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TSBK > SEC Filings for TSBK > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for TIMBERLAND BANCORP INC

Form 10-Q for TIMBERLAND BANCORP INC


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As used in this Form 10-Q, the terms "we," "our" and "Company" refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to "Bank" in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc. and the Bank's wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the condensed consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2014. This analysis as well as other sections of this report contains certain "forward-looking statements."

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our future operations. These statements relate to our


financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute an informal or formal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our reports filed with the Securities and Exchange Commission, including our 2013 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. We caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2014 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company's financial condition and results of operations as well as its stock price performance.

Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 22 branches (including its main office in Hoquiam). At March 31, 2014, the Company had total assets of $732.42 million and total shareholders' equity of $80.02


million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank's operations.

The profitability of the Company's operations depends primarily on its net interest income after provision for loan losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings. Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on those interest bearing liabilities. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

The provision for loan losses is dependent on changes in the loan portfolio and management's assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The provision for loan losses reflects the amount that the Company believes is adequate to cover estimated credit losses in its loan portfolio.

Net income is also affected by non-interest income and non-interest expenses. For the three and six month period ended March 31, 2014, non-interest income consisted primarily of service charges on deposit accounts, gain on sale of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of bank owned life insurance, a recovery of net OTTI losses and other operating income. Non-interest income is reduced by net OTTI losses on MBS and other investments and losses on the sale of MBS and other investments. Non-interest expenses consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card processing expenses, OREO and other repossessed asset expenses, postage and courier expenses, professional fees, deposit insurance premiums, other insurance premiums, state and local taxes, loan administration and foreclosure expenses, deposit operation expenses and data processing expenses and telecommunication expenses. Non-interest income and non-interest expenses are affected by the growth of our operations and growth in the number of loan and deposit accounts.

Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans, commercial real estate loans and land loans. The Bank originates adjustable-rate residential mortgage loans that do not qualify for sale in the secondary market. The Bank also originates commercial business loans.

Critical Accounting Policies and Estimates

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company's 2013 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates." That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the Company's 2013 Form 10-K.

Comparison of Financial Condition at March 31, 2014 and September 30, 2013

The Company's total assets decreased by $13.23 million, or 1.8%, to $732.42 million at March 31, 2014 from $745.65 million at September 30, 2013. The decrease in total assets was primarily due to a decrease in total cash and cash equivalents, which was partially offset by increases in net loans receivable, MBS and other investments, OREO and other repossessed assets and CDs held for investment.

Net loans receivable increased by $6.59 million, or 1.2%, to $554.69 million at March 31, 2014 from $548.10 million at September 30, 2013. The increase was primarily due to increases in commercial real estate loans, construction and land development loans, in particular custom and owner/builder loans, and commercial business loans. These increases were partially offset by decreases in multi-family loans, one-to four-family loans, land loans and consumer loans.


Total deposits decreased by $3.89 million, or 0.6%, to $604.37 million at March 31, 2014 from $608.26 million at September 30, 2013. The decrease was primarily a result of decreases in certificates of deposit accounts and money market accounts balances, which was partially offset by increases in non-interest bearing accounts, N.O.W. checking accounts and savings accounts.

Shareholders' equity decreased by $9.66 million, or 10.8%, to $80.02 million at March 31, 2014 from $89.69 million at September 30, 2013. The decrease in shareholders' equity was primarily a result of the redemption of 12,065 shares of Series A Preferred Stock and the payment of dividends on common stock. These decreases to shareholders' equity were partially offset by net income of $2.77 million for the six months ended March 31, 2014.

A more detailed explanation of the changes in significant balance sheet categories follows:

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $22.91 million, or 18.4%, to $101.63 million at March 31, 2014 from $124.54 million at September 30, 2013. The decrease was primarily due to a $22.81 million, or 28.0%, decrease in interest-bearing deposits in banks and a $1.44 million decrease in cash and due from financial institutions, which was partially offset by a $1.34 million increase in CDs held for investment. The decrease in interest-bearing deposits in banks was primarily the result of the funding of the redemption of Series A Preferred Stock for $12.07 million, a $6.59 million increase in net loans receivable and a $3.89 million decrease in total deposits.

MBS (Mortgage-backed Securities) and Other Investments: MBS and other investments increased by $1.66 million, or 24.3%, to $8.50 million at March 31, 2014 from $6.84 million at September 30, 2013, primarily due to the purchase of $3.0 million of U.S. government agency securities, which was partially offset by the sale of $747,000 in private label residential MBS and scheduled amortization and prepayments on MBS. For additional information on MBS and other investments, see Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in "Item 1, Financial Statements."

Loans: Net loans receivable increased by $6.59 million, or 1.2%, to $554.69 million at March 31, 2014 from $548.10 million at September 30, 2013. The increase in the portfolio was primarily a result of a $8.49 million increase in commercial real estate loans, a $6.72 million increase in construction loans and a $2.96 million increase in commercial business loans. These increases in net loans receivable were partially offset by a $3.90 million decrease in multi-family loans, a $3.31 million decrease in one-to four-family loans, a $1.55 million decrease in land loans, a $1.26 million decrease in consumer loans and a $1.95 million increase in the undisbursed portion of construction loans in process.

Loan originations decreased $25.11 million, or 22.8%, to $84.88 million for the six months ended March 31, 2014 from $110.0 million for the six months ended March 31, 2013. The Company continued to sell longer-term fixed rate loans for asset liability management purposes and to generate non-interest income. Sales of fixed rate one- to four-family mortgage loans decreased $37.63 million, or 70.9%, to $15.47 million for the six months ended March 31, 2014 compared to $53.10 million for the six months ended March 31, 2013. The decrease in loan originations and loans sold was primarily due to a reduction of $39.54 million in loans originated for sale as refinance demand for single family loans decreased.

For additional information, see Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in "Item 1, Financial Statements."

Premises and Equipment: Premises and equipment increased by $21,000, or 0.1%, to $17.78 million at March 31, 2014 from $17.76 million at September 30, 2013. The increase was primarily due to several remodeling projects at branch offices and several technology related initiatives.

OREO (Other Real Estate Owned): OREO and other repossessed assets increased by $1.49 million, or 12.7%, to $13.21 million at March 31, 2014 from $11.72 million at September 30, 2013. The increase was primarily due to the addition of $5.57 million in OREO properties and other repossessed assets which was partially offset by the disposition of 12 OREO properties totaling $3.65 million and OREO fair value write-downs of $376,000. At March 31, 2014, total OREO consisted of 55 individual properties. The properties consisted of 29 land parcels totaling $5.45 million, six commercial real estate properties totaling $3.51 million, 19 single-family homes totaling $4.08 million and one multi-family property of $170,000.

Goodwill and CDI: The recorded amount of goodwill of $5.65 million at March 31, 2014 was unchanged from September 30, 2013. The recorded amount of the CDI decreased $58,000, or 48.7%, to $61,000 at March 31, 2014 from $119,000 at September 30, 2013. The decrease was due to scheduled amortization of the CDI.


Deposits: Deposits decreased by $3.89 million, or 0.6%, to $604.37 million at March 31, 2014 from $608.26 million at September 30, 2013. The decrease was primarily a result of a $12.51 million decrease in certificates of deposit accounts and a $4.46 million decrease in money market accounts. These decreases were partially offset by increases of $7.95 million in non-interest bearing balances, a $3.95 million in N.O.W. checking accounts and a $1.19 million in savings accounts.

FHLB Advances: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 25% of the Bank's total assets, limited by available collateral. Borrowings are considered short-term when the original maturity is less than one year. At March 31, 2014 FHLB advances and other borrowings consisted of long-term FHLB advances with scheduled maturities at various dates in fiscal 2017 and bear interest at rates ranging from 3.69% to 4.34%. A portion of these advances may be called by the FHLB at a date earlier than the scheduled maturity date. FHLB advances remained unchanged at $45.00 million at March 31, 2014 and September 30, 2013.

Shareholders' Equity: Total shareholders' equity decreased by $9.66 million, or 10.8%, to $80.02 million at March 31, 2014 from $89.69 million at September 30, 2013. The decrease was primarily due to the repurchase of 12,065 shares of Series A Preferred Stock, for $12.07 million on December 20, 2013 and the payment of $551,000 in dividends on the Company's common stock and preferred stock. These decreases to shareholders' equity were partially offset by net income of $2.77 million for the six months ended March 31, 2014.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2014 and 2013

Net income decreased $119,000, or 9.3%, to $1.16 million for the quarter ended March 31, 2014 from $1.28 million for the quarter ended March 31, 2013. Net income to common shareholders, after adjusting for the preferred stock dividend, the preferred stock discount accretion and the discount on the redemption of preferred stock, decreased $41,000 or 3.4%, to $1.16 million for the quarter ended March 31, 2014 from $1.20 million for the quarter ended March 31, 2013. Net income per diluted common share decreased $0.01, or 5.8%, to $0.16 for the quarter ended March 31, 2014 from $0.17 for the quarter ended March 31, 2013. The decrease in net income was primarily due to decreased non-interest income and increased non-interest expense, which was partially offset by decreased provision for loan losses.

Net income decreased $216,000, or 7.2%, to $2.77 million for the six months ended March 31, 2014 from $2.99 million for the six months ended March 31, 2013. Net income to common shareholders after adjusting for the preferred stock dividend, the preferred stock discount accretion and the discount on redemption of preferred stock, decreased $80,000, or 3.0%, to $2.56 million for the six months ended March 31, 2014 from $2.64 million for the six months ended March 31, 2013. Net income per diluted common share decreased $0.02, or 5.1%, to $0.37 for the six months ended March 31, 2014 from $0.39 for the six months ended March 31, 2013. The decrease in net income was primarily due to decreased non-interest income and increased non-interest expense, which was partially offset by decreased provision for loan losses.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income: Net interest income remained virtually unchanged at $6.44 million for each of the quarters ended March 31, 2014 and 2013. The net interest margin increased to 3.85% for the quarter ended March 31, 2014 from 3.83% from the quarter ended March 31, 2013 .

Total interest and dividend income decreased by $140,000 or 1.9%, to $7.41 million for the quarter ended March 31, 2014 from $7.55 million for the quarter ended March 31, 2013 as the yield on interest bearing assets decreased to 4.43% from 4.49%. The decrease in the weighted average yield on interest-bearing assets was primarily a result of decreased market rates for loans and adjustable rate loans repricing to lower current market interest rates. Total interest expense decreased by $136,000 or 12.2%, to $975,000 for the quarter ended March 31, 2014 from $1.11 million for the quarter ended March 31, 2013 as the average rate paid on interest-bearing liabilities decreased to 0.72% for the quarter ended March 31, 2014 from 0.80% for the quarter ended March 31, 2013 and the average balance of interest-bearing liabilities declined $13.68 million. The decrease in funding costs was primarily a result of CDs repricing at lower market rates and changes in the composition of the deposit base as the percentage of non-interest bearing and lower costing transaction accounts increased.

Net interest income increased by $66,000, or 0.5%, to $12.90 million for the six months ended March 31, 2014 from $12.83 million for the six months ended March 31, 2013. The net interest margin for the six months ended March 31, 2014 increased slightly to 3.81% compared to 3.80% for the six months ended March 31, 2013.

Total interest and dividend income decreased by $248,000, or 1.6%, to $14.89 million for the six months ended March 31, 2014 from $15.14 million for the six months ended March 31, 2013 as the yield on interest bearing assets decreased to 4.40% for the


six months ended March 31, 2014 from 4.49% for the six months ended March 31, 2013. Total interest expense decreased by $314,000, or 13.6%, to $2.00 million for the six months ended March 31, 2014 from $2.31 million for the six months ended March 31, 2013 as the average rate paid on interest bearing liabilities decreased to 0.72% for the six months ended March 31, 2014 from 0.82% for the six months ended March 31, 2013 and the average balance of interest bearing liabilities decreased by $9.78 million.

Average Balances, Interest and Average Yields/Cost The following tables sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-bearing assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. (Dollars in thousands)

                                                    Three Months Ended March 31,
                                          2014                                         2013
                         Average      Interest and       Yield/       Average      Interest and       Yield/
                         Balance        Dividends         Cost        Balance        Dividends         Cost
Interest-bearing
assets: (1)
Loans receivable (2)   $ 568,448     $       7,255         5.10 %   $ 557,426     $       7,395         5.31 %
MBS and other
investments (2)            6,497                64         3.94         6,721                70         4.17
FHLB stock and equity
securities                 6,355                 6         0.45         6,595                 5         0.31
Interest-bearing
deposits                  87,328                87         0.40       102,367                82         0.32
Total interest-bearing
assets                   668,628             7,412         4.43       673,109             7,552         4.49
Non-interest-bearing
assets                    63,885                                       65,709
   Total assets        $ 732,513                                    $ 738,818

Interest-bearing
liabilities:
Savings accounts       $  94,478                11         0.05     $  90,015                11         0.05
Money market accounts     91,216                60         0.27        87,055                64         0.30
N.O.W. accounts          157,312               113         0.29       150,675               115         0.31
Certificates of
deposit                  162,750               330         0.82       191,089               460         0.98
Short-term borrowings          -                 -            -           599                 -         0.05
Long-term borrowings
(3)                       45,000               461         4.15        45,000               461         4.15
Total interest-bearing
liabilities              550,756               975         0.72       564,433             1,111         0.80
Non-interest-bearing
liabilities              102,260                                       82,330
Total liabilities        653,016                                      646,763
Shareholders' equity      79,497                                       92,055
Total liabilities and
shareholders' equity   $ 732,513                                    $ 738,818


Net interest income                  $       6,437                                $       6,441

Interest rate spread                                       3.72 %                                       3.69 %
Net interest margin
(4)                                                        3.85 %                                       3.83 %
Ratio of average
interest-bearing
  assets to average
interest-bearing
  liabilities                                            121.40 %                                     119.25 %


                                                         Six Months Ended March 31
                                            2014                                          2013
                           Average       Interest and       Yield/       Average       Interest and       Yield/
                           Balance        Dividends          Cost        Balance        Dividends          Cost
Interest-bearing assets:
(1)
. . .
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