
Non-Interest Bearing --% $11,861 5.58%
Negotiable order of withdrawal
("NOW ") Checking 1.75 24,467 11.51
Passbook Savings 2.60 28,647 13.47
Money Market Accounts 4.27 20,863 9.81
Other Deposits -- 3,636 1.71
Certificates of Deposit(1)
Maturing within 1 year 5.99 101,415 47.70
Maturing after 1 year but
within 2 years 6.17 17,380 8.18
Maturing after 2 years but
within 5 years 5.66 3,876 1.82
Maturing after 5 years 6.98 466 0.22
4.45 -------- ------
$212,611 100.00%
======== ======
------------
(1) Based on remaining maturity of certificates.
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 2000. Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less....................... $24,594
Over three through six months.............. 3,682
Over six through twelve months............. 10,979
Over twelve months......................... 3,165
-------
Total.................................. $42,420
=======
20
<PAGE>
<TABLE>
Deposit Flow. The following table sets forth the balances of savings deposits in the various types of
savings accounts offered by the Bank at the dates indicated.
At September 30,
-----------------------------------------------------------------------------
2000 1999 1998
--------------------------- ---------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing........ $ 11,861 5.58% $ 3,501 $ 8,360 4.44% $ 2,521 $ 5,839 3.42%
NOW checking................ 24,467 11.51 3,228 21,239 11.29 (356) 21,595 12.64
Passbook savings accounts... 28,647 13.47 (749) 29,396 15.62 2,081 27,315 15.99
Money market deposit........ 20,863 9.81 2,089 18,774 9.98 3,761 15,013
Certificates of deposit which
mature in the year ending:
Within 1 year............. 101,415 47.70 22,988 78,427 41.68 6,097 72,330 42.34
After 1 year, but
within 2 years.......... 17,380 8.18 (5,530) 22,910 12.18 3,517 19,393 11.35
After 2 years, but
within 5 years.......... 3,876 1.82 (1,442) 5,318 2.83 144 5,174 3.03
Certificates maturing
thereafter.............. 466 0.22 (387) 853 0.45 189 664
Other....................... 3,636 1.71 765 2,871 1.53 (640) 3,511 2.05
-------- ------ ------- -------- ------ ------- -------- ------
Total.................. $212,611 100.00% $24,463 $188,148 100.00% $17,314 $170,834 100.00%
======== ====== ======= ======== ====== ======= ======== ======
21
</TABLE>
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits
in the Bank classified by rates as of the dates indicated.
At September 30,
------------------------
2000 1999 1998
---- ---- ----
(In thousands)
2.00 - 3.99%...................... $ 109 $ 222 $ 227
4.00 - 4.99%...................... 6,261 28,687 381
5.00 - 5.99%...................... 50,198 74,565 80,539
6.00 - 6.99%...................... 61,301 3,527 11,548
7.00% and over.................... 5,268 507 4,866
-------- -------- -------
Total............................. $123,137 $107,508 $97,561
======== ======== =======
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at September 30, 2000.
Amount Due
---------------------------------------------
After
One to Two to
Less Than Two Five After
One Year Years Years Five Years Total
-------- ----- ----- ---------- -----
(In thousands)
2.00 - 3.99%......... $ 109 $ -- $ -- $ -- $ 109
4.00 - 4.99%......... 6,253 8 -- -- 6,261
5.00 - 5.99%......... 40,604 6,513 2,992 89 50,198
6.00 - 6.99%......... 50,913 9,266 843 279 61,301
7.00% and over....... 3,536 1,593 41 98 5,268
-------- ------- ------- ------- --------
Total............... $101,415 $17,380 $ 3,876 $ 466 $123,137
======== ======= ======= ======= ========
Deposit Activities. The following table sets forth the savings
activities of the Bank for the periods indicated.
Year Ended September 30,
--------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Beginning balance....................... $188,148 $170,834 $173,003
Net deposits (withdrawals) before
interest credited.................... 16,070 10,038 (9,639)
Interest credited....................... 8,393 7,276 7,470
Net increase (decrease) in deposits..... 24,463 17,314 (2,169)
-------- -------- --------
Ending balance.......................... $212,611 $188,148 $170,834
======== ======== ========
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for general business purposes.
The Bank has the ability to use advances from the FHLB-Seattle to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Seattle functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member of the FHLB-Seattle, the Bank is required to own capital stock in the
FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. Government)
provided certain creditworthiness standards have been met.
22
<PAGE>
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At September 30, 2000, the Bank maintained an uncommitted
credit facility with the FHLB-Seattle that provided for immediately available
advances up to an aggregate amount of $108.4 million, under which $81.1
million was outstanding.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated using
monthly average balance:
At or For the
Year Ended September 30,
------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Maximum amount of short-term FHLB
advances at any month end.......... $76,700 $33,600 $500
Approximate average short-term FHLB
advances outstanding.............. 62,967 10,150 250
Approximate weighted average rate
paid on short-term FHLB advances... 6.24% 5.41% 6.7%
Total short-term FHLB advances at
end of period...................... 64,800 33,600 --
REGULATION OF THE BANK
General
As a state-chartered, federally insured savings bank, the Bank is subject
to extensive regulation. Lending activities and other investments must comply
with various statutory and regulatory requirements, including prescribed
minimum capital standards. The Bank is regularly examined by the FDIC and the
Division and files periodic reports concerning the Bank's activities and
financial condition with its regulators. The Bank's relationship with
depositors and borrowers also is regulated to a great extent by both federal
law and the laws of Washington, especially in such matters as the ownership of
savings accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal
and state bank regulatory agencies also have the general authority to limit
the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Bank have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision
As a state-chartered savings bank, the Bank is subject to applicable
provisions of Washington law and the regulations of the Division adopted
thereunder. Washington law and regulations govern the Bank's ability to take
deposits and pay interest thereon, to make loans on or invest in residential
and other real estate, to make consumer loans, to invest in securities, to
offer various banking services to its customers, and to establish branch
offices. Under
23
<PAGE>
state law, savings banks in Washington also generally have all of the powers
that federal savings banks have under federal laws and regulations. The Bank
is subject to periodic examination and reporting requirements by and of the
Division.
Deposit Insurance
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of depository institutions. The FDIC
currently maintains two separate insurance funds: the Bank Insurance Fund
("BIF") and the SAIF. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.
The Bank's accounts are insured by the SAIF to the maximum extent
permitted by law. The Bank pays deposit insurance premiums based on a risk-
based assessment system established by the FDIC. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital "well capitalized,"
"adequately capitalized," and "undercapitalized" which are defined in the same
manner as the regulations establishing the prompt corrective action system, as
discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
six basis points for each $100 in domestic deposits for SAIF members while BIF
insured institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Bank.
Prompt Corrective Action
The FDIA requires each federal banking agency to implement a system of
prompt corrective action for institutions which it regulates. The federal
banking agencies have promulgated substantially similar regulations to
implement this system of prompt corrective action. Under the regulations, an
institution shall be deemed to be: (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and
is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has
a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that
24
<PAGE>
is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%;
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
The FDIA also provides that a federal banking agency may, after notice
and an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution
or an undercapitalized institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. (The FDIC may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At September 30, 2000, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness
The federal banking regulatory agencies have prescribed, by regulation,
standards for all insured depository institutions relating to: (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation,
fees and benefits ("Guidelines"). The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the FDIC determines that the Bank fails to meet any standard
prescribed by the Guidelines, the agency may require the Bank to submit to the
agency an acceptable plan to achieve compliance with the standard.
Capital Requirements
The FDIC's minimum capital standards applicable to FDIC-regulated banks
and savings banks require the most highly-rated institutions to meet a "Tier
1" leverage capital ratio of at least 3% of total assets. Tier 1 (or "core
capital") consists of common stockholders' equity, noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries minus all
intangible assets other than limited amounts of purchased mortgage servicing
rights and certain other accounting adjustments. All other banks must have a
Tier 1 leverage ratio of at least 100-200 basis points above the 3% minimum.
The FDIC capital regulations establish a minimum leverage ratio of not less
than 4% for banks that are not the most highly rated or are anticipating or
experiencing significant growth.
Any insured bank with a Tier 1 capital to total assets ratio of less than
2% is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet items, are multiplied by a risk-weight of 0% to
100%, based on the risks
25
<PAGE>
the FDIC believes are inherent in the type of asset or item. The components
of Tier 1 capital are equivalent to those discussed above under the 3%
leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk- weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier 1 capital.
The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At September 30, 2000, the Bank had a Tier
1 leverage capital ratio of 16.6% and net worth of 16.2% of total assets.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC may
determine that the minimum adequate amount of capital for that bank is greater
than the minimum standards established in the regulation.
The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as a downturn in
the economy in areas where the Bank has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet its
capital requirements.
The table below sets forth the Bank's capital position relative to its
FDIC capital requirements at September 30, 2000. The definitions of the terms
used in the table are those provided in the capital regulations issued by the
FDIC.
At September 30, 2000
------------------------------
Percent of Adjusted
Amount Total Assets(1)
------ ---------------
(Dollars in thousands)
Tier 1 (leverage) capital................... $58,470 16.63%
Tier 1 (leverage) capital requirement....... 14,068 4.00
------- -----
Excess...................................... $44,402 12.63%
======= =====
Tier 1 risk adjusted capital................ $58,470 21.73%
Tier 1 risk adjusted capital requirement.... 10,765 4.00
------- -----
Excess...................................... $47,705 17.73%
======= =====
Total risk-based capital.................... $61,110 22.71%
Total risk-based capital requirement........ 21,530 8.00
------- -----
Excess...................................... $39,580 14.71%
======= =====
--------
(1) For the Tier 1 (leverage) capital and Washington regulatory capital
calculations, percent of total average assets of $351.7 million. For
the Tier 1 risk-based capital and total risk-based capital calculations,
percent of total risk-weighted assets of $269.1 million.
(footnotes continued on following page)
26
<PAGE>
(2) As a Washington-chartered savings bank, the Bank is subject to the
capital requirements of the FDIC and the Division. The FDIC requires
state-chartered savings banks, including the Bank, to have a minimum
leverage ratio of Tier 1 capital to total assets of at least 3%,
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not
anticipating any significant growth, are required to maintain a ratio of
1% to 2% above the stated minimum, with an absolute total capital to
risk-weighted assets of at least 8%. The Bank has not been notified by
the FDIC of any leverage capital requirement specifically applicable to
it.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state
bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as
a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of
a qualified housing project, provided that such limited partnership
investments may not exceed 2% of the bank's total assets, (iii) acquiring up
to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions, and
(iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
Federal law provides that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank or for which
the FDIC has granted and exception must cease the impermissible activity.
Environmental Issues Associated With Real Estate Lending
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on, among
other things, all prior and present "owners and operators" of hazardous waste
sites. However, the U.S. Congress created a safe harbor provision for secured
creditors by providing that the term "owner and operator" excludes a person
who, without participating in the management of the site, holds indicia of
ownership primarily to protect its security interest in the site. Since the
enactment of the CERCLA, this "secured creditor exemption" has been the
subject of judicial interpretations which have left open the possibility that
lenders could be liable for cleanup costs on contaminated property that they
hold as collateral for a loan.
In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency ("EPA"), an
agency within the Executive Branch of the government, promulgated a regulation
clarifying when and how secured creditors could be liable for cleanup costs
under the CERCLA. Generally, the regulation protected a secured creditor that
acquired full title to collateral property through foreclosure as long as the
creditor did not participate in the property's management before foreclosure
and undertook certain due diligence efforts to divest itself of the property.
However, in February 1994, the U.S. Court of Appeals for the District of
Columbia Circuit held that the EPA lacked authority to promulgate such
regulation on the grounds that Congress meant for decisions on liability under
the CERCLA to be made by the courts and not the Executive Branch. In January
1995, the U.S. Supreme Court denied to review the U.S. Court of Appeal's
decision. In light of this adverse court ruling, in October 1995 the EPA
issued a statement entitled "Policy on CERCLA Enforcement Against Lenders and
Government Entities that Acquire Property Involuntarily" explaining that as an
enforcement policy, the EPA intended to apply as guidance the provisions of
the EPA lender liability rule promulgated in 1992.
27
<PAGE>
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Federal Reserve System
The Federal Reserve Board requires under Regulation D that all depository
institutions, including savings banks, maintain reserves on transaction
accounts or non-personal time deposits. These reserves may be in the form of
cash or non-interest-bearing deposits with the regional Federal Reserve Bank.
NOW accounts and other types of accounts that permit payments or transfers to
third parties fall within the definition of transaction accounts and are
subject to Regulation D reserve requirements, as are any nonpersonal time
deposits at a bank. Under Regulation D, a bank must establish reserves equal
to 0% of the first $4.9 million of net transaction accounts, 3% of the next
$41.6 million, and 10% plus $1.56 million of the remainder. The reserve
requirement on non-personal time deposits with original maturities of less
than 1.5 years is 0%. As of September 30, 2000, the Bank met its reserve
requirements.
Affiliate Transactions
The Company and the Bank are legal entities separate and distinct.
Various legal limitations restrict the Bank from lending or otherwise
supplying funds to the Company (an "affiliate"), generally limiting such
transactions with the affiliate to 10% of the bank's capital and surplus and
limiting all such transactions to 20% of the bank's capital and surplus. Such
transactions, including extensions of credit, sales of securities or assets
and provision of services, also must be on terms and conditions consistent
with safe and sound banking practices, including credit standards, that are
substantially the same or at least as favorable to the bank as those
prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act
Banks are also subject to the provisions of the Community Reinvestment
Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory
agency, in connection with its regular examination of a bank, to assess the
bank's record in meeting the credit needs of the community serviced by the
bank, including low and moderate income neighborhoods. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among
other things, to establish a new branch office that will accept deposits,
relocate an existing office or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution. The Bank received a "satisfactory" rating during its most recent
CRA examination.
Dividends
Dividends from the Bank constitute the major source of funds for
dividends which may be paid by the Company. The amount of dividends payable
by the Bank to the Company depends upon the Bank's earnings and capital
position, and is limited by federal and state laws, regulations and policies.
According to Washington law, the Bank may not declare or pay a cash dividend
on its capital stock if it would cause its net worth to be reduced below (i)
the amount required for liquidation accounts or (ii) the net worth
requirements, if any, imposed by the Director of the Division. Dividends on
the Bank's capital stock may not be paid in an aggregate amount greater than
the aggregate retained earnings of the Bank, without the approval of the
Director of the Division.
28
<PAGE>
The amount of dividends actually paid during any one period will be
strongly affected by the Bank's management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
REGULATION OF THE COMPANY
General
The Company, as the sole shareholder of the Bank is a bank holding
company and is registered as such with the Federal Reserve. Bank holding
companies are subject to comprehensive regulation by the Federal Reserve under
the Bank Holding Company Act of 1956, as amended ("BHCA"), and the regulations
of the Federal Reserve. As a bank holding company, the Company is required to
file with the Federal Reserve annual reports and such additional information
as the Federal Reserve may require and will be subject to regular examinations
by the Federal Reserve. The Federal Reserve also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely
related to the business of banking or managing or controlling banks as to be a
proper incident thereto. The list of activities determined by regulation to
be closely related to banking within the meaning of the BHCA includes, among
other things: operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing
securities brokerage services for customers.
Interstate Banking
The Federal Reserve must approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a
state other than such holding company's home state, without regard to whether
the transaction is prohibited by the laws of any state. The Federal Reserve
may not approve the acquisition of a bank that has not been in existence for
the minimum time period, not exceeding five years, specified by the statutory
law of the host state. Nor may the Federal Reserve approve an application if
the applicant, and its depository institution affiliates, controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Federal law does not affect the authority
of states to limit the
29
<PAGE>
percentage of total insured deposits in the state which may be held or
controlled by a bank holding company to the extent such limitation does not
discriminate against out-of-state banks or bank holding companies. Individual
states may also waive the 30% state-wide concentration limit contained in the
federal law.
The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
Dividends
The Federal Reserve has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition.
The Federal Reserve also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations
adopted by the Federal Reserve, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized" under the prompt corrective
action regulations.
Stock Repurchases
Bank holding companies, except for certain "well-capitalized" and highly
rated bank holding companies, are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption
if it determines that the proposal would constitute an unsafe or unsound
practice or would violate any law, regulation, Federal Reserve order, or any
condition imposed by, or written agreement with, the Federal Reserve.
Capital Requirements
The Federal Reserve has established capital adequacy guidelines for bank
holding companies that generally parallel the capital requirements of the FDIC
for the Bank. The Federal Reserve regulations provide that capital standards
will be applied on a consolidated basis in the case of a bank holding company
with $150 million or more in total consolidated assets.
The Company's total risk based capital must equal 8% of risk-weighted
assets and one half of the 8%, or 4%, must consist of Tier 1 (core) capital.
As of September 30, 2000, the Company's total risk based capital was 27.7% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
26.7% of risk-weighted assets.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is
30
<PAGE>
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also require that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new
rules will have no effect on the net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be determined under the experience method using a formula based
on actual bad debt experience over a period of years or, if the Bank is a
"large" association (assets in excess of $500 million) on the basis of net
charge-offs during the taxable year. The new rules allow an institution to
suspend bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institutions average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase
or home improvement loans are included and the institution can elect to have
the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes). See "REGULATION OF THE BANK --
Dividends" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. In addition, only 90% of
AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses).
31
<PAGE>
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Bank's federal income tax returns have been audited through
September 30, 1997. The Bank did not incur any net increase in tax liability
as a result of the audit.
Washington Taxation
The Bank is subject to a business and occupation tax imposed under
Washington law at the rate of 1.50% of gross receipts. Interest received on
loans secured by mortgages or deeds of trust on residential properties is
exempt from such tax.
Competition
The Bank operates in an intensely competitive market for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from large commercial banks, thrift institutions and credit
unions in its primary market area. Particularly in times of high interest
rates, the Bank has faced additional significant competition for investors'
funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes principally
from mortgage bankers, commercial banks and other thrift institutions. Such
competition for deposits and the origination of loans may limit the Bank's
future growth and earnings prospects.
Subsidiary Activities
The Bank has one wholly-owned subsidiary, Timberland Service Corporation
("Timberland Service"), whose primary function is to act as the Bank's escrow
department.
Personnel
As of September 30, 2000, the Bank had 111 full-time employees and 13
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank believes its relationship with its employees is
good.
Item 2. Properties
-------------------
The Bank operates 11 full-service facilities. The Bank owns all of its
offices. In October 1999, the Bank converted the Silverdale loan production
office to a full service branch in Poulsbo (Kitsap County), Washington, and in
November 1999, the Bank opened a full service branch in Spanaway (Pierce
County), Washington.
The following table sets forth certain information regarding the Bank's
offices at September 30, 2000, all of which are owned.
32
<PAGE>
Approximate
Square
Location Year Opened Footage Deposits
-------- ----------- ------- --------
(In thousands)
Main Office:
624 Simpson Avenue 1966 7,700 $ 63,315
Hoquiam, Washington 98550
300 N. Boone Street 1974 3,400 25,281
Aberdeen, Washington 98520
314 Main South 1975 2,800 33,067
Montesano, Washington 98563
361 Damon Road 1977 2,100 20,986
Ocean Shores, Washington 98569
2418 Meridian East 1980 2,400 32,158
Edgewood, Washington 98371
12814 Meridian East (South Hill) 1996 4,200 10,606
Puyallup, Washington 98373
202 Auburn Way South 1994 4,200 13,971
Auburn, Washington 98002
1201 Marvin Road, N.E. 1997 4,400 6,007
Lacey, Washington 98516
101 Yelm Avenue W. 1999 1,800 3,628
Yelm, Washington 98597
20464 Viking Way NW 1999 3,380 1,019
Poulsbo, Washington 98370
2419 224th Street E. 1999 3,865 2,573
Spanaway, Washington 98387
Data Center:
422 6th Street 1990 2,700 N/A
Hoquiam, Washington 98550
The Bank also operates 13 proprietary ATMs that are part of a nationwide
cash exchange network.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties
in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
33
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
--------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market under
the symbol "TSBK". As of September 30, 2000, there were 4,793,295 shares of
common stock outstanding and approximately 825 shareholders of record,
excluding persons or entities who hold stock in nominee or "street name"
accounts with brokers. Dividend payments by the Company are dependent
primarily on dividends received by the Company from the Bank. Under federal
regulations, the dollar amount of dividends the Bank may pay is dependent upon
its capital position and recent net income. Generally, if the Bank satisfies
its regulatory capital requirements, it may make dividend payments up to the
limits prescribed in the FDIC regulations. However, institutions that have
converted to a stock form of ownership may not declare or pay a dividend on,
or repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in connection with the
mutual to stock conversion.
The following table sets forth the market price range of the Company's
common stock for the year ended September 30, 2000. This information was
provided by the Nasdaq Stock Market.
High Low Dividends
---- --- ---------
Fiscal 2000
-----------
First Quarter $12.06 $10.75 $0.08
Second Quarter $11.25 $ 9.81 $0.08
Third Quarter $10.88 $ 9.06 $0.09
Fourth Quarter $12.56 $10.31 $0.10
Fiscal 1999
-----------
First Quarter $14.38 $10.00 $0.06
Second Quarter $13.00 $11.41 $0.06
Third Quarter $12.06 $10.69 $0.07
Fourth Quarter $13.25 $11.44 $0.08
Fiscal 1998
-----------
First Quarter N/A N/A N/A
Second Quarter $18.75 $14.50 N/A
Third Quarter $18.50 $15.50 $0.06
Fourth Quarter $16.75 $10.75 $0.06
34
<PAGE>
Item 6. Selected Financial Data
--------------------------------
The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company and
subsidiaries at and for the dates indicated. Since the Company had not
commenced operations prior to the Bank's mutual-to-stock conversion in January
1998, the financial information presented for the periods prior to 1998 is
that of the Bank only. The consolidated data is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiary presented herein.
At September 30,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets................$368,080 $307,116 $265,709 $211,553 $194,357
Loans receivable and
loans held for sale, net... 313,006 256,085 199,221 187,027 176,495
Investment securities
held-to-maturity........... -- -- -- -- --
Investment securities
available-for-sale......... 17,506 17,664 17,860 1,587 1,572
Mortgage-backed securities
held-to-maturity........... -- -- -- 3,990 4,951
Mortgage-backed securities
available-for-sale......... 11,569 13,992 17,555 -- --
Cash and due from financial
institutions interest-
bearing deposits in banks.. 12,002 8,126 21,784 11,446 5,055
Deposits.................... 212,611 188,148 170,834 173,003 156,549
FHLB advances............... 81,137 45,084 11,618 12,241 14,354
Shareholders' equity........ 72,312 72,245 81,780 24,645 21,329
Year Ended September 30,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
SELECTED OPERATING DATA:
Interest and dividend
income.....................$ 28,362 $ 23,109 $ 20,650 $ 17,947 $ 16,500
Interest expense............ 12,427 8,363 8,144 8,386 7,629
-------- --------- -------- -------- --------
Net interest income......... 15,935 14,746 12,506 9,561 8,871
Provision for loan losses... 885 363 200 597 70
-------- --------- -------- -------- --------
Net interest income after
provision for loan losses.. 15,050 14,383 12,306 8,964 8,801
Noninterest income.......... 1,738 592 1,540 1,235 688
Noninterest expense......... 7,966 7,160 6,340 5,040 5,392
Income before income taxes.. 8,822 7,815 7,506 5,159 4,097
Provision for income taxes.. 2,925 2,597 2,410 1,830 1,419
-------- --------- -------- -------- --------
Net income..................$ 5,897 $ 5,218 $ 5,096 $ 3,329 $ 2,678
======== ========= ======== ======== ========
Earnings per common share:
Basic......................$ 1.31 $ 1.03 $ 0.84 N/A N/A
Diluted....................$ 1.31 $ 1.03 $ 0.84 N/A N/A
Dividends per share........$ 0.35 $ 0.27 $ 0.12 N/A N/A
35
<PAGE>
At September 30,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OTHER DATA:
Number of real estate
loans outstanding.......... 3,000 2,797 2,708 2,679 2,512
Deposit accounts............ 24,195 22,527 22,014 21,668 19,994
Full-service offices........ 11 9 8 8 7
At or For the Year Ended
September 30,
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average
assets (1)............... 1.75% 1.89% 1.99% 1.62% 1.46%
Return on average
equity (2)............... 8.27 6.95 7.56 14.39 13.21
Interest rate spread (3)... 3.85 4.25 3.87 4.18 4.34
Net interest margin (4).... 4.95 5.56 5.13 4.84 4.97
Average interest-earning
assets to average
interest-bearing
liabilities.............. 128.55 141.50 137.84 115.60 114.76
Noninterest expense as a
percent of average
total assets.............. 2.37 2.60 2.47 2.46 2.93
Efficiency ratio (5)....... 45.07 46.68 45.14 46.68 56.41
Book value per share....... $15.09 $13.85 $13.02 N/A N/A
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans
as a percent of loans
receivable, net (6)....... 1.14 1.56 2.39 4.06 0.86
Nonperforming assets as a
percent of total assets... 1.52 1.60 2.46 3.83 0.85
Allowance for loan losses
as a percent of total
loans receivable, net (6). 0.84 0.80 0.86 0.91 0.64
Allowance for losses as a
percent of nonperforming
loans..................... 73.09 50.92 36.00 22.39 74.54
Net charge-offs to average
outstanding loans......... 0.01 -- -- 0.01 --
Capital Ratios:
Total equity-to-assets
ratio..................... 19.65 23.52 30.78 11.65 10.97
Average equity to average
assets (7)................ 21.19 27.25 26.27 11.28 11.02
-------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average interest-bearing liabilities.
(4) Net interest income (before provision for loan losses) as a percentage
of average interest-earning assets.
(5) Other expenses (excluding federal income tax expense) divided by the sum
of net interest income and noninterest income.
(6) Loans receivable includes loans held for sale and is not net of
allowance for loan losses.
(7) Average total equity divided by average total assets.
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the consolidated
financial condition and results of operations of the Company. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and accompanying notes thereto. Management's Discussion
and Analysis of Financial Condition and Results of Operations and other
portions of this Annual Report contain certain "forward-looking statements"
concerning the future operations of Timberland Bancorp, Inc. Management
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in our
Annual Report. We have used "forward-looking statements" to describe future
plans and strategies, including our expectations of the Company's future
financial results. Management's ability to predict results or the effect of
future plans or strategies is inherently uncertain. Factors which could
affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole, the ability
of the Company to control costs and expenses, the ability of the Company to
efficiently incorporate acquisitions into its operations, competitive products
and pricing, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
"forward-looking statements," and undue reliance should not be placed on such
statements.
Operating Strategy
The Bank is a community-oriented bank which has traditionally offered a
wide variety of savings products to its retail customers while concentrating
its lending activities on real estate loans. The primary elements of the
Bank's operating strategy include:
Emphasize Residential Mortgage Lending and Residential Construction
Lending. The Bank has attempted to establish itself as a niche lender in its
primary market areas by focusing its lending activities primarily on the
origination of loans secured by one- to- four family residential dwellings,
including an emphasis on loans for the construction of residential dwellings.
In an effort to meet the credit needs of borrowers in its primary area, the
Bank actively originates one- to- four family mortgage loans that do not
qualify for sale in the secondary market under FHLMC guidelines. The Bank
also originates loans secured by multi-family and commercial real estate
properties and, to a lesser extent, originates consumer loans. The Bank has
also been an active participant in the secondary market, originating
residential loans for sale to the FHLMC on a servicing retained basis. The
Bank also established a business banking division in July 1998 to increase the
Bank's origination of commercial business loans.
Diversify Primary Market Area by Expanding Branch Office Network. In an
effort to lessen its dependence on the Grays Harbor County market whose
economy has historically been tied to the timber and fishing industries, the
Bank has opened branch offices in Pierce, King, Thurston and Kitsap Counties.
Thurston, Pierce, King and Kitsap Counties contain the Olympia, Bremerton, and
Seattle-Tacoma metropolitan areas and their economies are more diversified
with the presence of government, aerospace and computer industries.
Limit Exposure to Interest Rate Risk. In recent years, the loans that
the Bank has retained in its portfolio generally have periodic interest rate
adjustment features or have been relatively short-term in nature. Loans
originated for portfolio primarily have included ARM loans and short-term
construction loans. Longer fixed-rate mortgage loans have generally been
originated for sale in the secondary market. Management believes that the
interest rate sensitivity of these adjustable rate and short-term loans more
closely match the interest rate sensitivity of the Bank's funding sources than
do other longer duration assets with fixed interest rates. Due to the current
interest rate environment, the
37
<PAGE>
Bank has increased its retention of 15 and 30 year fixed-rate mortgage loans.
Such loans are retained and designated as loans held for sale.
Market Risk and Asset and Liability Management
General. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from interest
rate risk inherent in its lending, investment, deposit and borrowing
activities. The Bank, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. Management actively
monitors and manages its interest rate risk exposure. Although the Bank
manages other risks, such as credit quality and liquidity risk, in the normal
course of business management considers interest rate risk to be its most
significant market risk that could potentially have the largest material
effect on the Bank's financial condition and results of operations. The Bank
does not maintain a trading account for any class of financial instruments nor
does it engage in hedging activities or derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
Qualitative Aspects of Market Risk. The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Bank has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage
the mismatch between asset and liability maturities and interest rates. The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Bank's interest-earning assets by retaining in its
portfolio, short-term loans and loans with interest rates subject to periodic
adjustments. The Bank relies on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered deposits,
reduce the effects of interest rate fluctuations because they generally
represent a more stable source of funds. As part of its interest rate risk
management strategy, the Bank promotes transaction accounts and certificates
of deposit with terms of up to six years.
The Bank has adopted a strategy that is designed to substantially match
the interest rate sensitivity of assets relative to its liabilities. The
primary elements of this strategy involve the origination of ARM loans for its
portfolio; maintaining residential construction loans as a portion of total
net loans receivable because of their generally shorter terms and higher
yields than other one- to- four family residential mortgage loans; matching
asset and liability maturities; investing in short-term securities; the
origination of fixed-rate loans for retention or sale in the secondary market
and the retention of the related loan servicing rights.
Sharp increases or decreases in interest rates may adversely affect the
Bank's earnings. However, based on a rate shock analysis prepared by the FHLB
of Seattle, an increase in interest rates of up to 100 basis points would
increase the Bank's projected net interest income, primarily because a larger
portion of the Bank's interest rate sensitive assets than interest rate
sensitive liabilities would reprice within a one year period. Management has
sought to sustain the match between asset and liability maturities and rates,
while maintaining an acceptable interest rate spread. Pursuant to this
strategy, the Bank actively originates adjustable rate loans for retention in
its loan portfolio. Fixed-rate mortgage loans generally are originated for
the immediate or future resale in the secondary mortgage market. At
September 30, 2000, adjustable rate mortgage loans and adjustable rate
mortgage-backed securities constituted $166.7 million or 48.6%, of the Bank's
total combined mortgage loan and mortgage-backed securities portfolio.
Although the Bank has sought to originate ARM loans, the ability to originate
such loans depends to a great extent on market interest rates and borrowers'
preferences. Particularly in lower interest rate environments, borrowers
often prefer to obtain fixed rate loans.
Consumer loans and construction and land development loans typically have
shorter terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Bank's exposure to fluctuations in interest rates. At
September 30, 2000, the construction and land development, and consumer loan
portfolios amounted to $89.9 million and $15.9 million, or 25.5% and 4.5% of
total loans receivable (including loans held for sale), respectively.
38
<PAGE>
Quantitative Aspects of Market Risk. Management of the Bank monitors the
Bank's interest rate sensitivity through the use of a model provided for the
Bank by the FHLB of Seattle. The model estimates the changes in NPV (net
portfolio value) and net interest income in response to a range of assumed
changes in market interest rates. The model first estimates the level of the
Bank's NPV (market value of assets, less market value of liabilities, plus or
minus the market value of any off-balance sheet items) under the current rate
environment. In general, market values are estimated by discounting the
estimated cash flows of each instrument by appropriate discount rates. The
model then recalculates the Bank's NPV under different interest rate
scenarios. The change in NPV under the different interest rate scenarios
provides a measure of the Bank's exposure to interest rate risk. The
following table is provided by the FHLB of Seattle based on data at September
30, 2000.
Net Interest Income Current Market Value
Projected ----------------------------- -----------------------------
Interest Rate Estimated $ Change % Change Estimated $ Change % Change
Scenario Value from Base from Base Value from Base from Base
-------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
+400 $13,156 $(1,196) (8.33)% $44,876 $(13,592) (23.25)%
+300 13,651 (701) (4.89) 48,696 (9,772) (16.71)
+200 14,135 (217) (1.51) 52,263 (6,205) (10.61)
+100 14,471 119 0.83 55,684 (2,784) (4.76)
BASE 14,352 -- -- 58,468 -- --
-100 13,993 (359) (2.50) 58,523 56 0.10
-200 13,297 (1,055) (7.35) 56,241 (2,227) (3.81)
-300 12,685 (1,667) (11.61) 54,084 (4,384) (7.50)
-400 12,212 (2,140) (14.91) 52,938 (5,530) (9.46)
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan repayments and deposit decay, and should not be relied
upon as indicative of actual results. Furthermore, the computations do not
reflect any actions management may undertake in response to changes in
interest rates.
In the event of a 200 basis point decrease in interest rates, the Bank
would be expected to experience an 3.8% decrease in NPV and a 7.4% decrease in
net interest income. In the event of a 200 basis point increase in interest
rates, a 10.6% decrease in NPV and an 1.5% decrease in net interest income
would be expected. Based upon the modeling described above, the Bank's asset
and liability structure generally results in decreases in NPV and decreases in
net interest income in a declining interest rate scenario and decreases in
NPV. This structure also generally results in decreases in net interest
income in a rising interest rate environment. However, the amount of change
in value of specific assets and liabilities due to changes in rates is not the
same in a rising rate environment as in a falling rate environment.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could possibly deviate significantly
from those assumed in calculating the table.
39
<PAGE>
Comparison of Financial Condition at September 30, 2000 and 1999
Total Assets: Total assets increased 19.9% to $368.1 million at September
30, 2000 from $307.1 million at September 30, 1999. The increase was
concentrated on loans receivable and loans held for sale, which grew $56.9
million, primarily funded by increased Federal Home Loan Bank ("FHLB")
borrowings and increased deposits. Asset growth was partially offset by the
use of $4.6 million to repurchase shares of the Company's stock.
Cash and Due from Financial Institutions: Cash and due from financial
institutions and interest-bearing deposit balances in banks increased to $12.0
million at September 30, 2000 from $8.1 million at September 30, 1999.
Investments and Mortgage-backed Securities: Investments and mortgage-
backed securities decreased 8.2% to $29.1 million at September 30, 2000 from
$31.7 million at September 30, 1999, primarily as a result of redemptions to
fund share repurchases and scheduled amortization and prepayments. For
additional details on investments and mortgage-backed securities see Note 2 to
the Notes to Consolidated Financial Statements contained in "Item 8, Financial
Statements and Supplementary Data."
Loans Receivable, and Loans Held-for-Sale, Net of Allowance for Loan
Losses: Loans receivable, including loans held-for-sale, net, increased 22.2%
to $313.0 million at September 30, 2000 from $256.1 million at September 30,
1999. This increase is primarily centered in one-to-four family mortgage
loans, multi-family mortgage loans, commercial mortgage loans and land loans
held in the Bank's portfolio.
Real Estate Owned, Net: Real estate owned, net, increased to $2.0 million
at September 30, 2000 from $867,000 at September 30, 1999. This balance
increased as the Bank foreclosed on a convenience store (with retail space)
and was the successful bidder on the property at a sheriff's sale in January
2000. The property is classified as REO with a balance of $1.3 million at
September 30, 2000. For additional information see "Item 1, Business --
Lending Activities -- Nonperforming Assets" and Note 5 to the Notes to
Consolidated Financial Statements contained in "Item 8, Financial Statements
and Supplementary Data."
Deposits: Deposits increased 13.0% to $212.6 million at September 30,
2000 from $188.1 million at September 30, 1999, primarily due to growth of
$15.6 million in the Bank's certificate of deposit accounts and smaller
increases in the non-interest bearing accounts, N.O.W. checking accounts and
money market accounts.
Borrowings: Borrowings increased 80.0% to $81.1 million at September 30,
2000 from $45.1 million at September 30, 1999, due to increased FHLB advances,
which were primarily used to fund loan portfolio growth.
Shareholders' Equity: Total shareholders' equity increased to $72.3
million at September 30, 2000 from $72.2 million at September 30, 1999,
primarily as a result of net income of $5.9 million, a $528,000 reduction in
the equity component related to the unearned shares issued to the Employee
Stock Ownership Trust, and an $87,000 decrease in Accumulated Other
Comprehensive Loss category. These increases to shareholder's equity were
partially offset by the repurchase of 424,127 shares of the Company's stock
for $4.6 million and the payment of $1.7 million in dividends to shareholders.
On June 26, 2000 the Company announced a plan to repurchase 243,040
shares of its common stock. This was the Company's seventh 5% stock
repurchase plan since the Bank's conversion to a public company in January of
1998. As of September 30, 2000, the Company had repurchased 67,500 of these
243,040 shares at an average price per share of $11.56.
Comparison of Financial Condition at September 30, 1999 and 1998
Total Assets: Total assets increased 15.6% to $307.1 million at
September 30, 1999 from $265.1 million at September 30, 1998, primarily as a
result of a $56.9 million increase in loans receivable and loans held for
sale, net
40
<PAGE>
of allowance for loan losses, which was primarily funded by increased FHLB
borrowings and increased deposits. The asset growth due to the increase in
the loan portfolio was partially offset by the use of $13.1 million to
repurchase shares of the Company's stock.
Cash and Due from Financial Institutions: Cash and due from financial
institutions and interest-bearing deposit balances in banks decreased by 62.7%
to $8.1 million at September 30, 1999 from $21.8 million at September 30,
1998. This decrease is primarily due to $13.1 million in funds used to
repurchase 1,064,453 shares of the Company's stock. These shares were
repurchased in October 1998, February 1999 and September 1999.
Investments and Mortgage-backed Securities: Investments and
mortgage-backed securities decreased by 10.6% to $31.7 million at September
30, 1999 from $35.4 million at September 30, 1998, primarily as a result of
scheduled amortization, prepayments, maturities, and sales. For additional
details on investments and mortgage- backed securities see Note 2 to the Notes
to Consolidated Financial Statements contained in "Item 8, Financial
Statements and Supplementary Data."
Loans Receivable, and Loans Held-for-Sale, Net of Allowance for Loan
Losses: Loans receivable, including loans held-for-sale, net, increased by
28.5% to $256.1 million at September 30, 1999 from $199.2 million at September
30, 1998. This increase is primarily a result of an increase in one-to-four
family mortgage loans, construction and land development loans, commercial
mortgage loans, multi-family loans, and commercial business loans held in the
Bank's portfolio.
Real Estate Owned, Net: Real estate owned, net, decreased to $867,000 at
September 30, 1999 from $1.7 million at September 30, 1998. This decrease is
primarily attributable to a $741,000 decrease in the real estate owned balance
of the condominium project that the Bank accepted a deed in lieu of
foreclosure on in November 1997. For additional information see "Item 1,
Business -- Lending Activities --Nonperforming Assets."
Deposits: Deposits increased by 10.1% to $188.1 million at September 30,
1999 from $170.8 million at September 30, 1998. This increase is primarily
attributable to growth of $9.9 million in the Bank's certificate of deposit
accounts and smaller increases in non-interest bearing accounts, passbook
savings accounts, and money market accounts.
Borrowings: Borrowings increased by 288.1% to $45.1 million at September
30, 1999 from $11.6 million at September 30, 1998 due to increased FHLB
advances, which were primarily used to fund loan portfolio growth.
Shareholders' Equity: Total shareholders' equity decreased by 11.7% to
$72.2 million at September 30, 1999 from $81.8 million at September 30, 1998,
primarily as a result of the repurchase of 1,064,453 shares of the Company's
stock for $13.1 million, and is partially offset by net income of $5.2 million
(less dividends paid of $1.5 million).
Comparison of Operating Results for Years Ended September 30, 2000 and 1999
Net Income: Net income increased to $5.9 million or $1.31 per basic share
($1.31 per diluted share) for the year ended September 30, 2000 from net
income of $5.2 million or $1.03 per basic share ($1.03 per diluted share) for
the year ended September 30, 1999. Net income for the year ended September
30, 2000 was increased by a $408,000 ($269,000 after income tax) market value
recovery on loans held for sale and the receipt of $290,000 ($191,000 after
income tax) of delinquent interest and fee income on a large non-performing
asset. Also affecting net income for the current year was a $522,000 ($345,000
after income tax) increase in the provision for loan losses (compared to the
same period in 1999) primarily due to loan portfolio growth. Net income for
the year ending September 30, 1999 was reduced by market value writedowns on
loans held for sale of $583,000 ($385,000 after income tax), and was partially
offset by the recognition of $442,000 ($292,000 after income tax) of
delinquent interest and fee income on two large non-performing loans.
41
<PAGE>
Net Interest Income: Net interest income increased 8.1% to $15.9 million
for the year ended September 30, 2000 from $14.7 million for the year ended
September 30, 1999. Interest income for the twelve months ended September 30,
2000 and September 30, 1999 included $281,000 and $442,000 of delinquent
interest received on large non-performing loans, respectively. The increase
in net interest income was primarily a result of increased interest income
from the Bank's larger loan portfolio. Average loan balances increased to
$289.4 million for the twelve months ended September 30, 2000 from $223.7
million for the twelve months ended September 30, 1999. The increased
interest income from the larger loan portfolio was partially offset by
increased interest expense due to increased deposits and FHLB advances.
Net interest margin was 4.95% (or 4.86% without the $281,000 in
delinquent interest received) for the year ended September 30, 2000 compared
to a net interest margin of 5.56% (or 5.40% without the $442,000 in delinquent
interest received) for the year ended September 30, 1999. The Company's lower
net interest margin is primarily a result of the increased use of higher
costing funds (FHLB Advances and certificates of deposit) to support the
Bank's loan growth. Also, the Company's net interest margin has been impacted
by reduced earnings resulting from a smaller investment portfolio, as a
portion of the interest bearing investments have been used to fund the
Company's stock repurchase program.
Interest expense increased 48.6% to $12.4 million for the year ended
September 30, 2000 from $8.4 million at September 30, 1999, due to a $2.9
million increase in interest expense on deposits (resulting from both volume
and average rate increases) and $3.0 million in increased interest related to
borrowings primarily used to fund loan growth.
Provision for Loan Losses: The provision for loan losses increased to
$885,000 for the year ended September 30, 2000 from $363,000 for the year
ended September 30, 1999. Management increased the provision for loan losses
primarily due to growth in the Bank's loan portfolio. Management deemed the
general loan loss reserves of $2.6 million at September 30, 2000 (0.84% of
loans receivable and loans held for sale and 73.1% of non-performing loans)
adequate to provide for estimated losses based on an evaluation of known and
inherent risks in the loan portfolio at that date.
Despite experiencing a higher percentage of non-performing loans than
some peer group averages, the Company's actual net charge-offs continue to
remain relatively small. For the year ended September 30, 2000 net charge-
offs and transfers were $301,000. Over the last five fiscal years, the
Company's combined net charge-offs and transfers have totaled only $592,000.
For additional information see "Item 1, Business -- Lending Activities --
Allowance for Loan Losses."
Noninterest Income: Total noninterest income increased to $1.7 million
for the year ended September 30, 2000 from $592,000 for the year ended
September 30, 1999. This increase is primarily due to a combined change of
$991,000 in the market value adjustments on loans held for sale as the Company
had a $408,000 market value recovery for the year ended September 30, 2000
compared to a $583,000 market value writedown for the year ended September 30,
1999. Smaller increases in service charges on deposits, gains on sale of
loans and other fees also contributed to the overall increase.
Noninterest Expense: Total noninterest expense increased 11.3% to $8.0
million for the year ended September 30, 2000 from $7.2 million for the year
ended September 30, 1999. The increase in noninterest expense is primarily
due to a $289,000 increase in salary and employee benefit expense, a $103,000
increase in premises and equipment expense, a $90,000 increase in advertising
expense, and an $88,000 increase in the cost of REO operations. The increase
in noninterest expense was also in connection with the establishment of a
$150,000 reserve associated with a check-kiting situation that resulted in a
checking account overdraft. The individual involved with the checking-kiting
scheme has made regular payments to resolve the overdraft. While no
assurances can be given, the Bank expects to fully recover the overdraft.
42
<PAGE>
Provision for Income Taxes: The provision for income taxes increased to
$2.9 million for the year ended September 30, 2000 from $2.6 million for the
year ended September 30, 1999 primarily as a result of higher income before
income taxes. The effective tax rate in both years was 33.2%.
Comparison of Operating Results for Years Ended September 30, 1999 and 1998
Net Income: Net income increased to $5.2 million, or $1.03 per basic
share ($1.03 per diluted share) for the year ended September 30, 1999 from
$5.1 million, or $0.84 per basic share ($0.84 per diluted share) for the year
ended September 30, 1998.
Net Interest Income: Net interest income increased 17.9% to $14.7 million
for the year ended September 30, 1999 from $12.5 million for the year ended
September 30, 1998, primarily as a result of increased interest income from
growth in the Bank's loan portfolio.
Interest and dividend income increased by 11.9% to $23.1 million for the
year ended September 30, 1999 from $20.7 million for the year ended September
30, 1998 primarily due to increased interest income on loans receivable. This
increase was primarily a result of growth in the Bank's loan portfolio as
average loans receivable increased to $223.7 million for the year ended
September 30, 1999 from $192.1 million for the year ended September 30, 1998.
Interest income was also increased by $442,000 of delinquent interest and fee
income that was received on two large nonperforming loans.
Interest expense increased by 2.7% to $8.4 million for the year ended
September 30, 1999 from $8.1 million for the year ended September 30, 1998,
primarily due to increased interest expense on FHLB advances.
Provision for Loan Losses: Provision for loan losses increased to
$363,000 for the year ended September 30, 1999 from $200,000 for the year
ended September 30, 1998. Management increased the provision primarily due to
growth in the Bank's loan portfolio. Management deemed the loan loss reserves
of $2.1 million at September 30, 1999 (0.80% of loans receivable and loans
held for sale and 50.9% of non-performing loans) adequate to provide for
estimated losses based on an evaluation of known and inherent risks in the
loan portfolio at that date. For additional information, see "Item 1,
Business -- Lending Activities -- Nonperforming Assets" included herein.
Noninterest Income: Total noninterest income decreased 61.6% to $592,000
for the year ended September 30, 1999 from $1.5 million for the year ended
September 30, 1998, primarily due to market value writedowns on loans held for
sale of $583,000. Decreases in servicing income on loans sold of $269,000 and
gains on sale of loans of $205,000 also contributed to the overall decrease.
These decreases were partially offset by a $123,000 increase in service
charges on deposits.
Noninterest Expense: Total noninterest expense increased 12.9% to $7.2
million for the year ended September 30, 1999 from $6.3 million for the year
ended September 30, 1998. The largest portion of this increase is a result of
a $374,000 increase in salary and employee benefit expense, which is primarily
a result of hiring additional employees to staff the new branches. Smaller
increases in expenses relating to premises and equipment, advertising, and
ATMs accounted for the majority of the remaining increase.
Provision for Income Taxes: The provision for income taxes increased to
$2.6 million for the year ended September 30, 1999 from $2.4 million for the
year ended September 30, 1998 primarily as a result of higher income before
income taxes.
Nonperforming Assets
Information with respect to the Bank's nonperforming assets at September
30, 2000 and September 30, 1999 is contained in "Item 1, Business -- Lending
Activities -- Nonperforming Assets and Delinquencies."
43
<PAGE>
Average Balances, Interest and Average Yields/Cost
The earnings of the Company depend largely on the spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities,
as well as the relative amount of the Company's interest-earning assets and
interest- bearing liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts 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 weekly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from weekly balances. Management does not believe that the use of
weekly balances instead of daily balances has caused any material difference
in the information presented.
44
<PAGE>
<TABLE>
Year Ended September 30,
---------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- -----------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2)... $289,377 $26,325 9.10% $223,691 $20,721 9.26% $192,082 $17,712 9.22%
Mortgage-backed and
investment securities.... 18,966 1,183 6.24 23,087 1,382 5.99 17,013 1,067 6.27
FHLB stock and equity
securities............... 11,009 713 6.48 13,106 766 5.84 2,824 180 6.69
Interest-bearing deposits. 2,697 141 5.23 5,132 240 4.68 31,901 1,682 5.27
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets................ 322,049 28,362 8.81 265,016 23,109 8.72 243,820 20,650 8.47
Non-interest-earning assets. 14,457 10,653 12,816
-------- -------- --------
Total assets............ $336,506 $275,669 $256,636
======== ======== ========
Interest-bearing liabilities:
Passbook accounts......... 27,183 694 2.55 $ 26,783 695 2.59 $ 33,025 906 2.74
Money market accounts..... 18,947 741 3.91 16,752 628 3.75 14,299 543 3.80
NOW accounts.............. 22,414 384 1.71 21,283 363 1.71 20,139 390 1.94
Certificates of deposit... 117,466 6,574 5.60 102,506 5,590 5.45 97,434 5,631 5.78
FHLB advances-other
borrowed money........... 64,518 4,034 6.25 19,967 1,087 5.44 11,991 674 5.62
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities........... 250,528 12,427 4.96 187,291 8,363 4.47 176,888 8,144 4.60
Non-interest bearing
liabilities............... 14,656 13,271 12,337
-------- -------- --------
Total liabilities....... 265,184 200,562 189,225
Shareholders' equity........ 71,322 75,107 67,411
-------- -------- --------
Total liabilities and
shareholders' equity... $336,506 $275,669 $256,636
======== ======== ========
Net interest income......... $15,935 $14,746 $12,506
======= ======= =======
Interest rate spread........ 3.85% 4.25% 3.87%
==== ==== ====
Net interest margin (3)..... 4.95% 5.56% 5.13%
==== ==== ====
Ratio of interest-earning
assets to average interest-
bearing liabilities........ 128.55% 141.50% 137.84%
====== ====== ======
----------------
(1) Does not include interest on loans 90 days or more past due. Includes
loans originated for sale.
(2) Average balance includes nonaccrual loans.
(3) Net interest income divided by total interest earning assets.
45
</TABLE>
<PAGE>
<TABLE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income on the
Company. Information is provided with respect to the (i) effects on interest income attributable to changes
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); (iii) changes in rate/volume (change in rate
multiplied by change in volume); and (iv) the net change (sum of the prior columns).
Year Ended September 30, Year Ended September 30,
2000 Compared to Year 1999 Compared to Year
Ended September 30, 1999 Ended September 30, 1998
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- ---------------------------------
Rate/ Net Rate/ Net
Rate Volume Volume Change Rate Volume Volume Change
---- ------ ------ ------ ---- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).............. $(362) $6,077 $(111) $5,604 $ 78 $2,916 $ 15 $3,009
Investments and mortgage-
backed securities.............. 57 (246) (10) (199) (49) 382 (18) 315
FHLB stock and equity securities.. 82 (122) (13) (53) (24) 688 (87) 577
Interest-bearing deposits......... 30 (114) (15) (99) (189) (1,411) 158 (1,442)
----- ------ ----- ------ ------ ------ ----- ------
Total net change in income
on interest-earning assets........ (193) 5,595 (149) 5,253 (184) 2,575 68 2,459
Interest-bearing liabilities:
Passbook accounts................. (11) 11 (1) (1) (50) (171) 10 (211)
NOW accounts...................... -- 21 -- 21 (48) 23 (2) (27)
Money market accounts............. 26 84 3 113 (8) 94 (1) 85
Certificate accounts.............. 153 809 22 984 (317) 293 (17) (41)
FHLB advances and other
borrowed money................... 162 2,424 361 2,947 (21) 448 (14) 413
----- ------ ----- ------ ------ ------ ----- ------
Total net change in expense
on interest-bearing liabilities... 330 3,349 385 4,064 (444) 687 (24) 219
----- ------ ----- ------ ------ ------ ----- ------
Net change in net interest income.. $(523) $2,246 $(534) $1,189 $ 260 $1,888 $ 92 $2,240
===== ====== ===== ====== ====== ====== ===== ======
---------------
(1) Excludes interest on loans 90 days or more past due. Includes loans originated for sale.
</TABLE>
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. The Company also raised $65.0 million in net
proceeds from the January 1998 stock offering. While the maturity and
scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At September 30,
2000, 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 20.3%. At September 30, 2000, the Bank also maintained
46
<PAGE>
an uncommitted credit facility with the FHLB of Seattle that provided for
immediately available advances up to an aggregate amount of $108.4 million,
under which $81.1 million was outstanding.
Liquidity management is both a short- and long-term responsibility of the
Bank's management. The Bank adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, and (iv) yields available on interest-
bearing deposits. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for repurchase
agreements.
The Bank's primary investing activity is the origination of one- to- four
family mortgage loans and construction and land development loans. During the
years ended September 30, 2000, 1999 and 1998, the Bank originated $34.2
million $41.1 million and $45.4 million of one- to- four family mortgage loans
and $69.6 million, $63.2 million and $58.1 million of construction and land
development loans, respectively. At September 30, 2000, the Bank had mortgage
loan commitments totaling $17.4 million and undisbursed loans in process
totaling $32.8 million. The Bank anticipates that it will have sufficient
funds available to meet current loan commitments. Certificates of deposit
that are scheduled to mature in less than one year from September 30, 2000
totaled $101.4 million. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature.
Federally-insured state-chartered banks are required to 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 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At September 30, 2000, the Bank was in compliance with all
applicable capital requirements. For additional details see the regulatory
capital table in Note 17 to the Notes to Consolidated Financial Statements
contained in "Item 8, Financial Statements and Supplementary Data" and "Item
1, Business -- Regulation of the Bank -- Capital Requirements."
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering the
change in the relative purchasing power of money over time due to inflation.
The primary impact of inflation on the operation of the Company is reflected
in increased operating costs. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant impact on a
financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
The information contained under "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset and Liability Management" of this Form 10-K is incorporated herein by
reference.
47
<PAGE>
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
----
Independent Auditors Report 49
Consolidated Balance Sheets as of September 30, 2000 and 1999 50
Consolidated Statements of Income For the Years Ended
September 30, 2000, 1999 and 1998 51
Consolidated Statements of Shareholders' Equity For the
Years Ended September 30, 2000, 1999 and 1998 52
Consolidated Statements of Cash Flows For the Years Ended
September 30, 2000, 1999 and 1998 53-54
Consolidated Statements of Comprehensive Income For the
Years Ended September 30, 2000, 1999 and 1998 55
Notes to Consolidated Financial Statements 56
48
<PAGE>
Independent Auditors' Report
November 2, 2000
The Board of Directors
Timberland Bancorp, Inc.
Hoquiam, Washington
We have audited the accompanying consolidated balance sheets of Timberland
Bancorp, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, cash flows
and comprehensive income for each of the years in the three-year period ended
September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Timberland
Bancorp, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000, in conformity with generally
accepted accounting principles.
/s/Knight Vale & Gregory PLLC
Tacoma, Washington
November 2, 2000
49
<PAGE>
Consolidated Balance Sheets
------------------------------------------------------------------------------
(Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
2000 1999
Assets
Cash and due from financial institutions $ 8,893 $ 6,810
Interest bearing deposits in banks 3,109 1,316
Investments and mortgage-backed securities 29,075 31,656
Loans receivable, net 284,663 233,597
Loans held for sale 28,343 22,488
313,006 256,085
Accrued interest receivable 1,756 1,480
Premises and equipment 8,614 7,621
Real estate owned 1,966 867
Other assets 1,661 1,281
Total assets $368,080 $307,116
Liabilities and Shareholders' Equity
Liabilities
Deposits $212,611 $188,148
Federal Home Loan Bank advances 81,137 45,084
Other liabilities and accrued expenses 2,020 1,639
Total liabilities 295,768 234,871
Shareholders' Equity
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued - - - -
Common stock, $0.01 par value; 50,000,000 shares
authorized; 6,612,500 shares issued, 4,793,295 and
5,217,422 shares outstanding 48 52
Additional paid-in capital 42,250 46,943
Unearned shares issued to employee stock ownership
trust (6,477) (7,005)
Retained earnings 36,795 32,646
Accumulated other comprehensive loss (304) (391)
Total shareholders' equity 72,312 72,245
Total liabilities and shareholders' equity $368,080 $307,116
See notes to consolidated financial statements.
50
<PAGE>
Consolidated Statements of Income
------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2000, 1999 and 1998
2000 1999 1998
Interest and Dividend Income
Loans receivable $26,325 $20,721 $17,712
Investments and mortgage-backed securities 1,183 1,382 1,067
Dividends from investments 713 766 189
Interest bearing deposits in banks 141 240 1,682
Total interest and dividend income 28,362 23,109 20,650
Interest Expense
Deposits 8,393 7,276 7,470
Federal Home Loan Bank advances 4,034 1,087 674
Total interest expense 12,427 8,363 8,144
Net interest income 15,935 14,746 12,506
Provision for Loan Losses 885 363 200
Net interest income after provision for
loan losses 15,050 14,383 12,306
Non-Interest Income
Service charges on deposits 507 440 317
Gain on sale of loans, net 103 74 279
Market value adjustment on loans held for sale 408 (583) 19
Gain (loss) on sale of securities available
for sale, net (22) - - 22
Escrow fees 198 240 242
Servicing income (expenses) on loans sold (2) (17) 252
Other 546 438 409
Total non-interest income 1,738 592 1,540
Non-Interest Expense
Salaries and employee benefits 4,535 4,246 3,872
Premises and equipment 960 856 730
Advertising 389 299 234
Other 2,082 1,759 1,504
Total non-interest expense 7,966 7,160 6,340
Income before federal income taxes 8,822 7,815 7,506
Federal Income Taxes 2,925 2,597 2,410
Net income $ 5,897 $ 5,218 $ 5,096
Earnings Per Common Share/Basic and Diluted $1.31 $1.03 $.84
See notes to consolidated financial statements.
51
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2000, 1999 and 1998
Unearned
Shares Accumulated
Issued to Other
Employee Compre-
Common Stock Additional Stock hensive
Paid-in Ownership Retained Income
Shares Amount Capital Trust Earnings (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 - - $- - $ - - $ - - $24,645 $ - - $ 24,645
Issuance of common stock 6,612,500 66 64,884 - - - - - - 64,950
Net income - - - - - - - - 5,096 - - 5,096
Repurchase of common stock (330,625) (3) (4,732) - - - - - - (4,735)
Cash dividends ($.12 per share) - - - - - - - - (793) - - (793)
Shares acquired for ESOP - - - - - - (7,930) - - - - (7,930)
Earned ESOP shares - - - - 31 396 - - - - 427
Change in unrealized gain on
securities available for sale,
net of tax - - - - - - - - - - 120 120
Balance,
September 30, 1998 6,281,875 63 60,183 (7,534) 28,948 120 81,780
Net income - - - - - - - - 5,218 - - 5,218
Repurchase of common stock (1,064,453) (11) (13,139) - - - - - - (13,150)
Cash dividends ($.27 per share) - - - - - - - - (1,520) - - (1,520)
Earned ESOP shares - - - - (101) 529 - - - - 428
Change in unrealized loss on
securities available for sale,
net of tax - - - - - - - - - - (511) (511)
Balance,
September 30, 1999 5,217,422 52 46,943 (7,005) 32,646 (391) 72,245
Net income - - - - - - - - 5,897 - - 5,897
Repurchase of common stock (424,127) (4) (4,599) - - - - - - (4,603)
Cash dividends ($.35 per share) - - - - - - - - (1,748) - - (1,748)
Earned ESOP shares - - - - (94) 528 - - - - 434
Change in unrealized loss on
securities available for sale,
net of tax - - - - - - - - - - 87 87
Balance,
September 30, 2000 4,793,295 $48 $42,250 ($6,477) $36,795 ($304) $ 72,312
See notes to consolidated financial statements.
52
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------
(Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2000, 1999 and 1998
2000 1999 1998
Cash Flows from Operating Activities
Net income $ 5,897 $ 5,218 $ 5,096
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 424 364 348
Deferred federal income taxes (231) (449) (33)
Earned ESOP shares 434 428 427
Federal Home Loan Bank stock dividends (224) (134) (126)
Market value adjustment on loans held
for sale (408) 583 (19)
Loss on sale of real estate owned, net 25 - - 25
(Gain) loss on sale of securities
available for sale 22 - - (22)
(Gain) loss on sale of loans (103) (74) 279
Provision for loan and real estate
owned losses 936 391 200
Net increase in loans originated for sale (5,169) (14,783) (4,618)
Net change in accrued interest receivable
and other assets, and other liabilities
and accrued expenses (89) 1,339 (714)
Net cash provided by (used in) operating
activities 1,514 (7,117) 843
Cash Flows from Investing Activities
Net (increase) decrease in interest-bearing
deposits in banks (1,793) 13,429 (8,295)
Activity in securities available for sale:
Sales 2,482 - - 312
Maturities, prepayments and calls 2,421 29,889 7,548
Purchases (1,989) (26,826) (17,025)
Activity in securities held to maturity:
Purchases - - - - (20,371)
Increase in loans receivable, net (54,139) (44,568) (11,846)
Additions to premises and equipment (1,416) (2,664) (257)
Additions to real estate owned (271) - - (663)
Proceeds from sale of real estate owned 1,109 1,498 3,097
Proceeds from sale of premises and
equipment - - 20 - -
Net cash used in investing activities (53,596) (29,222) (47,500)
Cash Flows from Financing Activities
Increase (decrease) in deposits 24,463 17,314 (2,169)
Increase (decrease) in Federal Home
Loan Bank advances 36,053 33,466 (623)
Proceeds from the issuance of common
stock, net of related costs - - - - 64,950
Repurchase of common stock (4,603) (13,150) (4,735)
Payment of dividends (1,748) (1,520) (793)
Common stock purchased for ESOP - - - - (7,930)
Net cash provided by financing activities 54,165 36,110 48,700
Net increase (decrease) in cash 2,083 (229) 2,043
Cash and Due from Financial Institutions
Beginning of year 6,810 7,039 4,996
End of year $ 8,893 $ 6,810 $ 7,039
(continued)
See notes to consolidated financial statements.
53
<PAGE>
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2000, 1999 and 1998
2000 1999 1998
Supplemental Disclosures of Cash Flow
Information
Income taxes paid $ 3,195 $2,975 $3,012
Interest paid 12,151 8,171 8,202
Supplemental Disclosures of Non-Cash
Investing Activities
Transfer of securities from held to
maturity to available for sale $ - - $ - - $20,375
Market value adjustment of securities
held for sale, net of tax 87 (511) 120
Loans transferred to real estate owned 2,013 581 3,909
See notes to consolidated financial statements.
54
<PAGE>
Consolidated Statements of Comprehensive Income
------------------------------------------------------------------------------
(Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries
Years Ended September 30, 2000, 1999 and 1998
2000 1999 1998
Comprehensive Income
Net income $5,897 $5,218 $5,096
Change in unrealized gains (losses)
on securities available for sale,
net of tax 87 (511) 120
Total comprehensive income $5,984 $4,707 $5,216
See notes to consolidated financial statements.
55
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Timberland
Bancorp, Inc. (the Company); its wholly owned subsidiary, Timberland Savings
Bank, SSB (the Bank); and the Bank's wholly owned subsidiary, Timberland
Service Corp. All significant intercompany transactions and balances have
been eliminated.
Nature of Operations
The Company is a holding company which operates primarily through its
subsidiary, the Bank. The Bank was established in 1915 and, through its
eleven branches located in Grays Harbor, Pierce, Thurston, Kitsap and King
Counties in Washington State, attracts deposits from the general public, and
uses those funds, along with other borrowings, to provide primarily real
estate loans to borrowers in western Washington, and to invest in investment
securities and mortgage-backed securities.
Consolidated Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities, as of
the date of the balance sheet, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of foreclosed real estate and
deferred tax assets.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
Conversion
In connection with the January 1998 conversion of the Bank from a
Washington-chartered mutual savings bank to a Washington-chartered stock
savings bank, a holding company, Timberland Bancorp, Inc. was formed. The
simultaneous conversion of the Bank to stock form, the issuance of the Bank's
common stock to the Company, and the offering and sale of the Company's common
stock to the public are referred to herein as "the conversion."
In the conversion, 6,612,500 common shares were sold at a subscription price
of $10 per share, resulting in net proceeds of approximately $64,950,000 to
the Company after $1,175,000 in offering expenses.
(continued)
56
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (continued)
Investments and Mortgage-Backed Securities
Debt and equity securities that will be held for indefinite periods of time,
including securities that may be sold in response to changes in market
interest rates, prepayment rates, need for liquidity, and changes in the
availability of and the yield of alternative investments, are considered
securities available for sale, and are reported at fair value. Fair value is
determined using published quotes as of the close of business on reporting
dates. Unrealized gains and losses are excluded from earnings, and are
reported as a separate component of shareholders' equity, net of the related
deferred tax effect, entitled "Accumulated other comprehensive income (loss)."
Realized gains and losses on securities available for sale, determined using
the specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
Loans Receivable
Loans are stated at the amount of unpaid principal, reduced by the undisbursed
portion of loans in process, unearned income and an allowance for loan losses.
Allowances for Losses
Allowances for losses on specific problem loans and real estate owned are
charged to earnings when it is determined that the value of these loans and
properties, in the judgment of management, is impaired. In addition to
specific reserves, the Bank also maintains general provisions for loan losses
based on evaluating known and inherent risks in the loan portfolio, including
management's continuing analysis of the factors and trends underlying the
quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the
loans. The ultimate recovery of loans is susceptible to future market factors
beyond the Bank's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated financial statements.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118.
These statements address the disclosure requirements and allocation of the
allowance for loan losses for certain impaired loans. A loan within the scope
of these statements is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement,
including scheduled interest payments. The Bank excludes smaller balance
homogenous loans, including single-family residential and consumer loans, from
the scope of these statements.
(continued)
57
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (continued)
Allowances for Losses (concluded)
When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such case, impairment is
measured at current fair value of the collateral, reduced by estimated selling
costs. When the measurement of the impaired loan is less than the recorded
investment in the loan, including accrued interest and net unamortized
deferred loan fees or costs, loan impairment is recognized by establishing or
adjusting an allocation of the allowance for loan losses. SFAS No. 114, as
amended, does not change the timing of charge-offs of loans to reflect the
amount ultimately expected to be collected.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
stated in the aggregate at the lower of cost or estimated market value. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Gains or losses on sales of loans are recognized at the
time of sale. The gain or loss is determined by the difference between the
net sales proceeds and the recorded value of the loans, including any
remaining unamortized deferred loan fees.
Interest on Loans and Loan Fees
Interest on loans is recorded as income when borrowers' monthly payments
become due. Allowances are established for uncollected interest on loans for
which the interest is determined to be uncollectible. Generally, all loans
past due three or more payments are placed on nonaccrual status and internally
classified as substandard. Any interest income recorded in the current
reporting period is fully reserved. Subsequent collections are applied
proportionately to past due principal and interest. Loans are removed from
nonaccrual status only when the loan is deemed current, and the collectibility
of principal and interest is no longer doubtful.
The Bank charges fees for originating loans. That portion of loan fees
exceeding the estimated direct cost of originating loans is deferred and
amortized to income, on the level-yield basis, over the loan term. If the
loan is repaid prior to maturity, the remaining unamortized deferred loan fee
is recognized in income at the time of repayment.
Loan Servicing Fees
The Bank records its mortgage servicing rights at fair value in accordance
with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, which requires the Bank to allocate the
total cost of all mortgage loans, whether originated or purchased, to the
loans (without the mortgage servicing rights), and to mortgage servicing
rights based on their relative fair values. The Bank is amortizing the
mortgage servicing assets, which totaled $356,000 and $358,000 at September
30, 2000 and 1999, respectively, over the period of the estimated servicing
income.
(continued)
58
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (continued)
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed on the
straight-line method over the following estimated useful lives: buildings -
thirty to forty years; furniture and equipment - three to seven years;
automobile - five years. The cost of maintenance and repairs is charged to
expense as incurred. Gains and losses on dispositions are reflected in
earnings.
Real Estate Owned
Real estate owned (REO) consists of properties acquired through or in lieu of
foreclosure, recorded initially at the lower of cost or fair value of the
properties less estimated costs of disposal. Costs relating to development
and improvement of the properties are capitalized; costs relating to holding
the properties are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to earnings if the recorded value of a
property exceeds its estimated net realizable value.
Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. Prior to fiscal year 1997, the Bank qualified under provisions
of the Internal Revenue Code which permitted, as a deduction from taxable
income, an allowance for bad debts based on a percentage of taxable income.
In 1996, the percentage-of-income bad debt deduction for federal tax purposes
was eliminated. In addition, federal tax bad debt reserves which had been
accumulated since October 1, 1988, that exceeded the reserves which would have
been accumulated based on actual experience, are subject to recapture over a
six-year recapture period. As of September 30, 2000, the Bank's federal tax
bad debt reserves subject to recapture approximated $1,100,000.
Deferred federal income taxes result from temporary differences between the
tax basis of assets and liabilities, and their reported amounts in the
consolidated financial statements. These will result in differences between
income for tax purposes and income for financial reporting purposes in future
years. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
(continued)
59
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (concluded)
Employee Stock Ownership Plan
The Bank sponsors a leveraged Employee Stock Ownership Plan (ESOP). The ESOP
is accounted for in accordance with the American Institute of Certified Public
Accountants Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plan. Accordingly, the debt of the ESOP is recorded as other
borrowed funds of the Bank, and the shares pledged as collateral are reported
as unearned shares issued to the employee stock ownership trust on the
consolidated balance sheets. The debt of the ESOP is with the Company and is
thereby eliminated in the consolidated financial statements. As shares are
released from collateral, compensation expense is recorded equal to the
average market price of the shares for the period, and the shares become
outstanding for earnings per share calculations. Cash dividends on
unallocated shares which are collateral for debt are used to reduce scheduled
principal and interest payments, and are recorded as a reduction of
compensation expense.
Cash Equivalents
The Company considers all amounts included in the balance sheet caption "Cash
and due from financial institutions" to be cash equivalents.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required
pro forma disclosures of the effects of all options granted have been provided
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
Earnings Per Share
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's
stock option plans. In 2000 and 1999 the effect of the Company's stock
options on earnings per share was antidilutive and, thus, basic and diluted
earnings per share are the same.
60
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 2 - Investments and Mortgage-Backed Securities
Investments and mortgage-backed securities have been classified according to
management's intent (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
September 30, 2000
U.S. agency securities $ 6,502 $ - - ($ 86) $ 6,416
Mortgage-backed securities 11,846 2 (279) 11,569
Municipal bonds 73 - - (2) 71
Mutual funds 6,641 - - (169) 6,472
FHLB stock 4,150 - - - - 4,150
Equity securities 323 116 (42) 397
Total $29,535 $ 118 ($ 578) $29,075
September 30, 1999
U.S. agency securities $ 6,506 $ - - ($ 87) $ 6,419
Mortgage-backed securities 14,267 6 (281) 13,992
Mutual funds 9,017 - - (172) 8,845
FHLB stock 2,338 - - - - 2,338
Equity securities 121 - - (59) 62
Total $32,249 $ 6 ($599) $31,656
The FHLB stock has a par value of $100 per share and is recorded at cost.
Stock owned in excess of required amounts can only be redeemed by the Federal
Home Loan Bank of Seattle.
(continued)
61
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 2 - Investments and Mortgage-Backed Securities (concluded)
Mortgage-backed securities pledged as collateral for public fund deposits
totaled $2,459,000 and $1,012,000 at September 30, 2000 and 1999,
respectively.
The contractual maturities of debt securities available for sale at September
30, 2000 are as follows (dollars in thousands). Expected maturities may
differ from scheduled maturities due to the prepayment of principal or call
provisions.
Amortized Fair
Cost Value
Due within one year $ 2,010 $ 1,996
Due from one year to five years 4,576 4,502
Due from five to ten years 3,050 2,976
Due after ten years 8,785 8,582
Total $ 18,421 $ 18,056
Note 3 - Loans Receivable and Loans Held for Sale
Loans receivable and loans held for sale consisted of the following at
September 30 (dollars in thousands):
2000 1999
Mortgage loans:
One- to four-family $ 108,307 $ 92,062
Multi-family 33,604 15,945
Commercial 58,632 52,049
Construction and land development 89,903 90,621
Land 12,561 9,059
Total mortgage loans 303,007 259,736
Consumer loans:
Home equity and second mortgage 9,816 7,978
Other 6,081 4,279
Total consumer loans 15,897 12,257
Commercial business loans 4,808 4,611
Total loans receivable 323,712 276,604
(continued)
62
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 3 - Loans Receivable and Loans Held for Sale (continued)
2000 1999
Less:
Undisbursed portion of loans in process $ 32,831 $ 37,781
Unearned income 3,578 3,170
Allowance for loan losses 2,640 2,056
39,049 43,007
Loans receivable, net 284,663 233,597
Loans held for sale (one- to four-family) 28,518 23,071
Market value adjustment (175) (583)
Loans held for sale, net 28,343 22,488
Total loans receivable and loans held for sale $313,006 $256,085
The weighted average interest rate on all loans at September 30, 2000 and 1999
was 8.64% and 8.37%, respectively.
Loans serviced for the Federal Home Loan Mortgage Corporation and others at
September 30, 2000 and 1999 were $68,849,000 and $63,765,000, respectively.
Certain related parties of the Bank, principally Bank directors and officers,
were loan customers of the Bank in the ordinary course of business during 2000
and 1999. Activity in related party loans during the years ended September 30
is as follows (dollars in thousands):
2000 1999
Balance, beginning of year $774 $768
New loans 63 32
Repayments (30) (26)
Balance, end of year $807 $774
(continued)
63
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 3 - Loans Receivable and Loans Held for Sale (concluded)
At September 30, 2000 and 1999, the Bank had non-accruing loans totaling
approximately $3,612,000 and $3,589,000, respectively. At September 30, 2000
no loans were 90 days or more past due and still accruing interest. At
September 30, 1999, approximately $449,000 of loans were 90 days or more past
due and still accruing interest. Loans over 90 days past due and still
accruing interest at September 30, 1999 were secured and in the process of
collection. No interest income was recorded on non-accrual loans for the
years ended September 30, 2000, 1999 and 1998. The average investment in non-
accrual loans for the years ended September 30, 2000, 1999 and 1998 was
$3,460,000, $3,565,000 and $5,014,000, respectively.
An analysis of the allowance for loan losses for the years ended September 30
follows (dollars in thousands):
2000 1999 1998
Balance, beginning of year $2,056 $1,728 $1,716
Provision for loan losses 885 363 200
Transfers to allowance for possible
losses on REO (270) (30) (180)
Loans charged off (293) (5) (8)
Recoveries 262 - - - -
Balance, end of year $2,640 $2,056 $1,728
Note 4 - Premises and Equipment
Premises and equipment consisted of the following at September 30 (dollars in
thousands):
2000 1999
Land $ 2,303 $ 1,877
Buildings and improvements 6,271 4,701
Furniture and equipment 2,294 2,084
Automobiles 19 22
Property held for future expansion 596 596
Construction and purchases in progress 536 1,357
12,019 10,637
Less accumulated depreciation 3,405 3,016
Total premises and equipment $ 8,614 $ 7,621
64
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 5 - Real Estate Owned
Real estate owned consisted of the following at September 30 (dollars in
thousands):
2000 1999
Real estate acquired through foreclosure $2,057 $1,060
Allowance for possible losses (91) (193)
Total real estate owned $1,966 $ 867
An analysis of the allowance for possible losses follows (dollars in
thousands):
2000 1999 1998
Balance, beginning of year $193 $192 $ 32
Provision for additional losses 51 28 - -
Transfers from allowance for loan losses 270 30 180
Write-downs (423) (57) (20)
Balance, end of year $ 91 $193 $192
Note 6 - Accrued Interest Receivable
Accrued interest receivable consisted of the following at September 30
(dollars in thousands):
2000 1999
Loans receivable $1,976 $1,688
Less reserve for uncollected interest 396 386
1,580 1,302
Investment securities and interest bearing deposits 176 178
Total accrued interest receivable $1,756 $1,480
65
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 7 - Deposits
Deposits consisted of the following at September 30 (dollars in thousands):
2000 1999
Non-interest bearing $ 11,861 $ 8,360
N.O.W. checking 24,467 21,239
Passbook savings 28,647 29,396
Money market accounts 20,863 18,774
Certificates of deposit 123,137 107,508
Other 3,636
2,871
Total deposits $212,611 $188,148
The weighted average interest rate on all deposits at September 30, 2000 and
1999 was 4.45% and 3.96%, respectively.
Time deposits of $100,000 or greater totaled $42,420,000 and $25,066,000 at
September 30, 2000 and 1999, respectively.
Scheduled maturities of certificates of deposit at September 30, 2000 are as
follows (dollars in thousands):
Within one year $101,415
Over one to two years 17,380
Over two to five years 3,876
After five years 466
Total $123,137
Interest expense by account type is as follows for the years ended September
30 (dollars in thousands):
2000 1999 1998
Certificates of deposit $6,573 $5,590 $5,631
Money market accounts 741 628 543
Passbook savings 694 695 906
N.O.W. checking 385 363 390
Total $8,393 $7,276 $7,470
66
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 8 - Federal Home Loan Bank Advances
The Bank has been approved for participation in the Federal Home Loan Bank of
Seattle Cash Management Advance Program, maturing February 2001, with a
maximum facility of $14,943,000. Advances requested under this program are
payable on demand or, if no demand is made, in one year from the date of
advance, and bear interest at the rate in effect at that time. Advances are
subject to the existing Advances, Security and Deposit Agreement, and are
granted at the sole discretion of the Federal Home Loan Bank of Seattle.
There were no advances outstanding under the Cash Management Advance Program
at September 30, 2000 or 1999.
The Advances, Security and Deposit Agreement, which includes the Cash
Management Advance Program, is maintained at 30% of total assets. The Bank
had advances at September 30, 2000 as follows (dollars in thousands):
Weighted
Average
Interest
Rate Amount
Maturities in years ending September 30:
2001 Fixed rate set maturity 6.69% $64,800
2002 Fixed rate monthly amortization 6.11 266
2006 Fixed rate monthly amortization 6.55 1,071
2007 Fixed rate set maturity 6.18 15,000
6.59 $81,137
Under the Advances, Security and Deposit Agreement, virtually all of the
Bank's assets, not otherwise encumbered, are pledged as collateral for
advances.
Note 9 - Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses comprise the following at September 30
(dollars in thousands):
2000 1999
Accrued pension and profit sharing payable $ 768 $ 683
Accrued interest payable on deposits and FHLB advances 557 281
Accounts payable and accrued expenses - other 695 675
Total other liabilities and accrued expenses $2,020 $1,639
67
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 10 - Federal Income Taxes
The Bank previously qualified under provisions of the Internal Revenue Code
that permitted federal income taxes to be computed after a deduction for
additions to bad debt reserves. Accordingly, retained earnings include
approximately $2,200,000 for which no provision for federal income taxes has
been made. If in the future this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes at the
current applicable rates would be imposed.
The components of the provision for income taxes at September 30 are as
follows (dollars in thousands):
2000 1999 1998
Current $3,156 $3,046 $2,443
Deferred benefit (231) (449) (33)
Total federal income taxes $2,925 $2,597 $2,410
The components of the Company's deferred tax assets and liabilities at
September 30 are as follows (dollars in thousands):
2000 1999
Deferred Tax Assets
Accrued interest on loans $ 110 $ 23
Accrued vacation 50 26
Deferred compensation 105 81
Unearned ESOP shares 239 118
Allowance for loan losses 573 278
Loans held for sale market value adjustment 63 198
Unrealized securities losses 157 201
Other 2 45
Total deferred tax assets 1,299 970
Deferred Tax Liabilities
FHLB stock dividends 501 395
Real estate sale, installment basis 33 32
Other 35 - -
Total deferred tax liabilities 569 427
Net deferred tax assets $ 730 $543
(continued)
68
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 10 - Federal Income Taxes (concluded)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows (dollars in thousands):
2000 1999 1998
Amount Percent Amount Percent Amount Percent
Taxes at statutory rate $2,999 34.0% $2,657 34.0% $2,552 34.0%
Other - net (74) (.8) (60) (.8) (142) (1.9)
Federal income taxes $2,925 33.2% $2,597 33.2% $2,410 32.1%
Note 11 - Profit Sharing Plans
The Bank maintains a tax-qualified profit sharing plan for the benefit of all
eligible employees who are at least 21 years of age and work a minimum of 501
hours. The Bank contributed $300,000, $249,000 and $226,000 to the plan for
the years ended September 30, 2000, 1999 and 1998, respectively.
Contributions are made on a discretionary basis.
In addition, the Bank has an employee bonus plan based on net income. Bonuses
accrued for the years ended September 30, 2000, 1999 and 1998 totaled
$229,000, $195,000 and $181,000, respectively.
Note 12 - Employee Stock Ownership Plan
In 1998, the Bank established an Employee Stock Ownership Plan (ESOP) that
benefits all employees with at least one year of service who are 21 years of
age or older. The ESOP is funded by Bank contributions in cash or stock.
Employee vesting occurs over six years. The amount of the annual contribution
is discretionary, except that it must be sufficient to enable the ESOP to
service its debt. All dividends received by the ESOP are used to pay debt
service.
In January 1998 the ESOP borrowed $7,930,000 from the Company to purchase
529,000 shares of common stock of the Company. The loan will be repaid
primarily from the Company's contributions to the ESOP over 15 years. The
interest rate on the loan is 8.5%. As of September 30, 2000, 841 shares had
been distributed out of the ESOP to participants.
Shares held by the ESOP as of September 30 were classified as follows:
2000 1999
Unallocated shares 432,016 467,283
Shares released for allocation 96,143 61,717
Total ESOP shares 528,159 529,000
(continued)
69
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 12 - Employee Stock Ownership Plan (concluded)
The approximate fair market value of the Bank's unallocated shares at
September 30, 2000 and 1999, respectively, is $5,184,000 and $5,344,000. The
expense under the ESOP was $199,000, $285,000 and $364,000 for the years ended
September 30, 2000, 1999 and 1998, respectively.
Note 13 - Stock Options
During the year ended September 30, 1999, the Company adopted a stock-based
option plan, which is described below. The Company applies APB Opinion No. 25
and related interpretations in accounting for this plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant dates for awards granted under this plan, consistent with the method of
SFAS No. 123, the Company's net income and earnings per share for the years
ended September 30 would have been reduced to these pro forma amounts (dollars
in thousands):
2000 1999
Net income:
As reported $5,897 $5,218
Pro forma 5,431 4,737
Earnings per share/basic and diluted:
As reported $1.31 $1.03
Pro forma 1.20 .93
Under the Company's stock option plan, the Company may grant options for up to
661,250 shares of its common stock to certain key employees and directors.
The exercise price of each option equals the fair market value of the
Company's stock on the date of grant. An option's maximum term is ten years.
Options are exercisable on a cumulative basis in annual installments of 10% on
each of the ten anniversaries from the date of grant. Vesting will be
accelerated to 20% per year if certain criteria relating to Company
performance are met.
The fair value of each 1999 option grant was estimated on the date of grant,
based on the Black-Scholes option-pricing model using the following
weighted-average assumptions: dividend yield of 2.25%; risk-free interest
rates of 6%; and expected lives of ten years. The weighted average fair value
of options granted during the year ended September 30, 1999 was $3.26.
During the year ended September 30, 1999, 582,494 shares were granted with a
weighted average exercise price of $12.02, respectively. The exercise prices
range from $12.00 to $12.38. No options were granted or exercised during the
year ended September 30, 2000. There were 10,000 shares forfeited during the
year ended September 30, 2000. There were 114,499 options exercisable with a
weighted average exercise price of $12.01 as of September 30, 2000.
70
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 14 - Deferred Compensation/Noncompetition Agreement and Severance
Compensation Agreement
The Bank has a deferred compensation/noncompetition arrangement with its chief
executive officer which will provide monthly payments of $2,000 per month upon
retirement. Once payments have commenced they will continue until his death,
at which time payments will continue to his surviving spouse until her death
or for 60 months. The present value of the payments, based on the life
expectancy of the chief executive officer, has been accrued based on a
retirement age of 65 and is included in other liabilities in the consolidated
financial statements. As of September 30, 2000 and 1999, $239,000, has been
accrued under the agreement.
In connection with the January 1998 conversion, the Bank adopted an Employee
Severance Compensation Plan, which expires in ten years, to provide benefits
to eligible employees in the event of a change in control of the Company or
the Bank (as defined in the plan). In general, all employees with two or more
years of service will be eligible to participate in the plan. Under the plan,
in the event of a change in control of the Company or the Bank, eligible
employees who are terminated or who terminate employment (but only upon the
occurrence of events specified in the plan) within 12 months of the effective
date of a change in control would be entitled to a payment based on years of
service with the Bank. The maximum payment for any eligible employee would be
equal to 24 months of their current compensation.
Note 15 - Management Recognition and Development Plan
On November 10, 1998, the Board of Directors adopted a Management Recognition
and Development Plan. The Plan allows for the purchase, in the open market or
through the issuance of authorized and unissued shares, of up to 264,500
shares of stock. The Plan is intended to award restricted stock to the
Company's employees and directors. As of September 30, 2000, no restricted
stock had been awarded under the Plan.
Note 16 - Commitments and Contingencies
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk is excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments. A summary of the Bank's commitments at September 30 is as
follows (dollars in thousands):
2000 1999
Commitments to extend credit $17,422 $14,753
(continued)
71
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 16 - Commitments and Contingencies (concluded)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by the
Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and
income-producing commercial properties.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these
claims, if any, will not have a material effect on the financial position of
the Company.
Note 17 - Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines of the regulatory framework for prompt
corrective action, the Bank must meet specific capital adequacy guidelines
that involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios as
defined in the regulations (set forth in the table below) of Tier 1 capital to
average assets, and minimum ratios of Tier 1 and total capital to
risk-weighted assets.
As of September 30, 2000, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
(continued)
72
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 17 - Regulatory Matters (continued)
The Company's and the Bank's actual capital amounts (dollars in thousands) and
ratios are also presented in the table.
To be Well
Capitalized
Under Prompt
Capital Correction
Adequacy Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2000
Tier 1 capital (to
average assets):
Consolidated $72,516 20.0% $14,334 4.0% N/A N/A
Timberland Savings
Bank, SSB 58,470 16.6 14,068 4.0 $17.585 5.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated 72,516 26.7 10,857 4.0 N/A N/A
Timberland Savings
Bank, SSB 58,470 21.7 10,765 4.0 16,148 6.0
Total capital (to risk-
weighted assets):
Consolidated 75,156 27.7 21,714 8.0 N/A N/A
Timberland Savings
Bank, SSB 61,110 22.7 21,530 8.0 26,913 10.0
September 30, 1999
Tier 1 capital (to
average assets):
Consolidated $72,391 24.5% $11,832 4.0% N/A N/A
Timberland Savings
Bank, SSB 56,864 19.8 11,484 4.0 $14,356 5.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated 72,391 32.5 8,911 4.0 N/A N/A
Timberland Savings
Bank, SSB 56,864 25.9 8,787 4.0 13,180 6.0
Total capital (to risk-
weighted assets):
Consolidated 74,447 33.4 17,822 8.0 N/A N/A
Timberland Savings
Bank, SSB 58,920 26.8 17,573 8.0 21,967 10.0
(continued)
73
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 17 - Regulatory Matters (concluded)
Restrictions on Retained Earnings
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its retained earnings of $23,866,000 as of June 30, 1997, the
date of the latest statement of financial condition used in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible withdrawable account holders who have maintained their
deposit accounts in the Bank after conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank (and only in such
an event), eligible depositors who have continued to maintain accounts will be
entitled to receive a distribution from the liquidation account before any
liquidation may be made with respect to common stock. The Bank may not
declare or pay cash dividends if the effect thereof would reduce its
regulatory capital below the amount required for the liquidation account.
Note 18 - Condensed Financial Information - Parent Company Only
Condensed Balance Sheets - September 30
(Dollars in Thousands)
2000 1999
Assets
Cash and due from financial institutions $ 14 $ 5
Interest bearing deposits 1,140 219
Investments and mortgage-backed securities available
for sale 5,712 7,801
Loan receivable from Bank 7,089 7,405
Investment in Bank 58,337 56,784
Other assets 53 90
Total assets $72,345 $72,304
Liabilities and Shareholders' Equity
Liabilities and accrued expenses $ 33 $ 59
Shareholders' equity 72,312 72,245
Total liabilities and shareholders' equity $72,345 $72,304
(continued)
74
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 18 - Condensed Financial Information - Parent Company Only (continued)
Condensed Statements of Income - Years Ended September 30
(Dollars in Thousands)
2000 1999 1998
Operating Income
Interest on investment and mortgage-backed
securities $ 199 $ 287 $ 907
Interest on loan receivable from Bank 621 645 469
Dividends on investments 235 352 63
Gain (loss) on sale of investment securities
available for sale (22) (1) 22
Dividends from Timberland Savings Bank 1,863 1,612 - -
Other 2 - - - -
Total operating income 2,898 2,895 1,461
Operating Expenses 204 245 70
Income before income taxes and equity
in undistributed income of Bank 2,694 2,650 1,391
Income Taxes 220 304 473
Income before equity in undistributed
income of Bank 2,474 2,346 918
Equity in Undistributed Income of Bank 3,423 2,872 4,178
Net income $5,897 $5,218 $5,096
(continued)
75
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 18 - Condensed Financial Information - Parent Company Only (concluded)
Condensed Statements of Cash Flows - Years Ended September 30 (Dollars in
Thousands)
2000 1999 1998
Cash Flows from Operating Activities
Net income $5,897 $ 5,218 $ 5,096
Adjustments to reconcile net income to
net cash provided:
Equity in undistributed income of Bank (3,423) (2,872) (4,178)
ESOP shares earned 434 428 427
(Gain) loss on sale of securities
available for sale 22 (1) (22)
Other, net (37) 117 (545)
Net cash provided by operating activities 2,893 2,890 778
Cash Flows from Investing Activities
Net (increase) decrease in interest-bearing
deposits in banks (921) 6,685 (6,904)
Investment in Bank 1,859 (429) (32,475)
Purchases of securities available for sale (269) (12,575) (17,224)
Proceeds from maturities of securities
available for sale - - 17,809 3,700
Proceeds from sale of securities available
for sale 2,482 - - 403
Funding provided to the Bank for purchase
of common stock for ESOP - - - - (7,930)
Principal repayments on loan receivable
from Bank 316 292 233
Net cash provided by (used in) investing
activities 3,467 11,782 (60,197)
Cash Flows from Financing Activities
Proceeds from the issuance of common stock,
net of related costs - - - - 64,950
Repurchase of common stock (4,603) (13,150) (4,735)
Payment of dividends (1,748) (1,520) (793)
Net cash provided by (used in) financing
activities (6,351) (14,670) 59,422
Net increase in cash 9 2 3
Cash and Due from Financial Institutions
Beginning of year 5 3 - -
End of year $ 14 $ 5 $ 3
76
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 19 - Earnings Per Share Disclosures
Basic earnings per share are computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted earnings
per share are computed by dividing net income applicable to common stock by
the weighted average number of common shares and common stock equivalents for
items that are dilutive, net of shares assumed to be repurchased using the
treasury stock method at the average share price for the Company's common
stock during the period. Common stock equivalents arise from assumed
conversion of outstanding stock options. In accordance with Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans,
issued by the American Institute of Certified Public Accountants, shares owned
by the Bank's Employee Stock Ownership Plan that have not been allocated are
not considered to be outstanding for the purpose of computing earnings per
share. Information regarding the calculation of basic and diluted earnings
per share for the years ended September 30, 2000 and 1999, respectively, is as
follows (dollars in thousands, except per share amounts).
2000 1999
Basic EPS Computation
Numerator - net income $5,897 $5,218
Denominator - weighted average common shares
outstanding 4,508,427 5,089,414
Basic EPS $1.31 $1.03
Diluted EPS Computation
Numerator - net income $5,897 $5,218
Denominator - weighted average common shares
outstanding 4,508,427 5,089,414
Effect of dilutive stock option - - - -
Diluted EPS $1.31 $1.03
Note 20 - Comprehensive Income
Net unrealized gains and losses included in comprehensive income were computed
as follows for the years ended September 30 (dollars in thousands):
Tax
Before-Tax (Benefit) Net-of-Tax
Amount Expense Amount
2000
Unrealized holding gains arising during
the year $111 $39 $72
Reclassification adjustment for losses 22 7 15
included in net income
Net unrealized gains $133 $46 $87
(continued)
77
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 20 - Comprehensive Income (concluded)
Tax
Before-Tax (Benefit) Net-of-Tax
Amount Expense Amount
1999
Unrealized holding losses arising
during the year ($774) ($263) ($511)
Reclassification adjustment for
gains/losses included in net income - - - - - -
Net unrealized losses ($774) ($263) ($511)
1998
Unrealized holding gains arising during
the year $203 $69 $134
Reclassification adjustment for gains
included in net income 22 8 14
Net unrealized gains $181 $61 $120
Note 21 - Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, 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. Major assumptions, methods and fair value estimates for the Bank's
significant financial instruments are set forth below:
Cash and Due from Financial Institutions and Interest Bearing Deposits in
Banks
The recorded amount is a reasonable estimate of fair value.
Investments, Mortgage-Backed Securities and Loans Held for Sale
The fair value of investments, mortgage-backed securities and loans held
for sale has been based on quoted market prices or dealer quotes.
Loans Receivable
Fair values for loans are estimated for portfolios of loans with similar
financial characteristics. Fair value is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers for the same remaining maturities. Prepayments are based
on the historical experience of the Bank.
(continued)
78
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 21 - Fair Values of Financial Instruments (concluded)
Deposits
The fair value of deposits with no stated maturity date is included at the
amount payable on demand. The fair value of fixed maturity certificates of
deposit is estimated by discounting future cash flows using the rates
currently offered by the Bank for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
The fair value of borrowed funds is estimated 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.
The estimated fair values of financial instruments at September 30, 2000 and
1999 were as follows (dollars in thousands):
2000 1999
Recorded Fair Recorded Fair
Amount Value Amount Value
Financial Assets
Cash and due from financial
institutions and interest
bearing deposits in banks $ 12,002 $ 12,002 $ 8,126 $ 8,126
Investments and mortgage
backed securities 29,075 29,075 31,656 31,656
Loans receivable 313,006 313,604 256,085 261,894
Financial Liabilities
Deposits $212,611 $213,234 $188,148 $188,401
Federal Home Loan Bank advances 81,137 80,712 45,084 44,916
Note 22 - Stock Repurchase Plan
In June 2000, the Company initiated a stock repurchase plan for the purchase
of 243,040 shares of stock. As of September 30, 2000, 67,500 shares had been
repurchased. The remainder is anticipated to be purchased during the year
ending September 30, 2001.
Note 23 - Subsequent Event
Subsequent to September 30, 2000, the Company approved a dividend in the
amount of $.10 per share to be paid on November 17, 2000 for shareholders of
record as of November 3, 2000.
79
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries
September 30, 2000 and 1999
Note 24 - Selected Quarterly Financial Data (Unaudited)
The following selected financial data are presented for the quarters ended
(dollars in thousands, except per share amounts):
Septem- Decem-
ber 30, June 30, March 31, ber 31,
2000 2000 2000 1999
Interest and dividend income $7,551 $7,460 $6,796 $6,555
Interest expense (3,636) (3,213) (2,888) (2,690)
Net interest income 3,915 4,247 3,908 3,865
Provision for loan losses (120) (410) (280) (75)
Noninterest income 869 647 167 55
Noninterest expense (2,107) (1,965) (1,839) (2,055)
Income before income taxes 2,557 2,519 1,956 1,790
Federal income taxes 848 838 647 592
Net income $1,709 $1,681 $1,309 $1,198
Basic and diluted earnings
per share $.39 $.38 $.29 $.26
Septem- Decem-
ber 30, June 30, March 31, ber 31,
1999 1999 1999 1998
Interest and dividend income $6,255 $5,600 $5,742 $5,512
Interest expense (2,337) (2,026) (1,985) (2,015)
Net interest income 3,918 3,574 3,757 3,497
Provision for loan losses (219) (70) (30) (44)
Noninterest income 161 (60) 216 275
Noninterest expense (1,797) (1,792) (1,820) (1,751)
Income before income taxes 2,063 1,652 2,123 1,977
Federal income taxes 684 546 707 660
Net income $1,379 $1,106 $1,416 $1,317
Basic and diluted earnings
per share $.28 $.23 $.28 $.24
80
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Definitive Proxy Statement
for the 2001 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank. Each of the executive
officers holds the same position with the Company and the Bank.
Executive Officers of the Company and Bank
Age at
Septem-
ber Position
30, ---------------------------------------------------
Name 2000 Company Bank
---- ---- ------- ----
Clarence E. Hamre 66 Chairman of the Board, Chairman of the Board,
President and Chief President and Chief
Executive Officer Executive Officer
Michael R. Sand 46 Executive Vice President Executive Vice President,
and Secretary Secretary and Director
Paul G. MacLeod 56 Treasurer Treasurer
Dean J. Brydon 33 Chief Financial Officer Chief Financial Officer
Biographical Information
Clarence E. Hamre has served as the Bank's President and Chief Executive
Officer since 1969.
Michael R. Sand has been affiliated with the Bank since 1977 and has
served as the Bank's Executive Vice President since 1986.
Paul G. MacLeod is the Bank's Treasurer and has been with the Bank since
1987.
Dean J. Brydon has been affiliated with the Bank since 1994 and has
served as the Chief Financial Officer since January 2000.
Item 11. Executive Compensation
--------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security
Ownership of Certain Beneficial Owners and Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.
81
<PAGE>
(b) Security Ownership of Management.
The information contained under the sections captioned "Security
Ownership of Certain Beneficial Owners and Management" and "Proposal I --
Election of Directors" is included in the Company's Proxy Statement and are
incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Transactions with Management" is included in the
Company's Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employee Severance Compensation Plan**
10.2 Employee Stock Ownership Plan**
10.3 1999 Stock Option Plan***
10.3 Management Recognition and Development Plan***
(21) Subsidiaries of the Registrant
(23) Consent of Accountants
(27) Financial Data Schedule
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (333-35817).
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997.
*** Incorporated by reference to the Registrant's 1999 Annual Meeting Proxy
Statement dated December 15, 1998.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 2000.
82
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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: December 20, 2000 By: /s/Clarence E. Hamre
Clarence E. Hamre
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/Clarence E. Hamre Chairman of the Board, President, December 20, 2000
-------------------- Chief Executive Officer and Director
Clarence E. Hamre (Principal Executive Officer)
/s/Michael R. Sand Executive Vice President, Secretary December 20, 2000
-------------------- and Director
Michael R. Sand
/s/Dean J. Brydon Chief Financial Officer December 20, 2000
-------------------- (Principal Financial and Accounting
Dean J. Brydon Officer)
-------------------- Director
Andrea M. Clinton
/s/Robert Backstrom Director December 20, 2000
--------------------
Robert Backstrom
-------------------- Director
Richard R. Morris
/s/David A. Smith Director December 20, 2000
--------------------
David A. Smith
/s/Peter J. Majar Director December 20, 2000
--------------------
Peter J. Majar
/s/Jon C. Parker Director December 20, 2000
--------------------
Jon C. Parker
/s/James C. Mason Director December 20, 2000
--------------------
James C. Mason
83
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
Timberland Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries of Ownership State of Incorporation
------------ ------------ ----------------------
Timberland Savings Bank SSB 100% Washington
Timberland Service
Corporation (1) 100% Washington
----------
(1) This corporation is a wholly owned subsidiary of Timberland Savings
Bank, SSB.
<PAGE>
Exhibit 23
Consent of Accountants
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Form 10-K of our report, dated November
2, 2000, on the consolidated financial statements of Timberland Bancorp and
Subsidiaries.
/s/Knight Vale & Gregory PLLC
Tacoma, Washington
December 11, 2000
<PAGE>
