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 ("Savings Bank") upon the Savings Bank's conversion from a Washington-chartered mutual to a Washington-chartered stock savings bank ("Conversion"). As of the filing date of this Annual Report on Form 10-K, the Conversion has not yet been consummated and the Company has no shares of capital stock issued and outstanding. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Savings Bank and its subsidiary.
The Savings Bank was established in 1915 as "Southwest Washington Savings and Loan Association." In 1935, the Savings 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 Savings Bank converted to a federally chartered mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Savings Bank converted to a Washington-chartered mutual savings bank and adopted its current name. The Savings Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. The Savings Bank is regulated by the Washington Department of Financial Institutions, Division of Banks ("Division") and the FDIC.
The Savings Bank is a community oriented savings 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 Savings 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.
Market Area
The Savings Bank considers Grays Harbor, Thurston, Pierce and King Counties and, to a lesser extent, adjoining Kitsap County as its primary market area. The Savings 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), two branch offices in Pierce County (Edgewood, opened in 1980, and Puyallup, opened in 1996), a branch office in Thurston County (Lacey, opened in 1997) and a loan production office in Kitsap County (Port Orchard, opened in 1995). See "Item 2.
Item 2. Properties - -------------------
The Savings Bank operates eight full-service facilities. The Savings Bank owns its all of its offices except for the Port Orchard Loan Center, which is leased. The lease expires in July 1998.
The following table sets forth certain information regarding the Savings Bank's offices at September 30, 1997, all of which are owned except for the loan center, which is leased.
Approximate Location Year Opened Square Footage Deposits - -------- ---------- -------------- -------- (In thousands) Main Office:
624 Simpson Avenue 1966 7,700 $60,272 Hoquiam, Washington 98550
Branch Offices:
300 N. Boone Street 1974 3,400 23,675 Aberdeen, Washington 98520
Approximate Location Year Opened Square Footage Deposits - -------- ----------- -------------- --------- (In thousands)
314 Main South 1975 2,800 $19,580 Montesano, Washington 98563
361 Damon Road 1977 2,100 20,577 Ocean Shores, Washington 98569
2418 Meridian East 1980 2,400 33,153 Edgewood, Washington 98371
12814 Meridian East (South Hill) 1996 4,200 5,215 Puyallup, Washington 98373
202 Auburn Way South 1994 4,200 9,461 Auburn, Washington 98002
1201 Marvin Road, N.E. 1997 4,400 1,070 Lacey, Washington 98516
Loan Center:
Port Orchard Loan Center 1995 444 N/A 700 Prospect Street, Suite #102 Port Orchard, Washington 98366
Data Center:
422 6th Street 1990 2,700 N/A Hoquiam, Washington 98550
The Savings Bank also operates ten proprietary ATMs that are part of a nationwide cash exchange network.
Item 3.
Item 3. Legal Proceedings - --------------------------
Periodically, there have been various claims and lawsuits involving the Savings Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Savings Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Savings Bank's business. The Savings 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 Savings Bank.
Item 4.
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, 1997.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - -------------------------------------------------------------------------
The Company had no shares of Common Stock outstanding at September 30, 1997.
The Board of Directors of the Company has not formulated a dividend policy, but intends to consider a policy of paying cash dividends in the future. The payment of dividends on the Common Stock will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company, industry trends and general economic conditions justify the payment of dividends. The rate of such dividends and the initial or continued payment thereof will depend upon various factors at the intended time of declaration and payment, including the Savings Bank's profitability and liquidity, alternative investment opportunities, and regulatory restrictions on dividend payments and on capital levels applicable to the Savings Bank. Accordingly, there can be no present assurance that any dividends will be paid. Periodically, the Board of Directors, if market, economic and regulatory conditions permit, may combine or substitute periodic special dividends with or for regular dividends. In addition, since the Company initially will have no significant source of income other than dividends from the Savings Bank and earnings from investment of the net proceeds of the Conversion retained by the Company, the payment of dividends by the Company will depend in part upon the amount of the net proceeds from the Conversion retained by the Company and the Company's earnings thereon and the receipt of dividends from the Savings Bank, which are subject to various tax and regulatory restrictions on the payment of dividends. Dividend payments by the Company will be subject to regulatory restriction under Federal Reserve policy as well as to limitation under applicable provisions of Washington corporate law. Under Washington law, the Company is prohibited from paying a dividend is, as a result of its payment, the Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The information under Item 1 of this Report under the caption "Selected Consolidated Financial Information" is incorporated herein by reference.
Item 7.
Item 7. 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 financial condition and results of operations of the Savings Bank. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto.
Comparison of Financial Condition at September 30, 1996 and September 30, 1997
Total assets increased 8.8% from $194.4 million at September 30, 1996 to $211.6 million at September 30, 1997, primarily as a result of an increase in loans receivable, net, which was funded by increased deposits and retained net income.
Cash and due from financial institutions increased 126.4% from $5.1 million at September 30, 1996 to $11.4 million at September 30, 1997, primarily as a result of an increase in public unit funds on deposit.
Investments and mortgage-backed securities held-to-maturity decreased 14.5% from $6.5 million at September 30, 1996 to $5.6 million at September 30, 1997. This decrease was attributable primarily to prepayments.
Loans receivable, including loans held-for-sale, net, increased 6.0% from $176.5 million at September 30, 1996 to $187.0 million at September 30, 1997, primarily as a result of an increase in one- to- four family mortgage loans from $96.0 million at September 30, 1996 to $100.1 million at September 30, 1997. Increases in commercial real estate loans (from $26.5 million to $29.4 million) and home equity and second mortgage loans (from $6.6 million to $8.1 million) also contributed to the increase in loans receivable, net. The increase in loans receivable, net, was attributable primarily to the opening of the South Hill branch office in October 1996 and the Lacey branch office in May 1997, as well as increased local loan demand. Construction and land development loans, however, decreased from $47.1 million at September 30, 1996 to $45.0 million at September 30, 1997 primarily as a result of construction loans being converted to permanent mortgage loans.
Loans held-for-sale decreased from $6.1 million at September 30, 1996 to $3.9 million at September 30, 1997. This 37.1% decrease resulted primarily from increased loans sales.
Premises and fixed assets, net, increased 11.8% from $4.9 million at September 30, 1996 to $5.4 million at September 30, 1997, primarily as a result of construction of the Lacey branch office, which opened in May 1997. See "Item 2. Properties."
Deposits increased 10.5% from $156.5 million at September 30, 1996 to $173.0 million at September 30, 1997, primarily as a result of normal growth and promotions associated with the opening of the South Hill and Lacey branch offices. The Savings Bank offered certificates of deposit with premium interest rates during a one month period after the opening of each branch office as an incentive to attract depositors in light of increased competition in these markets.
Total capital increased 15.5% from $21.3 million at September 30, 1996 to $24.6 million at September 30, 1997, primarily as a result of retained net income for the year ended September 30, 1997.
Comparison of Operating Results for the Years Ended September 30, 1996 and
Net Income. Net income increased 24.3% from $2.7 million for the year ended September 30, 1996 to $3.3 million for the year ended September 30, 1997 primarily as a result of the legislatively-mandated, one-time assessment levied by the FDIC on all SAIF-insured institutions to recapitalize the SAIF. Without this assessment, which amounted to $875,000 ($571,000 after tax) and was accrued during the year ended September 30, 1996, net income would have been $3.2 million for the year ended September 30, 1996.
Net Interest Income. Net interest income increased from $8.9 million for the year ended September 30, 1996 to $9.6 million for the year ended September 30, 1997 as a result of total interest income increasing more than interest expense.
Total interest income increased 8.8% from $16.5 million for the year ended September 30, 1996 to $17.9 million for the year ended September 30, 1997 primarily as a result of an increase in the average balance of loans receivable, net, from $168.0 million to $188.7 million as a result of increased loan demand. The average yield earned on loans receivable, net, decreased from 9.45% for year ended September 30, 1996 to 9.23% for the year ended September 30, 1997 primarily because of a decline in market interest rates and an increase in the balance of nonaccrual loans. See "Item 1. Business -- Lending Activities -- Nonperforming Assets and Delinquencies."
Total interest expense increased 9.9% from $7.6 million for the year ended September 30, 1996 to $8.4 million for the year ended September 30, 1997 primarily as a result of an increase in the average balance of deposit accounts from $144.4 million to $154.9 million.
The interest rate spread decreased from 4.34% for the year ended September 30, 1996 to 4.18% for the year ended September 30, 1997 primarily as a result of declining market interest rates and the effect of deposit account promotions associated with the opening of the South Hill and Lacey branch offices. The Savings Bank also increased
rates on deposit accounts in response to increased competition, which also contributed to the reduction in the interest rate spread.
Provision for Loan Losses. The provision for loan losses increased from $70,000 for the year ended September 30, 1996 to $597,000 for the year ended September 30, 1997. Based on the previously discussed risk weighted analysis performed quarterly by management, management increased the provision as a result of a change in the loan mix to include a larger percentage of non-residential mortgage loans, which are inherently riskier than one- to- four family mortgage loans, as well as its evaluation of nonperforming loans at September 30, 1997. Management deemed the allowance for loan losses adequate at September 30, 1997. See "Item 1. Business -- Lending Activities - -- Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 37.0% from $654,000 for the year ended September 30, 1996 to $896,000 for the year ended September 30, 1997. The increase resulted primarily from the recognition of mortgage loan servicing income in accordance with SFAS No. 125 beginning in January 1997 and normal increases in other income categories.
Noninterest Expense. Total noninterest expense decreased 6.5% from $5.4 million for the year ended September 30, 1996 to $5.0 million for the year ended September 30, 1997 primarily as a result of the one-time SAIF assessment fee accrued during fiscal 1996. Salaries and employee benefits increased from $2.5 million to $2.9 million and premises and fixed assets expense increased from $554,000 to $723,000, both as a result of the opening of the South Hill and Lacey branch offices.
Provision for Income Taxes. The provision for income taxes increased from $1.4 million for the year ended September 30, 1996 to $1.8 million for the year ended September 30, 1997 as a result of higher income before income taxes. The effective tax rate was 34.6% in fiscal 1996 and 35.5% in fiscal 1997.
Comparison of Operating Results for the Years Ended September 30, 1995 and
Net Income. Net income decreased 10.7% from $3.0 million in fiscal 1995 to $2.7 million in fiscal 1996 primarily as a result of the legislatively-mandated, one-time assessment levied by the FDIC on all SAIF-insured institutions to recapitalize the SAIF. Without this assessment, which amounted to $875,000 ($571,000 after tax), fiscal 1996 net income would have been $3.2 million.
Net Interest Income. Net interest income increased 9.6% from $8.1 million in fiscal 1995 to $8.9 million in fiscal 1996 as total interest income increased more than total interest expense.
Total interest income increased 14.2% from $14.5 million in fiscal 1995 to $16.5 million in fiscal 1996 primarily as a result of an increase in the average balance of loans receivable, net, from $143.1 million in fiscal 1995 to $168.1 million in fiscal 1996 as a result of increased loan demand. The average yield earned on loans receivable, net, decreased from 9.51% in fiscal 1995 to 9.45% in fiscal 1996 primarily because of a decline in market interest rates. Interest earned on investment and mortgage-backed securities decreased from $667,000 in fiscal 1995 to $397,000 in fiscal 1996 as average balances decreased from $12.7 million in fiscal 1995 to $6.7 million in fiscal 1996 as a result of prepayments of mortgage-backed securities and the maturity of U.S. Treasury securities. Dividend income from FHLB-Seattle and Financial Institution Insurance Group ("FIIG") stock increased from $98,000 in fiscal 1995 to $126,000 in fiscal 1996 primarily because of higher dividend rates. Interest earned from financial institutions on interest-earning deposits increased from $85,000 in fiscal 1995 to $97,000 in fiscal 1996 as a result of an increase in the average rate paid from 4.11% in fiscal 1995 to 4.68% in fiscal 1996.
Total interest expense increased 20.0% from $6.4 million in fiscal 1995 to $7.6 million in fiscal 1996 primarily as a result of an increase in the average balance of certificates of deposit from $73.6 million in fiscal 1995 to $89.0 million in fiscal 1996, coupled with an increase in the average rate paid from 5.41% in fiscal 1995 to 5.92% in fiscal 1996, as a result of promotions associated with the opening of the South Hill branch office.
Interest rate spread decreased from 4.56% in fiscal 1995 to 4.34% in fiscal 1996. This decrease is primarily attributable to higher interest expense on certificates of deposit associated with new branch office promotions.
Provision for Loan Losses. There was no provision for loan losses in fiscal 1995 compared to $70,000 in fiscal 1996. Management increased the provision in fiscal 1996 as a result of a larger loan portfolio and a change in the loan mix (as quantified by the quarterly reserve analysis described previously) to include a larger percentage of non-residential mortgage loans, which are inherently riskier than one- to- four family mortgage loans.
As a result of management's quarterly reserve analysis discussed previously, the calculated reserve range was between $589,000 and $2.2 million at September 30, 1996. The four nonperforming loans described under "Item 1. Business -- Lending Activities -- Nonperforming Assets and Delinquencies" added $33,000 and $141,000 to the high and low ends, respectively, of the calculated reserve range at September 30, 1996. General loan loss reserves were $1.1 million at September 30, 1996 and, in management's opinion, were adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. Management considered the likelihood of losses in excess of $1.1 million to be remote at September 30, 1996. See "Item 1. Business -- Lending Activities -- Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased 15.1% from $598,000 in fiscal 1995 to $688,000 in fiscal 1996. The increase resulted primarily from an increase in other fees from $113,000 in fiscal 1995 to $163,000 in fiscal 1996 as a result of an increased number of ATMs, together with increased escrow and annuity fees from $111,000 in fiscal 1995 to $132,000 in fiscal 1996 as a result of establishing a second escrow company division within the Savings Bank's service corporation subsidiary to service the Puget Sound area. This increase was partially offset by a decrease in gains on sales of loan from $45,000 in fiscal 1995 to $34,000 in fiscal 1996 because of lower sales volume resulting from higher market interest rates.
Noninterest Expense. Total noninterest expense increased 31.9% from $4.1 million in fiscal 1995 to $5.4 million in fiscal 1996 primarily as a result of an increase in deposit insurance premiums from $295,000 in fiscal 1995 to $1.2 million in fiscal 1996 attributable to the SAIF assessment. Prior to the SAIF recapitalization, the Savings Bank's total annual deposit insurance premiums amounted to 0.23% of assessable deposits. Effective January 1, 1997, the rate decreased to 0.065% of assessable deposits. See "REGULATION OF THE SAVINGS BANK -- Deposit Insurance." Salaries and employee benefits increased from $2.3 million in fiscal 1995 to $2.5 million in fiscal 1996 as a result of adding and training of staff to operate the newly opened South Hill branch office. Premises and fixed assets expense increased from $506,000 in fiscal 1995 to $554,000 in fiscal 1996, also because of the opening of the South Hill branch office.
Provision for Income Taxes. The provision for income taxes decreased from $1.6 million in fiscal 1995 to $1.4 million in fiscal 1996 as a result of lower income before income taxes. The effective tax rate was 34.8% in fiscal 1995 and 34.6% in fiscal 1996.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods indicated 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.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income of the Savings Bank. Information is provided with respect to (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, 1996 Compared to Year 1997 Compared to Year Ended September 30, 1995 Ended September 30, 1996 Increase (Decrease) Increase (Decrease) Due to Due to ---------------------------- ---------------------------- Rate/ Net Rate/ Net Rate Volume Volume Change Rate Volume Volume Change ---- ------ ------ ------ ---- ------ ------ ------ (Dollars in thousands)
Interest-earning assets: Loans receivable (1)(2). . . . $(86) $2,377 $(15) $2,276 $(370) $1,954 $(45) $1,539 Mortgage-backed securities and investment securities. . . 86 (315) (41) (270) 19 (131) (6) (118) FHLB stock and equity securities. . . 17 9 2 28 (14) 4 -- (10) Interest-bearing deposits. . . . 12 -- -- 12 4 32 1 37 ----- ------ ----- ------ ----- ------ ---- ------ Total net change in income on interest-earning assets. . . . . . 29 2,071 (54) 2,046 (361) 1,859 (50) 1,448
Interest-bearing liabilities: Passbook accounts -- (83) -- (83) 3 9 -- 12 NOW accounts. . . 36 (37) (3) (4) 9 15 -- 24 Money market accounts . . . . (71) 144 (22) 51 3 (9) -- (6) Certificate accounts . . . . 375 836 79 1,290 (36) 576 (4) 536 FHLB advances and other borrowed money. . . . . . (14) 30 (1) 15 (80) 307 (36) 191 ----- ------ ----- ------ ----- ------ ---- ------ Total net change in expense on interest-bearing liabilities . . . 326 890 53 1,269 (101) 898 (40) 757 ----- ------ ----- ------ ----- ------ ---- ------ Net change in net interest income $(297) $1,181 $(107) $ 777 $(260) $ 961 $(10) $ 691 ===== ====== ===== ====== ===== ====== ==== ======
- --------------------- (1) Excludes interest on loans 90 days or more past due. Includes loans originated for sale. (2) Net change in interest income on loans includes loan fees of $164,000, $164,000 and $157,000 for the years ended September 30, 1995, 1996 and 1997, respectively.
Asset and Liability Management and Interest Rate Risk
The Savings Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Savings 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 Savings Bank's interest-earning assets by retaining for its portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one- to- four family mortgage loans. The Savings 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 Savings Bank promotes transaction accounts and certificates of deposit with terms up to six years.
The Savings Bank has adopted a strategy that is designed to maintain or improve 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; and the origination of fixed-rate loans for sale in the secondary market and the retention of the related loan servicing rights.
Sharp decreases in interest rates may adversely affect the Savings Bank's earnings while increases in interest rates may beneficially affect the Savings Bank's earnings because a larger portion of the Savings 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 Savings Bank actively originates adjustable rate loans for retention in its loan portfolio. Fixed-rate mortgage loans generally are originated for the intended purpose of resale in the secondary mortgage market. At September 30, 1997, adjustable rate loans and adjustable rate mortgage-backed securities constituted $131.5 million, or 62.8%, of the Savings Bank's total combined mortgage loan and mortgage-backed securities portfolio. Although the Savings 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 Savings Bank's exposure to fluctuations in interest rates. At September 30, 1997, the construction and land development and consumer loan portfolios amounted to $45.0 million and $11.0 million, or 21.9% and 5.3% of total loans receivable, respectively. See "Item 1. Business -- Lending Activities -- Construction and Land Development Lending" and "-- Lending Activities -- Consumer Lending."
The Savings Bank also invests in short-term to medium-term U.S. Government securities as well as mortgage-backed securities issued or guaranteed by U.S. Government agencies. See "Item 1. Business -- Investment Activities."
The following table is provided by the Office of Thrift Supervision ("OTS") and illustrates the change in net portfolio value ("NPV") at September 30, 1997, based on OTS assumptions, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counter the effect of that interest rate movement.
The Savings Bank's analysis of its interest-rate sensitivity, as illustrated in the preceding table, incorporates certain assumptions regarding the amortization of loans and other interest-earning assets and the withdrawal of deposits. The Savings Bank's interest-rate sensitivity analysis, as illustrated in the foregoing table, could vary substantially if different assumptions were used or if actual experience differs from the assumptions used. The assumptions used in preparing the table are based on market loan prepayment rates and market deposit decay rates observed by the FHLB-Seattle on or about September 30, 1997. The Savings Bank believes that the FHLB-Seattle assumptions are a realistic representation of its own portfolio.
Net Portfolio Value and Net Interest Income Analysis. In addition to the interest rate gap analysis as discussed above, management monitors the Savings Bank's interest rate sensitivity through the use of a model which estimates the change in NPV and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Savings 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 Savings Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Savings Bank's exposure to interest rate risk. The following information is presented as of September 30, 1997.
Projected Net Interest Income Current Market Value Interest ------------------------------- ------------------------------- Rate Estimated $ Change % Change Estimated $ Change % Change Scenario Value from Base from Base Value from Base from Base - -------- ----- --------- --------- ----- --------- --------- (Dollars in thousands)
400 $9,226 $531 6.11% $24,455 $(931) (3.67)% 300 9,299 604 6.95 25,528 142 0.56 200 9,360 665 7.65 26,485 1,099 4.33 100 9,095 400 4.60 26,348 962 3.79 BASE 8,695 -- -- 25,386 -- -- (100) 8,228 (467) (5.37) 23,948 (1,438) (5.67) (200) 7,714 (981) (11.28) 22,261 (3,125) (12.31) (300) 7,362 (1,333) (15.33) 21,252 (4,135) (16.29) (400) 6,971 (1,723) (19.82) 20,823 (4,563) (17.97)
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. Further, 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 Savings Bank would be expected to experience an 12.3% decrease in NPV and a 11.3% decrease in net interest income. In the event of a 200 basis point increase in interest rates, a 4.3% increase in NPV and a 7.7% increase in net interest income would be expected. Based upon the modelling described above, the Savings Bank's asset and liability structure results in decreases in NPV and decreases in net interest income in a declining interest rate scenario and increases in NPV and increases in net interest income in a rising interest rate scenario. 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 likely deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Savings Bank'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. While maturities 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 Savings 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 Savings Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 1997, the Savings Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 11.11%. At September 30, 1997, the Savings Bank also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of $42.3 million, under which $12.2 million was outstanding.
Liquidity management is both a short- and long-term responsibility of the Savings Bank's management. The Savings 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 Savings Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for repurchase agreements.
The Savings 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, 1995, 1996 and 1997, the Savings Bank originated $26.9 million, $24.5 million and $27.1 million of one- to- four family mortgage loans and $33.2 million, $29.7 million and $35.2 million of construction and land development loans, respectively. At September 30, 1997, the Savings Bank had mortgage loan commitments totalling $6.0 million and undisbursed loans in process totalling $14.8 million. The Savings 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, 1997 totalled $76.3 million. Historically, the Savings 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. At September 30, 1997, the Savings Bank was in compliance with all applicable FDIC capital requirements. For a detailed discussion of regulatory capital requirements, see "REGULATION OF THE SAVINGS BANK -- Capital Requirements."
Impact of New Accounting Pronouncements
Accounting for Employee Stock Ownership Plans. In November 1993 the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 93-6, which requires an employer to record compensation expense in an amount equal to the fair value of shares committed to be released to employees from an employee stock ownership plan and to exclude unallocated shares from earnings per share computations. The effect of SOP 93-6 on net income and book value per share in future periods cannot be predicted due to the uncertainty of the fair value of the shares at the time they will be committed to be released.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. See Note 1 of Notes to the Consolidated Financial Statements for a discussion of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and of SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125. SFAS No. 127 defers the effective date of the application of certain portions of SFAS No. 125 until January 1, 1998. Following the adoption of SFAS No. 125 on January 1, 1997, the Savings Bank recorded servicing income on loans sold of $160,000.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in February 1997, establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly-held common stock or potential common stock. It replaces the presentation of primary EPS with a presentation of basic EPS and requires the dual presentation of basic and diluted EPS on the face of the income statement. SFAS No. 128 is effective for the financial statements for the periods ending after December 15, 1997. SFAS No. 128 requires restatement of all prior period EPS data presented. The impact of its adoption is not expected to be material to the Savings Bank.
Disclosure of Information About Capital Structure. SFAS No. 129, "Disclosure of Information About Capital Structure," establishes standards for disclosing information about an entity's capital structure and applies to all entities. SFAS No. 129 continues the previous requirements to disclose certain information about an entity's capital structure found in Accounting Principles Board ("APB") Opinions No. 10, "Omnibus Opinion - 1966," and No. 15, "Earnings Per Share," and SFAS No. 47, "Disclosure of Long-Term Obligations," for entities that were subject to those standards. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997. SFAS No. 129 contains no change in disclosure requirements for entities that were previously subject to the requirements of APB Opinions Nos. 10 and 15 and SFAS No. 47. The adoption of the provisions of SFAS No. 129 is not expected to have a material impact on the Savings Bank.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income," issued in July 1997, establishes standards for reporting and presenting of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial condition. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comprehensive purposes is required.
Disclosure About Segments. SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," issued in June 1997, establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 becomes effective for the Savings Bank's fiscal year ending September 30, 1999, and requires that comparative information from earlier years be restated to conform to its requirements. The adoption of the provisions of SFAS No. 131 is not expected to have a material impact on the Savings Bank.
Disclosures About Fair Value of Financial Instruments. See Notes 1 and 14 of Notes to the Consolidated Financial Statements for a discussion of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The Savings Bank adopted SFAS No. 107 for the year ended September 30, 1996.
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock-based employee compensation
plans. This statement encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting method are required to disclose in a footnote to the financial statements pro forma net income and, if presented, earnings per share, as if this statement had been adopted. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. Management expects to use the intrinsic value method upon consummation of the Conversion and the adoption of stock based benefit plans.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP, 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 is reflected in the increased cost of the Savings Bank's operations. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
Quantitative Aspects of Market Risk. Neither the Company nor the Savings Bank maintains a trading account for any class of financial instrument nor do they engage in hedging activities or purchase high-risk derivative instruments. Furthermore, neither the Company nor the Savings Bank is subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of the Savings Bank's interest-earning assets and interest-bearing liabilities, see the tables under Item 1, "Lending Activities -- Loan Maturity," "-- Investment Activities" and "-- Deposit Activities and Other Sources of Funds -- Time Deposits by Maturities."
Qualitative Aspects of Market Risks. See the discussion under Item 7, "Asset and Liability Management and Interest Rate Risk."
Item 8.
Item 8. Financial Statements and Supplementary Data - -------------------------------------------------------
All schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related Notes.
[Letterhead of Dwyer Pemberton and Coulson, P.C.]
November 13, 1997
Board of Trustees Timberland Savings Bank, S.S.B.
We have audited the accompanying consolidated balance sheets of Timberland Savings Bank, S.S.B. and subsidiary as of September 30, 1996 and 1997, and the related consolidated statements of income, capital, and cash flows for each of the three years in the period ended September 30, 1997. These consolidated financial statements are the responsibility of the Savings Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 Savings Bank, S.S.B. and subsidiary as of September 30, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Savings Bank adopted Statement of Financial Accounting Standards No. 115, Accounting For Certain Investments in Debt and Equity Securities, as of October 1, 1994, adopted Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, as of September 30, 1996 and adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, as of January 1, 1997.
/s/Dwyer Pemberton and Coulson, P.C.
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED BALANCE SHEETS September 30, 1996 and 1997 - ------------------------------------------------------------------------------
ASSETS
1996 1997 ---------------------------- Cash and due from financial institutions: Noninterest bearing deposits $ 3,930,641 $ 4,996,116 Interest bearing deposits 1,124,684 6,450,339 ---------------------------- 5,055,325 11,446,455 ---------------------------- Investments and mortgage-backed securities: Held to maturity, market value: 1996 - $4,865,614; 1997 - $3,981,865 4,950,794 3,990,229 Available for sale, cost: 1996 - $1,551,540; 1997 - $1,586,400 1,571,676 1,586,400 ---------------------------- 6,522,470 5,576,629 ----------------------------
Loans receivable - net 170,368,073 183,171,027 Loans held for sale - at market value 6,126,870 3,856,293 ---------------------------- 176,494,943 187,027,320 ---------------------------- Accrued interest receivable 1,056,885 1,137,052 Premises and fixed assets - net 4,856,347 5,431,187 Other real estate owned - net 124,533 433,715 Other assets 246,301 500,740 ---------------------------- TOTAL ASSETS $194,356,804 $211,553,098 ============================
LIABILITIES AND CAPITAL
LIABILITIES Deposits $156,549,417 $173,003,403 Federal Home Loan Bank advances 14,354,380 12,241,304 Other liabilities and accrued expenses 2,123,705 1,663,506 ---------------------------- TOTAL LIABILITIES 173,027,502 186,908,213 ----------------------------
CAPITAL Undivided profits 21,315,990 24,644,885 Net unrealized appreciation in equity investments, net of deferred federal income taxes of $6,824 in 1996 13,312 -0- ---------------------------- TOTAL CAPITAL 21,329,302 24,644,885 ---------------------------- TOTAL LIABILITIES AND CAPITAL $ 194,356,804 $ 211,553,098 ============================
See accompanying notes.
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED STATEMENTS OF INCOME For the years ended September 30, 1995, 1996 and 1997 - ------------------------------------------------------------------------------
1995 1996 1997 --------------------------------------------- INTEREST AND DIVIDEND INCOME Loans receivable $ 13,602,716 $ 15,879,506 $ 17,418,130 Investments and mortgage- backed securities 666,671 396,571 279,212 Dividends 98,471 126,189 116,281 Financial institutions 85,461 97,283 133,776 --------------------------------------------- TOTAL INTEREST INCOME 14,453,319 16,499,549 17,947,399 ---------------------------------------------
INTEREST EXPENSE Deposits 5,695,604 6,949,485 7,515,843 Federal Home Loan Bank advances and mortgage indebtness 663,918 679,075 869,822 --------------------------------------------- TOTAL INTEREST EXPENSE 6,359,522 7,628,560 8,385,665 --------------------------------------------- NET INTEREST INCOME 8,093,797 8,870,989 9,561,734
PROVISION FOR LOAN LOSSES -0- 70,000 596,782 --------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,093,797 8,800,989 8,964,952 ---------------------------------------------
NONINTEREST INCOME Service charges on deposits 277,275 278,046 313,667 Gain on sale of loans - net 44,512 33,908 339,199 Other fees 113,129 163,419 200,119 Income (loss) on operations of real estate - net (17,216) (999) 6,020 Escrow and annuity fees 111,092 132,088 108,548 Servicing income on loans sold -0- -0- 160,068 Other 64,490 81,927 107,356 --------------------------------------------- TOTAL NONINTEREST INCOME 598,282 688,389 1,234,977 ---------------------------------------------
NONINTEREST EXPENSE Salaries and employee benefits 2,328,768 2,505,717 2,894,058 Premises and fixed assets 505,924 554,084 723,364 Deposit insurance premiums 295,252 1,202,535 76,316 Advertising 132,638 136,496 234,061 Other 826,828 993,435 1,112,902 --------------------------------------------- TOTAL NONINTEREST EXPENSE 4,089,410 5,392,267 5,040,701 --------------------------------------------- INCOME BEFORE INCOME TAXES 4,602,669 4,097,111 5,159,228
PROVISION FOR INCOME TAXES 1,602,976 1,419,307 1,830,333 --------------------------------------------- NET INCOME $ 2,999,693 $ 2,677,804 $ 3,328,895 =============================================
See accompanying notes.
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED STATEMENTS OF CAPITAL For the years ended September 30, 1995, 1996 and 1997
- ------------------------------------------------------------------------------
NET UNREALIZED APPRECIATION UNDIVIDED IN EQUITY TOTAL PROFITS INVESTMENTS CAPITAL -------------------------------------------
BALANCE, October 1, 1994 $ 15,638,493 $ -0- $ 15,638,493 Net income 2,999,693 2,999,693 Unrealized appreciation in available-for-sale investments, net of deferred income taxes of $7,363 14,357 14,357 ------------------------------------------- BALANCE, September 30, 1995 18,638,186 14,357 18,652,543 Net income 2,677,804 2,677,804 Unrealized depreciation in available-for-sale investments, net of deferred income taxes of $539 (1,045) (1,045) ------------------------------------------- BALANCE, September 30, 1996 21,315,990 13,312 21,329,302 Net income 3,328,895 3,328,895 Realized gain on sale of investments, net of deferred income taxes of $6,824 (13,312) (13,312) ------------------------------------------- BALANCE, September 30, 1997 $ 24,644,885 $ -0- $ 24,644,885 ===========================================
See accompanying notes.
TIMBERLAND SAVINGS BANK, S.S.B.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 1995, 1996 and 1997
- ------------------------------------------------------------------------------
1995 1996 1997 ------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,999,693 $ 2,677,804 $ 3,328,895 -------------------------------------- Noncash revenues, expenses, gains and losses included in income: Depreciation 223,346 243,291 303,901 Deferred federal income taxes 180,000 (188,000) 42,000 Federal Home Loan Bank stock dividends (82,900) (107,000) (116,100) Market value adjustment - loans held for sale (23,502) 86,793 (70,305) Loss (gain) on sale of other real estate owned, net 20,591 (28) (12,358) FIIG stock dividends (14,080) (17,160) -0- Provision for loan and other real estate owned losses -0- 72,000 597,532 Net (increase) decrease in loans originated for sale (2,294,988) (689,927) 2,340,882 Increase in other assets, net (288,707) (47,296) (334,606) Increase (decrease) in other liabilities and accrued expenses, net (104,412) 1,245,675 (502,198) -------------------------------------- (2,384,652) 598,348 2,248,748 -------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 615,041 3,276,152 5,577,643 --------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of held-to-maturity investments and mortgage- backed securities (2,552,775) -0- -0- Sales of held-to-maturity investments and principal repayments on mortgage- backed securities 8,695,567 4,905,387 947,253 Sale of available-for-sale investments -0- -0- 101,376 Increase in loans receivable, net (32,646,646) (19,438,869) (13,399,736) Additions to premises and fixed assets, net (370,912) (1,491,635) (878,741) Additions to other real estate owned (14,830) (98,759) (568,172) Dispositions of other real estate owned 191,726 181,283 270,598 Investment in limited partnership (36,898) -0- -0- -------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (26,734,768) (15,942,593) (13,527,422) --------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES Increase in certificates of deposit, net 17,888,549 11,485,062 11,425,914 Increase (decrease) in other deposits, net (3,473,501) 1,980,132 5,027,871 Increase (decrease) in Federal Home Loan Bank advances, net 9,204,810 (603,748) (2,113,076) --------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,619,858 12,861,446 14,340,709 --------------------------------------- NET INCREASE (DECREASE) IN CASH (2,499,869) 195,005 6,390,930
CASH AND DUE FROM FINANCIAL INSTITUTIONS, Beginning 7,360,189 4,860,320 5,055,325 ---------------------------------------
CASH AND DUE FROM FINANCIAL INSTITUTIONS, Ending $ 4,860,320 $ 5,055,325 $11,446,255 =======================================
1995 1996 1997 --------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $ 1,450,000 $ 1,545,000 $ 1,578,367 Interest paid $ 6,255,112 $ 7,628,336 $ 8,377,026
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES Market value adjustment of investments held for sale $ 21,720 $ (1,584) $ (20,136) Deferred federal income taxes on market value adjustment of investments held for sale $ (7,363) $ 539 $ 6,824 Loans transferred to other real estate owned $ -0- $ 85,253 $ 506,575
See accompanying notes.
TIMBERLAND SAVINGS BANK, S.S.B.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended September 30, 1996 and 1997
NOTE 1. Organization and Summary of Significant Accounting Policies
Timberland Savings Bank, S.S.B. (the Savings Bank) was established in 1915 and provides financial services to borrowers and depositors located primarily in Western Washington.
The accounting principles followed by the Savings Bank and its wholly-owned subsidiary, Timberland Service Corp., and the methods of applying them conform with generally accepted accounting principles and with general industry practice. The more significant accounting policies are summarized below.
Principles of Consolidation:
All significant intercompany balances and transactions between the Savings Bank and its subsidiary have been eliminated in consolidation.
Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Financial Instruments:
For the year ended September 30, 1996, the Savings Bank has adopted Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About Fair Value of Financial Instruments. Under SFAS No. 107, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties (Note 14).
Investments and Mortgage-Backed Securities:
In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which was adopted as of October 1, 1994, the Savings Bank has classified its investments and mortgage-backed securities as follows:
Held-to-Maturity: Debt securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are stated at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method.
Available-for-Sale: 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 classified as available-for-sale. These assets are stated at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported as a separate component of capital until realized.
Trading Securities: Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and stated at market value with unrealized gains and losses included in earnings. The Savings Bank has no investments or mortgage-backed securities classified for trading purposes.
Gains or losses upon disposition of securities, regardless of classification, are based on the net proceeds and the adjusted stated amount of the securities sold, using the specific-identification method.
NOTE 1. (Continued)
Loans Receivable: - ----------------
Loans receivable are reported at the principal amount outstanding, net of loans in process of completion, unearned income, an allowance for loan losses and participating interests sold.
Allowance for Losses:
Allowances for losses on specific problem loans and other 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 Savings 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 Savings Bank's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements.
The Savings 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, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. These statements address the disclosure requirements and allocations 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 Savings Bank excludes smaller balance homogeneous loans, including single family residential and consumer loans from the scope of this statement.
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 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. At September 30, 1995, 1996 and 1997, respectively, the Savings Bank had no loans deemed to be impaired as defined by SFAS No. 114.
Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market are stated at the lower of cost or estimated market value in the aggregate. Gains or losses on sales of loans are recognized at the time of sale and include adjustments to record such loans at the lower of cost or market. The gain or loss is determined by the difference between the net sales proceeds and the recorded value of the loans, including any remaining deferred loan fees.
Premises and Fixed Assets:
Premises and fixed assets 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 five years; automobile - five years. The cost of maintenance and repairs is charged to expense as incurred.
NOTE 1. (Continued)
Other Real Estate Owned:
Other real estate owned consists of properties acquired through loan foreclosure and are initially recorded at fair value at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the recorded value of a property exceeds its estimated net realizable value.
Interest on Loans and Loan Fees:
Interest on loans is recorded as income as borrowers' monthly payments become due. Allowances are established for uncollected interest on loans for which the interest is determined to be uncollectible. 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 collectibility of principal and interest is no longer doubtful.
The Savings Bank charges fees for originating and servicing loans. These fees are for inspection of property and other miscellaneous services. That portion of loan fees exceeding the estimated cost of initiating and closing 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 balance is credited to income at the time of repayment.
Loan Servicing Fees:
Fees earned for servicing loans for the Federal Home Loan Mortgage Corporation ("FHLMC") are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred.
Income Taxes:
The Savings Bank files a consolidated federal income tax return with its subsidiary. The Savings Bank qualifies under provisions of the Internal Revenue Code which permit, as a deduction from taxable income, an allowance for bad debts based on a percentage of taxable income. The percentage method bad debt deduction available was 8 percent for the years ended September 30, 1995 and 1996.
Due to the passage of the Small Business Job Protection Act, effective October 1, 1996, the percentage-of-income bad debt deduction for federal tax purposes was eliminated. In addition, federal tax bad debt reserves which have been accumulated since October 1, 1988, that exceed the reserves which would have been accumulated based on actual experience, are subject to recapture over a six-year recapture period effective for tax years beginning October 1, 1996. However, the six-year recapture period may be postponed for up to two years provided the Savings Bank satisfies a mortgage origination test. As of September 30, 1997, the Savings Bank's federal tax bad debt reserves subject to recapture approximated $1,700,000.
Deferred federal income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. These will result in differences between income for tax purposes and income for financial statement purposes in future years (Note 11).
Advertising:
The Savings Bank expenses all advertising costs as incurred. Direct-response advertising costs incurred will be capitalized and amortized over the estimated period to be benefited.
NOTE 1. (Continued)
Statement of Cash Flows:
Cash and due from financial institutions include cash, funds due from financial institutions, and certificates of deposit with maturities of ninety days or less.
Recently Adopted Accounting Standards:
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76, 77 and 122 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. It requires that liabilities and derivatives incurred or obtained by transferors as part of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. Servicing assets and liabilities must be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss and assessment for asset impairment or increased obligation based on their fair values. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996.
The Savings Bank adopted SFAS No. 125 effective January 1, 1997, as required. SFAS No. 125 also requires that mortgage servicing rights be evaluated for impairment based on the assets fair value. The Savings Bank estimates fair value by discounting servicing asset cash flows using discount and prepayment rates that it believes market participants would use. For purposes of measuring impairment, mortgage servicing rights are stratified predominantly by loan term.
Reclassifications:
Certain September 30, 1995 and 1996 amounts have been reclassified to conform to the September 30, 1997 presentation. The reclassifications had no effect on previously reported net income or capital.
NOTE 2. Investments and Mortgage-Backed Securities
The following tables summarize the amortized cost, gross unrealized gains and losses, and the estimated market value of the Bank's investments and mortgage-backed securities at September 30, 1996 and 1997:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1996 COST GAINS LOSSES VALUE ---- --------------------------------------------- Held-to-Maturity Mortgage-backed securities: FHLMC $1,848,550 $ 2,356 $ (28,472) $1,822,434 FNMA 1,536,235 5,095 (58,637) 1,482,693 GNMA 1,566,009 -0- (5,522) 1,560,487 ---------------------------------------------- TOTAL HELD-TO- MATURITY $4,950,794 $ 7,451 $ (92,631) $4,865,614 ==============================================
Available-for-Sale FHLB stock $1,470,300 $ -0- $ -0- $1,470,300 FIIG stock 81,240 20,136 101,376 ---------------------------------------------- TOTAL AVAILABLE- FOR-SALE $1,551,540 $ 20,136 $ -0- $1,571,676 ==============================================
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1997 COST GAINS LOSSES VALUE ---- --------------------------------------------- Held-to-Maturity Mortgage-backed securities: FHLMC $1,398,454 $ 7,699 $ (12,600) $1,393,553 FNMA 1,255,534 9,614 (39,596) 1,225,552 GNMA 1,336,241 26,519 -0- 1,362,760 ---------------------------------------------- TOTAL HELD-TO- MATURITY $3,990,229 $ 43,832 $ (52,196) $3,981,865 ==============================================
Available-for-Sale FHLB stock $1,586,400 $ -0- $ -0- $1,586,400 ==============================================
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.
Mortgage-backed securities pledged as collateral for public fund deposits totaled $1,161,000 and $1,663,000 at September 30, 1996 and 1997, respectively.
The contractual maturity of investments and mortgage-backed securities at September 30, 1997, follows. Expected maturities may differ from contractual maturities due to the prepayment of principal or call provision.
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------------------------------------------
Held-To-Maturity: Due after 1 year through 5 years $ 946,661 $ 1,798 $ (12,600) $ 935,859 Due after 10 years 3,043,568 42,034 (39,596) 3,046,006 ---------------------------------------------- $3,990,229 $ 43,832 $ (52,196) $3,981,865 ==============================================
Available-For-Sale: FHLB stock $1,586,400 $ -0- $ -0- $1,586,400 ==============================================
NOTE 3. Loans Receivable - Net and Loans Held for Sale
Loans receivable including loans held for sale consisted of the following at September 30:
1996 1997 -----------------------------
Mortgage loans: One-to-four family $ 89,761,659 $ 96,252,021 Multi-family 12,569,371 12,177,603 Commercial 26,529,011 29,409,840 Construction and land development 47,140,084 45,031,339 Land 6,115,264 6,937,002 ----------------------------- TOTAL MORTGAGE LOANS 182,115,389 189,807,805 ----------------------------- Consumer loans: Home equity and second mortgage 6,576,284 8,142,495 Other 2,474,958 2,824,365 ----------------------------- TOTAL CONSUMER LOANS 9,051,242 10,966,860 ----------------------------- Commercial business loans 475,731 693,787 ----------------------------- TOTAL LOANS RECEIVABLE 191,642,362 201,468,452 -----------------------------
Less: Undisbursed portion of loans in process 18,433,608 14,820,370 Unearned income 1,707,718 1,760,945 Allowance for loan losses 1,132,963 1,716,110 ----------------------------- 21,274,289 18,297,425 ----------------------------- LOANS RECEIVABLE - NET 170,368,073 183,171,027 ----------------------------- Loans held for sale (one-to-four family) 6,216,243 3,875,361 Market-value adjustment (89,373) (19,068) ----------------------------- LOANS HELD FOR SALE - NET 6,126,870 3,856,293 ----------------------------- LOANS RECEIVABLE AND LOANS HELD FOR SALE - NET $ 176,494,943 $187,027,320 ============================= The composition of loans receivable including loans held for sale by interest rate type at September 30, 1997, is as follows:
FIXED ADJUSTABLE RATE RATE TOTAL ------------------------------------------- Mortgage loans: One-to-four family $ 12,951,771 $ 87,175,611 $ 100,127,382 Multi-family 5,404,429 6,773,174 12,177,603 Commercial 6,875,212 22,534,628 29,409,840 Construction and land development 35,180,824 9,850,515 45,031,339 Land 6,917,544 19,458 6,937,002 ------------------------------------------- TOTAL MORTGAGE LOANS 67,329,780 126,353,386 193,683,166 -------------------------------------------
Consumer loans: Home equity and second mortgage 6,081,523 2,060,972 8,142,495 Other 2,730,873 93,492 2,824,365 ------------------------------------------- TOTAL CONSUMER LOANS 8,812,396 2,154,464 10,966,860 -------------------------------------------
Commercial business loans 685,331 8,456 693,787 ------------------------------------------- TOTAL LOANS $ 76,827,507 $128,516,306 205,343,813 =========================== ------------- Less: Undisbursed portion of loans in process 14,820,370 Unearned income 1,760,945 Allowance for loan losses 1,716,110 Market-value adjustment - loans held for sale 19,068 ------------- 18,316,493 ------------- LOANS RECEIVABLE AND LOANS HELD FOR SALE - NET $ 187,027,320 =============
The weighted average interest rate on all loans at September 30, 1996 and 1997, was 8.77 percent and 8.79 percent respectively.
Loans serviced for the Federal Home Loan Mortgage Corporation and others at September 30, 1996 and 1997, $45,859,000 and $54,353,000 respectively.
At September 30, 1996 and 1997, the Savings Bank had commitments outstanding to originate mortgage loans at current market rates totaling $2,642,000 and $6,011,000 respectively.
At September 30, 1996 and 1997, the Savings Bank had commitments outstanding for nonmortgage loans totaling $1,621,000 and $2,922,000 respectively.
Officers, employees and trustees of the Savings Bank have outstanding loans which were made in the ordinary course of business. At September 30, 1996 and 1997, such loans approximated $1,862,000 and $1,820,000 respectively.
An analysis of loans outstanding to executive officers and trustees, net of percentage sold, as of September is as follows:
1996 1997 ----------------------- Balance, Beginning of period $ 702,392 $ 845,444 New loans 377,150 17,500 Repayments/sales (234,098) (59,731) ----------------------- Balance, End of period $ 845,444 $ 803,213 =======================
NOTE 3. (Continued)
At September 30, 1996 and 1997, the Savings Bank had non-accruing loans totaling approximately $1,520,000 and $7,555,000 respectively. At September 30, 1997, approximately $109,000 of loans were past due ninety days or more and still accruing. Unrecorded interest on the non-accrual loans totaled approximately $402,000 at September 30, 1997. No interest income was recorded on non-accrual loans for the year ended September 30, 1997.
An analysis of the allowance for loan losses at September 30 follows:
1995 1996 1997 ---------------------------------------
Balance, Beginning of period $ 1,120,108 $ 1,119,159 $ 1,132,963 Provision for loan losses 70,000 596,782 Transfers (54,718) (3,000) Loans charged off (949) (1,478) (19,160) Recoveries 8,525 ---------------------------------------
Balance, End of period $ 1,119,159 $ 1,132,963 $ 1,716,110 =======================================
Mortgage servicing rights totaling $166,785 were capitalized subsequent to the adoption of SFAS Nos. 125 and 127 on January 1, 1997. Amortization of these rights was $8,446 for the period ended September 30, 1997. The balance of $158,339 is included in "Other Assets" in the consolidated balance sheet at September 30, 1997.
NOTE 4. Premises and Fixed Assets
Premises and fixed assets consisted of the following at September 30:
1996 1997 -------------------------
Land $ 1,130,286 $ 1,804,067 Office buildings and improvements 3,073,018 4,261,597 Furniture and equipment 1,680,731 1,898,136 Automobiles 21,883 21,883 Property held for future expansion 20,584 20,584 Construction and purchases in progress 1,230,679 6,199 ------------------------- 7,157,181 8,012,466 Less accumulated depreciation 2,300,834 2,581,279 ------------------------- TOTAL $ 4,856,347 $ 5,431,187 =========================
NOTE 5. Other Real Estate Owned
Other real estate owned consisted of the following at September 30:
1996 1997 -------------------------
Real estate acquired through foreclosure $ 194,765 $ 466,161 Allowance for possible losses (70,232 (32,446) ------------------------- TOTAL $ 124,533 $ 433,715 =========================
On October 29, 1997, the Savings Bank accepted a deed in lieu of foreclosure on a condominium project which had an unpaid balance of $2,886,755 and was included in non-accruing loans at September 30, 1997. Management does not expect to incur any material loss upon disposition of the property.
NOTE 5. (Continued)
An analysis of the allowance for possible losses follows:
1995 1996 1997 --------------------------------- Balance, Beginning of period $ 13,514 $ 13,514 $ 70,232 Provision for additional losses 17,550 2,000 750 Transfers 54,718 3,000 Charged off (17,550) (41,536) --------------------------------- Balance, End of period $ 13,514 $ 70,232 $ 32,446 =================================
NOTE 6. Accrued Interest Receivable
Accrued interest receivable consisted of the following at September 30:
1996 1997 ---------------------------
Loans receivable $ 1,102,107 $ 1,573,627 Less reserve for uncollected interest 84,204 479,992 1,017,903 1,093,635 Interest bearing deposits and securities 38,982 43,417 --------------------------- TOTAL $ 1,056,885 $ 1,137,052 ===========================
NOTE 7. Deposits
Deposits consisted of the following at September 30:
1996 1997 ---------------------------
Noninterest bearing $ 3,571,060 $ 5,163,986 N.O.W. checking 18,002,534 19,587,043 Passbook savings 25,400,165 26,268,977 Money market accounts 13,364,304 14,423,860 Certificates of deposit 93,332,220 104,758,135 Other 2,879,134 2,801,402 --------------------------- TOTAL $156,549,417 $173,003,403 ===========================
The weighted-average interest rate on all deposits at September 30, 1996 and 1997, was 4.55 percent and 4.64 percent respectively.
Officers, employees and trustees of the Savings Bank have deposits totaling $1,089,823 and $1,072,880 at September 30, 1996 and 1997, respectively.
Deposits of $100,000 or greater totaled $17,721,000 and $22,897,000 at September 30, 1996 and 1997, respectively.
Scheduled maturities of certificates of deposit accounts at September 30 are as follows:
1996 1997 ---------------------------
Within one year $ 64,201,806 $ 76,283,894 One to two years 18,737,200 22,350,343 Two to five years 9,814,221 5,736,988 After five years 578,993 386,910 --------------------------- TOTAL $ 93,332,220 $104,758,135 ===========================
NOTE 7. (Continued)
Certificates of deposit by scheduled maturity and interest rate at September 30, 1997, are as follows:
INTEREST RATE WITHIN ONE TO TWO TO OVER FIVE RANGE ONE YEAR TWO YEARS FIVE YEARS YEARS TOTAL - ------------- ----------------------------------------------------------- 2.00 - 3.99% $ 153,078 $ -0- $ -0- $ -0- $ 153,078 5.00 - 5.99% 64,636,550 10,991,633 3,330,073 246,306 79,204,562 6.00 - 6.99% 11,136,631 7,118,283 2,054,566 41,468 20,350,948 7.00 and over 357,634 4,240,428 352,349 99,136 5,049,547 ----------------------------------------------------------- TOTAL $76,283,893 $22,350,344 $5,736,988 $386,910 $104,758,135 ===========================================================
Interest expense, by account type, is as follows at September 30:
1995 1996 1997 ---------------------------------------
Certificates of deposit $ 3,980,879 $ 5,270,398 $ 5,806,717 Money market accounts 468,575 520,235 514,495 Passbook savings 820,657 737,665 749,593 N.O.W. checking 425,493 421,187 445,038 --------------------------------------- TOTAL $ 5,695,604 $ 6,949,485 $ 7,515,843 =======================================
NOTE 8. Federal Home Loan Bank Advances
The Savings Bank has been approved for participation in the Federal Home Loan Bank of Seattle Cash Management Advance Program, maturing July 1998, with a maximum facility of $10,210,000. 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, 1996 and 1997.
The Advances, Security and Deposit Agreement which includes the Cash Management Advance Program, is maintained at 20 percent of total assets. The Savings Bank had advances at September 30, 1997, as follows:
Borrowing Interest Rate Maturity Date Balance - ------------ ------------- ------------- --------
Fixed rate 6.70% 04/28/98 $ 500,000 Fixed rate (monthly amortization) 6.11% 02/22/02 442,491 Fixed rate callable 5.39% 06/03/02 10,000,000 Fixed rate (monthly amortization) 6.55% 02/22/06 1,298,813 ------------ $ 12,241,304 ============ The weighted average rate for all advances at September 30, 1997 was 5.60 percent.
Under the Advances, Security and Deposit Agreement, virtually all of the Savings Bank's assets, not otherwise encumbered, are pledged as collateral for advances.
At September 30, 1997, annual repayments of FHLB advances, through September 30, 2002, and thereafter, totaled $500,000 for the year ending September 30, 1998, $10,442,491 for the year ending September 30, 2002 and $1,298,813 for the year ending September 30, 2006.
NOTE 9. Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses consisted of the following at September 30: 1996 1997 -----------------------
S.A.I.F. special assessment $ 874,917 $ -0- Federal income taxes 237,735 482,877 Accrued pension and profit sharing 417,137 492,680 Accrued interest on deposits and FHLB advances 138,246 146,885 Accounts payable and accrued expenses - other 455,670 541,064 ----------------------- TOTAL $2,123,705 $1,663,506 =======================
NOTE 10. Regulatory Capital
As a Washington-chartered savings bank, the Savings Bank is subject to the capital requirements of the FDIC and the Division. The FDIC requires state-chartered savings banks, including the Savings Bank, to have a minimum leverage ratio of Tier 1 capital to total assets of at least 3 percent, provided 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 percent to 2 percent above the stated minimum with an absolute total capital to risk-weighted assets of at least 8 percent. The Savings Bank has not been notified by the FDIC of any leverage capital requirements specifically applicable to it.
The Savings Bank's capital position relative to its FDIC capital requirements at September 30, 1997, is as follows:
AMOUNT PERCENT ---------------------------- Tier 1 (leverage) capital $ 24,644,885 12.01 Tier 1 (leverage) capital requirement 8,204,760 4.00 -------------------------- EXCESS $ 16,440,125 8.01 ==========================
Tier 1 risk adjusted capital $ 26,360,885 17.43 Tier 1 risk adjusted capital requirement 6,049,400 4.00 -------------------------- EXCESS $ 20,311,485 13.43 ==========================
Total risk-based capital $ 26,360,885 17.43 Total risk-based capital requirement 12,098,800 8.00 -------------------------- EXCESS $ 14,262,085 9.43 ==========================
The Savings Bank's total capital to total assets at September 30, 1996 and 1997, was 11.0 percent and 11.7 percent respectively.
NOTE 11. Federal Income Taxes
The Savings Bank has qualified under provisions of the Internal Revenue Code that permit federal income taxes to be computed after deduction of additions to bad debt reserves. Accordingly, capital includes approximately $2,100,000 for which no provision for federal income taxes has been made. If in the future capital 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:
1995 1996 1997 --------------------------------------- Current $ 1,422,976 $ 1,607,307 $ 1,872,333 Deferred (credit) 180,000 (188,000) (42,000) --------------------------------------- TOTAL $ 1,602,976 $ 1,419,307 $ 1,830,333 =======================================
NOTE 11. (Continued)
The components of federal income taxes at September 30 are as follows:
1996 1997 ----------------------- Current $ 48,911 $ 342,877 Deferred 182,000 140,000 Deferred, available-for-sale securities 6,824 -0- ---------------------- TOTAL $ 237,735 $ 482,877 ====================== The components of the Bank's deferred tax assets and liabilities at September 30 are as follows:
1996 1997 -----------------------
Deferred tax assets: Accrued interest on loans $ -0- $ 87,424 S.A.I.F. special assessment 297,472 -0- Depreciation 22,620 26,488 Accrued vacation 18,112 23,602 Deferred compensation 30,021 60,041 Loans held for sale market value adjustment 30,387 6,483 ---------------------- TOTAL DEFERRED TAX ASSETS 398,612 204,038 ----------------------
Deferred tax liabilities: FHLB and FIIG stock dividends 277,692 306,544 Federal income tax bad debt deduction 269,274 -0- Real estate sale, installment basis 33,212 32,858 Unrealized securities gains 6,824 -0- Other 434 4,636 ---------------------- TOTAL DEFERRED TAX LIABILITIES 587,436 344,038 ---------------------- DEFERRED TAX LIABILITY - NET $ 188,824 $ 140,000 ======================
The provision for federal income taxes differs from that computed at the statutory corporate tax rate at September 30 as follows:
1995 1996 1997 ---------------------------------------
Tax provision at statutory rate $1,564,907 $1,393,018 $1,754,138 Bad debt deduction Gain on sale of other real estate owned Nondeductible losses/ expenses - net 10,021 27,659 8,024 Other - net 28,048 (1,370) 68,171 --------------------------------------- TOTAL TAX EXPENSE $1,602,976 $1,419,307 $1,830,333 =======================================
NOTE 12. Profit Sharing Plans
The Savings Bank maintains a tax-qualified profit sharing plan for the benefit of all eligible employees who are at least twenty-one years of age and work a minimum of 501 hours. The Savings Bank contributed $177,581 and $171,616 to the plan in 1996 and 1997 respectively. Contributions are made on a discretionary basis.
In addition, the Savings Bank has an employee bonus plan based on net income. Bonuses accrued for the years ended September 30, 1996 and 1997, totaled $107,112 and $144,472 respectively.
NOTE 13. Deferred Compensation/Noncompetition Agreement
The Savings Bank has a deferred compensation/noncompetition arrangement with its chief executive officer which will provide monthly payments of $1,600 per month if retirement occurs at age sixty-two or $2,000 per month if retirement occurs at age sixty-five. 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 sixty months. The present value of the payments based upon the life expectancy of the chief executive officer are being accrued based on a retirement age of sixty-five and are included in other liabilities in the consolidated financial statements. As of September 30, 1996 and 1997, $132,444 and $176,592 respectively, has been accrued under the agreement.
NOTE 14. Fair Value of Financial Instruments
The Savings Bank has adopted Statement of Financial Accounting Standards No. 107, Disclosure About Fair Value of Financial Instruments, which 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 Savings Bank's significant financial instruments are set forth below.
Cash and Due from Financial Institutions: The recorded amount is a reasonable estimate of fair value.
Investments and Mortgage-backed Securities and Loans Held for Sale: The fair value of investments and mortgage-backed securities and loans held for sale have been based upon quoted market prices or dealer quotes.
Loans Receivable - Net: 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 upon the historical experience of the Savings Bank.
Mortgage Servicing Rights: The fair value of mortgage servicing rights is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate.
Other Assets, Other Liabilities and Accrued Expenses: The recorded amount is a reasonable estimate of fair value because of the short-term nature of these items.
Deposits: The fair value of deposits with no stated maturity date are 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 Savings 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, 1997, are as follows:
RECORDED FAIR AMOUNT VALUE --------------------------- Financial assets: Cash and due from financial institutions $ 11,446,455 $ 11,446,000 Investments and mortgage-backed securities 5,576,629 5,568,000 Loans receivable - net and loans held for sale 187,027,320 191,655,000 Mortgage servicing rights 158,339 166,000 Other assets 1,913,168 1,913,000
Financial liabilities: Deposits 173,003,403 173,468,000 Federal Home Loan Bank advances 12,241,304 12,176,000 Other liabilities and accrued expenses 1,663,506 1,664,000
NOTE 15. Conversion to Capital Stock Form of Ownership:
The Board of Trustees of the Savings Bank adopted a Plan of Conversion on July 10, 1997, to convert from a Washington-chartered mutual savings bank to a Washington-chartered capital stock savings bank with the concurrent formation of a holding company, subject to approval by the regulatory authorities and members of the Savings Bank. The conversion is expected to be accomplished through amendment of the Savings Bank's Washington charter and the sale of the holding company's common stock in an amount equal to the consolidated proforma market value of the holding company and the Savings Bank after giving effect to the conversion. The shares of common stock will be offered initially to the Savings Bank's depositors, employee benefit plans and to certain other eligible subscribers in a subscription offering. It is anticipated that any shares not purchased in the subscription offering will be offered in a direct community offering, and then any remaining shares offered to the general public in a syndicated community offering.
At the time of the conversion, the Savings Bank will establish a liquidation account in an amount equal to its capital as of the last date of the consolidated statement of financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Savings 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 Savings Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held.
Under Washington law, the holding company is prohibited from paying a dividend if, as a result of its payment, the holding company would be unable to pay its debts as they become due in the normal course of business, or if the Holding Company's total liabilities would exceed its total assets. As a converted institution, the Savings Bank also will be subject to the regulatory restriction that it will not be permitted to declare or pay a dividend on or repurchase any of its capital stock if the effect thereof would be to cause its regulatory capital to be reduced below the amount required for the liquidation account established in connection with the conversion.
Conversion costs will be deferred and reduce the proceeds from the shares sold in the conversion. If the conversion is not completed, all costs will be charged as an expense. Conversion costs incurred for the year ended September 30, 1997, were approximately $145,000.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure --------------------
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The Board of Directors of the Savings Bank is presently composed of nine members, who are elected for terms of three years, one-third of whom are elected annually in accordance with the Bylaws of the Savings Bank. The executive officers of the Savings Bank are elected annually by the Board of Directors and serve at the Board's discretion. The following table sets forth information with respect to the Directors and executive officers of the Savings Bank.
Directors of the Company
Age at Current September Director Term Name 30, 1997 Since Expires - ---- -------- ----- -------
Richard R. Morris, Jr. 60 1997 1998 Jon C. Parker 48 1997 1998 James C. Mason 42 1997 1998 Clarence E. Hamre 63 1997 1999 Robert Backstrom 68 1997 1999 Andrea M. Clinton 40 1997 1999 Michael R. Sand 43 1997 2000 Alan E. Smith 66 1997 2000 Peter J. Majar 70 1997 2000
Directors of the Savings Bank
Age at Current September Director Term Name 30, 1997 Since Expires - ---- -------- ----- -------
Clarence E. Hamre 63 1969 1999 Michael R. Sand 43 1993 2000 Andrea M. Clinton 40 1996 1999 Robert Backstrom 68 1992 1999 Richard R. Morris, Jr. 60 1992 1998 Alan E. Smith 66 1992 2000 Peter J. Majar 70 1987 2000 Jon C. Parker 48 1992 1998 James C. Mason 42 1993 1998
Executive Officers of the Company and Savings Bank
Age at Position September ------------------------------------------ Name 30, 1997 Company Savings Bank - ---- -------- ------- ------------
Clarence E. Hamre 63 Chairman of the Board, Chairman of the Board, President and Chief President and Chief Executive Officer Executive Officer Michael R. Sand 43 Executive Vice Chief Financial Officer President and and Executive Vice Secretary President, Secretary and Director Paul G. MacLeod 53 Treasurer Treasurer
Biographical Information
Clarence E. Hamre has served as the Savings Bank's President and Chief Executive Officer since 1969.
Michael R. Sand has served as the Savings Bank's Executive Vice President since 1986. Mr. Sand is the President of the Aberdeen Neighborhood Housing Services, the former President of the Grays Harbor Chamber of Commerce and a member of the Hoquiam Lion's Club.
Paul G. MacLeod is the Savings Bank's Treasurer and has been with the Savings Bank since 1987.
Item 11.
Item 11. Executive Compensation - ---------------------------------
Summary Compensation Table. The following information is furnished for Messrs. Hamre and Sand. No other executive officer of Savings Bank received salary and bonus in excess of $100,000 during the year ended September 30, 1997.
Annual Compensation -------------------------------------------- Other Annual All Other Name and Compensation Compensation Position Year(1) Salary($) Bonus($) ($)(2) ($)(3) - -------- ------- --------- -------- ------ ------
Clarence E. Hamre 1997 $152,289 $26,778 -- $59,148 Chairman of the 1996 146,588 29,997 -- 59,148 Board, President and Chief Executive Officer
Michael R. Sand 1997 $95,673 4,742 -- 10,042 Executive Vice 1996 91,004 5,246 -- 9,625 President and Secretary
- ------------- (1) Information prior to 1996 is not disclosed because the Company was not a SEC-registrant during the time. (2) Includes perquisites and other personal benefits, unless the aggregate amount of such compensation is the lesser of either $50,000 or 10% of total annual salary and bonus. (3) Includes amounts paid in connection with (i) any contract or arrangement with the Savings Bank, (ii) dollar value of amounts earned on long-term incentive plans; (iii) contributions made by the Savings Bank on behalf of the officer to vested and unvested defined contribution plans.
Deferred Compensation Agreement. The Savings Bank has entered into a deferred compensation agreement with Mr. Hamre which provides that, commencing upon his retirement at or after age 65, Mr. Hamre will
receive $2,000 per month for life. The monthly benefit is reduced to $1,600 per month in the event of Mr. Hamre's retirement prior to age 65. At Mr. Hamre's death, the monthly benefit would be payable to his surviving spouse until the earlier to occur of her death or 60 months. At September 30, 1997, the Savings Bank had accrued $177,000 in compensation expense with respect to its obligation to Mr. Hamre under the agreement.
Directors' Compensation
Board Fees. Except for the Messrs. Hamre and Sand, Directors are paid $500 per month and $250 for each regular Board meeting that they attend. Directors also receive $200 for each special Board meeting or committee meeting that they attend. Director fees totalled $88,000 for the year ended September 30, 1997. It is currently anticipated that, after completion of the Conversion, directors' fees will be paid by the Company and no separate fees will be paid for service on the Board of Directors of the Savings Bank.
Deferred Compensation Plan. The Savings Bank maintains a deferred compensation plan for the benefit of directors who may elect to defer receipt of all or a portion of their fees until retirement or termination of service. At the director's election, benefits are distributed in a lump sum or installment payments. At September 30, 1997, none of the Savings Bank's directors had elected to participate in the plan.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The Company had no shares of common stock outstanding at September 30, 1997.
(b) Security Ownership of Management.
The Company had no shares of common stock outstanding at September 30, 1997.
(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.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
Current law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. The Savings Bank is therefore prohibited from making any new loans or extensions of credit to the Savings Bank's executive officers and directors and at different rates or terms than those offered to the general public and has adopted a policy to this effect. The aggregate amount of loans by the Savings Bank to its executive officers and directors was approximately $803,000 at September 30, 1997. Such loans (i) were made in the ordinary course of business, (ii) were made on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with the Savings Bank's other customers, and (iii) did not involve more than the normal risk of collectibility or present other unfavorable features when made.
PART IV
Item 14.
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* 27 Financial Data Schedule
- ----------------- * Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-35817).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September 30, 1997.
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 24, 1997 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, December 24, 1997 Clarence E. Hamre President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Michael R. Sand - ------------------------ Executive Vice President, December 24, 1997 Michael R. Sand Secretary and Director (Principal Financial and Accounting Officer)
/s/ Andrea M. Clinton - ------------------------ Director December 24, 1997 Andrea M. Clinton
/s/ Robert Backstrom - ------------------------ Director December 24, 1997 Robert Backstrom
/s/ Richard R. Morris - ------------------------ Director December 24, 1997 Richard R. Morris
/s/ Alan E. Smith - ------------------------ Director December 24, 1997 Alan E. Smith
/s/ Peter J. Majar - ------------------------ Director December 24, 1997 Peter J. Majar
/s/ Jon C. Parker - ------------------------ Director December 24, 1997 Jon C. Parker
/s/ James C. Mason - ------------------------ Director December 24, 1997 James C. Mason
Exhibit 27 Financial Data Schedule (in thousands)
This schedule contains financial information extracted from the consolidated financial statements of Timberland Bancorp, Inc. for the year ended September 30, 1997 and is qualified in its entirety by reference to such financial statements.
Financial Data as of or for the year Item Number ended September 30, 1997 Item Description - ----------- ------------------------ ---------------- 9-03 (1) 4,996 Cash and Due from Banks 9-03 (2) 6,450 Interest - bearing deposits 9-03 (3) NA Federal funds sold - purchased securities for resale 9-03 (4) NA Trading account assets 9-03 (6) 1,586 Investment and mortgage backed securities held for sale 9-03 (6) 3,990 Investment and mortgage backed securities held to maturity - carrying value 9-03 (6) 3,982 Investment and mortgage backed securities held to maturity - market value 9-03 (7) 188,743 Loans 9-03 (7)(2) 1,716 Allowance for loan losses 9-03 (11) 211,553 Total assets 9-03 (12) 173,003 Deposits 9-03 (13) 500 Short - term borrowings 9-03 (15) 1,664 Other liabilities 9-03 (16) 11,741 Long - term debt 9-03 (19) NA Preferred stock - mandatory redemption 9-03 (20) NA Preferred stock - no mandatory redemption 9-03 (21) NA Common stocks 9-03 (22) 24,645 Other stockholders' equity 9-03 (23) 211,553 Total liabilities and stockholders' equity 9-04 (1) 17,418 Interest and fees on loans 9-04 (2) 395 Interest and dividends on investments 9-04 (4) 134 Other interest income 9-04 (5) 17,947 Total interest income 9-04 (6) 7,516 Interest on deposits 9-04 (9) 8,386 Total interest expense 9-04 (10) 9,562 Net interest income 9-04 (11) 596 Provision for loan losses 9-04 (13)(h) -0- Investment securities gains/ (losses) 9-04 (14) 5,041 Other expenses 9-04 (15) 5,159 Income/loss before income tax 9-04 (17) 5,159 Income/loss before extraordinary items 9-04 (18) NA Extraordinary items, less tax 9-04 (19) NA Cumulative change in accounting principles 9-04 (20) 3,329 Net income or loss 9-04 (21) NA Earnings per share - primary 9-04 (21) NA Earnings per share - fully diluted I.B. 5 9.09% Net yield - interest earnings - actual III.C.1. (a) 7,555 Loans on non - accrual III.C.1. (b) 109 Accruing loans past due 90 days or more III.C.2. (c) 70 Troubled debt restructuring III.C.2 -- Potential problem loans IV.A.1 1,133 Allowance for loan loss - beginning of period IV.A.2 22 Total chargeoffs IV.A.3 9 Total recoveries IV.A.4 1,716 Allowance for loan loss - end of period IV.B.1 1,716 Loan loss allowance allocated to domestic loans IV.B.2 -- Loan loss allowance allocated to foreign loans IV.B.3 -- Loan loss allowance - unallocated